The Star Online > Business
Published: Thursday March 19, 2009 MYT 7:37:00 AM
US Fed starts bold US$1.2 trillion effort to revive US economy
WASHINGTON: With the country sinking deeper into recession, the Federal Reserve launched a bold $1.2 trillion effort Wednesday to lower rates on mortgages and other consumer debt, spur spending and revive the economy.
To do so, the Fed will spend up to $300 billion to buy long-term government bonds and an additional $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.
Fed Chairman Ben Bernanke and his colleagues wrapped a two-day meeting by leaving a key short-term bank lending rate at a record low of between zero and 0.25 percent.
Economists predict the Fed will hold the rate in that zone for the rest of this year and for most - if not all - of next year.
The decision to hold rates near zero was widely expected.
But the Fed's plan to buy government bonds and the sheer amount - $1.2 trillion - of the extra money to be pumped into the U.S. economy was a surprise.
"The Fed is clearly ready, willing and able to be the ATM for the credit markets," said Terry Connelly, dean of Golden Gate University's Ageno School of Business in San Francisco.
Wall Street was buoyed.
The Dow Jones industrial average, which had been down earlier in the day, rose 90.88, or 1.2 percent, to 7,486.58. Broader indicators also gained.
And government bond prices soared.
Heralding a coming drop in mortgage rates, the yield on the benchmark 10-year Treasury note dropped to 2.50 percent from 3.01 percent - the biggest daily drop in percentage points since 1981.
The dollar, meanwhile, fell against other major currencies.
In part, that signaled concern that the Fed's intervention might spur inflation over the long run.
If the credit and financial markets can be stabilized, the recession could end this year, setting the stage for a recovery next year, Bernanke has said in recent weeks.
The Fed chief and his colleagues again pledged to use all available tools to make that happen, and economists expect further steps in the months ahead.
Since the Fed last met in late January, "the economy continues to contract," Fed policymakers observed in a statement they issued Wednesday.
"Job losses, declining equity and housing wealth and tight credit conditions have weighed on consumer sentiment and spending," they said.
The Fed's announcement that it will spend up to $300 billion over the next six months to buy long-term government bonds was something that in January it had hinted it would do.
But some officials had seemed to back off from the idea in recent weeks.
Such action is designed to boost Treasury prices and drive down their rates, as it did Wednesday.
Rates on other kinds of debt are likely to fall as well.
"This is going to help everybody," said Sung Won Sohn, economist at the Martin Smith School of Business at California State University.
"This might help the Fed put Humpty Dumpty back together again."
The last time the Fed set out to influence long-term interest rates was during the 1960s.
The Fed's decision to buy an additional $750 billion in mortgage-backed securities guaranteed by Fannie and Freddie comes on top of $500 billion in such securities it's already buying.
It also will double its purchases of Fannie and Freddie debt to $200 billion.
Since the initial Fannie-Freddie program was announced late last year, mortgage rates have fallen. Rates on 30-year mortgages now average 5.03 percent, down from 6.13 percent a year ago, according to Freddie Mac.
The Fed's decision to expand the program could further reduce rates, analysts said.
"This is not only going to keep mortgage rates low for a long period of time," said Greg McBride, a senior financial analyst at Bankrate.com.
"The mere announcement may produce a honeymoon effect and bring mortgage rates down to even lower levels in the coming days."
The goal behind all the Fed's moves is to spur lending.
More lending would boost spending by consumers and businesses, which would revive the economy.
The Fed also said it would consider expanding another $1 trillion program that's being rolled out this week.
That program aims to boost the availability of consumer loans for autos, education and credit cards, as well as for small businesses.
Where does the Fed get all the money? It prints it.
The Fed's series of radical programs to lend or buy debt has swollen its balance sheet to nearly $2 trillion - from just under $900 billion in September.
Sohn believes the Fed's balance sheet could grow to $5 trillion over the next two years.
The Fed has said it's mindful of the risks of pumping more money into the economy, bailing out financial institutions and leaving a key rate near zero for too long.
There's the potential to plant the seeds for higher inflation, put ever-more taxpayer money at risk and encourage "moral hazard."
That's when companies make high-stakes gambles knowing the government stands ready to rescue them.
The Bank of England last week began buying government bonds from financial institutions as it turned to new ways to help revive Britain's moribund economy.
The Bank of England, like the Fed, already had lowered its key interest rate to a record low of 0.5 percent.
Finance leaders from top economies have discussed coordinating actions from their governments and central banks to provide a more potent punch against the global financial crisis.
The Fed is taking the new steps as the U.S. economy sinks deeper into recession.
Businesses are facing weaker sales prospects as customers in the United States and abroad cut back, the policymakers said.
Still, the Fed said it hoped its actions, the government's bank rescue effort and President Barack Obama's $787 billion stimulus of increased government spending and tax cuts eventually will help revive the economy.
"Although the near-term economic outlook is weak, the committee anticipates that policy actions .... will contribute to a gradual resumption of sustainable economic growth," the Fed said.
But even in this best-case scenario, the nation's unemployment rate - now at quarter-century peak of 8.1 percent - will keep climbing. Some economists think it will hit 10 percent by the end of this year.
The recession, which began in December 2007, already has snatched a net total of 4.4 million jobs and has left 12.5 million searching for work.
Thursday, March 19, 2009
Monday, March 16, 2009
Will the stock market rally stick, or vanish?
Published: Sunday March 15, 2009 MYT 10:10:00 AMUpdated: Sunday March 15, 2009 MYT 10:11:24 AM
NEW YORK (AP) - Investors have seen this before. Since the bear market began in late 2007, the Dow Jones industrial average has fallen into a pattern of huge declines, big gains, and then even larger declines. Four times, the market has rallied only to dissipate.
This past week, the market made a fifth stab at recovery, logging its best performance in months after remarks from bank CEOs and economic data led investors to believe they had gotten too pessimistic.
The Dow Jones industrial average rallied for four straight days from nearly 12-year lows, and gained 597 points, or 9 percent - its best week since November. That followed a two-and-a-half month drop in the Dow of nearly 25 percent.
"People have been worried that we're heading into this abyss," said Tobias Levkovich, Citigroup's chief U.S. equity strategist. "There are signs that that's not the case, and there is some floor somewhere - that we may have overreacted."
But is the worst really over?
There's no formula to figure out if this latest rally will stick. But market analysts are watching closely for signs that the worst might be behind us, and they say some good signs are starting to pop up.
"There are little subtle things that have happened that are good - good enough to see that market is trying to establish a near-term bottom," said John Kosar, market technician and president of Asbury Research in Chicago. "But it's way, way, way too premature to try to make an argument that this is 'The Bottom.' "
Here are five reasons the market may have bottomed, and five reasons to still fear the bear.
FIVE SIGNS THE MARKET MAY HAVE BOTTOMED: PUMPED UP VOLUME
Market analysts say two signs of a bottom are the entrance of big institutional investors, because they hold stocks for the long-term, and high trading volumes during rallies. Check, and check.
Pension funds, mutual funds, and insurance funds began snapping up bargain stocks last week after sitting things out for a while, said Stuart Frankel & Co. president Jeffrey Frankel, who works on the floor of the New York Stock Exchange. And volumes on the New York Stock Exchange on Tuesday, Wednesday and Thursday of last week were about 7 to 8 billion shares - similar to those when stocks plummeted the week before.
THE ECONOMY'S BAD, BUT COULD BE WORSE
The U.S. economy might be horrible, but it's not the Great Depression. Unemployment is at 8.1 percent, and expected to rise above 10 percent, but that's nowhere near the 25 percent level experienced in the 1930s. And today, when people are fired, they can collect unemployment. Conditions are a far cry from shanty towns and bread lines.
Plus, the economy's slide appears to be slowing. U.S. retail sales, after stripping out autos, actually rose 1.6 percent in January and 0.7 percent in February.
