Offshore overnight
In one of the most dizzying half-hours in stock market history, the Dow Jones industrial average plunged almost 1000 points amid worries about European debt.
The Dow managed to recover two-thirds of its losses before the end of Thursday's Wall Street session, but all major indices closed sharply lower on a day that recalled the market turmoil of the 2008 financial crisis.
There were reports that a technical glitch hastened the selling.
Even so emotions ran high, with traders concerned that Greece's economic problems will hurt other European countries and ultimately, the US recovery.
Only 173 stocks rose on the New York Stock Exchange while 3002 fell.
Volume came to an extremely heavy 2.57 billion shares.
When markets settled, the Dow Jones Industrial Average had fallen 347.80 points, or 3.20 per cent, to 10,520.32 points.
The Standard & Poor's 500 index closed down 37.72 points, or 3.24 per cent, at 1128.15 points.
The Nasdaq composite closed down 82.65 points, or 3.44 per cent, at 2319.64 points.
European stock markets lost ground on Thursday as remarks on the Greek crisis by the head of the European Central Bank failed to reassure anxious investors.
ECB head Jean-Claude Trichet ruled out a Greek debt default and insisted that the problems besetting Greece were different from those faced by Spain and Portugal.
The London FTSE 100 closed down 80.94 points, or 1.52 per cent at 5260.99 points.
The German DAX 30 closed down 50.19 points, or 0.84 per cent, at 5908.26 points.
The French CAC 40 index closed down 79.92 points, or 2.20 per cent, at 3,556.11 points.
Commodities
Oil prices dropped to levels not seen since February on Thursday, as the stock market posted huge losses.
The benchmark crude oil for June delivery contract fell $US2.86 to settle at $US77.11 a barrel on the New York Mercantile Exchange.
Oil hit $US73.71 on February 16 and has lost almost $US10 a barrel since Monday.
Crude was lower at noon and the price slide picked up speed as the stock market tumbled and Investors flew to safer havens in gold and bonds.
Europe's debt problems got much of the blame for the drop in stocks and commodities. The ongoing crisis also has undermined the euro and strengthened the US dollar.
Commodities priced in US dollars, such as oil, become more expensive for investors holding euros as the US dollar rises.
In London, Brent crude gave up $US2.78 to settle at $US79.83 on the ICE futures exchange.
Gold for June delivery rose $US22.30 to settle at $US1197.30 an ounce on the Comex division of the New York Mercantile Exchange.
Silver for July delivery fell 1.9 US cents to settle at $US17.515 per fine ounce.
Copper for July delivery settled down 3.45 US cents at $US3.1170 per pound.
AAP, with Chris Zappone BusinessDay
http://www.smh.com.au/business/markets/stocks-set-to-plunge-after-us-freefall-20100507-uhc0.html
Friday, 7 May 2010
US stocks plummet, then recover some losses
US stocks plummet, then recover some losses
May 7, 2010 - 6:56AM
US stocks plunged 9 per cent in the last two hours of trading overnight before clawing back some of the losses as the escalating debt crisis in Europe stoked fears a new credit crunch was in the making.
The Dow suffered its biggest ever intraday point drop, which may have been caused by an erroneous trade entered by a person at a big Wall Street bank, multiple market sources said.
Indexes recovered some of their losses heading into the close but equities had erased much of their gains for the year to end down just over 3 percent, the biggest fall since April 2009.
"We did not know what a stock was worth today, and that is a serious problem," said Joe Saluzzi of Themis Trading in New Jersey.
Traders around the world were shaken from their beds and told to start trading amid the plunge as investors sought to stem losses in the rapid market sell-off.
Declining stocks outnumbered advancers on the New York Stock Exchange by more than 17 to 1. Volume soared to it highest level this year by far.
Nasdaq said it was investigating potentially erroneous transactions involving multiple securities executed between 2.40pm and 3pm New York time.
Investors had been on edge throughout the trading day after the European Central Bank did not discuss the outright purchase of European sovereign debt as some had hoped they would to calm markets, but gave verbal support instead to Greece's savings plan, disappointing some investors.
The Dow Jones industrial average dropped 347.80 points, or 3.20 per cent, to 10,520.32. The Standard & Poor's 500 Index fell 37.75 points, or 3.24 per cent, to 1128.15. The Nasdaq Composite Index lost 82.65 points, or 3.44 per cent, to 2319.64.
The sell-off was broad and deep with all 10 of the S&P 500 sectors falling 2 to 4 per cent. The financial sector was the worst hit with a fall of 4.1 per cent.
Selling hit some big cap stocks. Bank of America was the biggest percentage loser on the Dow, falling 7.1 per cent to $US16.28. All 30 component of the Dow closed lower.
An index known as Wall Street's fear gauge, the CBOE Volatility Index closed up more than 30 per cent at its highest close since May 2009. It had earlier risen as much as 50 per cent.
The mounting fears about a spreading debt crisis in Europe curbed the appetite for risk and put a report of weak US retail sales into sharper relief. Most top retail chains reported worse-than-expected same-store sales for April, sparking concerns about consumer spending, the main engine of the US economy.
That hit shares including warehouse club Costco Wholesale Corp, which fell 3.9 per cent to $US58.03, and apparel maker Gap Inc, which lost 7.2 per cent at $US22.91.
The head of the ECB, Jean-Claude Trichet, said on Thursday that Spain and Portugal were not in the same boat as Greece, but the risk premium that investors demand to hold Portuguese and Spanish government bonds flared to record highs.
Reuters
http://www.smh.com.au/business/markets/us-stocks-plummet-then-recover-some-losses-20100507-uh8l.html
May 7, 2010 - 6:56AM
US stocks plunged 9 per cent in the last two hours of trading overnight before clawing back some of the losses as the escalating debt crisis in Europe stoked fears a new credit crunch was in the making.
The Dow suffered its biggest ever intraday point drop, which may have been caused by an erroneous trade entered by a person at a big Wall Street bank, multiple market sources said.
Indexes recovered some of their losses heading into the close but equities had erased much of their gains for the year to end down just over 3 percent, the biggest fall since April 2009.
"We did not know what a stock was worth today, and that is a serious problem," said Joe Saluzzi of Themis Trading in New Jersey.
Traders around the world were shaken from their beds and told to start trading amid the plunge as investors sought to stem losses in the rapid market sell-off.
Declining stocks outnumbered advancers on the New York Stock Exchange by more than 17 to 1. Volume soared to it highest level this year by far.
Nasdaq said it was investigating potentially erroneous transactions involving multiple securities executed between 2.40pm and 3pm New York time.
Investors had been on edge throughout the trading day after the European Central Bank did not discuss the outright purchase of European sovereign debt as some had hoped they would to calm markets, but gave verbal support instead to Greece's savings plan, disappointing some investors.
The Dow Jones industrial average dropped 347.80 points, or 3.20 per cent, to 10,520.32. The Standard & Poor's 500 Index fell 37.75 points, or 3.24 per cent, to 1128.15. The Nasdaq Composite Index lost 82.65 points, or 3.44 per cent, to 2319.64.
The sell-off was broad and deep with all 10 of the S&P 500 sectors falling 2 to 4 per cent. The financial sector was the worst hit with a fall of 4.1 per cent.
Selling hit some big cap stocks. Bank of America was the biggest percentage loser on the Dow, falling 7.1 per cent to $US16.28. All 30 component of the Dow closed lower.
An index known as Wall Street's fear gauge, the CBOE Volatility Index closed up more than 30 per cent at its highest close since May 2009. It had earlier risen as much as 50 per cent.
The mounting fears about a spreading debt crisis in Europe curbed the appetite for risk and put a report of weak US retail sales into sharper relief. Most top retail chains reported worse-than-expected same-store sales for April, sparking concerns about consumer spending, the main engine of the US economy.
That hit shares including warehouse club Costco Wholesale Corp, which fell 3.9 per cent to $US58.03, and apparel maker Gap Inc, which lost 7.2 per cent at $US22.91.
The head of the ECB, Jean-Claude Trichet, said on Thursday that Spain and Portugal were not in the same boat as Greece, but the risk premium that investors demand to hold Portuguese and Spanish government bonds flared to record highs.
Reuters
http://www.smh.com.au/business/markets/us-stocks-plummet-then-recover-some-losses-20100507-uh8l.html
'Fat finger' trade forces US stocks dive
'Fat finger' trade forces US stocks dive
May 7, 2010 - 6:30AM
The biggest intraday point drop ever for the Dow Jones Industrial Average may have been caused by an erroneous trade entered by a person at a big Wall Street bank that in turn triggered widespread panic-selling.
At one stage, the Dow was down a whopping 998 points - or 9 per cent - before rebounding but it was still sharply lower for the session as continuing worries about Greece and the so-called sovereign debt contagion ate into investor confidence.
The so-called "fat finger" trade apparently involved an exchange-traded fund that holds shares of some of the biggest and most widely traded stocks, sources said. The trade apparently was put in on the Nasdaq Stock Market, sources said.
But US stocks still ended sharply lower, as continuing worries about the debt crisis in Greece ate into market confidence, prompting a wide-spread sell-off.
US stocks posted their largest percentage drop since April 2009, with all three major indexes ending down more than 3 per cent.
Indexes earlier in the afternoon had plunged even more steeply, before paring losses.
Observers questioned why Procter & Gamble’s stock tumbled precipitously - and some say that could have been behind the massive plunge.
Both Fox News and CNBC reported that a trading error involving P&G stock could have been responsible for part of a dip that dragged the Dow Jones Industrial Average within a hair’s breadth of a 1000-point drop.
The sudden sell-off saw investors desert stocks wholesale.
But P&G’s stock, which had been trading at $US62, suddenly began to crash, falling around 20 per cent at one point for no apparent reason.
The Dow Jones industrial average ended down 347.80 points, or 3.2 per cent, at 10,520.32. The Standard & Poor's 500 Index was off 37.75 points, or 3.24 per cent, at 1128.15. The Nasdaq Composite Index was down 82.65 points, or 3.44 per cent, at 2319.64.
Several sources said the speculation is that the trade was entered by someone at Citigroup. A Citigroup spokesman said it was investigating the rumour but that the bank currently had no evidence that an erroneous trade had been made.
http://www.smh.com.au/business/markets/fat-finger-trade-forces-us-stocks-dive-20100507-uh91.html
May 7, 2010 - 6:30AM
The biggest intraday point drop ever for the Dow Jones Industrial Average may have been caused by an erroneous trade entered by a person at a big Wall Street bank that in turn triggered widespread panic-selling.
At one stage, the Dow was down a whopping 998 points - or 9 per cent - before rebounding but it was still sharply lower for the session as continuing worries about Greece and the so-called sovereign debt contagion ate into investor confidence.
The so-called "fat finger" trade apparently involved an exchange-traded fund that holds shares of some of the biggest and most widely traded stocks, sources said. The trade apparently was put in on the Nasdaq Stock Market, sources said.
But US stocks still ended sharply lower, as continuing worries about the debt crisis in Greece ate into market confidence, prompting a wide-spread sell-off.
US stocks posted their largest percentage drop since April 2009, with all three major indexes ending down more than 3 per cent.
Indexes earlier in the afternoon had plunged even more steeply, before paring losses.
Observers questioned why Procter & Gamble’s stock tumbled precipitously - and some say that could have been behind the massive plunge.
Both Fox News and CNBC reported that a trading error involving P&G stock could have been responsible for part of a dip that dragged the Dow Jones Industrial Average within a hair’s breadth of a 1000-point drop.
The sudden sell-off saw investors desert stocks wholesale.
But P&G’s stock, which had been trading at $US62, suddenly began to crash, falling around 20 per cent at one point for no apparent reason.
The Dow Jones industrial average ended down 347.80 points, or 3.2 per cent, at 10,520.32. The Standard & Poor's 500 Index was off 37.75 points, or 3.24 per cent, at 1128.15. The Nasdaq Composite Index was down 82.65 points, or 3.44 per cent, at 2319.64.
Several sources said the speculation is that the trade was entered by someone at Citigroup. A Citigroup spokesman said it was investigating the rumour but that the bank currently had no evidence that an erroneous trade had been made.
http://www.smh.com.au/business/markets/fat-finger-trade-forces-us-stocks-dive-20100507-uh91.html
Understanding High Frequency Trading (HFT): Wall Street's Latest Scam
Wall St, New York, USA, 17 August 2009. The new cream-skimming trick in Wall Street's playbook is called High Frequency Trading, or HFT.
It works like this: big trading banks invest in super-computers that can process information at every faster speeds, splitting nano-seconds into smaller and smaller units. These super-computers can process instructions faster than regular computers, and much faster than humans. Next, they place these super-computers in the exchanges themselves. This gives direct access to the exchange, cutting out the latency of connections from remote locations. By trading faster than smaller investors, profits can be constantly churned.
http://bx.businessweek.com/investment-banking/view?url=http%3A%2F%2Fwww.economywatch.com%2Feconomy-business-and-finance-news%2Fhigh-frequency-trading-hft-wall-streets-latest-scam-18-08.html
It works like this: big trading banks invest in super-computers that can process information at every faster speeds, splitting nano-seconds into smaller and smaller units. These super-computers can process instructions faster than regular computers, and much faster than humans. Next, they place these super-computers in the exchanges themselves. This gives direct access to the exchange, cutting out the latency of connections from remote locations. By trading faster than smaller investors, profits can be constantly churned.
