Behind latest Fed rate cut, inflation fears loom

The Straits Times – March 20, 2008

WASHINGTON – THE United States central bank cut interest rates by three-quarters of a percentage point to 2.25 per cent, less than widely expected but more than what some of its policymakers were comfortable with.

Two of the 10 voting members of the Federal Open Market Committee opposed the cut, preferring ‘less aggressive action’, according to the Federal Reserve’s statement on Tuesday. Markets had expected a bigger 1 percentage point cut.

It was the first time since September 2002 that a pair of policymakers defied their Fed colleagues, and analysts sensed a change in the central bank’s message.

‘The message was, we’re going to be vigilant about inflation,’ Mr Jerry Webman, chief economist at Oppenheimer Funds, told the Chicago Tribune.

He added: ‘We’re going to do other things which treat the problems but avoid going down the traditional monetary path straight into the jaws of inflation. The dissents were part of that message.’

In its statement, the central bank warned of further weakening in the economy and ‘considerable stress’ in financial markets. But one paragraph dwelt on the risks of inflation.

By cutting rates further, Fed chairman Ben Bernanke is placing a heavy bet that commodity prices and other leading indicators of inflation will come down on their own, aided by a slowing economy.

While allowing that ‘uncertainty about the inflation outlook has increased’, the Fed reiterated the view that slower growth and lower ‘resource utilisation’ will bring inflation back into the central bank’s comfort zone.

Given the inflation warnings, Mr Michael Lewis of Free Market said that ‘while the Fed may cut rates at the April 29-30 meeting, we expect that the easing arc is about finished’.

Mr Michael Woolfolk, currency strategist at Bank of New York Mellon, told the Chicago Tribune that the next step might be a coordinated effort by major nations to intervene in currency markets to support the US dollar.

Repeated Fed interest rate cuts, as well as a pessimistic outlook towards the US economy, has sent the greenback to record lows – worsening inflation by pushing up the prices of oil and other commodities.

REUTERS, WASHINGTON POST

Wild swing reflects fears of US slowdown

Business Times – 12 Mar 2008

SHORT-COVERING and a late afternoon rebound on Nasdaq futures saw the Singapore market’s benchmark index chalking a remarkable 80-point turnaround in intra-day trading, first plunging to a new 16-month low, then rebounding to close in positive territory. Also boosting the market are expectations that the Federal Reserve may intervene more aggressively to address the impact of the tightening credit crunch.

Nevertheless the wild gyration characterised investor nervousness amid intensifying fears of a US recession and concern that tightening money market conditions could trigger a third wave of the global credit crisis.

After initially opening at a low of 2,794.62 points, the Straits Times Index dribbled sideways for much of the morning session before a late afternoon recovery by index movers like Singapore Telecom, DBS Bank, CapitaLand, Singapore Exchange and OCBC helped the index climb to its late afternoon high at 2871.60 points. It closed at 2,860.85 points, for a net 24.26-point gain.

However, the day started with a jolt for property stocks after Kuwait Finance House pulled out of a $818.4 million deal to buy 97 of GuocoLand’s apartments in its Singapore Goodwood Residence. GuocoLand – controlled by Malaysian property tycoon Quek Leng Chan – plunged to a low at $3.64, before recovering to close with a net 13-cent loss at $3.70.

Although other leading property plays like City Developments, controlled by Mr Quek’s cousin Kwek Leng Beng, and CapitaLand recovered to end the session in positive territory, the pullout by the Kuwaiti bank is nevertheless seen as an ominous sign for the residential property market here. Analysts said the move raises fears that the property sector may be heading for a serious downturn after a sharp run-up which started in late 2006.

Meanwhile, the larger concern for many investors is not so much whether the US is already in a recession, but how long the slowdown will last. Last week, the US employment report showed the economy lost 63,000 jobs in February, bringing job losses in the first two months of 2008 to 85,000. And US consumer confidence fell sharply in March, according to the latest reading of the RBC Cash Index, which at 33.1, is the lowest reading since data tracking began in 2002.

Traders say that while many Singapore listed stocks have retraced to attractive valuation levels, fears of a potential major capitulation on Wall Street and concerns over the direction and sustainability of the Chinese market  and economy is keeping investors sidelined.

In an online research report yesterday, Kim Eng said the Singapore index had a 22 per cent downside from current levels.

‘Since 1964, the five major bear markets in Singapore lasted an average of two years,’ Kim Eng’s Kelive noted. ‘The shortest one ran for 14 months (Jun ‘81 to Aug ‘82) while the longest down cycle extended 3¼ years (Dec ‘99 – Apr ‘03), albeit Sars had extended the crisis by an additional 1½ years. Within bear trends, there can be sharp rebounds as seen during Oct ‘81 – Jan ‘82 (+26 per cent), Jan-Mar ‘98 (+29 per cent) and Sept ‘01 – Mar ‘02 (+37 per cent). Assuming the current downturn lasts 14 months, the earliest that the market can expect to recover is end 2008.’

The research house sees DBS, UOB, CapitaLand, City Developments and SembCorp Industries as having the greatest downside risk among bluechips. Keppel Corp is the safest bet, it added.

US employers cut 63,000 jobs in February

Payroll data indicate that probability of recession is more than 50 per cent

(WASHINGTON) US employers cut payrolls for a second straight month during February, slashing 63,000 jobs for the biggest monthly decline in nearly five years as the nation’s labour markets weakened steadily, a government report yesterday showed.

The Labor Department said that last month’s cut followed an upwardly revised loss of 22,000 jobs in January rather than the 17,000 reported a month ago. It also said that only 41,000 jobs were created in December, half the 82,000 originally reported.

‘This confirms the fears that have been lurking in the financial markets in recent weeks. The

probability of a US recession is at more than 50 per cent,’ said Richard DeKaser, chief economist for National City Corp in Cleveland.

‘The Fed has to be more aggressive,’ he added. The US central bank is expected to cut interest rates again later this month and yesterday, just before the payrolls report became public, announced new measures to add liquidity to severely strained credit markets that are near seizing up.

The Federal announced that it was increasing the amount of money it will auction to banks this month to US$100 billion. It will make two moves to increase liquidity in the credit markets. First, it will increase the size of its March 10 and 24 auctions to banks to US$50 billion each. The auctions had been set for US$30 billion apiece initially. Fed officials said that they are prepared to move to even larger amounts at future auctions if necessary.

The Fed also said that, starting yesterday, it will begin a series of repurchase transactions expected to reach US$100 billion.

US Treasury debt prices shot up in anticipation that the Fed will cut interest rates while stock futures weakened sharply. The US dollar’s value was at a record low against the euro after the unfavourable employment report was issued.

The back-to-back January and February job losses were the first consecutive monthly declines since May and June of 2003.

The February jobs report was more bleak than expected.

Economists surveyed by Reuters forecast that 25,000 jobs would be added to payrolls last month.

They had forecast that the unemployment rate would edge up to 5.0 per cent.

Department officials said that February’s job losses were the largest for any month since March 2003, when 212,000 jobs were cut.

During February, the national unemployment rate eased to 4.8 per cent from 4.9 per cent in January, but that was because fewer people were in the labour force. The department said that the number of people in the workforce fell by 450,000 in February.

Job losses were widespread. Some 52,000 jobs were lost in the manufacturing industries, the largest decline since July 2003 when 92,000 jobs were cut. Construction businesses eliminated another 39,000 jobs on top of 25,000 that were cut in January, a reflection of the housing industry’s deepening woes.

Retail industries also shed jobs last month, dropping 34,000 people off their payrolls, a possible reflection of concern from businesses that hard-pressed consumers are likely to begin pulling back sharply on spending.

Source: Reuters, AFP (The Straits Times 8 Mar 08)

US household wealth falls for first time in five years

WASHINGTON – HOUSEHOLD wealth in the United States fell in the fourth quarter for the first time in five years, while borrowing slowed as home values plunged and lenders restricted credit, Federal Reserve figures have shown.

Net worth for households decreased by US$532.9 billion (S$739.5 billion) from the previous three months, the first decline since the third quarter of 2002, according to the Fed’s quarterly Flow of Funds report released on Thursday. Housing-related net worth dropped by US$176.4 billion.

Lower home and stock prices and reduced access to loans are prompting Americans to spend less, driving up foreclosures. A slowdown in consumer spending, which accounts for two-thirds of the economy, threatens to push the US into a recession.

‘Consumers are being squeezed from several directions,’ Fed governor Frederick Mishkin said in a speech this week.

Reduced household wealth, combined with a weakening job market and near-record fuel prices ‘are likely to restrain spending growth in the period ahead’, he said.

Owners’ equity as a share of their total real estate holdings fell to 47.9 per cent, the lowest since quarterly records began in 1951, from 48.9 per cent in the prior period.

The Fed based its calculations on a gauge of home prices published by the Office of Federal Housing Enterprise Oversight. Had the central bank used a measure of home prices developed by S&P/Case-Shiller instead, the loss in net worth would have been almost three times as much, according to JPMorgan Chase economist Michael Feroli in New York.

The drop in housing-related household net worth from October to December followed a decline of about US$600 million in the previous three months. Mortgage borrowing by households rose at a 5 per cent annual pace, the smallest gain since 1997.

Total borrowing by consumers, businesses and government agencies rose at an annual rate of 7.7 per cent last quarter compared with an 8.8 per cent gain the prior quarter, as borrowing by businesses climbed.

Total borrowing by households increased at a 5.6 per cent pace, and business borrowing rose at an annual pace of 12 per cent.

Borrowing by state and local governments climbed at a 7.6 per cent rate after rising 6.5 per cent the prior quarter, the Fed said.

Federal government borrowing rose at an annual pace of 5.1 per cent after increasing at an 8.8 per cent rate.

Source: BLOOMBERG NEWS (The Straits Times 8 Mar 08)

US reports surprise loss of 63,000 jobs

Biggest drop in five years another sign that economy is on the decline

WASHINGTON – THE United States unexpectedly lost jobs last month for the second consecutive month, adding to evidence that the economy is in a recession.

Payrolls fell by 63,000, the most in five years, after a revised decline of 22,000 in January, the Labour Department said yesterday in Washington.

The jobless rate declined to 4.8 per cent, reflecting a shrinking labour force as some people gave up looking for work.

‘All the lights are flashing red,’ said Mr Nariman Behravesh, the chief economist at Global Insight in Massachusetts, in an interview with Bloomberg Television. ‘We’re in a recession. I don’t think there is any doubt about it at this point.’

Treasury notes soared after the report on concern that the weakening labour market – combined with lower home prices, higher fuel bills and a global credit squeeze – will force consumers to cut spending further.

Minutes before the figures were released, the US Fed said it would expand two short-term auctions this month to US$100 billion (S$139 billion) to address ‘heightened liquidity pressures’ in markets.

Traders now expect Fed chairman Ben Bernanke and his team to cut their benchmark interest rate by at least three-quarters of a percentage point at or before their March 18 meeting.

Economists had projected that payrolls would rise by 23,000, following a previously reported 17,000 drop in January, according to the median of 76 forecasts in a Bloomberg News survey.

The jobless rate was forecast to rise to 5 per cent from January’s 4.9 per cent, with estimates ranging from 4.8 per cent to 5.2 per cent.

Revisions reduced by half the 82,000 increase in payrolls previously reported for December last year.

Service industries, which include banks, insurers, restaurants and retailers, added 26,000 workers last month. Retail payrolls fell by 34,100, the biggest drop in more than five years.

Payrolls at builders fell 39,000, the eighth consecutive month of cutbacks.

Home builders are trimming staff as the biggest housing slump in a quarter century deepens. Commercial building projects are also declining, indicating that firings at non-residential builders are likely to rise.

The real estate recession and financial market meltdown have led to growing dismissals at banks, mortgage and management firms.

‘There’s significant weakness in the job market because of construction declines,’ said Mr David Berson, the chief economist at California-based PMI Group, the second-largest US mortgage insurer. ‘For the next six months or so, we may get small negative numbers on payrolls.’

Manufacturing payrolls dropped by 52,000, the biggest decline since July 2003, after falling by 31,000 a month earlier. Economists had forecast a drop of 25,000.

Americans, whose spending accounts for more than two-thirds of the economy, are less upbeat about finding work, a Conference Board report showed last week. The share of consumers who said that jobs are plentiful fell and the proportion who said jobs are hard to get jumped, pushing consumer confidence down to a five- year low last month.

‘The economic situation has become distinctly less favourable,’ Mr Bernanke said in testimony to Congress last week.

The Fed chairman referred to ‘downside’ risks for the economy four times, including ‘the possibilities that the housing market or the labour market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further’.

Source: REUTERS (The Straits Times 8 Mar 08)

Growth slows in 8 of 12 regions in US: survey

Beige Book cites weak retail sales, slow manufacturing and housing woes

(NEW YORK) The Federal Reserve says economic growth has slowed in eight of 12 US regions since the start of the year, hurt by faltering retail sales, manufacturing and a continued decline in housing.

‘Two-thirds of the districts cited softening or weakening in the pace of business activity, while the others referred to subdued, slow or modest growth,’ the central bank said in its regional business survey, known as the Beige Book, on Wednesday.

The report provided anecdotal evidence of a cooling economy that echoed reports this week that showed a contraction in manufacturing and services last month.

Fed chairman Ben Bernanke told lawmakers last week that the central bank is prepared to lower interest rates further as needed to avert a deeper downturn.

The report noted that retail activity in most districts was weak or softening. Manufacturing was sluggish or have slowed in about half the districts.

Traders expect the Federal Open Market Committee to lower the benchmark rate by 0.75 percentage point by its meeting on March 18. Policy makers have lowered the rate by 2.25 percentage points since September to 3 per cent.

The Fed report also said that almost all districts reported ‘upward pressure on prices’ from higher raw materials and energy costs, though companies reported ‘mixed success’ in passing along costs in higher prices.

The Beige Book said housing remained a drag on the US economy. ‘Residential real estate markets generally remained weak,’ the report said, citing ‘tight or tightening credit standards’ in most districts.

Scarce credit, bloated inventories and falling prices continue to depress housing markets. Sales of existing homes fell in January to the lowest level since records began nine years ago, the National Association of Realtors said last month.

‘Growth risks are much more severe in the near term’ for the Fed, Bruce Kasman, chief economist at JPMorgan Chase, said. ‘Growth is pretty much stagnant right now.’

Companies reduced workers last month, the first reductions in the US in almost five years, a private report based on payrolls from ADP Employer Services showed on Wednesday.

The economy expanded 0.6 per cent at an annualised pace last quarter. Fed officials lowered their projections for economic growth by half a percentage point this year, according to quarterly figures published last month.

‘I continue to expect a period of economic weakness in the near term,’ Fed governor Frederic Mishkin said on Monday. ‘With the economic outlook having deteriorated significantly and financial markets under considerable stress, the FOMC will face significant challenges.’

The Beige Book’s regional anecdotes are gathered through hundreds of telephone calls, news clippings and personal contact by the staff of the 12 Fed banks, whose districts cover all 50 US states. The anecdotes are designed to supplement quantitative forecasts of the Board of Governors staff.

The Beige Book was prepared by the Boston Fed based on information collected on or before Feb 25.

Source: Bloomberg (Business Times 7 Mar 08)

Big US banks poised to fall further, says investment guru

Fed ‘making same errors’ Japan made trying to bail out everyone in 1990s

FINANCIAL guru Jim Rogers painted a doom-and-gloom picture of the United States economy yesterday and predicted that Singapore’s two investment companies would lose money on their recent investments in beleaguered banking giants.

Singapore-based Mr Rogers said investing billions of dollars in banks at this time, with the US financial sector in dire straits, was the wrong move.

He believes ‘banks will fall further’, hence his strategy of ’shorting investment banks on Wall Street’, including Citigroup and mortgage lender Fannie Mae. ‘Shorting’ means investing on the assumption that the shares will fall further.

Mr Rogers, who co-founded the Quantum Fund with billionaire George Soros in the 1970s and predicted the start of the commodities rally in 1999, said he was concerned by the recent bank deals made by Temasek Holdings and the Government of Singapore Investment Corporation (GIC).

‘It grieves me that Singapore is buying into these things,’ said Mr Rogers.

GIC pumped in 11 billion Swiss francs (S$14.7 billion) for a 9 per cent stake in Swiss bank UBS in December and invested US$6.88 billion (S$9.58 billion) in Citigroup a month later. In December, Temasek bought a US$4.4 billion stake in Merrill Lynch.

UBS shares have fallen by more than 30 per cent this year. Citigroup is down over 20 per cent, while Merrill Lynch is off about 5 per cent.

Mr Rogers told reporters at an ABN Amro product launch that he remained bullish on commodities but extremely bearish on equities, bonds and the greenback.

‘The only bull market I know of in the world right now is the commodities market,’ he said. ‘We’re only one-third of the way through the bull market.’

He also warned that inflation was going to get worse: ‘Demand is going higher at a time when there are supply constraints. Food inventories are at their lowest in 40 years.’

Oil prices also have the potential to go much higher, he said, adding that the US Federal Reserve was making the same mistake Japan did in the 1990s when it wanted to bail out everyone.

The US should have bitten the bullet instead of trying to put on ‘band-aids’, he added, referring to the Fed’s move of cutting interest rates to stave off a recession yet risking stoking the inflation fire.

‘The central bank is making disastrous mistakes,’ said Mr Rogers, adding that he was also ‘extremely pessimistic’ on the US dollar. The currency traded near record lows to the yen and Swiss franc yesterday.

Mr Rogers further forecast that the US sub-prime crisis would continue to haunt the world for a year or two. Even after it has ceased, he said, there will still arise other kinds of loan problems, such as with credit cards and cars.

