How to pay off your debts

Afghan horsemen play Buzkashi on the outskirts of Kabul. Buzkashi is the national sport of Afghanistan, which literally translated means "goat grabbing". A headless carcass is placed in the centre of a circle and surrounded by players of two opposing teams. The object of the game is to get control of the carcass and bring it to the scoring area
(Rafiq Maqbool/AP)

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From Times Online
January 31, 2008

How to pay off your debts
James Charles

We would all like to bury our heads in the sand when it comes to debt, but the stark reality is that the longer you leave it, the worse your situation will become, so act now. There are a number of simple steps that you can take to tackle the problem head on and get back in the black.

Prioritise
Work out which debts you need to address first. Some will be more urgent, while others, such as a student loan, can be cleared over a longer period of time. You could divide them into two groups: priority and non-priority. Mortgage repayments, for example, would be considered priority debts because failing to make your repayments could result in you losing your home.
Whether you want to tackle the smallest, largest, most expensive or cheapest debt first, it is vital that you keep up the minimum repayments on all debts. Not doing so can damage your credit score and reduce the chance of obtaining credit in the future.

Background
How to improve your credit rating
How to choose a credit card
How to pay off your debts
IVAs explained
Student loans explained
Related Links
Store card interest 'extortionate'
1.7m households request debt help
Fight back against rising interest rates

Budget
To help to work out how much spare cash you can devote to repaying debts, it is crucial that you draw up a budget.
You can use a budget calculator online or simply sit down with an old-fashioned pen and paper and list all your income and outgoings. Then try to cut back where you can and keep a lid on costs wherever possible.

Boost
A simple and obvious way to speed the process of clearing your debts is to raise your monthly payments, and there are lots of ways to get the extra money you will need to do it.
The possibilities are almost endless, from renting your driveway to selling your old mobile phone. You could try selling unwanted presents or gadgets on eBay or other auction sites.
It is also worth making sure that you are not due any tax credits or government benefits.
Check that you are on the best deals for your insurance, loans, mortgages and credit cards by using price comparison websites such as Moneyfacts.co.uk or moneysupermarket.com, Also check whether you are paying for loan insurance on your mortgage or other credit and decide whether you really need this cover.

Savings
If you have a pot of savings locked away for emergencies, consider using the money to clear debt. It is likely that the cost of your debts is more than the return on your savings.

Snowballing
Once you have organised your debts, you may want to look at clearing them through a process of snowballing.
This involves making the minimum payments on your debts but using any extra cash to pay off one of them. Once you have finished clearing this first debt, you should then focus on the second debt, using the same extra cash, plus the money that you were using to make the minimum payment on the first debt. Then simply continue this process until all your debts are cleared.

Consolidate
If you are overwhelmed by the number of different debts you have, it may be worth consolidating your debts into one large loan.
The most common way of doing this is to move all your credit card balances to a new card with a 0 per cent rate for balance transfers.
But be careful if you decide to take out a consolidation loan. They can be expensive in the long term and may be secured on your home.

Communicate
Having relatively small amounts of debt is now extremely common. The average UK adult owes £29,500, including mortgages, so you are certainly not alone. However, if you are struggling to make repayments, or you are feeling overwhelmed by your situation, seek help from a debt charity.
Also try speaking to your lender. It may be willing to make an agreement over a new repayment timetable. You could also speak to a debt management company. And if you are really stuck, you could consider an individual voluntary agreement or even, as a very last resort, bankruptcy.

http://www.timesonline.co.uk/tol/money/reader_guides/article3247171.ece

2009 threatens to be "a dangerous year"

World Bank wants Britain and US to track how well stimulus works

The head of the World Bank has called on Britain, the US and other major economies to establish ways of tracking the effectiveness of their growing fiscal stimulus packages.

By Richard Blackden
Last Updated: 9:37PM GMT 21 Mar 2009

World Bank President Robert Zoellick says that 2009 threatens to be "a dangerous year"

"There is a legitimate debate about how the stimulus will be used," World Bank President Robert Zoellick said yesterday. "If you are going to have very big expansionary programmes, you need to show some fiscal discipline." The comments come less than two weeks before a critical G20 Summit in London at which leaders of the world's major economies will be seeking a consensus on a new set of measures to help drag the world out of recession.
Mr Zoellick says that 2009 threatens to be "a dangerous year" in which the economic crisis has the potential to spill over into political and social unrest in a number of countries.

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The World Bank last week forecast the global economy will contract by as much as 2pc this year.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5029116/World-Bank-wants-Britain-and-US-to-track-how-well-stimulus-works.html

UK to remain in deflation trap until 2012, economists warn

UK to remain in deflation trap until 2012, economists warn
Britain will be mired in a deflation trap for years despite the radical efforts of the Bank of England to pump extra cash into the economy, economists have warned.

By Edmund Conway
Last Updated: 10:26PM GMT 21 Mar 2009

The forecast, by a team at BNP Paribas, states that prices in Britain will keep falling for at least another two-and-a-half years, as Britain suffers an apparently intractable bout of debt deflation.

The warning comes only days before official figures confirm this Tuesday that the Retail Price Index has dipped into negative territory for the first time in almost half a century.
It also follows a warning from the Bank itself that the UK is now exhibiting early signs of becoming stuck in debt deflation − the combination of falling prices and rising debt burdens that afflicted the US during the Great Depression.

But while many assume the combination of near-zero interest rates and a heavily-devalued pound will help prevent falling prices from becoming entrenched, and may stoke inflation, the BNP Paribas economists said they expected deflation to persist all the way until 2012. Furthermore, the fall in prices would be broad-based across the economy, pushing into the red not only the RPI but also the Consumer Price Index, which the Bank's Monetary Policy Committee targets

Alan Clarke, UK economist at BNP Paribas, said: "Our revised economic forecasts for the UK are the most pessimistic in the market. We expect GDP to contract by more than 4pc this year and by a further 1pc in 2010. We expect deflation to set in during 2011, even earlier were it not for the VAT hike [which will follow the temporary cut in the tax this year]."

"Over the medium term, we expect the unemployment rate to surge to above 10pc − well above neutral. This will exert significant downward pressure on inflation, turning negative in 2011."

The forecast is based largely on the bank's prediction that the unemployment rate will soar to 10.4pc of the workforce by 2011, depressing the wider economy and underlines the disparity between economists' expectations for the coming years.

The Office for National Statistics will on Tuesday announce that the annual rate of change in the RPI has dropped beneath zero for the first time since February 1960, most likely falling to -0.6pc. It is also likely to say that CPI inflation has fallen to around 2.5pc. The CPI does not include the effects of either house prices or mortgage interest payments, and so has been less affected by the falls in property values over the past year.

http://www.telegraph.co.uk/finance/financetopics/recession/5028673/UK-to-remain-in-deflation-trap-until-2012-economists-warn.html

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US calls on Sweden's "Mr Fix It" Bo Lundgren

US calls on Sweden's "Mr Fix It" Bo Lundgren
The Swedish financial chief known as "Mr Fix It" has been summoned to Washington to advise on how Sweden's model might avert a global banking meltdown.

