Even 'Dr. Doom' Is Scared: Economy Much Worse Than Roubini Predicted
Posted Mar 02, 2009 01:35pm EST
by Aaron Task in Newsmakers, Recession
Fed Chairman Bernanke raised eyebrows (and, briefly, the market) last week when said there's a "reasonable prospect" the economy will bottom this year and be in recovery in 2010.
But Berkshire Hathaway's Warren Buffett disagrees: The economy "will be in shambles throughout 2009 and...probably well beyond," the Oracle of Omaha declared this weekend.
In sum, Buffett and much of the rest of humanity are just now coming around to Nouriel Robuini's way of thinking, the economist known as "Dr. Doom" is upping the ante on his longstanding bearish views.
A year ago Roubini was forecasting an 18-month recession with a U-shaped recovery; now, he's now expecting the downturn to last at least 24 months and possibly 36-months. He also sees rising risks of a Japanese-style L-shaped stagnation, i.e. a prolonged period with little or no economic growth.
"I was one of most bearish people [but] the economy has surprised the bears on the downside," says Roubini of NYU's Stern School and RGE Monitor. "What's happening in the world now is scary."
Indeed, while the U.S. economy contracted 6.2% in the fourth-quarter, Roubini's main concern is economic activity in much of the rest of the world is in much worse shape. And while he is often critical of U.S. policymakers - including over the stimulus package, Fed policy and bank bailouts - Roubini says "the rest of the world is way behind the curve," in terms of doing the "right things" to confront the worst economic crisis since the 1930s.
http://finance.yahoo.com/tech-ticker/article/197164/Even-'Dr.-Doom'-Is-Scared-Economy-Much-Worse-Than-Roubini-Predicted?tickers=%5Edji,%5Egspc,QQQQ,DIA,SPY
Thursday, 5 March 2009
What Fuels The National Debt?
What Fuels The National Debt?
by Reem Heakal (Contact Author Biography)
First established in 1789 by an act of Congress, the United States Department of the Treasury is responsible for federal finances. This department was created in order to manage the expenditures and revenues of the U.S. government, and hence the means by which the state could raise money in order to function. Here we examine the responsibilities of the Treasury and the reasons and means by which it takes on debt.
Responsibilities of the Treasury
The U.S. Treasury is divided into two divisions: the departmental offices and the operating bureaus. The departments are mainly in charge of policy making and management of the Treasury, while the bureaus' duties are to take care of specific operations. Bureaus such as the Internal Revenue Service (IRS), which is responsible for tax collection, and the Bureau of Engraving and Printing (BEP), in charge of printing and minting all U.S. money, take care of the majority of the total work done by the Treasury. (For related reading, see Buy Treasuries Directly From The Fed.)
The primary tasks of the Treasury include:
The National Debt
A government creates budgets to determine how much it needs to spend to run a nation. Oftentimes, however, a government may run a budget deficit by spending more money than it receives in revenues from taxes (including customs duties and stamps). In order to finance the deficit, governments may seek to raise money by taking on debt, that is, by borrowing it from the public. The U.S. government first found itself in debt in 1790, after taking on the war debts following the Revolutionary War. Since then, the debt has been fueled by more war, economic recession and inflation. As such, the public debt is a result of accumulated budget deficits. (For more insight, read The Treasury And The Federal Reserve.)
The Role of Congress
Up until World War I, the U.S. government needed approval from Congress every time it wanted to borrow money from the public. Congress would determine the number of securities that could be issued, their maturity date and the interest they would pay. With the Second Liberty Bond Act of 1917, however, the U.S. Treasury was given a debt limit, or a ceiling of how much it could borrow from the public without seeking Congress' consent. The Treasury was also given the discretion to decide maturity dates, interest rate levels and the type of instruments that would be offered. The total amount of money that can be borrowed by the government without further authorization by Congress is known as the total public debt subject to limit. Any amount above this level has to receive additional approval from the legislative branch.
Who Owns the Debt?
The debt is sold in the form of securities to both domestic and foreign investors, as well as corporations and other governments. U.S. securities issued include Treasury bills (T-bills), notes and bonds as well as U.S. savings bonds. There are both short-term and long-term investment options, but short-term T-bills are offered regularly, as well as quarterly notes and bonds. When the debt instrument has matured, the Treasury can either pay the cash owed (including interest) or issue new securities.
Debt instruments issued by the U.S. government are considered to be the safest investments in the world because interest payments do not have to undergo yearly authorization by Congress. In fact, the money the Treasury uses to pay the interest is automatically made available by law.
The public debt is calculated on a daily basis. After receiving end-of-day reports from about 50 different sources (such as Federal Reserve Bank branches) regarding the amount of securities sold and redeemed that day, the Treasury calculates the total public debt outstanding, which is released the following morning. It represents the total marketable and non-marketable principal amount of securities outstanding (i.e. not including interest).
War Time
In times of war, a government needs more money to support the effort. To finance its needs, the U.S. government will often issue what are commonly known as war bonds. These bonds appeal to the nation's patriotism to raise money for a war effort. Following September 11, 2001, the U.S.A. Patriot Act was passed by Congress. Among other things, it authorized Federal agencies to initiate ways to combat global terrorism. To raise money for the "war on terrorism", the U.S. Treasury issued war bonds known as patriot bonds. These Series EE savings bonds hold a five-year maturity.
The U.S. Treasury has also become a key institution working with financial institutions to draft new policies aimed at battling counterfeiting and money laundering related to terrorism.
Conclusion
The public debt is a liability to the U.S. government, and the Bureau of Public Debt is responsible for the technical aspects of its financing. However, the only way to reduce debt is for the federal budget's expenditures to cease to exceed its revenues. Budget policy lies with the legislative branch of government, and thus, depending on the circumstances at the time of budget formulation, running a deficit may be the country's only choice.
For more insight, read Giants Of Finance: John Maynard Keynes.
by Reem Heakal, (Contact Author Biography)
http://www.investopedia.com/articles/04/011404.asp?partner=NTU3
by Reem Heakal (Contact Author Biography)
First established in 1789 by an act of Congress, the United States Department of the Treasury is responsible for federal finances. This department was created in order to manage the expenditures and revenues of the U.S. government, and hence the means by which the state could raise money in order to function. Here we examine the responsibilities of the Treasury and the reasons and means by which it takes on debt.
Responsibilities of the Treasury
The U.S. Treasury is divided into two divisions: the departmental offices and the operating bureaus. The departments are mainly in charge of policy making and management of the Treasury, while the bureaus' duties are to take care of specific operations. Bureaus such as the Internal Revenue Service (IRS), which is responsible for tax collection, and the Bureau of Engraving and Printing (BEP), in charge of printing and minting all U.S. money, take care of the majority of the total work done by the Treasury. (For related reading, see Buy Treasuries Directly From The Fed.)
The primary tasks of the Treasury include:
- The collection of taxes and custom duties
- The payment of all bills owed by the federal government
- The printing and minting of U.S. notes and U.S. coinage and stamps
- The supervision of state banks
- The enforcement of government laws including taxation policies
- Advising the government on both national and international economic, financial, monetary, trade and tax legislation
- The investigation and federal prosecution of tax evaders, counterfeiters and/or forgers
- The management of federal accounts and the national public debt
The National Debt
A government creates budgets to determine how much it needs to spend to run a nation. Oftentimes, however, a government may run a budget deficit by spending more money than it receives in revenues from taxes (including customs duties and stamps). In order to finance the deficit, governments may seek to raise money by taking on debt, that is, by borrowing it from the public. The U.S. government first found itself in debt in 1790, after taking on the war debts following the Revolutionary War. Since then, the debt has been fueled by more war, economic recession and inflation. As such, the public debt is a result of accumulated budget deficits. (For more insight, read The Treasury And The Federal Reserve.)
The Role of Congress
Up until World War I, the U.S. government needed approval from Congress every time it wanted to borrow money from the public. Congress would determine the number of securities that could be issued, their maturity date and the interest they would pay. With the Second Liberty Bond Act of 1917, however, the U.S. Treasury was given a debt limit, or a ceiling of how much it could borrow from the public without seeking Congress' consent. The Treasury was also given the discretion to decide maturity dates, interest rate levels and the type of instruments that would be offered. The total amount of money that can be borrowed by the government without further authorization by Congress is known as the total public debt subject to limit. Any amount above this level has to receive additional approval from the legislative branch.
Who Owns the Debt?
The debt is sold in the form of securities to both domestic and foreign investors, as well as corporations and other governments. U.S. securities issued include Treasury bills (T-bills), notes and bonds as well as U.S. savings bonds. There are both short-term and long-term investment options, but short-term T-bills are offered regularly, as well as quarterly notes and bonds. When the debt instrument has matured, the Treasury can either pay the cash owed (including interest) or issue new securities.
Debt instruments issued by the U.S. government are considered to be the safest investments in the world because interest payments do not have to undergo yearly authorization by Congress. In fact, the money the Treasury uses to pay the interest is automatically made available by law.
The public debt is calculated on a daily basis. After receiving end-of-day reports from about 50 different sources (such as Federal Reserve Bank branches) regarding the amount of securities sold and redeemed that day, the Treasury calculates the total public debt outstanding, which is released the following morning. It represents the total marketable and non-marketable principal amount of securities outstanding (i.e. not including interest).
