Feb 11, 2009
Cashing in on jobs gloom
SYDNEY - THE financial crisis is proving good business for Australian firms involved in corporate recovery, restructuring and insolvency, looking to hire from an expanding pool of financial professionals.
Unemployment in Australia may be on the rise, but website eFinancialCareers.com.au lists 104 job in those areas, a significant increase on last year or even six months ago, the website said without giving comparative numbers.
The ads were typically placed by investment banks, Australian commercial banks and the big accountancy firms, all looking to take advantage of a growing number of skilled professionals in the market.
'Since the beginning of my financial year I have increased my direct workforce by 30 per cent and my indirect workforce by another third,' said Chris Campbell, national leader of the corporate reorganisation group at accountancy firm Deloitte.
Rescue firms are on a hiring binge, a godsend for many unemployed bankers.
Australian financial institutions have generally kept layoff numbers close to their chest, but analysts estimate job cuts to amount to several thousands and more are on the horizon.
The economy may not have suffered anything like the fallout seen in many developed countries thanks to a sound financial sector, but its economy is rapidly shrinking.
Job ads in newspapers and on the Internet fell for the ninth straight month in January, a survey by the Australia and New Zealand Banking Corp showed on Monday.
The government expects unemployment to rise to 7 per cent by mid-2010, from just 4.5 per cent currently.
Insolvency specialists and corporate advisory units are hiring, said to Angus Price, a partner from search firm Derwent Executive in Sydney. He cited investment banks Goldman Sachs and Rothschild which have set up restructuring units in Australia.
Restructuring
Domestic banks are also expanding their restructuring areas, hiring specialists to manage their own portfolios exposed to troubled companies, said Patrick Everest, partner at Jon Michel, a specialist financial services search form Jon Michel Executive Search.
'A lot of companies are in a lot of trouble... finance institutions in particular need help in working out how to do these recoveries,' said Deloitte's Campbell.
Australia's high profile casualties include finance companies Allco Finance Group and Babcock & Brown, mall-owner Centro Properties, child-care group ABC Learning Centres All of them heavily borrowed from top banks.
And more corporate distress is on the horizon with ratings agency Standard & Poor's predicting a spike in corporate defaults in 2009 after seven years of relative calm with just three Australian corporate defaults.
Other sectors in vogue are project finance and family offices endowments where recruiters see demand on the rise.
Project finance is set to grow after the government said it would spend A$42 billion (S$42 billion) with a priority on urgently needed infrastructure.
Derwent's Price anticipates banks in particular to beef up their project finance units to fund the infrastructure mandates.
Another active recruiting area is family office endowment, an investment structure that is typically used by very rich individuals.
'There has been a huge turnaround in family offices looking to buy distressed assets as principal investment,' said Derwent's Price. -- REUTERS
http://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_336939.html
Wednesday, 11 February 2009
Credit markets easing
Feb 11, 2009
Credit markets easing
WASHINGTON - US Federal Reserve chairman Ben Bernanke said on Tuesday the vast array of special central bank programs appear to have helped ease a credit crunch that has been choking economic activity.
Appearing before the House of Representatives Committee on Financial Services, Bernanke said that measuring the impact of the Fed's programs 'is complicated by the fact that multiple factors affect market conditions'.
'Nevertheless, we have been encouraged by the responses to these programs, including the reports and evaluations offered by market participants and analysts,' he stated.
'Notably, our lending to financial institutions, together with actions taken by other agencies, has helped to relax the severe liquidity strains experienced by many firms and has been associated with considerable improvements in interbank lending markets.'
Mr Bernanke said that in the past year since the Fed and other central banks began efforts to pump liquidity into the financial system, there have been signs of improvement.
He said this is notable in the lowering of the Libor, or London interbank rate, used among banks for short-term loans. He also said corporate short-term borrowing terms have improved since the Fed entered the commercial paper market.
Additionally, he said a drop in US mortgage rates may help steady the critical housing market.
'All of these improvements have occurred over a period in which the economic news has generally been worse than expected and conditions in many financial markets, including the equity markets, have worsened,' he added. -- AFP
http://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_336882.html
Credit markets easing
WASHINGTON - US Federal Reserve chairman Ben Bernanke said on Tuesday the vast array of special central bank programs appear to have helped ease a credit crunch that has been choking economic activity.
Appearing before the House of Representatives Committee on Financial Services, Bernanke said that measuring the impact of the Fed's programs 'is complicated by the fact that multiple factors affect market conditions'.
'Nevertheless, we have been encouraged by the responses to these programs, including the reports and evaluations offered by market participants and analysts,' he stated.
'Notably, our lending to financial institutions, together with actions taken by other agencies, has helped to relax the severe liquidity strains experienced by many firms and has been associated with considerable improvements in interbank lending markets.'
Mr Bernanke said that in the past year since the Fed and other central banks began efforts to pump liquidity into the financial system, there have been signs of improvement.
He said this is notable in the lowering of the Libor, or London interbank rate, used among banks for short-term loans. He also said corporate short-term borrowing terms have improved since the Fed entered the commercial paper market.
Additionally, he said a drop in US mortgage rates may help steady the critical housing market.
'All of these improvements have occurred over a period in which the economic news has generally been worse than expected and conditions in many financial markets, including the equity markets, have worsened,' he added. -- AFP
http://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_336882.html
US ECONOMIC STIMULUS PLAN - Commercial property included
Feb 11, 2009
US ECONOMIC STIMULUS PLAN
Commercial property included
NEW YORK - THE commercial real estate industry applauded the government's move to include commercial mortgages in a key lending program on Tuesday, but experts said the plan's lack of details is disconcerting.
Treasury Secretary Timothy Geithner said the government's Term Asset-Backed Securities Loan Facility will include securities backed by commercial property loans.
The programme, being developed by the Federal Reserve, allows investors to swap AAA-rated securities for US Treasurys, which could then be used as collateral for new financing. The goal is to create new lending in a now frozen market.
The news comes not a moment too soon for the troubled commercial real estate industry, which is facing a deluge of debt coming due this year at the same time that property prices, rents and occupancies are falling.
If commercial landlords can't refinance, loan defaults will spike and lenders could end up owning shopping malls and office buildings along with their piles of foreclosed homes. That would likely prolong the credit crisis.
'There was a sense of urgency to do this quickly,' said Brendan Reilly, the lobbyist for the Commercial Mortgage Securities Association, about the bailout. 'It's critical to kick-starting the market.' The market for commercial mortgage-backed securities, or CMBS, virtually shut down last year as the financial system unraveled.
CMBS are commercial mortgages that are pooled together, sliced into pieces and resold as bonds. The money that lenders receive from the bonds is used to fund more loans.
The CMBS market funded nearly half of all commercial mortgages in 2007 at the height of the industry's boom. Last year, that shrank to 5 per cent, Reilly said.
The result? Sales plunged and, along with it, property prices.
Construction and acquisition loans dried up. And refinancing for short-term debt stalled. Commercial foreclosures have become a real possibility for even the soundest properties and owners.
'No one is calling for a bailout for high-flying guys who overpaid at the top of market, but there are many healthy owners with performing assets who can't access the debt markets right now,' said Dan Fasulo, managing director of research firm Real Capital Analytics.
About US$171 billion (S$257.7 billion) of non-bank commercial mortgages are scheduled to mature this year, according to the Mortgage Bankers Association.
And while defaults on commercial property loans now are relatively low barely above 1 per cent, they could shoot up to between 5 per cent and 6 per cent if credit conditions don't improve, said Victor Calanog, research director at Reis Inc.
'It's a great first step' Calanog said about the plan, 'but there's much to be done in fleshing out the details.' The plan leaves out a key piece of the puzzle: How will the government price CMBS assets, or any securities backed by debt? So far, the free market can't value them because no one is buying them, said Hessam Nadji, managing director at Marcus & Millichap Real Estate Investment Services.
'It sounds good in concept, but I'm still having a hard time deciphering the real solution,' Nadji said. 'The devil is in the details.' -- AP
http://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_336827.html
US ECONOMIC STIMULUS PLAN
Commercial property included
NEW YORK - THE commercial real estate industry applauded the government's move to include commercial mortgages in a key lending program on Tuesday, but experts said the plan's lack of details is disconcerting.
Treasury Secretary Timothy Geithner said the government's Term Asset-Backed Securities Loan Facility will include securities backed by commercial property loans.
The programme, being developed by the Federal Reserve, allows investors to swap AAA-rated securities for US Treasurys, which could then be used as collateral for new financing. The goal is to create new lending in a now frozen market.
The news comes not a moment too soon for the troubled commercial real estate industry, which is facing a deluge of debt coming due this year at the same time that property prices, rents and occupancies are falling.
If commercial landlords can't refinance, loan defaults will spike and lenders could end up owning shopping malls and office buildings along with their piles of foreclosed homes. That would likely prolong the credit crisis.
'There was a sense of urgency to do this quickly,' said Brendan Reilly, the lobbyist for the Commercial Mortgage Securities Association, about the bailout. 'It's critical to kick-starting the market.' The market for commercial mortgage-backed securities, or CMBS, virtually shut down last year as the financial system unraveled.
CMBS are commercial mortgages that are pooled together, sliced into pieces and resold as bonds. The money that lenders receive from the bonds is used to fund more loans.
The CMBS market funded nearly half of all commercial mortgages in 2007 at the height of the industry's boom. Last year, that shrank to 5 per cent, Reilly said.
The result? Sales plunged and, along with it, property prices.
Construction and acquisition loans dried up. And refinancing for short-term debt stalled. Commercial foreclosures have become a real possibility for even the soundest properties and owners.
'No one is calling for a bailout for high-flying guys who overpaid at the top of market, but there are many healthy owners with performing assets who can't access the debt markets right now,' said Dan Fasulo, managing director of research firm Real Capital Analytics.
About US$171 billion (S$257.7 billion) of non-bank commercial mortgages are scheduled to mature this year, according to the Mortgage Bankers Association.
And while defaults on commercial property loans now are relatively low barely above 1 per cent, they could shoot up to between 5 per cent and 6 per cent if credit conditions don't improve, said Victor Calanog, research director at Reis Inc.
'It's a great first step' Calanog said about the plan, 'but there's much to be done in fleshing out the details.' The plan leaves out a key piece of the puzzle: How will the government price CMBS assets, or any securities backed by debt? So far, the free market can't value them because no one is buying them, said Hessam Nadji, managing director at Marcus & Millichap Real Estate Investment Services.
'It sounds good in concept, but I'm still having a hard time deciphering the real solution,' Nadji said. 'The devil is in the details.' -- AP
http://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_336827.html
Too few details in Bailout 2.0
Feb 11, 2009
Too few details in Bailout 2.0
WASHINGTON - THE new bank rescue plan landed with a thud on Wall Street.
Worried that the revamped financial bailout was far too short on details, especially on how to clean up the books of the banks, investors drove the Dow Jones industrials tumbling more than 380 points.
Treasury Secretary Timothy Geithner announced a plan that could send as much as US$2 trillion (S$3 trillion) coursing through the banking system and the broader economy and stressed the government would act to stop 'catastrophic failure' of financial institutions.
But investors fretted that the government was nowhere near untangling the crisis that has paralysed the financial system and hammered the economy. Wall Street suffered its worst day since Dec 1.
'The good news is they are going to spend a trillion dollars,' said James Cox, managing partner at Harris Financial Group. 'The bad news is they don't know how.' The administration called it the Financial Stability Plan, abandoning the old TARP, or Troubled Asset Relief Program. And while it may have a new name, investors were also quick to point out a whole new set of problems.
Besides worrying the plan is too light on details, Wall Street seemed concerned it does not solve the problem of how to get the soured mortgage-backed assets off banks' books - the heart of the crisis.
Asked about the negative investor response, President Barack Obama told ABC News that Wall Street 'is hoping for an easy out on this thing, and there is no easy out.' For now, the Obama administration says it does not need more than the second US$350 billion chunk of the bailout fund, but it concedes that may change.
'We are going to have to adapt our program as conditions change. We will have to try things we never tried before,' Mr Geithner said.
'We will make mistakes. We will go throughout periods in which things get worse and progress is uneven or interrupted.' The new approach aims to use both public and private cash to buy soured assets off the books of the banks. But the plan provides almost no detail on how the assets would be priced - only that it would be left to the private sector. Pricing the bad assets is key, in part because pricing them too low would force banks to take devastating writedowns.
It's far from clear that the government approach, using federal loans to entice private buyers to take the soured assets, will work.
'Most fund managers see these assets and don't want to touch them,' said Christopher Whalen, managing director of Institutional Risk Analytics. 'They can't sell them.' The government will also use some of the bailout cash to try to kick-start as much as US$1 trillion in lending - hoping that getting the private market for bundled loans humming again will unlock credit in the rest of the economy.
Mr Geithner also wants to put all banks with more than US$100 billion in assets through a 'stress test' to determine whether they can handle the losses that could come from an extended economic downturn.
But details on that part of the plan were sketchy, too, and some observers worried that the process would be messy. It also raises legal questions about what would happen to banks that refuse to participate.
'Let's say they do a stress test and conclude that a bank is insolvent. The bank could say, 'No, that's not the case and we're going to challenge you,'' banking analyst Bert Ely said. 'There's a potential for a lot of litigation.' Banking industry officials reacted with caution.
'There are a lot of details that have not been provided yet, and the devil is in the details,' said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable.
Critics of how the Bush administration handled the first half of the bailout say it doled out money to banks with few strings attached and failed to get banks to resume more normal lending.
It will be at least a week before the Obama administration provides details of how it plans to help homeowners. Mr Geithner did say the government will use $50 billion of bailout money for that, and suggested it would help reduce mortgage principal and lower mortgage rates.
Even so, 'There's not a hell of a lot here to get a sense of,' Democratic Sen. Robert Menendez told Mr Geithner in an appearance later on Tuesday before the Senate Banking Committee.
Republican Senator Richard Shelby of Alabama faulted Geithner for 'a conceptual plan with many details yet to be filled in.' Mr Geithner said the administration was laying out the 'broad architecture' for the program with more details to come as the new plans are designed. He stressed the urgency of moving boldly, given the troubles facing the economy and the financial system.
Details of the new bailout plan came as the Senate passed Obama's $838 billion economic stimulus plan, clearing the way for talks with the House on a compromise measure.
In his speech outlining the plan, Geithner stressed the huge US$1 trillion figures represented loans that would ultimately be repaid.
And he said the cost of doing nothing would be far higher.
'The complete collapse of our financial system would be incalculable for families, for businesses and for our nation,' Geithner said.
Consumer advocates, who had unsuccessfully pressed the Bush administration to help individual borrowers, saw some of the changes as welcome.
'Certainly the flavor has changed and that's encouraging, but we need the meat on the bone here,' said John Taylor, chief executive of the National Community Reinvestment Coalition, a consumer group in Washington. -- AP
http://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_336900.html
Too few details in Bailout 2.0
WASHINGTON - THE new bank rescue plan landed with a thud on Wall Street.
Worried that the revamped financial bailout was far too short on details, especially on how to clean up the books of the banks, investors drove the Dow Jones industrials tumbling more than 380 points.