By Henry Samuel in Stockholm
Last Updated: 11:11AM GMT 20 Mar 2009

US turns to "Mr Fix It" Bo Lundgren, the steely-eyed head of Sweden's National Debt office, played a leading role in averting the collapse of the Swedish banking sector when a property bubble burst in the early 1990s.

Sitting in his office in downtown Stockholm before his trip to Washington, Mr Lundgren chuckled at the Wall Street joke that "Swedish models used to only attract attention if they were blonde and leggy".

Now, US President Barack Obama cites Sweden as a possible model of how best to tackle failing banks. Mr Lundgren, who was fiscal and financial affairs minister at the time of the last crisis, yesterday outlined the Swedish solution to the Congressional Oversight Panel, which supervises the US administration's troubled asset relief programme.

"I am a market liberal. I was even called the nearest Sweden had every come to having a party one could call libertarian," said Mr Lundgren, the former head of the Moderate Party with links to the Conservatives.

This did not stop him nationalising two failing major banks in 1992: the already majority state-owned Nordbanken, and the privately owned Gota bank.

"In the case of a crisis, the state needs to be strong," he said. "If it decides to act, it should become an owner."

After initial hesitation, when the Swedes chose to act they soon reached a broad political consensus.

The first, and in his eyes crucial step Mr Lundgren took was to restore liquidity by issuing a so-called "blanket guarantee" for all non-equity claims on Swedish banks.

This was vital to restore confidence, he said, and is something that has not been done in the US and UK.

It was also crucial not to put a figure on the guarantee, according to Stefan Ingves, the governor of the Riksbank, Sweden's central bank. Mr Ingves was a finance ministry official in the early 1990s and led the Bank Support Authority, created to resolve the crisis.

"If you pick a very low figure, people will say: 'That's not credible, we think the problem's bigger than that.' If you pick a very high figure, then people say: 'Oh gosh, is it that big a problem?'," he said.

The government did not extend its credit guarantee to shareholders of the nationalised banks, who were wiped out.

In the UK, the Royal Bank of Scotland has refused to go this far, but the Swedes insist this acts as a wake-up call to shareholders of troubled but still solvent banks to shape up or ship out. This decision spurred two private banks to raise private capital.

A "stress test" was worked out to determine how bad the problems were in each bank for the coming three years.

Banks were then ranked as healthy or as candidates for nationalisation, and those in between were told to clean up their act or face being taken over by the state.

Next, the toxic assets of the nationalised banks were ring-fenced into two separate bad banks and run by independent asset-management companies. The good assets were placed in a single, merged bank.

As central banks and supervisors "don't do corporate restructuring", the Swedish authorities decided to bring in investment bankers from the private sector to run the corporate finance side of the bad banks' assets. "Huge numbers" of bankers and auditors were flown in from London to do the "daily running of these businesses," said Mr Ingves.

Private banks were also urged to place their non-performing loans in separate bad banks. However, unlike what has been mooted in the US, there was never any question of the authorities buying bad assets from banks that remained in any way privatised. "We refused to do that because we could never agree on the price. If you pay too much it's a giveaway to the shareholders. If you pay very little then the transaction simply won't happen," said Mr Ingves.

Despite calling it a "political value judgment", it is clear he disapproves of countries such as Britain and the US who have committed huge sums to insure bad assets of private or part-private banks.

Once split, the two Swedish bad banks managed to liquidate their assets by 1997 and the state recouped at least half the funds it had made available.

While the process worked back then, the two Swedes recognised that the 1990s crisis, essentially home-grown and involving half a dozen national banks, was very different from the current global meltdown, involving far more banks and complex "packaged and repackaged" assets. Still, the solution remains the same, said Mr Ingves, even if far more co-ordination is today required.

"Clearly, one of the lessons that comes out of all this is that in Europe, the financial integration between countries ran way ahead of the EU's willingness to have a regulatory framework following at the same pace," said Mr Ingves.

The Swedes also expressed concern that other countries' handling of this crisis was still too piecemeal.

"In the US, certainly early on, there was no consistent policy over capital injection and bad assets. Now it's better but there are still too many loose ends," he said.

"To restore confidence you have to show exactly how big the problems are and how you are going to take care of that."

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5019186/US-calls-on-Mr-Fix-It.html

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UK house price falls among steepest in the world

UK house price falls among steepest in the world

Thursday, 5 March 2009

The credit crunch has triggered property price falls in nearly every housing market across the world, with the UK seeing some of the steepest drops, research showed today.


Around 81% of countries recorded falls in the value of property in the final quarter of last year, compared with just 27% in 2007, according to estate agents Knight Frank.

The group said it was now clear no market would escape unscathed from the global financial crisis, although the impact would vary according to the housing markets and underlying economies of individual countries.

The UK recorded the second steepest annual price declines out of the 42 countries Knight Frank looked at.

House prices fell by 14.7% in the UK during 2008, with 5.1% of the slide coming during the final quarter of the year.

The group said not all markets were at the same point in the cycle, with 19% of the countries it looked at still seeing price rises in the final three months of 2008.

But it added that although house prices rose by more than 10% last year in seven countries, values had now started to fall in six of them.

Dubai was the strongest performer during 2008, with house prices soaring by nearly 60% during the year, but much of this gain is expected to be wiped out in 2009.

At the other end of the scale, Latvia saw the steepest price slides on both an annual and quarterly basis, with homes dropping by 16% in the final three months of the year and plummeting by 33.5% during the whole of 2008.

Iceland also suffered badly, with prices falling by 14% during the year, with 11.3% of the slide coming in the final quarter following the collapse of its banking sector.

The United States and Ireland were both also near the top of the fallers' table with annual price drops of 12.1% and 9.1% respectively.

Nicholas Barnes, head of international residential research at Knight Frank, said: "The current downturn is unlike any other we have ever witnessed in both scale and causes.

"This year is likely to be more difficult than 2008, however, there is a 'consensus of hope' that the trough of the current cycle will be reached in 2009, although a bounce-back is not anticipated and the current fragility of markets could be exposed by further bad news from the financial sector or indeed the underlying economies.

"At some point, however, buyers will decide that price falls in many markets represent once-in-a-generation opportunities that are too good to pass up."

The Royal Institution of Chartered Surveyors also released research today showing the impact of the global economic problems on European housing markets.

It said the Baltic States had seen the sharpest falls during 2008, with Estonia recording a 23% slide, closely followed by the UK with drops of 16% and Ireland with falls of 9%.

It said even countries which did not experience a house price boom, such as Germany and Austria, had been hit by the credit crunch.

RICS said official house price indices in Spain surprisingly recorded only moderate price falls, but the current credit squeeze and the end of the consumer boom are expected to lead to a more material readjustment in 2009, particularly in the second homes sector.

Simon Rubinsohn, chief economist at RICS, said: "Ensuring a ready flow of mortgage finance needs to be an important priority for European governments but the key to providing support for property markets across the region is effective measures to underpin the economy."

GE reassures over profits of finance arm

From Times Online
March 19, 2009

GE reassures over profits of finance arm
Christine Seib, New York

Shares in General Electric (GE) rose almost 7 per cent in morning trading after the conglomerate reassured investors about the profitability of its troubled finance business.

