The humble Certificate of Deposit

Your Money
Not All Certificates of Deposit Are Plain Vanilla — or Safe

By RON LIEBER
Published: February 20, 2009
It was bad enough when big banks started going under. Then, money market funds became suspect. But now, even the humble certificate of deposit has become mired in scandal.

This week, the Securities and Exchange Commission accused a Texas financier named Robert Allen Stanford of fraud. Investigators allege that the scheme revolved in large part around the sale of about $8 billion of suspiciously high-yielding C.D.’s through Stanford International Bank.
These C.D.’s were not insured by the Federal Deposit Insurance Corporation. So once again, we’re faced with images of forlorn people trying and failing to extract their life savings.
There’s some question as to whether Stanford ought to have been using the phrase “certificate of deposit.” Most investors who hear “C.D.” immediately assume that it’s safe.
Faulty terminology or not, it’s a bad time for C.D.’s to get a black eye, given that growing numbers of people are looking for secure investments as stocks approach their bear market lows. So now that C.D.’s have been sullied, it makes sense to take a step back and review the basic product as well as other, more exotic C.D.’s that are being offered at banks, brokerage firms and elsewhere.

BASIC C.D.’S

When you buy a C.D. you hand over a pile of money to a bank and agree to keep it there for a certain period of time. In return for the certainty that it can use your funds for that long, the bank pays you interest, usually more interest than it would pay on a normal checking or savings account. Investments in C.D.’s are covered by the F.D.I.C., which currently offers insurance of up to $250,000 per person per bank. Additional coverage may be available depending on how you set up your accounts. (Links to the pertinent part of the F.D.I.C.’s Web site are available from the version of this story at nytimes.com/yourmoney.)
That $250,000 figure will fall to $100,000 for some types of accounts at the end of the year absent any new governmental action, so long-term C.D. investors need to keep that in mind.
There are plenty of places to shop for the best C.D. rates. Bankrate.com is one useful site, while MoneyAisle allows banks to compete for your business in an auction on the Web. Often, the banks offering the best rates are small banks you won’t have heard of or large banks that may be somewhat troubled.
As long as you don’t invest more than the F.D.I.C. limits, you don’t need to worry about losing your money. If the bank that issues your C.D. fails, however, another bank may end up with the failed bank’s deposits and has the right to lower your C.D. rate.
With any C.D., including the more complicated ones I outline below, there are a number of questions you should ask about the terms. Is the interest rate fixed? How long is the term? Is it callable, meaning the bank can give your money back to you before the term is up if it wants to? What sort of penalties exist if you need to take money out before the term is up? If the penalties are large enough, you could end up losing principal if you unexpectedly need the funds early.
You also want to check to see how the interest will be paid. Retirees may want a check, while others may want the money reinvested in the C.D. Also, how often does the bank pay out the interest? And will the bank try to automatically roll the money into a new C.D. when the term is up? Are there any commissions?

BROKERED C.D.’S

These are C.D.’s sold by brokerage firms, both large investment firms like Charles Schwab and small operations that maintain Web sites or try to cold-call you. They generally pool money from investors and then invest it in C.D.’s from F.D.I.C.-insured banks that the brokers find on their own. Sometimes, the banks are willing to pay better rates on brokered C.D.’s if the brokerage firm can bring a large enough pile of money to the bank.
One advantage here, according to René Kim, a senior vice president of Charles Schwab, is that you can keep multiple C.D.’s of different maturities in one account. And if you have a lot of money to put to work, you can place it with different banks to stay under the F.D.I.C. limits. Just be sure that the broker doesn’t place it with a bank where you already have other accounts, if the new money would put you over the F.D.I.C. limits.
Brokerage firms may tell you that there are no fees for early withdrawal of a brokered C.D. The S.E.C. warns, however, that if you want to get your money out early, your broker may need to try to sell your portion of the C.D. on a secondary market. You may not be able to sell it for an amount that will allow you to get all of your principal back.

INDEXED C.D.’S

These C.D.’s, also known as market-linked C.D.’s, generally guarantee that you’ll get your original investment back. They also let you share in the gain of a stock market index, like the Dow Jones industrial average or the Standard & Poor’s 500-stock index. If stocks are up during the term of your C.D., you’ll make some money. If not, you’ll still get your initial investment back, though inflation may have eroded its value.
While this downside protection and upside participation may be tempting at a time like this, these C.D.’s can be complicated. (They’re also a bit scarce at the moment, since stock market volatility makes it more expensive for banks to offer them.) Your return will depend on how the issuer of the C.D. calculates the average return on the index. So ask to see an example.
Also, the bank that offers the C.D. may not credit any of the money you earn until the end of the C.D.’s term, even though you still have to pay taxes each year on your interest.
Finally, while your initial investment may have F.D.I.C. protection, any gain during the term of the C.D. may not be covered if the bank goes under before the C.D.’s term is up, depending on how the interest is calculated and credited. Again, ask about this in advance. Also, don’t assume that your investment comes with F.D.I.C. insurance, because there are similar-sounding investments that may not.

FOREIGN CURRENCY C.D.’S

Here, you’re using American dollars to make a bet. At EverBank, which offers many foreign currency C.D.’s, you earn interest in the currency that you choose and can earn even more money if it appreciates against the dollar. If it moves in the opposite direction, however, you can lose not just your interest but some of the principal, too.
While the F.D.I.C. does insure the principal here, EverBank notes that the coverage is only for failure of the institution, not for fluctuation in currency prices. “Please only invest with money that you can afford to risk, and as part of a broadly diversified investment strategy,” its disclosure says.
The bank might as well say that you should only invest what you can afford to lose, which is not how most people normally think about C.D.’s.
So if you’re trying to stay safe, consider a plain, old-fashioned C.D. instead. And don’t ever assume, as some of the Stanford investors may have done, that F.D.I.C. insurance is automatically part of the C.D. package.
How safe is your C.D.? Write to rlieber@nytimes.com

http://www.nytimes.com/2009/02/21/your-money/21money.html?em

The Index Funds Win Again

Strategies
The Index Funds Win Again

By MARK HULBERT
Published: February 21, 2009
THERE’S yet more evidence that it makes sense to invest in simple, plain-vanilla index funds, whose low fees often lead to better net returns than hedge funds and actively managed mutual funds with more impressive performance numbers.

