Spreading Orchard buzz

New outlets offering niche, top-end products liven up the ‘quieter’ part of Singapore’s premier shopping area

WHILE the talk in town a week ago was about the government’s $40 million makeover of Orchard Road, the part of Orchard Road that stretches from Wheelock Place to Tanglin Mall has been going through some positive changes of its own.

Most people know it as the ‘quieter’ part of Orchard Road, but since the middle of this year, a number of shops offering niche, top-end products have sprung up, not to mention Jackie Chan’s first cafe in the world. And then, of course, there’s the imminent opening of St Regis, slated to usher in guests through its five-star hotel doors on Dec 22. It will be the first international luxury hotel brand to open in Singapore in more than a decade.

The newest retailers on that block are optimistic about the prospects of that side of Orchard Road, and actually they don’t mind that it has less shopping traffic as long as they’re the ‘right’ shoppers. Not only that, they have booked their spots in Orchard Road in anticipation of the boom when events like Formula One zoom into town, and when the integrated resorts (IRs) open.

‘We wanted a prestigious address,’ says Mikael Andersson, owner of the Hastens store, a top Swedish bed and mattress marque, at One Nassim Road. ‘But we didn’t necessarily want to pay for one with high shopper traffic.’

The location also worked because it allowed Hastens to have large store-front windows, and rent is lower than if it had set up shop in the central part of Orchard Road.

‘We don’t depend on walk-in customers but those who are familiar with the brand because it’s a well-known European brand,’ he says, adding that that part of Orchard Road has a high concentration of top-end condominiums as well.

Fine furnishings store Atmosphere, next to Hastens, was set up with the same philosophy. ‘This end of Orchard Road is quieter and more suitable for a luxury brand,’ says its director Bharat Ram, of Himatsingka Singapore Pte Ltd.

‘The upper end of Orchard Road has become more premium in the last two to three years. With the development of St Regis, many high-end brands have moved here,’ he says. ‘With rentals moving up significantly in the middle Orchard Road area, it makes eminent sense to open stores in the upper end of Orchard Road which is on the same stretch of the road, premium yet more affordable.’

He believes that there’ll be a significant movement of premium brands to this location in the coming months.

Already, there are brands like Franck Muller, which opened its new 1,900-sq-ft boutique at Delfi recently. And its distinctive store-frontage has added ‘a sense of excitement’ to that part of Orchard Road, believes Carina Lee, the luxury watch brand’s marketing communications manager.

Even though well-heeled, brand-conscious shoppers are aware that this is the part of Orchard Road that has the most exclusive fashion labels, it doesn’t help reminding them so. Which is the aim behind The Shopping Gallery at Hilton Hotel’s advertisements booked in several glossy fashion magazines from September to December.

‘This is the first time that The Shopping Gallery Hilton Singapore has embarked on an advertising campaign to market the place as a luxury shopping destination,’ says Cedric Tan, creative director for Balrog Inc which produced the campaign.

‘The ‘Fashion High, Fashion Life’ campaign is meant to gear up the gallery’s visibility. This is the place, after all, where high fashion grew up in Singapore. We have all the first-tier luxury brands like Missoni, Armani, Donna Karan and Dolce & Gabbana so we think it’s important to highlight that,’ he says.

He says that the six-figure advertising campaign is to pave the way for more events held at The Shopping Gallery next year, especially with the impending F1 race. About the profile of its typical shoppers, Mr Tan notes that they aren’t browsers. ‘They pick up what they want and go. We may not draw a lot of traffic, but we get the right traffic,’ he adds.

This part of Orchard Road could do with something like a Rodeo Drive, the three-block ‘branded’ shopping destination in Beverly Hills, California, says Yngvar Stray, general manager of the soon-to-open St Regis Hotel.

‘Orchard Road has been a centre of attraction for Singapore, but this side has never been able to be the draw. We need to make sure that Orchard Road doesn’t stop at Shaw House or Wheelock,’ says Mr Stray. ‘But if this part was positioned to be more like Rodeo Drive, that will be phenomenal,’ he adds. ‘The Hilton Hotel has one of the best shopping arcades I can think of and that inspiration should follow through along the street – being more exclusive, more niche.’

When St Regis opens next month, Mr Stray expects the 299-room hotel to generate a buzz with its restaurants, bars and spa. But then again, it intends to keep corporate activity nominal – even corporate room bookings – as the hotel is targeted at the individual traveller, in line with the greater concentration of luxury residences in the area.

Growing market

‘Orchard Road needs multiple attractions – and this part has more branded products. You come here because you understand its value,’ says Mr Stray.

Singapore has focused on mid-market growth for a long time now, but the high-end market is now growing, he feels. Along with it, more personalised attention and ‘bespoke’ service. Some shops have already picked up on this tone which St Regis Hotel itself is setting.

Franck Muller’s interior, for instance, is fashioned like a lush, private residence, complete with a long dining tablelike show space.

And then there’s Glitterati Fashion Boutique, a new cocktail and evening wear boutique which set up shop recently at Tudor Court. Owner Latika Alok made sure the shop has been designed with separate sitting rooms and cosy corners to provide personalised customer service. Although she had been running the business from her home since the early 1990s, she decided to get a shop space now ‘to position Glitterati for the IR market’, she notes, when there’ll be more events happening in town for which people have to dress up.

What about the fact that there are commercial buildings in that part of the town that don’t come up to scratch in terms of their services or appearances? Mr Stray doesn’t think that those will be an obstacle.

Nicholas Mak, research director of Knight Frank property consultancy, says that the upper end of Orchard Road needs more high-end shops, and possibly needs a few buildings to get a facelift, although he reckons that would happen only if building managers have a reason to increase rental or face some competition.

‘But the tenant mix is partly art and partly science. It’s a matter of coming up with the right formula,’ he says. The upper end of Orchard Road will continue to be seen more as a ‘destination’ area, he thinks.

