Replies to post #13358 on Value Microcaps Free-For-All

[roguedolphin]

Morgan Stanley warns of 'catastrophic event' as ECB fights Federal Reserve
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/16/bcnecb116.xml&CMP=ILC-mostviewedbox

By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 1:29am BST 17/06/2008

The clash between the European Central Bank and the US Federal Reserve over monetary strategy is causing serious strains in the global financial system and could lead to a replay of Europe's exchange rate crisis in the 1990s, a team of bankers has warned.

"We see striking similarities between the transatlantic tensions that built up in the early 1990s and those that are accumulating again today. The outcome of the 1992 deadlock was a major currency crisis and a recession in Europe," said a report by Morgan Stanley's European experts.

ECB President Jean-Claude Trichet has signalled that interest rates in Europe will rise
Jean-Claude Trichet is taking a hard line on rates

Just as then, Washington has slashed rates to bail out the banks and prevent an economic hard-landing, while Frankfurt has stuck to its hawkish line - ignoring angry protests from politicians and squeals of pain from Europe's export industry.

Indeed, the ECB has let the de facto interest rate - Euribor - rise by over 100 basis points since the credit crisis began.

Just as then, the dollar has plummeted far enough to cause worldwide alarm. In August 1992 it fell to 1.35 against the Deutsche Mark: this time it has fallen even further to the equivalent of 1.25. It is potentially worse for Europe this time because the yen and yuan have also fallen to near record lows. So has sterling.


Morgan Stanley doubts that Europe's monetary union will break up under pressure, but it warns that corked pressures will have to find release one way or another.

This will most likely occur through property slumps and banking purges in the vulnerable countries of the Club Med region and the euro-satellite states of Eastern Europe.

"The tensions will not disappear into thin air. They will find fault lines on the periphery of Europe. Painful macro adjustments are likely to take place. Pegs to the euro could be questioned," said the report, written by Eric Chaney, Carlos Caceres, and Pasquale Diana.

The point of maximum stress could occur in coming months if the ECB carries out the threat this month by Jean-Claude Trichet to raise rates. It will be worse yet - for Europe - if the Fed backs away from expected tightening. "This could trigger another 'catastrophic' event," warned Morgan Stanley.

The markets have priced in two US rates rises later this year following a series of "hawkish" comments by Fed chief Ben Bernanke and other US officials, but this may have been a misjudgment.

An article in the Washington Post by veteran columnist Robert Novak suggested that Mr Bernanke is concerned that runaway oil costs will cause a slump in growth, viewing inflation as the lesser threat. He is irked by the ECB's talk of further monetary tightening at such a dangerous juncture.

Federal Reserve Chairman Ben Bernanke is reported to be irked by the ECB's approach
Ben Bernanke is reported to be irked by the ECB's approach

The contrasting approaches in Washington and Frankfurt make some sense. America's flexible structure allows it to adjust quickly to shocks. Europe's more rigid system leaves it with "sticky" prices that take longer to fall back as growth slows.

Morgan Stanley says the current account deficits of Spain (10.5pc of GDP), Portugal (10.5pc), and Greece (14pc) would never have been able to reach such extreme levels before the launch of the euro.

EMU has shielded them from punishment by the markets, but this has allowed them to store up serious trouble. By contrast, Germany now has a huge surplus of 7.7pc of GDP.

The imbalances appear to be getting worse. The latest food and oil spike has pushed eurozone inflation to a record 3.7pc, with big variations by country. Spanish inflation is rising at 4.7pc even though the country is now in the grip of a full-blown property crash. It is still falling further behind Germany. The squeeze required to claw back lost competitiveness will be "politically unpalatable".

Morgan Stanley said the biggest risk lies in the arc of countries from the Baltics to the Black Sea where credit growth has been roaring at 40pc to 50pc a year. Current account deficits have reached 23pc of GDP in Latvia, and 22pc in Bulgaria. In Hungary and Romania, over 55pc of household debt is in euros or Swiss francs.

