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AP//Fed cuts key interest rate half-point to 1 percent
Wednesday October 29, 3:45 pm ET
By Martin Crutsinger, AP Economics Writer
Fed slashes key interest rate by half-point to 1 percent in effort to combat financial crisis
http://biz.yahoo.com/ap/081029/fed_interest_rates.html
WASHINGTON (AP) -- The Federal Reserve has slashed a key interest rate by half a percentage point as it seeks to revive an economy hit by a long list of maladies stemming from the most severe financial crisis in decades.
The central bank on Wednesday reduced its target for the federal funds rate, the interest banks charge on overnight loans, to 1 percent, a low last seen in 2003-2004.
The funds rate has not been lower since 1958, when Dwight Eisenhower was president.
The cut marked the second half-point reduction in the funds rate this month. The Fed slashed the rate by that amount in a coordinated move with foreign central banks on Oct. 8.[/b ]
In a brief statement explaining Wednesday's action, the Fed said that the "intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and business to obtain credit."
The central bank said that "downside risks to growth remain" holding out the promise of further rate cuts if needed. The rate-cut decision was unanimous.
Federal Reserve Chairman Ben Bernanke and his colleagues pledged that they would "monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."
Wall Street had staged its second biggest point surge ever on Tuesday with the Dow Jones industrial average climbing by 889 points in anticipation of the Fed's action. Trading was more subdued on Wednesday with the Dow actually slipping into negative territory immediately after the announcement, but surged up by about 200 points in late-afternoon trading.
Many analysts said they believe the Fed will not stop at 1 percent if officials see the need to cut rates further. Some are forecasting another half-point move at the Fed's last meeting of the year on Dec. 16.
But other economists said with rates already so low, the Fed may decide to hold at 1 percent, leaving some room for a further reduction if needed next year should the country's economic troubles intensify.
David Jones, chief economist at DMJ Advisors, said the Fed's rate cut will be followed over the next week by similar action in other major countries as they grow more concerned that the recession that began in the United States is spreading to their regions.
But he said a section of the Fed's statement where it listed all the efforts taken so far to battle the slowdown was a signal the central bank believes it has done enough for now.
Other economists disagreed, saying the Fed clearly lowered its worries about inflation while raising concerns about economic growth.
Sung Won Sohn, an economist at the Smith School of Business at California State University, said he believed the Fed will make the "momentous decision" to move the funds rate to zero if events in coming months show such an action is needed to battle the global credit crisis.
In its statement, the Fed indicated it had room to lower rates because the spreading economic weakness was lowering the risks that inflation would get out of control. Indeed, the weakness has caused dramatic declines in the price of oil and other commodities.
Fed weighs another rate reduction to limit fallout
http://news.yahoo.com/s/ap/20081028/ap_on_bi_ge/fed_interest_rates
WASHINGTON – Disappearing jobs, burrowing consumers and skittish companies are reasons for the Federal Reserve to lower interest rates and brace the tottering economy.
Fed Chairman Ben Bernanke and his colleagues open a two-day meeting Tuesday afternoon — their last before the November elections — to make a fresh assessment of economic and financial conditions and decide their next move on rates. Their decision will be announced Wednesday.
It is all but certain the Fed will cut rates — for the second time in this month alone. The big question: Just how low will the Fed go?
Investors on Wall Street and some economists are betting the Fed will slash its key rate by half percentage point to 1 percent. A few, however, however, think the Fed will opt for a smaller, quarter-point reduction to 1.25 percent.
"I'm torn," Stuart Hoffman, chief economist at PNC Financial Services Group, said about the size of the cut.
"Clearly, the economic outlook has weakened," he said.
Whatever the size of the rate cut, commercial banks' prime lending rate for millions of consumer loans would drop by a corresponding amount. The prime rate is now at 4.5 percent and is used to peg home equity loans, certain credit cards and other floating rate loans.
Under either scenario — a half percentage point or a quarter point cut — both the Fed's key rate and the prime rate would fall to their lowest in more than four years.
Underscoring one of the big stresses Americans are under: the value of homes — people's biggest asset — dropped by record amounts.
The Standard & Poor's/Case-Shiller 20-city housing index released Tuesday showed a drop of 16.6 percent in August from the year ago, the largest on record going back to 2000.
The smaller, 10-city index, fell 17.7 percent, the biggest decline in its 21-year history.
The Fed hopes that lower borrowing costs will entice people and businesses to spend again, which would help revive the economy. The Fed also hopes that other actions to shore up the U.S. financial system — along with lower rates — will help get credit flowing more freely again.
The Europeans also are weighing another rate cut.
With a U.S. recession seen as a foregone conclusion, any Fed rate reduction would be aimed at relieving some of the pain.
The Fed probably will hold the door open to additional rate reductions when it acts on Wednesday, economists said. The Fed's last scheduled meeting of the year is Dec. 16.
Many predict the economy contracted in the third quarter by around 0.5 percent when the government reports Thursday on the economy's performance. If that estimate is correct, it would mark the biggest decline in economic activity since the third quarter of 2001, when the country was suffering through its last recession.
Nervous consumers are expected to have cut back sharply in their spending during the third quarter. If that proves correct, it would mark the first drop in consumer spending since late 1991, when the economy was coming out of a recession.
It can take at least six months — often longer — for the Fed's rate cuts to make their way through the economy. The Fed's previous rate reductions, however, were blunted by the fact that credit became much harder to get as banks hunkered down.
Employers, meanwhile, are likely to keep cutting back on hiring. The unemployment rate — now at 6.1 percent — is expected to hit 7.5 percent or higher by next year. After the last recession, in 2001, the unemployment rate rose as high as 6.3 percent in June 2003.
A housing bust, a credit clog and a financial meltdown have collided, imperiling the U.S. economy and the global economy. Problems started out in the United States but have spread to other countries in Europe, Asia and elsewhere.
Earlier this month, the Fed and other central banks joined to slash rates, the first coordinated move of that kind in the Fed's history. That dropped the Fed's key rate down to its current 1.50 percent. It also marked an about face for the Fed, which had halted an aggressive rate-cutting campaign in June out of fears those low rate would worsen inflation. The Fed started signaling rates probably would go up to fend off inflation. The Fed shifted signals back to a rate cut when the economy worsened and the inflation threat lessened.
European Central Bank president Jean-Claude Trichet said Monday a rate cut next month is "a possibility" as moderating prices for oil and other commodities damp inflation pressures. The ECB joined the Fed in early October in cutting rates. Its key rate is at 3.75 percent.
GM, Chrysler request $10 billion in aid: sources
http://news.yahoo.com/s/nm/20081028/bs_nm/us_chrysler_gm;_ylt=AskWwO7Ujk2HuHO2ZqMa7BqyBhIF
NEW YORK/DETROIT (Reuters) – General Motors Corp and Cerberus Capital Management have asked the U.S. government for roughly $10 billion in an unprecedented rescue package to support a merger between GM and Chrysler LLC, two sources with direct knowledge of the talks said on Monday.
The government funding would include roughly $3 billion in exchange for preferred stock in the merged automaker, according to one of the sources, who was not authorized to discuss the matter publicly.
The U.S. Treasury Department is considering a request for direct aid to facilitate the merger and a decision could come this week, sources familiar with the still-developing government response said earlier on Monday.
An injection of $3 billion in equity to support a GM acquisition of Chrysler would be roughly equivalent to the current, depressed value of the top U.S. automaker.
It would also give U.S. taxpayers a large stake in the turnaround of a struggling auto industry that employs over 350,000 American workers and is credited with supporting employment for another 4.5 million in related fields.
Analysts see GM, Chrysler and rival Ford Motor Co having been driven to the brink of failure by a combination of management missteps, slowing global growth and problems in credit markets.
In addition to its equity stake, the U.S. government is also being asked to provide support for the GM-Chrysler merger by taking over some $3 billion in pension obligations under the terms of a proposal now before the government for review, the first source said.'
The final component of the proposed support package would be a credit line that could include U.S. government purchases of commercial paper issued by GM to relieve short-term pressure on liquidity, the person said.
A combined GM-Chrysler would control roughly a third of the U.S. auto market by sales and would face immediate pressure to cut costs stemming from excess capacity in almost every facet of its business. Those would include a stable of 11 brands, roughly 10,000 dealers and some 97,000 union-represented factory workers, analysts have said.
But one of the conditions of the merger would be that GM-Chrysler would spare as many jobs as possible in order to win broad political support for the government funding needed to complete the deal, people familiar with the merger discussions said.
GM could not be immediately reached for comment. Cerberus and Chrysler had no comment.
The roughly $10 billion to support the GM merger with Chrysler would be in addition to whatever funds would be allocated to the automaker under an already approved $25 billion program to provide low-interest loans to the industry for retooling to make more fuel-efficient cars.
Op-Ed Columnist:The Behavioral Revolution
By DAVID BROOKS//Posted by: grandpatb
NYT October 28, 2008
Roughly speaking, there are four steps to every decision. First, you perceive a situation. Then you think of possible courses of action. Then you calculate which course is in your best interest. Then you take the action.
Over the past few centuries, public policy analysts have assumed that step three is the most important. Economic models and entire social science disciplines are premised on the assumption that people are mostly engaged in rationally calculating and maximizing their self-interest.
But during this financial crisis, that way of thinking has failed spectacularly. As Alan Greenspan noted in his Congressional testimony last week, he was “shocked” that markets did not work as anticipated. “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.”
So perhaps this will be the moment when we alter our view of decision-making. Perhaps this will be the moment when we shift our focus from step three, rational calculation, to step one, perception.
Perceiving a situation seems, at first glimpse, like a remarkably simple operation. You just look and see what’s around. But the operation that seems most simple is actually the most complex, it’s just that most of the action takes place below the level of awareness. Looking at and perceiving the world is an active process of meaning-making that shapes and biases the rest of the decision-making chain.
Economists and psychologists have been exploring our perceptual biases for four decades now, with the work of Amos Tversky and Daniel Kahneman, and also with work by people like Richard Thaler, Robert Shiller, John Bargh and Dan Ariely.
My sense is that this financial crisis is going to amount to a coming-out party for behavioral economists and others who are bringing sophisticated psychology to the realm of public policy. At least these folks have plausible explanations for why so many people could have been so gigantically wrong about the risks they were taking.
Nassim Nicholas Taleb has been deeply influenced by this stream of research. Taleb not only has an explanation for what’s happening, he saw it coming. His popular books “Fooled by Randomness” and “The Back Swan” were broadsides at the risk-management models used in the financial world and beyond.
In “The Black Swan,” Taleb wrote, “The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup.” Globalization, he noted, “creates interlocking fragility.” He warned that while the growth of giant banks gives the appearance of stability, in reality, it raises the risk of a systemic collapse — “when one fails, they all fail.”
Taleb believes that our brains evolved to suit a world much simpler than the one we now face. His writing is idiosyncratic, but he does touch on many of the perceptual biases that distort our thinking: our tendency to see data that confirm our prejudices more vividly than data that contradict them; our tendency to overvalue recent events when anticipating future possibilities; our tendency to spin concurring facts into a single causal narrative; our tendency to applaud our own supposed skill in circumstances when we’ve actually benefited from dumb luck.
And looking at the financial crisis, it is easy to see dozens of errors of perception. Traders misperceived the possibility of rare events. They got caught in social contagions and reinforced each other’s risk assessments.
They failed to perceive how tightly linked global networks can transform small events into big disasters....[the snowball
effect]
Taleb is characteristically vituperative about the quantitative risk models, which try to model something that defies modelization. He subscribes to what he calls the tragic vision of humankind, which “believes in the existence of inherent limitations and flaws in the way we think and act and requires an acknowledgement of this fact as a basis for any individual and collective action.” If recent events don’t underline this worldview, nothing will.
If you start thinking about our faulty perceptions, the first thing you realize is that markets are not perfectly efficient, people are not always good guardians of their own self-interest and there might be limited circumstances when government could usefully slant the decision-making architecture (see “Nudge” by Thaler and Cass Sunstein for proposals). But the second thing you realize is that government officials are probably going to be even worse perceivers of reality than private business types. Their information feedback mechanism is more limited, and, being deeply politicized, they’re even more likely to filter inconvenient facts.
This meltdown is not just a financial event, but also a cultural one. It’s a big, whopping reminder that the human mind is continually trying to perceive things that aren’t true, and not perceiving them takes enormous effort.
Copyright 2008 The New York Times Company
AP///Oil falls below $62 as investors eye weak demand
Monday October 27, 7:50 am ET
By George Jahn, Associated Press Writer
Oil falls below $62 a barrel as investors eye falling demand
http://biz.yahoo.com/ap/081027/oil_prices.html
VIENNA, Austria (AP) -- Growing evidence of a severe global economic slowdown drove oil prices to below $62 a barrel Monday, as investors brushed off a sizable OPEC output cut.
Traders were taking their cues from world markets, which slumped again Monday with the Nikkei index in Japan closing at its lowest in 26 years, down 6.4 percent. Hong Kong, and European markets followed suit, closing or trading substantially lower. The Dow Jones industrial average fell 3.6 percent Friday.
Light, sweet crude for December delivery declined $2.23 to $61.92 a barrel in electronic trading on the New York Mercantile Exchange by noon in Europe, the lowest since May 2007.
On Friday -- even after the Organization of Petroleum Exporting Countries announced a 1.5 million barrel-a-day cut -- oil fell $3.69 to settle at $64.15. Prices have plunged 57 percent from a record $147.27 on July 11.
"The mood is fairly negative reflecting worry about the international economic outlook," said David Moore, a commodity strategist at Commonwealth Bank of Australia in Sydney. "If there is further weak economic data in the U.S. or Europe, prices could come under more downward pressure."
Iran's OPEC governor Mohammad Ali Khatibi said Sunday a reduction in production "will be considered" at the group's next meeting in Algiers in December -- a meeting that might even be held early if necessary.
"I thought the OPEC cut was a fairly decisive act, but concerns of recession in the major economies remain dominant," Moore said. "OPEC's cut does take a step toward tightening the market."
Vienna's JBC Energy said prices were out of OPEC's control -- for now.
"Oil is currently being driven by the present financial crisis and not by OPEC cuts," said its research report. "As oil prices are being pressured by the credit squeeze and a lack of liquidity, they may stay largely detached from supply factors for several weeks to come. As a result, OPEC is currently struggling with factors beyond its control."
Investors have been paying close attention to signs that a slowing economy and higher gasoline prices earlier this year have hurt crude demand in the U.S., the world's largest oil consumer.
The U.S. Department of Transportation said Friday that Americans drove 5.6 percent less, or 15 billion fewer miles (24 billion fewer kilometers), in August compared with same month a year ago -- the biggest single monthly decline since the data was first collected regularly in 1942.
"If we're looking a severe economic downturn, it's hard to say what the bottom of any commodity price will be," Moore said.
In other Nymex trading, gasoline futures fell more than 3 cents to $1.44 a gallon, while heating oil slipped by more than 4 cents to $1.91 a gallon. Natural gas for November delivery fell nearly 21 cents to $6.03 per 1,000 cubic feet.
In London, November Brent crude was down $1.75 to $60.30 a barrel on the ICE Futures exchange.
AP///World markets slump as Nikkei hits 26-year low
Monday October 27, 8:19 am ET
By Pan Pylas, AP Business Writer
World markets slump again as Tokyo's Nikkei falls to 26-year low on surging yen..
http://biz.yahoo.com/ap/081027/world_markets.html
LONDON (AP) -- European stock markets fell heavily Monday after the Nikkei index in Japan closed at its lowest in 26 years as the financial crisis raised recession fears and drove up the yen, piling the pressure on the country's exporters.
Tokyo's Nikkei 225 index closed down 6.4 percent to 7,162.90 -- the lowest since October 1982 -- with exporters like Toyota Motor Corp. and Sony Corp hit hard. The losses came despite a report that the government was considering massive capital injection into struggling banks in a bid to calm jittery financial markets.
"Worries about the impact of the surging yen on Japanese export earnings have hit the Nikkei hard," said Julian Jessop, chief international economist at Capital Economics.
"This in turn has led to sharp falls in European markets even when, as on Friday, the U.S. had closed higher the day before," he added.
Benchmarks in Britain, Germany and France trading down more than 4 percent. The FTSE 100 index was 190.97 points, or 4.9 percent, lower at 3,693.39, with heavyweight oil stocks BP PLC and Royal Dutch Shell down 5.1 percent and 4.7 percent respectively as oil prices continue to plummet despite last week's decision by the OPEC oil cartel to cut production.
Germany's DAX was down 200.24 points, or 4.7 percent, at 4,095.43 despite an 80 percent rise in the share price of Volkswagen AG following news that Porsche AG wants to increase its stake in the car manufacturer.
France's CAC-40 was the worst performing European index, down 216.34 points, or 6.8 percent, at 2,977.45, with car manufacturers heavily sold off after gloomy updates last week. Renault SA shares were 8.7 percent lower, while Peugeot SA shares were down 7.3 percent.
Dow futures were down 268 points, or 3.2 percent, at 7,994. Standard & Poor's 500 futures were down about 4 percent.
Mounting concerns about the yen and the effect of the financial crisis on currency markets prompted the world's seven leading industrial nations to issue a statement Sunday warning about the "recent excessive volatility" in the value of the Japanese currency, which is rising against the U.S. dollar towards the 90 yen level and near 13-year highs.
"We continue to monitor markets closely, and cooperate as appropriate," the G7 said.
The statement has raised the prospect of coordinated intervention to stem the yen's appreciation and could be the precursor to joint interest rate reductions too to help calm markets and provide some impetus to the stalling global economy. The U.S. Federal Reserve is already expected to cut its benchmark interest rate a half percentage point to 1 percent at a two-day meeting that ends Wednesday.
"The G7 statement has increased the chance of early coordinated rate cuts this week," said Hans Redeker, global head of FX strategy at BNP Paribas.
The yen has appreciated in part because it is seen as a safe haven for investors fleeing turmoil elsewhere because many think the Japanese economy will be less hit by the global recession.
The euro and the pound continued to drop, with the pound 3.0 percent lower at $1.5464 and the euro down 1.3 percent down at $1.2461. The euro is under pressure from fears about banks' exposure to emerging markets and expectations the European Central Bank will cut interest rates.
Economic data this week is likely to further stoke concerns about the global economy. Earlier Monday, the well-respected Ifo Institute in Germany reported that its main activity index fell to a five-year low 90.2 in October.
Monday's sharp stock market declines in Asia came amid another round of government measures to boost markets. In South Korea, the central bank slashed its key interest rate Monday by three-quarters of a percentage point -- its biggest cut ever -- to prevent Asia's fourth-largest economy from lurching into recession, while Australian and Hong Kong central bankers injected funds into their markets to ensure liquidity.
In mainland China, the benchmark index slumped to its lowest level in more than two years as investors reacted to dismal earnings reports. The Shanghai Composite Index lost 6.3 percent, or 116.27 points, to 1,723.35. It is now down about 72 percent from its peak about a year ago.
Hong Kong's Hang Seng Index tumbled 12.7 percent to 11,015.84, its lowest close in more than four years and biggest daily decline since 1991.
In the Philippines, the key index plummeted 12.3 percent to 1,713.83 points, triggering a circuit-breaker that automatically halted trading for 15 minutes.
Only South Korea's market managed to eke out gains, perhaps in part because of the big rate cut there. The benchmark Kospi ended 0.8 percent higher at 946.45.
In Europe, the International Monetary Fund said Sunday it had reached a tentative agreement to provide Ukraine with $16.5 billion in loans and announced that emergency assistance for Hungary had cleared a key hurdle.
In oil, crude prices weakened after OPEC's move to cut production in an attempt to halt the declines. Light, sweet crude for December delivery was down $1.95 to $62.20 a barrel. Oil prices have plunged more than 57 percent from a record $147.27 in mid-July.
AP reporters Jeremiah Marquez in Hong Kong and reporters Tomoko A. Hosaka in Tokyo, Elaine Kurtenbach in Shanghai, Hrvoje Hrankski in Manila and Kelly Olsen in Seoul contributed to this report.
South Korea announces record interest rate cut
Sun Oct 26, 2008 10:44pm EDT By Cheon Jong-woo
http://www.reuters.com/article/newsOne/idUSTRE49P3H120081027?sp=true
SEOUL (Reuters) - South Korea's central bank on Monday delivered its biggest ever interest rate cut and promised other measures to calm the panic that has been driving down financial markets and rapidly eroding economic growth.
With economic growth at a four-year low and weakening, President Lee Myung-bak told parliament the government would boost spending and cut taxes next year and stood ready to inject liquidity into the system until markets calm.
The Monetary Policy Committee slashed the base rate by 75 basis points to 4.25 percent at a rare unscheduled meeting as fears grow that Asia's fourth largest economy is buckling under the strain of the global financial turmoil.
"This rate cut is sharper than we expected, and indicated policy makers are seriously aware of the risk of the global financial crisis fast spreading into the real economy," said Kong Dong-rak, economist with Hana Daetoo Securities.
The cut, the biggest since the central bank started its current system of setting base rates in 1999, gave a short-lived lift to share prices which had their worst week ever last week, falling some 20 percent.
Several analysts said more rate cuts looked likely.
"The rate cut could help lessen the burden of household debt and play a role as a stepping stone to boost the economy ... Additional rate cuts are possible. A cut in rates might take place in December but more likely early next year," said Cho Seong-joon, economist at Meritz Securities.
C.BANK BUYS BANK BONDS
In another first, the central bank said it considered buying up to 10 trillion won ($6.9 billion) of bonds issued by local commercial banks to provide extra liquidity for the cash-starved banking sector.
But the overall economic concerns continued to press on markets. By 9:53 p.m. EDT, the main share index had given up its early gains to trade down 0.54 percent at 933.67 while the won continued to slip and was quoted at 1,440.80/42.10 to the dollar.
In a budget speech to parliament, Lee also said he would pursue deregulation of the financial services sector despite the global crisis to improve competition but also at the same time would tighten supervision to ensure capital is safeguarded.