ZOMBIE BANKS? NOT QUITE.
Before last week, investors were throwing around the term "zombie banks" to describe the big U.S. banks: Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co. The moniker comes from the insolvent, federally propped-up Japanese banks of the 1990s.
But last week, these three U.S. banks said they have actually been profitable so far this year. They are also borrowing less from the Federal Reserve now. Bank borrowing from the Fed fell to $19.6 billion last week - the lowest level since Lehman Brothers collapsed in September, pointed out Miller Tabak & Co. analyst Tony Crescenzi.
THE COMMODITY BOUNCE
It's counterintuitive, but Americans should be happy oil prices are not falling anymore. After massive price drops alongside stocks over the past several months, crude oil has jumped 16 percent in the past three weeks.
Crude oil and copper - which has risen 17 percent in three weeks - tend to be economic barometers, Kosar said. That is because if the cost of industrial metals and crude oil are rising, it means traders see demand trickling back. Growing demand means increasing industrial production.
MAIN STREET CAPITULATION
Everyone at cocktail parties is talking about how they have moved into cash.
Certainly, the financial crisis proved that Wall Street bigwigs are not all smarter than the rest of us. But it is usually a good time to buy when regular folks are saying they have cashed out.
"A year ago, everybody was at the dinner table talking about returns," Frankel said. "Right now, it's probably a good time to buy, because usually the masses are wrong."
FIVE SIGNS THE MARKET HAS YET TO FIND A BOTTOM: CHRONIC CREDIT WOES
The banks may not be dead, but they are still sick. So are those giant, complicated credit markets. JPMorgan analyst Thomas J. Lee noted that the markets for securities backed by residential and commercial mortgages have recently deteriorated to their worst levels since Lehman Brothers' bankruptcy.
The market needs a plan for these "toxic assets" - either by selling them to private investors, or allowing banks to mark them differently. A failure by the government to deliver such a plan sparked a sell-off last month, and if investors do not get one soon, the market could be in for another tumble. Analysts are not ruling out a Dow drop to 5,000, or an S&P decline to 500.
"We don't believe that the bear market's over yet," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York. Toxic assets "either need to come off the banks' balance sheets, or they need to improve on the banks' balance sheets."
ECONOMIC DROPS ARE JAGGED
Economies, like stock markets, do not decline in a straight line. The recent spate of better-than-expected retail sales data could be merely a short-term blip.
Sandeep Dahiya, a finance professor at Georgetown University's McDonough School of Business, said he wants to see three months of sustained increases in the Conference Board's consumer confidence index. It is currently at the lowest levels since the gauge started in the 1960s.
"Until that happens, I'm not willing to say this thing is behind us," he said.
SHORTS: NOT SWEET
A big chunk of last week's rally was driven by what's known as "short-covering" - when investors buy stocks simply to offset short trades, in which an investor borrows a stock then sells it right away, hoping to buy the same shares back later at a lower price, thus profiting from the decline.
It's difficult to differentiate between short-covering and regular buying, but floor traders last week estimated that between 50 percent and 60 percent of Tuesday's 379-point jump in the Dow was due to short-covering. And a rally driven by short-covering can disappear quickly when a scary headline hits the wires.
FEAR OF THE UNKNOWN
The market fears something wildly unexpected could happen. The Sept. 11, 2001 terrorist attacks threw a wrench in the market's recovery following the bursting of the technology bubble. And an unintended consequence of addressing the Great Depression with protectionism in the 1930s was global trade war, which hampered the U.S. market's recovery.
THE BERNIE MADOFF FACTOR
Even if you did not invest in Bernard Madoff's fund, you might still be an indirect victim. Trust in the markets took a major hit after his $65 billion Ponzi scheme was revealed last December. It took another blow when R. Allen Stanford's $8 billion scheme came out in February.
Without trust, the stock market cannot rise for long.
"A lot of people have been beaten and wounded, and it's going to take time to recover from that. It's more than wealth - confidence has been rattled," Frankel said.
Before jumping in, "everyone is looking twice," Frankel said.-AP
ฉ 1995-2009 Star Publications (Malaysia) Bhd (Co No 10894-D)
NEW YORK (AP) - Investors have seen this before. Since the bear market began in late 2007, the Dow Jones industrial average has fallen into a pattern of huge declines, big gains, and then even larger declines. Four times, the market has rallied only to dissipate.
This past week, the market made a fifth stab at recovery, logging its best performance in months after remarks from bank CEOs and economic data led investors to believe they had gotten too pessimistic.
The Dow Jones industrial average rallied for four straight days from nearly 12-year lows, and gained 597 points, or 9 percent - its best week since November. That followed a two-and-a-half month drop in the Dow of nearly 25 percent.
"People have been worried that we're heading into this abyss," said Tobias Levkovich, Citigroup's chief U.S. equity strategist. "There are signs that that's not the case, and there is some floor somewhere - that we may have overreacted."
But is the worst really over?
There's no formula to figure out if this latest rally will stick. But market analysts are watching closely for signs that the worst might be behind us, and they say some good signs are starting to pop up.
"There are little subtle things that have happened that are good - good enough to see that market is trying to establish a near-term bottom," said John Kosar, market technician and president of Asbury Research in Chicago. "But it's way, way, way too premature to try to make an argument that this is 'The Bottom.' "
Here are five reasons the market may have bottomed, and five reasons to still fear the bear.
FIVE SIGNS THE MARKET MAY HAVE BOTTOMED: PUMPED UP VOLUME
Market analysts say two signs of a bottom are the entrance of big institutional investors, because they hold stocks for the long-term, and high trading volumes during rallies. Check, and check.
Pension funds, mutual funds, and insurance funds began snapping up bargain stocks last week after sitting things out for a while, said Stuart Frankel & Co. president Jeffrey Frankel, who works on the floor of the New York Stock Exchange. And volumes on the New York Stock Exchange on Tuesday, Wednesday and Thursday of last week were about 7 to 8 billion shares - similar to those when stocks plummeted the week before.
THE ECONOMY'S BAD, BUT COULD BE WORSE
The U.S. economy might be horrible, but it's not the Great Depression. Unemployment is at 8.1 percent, and expected to rise above 10 percent, but that's nowhere near the 25 percent level experienced in the 1930s. And today, when people are fired, they can collect unemployment. Conditions are a far cry from shanty towns and bread lines.
Plus, the economy's slide appears to be slowing. U.S. retail sales, after stripping out autos, actually rose 1.6 percent in January and 0.7 percent in February.
ZOMBIE BANKS? NOT QUITE.
Before last week, investors were throwing around the term "zombie banks" to describe the big U.S. banks: Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co. The moniker comes from the insolvent, federally propped-up Japanese banks of the 1990s.
But last week, these three U.S. banks said they have actually been profitable so far this year. They are also borrowing less from the Federal Reserve now. Bank borrowing from the Fed fell to $19.6 billion last week - the lowest level since Lehman Brothers collapsed in September, pointed out Miller Tabak & Co. analyst Tony Crescenzi.
THE COMMODITY BOUNCE
It's counterintuitive, but Americans should be happy oil prices are not falling anymore. After massive price drops alongside stocks over the past several months, crude oil has jumped 16 percent in the past three weeks.
Crude oil and copper - which has risen 17 percent in three weeks - tend to be economic barometers, Kosar said. That is because if the cost of industrial metals and crude oil are rising, it means traders see demand trickling back. Growing demand means increasing industrial production.
MAIN STREET CAPITULATION
Everyone at cocktail parties is talking about how they have moved into cash.
Certainly, the financial crisis proved that Wall Street bigwigs are not all smarter than the rest of us. But it is usually a good time to buy when regular folks are saying they have cashed out.
"A year ago, everybody was at the dinner table talking about returns," Frankel said. "Right now, it's probably a good time to buy, because usually the masses are wrong."