Swedish, Austrian, Greek and Italian banks have provided much of the funding for the credit booms. A crunch is looming in 2009 when a wave of maturities fall due. "Could the funding dry up? We think it could," said the bank.


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[roguedolphin]

RBS stock market alert: Fund managers react

Last Updated: 12:19am BST 19/06/2008
(incredible comments on the link)
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/18/cmstockmarket18.xml&CMP=ILC-mostviewedbox

Fund managers respond to the RBS prediction of a fully-fledged stock market crash. By Paul Farrow

Fund managers have reacted strongly to the forecast by the Royal Bank of Scotland of stock market crash and warn investors not to act in haste and panic.

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.
RBS stock market alert: Fund managers react.
Stock market storm: but do turbulent times really lie ahead?

"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist. But Richard Buxton, fund manager at Schroders, says Mr Janjuah's comments are 'alarmist'.

"If you strip out anything stocks related to oil, energy and mining in the FTSE you will see that the market is already down by 30 per cent over the past year. We are in a bear market which has been masked by the performance of those sectors."

Buxton points out that many UK shares closely connected to the slowing economy are down between 50 and 80 per cent over the year already and it is too late for investors who have yet to protect their portfolios. They will merely crystallise losses, he says.
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"Yes, we are in for a tough time and there may be another sell-off but average earnings are cheap and an awful lot of the bad news is already priced in. It is too late to sell, investors need to look through the volatility - I am investing aggressively on downturns. Any falls will be temporary - the falls are simply pushing down on a spring in valuation terms."

Robin Geffen, chief investment officer at Neptune Asset Management says that he finds it 'amusing' that the grim outlook from RBS has emerged just days after the beleaguered bank completed its Rights Issue.

He echoes Buxton's sentiments. "The RBS analyst is a bit late with his forecast, about a year and half late. We have already had a bear market in many areas of the market. The guy has got the financial world confused with the real world where the consumer is real and the building of infrastructure is real. Any parallels to the stock market crash in the late 1920's are ga-ga."

Geffen argues that there is value and opportunities to be found - he has around 10 per cent in cash and is selectively adding to his portfolios.

"I still like emerging market, oil, gas and mining stocks."

The RBS report warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.

Such a slide on world bourses would amount to one of the worst bear markets over the last century.

"Cash is the key safe haven. This is about not losing your money, and not losing your job," said Mr Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate.

Yet Martin Walker, fund manager at Invesco Perpetual says the market has de-rated to such an extent that he can't envisage the market falling much from here.

"Much of the market is trading on historic low valuations, aside from the resource and basic materials. Even if those sectors fall by half it will not make a massive difference to the overall fall in the FTSE."

Walker is keen on the pharmaceutical stocks such as GlaxoSmithKline and AstraZeneca because they are uncorrelated to the economic cycle.

"There are also great opportunities to invest in companies that are growing profits and growing sustainable dividends. BT is yielding 7.5 per cent - and it is a safe yield – that's fantastic value."

Leading portfolio manager John Chatfeild-Roberts at Jupiter admits that the US economy which is teetering on the brink of a recession is a concern and that stagflation (stagnant economic growth and rising inflation) remains a real threat to all Western economies. But he is looking to invest and make the most of the volatility.

He has recently increased his exposure to Japan which he reckons is the one major economy in the world that will benefit from the re-emergence of inflation.

He adds: "The portfolios remain very underweight the UK, which is still in the early stages of a significant consumer slow down. We are underweight financials and have no direct property exposure. On the other hand, we favour a variety of energy, infrastructure and emerging market plays and think that the current risk/reward ratio of investing in good quality corporate bonds to be very favourable. We will look to increase our exposure to these securities where appropriate. We do expect volatility to pick up over the summer months and look forward to taking advantage of this across the portfolios."

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