Atmosphere’s Mr Ram figures that better connectivity between the middle area of Orchard and the upper end will make the flow of customer traffic easier. But he also expects that Ion Orchard, with its retail and luxury residential space, along with St Regis, ‘will completely re-position upper Orchard to the more important and premium part of Orchard Road’.

Time will be the test of Orchard Road’s makeover – and whether the upper end will really shape up to be upper crust.

 

Source: Business Times 9 Nov 07

Morgan Stanley hit by US$3.7b sub-prime bill

(NEW YORK) Morgan Stanley, the second-biggest US securities firm, joined Merrill Lynch & Co and Citigroup Inc in booking losses on sub-prime mortgage-related assets and said that the outlook for credit markets is bleaker than in September.

The company said that it lost US$3.7 billion in the two months through Oct 31 after prices for securities linked to home loans to risky borrowers sank further than the firm’s traders expected. The decline cuts fourth-quarter earnings by US$2.5 billion, although that figure may change by the end of the month, the New York-based company said.

Merrill Lynch, the third-largest securities firm, and Citigroup, the biggest US bank, also reported in the past two weeks that the value of their mortgage holdings deteriorated since the end of August, after late payments on US home-loans rose to a five-year high and foreclosures set a record. Colm Kelleher, Morgan Stanley’s chief financial officer, said that he now expects credit markets to take three to four quarters to recover instead of the one or two he had predicted in September.

‘The healing process will take longer,’ Mr Kelleher, 50, said in an interview on Wednesday. ‘The dislocation in the market has been quite severe, liquidity has dried up.’

Concerns about potential writedowns at Morgan Stanley have pushed the stock lower this week, bringing the year-to-date decline to 24 per cent. The shares fell 6.9 per cent to US$51.19 in New York Stock Exchange composite trading on Wednesday. Citigroup and Merrill are both down more than 40 per cent this year.

Morgan Stanley’s asset writedowns could wipe out fourth-quarter profit. The company was expected to earn US$1.93 billion in the period, according to the average estimate of 10 analysts surveyed by Bloomberg.

Chief executive officer John Mack oversaw an expansion of the firm’s mortgage business last year with the acquisition of Saxon Capital Inc for US$705 million in December. In addition to being a mortgage provider, Saxon services home loans to people with poor credit histories by collecting payments, maintaining records and foreclosing on delinquent borrowers.

Mr Mack, 62, has not faced the kind of investor criticism that preceded the Nov 4 resignation of Citigroup CEO Charles ‘Chuck’ Prince III and the ousting of his counterpart at Merrill Lynch, Stan O’Neal, on Oct 30.

‘I would imagine they will have to take more charges and more of their peers will have to take charges also,’ said Jon Fisher, who helps manage US$22 billion at Fifth Third Asset Management in Minneapolis.

‘Slowly but surely these boards and management teams are starting to come out with forecasts of how much bad paper is on their books.’

Writedowns of sub-prime-related assets at US banks and brokerage firms may total US$50 billion in the second half of 2007, Deutsche Bank AG analyst Michael Mayo estimated in a note to investors on Wednesday before Morgan Stanley’s announcement. Citigroup analyst Matt King said on Wednesday that the figure may reach US$64 billion.

David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, cut his recommendation on Morgan Stanley to ‘in line’ from ‘outperform’ on Nov 6, and said that he expected the company to write down as much as US$6 billion in securities.

Part of Morgan Stanley’s loss stemmed from derivative contracts its proprietary trading unit wrote earlier in the year, Mr Kelleher said. The traders anticipated a decline in the value of sub-prime securities, and the contracts made money for the firm in the second quarter, he said. They started losing money when prices fell further than the traders predicted, Mr Kelleher said.

‘These exposures did not come out of our client-facing activities, these were a proprietary position we put on,’ Mr Kelleher said in a conference call with analysts. ‘As markets continued to decline our risk exposure swung from short, to flat to long.’

The people responsible for the losses no longer work at the firm, said Morgan Stanley spokeswoman Jeanmarie McFadden. She declined to identify them.

 

Source: Bloomberg (Business Times 9 Nov 07)

More rate cuts may come, say Fed officials

Cuts likely if housing slump spreads to other areas and growth is weaker than expected

(MILWAUKEE) Federal Reserve officials on Wednesday said more interest rate cuts could be needed if economic growth proves weaker than expected, just a week after hinting that rates would probably stay steady for now.

Uncertainty about how events will play out in the housing and financial markets make another rate cut more likely than a rate hike, William Poole, a voting member of the policy-setting Federal Open Market Committee in 2007, told reporters after a speech at Marquette University.

‘It could be that the downdraft from the housing industry will spread to other sectors, which might require that recent rate cuts not be reversed, or even that additional cuts would be in order,’ he said.

The US central bank has cut benchmark interest rates twice, by a total of three-quarters of a percentage point, over the past two months, bringing the federal funds rate at 4.50 per cent from 5.25 per cent.

In announcing its second cut on Oct 31, it said risks to growth and the risk of inflation were about evenly balanced, implying a reluctance to lower borrowing costs further.

Even so, financial markets lean heavily toward another one-quarter-point rate cut on Dec 11, the final FOMC meeting of the year. The implied prospects for a move jumped on Wednesday to 76 per cent from 62 per cent.

‘While the concern over increasing inflation pressures continued to be prevalent, Fed speakers continue to note the downside risks from the housing and credit markets. This, in our view, leaves the door open to further rate cuts,’ Merrill Lynch economist David Rosenberg said in a research note.

The Fed, along with most other forecasters, anticipates a marked deceleration in growth in the fourth quarter after a surprisingly brisk outcome reported for the third quarter.

