'Sell every asset except gilts'

'Sell every asset except gilts'
Conventional assets – even gold – are no good as hedges against the inevitable deflation, says one asset manager.

By David Kauders
Last Updated: 12:17PM GMT 11 Mar 2009

At the end of last week, gilt prices soared and yields fell again. The market reacted positively to the Bank of England's announcement of quantitative easing. Yet in the preceding days and weeks the market had been spooked by concerns that the bail-outs would create inflation. Why the sudden change in sentiment?

It has long been our view that inflation scares have been seriously overstated and the real risk is deflation. Deflation occurs when a shrinking economy leaves businesses and consumers who have already borrowed heavily earning less and therefore unable to afford their existing debts.

There is the danger of a downward spiral caused by less income to pay interest. This is what the authorities are trying to avoid.

In a deflationary environment, only fixed-coupon gilts prosper: even index-linked stocks are ineffective. This is because the real rate of interest (nominal interest less inflation) has historically been around 2pc to 3pc for centuries.

If prices are falling rather than rising, fixed-coupon gilts gain in value, whereas the indexation formula for index-linked gilts indexes downwards with no floor. Other asset classes such as shares, property and many commodities depend on the continued take-up of more credit – which is why they did so well for many years.

As the credit crunch proceeded, governments introduced more and more bail-outs to keep banks lending. Real money, which has to be raised by increased taxation or by selling new gilts, was spent. This gave rise to fears that excess supply would depress gilt prices. Yet events show that the fears were mistaken. There are a number of reasons for gilt prices rising as supply expands:

• The biggest beneficiary of lower interest rates is government, as lower rates cut the cost of servicing the national debt;
• Pension funds are willing buyers and therefore absorb any supply offered to them;
• Risk elsewhere leads to a flight to quality and safety, irrespective of price.
• In addition, the Treasury have been selling new gilts to the market through the Debt Management Office's auction programme in order to fund the Government's spending. This takes cash out of the economy, yet the Bank of England wants to buy gilts back to put public money into the economy.
  
  

If the policy works it may ameliorate the recession, but the result is that the Bank of England counteracts the effect of the Treasury's extra supply of gilts.

Being realistic, there are many reasons why this quantitative easing may be of only cosmetic effect: why should banks lend to over-indebted businesses and consumers? What if they just run down their derivatives positions further?

Banks and building societies have to hold capital in reserve to ensure they can meet any losses. Historically, they had significant holdings in gilts and deposits at the Bank of England, but over the past 30 years standards were relaxed and other types of debt security were brought into those reserves.

Now they are rediscovering the advantages of having highly saleable assets such as gilts in their core capital and are therefore willing buyers of government bonds. Such bank purchases are significant, just as pension funds will be material buyers when they opt for certainty instead of risk to stem their losses in stock markets.

These large investors are the only ones who can sell to the Bank of England, yet they have good reasons for being net buyers.

However you look at it, institutional demand is increasing no matter what the supply of gilts. Nearly 20 years ago, in the recession of the early 1990s, the Government sold more gilts and prices rose (yields fell), in that case from around 13pc in 1990 to around 9pc in 1993. Inflation then was around 10pc and about to fall sharply. Notice the parallels as inflation now threatens to turn into deflation, the Government issues more gilts and prices rise again.

Investors have been pursuing property and gold for protection against financial risk. But property is an inflation hedge, not a deflation hedge, since its price level depends on the continued supply of credit.

There are also demographic factors that have favoured property in the postwar years but now turn against it: the lower birth rate, extensive owner occupation and the shift from net immigration to net emigration. Add this to the current financial pressure, and you can see why property is no longer a viable investment.

As for gold, it is the ultimate inflation hedge, since easy money provides the fuel for more people to buy it. But it is not a deflation hedge, for one simple reason. No currency is exchangeable into gold and no government is going to wreck its country's economy by adopting a gold standard.

This explains why the gold price perks up occasionally then always slips back again. The safest asset in the financial system is the promise of government to honour its own debt.

Private investors need to go with the flow. Investing in stock markets, like property, is proving singularly unrewarding at present. We believe the bear markets have much further to run before shares and property are cheap enough to buy again.

Since income offered by gilts is still above that earned from many bank accounts and there is a continuing flight to quality, gilt prices must go on rising until this deflation is over.

Investors should change to a gilt-only strategy to preserve capital and income. This way, they will have the cash to buy the bargains when stock markets offer them.

David Kauders is a partner at Kauders Portfolio Management.

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New Star peers into the future

http://www.telegraph.co.uk/finance/personalfinance/investing/4969399/Sell-every-asset-except-gilts.html

Bank shares: Bargain or basket case?

Bank shares: Bargain or basket case?
As some of Britain's banks languish in the 90pc club, have the shares fallen far enough to be worth buying again?

By Richard Evans
Last Updated: 6:20PM GMT 11 Mar 2009

RBS could be nationalised completely

Britain's banks have been a terrible investment. Many have joined the "90pc club" of companies whose share prices have fallen to a mere 10th of their former highs.

Shares in Royal Bank of Scotland, for example, had lost 94pc of their value at the time of writing, while Lloyds Banking Group was not far behind on 91pc. The figure for Barclays was 88pc. Even HSBC, which is seen as one of the strongest banks around, was trading 62pc below its peak at one stage, while Standard Chartered had lost 54pc of its value.


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Financial funds: 'The first good news could see a reversal'

Financial funds: 'The first good news could see a reversal'
Shareholders' gloom is deepened by the fact that they are unlikely to see any dividends for a while and that, in the case of Lloyds and RBS, the Government holds a controlling stake, potentially bringing political as well as commercial considerations into their decision-making.

Contrarian investors, who are used to buying at the point of maximum pessimism, may think it is time to buy the banks' shares. After all, they reason, all the bad news should be in the price, while the banks could prosper again when the economy eventually recovers. In five years' time, today's prices could look very cheap.

Others say the banks are bust in all but name and could be fully nationalised if the recent string of bail-outs fails to work.

So should investors be buying bank shares or steering clear? And should existing investors grit their teeth and hang on – or sell at a huge loss? We asked the experts for their views.