Basic stock market index funds generally aspire to nothing more than matching the returns of a market benchmark. So in a miserable year for stocks, index funds may not look very appealing. But it turns out that, after fees and taxes, it is the extremely rare actively managed fund or hedge fund that does better than a simple index fund.
That, at least, is the finding of a new study by Mark Kritzman, president and chief executive of Windham Capital Management of Boston. He presented his results in the Feb. 1 issue of Economics & Portfolio Strategy, a newsletter for institutional investors published by Peter L. Bernstein Inc.
Mr. Kritzman, who also teaches a graduate course in financial engineering at M.I.T.’s Sloan School of Management, set up his study to accurately measure the long-term impact of all the expenses involved in investing in a mutual fund or hedge fund. Those include transaction costs, taxes and management and performance fees.
He is not the first to try such a measurement. But, he said in an e-mail message, it is surprisingly hard to measure these costs accurately. The bite taken out by taxes, for example, depends on the specific combination of positive years and losing ones, as well as the order in which they occur. That combination and order also affect the performance fees charged by hedge funds.
Mr. Kritzman devised an elaborate method to take such contingencies into account. Then he calculated the average return over a hypothetical 20-year period, net of all expenses, of three hypothetical investments: a stock index fund with an annualized return of 10 percent, an actively managed mutual fund with an annualized return of 13.5 percent and a hedge fund with an annualized return of 19 percent. The volatility of the three funds’ returns — along with their turnover rates, transaction fees and management and performance fees — was based on what he determined to be industry averages.
Mr. Kritzman found that, net of all expenses, including federal and state taxes for a New York State resident in the highest tax brackets, the winner was the index fund.
Specifically, he assumed that long-term capital gains were subject to a 15 percent federal tax and a 6.85 percent state tax; short-term capital gains and dividends were taxed at a combined federal and state rate of nearly 42 percent. The index fund’s average after-expense return was 8.5 percent a year, versus 8 percent for the actively managed fund and 7.7 percent for the hedge fund.
Expenses were the culprit. For both the actively managed fund and the hedge fund, those expenses more than ate up the large amounts — 3.5 and 9 percentage points a year, respectively — by which they beat the index fund before expenses.
IF such outperformance isn’t enough to overcome the drag of expenses, what would do the trick? Mr. Kritzman calculates that just to break even with the index fund, net of all expenses, the actively managed fund would have to outperform it by an average of 4.3 percentage points a year on a pre-expense basis. For the hedge fund, that margin would have to be 10 points a year.
The chances of finding such funds are next to zero, said Russell Wermers, a finance professor at the University of Maryland. Consider the 452 domestic equity mutual funds in the Morningstar database that existed for the 20 years through January of this year. Morningstar reports that just 13 of those funds beat the Standard & Poor’s 500-stock index by at least four percentage points a year, on average, over that period. That’s less than 3 out of every 100 funds.
But even that sobering statistic paints too rosy a picture, the professor said. That’s because it’s one thing to learn, after the fact, that a fund has done that well, and quite another to identify it in advance. Indeed, he said, he has found from his research that only a minority of funds that beat the market in a given year can outperform it the next year as well.
Professor Wermers said he believed that it was “exceedingly probable that any fund that has beaten the market by an average of more than one percentage point per year over the last decade achieved that return almost entirely due to luck alone.”
“By definition, therefore, such a fund could not have been identified in advance,” he added.
The investment implication is clear, according to Mr. Kritzman. “It is very hard, if not impossible,” he wrote in his study, “to justify active management for most individual, taxable investors, if their goal is to grow wealth.” And he said that those who still insist on an actively managed fund are almost certainly “deluding themselves.”
What if you’re investing in a tax-sheltered account, like a 401(k) or an I.R.A.? In that case, Mr. Kritzman conceded, the odds are relatively more favorable for active management, because, in his simulations, taxes accounted for about two-thirds of the expenses of the actively managed mutual fund and nearly half of the hedge fund’s. But he emphasized the word “relatively.”
“Even in a tax-sheltered account,” he said, “the odds of beating the index fund are still quite poor.”
Mark Hulbert is editor of The Hulbert Financial Digest, a service of MarketWatch. E-mail: strategy@nytimes.com.

http://www.nytimes.com/2009/02/22/your-money/stocks-and-bonds/22stra.html?em

When Consumers Cut Back: An Object Lesson From Japan

When Consumers Cut Back: An Object Lesson From Japan

By HIROKO TABUCHI

Published: February 21, 2009

TOKYO — As recession-wary Americans adapt to a new frugality, Japan offers a peek at how thrift can take lasting hold of a consumer society, to disastrous effect.

Multimedia
Graphic
In Japan, Neither Spending Nor Saving

The economic malaise that plagued Japan from the 1990s until the early 2000s brought stunted wages and depressed stock prices, turning free-spending consumers into misers and making them dead weight on Japan’s economy.
Today, years after the recovery, even well-off Japanese households use old bath water to do laundry, a popular way to save on utility bills. Sales of whiskey, the favorite drink among moneyed Tokyoites in the booming ’80s, have fallen to a fifth of their peak. And the nation is losing interest in cars; sales have fallen by half since 1990.
The Takigasaki family in the Tokyo suburb of Nakano goes further to save a yen or two. Although the family has a comfortable nest egg, Hiroko Takigasaki carefully rations her vegetables. When she goes through too many in a given week, she reverts to her cost-saving standby: cabbage stew.
“You can make almost anything with some cabbage, and perhaps some potato,” says Mrs. Takigasaki, 49, who works part time at a home for people with disabilities.
Her husband has a well-paying job with the electronics giant Fujitsu, but “I don’t know when the ax will drop,” she says. “Really, we need to save much, much more.”
Japan eventually pulled itself out of the Lost Decade of the 1990s, thanks in part to a boom in exports to the United States and China. But even as the economy expanded, shell-shocked consumers refused to spend. Between 2001 and 2007, per-capita consumer spending rose only 0.2 percent.
Now, as exports dry up amid a worldwide collapse in demand, Japan’s economy is in free-fall because it cannot rely on domestic consumption to pick up the slack.
In the last three months of 2008, Japan’s economy shrank at an annualized rate of 12.7 percent, the sharpest decline since the oil shocks of the 1970s.
“Japan is so dependent on exports that when overseas markets slow down, Japan’s economy teeters on collapse,” said Hideo Kumano, an economist at the Dai-ichi Life Research Institute. “On the surface, Japan looked like it had recovered from its Lost Decade of the 1990s. But Japan in fact entered a second Lost Decade — that of lost consumption.”
The Japanese have had some good reasons to scale back spending.
Perhaps most important, the average worker’s paycheck has shrunk in recent years, even after companies rebounded and bolstered their profits.
That discrepancy is the result of aggressive cost-cutting on the part of Japanese exporters like Toyota and Sony. They, like American companies now, have sought to fend off cutthroat competition from companies in emerging economies like South Korea and Taiwan, where labor costs are low.
To better compete, companies slashed jobs and wages, replacing much of their work force with temporary workers who had no job security and fewer benefits. Nontraditional workers now make up more than a third of Japan’s labor force.
Younger people are feeling the brunt of that shift. Some 48 percent of workers age 24 or younger are temps. These workers, who came of age during a tough job market, tend to shun conspicuous consumption.
They tend to be uninterested in cars; a survey last year by the business daily Nikkei found that only 25 percent of Japanese men in their 20s wanted a car, down from 48 percent in 2000, contributing to the slump in sales.
Young Japanese women even seem to be losing their once- insatiable thirst for foreign fashion. Louis Vuitton, for example, reported a 10 percent drop in its sales in Japan in 2008.
“I’m not interested in big spending,” says Risa Masaki, 20, a college student in Tokyo and a neighbor of the Takigasakis. “I just want a humble life.”
Japan’s aging population is not helping consumption. Businesses had hoped that baby boomers — the generation that reaped the benefits of Japan’s postwar breakneck economic growth — would splurge their lifetime savings upon retirement, which began en masse in 2007. But that has not happened at the scale that companies had hoped.
Economists blame this slow spending on widespread distrust of Japan’s pension system, which is buckling under the weight of one of the world’s most rapidly aging societies. That could serve as a warning for the United States, where workers’ 401(k)’s have been ravaged by declining stocks, pensions are disappearing, and the long-term solvency of the Social Security system is in question.
“My husband is retiring in five years, and I’m very concerned,” says Ms. Masaki’s mother, Naoko, 52. She says it is no relief that her husband, a public servant, can expect a hefty retirement package; pension payments could fall, and she has two unmarried children to worry about.
“I want him to find another job, and work as long as he’s able,” Mrs. Masaki says. “We must be ready to fend for ourselves.”
Economic stimulus programs like the one President Obama signed into law last week have been hampered in Japan by deflation, the downward spiral of prices and wages that occurs when consumers hold down spending — in part because they expect goods to be cheaper in the future.
Economists say deflation could interfere with the two trillion yen ($21 billion) in cash handouts that the Japanese government is planning, because consumers might save the extra money on the hunch that it will be more valuable in the future than it is now.
The same fear grips many economists and policymakers in the United States. “Deflation is a real risk facing the economy,” President Obama’s chief economic adviser, Lawrence H. Summers, told reporters this month.
Hiromi Kobayashi, 38, a Tokyo homemaker, has taken to sewing children’s ballet clothes at home to supplement income from her husband’s job at a movie distribution company. The family has not gone on vacation in two years and still watches a cathode-ray tube TV. Mrs. Kobayashi has her eye on a flat-panel TV but is holding off.
“I’m going to find a bargain, then wait until it gets even cheaper,” she says.

http://www.nytimes.com/2009/02/22/business/worldbusiness/22japan.html?em

U.S. Pressed to Add Billions to Bailouts

U.S. Pressed to Add Billions to Bailouts


By EDMUND L. ANDREWS, ANDREW ROSS SORKIN and MARY WILLIAMS WALSH
Published: February 23, 2009

Related
Across the Atlantic, Echoes in R.B.S.’s Lifeline (February 24, 2009)
A Third Rescue Would Give Washington a 40% Stake in Citigroup (February 24, 2009)
New York Financier Picked as Top Adviser on Auto Industry Bailout (February 24, 2009)
Times Topics: Credit Crisis - Bailout Plan