Treasury Secretary Timothy Geithner announced a plan that could send as much as US$2 trillion (S$3 trillion) coursing through the banking system and the broader economy and stressed the government would act to stop 'catastrophic failure' of financial institutions.
But investors fretted that the government was nowhere near untangling the crisis that has paralysed the financial system and hammered the economy. Wall Street suffered its worst day since Dec 1.
'The good news is they are going to spend a trillion dollars,' said James Cox, managing partner at Harris Financial Group. 'The bad news is they don't know how.' The administration called it the Financial Stability Plan, abandoning the old TARP, or Troubled Asset Relief Program. And while it may have a new name, investors were also quick to point out a whole new set of problems.
Besides worrying the plan is too light on details, Wall Street seemed concerned it does not solve the problem of how to get the soured mortgage-backed assets off banks' books - the heart of the crisis.
Asked about the negative investor response, President Barack Obama told ABC News that Wall Street 'is hoping for an easy out on this thing, and there is no easy out.' For now, the Obama administration says it does not need more than the second US$350 billion chunk of the bailout fund, but it concedes that may change.
'We are going to have to adapt our program as conditions change. We will have to try things we never tried before,' Mr Geithner said.
'We will make mistakes. We will go throughout periods in which things get worse and progress is uneven or interrupted.' The new approach aims to use both public and private cash to buy soured assets off the books of the banks. But the plan provides almost no detail on how the assets would be priced - only that it would be left to the private sector. Pricing the bad assets is key, in part because pricing them too low would force banks to take devastating writedowns.
It's far from clear that the government approach, using federal loans to entice private buyers to take the soured assets, will work.
'Most fund managers see these assets and don't want to touch them,' said Christopher Whalen, managing director of Institutional Risk Analytics. 'They can't sell them.' The government will also use some of the bailout cash to try to kick-start as much as US$1 trillion in lending - hoping that getting the private market for bundled loans humming again will unlock credit in the rest of the economy.
Mr Geithner also wants to put all banks with more than US$100 billion in assets through a 'stress test' to determine whether they can handle the losses that could come from an extended economic downturn.
But details on that part of the plan were sketchy, too, and some observers worried that the process would be messy. It also raises legal questions about what would happen to banks that refuse to participate.
'Let's say they do a stress test and conclude that a bank is insolvent. The bank could say, 'No, that's not the case and we're going to challenge you,'' banking analyst Bert Ely said. 'There's a potential for a lot of litigation.' Banking industry officials reacted with caution.
'There are a lot of details that have not been provided yet, and the devil is in the details,' said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable.
Critics of how the Bush administration handled the first half of the bailout say it doled out money to banks with few strings attached and failed to get banks to resume more normal lending.
It will be at least a week before the Obama administration provides details of how it plans to help homeowners. Mr Geithner did say the government will use $50 billion of bailout money for that, and suggested it would help reduce mortgage principal and lower mortgage rates.
Even so, 'There's not a hell of a lot here to get a sense of,' Democratic Sen. Robert Menendez told Mr Geithner in an appearance later on Tuesday before the Senate Banking Committee.
Republican Senator Richard Shelby of Alabama faulted Geithner for 'a conceptual plan with many details yet to be filled in.' Mr Geithner said the administration was laying out the 'broad architecture' for the program with more details to come as the new plans are designed. He stressed the urgency of moving boldly, given the troubles facing the economy and the financial system.
Details of the new bailout plan came as the Senate passed Obama's $838 billion economic stimulus plan, clearing the way for talks with the House on a compromise measure.
In his speech outlining the plan, Geithner stressed the huge US$1 trillion figures represented loans that would ultimately be repaid.
And he said the cost of doing nothing would be far higher.
'The complete collapse of our financial system would be incalculable for families, for businesses and for our nation,' Geithner said.
Consumer advocates, who had unsuccessfully pressed the Bush administration to help individual borrowers, saw some of the changes as welcome.
'Certainly the flavor has changed and that's encouraging, but we need the meat on the bone here,' said John Taylor, chief executive of the National Community Reinvestment Coalition, a consumer group in Washington. -- AP
http://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_336900.html
World oil demand forecast cut
Feb 11, 2009
World oil demand forecast cut
PARIS - THE International Energy Agency cut its forecast again for global oil demand this year on Wednesday, but warned about a future supply crunch because of current low investment levels.
The energy watchdog for industrialised nations forecast that global oil demand would measure 84.7 million barrels per day (bpd) on average in 2009 - 570,000 bpd less than its last forecast made in January.
At this level, demand would be 1.1 percent or 1.0 million bpd less than in 2008, when demand also fell compared with the year earlier.
'Not only will the two-year contraction in oil demand be the first since the early 1980s, but 2009's decline will also be the largest since 1982,' the IEA said in its monthly oil report.
The watchdog, which has been revising down its once-buoyant forecasts for oil demand steadily since the end of last year, said its revisions were based on new economic growth forecasts from the International Monetary Fund.
The IMF slashed its global growth forecast for 2009 at the end of January, saying the financial crisis and spreading economic problems would result in expansion of just 0.5 per cent, its lowest rate since World War II.
The bleak economic environment has pushed oil prices down to below US$40 (S$60) a barrel in recent weeks, far from their peaks of nearly $150 last year, despite production cuts by OPEC oil producers.
The Organisation of Petroleum Exporting Countries (OPEC) has slashed its output in successive decisions to try to support the plunging market.
The IEA, echoing warnings from industry insiders and OPEC members, warned that one of the effects of low prices would be a delay in investment in future capacity which will be needed once global growth picks up again.
'Ultimately, low prices sow the seeds of their own destruction, and only clear signs of a recovering global economy will spur investment in new oil supply,' the report said.
'The danger is that if too much investment slips now, the scale of the price response to resurgent demand could again destabilise the global economy,' it added.
The secretary general of OPE, Abdalla Salem El-Badri, said on Monday that members of the cartel had already postponed 35 oil drilling projects because of low crude prices.
He has said that OPEC members need a price above $50 per barrel for their exports to encourage investment and balance their government budgets.
Many expensive oil projects have been called off in the last 12 months, particularly in Canada's high-cost tar sands, but news that OPEC countries are also reducing investment has sounded an alarm for analysts. -- AFP
http://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_337003.html
World oil demand forecast cut
PARIS - THE International Energy Agency cut its forecast again for global oil demand this year on Wednesday, but warned about a future supply crunch because of current low investment levels.
The energy watchdog for industrialised nations forecast that global oil demand would measure 84.7 million barrels per day (bpd) on average in 2009 - 570,000 bpd less than its last forecast made in January.
At this level, demand would be 1.1 percent or 1.0 million bpd less than in 2008, when demand also fell compared with the year earlier.
'Not only will the two-year contraction in oil demand be the first since the early 1980s, but 2009's decline will also be the largest since 1982,' the IEA said in its monthly oil report.
The watchdog, which has been revising down its once-buoyant forecasts for oil demand steadily since the end of last year, said its revisions were based on new economic growth forecasts from the International Monetary Fund.
The IMF slashed its global growth forecast for 2009 at the end of January, saying the financial crisis and spreading economic problems would result in expansion of just 0.5 per cent, its lowest rate since World War II.
The bleak economic environment has pushed oil prices down to below US$40 (S$60) a barrel in recent weeks, far from their peaks of nearly $150 last year, despite production cuts by OPEC oil producers.
The Organisation of Petroleum Exporting Countries (OPEC) has slashed its output in successive decisions to try to support the plunging market.
The IEA, echoing warnings from industry insiders and OPEC members, warned that one of the effects of low prices would be a delay in investment in future capacity which will be needed once global growth picks up again.
'Ultimately, low prices sow the seeds of their own destruction, and only clear signs of a recovering global economy will spur investment in new oil supply,' the report said.
'The danger is that if too much investment slips now, the scale of the price response to resurgent demand could again destabilise the global economy,' it added.
The secretary general of OPE, Abdalla Salem El-Badri, said on Monday that members of the cartel had already postponed 35 oil drilling projects because of low crude prices.
He has said that OPEC members need a price above $50 per barrel for their exports to encourage investment and balance their government budgets.
Many expensive oil projects have been called off in the last 12 months, particularly in Canada's high-cost tar sands, but news that OPEC countries are also reducing investment has sounded an alarm for analysts. -- AFP
http://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_337003.html
Insight into bonds
Insight into bonds
Published: 2009/02/11
Find out what is a bond; why invest in it; and what to watch out for when investing in bonds.
MALAYSIAN retail investors have never participated actively in bond investing.
Some of you may have bought bond funds offered by the unit trusts, however, most of you may not know what a bond investment is really about and the effect it has on your investment portfolio.
So then… what is a bond?
A bond represents the debt owed by either government units or corporations.
By investing in bonds, you basically become the lender to the issuers and you will be paid a specified percentage of interest.
This percentage of interest is called coupon payment and it is given to you by the issuer because of the use of your money.
At the end of the maturity date, you will get back your principal.
An example to quote is the Bond Simpanan Merdeka 2008 issued by Bank Negara for the senior citizens, which has a three-year tenure and pays 5 per cent interest per year.
In Malaysia, the main issuers of public debt are the government of Malaysia,Bank Negara Malaysia), and quasi government institutions (Khazanah, Danamodal and Danaharta).
Private debt securities and asset-backed securities are issued by the National Mortgage Corporation (Cagamas Bhd), financial institutions and non-financial corporations.
The major investors in the Malaysian bond market are the Employees Provident Fund (EPF), pension funds, insurance companies and other financial institutions.
The price of a bond is determined by many factors, with the main drivers being interest rates, inflation, maturity and credit quality.
Interest rates
Bonds are highly sensitive to interest rate fluctuations.
When the prevailing interest rate goes up higher than the coupon rate, the prices of the outstanding bonds will fall below the principal value.
If you are buying a bond fund, higher interest rates will cause lower fund prices.
Inflation
During periods of rapid economic growth, we will see increasing inflation.
This will eventually lead to higher interest rates and cause a drop in the value of bonds.
Deflation, the opposite of inflation, may occur when there is a recession or prolonged periods or little or no growth and excess capacity, will eventually lead to zero or negative real interest rates, causing the value of bonds to rise.
Maturity
Due to the sensitivities to inflation and interest rate fluctuations, longer term bonds will face more uncertainties compared to shorter term bonds.
As such, longer term bonds should offer better interest payments as the additional risk premium for the investors.
Nevertheless, they will suffer larger price fluctuations as a result of the longer period they take to mature.
Credit quality
When we lend out our money, we want to make sure that we will be able to get it back.
Therefore, the credibility or credit quality of the bond issuers plays an important role in the bond price.
A corporate bond will have a higher yield than a government guaranteed bond due to the additional risk that the investor has to bear for facing the possibility of the corporate bond defaulting.
The recent global financial crisis was partly attributed to the decline in credit quality for certain corporate bonds.
Why invest in bonds
Investing in bonds offers an alternative to investors to diversify their investment portfolios because it is relatively lower risk compared to stock investing.
As bonds provide periodic interest payments and repayment of principal at the end of the maturity, it will be suitable for you if your investment objective is to preserve capital and receive a predictable stream of income.
Depending on your investment time horizon, you can choose to invest in short-, medium- or long-term bonds.
However, you must understand the factors that drive the price of the bond that you invest in.
As retailers, most of the time we will be investing in bond funds offered by unit trusts or commercial banks.
Bond funds are combinations of various bonds, therefore, the risk of investing in bond funds is relatively lower compared to individual bonds.
However, you must take note of the factors listed above while selecting an appropriate bond fund.
In addition, you will also need to know about the fund management companies and make sure that the approaches they take are suitable for your risk profile and investment objectives.
The timing of investing in bond funds is also very important.
What to watch out for when investing in bonds
Watch out for the interest rate especially if it is too low or unstable.
Avoid speculative bonds. Even when you are investing in bond funds, make sure that the bonds in the portfolio are investment grade, which carries a credit rating of “BBB” and above.
Bonds with rating of “BB” and below are considered “high yield” and below investment grade.
Don’t invest a large portion of your portfolio in bonds. It will limit your portfolio growth, as over time, inflation will erode the fixed income stream and principal.
Bonds are suitable to complement stock investing.
This article was written by SIDC and Ooi Kok Hwa, a holder of a Capital Markets Services Representative’s Licence to carry on the business of investment advice under the Capital Markets and Services Act 2007.
The information provided in this article is for educational purposes only and should not be used as a substitute for legal or other professional advice.
Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission.
It was established in 1994 and incorporated in 2007.
http://www.btimes.com.my/Current_News/BTIMES/articles/20090211005643/Article/index_html
Published: 2009/02/11
Find out what is a bond; why invest in it; and what to watch out for when investing in bonds.
MALAYSIAN retail investors have never participated actively in bond investing.
Some of you may have bought bond funds offered by the unit trusts, however, most of you may not know what a bond investment is really about and the effect it has on your investment portfolio.
So then… what is a bond?
A bond represents the debt owed by either government units or corporations.
By investing in bonds, you basically become the lender to the issuers and you will be paid a specified percentage of interest.
This percentage of interest is called coupon payment and it is given to you by the issuer because of the use of your money.
At the end of the maturity date, you will get back your principal.
An example to quote is the Bond Simpanan Merdeka 2008 issued by Bank Negara for the senior citizens, which has a three-year tenure and pays 5 per cent interest per year.
In Malaysia, the main issuers of public debt are the government of Malaysia,Bank Negara Malaysia), and quasi government institutions (Khazanah, Danamodal and Danaharta).
Private debt securities and asset-backed securities are issued by the National Mortgage Corporation (Cagamas Bhd), financial institutions and non-financial corporations.
The major investors in the Malaysian bond market are the Employees Provident Fund (EPF), pension funds, insurance companies and other financial institutions.
The price of a bond is determined by many factors, with the main drivers being interest rates, inflation, maturity and credit quality.
Interest rates
Bonds are highly sensitive to interest rate fluctuations.
When the prevailing interest rate goes up higher than the coupon rate, the prices of the outstanding bonds will fall below the principal value.
If you are buying a bond fund, higher interest rates will cause lower fund prices.
Inflation
During periods of rapid economic growth, we will see increasing inflation.
This will eventually lead to higher interest rates and cause a drop in the value of bonds.
Deflation, the opposite of inflation, may occur when there is a recession or prolonged periods or little or no growth and excess capacity, will eventually lead to zero or negative real interest rates, causing the value of bonds to rise.
Maturity
Due to the sensitivities to inflation and interest rate fluctuations, longer term bonds will face more uncertainties compared to shorter term bonds.
As such, longer term bonds should offer better interest payments as the additional risk premium for the investors.
Nevertheless, they will suffer larger price fluctuations as a result of the longer period they take to mature.
Credit quality
When we lend out our money, we want to make sure that we will be able to get it back.
Therefore, the credibility or credit quality of the bond issuers plays an important role in the bond price.
A corporate bond will have a higher yield than a government guaranteed bond due to the additional risk that the investor has to bear for facing the possibility of the corporate bond defaulting.
The recent global financial crisis was partly attributed to the decline in credit quality for certain corporate bonds.
Why invest in bonds
Investing in bonds offers an alternative to investors to diversify their investment portfolios because it is relatively lower risk compared to stock investing.