Source: The Straits Times 6 Mar 08

US regulators look for signs of credit crisis spreading

They are keeping a keen eye on credit card, home equity and building loans

WASHINGTON – UNITED States regulators are watching credit card and commercial construction loans for signs that they may be the next trouble spots as strained financial markets constrain credit.

The housing downturn, with its epicentre in the sub- prime mortgage market, stayed atop the list of concerns. But regulators and Federal Reserve officials expressed concerns on Tuesday that credit risks may extend beyond mortgages.

Fed chairman Ben Bernanke said on Tuesday that credit-weary banks may be better off accepting lower home loan principal amounts rather than the bigger losses that would come from foreclosures.

He warned that mortgage delinquencies and foreclosures would likely rise as house prices fall further.

Mr Bernanke’s second-in- command, Mr Donald Kohn, said at a Senate Banking Committee hearing on the same day that the Fed was also keeping a close eye on credit card, home equity and commercial real estate loans as banks cope with a widening range of credit risks.

‘Federal Reserve supervisors are monitoring these consumer loan segments for signs of spillover from residential mortgage problems, particularly in regions showing home owner distress.

‘And they are paying particular attention to the securitisation market for credit card loans,’ he said. Mr Kohn added that commercial real estate is ‘another area that requires close supervisory attention’.

He noted that while personal bankruptcy rates remained below levels prior to bankruptcy law changes implemented in 2005, they ticked higher over the first nine months of last year and ‘could be a harbinger of increasing delinquency rates on other consumer loans’.

Despite those strains, Mr Kohn said the banking sector remained sound and he saw no threat to banks’ viability.

The credit mess that began with failing US sub- prime mortgage loans has left banks saddled with tens of billions of dollars in bad debts, prompting them to tighten lending standards. That has slowed the flow of cash to firms and consumers who power the US economy.

US Comptroller of the Currency John Dugan echoed concerns that the credit troubles may spread beyond mortgage loans.

‘Although credit card earnings have been fairly robust and portfolios are currently strong, we have a heightened level of concern in this area, even before the numbers confirm any significant deterioration,’ he said.

‘We expect losses from home equity loans to continue to escalate as, unlike first mortgages, these assets are largely held on banks’ balance sheets,’ he added.

But in a sign of how the Fed is conflicted in combating the competing threats of slowing growth and rising prices, another Fed official stressed that inflation was his top concern. ‘Containing inflation is the purpose of the ship I crew for,’ said Dallas Federal Reserve president Richard Fisher.

‘If a temporary economic slowdown is what we must endure while we achieve that purpose, then it is, in my opinion, a burden we must bear, however politically inconvenient,’ he said.

Source: REUTERS (The Straits Times 6 Mar 08)

Time to plan for the recovery that’s lying around the corner

(NEW YORK) Say the economy has fallen into recession, as so many people on and off Wall Street think. Is it time to bail out of stocks?

Selling may be the reflexive response by shareholders who have watched the value of their assets decline in step with economic indicators, but investment advisers contend that they should consider buying instead. Recessions tend to be short, and by the time one is widely acknowledged, they say, investors have often sold just in time to miss the recovery that lies around the corner.

‘People should be preparing for the next upswing because the downturn is already priced in,’ advised Ron Muhlenkamp, manager of the Muhlenkamp Fund.

Brendt Stallings, a fund manager for the TCW Group who specialises in shares of medium-size companies, suggests that investors may not be fearing the worst but that they certainly have it on their minds. And that has already registered in stock prices.

Portfolio managers who foresee a rebound concentrate their buying on segments of the economy that tend to outperform as a new growth cycle gathers momentum. They are not allocating all of their resources to such recovery plays, though, and are making allowances  for conditions that seem to be different from those of other recessions.

‘The normal rotation that occurs is a move into financials and consumer cyclicals,’ Mr Muhlenkamp noted before conceding that ‘normal’ does not quite describe the financial sector and such cyclical industries as housing these days. He likes some financial stocks, notably the mortgage buyer and seller Fannie Mae, but he prefers consumer-oriented companies like appliance maker Whirlpool and two transportation companies: Harley-Davidson and Winnebago.

Continuing with his eclectic list of companies that get people from here to there, he expects the stocks of Boeing and Caterpillar to rise with, or ahead of, the economy. A point in their favour, he said, is the level of the US dollar; it is far weaker than it was during the 2001 recession, giving American exporters a competitive edge.

Barbara Walchli, manager of the Aquila Rocky Mountain Equity fund, is another advocate of transportation stocks. The sector, she said, is ‘usually one of the groups that moves fastest coming off the bottom’.

One of the fastest of the fast may be Knight Transportation, a midsize trucking concern. Ms Walchli lauded Knight’s management for keeping the company’s books free of debt, unlike rival Swift Transportation, which she said had borrowed heavily to take itself private. She also likes Avnet, a distributor of electronic components to businesses. It fits well with her expectation that businesses will open their wallets before consumers as the economy emerges from its torpor.

Mr Stallings also foresees business spending picking up sooner, and he prefers potential beneficiaries of the trend that have a global reach.

Examples include Spirit AeroSystems, a supplier of commercial airline assemblies and components, and two companies, Cognizant Technology Solutions and Resources Connection, that provide outsourced labour to fulfil administrative or technical services for other businesses.

He also expects consumers to do their fair share in helping the economy bounce back. Among his favourite recovery plays here are three chains of different sorts: P F Chang’s China Bistro, which operates restaurants; pet supply company PetSmart; and Dick’s Sporting Goods.

‘It’s an interesting time to be a bottom-up fundamental growth manager,’ Mr Stallings said. ‘Everything is on sale across the board.’

Before buying stocks to anticipate a blast-off out of recession, investors must buy the premise that a recession is here. Many do not, including John Lynch, chief market analyst at Evergreen Investments.

‘The classic ingredients for a recession have been tight monetary policy and runaway inflation, especially wage inflation, and neither of those exists today,’ Mr Lynch said, despite some signs that inflation has been increasing.

He acknowledges that a third sign of recession – fear – is here, and then some, but he still describes the economy as being in ‘the late stages of expansion’ or possibly ‘knocking on the door of a recession’. That is only likely to postpone the reckoning until next year, he said.

In his view, the best companies in which to invest between now and then are in defensive areas like health care and basic consumer items, or in segments of technology that derive much of their revenue from businesses. Despite his less positive economic outlook, he, too, anticipates strong capital spending.

Defensive selections include Procter & Gamble, Pfizer and Johnson & Johnson. Among tech stocks that he mentioned are Intel, Microsoft and Oracle.

Even investment advisers who say the economy is approaching a trough prefer to hedge against the possibility that they are wrong.

David Fording, co-manager of the William Blair Growth fund, prefers consumer businesses that derive much of their sales abroad, where economic conditions appear less fragile. Mr Fording said he recently bought shares of the retailer Coach for that reason.

‘There are a number of growth drivers for Coach in the US and, more important, it’s a global brand,’ he said. His more conventional recovery choices include Fastenal, a supplier of construction and industrial supplies, and McCormick & Schmick’s Seafood Restaurants.

Such domestically focused companies are worth owning ‘if you feel that there’s a decent probability that we’ll make it through this rough patch’, Mr Fording said.

How rough will it be? He cautioned investors to expect conditions over the short term that are uncomfortable, but not necessarily unprofitable.

‘Regardless of whether we see really negative headlines for the next three to six months,’ he said, ‘it might very well be the case that the market climbs the wall of worry and looks past

the bad news to a recovery in 2009′.

Source: NYT (Business Times 5 Mar 08)

US economy already in recession: Buffett

He sees slowdown across the board; withdraws offer to guarantee bonds

NEW YORK – BILLIONAIRE investor Warren Buffett said the United States economy is in a recession and that stocks are ‘not cheap’ despite recent declines.

He also said he is no longer offering to guarantee US$800 billion (S$1.12 trillion) of municipal bonds backed by MBIA, Ambac Financial Group and FGIC, three bond insurers that ran into trouble from backing riskier debt.

Speaking on CNBC television on Monday, Mr Buffett said the economy is heading south even though gross domestic product (GDP) has not yet fallen for two straight quarters, a definition that many economists use to identify a recession.

He also said the slowing economy and the housing slump are hurting his insurance and investment company Berkshire Hathaway, whose 76 operating units sell things such as bricks, real estate brokerage services and underwear.

‘By any common sense definition, we are in a recession,’ Mr Buffett said. ‘Business is slowing down. We have retail stores in candy, home furnishings and jewellery. Across the board, I’m seeing a significant slowdown.’

Last week, the Commerce Department said America’s GDP rose at an annual rate of just 0.6 per cent in the fourth quarter.

Mr Buffett, 77, is one of the world’s richest people and is regarded by many as America’s greatest investor. Forbes magazine last September estimated his net worth at US$52 billion.

He said economic conditions have not deteriorated to the levels of 1973 and 1974, when there was a deep recession also marked by rising oil prices and falling stocks.

On Feb 12, Mr Buffett offered to reinsure US$800 billion of relatively safe municipal bonds, which are typically used to finance things such as hospitals, roads and schools. But he offered to back the bonds only at a steep premium. His offer also excluded risky debt, including securities tied to US sub-prime mortgages.

Bond insurers rejected the offer and have been seeking new sources of capital. Some have also been considering separating their municipal bond business from riskier businesses.

Mr Buffett on Monday said his earlier offer is now ‘not on the table’, and added that ‘we tossed our hat in the ring and they tossed the hat back’.

Source: REUTERS (The Straits Times 5 Mar 08)

Bernanke urges banks to forgive part of mortgages

ORLANDO – FEDERAL Reserve chairman Ben Bernanke, battling the worst United States housing recession in a quarter century, has urged lenders to forgive portions of mortgages for more borrowers whose home values have declined.

‘Efforts by both government and private sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done,’ he said in a speech yesterday. ‘Principal reductions that restore some equity for the home owner may be a relatively more effective means of avoiding delinquency and foreclosure.’

Mr Bernanke’s call goes beyond the stance of the Bush administration and previous Fed comments.

By comparison, the central bank’s Feb 27 report to Congress called for lenders to ‘pursue prudent loan workouts’ through means such as modifying mortgage terms and deferring payments.

‘Delinquencies and foreclosures likely will continue to rise for a while longer,’ Mr Bernanke said in his comments to the Independent Community Bankers of America.

‘Declines in short-term interest rates and initiatives involving rate freezes will reduce the impact somewhat, but interest rate resets will, nevertheless, impose stress on many households.’

In the past, home owners could refinance, though that option is now ‘largely’ gone because sales of bonds backed by sub-prime mortgages ‘have virtually halted’, Mr Bernanke said. ‘This situation calls for a vigorous response.’

He acknowledged this idea might be a tough sell to lenders. Lenders, he said, are reluctant to write down principal.

‘They said that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again.’

Mr Bernanke said by cutting the amount of the loan, this ‘may increase the expected payoff by reducing the risk of default and foreclosure’.

Source: BLOOMBERG NEWS, ASSOCIATED PRESS (The Straits Times 5 Mar 08)

Buffett retracts US$800b bond guarantee offer

Separately, he says US economy is in recession, stocks are not cheap

(NEW YORK) Billionaire investor Warren Buffett said yesterday that the US economy is in recession and that stocks are not cheap, despite recent declines.

Speaking on CNBC television, Mr Buffett also said that he is no longer offering to guarantee US$800 billion of municipal bonds backed by MBIA Inc, Ambac Financial Group Inc and FGIC Corp, three large bond insurers.

He said that ‘from a common-sense standpoint right now, we’re in a recession’, though the US economy has not yet recorded two straight quarters of declining gross domestic product, a traditional indicator of recession.

He said that the environment is ‘nothing like ‘73 or ‘74 yet’, referring to a deep economic downturn also marked by rising oil prices, higher inflation and falling stocks. Still, he said that investors should not rule out a significant economic downturn, and that Federal Reserve chairman Ben Bernanke has a ‘very tough balancing act’ in trying to boost economic growth without kindling inflation.

Mr Buffett said that there is a fair chance that inflation may ignite in a ’serious way’.

On Friday, his insurance and investment company Berkshire Hathaway Inc reported an 18 per cent decline in fourth-quarter profit. This stemmed in part from weakness in businesses linked to housing, including units that make bricks and carpet, and that offer real estate brokerage services.

Mr Buffett said that he was finding more buying opportunities in stocks following a 16 per cent decline in the Standard & Poor’s 500 stock index from its recent high in October. ‘I find more things to look at now than I did six months or a year ago.’

But he acknowledged that conditions have changed ‘more dramatically’ in the bond market. Berkshire last year spent US$19.11 billion on stocks and US$13.39 billion on bonds.

Falling security values and liquidity have pummelled bond insurers, which normally insure relatively safe municipal bonds but also guaranteed billions of dollars of riskier debt, often tied to sub-prime mortgages.

On Feb 12, Mr Buffett offered to reinsure US$800 billion of municipal bonds, but only at a steep premium. The offer did not include the riskier debt. Bond insurers rejected the offer and have been seeking new sources of capital or possibly breaking themselves up.

Mr Buffett yesterday said that his earlier offer was ‘not on the table’. In December, he started his own bond insurer, Berkshire Hathaway Assurance Corp.

Since 1965, Mr Buffett has transformed Berkshire Hathaway Inc into a US$216 billion conglomerate by acquiring out-of-favour companies with strong earnings and management, and investing in stocks.

Berkshire’s Class A shares closed on Friday at US$140,000. Through Friday, they had risen 32 per cent in the last year.

Source: Reuters (Business Times 4 Mar 08)

Sub-prime, debt still top US economic threat: poll

Inflation jitters a distant 3rd; terrorism fears down the list

(WASHINGTON) The combined punch of sub-prime mortgage defaults and heavy debt remains the biggest risk to the health of the US economy, a panel of business economists said yesterday.

‘NABE members are increasingly concerned over the short-term risks associated with sub-prime mortgages and other forms of indebtedness, while they continue to cast a wary eye on inflation,’ said Ellen Hughes-Cromwick, president of the National Association for Business Economists.

The conclusion was based on a survey of 259 members conducted between Feb 1 and 15 and updates a poll conducted in August.

Of the members polled for the NABE semi-annual Economic Policy Survey, 52 per cent said that the combined threat of sub-prime mortgage defaults and heavy debt was their No 1 concern, up from 32 per cent in August. Inflation was a distant third at 10 per cent in March, up from 6 per cent, the survey showed.

Only 9 per cent of the members polled said terrorism was now their top concern, compared with 20 per cent in August. ‘Fewer respondents support monetary and fiscal policies being implemented to address the credit situation, with more than one-third saying current monetary policy is too stimulative,’ said Ms Hughes-Cromwick.

Just 48 per cent judged monetary policy to be ‘about right’, a drop from 72 per cent in August and 81 per cent in March 2007.

Two-thirds of those surveyed expect short-term interest rates to decline over the next six months, with about half of those respondents expecting a cut between 25 basis points and 50 basis points, NABE said.

The Federal Reserve has aggressively cut the benchmark federal funds interest rate, bringing it down to 3 per cent from 5.25 per cent in mid-September to bolster the economy against the housing downturn and credit squeeze.

The most frequently cited concerns about lower interest rates are the threat of inflation and the sense that lower rates might ‘bail out investors who should have known better’, NABE said.

Source: Reuters (Business Times 4 Mar 08)

If the US goes into a recession…

How will a US slowdown or recession affect your organisation and industry, and the Singapore economy in general? What can businesses do in the event of a slowdown?

THE US recession had already started since December 2007. I predict that the federal funds rate will drop to one per cent by September 2008. After that, we will most likely witness a rebound and rally in the market.

If the recession is more prolonged, it would at most extend by another six months to March 2009.

Investors must remember that our present recessionary cycle is very different from the US recession between July 1981 and November 1982. In one way, it is similar to the 1981-82 one because the recession hit financial institutions such as banks and savings and loans particularly hard.

The significant difference lies in the fact that we now have the sovereign wealth funds stepping in to prevent these financial institutions from closing down. In addition, we have wealth distributed from oilrich countries in the Middle East.

Singapore is positioned to ride through the stormy weather in style! In these unique circumstances,

Singapore has invested in three of the world’s most exciting banks, namely UBS, Citigroup and Merrill Lynch. We have also lined up world-class activities to ensure a continuous influx of tourist arrivals to boost domestic consumption:

• Q1 2008 – Singapore Flyer
• Q3 2008 – Singapore Grand Prix
• Q3 2009 – Las Vegas Sands Marina
• Q3 2010 – Singapore 2010 Youth Olympic Games
• Q4 2010 – Resorts World Sentosa.

These activities will allow us to meet the challenges ahead. In the event of a slowdown, Singapore businesses should take advantage of this period to upgrade themselves through higher education, visiting other countries for opportunities and consolidating.

- Clemen Chiang

CEO

Freely Business School

Singapore can weather storm

SINGAPORE had been largely dependent on the US for its export market. However, in recent years, Singapore has successfully diversified its export markets to include China and India. In addition, its ongoing projects such as the integrated resorts, the hosting of the first Formula One night race and, most recently, the hosting of the 2010 Youth Olympics, would provide plenty of opportunities for the local market especially in the construction and services industries.

Hopefully, the ongoing IR projects and the tourism dollars being projected for the F1 race in

September would be sufficient to tide us over the US slowdown.

The only other economic factor that will pose a challenge is high inflation due to the double whammy of higher prices for both petroleum and food.

As an IT security company with headquarters in the US, with Singapore as its Asean and India headquarters, we will be able to sustain our growth by tapping the current ongoing projects in Singapore, as well as growing revenues in countries such as India and Vietnam.