JONATHAN JACKSON, KILLIK & CO
The bottom line is that all banks are high risk at present given the lack of visibility over the economy or the level of possible write downs in the future. It depends on what type of investor you are.

We don't think RBS or Lloyds are likely to be nationalised but the state's stakes could rise further if the economy turns out worse than we think. If you buy shares in Lloyds you are effectively buying an option on it surviving for three to five years and benefiting from its huge market share. Given the lack of visibility, both share prices will be very volatile.

With HSBC, the falling shares price is a reflection of investor concern that the bank may need to come back for more capital and the presence of hedge fund short positions betting on that.

Standard Chartered should benefit from the trend of survival of the fittest; it should be able to mop up market share as weak players fall away. It operates in a part of the world – Asia – that should experience stronger growth in the long term. It is well placed, but short sellers are attracted by the fact that the share price has held up well, so there could be more volatility. In the long term it's a strong bank and is much less likely to go under.

Barclays is not in as bad shape as Lloyds or RBS and has less chance of being nationalised. The market believes that Barclays will have to join the government asset protection scheme. The risk is that it may have to come back for more money. So far, it hasn't turned to the Government for capital, preferring instead to use third party investors.

In the long term, the Lehmans deal should turn out well. We will have more visibility by the end of the month.

MARK HALL, RENSBURG SHEPPARDS
There is a credible case for believing that the equity in the UK banks should already be worthless, given the scale of government intervention that has been necessary to keep the banks afloat.

However, with the authorities seemingly intent on avoiding full nationalisation, at least for now, the case for and against the shares is not quite so clear cut. There are still very realistic scenarios under which the shares are worthless but the upside could also be very substantial for any survivors of the current recession.

The only certainty is that the shares should be held only as part of a well-diversified portfolio or by those with a very high risk tolerance. The stories of pensioners with their life savings in one or two bank shares are very distressing.

NIC CLARKE, CHARLES STANLEY
We have a great deal of sympathy for those Lloyds TSB investors who bought a low-risk bank and through its management launching an ill advised acquisition [of HBOS] have lost a great proportion of the company.

We believe that the threat of complete nationalisation has been reduced significantly through this deal [with the Government to insure toxic assets]. Lloyds says it can now weather the severest of economic downturns as its assets have been thoroughly stress-tested.

The group will be loss-making in 2009 and there is a chance that it will be loss-making in 2010, despite the synergies from HBOS coming through, unless the outlook for the UK economy improves. And of course if the group is making a loss it is unlikely to pay a dividend, whether it is blocked or not. But at least the announcement [of the government deal] should improve the group's credit ratings and takes it a step nearer to a time when the market is able to value the group on an earnings basis. Unfortunately, due to the fallout from the HBOS deal that is the best that investors can hope for and any sort of recovery will take time. Our recommendation remains hold.

Putting a value on RBS currently is really about trying to decide what the odds are that it will be nationalised or whether it remains a listed company in say three years' time when the economy has improved.

Chief executive Stephen Hester's comment that "to make any forecast is hazardous" and that credit losses will rise "probably sharply" underlines the level of risk that investors are exposed to owning the stock during a prolonged recession. On balance our recommendation remains hold.

On Barclays, one key question mark has been whether the group has been conservative enough writing down its wholesale assets. It has seemed odd that RBS's global markets/wholesale bank has performed so markedly worse than Barclays Capital. Moody's cut its long-term ratings on Barclays by two notches to Aa3 on February 2 due to the potential for "significant" further losses due to credit-related write downs and rising impairments.

It would be helpful to know more detail regarding the Government's asset protection scheme. If participation makes economic sense Barclays' risk weighted assets will be reduced, which will diminish markets concerns about its capital.

And of course whether the macroeconomic forecasts improve/deteriorate in a number of key countries (US, UK, Spain and South Africa) will have a huge bearing on stock performance. Our recommendation remains hold.

http://www.telegraph.co.uk/finance/personalfinance/investing/shares/4973811/Bank-shares-Bargain-or-basket-case.html

Warren Buffett says financial crisis is 'economic Pearl Harbor'

Warren Buffett says financial crisis is 'economic Pearl Harbor'
Warren Buffett, the influential American investor, has likened his country's escalating fiscal woes to "an economic Pearl Harbor".

By Mark Coleman in Los Angeles Last Updated: 12:23PM GMT 10 Mar 2009
The multi-billionaire, who is an informal advisor to President Barack Obama, conceded the economy had approached "close to the worse case" possible.
He also warned that recovery would not come quickly.

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Acknowledging his own failure to foresee the scale of the crisis, he admitted: "It's fallen off a cliff. Not only has the economy slowed down but people have really changed their habits like I haven't seen."
Mr Buffett, recently ranked the second-richest American by Forbes magazine, said that fear was the greatest cause of damage to the economy, claiming it is now dominating the public's behaviour to an alarming degree.
"People are confused and scared," he said.
"People can't be worried about banks, and a lot of them are."
Mr Buffett singled out Americans' failure to predict the severity of home price declines, which he said in turn led to problems with securitizations and other debts tied to the stability of house prices.
He said: "It was like some kids saying the emperor has no clothes, and then after he says that, he says now that the emperor doesn't have any underwear either.
"We want to err on the side next time of not allowing big institutions to get as unchecked on leverage as we have allowed them to do."
Mr Buffett also urged consumers to curb their dependence on credit cards.
"I can't make money borrowing money at 18 or 20 per cent. I'd go broke."

http://www.telegraph.co.uk/finance/financetopics/recession/4965408/Warren-Buffett-says-financial-crisis-is-economic-Pearl-Harbor.html

Why You Should Love Economic Cycles

Why You Should Love Economic Cycles
By Motley Fool Staff
March 11, 2009 Comments (0)



With regard to the stock market, legendary investor Bernard Baruch was sure of only one thing: "It will fluctuate." Baruch's remark is the stock market's only guarantee, and it's no less true for the various industries that make up the business environment. No one can time these ups and downs precisely, but paying close attention to which way the economy and market are moving can help you spot great investing opportunities.