As bonds provide periodic interest payments and repayment of principal at the end of the maturity, it will be suitable for you if your investment objective is to preserve capital and receive a predictable stream of income.
Depending on your investment time horizon, you can choose to invest in short-, medium- or long-term bonds.
However, you must understand the factors that drive the price of the bond that you invest in.
As retailers, most of the time we will be investing in bond funds offered by unit trusts or commercial banks.
Bond funds are combinations of various bonds, therefore, the risk of investing in bond funds is relatively lower compared to individual bonds.
However, you must take note of the factors listed above while selecting an appropriate bond fund.
In addition, you will also need to know about the fund management companies and make sure that the approaches they take are suitable for your risk profile and investment objectives.
The timing of investing in bond funds is also very important.
What to watch out for when investing in bonds
Watch out for the interest rate especially if it is too low or unstable.
Avoid speculative bonds. Even when you are investing in bond funds, make sure that the bonds in the portfolio are investment grade, which carries a credit rating of “BBB” and above.
Bonds with rating of “BB” and below are considered “high yield” and below investment grade.
Don’t invest a large portion of your portfolio in bonds. It will limit your portfolio growth, as over time, inflation will erode the fixed income stream and principal.
Bonds are suitable to complement stock investing.
This article was written by SIDC and Ooi Kok Hwa, a holder of a Capital Markets Services Representative’s Licence to carry on the business of investment advice under the Capital Markets and Services Act 2007.
The information provided in this article is for educational purposes only and should not be used as a substitute for legal or other professional advice.
Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission.
It was established in 1994 and incorporated in 2007.
http://www.btimes.com.my/Current_News/BTIMES/articles/20090211005643/Article/index_html
Tuesday, 10 February 2009
Bank of England to warn recession will last far longer than Government's forecast
Bank of England to warn recession will last far longer than Government's forecast
The Bank of England will this week come into direct conflict with the Treasury as it warns on recession.
By Edmund Conway and Angela Monaghan
Last Updated: 12:40PM GMT 09 Feb 2009
In its quarterly Inflation Report, the Bank's Monetary Policy Committee will slash its economic growth forecast to the lowest level since it was granted independence in 1997, and will indicate that it is now poised to start buying up securities directly in a bid to pump extra money into the economy.
It comes after the MPC voted to cut borrowing costs to an all-time low of 1pc, despite warnings from savings groups that such a move would undermine incentives to save money.
The Bank is expected to cut its growth forecast from the already-bearish projection that the economy would shrink by 1.3pc in 2009 made in November, to one which factors in a far steeper decline. It undermines the Treasury's assessment in the pre-Budget report that the economy would start growing again in the second half of the year.
The Inflation Report is the Bank's three-monthly opportunity to indicate its outlook for the economy, and economists will be watching the event closely on Wednesday to determine how much further it will cut borrowing costs.
They expect further rate cuts towards zero, as well as quantitative easing, whereby the Bank would increase the money supply by buying assets like corporate and government bonds, complementing the £50bn Asset Purchase Facility scheme already announced by the Treasury. The Governor, Mervyn King, will also indicate how soon the Bank will embark on this.
Despite better-than-expected data from the services sector last week, more gloom is in store next week in the form of labour market statistics, which could show that unemployment surpassed the two million mark in December.
Figures from the Office for National Statistics are also likely to show the number of people claiming unemployment benefits jumped in January, after a series of high profile failures including Woolworths.
"We are looking for a nasty surge of 110,000, the largest increase since March 1991," said Philip Shaw, economist at Investec. That would take the number of claimants to about 1.27m.
http://www.telegraph.co.uk/finance/financetopics/recession/4561002/Bank-of-England-to-warn-recession-will-last-far-longer-than-Governments-forecast.html
The Bank of England will this week come into direct conflict with the Treasury as it warns on recession.
By Edmund Conway and Angela Monaghan
Last Updated: 12:40PM GMT 09 Feb 2009
In its quarterly Inflation Report, the Bank's Monetary Policy Committee will slash its economic growth forecast to the lowest level since it was granted independence in 1997, and will indicate that it is now poised to start buying up securities directly in a bid to pump extra money into the economy.
It comes after the MPC voted to cut borrowing costs to an all-time low of 1pc, despite warnings from savings groups that such a move would undermine incentives to save money.
The Bank is expected to cut its growth forecast from the already-bearish projection that the economy would shrink by 1.3pc in 2009 made in November, to one which factors in a far steeper decline. It undermines the Treasury's assessment in the pre-Budget report that the economy would start growing again in the second half of the year.
The Inflation Report is the Bank's three-monthly opportunity to indicate its outlook for the economy, and economists will be watching the event closely on Wednesday to determine how much further it will cut borrowing costs.
They expect further rate cuts towards zero, as well as quantitative easing, whereby the Bank would increase the money supply by buying assets like corporate and government bonds, complementing the £50bn Asset Purchase Facility scheme already announced by the Treasury. The Governor, Mervyn King, will also indicate how soon the Bank will embark on this.
Despite better-than-expected data from the services sector last week, more gloom is in store next week in the form of labour market statistics, which could show that unemployment surpassed the two million mark in December.
Figures from the Office for National Statistics are also likely to show the number of people claiming unemployment benefits jumped in January, after a series of high profile failures including Woolworths.
"We are looking for a nasty surge of 110,000, the largest increase since March 1991," said Philip Shaw, economist at Investec. That would take the number of claimants to about 1.27m.
http://www.telegraph.co.uk/finance/financetopics/recession/4561002/Bank-of-England-to-warn-recession-will-last-far-longer-than-Governments-forecast.html
Concern is mounting over the dramatic deterioration of public finances across the EU.
Europe ambushes Germany on debt bail-out
The European Union has called an emergency summit of national leaders this month to halt the drift towards protectionism and stem the risks of a debt crisis as the slump deepens.
By Ambrose Evans-Pritchard
Last Updated: 6:24PM GMT 09 Feb 2009
EU finance ministers are to discuss proposals over breakfast in Brussels today for some form of "debt-agency" or mechanism for the EU to raise bonds, a move seen by diplomats as a ploy to ambush Germany into accepting shared responsibility for EU debts – anathema to Berlin.
Concern is mounting over the dramatic deterioration of public finances across the EU. Ireland's deficit is heading for 12pc of GDP, and there are doubts over whether Italy and Greece can roll over some €250bn (£218bn) in state debt between them this year.
EU company debt is a worry too, now 95pc of GDP compared to 50pc in the US. "The amount of debt to roll over in the eurozone is huge, at a time when banks are tightening credit standards," said Gilles Moec, from Bank of America. "Spanish businesses are in a dire situation."
Mirek Topolanek, Czech premier and holder of the EU presidency, said the crisis summit was aimed at thrashing out a joint "recovery plan" and curbing the nationalist reflexes that are tearing the EU apart.
The Czechs are livid over comments by French president Nicolas Sarkozy, who threatened to withold aide for French car companies unless they spend it at home. " If we give money to the auto industry to restructure, we don't want to hear about plant moving to the Czech Republic," he said.
Mr Topolanek said the comments were "unbelievable" and could cause the Czech Republic to reject the Lisbon Treaty. "If somebody wanted to seriously threaten ratification, they couldn't have picked a better means," he said.
The French plan fleshed out yesterday offers €6.5bn in soft loans to Renault and PSA Peugeot Citroen on condition that they promise not to close any sites in France. The Brussels competition police said they will examine the details to determine whether the terms breach EU law.
http://www.telegraph.co.uk/finance/globalbusiness/4571850/Europe-ambushes-Germany-on-debt-bail-out.html
The European Union has called an emergency summit of national leaders this month to halt the drift towards protectionism and stem the risks of a debt crisis as the slump deepens.
By Ambrose Evans-Pritchard
Last Updated: 6:24PM GMT 09 Feb 2009
EU finance ministers are to discuss proposals over breakfast in Brussels today for some form of "debt-agency" or mechanism for the EU to raise bonds, a move seen by diplomats as a ploy to ambush Germany into accepting shared responsibility for EU debts – anathema to Berlin.
Concern is mounting over the dramatic deterioration of public finances across the EU. Ireland's deficit is heading for 12pc of GDP, and there are doubts over whether Italy and Greece can roll over some €250bn (£218bn) in state debt between them this year.
EU company debt is a worry too, now 95pc of GDP compared to 50pc in the US. "The amount of debt to roll over in the eurozone is huge, at a time when banks are tightening credit standards," said Gilles Moec, from Bank of America. "Spanish businesses are in a dire situation."
Mirek Topolanek, Czech premier and holder of the EU presidency, said the crisis summit was aimed at thrashing out a joint "recovery plan" and curbing the nationalist reflexes that are tearing the EU apart.
The Czechs are livid over comments by French president Nicolas Sarkozy, who threatened to withold aide for French car companies unless they spend it at home. " If we give money to the auto industry to restructure, we don't want to hear about plant moving to the Czech Republic," he said.
Mr Topolanek said the comments were "unbelievable" and could cause the Czech Republic to reject the Lisbon Treaty. "If somebody wanted to seriously threaten ratification, they couldn't have picked a better means," he said.
The French plan fleshed out yesterday offers €6.5bn in soft loans to Renault and PSA Peugeot Citroen on condition that they promise not to close any sites in France. The Brussels competition police said they will examine the details to determine whether the terms breach EU law.
http://www.telegraph.co.uk/finance/globalbusiness/4571850/Europe-ambushes-Germany-on-debt-bail-out.html
Monday, 9 February 2009
Bond market calls Fed's bluff as global economy falls apart
Bond market calls Fed's bluff as global economy falls apart
Global bond markets are calling the bluff of the US Federal Reserve.
By Ambrose Evans-Pritchard
Last Updated: 7:22PM GMT 08 Feb 2009
Comments 80 Comment on this article
The yield on 10-year US Treasury bonds – the world's benchmark cost of capital – has jumped from 2pc to 3pc since Christmas despite efforts to talk the rate down.
This level will asphyxiate the US economy if allowed to persist, as Fed chair Ben Bernanke must know. The US is already in deflation. Core prices – stripping out energy – fell at an annual rate of 2pc in the fourth quarter. Wages are following. IBM, Chrysler, General Motors, and YRC, have all begun to cut pay.
The "real" cost of capital is rising as the slump deepens. This is textbook debt deflation. It was not supposed to happen. The Bernanke doctrine assumes that the Fed can bring down the whole structure of interest costs, first by slashing the Fed Funds rate to zero, and then by making a "credible threat" to buy Treasuries outright with printed money.
Mr Bernanke has been repeating this threat since early December. But talk is cheap. As the Fed hesitates, real yields climb ever higher. Plainly, the markets do not regard Fed rhetoric as "credible" at all.
Who can blame bond vigilantes for going on strike? Nobody wants to be left holding the bag if and when the global monetary blitz succeeds in stoking inflation. Governments are borrowing frantically to fund their bail-outs and cover a collapse in tax revenue. The US Treasury alone needs to raise $2 trillion in 2009.
Where is the money to come from? China, the Pacific tigers and the commodity powers are no longer amassing foreign reserves ($7.6 trillion). Their exports have collapsed. Instead of buying a trillion dollars of extra bonds each year, they have become net sellers. In aggregate, they dumped $190bn over the last fifteen weeks.
The Fed has stepped into the breach, up to a point. It has bought $350bn of commercial paper, and begun to buy $600bn of mortgage bonds. That helps. But still it recoils from buying Treasuries, perhaps fearing that any move to "monetise" Washington's deficit starts a slippery slope towards an Argentine fate. Or perhaps Bernanke doesn't believe his own assurances that the Fed can extract itself easily from emergency policies when the cycle turns.
As they dither, the world is falling apart. Events in Japan have turned deeply alarming. Exports fell 35pc in December. Industrial output fell 9.6pc. The economy is contracting at an annual rate of 12pc. "Falling exports are triggering a downward spiral of production, incomes and spending. It is important to prepare for swift policy steps, including those usually regarded as unusual," said the Bank of Japan's Atsushi Mizuno.
The bank is already targeting equities on the Tokyo bourse. That is not enough for restive politicians. One bloc led by Senator Koutaro Tamura wants to create $330bn in scrip currency for an industrial blitz. "We are facing hyper-deflation, so we need a policy to create hyper-inflation," he said.
This has echoes of 1932, when the US Congress took charge of monetary policy. We are moving to a stage of this crisis where democracies start to speak – especially in Europe.
The European Central Bank's refusal to follow the lead of the US, Japan, Britain, Canada, Switzerland and Sweden in slashing rates shows how destructive Europe's monetary union has become. German orders fells 25pc year-on-year in December. French house prices collapsed 9.9pc in the fourth quarter, the steepest since data began in 1936. "We're dealing with truly appalling data, the likes of which have never been seen before in post-War Europe," said Julian Callow, Europe economist at Barclays Capital.
Spain's unemployment has jumped to 3.3m – or 14.4pc – and will hit 19pc next year, on Brussels data. The labour minister said yesterday that Spain's economy could not "tolerate" immigrants any longer after suffering "hurricane devastation". You can see where this is going.
Ireland lost 36,500 jobs in January – equal to a monthly loss of 2.3m in the US. As the budget deficit surges to 12pc of GDP, Dublin is cutting wages, disguised as a pension levy. It has announced "Rooseveltian measures" to rescue the foundering companies.
The ECB's obduracy has nothing to do with economics. It fears zero rates as a vampire fears daylight, because that brings the purchase of eurozone bonds ever closer into play. Any such action would usher in an EMU "debt union" by the back door, leaving Germany's taxpayers on the hook for Club Med liabilties. This is Europe's taboo.
Meanwhile, Eastern Europe is imploding. Industrial output fell 27pc in Ukraine and 10pc in Russia in December. Latvia's GDP contracted at a 29pc annual rate in the fourth quarter. Polish homeowners have had the shock from Hell. Some 60pc of mortgages are in Swiss francs. The zloty has halved against the franc since July.
Readers have berated me for a piece last week – "Glimmers of Hope" – that hinted at recovery. Let me stress, I was wearing my reporter's hat, not expressing an opinion. My own view, sadly, is that there is no hope at all of stabilizing the world economy on current policies.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4560901/Bond-market-calls-Feds-bluff-as-world-falls-apart.html
Global bond markets are calling the bluff of the US Federal Reserve.
By Ambrose Evans-Pritchard
Last Updated: 7:22PM GMT 08 Feb 2009
Comments 80 Comment on this article
The yield on 10-year US Treasury bonds – the world's benchmark cost of capital – has jumped from 2pc to 3pc since Christmas despite efforts to talk the rate down.
This level will asphyxiate the US economy if allowed to persist, as Fed chair Ben Bernanke must know. The US is already in deflation. Core prices – stripping out energy – fell at an annual rate of 2pc in the fourth quarter. Wages are following. IBM, Chrysler, General Motors, and YRC, have all begun to cut pay.
The "real" cost of capital is rising as the slump deepens. This is textbook debt deflation. It was not supposed to happen. The Bernanke doctrine assumes that the Fed can bring down the whole structure of interest costs, first by slashing the Fed Funds rate to zero, and then by making a "credible threat" to buy Treasuries outright with printed money.
Mr Bernanke has been repeating this threat since early December. But talk is cheap. As the Fed hesitates, real yields climb ever higher. Plainly, the markets do not regard Fed rhetoric as "credible" at all.