Lee has already warned that Asia's fourth largest economy faces even graver danger than during the 1997/98 Asian financial crisis when the country was only rescued from sovereign default by a massive International Monetary Fund-led bailout.
But the government has said its currency reserves of about $240 billion -- the world's sixth largest -- and generally sounder fundamentals mean it is not looking to the IMF for help this time.
South Korea's banks, with their large short-term foreign borrowing, have looked especially vulnerable to the global credit crunch in their struggle to access funds along with the threat that rapidly slowing growth at home could push many of their corporate customers into bankruptcy.
To help, the Bank of Korea said it was cutting its special interest rate for small- and medium-sized companies by 75 basis points. Small companies account for about 75 percent of the country's work force and are struggling in the face of an economic downturn and tight domestic liquidity.
Senior presidential economic policy aide, Bahk Byoung-won, told reporters on Sunday that it was important to reduce the interest burden on smaller companies and households.
Bahk said it would be difficult this time for the economy to recover from the downturn as fast as it did after the Asian financial crisis a decade ago.
Fed to slash rates as recession looms
Sun Oct 26, 2008 3:25pm EDT
http://www.reuters.com/article/ousiv/idUSTRE49P2D520081026?sp=true
CHICAGO (Reuters) - The U.S. Federal Reserve is expected to cut lending rates at a two-day policy meeting this week in response to unprecedented turmoil in financial markets and the threat of a global recession.
The consensus among Fed watchers is for a half-point cut in overnight rates to 1 percent, which would be the lowest level since June 2004. The central bank is also expected to signal a willingness to lower borrowing costs again if needed -- especially with inflation pressures fading fast.
"The economic and financial stability backdrop could not be more challenging," said Robert DiClemente, chief U.S. economist at Citigroup. "The deteriorating economic outlook suggests still greater scope for action."
Fed Chairman Ben Bernanke and his colleagues, who gather on Tuesday and Wednesday, have already cut the benchmark federal funds rate to 1.5 percent from 5.25 percent over the past 13 months. They will announce their latest decision around 2:15 p.m. EDT (1815 GMT) on Wednesday.
The Fed held rates steady at its last policy meeting on September 16, but cut rates by a half-point on October 8 in an emergency move coordinated with other major central banks.
The sharp rate cut was complemented by other recent steps to create new funding facilities or expand existing ones to try to ease strains in credit markets that had become increasingly paralyzed by risk aversion, especially after investment bank Lehman Brothers failed in September.
The coordinated efforts have helped ease the global credit crunch, but baby steps on short-term money markets have been overwhelmed by bigger problems for the overall economy.
"The stabilization of the financial system, though an essential first step, will not quickly eliminate the challenges still faced by the broader economy," Bernanke acknowledged in congressional testimony last Monday.
WHEN DOVES CRY
A Reuters poll on October 16 showed economists predicting the U.S. economy would contract for three straight quarters, beginning with the third quarter that ended last month.
Such a streak of declining gross domestic product would be the longest since 1974-75.
The U.S. Commerce Department will release its first snapshot of third-quarter GDP on Thursday, the day after the Fed announces its decision.
The U.S. labor market has shed jobs for nine consecutive months with no end in sight, while industrial output nosedived in September and consumer confidence has cratered, taking retail demand down.
The Institute for Supply Management's index of factory activity fell in September to 43.5, far into territory associated with recession, and regional indexes have suggested manufacturing activity has fallen further this month.
While retail sales dropped by 1.2 percent in September, a dramatic plunge in gasoline prices might salvage consumer spending in the final weeks of 2008 -- which would offer a rare bright spot for an economy the appears on a downward slope.
Gas prices have already been tracking the sharp drop in the price of crude oil, which has fallen by more than half since a record peak at $147 in July.
"If gasoline prices continue to move lower, they will start to act like an economic tail wind, which is clearly a positive development," said economists at Deutsche Bank.
GLOOM GROWS, INFLATION SLIPS
The spreading gloom has been reflected in remarks from Fed officials that hint at a willingness to lower rates further to try to stem the economy's slide.
San Francisco Federal Reserve Bank President Janet Yellen said on October 14 that the nation "appears to be in recession," while Chicago Fed President Charles Evans three days later said that the spike in the jobless rate to 6.1 percent from a low of 4.4 percent in March 2007 basically makes recession inevitable.
With the Fed's interest-rate ammunition already running low, Bernanke went before Congress last week and endorsed the idea of a second fiscal stimulus plan to complement the central bank's efforts to rescue the economy.
"With the economy likely to be weak for several quarters, and with the risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate," Bernanke said.
INFLATION OUTLOOK FLIPPED
The Fed had astounded some analysts in September by expressing equal worries about growth and inflation, even though energy and other commodities prices were already two months off their peaks and falling rapidly.
Since then the pendulum has swung further toward disinflation, so September's assessment that "downside risks to growth and the upside risks to inflation are both of significant concern" will certainly be reworked.
Ten-year inflation expectations reflected in securities prices are now below 1 percent, or under the low end of a range that many policy-makers see as "price stability."
"Officials may yet confront a potentially pernicious deflation, entailing faltering demand, falling nominal incomes and strangling real debt burdens," Citigroup's DiClemente warned.
Wall St Week Ahead: For stocks, October can't end soon enough
http://www.reuters.com/article/newsOne/idINN2453729020081024?sp=true
By Ellis Mnyandu
NEW YORK, Oct 24 (Reuters) - Whichever way next week plays out on Wall Street, the market is likely to close out an October that stock investors would rather forget.
So far this month, the Dow is off 22.8 percent, the S&P 500 is off 24.7 percent and the Nasdaq is down 25.8 percent -- putting them on track for their worst month since the October 1987 crash. In the S&P's case, this October could wind up being its worst month ever in the post-World War II era.
Bears are expected to tighten their grip on Wall Street in the week ahead unless there are reassurances by the U.S. Federal Reserve and other central banks that authorities have what it takes to reduce the blows from the menacing economic downturn.
But there's likely to be little comfort until the Fed issues its verdict on the economic outlook and the government releases its advance report on third-quarter real gross domestic product (GDP), due on Thursday.
The GDP data could well be the first negative print for this closely watched gauge of the U.S. economy's health since the revised reading for the fourth quarter of 2007. GDP measures the output of all goods and services within U.S. borders.
"The outlook for the market really depends upon what type of action the Fed may take," said Doug Roberts, chief investment strategist for Channel Capital Research in Shrewsbury, New Jersey. "I wouldn't rule out the possibility of something on a coordinated basis globally as well."
In addition to the Fed, the coming week will be jampacked with numbers -- economic indicators including new home sales, consumer sentiment, a survey on home prices, plus durable goods orders and data on personal incomes and spending -- as well as a deluge of earnings that could confirm investors' worst fears that the outlook for profits and economic growth is becoming grimmer.
Investors will comb through the data and the earnings to get a sense of how deep a recession the United States may face as real estate values keep sliding, stocks continue falling and consumers keep pulling their purse strings even tighter.
EYES AND EARS ON THE FED
The Federal Open Market Committee is scheduled to begin a two-day meeting on Tuesday to decide on interest rates. Their rate decision is expected on Wednesday afternoon at about 2:15 p.m. New York time (1815 GMT).
Futures fully price in a rate cut of one-half percentage point, or 50 basis points, in the fed funds rate, to 1 percent from 1.5 percent. If that happens, the fed funds rate, which is the rate that banks charge each other for overnight loans, would be brought back down to where it was in late June 2003, when it was at 1 percent -- the lowest in almost 40 years.
The interest-rate futures market also sees a "more than 20 percent" chance that the Fed could cut the fed funds rate more aggressively, to 0.75 percent -- that's right, to below 1 percent.
"I think that the anticipation is that the Fed will cut rates. The question is: How much?" said Bucky Hellwig, senior vice president at Morgan Asset Management in Birmingham, Alabama.
"A cosmetic rate cut probably won't have much benefit to the market. Psychologically, a bigger-than-expected cut would confirm that the Fed is actually using every weapon at their disposal to try and make the downturn less painful."
But while the Fed's rate pronouncement will get attention, it is the central bank's assessment of the economic conditions and outlook that investors will zero in on to decide whether they should buy, keep or sell stocks, with benchmark indexes at their lowest levels in more than five years.
Fed Chairman Ben Bernanke warned during a congressional hearing on Oct. 20 that the U.S. economy could be dogged by an extended period of subpar growth and, as a result, a second economic stimulus plan might be needed.
A GRUESOME OCTOBER
Wall Street also will wrap up October, a month notoriously troublesome for stocks since the market crashes of 1929 and 1987. So any whiff of encouraging news next week could be fodder for the bulls.
It may not be coincidental that the last trading day of October 2008 happens to be Halloween.
The Stock Trader's Almanac calls October the jinx month because of the crashes in 1929 and 1987, as well as the slide on Oct. 27, 1997, the back-to-back massacres in 1978 and 1979 and Friday the 13th in October 1989.
Yet October sometimes turns out to be a "bear killer" or a turning point when bears, after gorging themselves on stocks, go into hibernation.
The threat of economic upheaval has rattled markets around the globe as panicked investors and institutions, including hedge funds, rush to liquidate risky positions to raise cash.
In a dramatic move before Wall Street's opening bell on Friday, trading in U.S. stock futures were frozen several times as benchmark gauges hit levels that spur authorities to institute measures to prevent disorderly downdrafts amid a global slide.
Concern that the global economic downturn, sparked by the U.S. housing slump, might be deeper than expected drove U.S. stocks down sharply in Friday's session.
For the week, the Dow Jones industrial average .DJI was down 5.35 percent for the week, while the S&P 500 .SPX was off 6.78 percent and the Nasdaq was down 9.31 percent.
MARK YOUR CALENDARS
The data on September new home sales is scheduled for release on Monday, while on Tuesday, investors will wade through the Aug. S&P/Case-Shiller home price index and Oct consumer confidence.
Data on September durable goods is due on Wednesday, while weekly jobless claims will accompany the GDP report the following day.
The report on personal incomes and spending, which includes an inflation gauge watched closely by the Fed, is due on Friday, along with the Chicago PMI, a measure of manufacturing activity in the U.S. Midwest, and the Reuters/University of Michigan Surveys of Consumers. For full economic diary, see [ECI/US]
On the earnings front, investors will focus on energy heavyweights Exxon Mobil Corp (XOM.N: Quote, Profile, Research, Stock Buzz), due to post third-quarter results on Thursday, and rival Chevron (CVX.N: Quote, Profile, Research, Stock Buzz), set to report on Friday.
Phone company Verizon (VZ.N: Quote, Profile, Research, Stock Buzz), food maker Kraft Foods (KFT.N: Quote, Profile, Research, Stock Buzz), consumer products giant Procter & Gamble (PG.N: Quote, Profile, Research, Stock Buzz), insurer MetLife (MET.N: Quote, Profile, Research, Stock Buzz) and United States Steel Corp (X.N: Quote, Profile, Research, Stock Buzz) also are among the week's marquee names set to report earnings.
My friend is in NLY
Has about a 16% divi yield.
Not bad.
It is a puzzling thing. The truth knocks on the door and you say, "Go away, I'm looking for the truth," and so it goes away. Puzzling.
Stop by the ETERNITY board for a contrarian approach to all mattersof life
US DOLLAR DEATH DANCE
Jim Willie CB October, 2008
Posted by: bozzo
The US Dollar rally in the last several weeks has been remarkable. At closer examination, it highly resembles a spurt prior to death. Imagine an old man who just had a heart attack, lost feeling in certain body parts, his mind not working right, plenty of nonsense gibberish coming from his mouth, and now he is dancing hard on some last gasps.
The vast liquidation movement is akin to the old man going through an embalming process while dancing atop the tables at the funeral parlor, as bidding proceeds for his cadaver.
Are Americans last to realize the financial structure destruction means the USEconomy does not enter a recession,
but rather a bizarre unprecedented disintegration? It seems so. The liquidation of speculative positions, the massive de-leveraging, the payouts of defaulted bonds, these events are the opposite of developments toward revival or resuscitation, like business investment!! Liquidation is the exact opposite of investment, and precedes job cuts, not job creation.
The following survey of important issues is covered in depth in the October Hat Trick Letter. This month, an additional Crisis Coverage report was included, since too much has been happening, most of it confusing. Plenty of stories are occurring behind the stories, many covered. Here is a quick survey touching the surface on issues discussed and analyzed more in depth for subscribers.
FACTORS BEHIND US DOLLAR RALLY
What is pushing the US Dollar up cannot be construed as anything remotely resembling healthy factors. In no way whatsoever does it resemble investment. It is more like paid off death contracts, paid off death investments, paid off transfers from toxic US bonds into what are falsely regarded as safer US bonds with a guarantee from a crippled USGovt.
Foreign financial entities are liquidating on massive scale. They need a tremendous amount of USDollars in order to complete transactions. Also, a tremendous amount of USDollars are needed for CDSwap payouts as defaulted bonds are resolved.
Almost all CDSwap and other credit derivatives are paid out in US Dollars. The Lehman Brothers payout was full of lies, again. The Lehman Brothers total volume of corporate bonds was $160 billion, but $400 billion existed in total CDS volume tied to them! It is no surprise that the Dow and S&P500 stock indexes fell hard (by almost 400 points on Dow) and on the Lehman resolution day. And market mavens boasted of no impact on the Lehman funeral date!
The DTCC (Depository Trust & Clearing Corp) reported only a net $5.2 billion payout on the Lehman Brothers failure CDSwap resolution. The ‘Dis-Trust Clearing Corp’ might want to check credit derivative experts who claim between $220 billion and $270 billion in that total after netting. By the way, the DTCC is the official banking entity that oversees all stock clearing overnight, including all the naked shorting. The de-leveraging process has left the central bankers empty handed, exposed as having empty financial cupboards. Thus the need for massive central bank swaps from the USFed, which has perversely farmed out its function to foreigners. In fact, the foreign central banks might be in possession of more US$ inventory items than the USFed. So the US central bank has asked foreign central banks to do its job, and to manage the world reserve currency? This amidst a US$ rally!?!
The Credit Default Swaps are capable of burning Hiroshima holes all over the US financial system, resulting in US Economic implosion from eliminated bank and financial system structures almost entirely. The process has only begun, but in darkness. The other purpose for big bailouts was to prevent CDSwap explosions, risking a string of bombs to go off. The key aspect of CDSwap contracts is their hidden nature, with fuses intersecting in the dark.
When the market mavens talk about the de-leverage process,
they refer to speculative investments being liquidated. Often times, they do not include in the story how Wall Street firms, desperate to stave off bankruptcy, are targeting viciously their own clients. The big accounts lie in hedge funds, where the private wealthy are being decimated. Credit is being pulled. Margin calls are being delivered. Margin ratios are being raised. Those funds whose positions are aligned with the predators on Wall Street continue in their investment portfolios. Those funds in opposition are attacked with artillery, carpet bombs, and early morning raids.
The US Dollar is rallying amidst this type of sinister liquidation. The result has been numerous spread trades anchored by the USTreasury Bond are forced into sale.
That means a USTBond buyback occurs from the short cover on the trade. Whether a spread on mortgage bonds, corporate bonds, emerging market bonds, or crude oil, or gold, the trade is liquidated, and a USTBond is bought back. NO TANGIBLE END DEMAND, ONLY USTREASRY BOND SHORT COVERS. This is the basis for a US$ rally?
WORSENING US$ FUNDAMENTALS
How many times have we seen the US stock market go down, non-government bond yields rise, the USDollar rise, and the USTBond yields fall? That has been the norm in the last few weeks. These are death signals, not investment signals. The USEconomy cannot afford liquidation and constricted credit, a well-known fact, seemingly forgotten today. These signals come amidst falling confidence, more bank distress measures, more job loss, more home foreclosures, and lately, trouble with letters of credit at port facilities.
Financial markets, including the US Dollar, have yet to factor in the deep USEconomic recession. The US Dollar rally flies in the face of deteriorating fundamentals. See job cut announcements at Caterpillar, Merrill Lynch, General Motors, Chrysler, several Wall Street firms including Goldman Sachs today. Weekly jobless claims at close to half a million per week, equal to peak during the unrecognized 2001 recession. See the UMichigan consumer sentiment, Philly Fed index, Empire Fed index, leading economic indicators, durable goods orders, on and on. Retail sales, the backbone of the backwards USEconomy, are plummeting. That is, the plummet is before inflation price adjustments. Car sales are plummeting also.
Exports are to be worse from the higher US$ exchange rate on the table, combined with slower foreign economies. The improved export trade has been a big boast from the lunatics running the asylum. The USEconomy is accelerating in its decline, certain to produce a recession and huge USGovt deficits. That deficit is likely to at least double and possible quadruple next year. USTreasury Bond issuance cannot conceivably finance all, or at least half, of the commitments. The printing press will do the rest, which will cut down the US$ valuation. The USDollar decline lies ahead, when the distortions slow or come to an end. Gold will soar on the other side of this liquidation.
An extreme backlash attack is coming against the US Dollar. Rising import prices in foreign economies have already caused alarm. Foreigners will soon attack the US$ in a matter of time, using heavy US$-based reserves. Their banking sectors are in disarray, primarily because they are intimately tied to the US$ and USTBonds. The process has begun with Brazil and Mexico in Latin America, to use their strong reserves and sell into this queer US$ strength. That is what reserves are for.
The process will spread to other nations.
GOLD MARKET CLOSE TO BREAKING
The gap between the physical gold market and paper gold market is widening. An example bears this out. In Toronto this week, a major off-market gold transaction took place. The price paid was $1075 per ounce on the physical transaction. Its volume was in the multi-million$. There was no US involvement in the transaction, and the settlement was in euros.
Enormous repositioning is ongoing by the groups that will participate in the new, partially gold-backed currency. My take is this movement is from a large financial entity with global activity, and ties to central banks. It might be tied to the upcoming split in the euro, into a Nordic Euro and trashed Latin Euro. The Nordic version might contain a gold component. This and other transactions are taking place with European settlement. They are being satisfied in the alternative market, far from the distortions of COMEX. This was a physical transaction with the real metal being moved. Big shifts occur behind the scenes. A couple of months ago, 400 metric tonnes were moved into storage with the Royal Canadian Mint by a sovereign entity.
The more massive the paper manipulation, the more violent the coming correction. The asylum managers are losing control of their paper-physical arbitrage. Watch the gold lease rates, and silver lease rates, which have each more than tripled in the last two months. Lease rates precede price movement. Bullion bankers, including central banks, are reluctant to lease their physical supply. This time is no different, an event to come after the COMEX criminality is swept aside, or simply overwhelmed in return. One well-informed source, with over two decades of gold market experience, actually expects arrests to take place among COMEX officials before long.
John Embry of Sprott Asset Mgmt has raised the possibility of a December gold futures contract default. He is not predicting it, or claiming it as certain, but rather mentions how talk centers on the December gold contract as having extreme stress for actual delivery. Pressure is building. The December contract not only is end of quarter, but end of year. He suggests a possible default. He said, “there is probably going to be such an event to change perceptions.”
He cited a possible force majeure that could act as a “seminal event that defines the whole situation.” He explained that the physical gold price would then dictate the paper gold price, a return to normalcy, and with a gigantic move up in the gold price. Right now the paper gold market is overwhelming the physical side, but the physical side is constricted on supply. He explained that hedge funds are being unwound on a massive scale, slaughtered by margin calls. The long side must call for delivery on many contracts. He also expects there will be many questions on the Exchange Traded Funds soon as well, although those are surely not as important as the COMEX contract defaults. Watch and listen to his interview on the Canadian Business News Network (CLICK HERE), and be sure to move to the 10 to 11 minute mark.
NEW BRETTON WOODS II FARCE
Last weekend in Brussels, G8 Finance Ministers met.
Among other things, they discussed a reform to the global banking structures. For the many challenged on geography, that city is in Belgium, headquarters for many European Union functions, in Western Europe. Creditors were not present, which means the finance ministers were talking to themselves.
Credit masters were not invited. The nations whose banking systems are in the process of implosion are essentially attempting to revise the global currency system.
Those in attendance constitute the losers! However, the Arabs and Chinese were not present. This seems entirely backwards. The bankrupt nations do not dictate to the creditors terms of a revised agreement.
Imagine a large business saying the following. “We are bankrupt. We want a meeting. We are going to dictate to you bankers anyway. We are broke. Our economies are shattered. Our banking systems are in ruins. But we going to tell you how we are to restructure our debt and rework a new system. We realize our debts to you are bigger than we can ever repay. We realize we cannot continue in commerce without your continued extended credit. But we will force upon you a new system. It does not matter what your opinion is. You do not have a seat on this elite committee, sorry!” THIS FLOW IS NOT FROM THE WORLD OF REALITY!
No! Bankruptcy receivership is next, where creditors will be left with few options. They will be compelled to run management committees, and dissolve many functions of government. Creditors will probably await the G8 initiative, then summarily reject it. They will next propose their own new global financial structure. The teenager’s credit card is about to be taken away, when the irresponsible kid proposes a new repayment system, new promises, new chores done even. The kid has burned down half the neighborhood, yet thinks he can call the shots! Sadly, the parents will probably ground him and force a tutor to direct his studies, and force a strict drill sergeant to direct his work activities. His friends will not be permitted to form new teams that include him. A ‘Post-US World’ is being planned, and Americans are the last to know. Entire new barter systems between a key pair of nations is about to be launched. Regional bond and commodity organizations are being formed, with exclusion of the US. The US press reports nothing on these important developments.
Foreign creditors will form new committees, which will be recognized in time as the Receivership Committee.
Foreigners are watching in horror. Decisions have already been made, with Americans the last to know. In order to arrest the cancer they so clearly see, they are ready to force a complete upheaval. The USDollar will lose its global currency status, a thoroughly abused privilege. The above lack of disclosure only reinforces their motive to take action. They will move when they must, upon a system failure, or when they are challenged, or when flimsy attempts by debtors are made to dictate reform.