While striving to increase our business revenues, we have to strive even harder to keep  overheads such as travel, entertainment cost, rental and even remuneration packages to a bare minimal.

Therefore, Singapore is likely to be spared the economic meltdown in spite of the slowing US economy, as we have been taking steps to minimise our dependency on the US market. This is one giant leap of faith by the Singapore government in the right direction. In the words of Prime Minister Lee Hsien Loong: ‘We have dared to bring our dreams into reality.’

- Benjamin Low

Managing Director, South-east Asia and India

Secure Computing

I THINK a lot will depend on how protracted the US recession will be. If the US slowdown lasts for two quarters, as some economists believe, then I think the Singapore economy might not be significantly affected. Singapore is now less dependent on the US than before and is quite well plugged to the Asian twin growth engines of China and India. The Singapore economy has growth momentum on its side, with many projects like the IR, F1 and now the Youth Olympics, to stay resilient. However, if the US recession turns out to be severe, then not just Singapore but the global economy will be affected.

The steel industry, on the other hand, is going through interesting times. While 2007 was a good year for the industry, 2008 is beginning to look like an equally good if not better year. Demand for steel is going from strength to strength, not just domestically but globally.

In Singapore, demand for steel will see a further boost with more public projects in addition to the existing residential and office projects. Singapore is expected to construct a new University Town to host the Youth Olympics and there are planned expenditures to further expand our rail and road infrastructure in the coming years.

Globally, besides China and India which are consuming a lot of steel, the other two BRIC countries – Russia and Brazil – which used to be net exporters of steel are now instead buying steel. Russia – which benefited from the buoyant oil market – and Brazil – which benefited from the rise of both hard and soft commodities like iron ore and wheat – are undergoing an infrastructure boom.

With the rise of commodities, there is also strong demand for steel in the shipbuilding sectors to build vessels to carry the commodities.

- Wee Piew

CEO

HG Metal Manufacturing Ltd

A SLOWDOWN in the US economy will undoubtedly have an impact on the logistics sector and UPS, but we are confident that we will continue to grow by generating greater synergy between our businesses. Being an open economy, Singapore is naturally more susceptible to external shocks.

However, the Singapore government has been successful in attracting investments, which will provide some buffer from an external slowdown. This, complemented by growth in other regions, particularly the Asia Pacific, will provide impetus for the economy.

Asia was a key growth area for UPS in 2007, and looks set to continue this year. Growing intra-Asia trade and strong demand from China and India will continue to drive trade in the region. By aligning our supply chain and parcel delivery businesses, UPS will ensure greater synergy and more competitive offerings for our clients across Asia.

Despite the challenges and a moderated economic growth forecast, UPS is positive that the

Singapore economy is resilient and diversified enough to withstand the effect of a US slowdown.

- Mary Yeo

Managing Director

UPS

EXPERTS agree that the US economy is closer to the bottom than the top. Given this, we all must brace for ways of coping in the event of a full-blown US recession. As experience has shown us, a downtrend does not mean we are in for a crash. I would say that those of us in the direct selling industry can be resilient to an economic crunch for as long as we are able to grow and expand distributorship.

Still, it remains critical to re-think business decisions having to do with the proper marshaling of resources, especially for small and medium-sized businesses which will be the hardest hit. The basics, of course – stick to budget, monitor business closely, keep collection coming in, and tighten financial control.

Others would be wrongly cutting costs by way of reducing employee incentives. I believe, on the contrary, that we must encourage pay for performance incentives.

At Best World, our strategy is two-pronged: to continue to grow company sales and to optimise employee productivity. I believe that even in bad times, we must reward people as long as they are clearly able to contribute better performance to grow the company bottom line.

This year, we have restructured our company bonus system by basing it on company profit instead of gross sales. I see this as a win-win situation, a mutually beneficial manner of giving everyone a stake in the growth and viability of the business during these critical times.

- Dora Hoan

Group CEO

Best World International Ltd

VISIONARY business leaders are already using technology to enhance sales growth, drive incremental efficiencies and deliver excellent customer service. In challenging economic times, companies must keep their eyes on the horizon while smartly managing short-term turbulence.

For example, EMC is helping companies of various sizes invest in IT infrastructure solutions that squeeze more value from flat IT budgets. Reducing the physical space needed for IT infrastructure, as well as lowering the power and cooling costs to support the infrastructure, becomes even more important in tightening economic times.

In a slowdown, it is also important – although not easy – to remain focused on product and service innovation. As a company, EMC will spend more on R&D than ever before to ensure we bring new innovation to our customers globally.

Having seen Singapore’s economic indicators, and the recent Budget, I am confident that the country as a whole, and the local and multinational companies based here, are well positioned to deal with any changes to the world economy.

- Steve Leonard

Senior Vice-President, EMC Corporation; and President, EMC Asia Pacific/Japan

EMC Corporation

THE US is in recession and I suspect this one will be protracted and will impact the rest of the world. Emerio is an IT outsourcing company with an emphasis on support and consequently, we expect our business to grow faster as US companies will need to do even more with less!

As far as the Singapore economy is concerned, there would be a short-term impact but I am confident that with Singapore’s ability to re-invent itself, we will be able to counter it and emerge stronger. A focus on Asia – not just China and India but also the rest of Asia – should see us sailing through this period.

- Harish Nim

CEO

Emerio Corporation Pte Ltd

See downturn as opportunity

THERE is too much attention paid to whether ‘an economy’ is in recession. My view is that different sectors have remarkably different dynamics which argue against a generalised view. For example, it is fairly clear that financial services, construction and probably the durable goods sector in the US are ‘in recession’.

However, agriculture, aerospace and international tourism are booming. I have been surprised at the strength of the recent retail numbers. At any point, some sectors are likely to be in recession and others booming. Asia is no different.

A lot of attention has been paid to whether or not the Asian economies and the US economy are decoupled. I’ve seen little high-quality data associated with this debate; analysts seem to quote data showing the declining percentage of exports from Asia going to the US. This is a fairly shallow understanding of decoupling.

Second, the level of coupling will, of course, vary significantly by sector. For example, I have been surprised by the extent that Chinese and Singapore-based banks have taken write-offs on the US sub-prime products – which just goes to show that ‘coupling’ can occur in mysterious ways.

I believe a number of key sectors in the US will go through a fairly deep recession. The US is a more flexible and responsive economy than most OECD economies, and will therefore restructure and recover more quickly then other countries such as Japan, Germany and France. This is one of the great strengths of the country.

The nature of most Asian companies is that they would rather lose money then downsize, though this is a generalisation. If Asian companies find markets in the US are being crimped, they will aggressively pursue other markets. A Chinese toy manufacturer will not undertake layoffs because of a US slowdown. They will ask: Where else can I sell these toys?

As a result, whether Asia is currently decoupled from the US, at the end of this down-cycle Asia will be more decoupled from it than before. But it won’t happen automatically or smoothly; Korea and India are simply not going to accept Chinese toys as easily as the US. The optimistic case is that these frictions result in new resolve for the World Trade Organization and consistent global trading rules. Of course, there are pessimistic cases.

For companies, there is the classic advice: Cut costs and find new sources of revenues. I’m a consultant – of course I would say this! Just as important is to have a clear sense of history – who were the winners and losers in your sector in the last downturn? What did they do to gain share and maintain their financial performance?

The worst thing you can do is just hunker down and wait for the next upturn. Get your management together and figure out how to convert the downturn into an opportunity. If you don’t have some great ideas – hire a consultant!

- Charles M Ormiston

Director

Bain & Company

IT IS widely misunderstood that a slowdown or a recession will affect every company that is doing business with the US. This may not be the case as there are some recession-proof industries. I consider the aftermarket tyre industry to be such an industry. A slowdown in the auto industry affects the sales of new vehicles – but existing vehicles still need tyres to ply on. Within the tyre industry, the major brands may feel more heat than the budget brands. There is a tendency to shift from an expensive branded product to a non-branded economical product in such an environment.

I have seen a surge in business recently which strengthens my belief that the market is shifting its purchasing pattern. As such, I do not think that the companies operating in the ‘budget brand’ category in the after-market auto industry will be affected. In fact, this is the time to go after business which was not accessible in the past. Now is the time that customers are actually looking for value.

As a precaution, however, it is imperative that businesses start spreading their chips into other markets and protect their existing business by investing in business/credit insurance, which will cover them adequately in case of any default.

- GS Sareen

President and CEO

Omni United (S) Pte Ltd

MY ASSESSMENT is that a US slowdown will have a material impact on Singapore only if it is prolonged and severe. This is due to our sound economic fundamentals, diversification of our economy away from manufacturing and electronics, as well as our location in a high-growth region with a large middle-class market and educated workforce.

In times of market volatility, we foresee growth opportunities over the next few years given large foreign investment flows into the region, booming regional economies that contribute to rising mass affluence, as well as higher demand for wealth planning from fast-ageing societies.

As an Asian specialist, the DBS Group is well-placed to seize these opportunities because of our experience and sound understanding of the regional markets.

Businesses caught in the slowdown can look into ways to better manage their costs, explore other potential avenues for growth, possibly in new untapped markets, consider flexible work arrangements and raising staff productivity.

- Deborah Ho

CEO

DBS Asset Management

AS THE world’s third-largest IT services provider, Fujitsu Asia provides solutions for customers in the Asean markets of Singapore, Malaysia, Thailand, Indonesia, the Philippines and Vietnam – but not the US. Therefore, as long as the IT demand in our target markets remains healthy, we needn’t fear that a US slowdown or recession will impact us negatively.

The Singapore economy in general should also continue to do well because we are not as dependent on the US economy as compared to, say, five years ago.

Most indicators suggest that the IT demand will remain very strong this year. For example, a recent Gartner survey of about 1,500 chief information officers (CIOs) worldwide revealed that IT expenditure is expected to surge by about 8.3 per cent in Asia this year – far outstripping the 3.3 per cent rise in the global average.

The report also identified that in 2008, the focus areas among Asian CIOs include IT infrastructure, application rollouts and other areas. The implication here is that, despite the possibility of a US slowdown or recession, Asian companies are still prepared to invest in technology to prepare themselves for future business growth.

This makes sense because it can take months or even years for an IT investment to progress from conceptualisation to rollout.

Hence, companies that delay making vital investments during a downturn could be unknowingly disadvantaging themselves when things are back on the upswing. After all, without added headroom – which IT investments can provide – for scaled-up operations, companies might be unable to capitalise on the business opportunities that an economic recovery presents.

I always believe that adversity and opportunity exist togther. A slowdown in the US may pose some challenges, but it indirectly provides an impetus for companies to prepare themselves for future growth, which is merely a matter of time. And leading IT companies like Fujitsu Asia can help companies with such preparation efforts.

- Noboru Oi

Group CEO

Fujitsu Asia Pte Ltd

WITH the US being the world’s largest economy, economists and analysts have said that any signs of slowdown could impact everyone, especially those economies or industries highly dependent on the US. Some have warned that the effects of a drop in consumer spending could impact the Asian electronics manufacturers.

That said, we see resilience in the global economies. Where there are challenges, we also see some opportunities. All the more, businesses need to focus on creating value for their customers to maintain their competitive edge and strengthen their position in the industry.

For Excelpoint, we believe that it is critical to focus on executing well to strategy, maintain a strong cash position to capture opportunities, and be prepared to make adjustments where necessary to mitigate any risks. We will continue to invest in emerging markets where our customers have ventured into, and collaborate with them and our global partners to capitalise on opportunities in those markets.

Important, too, is the continued emphasis on innovation. We want to be able to research and develop new applications and technologies with the aim to offer our customers a wider range of solutions. This will help us emerge as winners in the industry in the long run.

- Albert Phuay

Chairman and Group CEO

Excelpoint Technology Ltd

WHILE we believe that a potentially bearish US economy will have a global impact on  Organisations and markets, this is an opportunity for many companies to take a hard look at how their operations can be optimised for efficiencies and how new businesses can be gained by looking beyond traditional means of getting to their customers and the marketplace.

There is a growing trend where deploying innovative technologies such as virtualisation and open source are helping businesses achieve these goals by optimising how information technology is supporting their existing business. Increasingly, businesses are also looking at more cost-effective and efficient channels to get to the business partners, customers and the marketplace by making information technology supplement their existing route to market.

We are confident that this is one way that businesses can save money and grow their businesses and give them a better chance of weathering not just this slowdown but any slowdown.

- Ong Chee Beng

Managing Director, Singapore

Sun Microsystems

IT IS still premature at this point to predict the extent of the US slowdown and to project how it will affect the Asia Pacific, and Singapore. However, with globalisation and lessons learnt from the Asian crisis, countries like Singapore are now more hedged against fluctuations from the US economy with greater investments in fast-growing markets like China and India.

I believe when one door closes, another window opens. In times of cyclical downturns, it is the onus of business leaders to proactively seek new opportunities (perhaps investing in emerging markets in the Asean region) to diversify risks and chart future growth. Many companies like us would have laid the groundwork in recent years, coupled with a long-term strategy, enabling us to ride out cyclical downturns, resulting in business continuity and growth prospects for the future.

- Bryan Low

Vice-President and Managing Director

AMD South Asia

A US downturn will almost certainly have a negative impact on Singapore’s economy, and it is unlikely that the childcare industry will be spared. At Cherie Hearts, for instance, we expect that a number of parents could look to alternative childcare options, such as home-based care by grandparents.

The best course of action that businesses can take in the face of an economic slowdown is to invest in training and development, as well as R&D. This will be our best bet in preparing ourselves to ride the economic growth once the dark clouds blow by. Cherie Hearts, for one, will be stepping up efforts on staff training, as well as curriculum research and development.

- Sam Yap SG

Group Executive Chairman

Cherie Hearts Group Int’l Pte Ltd

S’pore will be insulated by Asia

A RECENT study by technology research house Gartner shows that despite the US slowdown, Asian firms still plan to increase their annual IT budgets by about 8.3 per cent in 2008.

I believe that companies’ priority this year will be on technologies that directly improve their business performance. CA will continue to create and refine software that can help firms simplify and unify their IT operations, and which deliver tangible business value.

With regard to Singapore, the projected growth in Asia’s emerging economies should insulate us somewhat from the US slowdown, although many firms will still come under pressure to control costs.

This means that organisations should work on better tapping into their current resources. Besides using technology to streamline their operations, they should look harder at integrating technology with their people and processes. Best practices and consultancy services to achieve this are readily available, and businesses should proactively check them out.

- Brenton Smith

Managing Director and Area Manager, Asia South

CA

THE slowdown in the US may dampen business confidence and hurt our export-led economy but we will more likely be impacted by rising inflation and rapidly increasing business costs.

Many businesses are linked to regional and global customers, thus removing our reliance on just one country for trade. We are moving into Middle Eastern economies. We already have strong business links with the Chinese and Indian markets and these should help cushion the impact of the US slowdown. However, what seems to be at the forefront of many companies’ concerns is the more pressing problem of rising wages and a shortage of talent.

- Dhirendra Shantilal

Senior Vice-President, Asia Pacific

Kelly Services

FROM a geographical perspective, companies need to anticipate an economic slowdown in the US and switch activities and priorities towards growth regions like Asia. In Asia, because of the integration of global markets, developing countries will also be impacted, but this will be overshadowed by the domestic drive that we are seeing in countries such as China, India, and Southeast Asia.

Regarding the IT industry, there is no doubt that it will be impacted too. According to a recent IDC report, global technology spending will experience slower growth next year because of the current uncertain economic climate. Therefore, IT vendors and service providers must also stay ahead of the game by being flexible and making sure they adapt to these changes.

Last year, Serena Software moved to a software-as-a-service model and this is paying dividends for us now. In this environment of economic uncertainty, it is natural for companies to hold back on their capital investments to mitigate their risks. Therefore, the ability to adopt on-demand services on a pay-as-you-go basis is a perfect sourcing strategy for businesses seeking greater cost controls and flexibility during tough times.

- KC Yee

Vice-President, Asia Pacific

Serena Software

WHEN the world’s largest economy goes into a recession, most industries will be affected one way or another. Businesses need to understand that and start taking steps to balance the risks of a slowdown in the US. Businesses should look beyond the US market to cushion the downturn, if any.

Asia presents itself as an excellent opportunity for business growth.

Businesses can start by diversifying their clientele to reduce the risk of relying on a particular industry.

Riverstone, for example, is maintaining its lead in Asia for high-tech cleanroom gloves by expanding our clientele beyond the major players of hard disk drives and semiconductors.

For now, the demand for the high-tech clean-room consumables continues to grow and Riverstone intends to ride this trend.

- Wong Teek Son

Executive Chairman and CEO

Riverstone Holdings Ltd

AT AT&T, we are focusing on the strong growth engines in Asia Pacific – like China and India, but also the emerging markets in South-east Asia – and plan to continue investing in our business here to mitigate effects of a possible slowdown of the US economy.

Macro-economic data, ranging from the UN to the World Bank, shows that growth in Asia Pacific should be expected to continue, though maybe at a slightly lower rate than in the previous extraordinary years. Asia-Pacific economies are considered to be quite well-prepared to manage the continued uncertainty in the external environment coming from the US and, for example, the oil markets.

With our region continuing to be the fastest-growing region globally, a focus on such overseas opportunities can help minimise a potential dip in the US economic growth. Therefore, I would expect a continuous commitment to this region from global MNCs like AT&T. Most likely, we will see the further creation of high level jobs, continuous investments and more and more products and services being developed and managed in and out of the Asia Pacific – for a growing number of customers in this region.