FIVE SIGNS THE MARKET HAS YET TO FIND A BOTTOM: CHRONIC CREDIT WOES
The banks may not be dead, but they are still sick. So are those giant, complicated credit markets. JPMorgan analyst Thomas J. Lee noted that the markets for securities backed by residential and commercial mortgages have recently deteriorated to their worst levels since Lehman Brothers' bankruptcy.
The market needs a plan for these "toxic assets" - either by selling them to private investors, or allowing banks to mark them differently. A failure by the government to deliver such a plan sparked a sell-off last month, and if investors do not get one soon, the market could be in for another tumble. Analysts are not ruling out a Dow drop to 5,000, or an S&P decline to 500.
"We don't believe that the bear market's over yet," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York. Toxic assets "either need to come off the banks' balance sheets, or they need to improve on the banks' balance sheets."
ECONOMIC DROPS ARE JAGGED
Economies, like stock markets, do not decline in a straight line. The recent spate of better-than-expected retail sales data could be merely a short-term blip.
Sandeep Dahiya, a finance professor at Georgetown University's McDonough School of Business, said he wants to see three months of sustained increases in the Conference Board's consumer confidence index. It is currently at the lowest levels since the gauge started in the 1960s.
"Until that happens, I'm not willing to say this thing is behind us," he said.
SHORTS: NOT SWEET
A big chunk of last week's rally was driven by what's known as "short-covering" - when investors buy stocks simply to offset short trades, in which an investor borrows a stock then sells it right away, hoping to buy the same shares back later at a lower price, thus profiting from the decline.
It's difficult to differentiate between short-covering and regular buying, but floor traders last week estimated that between 50 percent and 60 percent of Tuesday's 379-point jump in the Dow was due to short-covering. And a rally driven by short-covering can disappear quickly when a scary headline hits the wires.
FEAR OF THE UNKNOWN
The market fears something wildly unexpected could happen. The Sept. 11, 2001 terrorist attacks threw a wrench in the market's recovery following the bursting of the technology bubble. And an unintended consequence of addressing the Great Depression with protectionism in the 1930s was global trade war, which hampered the U.S. market's recovery.
THE BERNIE MADOFF FACTOR
Even if you did not invest in Bernard Madoff's fund, you might still be an indirect victim. Trust in the markets took a major hit after his $65 billion Ponzi scheme was revealed last December. It took another blow when R. Allen Stanford's $8 billion scheme came out in February.
Without trust, the stock market cannot rise for long.
"A lot of people have been beaten and wounded, and it's going to take time to recover from that. It's more than wealth - confidence has been rattled," Frankel said.
Before jumping in, "everyone is looking twice," Frankel said.-AP
ฉ 1995-2009 Star Publications (Malaysia) Bhd (Co No 10894-D)
Wednesday, March 11, 2009
It’s bad but far from Doomsday – Barton Biggs
MARCH 11 – As recently as a few weeks ago, I was very gloomy about the global economy, bearish about stock markets and deeply depressed about the world in general. I believed there was a 50 per cent chance that the world was facing a long cycle of recession, depression and wealth destruction.
I maintained that the bears believe that the best-case economic scenario is Japan’s agony since the 1990s, and the worst is a replay of the 1930s.
Recent events haven’t brightened the picture. The global economic outlook has deteriorated – the market consensus is now that the angle of descent of not only the US economy, but Europe and the major emerging markets, has steepened.
And even more disconcertingly, President Obama has announced what many investors consider to be a populist redistributionist tax agenda, which increases the tax rate on capital gains and dividends and gives tax reductions and distributions to the middle class and the poor.
Neither event has buoyed investor mood, as witnessed by last week’s stock-market declines.
Despite this, I still believe that there is a 50 per cent probability of a happier outcome. The world is having the most severe recession of the post-war era, and the recovery will be sluggish and plagued by inflation.
Nevertheless, the doomsday scenario of depression and deflation, of the Dow Jones industrial average hitting 5000 and the S&P 500 hitting 500, is farfetched. In fact, markets could be on the brink of a major rally, and the US economy may begin to recover later this year. Here are the reasons why:
1. Powerful medicine. The financial panic and the collapse of the world economy caught the so-called Authorities (i.e., the central banks and the governments of the world) by surprise. They reacted slowly, but nevertheless far faster than the Authorities in the US in the 1930s or Japan in the 1990s.
In both cases, the Authorities were not only tardy, but also made serious policy errors, such as raising tax rates, imposing tariffs and not curing the banking systems. These mistakes are now well understood – the current Fed chairman has written a book on the subject.
This time around – and this is very important – the Authorities have unleashed powerful fiscal and monetary stimuli that are totally unprecedented in size and scope. Interest rates have been dramatically cut everywhere, and every week more countries announce new fiscal-stimulus programs. It takes time for these actions to affect economic activity.
Rate cuts and expansion of the money supply are powerful medicine, but won’t make a difference for at least a year. Fiscal programs are quicker, but also take time to implement.
The actions of the Authorities should begin to boost activity by the late spring, and their uplifting effect will grow as the year progresses. In the United States, the fiscal-stimulus program is expected to add 4 percentage points to real GDP growth in both the second and third quarters of this year.
In other words, the world economy should begin to level out and improve as time goes on. We are not in a hopeless death spiral as the bears say.
2. Markets already assume the worst. World stock markets have been falling since 2000 and, adjusted for inflation, are down 60 to 70 per cent. The sorry state of the world economy is front-page news.
Therefore, it stands to reason that the bad news is extremely well known and must be pretty thoroughly priced into the markets. Treasury bonds have vastly outperformed stocks for 10 years, and the relationship between the two is back to the level of the early 1980s, which was a fabulous buying opportunity for stocks; recall that 1982 was the takeoff point for the greatest bull market in history.
Bear in mind that for the entire 20th century, a turbulent 100 years, the annual real (after inflation) return for stocks in the US was 6.9 per cent, versus 1.8 per cent for Treasury bonds.
In Sweden the relevant figures were 8.2 per cent per year versus 2.3 per cent for bonds; in Germany, 3.7 per cent versus minus 2.3 per cent; and in Japan, 5 per cent versus 1.6 per cent.
Why would you want to be a lender to the US government rather than an owner of real assets or the means of production at a moment when the government is printing more paper than at any time in its history? Rolling more money off the printing presses always eventually means higher inflation and interest rates, which is of course bad for bonds.
3. Stocks are on sale. Depending on your frame of reference, stocks are either cheap or very cheap, in absolute terms as well as versus inflation and interest rates.
In America, the price-to-earnings ratio of the S&P 500 when it is calculated on a market-capitalisation-weighted basis is about nine times already depressed earnings. At the height of the bubble in 2000 that ratio was close to 20 times, and at the peak of the recovery in the fall of 2007, it was around 15.
In addition, the dividend yield on stocks in both the US and Europe is higher than that on government bonds.
Over the long run, the ratio of a company’s stock price to its book value (a measure of the retained earnings of a company), and the ratio of its stock price to sales, have been the best predictors of performance, and they show exceptional value at the moment. Buy low, sell high!
4. Pessimism is pervasive. Sentiment is just incredibly depressed. I have never seen anything like it, not even in 1974 when the outlook was very grim indeed. Back then, America had just lost a war in Vietnam and nearly impeached a president, it was suffering hyperinflation and a recession, and its cities were on fire.
Still, the gloom wasn’t at the levels that we are seeing today. Money-market cash is equivalent to 43 per cent of the total capitalisation of US stocks, an all-time high. The return on cash is zero! Hedge funds hold more cash than ever before. Private-equity funds are literally being given away because their owners don’t want the risk. All of it shows how bearish everyone is.
Over 40 years, my experience has been that when everyone is bearish, it’s invariably right to be gradually buying. Being a contrarian works. The bottom of a stock-market cycle, by definition, has to be the point of maximum bearishness. The news doesn’t have to be good for prices to rally; it just has to be less bad than what has already been factored into the market.