The government faced mounting pressure on Monday to put billions more in some of the nation’s biggest banks, two of the biggest automakers and the biggest insurance company, despite the billions it has already committed to rescuing them.
The government’s boldest rescue to date, its $150 billion commitment for the insurance giant American International Group, is foundering. A.I.G. indicated on Monday it was now negotiating for tens of billions of dollars in additional assistance as losses have mounted.
Separately, the Obama administration confirmed it was in discussions to aid Citigroup, the recipient of $45 billion so far, that could raise the government’s stake in the banking company to as much as 40 percent.
The Treasury Department named a special adviser to work with General Motors and Chrysler, two of Detroit’s biggest automakers, which are seeking $22 billion on top of the $17 billion already granted to them.
All these companies’ mushrooming needs reflect just how hard it is to stanch the flow of losses as the economy deteriorates. Even though the government’s finances are being stretched — and still more aid might be needed in the future — it is being forced to fill the growing holes in the finances of these companies out of fear that the demise of an important company could set off a chain reaction.
The deepening global downturn is dragging down all kinds of businesses, and, with no bottom to the recession in sight, investors sent the Standard & Poor’s 500-stock index down 3.5 percent, to its lowest close since April 1997. The Dow industrials fell 250.89 points, to 7,114.78, a 3.7 percent drop.
In an unexpectedly assertive joint statement after two weeks of bank stock declines, the Treasury Department, the Federal Reserve and federal bank regulatory agencies announced that the government might demand a direct ownership stake in major banks that do not have enough capital to weather a deeper downturn. The government will begin conducting a test of the banks’ financial health this week.
Administration officials emphasized that nationalizing any of the major banks was their least favorite solution to the banking crisis, but they acknowledged that some banks might be both too big to fail and too fragile to endure another round of shocks without substantial help.
The administration is debating how big a role to play in the auto businesses, what concessions the companies should make in return for aid and whether bankruptcy should be considered, though it prefers a private sector solution. On Monday, Steven Rattner, co-founder of the private equity firm Quadrangle Group, was named an adviser to the Treasury on restructuring the auto industry. As the administration takes bigger stakes in companies, the value held by existing shareholders is being diluted, which could make it even harder to attract private money in the future. Timothy F. Geithner, the secretary of the Treasury, recently outlined a bank recovery plan that included a new program to attract a combination of public and private money to buy troubled mortgages and other assets.
A.I.G. serves as a cautionary note about the difficulty of luring private investors when the size of the losses is unknown. In the months since the government initially stepped in last fall to take an 80 percent stake in the insurer, the company has suffered deepening losses and has been forced to post more collateral with its trading partners. The company, according to a person close to the negotiations, is discussing the prospect of converting the government’s $40 billion in preferred shares into common equity.
The prototype could turn out to be Citigroup, which is negotiating with regulators to replace the government’s nonvoting preferred shares with shares that are convertible into common stock.
“We absolutely believe that our private banking system is best off being in private hands and we are trying our best to keep it that way,” said one senior administration official, who spoke on condition of anonymity. But, he continued, the government is already deeply involved in propping up the banking system and may have no choice.
Officials said they were bracing for the possibility of new problems that might indeed require the government to take a more aggressive stance.
“Given our involvement at this particular stage, there is an element, a possibility over time, that we will end up with some ownership of these institutions,” the official said. “This is really about aggressive anticipatory action. It is an acceptance that the future is uncertain, but that we can plan on a certain basis for it.”
Acquiring common stock would give the government more control, but expose it to more risk. Armed with voting shares, government officials would have more power to replace management and change company strategy. But the Treasury would lose its claim to dividend payments, which in Citigroup’s case amount to more than $2.25 billion a year.
A.I.G. declined to provide details of its new financial problems, citing the “quiet period” just before it issues fourth-quarter results. But some people familiar with A.I.G.’s negotiations said it was on the brink of reporting one of the biggest year-end losses in American history.
Such losses lead to a bigger problem. A further credit rating downgrade would force the company to raise more capital, according to a person involved in the negotiations. The losses appeared to be across the board, unlike the insurer’s giant losses of last September, which were confined mostly to the derivative contracts, called credit-default swaps, that A.I.G. had written as insurance on other debts.
A.I.G. has not been writing new credit-default swap contracts, and had tried to put the swaps disaster behind it. In November the company worked out a relief package with the Federal Reserve Bank of New York, in which the most toxic of its swap contracts were put into a kind of quarantine, so they could no longer hurt its balance sheet.
But A.I.G. put only one type of credit-default swaps into the quarantine. It had written several other classes of credit-default swaps, which it has continued to carry on its books.
If the latest round of losses severely weaken A.I.G.’s capital and its creditworthiness, then its swap counterparties may be entitled to demand that A.I.G. come up with a large amount of cash for collateral — precisely the problem that brought the company to its knees last September.
“They stand, unfortunately, to bring others down with them if they go down,” said Donn Vickrey of Gradient Analytics, an independent research firm. Last fall, when A.I.G. received its initial $85 billion from the Fed, he estimated that the total cost of bailing out A.I.G. would eventually mount to $250 billion. “We are moving closer and closer to that prediction,” he said Monday.
The difficulty of shoring up A.I.G. must weigh on the administration at this moment. The administration’s banking statement amounted to a plan of action demonstrating a way to demand a major and possibly a controlling stake in systemically important banks like Citigroup and Bank of America.
“They are desperate to not nationalize the banks,” said Robert J. Barbera, chief economist at ITG. “They know what happened when they took Iraq and they would just as soon not take over the banks, because if you own it, you gotta fix it.”
Eric Dash and Michael J. de la Merced contributed reporting.

http://www.nytimes.com/2009/02/24/business/24bailout.html?_r=1&ref=business

Stocks Slump on Corporate Woes; Indexes Fall by 3.4%

Stocks Slump on Corporate Woes; Indexes Fall by 3.4%
By JACK HEALY 5:17 PM ET

Investors pushed the Dow and S.&P. 500 down to 1997 levels as losses piled up in technology and major industrial companies.

Investors called it another day of water-torture declines on Wall Street: drop, drop, drop.

A broad sell-off sent Wall Street staggering lower in the last hour of trading on Monday as the banking system continued to worry investors. The Dow Jones industrial average was down 250.89 points at the close while the Standard & Poor’s 500-stock index, a broader gauge of the market closed at its lowest level since April 1997.

Losses piled up in technology companies like Apple, Google and I.B.M. and industrial companies like DuPont, Caterpillar and the aluminum maker, Alcoa. But in a reversal, battered shares of Citigroup and Bank of America closed higher, and the financial sector fared better than the broader market.

With worries growing about the stability and solvency of the country’s big banks, the Treasury Department tried to reassure jittery investors with a message supporting the financial system and laying out details of the coming “stress tests” of major banks. The message did not calm anyone.

After a brief rise in early trading, stock markets fell into the red and sank lower throughout the afternoon. The Dow Jones industrial average closed down 3.4 percent to 7.114.78 while the broader S. & P. 500 fell 3.47 percent, or 26.72 points, to 743.33. The technology heavy Nasdaq was down 3.7 percent, or 53.51 points, to 1,387.72 as shares of technology companies turned lower.

Shares of Microsoft, Hewlett-Packard and other technology companies fell amid concerns about how the sector would hold up as the economy spins lower. Companies that make basic materials like steel, chemicals and plastic also sank. Crude oil fell $1.59, to $38.44 a barrel, scaling back some recent gains, and gold prices also fell back slightly to $995 an ounce.

The day’s declines continued the downward momentum of a brutal week that sent the major indexes down more than 6 percent. “In lieu of anything the market sees as positive, it’s going to continue its easiest path, and the path it sees is down,” said Joseph Saluzzi, co-head of equity trading at Themis Trading. “That’s where we’re stuck right now, and who’s going to get out in front of it?”

With America’s banking system facing a round of “stress tests,” the prospect of greater governmental control and an uncertain future, the government tried to assure investors early Monday that it would stand behind the banking system, and that it would provide additional temporary aid to banks.

“The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth,” the Treasury Department, the Federal Deposit Insurance Corporation and other agencies said in an unusual joint statement. “Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments.”