- Collis Loh

Country General Manager

AT&T Business, Singapore

A US slowdown or recession will have some, but not catastrophic impact on the Singapore economy, as a growing driver of Asia’s growth has been fuelled intra-region. Thus, while the US curtails its consumption demand, this will be counter-balanced by the continued rise of Asian consumption – whether in China, India, or even Vietnam.

Having said that, in the event of a slowdown, having the right people to work and manage your business is critical to weathering a tough economic environment. The companies who emerge winners will be those that are focused on measuring and improving productivity, including that of their workforce.

- Su-Yen Wong

Managing Director, Asean

Mercer (Singapore) Pte Ltd

Be ready for tough times

TECHNOLOGY spending is normally a lagging indicator of an up or down-market. Our order book and sales pipeline currently look very strong. If we are to see slowing tech spending it will most likely hit Asia three to four months from now. So far, US multinationals, even in the financial services sector, are keeping up their spending with projects still being executed. Only one major client that I have met recently has talked of deferring a project. Companies obviously need to have a Plan B ready for any slowdown in spending. It’s important to be ready with scenarios so that we can adjust our model as any changes unfold.

- Bill Padfield

CEO

Datacraft Asia

THE US will continue to be the leading global economy for many more years. However, the print, publishing and media-related industry as a whole, my organisation included, has also diversified, doing a substantial amount of business with Britain, the Middle East and the EU countries.

On a national basis, the US is one of our main trading partners. Consequently, a US slowdown or recession would, together with many other Asian countries, definitely affect us negatively. Gloomy markets, recovery and growth are all part of the economic system.

Singapore businesses can reduce this looming negative impact by aggressively diversifying investments and export makets – which we have already done to a considerable extent.

With prudence and foresight, our businessmen could further move into Russia, the Middle East, the Korean peninsula and other Asian countries, Latin America and Africa.

Singapore businesses – especially our cash-rich investors and exporters, be they in mindshare leadership, providing services or manufactured products – should reduce over-dependence on the US.

- R Theyvendran

Chairman / Managing Director

Stamford Media International Group

A US slowdown or recession will have a negative impact on the global economy. US consumption has been instrumental in helping to boost world economies for several years. The growth of China and India is not going to be able to make up for the shortfall in US consumption in the event of a major cutback in spending in the US.

In a similar vein, manufacturers in Singapore will be negatively affected by the US slowdown as their products are mostly exported overseas. CEOs need to understand that it is no longer business as usual. Fortunately for my company, we will be able to comfortably ride out the tough times as we are a multinational company that has recognised the need to change much earlier.

For those businesses which are financially weak, it is important to restructure quickly to face the new harsh realities. They have to review their cost structure to ensure that they remain cost-competitive.

Companies need to penetrate markets such as the Middle East, China and India, whose economies are still booming. However, for weak companies, it is better to be healthy before expanding overseas, or their limited resources will be further dissipated. They should get their act together in Singapore first, such as putting in place a strong and competent management team and getting a positive cash flow. There are opportunities in the recession too as many weaker competitors will be knocked out of the race.

- Teng Yeow Heng Michael

Managing Director

TR Formac Pte Ltd

A US recession will cause uncertainties and undulations across the globe, but economic giants like China and India can cushion some of that ripple effect. As expounded by Minister Mentor Lee Kuan Yew, increased domestic consumption and investments in infrastructure, which serve to sustain a robust financial core, can also help weather the economic storm.

Local businesses, particularly SMEs, must be ever-ready for unforeseen events and have contingency plans in place during a period of decline. These include cost-cutting measures like downsizing and reducing overheads as well as increasing savings and investing in short-term assets that can be liquidated in times of need.

- T Chandroo

Chairman and CEO

Modern Montessori International

Singapore may be hit

THERE is no doubt that any slowdown or recession in the US economy will have a direct impact on the Singapore economy. Although Minister Mentor Lee Kuan Yew has stated that Singapore will not be too badly affected should the US catch a cold, prevention is better than cure.

As electronics is an important sector that exports to the US market, any contraction in the US will have immediate effect on this major industry which contributes a large percentage of the manufacturing exports. To mitigate any drastic drop in exports, IE Singapore should support our manufacturers in aggressively sourcing new emerging markets in the Middle East, South Asia and North-east Asia. A better option would be to shift the bases of production closer to the markets.

Pakistan has been identified as a pivotal centre for electronics serving the Middle East and South Asia, while North Korea is also a focal centre serving Greater China and East Asia.

It is timely for the Singapore Business Federation to organise missions to these key centres to explore, exploit and extract the opportunities for exports, investments and R&D, etc. I am confident that the electronics sector would be nimble enough to ride out any economic setback in the US. Let’s pull ahead.

- Derek Goh

Executive Chairman / Group CEO

Serial System Ltd

I BELIEVE the signs indicate that the US is in a recession or on the verge of one – with consumption going down, interest rates being reduced, and the implementation of a US$152 billion package to stimulate the economy.

In such a scenario, I would suggest that Singapore businesses take a conservative approach by containing costs, ensuring that forecasts are conservative and watch inventories. When there are opportunities to monetise assets, I would proceed, as cash is king in this situation.

Until India and China dominate the world economy, I believe that whatever happens in the US will have an adverse impact on Asia and Singapore, although this will be less than before. Singapore has taken enough precautions to fend off any cold the US might suffer, but again it depends on how badly the US will be affected, as the financial crisis continues to unfold.

- Lim Soon Hock

Managing Director

Plan-B Icag Pte Ltd

THE sub-prime mortgage crisis has now ballooned into a deepening credit crunch, leading to less liquidity for a host of financial assets and structures. Although the US Federal Reserve has reduced interest rates in recent months, there is still a crisis of confidence in the US which mirrors the experience in Asia during the 1997 financial turmoil.

Clearly, the US is already in recession. Its extent and duration will depend on how long it takes for confidence to be restored. And the signs are not good because it seems that investors, banks and markets are getting more – and not less – jittery with each passing week. The impact of the US recession on Asia may be limited if it lasts six to nine months. However, Asian economies – even Japan, China or India – are probably not strong enough to weather a prolonged economic depression in the US.

As a privately-owned bank, Rabobank is taking steps to strike a balance between supporting our long-term customers, and preparing for a possible slowdown in this part of the world. On the one hand, as a financial cooperative, we must do our best to ensure that the funding needs of our customers are met. On the other hand, as a bank with a Triple A credit rating, we must maintain prudent lending policies, exercise due diligence and read market warning signs early and accurately.

Every cloud has a silver lining, so a widespread recession could perhaps moderate the worldwide trend of rising inflation, which is caused by escalating prices of commodities, labour and land.

If Singapore enters a recession, hopefully workers will realise that wage increases cannot outpace productivity gains indefinitely without companies losing competitiveness – which may ultimately lead to employees losing their jobs.

- Goh Chong Theng

General Manager, Singapore

Rabobank International

ANY US slowdown will impact businesses here. Everyone’s hope is that it will not be a contagion with business confidence being dragged down. The flipside is that the costs of US goods and services will be lower with a weaker dollar for those who do business with the US. This sliver of opportunity should enable us to offer more attractive and competitive goods and services.

On the other hand, people are hoping that the boom in China, the Middle East and elsewhere will provide a counter-balance. Like many Singapore companies, we stand our business on many legs in different countries. We hope to re-adjust our balance even as one part of the business is down.

Indeed, it may ironically be the balance we need with the current inflation and a resource crunch.

But more worrying is the way events might turn out. The great uncertainty and turbulence might catch many businesses wrong-footed. We all need to be vigilant.

- Liu Chunlin

CEO

K&C Protective Technologies Pte Ltd

A RISING tide lifts all boats, but unfortunately, the inverse is true as well when it comes to a US recession. Asia is not decoupled from the US or any other world economy and this should come as no surprise. Access and dependency go in lock-step and capital markets are extremely efficient at providing access to virtually any market segment in any economy – the sub-prime market, for example.

Diversification is the key and where countries are not efficient at achieving balance our firms must be.

An organisation’s best hedge is a global revenue stream, a balanced product set, and access to a wide range of market sectors.

- Mark Bashrum

Regional Vice-President, Asia

ESI International

DESPITE the slowdown in the US, Singapore’s financial and construction services clearly remain the bright spots, fuelling a soft-decoupling story for Singapore from the US economy. Still, with rising inflation and a negative real interest rate environment, private banking, like other businesses, cannot completely ignore the US downturn.

Investors, regardless of their wealth bracket, behave differently in this climate. Private banking clients tend to lower their risk appetite, gravitating towards conservative products with lower yields and margins. However, my private bankers must also be able to give clients the confidence to look beyond the downturn, instead of focusing on the storm clouds. It’s essential that we take a fresh look at our clients’ changing situation or new environment. Then we make sure our products and services adapt to help clients navigate the storm and come out on top.

- Barend Janssens

Head

ABN Amro Private Banking, Asia

THE US is a major consumer of goods and services which are manufactured all over the world. In the case of electronic goods, consumer demand will fall. Singapore, as a manufacturing site for such products, will be affected. Both facility and equipment utilisation will consequently be impacted.

Following from this, there is likely to be a reduction in labour and overhead costs by businesses to keep costs low and ride through the storm.

There is no miracle solution to overcoming recession as it is part of the business cycle. During a recession, businesses have to be prudent and keep a tight control over costs. We also have to explore other markets such as China and India to sell our goods but this does not happen overnight.

The government can provide support in terms of incentives, rental reductions, property tax adjustments, energy rate cuts and other such measures which will help companies through the turbulent period.

- EH Lim

CEO

Avi-Tech Electronics

IN MY view, the US will definitely suffer a recession this year due to the sub-prime problems and this will cause a global economic meltdown. Stock markets worldwide will decline by not less than US$7 trillion. The US consumes 25 per cent of the world’s products so a recession there will affect the world’s economies. Even Singapore’s growth this year is likely to be less than 4 per cent because of it.

The travel and tour industry will also slow down. Luckily, Singapore is a debt-free country; its dollar may well be equal to the greenback at some point.

SA Tours will promote travel to the US, for enjoyment as well as to build relationships to do business there. Singapore is a marketing hub and Singaporeans can market products produced in the US throughout Asean. A recession in the US may well be an opportunity for Singaporean businessmen to do business with Americans.

- Ng Kong Yeam

Group Executive Chairman

Sino-America Tours Corporation Pte Ltd

Others

A US recession would have varying degrees of impact on multinational organisations in Singapore, as well as the local economy, given that Singapore is a major trading partner of the US. However, as for the IT industry, we don’t foresee a huge negative impact in our region as economies like Singapore are still experiencing buoyant growth and companies are investing in technology solutions to provide them competitive advantages.

In fact, we believe that a critical aspect to managing such potential risks for organisations is to have access to accurate and timely information and business intelligence tools that facilitate quick and effective decision-making.

- VR Srivatsan

Vice-President, South Asia

Business Objects

CREDIT crunch, downturn, or recession, the coming year is going to be a challenge for the global economy – and the IT industry will face the same pressures. While there’s no doubt that tighter belts will mean IT departments paying close attention to IT vendors and service providers performance, it will not be simply the case of the thumb-screws coming out.

In our case, even amid economic uncertainty last year, Interwoven’s fourth quarter and full-year performance was the highest we have ever recorded. During an economic slowdown, we can see an increase in online marketing budgets – more cost effective than traditional marketing methods. So while the spend from IT may reduce in a slowdown, we expect to have access to a larger portion of the marketing budget. The tougher times are, the more important it is for companies to measure and make the most value out of their budgets.

We anticipate that other IT vendors and service providers will also find a niche to prosper during these times of economic uncertainty. Companies are realising that business efficiency can be improved by innovating aspects of their business using IT.

- Sanjay Aurora

Vice-President of Asia Pacific

Interwoven

Source: Business Times 3 Mar 08

Bernanke doesn’t utter R-word but he means it

His replies confirm economy is in recession: analysts

(NEW YORK) US Federal Reserve chairman Ben Bernanke didn’t utter the word, but analysts reading between the lines of his testimony to the US Congress this week say that he came as close as a central bank chief can to acknowledging the chances of recession.

Since the start of the global credit squeeze in mid-2007, the Fed has been cautious about suggesting US economic and financial conditions could get worse, in part for fear that markets might overreact.

Yet speaking before Congress on Thursday, the Fed chairman held true to his vow for greater transparency, predicting that economic growth, which slowed sharply in the fourth quarter of 2007, would not return to normal levels until at least 2010.

‘While the National Bureau of Economic Research (NBER) has yet to decide whether the US economy is in recession, Mr Bernanke’s replies have all but confirmed the economy is already in recession,’ said Ashraf Laidi, chief foreign exchange strategist at CMC Markets US in New York.

The NBER is considered the official arbiter of US recessions, but their calls tend to lag the actual start of a contractionary period by about three to six months.

Not only did Mr Bernanke offer a glum outlook for growth complicated by rising inflation, he also indicated that even his already depressed forecasts might be overly optimistic.

‘The risks to this outlook remain to the downside,’ Mr Bernanke said. ‘The risks include the possibilities that the housing market or labour market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further.’

It is not difficult to see how some observers might interpret strong words as these from a measured man like Mr Bernanke as a sign of real concern.

‘If you acknowledge a recession it’s your fault, so that’s one reason not to be the first to do it,’ said Alan Skrainka, chief market strategist at Edward Jones, in St Louis, Missouri.

The threat of a prolonged recession is not negligible. What started as a US housing market slump has since spread through the financial system like a wildfire, beginning with assets directly linked to sub-prime mortgages and then extending to bonds formerly deemed safe as mistrust in the banking sector soared to new heights.

Mr Bernanke also attempted to rein in inflation expectations by saying the central bank would remain vigilant on price pressures which have become more apparent after both producer and consumer inflation jumped in data released this month.

These developments not only complicated the Fed’s task of regulating the monetary lever, but could also paradoxically worsen the economic situation. Since any possible recession is expected to be driven by a retrenchment in consumer spending, further damage to purchasing power from rising costs could force a downward spiral.

The economy is not close to a 1970s-style mix of stagnant growth and high inflation, Mr Bernanke told the Senate banking committee, but he painted a generally dour outlook and cautioned that the downturn is likely to cause some small banks to go under.

‘I don’t anticipate stagflation,’ he said.

Some analysts have become increasingly worried about that possibility after recent high readings on inflation and weak readings on growth.

‘I don’t think we’re anywhere near the situation that prevailed in the 1970s,’ he said.

Source: Reuters, LAT-WP (Business Times 1 Mar 08)

Bernanke’s signal for rate cut stokes fears of inflation

Investors worry that stagflation could hit the US but Fed chief rejects the notion

WASHINGTON – UNITED States Federal Reserve chairman Ben Bernanke’s readiness to cut interest rates to avert a recession is stoking concerns that prices will get out of hand.

‘Mr Bernanke has really overweighted the economic risks relative to inflation,’ said Mr John Silvia, chief economist at Wachovia, following the Fed chief’s second and final day of testimony to Congress on Thursday.

‘He may get some disagreement’ among colleagues on the Federal Open Market Committee, Mr Silvia said.

Investors’ expectations for inflation over the next 10 years jumped to the highest since last June after Mr Bernanke said the US central bank will act in a ‘timely manner’ to combat ‘downside risks’ to growth – a signal to investors that the Fed will again cut interest rates.

The hope is that lower interest rates will encourage consumers and businesses to spend more, while the risk is that the weaker US dollar that will result from lower rates will cause prices of goods and services to be adjusted upwards. A falling US dollar has also seen investors put more of their money into commodities, driving up the prices of oil, metals and food.

Fears have grown that the US could come under the grip of stagflation, when stagnant growth is combined with rising inflation, for the first time in decades.

Mr Bernanke rejected the notion.

‘I don’t anticipate stagflation,’ he told lawmakers. ‘I don’t think we’re anywhere near the situation that prevailed in the 1970s.’

Mr Bernanke added that he expects inflation to calm down, in part because of sluggish economic growth and rising unemployment.

For now, he said, the biggest risk is the weakening economy.

Traders now see a 100 per cent chance that the Fed will lower its target rate for overnight loans between banks by at least a halfpoint, to 2.5 per cent at its next meeting on March 18.

Mr Bernanke acknowledged that with oil prices hitting all- time highs and food prices rising, the Fed was ‘in a difficult situation’.

‘While we can’t do much about oil prices or food prices in the short run, we do have to be careful to make sure that those prices do not either feed substantially into other types of prices,’ he said, adding that the Fed must ensure that the public stays ‘confident’ that it will control inflation.

Consumer prices last year surged 4.1 per cent, the most in 17 years, while wholesale prices were up 7.1 per cent, the biggest 12-month increase since 1981.

And consumers are expecting prices to keep on rising. Households’ estimate of price increases one year ahead reached 3.7 per cent last month, the highest since August 2006, according to a poll by the University of Michigan.

Source: BLOOMBERG NEWS, ASSOCIATED PRESS (The Straits Times 1 Mar 08)

Greenback sinks further, nears new low against euro

LOS ANGELES – IN THE Federal Reserve’s battle to keep the United States economy from a severe downturn, the beleaguered US dollar is getting walloped anew.

That is going to worsen the sticker shock for Americans headed overseas or buying some of their favourite imported goods.

But it also will underpin the current boom in US exports, which has helped offset some of the economic pain of the housing bust – at the expense of Asian and European exporters.

The dollar hovered near a record low against the euro at US$1.511 in Tokyo trading yesterday, just off a record of US$1.5144 struck on Wednesday.

Six years ago, one euro could fetch less than 87 US cents.

The dollar also fell to its lowest level in years against the Singapore dollar, Australian dollar, Swiss franc, Brazilian real, Russian rouble and a number of other currencies.