High Frequency Trading (HFT): Wall Street's Latest Scam
http://bx.businessweek.com/investment-banking/view?url=http%3A%2F%2Fwww.economywatch.com%2Feconomy-business-and-finance-news%2Fhigh-frequency-trading-hft-wall-streets-latest-scam-18-08.html
Thursday, 6 May 2010
A quick look at F & N (6.5.2010)
A quick look at F & N (6.5.2010)
http://spreadsheets.google.com/pub?key=tGDNB7GiYxmXFXxqJEqY49A&output=html
KUALA LUMPUR: MIDF Research has upgraded Fraser & Neave Holdings Bhd (F&N) to a buy with a higher target price of RM12 (from RM10.60) and said the company's 1HFY10 net profit grew 56.4% year-on-year to RM162.9 million, accounting for 69% and 60% of MIDF's and consensus full year numbers.
Excluding the RM10 million charges recognised in 2QFY09 due to the closure of glass plant in Petaling Jaya, MIDF estimated that the earnings growth was about +43% y-o-y.
The commendable results were mainly due to the higher soft drinks sales, better-than-expected overall profit margin and lower minority interest, it said.
"We are rolling over our valuation into FY11 numbers but with a lower implied PER of 14.5 times as compared with 16 times previously. As such, we are upgrading our call for F&N to buy with a higher target price of RM12 (previously RM10.60), based on 14.5 times FY11 EPS.
"We believe the downside is fairly limited, cushioned by the 5.1% net dividend yield," it said.
http://www.theedgemalaysia.com/business-news/165574-midf-research-raises-fan-target-price-to-rm12-.html
Related:
FY09/10 Half Year Results Briefing
7 May 2010
http://announcements.bursamalaysia.com/EDMS/edmsweb.nsf/all/1E4DE9BCD0574BC54825771B0032A5DB/$File/Half%20year%20results%207%20May%202010%20-%20FNHB%20(final).pdf
http://spreadsheets.google.com/pub?key=tGDNB7GiYxmXFXxqJEqY49A&output=html
| MIDF Research raises F&N target price to RM12 |  |  |  |
| Written by MIDF Research |
| Friday, 07 May 2010 09:38 |
KUALA LUMPUR: MIDF Research has upgraded Fraser & Neave Holdings Bhd (F&N) to a buy with a higher target price of RM12 (from RM10.60) and said the company's 1HFY10 net profit grew 56.4% year-on-year to RM162.9 million, accounting for 69% and 60% of MIDF's and consensus full year numbers.
Excluding the RM10 million charges recognised in 2QFY09 due to the closure of glass plant in Petaling Jaya, MIDF estimated that the earnings growth was about +43% y-o-y.
The commendable results were mainly due to the higher soft drinks sales, better-than-expected overall profit margin and lower minority interest, it said.
"We are rolling over our valuation into FY11 numbers but with a lower implied PER of 14.5 times as compared with 16 times previously. As such, we are upgrading our call for F&N to buy with a higher target price of RM12 (previously RM10.60), based on 14.5 times FY11 EPS.
"We believe the downside is fairly limited, cushioned by the 5.1% net dividend yield," it said.
http://www.theedgemalaysia.com/business-news/165574-midf-research-raises-fan-target-price-to-rm12-.html
Related:
FY09/10 Half Year Results Briefing
7 May 2010
http://announcements.bursamalaysia.com/EDMS/edmsweb.nsf/all/1E4DE9BCD0574BC54825771B0032A5DB/$File/Half%20year%20results%207%20May%202010%20-%20FNHB%20(final).pdf
News you could use: Stocks are Crashing.
Stocks are crashing, so you turn on the television to catch the latest market news.
The Stock Market is on sale. Huge banners reading: "SALE! 50% OFF!"
Then the anchorman announces brightly, "Stocks became more atractive yet again today, as the Stock Market dropped another 2.5% on heavy volume - the fourth day in a row that stocks have gotten cheaper. Tech investors fared even better, as leading companies like ABC lost nearly 5% on the day, making them even more affordable. That comes on top of the good news of the past year, in which stocks have already lost 50%, putting them at bargain levels not seen in years. And some prominent analysts are optimistic that prices may drop still further in the weeks and months to come."
Read more here:
"Falling stock prices would be fabulous news for any investor with a very long horizon."
The Stock Market is on sale. Huge banners reading: "SALE! 50% OFF!"
Then the anchorman announces brightly, "Stocks became more atractive yet again today, as the Stock Market dropped another 2.5% on heavy volume - the fourth day in a row that stocks have gotten cheaper. Tech investors fared even better, as leading companies like ABC lost nearly 5% on the day, making them even more affordable. That comes on top of the good news of the past year, in which stocks have already lost 50%, putting them at bargain levels not seen in years. And some prominent analysts are optimistic that prices may drop still further in the weeks and months to come."
Read more here:
News you could use
"Falling stock prices would be fabulous news for any investor with a very long horizon."
A quick look at Yee Lee (5.5.2010)
A quick look at Yee Lee (5.5.2010)
http://spreadsheets.google.com/pub?key=t110lp_dYviKliqIsIUOsLw&output=html
http://spreadsheets.google.com/pub?key=t110lp_dYviKliqIsIUOsLw&output=html
You Don’t Need Perfect Batting Average
You Don’t Need Perfect Batting Average: In order to significantly outperform the market, investors need not generate near perfect results.
Hammering home the idea that a few good stocks a decade can make an investment career, Lynch had this to say about Buffett:
"Warren states that twelve investments decisions in his forty year career have made all the difference."
Related:
Benjamin Graham
"To achieve satisfactory investment results is easier than most people realise; to achieve superior results is harder than it looks."
Hammering home the idea that a few good stocks a decade can make an investment career, Lynch had this to say about Buffett:
"Warren states that twelve investments decisions in his forty year career have made all the difference."
Related:
Lessons Learned From Investing Genius Peter Lynch
Benjamin Graham
"To achieve satisfactory investment results is easier than most people realise; to achieve superior results is harder than it looks."
A quick look at 3A Resources (5.5.2010)
A quick look at 3A Resources (5.5.2010)
http://spreadsheets.google.com/pub?key=tcpHxcoccuKHRFO8To1fewQ&output=html
http://spreadsheets.google.com/pub?key=tcpHxcoccuKHRFO8To1fewQ&output=html
Indonesia finance minister named a managing director of the World Bank Group
Indonesia finance minister quits
JAKARTA, May 5 — Indonesian Finance Minister Sri Mulyani Indrawati, a key reformer in Southeast Asia’s biggest economy, is leaving office in what could be a major blow to a crackdown on graft and tax evasion.
Indrawati, 47, was named a managing director of the World Bank Group, a sign of the growing clout of emerging economies. But the move also reflects increasing pressure on her at home from politicians opposed to her clean-up campaign.
“It’s a good move for her, but not good for Indonesia,” said Nick Cashmore, head of CLSA in Indonesia.
“She’s leaving earlier than expected, not doing the full five years. It shows that all these undercurrents are gathering pace.”
President Susilo Bambang Yudhoyono has congratulated Indrawati on the move, indicating he is willing to let her go, but investors will be watching who he appoints as her replacement for a signal on where the reform programme is headed.
Chief Economic Minister Hatta Rajasa will temporarily take charge of the finance portfolio until Indrawati’s replacement is appointed, presidential spokesman Julian Pasha told Reuters on Wednesday. Indrawati is to take up the World Bank post on June 1.
Rajasa is better known for his political skills, unlike Indrawati, who has a doctorate in economics and was an executive director at the International Monetary Fund before joining government.
Investors have been big buyers of Indonesian assets in the past 18 months, largely attracted by its pace of reform and liberalisation and the prospect of a surge in demand for its vast natural resources as the global economy recovers.
Local financial markets fell after the announcement of Indrawati’s move, but analysts said the weakening in the rupiah to 9,090 per dollar from 9,030 and a 3 percent drop in the stock market reflected broader investor concerns about emerging markets and risk related to the euro zone.
“The market will definitely react negatively to her departure,” said Destry Damayanti, an economist at Mandiri Sekuritas in Jakarta.
“Hopefully it is a short-lived one, but it all depends on who replaces her. That is the main concern for now, her replacement. What is needed is someone who is a professional, someone who is not politically biased.”
NO CENTRAL BANK GOVERNOR
Likely candidates include: Anggito Abimanyu, the head of the ministry’s Fiscal Policy Agency; Chatib Basri, an academic and special adviser to the finance minister; Raden Pardede, an economist and former head of the state asset management company; and Agus Martowardojo, president director of Indonesia’s largest lendor Bank Mandiri.
The change at the finance ministry comes at a time when the country is still without a governor for Bank Indonesia, the central bank. Darmin Nasution, the senior deputy governor, has been acting governor since mid-2009.
“With Sri Mulyani’s strong and credible reform credentials, her departure is likely to be seen negatively by the market, not to mention that Indonesia has not had a BI Governor in almost a year,” Citibank economist Johanna Chua said in a research note.
“Thus, vacancies in two of the most important economic posts will raise some concerns about the credibility of macro policies and the pace of reforms. Nonetheless, we think despite her departure, Indonesia’s track record of prudent fiscal policies will likely remain intact.”
Indrawati and Vice President Boediono, who was earlier the central bank governor, were regarded as Yudhoyono’s top reformers, taking a tough public stance against corrupt politicians, officials and businessmen in a country that ranks among the most corrupt in the world.
Their reforms, for example in the tax and customs offices, led to improvements in revenue collection but much more remains to be done to clean up the civil service, including the police and judiciary.
Indrawati raised salaries at revenue departments, fired corrupt officials, and introduced more transparent work practices including open plan offices and computerised records.
She has sent sent investigators from the anti-corruption commission on surprise raids, including to the customs department, to check whether officials had cash stashed away.
However, tax evasion remains a serious problem. In a country with a population of about 240 million, there are only 16 million registered tax payers.
JAKARTA, May 5 — Indonesian Finance Minister Sri Mulyani Indrawati, a key reformer in Southeast Asia’s biggest economy, is leaving office in what could be a major blow to a crackdown on graft and tax evasion.
Indrawati, 47, was named a managing director of the World Bank Group, a sign of the growing clout of emerging economies. But the move also reflects increasing pressure on her at home from politicians opposed to her clean-up campaign.
“It’s a good move for her, but not good for Indonesia,” said Nick Cashmore, head of CLSA in Indonesia.
“She’s leaving earlier than expected, not doing the full five years. It shows that all these undercurrents are gathering pace.”
President Susilo Bambang Yudhoyono has congratulated Indrawati on the move, indicating he is willing to let her go, but investors will be watching who he appoints as her replacement for a signal on where the reform programme is headed.
Chief Economic Minister Hatta Rajasa will temporarily take charge of the finance portfolio until Indrawati’s replacement is appointed, presidential spokesman Julian Pasha told Reuters on Wednesday. Indrawati is to take up the World Bank post on June 1.
Rajasa is better known for his political skills, unlike Indrawati, who has a doctorate in economics and was an executive director at the International Monetary Fund before joining government.
Investors have been big buyers of Indonesian assets in the past 18 months, largely attracted by its pace of reform and liberalisation and the prospect of a surge in demand for its vast natural resources as the global economy recovers.
Local financial markets fell after the announcement of Indrawati’s move, but analysts said the weakening in the rupiah to 9,090 per dollar from 9,030 and a 3 percent drop in the stock market reflected broader investor concerns about emerging markets and risk related to the euro zone.
“The market will definitely react negatively to her departure,” said Destry Damayanti, an economist at Mandiri Sekuritas in Jakarta.
“Hopefully it is a short-lived one, but it all depends on who replaces her. That is the main concern for now, her replacement. What is needed is someone who is a professional, someone who is not politically biased.”
NO CENTRAL BANK GOVERNOR
Likely candidates include: Anggito Abimanyu, the head of the ministry’s Fiscal Policy Agency; Chatib Basri, an academic and special adviser to the finance minister; Raden Pardede, an economist and former head of the state asset management company; and Agus Martowardojo, president director of Indonesia’s largest lendor Bank Mandiri.
The change at the finance ministry comes at a time when the country is still without a governor for Bank Indonesia, the central bank. Darmin Nasution, the senior deputy governor, has been acting governor since mid-2009.
“With Sri Mulyani’s strong and credible reform credentials, her departure is likely to be seen negatively by the market, not to mention that Indonesia has not had a BI Governor in almost a year,” Citibank economist Johanna Chua said in a research note.
“Thus, vacancies in two of the most important economic posts will raise some concerns about the credibility of macro policies and the pace of reforms. Nonetheless, we think despite her departure, Indonesia’s track record of prudent fiscal policies will likely remain intact.”
Indrawati and Vice President Boediono, who was earlier the central bank governor, were regarded as Yudhoyono’s top reformers, taking a tough public stance against corrupt politicians, officials and businessmen in a country that ranks among the most corrupt in the world.
Their reforms, for example in the tax and customs offices, led to improvements in revenue collection but much more remains to be done to clean up the civil service, including the police and judiciary.