War Time
In times of war, a government needs more money to support the effort. To finance its needs, the U.S. government will often issue what are commonly known as war bonds. These bonds appeal to the nation's patriotism to raise money for a war effort. Following September 11, 2001, the U.S.A. Patriot Act was passed by Congress. Among other things, it authorized Federal agencies to initiate ways to combat global terrorism. To raise money for the "war on terrorism", the U.S. Treasury issued war bonds known as patriot bonds. These Series EE savings bonds hold a five-year maturity.
The U.S. Treasury has also become a key institution working with financial institutions to draft new policies aimed at battling counterfeiting and money laundering related to terrorism.
Conclusion
The public debt is a liability to the U.S. government, and the Bureau of Public Debt is responsible for the technical aspects of its financing. However, the only way to reduce debt is for the federal budget's expenditures to cease to exceed its revenues. Budget policy lies with the legislative branch of government, and thus, depending on the circumstances at the time of budget formulation, running a deficit may be the country's only choice.
For more insight, read Giants Of Finance: John Maynard Keynes.
by Reem Heakal, (Contact Author Biography)
http://www.investopedia.com/articles/04/011404.asp?partner=NTU3
Wednesday, 4 March 2009
Q&A: Should I buy into HSBC's rights issue?
From Times OnlineMarch 2, 2009
Q&A: Should I buy into HSBC's rights issue?
We answer the pressing questions for shareholders and borrowers as the bank announces plans to raise billionsKathryn Cooper
BANKING giant HSBC today asked shareholders to stump up £12.5 billion to help it through the economic downturn, but stockbrokers gave the rights issue a lukewarm reception.
Britain’s biggest bank announced the country’s largest-ever cash call alongside a 62 per cent fall in pre-tax profits to $9.3 billion (£6.5 billion). It also cut its dividend for the full year by 29 per cent.
However, the results contained some good news for mortgage borrowers: the bank said it would aim to lend £15 billion this year, double 2007’s total.
The announcement will raise hopes that the mortgage freeze that has prevented buyers getting into the property market could be starting to thaw.
Under the terms of the rights issue, shareholders will be offered five new shares for every 12 they already own at a reduced price of 254p, a discount of 48 per cent to Friday’s close of 491.25p.
Investors who do not take up their rights will see the value of their holding diluted because there will be more shares in issue.
We answer your questions.
Q: I’m a shareholder. Should I take up the rights?
A: HSBC shares are not as widely held as those of Halifax Bank of Scotland (now part of Lloyds Banking Group), but thousands of small investors will still have to decide whether to take part in the fund raising.
Expert opinion is divided on what they should do.
Jonathan Jackson, head of equities at stockbroker Killik & Co said: “The group says the rights issue enhances its ability to deal with the impact of an uncertain economic environment, and to respond to unforeseen events, whilst providing options in relation to opportunities for those with superior financial strength.
“However, we believe it is more a reflection of the sharp deterioration in the group’s markets and the prospect of continued weakness to come. Against this background, the market will continue to worry about the group’s capital position and we would continue to avoid the shares.”
However, Nick Raynor, investment adviser at The Share Centre, another broker, drew comfort from the fact that the issue will be ‘fully underwritten’ – in other words, investment banks will take up the shares if investors do not.
“If clients can afford to, they should take up the rights,” he said. “The issue should put HSBC in a strong position in that it should not need fresh capital from either the government, or Middle Eastern investors, as with Barclays.”
Q: What are my options?
A: The first option is simply to take up the shares. The second is to sell the entitlement, known as the nil-paid rights, in the market for cash (alternatively the investor could let the rights lapse, and receive a cheque at the end of the issue).
The third option is to 'tail swallow', or to take up as many rights as possible to leave the investor in a cash neutral position.
According to Richard Hunter of Hargreaves Lansdown Stockbrokers, you should ask if you are happy with how the company plans to use the money, and whether putting in more money would make your portfolio overly heavy in banks.
Q: Are rights issues a good thing?
A: It depends. A study by JP Morgan of rights issues between 1989 and 1994 suggested they are a signal to buy only if the economy is showing signs of a recovery.
On the other hand, a study by Morgan Stanley found that the bigger the rights issue, the better – which bodes well for HSBC’s huge cash call.
Q: I’m a borrower. Is this good news for me?
A: Yes, in the sense it shows some banks are still willing to lend. As well as doubling the amount of money available for new loans, HSBC said it lent £17.1 billion in 2008, up from £9.1 billion in 2007. Its share of the gross mortgage market also went up from 2.4 per cent to 7 per cent.
One of its big successes was Ratematcher, when it offered to match borrowers’ cheap two-year deals from rivals when they came up for renewal. This led to a 200 per cent increase in mortgage sales.
Q: I’m remortgaging. Is HSBC a good bet?
A: It has some market leading deals if you have a big deposit, although it is always worth shopping around.
It has a market-leading five-year fix at just 3.99 per cent with a £999 fee if you have equity of 40 per cent and want to borrow no more than £250,000. It also has a two-year fix at 2.99 per cent with a £599 fee on the same basis
http://www.timesonline.co.uk/tol/money/article5832350.ece
Q&A: Should I buy into HSBC's rights issue?
We answer the pressing questions for shareholders and borrowers as the bank announces plans to raise billionsKathryn Cooper
BANKING giant HSBC today asked shareholders to stump up £12.5 billion to help it through the economic downturn, but stockbrokers gave the rights issue a lukewarm reception.
Britain’s biggest bank announced the country’s largest-ever cash call alongside a 62 per cent fall in pre-tax profits to $9.3 billion (£6.5 billion). It also cut its dividend for the full year by 29 per cent.
However, the results contained some good news for mortgage borrowers: the bank said it would aim to lend £15 billion this year, double 2007’s total.
The announcement will raise hopes that the mortgage freeze that has prevented buyers getting into the property market could be starting to thaw.
Under the terms of the rights issue, shareholders will be offered five new shares for every 12 they already own at a reduced price of 254p, a discount of 48 per cent to Friday’s close of 491.25p.
Investors who do not take up their rights will see the value of their holding diluted because there will be more shares in issue.
We answer your questions.
Q: I’m a shareholder. Should I take up the rights?
A: HSBC shares are not as widely held as those of Halifax Bank of Scotland (now part of Lloyds Banking Group), but thousands of small investors will still have to decide whether to take part in the fund raising.
Expert opinion is divided on what they should do.
Jonathan Jackson, head of equities at stockbroker Killik & Co said: “The group says the rights issue enhances its ability to deal with the impact of an uncertain economic environment, and to respond to unforeseen events, whilst providing options in relation to opportunities for those with superior financial strength.
“However, we believe it is more a reflection of the sharp deterioration in the group’s markets and the prospect of continued weakness to come. Against this background, the market will continue to worry about the group’s capital position and we would continue to avoid the shares.”
However, Nick Raynor, investment adviser at The Share Centre, another broker, drew comfort from the fact that the issue will be ‘fully underwritten’ – in other words, investment banks will take up the shares if investors do not.
“If clients can afford to, they should take up the rights,” he said. “The issue should put HSBC in a strong position in that it should not need fresh capital from either the government, or Middle Eastern investors, as with Barclays.”
Q: What are my options?
A: The first option is simply to take up the shares. The second is to sell the entitlement, known as the nil-paid rights, in the market for cash (alternatively the investor could let the rights lapse, and receive a cheque at the end of the issue).
The third option is to 'tail swallow', or to take up as many rights as possible to leave the investor in a cash neutral position.
According to Richard Hunter of Hargreaves Lansdown Stockbrokers, you should ask if you are happy with how the company plans to use the money, and whether putting in more money would make your portfolio overly heavy in banks.
Q: Are rights issues a good thing?
A: It depends. A study by JP Morgan of rights issues between 1989 and 1994 suggested they are a signal to buy only if the economy is showing signs of a recovery.
On the other hand, a study by Morgan Stanley found that the bigger the rights issue, the better – which bodes well for HSBC’s huge cash call.
Q: I’m a borrower. Is this good news for me?
A: Yes, in the sense it shows some banks are still willing to lend. As well as doubling the amount of money available for new loans, HSBC said it lent £17.1 billion in 2008, up from £9.1 billion in 2007. Its share of the gross mortgage market also went up from 2.4 per cent to 7 per cent.
One of its big successes was Ratematcher, when it offered to match borrowers’ cheap two-year deals from rivals when they came up for renewal. This led to a 200 per cent increase in mortgage sales.
Q: I’m remortgaging. Is HSBC a good bet?
A: It has some market leading deals if you have a big deposit, although it is always worth shopping around.
It has a market-leading five-year fix at just 3.99 per cent with a £999 fee if you have equity of 40 per cent and want to borrow no more than £250,000. It also has a two-year fix at 2.99 per cent with a £599 fee on the same basis
http://www.timesonline.co.uk/tol/money/article5832350.ece
US banks may need more bail-outs, says Ben Bernanke
US banks may need more bail-outs, says Ben Bernanke
Stock markets across the world suffered a second day of turbulence as the Chairman of the Federal Reserve warned that the US Government may have to pour even more cash into the twin bail-outs of its financial and economic systems.