The Treasury statement added that major banking institutions were “well capitalized.”

But analysts said investors remained worried about how America’s biggest banks would deal with the troubled assets on their balance sheets, and their prospects for weathering a prolonged economic contraction. Shares of Wells Fargo, Citigroup and Bank of America stayed positive, but other financial companies like Morgan Stanley and Goldman Sachs turned negative.

Analysts said that after fevered speculation last week about bank nationalization, many investors now expect the government to move in that direction, despite statements from the White House supporting a privately held banking system. Stock markets dropped on Friday amid concerns that a broad government takeover could wipe out financial shareholders.

Now, with the government set to begin the “stress tests” on Wednesday, investors want to know which banks will be deemed healthy and which will not, analysts said. Of most pressing concern are big banks including Citigroup, Bank of America, Wells Fargo and JPMorgan Chase, followed by regional chains.

“We need to know how they stand right now,” said Dave Rovelli, managing director of trading at Canaccord Adams. “The uncertainty of waiting for the results of these stress test is just killing the markets.”

Three weeks ago, stock markets tumbled after the Treasury Department announced plans to form a public-private partnership to take troubled mortgage-related assets off the balance sheets of banks. Investors said the government’s plans were short on details and left too much uncertainty about how those assets would be valued, or how private investors would be enticed to bid on them.

The losses on Wall Street came one week after the Dow sank to its lowest levels in six years on growing fears about banks across Europe and the United States.

By the end of trading on Friday, the Dow had tumbled 6.2 percent for the week, its worst since October, and had sunk to its lowest levels in six years. The S. & P. 500 fell 6.5 percent, dropping below 800, but was still slightly above its bear-market lows of Nov. 20.

“The technicians now have control of this market,” said Sam Stovall, chief investment strategist at Standard & Poor’s Equity Research. “People are saying, ‘Where do we go now? We don’t know what’s next.’ ”

What next for the price of gold?

What next for the price of gold?
While the outlook for the gold price remains positive, Blackrock Gold & General fund manager Graham Birch thinks investors should be wary of losing their perspective on it as part of a balanced portfolio.

By Pascal Dowling, head of research at Financial Express
Last Updated: 12:18PM GMT 23 Feb 2009

The price of gold this year overtook platinum briefly for the first time in a quarter of a century, causing a spike in gold funds. But while the outlook for the gold price remains positive, Blackrock Gold & General fund manager Graham Birch thinks investors should be wary of losing their perspective on it as part of a balanced portfolio.

Gold has rallied strongly in recent months to reach around $970 an ounce last week, close to its peak of more than $1,000 an ounce in March last year, prompting a new spike in the performance of funds with exposure to the metal.

Ruffer Baker Steel Gold has produced a total return of 55pc since the start of November when the price of gold began to rise, while Investec leapt 71pc over the same period. Smith & Williamson Global Gold & Resources fund has seen even greater returns, growing 75pc.

Blackrock Gold & General fund has produced a total return of 70pc – the equivalent of turning £1,000 into £1,700 over the same period, but the story behind this stellar performance is more complicated than it first appears.

Fund manager Graham Birch says the collapse of Lehman Brothers may have had a significant effect on the gold price last year, the implications of which are still being felt.

"You could argue that in the autumn of last year gold shares were too cheap. The price of gold was hit very hard during the Lehman crisis – you have to remember that so many people had money tied up with Lehman, and they were forced to sell whatever they had – including gold – during that period just to raise liquidity."

Gold reached a low in October last year, and has begun to recover. Because gold is priced in dollars and the dollar has strengthened against the pound, British investors with exposure to the precious metal have done particularly well.

Mr Birch claims that the commodity will continue to perform well, as people continue to buy into gold as a way to diversify their portfolios, and hedge their bets against the outcome of the various fiscal and monetary stimuli which governments, here and in the United States especially, are using to reinvigorate the economy.

Unsurprisingly, Adrian Ash, head of research at online gold trading facility www.bullionvault.com , agrees. The cost of holding gold, in terms of risk and lost interest, as opposed to cash, has fallen. To all intents and purposes, neither asset now pays any interest, but there is much concern about the possibility that money itself will be worth less in five years should inflation kick in on the back of these economic stimuli.

Mr Ash said: "The stimulus package which is coming through in the United States, I think a lot of people are seeing as the government heading straight to the dollar printing press. The big question is, in 12 months' time how many more dollars will there be in the world, and how much more gold will there be?"

Mr Birch said: "At the moment conditions are deflationary – money buys more than it used to – but central banks have cut back interest rates to virtually nothing, and once they've done that the next step is to use what they call quantitative easing – which is effectively printing money.

"A lot of people who are buying gold at the moment think that there is some danger that this quantitative easing might end in tears. If you are investing in a 10-year bond, for example, the interest rate is lousy, and it's redeemed in sterling – and you don't know what the effect of this quantitative easing is going to be; it could be that it's inflationary, and if it is that means you don't know what the value of sterling will be when it comes to redemption."

This wariness should support further strength in the gold price, claimed Mr Birch, but investors should not see exposure to the asset as a panacea. He explained: "Gold is not really an asset that helps poor people to get rich. It's an asset that helps rich people to stay rich as part of a diversified portfolio. You must remember that the people who are buying gold don't mind if they lose a bit of money on the gold price, if they are properly diversified, because if the gold price begins to fall, that probably means the conventional equity market is beginning to recover so they're making a bit of money elsewhere."

Gold, and in particular funds that invest in gold equities, should not be viewed as an absolute return option – or an option offering positive returns in any market. A recovery in the stock market would quite likely see poor returns or losses for funds of this type, and Mr Birch said this was important to remember.

"To be honest we would not take much action at all if the gold price did begin to fall. It sounds bad but these are sector funds, so we do not shy away from giving exposure to that sector just because it's begun to fall. We would take it on the chin, and that might mean people sell out of the fund, but that's their choice – we are not making the decision to go for exposure to gold for them, so we would not make the decision to deprive them of it,'' he said.

"It just so happens that exposure to gold has provided a good absolute return in recent years, but our goal is simply to provide exposure to it, and hopefully add some value over the long term."

http://www.telegraph.co.uk/finance/personalfinance/investing/4786021/What-next-for-the-price-of-gold.html

Why did no one see the credit crunch coming?

The Queen's tough question about the credit crunch has not been answered
Why did no one see the credit crunch coming? That was the awkward question Her Majesty the Queen asked on a visit to the London School of Economics last year.

By Peter Spencer
Last Updated: 9:32PM GMT 22 Feb 2009

Comments 18 Comment on this article

It would make a useful addition to many economics and finance examination papers this summer.

I would argue that it was hard to predict simply because nothing like this has ever happened before. History is littered with financial crises, but the collapse of the market in liquidity that lies at the heart of this problem is almost without precedent. The only case I am aware of is the collapse in international trade finance that took place after the assassination of the Archduke Ferdinand in Sarajevo, in the run up to the First World War.

The roots of this collapse lie in the global imbalances that have been building up for decades, making the world economy increasingly vulnerable. Huge savings in Asia depressed world interest and inflation rates and were channelled through the US banking system to western borrowers, reinforced since the millennium by the flow of petrodollars.

That helped drive the boom in UK mortgage and housing markets and the fall in the saving ratio. In 2006 our mortgage lenders were handing out £10bn of mortgages every month – and only getting in £5bn of that from savers. The rest was coming in from overseas banks.

The result was an overseas debt of £740bn between 2000 and 2006 – worth more than half of our gross domestic product – typically with a very short maturity. These dollar inflows had to be converted into sterling, which is why the exchange rate was so strong and exports so weak.

I think we all knew it could not last. It didn't matter whether you looked at the global imbalances; the level of house prices, or the 125pc mortgages that lenders were blithely handing out: this was clearly unsustainable.

People had been predicting a sticky end for years, but the dance just went on and on. Gordon Brown was repeatedly warned of the risk we were running with high levels of borrowing by the OECD, the IMF and other institutions. However, the music was so loud he could not hear.

He was not the only one. The Bank for International Settlements clearly warned of the threat to the global financial system posed by financial engineering and high levels of leverage. However, the markets refused to listen and just carried on dancing.