Basic economics
All industries and businesses follow the same laws of supply and demand. This concept has never changed and never will, and it follows a clear cycle.
During periods of high demand, high capacity utilization, and increasing operating margins, businesses begin implementing steps to meet the demand. The result usually includes new plant investment, increased product pricing, and increased production -- until supply exceeds demand. Then prices decline, less capacity gets used, and margins shrink. This period continues until -- you guessed it -- the available supply is outstripped by demand, at which point the cycle starts all over again.

For sale by owner
The homebuilding industry offers a near-perfect example of this cycle. After the tech bubble (a cycle in itself), the economy became a low-interest rate environment, making access to capital very easy and cheap. Demand for housing grew rapidly. First-time home buyers found it more manageable to assume loans, and newly minted real estate speculators used the flow of cheap money to "flip" homes. Homebuilders responded by turning out more homes and acquiring land lots at a blistering pace. For years, all was well.
Of course, the clock had to strike midnight sometime. The increased housing production ultimately exceeded demand, and homebuilders like Ryland (NYSE: RYL), KB Home (NYSE: KBH), and DR Horton (NYSE: DHI) now command a fraction of the market values they enjoyed in rosier times. No matter how fine these companies' management teams might be, with supply exceeding demand, it's not difficult to see why these firms have been battered.

In the oil patch
The same situation has playing out with just about anyone involved in energy these days. For years, energy prices languished as supply outstripped demand. But then demand started steadily growing, until oil prices reached nearly $150 per barrel last year.
In the end, the recession stopped that trend in its tracks, causing oil companies like ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) to fall dramatically from their 2008 highs. Yet while the prospects for homebuilders seem cloudy for the indefinite future, many still believe that energy prices are now unsustainably low, which could start a new upward cycle both for oil producers and natural gas companies such as Chesapeake Energy (NYSE: CHK) and XTO Energy (NYSE: XTO).

The key takeaway
An old proverb says, "What has risen shall one day fall, and what is fallen shall again rise." Should investors concentrate their efforts on trying to time such cycles? Not at all, Fools -- that's a sucker's game. However, we do think that it's exceedingly important to understand the industries in which you invest, to reduce the chance that you'll make your investments at inopportune times.
As investors, we attempt to buy low and sell high -- but don't confuse that with buying at the absolute bottom, and selling at the absolute top. That level of investing precision is mostly a matter of luck. Instead, Fools are better off focusing on buying underpriced businesses and selling overpriced ones.

Further Foolishness:
Is This the Next Incredible Buying Opportunity?
This Might Be the Market Bottom
Rule No. 1: It's OK to Lose Money

Want some help in figuring out whether a beaten-down company deserves your investment?

This article, written by Sham Gad, was originally published on Jan. 7, 2008. It has been updated by Dan Caplinger, who owns shares of Chesapeake Energy. Chesapeake Energy is a Motley Fool Inside Value pick.

http://www.fool.com/investing/value/2009/03/11/why-you-should-love-economic-cycles.aspx

Buffett Likes Banks

Buffett Likes Banks
By Alex Dumortier, CFA
March 11, 2009 Comments (3)

When Warren Buffett speaks, the market listens. On Monday, in a three-hour interview on CNBC, Buffett had some good things to say about the banking sector. That was all the fuel that was needed for some of the bank stocks to take off:

Bank
Daily Return (03/09/2009)

Bank of America (NYSE: BAC)
19.4%
Wells Fargo (NYSE: WFC)
15.8%
US Bancorp (NYSE: USB)
15.5%
SunTrust Banks (NYSE: STI)
7.8%
BB&T (NYSE: BBT)
4.1%

Some of the best gains were naturally reserved for stocks that Buffett owns on behalf of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B): US Bancorp and Wells Fargo.
"Banking has never been better, in one sense." Spelling out the reasons for his cheery disposition toward the sector in straightforward terms, Buffett said:
The banks are getting their money very cheaply, deposits are coming in, spreads have never been wider, all the new business they're doing is terrific. They will earn their way out of it [in the] overwhelming number of cases.

He went on to give specifics concerning Wells Fargo:
I would expect $40 billion a year pre-provision income. And under normal conditions I would expect maybe 10 to $12 billion a year of losses … So, you know, you get to very interesting figures.
What could Wells earn a few years out? Those numbers are pretty close to the results that Wells put up last year (which don't include Wachovia), so I'm going to assume that Buffett was referring to Wells Fargo's earnings power without Wachovia.
Let's accept those numbers (using the upper bound for loan losses) and make the following assumptions:
Wachovia provides an incremental $3 billion in net income.
The merger achieves the announced $5 billion in cost savings.
Wells Fargo doesn't repay the government's $25 billion preferred share investment.
Under that scenario -- that of a normal operating environment -- I estimate that Wells Fargo could generate approximately $2.50 in earnings per share annually. Based on Monday's closing price of $9.97, that's equivalent to a price-to-earnings ratio of 4 -- pretty attractive!

Let's remember a couple of things, though: First, we aren't in a normal environment yet, and it's not clear how long it will take us to get there. Second, there is a reason that bank shares are trading at such depressed valuations. As Buffett pointed out:
"The only worry in that is the government will force you to sell shares at some terribly low price." He went on to admit that forced dilution isn't an idle concern -- it's something that he himself thinks about. Furthermore, even the Oracle has been bitten by banks in this crisis. In 2008, he purchased $244 million worth of shares in two Irish banks, leaving him with an 89% loss at year's end. He gave himself a stern self-assessment on that situation during the interview: "I did not do my homework sufficiently on that, and I was just dead wrong."

Nonetheless, Berkshire is Wells Fargo's largest shareholder -- the position dates back to the last banking crisis in the early 1990s. In other words, Buffett's been doing his homework on Wells Fargo for a long time, and his degree of confidence should be much higher. I have to go with Buffett on this one: Despite my concerns about the California lender, I think it looks like a good bet right now.

More Foolishness:
Are GE Shares Finally a Buy?
10 Dividend Stocks for the Next Decade and Beyond
The Worst News in 53 Years


Take a hint from Buffett's recent investments in preferred shares with fat yields: In this market, dividends -- those that are sustainable -- will be a big component of future shareholder returns.