Already there are some glimmers of hope. In the oil-consuming countries, the huge drop in oil prices is similar to a massive tax cut. The fall in consumption is beginning to level out. Inventories have been reduced to levels so low that production will have to be increased even to meet the current depressed level of demand.
The Japanese car companies have announced assembly-line increases, and in the United States, auto-dealer and home-builder surveys have looked up. Last week, the purchasing-managers index (PMI) in China rose for the third consecutive month. JPMorgan’s global-manufacturing PMI posted a second consecutive gain in February, and its new-orders index has turned and is rising.
These indexes are still in recession territory, but the rate of change has turned up. US house prices are still falling, and mortgage foreclosures are rising.
However, the affordability of housing has soared and existing home sales are rising. The Obama administration is proposing major mortgage-term restructuring.
The final antidote to despair was captured by Bernard Baruch in his 1932 foreword to a reprint of Charles Mackay’s classic book “Extraordinary Popular Delusions and the Madness of Crowds.”
“If in the lamentable era of New Economics that preceded the crash of 1929, primitive investors had only chanted to themselves ‘two plus two still equals four,’ then the disaster might have been averted,” wrote Baruch.
Similarly, he said, amid the gloom that had descended by 1932, “when many begin to wonder if declines would never halt, the appropriate abracadabra may be: ‘They always did’.” And they always will. – Newsweek
I maintained that the bears believe that the best-case economic scenario is Japan’s agony since the 1990s, and the worst is a replay of the 1930s.
Recent events haven’t brightened the picture. The global economic outlook has deteriorated – the market consensus is now that the angle of descent of not only the US economy, but Europe and the major emerging markets, has steepened.
And even more disconcertingly, President Obama has announced what many investors consider to be a populist redistributionist tax agenda, which increases the tax rate on capital gains and dividends and gives tax reductions and distributions to the middle class and the poor.
Neither event has buoyed investor mood, as witnessed by last week’s stock-market declines.
Despite this, I still believe that there is a 50 per cent probability of a happier outcome. The world is having the most severe recession of the post-war era, and the recovery will be sluggish and plagued by inflation.
Nevertheless, the doomsday scenario of depression and deflation, of the Dow Jones industrial average hitting 5000 and the S&P 500 hitting 500, is farfetched. In fact, markets could be on the brink of a major rally, and the US economy may begin to recover later this year. Here are the reasons why:
1. Powerful medicine. The financial panic and the collapse of the world economy caught the so-called Authorities (i.e., the central banks and the governments of the world) by surprise. They reacted slowly, but nevertheless far faster than the Authorities in the US in the 1930s or Japan in the 1990s.
In both cases, the Authorities were not only tardy, but also made serious policy errors, such as raising tax rates, imposing tariffs and not curing the banking systems. These mistakes are now well understood – the current Fed chairman has written a book on the subject.
This time around – and this is very important – the Authorities have unleashed powerful fiscal and monetary stimuli that are totally unprecedented in size and scope. Interest rates have been dramatically cut everywhere, and every week more countries announce new fiscal-stimulus programs. It takes time for these actions to affect economic activity.
Rate cuts and expansion of the money supply are powerful medicine, but won’t make a difference for at least a year. Fiscal programs are quicker, but also take time to implement.
The actions of the Authorities should begin to boost activity by the late spring, and their uplifting effect will grow as the year progresses. In the United States, the fiscal-stimulus program is expected to add 4 percentage points to real GDP growth in both the second and third quarters of this year.
In other words, the world economy should begin to level out and improve as time goes on. We are not in a hopeless death spiral as the bears say.
2. Markets already assume the worst. World stock markets have been falling since 2000 and, adjusted for inflation, are down 60 to 70 per cent. The sorry state of the world economy is front-page news.
Therefore, it stands to reason that the bad news is extremely well known and must be pretty thoroughly priced into the markets. Treasury bonds have vastly outperformed stocks for 10 years, and the relationship between the two is back to the level of the early 1980s, which was a fabulous buying opportunity for stocks; recall that 1982 was the takeoff point for the greatest bull market in history.
Bear in mind that for the entire 20th century, a turbulent 100 years, the annual real (after inflation) return for stocks in the US was 6.9 per cent, versus 1.8 per cent for Treasury bonds.
In Sweden the relevant figures were 8.2 per cent per year versus 2.3 per cent for bonds; in Germany, 3.7 per cent versus minus 2.3 per cent; and in Japan, 5 per cent versus 1.6 per cent.
Why would you want to be a lender to the US government rather than an owner of real assets or the means of production at a moment when the government is printing more paper than at any time in its history? Rolling more money off the printing presses always eventually means higher inflation and interest rates, which is of course bad for bonds.
3. Stocks are on sale. Depending on your frame of reference, stocks are either cheap or very cheap, in absolute terms as well as versus inflation and interest rates.
In America, the price-to-earnings ratio of the S&P 500 when it is calculated on a market-capitalisation-weighted basis is about nine times already depressed earnings. At the height of the bubble in 2000 that ratio was close to 20 times, and at the peak of the recovery in the fall of 2007, it was around 15.
In addition, the dividend yield on stocks in both the US and Europe is higher than that on government bonds.
Over the long run, the ratio of a company’s stock price to its book value (a measure of the retained earnings of a company), and the ratio of its stock price to sales, have been the best predictors of performance, and they show exceptional value at the moment. Buy low, sell high!
4. Pessimism is pervasive. Sentiment is just incredibly depressed. I have never seen anything like it, not even in 1974 when the outlook was very grim indeed. Back then, America had just lost a war in Vietnam and nearly impeached a president, it was suffering hyperinflation and a recession, and its cities were on fire.
Still, the gloom wasn’t at the levels that we are seeing today. Money-market cash is equivalent to 43 per cent of the total capitalisation of US stocks, an all-time high. The return on cash is zero! Hedge funds hold more cash than ever before. Private-equity funds are literally being given away because their owners don’t want the risk. All of it shows how bearish everyone is.
Over 40 years, my experience has been that when everyone is bearish, it’s invariably right to be gradually buying. Being a contrarian works. The bottom of a stock-market cycle, by definition, has to be the point of maximum bearishness. The news doesn’t have to be good for prices to rally; it just has to be less bad than what has already been factored into the market.
Already there are some glimmers of hope. In the oil-consuming countries, the huge drop in oil prices is similar to a massive tax cut. The fall in consumption is beginning to level out. Inventories have been reduced to levels so low that production will have to be increased even to meet the current depressed level of demand.
The Japanese car companies have announced assembly-line increases, and in the United States, auto-dealer and home-builder surveys have looked up. Last week, the purchasing-managers index (PMI) in China rose for the third consecutive month. JPMorgan’s global-manufacturing PMI posted a second consecutive gain in February, and its new-orders index has turned and is rising.
These indexes are still in recession territory, but the rate of change has turned up. US house prices are still falling, and mortgage foreclosures are rising.
However, the affordability of housing has soared and existing home sales are rising. The Obama administration is proposing major mortgage-term restructuring.
The final antidote to despair was captured by Bernard Baruch in his 1932 foreword to a reprint of Charles Mackay’s classic book “Extraordinary Popular Delusions and the Madness of Crowds.”
“If in the lamentable era of New Economics that preceded the crash of 1929, primitive investors had only chanted to themselves ‘two plus two still equals four,’ then the disaster might have been averted,” wrote Baruch.
Similarly, he said, amid the gloom that had descended by 1932, “when many begin to wonder if declines would never halt, the appropriate abracadabra may be: ‘They always did’.” And they always will. – Newsweek
Monday, March 9, 2009
World Bank says global economy will shrink in 2009
Published: Monday March 9, 2009 MYT 7:45:00 AM
NEW YORK: The World Bank said Sunday that the global economy will shrink this year for the first time since World War II and that the global financial crisis will make it tougher for poor and developing nations to access needed financing.