Who can blame bond vigilantes for going on strike? Nobody wants to be left holding the bag if and when the global monetary blitz succeeds in stoking inflation. Governments are borrowing frantically to fund their bail-outs and cover a collapse in tax revenue. The US Treasury alone needs to raise $2 trillion in 2009.
Where is the money to come from? China, the Pacific tigers and the commodity powers are no longer amassing foreign reserves ($7.6 trillion). Their exports have collapsed. Instead of buying a trillion dollars of extra bonds each year, they have become net sellers. In aggregate, they dumped $190bn over the last fifteen weeks.
The Fed has stepped into the breach, up to a point. It has bought $350bn of commercial paper, and begun to buy $600bn of mortgage bonds. That helps. But still it recoils from buying Treasuries, perhaps fearing that any move to "monetise" Washington's deficit starts a slippery slope towards an Argentine fate. Or perhaps Bernanke doesn't believe his own assurances that the Fed can extract itself easily from emergency policies when the cycle turns.
As they dither, the world is falling apart. Events in Japan have turned deeply alarming. Exports fell 35pc in December. Industrial output fell 9.6pc. The economy is contracting at an annual rate of 12pc. "Falling exports are triggering a downward spiral of production, incomes and spending. It is important to prepare for swift policy steps, including those usually regarded as unusual," said the Bank of Japan's Atsushi Mizuno.
The bank is already targeting equities on the Tokyo bourse. That is not enough for restive politicians. One bloc led by Senator Koutaro Tamura wants to create $330bn in scrip currency for an industrial blitz. "We are facing hyper-deflation, so we need a policy to create hyper-inflation," he said.
This has echoes of 1932, when the US Congress took charge of monetary policy. We are moving to a stage of this crisis where democracies start to speak – especially in Europe.
The European Central Bank's refusal to follow the lead of the US, Japan, Britain, Canada, Switzerland and Sweden in slashing rates shows how destructive Europe's monetary union has become. German orders fells 25pc year-on-year in December. French house prices collapsed 9.9pc in the fourth quarter, the steepest since data began in 1936. "We're dealing with truly appalling data, the likes of which have never been seen before in post-War Europe," said Julian Callow, Europe economist at Barclays Capital.
Spain's unemployment has jumped to 3.3m – or 14.4pc – and will hit 19pc next year, on Brussels data. The labour minister said yesterday that Spain's economy could not "tolerate" immigrants any longer after suffering "hurricane devastation". You can see where this is going.
Ireland lost 36,500 jobs in January – equal to a monthly loss of 2.3m in the US. As the budget deficit surges to 12pc of GDP, Dublin is cutting wages, disguised as a pension levy. It has announced "Rooseveltian measures" to rescue the foundering companies.
The ECB's obduracy has nothing to do with economics. It fears zero rates as a vampire fears daylight, because that brings the purchase of eurozone bonds ever closer into play. Any such action would usher in an EMU "debt union" by the back door, leaving Germany's taxpayers on the hook for Club Med liabilties. This is Europe's taboo.
Meanwhile, Eastern Europe is imploding. Industrial output fell 27pc in Ukraine and 10pc in Russia in December. Latvia's GDP contracted at a 29pc annual rate in the fourth quarter. Polish homeowners have had the shock from Hell. Some 60pc of mortgages are in Swiss francs. The zloty has halved against the franc since July.
Readers have berated me for a piece last week – "Glimmers of Hope" – that hinted at recovery. Let me stress, I was wearing my reporter's hat, not expressing an opinion. My own view, sadly, is that there is no hope at all of stabilizing the world economy on current policies.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4560901/Bond-market-calls-Feds-bluff-as-world-falls-apart.html
IMF may run out of cash to fight crisis in six months
IMF may run out of cash to fight crisis in six months, Strauss-Khan warns
The International Monetary Fund could run out of cash to firefight the economic crisis in as little as six months, its managing director has warned.
By Edmund Conway, Economics Editor
Last Updated: 7:02PM GMT 08 Feb 2009
Dominique Strauss-Kahn said the Fund needed an urgent cash infusion if it was to continue bailing out troubled economies in the future. Mr Strauss-Kahn also indicated that the world's advanced economies were now tipping from recession into full-blown depression, cementing fears about the scale of the economic slump in rich nations.
The IMF head made the comments in Kuala Lumpur in Malaysia over the weekend, where he is attending a meeting of central bankers from Southeast Asia. The Fund has bailed out a number of countries including Iceland, Latvia and Pakistan but Mr Strauss-Kahn said there would be many others in need of help in the months ahead.
"Today, the IMF's resources are enough to face the situation but because we are facing a global crisis, the needs may be much bigger than previously," he said. "We have to intervene in Asia, Africa and Central Europe, Latin America, and maybe elsewhere. I can't promise that in six to eight months from now, we will have enough resources."
The Fund is seeking pledges from nations with large current account surpluses and foreign exchange reserves to donate it cash to help bolster troubled countries. At the World Economic Forum in Davos late last month deputy head John Lipsky is understood to have spent time meeting with various heads of state and of sovereign wealth funds for precisely this purpose. Japan has already offered to add $100bn to the Fund's resources, Mr Strauss-Kahn said.
"We need other countries to follow this generous example and provide funds with the means to address the challenges arising from this global crisis," he added.
He warned that the economic crisis would intensify unless the financial system was repaired, saying that although he hoped the world could avoid a repeat of the Great Depression, the "worst cannot be ruled out. There's a lot of downside risk."
The IMF recently slashed its world growth forecast to just 0.5pc - the weakest since the Second World War, and warned that the UK was facing the most severe slowdown of all developed economies. Although Mr Strauss-Kahn said that government spending packages and interest rate cuts would help, the health of the banking system was a far more important factor.
"All this will work if, and only if, the different countries are likely to do what they have to do in terms of restructuring the banking sector," he said. "And today it's not done."
The IMF has so far lent out $47.9bn to countries affected by the economic crisis - mostly those in Eastern Europe. Mr Strauss-Kahn said that the next victim could be Poland, which has said it does not need assistance now, but may well do in the future.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4560897/IMF-may-run-out-of-cash-to-fight-crisis-in-six-months-Strauss-Khan-warns.html
The International Monetary Fund could run out of cash to firefight the economic crisis in as little as six months, its managing director has warned.
By Edmund Conway, Economics Editor
Last Updated: 7:02PM GMT 08 Feb 2009
Dominique Strauss-Kahn said the Fund needed an urgent cash infusion if it was to continue bailing out troubled economies in the future. Mr Strauss-Kahn also indicated that the world's advanced economies were now tipping from recession into full-blown depression, cementing fears about the scale of the economic slump in rich nations.
The IMF head made the comments in Kuala Lumpur in Malaysia over the weekend, where he is attending a meeting of central bankers from Southeast Asia. The Fund has bailed out a number of countries including Iceland, Latvia and Pakistan but Mr Strauss-Kahn said there would be many others in need of help in the months ahead.
"Today, the IMF's resources are enough to face the situation but because we are facing a global crisis, the needs may be much bigger than previously," he said. "We have to intervene in Asia, Africa and Central Europe, Latin America, and maybe elsewhere. I can't promise that in six to eight months from now, we will have enough resources."
The Fund is seeking pledges from nations with large current account surpluses and foreign exchange reserves to donate it cash to help bolster troubled countries. At the World Economic Forum in Davos late last month deputy head John Lipsky is understood to have spent time meeting with various heads of state and of sovereign wealth funds for precisely this purpose. Japan has already offered to add $100bn to the Fund's resources, Mr Strauss-Kahn said.
"We need other countries to follow this generous example and provide funds with the means to address the challenges arising from this global crisis," he added.
He warned that the economic crisis would intensify unless the financial system was repaired, saying that although he hoped the world could avoid a repeat of the Great Depression, the "worst cannot be ruled out. There's a lot of downside risk."
The IMF recently slashed its world growth forecast to just 0.5pc - the weakest since the Second World War, and warned that the UK was facing the most severe slowdown of all developed economies. Although Mr Strauss-Kahn said that government spending packages and interest rate cuts would help, the health of the banking system was a far more important factor.
"All this will work if, and only if, the different countries are likely to do what they have to do in terms of restructuring the banking sector," he said. "And today it's not done."
The IMF has so far lent out $47.9bn to countries affected by the economic crisis - mostly those in Eastern Europe. Mr Strauss-Kahn said that the next victim could be Poland, which has said it does not need assistance now, but may well do in the future.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4560897/IMF-may-run-out-of-cash-to-fight-crisis-in-six-months-Strauss-Khan-warns.html
Allocations not reflecting investor sentiment
Allocations not reflecting investor sentiment
By Rita Raagas De Ramos 30 January 2009
Fund managers surveyed by Merrill Lynch are more optimistic about the economy, but fear of the unknown is driving them to stick to cash and bonds.
Investor sentiment has improved from the lows of 2008, but virtually none of that change is being reflected in actual asset allocations, according to Merrill Lynch’s survey of fund managers for January.
Among the 205 fund managers polled by Merrill Lynch from January 9 to January 15, only around 24% expect the global economy to weaken further over the next 12 months. That’s a sharp drop from 65% in October. In line with the better growth outlook, corporate profit expectations also improved.
Despite the improved sentiment, fund managers are now more overweight in cash, less overweight in bonds, and have generally scaled back regional equity exposure. The fund managers’ average cash balance remains high at 5.3%, albeit marginally lower than December’s 5.5% level. Cash positions reflect risk appetite, with many fund managers normally capping their cash at 5% of their portfolios when they are bullish.
“Investors are talking a more positive story especially with regards to the US, but the fear factor remains,” says Gary Baker, head of Europe, Middle East and Africa equity strategy at Banc of America Securities-Merrill Lynch. “They have the firepower to act, but are unconvinced by the modest recent equity rally, suggesting it is a bear market rally in both sentiment and markets. Global sector allocation remains resolutely defensive.”
Within a global equities portfolio, the US has slipped out of favour. Only 7% of the fund managers polled earlier this month were overweight in US equities compared with 25% in December.
“There has been a notable dip in the US equity market’s popularity and emerging market equities have been the new beneficiary of rotation away from the US,” says Michael Hartnett, chief emerging markets equity strategist at Banc of America Securities- Merrill Lynch.
US equity exposure has been cut in favour of global emerging markets, particularly China, and Japan. Europe is still seen as the least attractive region, reflecting a more hesitant government policy response to the financial crisis.
“China remains the big global growth wildcard in 2009,” says Hartnett. “Despite the announcement of huge fiscal stimulus packages in recent months, investors remain very sceptical about Chinese and Asian growth.”
China announced a Rmb4 trillion ($585 billion) stimulus package in November, aimed at combating the most serious economic threat to the mainland since the Asian financial crisis in 1997. Before the stimulus package was announced, China was riddled with worries over the impact of the global financial crisis on both domestic consumption and exports.
The stimulus package, with a life span that extends until 2010, covers key areas including affordable housing, rural infrastructure, railways, power grids, post-earthquake rebuilding in Sichuan, and social welfare to raise incomes. It also includes reforming the value-added-tax system to encourage investment in new technologies.
With foreign reserves and a budget surplus amounting to around $2 trillion, investors are confident that China has the capacity to further stimulate the economy if needed.
Meanwhile, sector-wise, fund managers are most overweight in pharmaceuticals, telecommunications and staples while most underweight in banks, industrials and materials.
The survey was conducted with the help of market research company Taylor Nelson Sofres (TNS). The survey measures net responses of the 205 fund managers, whose assets under management totalled $597 billion, by taking the balance between the bullish and bearish views for each survey question.
© Haymarket Media Limited. All rights reserved.
http://www.asianinvestor.net/article.aspx?CIaNID=95130
By Rita Raagas De Ramos 30 January 2009
Fund managers surveyed by Merrill Lynch are more optimistic about the economy, but fear of the unknown is driving them to stick to cash and bonds.
Investor sentiment has improved from the lows of 2008, but virtually none of that change is being reflected in actual asset allocations, according to Merrill Lynch’s survey of fund managers for January.
Among the 205 fund managers polled by Merrill Lynch from January 9 to January 15, only around 24% expect the global economy to weaken further over the next 12 months. That’s a sharp drop from 65% in October. In line with the better growth outlook, corporate profit expectations also improved.
Despite the improved sentiment, fund managers are now more overweight in cash, less overweight in bonds, and have generally scaled back regional equity exposure. The fund managers’ average cash balance remains high at 5.3%, albeit marginally lower than December’s 5.5% level. Cash positions reflect risk appetite, with many fund managers normally capping their cash at 5% of their portfolios when they are bullish.
“Investors are talking a more positive story especially with regards to the US, but the fear factor remains,” says Gary Baker, head of Europe, Middle East and Africa equity strategy at Banc of America Securities-Merrill Lynch. “They have the firepower to act, but are unconvinced by the modest recent equity rally, suggesting it is a bear market rally in both sentiment and markets. Global sector allocation remains resolutely defensive.”
Within a global equities portfolio, the US has slipped out of favour. Only 7% of the fund managers polled earlier this month were overweight in US equities compared with 25% in December.
“There has been a notable dip in the US equity market’s popularity and emerging market equities have been the new beneficiary of rotation away from the US,” says Michael Hartnett, chief emerging markets equity strategist at Banc of America Securities- Merrill Lynch.
US equity exposure has been cut in favour of global emerging markets, particularly China, and Japan. Europe is still seen as the least attractive region, reflecting a more hesitant government policy response to the financial crisis.
“China remains the big global growth wildcard in 2009,” says Hartnett. “Despite the announcement of huge fiscal stimulus packages in recent months, investors remain very sceptical about Chinese and Asian growth.”
China announced a Rmb4 trillion ($585 billion) stimulus package in November, aimed at combating the most serious economic threat to the mainland since the Asian financial crisis in 1997. Before the stimulus package was announced, China was riddled with worries over the impact of the global financial crisis on both domestic consumption and exports.
The stimulus package, with a life span that extends until 2010, covers key areas including affordable housing, rural infrastructure, railways, power grids, post-earthquake rebuilding in Sichuan, and social welfare to raise incomes. It also includes reforming the value-added-tax system to encourage investment in new technologies.
With foreign reserves and a budget surplus amounting to around $2 trillion, investors are confident that China has the capacity to further stimulate the economy if needed.
Meanwhile, sector-wise, fund managers are most overweight in pharmaceuticals, telecommunications and staples while most underweight in banks, industrials and materials.
The survey was conducted with the help of market research company Taylor Nelson Sofres (TNS). The survey measures net responses of the 205 fund managers, whose assets under management totalled $597 billion, by taking the balance between the bullish and bearish views for each survey question.