GE, which saw its shares plummet to an 18-year low of $5.87 this month on capital raising and ratings downgrade fears, said that GE Capital was likely to be profitable this year even in a worst-case economic scenario.

The company’s stock was up by 6.9 per cent at $11.03 each by 10.50am as shareholders welcomed the news.

Michael Neal, chief executive of GE Capital, said: "Even in the adverse case we’re probably break-even to slightly profitable".

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Keith Sherin, GE’s chief financial officer, added that the company had run stress tests of GE Capital’s portfolio of business and found nothing that would force GE to raise additional capital.

GE Capital, which sells commercial and personal loans as well as making proprietary investments in real estate, has been hit by the souring property market.

GE has put aside $10 billion against expected losses at the unit, which once accounted for about half of GE’s earnings but has shrunk to less than one-third.

Shares in GE started to rise last week after Standard & Poor’s stripped the company of its AAA credit rating, taking it to AA-plus.

Investors had expected the downgrade to be worse, so took the one-notch demotion as a sign that there was no further bad news to come from the finance business.

http://business.timesonline.co.uk/tol/business/article5939737.ece

Opportunities still abound in tougher financial times

Opportunities still abound in tougher financial times

Last Updated: 4:01PM GMT 19 Mar 2009

Managing client money in a downturn is proving to be the ultimate stress test. In an economic downturn, capital preservation becomes a greater consideration as investment risk increases.

Stockmarkets can experience sharp declines, volatility rises and traditional sources of income can be eroded. Such periods of economic difficulty also provide attractive opportunities. Being positioned with flexibility means it is possible to take advantage of these as they emerge.

To manage client money successfully in a downturn we have to try to identify the environment in which we are operating. This has been made more difficult by the rapid change in the economic and financial landscape in recent months. But certain factors are apparent:

A number of leading banks have wiped out their capital. Governments have, however, made it clear that they will do everything possible to protect savers and keep the banking system functioning. This is good news, but investors need to be wary of any loss of nerve by the authorities as they face up to multiple bank recapitalisations.

We have entered a recession that will be deep and last for several years. There will be a sharp fall in the rate of inflation and we may even see a negative number this year. Interest rates will continue to fall.

Given the level of uncertainty, the value of capital and the extensive range of attractive opportunities available it makes no sense to lock up capital even if apparent returns are attractive. For example, investors in five-year structured notes backed by a bank whose credit rating is deteriorating, will attest to how uncomfortable they feel at present and how much poorer they are in the short term.

Equally, borrowing to invest even though interest rates are falling is unnecessary and potentially dangerous.

Backward-looking asset-allocation models have also failed to protect investors. Decade-long average returns and past correlations have been of little use over the past year and they will continue to provide poor guidance for a number of years to come.

Governments are fully occupied in an exercise that may best be described as battlefield triage of the financial system, while at the same time trying to work out how to sustain the rest of the economy and the confidence of consumers. They have now moved on to search for explanations as to what went wrong and who to blame.

On the other hand, investors should have a different agenda.

Liquidity in all asset classes is critical so that when the forced selling stops and the markets stabilise, investors will be able to use valuable capital to maximum effect. There are attractive opportunities in all asset classes.

Interest rates are low and probably heading lower. Returns on cash are correspondingly low, but having a good cushion of liquidity provides the flexibility to redeploy this quickly as opportunities open up. Gilt yields have tumbled, reflecting the decline in interest rates and the expectation that inflation will remain low for some time.

However, while this may hold true for now, the combination of substantial fiscal and monetary stimulus packages is likely to rekindle inflation in two years. This makes inflation-linked gilts look more attractive at present.

Corporate bonds have delivered a poor return over the past year as the default risk priced into them rises in step with the deterioration in the economic environment. However, there are a number of high-quality investment-grade bonds offering attractive yields well in excess of government stock.

Equity markets have slumped, but there are many good-quality businesses with strong balance sheets that are generating sufficient cash flow to support progressive dividend policies. Equities are an unloved asset class at present, but many quality companies in sectors such as oil and pharmaceuticals are sitting at attractive valuations. Commodities also have a role to play within a diversified portfolio.

Our focus at present is on gold and silver, rather than economically sensitive industrial metals. We regard the former as a hedge against the longer term inflationary implications of the action being taken to stimulate the economy, specifically low interest rates and the expansion of the monetary base.

We believe that successful investment is about managing risk, sensible diversification and taking advantage of opportunities as they occur.

Michael Kerr-Dineen is chief executive of Cheviot Asset Management

http://www.telegraph.co.uk/finance/personalfinance/investing/5016903/Opportunities-still-abound-in-tougher-financial-times.html

South-east Asian nations band together to safeguard exports

South-east Asian nations band together to safeguard exports
South-east Asian leaders called for greater co-ordinated regional action to help restore their damaged export-driven economies.

By Ben Harrington
Last Updated: 10:38PM GMT 01 Mar 2009

At the annual Association of south-east Asian Nations (Asean) summit held at the Thai seaside resort of Hua Hin, the 10 members of the organisation endorsed measures to stimulate economic activity, ease access to credit, and stand firm against trade protectionism.
Asean members include Indonesia, Singapore, Malaysia, Philippines, Thailand, Brunei, Cambodia and Laos.

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Export-dependent Asian economic growth is slowing rapidly as consumers and companies cut back spending amid the worsening global downturn.
In south-east Asia, Singapore is in recession and economists believe Malaysia and Thailand are on the brink, while Indonesian growth has slowed to its weakest pace in more than two years.
Many Asian countries have announced stimulus plans to stem the economic damage, but exports will not stage a major recovery until consumers in the West start spending again.
However, The 10 leaders of Asean failed to spell out any specific policies the group would take in a chairman's statement. Leaders also called for reform of the international financial system to take more account of developing countries. Meanwhile, the Asean members also said they still plan to become an economic community similar to the European Union by 2015 to boost competitiveness.
However, the group stressed that the EU was an inspiration and not a model.
One of the less high-profile agreements to come out of the summit is that dentists are now allowed to practice throughout the region.

http://www.telegraph.co.uk/finance/economics/4903911/South-east-Asian-nations-band-together-to-safeguard-exports.html

World now in grip of 'Great Recession' warns IMF

World now in grip of 'Great Recession' warns IMF
The world is mired in what future generations may dub the "Great Recession", the head of the International Monetary Fund has declared, in the face of a flurry of negative economic news.

By Edmund Conway
Last Updated: 10:40AM GMT 11 Mar 2009

Mr Strauss-Kahn said that the Fund was poised to cut its forecast for 2009 global economic growth from the paltry 0.5pc expansion it predicted in January.
The global economy faces a contraction in overall gross domestic product for the first time since the Second World War, said Dominique Strauss-Kahn. His warning came as:

• Britain's leading economic forecaster, the National Institute for Economic and Social Research, said the UK economy has given up more than two years' worth of expansion, sliding back to the same size it was in summer 2006. It added that the recession had deepened in the first quarter of the year.