Fed chairman Ben Bernanke is expected to expand on the Fed’s outlook for the economy in testimony before Congress later yesterday.

With fourth-quarter economic softness on the radar, it will take an even weaker-than-expected result for the Fed to consider moving rates again, Mr Poole said. A key risk is that falling home prices could cause consumption, the largest component of US gross domestic product, to grow ’significantly slower’, he added.

Meanwhile, Atlanta Fed president Dennis Lockhart said the outlook for a return to near-trend economic growth by late 2008 remains uncertain given evidence of business spending retrenchment.

Despite recent signs of a resilient economy in the form of strong employment and personal spending, there is evidence of a business spending retrenchment, Mr Lockhart said in a speech to the Huntsville, Alabama, Rotary Club.

‘Recent feedback from our Reserve Bank board members and other contacts on the ground is somewhat more negative than the numbers suggest,’ he said.

However, in an interview published on The New York Times’s website late on Tuesday, Philadelphia Fed president Charles Plosser said it would take a ‘drastic’ fall in growth for him to support another rate cut. Mr Plosser, a wellknown policy hawk, will get his first vote on the FOMC in 2008 since joining the Philly Fed in 2006.

The inclusion of that balance of risks assessment in the Fed’s Oct 31 statement was not accidental, but rather a step toward the return to a more normal policy-making approach after the disruptive events of August and September, Mr Poole noted.

On a day when crude oil prices approached US$100 a barrel, gold prices spiked and the US dollar sank to record lows, policy-makers also confronted the potential for inflation and inflation expectations to rise, only months after inflation seemed to have been brought under control. ‘There are also important reasons to be concerned about the outlook for inflation,’ Fed governor Kevin Warsh told the New York Association for Business Economics.

Mr Poole looked for the Fed to strike just the right balance on policy to boost market confidence, doing ‘what is necessary, but not more’ on interest rates. ‘Excessive rate reductions would run the risk of increasing inflation in the future’ and of setting up an ‘unpleasant environment’ of rising inflation fears and higher long-term interest rates, he said.

Still, Fed governor Frederic Mishkin said it was important to not ‘overreact’ to rising oil prices and take a longer term view on their effect on inflation as the economy slows.

‘We find that the impact of the dollar depreciation on the overall price level is actually quite limited,’ Mr Mishkin said while testifying before the US House of Representatives Small Business Committee.

 

Source: Reuters (Business Times 9 Nov 07)

Fed panel sees US growth slowing, rising inflation risks

It, however, expects economy to improve later next year, Fed chief tells Congress

(WASHINGTON) Federal Reserve chairman Ben Bernanke said the US economy is likely to ’slow noticeably’ this quarter while high commodity prices and a weaker dollar may stoke inflation ‘for a time’.

Mr Bernanke said the Federal Open Market Committee (FOMC), which sets the benchmark US interest rate, saw risks to both growth and prices at its Oct 31 meeting, when officials reduced the rate by a quarter-point to 4.5 per cent.

‘Overall, the committee expected that the growth of economic activity would slow noticeably in the fourth quarter,’ Mr Bernanke said in prepared remarks to lawmakers at a hearing of the congressional Joint Economic Committee.

While FOMC members expected growth to improve later next year, ‘the committee also saw downside risks to this projection’ if the housing recession spilled into consumer spending and business investment, he said.

Dealers interpreted Mr Bernanke’s testimony as boosting chances of a rate cut next month sending US short-term interest rate futures higher.

Futures show as much as an 82 per cent implied chance that the Fed will trim benchmark rates by another one quarter percentage point in December, up from 70 per cent late on Wednesday.

US stocks fell following his remarks. The Dow Jones Industrial Average was down 66.09 points, or 0.50 per cent, at 13,233.93. The Standard & Poor’s 500 Index was down 3.94 points, or 0.27 per cent, at 1,471.68. The Nasdaq Composite Index was down 29.82 points, or 1.08 per cent, at 2,718.94.

The 53-year-old Fed chief is fighting on several fronts to maintain stable markets, keep the six-year economic expansion going and contain inflation expectations. Officials cut interest rates twice in the past two months, while signalling in the Oct 31 statement they are reluctant to lower borrowing costs further.

The inflation outlook was ’subject to important upside risks’ from prices of crude oil and other commodities and the weaker dollar, Mr Bernanke said. ‘These factors were likely to increase overall inflation in the short run and, should inflation expectations become unmoored, had the potential to boost inflation in the longer run as well.’

Mortgage defaults and delinquencies, which officials expect to worsen, continue to roil financial markets, causing investors to retreat from risk. Banks have tightened lending standards, which may pose a threat to spending.

Recent economic reports ’suggest the overall economy remained resilient in recent months’, Mr Bernanke said.

‘However, financial market volatility and strains have persisted.’

Household spending is likely to grow more slowly as tighter credit, weaker home prices and higher energy prices damp sentiment, he said.

‘Most businesses appeared to enjoy relatively good access to credit, but heightened uncertainty about economic prospects could lead business spending to decelerate as well,’ he said.

While central bankers including Fed governor Kevin Warsh and Philadelphia Fed president Charles Plosser reinforced the message this week that policy-makers are not yet prepared to cut rates further, traders have a different view. Federal funds futures contracts show a 68 per cent probability that the rate will fall another quarterpoint to 4.25 per cent next month.

The FOMC cut the benchmark lending rate 0.75 percentage point to 4.5 per cent in two meetings over the past eight weeks, the most aggressive easing since the economy was emerging from its last recession in 2001.

Fed officials are trying to cushion the economy from eroding housing markets, without pushing interest rates to a level that would reignite inflation.

 

Source: Bloomberg, Reuters, AP (Business Times 9 Nov 07)

Merrill’s mortgage woes piling up

Firm’s exposure US$6.3b more than previously disclosed

(NEW YORK) Merrill Lynch & Co Inc said on Wednesday its total exposure to risky collateralised debt obligations (CDOs) and sub-prime mortgages is US$27.2 billion, or about US$6.3 billion more than what the company disclosed late last month.

