Warren Buffett's Bear Market Maneuvers

Warren Buffett's Bear Market Maneuvers
by Dan Barufaldi (Contact Author Biography)

In times of economic decline, many investors ask themselves, "What strategies does the Oracle of Omaha employ to keep Berkshire Hathaway on target?" The answer is that the esteemed Warren Buffett, the most successful known investor of all time, rarely changes his long-term value investment strategy and regards down markets as an opportunity to buy good companies at reasonable prices. In this article, we will cover the Buffett investment philosophy and stock-selection criteria with specific emphasis on their application in a down market and a slowing economy. (For more on Warren Buffett and his current holdings, sign up for our Coattail Investor newsletter.)


The Buffett Investment Philosophy

Buffett has a set of definitive assumptions about what constitutes a "good investment". These focus on the quality of the business rather than the short-term or near-future share price or market moves. He takes a long-term, large scale, business value-based investment approach that concentrates on good fundamentals and intrinsic business value, rather than the share price. (For further reading, see Warren Buffett: The Road To Riches and What Is Warren Buffett's Investing Style?)

Buffett looks for businesses with "a durable competitive advantage." What he means by this is that the company has a market position, market share, branding or other long-lasting edge over its competitors that either prevents easy access by competitors or controls a scarce raw-material source. (For more insight, see Competitive Advantage Counts, 3 Secrets Of Successful Companies and Economic Moats Keep Competitors At Bay.)

Buffett employs a selective contrarian investment strategy: using his investment criteria to identify and select good companies, he can then make large investments (millions of shares) when the market and the share price are depressed and when other investors may be selling.

In addition, he assumes the following points to be true:
The global economy is complex and unpredictable.
The economy and the stock market do not move in sync.
The market discount mechanism moves instantly to incorporate news into the share price.
The returns of long-term equities cannot be matched anywhere else.

Buffett Investment Activity

Berkshire Hathaway investment industries over the years have included:
Insurance
Soft drinks
Private jet aircraft
Chocolates
Shoes
Jewelry
Publishing
Furniture
Steel
Energy
Home building

The industries listed above vary widely, so what are the common criteria used to separate the good investments from the bad?

Buffett Investment Criteria

Berkshire Hathaway relies on an extensive research-and-analysis team that goes through reams of data to guide their investment decisions. While all the details of the specific techniques used are not made public, the following 10 requirements are all common among Berkshire Hathaway investments:
The candidate company has to be in a good and growing economy or industry.
It must enjoy a consumer monopoly or have a loyalty-commanding brand.
It cannot be vulnerable to competition from anyone with abundant resources.
Its earnings have to be on an upward trend with good and consistent profit margins.
The company must enjoy a low debt/equity ratio or a high earnings/debt ratio.
It must have high and consistent returns on invested capital.
The company must have a history of retaining earnings for growth.
It cannot have high maintenance costs of operations, high capital expenditure or investment cash flow.
The company must demonstrate a history of reinvesting earnings in good business opportunities, and its management needs a good track record of profiting from these investments.
The company must be free to adjust prices for inflation.

The Buffett Investment Strategy

Buffett makes concentrated purchases. In a downturn, he buys millions of shares of solid businesses at reasonable prices. Buffett does not buy tech shares because he doesn't understand their business or industry; during the dotcom boom, he avoided investing in tech companies because he felt they hadn't been around long enough to provide sufficient performance history for his purposes.

And even in a bear market, although Buffett had billions of dollars in cash to make investments, in his 2009 letter to Berkshire Hathaway shareholders, he declared that cash held beyond the bottom would be eroded by inflation in the recovery.

Buffett deals only with large companies because he needs to make massive investments to garner the returns required to post excellent results for the huge size to which his company, Berkshire Hathaway, has grown. (To learn about the disadvantage of being confined to blue chip stocks, read Why Warren Buffett Envies You.)

Buffett's selective contrarian style in a bear market includes making some large investments in blue chip stocks when their stock price is very low. And Buffett might get an even better deal than the average investor: His ability to supply billions of dollars in cash infusion investments earns him special conditions and opportunities not available to others. His investments often are in a class of secured stock with its dividends assured and future stock warrants available at below-market prices.

Conclusion

Buffett's strategy for coping with a down market is to approach it as an opportunity to buy good companies at reasonable prices. Buffett has developed an investment model that has worked for him and the Berkshire Hathaway shareholders over a long period of time. His investment strategy is long term and selective, incorporating a stringent set of requirements prior to an investment decision being made. Buffett also benefits from a huge cash "war chest" that can be used to buy millions of shares at a time, providing an ever-ready opportunity to earn huge returns.

For further reading, see Think Like Warren Buffett and Warren Buffett's Best Buys.
by Dan Barufaldi , (Contact Author Biography)

Dan Barufaldi is an Independent Consultant associated with the management consulting and global business development firm, Globe Lynx Group, located in Lewiston, NY. He has a Bachelors degree in economics from Cornell University. Barufaldi has authored business articles and columns in four newspapers and several Chamber of Commerce publications.

http://www.investopedia.com/articles/stocks/09/buffett-bear-market-strategies.asp?partner=wbw4

Interesting questions in a survey

Took the survey in Investopedia today. Here are some of the interesting questions asked.

What investments currently interest you? (Check as many as apply)

Stocks

Mutual Funds

ETF

IRA/Retirement

FOREX

Options

Cash and Cash Equivalents

Futures/Commodities

Real Estate

Precious Metals

Bonds/Debt

CD/Notes/Bills

Money Market/Bank Account

None of the Above


What investments do you currently own?

Stocks

Mutual Funds

ETF

IRA/Retirement

FOREX

Options

Cash and Cash Equivalents

Futures/Commodities

Real Estate

Precious Metals

Bonds/Debt

CD/Notes/Bills

Money Market/Bank Account

None of the Above


There are many features on Investopedia. Which of the following features do you read or use? (Check as many as apply)


Latest Articles

Recent Stock Analysis

Tutorials

Exam Prep

Stock Simulator

Get Current Rates (Savings, Home Equity, Mortgate, etc.)

Other (Please Specify)



Which of the following types of method do you use to trade? (Check only one)

I trade online

I use a traditional broker

Both



On average, how often do you trade?

Several times per day

Daily

2-6 times a week

Once a week

2-3 times a month

Once a month

Less than once a month

I currently do not trade

I do not trade


On average, how many trades per month do you make?

None

1-5

6-10

11-50

51-99

100+

Don't Know


How often do you check your investments?


Everyday

2-6 times a week

Once a week

2-3 times a month

Once a month

Less often than once a month

Never check my investments


Which of the following best describes your portfolio size?


Less than $49,999

$50,000-$74,999

$75,000-$99,999

$100,000-$199,999

$200,000-$299,000

$300,000-$399,000

$400,000-499,000

$500,000-$999,999

$1,000,000+

Don't Know


Which of the following websites do you visit on a regular basis? (Check as many as apply)

Investopedia.com

WSJ.com

BW.com

NYtimes.com

FT.com

Forbes.com

Bloomberg.com

CNNmoney.com

Yahoofinance.com

Economist.com

USnews.com

Other


Which of the following best describes your age?


Under 18

18-24

25-34

35-44

45-54

55-64

65+


In the past 12 months, have you attended any school, classes, or workshops on
investing or finance related?

Yes

No

Not sure


Which of the following best describes your status?

Working full-time

Working part-time

Homemaker/Stay home parent

Student/working part or full-time

Student Only

Retired

Not Employed


Which of the following best describes the industry that you work in?


Investment Banking

Commercial Banking

Accounting

Real Estate

Mortgage Industry

Media

Retail

Telecommunications

Healthcare

Insurance

Manufacturing

Education

Other


Which of the following best describes your title?

C-Level (President, CEO, COO, CFO, CMO, CIO, etc.)

Owner/Partner

SVP/EVP

Director/GM

Manager

Consultant

Accountant

Financial Planner

Financial Adviser

Sales

Other


Which of the following best describes your total household income in 2008 before taxes?