By Edmund Conway and Angela Monaghan
Last Updated: 9:37PM GMT 03 Mar 2009
Ben Bernanke said the White House would have to consider increasing the scope of its $750bn banking rescue package, as well as readying further aggressive measures to shore up the world's biggest economy. His warning to Congress came as shares in London slid to a new six-year low amid disquiet about the stability of Britain's banks following Monday's cash calls from HSBC and AIG.
The Fed Chairman also remarked that although the government had little choice but to rescue AIG with a further $30bn cash injection, the episode had made him "more angry" than any other episode in the past 18 months.
Until the financial system had been repaired the economy would not recover, he said, adding: "Without a reasonable degree of financial stability, a sustainable recovery will not occur. Although progress has been made on the financial front since last fall, more needs to be done."
The comments indicate that the US Treasury, which has put its weight behind a asset insurance scheme for bad assets much like the UK's asset protection scheme, will have to spend more than originally anticipated on rescuing the banks. The Obama administration has slated for up to $750bn in new support to be spent on the banking bail-out in its first budget.
"We are better off moving aggressively today to solve our economic problems; the alternative could be a prolonged episode of stagnation," he said.
The comments saw the benchmark Dow Jones index of leading US stocks to drop 30 points, having dropped beneath the 7,000 mark on Monday for the first time in 12 years. It finished the day down 37.27 points, or 0.55pc, at 6726.02.
The FTSE 100 index closed down 113.74 points, or 3.14pc, at 3512.09.
A CBI study nevertheless showed that British companies were slightly more optimistic about their ability to obtain credit over the next three months in February. Their ability to place corporate paper also improved.
Stock markets across the world suffered a second day of turbulence as the Chairman of the Federal Reserve warned that the US Government may have to pour even more cash into the twin bail-outs of its financial and economic systems.
By Edmund Conway and Angela Monaghan
Last Updated: 9:37PM GMT 03 Mar 2009
Ben Bernanke said the White House would have to consider increasing the scope of its $750bn banking rescue package, as well as readying further aggressive measures to shore up the world's biggest economy. His warning to Congress came as shares in London slid to a new six-year low amid disquiet about the stability of Britain's banks following Monday's cash calls from HSBC and AIG.
The Fed Chairman also remarked that although the government had little choice but to rescue AIG with a further $30bn cash injection, the episode had made him "more angry" than any other episode in the past 18 months.
Until the financial system had been repaired the economy would not recover, he said, adding: "Without a reasonable degree of financial stability, a sustainable recovery will not occur. Although progress has been made on the financial front since last fall, more needs to be done."
The comments indicate that the US Treasury, which has put its weight behind a asset insurance scheme for bad assets much like the UK's asset protection scheme, will have to spend more than originally anticipated on rescuing the banks. The Obama administration has slated for up to $750bn in new support to be spent on the banking bail-out in its first budget.
"We are better off moving aggressively today to solve our economic problems; the alternative could be a prolonged episode of stagnation," he said.
The comments saw the benchmark Dow Jones index of leading US stocks to drop 30 points, having dropped beneath the 7,000 mark on Monday for the first time in 12 years. It finished the day down 37.27 points, or 0.55pc, at 6726.02.
The FTSE 100 index closed down 113.74 points, or 3.14pc, at 3512.09.
A CBI study nevertheless showed that British companies were slightly more optimistic about their ability to obtain credit over the next three months in February. Their ability to place corporate paper also improved.
Dow Jones valuations are just getting tougher
Dow Jones valuations are just getting tougher
With the Dow Jones Industrial Average firmly under 7,000, the US stock market is now well below its early-1995 level, adjusting for changes in nominal GDP.
By Martin Hutchinson, breakingviews.com
Last Updated: 1:23PM GMT 03 Mar 2009
That suggests it is cheap, assuming growth prospects are as good as they were back then. But there is a risk to such a an analysis: too much fiscal and budgetary stimulus could bring on growth-stultifying inflation.
Fast back to December 5, 1996.
The Standard and Poor's 500 Index closed at 744.38. That evening, Fed Chairman Alan Greenspan decried the market's "irrational exuberance". On the S&P's close of 700.82 on Monday, the market is clearly exuberant no more.
It is not, however, exceptionally low. Greenspan announced a new easier monetary policy to Congress later in early 1995. That day, the Dow Jones average, which had been generally rising since 1990, first reached 4,000. Adjusting for the 95pc increase in nominal GDP since that time would give an equivalent Dow level today of around 7,800. That suggests that current levels are only somewhat below their long term trend, and that the 1996-2007 period represented a lengthy bubble.
As for the S&P 500, Standard and Poor's currently projects 2009 earnings on the index of $48.10. Over the 20-year period to 2008, it traded at an average of 19.4 times earnings. That would imply a current value of 933.14. That 20-year period however includes the 12-year bubble. Taking a longer-term average of around 15 times earnings gives a valuation of 721.5 - again, just slightly above the current level.
So, based on 1995 stock prices and long-term earnings considerations the market is just below a middling valuation. However that assumes US growth and earnings prospects are as good today as they were in 1995, or over the long-term average.
That's where doubts creep in. If the exceptional monetary stimulus since September produces inflation, which needs to be squeezed out, or the unprecedentedly large budget deficits in fiscal years 2009 and 2010 "crowd out" private investment, then growth and earnings prospects for the next few years would be below average.
In that event, the market as it stands today would be overvalued. Bailouts and stimulus can thus produce long-term uncertainty as well as short-term uplift.
For more agenda-setting financial insight, visit www.breakingviews.com
http://www.telegraph.co.uk/finance/breakingviewscom/4931436/Dow-Jones-valuations-are-just-getting-tougher.html
With the Dow Jones Industrial Average firmly under 7,000, the US stock market is now well below its early-1995 level, adjusting for changes in nominal GDP.
By Martin Hutchinson, breakingviews.com
Last Updated: 1:23PM GMT 03 Mar 2009
That suggests it is cheap, assuming growth prospects are as good as they were back then. But there is a risk to such a an analysis: too much fiscal and budgetary stimulus could bring on growth-stultifying inflation.
Fast back to December 5, 1996.
The Standard and Poor's 500 Index closed at 744.38. That evening, Fed Chairman Alan Greenspan decried the market's "irrational exuberance". On the S&P's close of 700.82 on Monday, the market is clearly exuberant no more.
It is not, however, exceptionally low. Greenspan announced a new easier monetary policy to Congress later in early 1995. That day, the Dow Jones average, which had been generally rising since 1990, first reached 4,000. Adjusting for the 95pc increase in nominal GDP since that time would give an equivalent Dow level today of around 7,800. That suggests that current levels are only somewhat below their long term trend, and that the 1996-2007 period represented a lengthy bubble.
As for the S&P 500, Standard and Poor's currently projects 2009 earnings on the index of $48.10. Over the 20-year period to 2008, it traded at an average of 19.4 times earnings. That would imply a current value of 933.14. That 20-year period however includes the 12-year bubble. Taking a longer-term average of around 15 times earnings gives a valuation of 721.5 - again, just slightly above the current level.
So, based on 1995 stock prices and long-term earnings considerations the market is just below a middling valuation. However that assumes US growth and earnings prospects are as good today as they were in 1995, or over the long-term average.
That's where doubts creep in. If the exceptional monetary stimulus since September produces inflation, which needs to be squeezed out, or the unprecedentedly large budget deficits in fiscal years 2009 and 2010 "crowd out" private investment, then growth and earnings prospects for the next few years would be below average.
In that event, the market as it stands today would be overvalued. Bailouts and stimulus can thus produce long-term uncertainty as well as short-term uplift.
For more agenda-setting financial insight, visit www.breakingviews.com
http://www.telegraph.co.uk/finance/breakingviewscom/4931436/Dow-Jones-valuations-are-just-getting-tougher.html
Gold: Warning for investors chasing short-term gains
Gold: Warning for investors chasing short-term gains
The scale of the recent moves in the gold price and the resulting publicity are reasons for caution.
Daniel Sacks of Investec Asset Management
Last Updated: 3:56PM GMT 03 Mar 2009
There is no doubt that gold is getting a lot of coverage in the media, among global macro investors and the real money community. The suggestion is that everyone is "long" – expecting the price to rise further – and that the move has become overextended on both an absolute and an historical basis.
However, while it is true that gold has reached record highs in most currencies, it is still $70 below its dollar high reached almost a year ago and, when adjusted for inflation (CPI), the high point reached in 1980 is the equivalent of over $2,500 an ounce.
The gold price may well continue to suffer further short-term falls as part of a general upward trend, as has already been the case during this rally. However, it does not appear that we are approaching the stress point that a market often reaches near the end of a sustained price move as the graph becomes parabolic.
Indeed, the positive gold price trend is being tempered by the drop-off in Indian and Middle Eastern jewellery demand flows. Conversely, as jewellery manufacturers’ stocks decline, their willingness to buy the dips may diminish the downward moves of gold.
Gold behaves like a currency – it can be traded globally at the same price and has adequate stocks to back it up – yet it cannot be printed. It must be mined at a cost. It is hence a real asset, which generally holds its value in inflationary conditions. Gold has typically done well during periods of rising inflation and negative real interest rates.
The only episode approaching the severity of the current recession and the accompanying shock to net worth came in the aftermath of the first oil shock of 1973-74. That led to negative real interest rates at the short end of the curve in the US for five years, to higher inflation and ultimately to a major bull market for gold. Encouragingly, the current gold price is still about 60pc below its mid-1980 peak in real terms.