Global economy to shrink for first time since the Second World War

• China slid into deflation for the first time in the crisis, underlining the fact that Western nations' reliance on Chinese growth in the recession may be futile.

• Evidence emerged of an industrial production collapse across Europe, while the Irish central bank chief predicted his economy would shrink by a staggering 6pc this year.

• Eastern Europe's problems intensified, with the European Union pledging its readiness to give money to Romania and experts warning that Serbia's economy will shrink by 3pc unless it is bailed out by the IMF.

Mr Strauss-Kahn said that the Fund was poised to cut its forecast for 2009 global economic growth from the paltry 0.5pc expansion it predicted in January, saying a negative figure was now more likely.

"Since then the news hasn't been good," he said. "I think that we can now say that we've entered a Great Recession. This recession may last a long time unless the policies we're expecting are put in place, in which case 2010 can be a year of return to growth."

The world economy has not shrunk since 1945 because usually the contraction in recession countries has been balanced out by economic growth from elsewhere. However, the IMF chief said this recession was unusual for its breadth and ferocity. "The IMF expects global growth to slow below zero this year, the worst performance in most of our lifetimes," he said. "Continued deleveraging by world financial institutions, combined with a collapse in consumer and business confidence is depressing domestic demand across the globe, while world trade is falling at an alarming rate and commodity prices have tumbled."

The warning comes only days ahead of the G20 leading economies finance summit, which takes place this weekend. Ministers, including Chancellor Alistair Darling and US Treasury Secretary Tim Geithner, are due to meet to discuss a concerted response to the latest stages of the economic crisis.

NIESR said it had calculated that in the three months to the end of February Britain's economy shrank by 1.8pc. This is steeper than the official contraction of 1.5pc recorded by the ONS in the final quarter of 2009 and means the economy is now back to the same level it was in August 2006 .

http://www.telegraph.co.uk/finance/financetopics/recession/4969652/World-now-in-grip-of-Great-Recession-warns-IMF.html

Federal Reserve is now playing a high-risk game with inflation

Federal Reserve is now playing a high-risk game with inflation

The US Federal Reserve is increasing its balance sheet by another $1 trillion, including $300bn of Treasury bonds, the Federal Open Market Committee said on Wednesday.

By Martin Hutchinson, breakingviews.com
Last Updated: 8:55AM GMT
19 Mar 2009



Yet the pace of US economic decline seems to be slowing, while deflation is nowhere visible. Fed policy is now high-risk, and resurgent inflation may strike sooner than expected.

The FOMC said it expects inflation to remain subdued with some risk it could "persist for a time below rates that best foster economic growth”. Notably, the Fed is not now forecasting actual deflation.

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That’s not surprising, since February’s top-line consumer price index rose 0.4pc, equivalent to 4.8pc annually, while core consumer prices also rose, by 0.2pc. The Cleveland Fed’s median CPI was 2.8pc above the previous year. February’s producer price inflation was marginally lower, with the headline index rising at 1.2pc annually and the core measure at 2.4pc.

Meanwhile, last week’s unexpectedly strong February retail sales and Institute for Supply Management index readings suggest that economic decline is slowing.

The experience of the 1970s in both the United States and Britain demonstrates that the Fed’s theory that inflation won't co-exist with economic slack is wrong. Thus an over-inflationary monetary or fiscal policy could quickly produce accelerating inflation even while recession persists.

The Fed’s proposed purchase of $300bn of long-term Treasury bonds, when combined with the Obama administration’s record budget deficits, is particularly risky. Running large budget deficits and monetising them through central bank purchases of debt is a highly inflationary policy that has got plenty of emerging markets into trouble.

Broad money growth, whether by the M2 metric or by the St. Louis Fed’s MZM figure, has been running at over 15pc annually since last September. The $1trillion further expansion of the Fed’s balance sheet is very likely to accelerate this. The effect may not be obvious in the short term. But at some point, it is almost inevitable inflation will return, probably with force.

The Fed will then need to reverse policy with the speed and verve of a racing driver. Unfortunately, the odds are against it doing so before inflation has taken hold.

For more agenda-setting financial insight, visit www.breakingviews.com

http://www.telegraph.co.uk/finance/breakingviewscom/5014284/Federal-Reserve-is-now-playing-a-high-risk-game-with-inflation.html

'The market is as cheap as in 1953'

'The market is as cheap as in 1953'
When the market turns it will be one of the most stunning bull markets any of us has experienced.

By James Bartholomew
Last Updated: 8:17AM GMT 20 Mar 2009

These are truly extraordinary times. Share prices of many smaller companies are almost unbelievably low. I was once told by an editor never to use the word "cheap" and he had good reason. You can say something looks "cheap" today and look pretty silly when it is even cheaper tomorrow. But really these times make it very difficult not to employ the "c" word.

There is no pleasing the market. On Monday, two of the companies in which I have serious stakes – worth more than 7pc of my portfolio – announced results. Aero Inventory, which manages aircraft parts for airlines, produced excellent profits – up by nearly half. How did the shares respond? They fell 17pc.

Yes, there were one or two reasons for the fall. Above the rest, the company said it had not been able to agree terms for a new contract with a major airline. That was a disappointment. But the irony is in the past six months or so, I have been told that the share price has been weak because of fear of overexpansion leading to a need for capital-raising. So, one minute the company is distrusted because it is expanding too fast, the next it is spurned for not expanding quickly enough. Damned if you do, damned if you don't.

The other company that reported on Monday is safe and exciting. Healthcare Locums, an agency for health and social workers, still slumped 6pc on Tuesday morning.

Sometimes the market seems moody. Shares can rise or fall 20pc with no apparent cause. I wonder if it can be occasionally a single, relatively modest buyer or seller who moves the market a great deal because the turnover in shares has fallen so low. Some of my shares, REA Holdings for example, can easily go through a day without a share being bought or sold. I would also guess that sometimes the buying and selling is just because some people – or funds – need cash.

In theory, this should provide an ideal hunting ground for those seeking good long-term investments. Aero Inventory is forecast by Numis Securities to make earnings per share this year of 83p. The share price earlier this week was 168p. So the share price was only a fraction over two times forecast earnings. Normally my rule of thumb is to say that anything with an earnings multiple of less than 10 is lowly rated. A good company on a multiple of five I would normally regard as extremely good value. But a multiple of two? That is astonishing.

No, gritting my teeth, I won't use the "c" word. But what can you say? It is hard to do justice to how astonishing this kind of valuation is. And it is not as though the company is in any discernible danger. Yes, it is geared but it is profitable and has banking facilities right the way through to 2013. Aero Inventory is an extreme example of the market as a whole.

On the bad side, the chart of the FTSE 100, like the chart of Aero, offers no encouragement. There has been no break in the downward trend. On the other, by any traditional measure, shares are excellent value. The redemption yield on 15-year government stock is currently 3.6pc, whereas the dividend yield on shares is 5.3pc.

Normally, it is the other way around: the dividend yield is lower than the return on government stock for the simple reason that, over time, dividends have historically risen whereas the yield on a government stock does not. True, some companies are reducing or cutting their dividends but this is at the margin. On this method of valuation, as far as I can discover, shares have not been such good value compared to government stock since about 1953.