Merrill’s larger figure is mostly because of a deeper level of disclosure surrounding its banking operations. For the first time, the world’s largest brokerage disclosed US$5.7 billion worth of exposure to US sub-prime mortgages at Merrill Lynch Bank USA, a Utah-chartered industrial bank, and Merrill Lynch Bank & Trust Co, a full-service thrift.

Those operations file disclosures and financial statements with US banking regulators, which have not required details on sub-prime exposure.

In addition, Merrill said its exposure to CDOs is now US$15.82 billion, or about US$600 million more than what the company revealed in its third-quarter earnings release on Oct 24.

The figure is larger because a hedge against potential loss was terminated recently after a dispute with a counterparty, which Merrill declined to name.

CDOs and sub-prime mortgages were largely responsible for Merrill’s US$2.3 billion loss in the third quarter, the largest in the company’s history. A US$8.4 billion writedown, mostly related to sub-prime mortgages and CDOs, triggered the loss.

Analysts fear Merrill and other Wall Street banks will have to record further writedowns on their exposure because the market for CDOs and sub-prime mortgages remains in turmoil.

Analysts at Citigroup estimate banks will take up to US$64 billion more in writedowns, mostly from CDO-related exposure.

Mike Mayo, an analyst at Deutsche Bank, has estimated that Merrill’s additional writedown could top US$10 billion.

US banks have had to slash the value of CDOs and sub-prime mortgages because they are linked to a rising tide of defaults on home loans given to borrowers with weak credit.

 

Source: Reuters (Business Times 9 Nov 07)

Stocks tumble across Asia after Wall St drop

Nikkei index sheds 2%, Hang Seng 3.2% and Shanghai Composite 4.9%

(TOKYO) Asian markets fell yesterday after Wall Street posted its second big drop in a week as investors worried about the extent of fallout from the global credit crisis.

Japan’s benchmark Nikkei 225 index sank 2 per cent, while the Hang Seng Index in Hong Kong tumbled 3.2 per cent. China’s benchmark Shanghai Composite Index lost 4.9 per cent in its biggest one-day decline in four months.

Shares also fell in Australia, India, South Korea and the Philippines. Stock markets in Singapore and Malaysia were closed for the Deepavali holiday yesterday.

In Europe, shares were trading lower at midday on intensified credit fears, but BHP Billiton’s takeover approach for Rio Tinto limited losses by boosting mining and British stocks in general.

Both the European Central Bank and the Bank of England held their key interest rates steady yesterday in the face of soaring oil prices and a surging euro.

ECB policy-makers meeting here left their main lending rate at 4 per cent for the 13-nation eurozone. Speculation remained, however, that they could signal an intention to tighten credit in December for a region that accounts for roughly 15 per cent of global gross domestic product (GDP).

At the same time, the Bank of England, also meeting yesterday, kept British rates at 5.75 per cent.

At 1210 GMT, the FTS Eurofirst 300 index of top European shares was down 0.4 per cent at 1,524.20, rebounding strongly from a 1.5 per cent fall earlier in the session.

‘There has been renewed concern about the US sub-prime loan problem amid reports that losses at US and European financial institutions are expanding, which increases uncertainty,’ said Koji Takeuchi, senior economist at Mizuho Research Institute in Tokyo.

Jitters have grown since Citigroup Inc said on Sunday that it needed to take an additional US$8 billion to US$11 billion in writedowns.

Additional concerns about weakness in the US dollar, soaring oil prices and a record loss at General Motors Corp on an accounting adjustment sent the Dow Jones industrial average down 360.92, or 2.64 per cent, on Wednesday to 13,300.02. It was the third time in a month that the US bluechip index has dropped by more than 350 points.

Oil recouped early losses to resume its march towards the US$100-milestone yesterday, as resurfacing worries of tight winter supplies and continuing dollar weakness put the brakes on some early profit-taking.

By 1257 GMT, US crude for December delivery stood 57 US cents up at US$96.94. London Brent crude was 84 US cents up at US$94.08 a barrel, off lows of US$92.97.

Crude had dropped earlier yesterday amid concerns of weak US oil demand and falling stock markets, reversing some of the gains that had carried it to a peak of US$98.62, the latest in a succession of all-time highs.

Some investors are worried that global markets could repeat the plunge of August, when the sub-prime problems first came to the attention of the broader market.

‘What happened in August could happen (again),’ said Mizuho’s Mr Takeuchi.

In Japan, investors dumped financial and real estate shares such as Mizuho Financial and Mitsubishi Estate. The Nikkei 225 index fell 325.11 points, or 2.02 per cent, to 15,771.57.

A steadily strengthening yen against the US dollar also hurt exporters like Toyota Motor Corp and Sony Corp.

In Hong Kong, the benchmark Hang Seng index dropped 948.71 points, or 3.2 per cent, to 28,760.22, with property shares falling sharply.

Analysts warned that the market, which has surged this year, could fall further. ‘There’s no rush to buy stocks on dips as further downside may be imminent. It’s riskier to buy now,’ said Conita Hung, a director at Delta Asia Financial Group.

In mainland China, the market was hurt by declines overnight in American Depositary Receipts of large Chinese companies traded in New York.

‘The sharp decline in ADRs in the US has exerted selling pressure on their counterpart shares listed here,’ said Chen Huiqin, an analyst at Huatai Securities.

The drop shows how China’s still largely insular market is becoming increasingly linked to overseas markets, despite limits on foreign investment in mainland shares and on overseas stock purchases by Chinese.

China Southern Airlines fell 9.8 per cent yesterday after its ADRs slumped 6.9 per cent overnight, while PetroChina lost 5.5 per cent after its ADRs fell 7.2 per cent.