© Haymarket Media Limited. All rights reserved.
http://www.asianinvestor.net/article.aspx?CIaNID=95130
Saturday, 7 February 2009
Top 6 Most Common Financial Mistakes
Top 6 Most Common Financial Mistakes
by Investopedia Staff, (Investopedia.com) (Contact Author Biography)
It is indeed a material world. When it comes to spending, the U.S. is a culture of consumption. The result: rising levels of consumer debt and declining household savings rates. But in 2008, this culture was hit hard by economic reality. According to the Federal Reserve, U.S. household debt grew steadily from the time the Fed started tracking it in 1952. It declined for the first time in the third quarter of 2008. As a result of the credit crisis and ensuing economic recession, savings rates also rebounded. For those who had been living beyond their means for years, it suddenly got a lot harder to make ends meet. And, although the government tends to encourage spending during economic downturn and statistics may lead us to think that overspending is normal, it is often a risky choice. Here we'll take a look at seven of the most common financial mistakes that often lead people to major economic hardship. Even if you're already facing financial difficulties, steering clear of these mistakes could be the key to survival.
Mistake No. 1: Excessive/Frivolous Spending
Great fortunes are often lost one dollar at time. It may not seem like a big deal when you pick up that double-mocha cappuccino, stop for a pack of cigarettes, have dinner out or order that pay-per-view movie, but every little item adds up. Just $25 per week spent on dining out costs you $1,300 per year, which could go toward an extra mortgage payment or a number of extra car payments. If you're enduring financial hardship, avoiding this mistake really matters - after all, if you're only a few dollars away from foreclosure or bankruptcy, every dollar will count more than ever. (For more insight, see Squeeze A Greenback Out Of Your Latte.)
Mistake No. 2: Never-Ending Payments
Ask yourself if you really need items that keep you paying for every month, year after year. Things like cable television, subscription radio and video games, cell phones and pagers can force you to pay unceasingly but leave you owning nothing. When money is tight, or you just want to save more, creating a leaner lifestyle can go a long way to fattening your savings and cushioning your from financial hardship. (For more on this, see Get Your Budget In Fighting Shape.)
Mistake No. 3: Living on Borrowed Money
Using credit cards to buy essentials has become somewhat normal. But even if an ever-increasing number of consumers are willing to pay double-digit interest rates on gasoline, groceries and a host of other items that are gone long before the bill is paid in full, don't be one of them. Credit card interest rates make the price of the charged items a great deal more expensive. Depending on credit also makes it more likely that you'll spend more than you earn.(To learn more about credit cards, see Take Control Of Your Credit Cards and Credit, Debit And Charge: Sizing Up The Cards In Your Wallet.)
Mistake No. 4: Buying a New Car
Millions of new cars are sold each year, although few buyers can afford to pay for them in cash. However, the inability to pay cash for a new car means an inability to afford the car. After all, being able to afford the payment is not the same as being able to afford the car. Furthermore, by borrowing money to buy a car, the consumer pays interest on a depreciating asset, which amplifies the difference between the value of the car and the price paid for it. Worse yet, many people trade in their cars every two or three years, and lose money on every trade.
Sometimes a person has no choice but to take out a loan to buy a car, but how much does any consumer really need a large SUV? Such vehicles are expensive to buy, insure and fuel. Unless you tow a boat or trailer, or need an SUV to earn a living, is an eight-cylinder engine worth the extra cost of taking out a large loan? If you need to buy a car and/or borrow money to do so, consider buying one that uses less gas and costs less to insure and maintain. Cars are expensive. You might need one, but if you're buying more car than you need, you're burning through money that could have been saved or used to pay off debt. (To keep reading about this subject, check out Car Shopping: New Or Used?)
Mistake No. 5: Buying Too Much House
When it comes to buying a house, bigger is also not necessarily better. Unless you have a large family, choosing a 6,000-square-foot home will only mean more expensive taxes, maintenance and utilities. Do you really want to put such a significant, long-term dent in your monthly budget? (For more on buying a home, see Mortgages: How Much Can You Afford? and Downsize Your Home To Downsize Expenses.)
Mistake No. 6: Treating Your Home Equity Like a Piggy Bank
Your home is your castle. Refinancing and taking cash out on it means giving away ownership to someone else. It also costs you thousands of dollars in interest and fees. Smart homeowners want to build equity, not make payments in perpetuity. In addition, you'll end up paying way more for your home than it's worth, which virtually ensures that you won't come out on top when you decide to sell. (For further reading see Mortgages: The ABCs Of Refinancing.)
Living Paycheck to Paycheck
In 2007, the U.S. household savings rate fell below 1%, but other countries had considerably higher rates of personal savings. For example, the Netherlands, Italy, Norway, Germany and France personal savings rates average 10% or more according, to the OECD Factbook 2005. Clearly it is possible to enjoy a high standard of living without financing it with debt. Countries in Asia boast savings rates of as much as 30%!
The cumulative result of overspending puts people into a precarious position - one in which they need every dime they earn and one missed paycheck would be disastrous. This is not the position you want to find yourself in when an economic recession hits. If this happens, you'll have very few options. Everyone has a choice in how they live, so it's just a matter of making savings a priority.
Making a Payment Vs. Affording A Purchase
To steer yourself away from the dangers of overspending:
For more, check out Seven Common Investor Mistakes.
by Investopedia Staff, (Contact Author Biography)Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.
by Investopedia Staff, (Investopedia.com) (Contact Author Biography)
It is indeed a material world. When it comes to spending, the U.S. is a culture of consumption. The result: rising levels of consumer debt and declining household savings rates. But in 2008, this culture was hit hard by economic reality. According to the Federal Reserve, U.S. household debt grew steadily from the time the Fed started tracking it in 1952. It declined for the first time in the third quarter of 2008. As a result of the credit crisis and ensuing economic recession, savings rates also rebounded. For those who had been living beyond their means for years, it suddenly got a lot harder to make ends meet. And, although the government tends to encourage spending during economic downturn and statistics may lead us to think that overspending is normal, it is often a risky choice. Here we'll take a look at seven of the most common financial mistakes that often lead people to major economic hardship. Even if you're already facing financial difficulties, steering clear of these mistakes could be the key to survival.
Mistake No. 1: Excessive/Frivolous Spending
Great fortunes are often lost one dollar at time. It may not seem like a big deal when you pick up that double-mocha cappuccino, stop for a pack of cigarettes, have dinner out or order that pay-per-view movie, but every little item adds up. Just $25 per week spent on dining out costs you $1,300 per year, which could go toward an extra mortgage payment or a number of extra car payments. If you're enduring financial hardship, avoiding this mistake really matters - after all, if you're only a few dollars away from foreclosure or bankruptcy, every dollar will count more than ever. (For more insight, see Squeeze A Greenback Out Of Your Latte.)
Mistake No. 2: Never-Ending Payments
Ask yourself if you really need items that keep you paying for every month, year after year. Things like cable television, subscription radio and video games, cell phones and pagers can force you to pay unceasingly but leave you owning nothing. When money is tight, or you just want to save more, creating a leaner lifestyle can go a long way to fattening your savings and cushioning your from financial hardship. (For more on this, see Get Your Budget In Fighting Shape.)
Mistake No. 3: Living on Borrowed Money
Using credit cards to buy essentials has become somewhat normal. But even if an ever-increasing number of consumers are willing to pay double-digit interest rates on gasoline, groceries and a host of other items that are gone long before the bill is paid in full, don't be one of them. Credit card interest rates make the price of the charged items a great deal more expensive. Depending on credit also makes it more likely that you'll spend more than you earn.(To learn more about credit cards, see Take Control Of Your Credit Cards and Credit, Debit And Charge: Sizing Up The Cards In Your Wallet.)
Mistake No. 4: Buying a New Car
Millions of new cars are sold each year, although few buyers can afford to pay for them in cash. However, the inability to pay cash for a new car means an inability to afford the car. After all, being able to afford the payment is not the same as being able to afford the car. Furthermore, by borrowing money to buy a car, the consumer pays interest on a depreciating asset, which amplifies the difference between the value of the car and the price paid for it. Worse yet, many people trade in their cars every two or three years, and lose money on every trade.
Sometimes a person has no choice but to take out a loan to buy a car, but how much does any consumer really need a large SUV? Such vehicles are expensive to buy, insure and fuel. Unless you tow a boat or trailer, or need an SUV to earn a living, is an eight-cylinder engine worth the extra cost of taking out a large loan? If you need to buy a car and/or borrow money to do so, consider buying one that uses less gas and costs less to insure and maintain. Cars are expensive. You might need one, but if you're buying more car than you need, you're burning through money that could have been saved or used to pay off debt. (To keep reading about this subject, check out Car Shopping: New Or Used?)
Mistake No. 5: Buying Too Much House
When it comes to buying a house, bigger is also not necessarily better. Unless you have a large family, choosing a 6,000-square-foot home will only mean more expensive taxes, maintenance and utilities. Do you really want to put such a significant, long-term dent in your monthly budget? (For more on buying a home, see Mortgages: How Much Can You Afford? and Downsize Your Home To Downsize Expenses.)
Mistake No. 6: Treating Your Home Equity Like a Piggy Bank
Your home is your castle. Refinancing and taking cash out on it means giving away ownership to someone else. It also costs you thousands of dollars in interest and fees. Smart homeowners want to build equity, not make payments in perpetuity. In addition, you'll end up paying way more for your home than it's worth, which virtually ensures that you won't come out on top when you decide to sell. (For further reading see Mortgages: The ABCs Of Refinancing.)
Living Paycheck to Paycheck
In 2007, the U.S. household savings rate fell below 1%, but other countries had considerably higher rates of personal savings. For example, the Netherlands, Italy, Norway, Germany and France personal savings rates average 10% or more according, to the OECD Factbook 2005. Clearly it is possible to enjoy a high standard of living without financing it with debt. Countries in Asia boast savings rates of as much as 30%!
The cumulative result of overspending puts people into a precarious position - one in which they need every dime they earn and one missed paycheck would be disastrous. This is not the position you want to find yourself in when an economic recession hits. If this happens, you'll have very few options. Everyone has a choice in how they live, so it's just a matter of making savings a priority.
Making a Payment Vs. Affording A Purchase
To steer yourself away from the dangers of overspending:
- Start by monitoring the little expenses that add up quickly, then move on to monitoring the big expenses.
- Think carefully before adding new debts to your list of payments, and keep in mind that being able to make a payment isn't the same as being able to afford the purchase.
- Finally, make saving some of what you earn a monthly priority.
For more, check out Seven Common Investor Mistakes.
by Investopedia Staff, (Contact Author Biography)Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.
MOST POPULAR - YOUR MONEY
MOST POPULAR - YOUR MONEY
Credit Scores: What You Need to Know
Estate Planning: What You Need to Know
Your Money: Nutritional Insights on Saving Money
Wealth Matters: It’s Not Just the Money, It’s the Mind-Set
Shortcuts: The Popular Practice of Putting Stuff Off
Home Insurance: What You Need to Know
Health Insurance: What You Need to Know
Income Taxes: What You Need to Know
One Fewer Credit Score Accessible to Consumers
Your Money: Doing the Right Thing by Paying the Nanny Tax
Credit Scores: What You Need to Know
Estate Planning: What You Need to Know
Your Money: Nutritional Insights on Saving Money
Wealth Matters: It’s Not Just the Money, It’s the Mind-Set
Shortcuts: The Popular Practice of Putting Stuff Off
Home Insurance: What You Need to Know
Health Insurance: What You Need to Know
Income Taxes: What You Need to Know
One Fewer Credit Score Accessible to Consumers
Your Money: Doing the Right Thing by Paying the Nanny Tax
Money flow into areas entailing more risk
Markets Rise Despite Report
Daniel Acker/Bloomberg News
By JACK HEALY
Published: February 6, 2009
Not even the loss of 598,000 jobs could dampen Wall Street’s soaring mood on Friday. In a second day of gains, stock markets surged as investors waited for the federal government to detail its latest plans to shore up the banking system.
With Friday’s rally, the major indexes posted their first winning week in a month, and the technology-heavy Nasdaq composite gained enough to recoup its losses from last month, ending in positive territory for the year.
But some analysts questioned whether the Treasury Department’s expected announcement on Monday would be enough to meet investors’ expectations and whether stocks would fall back if the government’s plans turned out to be disappointing.
“It’s clear investors want to see something bold, something dramatic and something that is viable,” said Quincy Krosby, chief investment strategist at The Hartford. “We’ve had all these ad hoc, partial solutions. They don’t work, and then the market gets depressed. We’ll see if this is the one. We’ll see.”
On Friday, the Dow Jones industrial average gained 217.52 points, or 2.7 percent, to close at 8,280.59. The broader Standard & Poor’s 500-stock index rose 22.75 points, or 2.69 percent, to 868.60, and the technology-heavy Nasdaq composite index rose 45.47 points, or 2.94 percent, to 1,591.71.
Crude oil prices fell a dollar to settle at $40.17 a barrel in New York.
Analysts said they were cheered that financial markets seemed to shrug off a government report showing that unemployment climbed to 7.6 percent in January as the recession deepened, a sign the job market was still far from hitting bottom.
“It’s a good sign that we’re trading up in the face of bad news,” said Ed Hyland, global investment specialist at JPMorgan Private Bank. “That’s one of the signs that you look for in the bottoming of a bear market.”
Although the statistics were grim, the so-called whisper numbers representing the most pessimistic estimates on Wall Street guessed that unemployment could have spiked to 8 percent last month, given the mass layoffs announced by employers.
“It’s this paradigm: not as bad as it could’ve been is the new good,” said Art Hogan, chief market analyst at Jefferies & Company.
Analysts pointed to another positive signal: Congress appears to be making progress toward passing an economic stimulus package after Senate negotiators pared down a nearly $900 billion package to about $780 billion.
Investors snapped up distressed bank stocks like they were items on a bargain table and bid up basic-materials companies and shares of General Electric, Home Depot and Caterpillar. Retailers, whose shares have been hit by falling profits and reduced outlooks for 2009, rebounded on Friday.
Depressed bank stocks surged. Citigroup, Wells Fargo and JPMorgan Chase each posted double-digit gains, and Bank of America rose nearly 30 percent, rebounding to $6.13 a share in regular trading.
The broad rally lifted even companies that reported pessimistic earnings forecasts. In New York, shares of Toyota rose slightly to $69.38 after the automaker said it expected to post a loss for the fiscal year ending March 31, its first ever.
Shares of the Ford Motor Company and General Motors were flat.
Carmakers in the United States and abroad have been hammered by plummeting sales as financing becomes more difficult and consumers curtail their spending. This week, the Big Three automakers reported that new-vehicle sales fell 37 percent in January, their worst month in decades.
The price of Treasury debt fell as investors looked for higher returns on their money and stormed back into equities. The Treasury’s benchmark 10-year note fell 22/32, to 106 12/32, and the yield, which moves in the opposite direction from the price, was at 2.99 percent, up from 2.91 percent late Thursday, well above its December low of 2.06 percent.
Treasury yields plunged last year as losses mounted in the stock and bond markets and shaken investors rushed to find safe investments, but interest rates on short-term and long-term Treasury debt have crept higher in the last few weeks as the credit markets recover and on anticipation of huge government spending and borrowing.
Other barometers of the credit market were stable.
The London interbank offered rate, a measure of how much banks charge each other to borrow money, was little changed at 1.2 percent. The so-called TED spread, which increases as investors become more cautious about lending money, was 0.97 points, unchanged from Thursday.