Trade is forecast to fall to its lowest point in 80 years in 2009, as economic hardship ripples across the globe, the bank said.
The most drastic trade slowdowns are expected in East Asia, where growth had been robust, the bank said in a paper prepared for a meeting of finance ministers and central bank officials next week.
The impact on the poorest countries will be severe, the bank said, predicting that a group of 129 countries face a shortfall of $270 to $700 billion this year.
The bank, which offers low-interest loans and grants to developing nations, warned international financial institutions will not be able to cover even the low end of that estimate.
Only one-quarter of those vulnerable countries will be able to ease the economic downturn through job creation or "safety net" programs, the bank said.
The ramifications of the growing financial crisis on the world's poorest nations will likely remain for some time, the bank said.
Because richer nations are borrowing more, developing nations are being squeezed out and many financial organizations that have provided financing to lower-income countries "have virtually disappeared."
Developing countries that are still able to get credit will face higher borrowing costs and lower cash flow which will lead to weaker investment and slower growth, the bank said.
To ease the burden on developing nations, the bank urged cooperation from developed nations, global institutions and the private sector.
"We need to react in real time to a growing crisis that is hurting people in developing countries," World Bank Group President Robert B. Zoellick said.
"This global crisis needs a global solution and preventing an economic catastrophe in developing countries is important for global efforts to overcome this crisis. We need investments in safety nets, infrastructure, and small and medium size companies to create jobs and to avoid social and political unrest."
Developed countries should spend some of their billions in stimulus funds in poorer nations to ease the burden on those countries, World Bank Chief Economist and Senior Vice President Justin Yifu Lin said.
"Clearly, fiscal resources do have to be injected in rich countries that are at the epicenter of the crisis, but channeling infrastructure investment to the developing world where it can release bottlenecks to growth and quickly restore demand can have an even bigger bang for the buck and should be a key element to recovery," Lin said.
ฉ 1995-2009 Star Publications (Malaysia) Bhd (Co No 10894-D)
NEW YORK: The World Bank said Sunday that the global economy will shrink this year for the first time since World War II and that the global financial crisis will make it tougher for poor and developing nations to access needed financing.
Trade is forecast to fall to its lowest point in 80 years in 2009, as economic hardship ripples across the globe, the bank said.
The most drastic trade slowdowns are expected in East Asia, where growth had been robust, the bank said in a paper prepared for a meeting of finance ministers and central bank officials next week.
The impact on the poorest countries will be severe, the bank said, predicting that a group of 129 countries face a shortfall of $270 to $700 billion this year.
The bank, which offers low-interest loans and grants to developing nations, warned international financial institutions will not be able to cover even the low end of that estimate.
Only one-quarter of those vulnerable countries will be able to ease the economic downturn through job creation or "safety net" programs, the bank said.
The ramifications of the growing financial crisis on the world's poorest nations will likely remain for some time, the bank said.
Because richer nations are borrowing more, developing nations are being squeezed out and many financial organizations that have provided financing to lower-income countries "have virtually disappeared."
Developing countries that are still able to get credit will face higher borrowing costs and lower cash flow which will lead to weaker investment and slower growth, the bank said.
To ease the burden on developing nations, the bank urged cooperation from developed nations, global institutions and the private sector.
"We need to react in real time to a growing crisis that is hurting people in developing countries," World Bank Group President Robert B. Zoellick said.
"This global crisis needs a global solution and preventing an economic catastrophe in developing countries is important for global efforts to overcome this crisis. We need investments in safety nets, infrastructure, and small and medium size companies to create jobs and to avoid social and political unrest."
Developed countries should spend some of their billions in stimulus funds in poorer nations to ease the burden on those countries, World Bank Chief Economist and Senior Vice President Justin Yifu Lin said.
"Clearly, fiscal resources do have to be injected in rich countries that are at the epicenter of the crisis, but channeling infrastructure investment to the developing world where it can release bottlenecks to growth and quickly restore demand can have an even bigger bang for the buck and should be a key element to recovery," Lin said.
ฉ 1995-2009 Star Publications (Malaysia) Bhd (Co No 10894-D)
Wednesday, March 4, 2009
Malaysia may face full-blown recession
Wednesday March 4, 2009
By K.C LAW
KUALA LUMPUR: There is a 50% chance Malaysia will fall into a “full-blown” recession this year, said Malaysian Institute of Economic Research (MIER) executive director Prof Datuk Mohamed Ariff Abdul Kareem.
“Technical recession is almost certain. The 1.3% (real gross domestic product (GDP) forecast in January) is considered optimistic. In fact, I think the best-case scenario will be 0.5% growth this year.
“We forecast the first half year will have negative growth but hopefully the second half will show some positive figure, which will give us 0.5% growth,” he said, adding that MIER would review again the GDP as a lot of development has taken place since the last forecast. Speaking after a seminar organised by Rahim & Co, Ariff said Malaysia’s economy might remain sluggish for a long time.
“My fear is that we may be stuck there for sometime. Contraction may not be sharp but long,” he said, adding that it could take three years (2012) before the local economy returned to normalcy.
He expected the fiscal deficit to increase to more than 6% of GDP if the second stimulus package was RM30bil, which is about 4% of GDP. Financing the deficit budget was not a problem as there was a lot of liquidity in the local financial market, which funds 93% of the government deficit.
However, he said it was “not about how much you spend, it is how you spend that matters.”
“It is about confidence and confidence depends on transparency. People want to know where the money comes from and where it’s going. Unfortunately, transparency is low in Malaysia.
“A fiscal package may only cushion impact but cannot neutralise it. But without any stimulus package, it will be worse,” he said. Meanwhile, Ariff projected the ringgit would take at least four years to reach 2.8 against the US dollar, a level which he considered equilibrium.
He said the greenback continued to be artificially strong now because central banks worldwide were continuing to fund the US deficit, and thus increasing the demand for the dollar.
In the meantime, the ringgit would remain weak and volatile, but unlikely to cross 3.8 against the dollar, Ariff said.
ฉ 1995-2009 Star Publications (Malaysia) Bhd (Co No 10894-D)
By K.C LAW
KUALA LUMPUR: There is a 50% chance Malaysia will fall into a “full-blown” recession this year, said Malaysian Institute of Economic Research (MIER) executive director Prof Datuk Mohamed Ariff Abdul Kareem.
“Technical recession is almost certain. The 1.3% (real gross domestic product (GDP) forecast in January) is considered optimistic. In fact, I think the best-case scenario will be 0.5% growth this year.
“We forecast the first half year will have negative growth but hopefully the second half will show some positive figure, which will give us 0.5% growth,” he said, adding that MIER would review again the GDP as a lot of development has taken place since the last forecast. Speaking after a seminar organised by Rahim & Co, Ariff said Malaysia’s economy might remain sluggish for a long time.
“My fear is that we may be stuck there for sometime. Contraction may not be sharp but long,” he said, adding that it could take three years (2012) before the local economy returned to normalcy.
He expected the fiscal deficit to increase to more than 6% of GDP if the second stimulus package was RM30bil, which is about 4% of GDP. Financing the deficit budget was not a problem as there was a lot of liquidity in the local financial market, which funds 93% of the government deficit.
However, he said it was “not about how much you spend, it is how you spend that matters.”
“It is about confidence and confidence depends on transparency. People want to know where the money comes from and where it’s going. Unfortunately, transparency is low in Malaysia.
“A fiscal package may only cushion impact but cannot neutralise it. But without any stimulus package, it will be worse,” he said. Meanwhile, Ariff projected the ringgit would take at least four years to reach 2.8 against the US dollar, a level which he considered equilibrium.
He said the greenback continued to be artificially strong now because central banks worldwide were continuing to fund the US deficit, and thus increasing the demand for the dollar.
In the meantime, the ringgit would remain weak and volatile, but unlikely to cross 3.8 against the dollar, Ariff said.