My view is simple: shares are extremely good value, but it is impossible to know when the turn will come. When it does arrive, from this low valuation, it will be one of the most stunning bull markets any of us has experienced.

http://www.telegraph.co.uk/finance/personalfinance/investing/5017022/The-market-is-as-cheap-as-in-1953.html

Q&A All about 'toxic' debt

Q&A All about 'toxic' debt

Last Updated: 7:42PM BST 16 Sep 2008

What are "toxic" debts?

"Toxic" debt has become shorthand for the various asset classes hard hit by the financial crisis, such as sub-prime mortgages – the original "toxic" asset.

The word "toxic" caught on because these assets have proved financially ruinous. They have seen their valuations cut and buyer demand dry up.

The holders of the debt have in many cases fallen into a loss and been forced to raise emergency capital. The worst hit UK lender so far has been Royal Bank of Scotland, which has taken £5.9bn of writedowns and has had to raise £12bn from shareholders.

How much "toxic waste" is there?

Nobody really knows. Sandy Chen, banks analyst at Panmure Gordon, has estimated there are about $2,000bn (£1,127bn) of US sub-prime mortgages and another $1,000bn of "Alt-A or near-prime".

Those have been packaged into collateralised debt obligations (CDOs), pools of assets that are then spliced into several classes – from AAA secure through to BBB junk status.

More complex still are the "synthetic CDOs", which are not backed by assets but track asset performance. Panmure has estimated that there are $1,700bn of synthetic CDOs.

Asset backed securities have also been packaged into CDOs and have suffered writedowns. US commercial mortgages and leveraged loans, the debt provided by banks to finance private equity takeovers, are similarly now worth less than headline prices.

Even insurance taken out to guarantee bonds sold by the banks has turned "toxic". As the so-called monoline insurers have had their ratings downgraded, the banks have been exposed to more potential losses.

So, the potential exposure is hundreds of billions of dollars more than Panmure's estimate for the size of the sub-prime and near-prime market. As the economy weakens, the "toxic" portfolio is likely to widen to include credit card and car finance debt

What's the cost?

How long is a piece of string? The International Monetary Fund in April estimated that the US sub-prime meltdown will cost banks and other institutions $945bn.

For UK banks alone, it estimated the damage will be £20bn. Monoline exposures, commercial property and leveraged loans increase that estimate significantly.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/2971683/QandA--All-about-toxic-debt.html

Banking on money creation to heal UK financial system

Banking on money creation to heal UK financial system
Sunday, 08 March 2009 17:52


IT JUST DOESN’T pay to be a saver in the UK right now. With the Bank of England (BOE)’s historically low rate cut to 0.5% last Thursday, the sixth cut in a span of five months, yet another blow has been dealt to those relying on savings interest for income. Savings rates have more than halved since the central bank rate’s progressive decline from 5% before the first cut last October. The average UK easy access bank account rate of 0.9% may seem attractive to Singaporean savers, but it is a far cry from the highs of 3.5% seen last May. Cash ISA (individual savings account) rates have also fallen from a high of more than 6% during the heady pre-Icelandic bank collapse days; the prevailing best-buy rate is now 3%.

The latest interest rate cut has also paved the way for the implementation of quantitative easing (QE), which after months of speculation finally received the official green light from Chancellor Alistair Darling last Thursday. The Observer calls it the “nuclear” option in monetary policy terms, while The Times sees it as “the most forceful action yet” to tackle the economic recession. However one chooses to view it, there is no denying that QE — a yet unproven policy tool in the UK — will take the country into uncharted territory.

QE is popularly known as the printing of money but actually involves the creation of money supply through the purchase of assets. The Bank of Japan implemented it in the early 2000s to fight deflation, although its effectiveness remains questionable. The worsening state of the UK economy has called for such drastic measures, however, and with interest rates falling towards zero, the government has to seek alternative avenues to cut borrowing costs to stimulate the economy. As The Independent’s economic editor Sean O’ Grady puts it, it is all about getting money — spending power — into a demoralised economy.

The initial £75 billion ($165.3 billion) that the BOE will pump into the system is smaller than expected, but the Chancellor has given the bank permission to extend the amount up to £150 billion if necessary. The £75 billion will be used to purchase medium- and long-maturity conventional gilts in the secondary markets, and to part finance the previously announced £50 billion Asset Purchase Facility aimed at getting credit moving again through the purchase of corporate bonds. This demand for government and corporate bonds is expected to push up bond prices, which will in turn reduce yields and make corporate and public borrowing cheaper.

Speaking to The Daily Telegraph, Citigroup chief UK economist Michael Saunders believes that if done on a large-enough scale, QE is a powerful form of stimulus for the economy and is likely to ultimately stabilise the economy and buy time for the financial system to heal.

Still, managing QE can be a monumental task, given the complex decisions on how much money to create and what assets to buy. Vicky Redwood, consumer and debt specialist at research consultancy Capital Economics, was reported in The Independent as saying that the main practical difficulty with QE is knowing what to do and how much. Much depends on how vigorously the BOE embraces it; the main danger is doing too little, she adds.

QE also comes with other risks. The central bank could lose taxpayers’ money if corporate bonds default. Also, by entering the debt market, the government faces the longer-term threat of creating a bubble in the bond market, which could burst when the economy starts to improve again. This in turn will drive up interest rates, thus raising the cost of servicing the government’s staggering public debt, which, according to the latest official statistics, has hit £2 trillion with the banking bailout of the Royal Bank of Scotland and Lloyds.

By “creating” money, there is also the risk of a further weakening of the pound sterling and inflation; the policy needs to be monitored closely as increased money supply, coupled with falling production, could lead to demand outstripping supply and hyperinflation, ETX Capital senior trader Manoj Ladwa was reported as saying in the Financial Times. There is also the danger that, instead of achieving the objective of getting them to lend, banks may decide to hoard the additional money in their reserves, which is apparently what happened in Japan.

For QE to work, timing is crucial. Commentators feel that the biggest challenge for the Monetary Policy Committee is ascertaining when to scale back when the economy eventually begins to improve. Stopping too early could run the risk of sending the economy into a “double dip” recession, while stopping too late could result in the recession being replaced with inflation, warns The Times business and city editor David Wighton.

These are among the long-term risks that policymakers need to weigh against the shortterm threat of the current recession being pushed into a full-blown depression. With the UK economy expected to contract further — the BOE had last month forecast a y-o-y fall in output of almost 4% — many feel there is little choice but to move forward with what shadow chancellor George Osborne has called “a leap in the dark” and “a last resort”.

It seems rather ironic that just as a heavyspending, debt-laden population is wising up to its excessive ways and wants to preserve whatever it has left, it now has to contend with paltry savings rates and the possibility of having the value of its assets further eroded by inflation and a sinking currency.

