High steady ROE and increasing ROE

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


Why?


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


That brings the following important observations:

• Maintaining a constant ROE percentage requires steady earnings growth.


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

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

ROE vs Earnings Growth Rate (EPSGR)

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

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


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


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

ROE versus ROTC

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

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

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

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

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


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

Book Value and Intrinsic Value

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

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

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

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

Understanding insurance business

The management's view of the insurance business

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

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

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

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

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

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

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

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

Measuring talent and Integrity

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

Reinvestment dynamic

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

Fair price

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

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

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


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

Economic indicators and survey show recession easing

Economic indicators and survey show recession easing

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Contributing: Associated Press

Copyright 2009 Reuters Limited.

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

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

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

By Robert Deutsch, USA TODAY

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


USA TODAY'S 2009 INVESTMENT ROUNDTABLE

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Is cash really king?

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

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

We don't think so.

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

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

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

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

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

How can one intelligently navigate this market?

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

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

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

Is a depression on the way?

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

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

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

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

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

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

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

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

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

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

Are stocks cheap?

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

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

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

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

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

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

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

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

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

Is there relief in sight?

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

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

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

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

How important is rebuilding confidence?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Will a drop in mortgage rates spur lending?

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

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

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

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

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

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

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

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

Rogers: It is important it be deployed relatively quickly.

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

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

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

What would signal a turnaround?

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

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

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

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

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

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

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

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

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

For Housing Crisis, the End Probably Isn’t Near

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

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

US Bank Profits Appear Out of Thin Air

Bank Profits Appear Out of Thin Air

By ANDREW ROSS SORKIN
Published: April 20, 2009

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

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

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

Spain’s Falling Prices Fuel Deflation Fears in Europe

Spain’s Falling Prices Fuel Deflation Fears in Europe

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

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

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

Revenue Drops 62% as Morgan Stanley Posts a Loss

Revenue Drops 62% as Morgan Stanley Posts a Loss

By DAVID JOLLY
Published: April 22, 2009
Morgan Stanley reported a bigger-than-expected first-quarter loss on Wednesday, as it wrote down soured real estate investments and took a hit on its own debt.
The bank reported a net loss of $177 million, or 57 cents a share, compared with a profit of $1.4 billion a year ago. Revenue fell 62 percent to $3 billion. Analysts surveyed by Reuters had expected a loss of about 9 cents a share and revenue of about $4.9 billion.
Results were helped by a one-time tax benefit of $331 million “from the anticipated repatriation of non-U.S. earnings at lower than previously estimated tax rates.”
Morgan Stanley said its results were hurt by a $1.5 billion decrease in net revenue related to the tightening of credit spreads on certain of its long-term debt and “net losses of $1 billion on investments in real estate, amidst the industry-wide decline in this market.”
Like its larger rival, Goldman Sachs, Morgan Stanley in September converted itself into a bank holding company from an investment bank in order to gain access to emergency Federal Reserve funds. Accounting rules governing holding companies required the banks to change their reporting periods to the calendar year from a Nov. 30 year-end, leaving December as an orphan month.
Morgan Stanley reported a net loss of $1.3 billion for December.
Goldman Sachs last week posted a net profit of $1.7 billion for the first quarter of 2009. For December, it lost $1 billion.
Morgan Stanley also cut its quarterly dividend to 5 cents a share from 27 cents, saying the move would allow it to conserve about $1 billion a year.
Some investors have greeted bank results in the last weeks with optimism, seeing in better-than-anticipated headline numbers signs that the financial industry is stabilizing. But many analysts have cautioned that one-time items and liberal accounting were allowing banks to dress up what would otherwise, considering the continuing deterioration of asset values, have been a bad quarter.
American banks face great uncertainty as the Treasury and financial regulators work out how they will disclose the results of stress tests of 19 large banks. American banks had reported $510 billion in write-downs related to the credit crisis by the end of 2008, the International Monetary Fund said Tuesday, and it predicted they would need to write-down an additional $550 billion in 2009 and 2010.
In spite of difficult business conditions, Morgan Stanley “delivered strong results in investment banking, commodities, interest rates and credit products as well as solid performance in global wealth management,” John J. Mack, the chairman and chief executive, said in a statement. “In fact, Morgan Stanley would have been profitable this quarter if not for the dramatic improvement in our credit spreads — which is a significant positive development, but had a near-term negative impact on our revenues.”
Morgan Stanley said it had a Tier 1 capital ratio, a measure of financial strength, of 16.4 percent at the end of the first quarter. It said its investment banking business had revenue of $800 million, and that it ranked first globally in announced mergers and acquisitions in the first quarter. The bank said its fixed income sales and trading business posted revenue of $1.3 billion reflecting strong results in commodities, interest rates and credit products.
Goldman Sachs said last week that it wanted to return $10 billion in federal bailout money received under the Troubled Asset Relief Program, or TARP, as soon as possible to rid itself of the restrictions on executive pay and other matters. Morgan Stanley’s loss might make it more difficult for it to follow suit in the near term. For its part, Goldman Sachs is awaiting Treasury Secretary Timothy F. Geithner’s approval before it can do so.
Like its rivals, Morgan Stanley has also benefited from an indirect subsidy in the form of Federal Deposit Insurance Corporation backing for their debt issues, which allows them to raise money far more cheaply than they could on their own. Morgan Stanley has issued $23 billion of debt under the program.
Morgan Stanley, which sold a 21 percent stake to Mitsubishi UFJ Financial Group in September for $9 billion, entered a joint venture this year with Citigroup’s Smith Barney brokerage unit to expand its brokerage business.
It also announced a new joint venture with Mitsubishi UFJ integrating the two firms’ Japanese securities businesses into the third largest brokerage franchise in Japan.
Mr. Mack told a Japanese newspaper this week that Morgan Stanley also wanted to buy an American retail bank to gain deposits.
The bank has a market value of about $27 billion. Its shares, which had gained about 54 percent this year through the market close Tuesday, fell about 2 percent in premarket trading Wednesday.
Louise Story contributed reporting.