Indrawati raised salaries at revenue departments, fired corrupt officials, and introduced more transparent work practices including open plan offices and computerised records.
She has sent sent investigators from the anti-corruption commission on surprise raids, including to the customs department, to check whether officials had cash stashed away.
However, tax evasion remains a serious problem. In a country with a population of about 240 million, there are only 16 million registered tax payers.
Wilmar: Asia’s next Cargill in China?
Wilmar: Asia’s next Cargill in China?
KUALA LUMPUR, May 3 — Singapore-listed Wilmar is shaping up to become the Asian version of agribusiness giant Cargill, with an expanding network of farms, food processors and shipping companies.
And it’s showing its muscle where it matters most — in China.
Wilmar’s integrated China operations account for 44.7 per cent of its US$10.3 billion (RM32.79 billion) assets, allowing it to weather recent volatile food prices and now a likely yuan policy change.
The company had the most to gain when Beijing in April slapped import curbs on Argentine soyoil — a commodity that competes with Wilmar’s domestically crushed oilseeds in China and imported palm oil.
This resilience has spurred investors to clamour for Wilmar to revisit a shelved IPO for its China business, possibly this year, four years after the powerful Kuok family merged Wilmar and Malaysia-based Kuok Group to create the US$32 billion firm.
“I believe they will revisit the IPO. It’s anybody’s guess when it happens, but Wilmar has rightly tapped into the fact that agriculture is super-hot in China,” said Michael Greenall, an analyst with BNP Paribas.
“With the super-charged growth in China’s economy, higher incomes and rural-to-urban migration contributing to stronger demand in all the sectors it’s invested in, Wilmar will act.”
Wilmar’s proposed China listing would have raised as much as US$3.5 billion on the Hong Kong stock exchange, at the lower end of the range of China-based food companies.
Wilmar, which has been dubbed by analysts as the “China proxy”, currently trades at 18 times its 2010 earnings, richer than rival China Agri Industries’ 14 times but cheaper than 22 times at China Foods.
Wilmar’s shares have gained more than 8 per cent this year, outperforming a 2.5 per cent rise on Singapore’s benchmark index, while other plantation firms such as Malaysia’s Sime Darby, IOI Group and Indonesia’s Astra Agro Lestari are trading lower.
Margins in Wilmar’s main business sectors — oilseeds and grains, palm and laurics and consumer food products — certainly have room to grow as the world’s most populous country and third-largest economy keeps to its target of 8 per cent annual growth.
YUAN BOOST?
An immediate margin boost may come from a yuan policy shift that could make imported soybeans cheaper for Wilmar — a top importer that dominates a fifth of China’s 94 million tonnes of soy processing capacity.
It also buffers Wilmar from negative margins arising from weak livestock feed demand for soymeal, as the food processor can channel soyoil into its cooking oil business that controls 45 per cent of China’s market.
In contrast, the influx of cheap soy imports may further weigh on smaller crushers that have tiny integrated downstream operations. Some have none to speak of.
Soyoil accounts for a quarter of China’s 6.4 million tonnes of edible oil imports, and Wilmar makes up the rest with palm oil from its estates in Southeast Asia, taking a larger market share than Sime and IOI.
Analysts say a Wilmar IPO will bring all these factors into play.
“Wilmar is one of its kind. They are not only selling to China but they also know the supply side (because) they have estates in Malaysian and Indonesia,” said Ivy Ng, an analyst with Malaysia’s CIMB Investment Bank.
“If you look at China Agri, they don’t have any estates, they buy palm, process and sell.”
Wilmar’s plantation landbank of 570,000 hectares is just 41 per cent planted, and analysts say the planting will rise in tandem with China’s growing appetite for edible oils and palm oil getting cheaper if Beijing lets its currency appreciate.
The scale of its operations — 130 processors and plants in China — allows Wilmar to manage the fluctuations in soybeans and palm oil and preserve earnings.
A 10 per cent change in the price of palm oil only affects the company’s 2010 earnings by 2 per cent, Goldman Sachs said in a note. Other analysts say such a swing affects earnings of purer plantation plays such as Astra Agro Lestari by 13 per cent.
TURNING TO RICE AND WHEAT
The major risk to Wilmar’s growth is that it will eventually come up against regulations stipulating that foreign firms cannot own new soy processors and those with a soy market share of more than 15 per cent will not get approval to expand capacity.
But analysts are still pricing in an upside to Wilmar’s share price, which surged 130 per cent in 2009. The Thomson Reuters I/B/E/S survey of 19 analysts has an average target price for Wilmar of S$7.80 (RM18.13) — a 13 per cent gain from its current level.
Much of the optimism lies with Wilmar’s aggressive move into China’s highly fragmented rice and wheat milling sectors, which are the world’s largest, and also produce noodles and pastries.
“They have been investing a lot in rice and flour in China, which can become very big,” Nomura analyst Tanuj Shori said.
“The biggest entry barrier is scale. The bigger you are, the easier it is to achieve higher profitability.”
China Agri leads with a 2 per cent market share in both sectors, but Wilmar can take top position as it can build mills at its existing manufacturing bases where it can share overheads and logistics, reducing costs and boosting margins, analysts say.
Backed by a balance sheet of US$23.5 billion, Wilmar can fund its rice and wheat expansion through its US$1 billion capex. China Agri plans to spend US$1.1 billion this year.
And Wilmar can channel wheat and rice products to its existing edible oil customers — noodle manufacturers Tingyi and Want Want.
“We believe Wilmar is capable of adding 4 million tonnes,” said Hwang-DBS analyst Ben Santoso, basing that on five 400,000 tonne capacity plants for both rice and flour.
“Compared to its last published capacity of 890,000 tonnes, it’s an extraordinary expansion.” — Reuters
KUALA LUMPUR, May 3 — Singapore-listed Wilmar is shaping up to become the Asian version of agribusiness giant Cargill, with an expanding network of farms, food processors and shipping companies.
And it’s showing its muscle where it matters most — in China.
Wilmar’s integrated China operations account for 44.7 per cent of its US$10.3 billion (RM32.79 billion) assets, allowing it to weather recent volatile food prices and now a likely yuan policy change.
The company had the most to gain when Beijing in April slapped import curbs on Argentine soyoil — a commodity that competes with Wilmar’s domestically crushed oilseeds in China and imported palm oil.
This resilience has spurred investors to clamour for Wilmar to revisit a shelved IPO for its China business, possibly this year, four years after the powerful Kuok family merged Wilmar and Malaysia-based Kuok Group to create the US$32 billion firm.
“I believe they will revisit the IPO. It’s anybody’s guess when it happens, but Wilmar has rightly tapped into the fact that agriculture is super-hot in China,” said Michael Greenall, an analyst with BNP Paribas.
“With the super-charged growth in China’s economy, higher incomes and rural-to-urban migration contributing to stronger demand in all the sectors it’s invested in, Wilmar will act.”
Wilmar’s proposed China listing would have raised as much as US$3.5 billion on the Hong Kong stock exchange, at the lower end of the range of China-based food companies.
Wilmar, which has been dubbed by analysts as the “China proxy”, currently trades at 18 times its 2010 earnings, richer than rival China Agri Industries’ 14 times but cheaper than 22 times at China Foods.
Wilmar’s shares have gained more than 8 per cent this year, outperforming a 2.5 per cent rise on Singapore’s benchmark index, while other plantation firms such as Malaysia’s Sime Darby, IOI Group and Indonesia’s Astra Agro Lestari are trading lower.
Margins in Wilmar’s main business sectors — oilseeds and grains, palm and laurics and consumer food products — certainly have room to grow as the world’s most populous country and third-largest economy keeps to its target of 8 per cent annual growth.
YUAN BOOST?
An immediate margin boost may come from a yuan policy shift that could make imported soybeans cheaper for Wilmar — a top importer that dominates a fifth of China’s 94 million tonnes of soy processing capacity.
It also buffers Wilmar from negative margins arising from weak livestock feed demand for soymeal, as the food processor can channel soyoil into its cooking oil business that controls 45 per cent of China’s market.
In contrast, the influx of cheap soy imports may further weigh on smaller crushers that have tiny integrated downstream operations. Some have none to speak of.
Soyoil accounts for a quarter of China’s 6.4 million tonnes of edible oil imports, and Wilmar makes up the rest with palm oil from its estates in Southeast Asia, taking a larger market share than Sime and IOI.
Analysts say a Wilmar IPO will bring all these factors into play.
“Wilmar is one of its kind. They are not only selling to China but they also know the supply side (because) they have estates in Malaysian and Indonesia,” said Ivy Ng, an analyst with Malaysia’s CIMB Investment Bank.
“If you look at China Agri, they don’t have any estates, they buy palm, process and sell.”
Wilmar’s plantation landbank of 570,000 hectares is just 41 per cent planted, and analysts say the planting will rise in tandem with China’s growing appetite for edible oils and palm oil getting cheaper if Beijing lets its currency appreciate.
The scale of its operations — 130 processors and plants in China — allows Wilmar to manage the fluctuations in soybeans and palm oil and preserve earnings.
A 10 per cent change in the price of palm oil only affects the company’s 2010 earnings by 2 per cent, Goldman Sachs said in a note. Other analysts say such a swing affects earnings of purer plantation plays such as Astra Agro Lestari by 13 per cent.
TURNING TO RICE AND WHEAT
The major risk to Wilmar’s growth is that it will eventually come up against regulations stipulating that foreign firms cannot own new soy processors and those with a soy market share of more than 15 per cent will not get approval to expand capacity.
But analysts are still pricing in an upside to Wilmar’s share price, which surged 130 per cent in 2009. The Thomson Reuters I/B/E/S survey of 19 analysts has an average target price for Wilmar of S$7.80 (RM18.13) — a 13 per cent gain from its current level.
Much of the optimism lies with Wilmar’s aggressive move into China’s highly fragmented rice and wheat milling sectors, which are the world’s largest, and also produce noodles and pastries.
“They have been investing a lot in rice and flour in China, which can become very big,” Nomura analyst Tanuj Shori said.
“The biggest entry barrier is scale. The bigger you are, the easier it is to achieve higher profitability.”
China Agri leads with a 2 per cent market share in both sectors, but Wilmar can take top position as it can build mills at its existing manufacturing bases where it can share overheads and logistics, reducing costs and boosting margins, analysts say.
Backed by a balance sheet of US$23.5 billion, Wilmar can fund its rice and wheat expansion through its US$1 billion capex. China Agri plans to spend US$1.1 billion this year.
And Wilmar can channel wheat and rice products to its existing edible oil customers — noodle manufacturers Tingyi and Want Want.
“We believe Wilmar is capable of adding 4 million tonnes,” said Hwang-DBS analyst Ben Santoso, basing that on five 400,000 tonne capacity plants for both rice and flour.
“Compared to its last published capacity of 890,000 tonnes, it’s an extraordinary expansion.” — Reuters
Inflation may check Singapore bank profits
Inflation may check Singapore bank profits
May 05, 2010
SINGAPORE, May 5 — Singapore banks are mostly set to post double-digit rises in quarterly earnings as loans grew and bad debts declined, but rising inflationary pressures are raising medium-term concerns that higher rates may squeeze margins.
The city-state’s banks are benefiting from a strong recovery in the domestic economy, which is projected to expand as much as 9 per cent this year, its best annual performance since 2004. Singapore’s economy shrank 2 per cent last year.
But inflation — which is expected to hit a two-year high in the fourth quarter — is also posing a risk to short-term interest rates, which hit rock bottom during the financial crisis as Asian economies battled the global financial crisis.
“The main risk is an interest rate risk — a sharp repricing of the short-end of the curve which would result in a narrowing of net interest margins,” said Peter Elston, a strategist at Aberdeen Asset Management Asia.
“That repricing of the short end would be the result of a sudden change in inflationary expectations,” said Elston. Aberdeen owns OCBC and UOB in Singapore and Public Bank in Malaysia.
Analysts are bullish about bank earnings as strong capital markets and higher trading in currencies and bonds have helped lift results at global banks that are recovering from the credit crisis.
“The market will be looking for evidence of revenue recovery and that the earnings uplift from lower loan impairments is now largely a foregone conclusion,” Natasha Midgley, an analyst at Standard Chartered, said in a note. “In light of recent newsflow, we see scope for revenue-driven earnings’ upgrades.”
NEW STRATEGY
Banks will also benefit from a strong recovery in investor demand for mutual funds and insurance products, boosting fee income.
Analysts are also looking for clues from DBS chief executive Piyush Gupta on the progress he has made in implementing his new strategy that aims to widen the Singapore bank’s reach in Asia.
JPMorgan’s Harsh Wardhan Modi said Gupta has made a promising start, but he would like to see more progress in improving DBS’s Hong Kong business and gaining bigger market share in the segment serving small-and-medium enterprises as Asian economies recover.
In Malaysia, where most analysts do not provide quarterly forecasts, Macquarie Research expects banks will report on average a 43 per cent growth in net profit for Jan-March from a year ago, amid lower bad-debt charges.