Lim Yin Foong was editor of Personal Money, a Malaysian personal finance magazine published by The Edge Communications, from 2001 to 2006. She is currently based in the UK.

http://www.theedgesingapore.com/blogsheads/999-lim-yin-foong-2009/2808-banking-on-money-creation-to-heal-uk-financial-system.html

Pessimism too high, time to buy: Mark Mobius

Pessimism too high, time to buy: Mark Mobius

Tags: Mark Mobius Templeton

Thursday, 12 March 2009 18:08

Veteran fund manager Mark Mobius sees a potential 20% rise in emerging market stocks in 2009 and views extreme investor pessimism as a signal to gradually start buying equities. "The danger we face now is being too pessimistic," Mobius, the executive chairman of Templeton Asset Management, a division of San Mateo, California-based Franklin Templeton Investments, said in a telephone interview with Reuters.

“We are seeing that slight bottoming out, that we have to be cautious of because if we are caught with too much cash, specifically when we are looking at very good bargains, then we are going to be in trouble with our investors,” he said.

Latin America and Asia are the two favoured regions with China and Brazil among the top country picks. Select countries such as Egypt and Turkey stand out among harder hit regions. “Eastern Europe is pretty much a disaster”. He believes China’s stimulus plan will help it achieve its 8% GDP growth target this year, helping pull up Asia which increasingly sells more of its goods to the world’s third largest economy. Brazil’s diversified economy and growing consumerism also make it attractive, he said.

Mobius manages roughly US$20 billion in emerging market assets out of the firm’s US$377 billion assets under management. Asked how high emerging market stocks might go by year-end: “If you really press me I would say 20% would not be unlikely, and the reason I would say that with some degree of confidence is that we have already come up.”

MSCI’s emerging markets stock index fell 54.48% in 2008. While the index is down 9.46% year-to-date, it has risen more than 15% from its four-year low in October. The Templeton Developing Markets Trust, the main US registered fund Mobius manages, is down 11.44% so far this year after dropping over 57.77% in 2008, according to Reuters data. Cash levels for his portfolio fluctuate between the preferred level of zero and 7% he said. He characterises them as “normal, or certainly not higher than normal”. During the 1997–98 Asian financial crisis, cash levels in his funds reached 20%.

While market volatility may not be over, a market bottom could be in place, Mobius said when asked at what point in the next 12 months investors might claim they’ve cleared a hurdle. “I’m saying that now. I'm feeling that now because of the incredible pessimism that you see everywhere. That usually is a pretty good sign that we are over the hump,” he said.

“Almost universal pessimism is usually a very good time to be buying equities because equities lead the economy,” by six months to a year he said. Famous for his globe-trotting and “on the ground” research, Mobius said of a recent trip to Latin America that while companies were preparing for the worst, customer orders were still coming in and “a lot of them” are maintaining steady investment programmes.

“On the ground things look OK but with a slower pace. That is on the investment side. The valuations now are very very attractive, even if we do a big markdown on earnings,” he said.


Thursday, 12 March 2009 © 2009 - The Edge Singapore


Last Updated on Tuesday, 17 March 2009 11:52
http://www.theedgesingapore.com/blogsheads/1017-the-edge-2009/2954-pessimism-too-high-time-to-buy-mark-mobius.html

Buy China, emerging markets over 2 years, Marc Faber says

Buy China, emerging markets over 2 years, Marc Faber says
Monday, 16 March 2009 13:56


China and other emerging markets offer value over the next two years as growth picks up, investor Marc Faber said.

Investors should buy stocks and other assets in China after the market falls to its 2008 low to profit from an expected recovery, Faber said in an interview with Bloomberg Television. China is the world’s best-performing stock market this year.

“Rapidly growing countries have setbacks from time to time,” Faber, the publisher of the Gloom, Boom & Doom report, said in Hong Kong. “I think we’re going to test the lows again, but over the next two years, it’s probably a good time to invest.”

The MSCI World Index has retreated 18% this year, extending last year’s record 42% slump, amid concern the widening financial crisis and global recession will sap corporate profits. The Shanghai Composite Index, which tracks the larger of China’s two mainland exchanges, has gained 16% in 2009.

China is betting that a 4 trillion yuan ($900 billion) stimulus package and interest-rate cuts will help it reach its 8% growth target this year. The global economy is expected to expand at a 0.5% expansion, according to the International Monetary Fund.

Industrial and precious metals are attractive investments after the Reuters/Jefferies CRB Index of 19 commodities “collapsed,” Faber added. The CRB Index has dropped 8% this year, adding to the 36% retreat in 2008.

“Asset markets have already discounted a lot of the bad economic news,” he said. “ Some assets like commodities are very, very inexpensive.”

Faber had advised buying gold at the start of its eight-year rally, when it traded for less than US$300 an ounce. The metal topped US$1,000 last year and traded at US$932.78 an ounce today. He also told investors to bail out of US stocks a week before the so-called Black Monday crash in 1987, according to his website.

He continues to favour gold, which has gained 19% in the past six months because currencies including the US dollar are “not desirable”.

Stock markets are “not particularly expensive” and investors should consider buying them in anticipation of a recovery, Faber advised. The MSCI global index is valued at 11 times reported earnings, half its 10-year average multiple of 22.

“We also have a lot of equities that are not particularly expensive because they’ve collapsed,” Faber said. “These are relatively sound companies and whenever the recovery will come, they will be in a strong position.”



Monday, 16 March 2009 © 2009 - The Edge Singapore


Last Updated on Tuesday, 17 March 2009 11:53

http://www.theedgesingapore.com/blogsheads/1017-the-edge-2009/3009-buy-china-emerging-markets-over-2-years-marc-faber-says.html

How to set up your own investment club

How to set up your own investment club
We explain the dos and don'ts when forming a group to have a flutter on the stock market

Mark Atherton
Thousands of people up and down the country have organised themselves into investment clubs as a way of buying shares on the stock market.

It is a good way to learn how the stock market works and by pooling their money individual investors don’t have to commit more than a small sum each month so they are not risking a fortune.

The hurdles to starting up

Many people fear they do not know enough about shares to make sensible decisions. They also worry that the task of running a club, keeping the books and accounting for all the money might be beyond them.

Fortunately help is at hand. ProShare Investment Clubs is an organisation that exists specifically to assist those wishing to form such clubs. It can provide software and templates to smooth the path for club secretaries and treasurers.

In the same way, Digital Look, the financial information company, is on hand to offer research and investment tools. ProShare Investment Clubs says that, very often, clubs find they have more expertise within their ranks than they realised.

Setting up your club

Those interested in establishing a club will need to hold a meeting to gauge whether there is enough enthusiasm for the project to be carried forward. Some investment clubs are made up wholly or largely of people from one occupation, such as teachers or airline pilots. ProShare suggests it is better to have a range of expertise, so that the club members have expert knowledge of more than one subject.

There will need to be an election of office holders, usually including a chairman, a secretary and a treasurer. The first would normally chair the meetings, the second would deal with correspondence and records of meetings, while the third would look after the money and keep accounts.

Once the club is set up members should be able to select shares to buy and sell at their regular meetings. They will need to enlist the services of a stockbroker and here again ProShare can help. Its website has a link to APCIMS (The Association of Private Client Investment Managers and Stockbrokers) which holds details of more than 250 broking firms that deal in stocks and shares for private investors.