The latest plunge in the greenback’s value followed Fed chairman Ben Bernanke’s testimony on Capitol Hill on Wednesday, where he described the economy as ‘distinctly less favourable’.

He also made it clear that the US central bank was more worried about risks to growth than inflation.

He all but assured Congress that the central bank would continue to cut short- term interest rates.

To currency traders worldwide, that was a signal to dump the dollar again, deepening what has been a losing trend for the greenback since 2001.

Generally, the weaker a country’s economy is and the lower its interest rates, the weaker its currency gets as some global investors opt to take their money elsewhere – in the process selling one currency to buy another.

Wall Street is now convinced that the Fed will slash its benchmark rate by 50 basis points to 2.5 per cent from 3 per cent – a bigger cut than previously expected – when the central bank’s policymakers meet on March 18.

By contrast, the European Central Bank has held its key rate at 4 per cent since last June and shows no sign of wanting to join the Fed in easing credit. Higher European rates support the euro’s value at the dollar’s expense.

Source: LOS ANGELES TIMES (The Straits Times 29 Feb 08)

Orders for big-ticket US-made goods plunge 5.3% in Jan

(WASHINGTON) Signs of sluggish growth continue to beset the US economy with orders to US factories for big-ticket manufactured goods plunging in January by the largest amount in five months, even as Federal Reserve chairman Ben Bernanke sent a fresh signal that the central bank will again lower interest rates.

The Commerce Department reported yesterday that new orders dropped by 5.3 per cent last month, reflecting declines across a wide swath of industry from commercial aircraft and cars to heavy machinery and computers as manufacturers got caught in the weakness engulfing the rest of the economy.

The worse-than-expected decline was the latest in a string of reports indicating that the economy, battered by a prolonged slump in housing, a serious credit squeeze and soaring energy prices, is in danger of toppling into a recession.

‘The economic situation has become distinctly less favourable’ since the summer, the Fed chief told the House Financial Services Committee in his semiannual economic report to Congress.

Since Mr Bernanke’s last such assessment last summer, the housing slump has worsened, credit problems have intensified and the job market has deteriorated. Mr Bernanke said that the confluence of these factors has turned people and businesses alike to adopt a more cautious attitude towards spending and investment. This, he said, has further weakened the economy.

Incoming barometers continue to ’suggest sluggish economic activity in the near term’, Mr Bernanke told the House Financial Services Committee. At the same time, he added, the Fed must keep a close eye on inflation given the recent runup in energy and other prices paid by consumers and businesses.

For now, though, the No. 1 battle is shoring up the economy.

Mr Bernanke pledged anew to slice a key interest rate to help the wobbly economy, which many fear is on the verge of a recession – or possibly has already toppled into one.

The Fed ‘will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks’, Mr Bernanke said, hewing closely to assurances he offered earlier this month A growing number of analysts believe the economy will slip into a recession this quarter although they expect the downturn to be short and mild, thanks to aggressive interest rate cuts from the Federal Reserve and a US$168 billion economic stimulus package passed by Congress earlier this month.

Source: AP, AFP, Reuters (Business Times 28 Feb 08)

Stimulus will leave US even more vulnerable, experts warn

Stimulus will leave US even more vulnerable, experts warn

WASHINGTON – EVEN if Federal Reserve chairman Ben Bernanke, United States President George W. Bush and the US Congress win the battle to avert a recession in the US this year, they risk losing the war to strengthen the economy for the long term.

US economic growth will get a boost in the second half of this year, as consumers spend some of the US$107 billion (S$150.6 billion) in tax rebates passed by Congress and signed by Mr Bush this month.

The US may suffer a letdown afterward, as the kick from the stimulus wears off, leaving the economy vulnerable to its underlying weaknesses: a retrenching financial industry, indebted consumers and slowing productivity growth.

‘This is not a one- or two-quarter phenomenon,’ says economist Neal Soss of Credit Suisse. ‘This is not a V-shaped event. It’s a slowgrowth scenario.’

Fed officials see growth picking up to more than 2 per cent next year, as inflation ebbs to 2 per cent or below.

Mr Bernanke is slated to discuss the central bank’s forecast in a testimony to Congress tomorrow and on Thursday.

So far, the Fed’s deepest interest rate cuts since 2001 have not helped the financial markets or the economy. What they have caused is an increase in inflation expectations, with the price of gold soaring to a record US$958.40 an ounce last week.

What is more, say economists Soss and Ethan Harris of Lehman Brothers, policymakers face structural changes in the economy that are not so susceptible to the traditional tools of interest-rate and tax cuts.

As a result, Mr Soss sees the economy expanding just 1.3 per cent this year and about 1.5 per cent next year.

Mr Harris is even more pessimistic. He sees growth easing to 0.9 per cent next year from 1.1 per cent this year and 2.5 per cent last year.

Fed officials acknowledged in the minutes of their last meeting on Jan 29 and 30 that they were having trouble getting ahead of the credit squeeze in financial markets.

The financial industry is curtailing credit and conserving capital after a decade-long boom in profits went bust in the third quarter.

Following mounting losses on past loans, banks have already taken write-offs of US$163 billion since the beginning of last year.

A Fed survey released on Feb 4 found that banks had become stingier in granting credit during the previous three months.

Fed officials say they expect that to continue, making it harder for the central bank to stimulate the economy through lower borrowing costs.

‘The Fed can give liquidity to the markets, but the Fed cannot do much if the markets are afraid of solvency risks,’ said Mr Robert McTeer, a former Dallas Fed president.

Consumers, until now the driving force behind the expansion, are feeling the squeeze. While households will get a short-term boost from the coming tax rebates, their longer-run finances look shakier.

Households reduced their savings rate to virtually nil in December from close to 10 per cent of disposable income 15 years earlier.

That trend may reverse as credit becomes scarcer and home prices fall.

Mr Allen Sinai, chief economist at Decision Economics, calls the pullback by consumers ‘a seismic shift’.

‘For several years, the growth of consumer spending is going to be significantly below its long-run average of 3.5 per cent,’ he said.

Consumers have also been pinched by the rising cost of food, fuel and other necessities.

Inflation, as measured by the personal consumption price index, clocked in at a 3.5 per cent year- over-year rate in December, the highest for that month since 1990.

Behind the heightened inflation concerns: slowing productivity growth, making it harder for companies to recoup higher costs through increased efficiency.

Professor Robert Gordon, of Northwestern University, says the surge in productivity that began around 1995 was a one-time event sparked by the advent of the Internet.

Nobel laureate Edmund Phelps says there is little the Fed can do when faced with such a structural change.

‘We’ve had a series of booms, and it seems to me they are now over,’ says Mr Phelps, an economics professor at Columbia University.

‘As a result, we’re going to see a period of slower growth than in the past.’

BLOOMBERG NEWS (Source: The Straits Times 26 Mar 08)

Banking regulator sees more US mortgage defaults

WASHINGTON – Defaults are increasing among US homeowners with good, but not perfect, credit histories who obtained a non-traditional mortgage, a top US banking regulator said on Friday.

More pain can be expected as both borrowers with poor credit, who hold sub-prime mortgages, and borrowers with good credit, who hold Alt-A mortgages, see their interest rates reset, Federal Deposit Insurance Corp Chairman Sheila Bair said in prepared remarks for a speech in California’s Silicon Valley.

The Alt-A loan is generally made to borrowers who have good, but less than perfect credit histories and may involve less documentation of income and assets.

Ms Bair, who has been pushing banks and loan servicers to modify home loans, said new rules are needed to protect all homeowners and end compensation plans for brokers who steer borrowers into unaffordable mortgages.

About 85 per cent of borrowers with payment-option loans, one type of Alt-A mortgage, now owe more than they did at the time of origination, she said. About 75 per cent are making the minimum payment.

‘The problems associated with these products are already evident,’ Ms Bair said. ‘We’re seeing a rash of ‘first-year defaults’ among Alt-A loans to speculators and borrowers who should never have been qualified for the loan in the first place.’

Ms Bair has warned that a wave of loan problems involving prime borrowers looms next year because about US$600 billion of nontraditional mortgages were issued to prime borrowers in recent years.

Non traditional mortgages flourished after 2003, thanks to easy credit and double-digit home price increases in some markets.

Ms Bair and other banking regulators say one of the causes of the sub-prime mortgage mess stems from non-bank lenders that flew under regulatory radar while criteria to get a loan were lowered.

She also said a recent proposal by the US Federal Reserve Bank to amend the Truth-In-Lending rules, which apply to advertising and disclosure of interest rates and terms, are an important first step forward.

‘The home mortgage market needs strong rules,’ she said. ‘We need rules that apply acrossthe-board so they protect all homeowners, regardless of who their lender is, or what state they live in. We need rules that apply to banks and nonbanks alike.’

Source: REUTERS (Business Times 23 Feb 08)

US recession may be as deep as in the 1990s

Fed likely to remain aggressive about cutting rates as a result, says Merrill

NEW YORK – THE United States is in a recession that could be much worse than what it faced in 2001, and closer to the sharper economic slump of the 1990s, investment bank Merrill Lynch has said.

The bank also said the US Federal Reserve would likely remain in ‘aggressive rate-cutting mode’ as a result, cutting rates by 50 basis points on March 18.

Merrill argued that the manufacturing slowdown in the US mid-Atlantic region showed a ‘collapse in business confidence’ to levels not seen since the 1990s recession.

‘A pullback in the outlook of this magnitude could be extremely corrosive to the economy because it means shuttering production, slashing inventories, deeper job cuts and even cancelling capital expenditure plans,’ Merrill said in a report on Thursday.

The Philadelphia Federal Reserve’s business activity index, a reading of factories in the mid-Atlantic region that is viewed as a precursor of national factory performance, fell to minus 24 this month, below expectations for a minus 11.

Readings below zero show contraction in the industrial sector.

The reading was worse than even the most pessimistic Wall Street forecast, and suggested that economic deterioration is happening even more rapidly than many expected as the housing downturn continues unabated.

‘The debate is no longer about whether the economy is in a recession. In our view, it is about how hard the landing will be,’ Merrill said.

The six-month outlook in the region has collapsed from a cycle high of 39.6 last October to minus 16.9 this month, the steepest decline ever recorded by the Fed report, the bank noted.

‘This is clearly pointing to an economy that is in a recession,’ said Mr Eric Green, an economist at Countrywide Financial.

The softness was pervasive and looked to be getting worse, with the index of six-month business conditions falling to its lowest level since 1990.

New orders remained in negative territory but improved to minus 10.9 from minus 15.2, although employment did turn positive after a dip last month.

Separately, the Conference Board’s index of leading US economic indicators fell for a fourth straight month in January, dropping 0.1 per cent and corroborating the weakness seen elsewhere in the economy.

‘Four monthly declines in a row ordinarily is taken as an indicator of a manufacturing recession,’ said Mr Pierre Ellis, a senior economist at Decision Economics.

These concerns drove the stock market sharply lower and triggered a rally in the US Treasury bond market.

The Dow Jones Industrial Average fell 142.96 points, or 1.2 per cent, to 12,284.3 at the closing bell on Thursday.

Source: REUTERS (The Straits Times 23 Feb 08)

US Fed to focus on growth with possible risk of inflation

Most other central banks put a single goal above all others: stable prices

(WASHINGTON) A nightmare scenario of rising prices and falling growth emerged on Wednesday as the US government reported that consumer prices are surging even as the beleaguered housing sector remains stuck in its worst slump in a quarter century.

The combination of inflation and faltering growth – the infamous ’stagflation’ of the 1970s – creates a potential double bind for economic policymakers: Fight one and you risk feeding the other.

To the amazement of many analysts, however, the Federal Reserve Board signalled that it already has decided how it intends to attack that problem: By fighting the slowdown through continued interest rate cuts, while accepting the risk of higher prices.

In the minutes of its late January meetings and several conference calls released on Wednesday, central bank officials made clear that they would go for growth even if it means somewhat higher inflation.

‘In 2007, they were balancing their two objectives of price stability and sustainable economic growth,’ said Vincent Reinhart, former director of the Fed board’s division of monetary affairs. But now, said Mr Reinhart, ‘they care about growth first. They’re going to take a chance with inflation, and if you look at their projections they think they can get away with it’.

The danger is that prices will get out of hand as they did in the 1970s, and as they gave some hint of doing again in the report of January inflation.

The 0.4 per cent increase in the overall Consumer Price Index reported for last month was higher than analysts had expected. But what was most striking about the latest report was that the rises were not limited to the usual suspects, food and energy. Instead, they involved things that previously had fallen or remained stable – and thus had helped offset the recurrent food and energy increases.

Computer prices, for instance, which had tumbled 12 per cent over the past year, rose one per cent last month, said Stephen Cecchetti, former research director of the New York Federal Reserve Bank.

And restaurant meals, which have been stable till now, rose at a 4.9 per cent annual rate, he said.

And some analysts said the Fed’s decision to put boosting growth ahead of curbing inflation was almost immediately reflected in some new price increases. The benchmark gold price in New York rose to US$934.60 an ounce, up US$8, as investors snapped it up as a hedge against the inflation some fear the Fed will cause.

The Fed’s new priorities, together with tight supply, could have the same effect on oil. ‘I think oil has a shot at hitting US$150 a barrel before the end of the year,’ said Peter Schiff, CEO of Euro Pacific Capital, a brokerage house. ‘This is a highly inflationary period, and we’re creating the inflation.’

Over the past month, Fed leaders repeatedly signalled that their long-standing concern about inflation was giving way to worry about growth, housing and a freeze-up of the financial markets.

And the Fed’s policymaking Federal Open Market Committee made some of the steepest interest rate cuts in the central bank’s history in January.

But until Wednesday, the Fed had not said that it thinks rates will have to be held ‘relatively low’ for an extended period, as the newly released minutes do. Nor had it acknowledged that the low rates will mean somewhat higher inflation, as the forecasts included in the minutes effectively do.

‘Several participants noted that the risks of a downturn in the economy were significant,’ said the minutes of the Fed’s conference calls on Jan 9 and Jan 21 and Jan 29-30 meeting. ‘Many participants were concerned that the drop in equity prices, coupled with the ongoing decline in house prices, implied reductions in household wealth that would likely damp consumer spending.’ Some members of the FOMC said that when the economy had improved ‘a reversal of a portion of the recent easing actions, possibly even a rapid reversal might be appropriate’, said the minutes.

Still, policymakers suggested that their interest rate cuts are not feeding inflation as the economy is so weak there’s no pressure to push up prices. Their position was hard to square with the latest report of price rises and a pick-up in the speed of those rises.

The depth of the economic quandary in which the country and the Fed find themselves, and risk that policymakers are running in pursuing the strategy they have chosen is clearest when contrasted with that of other central banks. Most of the world’s central banks put a single goal above all others – stable prices.

‘The Fed is inverting that,’ Mr Reinhart said. ‘They’re putting growth first.’ Supporting the Fed’s slow-growth outlook, the Commerce Department said on Wednesday that housing construction puttered along at a 1.012 million home rate in January. That was a pick-up of 0.8 per cent from December’s pace. But analysts wrote off the improvement as a fluke.

Fed policymakers predicted that anaemic growth will nudge up the unemployment rate from its current 5 per cent to between 5.2 per cent and 5.3 per cent this year. That was up from their previous prediction of 4.8 per cent to 4.9 per cent.

Most strikingly, they forecast that the combination of their own growth-spurring interest rate cuts and other forces at work in the economy will cause inflation to rise faster than they had predicted previously. Using their favoured way of measuring inflation, they predicted an overall increase in prices of between 2.1 per cent and 2.4 per cent, higher than their previous prediction of 1.8 per cent to 2.1 per cent, and higher too than what was widely thought to be the outer limit of their comfort zone with inflation of 2 per cent.

Within the CPI, the so-called core inflation rate – excluding food and energy – was up 2.5 per cent for the 12 months ended Jan. 31.

 

Source: LAT-WP (Business Times 22 Feb 08)

‘US has slipped into recession’

NEW YORK – THE United States economy is in a recession, albeit a mild one, as a weakening consumer sector has compounded ongoing problems in the housing and credit markets, according to UBS economists.

‘It’s not coming. It’s here,’ UBS said in a research report on Wednesday.

The Federal Reserve on Wednesday sharply lowered its forecast for US economic growth for this year, but it is still expecting the economy to avoid a recession. Citing a deepening housing slump and tight credit, the Fed lowered its forecast to between 1.3 per cent and 2 per cent from a range of 1.8 per cent to 2.5 per cent it had projected in November last year.

UBS economists forecast US gross domestic product to fall 0.6 percentage point from the end of last year to the middle of this year.

The projected mild contraction will be led by the first decline in personal spending since the recession of 1991, UBS said.

Last month, the US government said the economy grew at an annual rate of 0.4 per cent in the fourth quarter of last year and expanded 2.2 per cent for the entire year, the weakest pace in five years.

Source: REUTERS (The Straits Times 22 Feb 08)

LATEST US DATA: US inflation gathering steam

Core readings above market forecasts; more grim news on the property front

(NEW YORK) US inflation accelerated in January in a worrying sign for the Federal Reserve’s campaign to bolster the flagging economy, while a separate report yesterday showed more troubling signs for the beleaguered housing market.

Annual consumer price inflation increased to an unexpectedly strong 4.3 per cent in January from an already elevated rate of 4.1 per cent in December, according to the Labor Department.

On a monthly basis, rising food costs helped push consumer prices up for a second straight month in January by 0.4 per cent, more than offsetting a moderation in energy price rises.

Excluding volatile food and energy items, growth in core consumer prices accelerated to 2.5 per cent from 2.4 per cent in December, a level that is likely to make Fed policy-makers uncomfortable.