Without any changes forthcoming soon, the foreign banking systems and economies face huge threats to failure. To friends, family, and contacts, my approach has been to attempt to explain the underlying forces behind revolutionary financial change. Foreigners must cut off a cancerous body part, the one attached to the United States. Foreigners must cut off flow from a toxic systemic organ, the one attached to the United States. CUT IT OFF OR RISK DEATH. They must disconnect of USDollar from the global currency system attached intimately to their own financial and economic systems. They must to survive.
ARAB GOALS & MOTIVES
Arabs clearly lust to control and manage a global gold trading center. It will be in Dubai in the United Arab Emirates. The new Gulf dinar currency will pave the road to that center.
The Gulf Coop Council is biding time, cutting time delay deals, warding off pressure by the US Govt, appeasing with weapons contracts from the US Military, and is working behind the scenes to create a new dinar currency. The new Gulf dinar is likely to be primarily gold in its backing.
So, foreign nations will soon be forced to purchase the dinar for all or most of crude oil payments. This forces the purchase of gold in order to purchase crude oil. The demand for gold will thus fortify the global banking system, by means of commodity settlements. Many details are unknown, but the basic structure has been slowly come to light. A new motive flashes red in front of Arabs to institute some changes FAST. The crude oil price is down, cut in half from July. Their revenues are sharply reduced. Russia figures into the complex deal to launch the dinar. The Saudis and small sheikdoms need security protection. The next chapter will involve protection amidst a gold-backed currency, not a military-backed currency, in Saudi eyes.
ISOLATED US TREASURYS
The other side to the Arab dilemma is that the US
Treasury Bond demand is quickly eroding from Petro-dollar recycle on trade surplus. The USGovt finds itself as relying far too much on foreign central banks for demand of USTBonds, relying far too much soon on the printing press. The USTBond demand is missing the oil surplus in recycle. Their reduced and unstable oil revenue motivates the Arabs to install a new payment system, based upon an end to the ugly defacto Petro-dollar standard. It shamefully is the basis of what my analysis has called a Protection Racket.
The incredible fact evident in the data is that until mid-September, the US Federal Reserve has drained liquidity from the US private banking system in order to offset its colossal bond swap bailouts for major Wall Street and New York money center banks. Their objective was to avoid undue US$ money supply growth. THEY WERE TARGETING GOLD. They essentially drained the lifeblood from the USEconomy on Main Street in order to subsidize fraud sanctioned and approved on Wall Street. Only since mid-September has the USFed been monetizing USTBond debt issuance. They are running scared, printing with abandon. The gold price is falling as the USDollar printing press is rapidly heating up, no longer offset by bank system drains. Details are in the Hat Trick Letter report.
DESERVED DISRESPECT TO GREENSPAN
Can you believe what is happening before a Congressional banking committee? Greenspan is being grilled, as his past errors are vividly pointed out. His past memos are being read back to him. His wrong premises are being questioned as having being totally discredited. His opposition to credit derivative disclosure is being challenged. His opposition to Fannie Mae reform is being challenged. He has been brought to task for his steadfast opposition for reform in the past during his tenure as USFed Chairman. He is being interrupted by lowly Congressional reps. His time to speak is being cut, in defense of others to be grilled. HE IS BEING SHOWN THE DISRESPECT DESERVED OF ANY FAILED PUBLIC OFFICIAL. Maybe they will demand to know who paid his second paycheck from Switzerland, and what his agenda was! Not likely! My view is that Greenspan was a primary key person used to take down the US banking system, to pave the way for a bigger agenda. These are intelligent people who knew what they were doing, who were the cheerleaders, even the Mythology High Priest.
Greenspan admitted a grand flaw in his free market ideology.
He admitted being shocked that financial markets did not self-regulate. Hey Alan! They never self-regulate amidst a Fascist Business Model, since regulators and law enforcement is compromised as much as humanly or institutionally possible!
He admitted a failure in the global financial market structure as he perceived it, a stunning admission.
He acknowledged the USEconomy is faltering badly. He sees the rise in job layoffs and unemployment. He sees the retrenchment in consumer spending. He sees the price declines in housing without abatement. He forecasted a worsening recession.
His biggest admission is this. He admits to a flaw in the structural model perceived in the critically function for global banking. Wow! THAT IS A BIG ADMISSION, NOT PROPERLY PERCEIVING THE GLOBAL BANK STRUCTURE. He admits to how his risk pricing model did not take into account periods of financial stress. Hey Alan! Is that not what they are designed for? He used to boast for a full decade how offloaded risk via credit derivatives was a sign of sophistication, which enabled economic expansion. Instead, my view is that risk offload devices contributed toward an expansion atop a bubble, which when burst, killed the entire US banking system and then the USEconomy. He used to boast that credit derivatives shared the risk, but in fact it resulted in destruction on a widespread systemic basis. Recall the many claims made by Bernanke, that the subprime mortgage bond bust would be contained. The former Princeton Professor is not a good student of banking and economics! Unlike me, he is greatly encumbered by the limitations of economics credentials! Mathematics and statistics are pure science and its application as artistry.
NO SOLUTIONS FOR ECONOMY FROM BAILOUTS
Almost all US-based bailouts to date are to pay for dead financial firms. Their shareholders and bond holders and asset base have been repaired but not restored. To think this benefits the loan process is folly. It facilitates retirement to the Caribbean for corrupt bank executives.
The flow of federal funds will not find its way to the people, or at least only pennies per dollar will. The ‘Top-down Approach’ is destined to fail because the corruption, bond fraud, accounting fraud, financial instrument shell game, and other assorted illicit procedures are the cause of the problem, and all lie at the top of the structure intended to trickle down! To expect benefits downstream is lunacy. In fact, the devices to assist and subsidize the criminal behavior at the top are vastly expanding with multiple branches. No less than five special purpose vehicles created by JPMorgan Chase were announced on Wednesday. The number of USFed lending facilities, all to big banks, none to people on Main Street, has exploded to such an extent that one needs a sportsbook guide to comprehend all the acronyms. David Rosenberg of Merrill Lynch even coined the YAP, yet another program. Proliferation might be what the architects of the Financial Coup d’Etat intended. Confusion is the best friend of coup architects, just like truth is the first victim of war.
The people receive $1 for every $500 given to Wall Street elite in fraud redemption. The rank & file population entered a ‘Revolving Door’ of loan repayments that often do not reduce the loan balance, assured to end in foreclosure within a year or so. The same nonsense of ‘Trickle Down’ was prevailed when it has no past precedent of succeeding.
The lack of disclosure is a tragedy. Congress demands no better disclosure, and receives none.
The Lehman Brothers resolution has been conducted in total darkness. Evidence coming my way indicates that JPMorgan is using the dead Lehman carcass as a vast private arsenal to attack hedge funds. Some such funds have most of their assets frozen, while their positions are attacked. What is happening is criminal, a climax of this administration, which has been taken over by Wall Street. A complaint has been made that Treasury Dept documents look like redacted CIA documents, hardly what is needed to instill confidence.
One official decree after another undermines investor confidence, the last being short rule restrictions on financial stocks, with an exemption given to Goldman Sachs.
This is a selective bailout of Wall Street, a process run by Wall Street, permitting financial crimes worthy of 1000-page indictments.
DISTRIBUTION CHANNELS INTERUPTED
Big disruptive events are occurring in the distribution system. Letters of credit are routinely being refused by export nations who distrust US sources. A fall of 10% to 20% in shipping traffic to western US ports has been reported. Ships are empty at Asian ports, some even loaded but interrupted on their voyage to US ports and European ports. Many details are given in the October Hat Trick Letter reports. Even manufacturers of shipping vessels are being severely affected, as credit has interrupted construction projects. Indian suppliers are often demanding 100% upfront on costs to east coast retailers, again showing the distrust. Almost total attention has been given to banks and credit markets and stock markets. The USEconomy is moving from recession toward something different from depression. The current interruption could actually be more like disintegration. Short-term credit is soon to interfere greatly with truckers and railways in distribution channels on the domestic side, much like letters of credit are wrecking havoc on the overseas shipper side.
The next big shoe to drop is credit cards.
Bank of America has announced plans, not yet fully implemented, to cut back on credit cards to lower FICO scorers.
The lower 60%-ile of credit score recipients will find themselves without credit cards at all. One friend told
me that he used to own 10 credit cards. Recently, all
but four were simply discontinued, but a few were not used. Other friends said most of their credit limits were slashed. Changes are coming. Then the next big shoe to drop will be commercial mortgage default. No reprieve, rest, or respite for US bankers. Changes are coming. It will force defaults in most every conceivable financial corner.
DISHONOR AMONG BANKERS
The system is breaking down. Just when the heart attack signals are actually improving, although only slightly, the US Economy is falling off a cliff, as unprecedented decay is occurring. Some improvement has been seen with the short-term LIBOR rate, the money market funding, TED spreads, and mortgage bond spreads. But bankers and financial subsidiaries are in focus for dishonor.
The following message came yesterday to my desk.
It pertains to General Electric. It involved dishonored Letters of Credit (L/C). The US banks not only distrust each other, they are engaging in criminal activity, like contract fraud.
If big enough, or connected well enough to the power center, it is permitted. Again, no solutions, only proliferation of chaos.
“Try this one on. One of our clients did a bond early last year (underwritten by RBC/Dain Rauscher) backed up by a General Electric Letter of Credit. There is a tag end of $1 million. The deal was the sale and lease back of 13 bank branches.
One remains. The tenant is a regional bank. RBC cannot remarket the bond now because the market is still frozen.
So the client, per the documents, called on the L/C for performance (as allowed in the L/C, which extends to 2021).
GE has reneged on the L/C and will not pay unless the two principals come up with $1M in cash. The client has said no way, the L/C has no such provision. GE has said, too bad, if you don’t like it, talk to our attorney. We’re not paying.” Stories like this are probably surfacing all over the North American landscape. US banks are defending themselves by dishonoring contracts.
U.S. Futures Fall; S&P 500, Dow Contracts Drop to `Limit Down'
http://www.bloomberg.com/apps/news?pid=20601087&sid=amV1xqk.4OQ4&refer=home
By Michael Patterson
Oct. 24 (Bloomberg) -- U.S. stock futures tumbled, sending contracts on the Dow Jones Industrial Average and the Standard & Poor's 500 Index down by their daily limit, as lower sales and profits at automakers and technology companies heightened concern the financial crisis is infecting the broader economy.
General Motors Corp. declined 11 percent and Ford Motor Co. lost 7 percent after Toyota Motor Corp., the world's second- largest automaker, reported its first sales decline in seven years. Apple Inc. fell 8.4 percent as Samsung Electronics Co., Asia's largest maker of chips and mobile phones, had its biggest profit drop in more than three years. Exxon Mobil Corp. lost 5.7 percent as oil and gasoline prices retreated.
``Investors are surprised by the full-stop in the underlying global economy,'' said Espen Furnes, an Oslo-based money manager at Storebrand Asset Management, which oversees the equivalent of $48 billion. ``It's everywhere now.
I don't think any major economies will escape this.''
S&P 500 futures expiring in December fell 60, or 6.6 percent, to 855.2 as of 11:40 a.m. in London. Dow futures dropped 550, or 6.3 percent, to 8,224, while Nasdaq-100 Index futures retreated 82.5, or 6.6 percent, to 1,171.
The S&P 500 futures will not trade below 855.20 until U.S. exchanges open for regular trading at 9:30 a.m. New York time, said Jeremy Hughes, a London-based spokesman for the Chicago Mercantile Exchange. Dow Average futures won't trade below the 8,224 level, he said. The ``limit down'' suspension allows both contracts to trade above those levels, he said.
`Out of Control'
``Financial markets have crashed and are out of control,'' said Yuji Ogino, an executive director at Meiji Dresdner Asset Management Co., which oversees the equivalent of $28 billion in Tokyo. ``This crash is different from anything I've experienced since getting into this business.''
Europe's Dow Jones Stoxx 600 Index slumped 9.2 percent today and the MSCI Asia Pacific Index sank 4.9 percent.
The MSCI All-Country World Index, a gauge of equity markets in developed and emerging nations, has tumbled 47 percent this year as a freeze in credit markets sparked by $659 billion of asset writedowns and credit losses at banks raised concern that the global economy is headed for a recession. About $30 trillion of market value has been erased from global equities in 2008, according to data compiled by Bloomberg.
GM, the biggest U.S. automaker, dropped to $5.44 in Germany and Ford, the second-largest, declined to $1.86.
Toyota sold about 2.236 million vehicles worldwide in the three months ended Sept. 30, down 4.3 percent from 2.336 million a year earlier. GM will release its third-quarter sales figure on Oct. 29.
Automakers
Volvo AB, the world's second-largest maker of heavy trucks, cut its industry growth outlook for this year, and PSA Peugeot Citroen, Europe's second-biggest carmaker, cut its full-year targets.
Apple, the maker of iPhones and iPods, dropped to $90.01. Intel Corp., the world's largest chipmaker, declined 3.5 percent to $14. Samsung's profit tumbled as oversupply drove down prices of semiconductors.
Earnings at the 200 companies in the S&P 500 that reported third-quarter results so far dropped by an average of 23 percent, trailing analysts' expectations by 1.6 percent, according to data compiled by Bloomberg.
General Electric Co., the economic bellwether whose products range from lightbulbs to power-plant turbines, dropped 5 percent to $17.86. The company said it plans to use the Federal Reserve's new short-term funding facility when it starts next week.
Microsoft Corp. retreated 6.8 percent to $20.81 even as the world's largest software maker reported profit and sales that beat analysts' projections.
Exxon, Chevron
Exxon, the biggest U.S. oil company, declined to $66.37. Chevron Corp., the second-largest, lost 5 percent to $63.40.
Crude futures fell as much as 7.1 percent to $63.05 a barrel in New York on speculation a potential OPEC output cut will fail to stave off price declines as global economic growth slows and fuel demand wanes.
The U.K.'s FTSE 100 Index dropped 7.5 percent after the economy shrank for the first time since 1992. South Korea's Kospi Index sank 11 percent as the country's economy grew at the slowest pace in four years.
The yen climbed against the dollar as the risk of a global recession prompted investors to slash carry trades, in which they fund purchases of higher-yielding assets with the Japanese currency.
Treasuries rose, headed for their biggest weekly gain since 1995. The 10-year yield fell 35 basis points this week, the most since May 1995, on speculation government and central bank efforts to revive lending won't avert a global slowdown.
To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net.
Last Updated: October 24, 2008 06:49 EDT
Cash-rich companies see opportunities amid turmoil
Thu Oct 23, 2008 3:46pm EDT
http://www.reuters.com/article/innovationNews/idUSTRE49M85620081023?sp=true
PHILADELPHIA (Reuters) - Companies as diverse as fertilizer maker Potash Corp (POT.TO: Quote, Profile, Research, Stock Buzz), pharmaceutical firm Merck & Co Inc (MRK.N: Quote, Profile, Research, Stock Buzz) and steelmaker Nucor Corp (NUE.N: Quote, Profile, Research, Stock Buzz) all have one thing in common: they view the financial market turmoil as opening up acquisition opportunities.
Companies with strong balance sheets and the luxury of cash may pursue acquisitions even though most dealmaking has been frozen by the lack of funding available in the credit markets.
Overall, the volume of mergers and acquisitions has dropped 24.7 percent so far this year worldwide, and fallen 29.7 percent in the U.S., according to Thomson Reuters data.
Despite this drop in total M&A, deals by corporations have seen less of a decline, softening only 12.3 globally and 7.6 percent in the U.S., according to Thomson Reuters data.
"There are a lot of companies sitting on significant cash that we think will be used once there's some stability in the market," said Tim Ghriskey, chief investment officer of Solaris Asset Management.
"The availability of credit is difficult, but if a company has the ability to finance it themselves and they have the cash on their balance sheets, they can do it," Ghriskey said.
Many of the recent deals forged amid the credit crisis where done under duress or timed to help ailing companies, such as the takeover of Bear Stearns by JP Morgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz), the planned acquisition of Constellation Energy Group Inc (CEG.N: Quote, Profile, Research, Stock Buzz) by MidAmerican Energy and the planned takeover of Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz) by Wells Fargo & Co (WFC.N: Quote, Profile, Research, Stock Buzz).
OPPORTUNISTIC BUYING
The next wave of deals could be powered by companies looking to take advantage of the market downturn to find cheap assets, analysts said.
"Opportunities in front of us are greater today than before and were not there a few weeks ago," Nucor Chairman, President and Chief Executive Officer Dan DiMicco said earlier this month. "Everybody's stock price has been beaten to death."
Drugmakers Eli Lilly & Co (LLY.N: Quote, Profile, Research, Stock Buzz), Roche Holding AG (ROG.VX: Quote, Profile, Research, Stock Buzz), Merck and Bristol-Myers Squibb Co (BMY.N: Quote, Profile, Research, Stock Buzz) have said that the financial crisis, by lowering the values of other drugmakers, could help them make acquisitions or forge drug-development deals.
"Right now the biotech companies are probably going to struggle the most in this environment," Eli Lilly Chief Executive John Lechleiter said.
"Certainly traditional sources of funding and the traditional capital markets that biotech companies have accessed are withering right now," Lechleiter said. "I think there is a sense that Big Pharma could provide that capital that many biotechs are looking for."
Companies in other sectors have been equally vocal about the opportunity for acquisitions.
Early this month, U.S. life insurance company MetLife Inc (MET.N: Quote, Profile, Research, Stock Buzz) raised $2 billion in fresh capital and said it was a moment of "real opportunities" for acquisitions.
Bill Lyons, chief financial officer of coal miner Consol Energy Inc (CNX.N: Quote, Profile, Research, Stock Buzz), said smaller rivals with substantial debt would be hit the hardest by the global economic slowdown.
Consol could benefit from that, since it "has liquidity and robust cash flows and is in an excellent position to take advantage of opportunities out there," Lyons said.
Meanwhile, Potash Corp of Saskatchewan (POT.TO: Quote, Profile, Research, Stock Buzz) (POT.N: Quote, Profile, Research, Stock Buzz), the world's largest fertilizer maker, this week increased its stake in Israel Chemicals Ltd (ICL.TA: Quote, Profile, Research, Stock Buzz) and said it may see more buying opportunities.
"We think there are opportune times right now. Certain competitors of ours may find themselves to be in a leveraged position unexpectedly and there may be opportunity for us to take advantage of that," Chief Executive Bill Doyle, said on Thursday.
WHY SELL ON THE LOW SIDE?
With the Standard & Poor's 500 Index down 40 percent this year, and the Dow Jones industrials average off 36.5 percent, would companies be willing to sell at such cheap levels?
"You get benefits even if you don't sell on top of the market," said Carsten Stendevad, Global Head of Citi's Financial Strategy Group. "In fact, the market reaction to asset sales is particularly strong in bear markets."
A study by Citi's Financial Strategy Group found that companies announcing divestitures have outperformed risk-adjusted market benchmarks over the short-term and long-term.
"Divestitures undertaken by poorly performing firms and divestitures initiated in weak economic environments have been particularly well received by investors," according to the Citi research.
"Selling assets is emotionally difficult for most companies," Stendevad said. "Yet, the rewards from selling are clear: investors consistently reward companies for selling, and sellers generally receive multiples expansion one year after the sale."
(Additional reporting by Steve James, Michael Erman and Juan Lagorio in New York, Roberta Rampton in Toronto, editing by Gerald E. McCormick)
"Under water" mortgages are growing threat to U.S.
Wed Oct 22, 2008 10:32am EDT By Tom Brown
http://www.reuters.com/article/newsOne/idUSTRE49L01S20081022?sp=true
CAPE CORAL, Florida (Reuters) - Long before she filed for bankruptcy, Ann Neukomm was "under water" -- she owed more on her mortgage than her house was worth -- a situation more and more Americans are finding themselves in.
As the financial crisis hits Main Street America, nearly one in six U.S. homeowners are finding themselves in the same position, threatening the U.S. economy with a new wave of foreclosures and bankruptcies.
About 12 million U.S. homeowners owe more than their homes are worth, compared with 6.6 million at the end of last year and slightly more than 3 million at the close of 2006, said Mark Zandi, chief economist at Moody's Economy.com.
"At the root it's 'the' problem," said Zandi. "If you're going to put your finger on the one thing that's gotten us into this fiasco, it's the fact that millions of homeowners are under water on their homes."
If, like Neukomm, these homeowners go into foreclosure, it would add to the oversupply of homes, delay a recovery in the housing market, and add to pressure on banks.
Already, U.S. consumer spending is slumping as homeowners find they can no longer take equity out of their homes to fund their lifestyles.
In a slowing economy, it doesn't take much to push an underwater mortgage into default.
"When you're under water and you have some kind of hit to your income or some kind of unintended expense, that's when you default. And so now we've got this noxious mix of millions of people under water and quickly rising unemployment," Zandi said.
Like Neukomm, 57, many people got into trouble by refinancing mortgages to pull out cash when rising property values made it seem like an almost risk-free deal.
She ended up filing for bankruptcy in May after failing to keep up with mortgage payments on her home in Cape Coral, a once-booming town in southwest Florida.
"It's a dirty word," said Neukomm of her bankruptcy and personal feelings of failure. "Nobody wants to say it."
WASTELAND
Cape Coral, built over swampland near Fort Myers on Florida's palm-fringed Gulf Coast, was fertile ground for the real estate boom, which peaked across much of the United States three years ago.
It is now a wasteland, with barren strip malls, a bloated inventory of unsold or abandoned homes and ubiquitous for-sale signs that speak volumes about the plunge in housing prices and surge in mortgage defaults that triggered the U.S. credit crunch last year.
With current home prices likely to decline on average by another 10 percent, Zandi said there will be 14.6 million homeowners under water by September next year.
"House prices have collapsed and you've got many homeowners who bought homes in the last three years who put very little down or have been borrowing against their homes," said Zandi. "That's causing this to rise very rapidly."