Oil prices had fallen back after rising above US$98 a barrel on Wednesday. Light, sweet crude for December delivery lost 27 US cents to US$96.10 a barrel in Asian electronic trading on the New York Mercantile Exchange.

 

Source: AP, AFP, Reuters (Business Times 9 Nov 07)

SUB-PRIME SHOCK – AIG takes US$2b hit in sub-prime losses

Insurer expected to write down additional US$550m next quarter

(NEW YORK) The American International Group (AIG), the world’s largest insurance company, said on Wednesday that it wrote down nearly US$2 billion in investments related to mortgages in the third quarter and expected to write down an additional US$550 million in the next quarter.

The reduction in value in AIG’s investments, detailed as part of its third-quarter earnings report, was the latest in a string of writedowns from big financial institutions and underscored the gravity of the growing crisis in housing related investments. Merrill Lynch, Citigroup and Morgan Stanley have reported billions in writedowns over the last month.

AIG’s writedowns were smaller than many on Wall Street had anticipated, and some analysts said they expected the company’s announcement to feed uncertainty about the extent of its exposure to the troubled mortgage-related investments. A result, they said, could be a further slide in the company’s already declining stock price.

Some investors had expected a writedown of as much as US$10 billion.

Before the announcement, AIG’s shares closed down US$4.15, or 6.7 per cent, at US$57.90, far below its price of about US$75 two years ago. They fell as low as US$56.50 after hours.

‘Some people are sceptical that AIG has made the correct assessment’ of its exposure, said Clifford Gallant, an analyst at Keefe, Bruyette & Woods. They are concerned, he said, that ‘there may be more out there’.

For the quarter, net income fell 27 per cent, to US$3.09 billion, or US$1.19 a share, compared with US$4.22 billion, or US$1.61 a share, in the period a year earlier. Much of the decline, the company said, was attributable to losses in several of its core businesses as a result of declines in the troubled home mortgage business. AIG said it had a decline of US$3.5 billion in the value of some investments before taxes.

It said $1.6 billion of that decline, and an additional $352 million, was from mortgage-related investments. Those assets remained on the company’s books and were thus not reflected in net income.

Martin J Sullivan, AIG’s chief executive, said that ‘while US residential mortgage and credit market conditions adversely affected our results, our active and strong risk management processes helped contain the exposure’. Mr Sullivan said AIG’s main commercial insurance unit, airline leasing business and asset-management arm reported strong income growth.

But he said life insurance and retirement units suffered ‘as market volatility adversely affected investment returns of certain asset classes.’

The insurer reported an overall loss of US$864 million in an investment portfolio of US$872.3 billion. That included US$149 million in losses related to residential mortgage-backed securities investments.

Wall Street analysts said they regarded the writedown by AIG as less disturbing than those by the banks. So far, no other insurers have reported comparable writedowns, and the analysts said they did not expected to see management changes or financial collapses at any insurance companies.

AIG and other insurance companies invested in mortgage-related securities mainly for the flow of interest, the analysts said, and they are expected to hold them until maturity in three to five years.

‘The big difference for the banks is that they may be forced to sell these securities,’ said Thomas V Cholnoky, an analyst for Goldman Sachs.

‘This is not a liquidity crisis for AIG as it potentially is for the banks. AIG generated US$8.4 billion in cash flow in the first six months of this year. It has more than US$1 trillion in assets.’

The writedown came as AIG’s stock was trading near its low for the year and a few days after Maurice R Greenberg, the company’s former chief executive and a large shareholder, suggested in a federal securities filing that he was contemplating trying to force management changes at AIG.

Mr Greenberg, 82, resigned in March 2005 as chairman and chief executive of AIG, which he built into a financial giant over nearly 40 years, after the New York attorney-general began investigating the company’s accounting practices. Mr Greenberg and AIG have been feuding since.

 

Source: NYT (Business Times 9 Nov 07)

Will oil send the US economy sliding again?

High price alone not fatal, but credit crisis, housing worry add to recession risk

NEW YORK CORRESPONDENT

NOT long ago, the general consensus would have been that US$100 oil would cause the US economy to go into a recession, and with good reason – the high price of oil crippled the American economy in the 1970s and early 1980s, was the primary cause of three serious recessions between 1973 and 1982, contributed mightily to another in 1992, and was a factor in the recession of 2001.

Yet with the US$100 per barrel mark clearly within sight – even though prices fell somewhat yesterday – the US economy has thus far weathered the oil storm, along with a housing market slump and the sub-prime credit crunch that has produced mind-boggling losses at major banking companies and raised fears on Wall Street that worse could yet come.

After reaching as high as a record US$98.62 in electronic trading on the New York Mercantile Exchange, oil prices were yesterday expected to continue their climb in the US. On Tuesday, light sweet crude closed at a record US $96.70 a barrel, nearly 70 per cent higher than on the first trading day of the year.

The Energy Information Administration was due to release its latest petroleum inventory report by yesterday, with analysts expecting it to show that last week’s stocks fell as a result of reduced imports from Mexico, parts of which are experiencing serious floods.

‘It’s all up-up and away for oil and energy companies,’ said Patrick Kerr, president of Oilgasfutures.com. ‘I believe we are going to see US$120 per barrel and US$5 per gallon at the pump soon.’

But the outlook for the US stock market is less bright. The continued plunge in the US dollar sent oil above US$98 per barrel and sunk the Dow Jones industrial average by 95 points, or 0.7 per cent, to 13,565.35 at one point on Wednesday in New York.

Broader stock indicators also fell sharply. Nevertheless, the US$100 oil barrel, which seems all but a certainty given high demand and the potential for more geopolitical worries, has yet to sink the stock market, which remains solidly up for the year.