The bad news on inflation was coupled with more grim news from the housing market, with permits to break ground on new US homes in January decreasing 3 per cent to the lowest rate in more than 16 years.

With the housing market’s problems now well publicised, financial markets focused on the inflation, which could complicate the Fed’s efforts to shore up the economy through a continuation of aggressive interest rate cuts.

‘The concern is on the inflation side. We are seeing an elevated trend, especially in the core,’ said Kevin Flanagan, fixed income strategist for global wealth management at Morgan Stanley in Purchase, New York.

Wall Street opened lower in the wake of the unexpectedly strong consumer prices but the dollar rose. Government bonds, which usually wilt at the prospect of inflation, fell in the wake of the consumer price release.

Economists polled by Reuters had expected a monthly rise of 0.3 per cent in consumer prices for an annual inflation rate of 4.2 per cent. The core readings were also above market forecasts of a 0.2 per cent increase month-on-month and 2.4 per cent year- on-year rise.

In the housing market, permits slipped to a 1.048 million annual rate, the weakest since a 984,000 rate in November 1991.

Permits are an indicator of builder confidence in future housing activity.

Starts rose to a 1.012 million annual rate, but it was only a slight rebound from the revised 1.004 million pace in December, which was the lowest pace for starts since May 1991.

In more dour housing news, US mortgage applications plunged last week, and demand hit the lowest level since the start of the year as interest rates surged, an industry group said. The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications for the week ended Feb 15 fell 22.6 per cent to 822.8, the lowest level since the week ended Jan. 4.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.09 per cent, up 0.37 percentage point from the previous week, the highest since late December.

 

Source: Reuters

Rising costs, strapped consumers squeeze top US foodmakers

(CHICAGO) For more than a year, food makers and other consumer products companies have passed on much of the burden of rising commodity costs to consumers.

In fact, companies like H J Heinz and Hormel Foods proved again with earnings forecasts and announcements on Friday that this was still the case early this year, fuelling a rally in food stocks. But that relief could prove short-lived, because 2008 could be the year American consumers start shunning branded products for less expensive private-label alternatives, industry experts warn.

Such a shift could hurt profits at the companies that already have exhausted most measures to cut costs and become more efficient over the past several years in the wake of soaring prices for wheat, cocoa, milk and energy, just to name a few. ‘When you say input costs are going up 6 per cent and you are only getting 4 per cent net pricing, where do you make up the rest?’ asked Gregg Warren, an analyst at Morningstar.

Rising commodity costs and economically stressed consumers were expected to be the main topics when consumer products company executives meet analysts at the Consumer Analyst Group of New York conference in Florida that began yesterday.

For the past several years, many of the big food and consumer products companies have tried to mitigate rising commodity costs by cutting jobs, closing plants and taking other steps to become more efficient.

They also passed some of those costs to consumers with price increases, generally finding little resistance as shoppers continued to eat brand-name foods and use brand-name soap, while cutting back in other areas.

But the pricing power is not unlimited by any means, Ken Harris, a principal at consulting firm Cannondale Associates, said. While the round of price increases that went into place a few weeks ago might not cause a major change, the next will, he said.

Concerns about higher costs and weaker pricing power had led to a sharp downturn in stocks that would normally perform well as defensive plays in an economy that might be on the brink of a recession. Even after a rally on Friday morning, the Standard & Poor’s packaged foods index is down 5 per cent this year.

The S&P household and personal care index is down 8 per cent.

‘We think investors remain rightfully focused on US economic weakness and the potential effects around the globe,’ Bear Stearns said in a research note about the Florida conference.

Consumers have already started trading down in juice and milk, said Brian Morgan, a senior research analyst at Euromonitor International. He also said he expected to see moves down in other staples like bread.

Source: Reuters

Investors looking for some clarity on the economy

WALL STREET INSIGHT

Focus on consumer price report, results of retail giants

AFTER somewhat of a comeback week for US stocks following the previous week’s heavy losses, investors will be forgiven if they feel as though they’ve got no idea what’s coming next.

Indeed, the events of the past week alone would normally be enough to keep Wall Street talking for a month: Yahoo’s rejection of Microsoft’s unsolicited takeover offer, Warren Buffet’s offer to assume US$800 million of bond liabilities from the three major bond insurers, Fed chief Ben Bernanke’s dour outlook for the economy, and the lowest consumer sentiment reading reported by the University of Michigan since February 1992.

‘I wouldn’t read very much into last week’s gains insofar as what it means for how the stock market is going to be trading in the coming week,’ said Joe Battipaglia, chief investment strategist at Ryan & Beck, who attributed most of the week’s advance to buying into an oversold market.

‘I see stocks bouncing up and down like they’ve been doing until we get some clarity on the economy and on how much more in writedowns are still to come from the financial sector,’ he said.

The uncertainty over the economy’s fate was mirrored in several reports last Friday, two of which pointed toward a recession, the other showing the economy holding up. In addition to the slump in consumer sentiment, Wall Street got the lowest reading in the Empire State manufacturing survey since May 2003.

But the January industrial production report showed a rise of 0.1 per cent putting it back to the record level hit in September, hardly a sign of recessionary contraction.

‘Most people believe that we’re either already in a recession or that a recession is an inevitable occurrence, but we’re still getting enough contradictory evidence to support an argument that we might not slump into negative growth,’ said Joel Naroff, president of Naroff Economic Advisors, who believes that the chances of a recession are now better than 50 per cent. Perhaps that signal that a recession is not necessarily such a foregone conclusion is what enabled the S&P 500 to eke out a 1.13 point, or 0.1 per cent gain, to 1,349.99 points.

However, the Dow Jones Industrials did not fare as well, slipping by 28.8 points, or 0.2 per cent, to end at 12,348.212. The Nasdaq Composite also finished in the red, giving up 10.74 points, or 0.5 per cent, to 2,321.80.

All three indexes registered gains for the week. The Dow and the broader S&P 500 advanced 1.4 per cent each while the Nasdaq was up 0.7 per cent.

The ongoing credit crisis and the recession fears that continue to dog the stock market will make a repeat performance difficult.

Meanwhile, crude oil has been on a comeback of its own of late, gaining 4.1 per cent last week to US$95.50 per barrel, its biggest weekly gain since November.

The US stock market will be closed on Monday for the President’s Day holiday, so investors will only have four days of trading to decide on whether stocks will rise or fall this week.

With signs growing that consumer spending, which is responsible for 70 per cent of the US economy, is waning, Wall Street will be keeping a close eye on fourth-quarter earnings reports from JC Penney and retailing king Wal-Mart Stores for further indications of a slowdown.

Wednesday’s consumer price report will also be under the investor spotlight, as inflationary pressures have been rising, which could further weaken consumer spending.

Reports from the beleaguered housing sector, which Fed chief Ben Bernanke noted remains the key to just how bad the US economic slowdown will become, are due tomorrow. Investors will hear more from the Fed on Wednesday when minutes from its most recent meeting will be released.

Wall Street also will get a look on Friday at the Philadelphia Federal Reserve’s manufacturing survey, whose poor showing last month set off alarm bells to many on Wall Street that recession was on its way.

On the fourth-quarter earnings front, tech heavyweight Hewlett-Packard also reports this week, as do Whole Foods, Newmont Mining, PG&E, Trump Entertainment and MGM Mirage, amongst others.

But earnings reports from several foreign banks could draw the most interest from investors, who are on high alert for more sub-prime mortgage related write-downs. Barclays, UBS and Societe Generale, whose US$7 billion trading scandal erupted two weeks ago, are due to report.

 

Source: Business Times 18 Feb 08

Signs of US stagflation will pass off, say economists

Weakening demand will eventually cool inflation, they say

(WASHINGTON) A clutch of distressing US economic data on Friday rekindled fears of 1970s-style stagflation, but the current bout of slow growth and rising costs should be short-lived.

While there is little hope of a quick reprieve for US consumers coping with petrol around US$3 per gallon and rising costs for groceries ranging from soup to diapers, the good news is that conditions are unlikely to worsen, and slackening demand will eventually cool inflation.

‘We’re about to find out if high prices are their own cure,’ said Citigroup economist Steven Wieting, adding that higher prices have already eroded real wage gains and put a damper on consumers’ discretionary purchases.

Mr Wieting and other economists argue that higher prices will inevitably curb demand, and as demand slows, companies will end up absorbing more of the pricing pressure. While energy costs may not fall dramatically, they probably won’t rise as fast as they did last year. In January, petroleum import prices jumped 67 per cent on a year-over- year basis, Mr Wieting noted.

Friday’s economic data showed manufacturing growth in New York fell to its weakest since April 2003, import prices rose much more sharply than anticipated, and the Reuters/University of Michigan Surveys of Consumers index hit a 16-year low while inflation expectations spiked.

‘The latest set of US numbers will play to market talk of stagflationary tendencies,’ said Alan Ruskin, chief international strategist at RBS Greenwich Capital.

Still, former US Federal Reserve chairman Alan Greenspan said on Thursday that stagflation was ‘too strong a term for what we are on the edge of’, adding the likelihood of a US recession was ‘50 per cent or better’.

His successor Ben Bernanke disagrees on the recession prediction and thinks inflation will moderate in the coming quarters.

He is far from alone on the inflation prediction.

Lakshman Achuthan, managing director at the Economic Cycle Research Institute, said his group’s future inflation gauge remained in a downtrend, even as its weekly index of leading economic indicators hit recessionary levels.

‘Consumers have been losing the battle at the pump, where gas prices have been high, but winning the war on inflation at the checkout counter, where in spite of higher import prices, stores like Wal-Mart are making repeated rounds of price cuts to keep consumers purchasing,’ he said.

With wheat hitting an all-time high of US$11.53 per bushel and oil creeping back towards US$100 per barrel, corporate profit margins are hurting.

Martin Baily, a senior fellow at the Brookings Institution and former economic adviser to President Bill Clinton, said there was one key ingredient missing from the current episode of stagflation – rising wages.

It is the vicious circle of rising prices leading to wage increases and still higher prices that has marked previous severe episodes of stagflation like the 1970s.

Citigroup’s Mr Wieting said that unlike that period, labour unions have limited negotiating power now, and are unlikely to have much success pushing for big cost-of-living raises.

‘I don’t know anyone who gets a higher wage because the cost of driving has gone up,’ he said.

 

Source: Reuters (Business Times 18 Feb 08)

2008 not necessarily like 2007: UBS

(ZURICH) UBS AG does not expect 2008 to be a year like 2007, when the Swiss bank wrote down US $18 billion in bad credits and posted the first loss since its creation, its chief executive was quoted as saying yesterday.

‘I view the environment as difficult due to great uncertainties related to the US economy. Nervousness will remain high in the markets. But you cannot conclude from that that 2008 will be a year like 2007 for UBS,’ UBS chief executive Marcel Rohner told newspaper NZZ am Sonntag.

UBS, the world’s largest manager of affluent people’s money, is Europe’s biggest casualty of the credit crunch by far. Investors fear the possibility of billions of dollars in new sub-prime writedowns.

Mr Rohner said UBS’s investment banking business would concentrate in 2008 on its strengths in customer business, such as equities and mergers and acquisitions advisory business.

‘Our goal is to give the businesses that do excellent work the space to develop further, while isolating the problem portfolios in the US mortgage market, managing them separately and quickly reducing the risks,’ he said.

UBS has published details of its exposure to problem areas in US debt, totalling US$88 billion at the end of 2007, including US$27.5 billion in sub-prime debt.

But Mr Rohner said the figure could not be used to predict losses, as it comprised highly diverse positions and risks. ‘The quality of our investment in leveraged buyouts, for example, is much better than in complex securities based on mortgages with poor debtor quality,’ he noted.

Mr Rohner said it was not currently possible to sell intact structured products. But where a collateralised debt obligation structure had become insolvent, UBS had been able to reduce its risks by selling the underlying securities at prices in line with their current valuation by the bank.

UBS’s private banking business has not been affected by the blow to the bank’s reputation, Mr Rohner said. Private banking recorded net inflows of more than 30 billion Swiss francs (S$38.8 billion) in the fourth quarter of 2007, and net inflows continued in January.

Mr Rohner defended the continuing payment of bonuses amid the losses, as the losses arose from real estate loans handled by a small part of the bank. Other areas of the bank had worked well and it was important to continue to motivate staff producing these results by treating them fairly.

 

Source: Reuters (Business Times 18 Feb 08)

IMPROVING OUTLOOK: UBS expects this year to be a better one

ZURICH – UBS does not expect this year to be like the last, when the Swiss bank wrote down US$18 billion (S$25.5 billion) in bad credits and posted the first loss since its creation, its chief executive officer (CEO) was quoted as saying yesterday.

‘I view the environment as difficult due to great uncertainties related to the United States economy. Nervousness will remain high in the markets. But you cannot conclude from that that 2008 will be a year like 2007 for UBS,’ CEO Marcel Rohner told Swiss daily newspaper NZZ am Sonntag.

UBS, the world’s largest manager of affluent people’s money, is Europe’s biggest casualty of the credit crunch by far. Investors fear the possibility of billions of dollars in new sub-prime write-downs.

Mr Rohner said UBS’ investment banking business would this year concentrate on its strengths in customer business, such as equities and mergers and acquisitions advisory business.

‘Our goal is to give the businesses that do excellent work the space to develop further, while isolating the problem portfolios in the US mortgage market, managing them separately and quickly reducing the risks.’

UBS has published details of its exposure to problem areas in US debt, totalling US$88 billion at the end of last year, including US$27.5 billion in sub-prime debt. But Mr Rohner said the figure could not be used to predict losses, as it comprised highly diverse positions and risks.

Last December, the Government of Singapore Investment Corp bought a 9 per cent stake in UBS for 11 billion Swiss francs (S$14.2 billion).

On Jan 30, UBS announced a 12.5 billion Swiss franc loss for the final three months of last year and a full-year loss of 4.4 billion Swiss francs, a record for the bank. This was due to a higher-than-expected US$14 billion write-down on assets connected to sub-prime mortgages in the US.

UBS was formed in 1998 after the Union Bank of Switzerland took over local rival Swiss Banking Corp.

 

Source: REUTERS (The Straits Times 18 Feb 08)

Asia won’t catch flu if US gets a cold, says MM Lee

With China and India propelling it, Asia won’t be ‘unduly disadvantaged’ by a recession in the US

ASIA – propelled by the twin engines of China and India – will not be ‘unduly disadvantaged’ if a recession hits the United States, said Minister Mentor Lee Kuan Yew last night.

‘I believe this may be the first time where the US economy catches a cold and we are not going to catch influenza – I hope,’ he said at the Singapore Airshow Aviation Leadership Summit dinner dialogue attended by about 200 aviation pundits.

The Chinese and Indian economies are unlikely to dip below 8, 9, or 10 per cent, he added, and while about 40 per cent of intra-Asian trade today is bound for the US, even if the US cuts its imports by half, Asia will not be too badly hit.

Zeroing in on the aviation industry, he was confident Asia will continue to soar high, as new airports are built and more people take to the skies.

He said: ‘I see enormous growth in Asia in the next 10, 20 years, more in Asia than in any other part of the world.’

China alone is looking at about 240 airports by 2020 and more than 500 by 2050 – and ‘that is just the beginning’ he said.

But on whether Asia, with its booming air travel sector, is well-placed to lead the aviation industry in all areas, including liberalisation going forward – an agenda that the International Air Transport Association (Iata) led by its head Giovanni Bisignani is trying to push – Mr Lee was a bit more sceptical, adding that ‘it will be very difficult’.

Countries with airlines that are not doing so well will want their flag carriers to grow stronger first before they open up. And while in his view, this is the ‘wrong approach’, it is nonetheless the reality.

Citing Singapore Airlines’ example, Mr Lee said its success shows how you become competitive when you are forced to compete internationally.

He remembers telling management and unions when Singapore Airlines (SIA) was set up as a separate entity from Malaysia’s national carrier that ‘if you can fly the flag and make a profit, I will be proud. If you cannot, let us forget it and somebody else can fly this flag’.

Everybody in SIA – from management, to pilots, to cabin crew and catering – understood that unless SIA was better than the rest, there was no reason for people to fly the airline.

Mr Lee said: ‘So I believe many of the problems that our neighbours are facing will go if they get international competition going and get international management to bring them up to speed. Then the whole region will prosper.’

Some progress has been made, he said, noting that by December, Asean will lift all restrictions on flights between capital cities of the 10 member states and by 2015, Asean national carriers will be able to criss-cross the skies over the region with no restrictions.

Turning to the other hot potato of global warming, Mr Lee was also asked during the 45-minute session for his reactions to attacks on the aviation industry by governments and organisations, primarily in Europe. Proposals have included taxes and penalties on airlines.

He replied that the industry contributes to about 2 per cent of man-made carbon emissions, but global warming has to be attacked in every way.

Still, if the problem is to be dealt with in a more cost-effective way, ‘then you must come to the conclusion that surely you can save more by rationalising air routes and have less of this prohibited flights and no-fly zones.’

Other things like more fuel-efficient jets, maybe the use of solar cells and many other options will also have to come.

According to industry average, one minute less of flight time saves 62 litres of fuel and 160kg of carbon emissions.

 

Source: The Straits Times 18 Feb 08

US on verge of recession: Greenspan

(SAN FRANCISCO) Former Federal Reserve chairman Alan Greenspan said the US economy is on the verge of its first recession in six years as falling home values hurt consumer spending.

‘We are clearly on the edge,’ Mr Greenspan told a group of energy-industry executives at the Cambridge Energy Research Associates’ 27th annual CERAWeek conference in Houston. He reiterated comments from last month that the odds of an economic contraction are ‘50 per cent or better’.