http://www.nytimes.com/2009/04/23/business/23bank.html?ref=business

Global downturn deeper that feared, says IMF

April 22, 2009

Global downturn deeper that feared, says IMF

In a grim assessment of global prospects, the IMF once again drastically cut its forecasts for key economies across the world

The savage slump in the world’s leading economies is set to be even deeper than previously feared, with recovery next year now unlikely to materialise, the International Monetary Fund warned today.

In a grim assessment of global prospects, the IMF once again drastically cut its forecasts for key economies across the world. It blamed the continuing blight from severe financial stresses for a still worsening global outlook.

For Britain, the fund inflicted a double blow on Alistair Darling minutes after the Chancellor unveiled his Budget. It predicted that the UK economy will now shrink by 4.1 per cent this year — markedly worse than Mr Darling’s own new projection for a 3.5 per cent decline, and said that the recession would drag on into 2010, with a further drop of 0.4 per cent in GDP next year. The Chancellor has predicted a recovery with 2010 growth of 1.25 per cent.

The fund’s hard-hitting report warned that, despite a blizzard of far-reaching official efforts to bail-out banks and stem financial turmoil, governments had failed to halt a vicious downward spiral as intense financial strains and deteriorating economic conditions feed off each other.

Calling for still more “forceful action” by governments on both sides of the Atlantic, the IMF said that halting the slump in the global economy and restoring growth now depended critically on governments “stepping up efforts to heal the financial sector”.

But a day after the fund predicted that cumulative losses for banks in the US, Europe and Japan from the credit crisis will hit $4 trillion, it also warned that, even if economic recovery is secured, it is set to be anaemic and “sluggish relative to past recoveries”.

The latest IMF forecasts, in its twice-yearly World Economic Outlook, project that what it says will be by far the worst world recession since the Second World War will mean a worldwide plunge in economic output (GDP) of 1.3 per cent. That compares with its January forecast which foresaw meagre world growth of just 0.5 per cent, still weak enough to be classed as a global recession.

In the leading economies of the West, the IMF now expects GDP to plummet this year by a vicious 3.8 per cent, down from the 2 per cent drop it expected in January.

It also now expects no revival in 2010, with the advanced industrial economies as a whole set to stagnate with zero growth. That contrasts with the recovery to 1.1 per cent growth that the fund was able to envisage only four months ago.

The bleak new assessment saw forecasts cut for every Western economy this year. The US economy, at the epicentre of the global financial firestorm, is forecast to shrink by 2.8 per cent this year and then to stagnate in 2010. The IMF has abandoned its hopes of a resurgence of American growth to 1.6 per cent next year, and cut its US forecast for this year by a further 1.2 percentage points.

In the eurozone, the report said that the plight of Europe’s big economies would also worsen, with the 16-nation bloc as a whole suffering a 4.2 per cent collapse in GDP this year, and set to shrink by another 0.4 per cent in 2010.