Groups can also register on the ProShare Investment Clubs website, where their names will be added to hundreds of others from all over the country. All they have to do is enter their club’s name and number of members. Once registered and logged in, they will be given their own home page and be able to enter details of their portfolio.

Regular club meetings

These are the occasions when club members can select shares to buy or sell. It is also the time when members can examine whether the club is continuing to meet its original objectives.

For example, in the very tough conditions of the past six months some investment clubs have put up the shutters, buying few if any shares, prompting some people to question whether an investment club should continue in existence if it is not doing any investing.

A ProShare spokeswoman says the key to a successful meeting is the chairman, who needs to make sure all members have a chance to have their say, while gently dissuading the more talkative from hogging the floor.

It is advisable to insist that no share can be bought without at least one person, often the proposer of the share, putting forward some research on the company’s background, followed by a proper debate, with a vote. As ProShare says: "If you buy a share on nothing more than a nod-nod, wink-wink, it will all end in tears.” A similar process should be applied to sell recommendations.

The nuts and bolts

Members should ensure they keep a record of each meeting, noting clearly any investment decisions made. They should also maintain an up to date record of the investment performance of their shares, both individually and as an overall portfolio. ProShare has software applications which enable clubs to create a detailed spreadsheet.

The problems of a bear market

Most investment clubs thrive in a bull market but can come unstuck in a bear market. It is never pleasant when shares start showing a loss rather than a profit and this can make some investment club members lose heart, as indicated above.

The advice from ProShare is to follow the example of Corporal Jones, in Dad’s Army - don’t panic. They should try to take a long term view and remember that historically markets have always recovered over time.

http://www.timesonline.co.uk/tol/money/investment/article5484160.ece

Deflation: why is it so dangerous?

Deflation: why is it so dangerous?
With the economic news seemingly becoming worse by the day, there has been much talk about the possibility of deflation – a prolonged period of falling general prices.

By George Buckley
Last Updated: 11:35AM GMT 17 Mar 2009

But why would this be so bad? After all, surely deflation is good for households if it means that the cost of the goods and services is becoming cheaper?

There are a few reasons it's not that simple. First, prices tend to be influenced by the state of the economy. If demand is greater than the supply of goods and services then prices rise. If demand is weaker –as is the case at the moment – then prices can drop. So falling prices tell us something about the fragile shape of the economy.

A fall in prices is bad news for companies that make or sell the products we buy. Imagine a retailer having to cut prices to shift stock, but at the same time paying more for imported goods because of the fall in pound’s value. This causes profits to turn to losses, meaning some retailers will go to the wall, and many will cut staff.

Deflation, therefore, doesn’t just mean lower prices – it also means higher unemployment and lower wages. It will become much more difficult for those people who’ve lost their job or had to take a pay cut to continue repaying their debt.

Some might be forced to sell their house to pay off the mortgage – but the more people who do this, the more house prices may fall (causing negative equity). And if house prices fall that can be a blow to confidence leading to a weaker economy which in turn might perpetuate deflation. It is easy to see how a vicious cycle can develop.

Consider the situation in which we have deflation, and more importantly we think it is going to continue. There is, then, little incentive to spend money today – we may as well wait until tomorrow when prices will be lower. And tomorrow we might think the same again, deferring our purchase indefinitely.

This is what happened in Japan in the 1990s - deflation came, and shoppers disappeared. Economic growth turned to economic contraction, and we witnessed what became known as Japan's "lost decade". Following a brief interlude where growth returned, a second lost decade seems to be in the making.

Even worse was the Great Depression. In the 1930s share prices tumbled leading to an economic slump of epic proportions – and, of course, deflation and falling wages. The crash that led to that depression was caused by investors buying shares with borrowed money, pushing their prices up to ever unsustainable levels. This time round it was excesses in the housing market and the financial sector.

Governments are now trying to spend their way out of recession, attempting to fill in the gap left by households and firms. The Bank of England is helping too by bringing interest rates down to exceptionally low levels – making it less desirable to save and thereby encouraging spending.

It is still very uncertain as to how all of this stimulus will affect the economy. The pressing need is to avert a period of deflation, but the risk is that too much policy easing could cause exactly the opposite

George Buckley is chief UK economist at Deutsche Bank

http://www.telegraph.co.uk/finance/financetopics/recession/5005277/Deflation-why-is-it-so-dangerous.html

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Britain showing signs of heading towards 1930s-style depression, says Bank

Britain showing signs of heading towards 1930s-style depression, says Bank

Britain is showing signs of sliding towards a 1930s-style depression, the Bank of England says today for the first time.

By Edmund Conway, Economics Editor
Last Updated: 8:23AM GMT 16 Mar 2009

The country is displaying early symptoms of being trapped in a so-called “debt deflation trap” where families find themselves pushed further and further into the red every month, according to a Bank report published today.

The stark warning will cause serious concerns, since it was this combination of falling prices and soaring debt burdens that plagued the US in the 1930s.


The Bank is using its Quarterly Bulletin to highlight the threat posed to the economy by deflation – where prices fall each year rather than rise.

Although inflation is currently in positive territory, it is expected to become negative in the coming months.

The Bank is worried that this may combine with high levels of indebtedness to squeeze families further.

It says that families with high debts could fall prey to the debt deflation trap. This means that the cost of their debts, which are fixed, would rise compared to average prices throughout the economy. While inflation erodes debts, deflation makes them relatively higher.

The Bank’s paper suggests that Britain is particularly at risk because there is a high proportion of families with significant levels of debt, and many of them are on fixed mortgage rate, which means they will not benefit from rate cuts.

Britons’ total personal debt – the amount owed on mortgages, loans and credit cards – is, at £1.46 trillion, more than the value of what the country produces in a year.

Total personal debt has risen by 165 per cent since 1997 and each household now owes an average of about £60,000.

The Conservatives claim this is the highest personal debt level in the world.

The Bank’s paper also says that consumers were suffering as banks keep the cost of borrowing high, despite Government attempts to get them lending again.

Alistair Darling, the Chancellor, and fellow finance ministers used their pre-G20 meeting this weekend to warn that more drastic action was necessary to help bring the world economy back from the brink of a possible repeat of the 1930s.

The Bank’s report puts pressure on Gordon Brown, who this weekend faced further calls to apologise for the recession, to secure agreement on an effective international rescue strategy when he hosts the G20 leaders at a summit in London at the start of April.

It comes as figures this week are expected to show the number of people unemployed will reach the two million mark.

The Bank’s report says: “This configuration of falling asset prices and depressed economic conditions in the face of an adverse demand shock is consistent with recent and prospective macroeconomic developments in the United Kingdom and internationally”.

It helps explain why it took such dramatic action earlier this month to pump extra cash into the economy.

The bank slashed interest rates to just above zero and pledged to create £150 billion worth of cash with which to buy up government and corporate debt.

This so-called quantitative easing is regarded as a radical measure to help prevent a repeat of the conditions associated with the Great Depression.

Many experts believe that the US authorities’ initial reluctance in the 1930s even to cut interest rates was partly responsible for causing the worst economic slump in Western history.