Under $24,999

$25,000-$49,999

$50,000-$74,999

$75,000-$99,999

$100,000-$149,999

$150,000-$199,999

$200,000-$249,999

$250,000-$299,999

$300,000+

Don't Know

Halal Forum expected to generate million-ringgit deals

Halal Forum expected to generate million-ringgit deals
By Hamisah Hamid

Published: 2009/04/24


THIS year's World Halal Forum (WHF 2009) will continue its tradition of generating several hundred million- ringgit worth of deals, its organisers said yesterday.

The previous three forums resulted in about RM500 million investments from international companies, KasehDia Sdn Bhd executive director Nordin Abdullah said.

Last year's event witnessed several hundred million-ringgit worth of deals signed, and this year's instalment should see similar performance, he added.

"And this is a conservative estimate," said Nordin, who is also WHF deputy chairman.

Earlier, KasehDia managing director Jumaatun Azmi said there will be a series of memoranda of understanding (MOUs), matchmaking and joint-venture deals signed during WHF 2009 and World Halal Research Summit 2009 (WHR 2009) next month.

"You can expect a very big announcement on the first day of WHF, involving a large public-listed company," she said at a news conference yesterday, but declined to elaborate.

Halal Industry Development Corp Sdn Bhd (HDC) chief executive officer Datuk Jamil Bidin said during the event, HDC will sign an MOU with a Muslim European country to develop halal industry there.

Areas covered in the deal include halal standards, training and halal parks. He said the collaboration provides an opportunity for Malaysian companies to penetrate the European market.

Themed, "Achieving Global Halal Integrity", WHF 2009 will take place on May 4 and 5, and host two concurrent parallel sessions - one on International Halal Integrity Alliance (IHI Alliance) standards and another on business and trade.

The first draft of 10 modules for the Global Halal Standard, which is expected to be endorsed by the Organisation of Islamic Conference (OIC) standards committee in the next few days, will be presented for public comment at WHF 2009.

Besides delegates from OIC countries, other international participants will come from the US, the UK, China, India, Thailand, New Zealand and Australia.

Meanwhile, WHR 2009, a conference on new research findings, emerging technologies and trends in halal industry, will be held on May 7 and 8.

Both events will be held in conjunction with Halal Malaysia Week, which will also feature the 6th Malaysia International Halal Showcase (Mihas 2009).

The global halal food sector grows 25 per cent annually, with increasing demand for value-added halal food products from Muslim population in developed countries such as halal sausages, pizza, microwaveable food and others.

There are currently about 1.8 billion Muslims worldwide, while the global halal industry is estimated to be worth US$1 trillion (RM3.64 trillion) a year.

http://www.btimes.com.my/Current_News/BTIMES/articles/23WHF/Article/

Assessing indebtedness. How much debt is too much?

Leverage

Leverage and debt assessments are perpetually subjective and are discussed continuously by financial and credit analysts. Some debt is usually regarded as a good thing, for it expands the size of the business and hence the return on owner capital/equity. But too much is too much. Where do you draw the line?

Guiding principles include comparative analysis and vulnerability to downturns. Debt must always be paid back, whether business is good or not - so debt stops being okay when it's too large to cover during a downturn or business strategy change.

Here are a couple of supporting metrics:

Debt to equity

This old standard is common used to get a feel for indebtedness, particularly in comparison with the rest of an industry.

D/E = Total long-term debt / Equity

A company with only $300,000 in long-term debt beyond the portion currently due, against $653 million in equity is virtually debt-free. Such a debt to equity ratio well below 1% is healthy, and so it is for most businesses too. But business analysts may wonder if the company could produce a greater return by borrowing and putting more assets in play. Evidently management has decided that it isn't worth it, so hasn't. That's a better decision than borrowing funds to make the wrong investments.

The investor is left to agree or disagree with management's judgment, but debt-free companies - just like debt-free consumers - come out ahead more often.


Interest coverage

Interest coverage is the ratio of earnings to annual interest, a rough indication of how solvent or burdened a company is by debt.

Interest coverage = Earnings / Annual interest

One way to look at whether a business has the right amount of debt is to look at how much of its earnings are consumed to pay interest on it. (Prudent to keep annual interest less than 20% of earnings.)

When looking at interest coverage, a good question to ask is this: What happens to coverage if, say, business (sales) drops 20%, as in a deep recession?

Capital-intensive and Capital-hungry companies

CAPITAL SUFFICIENCY

Capital-hungry companies are sometimes hard to detect, but there are a few obvious signs.

Companies in capital-intensive industries, such as manufacturing, transportation, or telecommunications, are likely suspects.

Here are a few indicators.

1. Share buybacks

The number of shares outstanding can be a real simple indicator of a capital hungry company. A company using cash to retire shares - if acting sensibly - is telling you that it generates more capital than it needs. On the other hand, if you look at a company like IBM, ROE has grown substantially, and massive share buybacks are a major reason.

Warning! : When evaluating share buybacks, make sure to look at actual shares outstanding. Relying on company news releases alone can be misleading. Companies also buy back shares to support employee incentive programs or to accumulate shares for an acquisition. Such repurchases may be okay but aren't the kind of repurchases that increase return on equity for remaining owners. (Comment: to take a look at HaiO share buyback.)

2. Cash flow ratio

Is cash flow from operations enough to meet investing requirements (capital assets being the main form of investment) and financing requirements (in this case, the repayment of debt)?

If not, it's back to the capital markets. This figure is pretty elusive unless you have - and study - statements of cash flow.

3. Lengthening asset cycles

If accounts receivable collection periods and inventory holding periods are lengthening (number of days' sales in accounts receivable and inventory), that forewarns the need for more capital.

4. Working capital

A company requiring steady increases in workng capital to support sales requires, naturally, capital. Working capital is capital.

ROE in Action

ROE in Action

Using Value Line as the source, IBM's ROE was a paltry 5% in the 1991-1993 timeframe. At that point, now-retired chairman and CEO Louis Gerstner took over. Through a balanced combination of profitability, productivity and capital structure initiatives, ROE rose quickly to the 20-25% range in 1995, and has been over 30% for most years since. Even maintaining ROE at a steady figure requires performance improvement, unless all returns are paid to shareholders.

Share buybacks have been one of the keys to ROE performance. When Gerstner took over, IBM had about 2.3 billion shares outstanding. Today, that figure hovers at about 1.5 billion - IBM has retired about a third of its shares. Meanwhile, per-share cash flow has risen from about $3 to over $10 per share.

Looking at IBM's track record, it's clear that Gertsner placed particular emphasis on managing ROE and its components. He managed the owner's bottom line - not just sales growth, earnings reports, and image. He took the concept of ROE to heart.

2008

-----

One of the best ways to understand a concept or approach to investing is by example. It's hard to find a "pure" example of strategic financial excellence culminating in a world-class ROE performance.

Companies may perform well and indeed have ROE in their sights, but difficult business conditions or changing markets make actual performance in all areas and "drivers" a mixed bag.

A search of typical "value" businesses, even in the Buffett/Berkshire portfolio, yields mostly mixed results.

Understanding the Importance of ROE

The importance of Return on Equity (ROE)

Profits and growth drive intrinsic value.

For any fairly priced asset to increase in value over time, the value of the returns must grow.

If it isn't easy to pin down growth and the value of growth, it gets a little easier to step back and identify business characteristics that drive growth.

Sustained return on equity (ROE) implies sustained growth and blare out, "well-managed company!"

The management can control the component drivers of ROE (profitability, productivity and capital structure) to achieve growth, ROE, and hence, intrinsic value.

Whether or not you indulge in intrinsic value calculations, be aware that earnings and growth do matter.

When you look at a business, you seek consistent, growing returns on a quality asset base - achieving reasonable returns without taking on unreasonable risk.