Germany is tipped to be worst hit with a GDP plunge of 5.6 per cent this year, and a further 1 per cent next year. Only France is predicted to see some imminent relief from the gloom, with as 3 per cent decline in 2009 forecast to be followed by modest 0.4 per cent growth after the new year.

The IMF said there were dangers that even its grim new assessment could be too rosy a view, if what it repeatedly called the “corrosive” downward spiral of financial and credit stresses aggravating economic woes was not arrested. “A key concern is that policies may be insufficient to arrest the negative feedback,” it said.

The fund attacked failures by governments to tackle the banking and credit crisis effectively enough. “Announcements have too often been short on detail and have failed to convince markets; cross-border coordination of initiatives has been lacking, resulting in undesirable spill-overs; and progress in alleviating uncertainty related to distressed [toxic] assets has been very limited.”

It renewed its warning a day before that an angry public backlash against banks, bankers and the financial industries could prevent governments from taking the decisive and extensive action needed to stem the threat.

Even once growth is eventually restored to the world’s key economies, the IMF added that the long-term damage from the recession and financial turmoil meant that “there will be a difficult transition period, with output growth appreciably below rates seen in the recent past”.

In a rare glimmer of hope, it conceded, however that: “Recent data provide some tentative indications that the rate of contraction [in the main economies] may now be starting to moderate.”

http://business.timesonline.co.uk/tol/business/article6147495.ece

Alistair Darling unveils 50 per cent tax rate in UK Budget 2009

Alistair Darling unveils 50 per cent tax rate in Budget 2009

A new 50 per cent top rate of income tax has been announced in the Budget by Alistair Darling, the Chancellor.

By Jon Swaine and Angela Monaghan
Last Updated: 1:43PM BST 22 Apr 2009


The rate will apply to earnings above £150,000 and will replace the 45 per cent rate unveiled in the pre-Budget Report last November. It will take effect from next April - a year earlier than had been planned for the 45p rate.

Personal allowances will also be fully withdrawn for those with incomes over £100,000 from next April.


Tax relief will be reduced on pensions earnings above £150,000, Mr Darling added. However, the basic state pension and the Winter fuel allowance will both continue to rise.

The decisions came as Mr Darling announced the most important budget for a generation, aimed at tackling the worst recession since the Second World War.

Outlining the scale of the problem, Mr Darling announced that he expects that the economy will contract by about 1.6 per cent during the first quarter of this year, and that GDP growth will be about -3.5 per cent for the year.

The recession has forced the Chancellor to rip up his economic forecasts made in the Pre-Budget Report in November, in which the economy was expected to contract by just 1.25 per cent.

In contrast to more pessmistic forecasts from the City, Mr Darling said that he expected the economy to start growing again towards the end of this year, before growing by about 1.25 per cent in 2010 and 3.5 per cent in 2011.

The Chancellor also admitted that Government borrowing will soar to £175bn in the current financial year, or 12 per cent of the country's gross domestic product. The recession has torn a hole through Britain's public finances as tax receipts collapse and spending on benefits such as unemployment rise.

Inflation is expected to continue falling sharply, Mr Darling said, reaching about 1 per cent on the Government's preferred measure by the end of this year. Deflation will continue to be shown on the RPI measure, he added. It is set to fall to about -3 per cent by September, before moving back above zero next year.

A widely-trailed car scrappage scheme will be implemented next month to provide motorists with a £2,000 discount on new vehicles bought when they trade in cars over 10 years old, Mr Darling announced. The scheme will end in March 2010.

Mr Darling also announced a blitz of measures to stop UK unemployment spiralling higher as the recession bites. An additional £1.7bn was pledged to support the unemployed.

From January everyone under the age of 25 who has been jobless for 12 months will be offered a job or a place in training with additional money on top of benefits for those in training.

The "stamp duty holiday" on properties sold for less than £175,000 is to be extended until the end of the year, Mr Darling announced.



http://www.telegraph.co.uk/finance/financetopics/budget/5200435/Alistair-Darling-unveils-50-per-cent-tax-rate-in-Budget-2009.html

Britain and US at odds over further bank bail-outs

Britain and US at odds over further bank bail-outs
Gordon Brown and Alistair Darling are growing increasingly concerned over America's failure to clean up the "toxic" debts of many of its major banks despite repeated attempts to do so.