Maybank’s earnings are set to outperform this year after its last financial year was marred by big writeoffs linked to acquisitions in Indonesia and Pakistan. — Reuters
May 05, 2010
SINGAPORE, May 5 — Singapore banks are mostly set to post double-digit rises in quarterly earnings as loans grew and bad debts declined, but rising inflationary pressures are raising medium-term concerns that higher rates may squeeze margins.
The city-state’s banks are benefiting from a strong recovery in the domestic economy, which is projected to expand as much as 9 per cent this year, its best annual performance since 2004. Singapore’s economy shrank 2 per cent last year.
But inflation — which is expected to hit a two-year high in the fourth quarter — is also posing a risk to short-term interest rates, which hit rock bottom during the financial crisis as Asian economies battled the global financial crisis.
“The main risk is an interest rate risk — a sharp repricing of the short-end of the curve which would result in a narrowing of net interest margins,” said Peter Elston, a strategist at Aberdeen Asset Management Asia.
“That repricing of the short end would be the result of a sudden change in inflationary expectations,” said Elston. Aberdeen owns OCBC and UOB in Singapore and Public Bank in Malaysia.
Analysts are bullish about bank earnings as strong capital markets and higher trading in currencies and bonds have helped lift results at global banks that are recovering from the credit crisis.
“The market will be looking for evidence of revenue recovery and that the earnings uplift from lower loan impairments is now largely a foregone conclusion,” Natasha Midgley, an analyst at Standard Chartered, said in a note. “In light of recent newsflow, we see scope for revenue-driven earnings’ upgrades.”
NEW STRATEGY
Banks will also benefit from a strong recovery in investor demand for mutual funds and insurance products, boosting fee income.
Analysts are also looking for clues from DBS chief executive Piyush Gupta on the progress he has made in implementing his new strategy that aims to widen the Singapore bank’s reach in Asia.
JPMorgan’s Harsh Wardhan Modi said Gupta has made a promising start, but he would like to see more progress in improving DBS’s Hong Kong business and gaining bigger market share in the segment serving small-and-medium enterprises as Asian economies recover.
In Malaysia, where most analysts do not provide quarterly forecasts, Macquarie Research expects banks will report on average a 43 per cent growth in net profit for Jan-March from a year ago, amid lower bad-debt charges.
Maybank’s earnings are set to outperform this year after its last financial year was marred by big writeoffs linked to acquisitions in Indonesia and Pakistan. — Reuters
Wednesday, 5 May 2010
US stocks dive as Greek crisis takes toll
US stocks dive as Greek crisis takes toll
May 5, 2010 - 6:35AM
Overseas markets in crash mode
The DJIA was down by 2.0 per cent, and the S&P500 down by 2.4 per cent after heavy selling on
Investors dumped US stocks in Wall Street's worst session in three months on the fear that even with a bailout for Greece, Europe's debt crisis could spread to other weak euro zone countries.
The sell-off echoed a wave of fear that gripped financial markets as investors fretted the crisis in Europe could derail the global economic recovery. A gauge of investor fear jumped more than 18 per cent.
What you need to know
The SPI was off 104 points at 4630
The Australian dollar was buying 90.89 US cents
The Reuters Jefferies CRB index fell 2.34%
Big exporters to Europe including technology and industrial companies tumbled, with Hewlett-Packard off 3.9 per cent to $US50.64 and Caterpillar down 4.6 per cent to $US66.70.
"It looks like we've got some profit-taking on early-cycle exporters, companies with a big global presence over in Europe," said Fred Dickson, chief market strategist at D.A. Davidson & Co in Lake Oswego, Oregon.
Basic materials shares tumbled as the euro hit a one-year low against the US dollar. The Reuters-Jefferies commodity index and the S&P materials index both posted their worst day since early February, sliding 2.3 per cent and 3.5 per cent, respectively.
The Dow Jones industrial average lost 225.06 points, or 2.02 per cent, to 10,926.77. The Standard & Poor's 500 Index fell 28.66 points, or 2.38 per cent, to 1173.60. The Nasdaq Composite Index dropped 74.49 points, or 2.98 per cent, to 2424.25.
The CBOE Volatility Index, Wall Street's so-called fear gauge, finished up 18.1 per cent at 23.84 points, its highest closing level in three months.
Airline shares were hard hit, with the Arca Airline Index shedding 5.39 per cent after a recent run-up.
Despite the S&P 500's steep fall, the benchmark did not break major technical support except for a short-term bottom at 1181 on the S&P 500, the intraday low hit last week.
"For initial support most people are watching the 50-day moving average, which is at 1168," said John Schlitz, chief US market technician at Instinet in New York.
Encouraging US economic data on manufacturing and housing failed to provide a floor to the market. Reports showed new orders received by US factories in March unexpectedly increased and pending home sales rose to a five-month high.
On the upside, better-than expected earnings from drug makers Merck & Co Inc and Pfizer Inc boosted those shares by about 2 per cent each.
About 12 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, more than last year's estimated daily average of 9.65 billion.
Declining stocks outnumbered advancing ones on the NYSE by a ratio of about 6 to 1, while on the Nasdaq, about 29 stocks fell for every five that rose.
Reuters
http://www.smh.com.au/business/markets/us-stocks-dive-as-greek-crisis-takes-toll-20100505-u7o3.html
May 5, 2010 - 6:35AM
Overseas markets in crash mode
The DJIA was down by 2.0 per cent, and the S&P500 down by 2.4 per cent after heavy selling on
Investors dumped US stocks in Wall Street's worst session in three months on the fear that even with a bailout for Greece, Europe's debt crisis could spread to other weak euro zone countries.
The sell-off echoed a wave of fear that gripped financial markets as investors fretted the crisis in Europe could derail the global economic recovery. A gauge of investor fear jumped more than 18 per cent.
What you need to know
The SPI was off 104 points at 4630
The Australian dollar was buying 90.89 US cents
The Reuters Jefferies CRB index fell 2.34%
Big exporters to Europe including technology and industrial companies tumbled, with Hewlett-Packard off 3.9 per cent to $US50.64 and Caterpillar down 4.6 per cent to $US66.70.
"It looks like we've got some profit-taking on early-cycle exporters, companies with a big global presence over in Europe," said Fred Dickson, chief market strategist at D.A. Davidson & Co in Lake Oswego, Oregon.
Basic materials shares tumbled as the euro hit a one-year low against the US dollar. The Reuters-Jefferies commodity index and the S&P materials index both posted their worst day since early February, sliding 2.3 per cent and 3.5 per cent, respectively.
The Dow Jones industrial average lost 225.06 points, or 2.02 per cent, to 10,926.77. The Standard & Poor's 500 Index fell 28.66 points, or 2.38 per cent, to 1173.60. The Nasdaq Composite Index dropped 74.49 points, or 2.98 per cent, to 2424.25.
The CBOE Volatility Index, Wall Street's so-called fear gauge, finished up 18.1 per cent at 23.84 points, its highest closing level in three months.
Airline shares were hard hit, with the Arca Airline Index shedding 5.39 per cent after a recent run-up.
Despite the S&P 500's steep fall, the benchmark did not break major technical support except for a short-term bottom at 1181 on the S&P 500, the intraday low hit last week.
"For initial support most people are watching the 50-day moving average, which is at 1168," said John Schlitz, chief US market technician at Instinet in New York.
Encouraging US economic data on manufacturing and housing failed to provide a floor to the market. Reports showed new orders received by US factories in March unexpectedly increased and pending home sales rose to a five-month high.
On the upside, better-than expected earnings from drug makers Merck & Co Inc and Pfizer Inc boosted those shares by about 2 per cent each.
About 12 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, more than last year's estimated daily average of 9.65 billion.
Declining stocks outnumbered advancing ones on the NYSE by a ratio of about 6 to 1, while on the Nasdaq, about 29 stocks fell for every five that rose.
Reuters
http://www.smh.com.au/business/markets/us-stocks-dive-as-greek-crisis-takes-toll-20100505-u7o3.html
The depressing lessons of history, ignored: it is the market cannot be left to regulate itself.
The depressing lessons of history, ignored
MARK CROSBY
May 5, 2010
If experience has taught us anything, it is the market cannot be left to regulate itself.
ONE might think that as an economist I would have great faith in markets and market systems. But in my view the most important part of my training as an economist was aimed at working out under what conditions markets fail - and what to do about them.
Most economists are in agreement that markets, if left alone, will not work very well. Natural monopolies and pollution problems require regulation or perhaps public provision to help the market along. Most economists, myself included, regard financial markets as subject to important forms of market failure. Banks have a bad history of failing, and creating significant problems for the wider economy when they do, and so regulation to strengthen that industry is an important part of an economy's legal infrastructure.
Even in the US this view of the importance of regulating finance was dominant after the Great Depression. During the Depression thousands of banks failed, prolonging and deepening the downturn. While most of the world economy was in recovery from the Great Depression in 1933, the number of bank failures in the US that year extended it there for several more years.
Subsequent changes to financial systems meant that banks and finance were very stable until the deregulation in many economies that began in the early 1980s. Much of this deregulation was a good thing, promoting more competition for example, but in some cases deregulation went too far. The first post-Depression failure in the US occurred shortly after financial market deregulation had begun, with widespread problems and failures in the savings and loan sector.
There have also been problems with particular financial products related to deregulation. In the mid-1980s, many banks in Australia offered their customers ''cheap'' Swiss franc loans. At a time when interest rates in Australia were well into double digits, farmers and many small-business customers were encouraged to borrow overseas at lower rates in francs.
Economic theory would suggest that higher interest rates in Australia tend to predict a weakening Australian dollar. In this case theory was right and a halving of the value of the Aussie in the space of a year resulted in a doubling of the principal outstanding for borrowers in $A terms. This could have bankrupted many, but legal cases against the banks resulted in the banks wearing large losses, rather than their customers.
The key issue in the lawsuits was the fact customers were not properly advised of the risks involved in taking out a foreign-currency loan.
Around this time, Bankers Trust in the US was being sued by four of its customers over losses related to derivatives products.
One was Proctor&Gamble, whose chairman at the time said: ''There is a notion that end-users of derivatives must be held accountable for what they buy. We agree completely, but only if the terms and risks are fully and accurately disclosed. The issue here is Bankers Trust's selling practices.'' In the end all four suits against Bankers Trust were settled out of court and it was forced to write off more than $100 million in derivatives payments owed to it.
The Swiss loan episode and other problems in the mortgage market in Australia in the early 1990s led to stronger regulation regarding protection of customers purchasing financial products - borrowers are required to acknowledge that they understand the terms of their mortgages. As a result, mortgages in Australia tend to be quite simple and Australian banks have not been in difficulties such as those now faced by Goldman Sachs due to the creation and promotion of overly complicated derivative products.
The US has pursued further deregulation since the 1980s. Alan Greenspan as chairman of the Federal Reserve was famous for arguing that the market would resolve potential problems. In a sense Greenspan was right, but the cost of the market solution has been enormous. The lack of regulation in the US mortgage market led to foreclosures and the housing meltdown.
The lack of customer protections has enabled financial firms to sell more and more complicated products to customers. The sophistication of these products has caught out not only customers, but even many sophisticated financial market players, such as the ratings agencies.
Goldman Sachs has claimed to a US Senate committee that it is only a ''market maker'', creating liquidity and prices for financial market products. The problem with that is that Goldman is the creator of the product - it is very easy to make money if an institution that is trusted creates a dodgy product to sell to unsuspecting customers and sets up a side scheme that makes money when the dodgy product fails. This is not market-making but making a market that is designed to fail.
The US in particular needs much more consumer-friendly legislation. Proposed changes to Australian regulations in the area of superannuation that more strongly protect consumers are to be encouraged. It is all very well to make a market, but some markets ought not to be made in the first place.
Mark Crosby is associate professor and associate dean, international, at the Melbourne Business School, University of Melbourne.
Source: The Age
http://www.smh.com.au/business/the-depressing-lessons-of-history-ignored-20100504-u7b7.html
MARK CROSBY
May 5, 2010
If experience has taught us anything, it is the market cannot be left to regulate itself.
ONE might think that as an economist I would have great faith in markets and market systems. But in my view the most important part of my training as an economist was aimed at working out under what conditions markets fail - and what to do about them.
Most economists are in agreement that markets, if left alone, will not work very well. Natural monopolies and pollution problems require regulation or perhaps public provision to help the market along. Most economists, myself included, regard financial markets as subject to important forms of market failure. Banks have a bad history of failing, and creating significant problems for the wider economy when they do, and so regulation to strengthen that industry is an important part of an economy's legal infrastructure.
Even in the US this view of the importance of regulating finance was dominant after the Great Depression. During the Depression thousands of banks failed, prolonging and deepening the downturn. While most of the world economy was in recovery from the Great Depression in 1933, the number of bank failures in the US that year extended it there for several more years.
Subsequent changes to financial systems meant that banks and finance were very stable until the deregulation in many economies that began in the early 1980s. Much of this deregulation was a good thing, promoting more competition for example, but in some cases deregulation went too far. The first post-Depression failure in the US occurred shortly after financial market deregulation had begun, with widespread problems and failures in the savings and loan sector.
There have also been problems with particular financial products related to deregulation. In the mid-1980s, many banks in Australia offered their customers ''cheap'' Swiss franc loans. At a time when interest rates in Australia were well into double digits, farmers and many small-business customers were encouraged to borrow overseas at lower rates in francs.