Gold appears to be benefiting both from being the traditional hedge for inflation hawks (some of whom are now beginning to worry about the risk of hyperinflation) and from the mistrust of some investors towards cash assets and government obligations during the current financial crisis.
It would probably require only a minority of investors to believe that they need to continue to allocate more towards gold to have a significant price impact.
Even though inflation risks remain low in our view, we believe that these forces are likely to continue to support gold prices.
Daniel Sacks is co-portfolio manager, Global Gold and Precious Metals at Investec
http://www.telegraph.co.uk/finance/personalfinance/investing/gold/4931336/Gold-Warning-for-investors-chasing-short-term-gains.html
Comment: A highly speculative asset for the uninitiated.
The scale of the recent moves in the gold price and the resulting publicity are reasons for caution.
Daniel Sacks of Investec Asset Management
Last Updated: 3:56PM GMT 03 Mar 2009
There is no doubt that gold is getting a lot of coverage in the media, among global macro investors and the real money community. The suggestion is that everyone is "long" – expecting the price to rise further – and that the move has become overextended on both an absolute and an historical basis.
However, while it is true that gold has reached record highs in most currencies, it is still $70 below its dollar high reached almost a year ago and, when adjusted for inflation (CPI), the high point reached in 1980 is the equivalent of over $2,500 an ounce.
The gold price may well continue to suffer further short-term falls as part of a general upward trend, as has already been the case during this rally. However, it does not appear that we are approaching the stress point that a market often reaches near the end of a sustained price move as the graph becomes parabolic.
Indeed, the positive gold price trend is being tempered by the drop-off in Indian and Middle Eastern jewellery demand flows. Conversely, as jewellery manufacturers’ stocks decline, their willingness to buy the dips may diminish the downward moves of gold.
Gold behaves like a currency – it can be traded globally at the same price and has adequate stocks to back it up – yet it cannot be printed. It must be mined at a cost. It is hence a real asset, which generally holds its value in inflationary conditions. Gold has typically done well during periods of rising inflation and negative real interest rates.
The only episode approaching the severity of the current recession and the accompanying shock to net worth came in the aftermath of the first oil shock of 1973-74. That led to negative real interest rates at the short end of the curve in the US for five years, to higher inflation and ultimately to a major bull market for gold. Encouragingly, the current gold price is still about 60pc below its mid-1980 peak in real terms.
Gold appears to be benefiting both from being the traditional hedge for inflation hawks (some of whom are now beginning to worry about the risk of hyperinflation) and from the mistrust of some investors towards cash assets and government obligations during the current financial crisis.
It would probably require only a minority of investors to believe that they need to continue to allocate more towards gold to have a significant price impact.
Even though inflation risks remain low in our view, we believe that these forces are likely to continue to support gold prices.
Daniel Sacks is co-portfolio manager, Global Gold and Precious Metals at Investec
http://www.telegraph.co.uk/finance/personalfinance/investing/gold/4931336/Gold-Warning-for-investors-chasing-short-term-gains.html
Comment: A highly speculative asset for the uninitiated.
HSBC's cash call provides reality check despite Asian promise
HSBC's cash call provides reality check despite Asian promise
HSBC'S awful results are an important reality check for everyone caught up in the global financial crisis.
By Damian Reece
Last Updated: 5:57AM GMT 03 Mar 2009
While our attention here has been focused on domestic trouble and strife to do with which bankers got paid what and when, the world economy continues to go to pot.
The bank's results are truly awful, even before the £17.5bn of write downs including its disastrous US business, but then so is the global financial system in case you'd forgotten.
A £12.5bn rights issue reveals a bank extremely worried about the future, but then so it ought to be.
Its senior executives are foregoing bonuses for 2008 but then so they should, having overseen a company that on the best measure saw an 18pc fall in profits and the worst a 62pc drop.
Stephen Green, HSBC's chairman, sought to explain the causes of the current crisis on Monday with reference to the triangle of Western consumer economies gorging themselves on debt supported by the surpluses of the Far Eastern producer nations and the oil and mineral rich resource nations.
Last year that once golden triangle fast became a Bermuda triangle with the likes of HSBC a piece of the wreckage bobbing around in the ocean – afloat at least and not completely sunk.
These results are no cause to sing out in celebration but neither are they a death knell.
This is a UK-based bank still going without government aid and able to raise a record £12.5bn from investors. It has at least a veneer of credibility left, enough for it to talk of opportunities to pick off acquisitions as competitors seek safe harbour.
The 19pc fall in its shares yesterday reflects the fact that, understandably, pessimists win every argument at the moment.
The outlook is bad enough that no one can be sure that HSBC won't need the financial help of at least one government in future. Markets have got used to expecting the worst only to see those expectations all too often surpassed so they are in no mood to give anyone the benefit of the doubt.
What is in no doubt, however, will be the shift in economic power from West to East as a result of this crisis, an axis that HSBC straddles.
Even now Asia, except Japan, is expected to grow 4.6pc in 2009, a terrible result for the region but at least it's in positive territory in these worst of times.
The region still has the surpluses to stimulate domestic and regional demand while retaining the firepower to buy up the West's distressed assets at knock down prices.
All this at a time when the likes of the UK and the US will have to pay off debt and right the wrongs of their credit binge, further limiting economic recovery here.
http://www.telegraph.co.uk/finance/comment/damianreece/4929190/HSBCs-cash-call-provides-reality-check-despite-Asian-promise.html
HSBC'S awful results are an important reality check for everyone caught up in the global financial crisis.
By Damian Reece
Last Updated: 5:57AM GMT 03 Mar 2009
While our attention here has been focused on domestic trouble and strife to do with which bankers got paid what and when, the world economy continues to go to pot.
The bank's results are truly awful, even before the £17.5bn of write downs including its disastrous US business, but then so is the global financial system in case you'd forgotten.
A £12.5bn rights issue reveals a bank extremely worried about the future, but then so it ought to be.
Its senior executives are foregoing bonuses for 2008 but then so they should, having overseen a company that on the best measure saw an 18pc fall in profits and the worst a 62pc drop.
Stephen Green, HSBC's chairman, sought to explain the causes of the current crisis on Monday with reference to the triangle of Western consumer economies gorging themselves on debt supported by the surpluses of the Far Eastern producer nations and the oil and mineral rich resource nations.
Last year that once golden triangle fast became a Bermuda triangle with the likes of HSBC a piece of the wreckage bobbing around in the ocean – afloat at least and not completely sunk.
These results are no cause to sing out in celebration but neither are they a death knell.
This is a UK-based bank still going without government aid and able to raise a record £12.5bn from investors. It has at least a veneer of credibility left, enough for it to talk of opportunities to pick off acquisitions as competitors seek safe harbour.
The 19pc fall in its shares yesterday reflects the fact that, understandably, pessimists win every argument at the moment.
The outlook is bad enough that no one can be sure that HSBC won't need the financial help of at least one government in future. Markets have got used to expecting the worst only to see those expectations all too often surpassed so they are in no mood to give anyone the benefit of the doubt.
What is in no doubt, however, will be the shift in economic power from West to East as a result of this crisis, an axis that HSBC straddles.
Even now Asia, except Japan, is expected to grow 4.6pc in 2009, a terrible result for the region but at least it's in positive territory in these worst of times.
The region still has the surpluses to stimulate domestic and regional demand while retaining the firepower to buy up the West's distressed assets at knock down prices.
All this at a time when the likes of the UK and the US will have to pay off debt and right the wrongs of their credit binge, further limiting economic recovery here.
http://www.telegraph.co.uk/finance/comment/damianreece/4929190/HSBCs-cash-call-provides-reality-check-despite-Asian-promise.html
The Case for Dumping Everything Now
The Case for Dumping Everything Now
By Dan Caplinger March 3, 2009 Comments (14)
By now, you must be tired of hearing about how, after witnessing the worst stock market losses in generations, you should simply have faith and keep investing. Common sense says it's ridiculous. Why should you throw good money into the market right now, when no one has a clue what the future will look like mere weeks from now, let alone in the years to come?
You don't need me to come up with reasons why you should get out now. Just take a look at the latest news:
All the government action we've seen over the past six months just seems to have made a bad situation worse, shaking the foundations of our capitalist system to the core.
Even after all the damage we've seen in the housing market, home prices could easily keep falling further than they have already.
Stocks fell Monday to their lowest levels in 12 years, and with November's lows broken, some believe that's just the start of another major downturn that could lop another 40% off the major indexes.
Given all that, the argument in favor of selling everything for whatever you can get basically boils down to three points:
Sounds reasonable. Sign me up.
Oh, come on! As a skeptic and a lover of conspiracy theories, part of me really sympathizes with this train of thought. Having dropped so far so quickly, there's no apparent reason why the market couldn't drop more. Plenty of investors have lost so much already that they may well not be able to afford to take any more risk with their life savings. Whether mere greed or a simple failure to understand the risk of the stock market got them into stocks, it's unfortunate that so many people have gotten hurt by these declines.
But all this pessimism really just looks like an amplified version of what you always see at market extremes. When stocks are flying, as they were in 2007, no one thinks they'll ever stop. Once they've crashed and burned, as they did in 1982 and 2002, people think they'll never come back.