Economists like Zandi worry that the underlying housing crisis could eventually prove much more costly to the U.S. taxpayer than the $700 billion the U.S. government has pledged to recapitalize banks and buy up distressed debt from financial institutions.
"The government is going to have to start filling this negative equity hole and that's just going to be a direct cost to taxpayers," Zandi said. "This is going to be the really costly part, I think, for taxpayers."
While the U.S. government has focused its rescue on banks, it has done little to help individuals who are struggling to pay their mortgages, apart from the HOPE NOW program, which has facilitated a few hundred thousand mortgage restructurings.
The government may have no option but to step in, especially if a rising tide of foreclosures and falloff in property and other tax revenues endanger municipalities and local governments and force some into bankruptcy.
Both presidential candidates have outlined plans for relief for distressed homeowners but critics say they have been short on details and there appears to be little consensus about how best to help homeowners who are under water.
DREAM HOME
Among homeowners in danger is Virginia Washington, a 64-year-old medical secretary from California who bought her retirement home in the town of Tolleson, Arizona, in 1996.
"It was supposed to be my dream home, but it has turned out to be a nightmare," said Washington, who owes $207,000 on a house that is worth about $150,000.
Whereas many families that are now saddled with negative equity simply hand the keys back to the bank and walk away, Washington is haunted by the fear of losing the $65,000 in savings she put down as her deposit.
"Many people did not put any money down on a home and they feel free to walk away. But $65,000, there's no money tree that grows that kind of money," she said.
In Stockton, California, a town that has become a posterchild of the U.S. housing crisis, Zillow.com said nearly every homeowner who bought in 2006 is now under water.
There are countless other troublespots across the country.
Nationwide, for those who purchased U.S. homes since the beginning of 2003, nearly one in three now have negative equity. Nearly half of buyers who purchased in 2006 are under water.
Despite tighter credit and underwriting for home loans this year, Steve Berg, a managing director at research firm LPS Applied Analytics, said mortgages originated in 2008 were on par or trending worse than those originated last year or in 2006.
"Presumably the equity position of the borrowers in the loans originated this year should be better," Berg said in an interview. "That doesn't appear to be the case, and certainly not to the magnitude you'd expect."
Foreclosed homes already account for 50 percent of all home sales in some markets, according to Zillow.com, an online real estate research service.
For homeowners like Neukomm, any solution to the negative equity problem will be too late. Any day now, she says she expects to receive a letter giving her 21 to 30 days to abandon the house she bought back in 2000.
"I can make my credit card payments. I just can't do it with the house," she said, adding that she was now looking at rental properties in Cape Coral.
(Reporting by Tom Brown; Additional reporting by Tim Gaynor in Phoenix, Julie Haviv in New York and Emily Kaiser in Washington; Editing by Eddie Evans)
Barack Obama's team is briefed by Bush staff after warnings about a terrorist attack.
Senior aides to Barack Obama have been meeting George W.Bush's staff to begin planning a smooth transfer of power.
By Tim Shipman in Washington
Last Updated: 1:31PM BST 19 Oct 2008
Officials from both campaigns have been asked to briefings after warnings from US intelligence that terrorists and rogue states will seek to exploit the power vacuum following November's presidential election.
For the first time in American history the FBI has begun vetting likely officials of the next administration before the election, to ensure they have security clearance to deal with crises on day one.
Intelligence chiefs expect an attempt to emulate the terrorist strikes on Britain when Gordon Brown took power and are concerned that Russia or Iran could use the 77 days of paralysis between the election and the inauguration on January 20 for acts of international brinkmanship, like the invasion of Georgia.
An official involved in the transition discussions told The Sunday Telegraph: "There has been no specific threat but the assessment is that someone will try something.
"It could be a terrorist attack on US assets overseas. It could be the leader of a rogue state chancing his arm. Putin and Ahmadinejad have form."
The transition of power in the US is a chaotic process. More than 1,100 political appointees in senior posts have to be approved by the Senate, a process that can take months.
On Wednesday the current White House chief of staff, Josh Bolten, chaired a meeting of senior White House staff and representatives of both Mr Obama and his Republican rival John McCain.
President Bush's creation of this Presidential Transition Coordinating Council, the earliest ever, is designed to
avoid a repeat of the situation on September 11 2001, when
only one third of his national security appointees had been approved by the Senate, nine months into his presidency.
Martha Kumar, director of the White House Transition Project, an independent group that advises the transition teams of both campaigns, told The Sunday Telegraph: "The times of changing of power are soft times, times of vulnerability. Just look at what has happened around the world, including in Great Britain.
"You had the failed bombings in London and then the attack at Glasgow airport three days after Gordon Brown took office. In Spain the Madrid bombings were three days before the presidential election."
There have been particularly intensive efforts to make sure Mr Obama has his national security team in place, not just because he is widely expected to win the election on November 4, but because intelligence analysts believe America's enemies are more likely to try to take advantage of Mr Obama's international inexperience than they would of Mr McCain.
A senior official in the Obama camp, whose name has been submitted for FBI vetting, said: "We will be ready and we will be seen to be ready."
He said that Mr Obama is close to finalising plans for his first 100 days in power - which will include major moves on the economy, healthcare and Iraq in his first week, designed to make his priorities clear to Americans.
He is planning a series of early interventions to stamp his authority on the economic crisis. This will include legislation proposing a $300bn stimulus package which would be published before President Bush has even left the White House, so that it can be passed as soon as he takes power.
Mr Obama is also planning executive orders that do not require legislation on his first day in office, which could include plans to promote renewable energy resources and create jobs.
His transition team, which is reportedly much more extensive and active than Mr McCain's, features 10 working groups in different policy areas to convert campaign promises into concrete legislation. It is chaired by John Podesta, Bill Clinton's former White House chief of staff who runs the Centre for American Progress, a think tank long seen as a Democratic administration in exile.
Mr Podesta is working closely with Michael Signer, a former foreign policy aide to John Edwards in charge of homeland security affairs. Mr Podesta and Jason Furman, one of Mr Obama's two most influential economic advisers, have already held talks with sceptical conservative Democrats to line up the votes to pass a stimulus package.
Mr Obama has also worked to cultivate a close relationship with the Treasury Secretary, Henry Paulson, and personally asked him to help out during the transition, sparking speculation that he might keep Mr Paulson in post for the first year of his presidency.
Ms Kumar said: "There are things that a president can do immediately that establish his brand of leadership and help establish with the public what the priorities are.
"Reagan issued executive orders at the luncheon following the inauguration. He didn't even wait to get to the White House.
He wanted to show how seriously he took the issue of the economy."
FBI vetting is also under way on 100 people from both campaigns, including Susan Rice, expected to be made the second successive black woman national security adviser after Condoleezza Rice; Greg Craig, a Washington lawyer tipped to become Mr Obama's chief White House counsel and his likely White House chief of staff; and the former senator and campaign chairman Tom Daschle. If Daschle prefers to become Health Secretary, Obama's current chief of staff Pete Rouse, nicknamed the 101st Senator for his connections on Capitol Hill, would take the job.
Other key national security officials will include Denis McDonough, chief foreign affairs adviser to the campaign and Richard Danzig, a secretary of the Navy under Clinton.
John Kerry, the Democratic candidate four years ago, and his fellow senator Chris Dodd, a failed candidate this year, are vying to become Secretary of State.
Mr Kerry, an Army veteran, is also a contender to take control of the Pentagon, but many expect that post to go to a Republican, perhaps the maverick senator Chuck Hagel.
Colin Powell, a former secretary of state and chairman of the joint chiefs could return to government if he endorses Obama, as many expect. The veteran Democratic Senator Sam Nunn's name is also in the frame.
Don't Blame Capitalism
By Peter Schiff
Thursday, October 16, 2008; Page A19
Amid the chaos of recent days, as the federal government has taken gargantuan steps to stabilize the financial markets, realigning the U.S. economic system in the process, comes a nearly universal consensus: This crisis resulted from government reluctance to regulate the unbridled greed of Wall Street. Many economists and market participants who were formerly averse to government interference agree that a more robust regulatory framework must be constructed to cage the destructive forces of capitalism.
For the political left, which has long championed the need for such limits, this crisis is the opportunity of a lifetime.
Absent from such conclusions is the central role the government played in creating the crisis. Yes, many Wall Street leaders were irresponsible, and they should pay. But they were playing the distorted hand dealt them by government policies. Our leaders irrationally promoted home-buying, discouraged savings, and recklessly encouraged borrowing and lending, which together undermined our markets.
Just as prices in a free market are set by supply and demand, financial and real estate markets are governed by the opposing tension between greed and fear. Everyone wants to make money, but everyone is also afraid of losing what he has. Although few would ascribe their desire for prosperity to greed, it is simply a rose by another name. Greed is the elemental motivation for the economic risk-taking and hard work that are essential to a vibrant economy.
But over the past generation, government has removed the necessary counterbalance of fear from the equation. Policies enacted by the Federal Reserve, the Federal Housing Administration, Fannie Mae and Freddie Mac (which were always government entities in disguise), and others created advantages for home-buying and selling and removed disincentives for lending and borrowing. The result was a credit and real estate bubble that could only grow -- until it could grow no more.
Prominent among these wrongheaded advantages are the mortgage interest tax deduction and the exemption of real estate capital gains from taxable income. These policies create unnatural demand for home purchases and a (tax-free) incentive to speculate in real estate.
Similarly, the FHA, Fannie and Freddie were created to encourage lending by allowing primary lenders to turn their long-term risk over to the government. Absent this implicit guarantee, lenders would probably have been much more conservative in approving borrowers and setting interest terms, and in requiring documentation of incomes and higher down payments. Market forces would have kept out unqualified buyers and prevented home-price appreciation from exceeding the growth in household income.
Interest rates contributed the most to creating the housing boom. After the dot-com crash and the slowdown following the attacks of Sept. 11, 2001, the Federal Reserve took extraordinary steps to prevent a shallow recession from deepening. By slashing interest rates to 1 percent and holding them below the rate of inflation for years, the government discouraged savings and practically distributed free money.
Artificially low interest rates invigorated the market for adjustable-rate mortgages and gave birth to the teaser rate, which made overpriced homes appear affordable. Alan Greenspan himself actively encouraged home buyers to avail themselves of these seeming benefits. As monetary policy caused houses to become more expensive, it also temporarily provided buyers with the means to overpay. Cheap money gave rise to subprime mortgages and the resulting securitization wave that made these loans appear safe for investors.
And even today, as market forces deflate the credit bubble,
the government is stepping in to re-inflate it. First came the Treasury's $700 billion plan to purchase mortgage assets that no one in the private sector would buy. Now it has recapitalized banks to the tune of $250 billion, guaranteeing loans between banks and fully insuring non-interest-bearing accounts. Policymakers say that absent these steps,
banks would not be able to extend loans. But given our already staggering debt burden, perhaps more loans are not the answer. That's what the free market is telling us. But the government cannot abide solutions that ask for consumer sacrifice.
Real credit can be supplied only by savings, so artificial steps to stimulate lending will only produce inflation. By refusing to allow market forces to rein in excess spending, liquidate bad investments, replenish depleted savings, fund capital investment and help workers transition from the service sector to the manufacturing sector, government is resisting the cure while exacerbating the disease.
The United States reached its economic preeminence on the strength of its free markets. So far, the economic disaster exacerbated by government policies is creating opportunities for further government interference, which will lead to bigger catastrophes. Binding the country to a tangle of socialist ideals will seal our fate as a second-rate economic power.
The writer, who was economic adviser for Ron Paul's 2008 presidential campaign, is president of Euro Pacific Capital. He is the author of "The Little Book of Bull Moves in Bear Markets."
The LIBOR Disconnection
Posted by David Gaffen
In the last several months, the U.S. Federal Reserve has promulgated various lending facilities with long, complicated names. There are many missions, but one in particular: getting major banks comfortable with lending to each other on a short-term basis at levels that aren’t exorbitant. In short, doing what banks, until August of last year, did without batting an eyelash.
So far, it hasn’t worked, and it’s become a source of frustration to banking executives, as Citigroup Inc. CFO Gary Crittenden noted on his company’s earnings conference call Wednesday.
“Obviously there are a lot of people who are focused on what could happen to bring LIBOR down,” he told analysts. “We will take action, obviously, if it continues to be kind of disconnected, if the pricing and the cost of funds continue to be disconnected.”
The question is, where will the money come from? The short-term funding needs of banks have largely been satisfied in the overnight and short-term lending markets, where banks borrow from each other, using unsecured loans, paying the London interbank offered rate, or LIBOR, which generally is set a few hundredths of a percentage point above the U.S. Federal Reserve’s federal-funds target.
Right now, the best option for Citigroup and others is the Federal Reserve. Thanks to the various lending facilities the Fed has set up, banks have been working around their inability to borrow from each other (a self-serving cycle, in a way) by going to the Fed.
With the current fed-funds rate at 1.5%, a normal LIBOR rate would be in the range of 1.55% to 1.65%. But the spread between LIBOR and the funds rate started to widen out in August of 2007 and has not snapped back to its previous shape.
As of Thursday morning, overnight LIBOR was 1.94%, or 0.44 percentage point above the federal-funds rate. Wednesday, that rate was 2.14%, and it continues to fluctuate wildly due to the thin trading in that market.
Banks don’t have a lot of other options for short-term funding. Commercial paper rates are higher for banks than for similarly rated corporations, and it’s a less popular market for banks. “They don’t have a lot of good options, except for one biggie, and that’s the unlimited sources of funding from central banks,” says James Bianco of Bianco Research.
But using the central bank as a crutch is disruptive to the short-term markets. Banks can’t accurately portray overnight and short-term rates if little borrowing is happening, and that results in LIBOR being little more than a guess.
For example, three-month LIBOR was set at 4.50% Thursday. Normally the banks surveyed would have put it right around that level, but the difference between the highest and lowest bank was nearly a full percentage point, Mr. Bianco said.
“When they don’t deal with each other, these other markets cease to exist,” he said. “And we need a benchmark for short-term funding for everybody outside the banking system.”
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100.
If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that's what they decided to do.
The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve.
'Since you are all such good customers, he said, 'I'm going to reduce the cost of your daily beer by $20.
Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free.
But what about the other six men - the paying customers?
How could they divide the $20 windfall so that everyone would get his 'fair share?'
They realized that $20 divided by six is $3.33.
But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.
So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same way Tax Savings are dispersed, and he proceeded to work out the amounts each should pay.
And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (2 5% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before.
And the first four continued to drink for free.
But once outside the restaurant, the men began to compare their savings.
'I only got a dollar out of the $20,'declared the sixth man.
He pointed to the tenth man,' but he got $10!'
'Yeah, that's right,' exclaimed the fifth man.
'I only saved a dollar, too. It's unfair that he got ten times more than I!'
'That's true!!' shouted the seventh man.
'Why should he get $10 back when I got only two?
The wealthy get all the breaks!'
'Wait a minute,' yelled the first four men in unison.
'We didn't get anything at all. The system exploits the poor.'
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him.
But when it came time to pay the bill, they discovered something important.
They didn't have enough money between all of them for even half of the bill!
And that, boys and girls, journalists and college professors, is how our tax system works.
The people who pay the highest taxes get the
most benefit from a tax reduction.
Tax them too much, attack them for being wealthy, and they just may not show up anymore.
In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.
For those who understand,
no explanation is needed.
For those who do not understand,
no explanation is possible.
B of A's Biggest Bet Ever
[Some things have changed since this article was written three weeks ago; however, inasmuch as the Merrill acquisition is an all-stock deal, the size of the acquisition in relation to BAC’s market cap is unchanged from when the deal was announced.]
http://online.barrons.com/article/SB122187666961059619.html
›September 22, 2008
By JACQUELINE DOHERTY
Last week, when almost all financial companies were playing defense, Bank of America CEO Ken Lewis went on the offense. After years of coveting the Thundering Herd, Bank of America purchased Merrill Lynch and its 16,690 retail brokers for $50 billion in stock. While some bemoan what they consider a hefty price tag, given the questionable value of some of Merrill's assets, the deal is a sign of Lewis' confidence in Bank of America's long-term prospects, not to mention those of the U.S. economy and the nation's roiled financial markets.
If the deal is approved by both companies' shareholders, a combined B of A and Merrill Lynch would be a behemoth, with leadership positions in commercial, consumer and investment banking and retail brokerage. Its sources of revenue will be much more evenly distributed than the current Bank of America's (ticker: BAC), which depends disproportionately on consumer and commercial banking. The new company should be able to generate 6% to 9% annual revenue growth, and 10% growth in earnings per share, on "the other side" of the current financial crisis, Lewis told Barron's last week. If his assumptions about loan performance and the economy are correct, the deal should add to Bank of America's earnings by 2010.
"Merrill Lynch fills the two holes we had," Lewis said, referring to global investment banking and a broader wealth-management business. Merrill (MER) joins a stable of Lewis-acquired companies, including Countrywide Financial, MBNA and FleetBoston Financial, that form today's Bank of America, a colossus in its own right with $1.6 trillion of tangible assets and a market capitalization of $171 billion, even after its shares, now 37.48 apiece, have been punished.
"We don't need anything else," Lewis insisted.
B of A's boss struck the Merrill deal believing the U.S. is in a shallow recession and that the credit crisis wracking the financial markets for more than a year is approaching a bottom. A true bottom won't emerge, he says, until the nation's housing market starts to stabilize, something he expects to happen in the first half of 2009.
"Interest rates have decreased, and our mortgage-refinancing volumes have increased," Lewis notes. "Hopefully, that will be part of the cure."
Lewis forecasts continued high levels of loan charge-offs for B of A and the need to keep building loan-loss reserves. The Charlotte, N.C.-headquartered bank has set aside $17 billion in the past four quarters for credit losses and to boost reserves. Even if residential real-estate losses, and losses on securities tied to residential mortgages, decrease, losses in the bank's credit-card and commercial-loan portfolios are likely to grow if the broader economy softens. While this will keep overall earnings depressed, Lewis doesn't expect Bank of America to slip into the red.
In its latest quarter, for example, B of A's revenue exceeded $20 billion, owing in part to the difference, or spread, between the low rates the bank pays on deposits and the higher rates it can charge for loans. The company provided for $5.8 billion of loan losses, an expense three times that incurred in the same quarter of 2007. But it still managed to generate $3.4 billion of net income, or 72 cents a share. Analysts expect Bank of America to earn $11 billion, or $2.39 a share, this year. Lewis credits "diversity, and a risk-management system that didn't catch it all, but put us in a better position than many."
Buying Merrill Lynch, with its billions in troubled assets, could threaten that position -- or burnish B of A's status and bottom line. Analysts question the value of about $86 billion of Merrill's assets, including almost $9 billion of collateralized debt obligations, or CDOs; $22.9 billion of commercial-real-estate exposure, and $17 billion of non-prime residential mortgages, according to Bernstein Research. Merrill's assets would be subsumed into B of A's $871 billion loan portfolio and $460 billion portfolio of securities.
If Merrill's loans are priced to market and the market accurately reflects future losses, they won't cause losses for Bank of America. If they aren't priced low enough, however, B of A might have to increase its write-offs, which would hurt the bank's earnings, shrink its assets and eat into its capital base. The U.S. Treasury's move Friday to establish a rescue plan that would buy distressed assets from financial institutions could help to stabilize debt prices -- potentially a plus.
In the best-case scenario for B of A and its holders, Merrill's assets will have been marked too conservatively, and its loans will perform better than expected. As such, Bank of America would pocket the gains, and its assets and equity would increase. That's hard to imagine amid the revelations of recent weeks, but not impossible.
The Merrill deal is likely to close in the first quarter. So far, large investors haven't "given us any push-back on the strategic benefit of the deal," says Lewis. But they have questioned the amount of due diligence the bank conducted in a deal that came together over a weekend, as well as the price B of A agreed to pay in the all-stock deal -- $32 per Merrill share, based on Bank of America's current price.
A sum-of-the-parts valuation of Merrill performed by Bernstein analyst Brad Hintz might still some skeptics, as it suggests B of A bought Merrill's loans at a discount to their value. That could help it compensate for further losses. Hintz values Merrill's equity stake in asset manager BlackRock (BLK) at roughly $13 billion, its retail brokerage business at $26.7 billion and its capital-markets operation at $16.2 billion, or 0.75 times tangible book value, for a total price tag of $35 per share.
As for B of A itself, the company had $163 billion of shareholder equity at the end of the second quarter, but only $75 billion in tangible equity. As a result, its ratio of tangible equity to tangible assets -- some 4.6% -- is a bit below the industry norm of 5% to 7%. Citigroup 's (C) ratio is 4.05% and JPMorgan Chase 's (JPM) is 4.84%, according to RBC Capital Markets.
Lewis -- and regulators -- prefer to look at the bank's Tier 1 capital ratio, or its equity divided by risk-adjusted assets. B of A's Tier 1 ratio stood at 8.25% in the second quarter, and will decline to 7.4% after the July close of the bank's Countrywide Financial purchase and the forthcoming purchase of Merrill. The feds consider a bank with a 6% Tier 1 ratio well capitalized, and Lewis aims to return the ratio back above 8%.
Lewis doesn't plan to sell equity to achieve that goal, but he may sell stakes the bank holds in China Construction Bank and other entities, and cut the dividend. Bank of America pays about $11 billion of dividends annually, and isn't likely to earn more this year than its annual payout of $2.56 a share. The dividend's abnormally high 7.1% yield implies that the market expects a reduction.
From a strategic perspective, the deal has much to recommend it. The Merrill Lynch private-client business will go far to balance Bank of America's revenue mix. In the first half of 2008, the combined company would have generated 48% of revenue from the consumer and small-business commercial-banking group; 32% from the global corporate and investment bank, and 20% from asset management. Prior to the deal, the split was 70%, 24% and 6%.