When it finally came, the end of the credit boom was much more sudden than anyone imagined. Like myself, most economists thought in terms of a gradual rebalancing as the debts built up and house prices became unaffordable, with the brakes applied gently. We expected things to turn round gradually, moving in a cyclical way rather than screeching to a halt. The surprise was that this time the international banking markets simply froze, suddenly halting the inflows into sterling and the credit markets. So what we got was more like a car crash. The economy had to adjust suddenly rather than, as we thought, gradually

Regrettably, very few were wearing seat belts. Now all of those heavy short term debts have to be repaid. Northern Rock was of course the first casualty, and the housing market quickly followed, dragging the rest of the economy into recession. The pound has been another casualty.

As I say, economists usually expect things to turn round gradually rather than abruptly. Financial markets can turn on a sixpence, but they usually remain open for business, even after a stock market crash. As Hyman Minsky observed, credit markets swing from elation and speculation to panic and contraction. But they have not shut down before, at least in peacetime.

Interest rates and financial prices can react violently in a crisis, but usually they manage to get demand back into line with supply. If confidence collapses it may take a big fall in the stock market to tempt bargain hunters back in, but eventually this happens.

Credit markets seem easier to understand than the stock market but are actually much more complex. If the supply of bank finance is cut, interest rates will normally rise to help bring demand into line with supply. But as Joseph Stiglitz pointed out in a famous paper with Andrew Weiss in 1981, this will discourage prudent borrowers who tend to be price sensitive, increasing the proportion of bad risks on the loan book. It is hard to prevent this: bank managers can't really distinguish the bad risks; otherwise they would not get a loan in the first place. Credit risk rises, particularly if a recession results, meaning that a rise in the loan rate can actually reduce the profitability of the loan book.

In this situation, banks tend to ration their customers rather than raising rates any further. A similar effect seems to have shut down the inter-bank and other wholesale credit markets in August 2007. Inter-bank rates naturally moved up as the market began to worry about bank losses on sub-prime loans.

But they reached a point at which they began to raise questions about the borrower's ability to repay. Any bank that was prepared to pay 1pc or so over the odds clearly had a liquidity problem. It might also have a solvency problem, especially if it was relying on high cost wholesale funds to fund a historic portfolio of low cost mortgages. So any banks that did have surplus cash simply hoarded it rather than risking it.

Of course there was more to it than that. Once Northern Rock failed, it became clear that wholesale depositors could not rely on the bank regulators to monitor the banks properly.

This also raised doubts about the Bank of England's ability to help out banks without stigmatising them, even if they just had a temporary problem with their liquidity.

Moreover, when the credit markets dried up it was no longer possible to place a market value on many of the banks assets. But whatever the reasons for this, the banks simply stopped lending to each other. Then they stopped lending to us.

Peter Spencer is Professor of Economics and Finance, University of York and Economic Adviser, Ernst & Young ITEM Club

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4782758/The-Queens-tough-question-about-the-credit-crunch-has-not-been-answered.html

Valuations are the core determinant of equity market returns.

Reason to hope for stock market investors
The "brutal" lesson will can learn from the past 10 years is that valuations are the core determinant of equity market returns.

By Paul Farrow
Last Updated: 12:14PM GMT 23 Feb 2009

John Maynard-Keynes: 'Success is always to the minority and never to the majority'
It is official. Equities were the worst performing asset class over the past decade, delivering negative real returns since 1998.

I don't suppose that those of you who have owned shares, unit trusts or Isas over the period will be too surprised at the revelation.

Unless you had been canny and bagged profits when they came and timed your run into commodities or emerging markets (and got out again) – or followed the gold bugs – you would have been a loser.

Fund statements that will have landed on doormats over the past year will have made for grim reading, while workers who are in defined contribution pension schemes have just learned that their pension fund has fallen in value by 25pc last year.

Consensus on where equities go from here is difficult to gauge, although the bears seem to outnumber the bulls. Investors seem to be shunning equities in favour if bonds.

Many advisers are once again advocating the merits of diversification – in other words, if you had invested in other assets such as cash and bonds, you would have fared better than someone who was overexposed to equities.

Yet not everyone believes diversification is the name of the game. Gary Potter, a multi-manager at Thames River, is one who argues that the crisis has narrowed the correlation between assets, making diversification less of a benefit.

He is happy to remain overweight in cash for the time being.

Some might be proclaiming the death of equities, although such thoughts could be premature.

It is easy to be sceptical about shares right now given their woeful performance, but the analysts who have just finished writing the 2009 Barclays Equity Gilt Study give reason for hope.

Firstly, the underperformance of shares has nothing to do with the asset class per se. Secondly, it says the macroeconomic environment has little influence on shares, which is a cheery thought given the deepening global recession.

Even corporate profitability, you might be surprised to learn, isn't the deciding factor on whether a share outperforms or not.

The study concludes that the "brutal" lesson will can learn from the past 10 years is that valuations are the core determinant of equity market returns.

Its research suggests that the reason shares have had such an abysmal ride over the past decade is that they were overvalued. Through the good times we were paying too much to get access to bumper profits.

"When the surge in growth ended abruptly in 2008, equity prices fell in line with the actual and expected decline in profits.

Expensive valuations therefore caused equity returns to underperform profits following the 2001 slowdown and then did the same during the ensuing boom, while finally failing to provide a cushion when the business cycle turned down," the study concludes.

You can probably guess where the Barclays mob are going with this, so if you are considering stuffing your spare cash under your mattress, keeping it in a savings account despite the dismal rates of interest, or even following the herd and piling into bonds, then bear this in mind.

The authors of the study believe that equity valuations will fall a little further and remain low for a while, before recovering late in the decade. Meanwhile, bonds' rising yields will "self-evidently" damage returns. The end result is that equities will outperform bonds over the next 10 years.

The contrarian argument put forward by Barclays might whet the appetite of those yearning for some optimism. Those optimists might also want to be reminded of this post-Depression scribbling from John Maynard Keynes, the most famous contrarian investor of them all.

In 1937 he wrote: "It is the one sphere of life and activity where victory, security and success is always to the minority and never to the majority. When you find anyone agreeing with you, change your mind."

http://www.telegraph.co.uk/finance/personalfinance/comment/paulfarrow/4786377/Reason-to-hope-for-stock-market-investors.html

Darling’s latest rescue plan for the economy is to print fresh money.

By GEORGE PASCOE-WATSON
Political Editor


CHANCELLOR Alistair Darling’s latest rescue plan for the economy is to print fresh money.
The Treasury and the Bank of England will agree this week on a £100billion injection of cash which currently doesn’t exist. Economists call the highly risky strategy “quantitative easing”.

Here is The Sun’s guide to modern-day printing money:


Why is it happening?
The Bank of England’s main weapon against a slump is interest rates. It has cut them down to one per cent already to put more cash in people’s pockets.

But that still hasn’t done the trick and once interest rates fall to zero per cent, it must find a new way of kick- starting the economy.


Does this literally mean fresh bank notes, i.e fivers and tenners, being printed?
No.


So why is it called printing money?
Quantitative easing means flooding the economy with more money than currently exists. But the cash injected is not new bank notes. It is done electronically by the Bank of England, our central bank.


How does it happen?
High Street banks will “sell” their assets to the Bank of England. These can be mortgage deals they have with customers, Government bonds and other debt. The Bank of England will then pay the banks for these assets with money that currently doesn’t exist. It won’t be hard cash — it will be electronic transfers of money.

In fact, the Bank of England will merely increase the size of commercial banks’ accounts held there. All banks must keep reserves of cash at the Bank of England.

So the commercial banks’ assets will be swapped for more cash reserves by the Bank of England.


What happens next?
Commercial banks will have more money to use — and lend. Printing money will also keep long-term interest rates down — meaning banks will be more likely to lend to each other.

This will encourage them to give credit to firms and individuals who will start spending money.


How much cash is there in the money supply?
We currently have £1.95trillion in the UK money supply. Only £50billion is cash — or £850 per person. The rest is in banks as savings and investments.


Are there risks?
There is a risk of hyper-inflation if printing money is done too rapidly.


Has it ever been done before?
Yes. Most recently the Japanese government did it for six years, only ending the practice in 2006. But experts believe the move did not make a significant difference to their long-term slump.