Alex Dumortier, CFA has a beneficial interest in Wells Fargo and BB&T, but not in any of the other companies mentioned in this article. BB&T is a Motley Fool Income Investor pick. Berkshire Hathaway is a Motley Fool Inside Value and a Motley Fool Stock Advisor recommendation. The Fool owns shares of Berkshire Hathaway. US Bancorp is a former Motley Fool Income Investor pick.

http://www.fool.com/investing/dividends-income/2009/03/11/buffett-likes-banks.aspx

3 Reasons Why Investors Will Panic Again

3 Reasons Why Investors Will Panic Again
By Dan Caplinger
March 11, 2009 Comments (1)


Few things beat the thrill of owning stocks on a day like Tuesday. Yet just as experienced long-term investors have kept the losses of the past year in perspective, so too should you not draw any major conclusions from yesterday's gains.
Sure, the major market benchmarks gained 5% or more on Tuesday. Those are healthy rises -- but if you look back, you'll see that the last time the S&P 500 closed this high was on Feb. 27, less than two weeks ago.

Unfortunately, there are plenty of reasons why we may not be out of the woods yet. Here are just a few.

1. Even in a rebound, for every two steps forward, there's a step back
Just as few bull markets feature stocks moving straight up without any hiccups along the way, bear markets don't always involve uninterrupted crashes. Most often, you'll see plenty of moves in both directions, with the overall trend only becoming clear after longer periods of time.
For instance, since the last bull market ended in October of 2007, we've had a number of significant bounces in the S&P:
From March to May 2008, the S&P rose from its March lows of slightly less than 1,275 to about 1,425.
After October 2008's lows around 850, the index bounced back to over 1,000 in just over a week.
Then later in November, the index plummeted to 750 before recovering to 935.
To put in that perspective, Tuesday's gains could easily be just the beginning of a more substantial up move -- and yet still constitute only a bounce in the ongoing bear market.

2. More bad news on the earnings front
Most analysts expect another round of terrible earnings reports from the first quarter of this year, which will get announced predominantly in April and May. For instance, look at these projections for some major U.S. companies:

Stock
Estimated 1st-Quarter EPS Growth,Year-Over-Year
Reduction in Estimate,Last 90 Days

Intel (Nasdaq: INTC)
(92%)
88%
Target (NYSE: TGT)
(36%)
20%
Mosaic (NYSE: MOS)
(70%)
78%
ConocoPhillips (NYSE: COP)
(72%)
53%
Wells Fargo (NYSE: WFC)
(58%)
47%
Deere (NYSE: DE)
(36%)
30%
J.C. Penney (NYSE: JCP)
(144%)
271%
Source: Yahoo! Finance. As of March 10.

Even if the economy has started to turn back from recession to recovery, it won't do so overnight. As massive as the amount of economic activity in the U.S. is, turning on a dime isn't a reasonable expectation.

3. Investors have to change their attitude
And expectations are what matters most right now. What the economy will actually do isn't all that important -- because everyone has a pretty good sense that the economy will be lousy for the foreseeable future. However, the sea change in the markets will come when investors start reacting differently to all the bad news.
Recently, uncertainty has dominated the markets. With government intervention becoming a nearly everyday occurrence, investors haven't had any idea what to expect. The specter of nationalization put fear into shareholders of financial companies -- and since they are at the epicenter of the current crisis, they carry huge symbolic value even beyond the critical role they play in our economic system.
However, if investors start looking for news that supports a glass-half-full theory rather than sticking with the gloom and doom that has dominated over the past six months, the markets have plenty of room to run on the upside -- even before a real recovery takes hold.

How to prepare
So what's the right strategy for your investments now? What you should do hasn't changed since yesterday, or last month, or last year. Many of those who've carried on with their normal investing strategies have taken big losses, but they see those losses as temporary. Meanwhile, with money they've added to the market after its crash, they're picking up shares of the companies they want to own at prices they could never have imagined seeing before all this happened.
So, just as the market's drop didn't mean that the world was going to end, yesterday's rally certainly doesn't mean that we've hit bottom and the bear market is officially over. When it comes to the important investing decisions you need to make, however, none of that really matters -- so enjoy your gains, but don't think of them as anything but a bump in the road.

For more on investing in any market, read about:
Stocks for the next Great Depression.
Why Warren Buffett is buying stocks now.
You should buy the cheapest stocks around.

Fool contributor Dan Caplinger isn't panicking. He doesn't own shares of the companies mentioned in this article. Intel is a Motley Fool Inside Value recommendation. The Fool owns shares and covered calls of Intel.

http://www.fool.com/investing/general/2009/03/11/3-reasons-why-investors-will-panic-again.aspx