Economic theory would suggest that higher interest rates in Australia tend to predict a weakening Australian dollar. In this case theory was right and a halving of the value of the Aussie in the space of a year resulted in a doubling of the principal outstanding for borrowers in $A terms. This could have bankrupted many, but legal cases against the banks resulted in the banks wearing large losses, rather than their customers.
The key issue in the lawsuits was the fact customers were not properly advised of the risks involved in taking out a foreign-currency loan.
Around this time, Bankers Trust in the US was being sued by four of its customers over losses related to derivatives products.
One was Proctor&Gamble, whose chairman at the time said: ''There is a notion that end-users of derivatives must be held accountable for what they buy. We agree completely, but only if the terms and risks are fully and accurately disclosed. The issue here is Bankers Trust's selling practices.'' In the end all four suits against Bankers Trust were settled out of court and it was forced to write off more than $100 million in derivatives payments owed to it.
The Swiss loan episode and other problems in the mortgage market in Australia in the early 1990s led to stronger regulation regarding protection of customers purchasing financial products - borrowers are required to acknowledge that they understand the terms of their mortgages. As a result, mortgages in Australia tend to be quite simple and Australian banks have not been in difficulties such as those now faced by Goldman Sachs due to the creation and promotion of overly complicated derivative products.
The US has pursued further deregulation since the 1980s. Alan Greenspan as chairman of the Federal Reserve was famous for arguing that the market would resolve potential problems. In a sense Greenspan was right, but the cost of the market solution has been enormous. The lack of regulation in the US mortgage market led to foreclosures and the housing meltdown.
The lack of customer protections has enabled financial firms to sell more and more complicated products to customers. The sophistication of these products has caught out not only customers, but even many sophisticated financial market players, such as the ratings agencies.
Goldman Sachs has claimed to a US Senate committee that it is only a ''market maker'', creating liquidity and prices for financial market products. The problem with that is that Goldman is the creator of the product - it is very easy to make money if an institution that is trusted creates a dodgy product to sell to unsuspecting customers and sets up a side scheme that makes money when the dodgy product fails. This is not market-making but making a market that is designed to fail.
The US in particular needs much more consumer-friendly legislation. Proposed changes to Australian regulations in the area of superannuation that more strongly protect consumers are to be encouraged. It is all very well to make a market, but some markets ought not to be made in the first place.
Mark Crosby is associate professor and associate dean, international, at the Melbourne Business School, University of Melbourne.
Source: The Age
http://www.smh.com.au/business/the-depressing-lessons-of-history-ignored-20100504-u7b7.html
The risks of buying into IPOs
Wednesday May 5, 2010
The risks of buying into IPOs
Personal Investing - By Ooi Kok Hwa
Investors may not necessarily make quick gains from share offerings
AS our economic outlook is getting more promising, there are growing interests from companies to list on Bursa Malaysia.
However, despite the higher number of initial public offerings (IPOs) and bigger, broad trading volumes lately, we noticed that the general public’s buying interest, especially of retail investors, in recent IPOs remains low.
If we were to scrutinise IPO prospectuses, we will seldom come across one that states the main purpose of the company seeking to go public is to share its profits with the investors. Instead, most companies would want the investors to share the risks involved in running the companies.
Hence, more often than not, the first few sections of the prospectuses will highlight all the risks involved in buying into those IPOs.
Investors need to understand that buying into IPOs does not necessarily mean investors can make quick gains. Sometimes, they may need to hold on to those investments for medium to long term.
There are two main types of share offerings:
Public issues involve companies issuing new shares to investors and the money raised will be channelled into reducing companies’ borrowings or used for future expansion.
As for offer for sale of stock, the shares that investors subscribe to are from existing company owners. Therefore, the money raised from the new investors will be channelled to existing owners, which also means the existing owners will have cashed out a portion of their investments in those companies.
The Table shows how the owners of a listed company, Company A, are able to get back their original investment through an IPO. The total shareholders’ funds of RM800mil represent the total original investment cost of Company A’s existing owners.
Let’s assume Company A offers 25% of its shares to the general public (line f) and the type of offering is offer for sale. If the IPO price to book value per share is about four times (line e), the offer for sale of 25% of its outstanding shares will allow the existing owners to recoup all of their initial capital invested in the company (Line g, h and i).
Even though this does not imply that Company A is not able to perform in future, investors need to understand that the remaining 75% of the shares or 1,534 million (0.75 x 2,045 million shares) owned by the existing owners are in effect “free” to them.
If Company A is fundamentally strong with good future prospects, then investors should not be too worried about the existing owners cashing out.
However, if the fundamentals of Company A start to deteriorate, investors need to be extra careful as the remaining 75% of the shares owned by the existing owners are now costless to them. Under such circumstances, every share the existing owners manage to sell into the market, regardless of the price, is extra gain for the owners.
Therefore, the existing owners can afford to sell the shares at any price they wish. However, if the price is below what retail investors had paid, it will mean a loss to them.
● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
http://biz.thestar.com.my/news/story.asp?file=/2010/5/5/business/6190058&sec=business
The risks of buying into IPOs
Personal Investing - By Ooi Kok Hwa
Investors may not necessarily make quick gains from share offerings
AS our economic outlook is getting more promising, there are growing interests from companies to list on Bursa Malaysia.
However, despite the higher number of initial public offerings (IPOs) and bigger, broad trading volumes lately, we noticed that the general public’s buying interest, especially of retail investors, in recent IPOs remains low.
If we were to scrutinise IPO prospectuses, we will seldom come across one that states the main purpose of the company seeking to go public is to share its profits with the investors. Instead, most companies would want the investors to share the risks involved in running the companies.
Hence, more often than not, the first few sections of the prospectuses will highlight all the risks involved in buying into those IPOs.
Investors need to understand that buying into IPOs does not necessarily mean investors can make quick gains. Sometimes, they may need to hold on to those investments for medium to long term.
There are two main types of share offerings:
- public issue and
- offer for sale.
Public issues involve companies issuing new shares to investors and the money raised will be channelled into reducing companies’ borrowings or used for future expansion.
As for offer for sale of stock, the shares that investors subscribe to are from existing company owners. Therefore, the money raised from the new investors will be channelled to existing owners, which also means the existing owners will have cashed out a portion of their investments in those companies.
Let’s assume Company A offers 25% of its shares to the general public (line f) and the type of offering is offer for sale. If the IPO price to book value per share is about four times (line e), the offer for sale of 25% of its outstanding shares will allow the existing owners to recoup all of their initial capital invested in the company (Line g, h and i).
Even though this does not imply that Company A is not able to perform in future, investors need to understand that the remaining 75% of the shares or 1,534 million (0.75 x 2,045 million shares) owned by the existing owners are in effect “free” to them.
If Company A is fundamentally strong with good future prospects, then investors should not be too worried about the existing owners cashing out.
However, if the fundamentals of Company A start to deteriorate, investors need to be extra careful as the remaining 75% of the shares owned by the existing owners are now costless to them. Under such circumstances, every share the existing owners manage to sell into the market, regardless of the price, is extra gain for the owners.
Therefore, the existing owners can afford to sell the shares at any price they wish. However, if the price is below what retail investors had paid, it will mean a loss to them.
● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
http://biz.thestar.com.my/news/story.asp?file=/2010/5/5/business/6190058&sec=business
Another View: Market Makers or Market Gamers?
INVESTMENT BANKING
Another View: Market Makers or Market Gamers?
May 4, 2010, 1:56 PM
Michael Stumm, the chief executive of Oanda, argues that weak requirements on transparency and disclosure have enabled a conflict-of-interest culture to dominate the financial industry.
Now that the securities fraud investigation of Goldman Sachs has reached the Justice Department, the financial industry has hit a new low in public opinion. It’s never been easier to hate the banks.
The leaders of governments around the world have taken note and are using this anger to court favor with voters. Naturally, they’re pushing for greater legislative control over the banking system.
It remains to be seen if Goldman Sachs did knowingly and fraudulently sell junk securities to unsuspecting clients, or if, as Goldman contends, the firm did nothing wrong in the mortgage-related deal and provided proper disclosure. I would argue that the final outcome of the Securities and Exchange Commission’s civil fraud suit matters little. The fact that an American regulator is questioning the trustworthiness of a sterling Wall Street firm means we’ve already crossed the Rubicon.
There is no doubt that serious changes are coming. They will be expensive and complicated, and they may not even fix the problems they’re intended to solve. And when these changes come, we in the industry will have no one to blame but ourselves. It may be trite to say this now, but it did not have to be this way.
Most of the world’s leading industrialized countries, with the notable exception of Canada and Japan, have come out in support of new fees and taxes for the banking system. One such idea is the “Tobin tax,” which would attach a fee to every financial transaction. Another is set out in a document recently leaked from the International Monetary Fund, which advocates for two new taxes on the banking system. Money from these would pay for a potential future economic crisis.
To our industry’s discredit, some of the largest names in the business have earned reputations for relying on questionable practices to make oversized profits. As President Obama warned in his recent address to Wall Street, if your business model is based on bilking your customers, it is time to change how you do business.
Transparency is the distinction between making a deal or a market, and gaming a deal or a market. A business that shows its customers how things work behind the scenes is able to prove its operations are honest. Transparency ultimately equates to fairness.
There are times when a market maker must take the opposite side of a client’s position to ensure an active market. However, this should be accomplished through technology that automates the process to ensure there is no conscious manipulation to bet against clients. If the firm offering the security holds a position — or if any affiliated entity holds a position — this information must be made available to the prospective buyer. Full disclosure with respect to the underlying securities must also be published.
In the case against Goldman Sachs, the S.E.C. contends the firm deliberately suppressed information about the quality of the underlying securities and did not disclose that the hedge fund firm Paulson & Company was taking a short position. If true, it means Wall Street’s most respected investment bank sold a product to clients at worse odds than if those clients walked into a casino and bet their money on a single spin of a roulette wheel — worse odds because casinos at least acknowledge to their patrons that the odds are stacked in favor of the house.
It is shameful that the investment industry has been reduced to deliberate attempts to prey on the vulnerabilities of investors in order to profit. Gone are the days, it seems, when banks and investment firms operated on principles of adding value to the investment process. Now these firms make the majority of their profits through proprietary, or “prop,” trading, in which in-house traders conduct transactions on behalf of the firm. This is an inherent conflict of interest that has propagated a new operating philosophy based on making money any way possible, even if it means taking advantage of your client.
The weak requirements around transparency and disclosure have enabled this new culture to dominate the industry. But I can tell you firsthand that fairness and profit need not be mutually exclusive. Oanda’s core value is transparency, so we publish open and short positions for each supported currency pair on our foreign-exchange trading platform. These are positions held by actual clients, and having access to this information makes it possible for traders to gauge real market sentiment.
In contrast, those who attempt to profit by gaming the market will obfuscate the truth — or purposely misrepresent facts — to prevent customers from making informed decisions. Too many market makers fall prey to this temptation. They increase their rate of “wins” over clients by hiding information or using technology in what I can only describe as a perverse way.
The investment industry continues to concentrate development efforts more on creating advantages for themselves, rather than committing to an efficient market. There is a technology “arms race” under way on Wall Street, as evidenced by the adoption of high-frequency trading that favors those with the largest information technology budgets. Deals with exchanges that allow for an early look at market prices or the creation of dark pools that hide the trading activity of the large firms have served only to put smaller traders at a disadvantage.
Transparency and fairness for all market participants? Hardly.
Such government moves as extracting new taxes and taking aim at executive bonuses, while undoubtedly proving immensely popular with a jaded public, detract from the main issue. Though it may sound naïve and even a bit simplistic, what is needed is greater transparency to force a change in the way business is conducted. While it is impossible to mandate “fairness” as a business requirement, transparency can be both legislated and measured, and this will do more to level the field than any other administrative requirement.
The current investigation against Goldman Sachs is still in the early stages, but the damage to the industry’s reputation has already taken its toll. I remain optimistic however, that the day is coming when transparency is seen by financial executives as a competitive goal to strive for, rather than something to avoid.
Michael Stumm is the chief executive of the Oanda Corporation, a provider of online foreign currency exchange trading and services and the source of the currency rates used by leading institutions including PricewaterhouseCoopers, Ernst & Young and KPMG.
http://dealbook.blogs.nytimes.com/2010/05/04/another-view-market-makers-or-market-gamers/?ref=business
Another View: Market Makers or Market Gamers?
May 4, 2010, 1:56 PM
Michael Stumm, the chief executive of Oanda, argues that weak requirements on transparency and disclosure have enabled a conflict-of-interest culture to dominate the financial industry.
Now that the securities fraud investigation of Goldman Sachs has reached the Justice Department, the financial industry has hit a new low in public opinion. It’s never been easier to hate the banks.
The leaders of governments around the world have taken note and are using this anger to court favor with voters. Naturally, they’re pushing for greater legislative control over the banking system.
It remains to be seen if Goldman Sachs did knowingly and fraudulently sell junk securities to unsuspecting clients, or if, as Goldman contends, the firm did nothing wrong in the mortgage-related deal and provided proper disclosure. I would argue that the final outcome of the Securities and Exchange Commission’s civil fraud suit matters little. The fact that an American regulator is questioning the trustworthiness of a sterling Wall Street firm means we’ve already crossed the Rubicon.