Wealth management has historically been a business with steadier, more consistent revenue, a higher growth rate (due to an aging population) and wider margins. It also has garnered price/earnings multiples that can be double those of commercial banks.
The deal also creates cross-selling opportunities for B of A -- something often promised in mergers but rarely delivered. Among the bank's clientele are eight million "mass affluent" customers, with assets of $100,000 to $3 million, says Lewis. Merrill brokers won't have to make cold calls to drum up business, with so many hot leads.
Conversely, if Bank of America uses Merrill brokers to sell more services to B of A clients, it's less likely those clients will get poached by the competition. "If you have more relationships with the customers, they're more likely to stay with you and be more profitable," says RBC analyst Joe Morford.
Lewis plans to retain the Merrill name, keep the retail-brokerage operation intact and provide retention bonuses for financial advisers. Merrill also brings to Bank of America a top-notch investment-banking operation that can provide financial services to the bank's commercial clients.
Lewis has targeted $7 billion of cost savings from the merger, equal to 10% of the combined companies' cost base, or 25% to 30% of Merrill's cost base, RBC calculates.
Ken Lewis has rolled the dice on a risky deal at an uncertain time. If it succeeds, and adds long-term value to Bank of America's franchise, he'll be viewed as the consummate value investor -- and one of the key architects of a new and stronger Wall Street.‹
Fed orders emergency rate cut, other banks follow
By JEANNINE AVERSA, AP Economics Writer 8:00 am
http://news.yahoo.com/s/ap/20081008/ap_on_bi_ge/fed_interest_rates;_ylt=Aq2cWAhq3fCoe3U9gVZfJ86yBhIF
WASHINGTON - The Federal Reserve, acting in coordination with other global central banking authorities, cut a key U.S. interest rate by half a percentage point Wednesday to steady a teetering economy.
The Fed reduced its key rate from 2 percent to 1.5 percent.
In Europe, which also has been hard hit by the financial crisis, the Bank of England cut its rate by half a point to 4.5 percent, while the European Central Bank sliced its rate to 3.75 percent.
Other central banks also taking part include the banks of Canada, Sweden, and Switzerland.
China also cut its key interest rates Wednesday for a second time in less than one month to stimulate slowing economic growth amid the global credit crisis.
Fed Chairman Ben Bernanke and his colleagues ratcheted down their key rate by 0.5 percentage point to 1.5 percent.
The action revives the central bank's rate-cutting campaign which had been halted in June out of concerns that those low rates would worsen inflation. Since then, however, economic and financial conditions have dangerously deteriorated, forcing the Fed to reverse course.
The fact that the Fed felt it couldn't wait until its regularly scheduled meeting on Oct. 28-29, underscored the urgency of the situation.
The Fed took the action in a coordinated move with other central banks, which also were cutting their rates.
"The pace of economic activity has slowed markedly in recent months," the Fed said "Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit."
Although inflation has been high, the Fed believes that the recent drop in energy prices and the weaker prospects for economic activity have reduced this threat to the economy.
The Wednesday cuts come as markets in Asia and Europe sink amid waning confidence, Britain steps in to support banks, and Russia closes its main stock market for two days.
In addition, the Fed reduced its emergency lending rate to banks by half a percentage point to 1.75 percent. Given the intense credit crisis, banks have been ramping up their borrowing from the Fed's emergency "discount" window.
In response, the prime lending rate for millions of borrowers will drop by a corresponding amount. The prime rate applies to certain credit cards, home equity lines of credit and other loans.
The hope was to spur nervous consumers and businesses to spend more freely again. They clamped down as housing, credit and financial problems intensified last month, throwing Wall Street into chaos. Many believe the country is on the brink of, or already in, its first recession since 2001.
The Fed's last rate cut was in late April, capping one of the most aggressive rate-cutting campaigns in decades as it scrambled to shore up the faltering economy. After that, the Fed moved to the sidelines, holding rates steady as zooming food and energy prices during that period threatened to ignite inflation. In the past few months, energy prices have retreated from record highs reached in mid-July, giving the Fed more leeway to drop rates again.
At its last meeting in September, the Fed struck a more dire tone about the economy, hinting that a rate reduction once again could be in the offing.
Even with the unprecedented $700 billion financial bailout quickly signed into law by President Bush on Friday, the failing economy and the jobs market probably will get worse. Many believe the economy will jolt into reverse later this year — if it hasn't already_ and will stay sickly well into next year.
One of the most crucial pillars of the economy — the jobs market — has cracked, and wage growth is slowing. This means that consumers will be even more hard-pressed to spend in the fashion that helps grow the economy.
Increasingly skittish employers slashed payrolls by 159,000 in September, the most in more than five years. A staggering 760,000 jobs have disappeared so far this year. The unemployment rate is 6.1 percent, up sharply from 4.7 percent a year ago.
The unemployment rate could hit 7 or 7.5 percent by late 2009. If that happens, it would mark the highest rate of joblessness since the months immediately following the 1990-91 recession. Some economists say the jobless rate could rise even more before the situation starts to get better.
Mounting job losses, shrinking paychecks, shriveling nest eggs and rising foreclosures all have weighed heavily on American voters. The economy is their No. 1 concern, polls have shown.
Spooked consumers and businesses have pulled back so much that some analysts fear the economy stalled — or even worse, shrank — in the July-to-September quarter. Many predict the economy will contract in both the final quarter of this year and the first quarter of next year, meeting the classic definition of a recession.
The financial crisis that intensified in September is forcing a seismic shake-up on Wall Street.
Lehman Brothers, the country's fourth-largest investment bank, filed for bankruptcy protection. A weakened Merrill Lynch, deciding it couldn't go it alone anymore, found help in the arms of Bank of America. American International International Group was thrown a financial lifeline. And, the last two investment houses — Goldman Sachs and Morgan Stanley — decided to convert themselves into commercial banks to better weather the financial storm. The number of banks that have failed this year are up sharply from last year. On Friday, Wachovia Corp. said it will be acquired by Wells Fargo & Co. wiping out Wachovia's previous plan to sell its banking operations to rival suitor Citigroup Inc.
It's Time to Revisit Emerging Markets
http://online.barrons.com/article/SB122247544705681159.html
›September 29, 2008
By LESLIE P. NORTON
For the better part of a year, Ben Inker was worried about skyrocketing emerging-markets shares. Rising commodity prices, rampant global outsourcing and rapid industrialization had shoved valuations to big premiums over older, more stable markets like the U.S.
Inker, a bright Yale grad who oversees the asset-allocation division of money-manager Grantham Mayo Van Otterloo, finally threw in the towel in July, as the U.S. financial crisis worsened, European and Japanese economies appeared stalled, and commodities prices plunged. Jeremy Grantham, GMO's chairman, subsequently said the well-respected asset manager was "underweight" the bourses of the developing world, and that U.S. shares would produce greater returns.
Smart call: Brazil is off 23%, Mexico 13%, Russia 43%, China 16%, Korea 12%, versus a 3% decline for the U.S. since July.
But just a few months later, Inker and GMO are rethinking their stance. "They've fallen far worse than everybody else, and probably are once again cheap relative to the world's other equity markets," says Inker. "Life is surprisingly different."
Mohamed El-Erian, the emerging-markets expert who is now the co-chief-investment officer of Pimco, is even more optimistic. He cites the markets' superior growth and favorable wealth-dynamics, even though the U.S. financial crisis caused many fund managers to repatriate their capital from markets that, in hindsight, were probably too small and narrow to accommodate the flows.
"Is there a cyclical case now for emerging markets? Yes there is," says El-Erian.
If it finally comes together, Washington's financial-stabilization plan "is not only going to stop the rush out the door, but attract new interest. Technically, you'll see an even sharper rally in emerging markets than U.S. equities. I'd at this point be looking to buy the [MSCI Emerging Markets] index."
Even if the next rally doesn't quite look like the straight-up trajectory that troubled Inker, it holds the prospect of reversing recent losses based on strong -- but not as strong -- economic growth.
Virtually all of the experts Barron's checked with last week cautioned investors to steer clear of frontier markets like Pakistan, and to channel more funds toward either broad indexes or more robust economies like China's.
There are plenty of obstacles to help keep growth from getting out of control. Third-quarter results are likely to be a bloodbath for emerging-markets funds, which are down 22% quarter-to-date, and 33% so far this year -- something Barron's predicted last summer.
As oil and other commodities collapsed, Asia outpaced Latin America in the third quarter. Investors yanked cash from funds focused on the developing world as the financial crisis worsened this month. "Appetite has dwindled, even as relative optimism about U.S. shares rises," says Michael Hartnett, the emerging-markets strategist for Merrill Lynch. "Global investors are being forced to sell anything they can't pronounce. You're starting to see distressed valuations," he says.
The jitters rose last week as Washington struggled over the terms for a bailout bill for Wall Street. In Hong Kong, false rumors about Bank of East Asia's solvency sent stocks plunging. The declines also disabused remaining fans who prized the funds for theoretically low correlation: In fact, they're 80% correlated with the Standard & Poor's 500. And as world markets sag, emerging markets fall right along with them.
One key fact to remember: This financial crisis didn't start in the developing world as so many did in the '90s -- Mexico's '94 peso devaluation, for example, or Thailand's '97 decoupling from the dollar, or Brazil's depreciation of its currency, the real, in '99.
Conditions in developing countries haven't been this good in years. They may be at their best since MSCI launched the index exactly 20 years ago. China, Malaysia, Taiwan and Russia are all building current account surpluses. Thanks to the boom in commodities, Brazil in January became a net creditor, and joined the ranks of investment grade sovereigns in the spring.
The shares' sudden cheapness and the growth in the developing world contrast with the tougher times Western economies face trying to squeeze out more growth. Nobody knows how far the banking crisis will lower long-term growth rates for the big Group of Seven countries.
Yes, the emerging markets will be affected, too. The International Monetary Fund thinks growth in the developing world will slow to 7% this year, from 8% in '07. Analysts have been chopping earnings-growth estimates for the MSCI Emerging Markets index companies to 10.1% in '08 and 17.2% in '09. Morgan Stanley took its '08 forecast down to 5%, and thinks earnings will grow 7% at these companies in '09.
Antoine Van Agtmael, the investor who coined the term "emerging markets," thinks the group will still earn 12% to 15% this year. Last week, the MSCI index traded at 10.9 times trailing earnings -- its lowest valuation since October of 2001 and cheap even assuming a lower level of "normalized" earnings. In contrast, the S&P 500 trades at 23 times trailing earnings. A nearby list of the MSCI index's largest markets shows that for many bourses, earnings can take a decent haircut.
Thus, it makes sense to start building a position in a cheap sector where the long-term bullish case remains intact. David Fisher, chairman of Capital Group, recently said he expects 70% of the world's growth over the next two decades to come from the emerging markets. At the moment, they account for just 11% of the world's stock-market value, even though JPMorgan Chase reckons they'll account for 28% of the global economy next year. By contrast, the U.S. accounts for 40% of the world's stock-market value, but only a quarter of its economy.
The developing world's young populations and rising wealth will keep growth going for decades. "These attractive demographics will go through their life cycles -- consuming more, buying houses and raising families," says David Riedel, who steers Riedel Research, an emerging-markets equity analysis firm.
El-Erian of Pimco recommends buying an index fund. One is the iShares MSCI Emerging Markets Index Fund (ticker: EEM). And he thinks equities are cheaper than bonds. Last week, the JPMorgan EMBI-Plus index, the developing-markets bond benchmark, was just 367 basis points over comparable U.S. Treasuries, versus 1,000 points in the Asian economic crisis.
…Today, the MSCI Emerging Markets index trades well below 930 (it's ranged from a high of 1338 in 2007 to a low of 767 earlier this month). The 930 figure is important, according to Merrill Lynch, because it's the average level at which the vast majority of money flows from retail investors entered emerging-markets funds between 2002 and 2008. Frightened investors often bail out at or near break-even. If markets rally, investors might simply bail out at those levels, acknowledges Claudio Brocado, an emerging-markets specialist at Batterymarch Financial Management. Still, he avers, "current levels present terrific buying opportunities."
We'd have to agree. Surely there will be turbulence, and further downside is likely if developed markets extend their slides. The rise and fall of oil prices will have an enormous impact on political stability -- as well as infrastructure-spending and social services. But there will be many rewards over the long term. After all, after years of waiting, South Korea was finally upgraded to developed-markets status by London-based FTSE Group, joining the indexing ranks of the U.S., Europe and Japan. MSCI says it may do the same in June. That will vastly expand the pool of buyers who'll consider South Korea for investment, and gives the intrepid investor less cause for worry and more reason to buy.‹
Microsoft Offers Safety and Muscle
http://online.barrons.com/article/follow_up.html
›September 29, 2008
In your search for a safe place to stash some cash, consider Microsoft (ticker: MSFT), one of the cheapest tech plays. In case you missed it amid the crush of financial calamities elsewhere, Microsoft gave an impressive demonstration last week of its financial muscle, announcing a new $40 billion stock-repurchase plan, equal to 16.5% of the company's current market capitalization. The latest buyback follows completion of a previous $40 billion plan; Microsoft notes it now has returned $115 billion to holders in the past five years, in the form of dividends and share repurchases.
The company also announced it plans to dip its toe into the debt market for the first time, setting up a $2 billion commercial-paper program. Microsoft became the first new issuer to get a triple-A rating from Moody's since 2002. And there's more: The software powerhouse boosted its dividend by 18% and now provides investors with a 2% yield.
All this, and the company is expected to increase fiscal 2009 revenue by close to 12%, to $67.3 billion. Profits for the year could hit $2.15 a share, going to $2.42 in fiscal '10. Based on '09 estimates, the stock trades at a modest 12.6 times earnings; using 2010 estimates, the multiple is 11. Seriously, what's not to like here?
In a talk in Santa Clara, Calif., Thursday night, Microsoft CEO Steve Ballmer conceded the tech industry isn't immune to the crisis in the financial sector, but he also said tech execs still see "a certain buoyancy" to demand. In a sense, he provided the same message Oracle (ORCL) delivered a week earlier: So far, the financial crisis has not cratered demand.
Venture capitalist Ann Winblad, who interviewed Steve on stage at the Santa Clara event, noted Microsoft got more than $35 billion in revenue in its June 2008 fiscal year from two businesses- Windows and Office-that people see less as growth vehicles than as cash cows. Ballmer shot back that the two are growing by 15% to 25% a year, saying, "I'm glad to have those cows in my pasture."
There was much discussion of Microsoft's push into the advertising market; Ballmer noted it already gets more than $3 billion a year from ad sales and ranks among the world's largest sellers of advertising. He added that the company is committed to spending 5% to 10% of its operating income in the next few years on its ad business. Therein lies the biggest concern: that Ballmer may yet make another run at Yahoo! (YHOO), squandering lots of cash.
Microsoft's shares already seem to be discounting such a misstep, along with a slowdown in corporate IT spending. With the stock down 24% for the year, Redmond, Wash., might offer some shelter from the storm.‹
Time to Buy General Electric?
http://online.barrons.com/article/follow_up.html
›September 29, 2008
General Electric's financial performance continues to disappoint, with the conglomerate reducing earnings guidance last week for the second time this year. At 25, however, its shares look cheap enough to buy.
GE's "operations have improved since 2000, but there has been a dramatic contraction of valuation," says Jack De Gan, chief investment officer at Harbor Advisory in Portsmouth, N.H.
Revenue per share has grown to $19, up from $13 in 2000; cash flow per share has popped up to $3.30 from $2 in 2000; earnings per share is $2, up from $1.29, and dividends per share are $1.25, up from 57 cents. Yet the stock is 50% lower.
If GE can net $2.50 in 2010 and attract an earnings multiple of 15, the shares could return to $37.50, reasons De Gan. Granted, Barron's has overestimated the stock's attractions in the past, but it's tough to see GE trading much below a current 12.5 times estimated earnings.
General Electric cut its third-quarter forecast last week to a range of 43 cents to 48 cents a share, down from 50 cents to 54 cents. It also revised full-year targets to $1.95 to $2.10 a share, from $2.20 to $2.30. Before the company began lowering expectations, analysts thought GE could earn $2.43.
In its new guidance, GE assumes the finance business will see a 10% to 30% drop in earnings, while the industrial businesses will grow 10% or more next year. Finance earnings will come down as the company reduces leverage, sees fewer gains from asset sales and adds to its provision for credit-card write-offs. Also, GE could suffer some mark-to-market losses in its "securities for sale portfolio."
Given the financial tumult of recent weeks, investors understandably are scared about losses that might lurk within GE Capital. Bear in mind, however, that the unit enjoys some advantages over commercial and investment banks. For one, most of its loans are underwritten internally and held to maturity, so they don't get marked to market. Also, GE's leverage is only about 7.2 times assets, well below many financial concerns.
GE has maintained its triple-A rating and reinforced it by numerous moves last week. "They have access to capital and capital is in scarce supply," says James Medvedeff, a senior analyst at Evergreen Investment Management, which owns the shares. When the market stablizes, GE Capital should remain a giant in its industry, with fewer, weaker competitors.‹
RE: VTA....
It appears that van Kampen has corrected the down-loadable Excell spread sheets that I complained about in #msg-31977545.
Wall Street's Unraveling
By Robert Samuelson
Newsweek September 17, 2008
WASHINGTON -- Wall Street as we know it is kaput.
It is not just that Merrill Lynch agreed to be purchased by Bank of America or that the legendary investment bank Lehman Brothers filed for bankruptcy or that the insurance giant AIG is floundering. It is not even that these events followed the failure of the investment bank Bear Stearns or the government's takeover of Fannie Mae and Freddie Mac, the largest mortgage lenders. What's really happened is that Wall Street's business model has collapsed.
Greed and fear, which routinely govern financial markets, have seeded this global crisis. Just when it will end isn't clear. What is clear is that its origins lie in the ways that Wall Street -- the giant investment houses, brokerage firms, hedge funds and "private equity" firms -- has changed since 1980.
Its present business model has three basic components.
First, financial firms have moved beyond their traditional roles as advisers and intermediaries. Once, major investment banks such as Goldman Sachs and Lehman worked mainly for their clients. They traded stocks and bonds for major institutional investors (insurance companies, pension funds, mutual funds). They raised capital for companies by underwriting -- selling -- new stocks and bonds for the firms. They provided advice to corporate clients on mergers, acquisitions and spinoffs.
All these services earned fees.
Now, most financial firms also invest for themselves. They use partners' or shareholders' money to place bets on stocks, bonds and other securities -- so-called "principal transactions." Merrill and other retail brokers, which once served individual clients, have ventured into investment banking. So have some commercial banks that were barred from doing so until the repeal in 1999 of the Glass-Steagall Act of 1933.
Second, Wall Street's compensation is heavily skewed toward annual bonuses, reflecting the profits traders and managers earned in the year. Despite lavish base salaries, bonuses dominate. Managing directors with 15 years' experience can receive bonuses five to 10 times their base salaries of $200,000 to $300,000.
Finally, investment banks rely heavily on borrowed money, called "leverage" in financial lingo. Lehman was typical.
In late 2007, it held almost $700 billion in stocks, bonds and other securities. Meanwhile, its shareholders' investment (equity) was about $23 billion. All the rest was supported by borrowings. The "leverage ratio" was 30 to 1.
Leverage can create huge windfalls.
Suppose you buy a stock for $100. It goes to $110.
You made 10 percent, a decent return. Now suppose you borrowed $90 of the $100. If the price rises to $101, you've made 10 percent on your $10 investment. (Technically, the price has to exceed $101 slightly to cover interest payments.)
If it goes to $110, you've doubled your money. Wow.
Once assembled, these components created a manic machine for gambling. Traders and money managers had huge incentives to do whatever would increase short-term profits. Dubious mortgages were packaged into bonds, sold and traded. Investment houses had huge incentives to increase leverage. While the boom continued, government remained aloof. Congress resisted tougher regulation for Fannie and Freddie and permitted them to run leverage ratios that, by plausible calculations, exceeded 60 to 1.
It wasn't that Wall Street's leaders deceived customers or lenders into taking risks that were known to be hazardous. Instead, they concluded that risks were low or nonexistent. They fooled themselves, because the short-term rewards blinded them to the long-term dangers. Inevitably, these surfaced. Mortgages went bad. The powerful logic of high leverage went into reverse. Losses eroded firms' tiny capital bases, raising doubts about their survival. This year, Lehman lost nearly $8 billion in "principal transactions." Otherwise, it was profitable.
How Wall Street restructures itself is as yet unclear. Companies need more capital. Merrill went to Bank of America because commercial banks have lower leverage (about 10 to 1). It seems likely that many thinly capitalized hedge funds will be forced to reduce leverage. Ditto for "private equity" firms. In time, all this may prove beneficial. Financial firms may take fewer stupid and wasteful risks -- at least for a while. Talented and ambitious people may move from finance, where they were attracted by exorbitant pay, into more productive industries.
But the immediate effect may be to damage the rest of the economy. People have already lost their jobs. States and localities, particularly New York City and New Jersey, that depend on Wall Street's profits and payrolls will face further spending cuts. Banks and investment banks may tighten lending standards again and impede any economic recovery.
The stock market's swoon may deepen consumers' pessimism, fear and reluctance to spend. There may be more failures of financial firms. It's hard to know, because financial crises resemble wars in one crucial respect: They result from miscalculation.
posted by grandpatb on the BV board.
Copyright 2008, Washington Post Writers Group
Billions to be shared by Enron shareholders
By JUAN A. LOZANO/Associated Press Writer
http://www.heraldtribune.com/article/20080909/APF/809091331
Published: Tuesday, September 9, 2008 at 7:28 p.m.
HOUSTON - Enron Corp. shareholders and investors will split about $7 billion from financial institutions accused of participating in the fraud that caused the once-mighty energy company to collapse.
The settlement amount was listed at $7.2 billion, a sum that has been accruing interest since 2002 and includes $688 million plus interest in attorneys fees.
The deal, approved late Monday by U.S. District Judge Melinda Harmon, and the attorneys fees are the largest in history in a U.S. securities fraud case.