HSBC Stock Plunge Prompts Regulator Probe of Trade

HSBC Stock Plunge Prompts Regulator Probe of Trade (Update2)
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By Hanny Wan and Kelvin Wong
March 10 (Bloomberg) -- HSBC Holdings Plc’s 24 percent plunge in Hong Kong yesterday prompted a government probe and the stock exchange to consider bringing forward changes to end- of-day trading processes. The shares rallied 14 percent today.
The Securities and Futures Commission is investigating trades put through at yesterday’s close, Financial Secretary John Tsang told reporters today in comments broadcast by local television. Hong Kong Exchanges & Clearing Ltd. may accelerate the implementation of a 2 percent cap on stock fluctuations during so-called closing auction sessions, a spokesman said.
“Yesterday’s closing auction exposes the flaw in our stock trading system that allows these kinds of trades,” said Chim Pui-chung, a Hong Kong legislator who represents the financial services industry. “The SFC needs to take responsibility for this and to investigate immediately, and release their findings to let investors know what happened.”
The closing auction process, used by the exchange since May last year, has attracted criticism from lawmakers and investors who claim it distorts stock pricing. The session extends trading by 10 minutes from the original 4 p.m. local time close, during which buy and sell orders are matched by an auction trading mechanism.
Four days after the closing auction was introduced, eight stocks moved by more than 10 percent from the last traded price at 4 p.m., which Hong Kong Exchanges said was due to a rebalancing of MSCI Barra indexes.
‘Annoys The Market’
“It annoys the market and especially retail investors,” said Andrew Sullivan, a sales trader at Mainfirst Securities Hong Kong Ltd., referring to the stock fluctuations during the auctions.
The sessions are an international practice aimed at providing a “fair and market-driven method” to determine closing stock prices, the exchange said in October 2007 when it announced the new system.
Hong Kong Exchanges said March 5 that it planned to implement a 2 percent limit on the changes of stock prices within the auctions on June 22.
“Our plan hasn’t changed, but we can’t rule out the possibility of pushing the plan forward,” spokesman Henry Law said in an interview today. “It depends on how soon the market can upgrade its trading systems.”
All brokerages need to finish testing the parameters they set for the closing auction session before the exchange can go ahead with the new volatility cap, he said.
HSBC Shares Rally
The bourse said in November 2008 that the Tokyo Stock Exchange, Korea Exchange, Taiwan Stock Exchange, and Shenzhen Stock Exchange had price controls in their closing auction sessions, whereas the New York Stock Exchange, London Stock Exchange, and Australian Securities Exchange do not.
HSBC’s 24 percent tumble yesterday wasn’t the result of “panic selling, it was technical trades,” Sandy Flockhart, chief executive officer of the bank’s Asian business told reporters in Hong Kong today.
The stock, the second-largest constituent on the benchmark Hang Seng Index, fell more than 10 percent during the closing auction session, dragging the shares to the lowest since May 1995. The shares rallied 14 percent today to HK$37.60.
“HSBC is a very unique stock and it has an intricate relationship with Hong Kong people’s lives,” said legislator Chim. “When it fluctuates like yesterday it has a huge impact on people’s sentiment and wealth.”
To contact the reporters on this story: Hanny Wan in Hong Kong at hwan3@bloomberg.net; Kelvin Wong in Hong Kong at kwong40@bloomberg.net. Last Updated: March 10, 2009 05:28 EDT

http://www.bloomberg.com/apps/news?pid=20601089&refer=china&sid=aQ_lndHEmwUg

http://www.breakingviews.com/2009/03/10/HSBC.aspx?sg=nytimes

Australia Retail Sales Growth to Slump on Job Cuts, Access Says

Australia Retail Sales Growth to Slump on Job Cuts, Access Says
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By Jacob Greber

March 11 (Bloomberg) -- Australian retail sales growth will slump from the middle of this year as rising unemployment offsets the positive impact from government cash handouts to workers, research company Access Economics said.
Retail sales growth, adjusted to remove the effect of inflation, will slow to 0.2 percent in the 12 months through June 2010 from 0.8 percent in fiscal 2009, Access Director David Rumbens said in a report released in Canberra today.
Prime Minister Kevin Rudd’s government will this month begin distributing A$11 billion ($7 billion) in cash to families and workers to stoke household spending that accounts for more than half the economy. Gross domestic product unexpectedly shrank in the fourth quarter for the first time in eight years as consumers spent less at retailers including David Jones Ltd.
“Retailers face a tough road ahead,” Rumbens said. “The economic backdrop continues to get uglier, so these measures are only likely to result in real retail spending treading water in the first half of 2009.”
Access estimates the cash handouts will increase total consumer spending by A$500 million in the current quarter, and A$1.6 billion in the three months through June.
“The boost to consumer spending which will result, however, will be against a backdrop of a significant loss of labor income and further asset price falls in 2009,” the report said. “The real pain on profits and on jobs is just around the corner.”
Jobs advertised in newspapers and on the Internet tumbled by a record 10.4 percent in February and 39.8 percent from a year earlier, according to an Australia & New Zealand Banking Group Ltd. report released in Melbourne yesterday.

Jobless Rate
Employers probably cut 20,000 jobs last month and the unemployment rate rose to 5 percent from 4.8 percent in January, according to a Bloomberg survey of economists. Jobs figures will be released on March 12.
Access predicts the jobless rate will peak at around 7.5 percent in mid 2010.
“A retail recovery may have to wait until fiscal 2011,” Rumbens said. “And watch out for housing prices,” which fell 3.3 percent last year. “If they were to take a major tumble, then the outlook for retailers would be notably worse.”
Companies including BHP Billiton Ltd., the world’s biggest miner, and manufacturer Pacific Brands Ltd., are firing workers after the economy shrank 0.5 percent in the fourth quarter from the previous three months as exports slumped.
To boost sales at retailers such as David Jones, Australia’s second-biggest department store chain, the government distributed A$8.7 billion in cash grants to families and pensioners in December. Of that, about 25 percent was spent, Access said.

Retail Sales
Retail sales jumped 3.8 percent in December, the most in eight years, and advanced 0.2 percent in January, according Bureau of Statistics figures.
Without the government’s December cash boost, retail sales that month would probably have stalled, Rumbens said in today’s report. Households will probably spend around 25 percent of the next round of handouts and use the rest to pay off debt or increase savings, he said.
“The outlook for retail in 2009 will be directly affected by the amount of deleveraging that households decide is prudent, as they attempt to build a buffer against uncertainty,” Rumbens said.
“This means that consumer caution -- paying down debt and saving more -- will compound the effects of lost labor income as the unemployment rate rises.”
Retailers will respond to weakening sales growth by firing workers, renegotiating property rents, cutting stock and working to maintain cash flow, today’s report said.
To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net Last Updated: March 10, 2009 09:01 EDT

http://www.bloomberg.com/apps/news?pid=20601081&sid=agFpM3i3E92c&refer=australia

Australia Dollar Gains to 1-Week High After U.S. Stocks Rally

Australia Dollar Gains to 1-Week High After U.S. Stocks Rally
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By Candice Zachariahs

March 11 (Bloomberg) -- The Australian dollar gained to the highest in a week as U.S. stocks posted their biggest rally this year, raising speculation investors will buy riskier assets. New Zealand’s dollar also advanced.
The currencies traded near the strongest in three days against the yen after Citigroup Inc. said it is having its best quarter since 2007. Gains in the currencies may be limited before a meeting tomorrow where New Zealand’s central bank is forecast to lower interest rates to a record low to boost an economy that’s entered its fifth quarter in recession.
“Lowered risk aversion concerns, driven by equity gains, delivered steady buying demand,” for the South Pacific nations’ currencies, wrote David Croy, a strategist at ANZ Investment Bank in Wellington. New Zealand’s currency was “dragged reluctantly higher off the back of a stronger Australian dollar.”
Australia’s currency rose 0.9 percent to 64.64 U.S. cents as of 8:56 a.m. in Sydney from 64.06 cents late in Asia yesterday. It earlier touched 64.88 cents, the most since March 5. The currency advanced 1.2 percent to 63.82 yen.
New Zealand’s dollar gained 1.2 percent to 50.44 U.S. cents from 49.83 cents in Asia yesterday. It bought 49.80 yen from 49.06 yen.