Mr Greenspan’s view has evolved from a year ago, when he saw a one-in-three chance of a recession, citing slowing profit growth and becoming one of the first economists to warn of the risk. Now, Wall Street firms including Merrill Lynch & Co and Goldman Sachs Group Inc are forecasting a contraction in the aftermath of the worst housing downturn in a quarter century.

Fed chairman Ben S Bernanke, Mr Greenspan’s successor, acknowledged ‘downside’ risks to the expansion on Thursday, while telling lawmakers he expects growth to pick up later this year. He reiterated the central bank is prepared to take ‘timely’ action to aid the economy as needed.

‘While we are at stall speed in the US at the moment, we haven’t yet seen the discontinuity that characterises a recession,’ Mr Greenspan said during a question-and-answer session on Thursday.

‘American business was in such extra-good shape before this problem hit. Otherwise we would be talking about how long and how deep. We are not there yet.’

The lack of available credit ‘hasn’t been a major problem yet for American business’, he added. Consumer spending has been slowed by falling home values, which leaves homeowners with less capital to borrow against, Mr Greenspan said.

‘Home prices will continue to weaken,’ the 81-year-old former Fed chief said. ‘When a bubble breaks, you go into primordial fear.’ The former chairman, a Republican, gave a nod toward Republican presidential candidate John McCain, comparing him with ex-president Ronald Reagan.

‘John McCain has the same roots as Reagan, being a Goldwater Republican.’

 

Source: Bloomberg (Business Times 16 Feb 08)

New trouble brewing as another debt market falters

Investors now refusing to buy US securities regarded not too long ago as safe as cash

NEW YORK – SOME investors got a big jolt from Goldman Sachs this week: Goldman, the most celebrated bank on Wall Street, refused to let them withdraw money from investments they had considered as safe as cash.

The investments at issue are so-called auction-rate securities, instruments at the centre of the latest squeeze in credit markets.

Goldman, Lehman Brothers, Merrill Lynch and other banks have been telling investors the market for these securities is frozen – and so is their cash.

Banks typically pitch these securities to corporations and wealthy individuals as safe alternatives to cash. The bonds are, in fact, long-term securities, but banks hold weekly or monthly auctions to set interest rates and give holders the option of selling the securities.

Only this week, almost 1,000 of these auctions have failed. The banks also refused to support the auctions, leaving many investors wondering when they will get their money back.

‘Investors have lost confidence in the liquidity of these instruments,’ said Mr G. David Mac- Ewen, the chief investment officer for fixed income at American Century Investments, a mutual fund company. ‘These types of instruments depend on new investors showing up to own the securities.’

The US$330 billion (S$467.7 billion) auction-rate market is dominated by municipalities and other tax-exempt institutions like the Port Authority of New York and New Jersey, which issued some auction securities and had its interest rate soar to 20 per cent on Wednesday. Closed-end mutual funds, student loan companies and corporations also issue such securities.

A failed auction does not mean the securities go into default because the issuer continues to pay interest at the higher rate – the ‘fail rate’.

The market, however, has a troubled history. In 2006, the Securities and Exchange Commission (SEC) reached a US$13 million settlement with 15 investment banks, and the industry agreed to impose a voluntary code of conduct for the auction-rate market.

The SEC investigation centred on how bidding was conducted for these securities. Critics complain that investment banks have the upper hand in bidding because they can bid after seeing what other investors have bid.

Brokerage firms are not legally obligated to make a market in auction securities or give clients a price, even if there is not one in the market. Clients who are unable to sell, however, are likely to argue that they were wrongly put into long-term securities when their intention was to buy shorter-term debts.

‘If these were pitched as cash equivalents, if that is what the broker said they were, the banks may be held responsible for losses and clients’ inability to get their money out,’ said Mr Jacob Zamansky, a securities lawyer who represents individual investors.

The situation is an awkward one for investment banks and brokers that have had to tell clients that their cash is frozen until at least the next auction – if not longer.

One affluent New Jersey family has sued Lehman Brothers for the declining value of its cash in auction-rate securities. Lehman has said it acted properly.

 

Source: NEW YORK TIMES (The Straits Times 16 Feb 08)

US economy: Paulson, Bernanke play it cool

WASHINGTON – THOUGH economic officials have to avoid hysteria so that they don’t cause panic, United States Treasury Secretary Hank Paulson and Federal Reserve chairman Ben Bernanke, testifying before the US Senate banking committee on Thursday, went so far the other way that they seemed bored.

Mr Paulson could have been the secretary of ennui as he slouched in the witness chair before the Senate banking committee.

‘Are we headed towards or in danger of being in a recession?’ asked Democratic Senator Bob Menendez.

‘I don’t have a crystal ball,’ the secretary said.

‘Aren’t you underestimating – not paying enough attention to, the severity of the problem in the credit markets?’ inquired Democratic Senator Charles Schumer.

‘It’s one thing to identify a problem,’ Mr Paulson returned. ‘It’s another to know exactly what to do about it.’

Democratic Senator Bob Casey, asked about home foreclosures and the ’sub-prime crisis’.

Replied Mr Paulson, ‘I didn’t create this problem.’

No, but if he and his fellow Bush economic advisers get any more laid back about the state of the US economy, they will have to make their next appearance before Congress in a horizontal position.

For much of the exchange, Mr Paulson leaned back, draping his left arm over the back of his chair.

Mr Bernanke looked down, admired the chamber’s marble walls, and stroked his beard.

Even a few Republicans on the panel were troubled by the lethargy. ‘Chairman Bernanke, I just want to give you a heads-up: When you see something coming, don’t put it off,’ suggested Senator Jim Bunning.

Senator Bob Corker tried a semantic question to draw out the witnesses. Is it a housing ‘crisis’ or a ‘correction’?’

‘I don’t use loaded words,’ came Mr Paulson’s inevitable reply, ’so I’ve been using ‘correction’ because it is a correction.’

By contrast, committee chairman Chris Dodd used the word ‘crisis’ 12 times in his opening statement alone.

Mr Paulson must have known he sounded off-key, because towards the end, he threw in disclaimers such as ‘I don’t mean to be overly complacent’ and ‘I don’t mean to sound heartless’.

Heartless? No. But complacent was harder to avoid.

Mr Schumer noted that Wall Street bankers ’seem much more worried than you guys’.

‘Some see more worry than others,’ Mr Paulson replied.

Clearly.

 

Source: NEW YORK TIMES (The Straits Times 16 Feb 08)

US economic outlook has worsened: Bernanke

Fed chief signals that he is ready to lower key interest rate

(WASHINGTON) Federal Reserve chairman Ben Bernanke told Congress yesterday that the United States’ economic outlook has deteriorated and signalled that the central bank is ready to keep on lowering a key interest rate – as needed – to shore things up.

In prepared remarks to the Senate Banking Committee, Mr Bernanke said that the one-two punch of the housing and credit crises has greatly strained the economy. Hiring has slowed and people are likely to tighten their belts further as they are pinched by high energy prices and watch the value of their single biggest asset – their homes – weaken, he warned.

‘The outlook for the economy has worsened in recent months, and the downside risks to growth have increased,’ Mr Bernanke said. ‘To date, the largest economic effects of the financial turmoil appear to have been on the housing market, which, as you know, has deteriorated significantly over the past two years or so.’

Mr Bernanke also said that the ‘virtual shutdown’ of the market for sub-prime mortgages – given to people with blemished credit histories or low incomes – and a reluctance by skittish lenders to make ‘jumbo’ home loans exceeding US$417,000 have aggravated problems in the housing market.

Unsold homes have piled up and foreclosures have climbed to record highs.

‘Further cuts in homebuilding and in related activities are likely,’ Mr Bernanke cautioned.

Given all the dangers facing the economy, the Fed ‘will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks’, he said, indicating that additional rate cuts were likely.

Mr Bernanke said that his forecast is for the economy to continue to endure a ‘period of sluggish growth’. That would be ‘followed by a somewhat stronger pace of growth starting later this year’ as the effects of the Fed’s rate cuts and a newly enacted stimulus package begin to be felt. The US$168 billion package, which includes rebates for people and tax breaks for businesses, was speedily passed by Congress last week and signed into law on Wednesday by US President George W Bush.

Even though Mr Bernanke’s forecast envisions an improving economic picture later this year, the Fed chief said that it was nonetheless ‘important to recognise that downside risks to growth remain, including the possibilities that the housing market or the labour market may deteriorate to an extent beyond that currently anticipated’ or that credit will become even harder to secure.

That is why, for now, Mr Bernanke indicated that the Fed is still inclined to lower interest rates.

Yet, that could change, depending on how the economy and inflation unfold.

‘A critical task for the Federal Reserve over the course of this year will be to assess whether the stance of monetary policy is properly calibrated to foster our mandated objectives’ of promoting healthy employment and economic growth while keeping inflation under control.

Inflation should moderate, Mr Bernanke said. Yet, last year’s steep run-up in oil prices is a reminder that the Fed cannot let down its inflation guard and must keep close tabs on the inflation expectations of investors, consumers and businesses. Those expectations can affect their behaviour, which can affect the economy.

‘Any tendency of inflation expectations to become unmoored or for the Fed’s inflation-fighting credibility to be eroded could greatly complicate’ the Fed’s job, he said.

The troubles in the housing and credit markets threaten to push the US economy into its first recession since 2001 – if it has not fallen into one already.

 

Source: AP (Business Times 15 Feb 08)

Troubled banks want to transfer some mortgage risks to US govt

New proposal for delinquent borrowers to refinance into loans backed by state

THE United States banking industry, struggling to contain the fallout from the mortgage debacle, is now proposing to move some of the risk for troubled housing loans to the government, The Wall Street Journal reported yesterday.

One proposal, being urgently advanced by officials at Credit Suisse Group, calls for the Federal Housing Administration (FHA), a US government agency, to guarantee mortgage refinancing by some delinquent borrowers, said the paper.

Credit Suisse officials have met senior officials from the Department of Housing and Urban Development, which runs the FHA, and other policymakers to discuss the proposal, it added.

The risk: If delinquent borrowers default on their refinanced loans, the federal government would have to absorb the loss, said the Journal.

Just a few months ago, such a proposal would have been considered unreasonable. But the fact that the plan is receiving serious consideration suggests the level of concern in Washington, as housing problems worsen and efforts to tackle them fall short, said the report.

A plan by banks to rescue bank-affiliated funds that had invested in mortgage-backed securities fell through, while a hotline for troubled borrowers has helped only a small fraction of those in need.

This week, the government announced its latest idea – Project Lifeline – a mortgage-industry plan that would give seriously delinquent borrowers extra time to avoid foreclosure.

The Credit Suisse plan would open the way for nearly 600,000 sub-prime borrowers, many of whom are delinquent on their mortgages, to refinance into loans backed by the FHA, said the Journal.

Around 1.3 million borrowers in the US were either seriously delinquent or in foreclosure at the end of the third quarter, according to the latest figures from the Mortgage Bankers Association.

Credit Suisse said the plan would make US$89 billion (S$126.1 billion) in sub-prime loans eligible for refinancing.

The FHA was created during the Great Depression and provides mortgage insurance for qualified borrowers.

The agency grew less popular during the recent housing boom because credit was widely available, but it has recently rebounded as some credit markets have dried up. Home owners with FHA insurance pay premiums into an insurance fund.

Another bank, JPMorgan Chase, is putting together its own proposal to expand the number of home owners who could refinance into FHA-backed loans, said the Journal.

 

Source: The Straits Times 15 Feb 08

Bernanke ‘upbeat’ US will avoid recession

He tells lawmakers the economy may pick up dramatically

(WASHINGTON) US Federal Reserve chairman Ben Bernanke voiced optimism in a closed-door meeting with Republican lawmakers on Tuesday that the United States would avoid slipping into a recession, Senator Charles Grassley said.

‘He was very upbeat about our not going into recession,’ the Iowa Republican said in an interview on Bloomberg Television.

Mr Grassley said Mr Bernanke expects the economy ‘to pick up pretty dramatically’ after growing slowly in the first half of this year. The Fed chairman called the economic stimulus package passed by Congress ‘helpful’ and indicated he’s willing to cut rates further if necessary to aid the economy, Mr Grassley added.

‘I got the sense that he’s ready to move if he needs to move,’ Mr Grassley said, adding that a rise in inflation may not be sharp enough to prevent additional rate reductions.

‘Inflation did come up and it’s going to be a little bit higher than what they like,’ Mr Grassley said. ‘But they believe that it’s nothing that’s going to stop their decreasing interest rates if they need to be decreased.’

Senator Richard Shelby of Alabama, the senior Republican on that committee, described Mr Bernanke as ‘optimistic but guarded’ in Tuesday’s meeting.

Another Senator said Mr Bernanke expects the downtrodden US housing sector to improve by the end of the year.

‘He let us believe that the housing situation should begin to ameliorate by the end of the year,’ said Pete Domenici, a New Mexico Republican.

Homeowners in the US threatened with foreclosure would in some instances get a 30-day reprieve under an initiative the Bush administration announced on Tuesday.

Dubbed ‘Project Lifeline’, the programme will be available to people who have taken out all types of mortgages, not just the high-cost sub-prime loans that have been the focus of previous relief efforts and have contributed to a decline in the US economy.

The programme was put together by six of the largest US financial institutions, which service almost 50 per cent of the mortgages in the US.

These lenders say they will contact homeowners who are 90 or more days overdue on their monthly mortgage payments. The homeowners will be given the opportunity to put the foreclosure process on pause for 30 days while the lenders try to work out a way to make the mortgage more affordable to homeowners.

‘Project Lifeline is a valuable response, literally a lifeline, for people on the brink of the final steps in foreclosure,’ Housing and Urban Development Secretary Alphonso Jackson said at a joint news conference with Treasury Secretary Henry Paulson.

He said the goal was to provide a temporary pause in the foreclosure process ‘long enough to find a way out’ by letting homeowners and lenders negotiate a more affordable mortgage.

 

Source: Bloomberg, Reuters, AP (Business Times 14 Feb 08)

IEA’s demand forecast cut on US slowdown

(LONDON) The International Energy Agency, an adviser to 27 industrialised nations, cut its forecast for 2008 global oil demand because of the slowing US economy and said the underlying trend was ‘even weaker’.

The agency reduced its forecast for demand this year by 200,000 barrels a day to 87.6 million barrels a day. That lowers the annual growth rate to 1.9 per cent, down from 2.3 per cent in last month’s Oil Market Report.

‘The economic environment is clearly paramount,’ the Paris-based agency said yesterday in its report. ‘An economic slowdown has the potential to change the landscape over the next few years: depending on how deep it is and how long it lasts.’

Global growth may slow to its weakest pace since 2003 this year as the US credit crisis spreads through the world’s largest economy, the International Monetary Fund said in its latest economic report. The US economy lost 17,000 jobs in January, the first drop in more than four years.

Global oil demand will be 88 million barrels a day in the first quarter of 2008, 170,000 barrels a day less than last month’s forecast, the IEA said.

‘We are watching carefully the US economy and how other international organisations see the situation,’ IEA executive director Nobuo Tanaka told reporters at an energy conference in Houston on Tuesday. The ‘downward trend is a major reason for this’.

Supply from the Organisation of Petroleum Exporting Countries, whose members produce more than 40 per cent of the world’s crude, will need to average 31.8 million barrels a day this year in order to balance global demand, 100,000 barrels a day more than last month’s estimate, the report said.

Opec, scheduled to meet on March 5, held quotas unchanged at its meeting in Vienna earlier this month.

Officials said the group may cut crude production should slowing economies in the US and Europe threaten energy demand.

Crude prices have averaged more than US$90 so far this month in New York and would have to drop to around US$80 a barrel for Opec to act, Opec officials said last week.

The group pumped 32 million barrels a day in January, according to the IEA. Opec’s installed crude capacity is currently at 35 million barrels a day, an increase of 300,000 barrels a day from last month, thanks to revisions for Angola and Persian Gulf producers, the report said.

Global oil supply averaged 87.2 million barrels a day in January, an increase of about 750,000 a day from December, the IEA said.

New output from Brazil and the assumed recovery of production from December outages in Azerbaijan, Mexico and China led to the increase, according to the report.

Crude oil traded little changed yesterday after IEA made the forecast.

Petroleos de Venezuela SA, the state oil company, cut off sales of crude and fuel to Exxon Mobil Corp in retaliation for the freezing of US$12 billion in assets in a legal dispute.

‘The IEA had been over-estimating demand all over last year,’ said Oliver Jakob, managing director of Swiss firm Petromatrix. ‘They were way above everyone else, and now the slowdown in the US economy is another reason why they have further corrections to make.’

Crude oil for March delivery traded at US$92.89 a barrel, up 11 cents, on the New York Mercantile Exchange at 9.48am London time yesterday. On Tuesday, the contract fell 81 cents, or 0.9 per cent, to US $92.78 a barrel.

 

Source: Bloomberg (Business Times 14 Feb 08)

Survey of economists signals US recession

(NEW YORK) According to Wall Street’s forecasters, the recession of 2008 is now unavoidable. That is, if you read between the lines of their predictions.

In a survey released on Tuesday by the Federal Reserve Bank of Philadelphia, forecasters said on average there was a 47 per cent chance that the economy would shrink in the first quarter of this year.

But the economists surveyed, many working for investment banks or Wall Street research firms, are an optimistic bunch, and every time they have become so worried over the last four decades, the economy has ended up in a recession.

There have been six recessions since 1968, the year that the quarterly survey of economists began. At the start of each one, economists put the odds that the economy would shrink in the current quarter at 40 per cent or more.