There is no doubt that serious changes are coming. They will be expensive and complicated, and they may not even fix the problems they’re intended to solve. And when these changes come, we in the industry will have no one to blame but ourselves. It may be trite to say this now, but it did not have to be this way.
Most of the world’s leading industrialized countries, with the notable exception of Canada and Japan, have come out in support of new fees and taxes for the banking system. One such idea is the “Tobin tax,” which would attach a fee to every financial transaction. Another is set out in a document recently leaked from the International Monetary Fund, which advocates for two new taxes on the banking system. Money from these would pay for a potential future economic crisis.
To our industry’s discredit, some of the largest names in the business have earned reputations for relying on questionable practices to make oversized profits. As President Obama warned in his recent address to Wall Street, if your business model is based on bilking your customers, it is time to change how you do business.
Transparency is the distinction between making a deal or a market, and gaming a deal or a market. A business that shows its customers how things work behind the scenes is able to prove its operations are honest. Transparency ultimately equates to fairness.
There are times when a market maker must take the opposite side of a client’s position to ensure an active market. However, this should be accomplished through technology that automates the process to ensure there is no conscious manipulation to bet against clients. If the firm offering the security holds a position — or if any affiliated entity holds a position — this information must be made available to the prospective buyer. Full disclosure with respect to the underlying securities must also be published.
In the case against Goldman Sachs, the S.E.C. contends the firm deliberately suppressed information about the quality of the underlying securities and did not disclose that the hedge fund firm Paulson & Company was taking a short position. If true, it means Wall Street’s most respected investment bank sold a product to clients at worse odds than if those clients walked into a casino and bet their money on a single spin of a roulette wheel — worse odds because casinos at least acknowledge to their patrons that the odds are stacked in favor of the house.
It is shameful that the investment industry has been reduced to deliberate attempts to prey on the vulnerabilities of investors in order to profit. Gone are the days, it seems, when banks and investment firms operated on principles of adding value to the investment process. Now these firms make the majority of their profits through proprietary, or “prop,” trading, in which in-house traders conduct transactions on behalf of the firm. This is an inherent conflict of interest that has propagated a new operating philosophy based on making money any way possible, even if it means taking advantage of your client.
The weak requirements around transparency and disclosure have enabled this new culture to dominate the industry. But I can tell you firsthand that fairness and profit need not be mutually exclusive. Oanda’s core value is transparency, so we publish open and short positions for each supported currency pair on our foreign-exchange trading platform. These are positions held by actual clients, and having access to this information makes it possible for traders to gauge real market sentiment.
In contrast, those who attempt to profit by gaming the market will obfuscate the truth — or purposely misrepresent facts — to prevent customers from making informed decisions. Too many market makers fall prey to this temptation. They increase their rate of “wins” over clients by hiding information or using technology in what I can only describe as a perverse way.
The investment industry continues to concentrate development efforts more on creating advantages for themselves, rather than committing to an efficient market. There is a technology “arms race” under way on Wall Street, as evidenced by the adoption of high-frequency trading that favors those with the largest information technology budgets. Deals with exchanges that allow for an early look at market prices or the creation of dark pools that hide the trading activity of the large firms have served only to put smaller traders at a disadvantage.
Transparency and fairness for all market participants? Hardly.
Such government moves as extracting new taxes and taking aim at executive bonuses, while undoubtedly proving immensely popular with a jaded public, detract from the main issue. Though it may sound naïve and even a bit simplistic, what is needed is greater transparency to force a change in the way business is conducted. While it is impossible to mandate “fairness” as a business requirement, transparency can be both legislated and measured, and this will do more to level the field than any other administrative requirement.
The current investigation against Goldman Sachs is still in the early stages, but the damage to the industry’s reputation has already taken its toll. I remain optimistic however, that the day is coming when transparency is seen by financial executives as a competitive goal to strive for, rather than something to avoid.
Michael Stumm is the chief executive of the Oanda Corporation, a provider of online foreign currency exchange trading and services and the source of the currency rates used by leading institutions including PricewaterhouseCoopers, Ernst & Young and KPMG.
http://dealbook.blogs.nytimes.com/2010/05/04/another-view-market-makers-or-market-gamers/?ref=business
Spanish stocks fall 5%
Spanish stocks fall 5%
May 5, 2010 - 7:54AM
AFP
The Spanish stock market plunged more than 5.0 per cent on Tuesday on investor fears the Greek debt crisis could spread to other eurozone countries - such as Spain - struggling to contain public deficits.
The benchmark Ibex-35 share index shed 5.41 per cent led by losses in banking stocks amid concern that Spain could be hit with fresh credit downgrades following a cut by Standard & Poor's last week.
The stock market was also hit by market rumours that Spain would ask for 280 billion euros ($A398.58 billion) in aid from the International Monetary Fund, which were dismissed by Spanish Prime Minister Jose Luis Rodriguez Zapatero as "absolute madness".
"These rumours are intolerable," he told a news conference in Brussels.
The head of the OECD meanwhile insisted that the situation in Greece was not comparable to that in Spain or another eurozone state seen as vulnerable, Portugal.
On Sunday, European nations endorsed an unprecedented 110-billion-euro ($A157.62 billion) bailout package to save Greece from bankruptcy and shore up the euro single currency.
Both the Moody's and Fitch agencies said Tuesday they were not reevaluating their rating for Spain, which is currently AAA, the highest possible rating.
"At the moment that I am speaking to you, the rating for Spain is still triple A, with a stable outlook," a Fitch spokeswoman told AFP in Paris.
S&P on Wednesday lowered Spain's long-term sovereign credit rating to AA from AA+ amid fears its recession could further weaken its public finances.
The move on Spain came one day after it cut Portugal's long-term credit rating by two notches and reduced Greece's rating the junk status, the first eurozone country rated less than investment grade since the launch of the euro.
Spain, which has the eurozone's third-largest deficit after Ireland and Greece, was last cut by S&P in January 2009 when its credit rating was lowered one notch from AAA.
Markets are especially sensitive to Spain's fiscal situation because of the size of its economy, which is Europe's fifth largest. European banks also have far greater exposure to Spanish debt than to Greek or Portuguese debt.
While Greece's public deficit was equal to 13.6 per cent of its gross domestic product (GDP) last year, in Spain it was 11.2 per cent.
Greece's debt-to-GDP ratio is 115.1 per cent, compared to just 53.2 per cent in Spain.
Spain will on Thursday issue five-year bonds with a proposed interest rate of 3.0 per cent that will expire on April 30, 2015. It hopes to raise at least two billion euros.
© 2010 AFP
http://news.smh.com.au/breaking-news-business/spanish-stocks-fall-5-20100505-u7t6.html
May 5, 2010 - 7:54AM
AFP
The Spanish stock market plunged more than 5.0 per cent on Tuesday on investor fears the Greek debt crisis could spread to other eurozone countries - such as Spain - struggling to contain public deficits.
The benchmark Ibex-35 share index shed 5.41 per cent led by losses in banking stocks amid concern that Spain could be hit with fresh credit downgrades following a cut by Standard & Poor's last week.
The stock market was also hit by market rumours that Spain would ask for 280 billion euros ($A398.58 billion) in aid from the International Monetary Fund, which were dismissed by Spanish Prime Minister Jose Luis Rodriguez Zapatero as "absolute madness".
"These rumours are intolerable," he told a news conference in Brussels.
The head of the OECD meanwhile insisted that the situation in Greece was not comparable to that in Spain or another eurozone state seen as vulnerable, Portugal.
On Sunday, European nations endorsed an unprecedented 110-billion-euro ($A157.62 billion) bailout package to save Greece from bankruptcy and shore up the euro single currency.
Both the Moody's and Fitch agencies said Tuesday they were not reevaluating their rating for Spain, which is currently AAA, the highest possible rating.
"At the moment that I am speaking to you, the rating for Spain is still triple A, with a stable outlook," a Fitch spokeswoman told AFP in Paris.
S&P on Wednesday lowered Spain's long-term sovereign credit rating to AA from AA+ amid fears its recession could further weaken its public finances.
The move on Spain came one day after it cut Portugal's long-term credit rating by two notches and reduced Greece's rating the junk status, the first eurozone country rated less than investment grade since the launch of the euro.
Spain, which has the eurozone's third-largest deficit after Ireland and Greece, was last cut by S&P in January 2009 when its credit rating was lowered one notch from AAA.
Markets are especially sensitive to Spain's fiscal situation because of the size of its economy, which is Europe's fifth largest. European banks also have far greater exposure to Spanish debt than to Greek or Portuguese debt.
While Greece's public deficit was equal to 13.6 per cent of its gross domestic product (GDP) last year, in Spain it was 11.2 per cent.
Greece's debt-to-GDP ratio is 115.1 per cent, compared to just 53.2 per cent in Spain.
Spain will on Thursday issue five-year bonds with a proposed interest rate of 3.0 per cent that will expire on April 30, 2015. It hopes to raise at least two billion euros.
© 2010 AFP
http://news.smh.com.au/breaking-news-business/spanish-stocks-fall-5-20100505-u7t6.html
Why you should worry about Greece
Why you should worry about Greece
GREG HOFFMAN
May 3, 2010
A glance at a chart of the All Ordinaries index since its March 2009 low gives a fair indication that worrying is not currently on the agenda for most investors. ''Stocks are going up,'' they might observe of the 50 per cent rise, ''now's the time to buy.''
''Stocks have already gone up,'' we might reply at The Intelligent Investor. And as our former editor James Carlisle likes to remind people, stocks have no mass and therefore cannot have ''momentum'' in the scientific sense.
Small, regular gains can be easily stripped away by downward ''gaps'' in price; such as that experienced last week by investors in popular biotech stock Biota, which saw its stock fall sharply after investors were disappointed with the latest royalty payments relating to its anti-flu drug, Relenza.
It's important that we don't become complacent following a year of strong gains. And our team has many things on its worry list. One of those is a potential sovereign debt explosion. We saw wobbles in Dubai late last year and Greece is currently making plenty of headlines.
''The Greek debt crisis is now morphing into something much broader,'' wrote Mohamed El-Erian in the Financial Times recently.
El-Erian is chief executive and co-chief investment officer of Pimco, the world's largest bond investor. That alone would make his thoughts on the topic noteworthy. The fact that he is also a former deputy director of the International Monetary Fund (and was put forward as a potential managing director of the IMF in 2004) provides even more weight to his insights.
''Markets are now catching up to the reality of over-burdened public finances in the aftermath of the global financial crisis,'' El-Erian explained.
''These developments are of particular concern to countries with elevated debt levels and challenging maturity profiles for this debt. Indeed, absent some dramatic change in sentiment, they will need to worry not only about their ability to mobilise new funding from the private sector at reasonable cost, but also about keeping their existing creditors on board.''
He then stated his view of the likely next steps in this messy situation: ''As a result, credit downgrades will multiply. And once a package is approved for Greece, there will be questions as to whether similar packages can be secured for other vulnerable countries in the European Union.''
Eye-catching insight
Those comments are usefully succinct but not particularly out of the mainstream. What caught my eye in the same piece was the following insight:
''...the disorderly market moves of recent days will place even greater pressure on the balance sheets of Greek banks and their counterparties in Europe and elsewhere. The already material risks of disorderly bank deposit outflows and capital flights are increasing. The bottom line is simple yet consequential: the Greek debt crisis has morphed into something that is potentially more sinister for Europe and the global economy. What started out as a public finance issue is quickly turning into a banking problem too; and, what started out as a Greek issue has become a full-blown crisis for Europe.''
With substantial action from the European Union and the IMF, these ructions may prove a sideshow for Australian investors (as did last year's concerns about Dubai). But if El-Erian's fears prove well founded, we may be at the start of something much more serious.
The key point is that there are substantial risks in the global economy and it is foolish to ignore them. And, on a related note, over the past two years we've seen just how vulnerable our Aussie dollar can be to a loss of confidence.
Perhaps we're now firmly locked in to a Chinese ''growth miracle'' and our currency has found a new, permanently high plateau. But if that's not the case, now might prove an advantageous time to add some well-chosen international exposure to your portfolio.
This article contains general investment advice only (under AFSL 282288).
Greg Hoffman is research director of The Intelligent Investor
http://www.smh.com.au/business/why-you-should-worry-about-greece-20100503-u2s0.html
GREG HOFFMAN
May 3, 2010
A glance at a chart of the All Ordinaries index since its March 2009 low gives a fair indication that worrying is not currently on the agenda for most investors. ''Stocks are going up,'' they might observe of the 50 per cent rise, ''now's the time to buy.''
''Stocks have already gone up,'' we might reply at The Intelligent Investor. And as our former editor James Carlisle likes to remind people, stocks have no mass and therefore cannot have ''momentum'' in the scientific sense.
Small, regular gains can be easily stripped away by downward ''gaps'' in price; such as that experienced last week by investors in popular biotech stock Biota, which saw its stock fall sharply after investors were disappointed with the latest royalty payments relating to its anti-flu drug, Relenza.