Stocks Rally
The currencies climbed as the Standard and Poor’s 500 Index jumped 6.4 percent, the most since Nov. 24. Citigroup Chief Executive officer Vikram Pandit said the bank had been profitable through the first two months of 2009.
Technical analysts at Citigroup recommended raising the exit point on their trading recommendation to buy the Australian dollar at 63.50 U.S. cents with an initial target of 68.50 U.S. cents and then 72.70 cents. Investors should place a stop at 63.30 cents to “limit downside exposure,” wrote New York-based Tom Fitzpatrick and London-based Shyam Devani, technical analysts at Citigroup, in a research note yesterday.
Recent “gains for the Australian dollar-U.S. dollar have been rather quick and are likely to be tested by short-term pullbacks in risk sentiment,” they wrote.
Gains in the Australian and New Zealand dollars may also be limited as New Zealand’s central bank will cut the official cash rate to at least 3 percent from 3.5 percent, according to 13 economists surveyed by Bloomberg. Seven analysts estimate Governor Alan Bollard will lower the rate by 50 basis points, three expect a reduction of 75 basis points and three predict a 100 basis-point cut. A basis point is 0.01 percentage point.
The number of people employed in Australia probably fell by 20,000 and the unemployment rate likely climbed to 5 percent in February, the highest since April 2006, according to separate surveys. The government will report the jobless figures tomorrow.
Benchmark interest rates are 3.25 percent in Australia and 3.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.
To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net Last Updated: March 10, 2009 18:13 EDT

http://www.bloomberg.com/apps/news?pid=20601081&sid=a3au2m9amEak&refer=australia

U.K., French Industrial Production Falls, Worsening Recession

U.K., French Industrial Production Falls, Worsening Recession
By Simon Kennedy and Brian Swint

March 10 (Bloomberg) -- Industrial production plunged in the U.K. and France in January, threatening to push Europe into a deeper recession.
U.K. factory output fell 2.9 percent from December and 6.4 percent in the three months through January, the most in at least four decades. French industrial production sank 3.1 percent on the month, five times the pace predicted by economists, and 13.8 percent from a year earlier.
Companies from IMI Plc to Valeo SA are being ravaged by the global economic crisis as demand slumps and credit remains tight. With the worst recession since World War II driving up unemployment, the European Central Bank and Bank of England are under mounting pressure to keep easing monetary policy.
“Manufacturing is being very hard hit and there’s little prospect of a turnaround,” said Collin Ellis, European economist at Daiwa Securities SMBC Europe Ltd. in London. “The data raises fresh questions about the severity of the European downturn.”
British manufacturing has now dropped for 11 months, the worst streak of contraction since 1980, when Margaret Thatcher was prime minister. Factory production accounts for about 15 percent of the economy, compared with about 75 percent for services and 6 percent for construction.
“This is unbelievably grim,” Alan Clarke, a London-based economist at BNP Paribas SA, said in an interview. “There’s no sign of the slowdown abating. The Bank of England will probably need to do more.”
Out of 13 categories of manufacturing, nine fell and four rose on the month, the statistics office said. Transport equipment, electrical, optical goods, and machinery and equipment led the declines. Production of motor vehicles and auto parts drove the slump in the transport category, the data showed.

Car Sales
European car production will probably fall 25 percent and sales are likely to drop 20 percent this year, the European Automobile Manufacturers Association said on March 5.
Separate reports today showed the French trade deficit swelled in January as the value of exports fell to the lowest in almost four years, while German shipments slid for the fourth straight month by declining 4.4 percent on the month.
“The pace of contraction remains extremely strong” in France, said Frederique Cerisier, an economist at BNP Paribas in Paris. The figures may prompt him to further downgrade his forecast that the economy will contract 2.3 percent this year.
To combat the slump, President Nicolas Sarkozy’s government is injecting funds into banks and helping them raise cash to lend to companies and households. In December, he introduced a 26 billion-euro ($33 billion) economic-stimulus package to spur construction.

U.K. Aid Package
U.K. Trade Minister Ian Pearson will set out how a 2.3 billion-pound ($3.2 billion) aid package for automakers will work and which companies will be eligible when he meets executives tomorrow. The government is considering separate help for General Motors Corp.’s Vauxhall unit.
The European Central Bank last week cut its benchmark to a record low of 1.5 percent, while its U.K. counterpart lowered its to a record 0.5 percent and took the unprecedented step of printing money to buy assets and replenish bank balance sheets.
IMI Plc, the world’s biggest maker of pneumatic controls, said last week it reduced its global workforce by 10 percent and plans further reductions in the coming weeks. Valeo SA, France’s second-largest auto-parts maker, has temporarily shuttered plants.
To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net. To contact the reporter on this story: Simon Kennedy in Paris at Skennedy4@bloomberg.net. Last Updated: March 10, 2009 08:32 EDT

http://www.bloomberg.com/apps/news?pid=20601102&refer=uk&sid=aUvgE0D.somI

Pound Falls Against Euro as Housing Sales Slide to Record Low

Pound Falls Against Euro as Housing Sales Slide to Record Low
By Matthew Brown

March 10 (Bloomberg) -- The pound fell to its weakest in more than five weeks against the euro after Britain’s housing sales slipped to the lowest level since at least 1978 and manufacturing shrank the most in four decades.
The U.K. currency dropped for a third day versus the 16- nation currency as the Bank of England prepared to print money to buy assets as part of a quantitative easing policy. The average number of transactions in a survey of real-estate agents and surveyors fell to 9.5 per respondent in the quarter through February, the least since the data began three decades ago, the Royal Institution of Chartered Surveyors said today.
“Investors are saying we don’t like the banking situation in the U.K., the housing data was bad, and we’re nervous about the economy,” said Jeremy Stretch, a senior currency strategist in London at Rabobank International. “Quantitative easing is about to begin, and all these factors tell us to stand aside and wait until it gets cheaper.”
The pound weakened to 92.33 pence per euro by 5:20 p.m. in London, from 91.53 yesterday. It slipped to 92.48 pence earlier, the lowest level since Jan. 29. Against the dollar, the currency was little changed at $1.3784.
Factory production dropped 2.9 percent in January from December, the Office for National Statistics in London said. Economists in a Bloomberg survey predicted a 1.4 percent decline. Manufacturing shrank 6.4 percent in the three months through January, the most since records began in 1968.