"We're pleased that the court recognizes the tremendous amount of work, skill and determination required to overcome significant obstacles in this complicated case," said Patrick Coughlin, attorney for the regents of the University of California, the lead plaintiffs.
About 1.5 million individuals and entities will be eligible to share in the distribution under the settlement plan. The attorneys fees will go to San Diego-based Coughlin Stoia Geller Rudman & Robbins LLP, the law firm representing the university.
Besides the University of California, other plaintiffs who will share in the proceeds include pension plans from New York City and Hawaii, various investment firms and the Archdiocese of Milwaukee.
The distribution plan was part of a $40 billion lawsuit filed by shareholders and investors, who claim Bank of America, JPMorgan Chase & Co., Citigroup and others participated in the accounting fraud that led to Enron's downfall.
Calculating shares of the $7.2 billion will be determined by a formula that factors in such things as the stock's purchase price and the type of stock bought.
At its height, Enron's common stock sold for as much as $90 per share, before plummeting to as low as $1 right before the company declared bankruptcy.
Under the plan, investors will get an average of $6.79 per share of common stock and an average of $168.50 per share of preferred stock.
To be eligible for the settlement, investors and shareholders needed to have bought Enron or Enron-related securities between Sept. 9, 1997 and Dec. 2, 2001.
Attorneys for several investors objected to the distribution plan and the attorneys fees.
Texas Attorney General Greg Abbott, who had previously filed court briefs in support of plaintiffs' claims, also objected to the attorneys fees.
"General Abbott continues to object to giving millions of dollars to plaintiff lawyers when that money should go to the hardworking men and women who suffered from Enron's demise," said Jerry Strickland, a spokesman for Abbott's office.
"This court reiterates that there is no way to allocate these proceeds that would not in some way favor or disfavor to some degree some of the class members," Harmon wrote in her order. "On the whole, the court finds that ... the chosen method is fair, adequate and reasonable."
Harmon also said the attorneys fees, which are 9.5 percent of the settlement, are "fair and reasonable."
Several financial institutions have not settled and remain as defendants in the Enron case, including Merrill Lynch & Co., Credit Suisse First Boston and Barclays Bank PLC. Several former Enron officers also remain as defendants, including former chief executive Jeffrey Skilling, now serving a criminal sentence of more than 24 years in federal prison in Minnesota.
But the lawsuit has been on hold since an appeals court last year ruled shareholders and investors could not sue as a class, which would have allowed them to sue as a group and have more leverage to settle the case out of court.
The U.S. Supreme Court in January refused to hear arguments in the lawsuit. The high court in a similar case gave a measure of protection from securities lawsuits to suppliers, banks, accountants and law firms that do business with corporations engaging in securities fraud.
Because of that ruling, Harmon is still deciding whether the financial institutions that remain as defendants will be dismissed from the lawsuit.
Enron, once the nation's seventh-largest company, entered bankruptcy proceedings in December 2001 after years of accounting tricks could no longer hide billions in debt or make failing ventures appear profitable.
The collapse wiped out thousands of jobs, more than $60 billion in market value and more than $2 billion in pension plans.
Enron founder Kenneth Lay and Skilling were convicted in 2006 for their roles in the company's collapse. Lay's convictions for conspiracy, fraud and other charges were wiped out after he died of heart disease in 2006.
Hi D of A,
Thanks for the update on IWA. Hindsight I guess is very good when looking for stability in this market.
Yes, it's been a wild ride with the Financial Stocks. It's a good thing I practice a very sophisticated form of meditation as I have made and lost quite a bit of money with the financials. Right now I'm stopped out on just about everyone except for Citibank.
I just invested in some F and GM as I can't see them going much lower. But who knows.
I'm going to sit on the side lines for a while hoping for some sanity to creep in. IMHO and FWIW
Regards,
Abreis
IWA at Jefferies Co. Communications Conference
IWA’s webcast of the presentation to the Jefferies Communications Conference today was uneventful. It was a reiteration of IWA’s strengths (stable dividend, incremental growth opportunities, and no impending regulatory risk). Craig Knock detailed company history and its market position. There was one question, i.e. why is IWA’s tax rate so low (i.e. because of a long standing NOL and goodwill amortization which will continue until 2015).
PS: Abreis, I imagine that you have had a lot of excitement recently with regard to any banking and brokerage stocks you may have purchased.... I for one have been looking at Regions Financial for a long time, but have been scared away by their large exposure to home equity loans (these lose all of their value when a property is repossessed).
Regarding VTA (and VVR)...
There seems to be an effort to make the VTA and VVR more open to the investors. Something that I applaud. However, the VTA and VVR teams have done a poor job. It appears that management does not pay attention to detail...a damning statement for funds such as these.
For example:
==
1. Van Kampen provides down-loadable Excel spread sheets of a) VTA’s & VVR’s holdings approximately 30 days after the end of each calendar quarter, b) historical distributions, and c) historical prices. see: http://www.vankampen.com/vksite/holdings/holdings_ce.asp & http://www.vankampen.com/vksite/prices/history_ce.asp
The fund holding data could be particularly revealing, especially if one kept track of quarter to quarter changes. But the data provided is sloppy (or wrong). The absurdity of the website fund holdings’ data is easily revealed by summing the 6/30/08 market values to get $3.1B. This is markedly different from the $1.7B on 4/30/08 and the current assets of $1.2B listed at http://www.vankampen.com/vksite/prices/prices_ce.asp .
Looking closely, one sees that this is due to repeated duplicate, and sometimes triplicate, data entries in the website spreadsheet. And, when you compare the data to that published in the N-Q filed on 6/26/2008 for the preceding quarter, you find that there are some minor discrepancies in the stated principle amounts that are difficult to rectify. For example, one need to go no further than the second entry on the N-Q where the IAP Worldwide Sevices holding of 4/30/08 is listed once at a principle amount of $2,426,000. On the van Kampen website listing of 6/30/08 fund holdings, IAP is listed twice with each listing having a par value of $2,240,634 for a rounded total of $4,471,000.
===
2. Responses to questions in the 9/4/08 Conference Call suggested to me that the Portfolio Manager (Phil Yarrow) and Portfolio Specialist (Greg Olsen) did not have detailed knowledge of the fund parameters important to investors.
Relevant question and answer exchanges:
<Q>: Okay, and in terms of the, the volatility in the NAV, I recall a couple of years ago, VVR stood out among the corporate loan funds of having one of the lowest standard deviations among its peer groups. And I also noticed that has kind of reverted or inverted, I don’t know what you want to call it, it now is standing out as having the highest NAV, so I guess what my question is, can you tell us a little about what has happened over the -- 18 months or so, has there been any changes in your management approach in terms of size of the concentration of the holdings, sector allocations, what -- I guess what I am looking for is some color on what -- are there any changes and how -- explain the difference in the standard deviation on NAVs.
<A – Phil Yarrow>: There definitely hasn’t been any changes in the management style as far as
concentration, industry or name, we clearly managed the portfolio in exactly the same manner. I got to be honest -- without going back and really doing some detailed analysis, I don’t really know the answer as to why standard deviation might have changed. Clearly, you know, VVR does have a significant amount of leverage, which magnifies the declines and the increases in the fund, when market conditions change. So I am not really sure if you’re comparing a period of time when there was virtually no -- when the market was very stable with one way it’s obviously, been very volatile, but there is definitely not been any management style changes.
.
.
<Q>: Hi guys. Just a quick update on loan pricing. I know at the outset, you were all seeing sort of LIBOR plus 6 in the portfolio on average. Can you give us a sense for where the market is now?
<A – Phil Yarrow>: When we say -- and you’re talking about the market yield that we would see on the loans, or the actual loan coupons?
<Q>: Just a sense that I think that the target was somewhere around 8 or 9% at the time.
<A – Phil Yarrow>: Yes.
<Q>: And that was sort of a yield on the portfolio.
<A – Phil Yarrow>: Yes.
<Q>: Which was about LIBOR 6, if I remember correctly? Just curious what you all are seeing now.
<A – Phil Yarrow>: Okay. I already said I don’t have that number in front of me, but clearly I would say if you looked at the portfolio and the trading levels, and you obviously have to make some sort of assumption about average life of these loans. If we assumed maybe a four year average life, I think in VTA you’d be seeing something probably in the LIBOR plus 800 range maybe, LIBOR plus 800 to 900, and VVR a little bit lower than that, but it’s certainly high.
.
.
<Q>: Hi, guys. Just what’s the average spread on the portfolio at this point? Just an average you know stated spread not market based on the market rate. Round numbers I mean.
<A – Phil Yarrow>: Okay. And again I don’t have the numbers in front of me. So I am sort of going let the office off my head yet VVR obviously this fund has been around for a while here and so I would say that the average spread is going to be somewhere in the L plus 250 to L plus 300 range probably.
<Q>: Okay, okay.
<A – Phil Yarrow>: VTA, where -- was we have obviously been ramping that trend up over the last 12 months or so. It’s going to have a much higher steady two point spread. I mean probably more or like a LIBOR plus, 400 plus.
.
.
<Q>: And what is your average spread on the leverage?
<A>: Average cost of the leverage?
<Q>: No, just what are you making between what you’re borrowing and what you’re getting paid?
<A>: Well, it’s...
<Q>: On average.
<A – Phil Yarrow>: On average. You see, you have to -- there is two ways of looking at it, right? You can look at it from our actual income basis and on what the market yielded on the portfolios. So, I am not – I mean on an income basis, I am not sure, but it’s probably certainly a couple of 100 basis points. And if you looked at the market yield of the portfolio compared to the cost of leverage, and it’s substantially more than obviously, as we mentioned.
The Dividends from Far, Far Away
http://online.wsj.com/article/SB121883880521145583.html
›By SHEFALI ANAND
August 16, 2008
Dividend-seeking investors should cast their gaze abroad.
Foreign stocks have much more attractive yields these days. A leading index of big-cap stocks in developed overseas markets yielded a 3.7% payout as of July 31, compared with a 2.4% rate for similar U.S. stocks.
As aging baby-boomers in the U.S. look for ways to get income, a number of mutual funds and exchange-traded funds have been launched with a focus on dividend-paying foreign stocks. Most recently, fund giant American Funds, which rarely trots out new funds, filed for an income-oriented foreign-stock fund to be introduced this fall.
Dividend-paying funds and stocks are traditionally safer bets in difficult markets such as the current one. But many of the highest yielding stocks in the U.S. are financials, which have been hurt by the turmoil in the mortgage market.
No one knows when companies such as Citigroup Inc. and Merrill Lynch & Co. will dig their way out of the current mess, so buying their shares is hardly a conservative bet right now. A number of banks including Citigroup, Wachovia Corp. and National City Corp. have chopped their dividends to conserve capital.
Overseas too, a lot of the high-yielding stocks are financials. Some, such as UBS AG are embroiled in the U.S. mortgage-market rout. But others stocks, such as HSBC Holdings PLC, which yields 5.4%, Lloyds TSB Group PLC, with a 12% yield, and Barclays PLC, with a 9.8% yield, have been hurt less by the U.S. mortgage market.
Glenn Zannotti, a 45-year-old account manager for a nonprofit in Tulsa, Okla., holds a portfolio of U.S.-traded shares of 10 foreign companies, all of which yield more than 4%. Recently, he has been buying financial stocks, such as Barclays, Deutsche Bank AG and Royal Bank of Scotland Group PLC, which he considers "good long-term value" and a complement to his U.S.-stock holdings.
Of course, high-yielding foreign stocks bring their own risks. Foreign banks will be hit hard if the global slowdown intensifies. These firms could get swept up if housing prices get worse in their home markets.
What's more, any U.S. investor owning a foreign stock faces currency risks. In the past few years, foreign currencies have been rising against the dollar, pushing up the value of foreign shares held by U.S. investors. But the dollar has made a comeback in recent weeks, and if this continues, foreign shares could hurt returns for Americans.
Why do foreign companies pay higher dividends? There was a time when U.S. companies had much higher payouts. But over recent decades, U.S. companies have retained more earnings to plow them back into the business. They also have done a lot of share buybacks in recent years.
Meanwhile, many foreign companies take more a traditional approach to dividends: the money they earn belongs to their shareholders, and they return it to investors in the form of rising dividends. Also, earnings growth in some Asian countries such as Taiwan is spurring their companies to start paying dividends or increase the dividends they already pay.
According to calculations by Jesper Madsen, manager of Matthews Asia Pacific Equity Income Fund, dividends from companies included in the MSCI AC Asia Pacific Index have grown at an average of 18% annually between 2003 and 2007, as compared with 6% for companies in the Standard & Poor's 500-stock index, on an equal-weighted basis.
Mr. Madsen notes that in some countries such as Taiwan, some of the highest-dividend-yielding companies are technology companies. That is quite different from the situation in the U.S. where many tech companies don't pay dividends at all.
Vincent McBride, manager of the recently launched Lord Abbett International Dividend Income Fund, says he has been finding gems in foreign companies that are subsidiaries of large multinationals. An example is Telefonica O2 Czech Republic, a unit of one of the world's leading phone companies, Telefónica SA. It yields about 9.8%.
The Morningstar Inc. data base has about two dozen foreign mutual funds that seek out dividend-paying stocks; a third of them are "global," meaning they can invest in the U.S if the manager so wants. Pure foreign dividend funds go by "International Equity Dividend" or "Equity Income" in their titles, while funds that have income only as a secondary objective go by names like "Growth & Income."
The largest fund by assets is the T. Rowe Price International Growth and Income, at $2.9 billion, and is also among the oldest with a 1998 inception. The fund is down 19% this year, thanks partly to its 24% stake in financials, but has a 14% annualized return over the past five years, according to Morningstar. Its 12-month yield is 2.26%.
In addition, there are 22 foreign dividend-oriented exchange-traded funds, mostly launched since 2006. Sixteen of these are from WisdomTree Investments Inc., a company which subscribes to the research of Jeremy Siegel, a professor at the University of Pennsylvania, who believes that dividends are the most objective way to value a company.
The ETFs go from broad ones, such as the PowerShares International Dividend Achievers Porfolio, launched in 2005 and yielding 4.1%, to specialized ones such as the WisdomTree International SmallCap Dividend, which currently yields 2.6%. These are two of the largest such ETFs, with slightly more than $460 million in assets.
The foreign-focused fund with the highest yield currently is Henderson Global Equity Income, with a 12-month yield of 8.8%, followed by the iShares Dow Jones EPAC Select Dividend ETF with an 8.3% yield. The highest-yielding fund may not be suitable for all investors. For instance, the iShares DJ EPAC ETF has 50% of its assets in financials.
Most investors are advised to pick a broadly diversified fund, across countries and sectors. Steve Janachowski, a financial adviser in Tiburon, Calif., suggests looking at a "global" fund, such as the Tweedy, Browne Worldwide High Dividend Yield Value Fund, which was launched last year.
"I would use that as part of my overall foreign and global strategy," Mr. Janachowski says.‹
Hi D of A,
The recent meltdown of the banking and brokerage stocks was too hard to resist. Although justified, I think with some it was over done. I expect the more solid ones to start appreciating as they get their act together and money starts flowing into the sector.
Please keep me informed re IWA. It's still a steady income player and I might revisit it in the future. Thanks as always for your rational analysis. FWIW and INHO.
Regards,
Abreis
Abreis...
Sorry to see that you no longer hold IWA. You were the only one I knew, other than myself, interested in this stock.
With respect to banks.. I've been watching their action with interest... but only as a spectator. You might find a bottom, but I fear that there will be some structural changes that will hold them down for some time... And, I expect that when their equilibrium price is found, they will reduce (or adjust) the dividend to be more in line with historical payouts.
Hi D of A,
Thanks for the update. I stopped out of my position last week and right now I'm looking at some beaten down bank shares. I think the worst is just about behind them and am looking at the stronger ones for some real future growth as they get their act together.
Looking and starting to nibble at RDN, ABK, WM, LEH, C and the mutual fund UYG. Holding CSE as they're dividend is still pretty high and I like there growth prospects. FWIW and IMHO.
Regards,
Abreis
Abreis, Re: IWA’s Aug 2008 CC and RBC Presentations
The good news is that the dividend is safe. It is paid out of cash flow that is more than adequate, largely due to minimal taxes until June 2015.
The bad news is that there is no growth. There is chronic loss of land lines (ILECs) partially balanced by increases in DSL and CLEC lines. The net land line loss is periodically remediated by incremental purchases of private rural telecoms such as the recent purchase of Bishop.
IWA continues to point out that they do not participate in the Universal Service Fund, USF (at least in any meaningful way). The USF has been a cash cow for their rural telecom peers. There is a growing consensus that the federal USF and high cost loop support of rural telephone systems will be reduced. I suspect that if and when this happens, rural telecoms in general will see their stock Price/Earnings ratios contract. I’m assuming that IWA will experience a sympathetic reduction in its stock price even though they have made it clear that loss of this federal support will have no impact on their operations.
On the bright side for IWA, loss of federal USF support will likely push small rural telecoms to insolvency making acquisitions cheaper. IWA claims that there are 150 small rural telecoms in Iowa and a smaller number in Minnesota that could be up for grabs in such a consolidation. I also continue to believe that Verizon might divest its midwest rural land lines through a Reverse Morris Trust (#msg-29791035). Thus, IWA’s strategy of maintaining cash flow through intermittent acquisitions will likely remain successful.... again supporting the dividend for years to come.
When asked what IWA plans to do with the AWS and 700 spectrum they have purchased, the CFO, Craig Knock, explained that IWA made the purchases for strategic reasons and have no immediate plans. However, the most likely scenario, when they do decide to capitalize on thier investments, is to use this wireless spectrum to support the broadband network when laying lines for DSL is not economical or to support the CLEC program (which targets business customers in the Quest marketplace).
In my summary of the May 2008 CC (#msg-29623158) I had noted that disproportionately large open interest in December 20 calls (currently 6,000+ contracts, where the expected number would be in the hundreds). Holew explained the phenomenon in his June 4th message on the Yahoo IWA message board; i.e. an investment newsletter suggested buying IWA covered calls to collect the dividend and the option premium.
UVICF 19.1% yield at current 3.45 price ...
.09 quarterly div. times 4 = .36
.30 special div declared today = .30
Total of .66 divided by 3.45 price = 19.1%
They have been consistent in dividend payments over past several years. And they have had a special dividend for the past three (.25, .30, .30). They have an increasing royaly revenue stream from Bausch and Lomb, as well as revenues from their own contact lens sales.
This board seems quite of lately and I have been looking for some good yielding investments of late. Hope others who follow/post may start contributing again.
I recently bought back a stock I had sold a couple years ago, CHKE. They are a licensing company (Cherokee is the company name and main brand). The dividend will likely be cut but my guess is it remains above $2 annually which puts the yield close to 10%. Target is the main source of US revenue but their growth overseas and dependence on the Cherokee brand has diminished (though it is still by far their key asset).
US Stocks at a Glance
Stocks trade mixed following quarterly reports
NEW YORK - Stocks fluctuated Monday as investors examined a mix of earnings reports and monitored the price of oil, but found little reason to take the market squarely in any direction.
Among the latest companies to report, Verizon Communications Inc. said its second-quarter profit rose 12 percent, although revenue came in short of Wall Street's forecasts. Kraft Foods Inc. said higher prices helped offset rising commodity costs and listed second-quarter earnings nearly 4 percent.
Beyond corporate news, investors are waiting to see if oil prices' sharp drop of recent weeks has come to an end, or is just pausing. Light, sweet crude rose 24 cents per barrel to $123.50 on the New York Mercantile Exchange.
In midmorning trading, the Dow Jones industrial average fell 39.73, or 0.35 percent, to 11,330.96. Broader stock indicators fell. The Standard & Poor's 500 index fell 0.87, or 0.07 percent, to 1,257.86, and the Nasdaq composite index fell 4.24, or 0.18 percent, to 2,306.29. Stocks mostly fell last week as investors worried about the financial and housing sectors. The tech-heavy Nasdaq advanced following several strong corporate reports in the sector.
Bond prices rose Monday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 4.04 percent from 4.10 percent from late Thursday.
The dollar was mixed against other major currencies, while gold prices rose. Investors will also be looking later in the week to economic reports on employment, gross domestic product and the manufacturing sector. Verizon, one of the 30 stocks that makes up the Dow industrials, made some investors uneasy after customers disconnected their landlines faster than before. Verizon fell 45 to $34.
Kraft, the maker of Velveeta, Oreo cookies and Maxwell House coffee, rose $1.20, or 4.1 percent, to $30.58 aftter raising its forecast for the year. Private equity firm Kohlberg Kravis Roberts & Co. said Sunday it plans to go public on the New York Stock Exchange through a takeover of its Amsterdam-listed affiliate investment fund KKR Private Equity Investors LP.
Fannie Mae and Freddie Mac advanced after Congress over the weekend passed housing legislation to the White House that could benefit as many as 400,000 homeowners. The plan also offers temporary financial assistance to the two government-chartered companies, who together back or hold nearly half of all mortgage debt in the U.S. Fannie Mae rose 25 cents, or 2.2 percent, to $11.80, while Freddie Mac rose 18 cents, or 2.2 percent, to $8.45.
Tyson Foods Inc., the world's largest meat company, fell 97 cents, or 6 percent, to $15.26 after reporting a 90 percent drop in its fiscal third-quarter profits because of rising cost of grain used to feed chicken.
Unilever NV rose 61 cents, or 2.1 percent, to $29.75 after agreeing to sell its North American laundry detergents business, including the All, Snuggle, Wisk and Surf brands, to a private equity group Vestar Capital Partners for $1.45 billion.
Amgen Inc. surged $7.24, or 13 percent, to $61.16 after the company reported positive trial results for its osteoporosis drug candidate denosumab. Late-stage clinical trial results showed denosumab reduced the incidence of fractured vertebrae in post-menopausal women. Amgen jumped $7.60, or 14 percent, to $61.52.