Change does happen
That's not to say that every stock will survive. Countless firms went under during the Great Depression. Among the Nifty 50 stocks of the 1960s and 1970s, companies like Polaroid saw their huge rises turn to declines. Polaroid went nowhere for decades before eventually declaring bankruptcy.
Similarly, this time around, many companies will never see their former strength restored. I don't know whether big financial firms such as Citigroup (NYSE: C) and Bank of America (NYSE: BAC) will share Polaroid's fate. They might.
But like so many times in the past, they may well recover from the abyss and deliver great returns. Consider how some of these Nifty 50 stocks -- the same ones that did so badly in the 1973-74 bear market -- did when they finally bounced back:
Nifty 50 Stock
Return 1/1/1973 to 12/31/1974
Return 1/1/1975 to 3/2/2009
Coca-Cola (NYSE: KO)
(62.8%)
9,350%
IBM (NYSE: IBM)
(45.6%)
2,046%
3M (NYSE: MMM)
(44.4%)
2,216%
Procter & Gamble (NYSE: PG)
(24.2%)
4,732%
Disney (NYSE: DIS)
(82.2%)
4,621%
Source: Yahoo! Finance.
These stocks may again prove to be tomorrow's leaders -- or get replaced by others. But the important thing for investors is that some companies will survive to see their stocks flourish.
As attractive as the case for dumping everything now may seem, it's not the right move. Unless you truly believe the end of everything is nigh, betting on the long-term recovery of the world economy is the best choice -- and it's likely to pay off, given enough time.
For more on getting your portfolio back on track, read about:
The ultimate safe-haven investment.
Is it finally time to buy bank stocks?
Investing in the best companies on Earth.
Fool contributor Dan Caplinger is willing to go down with the ship -- at least with some of his money. He doesn't own shares of the companies mentioned in this article. 3M, Coca-Cola, and Disney are Motley Fool Inside Value selections. Disney is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy will never dump you.
Read/Post Comments (14)
http://www.fool.com/investing/value/2009/03/03/the-case-for-dumping-everything-now.aspx
By Dan Caplinger March 3, 2009 Comments (14)
By now, you must be tired of hearing about how, after witnessing the worst stock market losses in generations, you should simply have faith and keep investing. Common sense says it's ridiculous. Why should you throw good money into the market right now, when no one has a clue what the future will look like mere weeks from now, let alone in the years to come?
You don't need me to come up with reasons why you should get out now. Just take a look at the latest news:
All the government action we've seen over the past six months just seems to have made a bad situation worse, shaking the foundations of our capitalist system to the core.
Even after all the damage we've seen in the housing market, home prices could easily keep falling further than they have already.
Stocks fell Monday to their lowest levels in 12 years, and with November's lows broken, some believe that's just the start of another major downturn that could lop another 40% off the major indexes.
Given all that, the argument in favor of selling everything for whatever you can get basically boils down to three points:
- The cyclical nature of the economy has ended, and there's no hope that businesses can grow or even come close to their past glory.
- Everything that everyone has done to try to support the economy will ultimately fail.
- Once everyone figures out that the only thing holding up this house of cards is unsustainable government spending, people will abandon the current economic system, and all the financial assets that previously held so much value will become worthless.
Sounds reasonable. Sign me up.
Oh, come on! As a skeptic and a lover of conspiracy theories, part of me really sympathizes with this train of thought. Having dropped so far so quickly, there's no apparent reason why the market couldn't drop more. Plenty of investors have lost so much already that they may well not be able to afford to take any more risk with their life savings. Whether mere greed or a simple failure to understand the risk of the stock market got them into stocks, it's unfortunate that so many people have gotten hurt by these declines.
But all this pessimism really just looks like an amplified version of what you always see at market extremes. When stocks are flying, as they were in 2007, no one thinks they'll ever stop. Once they've crashed and burned, as they did in 1982 and 2002, people think they'll never come back.
Change does happen
That's not to say that every stock will survive. Countless firms went under during the Great Depression. Among the Nifty 50 stocks of the 1960s and 1970s, companies like Polaroid saw their huge rises turn to declines. Polaroid went nowhere for decades before eventually declaring bankruptcy.
Similarly, this time around, many companies will never see their former strength restored. I don't know whether big financial firms such as Citigroup (NYSE: C) and Bank of America (NYSE: BAC) will share Polaroid's fate. They might.
But like so many times in the past, they may well recover from the abyss and deliver great returns. Consider how some of these Nifty 50 stocks -- the same ones that did so badly in the 1973-74 bear market -- did when they finally bounced back:
Nifty 50 Stock
Return 1/1/1973 to 12/31/1974
Return 1/1/1975 to 3/2/2009
Coca-Cola (NYSE: KO)
(62.8%)
9,350%
IBM (NYSE: IBM)
(45.6%)
2,046%
3M (NYSE: MMM)
(44.4%)
2,216%
Procter & Gamble (NYSE: PG)
(24.2%)
4,732%
Disney (NYSE: DIS)
(82.2%)
4,621%
Source: Yahoo! Finance.
These stocks may again prove to be tomorrow's leaders -- or get replaced by others. But the important thing for investors is that some companies will survive to see their stocks flourish.
As attractive as the case for dumping everything now may seem, it's not the right move. Unless you truly believe the end of everything is nigh, betting on the long-term recovery of the world economy is the best choice -- and it's likely to pay off, given enough time.
For more on getting your portfolio back on track, read about:
The ultimate safe-haven investment.
Is it finally time to buy bank stocks?
Investing in the best companies on Earth.
Fool contributor Dan Caplinger is willing to go down with the ship -- at least with some of his money. He doesn't own shares of the companies mentioned in this article. 3M, Coca-Cola, and Disney are Motley Fool Inside Value selections. Disney is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy will never dump you.
Read/Post Comments (14)
http://www.fool.com/investing/value/2009/03/03/the-case-for-dumping-everything-now.aspx
Tuesday, 3 March 2009
What's Next? Dow 5,000?
What's Next? Dow 5,000?
By Morgan Housel March 2, 2009 Comments (16)
Recs
35
Stock Advisor
Since 2002, Motley Fool Stock Advisor has outperformed the S&P 500 by 29 percentage points. Join David and Tom Gardner in Stock Advisor today.
If someone told you one year ago that Bear Stearns, Fannie Mae, Freddie Mac, AIG, Washington Mutual, Wachovia, Lehman Brothers, Merrill Lynch, and Citigroup (NYSE: C) would be either bankrupt or saved while en route to bankruptcy, most people wouldn't have taken you seriously.
And as recently as, I don't know, last month, if you told anyone the Dow would be on the path to some obscenely low number -- we'll call it Dow 5,000 -- most wouldn't take you all that seriously, either.
Well, Fools, meet insanity. It's quickly becoming the new reality.
What's notable about today's trip below Dow 7,000? Not that 7,000, or 5,000, is really of any significance. Other than being a psychologically painful barrier, the Dow's short-term fluctuations are of little importance.
What's notable is that the mood doesn't seem to be the panicky, 10% daily drops, sell-now-and-ask-questions later mood we saw last fall. Not that anyone's claiming to speak for Mr. Market, but the mood now seems to be based on coming to terms with the financial sector's insolvency. In other words, as markets keep falling, the selling is getting more and more rational.
Falling hardToday's big news, for example, was word that AIG (NYSE: AIG) was back at the trough, hoping another $30 billion of taxpayer dole will do the trick. This after reporting the largest quarterly loss in history -- any company's history -- of $61.7 billion. Do the math: that's $7,762 per second.
Problem is, this is AIG's fourth bailout in six months. Citigroup is on round three. Bank of America (NYSE: BAC) is hoping bailout part deux will be enough.
That's what's underscoring the market's plunge right now: Every "plan" so far has been a finger-in-the-dike attempt at plugging a hole that's getting exponentially larger. On the other end of the spectrum, Goldman Sachs (NYSE: GS) and JPMorgan Chase (NYSE: JPM) actually want to pay their TARP money back because -- surprise -- Uncle Sam, as it turns out, can be the ficklest of business partners.
The original idea was that by preventing systemic collapse, private capital would eventually be lured back into financial markets, hence paving the way for recovery. But since every few weeks the rules change, the strategy shifts, and the dilution gets bigger, no investor in their right mind wants to dip their toes in.
Can they handle the truth? General Motors (NYSE: GM), Chrysler, and Ford (NYSE: F) had to submit turnaround plans and a general strategy as to how they'll dig out of their hole. No one really takes these goals seriously, but at least there's a strategy. There are clear-cut rules and deadlines that need to be met. There's clarity, if you want to call it that.
Banks don't have anything remotely close. It's a free-for-all of, "A few billion here, a couple billion there. Change the rules here. Add more terms there." Investors, rightfully so, want nothing to do with it. No one wants to play until they know the rules.
Until there's a coherent plan, (which I think means nationalization of at least a few of the walking dead), investors will stay a million miles away from financial investments -- even if assets look undeniably cheap. As long as that's the case, banks will crumble; As long as that's the case, the economy will follow suit; And as long as that's the case, stock indices won't be far behind. And around and around we go.
Where to now? Last October, at the pinnacle of market hysteria, we ran a poll asking Fools how low the Dow might go. 66% of respondents didn't think it would dip below 7,500.