ROE Components and Strategic Profit Formula ("DuPont formula")

ROE Components and the Strategic Profit Formula ("DuPont formula")

Some years back, the finance department at DuPont originated the "strategic profit formula." In some circles, this is called the "DuPont formula."

Return on equity = [profits/sales] x [sales/assets] x [assets/equity]

It is easy to see the links in this chain: profitability, productivity and capital structure.

These strategic business fundamentals that directly influence ROE are controlled or influenced by management. Management can influence or control these business fundamentals to maintain or increase ROE. Good managers work on each one.

When all three are strong and tight, ROE outcome is destined for success. If there is a "weakest link" (a business fundamental that is poor, failing, or declining), it can weaken the entire chain and hamper ROE indefinitely.

For each of these business fundamentals in the formula, we observe its value,

• in what direction it's going (trend) and
• how it compares to others in the industry.

Benjamin Graham 113 wise words

Just reminding myself and this may also be useful for some who are following this blog:

"The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more.* Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement." - Benjamin Graham

In these 113 words Graham summarised his lifetime of experience.

If you keep them close at hand and let them guide you throughout your investing life, you will survive whatever the markets throw at you.

For those wishing to monitor the various stock market indices in the world, visit this site.
World Market Index http://www.indexq.org/

High steady ROE and increasing ROE

Many investors, Warren Buffett himself included, get pretty excited when they see steady ROE over a number of years, particularly when already at a high level, say, greater than 15 percent.


Why?


ROE is defined as net earnings divided by owner's equity. What happens to net earnings, each year, in well-managed companies? They become part of owner's equity as retained earnings. Then, over time, the denominator of the ROE equation goes up, as earnings become equity (unless a portion of earnings are paid out as dividends).


That brings the following important observations:

• Maintaining a constant ROE percentage requires steady earnings growth.


• A company with increasing ROE, without undue exposure to debt or leverage, is especially attractive.

On the surface, a steady ROE would appear to indicate a ho-hum business. Same old, smae old, year in and year out. But the truth as illustrated is quite different. One can be excited that the business is growing to stay the same, as evidenced by a high constant ROE. :-)

ROE vs Earnings Growth Rate (EPSGR)

In fact, over time, ROE trends towards the earnings growth rate of the company.

A company with a 5 percent earnings growth rate and a 20 percent ROE today will see ROE gradually diminishing toward 5 percent.


A company with a 20 percent earnings growth rate and a 10 percent ROE will see ROE move toward 20 percent, as the numerator grows faster than the denominator.


Also read:
ROE versus ROTC
****Stock selection for long term investors

ROE versus ROTC

ROTC, or return on total capital, is another measure of owner returns, which has gained popularity recently. The difference between ROTC and ROE is the denominator "TC," or total capital, vs, the "E," or equity.

Total capital is owner's equity plus long-term debt. Using the more"holistic" total capital gives a more complete measure of business performance; that is, how much the company is earning on its total investment, including borrowed funds.

ROTC helps investors see through the effects of leverage. If a company is growing ROE but not ROTC, chances are, the company is doing it by borrowing to fund growth-producing assets, thus leveraging the comapny (this can be a good thing in moderation).

So, many investors look at ROTC and ROE together. They should march side by side and change in unison.

Some information sources like Yahoo! Finance and Value Line list both figures simultaneously.


Also read:
****Stock selection for long term investors

Book Value and Intrinsic Value

Warren Buffett pointed out the difference between book value and intrinsic value.

"Book value is what the owners put into the business, intrinsic value is what they take out of it."

In another explanation offered in a 1996 Berkshire Hathaway annual report, he likened book value to college tuition paid, with intrinsic value being the income resulting from the education. The education and the dollars spent on an education mean nothing unless there is a resulting financial return.

The point: It's easy for investors to put too much emphasis on book value and not enough on intrinsic value.

Understanding insurance business

The management's view of the insurance business

Is the business profitable? Is the return on total capital excellent?

An insurance company has 2 streams of income, namely from:
• underwriting and
• investing.

Insurance company aims for long term total return. This involves strict discipline and nurturing proper behaviour. It can grow its business either organically or through acquisition. It can also grow by expanding its business overseas and into specialty insurance.

The assets allowed in the investment management portfolio of insurance company include:
• fixed income securities and
• equity securities.

Fixed income security is one where money invested is received with interest in a specific time. Equity security does not give explicit promises on returns.

In the balance sheet of the insurance company, the largest item of its source of fund (liability section) is the loss reserve. This is generally invested in high quality fixed income security (e.g. bonds), with the invested duration matching those of the claims and ensuring a positive spread. The other source of fund is the shareholders equity. There is never the need to repay this. Therefore, this can be invested with unlimited time horizon, usually in more conservative equity securities.

Here is what the management team of an insurance company hopes to achieve:

“The management hopes to compound book value per share over a long time for the business. This incorporates the total return from underwriting and investing, aiming for a ROE > 20%.
Underwriting can be in various types of insurances; including specialty niches. Insurance is a competitive business that is also cyclical. The incentive compensation plan for the employees shall be aligned to the results generated. We will always focus on the long term compound total return. The business shall be without excessive leverage, perhaps 1/3 debt and 2/3 equity. Though smooth and consistent results are to be expected in many industries or businesses, this is not so for the insurance business. The results can be lumpy at time, as the role of the insurance businesses is to smooth the losses incurred by the insured. For example, a hurricane can occur anytime and this may result in a lower profit or a loss that year. In the next year, the higher premium factoring the event, the profit may be better if no major calamity occurs. Therefore, we can expect and accept short term uncertainties in this insurance business. It is better to look at the rolling 5 years goal measurement which is also the one we aim for.”

Measuring talent and Integrity

Talent and integrity are difficult to measure in any business. In general, judge the future of the business by its past performance. Also, check that the compensation to the employee is fair. There should be no misappropriation of shareholder funds. There should be no stock option abuse. The management should be focused on the long term return. Reports to shareholders should be clear, concise and complete. There should be no excessive leverage. The management should have good honest relationship with the shareholders, always conscious that shareholders are the owners of the company.

Reinvestment dynamic

The future of the insurance business is bright. The insurance premium/GDP ratio is still low and trending upwards. There is a lot of room to grow this business. The business will grow when society grows. New insurance risks require new products, growing the insurance market. Growth can also be by reinvestment in new geographical areas.

Fair price

What is the role of the management in determining the share price?.

E.g. Valuing insurance company X
Price peaked at $550 giving a P/BV of 2x.
Historical P/BV 1.5 – 2.0x.
At today’s price of $300, P/BV is 1.3x

The managers of the insurance business have little or no control over the short term stock price swings. They should focus on building up the book value per share over the long term through superior underwriting and excellent investing. A good business should last a long period producing results to the investor over time.


Also read:
Great Eastern buys more S'pore stocks, eyes China equity marts

Economic indicators and survey show recession easing

Economic indicators and survey show recession easing

WASHINGTON (Reuters) — A key gauge of future economic activity fell for a third month in March, showing the recession may persist through the summer, a nonprofit research group said Monday.

"The recession may continue through the summer, but the intensity will ease," said Ken Goldstein, an economist at the Conference Board.

That view is in line with the latest quarterly survey by the National Association for Business Economics (NABE), released Monday, which indicates the economy is at an inflection point, but not quite a turning point, said Sara Johnson, lead analyst on the survey and an economist at IHS Global Insight.

The results, however, show the recession is abating, she says.

"Key indicators — industry demand, employment, capital spending, and profitability — are still declining, but the breadth of decline is narrowing," she said.

The results mirror announcements by the Federal Reserve last week that there were faint signs of hope that the economy is improving. The Fed said five of its 12 regional banks reported the pace of economic decline was moderating.

Still, the NABE survey of companies and trade associations shows 93% of respondents expect real gross domestic product to decline this year. That was worse than 78% in the January survey.