“It doesn’t sound like a lot, but that’s the beginning of a very significant shift in investor appetites,” said Marc D. Stern, chief investment officer of the Bessemer Trust. “We’re seeing money flow into areas entailing more risk. There’s fear out there, but I think it’s increasingly being mitigated by the sense that there’s money to be made.”
http://www.nytimes.com/2009/02/07/business/07markets.html?ref=business
Daniel Acker/Bloomberg News
By JACK HEALY
Published: February 6, 2009
Not even the loss of 598,000 jobs could dampen Wall Street’s soaring mood on Friday. In a second day of gains, stock markets surged as investors waited for the federal government to detail its latest plans to shore up the banking system.
With Friday’s rally, the major indexes posted their first winning week in a month, and the technology-heavy Nasdaq composite gained enough to recoup its losses from last month, ending in positive territory for the year.
But some analysts questioned whether the Treasury Department’s expected announcement on Monday would be enough to meet investors’ expectations and whether stocks would fall back if the government’s plans turned out to be disappointing.
“It’s clear investors want to see something bold, something dramatic and something that is viable,” said Quincy Krosby, chief investment strategist at The Hartford. “We’ve had all these ad hoc, partial solutions. They don’t work, and then the market gets depressed. We’ll see if this is the one. We’ll see.”
On Friday, the Dow Jones industrial average gained 217.52 points, or 2.7 percent, to close at 8,280.59. The broader Standard & Poor’s 500-stock index rose 22.75 points, or 2.69 percent, to 868.60, and the technology-heavy Nasdaq composite index rose 45.47 points, or 2.94 percent, to 1,591.71.
Crude oil prices fell a dollar to settle at $40.17 a barrel in New York.
Analysts said they were cheered that financial markets seemed to shrug off a government report showing that unemployment climbed to 7.6 percent in January as the recession deepened, a sign the job market was still far from hitting bottom.
“It’s a good sign that we’re trading up in the face of bad news,” said Ed Hyland, global investment specialist at JPMorgan Private Bank. “That’s one of the signs that you look for in the bottoming of a bear market.”
Although the statistics were grim, the so-called whisper numbers representing the most pessimistic estimates on Wall Street guessed that unemployment could have spiked to 8 percent last month, given the mass layoffs announced by employers.
“It’s this paradigm: not as bad as it could’ve been is the new good,” said Art Hogan, chief market analyst at Jefferies & Company.
Analysts pointed to another positive signal: Congress appears to be making progress toward passing an economic stimulus package after Senate negotiators pared down a nearly $900 billion package to about $780 billion.
Investors snapped up distressed bank stocks like they were items on a bargain table and bid up basic-materials companies and shares of General Electric, Home Depot and Caterpillar. Retailers, whose shares have been hit by falling profits and reduced outlooks for 2009, rebounded on Friday.
Depressed bank stocks surged. Citigroup, Wells Fargo and JPMorgan Chase each posted double-digit gains, and Bank of America rose nearly 30 percent, rebounding to $6.13 a share in regular trading.
The broad rally lifted even companies that reported pessimistic earnings forecasts. In New York, shares of Toyota rose slightly to $69.38 after the automaker said it expected to post a loss for the fiscal year ending March 31, its first ever.
Shares of the Ford Motor Company and General Motors were flat.
Carmakers in the United States and abroad have been hammered by plummeting sales as financing becomes more difficult and consumers curtail their spending. This week, the Big Three automakers reported that new-vehicle sales fell 37 percent in January, their worst month in decades.
The price of Treasury debt fell as investors looked for higher returns on their money and stormed back into equities. The Treasury’s benchmark 10-year note fell 22/32, to 106 12/32, and the yield, which moves in the opposite direction from the price, was at 2.99 percent, up from 2.91 percent late Thursday, well above its December low of 2.06 percent.
Treasury yields plunged last year as losses mounted in the stock and bond markets and shaken investors rushed to find safe investments, but interest rates on short-term and long-term Treasury debt have crept higher in the last few weeks as the credit markets recover and on anticipation of huge government spending and borrowing.
Other barometers of the credit market were stable.
The London interbank offered rate, a measure of how much banks charge each other to borrow money, was little changed at 1.2 percent. The so-called TED spread, which increases as investors become more cautious about lending money, was 0.97 points, unchanged from Thursday.
“It doesn’t sound like a lot, but that’s the beginning of a very significant shift in investor appetites,” said Marc D. Stern, chief investment officer of the Bessemer Trust. “We’re seeing money flow into areas entailing more risk. There’s fear out there, but I think it’s increasingly being mitigated by the sense that there’s money to be made.”
http://www.nytimes.com/2009/02/07/business/07markets.html?ref=business
Pu'er tea Bubble Bursts
A County in China Sees Its Fortunes in Tea Leaves Until a Bubble Bursts
Shiho Fukada for The New York Times
A statue in Menghai County, China, where Pu’er tea is processed.
By ANDREW JACOBS
Published: January 16, 2009
MENGHAI, China — Saudi Arabia has its oil. South Africa has its diamonds. And here in China’s temperate southwest, prosperity has come from the scrubby green tea trees that blanket the mountains of fabled Menghai County.
The New York Times
Menghai is in a lush, mountainous tea-growing region.
Over the past decade, as the nation went wild for the region’s brand of tea, known as Pu’er, farmers bought minivans, manufacturers became millionaires and Chinese citizens plowed their savings into black bricks of compacted Pu’er.
But that was before the collapse of the tea market turned thousands of farmers and dealers into paupers and provided the nation with a very pungent lesson about gullibility, greed and the perils of the speculative bubble. “Most of us are ruined,” said Fu Wei, 43, one of the few tea traders to survive the implosion of the Pu’er market. “A lot of people behaved like idiots.”
A pleasantly aromatic beverage that promoters claim reduces cholesterol and cures hangovers, Pu’er became the darling of the sipping classes in recent years as this nation’s nouveaux riches embraced a distinctly Chinese way to display their wealth, and invest their savings. From 1999 to 2007, the price of Pu’er, a fermented brew invented by Tang Dynasty traders, increased tenfold, to a high of $150 a pound for the finest aged Pu’er, before tumbling far below its preboom levels.
For tens of thousands of wholesalers, farmers and other Chinese citizens who poured their money into compressed disks of tea leaves, the crash of the Pu’er market has been nothing short of disastrous. Many investors were led to believe that Pu’er prices could only go up.
“The saying around here was ‘It’s better to save Pu’er than to save money,’ ” said Wang Ruoyu, a longtime dealer in Xishuangbanna, the lush, tea-growing region of Yunnan Province that abuts the Burmese border. “Everyone thought they were going to get rich.”
Fermented tea was hardly the only caffeinated investment frenzy that swept China during its boom years. The urban middle class speculated mainly in stock and real estate, pushing prices to stratospheric levels before exports slumped, growth slowed and hundreds of billions of dollars in paper profits disappeared over the past year.
In the mountainous Pu’er belt of Yunnan, a cabal of manipulative buyers cornered the tea market and drove prices to record levels, giving some farmers and county traders a taste of the country’s bubble — and its bitter aftermath.
At least a third of the 3,000 tea manufacturers and merchants have called it quits in recent months. Farmers have begun replacing newly planted tea trees with more nourishing — and now, more lucrative — staples like corn and rice. Here in Menghai, the newly opened six-story emporium built to house hundreds of buyers and bundlers is a very lonely place.
“Very few of us survived,” said Mr. Fu, 43, among the few tea traders brave enough to open a business in the complex, which is nearly empty. He sat in the concrete hull of his shop, which he cannot afford to complete, and cobwebs covered his shelf of treasured Pu’er cakes.
All around him, sitting on unsold sacks of tea, were idled farmers and merchants who bided their time playing cards, chain smoking and, of course, drinking endless cups of tea.
The rise and fall of Pu’er partly reflects the lack of investment opportunities and government oversight in rural Yunnan, as well as the abundance of cash among connoisseurs in the big cities.
Wu Xiduan, secretary general of the China Tea Marketing Association, said many naïve investors had been taken in by the frenzied atmosphere, largely whipped up by out-of-town wholesalers who promoted Pu’er as drinkable gold and then bought up as much as they could, sometimes paying up to 30 percent more than in the previous year.
He said that as farmers planted more tea, production doubled from 2006 to 2007, to 100,000 tons. In the final free-for-all months, some producers shipped their tea to Yunnan from other provinces, labeled it Pu’er, and then enjoyed huge markups.
When values hit absurd levels last spring, the buyers unloaded their stocks and disappeared.
“The market was sensationalized on purpose,” Mr. Wu said, speaking in a telephone interview from Beijing.
With its near-mythic aura, Pu’er is well suited for hucksterism. A favorite of emperors and imbued with vague medicinal powers, Pu’er was supposedly invented by eighth-century horseback traders who compressed the tea leaves into cakes for easier transport. Unlike other types of tea, which are consumed not long after harvest, Pu’er tastes better with age. Prized vintages from the 19th century have sold for thousands of dollars a wedge.
Over the past decade, the industry has been shaped in ways that mirror the Western fetishization of wine. Sellers charge a premium for batches picked from older plants or, even better, from “wild tea” trees that have survived the deforestation that scars much of the region. Enthusiasts talk about oxidation levels, loose-leaf versus compacted and whether the tea was harvested in the spring or the summer. (Spring tea, many believe, is more flavorful.)
But with no empirical way to establish a tea’s provenance, many buyers are easily duped.
“If you study Pu’er your whole life, you still can’t recognize the differences in the teas,” said Mr. Wang, the tea buyer. “I tell people to just buy what tastes good and don’t worry about anything else.”
Among those most bruised by the crash are the farmers of Menghai County. Many had never experienced the kind of prosperity common in China’s cities. Villagers built two-story brick homes, equipped them with televisions and refrigerators and sent their children to schools in the district capital. Flush with cash, scores of elderly residents made their first trips to Beijing.
“Everyone was wearing designer labels,” said Zhelu, 22, a farmer who is a member of the region’s Hani minority and uses only one name. “A lot of people bought cars, but now we can’t afford gas so we just park them.”
Last week, dozens of vibrantly dressed women from Xinlu sat on the side of the highway hawking their excess tea. There were few takers. The going rate, about $3 a pound for medium-grade Pu’er, was less than a tenth of the peak price. The women said that during the boom years, tea traders from Guangdong Province would come to their village and buy up everyone’s harvest. But last year, they simply stopped showing up.
Back at Menghai’s forlorn “tea city,” Chen Li was surrounded by what he said was $580,000 worth of product he bought before the crash. As he served an amber-hued seven-year-old variety, he described the manic days before Pu’er went bust. Out-of-towners packed hotels and restaurants. Local banks, besieged by customers, were forced to halve the maximum withdrawal limit.
“People had to stand in line for four or five hours to get the money from the bank, and you could often see people quarreling,” he said. “Even pedicab drivers were carrying tea samples and looking for clients on the street.”
A trader who jumped into the business three years ago, Mr. Chen survives by offsetting his losses with profits from a restaurant his family owns in Alabama. He also happens to be one of the few optimists in town. Now that so many farmers have stopped picking tea, he is confident that prices will eventually rebound. As for the mounds of unsold tea that nearly enveloped him?
“The best thing about Pu’er,” he said with a showman’s smile, “is that the longer you keep it, the more valuable it gets.”
Shiho Fukada for The New York Times
A statue in Menghai County, China, where Pu’er tea is processed.
By ANDREW JACOBS
Published: January 16, 2009
MENGHAI, China — Saudi Arabia has its oil. South Africa has its diamonds. And here in China’s temperate southwest, prosperity has come from the scrubby green tea trees that blanket the mountains of fabled Menghai County.
The New York Times
Menghai is in a lush, mountainous tea-growing region.
Over the past decade, as the nation went wild for the region’s brand of tea, known as Pu’er, farmers bought minivans, manufacturers became millionaires and Chinese citizens plowed their savings into black bricks of compacted Pu’er.
But that was before the collapse of the tea market turned thousands of farmers and dealers into paupers and provided the nation with a very pungent lesson about gullibility, greed and the perils of the speculative bubble. “Most of us are ruined,” said Fu Wei, 43, one of the few tea traders to survive the implosion of the Pu’er market. “A lot of people behaved like idiots.”
A pleasantly aromatic beverage that promoters claim reduces cholesterol and cures hangovers, Pu’er became the darling of the sipping classes in recent years as this nation’s nouveaux riches embraced a distinctly Chinese way to display their wealth, and invest their savings. From 1999 to 2007, the price of Pu’er, a fermented brew invented by Tang Dynasty traders, increased tenfold, to a high of $150 a pound for the finest aged Pu’er, before tumbling far below its preboom levels.
For tens of thousands of wholesalers, farmers and other Chinese citizens who poured their money into compressed disks of tea leaves, the crash of the Pu’er market has been nothing short of disastrous. Many investors were led to believe that Pu’er prices could only go up.
“The saying around here was ‘It’s better to save Pu’er than to save money,’ ” said Wang Ruoyu, a longtime dealer in Xishuangbanna, the lush, tea-growing region of Yunnan Province that abuts the Burmese border. “Everyone thought they were going to get rich.”
Fermented tea was hardly the only caffeinated investment frenzy that swept China during its boom years. The urban middle class speculated mainly in stock and real estate, pushing prices to stratospheric levels before exports slumped, growth slowed and hundreds of billions of dollars in paper profits disappeared over the past year.
In the mountainous Pu’er belt of Yunnan, a cabal of manipulative buyers cornered the tea market and drove prices to record levels, giving some farmers and county traders a taste of the country’s bubble — and its bitter aftermath.
At least a third of the 3,000 tea manufacturers and merchants have called it quits in recent months. Farmers have begun replacing newly planted tea trees with more nourishing — and now, more lucrative — staples like corn and rice. Here in Menghai, the newly opened six-story emporium built to house hundreds of buyers and bundlers is a very lonely place.
“Very few of us survived,” said Mr. Fu, 43, among the few tea traders brave enough to open a business in the complex, which is nearly empty. He sat in the concrete hull of his shop, which he cannot afford to complete, and cobwebs covered his shelf of treasured Pu’er cakes.
All around him, sitting on unsold sacks of tea, were idled farmers and merchants who bided their time playing cards, chain smoking and, of course, drinking endless cups of tea.
The rise and fall of Pu’er partly reflects the lack of investment opportunities and government oversight in rural Yunnan, as well as the abundance of cash among connoisseurs in the big cities.
Wu Xiduan, secretary general of the China Tea Marketing Association, said many naïve investors had been taken in by the frenzied atmosphere, largely whipped up by out-of-town wholesalers who promoted Pu’er as drinkable gold and then bought up as much as they could, sometimes paying up to 30 percent more than in the previous year.
He said that as farmers planted more tea, production doubled from 2006 to 2007, to 100,000 tons. In the final free-for-all months, some producers shipped their tea to Yunnan from other provinces, labeled it Pu’er, and then enjoyed huge markups.
When values hit absurd levels last spring, the buyers unloaded their stocks and disappeared.
“The market was sensationalized on purpose,” Mr. Wu said, speaking in a telephone interview from Beijing.
With its near-mythic aura, Pu’er is well suited for hucksterism. A favorite of emperors and imbued with vague medicinal powers, Pu’er was supposedly invented by eighth-century horseback traders who compressed the tea leaves into cakes for easier transport. Unlike other types of tea, which are consumed not long after harvest, Pu’er tastes better with age. Prized vintages from the 19th century have sold for thousands of dollars a wedge.