In the spirit of the wisdom of crowds, we'll try it again: How low do you think the Dow will go?
http://www.fool.com/investing/dividends-income/2009/03/02/whats-next-dow-5000.aspx
Related article: Mon, 2/9/09,
Stocks to fall AT LEAST another 40%! Here's why ...
By Morgan Housel March 2, 2009 Comments (16)
Recs
35
Stock Advisor
Since 2002, Motley Fool Stock Advisor has outperformed the S&P 500 by 29 percentage points. Join David and Tom Gardner in Stock Advisor today.
If someone told you one year ago that Bear Stearns, Fannie Mae, Freddie Mac, AIG, Washington Mutual, Wachovia, Lehman Brothers, Merrill Lynch, and Citigroup (NYSE: C) would be either bankrupt or saved while en route to bankruptcy, most people wouldn't have taken you seriously.
And as recently as, I don't know, last month, if you told anyone the Dow would be on the path to some obscenely low number -- we'll call it Dow 5,000 -- most wouldn't take you all that seriously, either.
Well, Fools, meet insanity. It's quickly becoming the new reality.
What's notable about today's trip below Dow 7,000? Not that 7,000, or 5,000, is really of any significance. Other than being a psychologically painful barrier, the Dow's short-term fluctuations are of little importance.
What's notable is that the mood doesn't seem to be the panicky, 10% daily drops, sell-now-and-ask-questions later mood we saw last fall. Not that anyone's claiming to speak for Mr. Market, but the mood now seems to be based on coming to terms with the financial sector's insolvency. In other words, as markets keep falling, the selling is getting more and more rational.
Falling hardToday's big news, for example, was word that AIG (NYSE: AIG) was back at the trough, hoping another $30 billion of taxpayer dole will do the trick. This after reporting the largest quarterly loss in history -- any company's history -- of $61.7 billion. Do the math: that's $7,762 per second.
Problem is, this is AIG's fourth bailout in six months. Citigroup is on round three. Bank of America (NYSE: BAC) is hoping bailout part deux will be enough.
That's what's underscoring the market's plunge right now: Every "plan" so far has been a finger-in-the-dike attempt at plugging a hole that's getting exponentially larger. On the other end of the spectrum, Goldman Sachs (NYSE: GS) and JPMorgan Chase (NYSE: JPM) actually want to pay their TARP money back because -- surprise -- Uncle Sam, as it turns out, can be the ficklest of business partners.
The original idea was that by preventing systemic collapse, private capital would eventually be lured back into financial markets, hence paving the way for recovery. But since every few weeks the rules change, the strategy shifts, and the dilution gets bigger, no investor in their right mind wants to dip their toes in.
Can they handle the truth? General Motors (NYSE: GM), Chrysler, and Ford (NYSE: F) had to submit turnaround plans and a general strategy as to how they'll dig out of their hole. No one really takes these goals seriously, but at least there's a strategy. There are clear-cut rules and deadlines that need to be met. There's clarity, if you want to call it that.
Banks don't have anything remotely close. It's a free-for-all of, "A few billion here, a couple billion there. Change the rules here. Add more terms there." Investors, rightfully so, want nothing to do with it. No one wants to play until they know the rules.
Until there's a coherent plan, (which I think means nationalization of at least a few of the walking dead), investors will stay a million miles away from financial investments -- even if assets look undeniably cheap. As long as that's the case, banks will crumble; As long as that's the case, the economy will follow suit; And as long as that's the case, stock indices won't be far behind. And around and around we go.
Where to now? Last October, at the pinnacle of market hysteria, we ran a poll asking Fools how low the Dow might go. 66% of respondents didn't think it would dip below 7,500.
In the spirit of the wisdom of crowds, we'll try it again: How low do you think the Dow will go?
http://www.fool.com/investing/dividends-income/2009/03/02/whats-next-dow-5000.aspx
Related article: Mon, 2/9/09,
Stocks to fall AT LEAST another 40%! Here's why ...
Dow slides below 7,000 for first time in twelve years
Dow slides below 7,000 for first time in twelve years
The Dow Jones below 7,000 for the first time in twelve years on Monday after American International Group posted the largest quarterly loss in US corporate history.
By Telegraph Staff
Last Updated: 3:59PM GMT 02 Mar 2009
Dow Jones Industrial Average slides below 7,000 for first time in twelve years.
The blue chip index fell 144.8 - or 2pc - to 6918 points within minutes of opening after AIG reported a $61.7bn (£44bn) fourth-quarter loss and the US government said it would give the insurer another $30bn in loans. This is in addition to the $150bn it has already given the ailing insurer.
Wall Street's concerns about how governments around the world will fix the financial system and global economy have sent stocks to their lowest levels in 12 years.
The Dow Jones industrial average has dropped for six consecutive months, and is worth less than half of its October 2007 record high of 14,164.53.
Investors were also worried about European financial companies. HSBC, Europe's largest bank by market value, on Monday reported a 70pc drop in 2008 net profit and said it needs to raise £12.5bn and cut 6,100 jobs in the US.
HSBC and general gloom about banks and the global economy dragged down European stocks. Markets in London, Frankfurt and Paris was down between 2pc and 3.5pc just after trading started in New York.
Billionaire Warren Buffett wrote in his annual letter to investors on Saturday that he is sure "the economy will be in shambles throughout 2009 — and, for that matter, probably well beyond — but that conclusion does not tell us whether the stock market will rise or fall".
"As bad as things are, they can still get worse, and get a lot worse," Bill Strazzullo, chief market strategist for Bell Curve Trading, told AP.
Mr Strazzullo said he believes there's a significant chance the S&P 500 and the Dow will fall back to their 1995 levels of 500 and 5,000, respectively.
http://www.telegraph.co.uk/finance/markets/4927959/Dow-slides-below-7000-for-first-time-in-twelve-years.html
The Dow Jones below 7,000 for the first time in twelve years on Monday after American International Group posted the largest quarterly loss in US corporate history.
By Telegraph Staff
Last Updated: 3:59PM GMT 02 Mar 2009
Dow Jones Industrial Average slides below 7,000 for first time in twelve years.
The blue chip index fell 144.8 - or 2pc - to 6918 points within minutes of opening after AIG reported a $61.7bn (£44bn) fourth-quarter loss and the US government said it would give the insurer another $30bn in loans. This is in addition to the $150bn it has already given the ailing insurer.
Wall Street's concerns about how governments around the world will fix the financial system and global economy have sent stocks to their lowest levels in 12 years.
The Dow Jones industrial average has dropped for six consecutive months, and is worth less than half of its October 2007 record high of 14,164.53.
Investors were also worried about European financial companies. HSBC, Europe's largest bank by market value, on Monday reported a 70pc drop in 2008 net profit and said it needs to raise £12.5bn and cut 6,100 jobs in the US.
HSBC and general gloom about banks and the global economy dragged down European stocks. Markets in London, Frankfurt and Paris was down between 2pc and 3.5pc just after trading started in New York.
Billionaire Warren Buffett wrote in his annual letter to investors on Saturday that he is sure "the economy will be in shambles throughout 2009 — and, for that matter, probably well beyond — but that conclusion does not tell us whether the stock market will rise or fall".
"As bad as things are, they can still get worse, and get a lot worse," Bill Strazzullo, chief market strategist for Bell Curve Trading, told AP.
Mr Strazzullo said he believes there's a significant chance the S&P 500 and the Dow will fall back to their 1995 levels of 500 and 5,000, respectively.
http://www.telegraph.co.uk/finance/markets/4927959/Dow-slides-below-7000-for-first-time-in-twelve-years.html
Money made easy for young adults
http://www.whataboutmoney.info/
Money made easy for young adults
A user-friendly website from the City regulator offers impartial help to financial novices.
By Chris Pond
Last Updated: 12:46PM GMT 02 Mar 2009
The FSA's new website has advice on subjects such as student finance and budgeting Photo: GETTY
With many people now feeling the pinch of the credit crunch, getting on top of your finances and maintaining a healthy bank balance has never been more important.
It can be a daunting prospect for young adults who may be managing their own finances for the first time, and might not know where to find unbiased financial guidance.
Struggling with the pressures of financial unease themselves, parents of young adults embarking on those first independent steps may have additional concerns about how their children will cope with managing their money.
Research by the Financial Services Authority (FSA) has revealed that 16 to 24-year-olds are the most at risk when it comes to money, particularly with regards to planning ahead and choosing financial products.
A helping hand is now available in the form of www.whataboutmoney.info, a website launched by the FSA in June last year to offer impartial financial information to young adults aged 16-24.
The site forms part of the FSA's National Strategy for Financial Capability, which aims to improve the financial capability of all consumers in the UK. The website encourages young people to take charge of money matters and aims to provide information on the money issues important to them now.
A key feature to help users find information relevant to them is the "life stage guides". These offer tips on getting to grips with money issues affecting young people during the life-changing events they will go through, such as leaving school or going to college, getting their first job or their own place.
Each easily digestible guide outlines the top five need-to-know tips, has a video case study and displays links to further information from other resources.
The site is also divided into pages examining the key financial concerns that young adults face. "Getting money" is split into sections that look at jobs, benefits, starting a business, ways to borrow and manage money responsibly. "Spending money" looks at parting with cash – from getting a phone to running a home.