The Chancellor acknowledged at the G20 meeting that the economic situation was “grave” but pledged not to allow a repeat of the Depression years. The ministers promised to pump more cash into their economies if necessary in the next few months.

However, some have expressed concern that the meeting failed in its aspiration to reach a specific agreement on the amount of cash countries need to spend in the coming year. Others have warned that it does not set a clear enough agenda for the much-anticipated full G20 summit on April 2.

Some speculate that the Prime Minister may use the G20 as a justification for a series of further tax cuts and spending increases in the Budget next month, though many economists have warned that despite the scale of the recession faced by the UK the Treasury has little capacity to borrow more.

Mr Darling has signalled that the meeting must not be allowed to mirror a 1933 summit in London which failed to halt the Great Depression. He said failure to agree co-ordinated action then meant that the Depression continued for years when it “need not have done so”.

Writing in The Sunday Telegraph George Osborne, the Shadow Chancellor, said Mr Brown must use the G20 as “the moment to send the clearest of signals that, unlike in the 1930s, this banking crisis will not send the world spinning into a protectionist spiral.”

He said that “ministerial promises” had failed to deliver any real benefits to struggling home owners or desperate businesses.

http://www.telegraph.co.uk/finance/financetopics/recession/4996994/Britain-showing-signs-of-heading-towards-1930s-style-depression-says-Bank.html

Testing 3 Types Of Analysts

Testing 3 Types Of Analysts
by Rick Wayman


There are several types of analysts on Wall Street, and they produce different kinds of reports because they have different kinds of clients. Let's take a look at the different responsibilities required for each analyst, so that you can do your own litmus test to see which ones you need to pay attention to.

Sell-Side Analysts
These are the analysts that are dominating today's headlines. They are employed by brokerage houses to analyze companies and write in-depth research reports, conducting what is sometimes called primary research. These reports are used to "sell" an idea to individuals and institutional clients. Individual investors gain access to these reports mainly by having accounts with the brokerage firm. For example, to get free research from Merrill Lynch, you need to have an account with a Merrill Lynch broker. Sometimes the reports can be purchased through a third party such as Multex.com. Institutional clients (i.e. mutual fund managers) get research from the brokerage's institutional brokers. (Keep reading about fund managers in Should You Follow Your Fund Manager? and Choose A Fund With A Winning Manager.)
A good sell-side research report contains a detailed analysis of a company's competitive advantages and provides information on management's expertise and how the company's operating and stock valuation compares to a peer group and its industry. The typical report also contains an earnings model and clearly states the assumptions that are used to create the forecast. Writing this type of report is a time consuming process. Information is obtained by reading the company's filings for the Securities & Exchange Commission, meeting with its management and, if possible, talking with its suppliers and customers. It also entails analyzing (using the same process) the company's publicly-traded peers for the purpose of better understanding differences in operating results and stock valuations. This approach is called fundamental analysis because it focuses on the company's fundamentals. This is a rigorous and time-consuming process that limits a typical sell-side analyst specializing in two or three industries and covering about 10-15 companies, depending on the number of sectors he or she follows.The challenge facing the brokerages is that it's extremely expensive to create all this research. Brokerages must recover the costs of paying sell-side analysts from somewhere, but deregulation has significantly reduced the ability to make a profit at anything except investment banking deals. The main result of these "forces" is that research departments cannot research any companies that do not have a potential investment bank deal of about $50 million or more. This leaves thousands of great companies without research. Couple this with the fact that research departments drop coverage rather than issue "sell" reports, and you'll get the perception that analysts only issue "buy" recommendations. (To read more on this, see Why There Are Few Sell Ratings On Wall Street and Stock Ratings: The Good, The Bad And The Ugly.)

Buy-Side Analysts
Buy-side analysts are employed by fund managers like Fidelity and Janus, as well as pension funds. Like the sell-side analysis, the buy-side analyst specializes in a few sectors and analyzes stocks to make buy/sell recommendations; however, the buy-side differs from the sell-side in three main ways: they follow more stocks (30-40), they write very brief reports (generally one or two pages), and their research is only distributed to the fund's managers. Buy-side analysts can cover more stocks than sell-side analysts because they have access to all the sell-side research. They also have the opportunity to attend industry conferences, hosted by sell-side firms. During these conferences, the managements of several companies in a sector present why they are a better investment. After gathering this information, buy-side analysts summarize their case in a brief report that also contains an earnings forecast. These reports are only distributed to the fund's managers.
The sell-side provides research and conferences to the buy-side in the hopes that the buy-side will let them execute the large trades that the funds make when they act on the recommendation provided by the sell-side. Having access to the sell-side's primary research and the ability to attend industry conferences allows the buy-side analyst to follow many more stocks than a sell-side analyst. To compensate the firm for this information, the funds will buy and sell stocks with the brokerage firms that provide the best information.

Independent Analysts
Independent analysts are practitioners who are not employed by either brokerage firms or mutual/pension funds. "Indies", as they are sometimes called, are firms established to provide research that is "untainted" by investment banking deals. Some Indies focus on serving institutional clients and are paid a fee to follow certain stocks and/or to find new ideas that the sell-side is missing. In some cases, these institutional Indies have a relationship with a brokerage firm and are compensated by trades given to them by the funds. Sometimes it is a fee-only arrangement.Other Indies provide their research to both the institutional and individual investors. These firms may provide their research on a subscription basis or for free. In either case, it is important to understand the nature of the relationship between the research firm and the company that is being analyzed (generally called the "Subject Company"), even if the report is not free. Every research report is required to have a section called the disclaimer that discloses, among other things, the nature of the relationship between the research firm and the subject company. Every major brokerage firm and every Indie must provide this information. This disclaimer generally appears at the end of the report and is in small type. In it, the research firm must disclose if and how it is compensated for providing research. For example, major Wall Street firms will disclose that they provided investment-banking services to the subject company. Some indies will accept stock or other forms of equity as payment for their services. Other Indies will only accept a cash only fixed-fee.

Analyst Objectivity
The objectivity of research reports is a major question, one that is now asked of both the large Wall Street firms as well as the Indies. Is Wall Street research objective? Can an indie provide an objective research report if it is paid by the subject company? These are difficult questions to answer without reading the disclosure and the report and knowing something about the firm and the analyst. Just like on Wall Street, some indies strive to meet a higher standard of ethical conduct while others just try to manipulate stocks. But it is your responsibility to understand and evaluate this information.Indies play an important role in today's market by providing research on small/micro cap stocks that are ignored by traditional brokerage research departments. Wall Street has become myopic, focused on big cap stocks and pleasing big institutional investors. This has resulted in the majority of stocks becoming "orphans" despite their investment potential. Indies attempt to bridge this information gap by providing research on stocks Wall Street has orphaned. While the Internet revolution has increased the ability of individual investors to do their own trades and research, it takes time and experience to do a thorough job. Legitimate indies take the time to provide useful information. It is up to you to judge its worth.

by Rick Wayman, (Contact Author Biography)

http://investopedia.com/articles/analyst/052102.asp