But signs are improving. In the latest survey, more companies reported rising demand for their products, while fewer reported a decline. The net rising index for industry demand — which measures the difference of those two numbers — improved to -14% in April from -28% in January. The January figure, the survey noted, was the worst since the survey began in 1982.

Net rising indexes swung from negatives to slight positives for the finance, insurance and real estate and services sectors, while demand remained depressed in transportation, utilities, information and communications.

More companies are also seeing their profit margins increase. In the latest survey, 14% of respondents said profit margins were rising, while 45% said they were falling. The rest said they were unchanged, meaning the net rising index was -30%, an improvement from January's -41%.

Capital spending — which is tied to business growth — improved as 15% of respondents reported boosting capital spending the last three months, up from 12% in January. But the majority of respondents, 54%, were leaving capital spending unchanged, and the rest — 31% — were cutting back.

Employment prospects are still down, and wages are at their lowest point since the survey began 27 years ago.

In April, 14% of companies reported employment had risen — the same as in January. But the percentage of companies reporting lower employment was 39%, down from 44%. Goods-producing industries fared worst, with 83% reporting job losses, and none reporting growth. The financial, investment and real-estate sector showed signs of stabilizing.

The outlook for jobs remains grim, with losses expected to continue the next six months. Only 16% of companies predicted an increase in hiring at their firms, slightly worse than January's 17%. But the percentage of companies predicting job losses improved to 33% from 39%.

The NABE survey of 109 members was taken March 23 through April 1.

In its report, the Conference Board said its leading economic index declined 0.3% last month, steeper than the 0.2% analysts were expecting. The index for February was better than previously reported, falling 0.2% instead of 0.4%. But it was revised lower in January to a 0.2% decline, instead of a 0.1% increase.

The index has not risen in nine months. In September and December it was unchanged; it experienced the largest drop during that period in October, when it fell 1%.

Real money supply and interest rates both improved in March, but not enough to counterbalance the drag of building permits, stock prices and supplier deliveries.

The past six months, the index has fallen 2.5%, compared with a smaller 1.4% drop the previous six months.

The Coincident Index, a measure of current conditions, fell for a third month, by 0.4%, primarily due to declines in employment and industrial production.

The Lagging Index, which provides a look backward, has been on a down trend since July 2007, the Conference Board said. Its 0.4% decline in March was caused by weakness across all components, which include duration of unemployment, inventory levels, and outstanding loans.

"There have been some intermittent signs of improvement in the economy in April, but the leading economic index and most of its components are still pointing down," Goldstein said.

Contributing: Associated Press

Copyright 2009 Reuters Limited.

http://www.usatoday.com/money/economy/2009-04-20-leading-indicators_N.htm

Hope builds for stock recovery in new year? Pros share predictions

Hope builds for stock recovery in new year? Pros share predictions
Updated 12/16/2008 8:30 PM

By Robert Deutsch, USA TODAY

The USA TODAY Investment Roundtable participants were, from left: Dan Chung, CEO and chief investment officer at Fred Alger Management; Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors; Thomas Lee, chief U.S. equity strategist, JPMorgan Chase; Brian Rogers, chairman and chief investment officer of T. Rowe Price; and Linda Duessel, equity market strategist, Federated Investors.
http://www.usatoday.com/money/markets/2008-12-14-stock-market-roundtable-investors_N.htm (Videos)


USA TODAY'S 2009 INVESTMENT ROUNDTABLE

By Adam Shell, USA TODAY
NEW YORK — For most investors, this year can't end fast enough. Next up: 2009, which is a clean slate, a fresh start.

But the new year also inherits the same problems that in 2008 drove the Standard & Poor's 500 index down as much as 52% from its high — the worst bear market drop since the 1930s. The economy, 12 months into a recession, is on life support. Banks in survival mode are reluctant to lend. Consumers, spooked by job losses, dwindling 401(k)s and tighter credit, are hunkering down.

It is with that grim backdrop that USA TODAY held its 13th annual Investment Roundtable, picking the brains of five top investment pros about the outlook for 2009.

The panelists, despite scary headlines, say it's a mistake for investors to pull their money out of stocks and stash the cash under a mattress — partly because the mattress pays zero interest and partly because those investors will miss out on opportunities when stocks rebound.

"If you believe the world doesn't end that often, and you believe good companies don't disappear, I think it is actually a good time to invest," says Brian Rogers, chairman and chief investment officer at T. Rowe Price.

All the panelists predict stocks will end 2009 in positive territory. But they warn that the market is likely to trade in a V-shaped pattern, which means more scary plunges along the way.

The most bearish was Hugh Johnson, chairman and chief investment officer at Johnson Illington Advisors. He says investors should cut back their stock exposure until trends improve.

A key to the year is how successful President-elect Barack Obama's stimulus plan is in generating jobs and getting the economy back on track, says Linda Duessel, equity market strategist at Federated Investors.

Barring an economic hard landing in China, the badly depressed U.S. stock market offers some good values and could enjoy double-digit gains in '09, predicts Dan Chung, CEO and chief investment officer at Alger Funds.

Despite comparisons to the Great Depression, today's crisis, while serious, doesn't compare, adds Thomas Lee, chief U.S. equity strategist at JPMorgan Chase.

MARKET OUTLOOK: Will stocks earn a bigger return than cash in 2009?

Stocks are down 40% this year. Banks are failing. Some warn of a Depression. People are scared. Should they pull all their money out of stocks and put it under a mattress?

Hugh Johnson: Since it is so easy to be wrong in this business, going to such an extreme position under any market conditions is usually a mistake. But my rule is to never ignore the primary trends. And those trends are clearly very negative now.

Most long-term investors should have no less than 35% of their money invested in stocks and no more than 65%. I am not smart enough to know when we are at the bottom. So I am advising a very low exposure to stocks. If you have a higher stock allocation, or are closer to 65% and made the mistake of not reducing it, you should go to 35%.

Is cash really king?

Linda Duessel: Well, cash and the U.S. Treasury market. But you have to try to keep emotion out of this. My fear for the average American is that he will sell low, as many people did in October, and forget to get back in when the market rebounds and will buy high again.

Yes, this is the worst financial crisis we have seen in our lifetimes. People ask, "We were down 52% (from the high), should I sell now?"

We don't think so.

We think stocks will successfully retest the Nov. 20 lows of roughly 750 on the Standard & Poor's 500 index (vs. 880 Friday). But even if corporate earnings take a big hit next year, which we think they will, 750 on the S&P 500 still prices in a lot of bad news. If you are truly a long-term investor, and have an opportunity to buy stocks at a low price, even if the market goes down another 10% or 15%, it is time to peel back into the market.

Dan Chung: You are asking a market-timing question. Should we be in cash? When do we get back in? The answer is you should be in now, always and forever unless you have a two-year horizon. Don't try to time whether this thing ends in April or July or January 2010. The real issue is, where are the opportunities for investors now? Even at the end of Great Depression there was a 100% rally.

Johnson: Look at what dollar-cost averaging (a strategy of putting cash to work on a regular basis) would have done for you from 1929 to 1938. The market was down 54% during that period but if you put $1,000 in at the start of each year from 1929 to 1939, youwould have been up 6%.

Chung: It is important to remind investors that are seeking safety in short-term Treasury bonds or cash, that they are getting absolutely no return for that. If you miss something like the five or 10 best days in the stock market, your returns long term decline to basically zero.

Look at the volatility in the stock market. We got an 18% rally the week of Thanksgiving but gave up 9% in a day. That rally isa sign of what we will see on the up side when stocks turn.

How can one intelligently navigate this market?

Brian Rogers: The world doesn't end that often. So I am more in the camp that this is a very severe financial situation, but not 1929. Good companies don't disappear, although recent experience has led some of us to question that.

An awful lot of stress is reflected in today's market. Values are way down. If you believe the world doesn't end that often, and you believe good companies don't disappear, I think it is actually a good time to invest.

Unlike Hugh, I think investors who have a low stock exposure have to move the other way. You want to be increasing exposure to stocks. With the government's policy responses and the new Obama administration, the seeds of the recovery will be in place at some point and better days will be ahead.