Less dependent

Higher energy prices are, effectively, a tax on consumers and businesses. Cash that might have otherwise gone towards buying, major consumer items, from TV sets to washing machine, or on big vacations, ends up in the fuel tank of the family car.

Lehman Brothers estimated that a US$10 per barrel rise in oil, if sustained, knocks somewhere between a quarter and half a percentage point off GDP annual growth.

But not only has the economy not sunk into a recession, it has continued on its expansionary path, with employment growing at healthy clip as of the third quarter, observed Mark Perry, a professor of economics and finance at the University of Michigan.

High oil price has not already sunk the economy into a recession all by itself because business and industry in the US are far less dependent on oil in 2007 than they were just 10 years ago.

Prof Perry said: ‘The US is now about twice as energy efficient, requiring only about half the energy consumption per dollar of real GDP, as we were 20 years ago.’

Another factor behind the muted impact of soaring oil prices thus far compared to previous oil shocks is that those in the 1970s, 1980s and even early in this century came about because of sudden and substantial decreases in oil supply, in the range of 5 to 10 per cent. The rise that has occurred since 2005 has been primarily demand-driven, as major producers like Opec have failed to increase supply at a sufficient rate to keep up with burgeoning demand from major oil consumers like China and India.

But Wall Street analysts warned that the long-term pain of energy prices that have more than doubled in three years, rising more than 40 per cent in the past six months, is rippling through the economy at a time when the housing market is crashing and the sub-prime credit fiasco is bringing down the financial sector.

US$100-a-barrel oil and what is sure to be significantly higher petrol price in the months to come could not come at a worse time for the US economy. As an economic force, analysts said, higher oil price alone would not be enough to cause severe economic damage. But when placed on top of other major economic concerns, such as a brutal housing correction, troubled financial markets and hard-hit banks, it could well be the straw that breaks the camel’s back.

‘You’ve got some of the top Wall Street minds, from George Soros to Warren Buffett and Julian Robertson, saying we’re heading into a recession, and the price of oil is clearly a big reason why,’ said J Adam Hewison, president of INO.com, a financial research firm that offers technical analyses of equities, futures, options and foreign exchange markets.

Just as worrying, the prospects for oil retreating to lower levels in the next several months appears low, many Wall Street analysts said. ‘I put a lot of the blame for what I see as a sustained rise in oil prices at these levels on the Fed (the US central bank) and its chairman, Ben Bernanke,’ said Mr Hewison.

Disastrous cycle

‘A weakening dollar means we’re paying more for our oil, and the with every rate cut the Fed enacts, it is pushing the deterioration of the dollar even further. It’s a pretty disastrous cycle we’re in right now.’ Oil futures offer a hedge against a weak dollar, and oil futures bought and sold in US dollars are more attractive to foreign investors when the dollar is falling.

Analysts noted that the economy, and specifically consumers have yet to feel the full brunt of the most recent leg up in crude prices, because the rise from the mid-US$70s to the current flirtation with triple digits has come so quickly.

But with petrol prices in the US breaking through US$3 per US gallon mark (which works out at S$1.15 per litre) and still rising, and airlines raising fares across the board, Merrill Lynch economist David Rosenberg said: ‘The consumer is finally feeling the pain of higher prices, and that will cut into ‘real’ growth in the fourth quarter.’

If the price of oil stays high through the northern winter – and weather forecasters are predicting a cold winter season in the north-eastern states of the US – petrol prices could start flirting with the US$4 per gallon mark by the time the summer ‘driving season’ rolls around next year.

‘That will take another big bite out of consumers’ ability and inclination to spend, and thus depress economic activity,’ said Joel Naroff, president of Naroff Economic Advisors.

 

Source: Business Times 9 Nov 07

Turbulent time for Asian markets next year: S&P

ASIAN stock markets face a difficult 2008 and could slide sharply, ratings agency Standard & Poor’s (S&P) said yesterday, as regional share prices fell heavily.

‘Next year will be a more difficult one for stock-market returns and we would not rule out the risk of a sharp correction,’ Asia-Pacific equity research head Lorraine Tan said in a statement.

Asian equity markets have reached increasingly risky levels and there will be less scope for them to rise after this year’s strong performance, the report added.

‘Markets would be jittery over potential negative news, such as on inflation and further deterioration in the US and European economies,’ said Ms Tan.

The United States is struggling with a credit crunch and housing market slowdown, after record defaults on sub-prime mortgages extended to homebuyers with riskier credit profiles.

The report said markets in Hong Kong, South Korea and Thailand were likely to deliver better relative performances next year, but Japan is set to do less well.

S&P also expects more ratings downgrades for the corporate sector next year due to rising costs and less readily available credit.

Mr Ian Thompson, the firm’s chief credit officer for regional ratings services,  aid casualties were expected, especially outside the financial sector.

‘There may be more ratings downgrades than upgrades among Asia-Pacific companies next year’.

That contrasted sharply with the general improvement in credit quality this year, he said in the statement.

S&P expects South-east Asian economies to grow on average by 6.4 per cent next year, with Indonesia and the Philippines seen as bright spots.

Source: AGENCE FRANCE-PRESSE (The Staits Times 9 Nov 07)

NEWS ANALYSIS – Banks’ showing may be as good as it gets amid credit turmoil

IS THIS as bad as it gets? This was the question on many investors’ minds as they scrutinised the impact of the global credit market turmoil on the third-quarter results of the three Singapore banks.

They have reason to be jittery, given the financial haemorrhage suffered by Wall Street banks.

Merrill Lynch has made write-downs of $8.4 billion while Citigroup is owning up to US$11 billion (S$15.9 billion) of possible losses over risky debt instruments.

They are called collateralised debt obligations (CDOs) and are packaged from sub-prime, or risky, mortgages in the United States.