"Keeping money" helps to make sense of bank accounts, savings and investments, while "Student money" covers the facts about student finance. The "Budgeting tools" section simplifies money management, with links to external resources and applications such as budget and loan calculators, to enable users to monitor and evaluate incomings and outgoings.
The website has also recently been enhanced with "Real life economist" blogs. The "Real life economists" are a group of 16 to 24 year-olds at various life stages that feature throughout the website, providing an insight into the financial lives of young adults in similar positions.
Robyn Cooper, for example, is self-employed – a part-time actress who owns and runs her own small business, while Ian Stuart is a 16-year-old college student. The interactive blog section allows them to share their views on money matters with the website's users, who are then free to post their own comments and responses.
The "Questions & Answers" section outlines the top 10 queries, covering topics such as tax and loans, for simple, quick advice. Users can also send through their own personal queries to which they'll receive a free and personal written response within three working days.
For young adults wanting to know more about current money issues they may face, the "In the spotlight" page provides an update.
The aim is to give users clear-cut information on current topics such as interest rate changes and payday loans and explain how they might affect them. Users will also find a link here to the latest news on firms or products that are regulated by the FSA.
Whataboutmoney.info is an evolving tool for young adults that is being continually improved with new and up-to-date content. The site is an accessible and, more importantly, impartial resource for young adults (and even parents) that could help them to understand better money matters and, in turn, to stand them in good stead for planning and investing in their future.
Chris Pond is director of financial capability at the Financial Services Authorit
http://www.telegraph.co.uk/finance/personalfinance/consumertips/4927132/Money-made-easy-for-young-adults.html
Money made easy for young adults
A user-friendly website from the City regulator offers impartial help to financial novices.
By Chris Pond
Last Updated: 12:46PM GMT 02 Mar 2009
The FSA's new website has advice on subjects such as student finance and budgeting Photo: GETTY
With many people now feeling the pinch of the credit crunch, getting on top of your finances and maintaining a healthy bank balance has never been more important.
It can be a daunting prospect for young adults who may be managing their own finances for the first time, and might not know where to find unbiased financial guidance.
Struggling with the pressures of financial unease themselves, parents of young adults embarking on those first independent steps may have additional concerns about how their children will cope with managing their money.
Research by the Financial Services Authority (FSA) has revealed that 16 to 24-year-olds are the most at risk when it comes to money, particularly with regards to planning ahead and choosing financial products.
A helping hand is now available in the form of www.whataboutmoney.info, a website launched by the FSA in June last year to offer impartial financial information to young adults aged 16-24.
The site forms part of the FSA's National Strategy for Financial Capability, which aims to improve the financial capability of all consumers in the UK. The website encourages young people to take charge of money matters and aims to provide information on the money issues important to them now.
A key feature to help users find information relevant to them is the "life stage guides". These offer tips on getting to grips with money issues affecting young people during the life-changing events they will go through, such as leaving school or going to college, getting their first job or their own place.
Each easily digestible guide outlines the top five need-to-know tips, has a video case study and displays links to further information from other resources.
The site is also divided into pages examining the key financial concerns that young adults face. "Getting money" is split into sections that look at jobs, benefits, starting a business, ways to borrow and manage money responsibly. "Spending money" looks at parting with cash – from getting a phone to running a home.
"Keeping money" helps to make sense of bank accounts, savings and investments, while "Student money" covers the facts about student finance. The "Budgeting tools" section simplifies money management, with links to external resources and applications such as budget and loan calculators, to enable users to monitor and evaluate incomings and outgoings.
The website has also recently been enhanced with "Real life economist" blogs. The "Real life economists" are a group of 16 to 24 year-olds at various life stages that feature throughout the website, providing an insight into the financial lives of young adults in similar positions.
Robyn Cooper, for example, is self-employed – a part-time actress who owns and runs her own small business, while Ian Stuart is a 16-year-old college student. The interactive blog section allows them to share their views on money matters with the website's users, who are then free to post their own comments and responses.
The "Questions & Answers" section outlines the top 10 queries, covering topics such as tax and loans, for simple, quick advice. Users can also send through their own personal queries to which they'll receive a free and personal written response within three working days.
For young adults wanting to know more about current money issues they may face, the "In the spotlight" page provides an update.
The aim is to give users clear-cut information on current topics such as interest rate changes and payday loans and explain how they might affect them. Users will also find a link here to the latest news on firms or products that are regulated by the FSA.
Whataboutmoney.info is an evolving tool for young adults that is being continually improved with new and up-to-date content. The site is an accessible and, more importantly, impartial resource for young adults (and even parents) that could help them to understand better money matters and, in turn, to stand them in good stead for planning and investing in their future.
Chris Pond is director of financial capability at the Financial Services Authorit
http://www.telegraph.co.uk/finance/personalfinance/consumertips/4927132/Money-made-easy-for-young-adults.html
Gold update: Sixth day of falls in New York
Gold update: Sixth day of falls in New York
Gold has fallen in New York for a sixth straight session as some investors sold the precious metal to cover losses in equity markets. Silver also declined.
By Bloomberg staffLast Updated: 4:30PM GMT 02 Mar 2009
Gold futures for April delivery fell $2, or 0.2pc, to $940.50 an ounce at 10.10am on the Comex division of the New York Mercantile Exchange. The metal dropped 6pc last week.
In London, gold for immediate delivery lost $1.88, or 0.2pc, to $940.47 an ounce in early afternoon trading. The precious metal has earlier risen by as much as 1.7pc.
In February gold climbed by 1.5pc, the fourth consecutive monthly gain, while the Standard & Poor’s 500 Index fell by 11pc. Investment in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, reached a record 1,029.3 metric tons on February 26.
“As things get a little uglier in the stock market, we might see some selling of gold for margin calls,” said Frank McGhee, the head dealer at Integrated Brokerage Services in Chicago. “There’s some weight on gold now.”
Silver futures for May delivery declined 20.5 cents, or 1.6pc, to $12.905 an ounce. The metal rose 4.3pc in February.
News, comment and analysis on gold on our new dedicated page
FTSE loses billions of pounds within hours
FTSE loses billions of pounds within hours
Billions of pounds have been wiped off the value of Britain's leading companies after losses at HSBC and AIG drove share prices to a six-year low.
By Graham Ruddick and Myra Butterworth
Last Updated: 5:37PM GMT 02 Mar 2009
HSBC Hldgs
The FTSE 100 index of top UK shares dropped after HSBC confirmed a £12.5 billion rights issue.
It fell by 5.3 per cent and below the 3,700 mark for the first time since April 2003, losing investors £47.7 billion.
The sharp decline took the FTSE 100 below the lows experienced last October as UK banks teetered on the edge of collapse and were bailed out by the Government.
It came as analysts expressed concerns about the state of the UK economy, saying the financial crisis could spill over into other industries.
Investors were spooked by HSBC's rights issue after the UK's biggest bank asked for extra cash from shareholders to boost its balance sheet.
The request was made despite HSBC being one of the British banks least affected by the credit crisis.
HSBC's share issue is the biggest ever in Britain, surpassing the £12 billion request by Royal Bank of Scotland last year before it was forced into state support.
HSBC said the rights issue should help its 'ability to deal with the impact of an uncertain economic environment and to respond to unforeseen events'.
The move sent shares in HSBC down almost 19 per cent and also pulled Standard Chartered, which like HSBC conducts a significant amount of business in Asia, down by a similar amount.
Other UK banks also saw their share price tumble, including Royal Bank of Scotland (which closed down 2.6 per cent), Lloyds Banking Group (down 15 per cent) and Barclays (down 6 per cent).
At the same time, one of the world's largest insurers AIG - which was first saved from collapse in September with a package that grew to $150 billion last year - has had to ask for help again after failing to sell enough assets to repay the US.
Simon Denham, managing director of spread-betting company Capital Spreads, said: "The slowly falling indices are dragging ever more of the total economy into the mire and there is a very real possibility of the problem accelerating into an absolute disaster as opposed to a problem mainly constrained to the financial sector at the moment."
The FTSE 100 has not closed below 3,700 since the outbreak of war in Iraq at the end of March 2003. It was at 3,625.83 at the close of play.
David Buik of BGC Partners pointed out that the FTSE 100 is now lower than when Tony Blair won the 1997 general election. "What a waste of a decade that was," he said.
http://www.telegraph.co.uk/finance/newsbysector/epic/hsba/4928648/FTSE-losses-billions-of-pounds-within-hours.html
Billions of pounds have been wiped off the value of Britain's leading companies after losses at HSBC and AIG drove share prices to a six-year low.
By Graham Ruddick and Myra Butterworth
Last Updated: 5:37PM GMT 02 Mar 2009
HSBC Hldgs
The FTSE 100 index of top UK shares dropped after HSBC confirmed a £12.5 billion rights issue.
It fell by 5.3 per cent and below the 3,700 mark for the first time since April 2003, losing investors £47.7 billion.
The sharp decline took the FTSE 100 below the lows experienced last October as UK banks teetered on the edge of collapse and were bailed out by the Government.
It came as analysts expressed concerns about the state of the UK economy, saying the financial crisis could spill over into other industries.
Investors were spooked by HSBC's rights issue after the UK's biggest bank asked for extra cash from shareholders to boost its balance sheet.