Is a depression on the way?

Thomas Lee: Housing values, the biggest asset for most people, are going to decline another 15% to 20%. You are still talking about a massive deleveraging happening across all debt markets. For that reason, U.S. households have got to be very protective of how they invest in stocks, because that is another risk asset for them. Still, I would say with pretty strong confidence that I don't think this compares to the Great Depression.

We have been able to piece together GDP statistics from the 1920s. One thing that really struck us is that the stock market in August 1921 began a massive bull market that saw stocks rise 500% through September 1929. GDP rose 44% during that period. The decline that followed to the 1932 low reversed the entire rise of both the stock market and GDP.

By comparison, GDP since 2002 has risen 30% through 2007 and the stock market was only up 90%. We haven't even had the condition of a bubble that really drove us to the 1929 highs.

Is it time to be fearful or to look for opportunities?

Chung: The market is part psychology, part fundamentals. At the best of times it is 50/50; and at the worst of times the swing factor is emotions, which go from euphoria to fear.

Unfortunately, as human beings we are not particularly good at controlling our emotions. The classic flight or fight response is programmed for millions of years in our genes.

It is clear things have fallen off a cliff in many sectors. The opportunity is to try to sort through companies that are now better positioned. The strong ones can take advantage of the bad economy in the sense that it is eliminating competition for them. Companies coming out of this will gain market share and improve their competitive position.

Timing-wise, it is time to increase equity positions over the next six months. The market will start to recover far in advance of fundamentals. That's typical of the end of most bear markets. We wouldn't necessarily be going in hand in fist. That kind of euphoria would be inappropriate.

Is all the bad news on the economy and profits already reflected in stock prices?

Chung: The current earnings estimates for the S&P 500 for '09 are too high ($82.60, according to Thomson Reuters) and that is why I am throwing out the $50 to $65 range. What is really fascinating, so many people are focused on looking into the darkness expected in '09. They're forgetting the market is not just about '09, but about 2010, 2011, 2012. There will be a recovery. The market is already discounting that.

Are stocks cheap?

Duessel: Until very recently the operating earnings projection for 2009 was a touch over $100. At Federated we say, okay, in the '73-'75 downturn earnings fell 73%. So why don't we cut '09 by $40 and take it to $60? What price should we pay for $60 of earnings, which is low and Draconian.

The average price per $1 dollar of earnings paid at market bottoms since 1957 is 13.8 times. Take 13 and multiply that by $60 and you get 780 (estimated value) for the S&P 500. That is close to the 752 low we hit on November 20th, which is also close to the market bottom of the 2002 recession.

If you look at the price paid for earnings at the two bear market lows of the big consumer-led recessions, in the '70s and early '80s, they were seven to eight times, instead of 13. Do we have to go that low? No, because inflation is much lower this time.

Johnson: I had an awful experience in '73-'74, another in '81-'82. I don't tell you this to show I am old but to contradict. The one mistake I made in the '70s was basing my investment decisions on the price-to-earnings ratio, or P-E, of the S&P 500. The average historical P-E was 16, the low 12. The high in those periods was 20, so when it got to 14, I said stocks are cheap. And then it got to 12 and I said stocks are cheap. Of course, the P-E went to 6.

I agree with what I hear everybody saying, that the market is arguably very undervalued — but only if consensus forecasts of the economy and earnings are correct. Maybe the market is right and the forecasts are going to come down a lot. You have to be very careful about saying the market is undervalued and therefore I should increase my stock allocation. You can get hurt.

ECONOMIC OUTLOOK: Will the recession get worse before it gets better?

The economy basically drives everything: consumer spending, corporate earnings, investor psychology. We are 12 months into the recession, just four months shy of the longest recession in the postwar era, and the economic data are getting worse. How bad can things get?

Duessel: The key question for how bad it gets goes to how high unemployment goes. And that has a lot to do with when this credit crunch will ease. Things have fallen off a cliff. The numbers that we have seen most recently on the unemployment situation (533,000 job losses in November and a 6.7% jobless rate) are bearing that out. It's looking more like the deep kind of consumer-led recessions that we saw in '73-'74, when unemployment rose to 9%, and in '80-'82 when unemployment rose to 11%. People are not spending money because they are worried about losing their jobs.

Johnson: The bad news is we are in a recession. The good news is we are already one year into the recession. In the postwar period, recessions have lasted 10 months on average. So this one is long by comparison. But if you look at the average since 1854, it is about 17 months.

Is there relief in sight?

Johnson: Bear markets and recessions all end. And they are followed by bull markets and recoveries. Is there something more significant that we have to worry about, something like the Depression in the 1929-32 period?

Given the unprecedented level of fiscal and monetary stimulus from the government, it is hard for me to imagine this is going to be significantly longer than the average 17-month recession since 1854.

Duessel: This will be a worse-than-average recession. We have our fingers crossed that we will be starting a recovery in mid-2009.

Historically, stocks tend to turn up a little more than halfway through a recession, and have posted 40% returns, on average, 12 months after the turn.

How important is rebuilding confidence?

Rogers: You look at the negative news like layoffs, and I think that will continue. On the psychology front, I read that 75% of Americans think Obama can improve growth in the economy. If people believe that, we will see some follow-through on that. If confidence improves, that will be what leads us to a better investment environment.

Chung: At some point, the market is going to understand that, while things are bad and maybe getting worse, the rate of decline will slow. People will see that there is reason to be optimistic.

Johnson: You're going to get a stimulus package implemented quickly. States with shovel-ready projects will start to hire people. Perhaps as early as spring, you might see better job numbers. That may stabilize confidence.

Lee: What is very different about this situation is it is the first time we have entered a recession where households are net debtors. Households always had more cash, stocks and bonds than mortgages or consumer credit.

Housing is the centerpiece of the problem in the economy; we are talking about a massive deflation in home values. Our credit analysts are coming to the consensus that homeownership rates, which got to 70%, have to drop. There are 5 million homes people bought that they shouldn't have. If they become renters, that is $1 trillion of debt coming off. The drop in gas prices is a $300 billion savings boost.

It all hinges on restoring a normalized level of debt for households. What Obama does is going to be absolutely critical in transferring ownership of homes and getting financial obligation ratios back in line. That sets us up potentially for a period of very big prosperity.

CREDIT CRISIS: Is the thaw beginning, or is another freeze ahead?

Rogers: There is a bottleneck right now. If you talk to the woman that runs Bank of America in Maryland, she says, "We have plenty of capital to lend, but we can't find good borrowers." Then you talk to people and small-business owners you think are good borrowers, and they say, "We can't get credit."

Time will heal that. The strong banks are in fact lending because this is what banks do.

What if banks won't lend, and hoard cash to survive?

Rogers: Nothing frightens equity investors more than a credit market problem. It brings into question the issue of whether a company can finance its operations. If there is concern about that, it more or less freaks everybody out.

We have seen credit markets seizing up before. Time heals some of those wounds. Some of these policy initiatives are a good step to solving some of the credit market concerns. The commercial paper market (which companies use to fund daily operations) is already working a little better. I talked to two companies yesterday (Dec. 4), General Mills and Automatic Data Processing. Both said they had no problem with their commercial paper programs. We are seeing a return to normalcy in the credit markets, and ultimately that will make other markets feel better.

Duessel: There was a similar frustration with banks not lending back in the Depression despite government help. At the time, President Hoover complained to The New York Times: "Banks have not passed the benefits of these relief measures to their customers."

I met with a financial services company (on Dec. 4) and the banker was quizzed by some angry person, who asked, "Why won't you lend the money?" And the banker said, "We have the same standards as we have always had. But the problem is our customers' situation is rapidly getting worse. So (why) are we going to go ahead and lend?" So it is going to take a while because things will still get worse.