Quantitative Easing
The Bank of England will seek to buy 2 billion pounds of gilts in an operation for its asset-purchase facility on March 11, it said last week. Policy makers said March 5 they will acquire as much as 150 billion pounds of government and corporate assets, the first central bank to adopt quantitative easing since the Bank of Japan in the 1990s.
“With the Bank of England taking far more aggressive steps than any other central bank, bar possibly the Federal Reserve, the pound remains vulnerable to the downside,” Derek Halpenny, the London-based European head of global currency research at Bank of Tokyo-Mitsubishi UFJ Ltd., wrote in a note today.
Policy makers cut the nation’s benchmark interest rate 4.5 percentage points to an all-time low of 0.5 percent since October as the economy headed for its worst recession since World War II. Gross domestic product contracted 1.5 percent in the fourth quarter, the most since 1980, a report on Feb. 25 showed.
The pound may still strengthen to 89 pence per euro in the next three months as the recession in the euro region economy deepens, Stretch said. For Merrill Lynch & Co., the euro’s gain against the pound may have gone to far.

Gilts Rise
“We will probably look to fade the move higher in the euro- pound if and when the short-term interest-rate spread-compression trend resumes,” wrote Steven Pearson, a London-based strategist at Merrill Lynch. “It is worth noting that with the Bank of England bank rate having likely reached its terminal level, pound-euro may now start to trade well during risk aversion.”
U.K. government bonds rose, with the yield on the 10-year gilt falling one basis point to 3.11 percent. The 4.5 percent security due March 2019 advanced 0.09, or 90 pence per 1,000- pound face amount, to 111.82. Two-year gilt yields slipped one basis point to 1.32 percent. Bond yields move inversely to prices.
The U.K. Treasury today sold 3 billion pounds of 4.5 percent bonds maturing in 2019. The sale received bids 2.06 times the amount offered, the Debt Management Office said, compared with an average 1.9 times at the last three auctions of the securities.

‘Carried Away’
“Investors are getting carried away with the euphoria surrounding quantitative easing,” said Ian Williams, chief executive officer of Charteris Portfolio Managers in London. “The Bank of England is a buyer of gilts, but the U.K. government is still a net seller of gilts. The compression in yields when the penny drops is going to be difficult to maintain, and the implications of quantitative easing are inflationary.”
The yield on the 10-year gilt may rise to 3.25 percent by the end of April, said Williams, whose U.K. government-bond fund beat all its competitors in January, according to data from Lipper and given to Bloomberg by Charteris.
Ten-year gilts may keep gaining, according to technical strategists at Barclays Plc.
“Bigger picture, the secular bull trend remains intact, particularly following the recent failure to overcome 3.82 percent-area support,” Barclays Capital analysts including Jordan Kotick in New York wrote in a report. The yield may move toward 2.70 percent “medium term,” they said.
To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net Last Updated: March 10, 2009 13:43 EDT

http://www.bloomberg.com/apps/news?pid=20601102&refer=uk&sid=adCmriDF1wc8

Dollar defies recipe for currency collapse

Dollar defies recipe for currency collapse
The US Federal Reserve is printing money. The US government is also spending wildly today so there won’t be a depression tomorrow. It sounds like a recipe for currency collapse. Yet the dollar keeps picking up. And the trend seems unlikely to change soon. What’s going on? Well, consider the competition.

By Ian Campbell, breakingviews.com
Last Updated: 4:08PM GMT 10 Mar 2009

Start with the dollar’s predecessor as reserve currency – the pound. At $1.38, it is close to setting what would be 20-year lows against the dollar, less than a year after it set quarter-century highs.

Let us count the woes. The banks have big foreign liabilities, the deficit-ridden UK government has taken on most of the risk in the banking sector, and the Bank of England is going to add £75bn in fresh notes to the pool of sterling assets. Who wants them? Not foreign investors.

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The euro, Icarus-like last summer, also looks to be heading fast for the soil. Eurozone growth is bad. Its banks are in trouble. How to avoid an unfortunate roast of Greece, Ireland, Portugal and Spain is the question. But now add Belgium, Italy and Austria, whose banks are among the worst affected by eastern Europe’s implosion.

In Frankfurt, Jean-Claude Trichet, head of the European Central Bank is not in favour of easing. In Berlin, Chancellor Angela Merkel is not keen on bailing. The zone is sinking.

Just like Japanese exports – down by an annual 46pc in January. The yen’s rise last year was in part technical. Hedge funds advocated shorting Japan. Then it became time to drop those risky yen shorts and run for cover. But Japan’s fundamentals are now exposed and none too pretty. Recession is intense.

US fundamentals are dreadful, too. But policy-making could hardly be more activist. It is in essence a huge gamble on recovery. For now, the world would rather take that gamble and buy the multitude of treasuries the US government is issuing than contemplate anything else. The reserve currency will forge ahead. Unless the world starts to think the big US wager is going to be a losing one.

http://www.telegraph.co.uk/finance/breakingviewscom/4968519/Dollar-defies-recipe-for-currency-collapse.html

Interest rate cut: what do I do with my money now?

Interest rate cut: what do I do with my money now?

With interest rates close to zero, savers could be forgiven for giving up, and putting their cash under the mattress.