ฉ 1995-2009 Star Publications (Malaysia) Bhd (Co No 10894-D)
Tuesday, March 3, 2009
The Depression word: Will recession become something worse?
By TOM RAUM and DANIEL WAGNER, Associated Press Writers Tom Raum And Daniel Wagner, Associated Press Writers Mon Mar 2, 3:28 pm ET
WASHINGTON – A Depression doesn't have to be Great — bread lines, rampant unemployment, a wipeout in the stock market. The economy can sink into a milder depression, the kind spelled with a lowercase "d."
And it may be happening now.
The trouble is, unlike recessions, which are easy to define, there are no firm rules for what makes a depression. Everyone at least seems to agree there hasn't been one since the epic hardship of the 1930s.
But with each new hard-times headline, most recently an alarming economic contraction of 6.2 percent in the fourth quarter, it seems more likely that the next depression is on its way.
"We're probably in a depression now. But it's not going to be acknowledged until years go by. Because you have to see it behind you," said Peter Morici, a business professor at the University of Maryland.
No one disputes that the current economic downturn qualifies as a recession. Recessions have two handy definitions, both in effect now — two straight quarters of economic contraction, or when the National Bureau of Economic Research makes the call.
Declaring a depression is much trickier.
By one definition, it's a downturn of three years or more with a 10 percent drop in economic output and unemployment above 10 percent. The current downturn doesn't qualify yet: 15 months old, that 6.2 percent drop in output and 7.6 percent unemployment.
Another definition says a depression is a sustained recession during which the populace has to dispose of tangible assets to pay for everyday living. For some families, that's happening now.
Morici says a depression is a recession that "does not self-correct" because of fundamental structural problems in the economy, such as broken banks or a huge trade deficit.
Or maybe a depression is whatever corporate America says it is. Tony James, president of private equity firm Blackstone, called this downturn a depression during an earnings conference call last week.
The Great Depression retains the heavyweight crown. Unemployment peaked at more than 25 percent. From 1929 to 1933, the economy shrank 27 percent. The stock market lost 90 percent of its value from boom to bust.
And while last year in the stock market was the worst since 1931, the Dow Jones industrials would have to fall about 5,000 more points to approach what happened in the Depression.
Few economists expect this downturn will be the sequel. But nobody knows for sure, and nobody can say when or whether the downturn may deepen from a recession to a depression.
In his prime-time address to Congress last week, President Barack Obama acknowledged "difficult and trying times" but sought to rally the nation with an upbeat vow that "we will rebuild, we will recover."
The next day, Federal Reserve Chairman Ben Bernanke told the House Financial Services Committee that the "recession is serious, financial conditions remain difficult." He held out a best-case hope that it might end later this year, with "full recovery" in two to three years.
Despite the tempered optimism, the economic outlook remains grim. Consumer confidence has fallen off the table, stocks are at 12-year lows, layoffs come by the tens of thousands, and credit remains tight.
The current downturn has many of the 1930s characteristics, including being primed by big stock market and real estate booms that turned to busts, said Allen Sinai, founder of Boston-area consulting firm Decision Economics.
Policymakers and economists note there are safeguards in place that weren't there in the 1930s: deposit insurance, unemployment insurance and an ability by the government to hurl trillions of dollars at the problem, even if it means printing money.
Before the 1930s, any serious economic downturn was called a depression. The term "recession" didn't come into common use until "depression" became burdened by memories of the 1930s, said Robert McElvaine, a history professor at Millsaps College in Jackson, Miss.
"When the economy collapsed again in 1937, they didn't want to call that a new depression, and that's when recession was first used," he said. "People also use 'downward blip.' Alan Greenspan once called it a 'sideways waffle.'"
Most postwar U.S. recessions have come after the Fed has increased interest rates to cool down rapid economic growth and inflation. Later, the Fed lowers rates and helps restart the economy, with the housing and auto sectors — both sensitive to interest rates — leading the way.
This time is different: As Senate Banking Committee Chairman Chris Dodd, D-Conn., said, "Our housing and auto sectors are leading us not out of recession, but into it."
What's more, the Fed no longer has the ability to kick-start recovery by lowering interest rates. The central bank has already effectively lowered the short-term rates it controls to zero.
And there are no guarantees the massive economic stimulus package and series of bank bailouts will stave off a nightmare recession, or worse.
"It is certainly plausible that the kinds of policy measures that have been good enough to tame the business cycle are no longer adequate in a fast-moving, highly leveraged, highly networked economy," said Anirvan Banerji of the Economic Cycle Research Institute.
Today's economic indicators don't project a depression. But Banerji is cautious. Economic data in 1929 didn't show that the stock market crash was about to lead to years of economic misery, either.
"It did not look like the kind of plunge that would be a depression until after the recession began," Banerji said. "The Great Depression didn't start out as a depression. It started out as a recession."
The depression that consumed most of the 1870s and followed something called the Panic of 1873 makes a better comparison to what's happening now, said Scott Nelson, a history professor at the College of William and Mary.
Financial markets had become centrally located by the 1870s, notably in London. And nations had not yet enacted the protectionist trade policies that were in place by the 1930s.
The results were not exactly promising. Gangs of orphans roamed city streets as men moved west to pursue cattle industry jobs. Widows struggled to make money by serving unlicensed liquor. Thousands of workers, many Civil War veterans, became transients.
The downturn lasted more than five years, according to the economic research bureau — four times as long as what the United States has endured so far in this downturn.
Today's recession is already longer than all but two of the downturns since World War II. But for now, public officials are being extremely cautious about the D-word. Alfred Kahn, a top economic adviser to President Carter, learned that lesson in 1978 when he warned that rampaging inflation might lead to a recession or even "deep depression."
When presidential aides asked him to use another term, Kahn promised he'd come up with something completely different.
"We're in danger," he said, "of having the worst banana in 45 years."
WASHINGTON – A Depression doesn't have to be Great — bread lines, rampant unemployment, a wipeout in the stock market. The economy can sink into a milder depression, the kind spelled with a lowercase "d."
And it may be happening now.
The trouble is, unlike recessions, which are easy to define, there are no firm rules for what makes a depression. Everyone at least seems to agree there hasn't been one since the epic hardship of the 1930s.
But with each new hard-times headline, most recently an alarming economic contraction of 6.2 percent in the fourth quarter, it seems more likely that the next depression is on its way.
"We're probably in a depression now. But it's not going to be acknowledged until years go by. Because you have to see it behind you," said Peter Morici, a business professor at the University of Maryland.
No one disputes that the current economic downturn qualifies as a recession. Recessions have two handy definitions, both in effect now — two straight quarters of economic contraction, or when the National Bureau of Economic Research makes the call.
Declaring a depression is much trickier.
By one definition, it's a downturn of three years or more with a 10 percent drop in economic output and unemployment above 10 percent. The current downturn doesn't qualify yet: 15 months old, that 6.2 percent drop in output and 7.6 percent unemployment.
Another definition says a depression is a sustained recession during which the populace has to dispose of tangible assets to pay for everyday living. For some families, that's happening now.
Morici says a depression is a recession that "does not self-correct" because of fundamental structural problems in the economy, such as broken banks or a huge trade deficit.
Or maybe a depression is whatever corporate America says it is. Tony James, president of private equity firm Blackstone, called this downturn a depression during an earnings conference call last week.
The Great Depression retains the heavyweight crown. Unemployment peaked at more than 25 percent. From 1929 to 1933, the economy shrank 27 percent. The stock market lost 90 percent of its value from boom to bust.
And while last year in the stock market was the worst since 1931, the Dow Jones industrials would have to fall about 5,000 more points to approach what happened in the Depression.
Few economists expect this downturn will be the sequel. But nobody knows for sure, and nobody can say when or whether the downturn may deepen from a recession to a depression.