Johnson: Obviously, now there is a significant risk in lending. Banks are very concerned about the state of the economy. And the truth is, there isn't a lot of loan demand, which is why this stimulus plan is so important. Hopefully it will jump-start the credit-demand part of the equation, and the two together will start to lead to an increase in lending so the credit creation process can once again start.

Isn't there a risk that as job losses mount and people default on more debt that the credit crisis could intensify?

Lee: Three things have really driven credit: the economy, the flight to liquidity and balance-sheet issues resulting from the deleveraging process. After September, the flight to liquidity and the deleveraging issues became the dominant factors driving credit prices. So, in a way, the complete freezing of credit had less to do with the economy.

In '09, even if the economy worsens, the more important drivers of credit will be the risk appetite of investors and how far corporate dealers, hedge funds and insurance companies are along in the deleveraging process. That could have good implications.

Will a drop in mortgage rates spur lending?

Rogers: Yes. I have been struck by how sticky mortgage rates have been. Now it seems there are all these programs in place, loan-modification programs or efforts to get rates down. That will be good business for financial institutions prospectively. There will come a time when people actually want to buy houses again.

If you can get mortgage rates down, and get soundly financed properties that people who have jobs actually live in and raise families in, as opposed to a lot of speculative activity, the affordability ratio will improve. If you can get rates, now at 5.5%, down to 4.5%, you will see loan demand pick up.

THE OBAMA FACTOR: Can the new president revive confidence — and economy?

Rogers: With Obama we are making a leap of faith. It is not tangible; you can't put numbers on it. People want to believe. There is no hard and fast evidence that all these policy issues will work. You have to believe that new leadership and a new attitude — and someone people have confidence in — can help lead the country out of a morass.

Chung: We are putting too much emphasis on Obama. It is the American people and their entrepreneurial spirit that will lead. Companies with the best management and people are going to get us out of this. Obama can be important. He can be symbolic. And some of what he plans to initiate — energy efficiency, alternative fuels — can spark growth in particular industries. But I don't want to bet everything on Jan. 20.

Duessel: Psychology and confidence are good, but what is better than $1 trillion being thrown at the problem that will hire a lot of people? Plus you have an entire country saying, "We're going to give you your chance, have at it."

Let's talk about the controversial TARP rescue plan. Where should Obama target the remaining $350 billion?

Duessel: It has become clear to many people watching this that they need to get right at the housing problem and right at the foreclosure problem.

Rogers: It is important it be deployed relatively quickly.

Johnson: How much you spend and how you spend it is very important. Is the crisis significant enough that we have to spend that amount of money in order to stabilize the economy and financial system? My answer is yes.

What is the risk if the markets view any of Obama's steps along the way as a misstep?

Johnson: We feel good about the economic team he put together. Eventually you have got to start to see some payoff. There has to be some evidence that there is light at the end of the tunnel.

What would signal a turnaround?

Johnson: We have got to see some evidence of stability in employment. You'll also want to see leading indicators of the economy start to stabilize, like jobless claims, building permits, consumer expectations, orders for consumer and durable goods — and the stock market itself.

You haven't seen that yet. Once investors start to see that the stock market will stabilize.

http://www.usatoday.com/money/markets/2008-12-14-stock-market-roundtable-investors_N.htm
Click to visit the video of the Investment Roundtable Discussion.

Also read: http://www.usatoday.com/money/economy/2009-04-20-leading-indicators_N.htm

I.M.F. Puts Bank Losses From Global Financial Crisis at $4.1 Trillion

I.M.F. Puts Bank Losses From Global Financial Crisis at $4.1 Trillion

By MARK LANDLER
Published: April 21, 2009
WASHINGTON — As finance ministers gather here this weekend for meetings of the International Monetary Fund and the World Bank, they will focus on two eye-popping numbers: $4.1 trillion, the fund’s latest projected losses from the global economic crisis, and $1.1 trillion to help fix it.
The huge numbers illustrate the depth of the worldwide economic upheaval and the challenge facing those institutions, which are increasingly at the heart of efforts to contain the damage.
In a report released Tuesday, the I.M.F. estimated that banks and other financial institutions faced aggregate losses of $4.05 trillion in the value of their holdings as a result of the crisis.
Of that amount, $2.7 trillion is from loans and assets originating in the United States, the fund said. That estimate is up from $2.2 trillion in the fund’s interim report in January, and $1.4 trillion last October.
The fund said that it spotted the first glimmers of stabilization in the global financial system, but that “continued decisive and effective action” by governments, banks and institutions like the I.M.F. would be needed to prevent the system from going into a downward spiral.
At a meeting of industrial and developing countries in London this month, President Obama and other leaders pledged $1.1 trillion more for the fund and, to a lesser extent, the World Bank.
Now, the I.M.F. must figure out how to turn those pledges into hard cash — no easy task, insiders and outside experts say — and how to marshal the money to steady teetering economies including those of Iceland and Pakistan.
“We’d be deluding ourselves if we think it is going to solve the crisis,” said Desmond Lachman, an expert on the fund at the American Enterprise Institute in Washington. He was speaking at a conference organized by the institute titled “Can the I.M.F. Really Save the World?”
The answer, most participants agreed, was no, but its vastly increased resources have turned the fund into a crucial player.
“Anytime you raise expectations, it’s important that you deliver,” said Robert B. Zoellick, the president of the World Bank. “Part of this week’s meetings will be about how you deliver.”
Analysts said the $1.1 trillion sum assumed huge contributions by the United States, China and other countries, which may or may not come through. It also counts some contributions more than once, and it counts some in the form of a synthetic I.M.F. currency that is not hard cash.
Using funds on hand, the World Bank said it would triple its investments in social safety-net programs to $12 billion over the next two years. The goal, Mr. Zoellick said, is to protect the most vulnerable people in developing countries from facing poverty, hunger or disease because of the crisis. “It’s vital that we make this more than a discussion of high finance,” he told reporters on Tuesday.
The reality is that the Washington meetings will be dominated by talk about the escalating losses weighing on the world’s leading banks, insurance companies and pension funds. The fund’s report said the recession was magnifying the impact of the credit squeeze on them.
“Shrinking economic activity has put further pressure on banks’ balance sheets as asset values continue to degrade, threatening their capital adequacy and further discouraging fresh lending,” the fund said in its report, released twice a year, which has become a barometer of the severity of the crisis.
As banks struggle to cleanse their balance sheets, the fund said, capital flows to emerging-market economies have plummeted, throwing Eastern Europe into crisis. That threatens to spill over to Western Europe, because its banks are major lenders to Hungary, Estonia and other countries.
Among European countries, the fund has already agreed to more than $55 billion in loans to Hungary, Serbia, Romania, Iceland, Ukraine, Belarus and Latvia. More may yet need to be bailed out.
On Tuesday, Colombia became the second Latin American country to seek aid, requesting $10.4 billion. Last Friday, the fund approved a $47 billion line of credit for Mexico, making it the first country to qualify for a loan from a program that extends credit to emerging economies that are considered well managed. Poland also said this week that it would seek a $20.5 billion credit line under that program.
With so many loans flowing out the door, experts said, the fund would run out of money without the infusion.
“They really need to nail down this financing, especially from emerging markets,” said Eswar S. Prasad, a professor of trade policy at Cornell University and a former head of the China division at the I.M.F.
In a twist that leaves some experts shaking their heads, the fund needs money from cash-rich developing countries, like China and India, to help more developed but strapped countries, like those in Eastern Europe.
Western Europe looms as the next front in the crisis, according to the fund’s report. It estimates that financial institutions will have to write down $1.19 trillion in loans and securities originating there. And they have gotten off to a much slower start than their American counterparts.
In the United States banks reported $510 billion in write-downs by the end of 2008, and they face an additional $550 billion in 2009 and 2010, the fund said. In the countries of the euro zone, banks reported just $154 billion in write-downs by the end of last year and still face $750 billion in projected write-downs, the fund said.
David Jolly contributed reporting from Paris.