Analysts warn the worst may not be over for these investment banks. So it is hardly surprising attention in Singapore has been gripped more by local banks’ provisions for CDOs than by their robust core earnings growth.

They are reaping the benefits of a booming Singapore economy, which have helped them deliver a 13 per cent rise in combined net profits to $1.57 billion for the quarter. This came despite write-downs, volatile markets putting pressure on interest margins and a rising Singdollar, which affected the value of overseas earnings.

The quality of the banks’ overall assets remained pristine, with non-performing loans dwindling.

Meanwhile, each bank’s provisions for asset-backed CDOs proved quite different from expectations. OCBC’s provisions surpassed market estimates by up to eight times as it aggressively set aside $221 million, or 82 per cent of its total exposure to CDOs. Analysts praised the safety-first move as one of the most conservative by any bank worldwide.

DBS set aside $70 million, about a quarter of its $275 million of CDOs. This was much lower than the average forecast of $125 million in a Reuters poll.

UOB made provisions of $55 million, or almost 60 per cent of its total asset-backed CDOs.

Analyst opinions differ widely over whether the bad news on CDOs is almost over.

Daiwa Securities’ Mr David Lum is among those who say the three banks tend to be conservative in making loan-loss provisions, so the worst may have passed.

But others, such as JPMorgan analysts, warn: ‘It ain’t over yet.’ They note that the prices of asset-backed CDOs continue to fall, slumping 50 per cent since Sept 30.

They also predicted that DBS has further mark-to-market losses of $116 million in the fourth quarter, while UOB has just another $10 million to go.

But one thing is clear to all: The three banks’ core businesses have proved robust so far. Not surprisingly, lending has been a star performer for all three amid a buoyant property market.

OCBC posted loans growth of 15 per cent – lower than DBS’ 23 per cent but close to UOB’s 15.6 per cent.

Fee income was also going strong. DBS, in particular, benefited from what CIMB-GK analyst Kenneth Ng described as ‘unexpectedly powerful’ capital market related-fees. Its net fee income rose 38 per cent to a record $403 million, riding on activities like stockbroking and wealth management.

However, wider credit spreads for trading instruments, triggered by the sub-prime crisis, took their toll on trading income.

DBS recorded a net trading loss of $47 million compared with a net trading income of $100 million in the previous quarter. UOB’s foreign exchange, securities and derivatives income fell from $97 million to $26 million.

Despite the solid performance of their underlying businesses, the banks are warning of risks and challenges on the horizon. In the near term, there will be pressures on net interest margins, amid a downward trend in Singapore interest rates and widening credit spreads.

The spreads are the difference in yield between a riskier corporate bond and a relatively risk-free government bond. Wider spreads may force the banks to take larger mark-to-market losses, which in turn will whittle down trading and investment income.

In the third quarter, UOB’s net interest margin had already declined 0.04 of a percentage point to 1.93 per cent compared with the same period last year. This was because it had more investment in shorter-term assets – less risky but with lower yields.

The banks’ earnings growth momentum may also be stifled if there is a sharp slowdown in the US – Asia’s biggest export market.

Other risks include ‘peaking loans growth’, while the axing of the deferred payment scheme for housing loans in Singapore may cause the high-end residential property market to cool, noted Morgan Stanley analyst Matthew Wilson.

So perhaps investors should start asking instead if the third-quarter showing is as good as it gets – at least until the credit market turmoil simmers down.

 

Source: The Straits Times 9 Nov 07

China tightens foreign investment rules

It welcomes funding to help clean up the environment but puts limits on some sectors

SHANGHAI – CHINA has announced new rules to limit foreign investment in key industries, as it seeks to cool its overheated economy and clean up its damaged environment, state press reported yesterday.

In a wide-ranging directive published late on Wednesday, China’s key economic developmental agency identified sectors from real estate and financials to oil and rare metals as restricted or off-limits to foreign capital.

Overseas investments that can help China to protect the environment, cut pollution and develop renewable energy will be encouraged, according to the National Development and Reform Commission statement.

‘It should give a shot in the arm to efforts to save energy and protect the environment by encouraging greener use of foreign investment,’ the official China Daily newspaper said in an editorial.

Investment in high technology and advanced materials and equipment manufacturing will also be welcome, but those in production industries in which China has mature technologies and capacity will not be encouraged, it said.

The directive highlights Beijing’s latest policy initiative to restructure its export-driven economy, whose booming but lopsided growth has for decades relied on government and foreign investment to expand.

Under the guidelines, foreigners will be barred from investing in non-renewable mineral resources, such as tungsten, tin, antimony and molybdenum, as well as in small and mid-sized oil refineries.

Refining of copper, zinc, aluminium and rare earths will be restricted, and so will exploration for gold, silver and platinum.

Limits will also be placed on high-end real estate such as hotels and malls, property agencies and brokerages, as part of efforts to cool soaring real estate prices nationwide.

In the financial industry, the commission confirmed restrictions already in place in life insurance and asset management.

China’s spectacular economic growth of the last three decades has come at a heavy price to its environment, while surging exports have created a huge trade surplus that is at the forefront of trade spats with major economic partners.

BNP Paribas economist Chen Xingdong said the rules reflected a fundamental change in China’s strategies for foreign funds.

‘In the past, there was no control – China just opened the door, the window and let whatever foreign investment come in,’ he said. ‘Now, China doesn’t want just rapid growth; it also wants to pay attention to quality.’

Some analysts expressed concern for what they said looked like a turn towards protectionism.

‘The overall direction should be towards ‘more open’ industries rather than the opposite, ’said Citigroup economist Shen Minggao.

‘The government is worried about resources and the rise in commodity prices, and wants to make sure that scarce resources are under the control of domestic firms, but that’s the direction that we’re worried about.’

Recent policy measures have added to the impression that China is becoming more discerning about investment.