What about disasters?
Money was printed and pumped into the economy in Zimbabwe under Robert Mugabe and in pre-Second World War Germany. Both actions led to the economies’ collapse as banknotes became worthless.

In Germany people carried cash in wheelbarrows because each note was worth so little. The barrows were soon stolen because they were worth more than the cash due to hyperinflation.

http://www.thesun.co.uk/sol/homepage/news/money/article2262459.ece

Stocks and Earnings: Racing to the Bottom

November 20, 2008,
Stocks and Earnings: Racing to the Bottom
By David Leonhardt
One problem for the stock market right now is that estimates of corporate earnings are falling almost as fast as share prices.

That means that even as stocks lose value, they are not really getting cheaper — at least in the way that their valuation is most commonly measured (which is relative to the earnings of the underlying companies). Just to keep from getting more expensive, stocks have had to fall.

After today’s drop, the Standard & Poor 500-stock index has dropped 14.2 percent since Oct. 24, for instance. But S.&P.’s estimates for the net earnings of the 500 companies in its index has dropped 13.9 percent over that same four-week span. (Thanks to Howard Silverblatt of S.&P. for these numbers. They are for the year ending June 30, 2009.) S.&P. has had to lower its earnings estimates because the deteriorating economy is causing companies to lower their own estimates.

The standard measure of stocks’ valuation is the price-earnings ratio: the stock price of the average company in the S.&P. 500 company divided by its annual earnings. Right now, the forward-looking version of that ratio — today’s stock price, divided by estimated earnings over the next year — is about 16, which also happens to be roughly its average over the last century. By this measure, in other words, stocks are not yet inexpensive despite the enormous losses of the last year.

Some stock watchers — like John Bogle of Vanguard and Robert Shiller, the author of “Irrational Exurberance” — prefer a longer-term P/E ratio, one that is based on 10 years of earnings. That helps control for the sharp declines in corporate earnings during a recession. By this measure, the P/E ratio appears to be about 13.

That is below its historical average — and offers some reason to think stocks are starting to become cheap. On the other hand, that ratio bottomed out at close to 5 during the other two great bear markets of the past century, in the 1930s and the 1970s and early 80s.
Stocks are definitely becoming cheaper. If you are a long-term investor, they may even be worth buying at this point. But they may still have a ways to fall.

http://economix.blogs.nytimes.com/2008/11/20/stocks-and-earnings-racing-to-the-bottom/

Why Stocks Still Aren’t Cheap

February 20, 2009,
Why Stocks Still Aren’t Cheap
By David Leonhardt

At long last, are stocks cheap? Amazingly enough, they still are not, at least by one commonly used measure.

Stocks fell again today. The Standard & Poor’s 500-stock index closed at 770, which isn’t too far from the low of 752 that it reached in November. In inflation-adjusted terms, the index is about 55 percent below its 2000 peak.

Those comparisons certainly make it sound as if stocks are incredibly cheap. But they aren’t, at least not according to the price-earnings ratio. That ratio, a standard measure of market valuation, divides the average price of stock in the index by the earnings of the companies in the index.

Based on the average earnings of companies over the past year, the current p-e ratio is about 30, far above the long-term historical average of 16. By this metric, stocks actually look expensive and may seem as if they still much further to fall.

The problem with this metric, however, is that it’s overly sensitive to economic swings. Corporate earnings are plunging now, because of the recession. P-E ratios always spike during recessions — and corporate earnings always recover, so many investors simply ignore short-term ratios during recessions.

It makes more sense to look at earnings over a longer period of time, which smooths out the economic cycle. I have written before about a P-E ratio based on the previous 10 years of earnings, a measure favored by Robert Shiller, the author of “Irrational Exuberance,” and others. (I first wrote about it in the summer of 2007, when being bearish was a lot lonelier.)

By this measure, the P-E ratio of the S.&P. 500 is now about 14.5. It’s below average, but not enormously so. By comparison, this ratio fell to 6 during the 1930s and 7 during the early 1980s. In short, stocks are a little less expensive than their historical average. But they are far more expensive than they were at the worst points of the other two worst recessions of the past century.

How could this be? The main answer is that stocks were incredibly expensive before the current crisis began — more expensive than at almost any other point in the last 100 years, save the bubbles of the 1920s and 1990s. They had a long way to fall. The fact that earnings are falling — and may well remain low for the next several years — doesn’t help either.

For the average investor, I would repeat the advice I offered in November:
Stocks are definitely becoming cheaper. If you are a long-term investor, they may even be worth buying at this point. But they may still have a ways to fall.
As per usual, thanks to Howard Silverblatt at S.&P., for providing valuable data.

http://economix.blogs.nytimes.com/2009/02/20/why-stocks-still-arent-cheap/

There will be slim pickings if China loses its appetite for Western debt

There will be slim pickings if China loses its appetite for Western debt
Last week I argued that the idea of large Asian economies "decoupling" from the West was unhelpful. Globalization makes nations more interrelated, not less. So export-oriented nations like China and India were always going to feel the impact of a massive Western contraction.

By Liam Halligan
Last Updated: 6:11PM GMT 21 Feb 2009

Comments 0 Comment on this article

But I have to admit that China, with its massive 1,400m population, isn't doing badly. Retail sales remain strong – up 17pc in real terms. Growth has slowed, but GDP still expanded by a pretty spectacular 6.8pc during the fourth quarter of last year.

Japan – that other Asian giant – continues to suffer. Tumbling exports have sparked the worst slump in 35 years. Japanese GDP contracted 3.3pc during the last three months of 2008 – equivalent to a 12.7pc annualized drop. The Nikkei 225 index of leading Japanese shares is down 16pc since the start of 2009. Chinese shares, in contrast, have gained 25pc this year – the best return of any stock market in the world. London's FTSE-100 shed 12pc over the same period, with New York's S&P 500 down 15pc.

Optimism in China has been boosted by the government's Rmb4,000bn (£405bn) support package. Unlike Japan and the cash-strapped Western nations, China is funding its fiscal stimulus using reserves, not extra borrowing.

As the West's predicament has worsened, and China's relative strength has punched through, the political mood music has changed. Just a few weeks ago, in his first speech as US Treasury Secretary, Timothy Geithner accused Beijing of "manipulating" its currency. So what if the renminbi has appreciated more than 20pc against the dollar since 2005, undermining Chinese exports? Wanting to appear tough, "Tiny Tim" attacked China.

Last week's G7 Finance Minister's meeting in Rome produced far more measured tones. "We welcome China's fiscal measures and continued commitment to move to a more flexible exchange rate," purred the post-Summit communiqué.

Hillary Clinton also perfected her "China bashing" rhetoric as she bid for the White House. But now, as US Secretary of State, and on a visit to China, she insists "a positive co-operative relationship" between Beijing and Washington "is vital to peace and prosperity, not only in the Asia-Pacific region, but worldwide".

So, what's different – apart from US politicians no longer being in election mode? Well, behind the scenes, the Chinese government has started demanding guarantees for the $700bn of US Treasury bills on its books.

China has been keeping the States afloat for the best part of a decade, buying up vast quantities of T-bills to fund America's enormous budget and trade deficits. At any point, China could seriously damage the world's largest economy – by refusing to lend more money. So reliant is America on funding from Beijing that, by turning off the cash taps, China could spark an instant run on the dollar.

The Chinese haven't done that as it would harm their dollar-based holdings and they understand we live in an inter-dependent world.

But the ever-greater use of Asian savings to fund the "advanced" economies' deficits is unsustainable. And, as such, we're reaching the point where it will not be sustained. With Western governments intent on printing money and debauching their currencies, the big emerging market creditors – not only China, but Taiwan, Russia, South Korea and others – are now privately raising doubts about their future appetite for Western debt.

This demand drop-off will happen just as the West's dependence on such credit peaks. America and the UK are starting to issue sovereign paper like confetti, to fund highly-irresponsible "recovery programs".

The "rush from risk" that followed the Lehman collapse last September caused the repatriation of billions of dollars invested in emerging markets back to the "safe haven" of the West. That has so far allowed the US and UK authorities to get their larger debt issues away.

But the upcoming volumes are simply enormous. Last year, the US sold bonds to cover its $460bn deficit – around $200bn to foreigners, with China taking the lion's share. But America is on course to issue a staggering $2,000bn of debt in each of the next two years.