It's important that we don't become complacent following a year of strong gains. And our team has many things on its worry list. One of those is a potential sovereign debt explosion. We saw wobbles in Dubai late last year and Greece is currently making plenty of headlines.
''The Greek debt crisis is now morphing into something much broader,'' wrote Mohamed El-Erian in the Financial Times recently.
El-Erian is chief executive and co-chief investment officer of Pimco, the world's largest bond investor. That alone would make his thoughts on the topic noteworthy. The fact that he is also a former deputy director of the International Monetary Fund (and was put forward as a potential managing director of the IMF in 2004) provides even more weight to his insights.
''Markets are now catching up to the reality of over-burdened public finances in the aftermath of the global financial crisis,'' El-Erian explained.
''These developments are of particular concern to countries with elevated debt levels and challenging maturity profiles for this debt. Indeed, absent some dramatic change in sentiment, they will need to worry not only about their ability to mobilise new funding from the private sector at reasonable cost, but also about keeping their existing creditors on board.''
He then stated his view of the likely next steps in this messy situation: ''As a result, credit downgrades will multiply. And once a package is approved for Greece, there will be questions as to whether similar packages can be secured for other vulnerable countries in the European Union.''
Eye-catching insight
Those comments are usefully succinct but not particularly out of the mainstream. What caught my eye in the same piece was the following insight:
''...the disorderly market moves of recent days will place even greater pressure on the balance sheets of Greek banks and their counterparties in Europe and elsewhere. The already material risks of disorderly bank deposit outflows and capital flights are increasing. The bottom line is simple yet consequential: the Greek debt crisis has morphed into something that is potentially more sinister for Europe and the global economy. What started out as a public finance issue is quickly turning into a banking problem too; and, what started out as a Greek issue has become a full-blown crisis for Europe.''
With substantial action from the European Union and the IMF, these ructions may prove a sideshow for Australian investors (as did last year's concerns about Dubai). But if El-Erian's fears prove well founded, we may be at the start of something much more serious.
The key point is that there are substantial risks in the global economy and it is foolish to ignore them. And, on a related note, over the past two years we've seen just how vulnerable our Aussie dollar can be to a loss of confidence.
Perhaps we're now firmly locked in to a Chinese ''growth miracle'' and our currency has found a new, permanently high plateau. But if that's not the case, now might prove an advantageous time to add some well-chosen international exposure to your portfolio.
This article contains general investment advice only (under AFSL 282288).
Greg Hoffman is research director of The Intelligent Investor
http://www.smh.com.au/business/why-you-should-worry-about-greece-20100503-u2s0.html
Wishing Greece Had Never Joined the Euro
Wishing Greece Had Never Joined the Euro
By DAN BILEFSKY
Published: May 4, 2010
ATHENS — It was a harbinger of things to come.
In April 1997, the Greek finance minister, Yannos Papantoniou, implored his European Union counterparts at a meeting in Brussels to print some of the future euro notes in Greek letters. But then a stern-faced Theodore Waigel, the German finance chief, weighed in.
Latin alphabet only, Mr. Waigel insisted. Besides, Mr. Papantoniou recalls Mr. Waigel saying, poor small Greece was in no position to make demands: “He said to me, ‘What makes you think you will ever be in the euro?”’
But Mr. Papantoniou, a Socialist who shepherded Greece’s entry into the euro zone, had the last word. “I replied that Greece would be in the euro and that a poor villager in Greece would never embrace the currency unless it looked Greek,” he said during an interview. “It was a matter of pride. I fought hard, and placed a bet with him then and there — and I won.”
Now, as Greece’s E.U. partners prepare to bail out the debt-ridden country — the first time that the 16-nation euro zone has needed to rescue one of its members — many critics, inside and outside the country, are wishing that Mr. Papantoniou had lost his bet.
Amid growing concern that the contagion could spread to countries along Europe’s southern tier and even infect the Continent’s banking system, Greece’s turbulent recent history suggests that the crisis is, in many ways, a peculiarly Greek tragedy. It is rooted in an ancient country’s epic profligacy and abetted by the hubris of European leaders whose desire for integration at any cost compelled them to allow political considerations to trump economic realities.
By many accounts, Europe’s current plight can be traced to 1981, when Greece, still emerging from the aftermath of a military dictatorship, rushed to join the European Community, 14 years ahead of the much-richer Austria, Finland and Sweden, and five years before Spain and Portugal.
At the time, President François Mitterrand of France opposed the bloc’s southward expansion, fearing that countries like Greece were not ready.
But those in favor of expansion carried the day, arguing that linking countries like Greece, Spain and Portugal to European structures was the best means to modernize their fragile democracies.
For the classically educated leaders of Europe, who viewed Greece as the cradle of democracy, tying the poor Balkan country to the geographically distant western Europe was, Mr. Papantoniou recalled, a “historic mission.”
During Greece’s first decade of membership, Europe’s generous subsidies helped catapult Greece out of its backwardness. By 1997, when European leaders prepared to inaugurate the single currency, some were praising Greece, which was enjoying steady economic growth of more than 3 percent under the Socialist government of Prime Minister Costas Simitis.
For Athens, Mr. Papantoniou recalled, joining the euro was a matter of pride and necessity in that it would stabilize the country’s economy by fending off predatory speculators while allowing Greece access to credit at low interest rates as part of the wealthy euro club.
“Once we were in line to join the euro, we started to transform from a Third World country to one that aspired to look more like Switzerland,” he said.
But Greece’s path to the euro was far from assured. Public opinion in Germany, scarred by the memory of wartime hyperinflation, was wary of giving up the Deutsch mark, and the German government insisted on tough conditions for those countries wanting to join.
In December 1996, the currency’s rules were toughened in a so-called Stability and Growth Pact, intended to fine members that persistently failed to conform. The unspoken intention was to raise the barrier for southern European countries, which were seen as having looser, more inflationary, economic policies.
Germany wanted the fines to be automatic, but other countries, led by France, put the onus of enforcement on E.U. political leaders. (No country, Greece included, has ever been fined even though the rules have been routinely broken by most countries in the euro zone.)
The euro was fundamentally a political creation, which meant that the rules could be bent when deciding whom to admit. So, the 11 countries that locked their currencies in January 1999 — the first stage in the creation of the euro — included Italy, Belgium, Spain and Portugal. Greece failed to join because of budgetary and inflationary woes.
The European Central Bank expressed concern about Greek finances as early as 2000, noting in a report that Greece’s total debt was far above the prescribed limit.
Still, Athens kept up the pressure to be admitted in time for the debut of euro notes and coins in 2002. Mr. Simitis, who had taught at a German university in the 1970s, adroitly lobbied German politicians and bankers, mindful of their resistance.
In the end, Greece joined a year earlier than expected, in January 2001. It had — on paper — sharply reduced its budget deficit. And, while it had not reduced debt sufficiently, it invoked the precedents of other countries, like Italy and Belgium, which had been allowed in despite breaching the limit. The political imperative of keeping the euro on track silenced critics.
“At the time there were clear indications that the Greeks were forging the data, especially data on deficits to make their public finance situation look more benign than it really was,” said Jürgen von Hagen, professor of economics at the University of Bonn. “But European governments did not want to pay attention. For political reasons they wanted Greece in.”
The laxity with regard to fiscal discipline extended to the biggest players in the euro club. In 2002, 2003 and 2004 even Germany and France breached the deficit rules, setting a dangerous precedent.
By 2004, it was clear that Greek economic data was faulty. The Union opened its first investigation into Greece’s deficit. But despite evidence compiled by Eurostat, the Union’s official statistics agency, that Athens had fudged the numbers, Union officials made clear that ejecting Greece from the euro zone was not an option.
Mr. Papantoniou, the former finance minister, blamed the discrepancy in the deficit figures on a change of accounting rules under the center-right government of Kostas Karamanlis, who came to power after the Socialists were ousted in March 2004 and altered the way military spending had been calculated.
“It’s a big lie that the Greeks falsified the statistics,” Mr. Papantoniou said.
Tommaso Padoa-Schioppa, a former executive board member of the E.C.B., recalled that after questions arose about the accuracy of Greek financial data, many countries shot down attempts to strengthen Eurostat’s oversight powers
“The fact is that an opportunity was lost at the time,” he said. “Greece is to blame for its poor management of public finance and competitiveness. But the peers have to be blamed for not doing their job sufficiently well.”
But even apart from the statistics debacle, Greece’s economy soon lurched from bad to worse. Mr. Karamanlis went on a spending spree to prepare for the 2004 Summer Olympics; the increased security costs imposed after the September 11 terrorist attacks in 2001 pushed the price tag even higher.
More broadly, said Yiannis Stournaras, a leading economist and former advisor to the ruling Socialist Party, Greece treated entry into the euro as an invitation to party.
“Instead of cutting the deficit and liberalizing the economy,” he said, “the country continued to spend.”
Governments on the left and the right failed to overhaul a bloated public sector that critics have compared with a Soviet-style system.
“Now we are paying the price for the fact that we lived above our means, with amazing profligacy, and failed to reduce the role of the state,” Mr. Papantoniou said. “Some might say we should have done more.”
Additional reporting was contributed by Stelios Bouras in Athens, Stephen Castle in Brussels and Jack Ewing in Frankfurt.
http://www.nytimes.com/2010/05/05/business/global/05iht-greece.html?ref=business
By DAN BILEFSKY
Published: May 4, 2010
ATHENS — It was a harbinger of things to come.
In April 1997, the Greek finance minister, Yannos Papantoniou, implored his European Union counterparts at a meeting in Brussels to print some of the future euro notes in Greek letters. But then a stern-faced Theodore Waigel, the German finance chief, weighed in.
Latin alphabet only, Mr. Waigel insisted. Besides, Mr. Papantoniou recalls Mr. Waigel saying, poor small Greece was in no position to make demands: “He said to me, ‘What makes you think you will ever be in the euro?”’
But Mr. Papantoniou, a Socialist who shepherded Greece’s entry into the euro zone, had the last word. “I replied that Greece would be in the euro and that a poor villager in Greece would never embrace the currency unless it looked Greek,” he said during an interview. “It was a matter of pride. I fought hard, and placed a bet with him then and there — and I won.”
Now, as Greece’s E.U. partners prepare to bail out the debt-ridden country — the first time that the 16-nation euro zone has needed to rescue one of its members — many critics, inside and outside the country, are wishing that Mr. Papantoniou had lost his bet.
Amid growing concern that the contagion could spread to countries along Europe’s southern tier and even infect the Continent’s banking system, Greece’s turbulent recent history suggests that the crisis is, in many ways, a peculiarly Greek tragedy. It is rooted in an ancient country’s epic profligacy and abetted by the hubris of European leaders whose desire for integration at any cost compelled them to allow political considerations to trump economic realities.
By many accounts, Europe’s current plight can be traced to 1981, when Greece, still emerging from the aftermath of a military dictatorship, rushed to join the European Community, 14 years ahead of the much-richer Austria, Finland and Sweden, and five years before Spain and Portugal.
At the time, President François Mitterrand of France opposed the bloc’s southward expansion, fearing that countries like Greece were not ready.
But those in favor of expansion carried the day, arguing that linking countries like Greece, Spain and Portugal to European structures was the best means to modernize their fragile democracies.
For the classically educated leaders of Europe, who viewed Greece as the cradle of democracy, tying the poor Balkan country to the geographically distant western Europe was, Mr. Papantoniou recalled, a “historic mission.”
During Greece’s first decade of membership, Europe’s generous subsidies helped catapult Greece out of its backwardness. By 1997, when European leaders prepared to inaugurate the single currency, some were praising Greece, which was enjoying steady economic growth of more than 3 percent under the Socialist government of Prime Minister Costas Simitis.
For Athens, Mr. Papantoniou recalled, joining the euro was a matter of pride and necessity in that it would stabilize the country’s economy by fending off predatory speculators while allowing Greece access to credit at low interest rates as part of the wealthy euro club.
“Once we were in line to join the euro, we started to transform from a Third World country to one that aspired to look more like Switzerland,” he said.
But Greece’s path to the euro was far from assured. Public opinion in Germany, scarred by the memory of wartime hyperinflation, was wary of giving up the Deutsch mark, and the German government insisted on tough conditions for those countries wanting to join.
- Budget deficits were supposed to be less than 3 percent of gross domestic product,
- debt was not to exceed 60 percent of G.D.P. and
- inflation could not top 3 percent.
In December 1996, the currency’s rules were toughened in a so-called Stability and Growth Pact, intended to fine members that persistently failed to conform. The unspoken intention was to raise the barrier for southern European countries, which were seen as having looser, more inflationary, economic policies.
Germany wanted the fines to be automatic, but other countries, led by France, put the onus of enforcement on E.U. political leaders. (No country, Greece included, has ever been fined even though the rules have been routinely broken by most countries in the euro zone.)
The euro was fundamentally a political creation, which meant that the rules could be bent when deciding whom to admit. So, the 11 countries that locked their currencies in January 1999 — the first stage in the creation of the euro — included Italy, Belgium, Spain and Portugal. Greece failed to join because of budgetary and inflationary woes.
The European Central Bank expressed concern about Greek finances as early as 2000, noting in a report that Greece’s total debt was far above the prescribed limit.