In his prime-time address to Congress last week, President Barack Obama acknowledged "difficult and trying times" but sought to rally the nation with an upbeat vow that "we will rebuild, we will recover."
The next day, Federal Reserve Chairman Ben Bernanke told the House Financial Services Committee that the "recession is serious, financial conditions remain difficult." He held out a best-case hope that it might end later this year, with "full recovery" in two to three years.
Despite the tempered optimism, the economic outlook remains grim. Consumer confidence has fallen off the table, stocks are at 12-year lows, layoffs come by the tens of thousands, and credit remains tight.
The current downturn has many of the 1930s characteristics, including being primed by big stock market and real estate booms that turned to busts, said Allen Sinai, founder of Boston-area consulting firm Decision Economics.
Policymakers and economists note there are safeguards in place that weren't there in the 1930s: deposit insurance, unemployment insurance and an ability by the government to hurl trillions of dollars at the problem, even if it means printing money.
Before the 1930s, any serious economic downturn was called a depression. The term "recession" didn't come into common use until "depression" became burdened by memories of the 1930s, said Robert McElvaine, a history professor at Millsaps College in Jackson, Miss.
"When the economy collapsed again in 1937, they didn't want to call that a new depression, and that's when recession was first used," he said. "People also use 'downward blip.' Alan Greenspan once called it a 'sideways waffle.'"
Most postwar U.S. recessions have come after the Fed has increased interest rates to cool down rapid economic growth and inflation. Later, the Fed lowers rates and helps restart the economy, with the housing and auto sectors — both sensitive to interest rates — leading the way.
This time is different: As Senate Banking Committee Chairman Chris Dodd, D-Conn., said, "Our housing and auto sectors are leading us not out of recession, but into it."
What's more, the Fed no longer has the ability to kick-start recovery by lowering interest rates. The central bank has already effectively lowered the short-term rates it controls to zero.
And there are no guarantees the massive economic stimulus package and series of bank bailouts will stave off a nightmare recession, or worse.
"It is certainly plausible that the kinds of policy measures that have been good enough to tame the business cycle are no longer adequate in a fast-moving, highly leveraged, highly networked economy," said Anirvan Banerji of the Economic Cycle Research Institute.
Today's economic indicators don't project a depression. But Banerji is cautious. Economic data in 1929 didn't show that the stock market crash was about to lead to years of economic misery, either.
"It did not look like the kind of plunge that would be a depression until after the recession began," Banerji said. "The Great Depression didn't start out as a depression. It started out as a recession."
The depression that consumed most of the 1870s and followed something called the Panic of 1873 makes a better comparison to what's happening now, said Scott Nelson, a history professor at the College of William and Mary.
Financial markets had become centrally located by the 1870s, notably in London. And nations had not yet enacted the protectionist trade policies that were in place by the 1930s.
The results were not exactly promising. Gangs of orphans roamed city streets as men moved west to pursue cattle industry jobs. Widows struggled to make money by serving unlicensed liquor. Thousands of workers, many Civil War veterans, became transients.
The downturn lasted more than five years, according to the economic research bureau — four times as long as what the United States has endured so far in this downturn.
Today's recession is already longer than all but two of the downturns since World War II. But for now, public officials are being extremely cautious about the D-word. Alfred Kahn, a top economic adviser to President Carter, learned that lesson in 1978 when he warned that rampaging inflation might lead to a recession or even "deep depression."
When presidential aides asked him to use another term, Kahn promised he'd come up with something completely different.
"We're in danger," he said, "of having the worst banana in 45 years."
Dow below 6,800; lowest close since ’97
NEW YOR, March 3 – Investor worries about the economy in general, and financial companies in particular, continued to erode the markets on Monday as the Dow Jones industrial average fell below 7,000 for first time since October 1997.
“It’s pretty despondent everywhere,” said Dwyfor Evans, a strategist at State Street Global Markets in Hong Kong. “Okay, there are signs that some of the leading indicators have stabilised to some extent, but it’s at a very, very low level, and we’re not seeing corporate investment picking up, or consumers starting to spend again – in other words, the traditional mechanisms by which economies come out of a recession are absent at this time.”
At the close, the Dow was down 299.64 points, or 4.2 per cent to 6,763.29, while the Standard & Poor’s 500-stock index declined 34.27 points or 4.6 per cent , to 700.82. The Nasdaq fell 3.9 per cent or 54.99 points to 1,322.85.
Investors expressed concern about the ability of banks to raise more capital, after the British bank, HSBC Holdings, offered new shares at a substantial discount. HSBC Holdings, the global British bank, fell 18.7 per cent after the bank said it would seek to raise nearly $18 billion in capital from shareholders and shut down its American consumer lending business.
Washington also agreed on Monday to provide another $30 billion to the insurance giant, American International Group, which also reported a $61.7 billion loss. On Friday, Washington took a larger stake in Citigroup, reducing the value of shareholders’ stock.
“Another day, another 200 points,” David Dietze, chief investment strategist at Point View Financial Services, said, comparing the daily markets to water torture.
The decision by many companies to trim dividends – one of the remaining incentives for owning stocks – was contributing to the sell-off, Dietze said.
Earlier Monday, the large regional bank PNC Financial Services Group cut its dividend 85 per cent and the International Paper Company cut its by 90 per cent. Last week, General Electric cut its dividend 68 per cent , and JPMorgan Chase reduced its dividend 87 per cent.
Looking ahead, he said: “All eyes are on that Friday unemployment report.”
“We could be in for a shocker,” he said. Economists expect a loss of 675,000 jobs in February, following a decline of 598,000 in January. The unemployment rate is expected to rise to 8 per cent , from 7.6 per cent.
The declines on Monday were across the board, led by the banking and basic materials sector.
Citigroup was down 17.9 per cent while Bank of America down 7.9 per cent. JPMorgan Chase declined 6.2 per cent. The S&P financial sector was down 5.8 per cent overall.
BNP Paribas fell 8.3 per cent , Royal Bank of Scotland fell 2.5 per cent and UBS fell 10.6 per cent in Europe, while Mitsubishi UFJ fell 6.9 per cent and Mizuho Financial Group 3.7 per cent in Tokyo.
Shares of A.I.G. were 7.2 per cent higher on the strength of the latest government assistance.
Dietze said that investors were also concerned about the message that they were hearing from governments. In Europe, over the weekend, stronger countries refused to come to the aid of smaller, struggling governments.
And out of Washington, he said, the message continues to be inconsistent.
The Senate has delayed confirmation of some members of the administration’s economic team, and the government has yet to value the toxic mortgage assets it has accepted from financial institutions.
“As bad as things are, they can still get worse, and get a lot worse,” Bill Strazzullo, chief market strategist for Bell Curve Trading, told The Associated Press. Strazzullo said he believed there was a significant chance the S&P 500 and the Dow will fall back to their 1995 levels of 500 and 5,000, respectively.
The “game-changer,” he told The A.P., will be the housing market and whether it can stabilise.
Crude oil settled at $40.70 a barrel, down $4.06 in New York trading.
Bond prices rose Monday as investors sought safety while the yield on the three-month T-bill fell slightly.
Wall Street followed both Europe and Asia lower. In economic news on Monday, personal spending rose 0.6 per cent in January and incomes rose 0.4 per cent , while construction spending fell 3.3 per cent. Manufacturing contracted in February for the 13th month, but at a slower pace than expected.
The Dow Jones Euro Stoxx 50 index, a barometer of euro zone blue chips, was down 4.7 per cent , while the FTSE 100 index in London dropped 5.3 per cent. The CAC 40 in Paris fell 4.4 per cent and the DAX in Frankfurt fell 3.4 per cent.
Currencies across Eastern Europe plunged Monday after European Union leaders rejected a huge rescue package for its newest members. Officials in Brussels rejected suggestions that the foreign exchange markets were reacting to decisions made at a summit meeting Sunday, where leaders agreed only to consider any bailouts on a case-by-case basis.