Advancing issues narrowly outnumbered decliners on the New York Stock Exchange, where volume came to 189.8 million shares.
The Russell 2000 index of smaller companies fell 3.26, or 0.46 percent, to 707.08. Overseas, Japan's Nikkei stock average rose 0.14 percent. In afternoon trading, Britain's FTSE 100 fell 0.07 percent, Germany's DAX index fell 0.58 percent, and France's CAC-40 declined 0.61 percent.
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Forex
Forex - Dollar softens on ongoing U.S. financial sector jitters
LONDON - The euro was stronger against the dollar despite weaker-than-expected German consumer confidence data as investors continued to remain jittery about the U.S. finance sector. The U.S. government announced after market close on Friday that two more mortgage lenders were to be shut down, with investors fearing there may be more to come.
Earlier today the GfK market research institute said its consumer climate index for Germany is forecast to sink to 2.1 points in August, its lowest level since June 2003 and down from 3.6 points in July. The figure is far lower than the 3.5 point consensus forecast from a Thomson Financial News poll of economists.
Analysts said the figures indicate rising inflation is hitting consumers' willingness to spend, deepening the slowdown in the German economy. "The good times are definitely over and the German economy is on a slide to a recession-like scenario," said Carsten Brzeski at ING.
At 1110 GMT the euro was trading at $1.5758 having, compared to the day-high of $1.5717 hit at 0758 GMT. Looking further ahead analysts expect the dollar to continue to gain on the euro as the European economic data continues to take a turn for the worse, while weak U.S. data no longer comes as a surprise.
Elsewhere a turn lower in European equity markets meant the yen recovered after falling earlier to a one-month low against the dollar. However signs of long-term pick up in risk appetite begun to materialise last week and that coupled with falling oil prices mean analysts see little scope for a long-term rally in the Japanese currency.
"Altogether the outlook for the yen remains rather poor," said Commerzbank's Leuchtmann. "Because of low domestic interest rates and almost no rate hike speculation for the time being, the yen suffers from good news regarding the international financial sector," he added.
At 1110 GMT the dollar was trading at 107.62 yen compared to 107.77 yen at 0755 GMT. Elsewhere the pound remained under pressure following a a series of gloomy surveys on the UK economy.
Hometrack reported that house prices fell 1.2 percent between July and June, while the Land Registry reported house prices in England and Wales fell 1.0 percent between June and May. Added to this was a report from KPMG reporting that more than half of UK employers expect to lay off workers in the coming months.
Last week official figures showing a slump in retail sales during June and a fall in second quarter GDP growth fuelled talk that the economy is on the brink of a recession. "With the credit crunch, housing downturn and a lack of purchasing power weighing on the economy, a UK recession is starting to look unavoidable," said James Knightley at ING.
There is little top-tier UK data out this week, but the Nationwide house price index and the CBI's retail survey are both expected to add to the ongoing gloom. At 1110 GMT the pound was trading at $1.9885 compared to $1.9843 at 0755GMT. Meanwhile the euro was trading at 0.7922 pence compared to 0.7912 pence at 0755 GMT this morning.
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Financials
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Euroshares
Euroshares open lower profit taking as Dow closed off highs; Ryanair, TNT weigh
LONDON - Europe's largest exchanges moved lower in opening deals as investors lock in profits ahead of the oncoming earnings deluge and as the DJIA closed well off intra-day lows on Friday, with disappointing updates from Ryanair and TNT.
At 09.35 a.m., the DJ STOXX 50 was down 11.85 points, or 0.43 percent, at 2845.05 and the DJ STOXX 600 was down 0.96 euros, or 0.34 percent, at 280.8.
Shares in budget airline Ryanair plunged 14.18 percent after the group warned it could make a full year loss of up to 60 million euros if oil prices stayed high and fares fell.
The Irish group said adjusted profit after tax for the three months to the end of June had come in at 21 million euros ($33 million). Ryanair said first-quarter revenues grew by 12 percent to 777 million euros. That was well below the 865.4 million average of five forecasts in a Reuters survey and lower than the most cautious of the five analysts, who predicted 836.4 million.
The Dublin-based carrier said consumer confidence was plummeting in an emerging recession in the UK and Ireland, which it planned to respond to by cutting fares more aggressively than competitors.
The shares were also under pressure after Citigroup cut its stance to 'hold' from 'buy' before the warning. Peer Easyjet slumped 7.15 percent and larger airlines were also lower. BA fell 4.96 percent. Shares in Lufthansa fell only 1.62 percent as shares found support from news Citigroup upped its rating to 'buy' and said the German flag carrier is its top pick.
And Holland's TNT NV dropped 8.26 percent after it said it expects full-year 2008 organic growth and operating margins to come in at the low end of its guided range as it reported worse-than-expected second quarter results.
Banks were on the back foot again as Citigroup downgraded the banking sector to 'underweight' from 'neutral', saying there will be more pain in the global economy as unemployment rises, there are more corporate failures, with asset values at risk and bad debt rates set to pick up.
Credit Agricole fell 2.45 percent, Unicredit fell back 2.19 percent. SG Secs cut the Italian bank to 'hold' from 'buy'. Cheuvreux downgraded Banco Popular to 'sell' from 'underperform' Shares fell 0.99 percent.
But there was some unexpectedly good news in the consumer goods sector. Reckitt Benckiser shares moved up 2.09 percent after the world's biggest household cleaning goods maker, said second-quarter profits rose 11 percent and said it was on track to meet its full year sales and profit targets.
Group adjusted net profit for April-June of 240 million pounds ($476.4 million), in line with forecasts ranging from 229 million to 240 million and averaging 235 million pounds.
And investors cheered news Anglo-Dutch consumer goods company Unilever Plc., up 1.02 percent, said it will sell its North American laundry business to Vestar Capital Partners for $1.075 bln cash, saying the price-tag was in line with market expectations.
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Asia at a Glance
Asian stock market summary
JAPAN
The Nikkei 225 Stock Average finished up 0.1 percent at 13,358.78, after trading listlessly for most of the day, with buying interest fuelled by Wall Street's rebound overnight after better-than-expected U.S. economic data eased concerns about the state of the economy.
But the gains were capped by caution ahead of the release of quarterly earnings Tuesday by Sony Corp. and Matsushita Electric Industrial Co., as well as key U.S. economic data. The broader Topix rose 0.2 percent to 1,300.79.
SOUTH KOREA
The KOSPI ended up 0.36 point at 1,598.29, as investors exercised caution ahead of a series of data to be released at home and in the United States, with big technology names such as Samsung Electronics extending their falls on tepid earnings prospects. Key data to watch this week include the U.S. employment report and gross domestic product and South Korea's factory output and inflation numbers.
AUSTRALIA
The benchmark S&P/ASX 200 index fell 48.4 points to 4,922.1, as a profit warning from Australia and New Zealand Banking Group deepened concerns about credit market losses, triggering further selling in the banking sector.
ANZ shares slumped 10.9 percent, the steepest one-day percentage fall since October 1987, after it warned of lower profit and predicted bad debt charges of around A$1.2 billion in the second half due to the ongoing credit crisis
CHINA
The benchmark Shanghai Composite Index closed up 1.32 percent at 2,903.01, on signs of a shift in monetary policy weighted towards growth. Airlines and oil refiners led the gains but banks and property stocks came off their highs.
The Shanghai A-share Index was up 1.33 percent at 3,045.50, while the Shenzhen A-share Index rose 0.98 percent to 911.83. The Shanghai B-share Index rose 0.32 percent at 214.89, while the Shenzhen
B-share Index gained 0.81 percent to 468.31.
PHILIPPINES
Manila's 30-company composite index closed up 1.1 percent at 2,540.81, buoyed by positive leads overseas such as Wall Street rebounding on Friday and oil futures trading below $124 a barrel. But trading was subdued and turnover thinner as investors continued to worry about inflation and the overall condition of the U.S. economy.
HONG KONG
The Hang Seng index closed down 53.5 points or 0.24 pct at 22,687.21, off a low of 22,619.23 and high of 22,862.03.
INDIA
India's benchmark 30-share Sensex of the Bombay Stock Exchange closed up 74.17 points or 0.52 percent at 14,349.11 and the broader 50-share S&P CNX Nifty of the National Stock Exchange gained 20.25 points or 0.47 percent to close at 4,332.10.
TAIWAN MARKETS CLOSED DUE TO TYPHOON
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Commodities
Metals - Copper up but summer slowdown, rising stock cap gains
LONDON - Copper rose, continuing its recovery from a five week low hit last week, on bargain hunting, steady oil prices and as demand prospects improved.
The red metal took a battering last week as oil prices tumbled to a seven week low and as equity markets weakened. Lower oil usually reduces investment into commodities as the need to hedge against inflation falls. Falling equity markets meanwhile, often used as a barometer for economic growth, also pushed copper lower.
Basemetals.Com analyst William Adams said that although prices were higher Monday, the recent pull back in the oil price has led to a widespread correction in most of the leading base metals and with the summer slowdown in full swing, consumers and funds seem in no hurry to buy heavily just yet.
At 11:12 a.m., three-month copper on the LME rose to $8,000 per tonne from $7,956 at the close Friday. Meanwhile, rising copper stocks also capped the metal's gains. The LME said Monday copper stocks stored in warehouses across the globe rose by 2,575 tonnes and now stand at 136,050 - the highest level since early 2008.
Elsewhere on the LME, aluminium was higher at $2,978 per tonne from $2,969, nickel rose to $18,499 per tonne from $18,450, zinc was up at $1,860 per tonne from $1,845, tin climbed to $22,500 per tonne from $22,350 and lead jumped to $2,170 per tonne from $2,115 at the close Thursday.
Oil prices rise as pipelines attacked in Nigeria
LONDON - Oil prices rose on Monday as rebels said they had sabotaged two pipelines in Nigeria, which is a major exporter of crude. Brent North Sea crude for September climbed 89 cents to 125.41 dollars a barrel.
New York's main contract, light sweet crude for September delivery, advanced by 92 cents to 124.18 dollars a barrel.
The Movement for the Emancipation of the Niger Delta (MEND) claimed on Monday that it had sabotaged two Shell pipelines in Rivers state in southern Nigeria overnight.
In an email, it said "heavily armed" MEND fighters had attacked the pipelines at Kula and Rumuekpe operated by Shell Petroleum Development.
Two Shell spokesmen said the claim -- and the extent of any damages -- were being verified. Word of the sabotage came after the release on Saturday of eight foreign workers who had been kidnapped near a major oil export terminal in southern Nigeria with no ransom being paid.
The oil-rich Niger Delta has seen numerous kidnappings targeting foreign energy firms, claimed by militants demanding a greater share of oil wealth for the region's inhabitants.
Violence in the southern region has reduced Nigeria's total oil production by a quarter since January 2006. Nigeria was Africa's biggest oil producer until it was overtaken in April by Angola, according to Organization of Petroleum Exporting Countries (OPEC) figures.
Interesting read on the IndyMac Bank failure in California:
http://www.latimes.com/business/la-fi-indymac16-2008jul16,0,4757797,full.story
Confusion at IndyMac fuels customers' anger
Some depositors wait for hours in line, then complain of difficulty getting their money. Police are called at branches in Encino and Northridge.
By Andrea Chang, E. Scott Reckard and Kathy M. Kristof, Los Angeles Times Staff Writers
July 16, 2008
Depositors of failed IndyMac Bank endured long waits in the summer heat for a second day Tuesday, with crowds becoming irate at several branches and customers with large accounts complaining of serious problems in getting their money.
Banking experts said the chaotic scenes risked touching off runs on other banks unless federal regulators quickly cashed out insured accounts and gave depositors accurate information about their funds.
The Federal Deposit Insurance Corp. took over Pasadena-based IndyMac late Friday and has assured depositors that accounts with $100,000 held in a single name or $250,000 in a retirement account are safe.
But many customers have said that when they checked their balances online, tens of thousands of dollars appeared to be missing. And when they went to branches in search of answers, they encountered lines hundreds of people deep and unhelpful staff members. On Tuesday, reports of unruly crowds brought police to branches in Encino and Northridge, although there were no arrests or injuries.
Noelle Gabay of Northridge, a budget analyst for the state of California, said FDIC officials acknowledged that she was owed $213,500 but provided her access only to $99,000.
"My trust in the FDIC is gone," said Gabay, 49. "The question is now, where do we put our money? Do we buy a bigger mattress?"
Bert Ely, a banking consultant in Arlington, Va., whose clients include financial-services trade groups, said the IndyMac situation was "generating anxieties all across the country."
"They should have been better prepared for this," he said, adding that regulatory oversight of IndyMac had been lax.
Ely noted that the bank, hobbled by massive defaults on loans made at the height of the real estate market, was not on the FDIC's list of troubled institutions as of March 31. It was placed on the list in June. However, he said IndyMac's fall was hastened by public questions from Sen. Charles E. Schumer (D-N.Y.) last month about the bank's strength -- comments that apparently helped trigger a $1.3-billion run on deposits.
Schumer has responded to such criticism by saying that IndyMac brought on its own problems by engaging for years in "poor and loose lending practices" that regulators should have prevented.
Longtime bank analyst Frederick Cannon, chief equity strategist for Keefe, Bruyette & Woods, said because of the distress at IndyMac, executives at other banks "are working very actively with their depositors to explain how insurance works, and what's covered."
John Bovenzi, the FDIC official who is now IndyMac's chief executive, acknowledged that some online records of accounts and insurance were inaccurate, fueling fear and anger among depositors. "They'll need to talk to an FDIC claims manager to sort it out," he said. "Some electronic records may not be complete, and we'll need to get a look at the documents" that set up the account.
Depositors can get FDIC coverage beyond the usual $100,000 per account by opening joint accounts and trust accounts. The FDIC has said that in addition to fully paying out insured IndyMac deposits, it will immediately pay half of uninsured IndyMac deposits.
Several depositors, though, complained Tuesday that the FDIC was failing to properly calculate interest and accused IndyMac employees of providing erroneous information about deposit insurance.
Todd Bash, a 43-year-old teacher from San Gabriel, was worried about IndyMac's viability after reading about its woes in the media, so he had gone into his branch in West Covina on July 8 -- three days before regulators seized the bank. He had two certificates of deposit, a savings account and a checking account, totaling more than $180,000.
Bash said he had been ready to pull his funds, but the teller told him that he could add beneficiaries to get extra insurance. He added his mother to one account and his sister to another.
But after IndyMac was seized, an FDIC hotline operator said the extra insurance wasn't necessarily valid, Bash said. That landed him in line Monday. After eight hours, the bank closed and he went home.
He went on the FDIC website again and used the system's deposit insurance calculator, which said all of his deposits were fully covered.
Bash returned to the bank Tuesday more confident, but when he finally talked to a teller, she showed him that more than $80,000 was missing from one account. Why? The teller didn't know. She referred him to an FDIC official in the branch, who also couldn't tell him what happened, he said.
"One person finally suggested that maybe there was a hold on my account, but when I asked if it was a hold, why wouldn't they just say there was a hold? . . . Nobody could give me any answers," he said.
FDIC spokesman David Barr said most of the problems stemmed from trust accounts that have been put on hold until the agency determines that beneficiaries have been properly named. In most cases, those funds will be released in full after the depositor confers in person with the FDIC, he said.
Frozen trust accounts also caused tellers to fail to credit interest payments to some borrowers. "We apologize for that," Barr said, adding that the FDIC is checking accounts where that may have occurred and will mail missing interest to depositors. "It may take us a few days, but we will get it out."
He said that in the future the FDIC will ensure that borrowers are better informed that trust accounts may be briefly put on hold, and tellers will be cautioned not to underpay interest.
Such difficulties compounded the tension from long waits in line Tuesday, which were reported at several of IndyMac's 33 branches despite the FDIC's addition of 100 tellers to help ease the crunch.
In Encino, as many as 80 people were waiting outside around 8 a.m. when several customers tried to cut in line, LAPD Officer April Harding said. Police told customers to remain calm or face arrest, and order was restored, with private guards standing watch and police acting as backup.
As the morning wore on, customers leaned over a metal railing separating them from a row of guards and yelled complaints. The main point of contention involved a sign-up list that was started late Monday after many customers had given up and left for the day.
"He promised us there would not be a list," one woman yelled at a security guard. "We don't know who to believe!"
There was greater order at other branches. There wasn't even a line at IndyMac's main branch in Pasadena, which on Monday had been flooded with customers. On Tuesday afternoon, the only people outside were IndyMac employees overseeing an appointment list.
IndyMac is the fifth FDIC-insured institution to fail this year. John M. Reich, director of the Office of Thrift Supervision, said regulators had hoped to work out its problems in an orderly manner over time.
The FDIC had managed to do that with another troubled California lender, Fremont General Corp. of Santa Monica, whose Brea-based bank subsidiary was a major maker of subprime loans that began going bad in massive numbers.
The FDIC forced Fremont to stop lending in March 2007, saying it was making too many unaffordable loans. Under the scrutiny of the federal agency, the bank gradually found buyers for its holdings and liquidated its operations without a government takeover.
Reich said IndyMac had been actively seeking a major investor to provide capital or a buyer when the run on deposits began. "Although this institution was already in distress, the deposit run pushed IndyMac over the edge," he said.
Some experts say the FDIC needs to focus on helping depositors regain their funds quickly. Cannon, the bank analyst, said he was surprised to hear FDIC chief Sheila Bair say Monday that she would halt foreclosure proceedings to help some IndyMac mortgage holders stay in their homes.
Bair, he said, "was focusing on modifying loans rather than on the primary role of the FDIC, which is managing the deposits." Through a spokesman, she declined to comment.
The New York Stock Exchange suspended trading Tuesday in IndyMac Bancorp, the holding company for IndyMac Bank. The stock, which peaked at $50 a share in 2006, was changing hands at 9 cents.
andrea.chang@latimes.com
scott.reckard@latimes.com
kathy.kristof@latimes.com
First real shot across the bow of the oil speculators. It will be interesting to see how the market ultimately reacts, and how the free market Wall Street parties rally against this approach(especially Paulson and the commodity market participants),
The Wall Street Journal
June 27, 2008
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Bill Targets
Speculation
Over Energy
By SIOBHAN HUGHES
June 27, 2008
WASHINGTON -- The House of Representatives -- on a day when crude-oil prices hit a record high -- voted Thursday to order the nation's energy-market regulator to use its emergency powers to immediately curb excessive energy-market speculation.
The 402-19 vote was in favor of a bill that calls on the Commodity Futures Trading Commission to more aggressively police the energy markets it oversees. The overwhelming support indicates both parties want the CFTC to step up its review of whether speculation is contributing to rising prices and be prepared to take dramatic steps. Those steps could range from increasing the amount of money traders must put down to bet on the direction of energy prices, to temporarily shutting down the markets.
"Speculation is part of the problem," said Rep. Chris Van Hollen (D., Md.). Forcing the CFTC to use its emergency powers "opens up a whole set of new tools that they are not using."
It isn't clear the bill will become law anytime soon. The Senate won't take up the bill until next month at the earliest, and many people are betting senators won't pass it. Even if they do, there is the risk that both chambers would need a two-thirds majority to override a presidential veto. While the White House hasn't said whether it would veto the bill, the Bush administration has downplayed the role of speculation and maintained that oil prices are rising because of growing world-wide demand.
"The CFTC has the appropriate authority and oversight to review energy markets," said White House spokesman Tony Fratto. "The most important factor in rising oil prices is increasing global demand."
The vote came on a day when crude-oil futures hit an intraday record above $140 a barrel after OPEC's president said prices could rise above $150 a barrel.
Some lawmakers say prices have more than doubled over the past year in part because of a flood of money entering the commodity-futures markets.
Wall Street firms are concerned about the talk of further congressional action. They have been making a case that speculation is not the same thing as manipulation, and arguing that speculators are necessary for markets to function.
Trading by swaps dealers -- the big Wall Street banks involved in energy trading -- on behalf of financial investors and commodity companies, along with noncommercial traders such as hedge funds, accounts for an estimated 70% of trading in U.S. markets, up from about 57% three years ago, according to the CFTC.
The CFTC has said it isn't clear whether speculators are driving up prices, since some people may be betting that prices will fall, while others may be betting that prices will rise. The agency has promised to report to Congress by mid-September on the role played by swaps dealers.
The U.S. Senate may take up a similar measure later this summer, according to a spokesman for Senate Majority Leader Harry Reid (D., Nev.) With numerous bills dealing with energy market speculation under consideration, it isn't clear which measure, if any, might become law.
--Henry J. Pulizzi contributed to this article.
Write to Siobhan Hughes at siobhan.hughes@dowjones.com1
Fed leaves rates steady, citing inflation worries
By MARTIN CRUTSINGER, AP Economics Writer
http://news.yahoo.com/s/ap/20080625/ap_on_bi_ge/fed_interest_rates
WASHINGTON - With inflation moving higher on its worry list, the Federal Reserve held interest rates steady Wednesday, ending nearly a year of cuts to bolster the economy, and hinted that the next direction for rates could be up.
Fed Chairman Ben Bernanke and all but one of his central bank colleagues agreed that the best course was to leave a key rate alone at 2 percent, as the country slogs through the crosscurrents of plodding economic growth and zooming energy and food prices that threaten to spread inflation.
That meant the prime lending rate for millions of consumers and businesses stayed at 5 percent. The prime rate applies to certain credit cards, home equity lines of credit and other loans.
The decision brought to a close a powerful series of rate reductions that started in September and extended through late April. It was the central bank's most aggressive intervention in two decades to shore up an economy bruised by the trio of housing, credit and financial crises.
On Wall Street, stocks ended with a modest gain. The Dow Jones industrial average closed up 4.40 points to 11,811.83. Broader stock indicators managed to log stronger gains than the blue chips.
The Fed said it believes its rate cuts will "promote moderate growth over time" as they work their way through the economy. It also said risks that economic growth will falter appear to have "diminished somewhat."