The request was made despite HSBC being one of the British banks least affected by the credit crisis.
HSBC's share issue is the biggest ever in Britain, surpassing the £12 billion request by Royal Bank of Scotland last year before it was forced into state support.
HSBC said the rights issue should help its 'ability to deal with the impact of an uncertain economic environment and to respond to unforeseen events'.
The move sent shares in HSBC down almost 19 per cent and also pulled Standard Chartered, which like HSBC conducts a significant amount of business in Asia, down by a similar amount.
Other UK banks also saw their share price tumble, including Royal Bank of Scotland (which closed down 2.6 per cent), Lloyds Banking Group (down 15 per cent) and Barclays (down 6 per cent).
At the same time, one of the world's largest insurers AIG - which was first saved from collapse in September with a package that grew to $150 billion last year - has had to ask for help again after failing to sell enough assets to repay the US.
Simon Denham, managing director of spread-betting company Capital Spreads, said: "The slowly falling indices are dragging ever more of the total economy into the mire and there is a very real possibility of the problem accelerating into an absolute disaster as opposed to a problem mainly constrained to the financial sector at the moment."
The FTSE 100 has not closed below 3,700 since the outbreak of war in Iraq at the end of March 2003. It was at 3,625.83 at the close of play.
David Buik of BGC Partners pointed out that the FTSE 100 is now lower than when Tony Blair won the 1997 general election. "What a waste of a decade that was," he said.
http://www.telegraph.co.uk/finance/newsbysector/epic/hsba/4928648/FTSE-losses-billions-of-pounds-within-hours.html
Irrational fears erode Buffett premium
Irrational fears erode Buffett premium
Berkshire Hathaway shares lost more than 30pc in 2008, and more since. The value of the investment group's investment portfolio fell just 10pc.
By Richard Beales, breakingviews.com
Last Updated: 10:38AM GMT 02 Mar 2009
Warren Buffett, chief executive, doesn't focus on the share price. But the Sage of Omaha says risks, formerly under-appreciated in the investment world, are now being overpriced. And as that corrects, shares of the billionaire's investment company could benefit.
Buffett admits he "did some dumb things", like buying billions of dollars of ConocoPhillips stock when energy prices were near their peaks.
Even so, the per-share book value, or assets minus liabilities, of Berkshire's holdings fell a smidgeon less than 10pc in 2008 - against a 37pc loss on the S&P 500 index and a near-20pc fall for the average hedge fund. In that context, the Nebraskan investor's worst performance since 1965 - and only his second annual decline in book value - doesn't look so bad.
Berkshire shares tell a different story. At the end of 2007, they traded at a premium to book value of more than 80pc. By the end of last year, the premium had shrunk to less than 40pc. Now, it's only just more than 10pc based on the year-end book value, admittedly now too high.
Buffett sees the economy in a "shambles" through 2009 and probably beyond. That affects both Berkshire's own businesses and those of companies whose stock it owns. But other potential worries look less rational. One centres on derivatives. Berkshire has written put options on global stock indexes and various derivatives on corporate credit.
These have generated $13bn-odd of paper losses between them so far. Yet not only is Buffett's record comforting as to the eventual outcomes, the exposure is scaled to Berkshire's capacity - unlike, say, that of the flailing American International Group. An improbable total loss on the credit derivatives, for instance, would absorb only half Berkshire's cash on hand.
A fearful market could be focusing too much on the unhappy keywords attached to Berkshire: finance, derivatives, investments and insurance, to name a few. When irrational fears start to subside, the Buffett premium could return. While it might be damped by the fact that the 78-year-old isn't immortal, that could still help Berkshire stock even before the underlying investments turn around.
http://www.telegraph.co.uk/finance/breakingviewscom/4926633/Irrational-fears-erode-Buffett-premium.html
Berkshire Hathaway shares lost more than 30pc in 2008, and more since. The value of the investment group's investment portfolio fell just 10pc.
By Richard Beales, breakingviews.com
Last Updated: 10:38AM GMT 02 Mar 2009
Warren Buffett, chief executive, doesn't focus on the share price. But the Sage of Omaha says risks, formerly under-appreciated in the investment world, are now being overpriced. And as that corrects, shares of the billionaire's investment company could benefit.
Buffett admits he "did some dumb things", like buying billions of dollars of ConocoPhillips stock when energy prices were near their peaks.
Even so, the per-share book value, or assets minus liabilities, of Berkshire's holdings fell a smidgeon less than 10pc in 2008 - against a 37pc loss on the S&P 500 index and a near-20pc fall for the average hedge fund. In that context, the Nebraskan investor's worst performance since 1965 - and only his second annual decline in book value - doesn't look so bad.
Berkshire shares tell a different story. At the end of 2007, they traded at a premium to book value of more than 80pc. By the end of last year, the premium had shrunk to less than 40pc. Now, it's only just more than 10pc based on the year-end book value, admittedly now too high.
Buffett sees the economy in a "shambles" through 2009 and probably beyond. That affects both Berkshire's own businesses and those of companies whose stock it owns. But other potential worries look less rational. One centres on derivatives. Berkshire has written put options on global stock indexes and various derivatives on corporate credit.
These have generated $13bn-odd of paper losses between them so far. Yet not only is Buffett's record comforting as to the eventual outcomes, the exposure is scaled to Berkshire's capacity - unlike, say, that of the flailing American International Group. An improbable total loss on the credit derivatives, for instance, would absorb only half Berkshire's cash on hand.
A fearful market could be focusing too much on the unhappy keywords attached to Berkshire: finance, derivatives, investments and insurance, to name a few. When irrational fears start to subside, the Buffett premium could return. While it might be damped by the fact that the 78-year-old isn't immortal, that could still help Berkshire stock even before the underlying investments turn around.
http://www.telegraph.co.uk/finance/breakingviewscom/4926633/Irrational-fears-erode-Buffett-premium.html
China built enormous stake in US equities just before crash
China built enormous stake in US equities just before crash
The Chinese government more than tripled its investments in the US stock market to $99.5bn (£70 bn) just months before the financial crisis, it has emerged.
By Malcolm Moore in Shanghai
Last Updated: 3:06PM GMT 02 Mar 2009
The People's Bank of China in Beijing. The shift into riskier investments was the result of a power-struggle between the central bank and the Ministry of Finance.
The Chinese government more than tripled its investments in the US stock market to $99.5bn (£70 bn) just months before the financial crisis, it has emerged.
By Malcolm Moore in Shanghai
Last Updated: 3:06PM GMT 02 Mar 2009
The People's Bank of China in Beijing. The shift into riskier investments was the result of a power-struggle between the central bank and the Ministry of Finance.
Provisional figures from the US Treasury department showed that Beijing was holding $99.5bn of shares in June 2008, up from $29bn in 2007. Two years ago, China only held $4bn in US equities, preferring to concentrate on Treasury bills.
However, economists said the latest figures suggested that China may have bought as much as $150bn of equities worldwide, or 7pc of its vast foreign exchange reserves.
Brad Setser, an economist with the Council on Foreign Relations, a US think tank, said the State Administration of Foreign Exchange (SAFE), a branch of the Chinese central bank charged with looking after the foreign reserves, was responsible for the buying spree.
Last year, a Sunday Telegraph investigation revealed that SAFE had built holdings of £9bn in companies listed in London. The new figures suggest that SAFE has now become one of the largest sovereign wealth funds in the world, although it is likely to have been badly burned by falling markets during the financial crisis.
The shift into riskier investments was the result of a power-struggle between China’s central bank and the Ministry of Finance, both of which wanted to show they were capable of managing China’s huge wealth.
The Ministry of Finance runs the $200bn China Investment Corporation (CIC), the country’s official sovereign wealth fund, but has been heavily criticised for taking loss-making stakes in Blackstone and Morgan Stanley.
Mr Setser estimates that only $8bn of the $99.5bn of US equities were bought by CIC, with the rest being purchased by SAFE. “SAFE wanted to show that it could manage a portfolio of 'risk’ assets,” he said, in order to make sure that more of its funds were not passed over to CIC.
However, an official from the China Banking Regulatory Committee said that SAFE had little idea of how to make overseas investments, and lacks a proper team of analysts and stock-pickers.
The head of SAFE, Hu Xiaolian, is one of the few women at the top of a major Chinese government department. However, she has little commercial experience, having spent her entire career at the central bank and graduated from the bank’s own university.
Nevertheless, Arthur Kroeber, an economist at Dragonomics in Beijing, said China is likely to continue buying equities despite the slumping markets.
“They would have seen a considerable erosion in value by now, but I think they are absolutely playing a long game. Fundamentally, what choice do they have? What short game is there that is making money these days?” he said.
“SAFE is saying: the market may be problematic, but if we buy now for the long-term, we’ll probably finish up.” He added that the Chinese public was relatively content with the management of the country’s wealth, since SAFE does not disclose any information about its buying activities.
“As long as they don’t build a big stake in a high-profile company that blows up, they will be ok,” he said, adding that he thought it was possible for the central bank to put as much as 10pc of its foreign reserve holdings into equities. “I would be surprised, however, if they were authorised to put more than 10pc into shares,” he said.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4927567/China-built-enormous-stake-in-US-equities-just-before-crash.html
Subscribe to:
Posts (Atom)