Over the past decade, the industry has been shaped in ways that mirror the Western fetishization of wine. Sellers charge a premium for batches picked from older plants or, even better, from “wild tea” trees that have survived the deforestation that scars much of the region. Enthusiasts talk about oxidation levels, loose-leaf versus compacted and whether the tea was harvested in the spring or the summer. (Spring tea, many believe, is more flavorful.)
But with no empirical way to establish a tea’s provenance, many buyers are easily duped.
“If you study Pu’er your whole life, you still can’t recognize the differences in the teas,” said Mr. Wang, the tea buyer. “I tell people to just buy what tastes good and don’t worry about anything else.”
Among those most bruised by the crash are the farmers of Menghai County. Many had never experienced the kind of prosperity common in China’s cities. Villagers built two-story brick homes, equipped them with televisions and refrigerators and sent their children to schools in the district capital. Flush with cash, scores of elderly residents made their first trips to Beijing.
“Everyone was wearing designer labels,” said Zhelu, 22, a farmer who is a member of the region’s Hani minority and uses only one name. “A lot of people bought cars, but now we can’t afford gas so we just park them.”
Last week, dozens of vibrantly dressed women from Xinlu sat on the side of the highway hawking their excess tea. There were few takers. The going rate, about $3 a pound for medium-grade Pu’er, was less than a tenth of the peak price. The women said that during the boom years, tea traders from Guangdong Province would come to their village and buy up everyone’s harvest. But last year, they simply stopped showing up.
Back at Menghai’s forlorn “tea city,” Chen Li was surrounded by what he said was $580,000 worth of product he bought before the crash. As he served an amber-hued seven-year-old variety, he described the manic days before Pu’er went bust. Out-of-towners packed hotels and restaurants. Local banks, besieged by customers, were forced to halve the maximum withdrawal limit.
“People had to stand in line for four or five hours to get the money from the bank, and you could often see people quarreling,” he said. “Even pedicab drivers were carrying tea samples and looking for clients on the street.”
A trader who jumped into the business three years ago, Mr. Chen survives by offsetting his losses with profits from a restaurant his family owns in Alabama. He also happens to be one of the few optimists in town. Now that so many farmers have stopped picking tea, he is confident that prices will eventually rebound. As for the mounds of unsold tea that nearly enveloped him?
“The best thing about Pu’er,” he said with a showman’s smile, “is that the longer you keep it, the more valuable it gets.”
Credit Crisis -- The Essentials
Credit Crisis -- The Essentials
Latest Developments: Updated: Feb. 7, 2009
The Obama administration has settled on a plan to inject billions of dollars in fresh capital into banks and entice investors to purchase their most troubled assets. Feb. 6, 2009
Senate Democrats reached an agreement with Republican moderates on Friday to pare a huge economic recovery measure, clearing the way for approval of a package that President Obama said was urgently needed in light of mounting job losses. Feb. 6, 2009
With the economic downturn taking a toll on industries that employ more men, women are close to surpassing men on the nation's payrolls. Feb. 6, 2009
A plan backed by the Obama administration would help desperate homeowners stay in their houses while they renegotiate their debt. Feb. 6, 2009
Overview
By THE NEW YORK TIMES
In the fall of 2008, the credit crunch, which had emerged a little more than a year before, ballooned into Wall Street’s biggest crisis since the Great Depression. As hundreds of billions in mortgage-related investments went bad, mighty investment banks that once ruled high finance have crumbled or reinvented themselves as humdrum commercial banks. The nation’s largest insurance company and largest savings and loan both were seized by the government. The channels of credit, the arteries of the global financial system, have been constricted, cutting off crucial funds to consumers and businesses small and large.
In response, the federal government adopted a $700 billion bailout plan meant to reassure the markets and get credit flowing again. But the crisis began to spread to Europe and to emerging markets, with governments scrambling to prop up banks, broaden guarantees for deposits and agree on a coordinated response.
Origins
The roots of the credit crisis stretch back to another notable boom-and-bust: the tech bubble of the late 1990’s. When the stock market began a steep decline in 2000 and the nation slipped into recession the next year, the Federal Reserve sharply lowered interest rates to limit the economic damage.
Lower interest rates make mortgage payments cheaper, and demand for homes began to rise, sending prices up. In addition, millions of homeowners took advantage of the rate drop to refinance their existing mortgages. As the industry ramped up, the quality of the mortgages went down.
And turn sour they did, when home buyers had to leverage themselves to the hilt to make a purchase. Default and delinquency rates began to rise in 2006, but the pace of lending did not slow. Banks and other investors had devised a plethora of complex financial instruments to slice up and resell the mortgage-backed securities and to hedge against any risks — or so they thought.
The Crisis Takes Hold
The first shoe to drop was the collapse in June 2007 of two hedge funds owned by Bear Stearns that had invested heavily in the subprime market. As the year went on, more banks found that securities they thought were safe were tainted with what came to be called toxic mortgages. At the same time, the rising number of foreclosures helped speed the fall of housing prices, and the number of prime mortgages in default began to increase.
The Federal Reserve took unprecedented steps to bolster Wall Street. But still the losses mounted, and in March 2008 the Fed staved off a Bear Stearns bankruptcy by assuming $30 billion in liabilities and engineering a sale to JPMorgan Chase for a price that was less than the worth of Bear’s Manhattan skyscraper.
Sales, Failures and Seizures
In August, government officials began to become concerned as the stock prices of Fannie Mae and Freddie Mac, government-sponsored entities that were linchpins of the housing market, slid sharply. On Sept. 7, the Treasury Department announced it was taking them over.
Events began to move even faster. On Sept. 12, top government and finance officials gathered for talks to fend off bankruptcy for Lehman Brothers. The talks broke down, and the government refused to step in and salvage Lehman as it had for Bear. Lehman’s failure sent shock waves through the global banking system, as became increasingly clear in the following weeks. Merrill Lynch, which had not been previously thought to be in danger, sold itself to the Bank of America to avoid a similar fate.
On Sept. 16, American International Group, an insurance giant on the verge of failure because of its exposure to exotic securities known as credit default swaps, was bailed out by the Fed in an $85 billion deal. Stocks dropped anyway, falling nearly 500 points.
The Government’s Bailout Plan
The bleeding in the stock market stopped only after rumors trickled out about a huge bailout plan being readied by the federal government. On Sept. 18, Treasury Secretary Henry M. Paulson Jr. publicly announced a three-page, $700 billion proposal that would allow the government to buy toxic assets from the nation’s biggest banks, a move aimed at shoring up balance sheets and restoring confidence within the financial system.
Congress eventually amended the plan to add new structures for oversight, limits on executive pay and the option of the government taking a stake in the companies it bails out. Still, many Americans were angered by the idea of a proposal that provided billions of dollars in taxpayer money to Wall Street banks, which many believed had caused the crisis in the first place. Lawmakers with strong beliefs in free markets also opposed the bill, which they said amounted to socialism.
President Bush pleaded with lawmakers to pass the bill, but on Sept. 29, the House rejected the proposal, 228 to 205, with an insurgent group of Republicans leading the opposition. Stocks plunged, with the Standard & Poor’s 500-stock index losing nearly 9 percent, its worst day since Oct. 19, 1987.
Negotiations began anew on Capitol Hill. A series of tax breaks were added to the legislation, among other compromises and earmarks, and the Senate passed a revised version Oct. 1 by a large margin, 74 to 25. On Oct. 3, the House followed suit, by a vote of 263 to 171.
When the bill passed, it was still unclear how effective the bailout plan would be in resolving the credit crisis, although many analysts and economists believed it would offer at least a temporary aid. Federal officials promised increased regulation of the financial industry, whose structure was vastly different than it had been just weeks before.
The first reactions were not positive. Banks in England and Europe had invested heavily in mortgage-backed securities offered by Wall Street, and England had gone through a housing boom and bust of its own. Losses from those investments and the effect of the same tightening credit spiral being felt on Wall Street began to put a growing number of European institutions in danger. Over the weekend that followed the bailout’s passage, the German government moved to guarantee all private savings accounts in the country, and bailouts were arranged for a large German lender and a major European financial company.
And even as the United States began to execute its bailout plan, the tactics continued to shift, with the Treasury announcing that it would spend some of the funds to buy commercial paper, a vital form of short-term borrowing for businesses, in an effort to get credit flowing again.
Continued Volatility
When stock markets in the United States, Europe and Asia continued to plunge, the world’s leading central banks on Oct. 8 took the drastic step of a coordinated cut in interest rates, with the Federal Reserve cutting its two main rates by half a point.
And after a week in which stocks declined almost 20 percent on Wall Street, European and American officials announced coordinated actions that included taking equity stakes in major banks, including $250 billion in investments in the United States. The action prompted a worldwide stock rally, with the Dow rising 936 points, or 11 percent, on Oct. 13.
But as the prospect of a severe global recession became more evident, such gains were impossible to sustain. Just two days later, after Ben S. Bernanke, the Federal Reserve chairman, said there would be no quick economic turnaround even with the government’s intervention, the Dow plunged 733 points.
The credit markets, meanwhile, were slow to ease up, as banks used the injection of government funds to strengthen their balance sheets rather than lend. By late October, the Treasury had decided to use its $250 billion investment plan not only to increase banks’ capitalization but also to steer funds to stronger banks to purchase weaker ones, as in the acquisition of National City, a troubled Ohio-based bank, by PNC Financial of Pittsburgh.
The volatility in the stock markets was matched by upheaval in currency trading as investors sought shelter in the yen and the dollar, driving down the currencies of developing countries and even the euro and the British pound. The unwinding of the so-called yen-carry trade, in which investors borrowed money cheaply in Japan and invested it overseas, made Japanese goods more expensive on world markets and precipitated a steep plunge in Tokyo stock trading.
Oil-producing countries were hit by a sudden reversal of fortune, as the record oil prices reached over the summer were cut in half by October because of the world economic outlook. Even an agreement on a production cut by the Organization of the Petroleum Exporting Countries on Oct. 24 failed to stem the price decline.
Stock markets remained in upheaval, with the general downward trend punctuated by events like an 11-percent gain in the Dow on Oct. 28. A day later, the Fed cut its key lending rate again, to a mere 1 percent. In early November, the European Central Bank and the Bank of England followed with sharp reductions of their own.
Federal officials also moved to put together a plan to aid homeowners at risk of foreclosure by shouldering some losses for banks that agree to lower monthly payments. Detroit’s automakers, meanwhile, hard hit by the credit crisis, the growing economic slump and their belated transition away from big vehicles, turned to the government for aid of their own, possibly including help in engineering a merger of General Motors and Chrysler.
The leaders of 20 major countries, meanwhile, agreed to an emergency summit meeting in Washington on Nov. 14 and 15 to discuss coordinated action to deal with the credit crisis. The group agreed to work more closely, but put off thornier questions until next year, in an early challenge for the Obama administration.
The Crisis and the Campaign
The credit crisis emerged as the dominant issue of the presidential campaign in the last two months before the election. On Sept. 24, as polls showed Senator John McCain’s support dropping, he announced that he would suspend his campaign to try to help forge a deal on the bailout plan. The next day, both he and Senator Barack Obama met with Congressional leaders and President Bush at the White House, but their efforts failed to assure passage of the legislation, which went down to defeat in an initial vote on Sept. 29, a week before it ultimately passed.
The weakening stock market and growing credit crisis appeared to benefit Mr. Obama, who tied Mr. McCain to what he called the failed economic policies of President Bush and a Republican culture of deregulation of the financial markets. Polls showed that Mr. Obama’s election on Nov. 4 was partly the fruit of the economic crisis and the belief among many voters that he was more capable of handling the economy than Mr. McCain.
As president-elect, Mr. Obama made confronting the economic crisis the top priority of his transition. Just three days after his election, he convened a meeting of his top economic advisers, including the billionaire investor Warren Buffett; two former Treasury secretaries, Lawrence H. Summers and Robert E. Rubin; Paul A. Volcker, a former Federal Reserve chairman; and Eric E. Schmidt, the chief executive of Google. After their Nov. 7 meeting, he called quick passage of an economic stimulus package, saying it should be taken up by the the lame-duck Congressional session, and that if lawmakers failed to act, it would be his main economic goal after assuming office Jan. 20.
Mr. Obama also faced a host of other demands as president-elect, including calls to bail out the auto industry, particularly General Motors, which warned that it would run out of cash by mid-2009. And some economists and conservatives questioned whether, given the economic crisis, he could still meet some of his pledges from the campaign, like rapidly rolling back the Bush tax cuts, which some felt would hurt demand, and pushing ahead with his planned expansion of health care coverage, which could greatly increase a soaring deficit.
Deeper Problems, Dramatic Measures
With credit markets still locked up and investors getting worried about the big banks, Wall Street marked a grim milestone in late November when stock markets tumbled to their lowest levels in a decade. In all, the slide from the height of the stock markets had wiped out more than $8 trillion in wealth. The markets inched back in the weeks that followed as investors looked forward to a new administration and a huge economic stimulus package, but key indicators of the economy only got worse.
In December, an obscure group of economists confirmed what millions of Americans had suspected for months: the United States was in a recession. The economy had actually slipped into recession a year earlier, a committee of economists said, putting the current downturn on track to be the longest in a generation. Unemployment rose to its highest point in more than 15 years. Trade shrank. Home prices fell farther. As inflation virtually halted, economists began to worry about deflation, the vicious cycle of lower prices, lower wages and economic contraction.
Retailers suffered one of the worst holiday seasons in 30 years as worried consumers cut back, raising the likelihood that dozens more would join stores like Sharper Image, Circuit City and Linens 'n Things in bankruptcy.
On Dec. 16, the Federal Reserve entered uncharted waters of monetary policy by cutting its benchmark interest rate to nearly zero percent and declaring that it would deploy its balance sheet and essentially print money to fight the deepening recession and locked credit markets. Investors cheered, sending the Dow up more than 300 points, but many economists began to worry about the world's appetite for hundreds of billions of dollars in new Treasury debt.
Other countries followed the Fed with rate cuts of their own. Britain’s central bank a wave of refinancing that nevertheless skipped many homeowners.
But as Mr. Obama took office, investors were just as worried as ever, as evidenced by Wall Street’s worst Inauguration Day drop ever. The fourth-quarter corporate earnings season was marked by billion-dollar losses and uncertain outlooks for 2009. The economy showed no sign of turning around. And many lawmakers and analysts began to wonder whether the first $350 billion in bailout money had any effect at all. Banks that received bailout funds sat on their money, rather than lend it out to consumers or home buyers.