Over the same period, the UK will be flogging three times more gilts annually than during 2008. Right across the Western world, crisis-ridden governments will be issuing more and more debt.

Worried about falling currencies and rising inflation, the emerging markets – not least the Chinese – are demanding better returns to buy Western sovereign bonds. This is entirely justified. The debtor governments are weak, confused, and piling loans on top of loans with little sign of future growth.

But how will the Western world react when the creditor countries finally refuse to buy? How will America respond – with resignation, understanding, or aggression? That's the crucial question the world faces over the next three to five years. Just what happens when China stops buying US government debt?

This 'crank' sticks by his prediction that the single currency will not survive

The euro has just surged 2pc against the dollar, up from a three-month low. Why? Certainly not because the eurozone's economic prospects have improved.

New data shows a sharp drop in the 16-member states' PMI index – a bellwether for future growth. The single currency area is still contracting at breakneck speed, and now faces a 1.2pc fall in GDP during the first three months of this year.

So why did the euro strengthen? Because Peer Steinbrueck, Germany's finance minister, indicated the currency union's largest economy would consider bailing-out weaker members if they defaulted on their sovereign debts.

Since the euro was launched in 1999, those of us arguing it would eventually break-up have been dismissed as cranks. But now, by admitting it "will show itself capable of acting", Germany has acknowledged bail-outs may be needed, suggesting collapse is a genuine possibility. The only surprise is that it's taken so long for the politicians to face up to economic reality.

For some time now, eurozone countries with large budget and/or trade deficits have been forced to pay high interest rates when issuing sovereign debt. These problem nations – Portugal, Ireland, Italy, Greece and Spain – are known collectively in global debt markets by the unfortunate acronym of "PIIGS".

The gap between their average 10-year bond yield and the rate needed to sell German government debt – "the PIIGS-spread" – has just topped 200 basis points. Austria has also now joined this high-risk group – given the exposure of its banking system to the emerging markets of Eastern Europe.

German Chancellor Angela Merkel refuses to comment on whether Germany would help eurozone members in trouble. No wonder. As German exports suffer, unemployment is rising. And after years of budgetary restraint, German voters won't take kindly to paying for excesses elsewhere.

But signals coming out of the German Finance Ministry indicate a plan is anyway being hatched – for countries with better credit ratings to sell bonds and then lend the proceeds to the ailing PIIGS. In return for doing this, though, the stronger members will surely want some say over how the money is spent and when taxes will be raised to pay it back.

At that point, eurozone voters will become extremely nervous at an implicit transfer of sovereignty – and the central contradictions of monetary union will be exposed. I've predicted the demise of the single currency since long before it's launch. I'm sticking to that view.

http://www.telegraph.co.uk/finance/comment/liamhalligan/4741093/There-will-be-slim-pickings-if-China-loses-its-appetite-for-Western-debt.html

Finding Affordable Financial Advice

Finding Affordable Financial Advice
by Laura Rowley
Posted on Friday, February 20, 2009, 12:00AM

While the world is chock-full of financial planners, they typically serve clients with $250,000 or more to invest. Sound, affordable advice can be tough to find for less-affluent wage earners. (And in the era of Bernie Madoff, whom can you trust?)

The economic crisis underscores the need to address finances in a holistic way -- debt, savings, investments, insurance, etc. -- and that may mean reaching out for guidance.

Here's a look at some of the efforts to fill the affordable advice void, designed for people who are either novices or have some financial literacy but want a coach to assist them in refining and reaching their goals.

Large Firms

Smith Barney's myFi, a division of Citigroup, recently launched a "Financial Wellness Program," in which clients pay $50 to $100 a month to develop a plan with an advisor. Counselors typically have seven years' experience and some level of financial certification. They act as fiduciaries, and don't get commissions for steering clients into Citi's products.

"We said, ‘Let's wipe away the past and [offer] the opportunity to pay for financial [advice] the way you'd pay for a utility,'" says Andy Sieg, managing director and head of myFi. "It has nothing to do with products and everything to do with advice. It's one price for ongoing coaching across all the issues of your financial life. Even someone on the verge of bankruptcy can call."

The coach walks clients through diagnostic tools to develop goals and an action plan. The client also has access to a series of planning modules over the course of a year, delivered by certified financial planners (CFPs) and other specialists. The coach is typically in touch with the client once a month, with an in-depth session occurring once a quarter. Coaches don't suggest specific products, but they will recommend resources, such as Bankrate.com or LendingTree.com, for mortgage rates.

Waiving Nuisance Fees

Participants don't need to have assets invested with Smith Barney, although clearly the firm is hoping to eventually attract those investments. If a client does bring assets to the table, myFi currently waives brokerage and account fees, as well as other transaction charges, for those with less than $100,000 in managed assets.

"It is extremely transparent in terms of what the customer is paying and what they get for what they pay," says Sieg. "What we heard from clients is they don't necessarily understand pricing in financial services, and clearly have a negative reaction when they feel there are nuisance fees."

Other large financial services firms, including Fidelity, Vanguard, and Charles Schwab, offer advice, but it's generally reserved to retirement or college savings advice. Fidelity, for example, offers free asset allocation advice at one of its 128 centers or on the phone, a spokesman says, adding that the advisors don't earn commission on the products they recommend. The advice is based on the firm's online tools (which some critics say are skewed toward over-saving for retirement).

For clients with less than $100,000 in investable assets, The Vanguard Group offers asset allocation and investment advice, as well as analyses of saving and spending in retirement, for a $1,000 fee. Clients fill out a detailed questionnaire online and then spend an hour on the phone with a fee-only consultant, who makes portfolio recommendations based on Vanguard's mutual funds (but doesn't earn commission on funds.) You can't get services like estate or insurance planning unless you have $500,000 or more of investable assets.

Seminars and Money Clubs

Another approach is to find like-minded peers to keep you on track -- in other words, a money club. "The group is a collective conscience that can increase your knowledge by sharing and increase the odds that you do your homework and follow through on actions," explains Diahann Lassus, president of the National Association of Personal Financial Advisors (NAPFA), a group of fee-only professionals.

Money clubs have been springing up nationwide, with many non-profit groups focused on women. Two veteran organizations are the San Diego-based Women's Institute for Financial Education (which has trademarked "money club") and New York-based Savvy Ladies, which had 5,000 women participate in clubs and educational programs last year.

Stacy Francis, a fee-only CFP in New York, founded Savvy Ladies in 2002, and she donates 20 percent of her firm's income to help run the non-profit. For an annual membership fee of $50 to $160, members get access to 18 to 24 workshops and seminars a year, as well as help finding or starting a club. They also get to have one-on-one monthly phone sessions with a CFP who works pro bono.

"Our goal was to create clubs across the nation, and we have some up and running -- but not as many as I had hoped," Francis says. "The challenge has been finding champions willing to do the work -- to find a space to meet and reach out to other members of the community who might want to participate."

If you're interested in starting a club, see these guidelines.

The USDA's Cooperative State Research, Education, and Extension Service brings together the teaching, research, and extension activities of 103 land-grant universities and the U.S. Department of Agriculture. CES is a public-funded, non-formal educational system that extends research-based information to nearly 3,150 county offices. (To find one near you, click here.) The Cooperative Extension Service also offers extension.org, which allows consumers to submit financial questions and receive answers from educators by email.

You can also access a personal finance course online for free through the OpenCourseWare Consortium. It's a group of about 250 universities internationally -- including 17 in the U.S. -- that offers course materials, lecture notes, tests, and more.

Crown Financial Ministries, which has roots in the mid-1970s, offers programs nationally and internationally; its curriculum is founded in evangelical Christian teaching. The Bible-based programs emphasize eliminating all debt and tithing 10 percent of one's income.

Financial guru Dave Ramsey, who also layers Christian messages in his teachings, has trained an army of instructors through his Financial Peace University. They offer a 13-week financial course for $99 around the country.

Financial author Lynn Khalfani-Cox is sponsoring her own Zero-Debt Tour at churches across the country. "The requests have come into us specifically from a lot of churches over the last two years," she says. "People are looking for help and for hope -- and in times of crisis, they do turn to faith."