By Harry Wallop, Consumer Affairs Editor
Last Updated: 9:23PM GMT 05 Mar 2009

Corporate bonds are becoming increasingly popular. These are a form of IOU issued by large companies. The important thing is not to store it under the bed

What's the point of letting £100,000 languish in an account for it to earn all of £290 in interest in a year. And that's before tax.

But savers really should not despair at the average savings rates cited by the Bank of England. Canny investors need to shop around, hunt for better than average, and think about alternative places for their cash than a standard deposit account.

For starters, there are some cash Individual Savings Accounts, that are offering well over 3 per cent, such as Marks & Spencer's 3.1 per cent, which savers can withdraw their money from at any time. The advantage with ISAs is that they are more or less tax free, though savers can only invest up £3,600 each year.

For those with more cash, and the discipline to deposit money regularly, they can enjoy an astonishingly good rate of 5.84 per cent from Barclays – more than tenfold the new Bank Rate. The down side is that you have to put in at least £20 every month but no more than £250.

Further afield from traditional banks, there are endless possibilities.

Corporate bonds are becoming increasingly popular. These are a form of IOU issued by large companies. (Take a look at Barclays corporate bond.)

They are not risk-free and tend to pay higher returns than deposits to compensate investors for a lower degree of security; for example, British American Tobacco bonds due to be redeemed in 2019 currently yield – or pay out the equivalent of an annual return – about 6.4 per cent, while Tesco bonds pay 5.5 per cent. And Tesco is still likely to still be around in 2019 to pay investors back.

Or you can always turn to the last refuge of the desperate: gold, which is proving a volatile, but impressive, performer during the financial crisis.

You can buy the stuff via gold exchange traded funds, which trade on the stock market like shares, or pop down to a bullion dealer and buy a bar or coin of the hard stuff.

The important thing is not to store your savings under the bed.

The only winner will be the local neighbourhood thief. And as the police have warned, they are on the increase – unlike interest rates.


http://www.telegraph.co.uk/finance/personalfinance/savings/4944354/Interest-rate-cut-what-do-I-do-with-my-money-now.html

Dividends: Which are safe and which may fall?

Dividends: Which are safe and which may fall?

The income from shares offers some protection against a bear market – unless it is cut. We asked the experts which companies looked safest.

By Richard Evans
Last Updated: 10:35AM GMT 07 Mar 2009

Share prices have been falling for months now but for many investors there has been one crumb of comfort: dividends.

After all, share prices can recover if you don’t sell – and hanging on can be relatively painless if the income from your investment is maintained or even increased.

But there have been some worrying developments for dividends recently. HSBC, the bank that seemed relatively unscathed by the financial crisis, was forced to cut its payout; now there are rumours that BP may have to freeze its dividend for the first time in years because of the falling oil price.

So we asked the experts which dividends they thought should be safe despite the turmoil – and which ones could be at risk.

Ian Lance, manager of the Schroder Income fund, said: "Despite all the concerns about the sustainability of dividend payments in the face of falling profits, we believe those invested in UK equities are still being well rewarded, particularly as yield is becoming increasingly difficult to find in many other areas of investment.

"The dividend yield on the highest yielding UK equities has risen to its highest point in around 20 years – even if you exclude financials. The dividend yield on non-financial stocks now exceeds the yield on 10-year government bonds."

As for concerns about how resilient these yields will be, Mr Lance said dividend levels were likely to fall across the UK market as a whole over the next couple of years, but he remained confident that a number of companies had sufficient dividend "cover" – the degree to which the dividend is exceeded by earnings – to support their current payouts even if earnings fell.

Schroders believes that the most resilient and attractive dividend streams will be among the long-established, well-diversified "mega caps" and companies that declare dividends in US dollars, given that sterling’s weakness pushes up their value. "These include names such as GlaxoSmithKline, AstraZeneca, Royal Dutch Shell and Vodafone, which we bought some time ago when they were out of favour with other investors and consequently undervalued, and which we continue to hold today," said Mr Lance.

Jonathan Jackson, an equity analyst at Killik & Co, the stockbroker, is not convinced that BP's dividend is under threat; he expects it to be safe for at least this year and next. "My reading is that BP will let gearing [borrowing relative to equity] increase," he said. "Holding the dollar-denominated dividend means 23pc growth for British shareholders, resulting in a yield of 10pc."

He also backs Vodafone, which is yielding 6.5pc, pointing to its strong balance sheet and "fairly defensive" qualities. "Tobacco stocks such as BAT and Imperial Tobacco have stable cash flows throughout the cycle," he added.

Hugh Duff, an investment manager at Scottish Investment Trust, said that among his holdings were two companies likely to maintain, or possibly grow, their dividends: Serco and De La Rue.

"Serco is a leading international services company operating in a broad range of sectors, servicing both private and public markets. The long-term nature of Serco’s contracts and the significant order book give us confidence in the company’s defensive and highly visible earnings growth," he said.

"De La Rue is the world’s largest commercial security printer and literally has a licence to print money. The company's main operation is the production of 150 currencies on behalf of central banks. The demand for currency printing is expected to continue to show stable growth, with a key driver being the increasing use of cash machines which require notes to be in mint condition. De La Rue has a very good track record of returning the profits from this business to shareholders through special dividends and dividends."

Turning to companies seen as candidates for cutting their dividends, Mr Jackson singled out BT Group. "There are trading difficulties in the global services division and a pension fund gap," he said. A recent ruling from the pensions regulator that pensions should take priority over dividends made a cut more likely, he added.

"The consensus in the City is that the dividend could be halved but we don’t know the size of the pensions deficit. BT used to put £280m into the fund annually to reduce the gap, now it could need to put in twice that figure. The cost of the dividend is £1.2bn."

Mark Hall, a fund manager at Rensburg Sheppards, voiced concern about life insurers. He said: "The sector I am most concerned about now regarding dividend payments is the life assurers such as Legal & General and Aviva. They have big bond portfolios and are vulnerable to any further dislocation in the financial system putting even greater pressure on their solvency ratios.

"This contrasts with the general insurance companies and Lloyd's specialists such as Royal Sun Alliance and Amlin, where we think the dividend prospects are really quite good."


http://www.telegraph.co.uk/finance/personalfinance/investing/4941355/Dividends-Which-are-safe-and-which-may-fall.html