At the same time, the Fed expressed heightened concern about inflation.
"Upside risks to inflation and inflation expectations have increased," the Fed said. Inflation eats into paychecks, corporate profits and erodes the value of investments. It is hard to control once it gets out of hand.
Some Wall Street investors and economists think the Fed, to fend off inflation, might be forced to start boosting rates as early as its next meeting on Aug. 5 or toward the end of this year — possibly at the Dec. 16 meeting.
Others, however, think that's a situation the Fed would like to avoid — especially given that the housing market is stuck in a deep slump, foreclosures are at record highs and jobs are harder to find. Raising rates too soon could hurt housing and deal a setback to the national economy. Those analysts believe the Fed won't start to push up rates until next year.
The Fed didn't signal that a rate increase was imminent, instead leaving the timing open.
However one member — Richard Fisher, president of the Federal Reserve Bank of Dallas, wanted to increase rates at Wednesday's meeting. Fisher, who has a reputation for being extra vigilant on inflation, was the sole dissenter.
"The needle is shifting more to greater concerns over inflation as opposed to economic growth," said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group. "That means the Fed's next move in interest rates will be up but the Fed left its options open with respect to timing."
Although Fed policymakers believed the economy would eventually gain some traction, they acknowledged that conditions are delicate and the economy is not out of the woods yet.
"Labor markets have softened further and financial markets remain under considerable stress," the Fed said. "Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters."
The economy has grown at a snail's pace in recent months. And, employers have cut jobs every month so far this year. The unemployment rate jumped from 5 percent in April to 5.5 percent in May, the largest one-month increase in two decades. The unemployment rate is expected to keep on rising in the months ahead, even if economic growth improves somewhat.
Hours before the Fed's decision, the government released a report underscoring the depth of the housing slump. New-home sales fell 2.5 percent in May, while home prices were down 5.7 percent from a year earlier, the Commerce Department said.
Mortgage rates are rising — spurred by investors' concerns about inflation. Those higher rates spell yet more headaches for the flailing housing market.
In a string of speeches over the past few weeks, Bernanke and his colleagues have ramped up tough anti-inflation talk. They've done that to rein in inflation expectations of consumers, investors and businesses. If those groups think prices will keep on rising, they'll act in ways that can worsen inflation.
Bernanke, in a rare public utterance for a Fed chief, also has sounded a warning that the slide in the U.S. dollar could contribute to a rise in inflation. He has sought to use words — instead of action — to bolster the dollar and try to lessen inflation pressures.
Consumer prices in the first five months of this year have risen at an annual rate of 4 percent. That's down from a 4.1 percent increase last year — the biggest jump in 17 years — but is still too high for the Fed's liking. Gasoline prices and oil prices have set a string of record highs. Gas has topped $4 a gallon, while oil prices are at $134.55 a barrel.
The Fed said it expects inflation to moderate later this year and next but said rising prices for energy, food and other commodities are a cause of concern. Those increases have made people boost their inflation expectations. Thus, "uncertainty about the inflation outlook remains high," the Fed said.
Preciouslife, an interesting post that illuminates the role that speculation plays in todays oil market. The Kudlow creed that "free market capitalism is the path to economic prosperity" seems to have hit a brick wall in this situation. The current bullish supply and demand factors in the energy market have provided the cover for unbridled speculation. In the long run, provided we live so long, either energy substitutions will equilibrate costs to benefits or economic recession will result in demand liquidation. The pain that would ensue during either macro equilibrating scenarios would be a disaster. I believe it is essential to curb non-user speculation in the oil market. When will our political surrogates stop talking and begin acting to resolve this problem?
Sky-High Oil Will Make U.S. Go Broke
Charles Biderman, TrimTabs 06.23.08, 7:00 PM ET
http://www.forbes.com/finance/2008/06/23/crude-biderman-margin-pf-etf-in_tt_0623trimtabs_inl.html
Stratospheric crude oil prices precipitated by speculation are wreaking havoc on the U.S. economy.
Based on income tax withholdings data from the Daily Treasury Statement, the wages of all U.S. workers on payrolls were unchanged on a year-over-year basis in the past two weeks (Friday, June 6 through Thursday, June 19) and rose 1.1% year-over-year in the past four weeks (Friday, May 23 through Thursday, June 19). Both of those growth rates are well below the 2.8% year-over-year in May, and they are consistent with an economy that is contracting sharply.
As long as oil prices stay above $120 per barrel, the economy is more likely to slow than strengthen, and companies are not likely to announce much float shrink. With real wages falling, large numbers of jobs being shed, gas prices exceeding $4 per gallon almost everywhere and home prices falling about 1% per month nationally, this year is going to be tough for American consumers.
Believe it or not, there is plenty of oil in the world. What is in short supply are investors willing to go short oil futures. The open interest on oil futures worldwide is 2.6 million contracts. With oil prices at $135 per barrel, each contract is worth $135,000. To control $135,000 of oil, investors have to put up no more than $10,000. Click here for "Energy Bull Market: 6 Must-Own Stocks," a free special report from Forbes.
A hefty $1.3 billion per month flowed into commodity trading advisers (CTAs) in the first four months of this year, and $700 million per month flowed into commodity exchange-traded funds (ETFs) in the first five months of this year. Those amounts do not even include investments through other vehicles by hedge funds and pension funds. The latest issue of Barron's reports that $55 billion flowed into commodity investments in the first quarter of 2008, and probably at least one-third of that amount was directed into long-only investments in oil.
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In any case, if half of the $2 billion per month inflow into CTAs and commodity ETFs were used to go long oil futures, it would be enough to go long 100,000 contracts, which is equal to 4% of the open interest on oil futures. In other words, open interest would grow roughly 50% per year just from inflows into CTAs and commodity ETFs.
What is happening now is not demand destruction, it is a financial disaster. The U.S. consumes 21 million barrels of per day. At $135 per barrel, the U.S. spends $1.0 trillion per year on oil, which is equal to 15% of the $6.8 trillion in take-home pay of everyone who pays taxes. If oil prices rose to $200 per barrel, the U.S. would spend $1.5 trillion per year on oil, which would be equal to 22% of take-home pay. Moreover, those percentages of 15% and 22% do not even include the cost of coal or natural gas. In other words, the U.S. will be broke long before oil prices hit $200 per barrel, and the rest of the world would be sure to follow.
Another way to put the oil crisis into perspective is to compare increased spending on oil to inflows into savings and investment vehicles. For every $60 per barrel increase in the price of oil, the U.S. spends an additional $450 billion annually, or $38 billion per month, on oil. In the past twelve months, the inflow into savings and investment vehicles--bank savings, certificates of deposit, retail money market funds, and all long-term mutual funds--was $744 billion, which is $296 billion more than the additional money the U.S. would spend each year on oil if the price of oil rose by $60 per barrel from its current level.
From April through June, the inflow into savings and investment vehicles was $35 billion per month, down 43% from $61 billion per month in the same period last year. In other words, the U.S. will generate almost no savings if the price of oil stays at $135 per barrel. If the price of oil rises even modestly from its current level, the U.S. will be operating at a deficit.
If regulators raised the margin requirement for oil futures to 25% from no more than 7.5%, the oil market would crack. Unfortunately for oil users, regulators are unlikely to boost the margin requirement, unless outside pressure becomes unbearable, because the income of commodity exchanges and traders would plummet.
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But there are two other solutions to the oil crisis.
The first is requiring major players in the oil futures market to disclose their total positions of all kinds in crude. Given the importance of oil to the U.S. economy, everyone should be able to know who is going long crude oil in a big way. Institutional owners must report what stocks they own at least semiannually. Why should they not be required to report the amount of crude oil they are long?
The second solution is for oil consumers to make a concerted effort to go short oil futures. The U.S. government has been spending $280 million per month, pumping 70,000 barrels of oil per day into salt caverns. Instead of buying oil, why not go short 35,000 contracts monthly at $8,000 per contract, in other words selling high the crude we bought relatively low? What if other major crude oil users also went short oil futures each month? What if the Japanese government, airlines, trucking companies and utilities spent several billion dollars to go short oil futures each month until the oil market came to its senses?
It is insane for the world to go broke while oil traders and a handful of gangsters who control their national oil production make huge fortunes.
Hi D of A,
Thanks for the update. I will also be looking to see if the dividend is cut. If that's the case, I will review my holding and problably bail. FWIW and IMHO.
Regards,
Abreis
IWA & Reverse Morris Trust...
Abreis, if you continue to hold IWA, you may want to think through what you will do if Verizon (VZ) spins off its rural lines in the north central US (Illinois, Indiana, Ohio, and Michigan) to IWA as a reverse Morris Trust, a recurring speculation these days.
The reverse Morris Trust is a tax strategy whereby VZ would avoid substantial taxes on its depreciated rural copper telephone lines they got from GTE. IWA would become a much larger regional telephone company that might benefit from economies of scale. Because of the tax advantage one would expect that VZ would sell (divest) the property to IWA at a substantial discount. They might also pay IWA for its wireless spectrum.
In short, to execute a reverse Morris trust, VZ must create a subsidiary that is bigger than IWA. This subsidiary then merges with IWA. The VZ shareholders get IWA stock prorated to their VZ holding. IWA management takes over the merged company.
VZ just completed a similar reverse Morris Trust divestiture of its New England rural telephone land lines to Fairpoint Communications (FRP). It took about 1.5 yrs after the announced intent before the deal was actually completed. This deal with FRP can be used to predict what will happen if a similar merger is made with IWA. The details can be found in FRP’s Form 434B3 filed on February 29, 2008.
The most important lesson relevant to IWA’s dividend policy was that the New England states required that Fairpoint reduce its dividend and paydown debt as a precondition for regulatory approval of the deal. I suspect that similar concessions would be likely if IWA were to take over the VZ north central GTE lines.
A second lesson was that the merger itself created selling pressure. This is because VZ is in both the S&P 500 and the Dow Jones Industrial Average. Index funds that received Fairpoint shares as a result of the deal were forced to sell them. The number of shares that they receive in a reverse Morris Trust deal is large (i.e. Verizon shareholders must control at least 50% of the resultant entity for the deal to be tax advantaged). Additional selling pressure may have resulted from those original VZ shareholders invested in VZ for the wireless story, not the rural telephone franchise.
Personally, I think that IWA would be greatly strengthened by addition of VZ’s north central GTE lines. But there would be some integration turbulence and the dividend will probably be reduced. If such a deal is announced, I don’t expect any big swings in stock price. However, I will probably liquidate my position because I am in it for the current yield, not long term growth.
-------------------------
Some useful websites:
http://telephonyonline.com/mag/telecom_rlec_ma_next/ - Early speculation about IWA involvement in reverse Morris Trust for VZ properties (5/22/06).
http://www.raymondjames.com/pdfs/industry/itell013007b_0843.pdf - Discussion of the financial rationale for a union (1/30/07).
http://biz.yahoo.com/ap/080409/fairpoint_analyst_note.html?.v=1 – Discussion of why Fairpoint share price dropped after reverse Morris Trust deal was announced (4/9/08).
http://www.sec.gov/Archives/edgar/data/1062613/000095012308002306/y40915bxe424b3.htm
SEC form 434B3 filed by FRP on 2/29/08.
Hi D of A,
Thanks for the update. Please keep them coming. IWA has been holding up pretty well in this investment environment.
Right now I'm looking at HRP. They pay a decent dividend for such a low priced stock. They are a REIT, but one that is mostly in commercial property. This is from Yahoo's message board:
HRP's main focus is dividend/income stability, growth secondary, an investment grade credit rating and offers a relatively high yield. This core strategy matches precisely my main investment objective. As someone who has followed HRP closely for many years, it is reasonably transparent that its actions are consistent with this core strategy. Thus far,although with the realization it is an ongoing struggle, HRP has substantially achieved its core objective.
FWIW and in MHO.
Regards,
Abreis
Abreis, regarding IWA...
Today’s presentation by IWA management at the Lehman Brothers Worldwide Wireless and Wireline Conference reiterated IWA’s strengths. It is available at http://cc.talkpoint.com/LEHM002/052808a_jw/default.asp?entity=lowa for 90 days.
I didn’t see anything new in the presentation per se. However, the slide set is good and can be downloaded; the question and answer session was interesting, even though it only lasted about five minutes. There were two question strings, one asking why Mediacom has not been a serious competitive threat and the other related to mergers and acquisitions (I have appended a transcript of this latter string below).
The M&A discussion builds upon current conjectures regarding consolidation in the rural telecom arena (see http://telephonyonline.com/mag/telecom_rlec_ma_next/ ).
On a related note, there seems to be an extraordinary interest in Dec 20 calls. The open interest for this strike is 2,173 contracts; whereas, the summed open interest for all call strikes in Jun is about 1,300, for Jul about 100, and for Sept about 1200 (see http://finance.yahoo.com/q/op?s=IWA&m=2008-12 ). It is hard to know what to make of this pattern; however, somebody might be very interested in keeping the price below 20 when December comes.
================
My transcript of the Q&A session regarding mergers and acquisitions:
Minute 27:04 - 30:05:
1st Question (the moderator): Let me ask you about consolidation in the space. That clearly is the buzz word these days. You mentioned that you think that you’re safer. And you have definitely kept perhaps much cleaner than maybe some of your peers. Are you open to consolidation in the RLEC space from both being a buyer and/or being a seller? Can you give us your thoughts on that perspective?
Alan Wells, Chairman & CEO: Well first of all, I think that consolidation will happen. It has happened up to now. As you know there have been a lot of transactions over the past several years. I think that there will be more transactions as time goes by. We obviously have been a participant of that because we have made some acquisitions in the state of Iowa. And the Bishop transaction has been outside the state. And the transactions will continue. I think we would certainly be a participant in that. Clearly on the side of looking for transactions that make sense to us to acquire. But obviously as a public company, if someone were to make an overture to us at an attractive price, that is something that our Board has to consider. I don’t think you can ever rule that out. But I certainly couldn’t talk to you about that today even if we had a transaction underway.
2nd questioner (from the audience): I mean how would that happen. I understand M&A and the dynamics within. I guess I’m wondering from your standpoint how accretive can a transaction be when your peers trade at 2-3 multiple points below where you stand right now. Can you explain to me if it is possible for them to acquire you and still be accretive. Because that is one thing that I tried to understand from Embarq and I couldn’t get that. Meaning Embarq trades at 5 times EBITA and you guys are at 8.8 times. There is a big value gap there. I’m wondering with M&A could somepay pay say a modest premium to you and still collect a... I mean what kind of EBITA multiple synergies can you generate from a transaction. That’s what I’m trying to understand with this... the dynamic that we are hearing about the dynamic M&A. I think that you guys are a very likely buyer because you’re positioned brilliantly now because you have such a great multiple. But I’m wondering from a seller’s standpoint what multiple would the buyer have to be at such that it could pay for you and it be accretive. You know what I am saying. It’s a strange question, I understand, but I’m just trying to understand the dynamics.
Alan Wells: I am not sure that I can talk about how somebody would look at us if someone were going to buy us. But like any other M&A transaction you need to look at what the free cash flow accretion would be. There would be a lot of factors to consider. You would have to look at what the incremental borrowing costs would be. You would have to look also at what the synergies would be as part of the transaction. Much like we would look at a transaction if we were the acquirer. But I think that it would be safe to say that there are probably accretive transactions that could be had either by us or somebody else or by somebody else of us throughout the space, even though the multiples may be different and I would think that probably Tom and others who look at that sort of thing more closely could answer this more ...
Supreme Court Upholds Tax Exemption for In-State Munis
http://online.wsj.com/article/SB121120201571003423.html
>>
By MARK H. ANDERSON
May 19, 2008 10:36 a.m.
WASHINGTON -- The Supreme Court on Monday voted 7-2 to uphold the tax exemption states and localities give to in-state municipal bonds.
The ruling overturns a Kentucky appeals court holding that had said the practice violates the Constitution because it discriminates against out-of-state bonds. The outcome means the opinion will require no changes to the way the market for public municipal bonds operates.
Justice David Souter wrote the main opinion for the court. Seven justices supported the outcome of the case but they splintered over some of the reasoning. These differences of opinion are likely the reason the court took six months to rule.
"Kentucky's tax exemption favors a traditional government function without any differential treatment favoring local entities over substantially similar out-of-state interests," Mr. Souter wrote. "This type of law does not discriminate against interstate commerce."
The lawsuit began in 2003 when two Louisville residents, George and Catherine Davis, filed a class-action lawsuit against Kentucky, arguing it was wrong for the state to tax interest on their out-of-state bond investments while exempting in-state bond interest.
A trial judge ruled against them. But the Kentucky Court of Appeals reversed, ruling the state interest exemption violated the U.S. Constitution because the same break isn't extended to out-of-state bond products. The Kentucky Supreme Court in 2006 let the lower court ruling stand.
More than 40 states exempt interest on in-state municipal bonds from income taxes, creating what is a tremendous nationwide market for bond products carved up by state boundaries. According to the Bond Buyer/Thomson Financial 2007 Yearbook, state and local government bonds are increasingly popular, with $891 billion issued in 2005 and 2006 alone.
The case is Kentucky v. Davis, 06-666.
<<
REITs Post Surprisingly Strong 1Q08 Results
http://online.wsj.com/article/SB121011023400271891.html
>>
By JENNIFER S. FORSYTH, ALEX FRANGOS and KRIS HUDSON
May 7, 2008
Given fears that a sagging economy and a crippled credit market might wreak havoc on the commercial property market, real-estate investment trusts delivered surprisingly strong earnings for the first quarter, with many companies beating analysts' estimates.
An analysis by Keefe, Bruyette & Woods of 64 REITs or real-estate operating companies that have reported first-quarter earnings as of Monday found 32 had exceeded analysts' consensus expectations, after adjusting for nonrecurring items. An additional 16 met expectations, and 14 missed. Two of the REITs had no meaningful consensus estimates.
The generally solid performance appears to justify the sector's rally over the past two months -- with the SNL U.S. REIT Equity Index up 14%, compared with 6% for the Standard & Poor's 500-stock index.
"We're not getting these monstrous misses that some observers might have expected going into earnings season," says Richard Anderson, director of REIT research for BMO Capital Markets.
Of course, the U.S. earnings season isn't over, so the tally could change. But executives and analysts say that the generally positive results so far reflect the property market's strong fundamentals. The U.S. commercial real-estate market benefited from limited new supply coming online in the earlier part of this decade, thanks to competition for land from home builders and high construction costs.
Nonetheless, REIT executives are cautious about the outlook for the rest of the year, saying earnings could suffer if job losses continue. Of the 32 companies that beat estimates, only 12 raised earnings guidance for 2008. That indicates that either Wall Street was too conservative for the first quarter or that many companies expect a slowdown later, says Sheila McGrath, senior vice president for Keefe, Bruyette & Woods.
For example, BRE Properties Inc., a San Francisco apartment company had a strong first quarter with 4.2% net operating income growth, year over year. Constance Moore, BRE's chief executive, said in an earnings call with analysts that while she was maintaining her initial guidance, "given the range of regional economic conditions, strong in certain markets, recessionary in others, this is going to be a challenging year and perhaps longer."
Moreover, for some REITs, such as those that specialize in office buildings, there is a lag time between job losses and tenants vacating space because of multiyear leases. Even in Manhattan, the strongest U.S. office market, with a tight vacancy rate of less than 6%, layoffs on Wall Street are expected to eventually make a dent in landlord earnings.
So far for the year, REITs that specialize in self-storage units are the top-performing group, with total returns, including dividends, up 24%, followed by apartment companies and shopping centers, up 15% and 10%, respectively, according to the National Association of Real Estate Investment Trusts, a trade association.
One factor helping apartments is declining rates of homeownership. Around 1.5 million households have left the ranks of homeowners during the past few years amid the property slump. Many of those have become renters.
Nonetheless, the backlash from the single-family home and condominium downturn has hurt some markets. Camden Property Trust, for instance, saw weakness in its northern Virginia properties. Folks unable to sell homes and condos there and in markets such as Florida, Las Vegas and Arizona are instead putting them on the rental market, creating new competition for the apartment REITs.
Looking forward, whether apartment REITs can maintain their strength will depend on the job growth situation, says Mike Salinsky, analyst at RBC Capital Markets. In general, apartment performance closely tracks job growth. As the number of jobs shrink, people tend to double up with friends or move in with family, depressing demand for apartments.
Another thing to watch: the summer-leasing season when a disproportionate share of annual apartment leases are signed. The period will be a critical test for apartment landlords given the uncertainties in the economy, says Alexander Goldfarb, analyst at UBS AG.
For retail REITs, first-quarter results have revealed steady performance that so far has largely escaped fallout from the slumping economy. Analysts had expected retail REITs to report declines in occupancy because consumer spending has slowed and store closures are forecast to multiply. Indeed, the International Council of Shopping Centers recently boosted its forecast of U.S. store closures for this year to nearly 6,500 from 5,800, putting the tally on track for its highest total since 2001.
Yet mall REITs and their peers in the shopping-center market generally held up last quarter, illustrating that the landlords are less susceptible than their tenants to short-term swings in consumer spending -- as long as those tenants keep paying rent. The REITs' growth in net operating income slowed last quarter, but not drastically.
Among the retail REITs showing slight strain last quarter was Equity One Inc., an owner of shopping centers in the Southeastern U.S. Equity One's primary market, Florida, has suffered significantly amid the housing market's turmoil. In turn, Equity One's occupancy rate fell to 92.7% in the first quarter from 94.1% a year earlier as closures of video stores and restaurants took their toll.
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Hi D of A,
Thanks for the update. I see IWA as more of a conservative play due its steady business and reliabale dividend payment. When banks are only paying around 2% interest you can't go too wrong here.
IMHO.
Regards,
Abreis
Alesco Financial Inc. Announces First Quarter 2008 Financial Results
Good news. Hopefully I'll have a RAS-like experience tomorrow.
http://biz.yahoo.com/prnews/080506/nytu126.html?.v=101
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