The government has rolled out rules that require state-level approval for mergers and acquisitions. China’s State Council, or Cabinet, has also released a list of strategic sectors of which the state intends to retain control.

Among them are military-related manufacturing, power production and grids, petroleum, gas and petrochemicals, telecoms, coal, civil aviation and shipping.

WHAT’S HOT

• China will encourage overseas investments that can help to protect the environment, cut pollution and develop clean energy.

• Investment in high technology and advanced materials and equipment manufacturing will also be welcome.

WHAT’S NOT

• Foreigners are barred from investing in non-renewable mineral resources, such as tungsten and tin, as well as in small and mid-sized oil refineries.

• Refining of copper, zinc, aluminium and rare earths will be restricted, and so will exploration for gold, silver and platinum.

• Restrictions already in place in life insurance and asset management will remain.

STATUS QUO

• The state intends to keep control of industries such as military-linked manufacturing, power production, petroleum, telecoms and shipping.

    

Source: AGENCE FRANCE-PRESSE (The Straits Times 9 Nov 07)

Regional bourses in disarray as credit woes dog Wall St again

China takes the worst battering as it falls 4.9%; investors fear repeat of market carnage in August

TOKYO – ASIAN markets tumbled yesterday after Wall Street suffered its second-largest drop in a week amid worries about the extent of the fallout from the global credit crisis.

China’s benchmark Shanghai Composite Index fell 4.9 per cent in its biggest one-day decline in four months.

Japan’s benchmark index sank 2 per cent, while the Hang Seng in Hong Kong tumbled 3.2 per cent. Shares also fell in Australia, India, South Korea and the Philippines.

‘There has been renewed concern about the sub-prime loan problem in the United States amid reports that losses at US and European financial institutions are expanding, which increases uncertainty,’ said Mizuho Research Institute senior economist Koji Takeuchi in Tokyo.

Jitters have worsened since Citigroup said on Sunday that it needed to take further write-downs of US$8 billion to US$11 billion (S$11.6 billion to S$15.9 billion).

Additional concerns about weakness in the US dollar, soaring oil prices and a record loss at General Motors following an accounting adjustment, sent the Dow Jones Industrial Average down 360.92 points, or 2.64 per cent, on Wednesday to 13,300.02 points. It was the third time in a month the US blue-chip index had dropped by more than 350 points.

Some investors are worried that global markets could suffer a plunge similar to that seen in August, when subprime woes first came to the attention of the broader market.

‘What happened in August could happen again,’ said Mr Takeuchi.

In Japan, investors dumped financial and real estate shares such as Mizuho Financial and Mitsubishi Estate.

The Nikkei 225 index fell 325.11 points, or 2.02 per cent, to 15,771.57 points.

A steadily strengthening yen against the US dollar also hurt exporters such as Toyota Motor and Sony.

In Hong Kong, the benchmark Hang Seng dropped 948.7 points, or 3.2 per cent, to 28,760.2 points. Property shares, in particular, fell sharply.

Analysts warned that the Hong Kong market, which has surged this year, could fall further.

‘There’s no rush to buy stocks on dips as further downside may be imminent. It’s riskier to buy now,’ said Delta Asia Financial director Conita Hung.

In China, the market was hurt by declines overnight in American depositary receipts of large Chinese stocks traded in New York.

The drop shows how China’s still largely insular market is becoming increasingly linked to overseas markets, despite limits on foreign investment in mainland shares and on overseas stock purchases by citizens.

Source: ASSOCIATED PRESS (The Straits Times 9 Nov 07)

Morgan Stanley reports $5.3b in sub-prime losses

Asset write-downs may wipe out securities firm’s fourth-quarter gain

NEW YORK – MORGAN Stanley joined Merrill Lynch and Citigroup in booking losses on sub-prime mortgage-related assets, and said the outlook for credit markets is bleaker now than it was in September.

The firm said it lost US$3.7 billion (S$5.3 billion) in the two months ended Oct 31 after prices for securities linked to home loans made to risky borrowers sank further than its traders had expected.

These losses cut fourth-quarter earnings at the country’s second-largest securities firm by US$2.5 billion, although the firm said the figure might change by the month’s end.

Merrill Lynch, the country’s third-largest securities firm, and Citigroup, its biggest bank, have also reported deteriorations in the value of their mortgage holdings since the end of August.

Morgan Stanley chief financial officer Colm Kelleher said he now expects credit markets to take three to four quarters to recover.

‘The healing process will take longer,’ he said. ‘The dislocation in the market has been quite severe; liquidity has dried up.’

Concerns about potential write-downs at Morgan Stanley have pushed the stock lower this week, bringing the year-to-date decline to 24 per cent. The shares fell 6.9 per cent to US$51.19 in New York Stock Exchange composite trading on Wednesday.

Citigroup and Merrill have both seen their shares fall by more than 40 per cent this year.

Morgan Stanley’s asset write-downs could wipe out its fourth-quarter profit. It was expected to earn US$1.93 billion for the period, according to the average estimate of 10 analysts surveyed by Bloomberg.

Write-downs of sub-prime related assets at US banks and brokerages could add up to US$50 billion in the second half, Deutsche Bank analyst Michael Mayo estimated before Morgan Stanley’s announcement.

Citigroup analyst Matt King said the figure might reach US$64 billion.

Morgan Stanley’s maximum potential losses from sub-prime related assets stood at US$6 billion at the end of last month, down from US$10.4 billion at end-August, the firm said.

That ‘net exposure’ figure assumes that all of the securities default and no money is recovered on any of them.

The firm said it does not plan to release more information about the exposures until it reports fourth-quarter results next month.

Except for the losses that will affect its fixed-income division, the firm said it ‘expects to deliver solid results in each of its other businesses’.

Source: BLOOMBERG NEWS (The Straits Times 9 Nov 07)