The monetary affairs commissioner Joaquín Almunia told reporters in Brussels that the European Union was providing a huge amount of support to its eastern members. But he conceded more may be needed for some countries.
Still, bank analysts and traders were unimpressed, as reflected in sharp currency market drops.
“The EU again has proven it is unable to manage a coordinated response to the crisis,” Commerzbank analysts wrote in a note Monday. “The problems arising in Eastern Europe will put further pressure on the euro.”
The Tokyo benchmark Nikkei 225 stock average fell 3.8 per cent , while the S&P/ASX 200 in Sydney shed 2.8 per cent. The Hang Seng index in Hong Kong dropped 3.9 per cent.
The TSX in Toronto dropped 5.9 per cent after the government reported that Canada’s economy shrank in the fourth quarter for the first time since 1991. Statistics Canada said on Monday the economy contracted at an annualised rate of 3.4 per cent in the quarter, the worst performance since the first quarter of 1991.
Economic data and company earnings in recent weeks have eroded hopes that a gradual recovery would start to materialize during the second half of the year. If, as seems increasingly likely, a tangible recovery will not come until 2010 at the earliest, Evans said, “that means corporate earnings will remain extremely soft for quite some time.”
“And that in turn means it’s pretty clear that there is more value to be had in safe havens like bonds than in equities,” he added.
Economic data from Europe added to the dismal atmosphere in the market.
The Markit euro zone manufacturing purchasing managers’ index sank in February to a record low of 33.5 from 34.4 in January.
On Monday, the Japan Automobile Dealers Association said in a statement that auto sales in February declined 32.4 per cent , the seventh consecutive monthly decline.
Japan last week reported that exports in January declined by nearly half from a year ago, while South Korea on Monday released data for February – the first in the region to issue data for that month – showing a 17 per cent plunge in exports. – NYT
“It’s pretty despondent everywhere,” said Dwyfor Evans, a strategist at State Street Global Markets in Hong Kong. “Okay, there are signs that some of the leading indicators have stabilised to some extent, but it’s at a very, very low level, and we’re not seeing corporate investment picking up, or consumers starting to spend again – in other words, the traditional mechanisms by which economies come out of a recession are absent at this time.”
At the close, the Dow was down 299.64 points, or 4.2 per cent to 6,763.29, while the Standard & Poor’s 500-stock index declined 34.27 points or 4.6 per cent , to 700.82. The Nasdaq fell 3.9 per cent or 54.99 points to 1,322.85.
Investors expressed concern about the ability of banks to raise more capital, after the British bank, HSBC Holdings, offered new shares at a substantial discount. HSBC Holdings, the global British bank, fell 18.7 per cent after the bank said it would seek to raise nearly $18 billion in capital from shareholders and shut down its American consumer lending business.
Washington also agreed on Monday to provide another $30 billion to the insurance giant, American International Group, which also reported a $61.7 billion loss. On Friday, Washington took a larger stake in Citigroup, reducing the value of shareholders’ stock.
“Another day, another 200 points,” David Dietze, chief investment strategist at Point View Financial Services, said, comparing the daily markets to water torture.
The decision by many companies to trim dividends – one of the remaining incentives for owning stocks – was contributing to the sell-off, Dietze said.
Earlier Monday, the large regional bank PNC Financial Services Group cut its dividend 85 per cent and the International Paper Company cut its by 90 per cent. Last week, General Electric cut its dividend 68 per cent , and JPMorgan Chase reduced its dividend 87 per cent.
Looking ahead, he said: “All eyes are on that Friday unemployment report.”
“We could be in for a shocker,” he said. Economists expect a loss of 675,000 jobs in February, following a decline of 598,000 in January. The unemployment rate is expected to rise to 8 per cent , from 7.6 per cent.
The declines on Monday were across the board, led by the banking and basic materials sector.
Citigroup was down 17.9 per cent while Bank of America down 7.9 per cent. JPMorgan Chase declined 6.2 per cent. The S&P financial sector was down 5.8 per cent overall.
BNP Paribas fell 8.3 per cent , Royal Bank of Scotland fell 2.5 per cent and UBS fell 10.6 per cent in Europe, while Mitsubishi UFJ fell 6.9 per cent and Mizuho Financial Group 3.7 per cent in Tokyo.
Shares of A.I.G. were 7.2 per cent higher on the strength of the latest government assistance.
Dietze said that investors were also concerned about the message that they were hearing from governments. In Europe, over the weekend, stronger countries refused to come to the aid of smaller, struggling governments.
And out of Washington, he said, the message continues to be inconsistent.
The Senate has delayed confirmation of some members of the administration’s economic team, and the government has yet to value the toxic mortgage assets it has accepted from financial institutions.
“As bad as things are, they can still get worse, and get a lot worse,” Bill Strazzullo, chief market strategist for Bell Curve Trading, told The Associated Press. Strazzullo said he believed there was a significant chance the S&P 500 and the Dow will fall back to their 1995 levels of 500 and 5,000, respectively.
The “game-changer,” he told The A.P., will be the housing market and whether it can stabilise.
Crude oil settled at $40.70 a barrel, down $4.06 in New York trading.
Bond prices rose Monday as investors sought safety while the yield on the three-month T-bill fell slightly.
Wall Street followed both Europe and Asia lower. In economic news on Monday, personal spending rose 0.6 per cent in January and incomes rose 0.4 per cent , while construction spending fell 3.3 per cent. Manufacturing contracted in February for the 13th month, but at a slower pace than expected.
The Dow Jones Euro Stoxx 50 index, a barometer of euro zone blue chips, was down 4.7 per cent , while the FTSE 100 index in London dropped 5.3 per cent. The CAC 40 in Paris fell 4.4 per cent and the DAX in Frankfurt fell 3.4 per cent.
Currencies across Eastern Europe plunged Monday after European Union leaders rejected a huge rescue package for its newest members. Officials in Brussels rejected suggestions that the foreign exchange markets were reacting to decisions made at a summit meeting Sunday, where leaders agreed only to consider any bailouts on a case-by-case basis.
The monetary affairs commissioner Joaquín Almunia told reporters in Brussels that the European Union was providing a huge amount of support to its eastern members. But he conceded more may be needed for some countries.
Still, bank analysts and traders were unimpressed, as reflected in sharp currency market drops.
“The EU again has proven it is unable to manage a coordinated response to the crisis,” Commerzbank analysts wrote in a note Monday. “The problems arising in Eastern Europe will put further pressure on the euro.”
The Tokyo benchmark Nikkei 225 stock average fell 3.8 per cent , while the S&P/ASX 200 in Sydney shed 2.8 per cent. The Hang Seng index in Hong Kong dropped 3.9 per cent.
The TSX in Toronto dropped 5.9 per cent after the government reported that Canada’s economy shrank in the fourth quarter for the first time since 1991. Statistics Canada said on Monday the economy contracted at an annualised rate of 3.4 per cent in the quarter, the worst performance since the first quarter of 1991.
Economic data and company earnings in recent weeks have eroded hopes that a gradual recovery would start to materialize during the second half of the year. If, as seems increasingly likely, a tangible recovery will not come until 2010 at the earliest, Evans said, “that means corporate earnings will remain extremely soft for quite some time.”
“And that in turn means it’s pretty clear that there is more value to be had in safe havens like bonds than in equities,” he added.
Economic data from Europe added to the dismal atmosphere in the market.
The Markit euro zone manufacturing purchasing managers’ index sank in February to a record low of 33.5 from 34.4 in January.
On Monday, the Japan Automobile Dealers Association said in a statement that auto sales in February declined 32.4 per cent , the seventh consecutive monthly decline.
Japan last week reported that exports in January declined by nearly half from a year ago, while South Korea on Monday released data for February – the first in the region to issue data for that month – showing a 17 per cent plunge in exports. – NYT
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