http://www.nytimes.com/2009/04/22/business/global/22fund.html?em

For US Housing Crisis, the End Probably Isn’t Near

For Housing Crisis, the End Probably Isn’t Near

By DAVID LEONHARDT
Published: April 21, 2009
The closest thing to a real estate crystal ball in the last few years has been the house auctions that are regularly held around the country.
At the real estate auction, a bidder assistant yells to signal to the auctioneer that an audience member decided, after a tense moment, to place a higher bid.
In 2006 and early 2007, the official housing statistics were still showing that house prices were holding up. But that was largely because so many sellers were refusing to sell. The auctions, made up mostly of foreclosed homes, showed the truth: house values were starting to plummet in many places.
So a few weeks ago, I decided to go to an auction at a hotel ballroom in Washington — and to study the results of several others elsewhere — with an eye to figuring out whether prices may now be close to bottoming out.
That’s clearly a huge economic question. Last week, JPMorgan’s chief financial officer told Eric Dash of The New York Times that JPMorgan, and presumably other banks, would be under pressure “until home prices stabilize and unemployment peaks.” As long as home prices are falling, foreclosures are likely to keep rising and the toxic assets polluting bank balance sheets are likely to stay toxic.
There are reasons, though, to think that prices may be on the verge of stabilizing. Relative to fundamentals, like household incomes and rents, houses nationwide now appear to be overvalued by only about 5 percent. You can make an argument that the end of the housing crash is near.
But that’s not what I found at the auctions.
•
“This is a perfect storm of opportunity,” Bob Michaelis, goateed with a shaved head, told the 300 or so people who had come to downtown Washington for the auction.
Mr. Michaelis, the auction manager, spoke from a lectern on stage, and his goal seemed to be to persuade people that they might never see a buyers’ market as good as this one. Prices have plunged, and interest rates, he said, are at “generational lows.” (The National Association of Realtors has been running a radio commercial this spring making a similar case.)
“Look around to your left and your right, and you’ll see someone who sees an opportunity just like you do,” Mr. Michaelis said. “We’re approaching the bottom of the market, I think. We’re approaching the bottom of the market, if we’re not there already.”
He then told the audience that, in the last 100 years, house prices have recovered from every downturn and gone on to reach record highs. Oh, and Wells Fargo and Countrywide were standing by, ready to offer financing to qualified auction buyers.
If nothing else, this sales pitch certainly had chutzpah. It combined the old bubble-era notion that house prices always rise over time (ignoring the fact that incomes, stock values and the price of bread do, too) with the new postcrash idea that houses must be a bargain because they’re a lot cheaper than they used to be. Even Countrywide, which was taken over by Bank of America after so many of its subprime mortgages went bad, is still part of the housing pitch.
Yet as soon as the auction began, it was clear that the pitch wasn’t working.
The winning bid on the first home auctioned off, a two-bedroom townhouse in Virginia Beach, was $115,000. Just last July, it sold for $182,000, according to property records. A four-bedroom brick house with a two-car garage in Upper Marlboro, Md., went for $375,000. Last year, it sold for $563,000.
Throughout the evening, such low-ball prices continued to win the bidding. At one point, the auctioneer, Wayne Wheat, interrupted his sing-song auction call to cheerfully ask, “Where are my investors?”
The tables that had been set up around the edges of the ballroom, reserved for people planning to buy multiple houses, were mostly empty. Many audience members, like the man in a camouflage baseball cap just in front of me, were attending their first auction.
On Sunday, my colleague Carmen Gentile went to a larger auction, in Miami, to see if my experience had been unusual. It wasn’t. The homes there also sold for just a fraction of what they would have even a year ago. The rate of decline in Miami hasn’t even slowed noticeably in recent months, according to data kept by Real Estate Disposition Corporation, known as R.E.D.C., which runs the auctions.
A recently transplanted New Yorker named Michael Houtkin won the bidding on a one-bedroom condominium on the outskirts of Boca Raton, a few blocks from three golf courses, for the incredible price of $30,000. “Things were almost being given away,” he said later.
As is often the case at these auctions, the seller of the condo — Fannie Mae — retained the right to refuse the winning bid and keep the property. But Mr. Houtkin told me he was optimistic his bid would be accepted. An R.E.D.C. employee suggested to him that $30,000 wasn’t much below the minimum price that Fannie Mae had hoped to receive.
How could that be? Because Fannie Mae, like many banks, is inundated with foreclosed properties. In recent weeks, banks have begun accelerating foreclosures again, after having held off while waiting to find out which homeowners would be eligible for the Obama administration’s assistance program.
The glut of foreclosed homes creates a self-reinforcing cycle. Falling prices lead to more foreclosures. Foreclosures lead to an excess supply of homes for sale. The excess supply then leads to further price declines. Jan Hatzius, the chief economist at Goldman Sachs, says that the “massive amount of excess supply” means that home prices nationwide will probably fall an additional 15 percent.
This estimate hides a lot of variation, too. In Miami, Goldman forecasts, prices could drop an additional 33 percent, which is pretty amazing since they’ve already fallen 50 percent from their 2006 peak.
Nor is excess supply the only reason prices still have a way to fall. Nationwide, homes may not be overvalued by much. But in some cities, including New York, San Francisco, Los Angeles, Boston, Chicago and Miami, they remain very expensive.
So while Mr. Hatzius and his Goldman colleagues are somewhat more pessimistic than most forecasters, but the difference isn’t enormous.
I’ll confess that this bearish picture isn’t exactly what I had hoped to find. A year ago, as part of a move from New York to Washington, my wife and I bought our first house.
We did so fully expecting prices to continue falling (though perhaps not as much as they ultimately will, given the severity of the financial crisis). But we decided they had fallen enough for us to take the plunge. We preferred buying before the bottom of the market instead of renting and having to move again in a year or two.
Still, when I wrote about that decision last spring, I argued that anyone who didn’t have to probably should not buy yet. Prices still had a way to fall.
They don’t have as far to fall today, but the great real estate crash is not over, either. So if you are part of the 30 percent of American households who rent and you’re trying to decide when to buy, relax.
The market is still coming your way.
E-mail: Leonhardt@nytimes.com

http://www.nytimes.com/2009/04/22/business/economy/22leonhardt.html?em

US Bank Profits Appear Out of Thin Air

Bank Profits Appear Out of Thin Air

By ANDREW ROSS SORKIN
Published: April 20, 2009

This is starting to feel like amateur hour for aspiring magicians.
Another day, another attempt by a Wall Street bank to pull a bunny out of the hat, showing off an earnings report that it hopes will elicit oohs and aahs from the market. Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow their audiences with what appeared to be — presto! — better-than-expected numbers.
But in each case, investors spotted the attempts at sleight of hand, and didn’t buy it for a second.
With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JPMorgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that’s sort of like saying you’re richer because the value of your home has dropped); Citigroup pulled the same trick.
Bank of America sold its shares in China Construction Bank to book a big one-time profit, but Ken Lewis heralded the results as “a testament to the value and breadth of the franchise.”
Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them.
“Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won’t be pretty,” he said.
Investors reacted by throwing tomatoes. Bank of America’s stock plunged 24 percent, as did other bank stocks. They’ve had enough.
Why can’t anybody read the room here? After all the financial wizardry that got the country — actually, the world — into trouble, why don’t these bankers give their audience what it seems to crave? Perhaps a bit of simple math that could fit on the back of an envelope, with no asterisks and no fine print, might win cheers instead of jeers from the market.
What’s particularly puzzling is why the banks don’t just try to make some money the old-fashioned way. After all, earning it, if you could call it that, has never been easier with a business model sponsored by the federal government. That’s the one in which Uncle Sam and we taxpayers are offering the banks dirt-cheap money, which they can turn around and lend at much higher rates.
“If the federal government let me borrow money at zero percent interest, and then lend it out at 4 to 12 percent interest, even I could make a profit,” said Professor Finkelstein of the Tuck School. “And if a college professor can make money in banking in 2009, what should we expect from the highly paid C.E.O.’s that populate corner offices?”
But maybe now the banks are simply following the lead of Washington, which keeps trotting out the latest idea for shoring up the financial system.
The latest big idea is the so-called stress test that is being applied to the banks, with results expected at the end of this month.
This is playing to a tough crowd that long ago decided to stop suspending disbelief. If the stress test is done honestly, it is impossible to believe that some banks won’t fail. If no bank fails, then what’s the value of the stress test? To tell us everything is fine, when people know it’s not?
“I can’t think of a single, positive thing to say about the stress test concept — the process by which it will be carried out, or outcome it will produce, no matter what the outcome is,” Thomas K. Brown, an analyst at Bankstocks.com, wrote. “Nothing good can come of this and, under certain, non-far-fetched scenarios, it might end up making the banking system’s problems worse.”
The results of the stress test could lead to calls for capital for some of the banks. Citi is mentioned most often as a candidate for more help, but there could be others.
The expectation, before Monday at least, was that the government would pump new money into the banks that needed it most.
But that was before the government reached into its bag of tricks again. Now Treasury, instead of putting up new money, is considering swapping its preferred shares in these banks for common shares.
The benefit to the bank is that it will have more capital to meet its ratio requirements, and therefore won’t have to pay a 5 percent dividend to the government. In the case of Citi, that would save the bank hundreds of millions of dollars a year.
And — ta da! — it will miraculously stretch taxpayer dollars without spending a penny more.
The latest news on mergers and acquisitions can be found at nytimes.com/dealbook.