By Robert Winnett and James Quinn
Last Updated: 11:15AM BST 22 Apr 2009

Although President Barack Obama announced a plan last month to offer fund managers and private investors the equivalent of cheap US government loans to buy up $1 trillion (£681bn) of toxic debts from big American banks, the plan has yet to swing into action with many details still unknown.

There are now growing fears in Westminster that President Obama's proposed "public-private" partnership will fail to solve the problem as there is not sufficient appetite among the investment community to buy up the dubious loans. Mr Darling is understood to believe that President Obama will have to announce a new state package of assistance for American banks. In Britain the Treasury has agreed to underwrite 90pc of losses from questionable loans incurred by banks including the Royal Bank of Scotland.

The Treasury is now concerned that unless a new American package is announced imminently, British attempts to tackle the recession may be hindered. "America will have to announce a new package to help its banks, this needs to be sorted before we can move forward," said one well-placed source.

The growing signs of tension between Westminster and Washington DC – the first between the Brown and Obama administrations – come as the US Treasury completes a series of financial "stress tests" designed to measure the capital requirements of 19 of America's largest financial institutions.

Publication of the test results are scheduled for May 4, and it is thought highly unlikely that the Obama administration will make any move to shore-up the banking system before then.

One source close to the US Treasury expressed surprise that Mr Darling would think the US is not doing enough, given that the public-private partnership to buy toxic loans is just one of a number of programmes launched by the Obama administration to rescue the financial system.

Those programmes include the Federal Reserve's $1 trillion Term Asset-Backed Securities Loan Facility designed to fund new bank lending through buying up existing securities, and efforts to resuscitate the ailing US housing market.

Under President Bush, the US initially apportioned $700bn to rescue its banking system, choosing first to inject money straight into bank's balance sheets, but it has also since been used to help the car industry.


http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5196478/Britain-and-US-at-odds-over-further-bank-bail-outs.html

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Goldman Sachs turns bullish on Chinese economy

Goldman Sachs turns bullish on Chinese economy

Goldman Sachs has dramatically raised its forecasts for the Chinese economy and is now predicting 8.3pc growth for this year, above the Communist Party's own target.

By Malcolm Moore in Shanghai
Last Updated: 9:36AM BST 22 Apr 2009


The reversal came after a raft of strong economic data in March convinced pundits that green shoots are starting to reappear in the Chinese economy, which could shortly overtake Japan as the world's second-largest.

Previously Goldman Sachs forecast that China would only grow by 6pc in 2009. Other economists have predicted growth to be as low as 5pc; strong compared to the rest of the world, but lower than the magic 8pc threshold that China believes is essential to maintain calm.

The Communist Party says that growth under 8pc will not produce enough jobs to keep unemployment at a manageable level and to avoid unrest.

After exports fell by nearly 20pc in the first quarter, the government has poured money into the economy to keep it running. As well as a 4 trillion yuan (£400bn) fiscal stimulus package, Chinese banks have made 4.8 trillion yuan in new loans so far this year.

In order to finance the sudden increase in credit, the Chinese central bank has started printing huge quantities of money. In March, the increase in M2 money supply was 25.5pc, the highest it has been since the Asian financial crisis.

Goldman Sachs is predicting that consumer price inflation will be negative, at -0.3pc, this year, allowing for further cuts in interest rates and the issuing of more new money.

"We are fully confident that we will overcome difficulties and challenges and we have the ability to do so," said Wen Jiabao, the Chinese prime minister, at the National People's Congress in March, as he underlined the government's determination to keep GDP growth at 8pc.

"Since the announcement of the fiscal stimulus package last November [...] the pace of implementation of new infrastructure investment and the scale of domestic credit expansion have been unprecedented," said Helen Qiao, an economist at Goldman Sachs. She added that growth next year would be 10.9pc.

Economic growth was just 6.1pc in the first quarter of this year, the lowest on record. However, commentators suggested that the figure was the bottom of the cycle, and that increases in industrial production, retail sales and fixed asset investment would soon buoy the Chinese economy.

However, Stephen Green, an economist at Standard Chartered in Shanghai, expressed some skepticism that there was a full-blown recovery underway. He said growth had accelerated from the end of last year, but cautioned that "there is a huge amount of volatility in the numbers and a chunk of salt is needed."

He added that while the fiscal stimulus package is likely to boost investment by companies in the short-term, in the long run China needs to increase the incomes of its workers and complete a social welfare system. He kept his forecast at 6.8pc for the year.

http://www.telegraph.co.uk/finance/financetopics/recession/5198966/Goldman-Sachs-turns-bullish-on-Chinese-economy.html