Q and A

Finally, DIY investors seeking answers to more-narrow financial questions can find a fee-only planner who charges by the hour at garrettfinancialnetwork.com, or use a Web site such as myfinancialadvice.com, which answers questions for a fee. Additionally, NAPFA is touring the country with Your Money Bus, in which members offer free financial planning advice to consumers in various cities around the country, through June 3.

Lassus says no matter which educational avenue a novice chooses, the key is to reach out: "Just like the odds are much higher that you will actually reach an objective when you write it down, they are also much higher when you share your objectives with someone else."

http://finance.yahoo.com/expert/article/moneyhappy/143028

Also read: Personal Money http://www.invest.com.my/game/intro/

Major indexes fall more than 6 percent for week

Major indexes fall more than 6 percent for week
Friday February 20, 7:32 pm ET
By Tim Paradis, AP Business Writer
Wall Street ends another terrible week; major indexes drop by more than 6 percent


NEW YORK (AP) -- Wall Street ended another terrible week Friday, leaving major indexes down more than 6 percent as investors worried that the recession will persist for at least the rest of the year and that government intervention will do little to hasten a recovery.

Investors shaved 100 points off the Dow Jones industrial average just a day after the market's best-known indicator dropped to its lowest level since the depths of the last bear market, in 2002. Stocks of struggling financial companies were among the hardest hit.

The Standard & Poor's 500 index, the barometer most closely watched by market pros, came close to its lowest point in nearly 12 years.

"Right now, more than a crisis in mortgages or in housing, we have a crisis in confidence. That is biggest problem in trying to analyze the current market," said James Stack, president of market research firm InvesTech Research in Whitefish, Mont. "You cannot analyze psychology."

Wall Street has been sinking lower as investors come to terms with the fact that the optimism behind a late-2008 rally was clearly unfounded. Companies' forecasts for this year, on top of a dismal series of fourth-quarter earnings reports, pounded home the reality that no one can determine when the recession will end.

"It was a market that was built on that hope, and what we're seeing now is an unwinding of that," said Todd Salamone, director of trading and vice president of research at Schaeffer's Investment Research in Cincinnati, of the rally from late November to early January.

The disappointment seen this week arose from the market's growing recognition that the Obama administration's multibillion-dollar stimulus and bailout programs are unlikely to turn the economy around anytime soon.

"There were a lot of people that were banking on Washington to get us out of this. I don't know if there is anything Washington can do," Salamone said. He said the global economy is going through the tedious process of reducing borrowing and working through bad debt -- something government help can't speed up.

With the week erasing whatever shreds of hope the market had, there is virtually no chance of a rally on Wall Street. What the market might see is a blip upward -- but blips tend to evaporate quickly.

That's what happened Friday. Stocks erased some of their losses after White House press secretary Robert Gibbs doused fears that the government would nationalize crippled banks. Investors who worried about seeing their shares wiped out by a government takeover welcomed the news, but it didn't ease broader concerns about the economy.

The Dow Jones industrials briefly went into positive territory, but quickly turned down again.

Salamone said investors had been too hopeful in late 2008 and at the start of this year that the new administration would be able to swiftly disentangle the economy.

The Dow industrials fell 100.28 points, or 1.3 percent, to 7,365.67 after earlier falling more than 215 points. On Thursday, the Dow broke through its Nov. 20 low of 7,552.29, and closed at its lowest level since Oct. 9, 2002.

The Dow's 6.2 percent slide for the week was its worst performance since the week ended Oct. 10, when it lost 18.2 percent.

The Standard & Poor's 500 index on Friday fell 8.89, or 1.14 percent, to 770.05. The benchmark most watched by traders came within less than 2 points of its Nov. 20 close of 752.44, which was its lowest since April 1997. It remains above its Nov. 21 trading low of 741.02.

The Nasdaq composite index fell 1.59, or 0.11 percent, to 1,441.23.

For the week, the S&P fell 6.9 percent, while the Nasdaq lost 6.1 percent.

Declining issues outnumbered advancers by about 3 to 1 on the New York Stock Exchange, where consolidated volume came to a heavy 8.12 billion shares as options contracts expired. Volume on Thursday came to 5.64 billion shares.

The Russell 2000 index of smaller companies fell 5.75, or 1.4 percent, to 410.96.

Other world indicators also fell sharply. Britain's FTSE 100 declined 3.2 percent, Germany's DAX index tumbled 4.8 percent, and France's CAC-40 fell 4.3 percent.

Shares of financial bellwethers Citigroup Inc. and Bank of America Corp. fell on worries the government will have to take control of them. Citigroup tumbled 22 percent, while Bank of America fell 3.6 percent. The stocks were down as much as 36 percent during the session.

The fears about the banks are hurting shareholders of those companies and dragging down the rest of the market because the broader economy can't function properly when banks are unable to lend at more normal levels.

"Financing is the blood which runs through our nation's veins. It's what keeps us alive," said Lawrence Creatura, a portfolio manager at Federated Clover Investment Advisors.

He said the talk of nationalizing banks only underscores the troubles with the economy.

"Things are clearly not normal. It's not healthy. The patient was on life support, and now what we're talking about getting out the paddle with respect to nationalization," Creatura said.

As investors dropped out of stocks, safer investments like Treasury debt and gold rose. The price of the benchmark 10-year Treasury note rose sharply, sending its yield down to 2.79 percent from 2.86 percent. The yield on the three-month T-bill, considered one of the safest investments, fell to 0.26 percent from 0.30 percent late Thursday.

Gold broke above $1,000, closing at $1,002.20 an ounce on the New York Mercantile Exchange.

Investors are looking desperately at any safe havens simply because the stock market, which rises and falls on investors' expectations for the future, sees only trouble ahead.

"There's still a big fear factor syndrome," said Michael Strauss, chief economist and market strategist at Commonfund. "There is a focus on what is happening here and now instead of six months to nine months from now."

The Dow Jones industrial average closed the week down 484.74, or 6.2 percent, at 7,365.67. The Standard & Poor's 500 index fell 56.79, or 6.9 percent, to 770.05. The Nasdaq composite index fell 93.13, or 6.1 percent, closing at 1,441.23.

The Russell 2000 index, which tracks the performance of small company stocks, declined 37.40, or 8.3 percent, to 410.96.

The Dow Jones Wilshire 5000 Composite Index -- a free-float weighted index that measures 5,000 U.S. based companies -- ended at 7,802.27, down 583.47, or 6.96 percent, for the week. A year ago, the index was at 13,758.35.

http://biz.yahoo.com/ap/090220/wall_street.html

Buffett's metric says it's time to buy

Buffett's metric says it's time to buy

According to investing guru Warren Buffett, U.S. stocks are a logical investment when their total market value equals 70% to 80% of Gross National Product.
By Carol J. Loomis and Doris Burke
February 4, 2009: 9:49 AM ET

(Fortune Magazine) -- Is it time to buy U.S. stocks?
According to both this 85-year chart and famed investor Warren Buffett, it just might be. The point of the chart is that there should be a rational relationship between the total market value of U.S. stocks and the output of the U.S. economy - its GNP.
Fortune first ran a version of this chart in late 2001 (see "Warren Buffett on the stock market"). Stocks had by that time retreated sharply from the manic levels of the Internet bubble. But they were still very high, with stock values at 133% of GNP. That level certainly did not suggest to Buffett that it was time to buy stocks.
But he visualized a moment when purchases might make sense, saying, "If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you."
Well, that's where stocks were in late January, when the ratio was 75%. Nothing about that reversion to sanity surprises Buffett, who told Fortune that the shift in the ratio reminds him of investor Ben Graham's statement about the stock market: "In the short run it's a voting machine, but in the long run it's a weighing machine."
Not just liking the chart's message in theory, Buffett also put himself on record in an Oct. 17 New York Times op-ed piece, saying that he was personally buying U.S. stocks after a long period of owning nothing (outside of Berkshire Hathaway (BRKB) stock) but U.S. government bonds.
He said that if prices kept falling, he expected to soon have 100% of his net worth in U.S. equities. Prices did keep falling - the Dow Jones industrials have dropped by about 10% since Oct. 17 - so presumably Buffett kept buying. Alas for all curious investors, he isn't saying what he bought.

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http://money.cnn.com/2009/02/04/magazines/fortune/buffett_metric.fortune/index.htm