This article has been revised to reflect the following correction:
Correction: April 22, 2009 The DealBook column on Tuesday, about accounting changes at large banks that had the effect of improving their quarterly earnings reports, misidentified a professor who was critical of the accounting moves. He is Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth — not Steven Roth.

http://www.nytimes.com/2009/04/21/business/21sorkin.html?em

Spain’s Falling Prices Fuel Deflation Fears in Europe

Spain’s Falling Prices Fuel Deflation Fears in Europe

The company Fermax has reduced prices by a third on the video intercoms it makes for homes and apartment buildings, hoping to increase sales.

By NELSON D. SCHWARTZ
Published: April 20, 2009
VALENCIA, Spain — Faced with plunging orders, merchants across this recession-wracked country are starting to do something that many of them have never done: cut retail prices.
Prices dipped everywhere, from restaurants and fashion retailers to pharmacies and supermarkets in March. Hoping to increase sales, Fernando Maestre reduced prices by a third on the video intercoms his company makes for homes and apartment buildings. But that has not helped, so, along with many other Spanish employers, he is continuing to fire workers.
The nation’s jobless rate, already a painful 15.5 percent, could soon reach 20 percent, a troubling number for a major industrialized country.
With the combination of rising unemployment and falling prices, economists fear Spain may be in the early grip of deflation, a hallmark of both the Great Depression and Japan’s lost decade of the 1990s, and a major concern since the financial crisis went global last year.
Deflation can result in a downward spiral that can be difficult to reverse. As unemployment rises sharply and consumers cut spending, companies cut prices. But if sales do not pick up, then revenue can decline further, forcing more cuts in workers or wages. Mr. Maestre is already contemplating additional job and wage cuts for his 250 employees.
Nowhere is this cycle more evident than in Spain. Last month, it became the first of the 16 nations that use the euro to record a negative inflation rate. The drop, though just 0.1 percent, had not happened since the government began tracking inflation in 1961, and Spanish officials have said prices could keep dropping through the summer.
Some of the decline came as volatile food prices sank; the cost of fish fell 6.2 percent, and sugar was down 5.7 percent. But even prices in normally stable sectors like drugs and medical treatments fell 0.7 percent in March, and there were slight declines in footwear, clothing and prices for household electronics.
“Alarm bells are going off,” said Lorenzo Amor, president of the Association of Autonomous Workers, which represents small businesses and self-employed people. “Economies can recover from deceleration, but it’s harder to recover from a deflationary situation. This could be a catastrophe for the Spanish economy.”
Deflation is not just a Spanish concern. Luxembourg, Portugal and Ireland have reported price drops, too. While the declines have been slight — and prices rose modestly after factoring out food and energy prices, which can fluctuate widely — other figures released this month suggest the risk of deflation is growing.
In Germany, wholesale prices dropped 8 percent in March from a year ago, the steepest fall since 1987. In Japan, wholesale prices fell 2.2 percent on an annual basis. In the United States, the Consumer Price Index fell 0.1 percent in March, year over year, the first decline of its kind since 1955, though prices rose 0.2 percent excluding food and energy.
“It doesn’t mean it will spread here to the U.S., but we need to look closely at Spain and other places to understand the dynamic,” says Simon Johnson, a professor at the Sloan School of Management at the Massachusetts Institute of Technology and a former chief economist for the International Monetary Fund. “It’s like the front line of a new virus outbreak.”
The trends have unnerved even well-established businesses. “There is such a huge lack of confidence in the politicians, in the European Union and in the banks,” said Arturo Virosque, 79, president of Valencia’s chamber of commerce and the owner of a local logistics company. Ticking off crises going back to the Spanish Civil War in his youth, he said, “this is different. It’s like an illness.”
After price cuts by competitors, Mr. Virosque’s company reduced charges for storage and transportation, and slashed its work force to about 170, from 250. “The worst thing is that we have to cut the young people,” he said, because higher severance makes it too expensive to fire older workers.
While unemployment traditionally is higher in Spain than in much of Europe, the sharp increase has many here nervous. The jobless rate for those under 25 is at a Depression-like level of 31.8 percent, the highest among the 27 nations of the European Union.
Before cutting prices in early 2009, Mr. Maestre ordered several rounds of job cuts at his company, Fermax, as sales of the intercoms collapsed with Spain’s housing bubble.
“It’s a question of survival for everybody,” he said. Still, the lower prices have not translated into higher sales. Fermax’s orders fell 25 percent in the first quarter. Prices for some intercom parts that he buys, like video screens, have also come down, but it is not enough to make up for the sales drought. “Prices have to come down more and we will have to spend less,” he said.
The effects of this downward spiral are evident at Valencia’s principal soup kitchen, in an imposing stone building constructed a century ago as an alms house. Each day, a line forms around the block by noon. The Casa de la Caridad, or House of Charity, is helping three times as many people as it did a year ago. More than 11,000 meals were served in March, and it expects to top 12,000 this month.
As the economic decline has broadened, so has the range of people seeking help. In the past, most were out-of-work immigrants or the homeless, said the center’s director, Guadalupe Ferrer. Today, “it’s more and more people like us who had a house, a respectable job, but are now unemployed.”
The employed worry that falling prices will endanger their jobs as well.
Yolanda Garcia has worked as a butcher under the arches of Valencia’s soaring Art Nouveau central market for a decade, but she’s troubled that a drop in the price of chicken, to 5.99 euros a kilo, from 6.99, has not attracted more customers to her stall.
“Of course, we’re worried the boss will have to reduce staff,” said Ms. Garcia, 38, whose husband, a construction worker, was laid off two months ago.
All this has made deflation, once a subject largely reserved for economists who studied the Great Depression, into front-page news here.
The American economy is less vulnerable to deflation, in part because of the Federal Reserve’s decision to cut interest rates to near zero and increase lending by $2 trillion. The European Central Bank has also cut rates, though more slowly, and it has resisted the lending measures adopted by the Fed and the Bank of England to prop up spending.
When Spain had its own currency, the peseta, the central bank could have simply devalued it, or cut interest rates to zero. But that is not an option in the era of the euro, when monetary policy is controlled from the European Central Bank’s headquarters in Frankfurt, said Santiago Carbó, a professor of economics at the University of Granada.
“If we enter into a deflationary period, we won’t have the monetary tools to sort it out,” Mr. Carbó said.

http://www.nytimes.com/2009/04/21/business/global/21deflate.html?em