And bailout recipients such as Citigroup and Bank of America were forced to step forward for additional lifelines, raising one of the most uncomfortable questions a new president has ever had to address: Would the government nationalize the American banking system?
http://topics.nytimes.com/topics/reference/timestopics/subjects/c/credit_crisis/index.html
Latest Developments: Updated: Feb. 7, 2009
The Obama administration has settled on a plan to inject billions of dollars in fresh capital into banks and entice investors to purchase their most troubled assets. Feb. 6, 2009
Senate Democrats reached an agreement with Republican moderates on Friday to pare a huge economic recovery measure, clearing the way for approval of a package that President Obama said was urgently needed in light of mounting job losses. Feb. 6, 2009
With the economic downturn taking a toll on industries that employ more men, women are close to surpassing men on the nation's payrolls. Feb. 6, 2009
A plan backed by the Obama administration would help desperate homeowners stay in their houses while they renegotiate their debt. Feb. 6, 2009
Overview
By THE NEW YORK TIMES
In the fall of 2008, the credit crunch, which had emerged a little more than a year before, ballooned into Wall Street’s biggest crisis since the Great Depression. As hundreds of billions in mortgage-related investments went bad, mighty investment banks that once ruled high finance have crumbled or reinvented themselves as humdrum commercial banks. The nation’s largest insurance company and largest savings and loan both were seized by the government. The channels of credit, the arteries of the global financial system, have been constricted, cutting off crucial funds to consumers and businesses small and large.
In response, the federal government adopted a $700 billion bailout plan meant to reassure the markets and get credit flowing again. But the crisis began to spread to Europe and to emerging markets, with governments scrambling to prop up banks, broaden guarantees for deposits and agree on a coordinated response.
Origins
The roots of the credit crisis stretch back to another notable boom-and-bust: the tech bubble of the late 1990’s. When the stock market began a steep decline in 2000 and the nation slipped into recession the next year, the Federal Reserve sharply lowered interest rates to limit the economic damage.
Lower interest rates make mortgage payments cheaper, and demand for homes began to rise, sending prices up. In addition, millions of homeowners took advantage of the rate drop to refinance their existing mortgages. As the industry ramped up, the quality of the mortgages went down.
And turn sour they did, when home buyers had to leverage themselves to the hilt to make a purchase. Default and delinquency rates began to rise in 2006, but the pace of lending did not slow. Banks and other investors had devised a plethora of complex financial instruments to slice up and resell the mortgage-backed securities and to hedge against any risks — or so they thought.
The Crisis Takes Hold
The first shoe to drop was the collapse in June 2007 of two hedge funds owned by Bear Stearns that had invested heavily in the subprime market. As the year went on, more banks found that securities they thought were safe were tainted with what came to be called toxic mortgages. At the same time, the rising number of foreclosures helped speed the fall of housing prices, and the number of prime mortgages in default began to increase.
The Federal Reserve took unprecedented steps to bolster Wall Street. But still the losses mounted, and in March 2008 the Fed staved off a Bear Stearns bankruptcy by assuming $30 billion in liabilities and engineering a sale to JPMorgan Chase for a price that was less than the worth of Bear’s Manhattan skyscraper.
Sales, Failures and Seizures
In August, government officials began to become concerned as the stock prices of Fannie Mae and Freddie Mac, government-sponsored entities that were linchpins of the housing market, slid sharply. On Sept. 7, the Treasury Department announced it was taking them over.
Events began to move even faster. On Sept. 12, top government and finance officials gathered for talks to fend off bankruptcy for Lehman Brothers. The talks broke down, and the government refused to step in and salvage Lehman as it had for Bear. Lehman’s failure sent shock waves through the global banking system, as became increasingly clear in the following weeks. Merrill Lynch, which had not been previously thought to be in danger, sold itself to the Bank of America to avoid a similar fate.
On Sept. 16, American International Group, an insurance giant on the verge of failure because of its exposure to exotic securities known as credit default swaps, was bailed out by the Fed in an $85 billion deal. Stocks dropped anyway, falling nearly 500 points.
The Government’s Bailout Plan
The bleeding in the stock market stopped only after rumors trickled out about a huge bailout plan being readied by the federal government. On Sept. 18, Treasury Secretary Henry M. Paulson Jr. publicly announced a three-page, $700 billion proposal that would allow the government to buy toxic assets from the nation’s biggest banks, a move aimed at shoring up balance sheets and restoring confidence within the financial system.
Congress eventually amended the plan to add new structures for oversight, limits on executive pay and the option of the government taking a stake in the companies it bails out. Still, many Americans were angered by the idea of a proposal that provided billions of dollars in taxpayer money to Wall Street banks, which many believed had caused the crisis in the first place. Lawmakers with strong beliefs in free markets also opposed the bill, which they said amounted to socialism.
President Bush pleaded with lawmakers to pass the bill, but on Sept. 29, the House rejected the proposal, 228 to 205, with an insurgent group of Republicans leading the opposition. Stocks plunged, with the Standard & Poor’s 500-stock index losing nearly 9 percent, its worst day since Oct. 19, 1987.
Negotiations began anew on Capitol Hill. A series of tax breaks were added to the legislation, among other compromises and earmarks, and the Senate passed a revised version Oct. 1 by a large margin, 74 to 25. On Oct. 3, the House followed suit, by a vote of 263 to 171.
When the bill passed, it was still unclear how effective the bailout plan would be in resolving the credit crisis, although many analysts and economists believed it would offer at least a temporary aid. Federal officials promised increased regulation of the financial industry, whose structure was vastly different than it had been just weeks before.
The first reactions were not positive. Banks in England and Europe had invested heavily in mortgage-backed securities offered by Wall Street, and England had gone through a housing boom and bust of its own. Losses from those investments and the effect of the same tightening credit spiral being felt on Wall Street began to put a growing number of European institutions in danger. Over the weekend that followed the bailout’s passage, the German government moved to guarantee all private savings accounts in the country, and bailouts were arranged for a large German lender and a major European financial company.
And even as the United States began to execute its bailout plan, the tactics continued to shift, with the Treasury announcing that it would spend some of the funds to buy commercial paper, a vital form of short-term borrowing for businesses, in an effort to get credit flowing again.
Continued Volatility
When stock markets in the United States, Europe and Asia continued to plunge, the world’s leading central banks on Oct. 8 took the drastic step of a coordinated cut in interest rates, with the Federal Reserve cutting its two main rates by half a point.
And after a week in which stocks declined almost 20 percent on Wall Street, European and American officials announced coordinated actions that included taking equity stakes in major banks, including $250 billion in investments in the United States. The action prompted a worldwide stock rally, with the Dow rising 936 points, or 11 percent, on Oct. 13.
But as the prospect of a severe global recession became more evident, such gains were impossible to sustain. Just two days later, after Ben S. Bernanke, the Federal Reserve chairman, said there would be no quick economic turnaround even with the government’s intervention, the Dow plunged 733 points.
The credit markets, meanwhile, were slow to ease up, as banks used the injection of government funds to strengthen their balance sheets rather than lend. By late October, the Treasury had decided to use its $250 billion investment plan not only to increase banks’ capitalization but also to steer funds to stronger banks to purchase weaker ones, as in the acquisition of National City, a troubled Ohio-based bank, by PNC Financial of Pittsburgh.
The volatility in the stock markets was matched by upheaval in currency trading as investors sought shelter in the yen and the dollar, driving down the currencies of developing countries and even the euro and the British pound. The unwinding of the so-called yen-carry trade, in which investors borrowed money cheaply in Japan and invested it overseas, made Japanese goods more expensive on world markets and precipitated a steep plunge in Tokyo stock trading.
Oil-producing countries were hit by a sudden reversal of fortune, as the record oil prices reached over the summer were cut in half by October because of the world economic outlook. Even an agreement on a production cut by the Organization of the Petroleum Exporting Countries on Oct. 24 failed to stem the price decline.
Stock markets remained in upheaval, with the general downward trend punctuated by events like an 11-percent gain in the Dow on Oct. 28. A day later, the Fed cut its key lending rate again, to a mere 1 percent. In early November, the European Central Bank and the Bank of England followed with sharp reductions of their own.
Federal officials also moved to put together a plan to aid homeowners at risk of foreclosure by shouldering some losses for banks that agree to lower monthly payments. Detroit’s automakers, meanwhile, hard hit by the credit crisis, the growing economic slump and their belated transition away from big vehicles, turned to the government for aid of their own, possibly including help in engineering a merger of General Motors and Chrysler.
The leaders of 20 major countries, meanwhile, agreed to an emergency summit meeting in Washington on Nov. 14 and 15 to discuss coordinated action to deal with the credit crisis. The group agreed to work more closely, but put off thornier questions until next year, in an early challenge for the Obama administration.
The Crisis and the Campaign
The credit crisis emerged as the dominant issue of the presidential campaign in the last two months before the election. On Sept. 24, as polls showed Senator John McCain’s support dropping, he announced that he would suspend his campaign to try to help forge a deal on the bailout plan. The next day, both he and Senator Barack Obama met with Congressional leaders and President Bush at the White House, but their efforts failed to assure passage of the legislation, which went down to defeat in an initial vote on Sept. 29, a week before it ultimately passed.
The weakening stock market and growing credit crisis appeared to benefit Mr. Obama, who tied Mr. McCain to what he called the failed economic policies of President Bush and a Republican culture of deregulation of the financial markets. Polls showed that Mr. Obama’s election on Nov. 4 was partly the fruit of the economic crisis and the belief among many voters that he was more capable of handling the economy than Mr. McCain.
As president-elect, Mr. Obama made confronting the economic crisis the top priority of his transition. Just three days after his election, he convened a meeting of his top economic advisers, including the billionaire investor Warren Buffett; two former Treasury secretaries, Lawrence H. Summers and Robert E. Rubin; Paul A. Volcker, a former Federal Reserve chairman; and Eric E. Schmidt, the chief executive of Google. After their Nov. 7 meeting, he called quick passage of an economic stimulus package, saying it should be taken up by the the lame-duck Congressional session, and that if lawmakers failed to act, it would be his main economic goal after assuming office Jan. 20.
Mr. Obama also faced a host of other demands as president-elect, including calls to bail out the auto industry, particularly General Motors, which warned that it would run out of cash by mid-2009. And some economists and conservatives questioned whether, given the economic crisis, he could still meet some of his pledges from the campaign, like rapidly rolling back the Bush tax cuts, which some felt would hurt demand, and pushing ahead with his planned expansion of health care coverage, which could greatly increase a soaring deficit.
Deeper Problems, Dramatic Measures
With credit markets still locked up and investors getting worried about the big banks, Wall Street marked a grim milestone in late November when stock markets tumbled to their lowest levels in a decade. In all, the slide from the height of the stock markets had wiped out more than $8 trillion in wealth. The markets inched back in the weeks that followed as investors looked forward to a new administration and a huge economic stimulus package, but key indicators of the economy only got worse.
In December, an obscure group of economists confirmed what millions of Americans had suspected for months: the United States was in a recession. The economy had actually slipped into recession a year earlier, a committee of economists said, putting the current downturn on track to be the longest in a generation. Unemployment rose to its highest point in more than 15 years. Trade shrank. Home prices fell farther. As inflation virtually halted, economists began to worry about deflation, the vicious cycle of lower prices, lower wages and economic contraction.
Retailers suffered one of the worst holiday seasons in 30 years as worried consumers cut back, raising the likelihood that dozens more would join stores like Sharper Image, Circuit City and Linens 'n Things in bankruptcy.
On Dec. 16, the Federal Reserve entered uncharted waters of monetary policy by cutting its benchmark interest rate to nearly zero percent and declaring that it would deploy its balance sheet and essentially print money to fight the deepening recession and locked credit markets. Investors cheered, sending the Dow up more than 300 points, but many economists began to worry about the world's appetite for hundreds of billions of dollars in new Treasury debt.
Other countries followed the Fed with rate cuts of their own. Britain’s central bank a wave of refinancing that nevertheless skipped many homeowners.
But as Mr. Obama took office, investors were just as worried as ever, as evidenced by Wall Street’s worst Inauguration Day drop ever. The fourth-quarter corporate earnings season was marked by billion-dollar losses and uncertain outlooks for 2009. The economy showed no sign of turning around. And many lawmakers and analysts began to wonder whether the first $350 billion in bailout money had any effect at all. Banks that received bailout funds sat on their money, rather than lend it out to consumers or home buyers.
And bailout recipients such as Citigroup and Bank of America were forced to step forward for additional lifelines, raising one of the most uncomfortable questions a new president has ever had to address: Would the government nationalize the American banking system?
http://topics.nytimes.com/topics/reference/timestopics/subjects/c/credit_crisis/index.html
How to Value Stocks
How to Value Stocks
By Motley Fool Staff May 23, 2008 Comments (3)
So just how do you value the shares of a company? Should you look at earnings, revenues, cash flow, or something else entirely? Do you need to apply one or several valuation methods to discern what the fair price for a share of stock would be?
In this series of informative articles, Fools can learn many ways to value a company's shares, as well as helpful methods to determine whether or not a stock is undervalued right now.
How to Read a Balance Sheet
These articles explore the mechanics of a balance sheet and define the items that go into one. Readers will understand how to use this knowledge most effectively to pick stocks.
Introduction to Valuation Methods
How do you value the shares of a publicly traded company? This helpful series details the many and varied ways one can understand the fundamentals about a company's business to value its shares. You can learn to use earnings, revenues, cash flow, equity, dividend yield, and subscribers to figure out how much a company is worth.
Return on Equity
Disarmingly simple to calculate, return on equity (ROE) stands as a crucial weapon in the investor's arsenal if properly understood for what it is. ROE encompasses the three main "levers" by which management pokes and prods the corporation -- profitability, asset management, and financial leverage. This series walks you through how to use ROE to value stocks.
A Look at ROIC
(Return on Invested Capital)It isn't profit margins that determine a company's desirability; it's how much cash can be produced by each dollar of cash that is invested in a company by either its shareholders or lenders. Measuring the real cash-on-cash return is what return on invested capital (ROIC) seeks to accomplish. This series is an introduction to how ROIC is calculated.
Read/Post Comments (3) Recommend This Article (76)
http://www.fool.com/investing/beginning/how-to-value-stocks.aspx
By Motley Fool Staff May 23, 2008 Comments (3)
So just how do you value the shares of a company? Should you look at earnings, revenues, cash flow, or something else entirely? Do you need to apply one or several valuation methods to discern what the fair price for a share of stock would be?
In this series of informative articles, Fools can learn many ways to value a company's shares, as well as helpful methods to determine whether or not a stock is undervalued right now.
How to Read a Balance Sheet
These articles explore the mechanics of a balance sheet and define the items that go into one. Readers will understand how to use this knowledge most effectively to pick stocks.
Introduction to Valuation Methods
How do you value the shares of a publicly traded company? This helpful series details the many and varied ways one can understand the fundamentals about a company's business to value its shares. You can learn to use earnings, revenues, cash flow, equity, dividend yield, and subscribers to figure out how much a company is worth.
Return on Equity
Disarmingly simple to calculate, return on equity (ROE) stands as a crucial weapon in the investor's arsenal if properly understood for what it is. ROE encompasses the three main "levers" by which management pokes and prods the corporation -- profitability, asset management, and financial leverage. This series walks you through how to use ROE to value stocks.
A Look at ROIC
(Return on Invested Capital)It isn't profit margins that determine a company's desirability; it's how much cash can be produced by each dollar of cash that is invested in a company by either its shareholders or lenders. Measuring the real cash-on-cash return is what return on invested capital (ROIC) seeks to accomplish. This series is an introduction to how ROIC is calculated.
Read/Post Comments (3) Recommend This Article (76)
http://www.fool.com/investing/beginning/how-to-value-stocks.aspx
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