Still, Athens kept up the pressure to be admitted in time for the debut of euro notes and coins in 2002. Mr. Simitis, who had taught at a German university in the 1970s, adroitly lobbied German politicians and bankers, mindful of their resistance.
In the end, Greece joined a year earlier than expected, in January 2001. It had — on paper — sharply reduced its budget deficit. And, while it had not reduced debt sufficiently, it invoked the precedents of other countries, like Italy and Belgium, which had been allowed in despite breaching the limit. The political imperative of keeping the euro on track silenced critics.
“At the time there were clear indications that the Greeks were forging the data, especially data on deficits to make their public finance situation look more benign than it really was,” said Jürgen von Hagen, professor of economics at the University of Bonn. “But European governments did not want to pay attention. For political reasons they wanted Greece in.”
The laxity with regard to fiscal discipline extended to the biggest players in the euro club. In 2002, 2003 and 2004 even Germany and France breached the deficit rules, setting a dangerous precedent.
By 2004, it was clear that Greek economic data was faulty. The Union opened its first investigation into Greece’s deficit. But despite evidence compiled by Eurostat, the Union’s official statistics agency, that Athens had fudged the numbers, Union officials made clear that ejecting Greece from the euro zone was not an option.
Mr. Papantoniou, the former finance minister, blamed the discrepancy in the deficit figures on a change of accounting rules under the center-right government of Kostas Karamanlis, who came to power after the Socialists were ousted in March 2004 and altered the way military spending had been calculated.
“It’s a big lie that the Greeks falsified the statistics,” Mr. Papantoniou said.
Tommaso Padoa-Schioppa, a former executive board member of the E.C.B., recalled that after questions arose about the accuracy of Greek financial data, many countries shot down attempts to strengthen Eurostat’s oversight powers
“The fact is that an opportunity was lost at the time,” he said. “Greece is to blame for its poor management of public finance and competitiveness. But the peers have to be blamed for not doing their job sufficiently well.”
But even apart from the statistics debacle, Greece’s economy soon lurched from bad to worse. Mr. Karamanlis went on a spending spree to prepare for the 2004 Summer Olympics; the increased security costs imposed after the September 11 terrorist attacks in 2001 pushed the price tag even higher.
More broadly, said Yiannis Stournaras, a leading economist and former advisor to the ruling Socialist Party, Greece treated entry into the euro as an invitation to party.
“Instead of cutting the deficit and liberalizing the economy,” he said, “the country continued to spend.”
Governments on the left and the right failed to overhaul a bloated public sector that critics have compared with a Soviet-style system.
“Now we are paying the price for the fact that we lived above our means, with amazing profligacy, and failed to reduce the role of the state,” Mr. Papantoniou said. “Some might say we should have done more.”
Additional reporting was contributed by Stelios Bouras in Athens, Stephen Castle in Brussels and Jack Ewing in Frankfurt.
http://www.nytimes.com/2010/05/05/business/global/05iht-greece.html?ref=business
Wall Street Indexes Close Down More Than 2%
May 4, 2010
Wall Street Indexes Close Down More Than 2%
By CHRISTINE HAUSER
The euro fell sharply on Tuesday and major indexes in Europe and the United States tumbled as the sovereign debt crisis in Europe and the risk of contagion continued to hang over the market.
At the close, the Dow Jones industrial average was 225.06 points, or 2.02 percent, lower at 10,926.77. The Standard & Poor’s 500-stock index fell 28.66 points, or 2.38 percent, to 1,173.60, while the Nasdaq dropped 74.49 points, or 2.98 percent, to 2,424.25.
The last time the Dow closed lower than that was on April 7, when it fell 72.47 points to 10,897.52
In London, the FTSE 100 declined 2.56 percent or 142.18 points, while the DAX in Frankfurt fell 160.06 points to 2.6 percent. In Paris, the CAC-40 dropped 139.17 points or 3.64 percent.
Although the 15 other countries in the euro zone and the International Monetary Fund had agreed to give Greece 110 billion euros ($144 billion) in aid over three years, traders said the austerity plan remained a hard sell. Hundreds of Greek demonstrators took to the streets on Tuesday to rail against tough new austerity measures aimed at helping the debt-ridden country stave off economic disaster.
One lingering question is whether the $144 billion is enough to settle Greece’s problems and keep them from spreading.
Investors were also watching Spain and Portugal, which have both had their debt downgraded in the last week. Greek government debt fell Tuesday, with the yield on the 10-year benchmark bond rising 36 basis points to 8.8 percent. In a sign of spreading nervousness, Portuguese and Spain bond yields also rose Tuesday.
“If there are real sovereign debt risks in Spain that is an issue for all multinational banks,” said Uri Landesman, president of Platinum Partners.
“What is going on in Europe is eventually going to result in defaults,” said Jeffrey Saut, the chief investment strategist for Raymond James. “They Band-Aided over the situation, and I think it is going to be very bad for the European banking complex.”
All of that has hurt the euro, which slipped 1.35 percent on Tuesday against dollar, trading at $1.3019. At one point, the euro slipped below $1.30.
“The impact of the potential contagion will continue to weigh on the euro in the near term,” Moody’s chief international economist, Ruth Stroppiana, said. “If the Greece situation does spread to Portugal, Spain and elsewhere in the euro zone then the euro would continue to fall. But the situation is still a very serious one.”
Kevin Chau, a currency analyst with IDEAglobal, said the euro could go to $1.25 by the end of the summer, and that others have put it at $1.20.
“I think that it will continue to go down because the problems over in Europe and the structure of the euro is being questioned,” Mr. Chau said. “The European members’ will to make the euro work and this whole unity work, is being questioned because of what is going on with Greece.”
The European debt crisis dominated Wall Street. Traders paid little attention to the latest economic reports, which both topped expectations. The Commerce Department said that orders to factories rose 1.3 percent in March, and the National Association of Realtors said its index of sales agreements for previously occupied homes rose a stronger-than-expected 5.3 percent in March.
M. Jake Dollarhide, chief executive of Longbow Asset Management, said the economy was one part of a “three-pronged monster” stirring up concern; the others being the unresolved Greek debt issue and a fear of terrorism that stemmed from the discovery over the weekend of a car bomb in Times Square.
“The third prong is just the fact that we have not achieved economic resurgence up to a level that makes people feel comfortable,” Mr. Dollarhide said. “There are a lot of pressures, a lot of anxiety.”
In the past several market days, the declines in the market have been followed by recoveries. But investors were not seeing today’s lows as buying opportunities so far, he said.
Traders have also moved beyond the earnings season,which was highlighted by a string of stronger-than-expected results.
“Earnings season is pretty much in the rearview mirror,” Mr. Saut said, “so you haven’t got that to prop you up right now.”
Materials, industrials and information technology sectors were lower. FMC Corp. ended down less than 1 percent at $64.02. The Dow Chemical Co. closed $2.11 lower at $29.31.
Financials were going to remain a concern, Mr. Landesman said, given the prospect of financial regulation and the accusations of trading fraud against Goldman Sachs. Shares of Goldman Sachs and most other major banks were lower Tuesday. Goldman Sachs closed 5 cents down at $149.45 and Citigroup Inc was lower by 15 cents at $4.26.
Information technology stocks were among the most actively traded. Intel ended 70 cents down at $22.56 and Microsoft was down 73 cents at $30.13.
“Technology has had such a big run-up with Apple, and Nasdaq is under a lot of pressure today,” Mr. Dollarhide said. Shares of Apple closed at $258.68, down 2.8 percent, while Dell Inc. was down 4.4 percent at $15.66 and Google ended 4.57 percent lower at $506.37.
And energy shares slipped. Britain’s main index was dragged down by BP and concerns about the costs that the oil company will face from the spill in the Gulf of Mexico. BP shares closed down 2.95 percent in London.
“The worst thing is when you can’t really size a risk or a problem,” Mr. Landesman said.
On Wall Street, Exxon Mobil declined $1.37 to $66.47 and Chevron dropped about $2.07 to $80.76.
Mr. Saut said that he believed Wall Street was predisposed to the declines.
“We are set up for a correction,” he said. “We are into a buying stampede.”
http://www.nytimes.com/2010/05/05/business/05markets.html?src=me&ref=business
Wall Street Indexes Close Down More Than 2%
By CHRISTINE HAUSER
The euro fell sharply on Tuesday and major indexes in Europe and the United States tumbled as the sovereign debt crisis in Europe and the risk of contagion continued to hang over the market.
At the close, the Dow Jones industrial average was 225.06 points, or 2.02 percent, lower at 10,926.77. The Standard & Poor’s 500-stock index fell 28.66 points, or 2.38 percent, to 1,173.60, while the Nasdaq dropped 74.49 points, or 2.98 percent, to 2,424.25.
The last time the Dow closed lower than that was on April 7, when it fell 72.47 points to 10,897.52
In London, the FTSE 100 declined 2.56 percent or 142.18 points, while the DAX in Frankfurt fell 160.06 points to 2.6 percent. In Paris, the CAC-40 dropped 139.17 points or 3.64 percent.
Although the 15 other countries in the euro zone and the International Monetary Fund had agreed to give Greece 110 billion euros ($144 billion) in aid over three years, traders said the austerity plan remained a hard sell. Hundreds of Greek demonstrators took to the streets on Tuesday to rail against tough new austerity measures aimed at helping the debt-ridden country stave off economic disaster.
One lingering question is whether the $144 billion is enough to settle Greece’s problems and keep them from spreading.
Investors were also watching Spain and Portugal, which have both had their debt downgraded in the last week. Greek government debt fell Tuesday, with the yield on the 10-year benchmark bond rising 36 basis points to 8.8 percent. In a sign of spreading nervousness, Portuguese and Spain bond yields also rose Tuesday.
“If there are real sovereign debt risks in Spain that is an issue for all multinational banks,” said Uri Landesman, president of Platinum Partners.
“What is going on in Europe is eventually going to result in defaults,” said Jeffrey Saut, the chief investment strategist for Raymond James. “They Band-Aided over the situation, and I think it is going to be very bad for the European banking complex.”
All of that has hurt the euro, which slipped 1.35 percent on Tuesday against dollar, trading at $1.3019. At one point, the euro slipped below $1.30.
“The impact of the potential contagion will continue to weigh on the euro in the near term,” Moody’s chief international economist, Ruth Stroppiana, said. “If the Greece situation does spread to Portugal, Spain and elsewhere in the euro zone then the euro would continue to fall. But the situation is still a very serious one.”
“I think that it will continue to go down because the problems over in Europe and the structure of the euro is being questioned,” Mr. Chau said. “The European members’ will to make the euro work and this whole unity work, is being questioned because of what is going on with Greece.”
The European debt crisis dominated Wall Street. Traders paid little attention to the latest economic reports, which both topped expectations. The Commerce Department said that orders to factories rose 1.3 percent in March, and the National Association of Realtors said its index of sales agreements for previously occupied homes rose a stronger-than-expected 5.3 percent in March.
M. Jake Dollarhide, chief executive of Longbow Asset Management, said the economy was one part of a “three-pronged monster” stirring up concern; the others being the unresolved Greek debt issue and a fear of terrorism that stemmed from the discovery over the weekend of a car bomb in Times Square.
“The third prong is just the fact that we have not achieved economic resurgence up to a level that makes people feel comfortable,” Mr. Dollarhide said. “There are a lot of pressures, a lot of anxiety.”
In the past several market days, the declines in the market have been followed by recoveries. But investors were not seeing today’s lows as buying opportunities so far, he said.
Traders have also moved beyond the earnings season,which was highlighted by a string of stronger-than-expected results.
“Earnings season is pretty much in the rearview mirror,” Mr. Saut said, “so you haven’t got that to prop you up right now.”
Materials, industrials and information technology sectors were lower. FMC Corp. ended down less than 1 percent at $64.02. The Dow Chemical Co. closed $2.11 lower at $29.31.
Financials were going to remain a concern, Mr. Landesman said, given the prospect of financial regulation and the accusations of trading fraud against Goldman Sachs. Shares of Goldman Sachs and most other major banks were lower Tuesday. Goldman Sachs closed 5 cents down at $149.45 and Citigroup Inc was lower by 15 cents at $4.26.
Information technology stocks were among the most actively traded. Intel ended 70 cents down at $22.56 and Microsoft was down 73 cents at $30.13.
“Technology has had such a big run-up with Apple, and Nasdaq is under a lot of pressure today,” Mr. Dollarhide said. Shares of Apple closed at $258.68, down 2.8 percent, while Dell Inc. was down 4.4 percent at $15.66 and Google ended 4.57 percent lower at $506.37.
And energy shares slipped. Britain’s main index was dragged down by BP and concerns about the costs that the oil company will face from the spill in the Gulf of Mexico. BP shares closed down 2.95 percent in London.
“The worst thing is when you can’t really size a risk or a problem,” Mr. Landesman said.
On Wall Street, Exxon Mobil declined $1.37 to $66.47 and Chevron dropped about $2.07 to $80.76.
Mr. Saut said that he believed Wall Street was predisposed to the declines.
“We are set up for a correction,” he said. “We are into a buying stampede.”
http://www.nytimes.com/2010/05/05/business/05markets.html?src=me&ref=business
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