At times, the economists have either jumped the gun or said that a recession would last longer than it did.

In late 1979, for example, the forecasters said the economy was already likely to be shrinking; the National Bureau of Economic Research – widely considered the arbiter of business cycles – later said that the recession began in January 1980.

But the recession-probability index – which the Philadelphia Fed calls the Anxious Index – has yet to miss a recession or to signal one that never happened.

Its biggest blemish came in the first quarter of 1988, when forecasters put the odds of a negative quarter at 35 per cent. The economy then continued to grow for more than two years, before entering a recession in the summer of 1990.

In the latest survey, the forecasters also said there was a 43 per cent chance that the economy would shrink in the second quarter of 2008. Every time that reading has risen above 40 per cent, the economy has gone into recession.

 

Source: NYT (Business Times 14 Feb 08)

Global tech outlook cut on US recession fears

(SAN FRANCISCO) Two leading technology research firms have cut global technology outlook for this year, citing the risk of a US recession.

Forrester Research Inc said it now expects global technology purchases to grow 6 per cent in dollar terms this year, down from an earlier projection of 9 per cent. It expects US purchases of technology goods and services to grow 2.8 per cent, down from a previous forecast of 4.6 per cent.

The revisions assume a mild recession in the United States in the first two to three quarters of 2008, Forrester said on Sunday. The US accounts for about a third of global technology purchases.

‘While it is by no means certain that the US economy will in fact experience a recession, the risks of one are high enough to justify a more conservative outlook,’ Forrester vice-president Andrew Bartels said.

IDC also lowered its global outlook, citing similar concerns. It said on Monday it now expects worldwide IT market growth of 5 per cent this year, down from its previous forecast of 5.5 per cent and off from 2007’s 6 per cent.

‘While there is still debate over the severity and length of a US economic slowdown, we do know that the IT market will not escape unscathed from any significant downturn,’ said Stephen Minton, vice-president of Worldwide IT Markets at IDC.

Within technology, software investment will likely do better than the average, growing 8 per cent globally in 2008 but still down from 11 per cent last year, Forrester said.

 

Source: Reuters (Business Times 13 Feb 08)

Credit crisis spreading far beyond sub-prime loans

Repayments on prime mortgages, credit cards and car loans also affected

(NEW YORK) The credit crisis is no longer just a sub-prime mortgage problem.

As US home prices fall and banks tighten lending standards, people with good, or prime, credit histories are falling behind on their house payments, car loans and credit cards at a quickening pace, according to industry data and economists.

The rise in prime delinquencies, while less severe than the one in the sub-prime market, nonetheless poses a threat to the battered housing market and weakening US economy, which some specialists say is in a recession or headed for one. Until recently, people with good credit, who tend to pay their bills on time and manage their finances well, were viewed as a bulwark against the economic strains posed by rising defaults among borrowers with blemished, or sub-prime, credit.

‘This collapse in housing value is sucking in all borrowers,’ said Mark Zandi, chief economist at Moody’s Economy.com.

Like sub-prime mortgages, many prime loans made in recent years allowed borrowers to pay less initially and face higher adjustable payments a few years later. As long as home prices were rising, these borrowers could refinance their loans or sell their properties to pay off their mortgages. But now, with prices falling and lenders clamping down, homeowners with solid credit are starting to come under the same financial stress as those with sub-prime credit.

‘Sub-prime was a symptom of the problem,’ said James Keegan, a bond portfolio manager at American Century Investments, a mutual fund company. ‘The problem was we had a debt or credit bubble.’ The bursting of that bubble has led to steep losses across the financial industry.

American International Group said on Monday that auditors found that it may have understated losses on complex financial instruments linked to mortgages and corporate loans.

The turmoil is also stirring fears that some hedge funds may run into trouble. At the end of September, nearly 4 per cent of prime mortgages were past due or in foreclosure, according to the Mortgage Bankers Association. That was the highest rate since the group started tracking prime and sub-prime mortgages separately in 1998. The delinquency and foreclosure rate for all mortgages, 7.3 per cent, is higher than at any time since the group started tracking that data in 1979, largely as a result of the surge in sub-prime lending during the last few years.

The default rate for prime mortgages is still far lower than for sub-prime loans, about 24 per cent of which are delinquent or in foreclosure. Some economists note that slightly more than a third of American homeowners have paid off their mortgages completely. This group is generally more affluent and contributes more to consumer spending and the economy relative to its size.

Unlike sub-prime borrowers, who tend to have lower incomes and fewer assets, prime borrowers have greater means to restructure their debts if they lose jobs or encounter other financial challenges.

 

Source: NYT, AP (Business Times 13 Feb 08

White House does not expect a recession

(WASHINGTON) The White House predicted on Monday that the economy would escape a recession and that unemployment would remain low this year, though it acknowledged that growth had already slowed.

‘I don’t think we are in a recession right now, and we are not forecasting a recession,’ said Edward Lazear, chairman of the White House Council of Economic Advisers.

Presenting the White House’s annual report to Congress on the economy, Mr Lazear acknowledged that the plunge in housing and mortgage markets had yet to hit bottom and that growth would be low in the first half of 2008.

But administration officials are counting on a lift this summer from the US$168 billion economic stimulus package that Congress passed last week and from the Federal Reserve’s recent decisions to reduce shortterm interest rates.

The administration’s forecast calls for the economy to expand 2.7 per cent this year and for unemployment to remain at 4.9 per cent. That is much more optimistic than predictions by many analysts on Wall Street.

Among economists surveyed by the Blue Chip Economic Forecast, a closely watched monthly survey, the consensus prediction is that the economy will expand 1.7 per cent.

Indeed, many analysts contend the US has already slipped into a recession and will get only a temporary lift from the stimulus package.

The report on Monday predicts that business investment growth and job growth are both likely to remain ’solid’ in 2008.

 

Source: NYT (Business Times 13 Feb 08)

Write-downs from sub-prime problems could touch $568b

German minister sounds warning as officials await audits from banks

THE bloodbath is not over yet.

Sub-prime-related write- offs may hit US$400 billion (S$567.8 billion) – more than treble the US$130 billion losses that Wall Street banks and other financial institutions have revealed in recent weeks, according to the world’s top finance officials.

Speaking on Saturday after last weekend’s Group of Seven (G-7) meeting in Tokyo, German Finance Minister Peer Steinbrueck said the grouping now feared that write-offs of losses on securities linked to United States sub-prime mortgages could reach US$400 billion.

This is also far bigger than the US Federal Reserve’s estimates for sub-prime losses last year of US$100 billion to US$150 billion.

According to Bank of Italy governor Mario Draghi, the next two weeks will be critical in revealing how much damage the credit crisis has done to the global financial system.

‘The next 10 days to two weeks will be crucial because we are going to have the first audited accounts from financial institutions since the crisis started,’ said Mr Draghi, who is the chairman of the Financial Stability Forum (FSF). The FSF, a committee of international regulators and central bankers, is heading an international inquiry into the crisis.

Some of the world’s biggest banks have already disclosed billions of dollars of bad credits related to the US sub-prime mortgage market collapse, but these are only preliminary estimates, he added.

‘Auditors have become more vigilant’ as the fallout from the sub-prime crisis continues to spread and audited accounts for last year could reveal a grimmer picture, Mr Draghi told The Business Times.

The FSF’s preliminary report at the G-7 meeting warned that ‘there remains risk that further shocks may lead to a recurrence of the acute liquidity pressures experienced last year’, adding that ‘it is likely we face a prolonged adjustment, which could be difficult’.

Mr Draghi also said regulators were ready to force banks to reveal their losses and replenish their equity ratios.

He did not rule out the possibility that governments might eventually need to inject capital into banks, although he stressed that market solutions should take precedence. The FSF will issue its full report on the causes of the credit crisis and ways to tackle it in April.

The G-7 policymakers, in their statement, painted a grim picture, saying the US economy may slow further, eroding global growth, while banks, despite falling interest rates, will tighten credit even further.

While the G-7 did not propose specific measures, European Central Bank (ECB) president Jean-Claude Trichet said countries will do what was necessary, both individually and collectively, to counter a ’significant market correction’.

Economists, however, said the ECB is held back from cutting interest rates by its fears of rising inflation.

‘The problems are going right through all parts of the financial markets and there’s not much the G-7 can do about this,’ Mr Gilles Moec, an economist at Bank of America in London, told Australia’s The Age newspaper.

‘There’s a danger that the downturn will become a self- fulfilling prophecy,’ he was quoted as saying.

 

Source: The Straits Times 12 Feb 08

Critical week for news of sub-prime damage: G-7

Leading banks to present first audited accounts since crisis

IN TOKYO

THIS week will be critical in revealing how much damage the credit crisis has done to the global financial system, according to a key official involved in last weekend’s meeting of Group of Seven (G-7) finance ministers in Tokyo.

Leading banks will present the first audited accounts since the crisis erupted, said Bank of Italy governor Mario Draghi, who heads an international inquiry into the crisis.

Some of the world’s biggest banks have already disclosed billions of dollars of bad credits related to the US subprime mortgage market collapse but these are only preliminary estimates, said Mr Draghi, who chairs the Financial Stability Forum (FSF) working group on the crisis. ‘The next ten days will be crucial’ in revealing the true extent of the damage, he said after the G-7 meeting ended last Saturday.

‘Auditors have become more vigilant’ as fallout from the sub-prime crisis continues to spread and audited accounts for 2007 could reveal a grimmer picture, Mr Draghi told BT. The FSF report warned that ‘there remains risk that further shocks may lead to a recurrence of the acute liquidity pressures experienced last year’, adding that ‘it is likely we face a prolonged adjustment, which could be difficult’.

G-7 ministers and central bank governors shied away from any concerted fiscal or monetary actions to address the crisis at their Tokyo meeting but said that they were ‘deeply engaged in working together to strengthen financial stability, limit the impact of the financial turmoil and address the factors that contributed to it’. But even as the crisis unfolds, they recognised its growing impact on the global economy.

‘The current financial turmoil is serious and persisting,’ acknowledged US Treasury Secretary Henry Paulson after huddling with his colleagues from Japan, Canada, Germany, France, Britain and Italy. ‘There was a climate of much greater pessimism and worry than in October (when G-7 finance ministers last met) in Washington,’ added Italian Finance Minister Tommaso Padoa Schioppa.

The Tokyo meeting revealed continuing splits among finance ministers as to how far the global economy will slow under the impact of the sub-prime crisis, and what actions G-7 governments should take to combat a slowdown.

Japanese Finance Minister Fukushiro Nukaga called these ‘differences rather than discord’ and said that each country should take whatever actions are appropriate to its circumstances. But they agreed that ‘the world confronts a more challenging and uncertain environment than when we met last October’.

With spreading financial turbulence and the threat of recession looming in the world’s two biggest economies – the US and Japan – the finance and central bank officials paid little attention to issues such as exchange rates which usually dominate G-7 meetings. And, although they called on Opec countries to raise production in a bid to control spiralling oil prices, it was the shaky state of the global financial system that was at centre stage.

‘The potential exists that risk-shedding (by banks and other financial institutions) could tighten constraints on a widening set of borrowers and thereby slow economic growth, which could further impair growth,’ the FSF said in its interim report presented to the G-7. The final report on solutions to the credit crisis is due in April, when the ministers next meet in Washington.

Led by this year’s chairman, Mr Nukaga, the G-7 ministers called for greater disclosure by financial institutions of the full extent of damage to their balance sheets from the sub-prime mortgage and credit crisis. But there are growing fears the process will reveal huge holes in the capital base of global financial institutions. ‘There was a general view the need for write-offs at banks will amount to about US$400 billion,’ said German Finance Minister Peer Steinbrueck.

Mr Nukaga, meanwhile, warned his G-7 colleagues that Japan’s own financial crisis after the collapse of the bubble economy had forced authorities to inject huge amounts of public funds into toppling banks. Japan left it ‘too late’ in dealing with the situation, one senior financial source told BT.

 

Source: Business Times 11 Feb 08

Sub-prime probes focus on disclosure, valuation

(WASHINGTON) The Securities and Exchange Commission (SEC) is investigating how banks, creditrating firms and lenders valued and disclosed complex mortgage-backed securities that ultimately led to the sub-prime crisis, a top agency enforcer said on Saturday.

‘The big question is, who knew what when, and what did they disclose to the marketplace?’ said Cheryl Scarboro, an associate director in the SEC’s enforcement division in charge of the sub-prime working group.

The SEC has opened about three dozen investigations into firms and individuals involved in the sub-prime mortgage market.

The investor protection agency has not named any names. But Morgan Stanley and Merrill Lynch are some of the firms in the financial services industry that have disclosed that government investigators are seeking information about their sub-prime activities.

Ms Scarboro said the cases can be broken down into three main areas: the securitisation process, the origination process and the retail area. Insider trading is also a key area.

‘Our investigations into potential misconduct is clearly a priority at the division,’ Ms Scarboro said at a Practising Law Institute conference in Washington.

Banks, due diligence firms and credit-rating agencies are being examined for their role in the securitisation process, or how mortgages were sold, repackaged and bundled into special financial products. The SEC is looking at the valuations and accounting treatments of mortgage-backed securities.

It is looking at whether the securities were valued correctly in the first place, what was the level of risk and if that was adequately disclosed to shareholders.

The methodology and models that companies used to value the complex financial products are being examined as well.

The agency also is looking at write-downs that financial firms have been forced to take and whether the assets should have been taken down and disclosed earlier.

 

Source: Reuters (Business Times 11 Feb 08)

Odds of US recession now at 50%: Blue Chip forecast

Outlook dampened by data showing a contraction in hiring, consumer spending

(WASHINGTON) The odds of a US recession have increased and stand at nearly 50 per cent amid a spate of data showing a weakening labour market, signs of more credit tightening and turmoil in the financial markets, the latest Blue Chip economic forecast projects.

A month ago, economists in this closely watched forecast put the chance that the world’s richest economy would fall into recession at 40 per cent, but government data showing a contraction in hiring, slowed consumer spending and other reports pointing to sagging business activity have indicated a much more deteriorated outlook.

Among those economists, slightly more than 20 per cent are now expecting to see the economy contract in at least one or two quarters.

‘The economic malaise that originated in the housing sector during 2006 (and) spread to the financial market in 2007, now appears to be infecting Main Street,’ the newsletter wrote.

And even as the economy slows, inflation is expected to creep higher.

The majority of those surveyed between Feb 5 and 6, however, continue to say that a recession will be avoided.

But growth is going to be weak.

Economists are now projecting that the economy will grow by just 1.7 per cent in all of 2008, down from the 2.2 per cent forecast a month ago.

Blue Chip economists are expecting that the Federal Reserve will continue to cut interest rates to help avert a recession. They expect that the central bank will reduce its target federal funds rate by at least half a percentage point more this year.

Last month, the Fed cut benchmark interest rates by a sharp 1.25 percentage points in a bold move to support growth as weakness, which was largely contained in the housing market last year, began to spread.

The series of recent cuts took overnight rates, which stood at 5.25 per cent in early September, down to 3 per cent.

But those rate cuts may fuel inflation, a concern that has been voiced by a growing number of economists and some Fed officials.

‘Despite lowered expectations for economic growth, consensus forecasts of inflation this year continued to creep higher,’ the newsletter said.

Consumer prices, excluding food and energy, are expected to increase 2.3 per cent in 2008 and by 2.2 per cent in 2009, well above the Fed’s 2 per cent comfort ceiling.

New home building activity is expected to drop by 25 per cent from levels seen in 2007.

‘All of our panelists think real residential investment will remain a drag on GDP growth during the first half of this year and 42 per cent of them say it will subtract from GDP growth throughout 2008,’ the newsletter said.

The consensus predicts that sales of both new and existing homes will fall another 14 per cent this year and prices will decline 9.3 per cent.

Even so, the trade sector is expected to remain the bright spot in the economy, as the decline in the value of the US dollar and better growth abroad has fuelled demand for American goods.

 

Source: Reuters (Business Times 11 Feb 08)

LATEST US DATA: ‘Painful’ and ‘drawn out’ recession likely: report

(NEW YORK) The US economy has entered a recession that will be more painful and drawn out than the usual downturn, the director of the Reuters/University of Michigan consumer sentiment survey said yesterday.

Inflation pressures will linger despite the retrenchment in consumer spending, complicating the task of policy makers, the University’s Richard Curtin said in a report, citing data from industry group The Conference Board.

‘This is no ordinary recession,’ he said. ‘The after-effects will last much longer than the typical downturn.’

He said the Conference Board’s expectations index is a strong predictor of economic contractions, and that it is currently flashing red.

With Americans getting hit with everything from a housing downturn to excess borrowing, things will get worse before they get better.

‘Consumers must take more drastic steps to stabilise their finances in the midst of high fuel and food prices, stagnant incomes, and record debt,’ Mr Curtin said.

The new report adds that a rising wealth gap will, even more than usual, lead to disproportionate pain for middle and lower-income Americans.

‘Growing income inequality has insulated higher income groups to a greater extent than ever before,’ the report said.

Meanwhile, inventories of unsold goods at US wholesalers jumped a larger-than-expected 1.1 per cent in December, while wholesale sales of durable goods posted its biggest drop in more than six years, government data showed yesterday.

 

Source: Reuters (Business Times 9 Feb 08)

Americans in for worst recession in 20 years?

Recent job and other data show an economic downturn may last longer, too

(WASHINGTON) The chances of the United States avoiding a recession appear to be growing dimmer by the day, and any contraction in the economy will likely last longer and be more severe than other downturns in the past 20 years.

Recent reports have shown the US housing market slump and rising defaults in the mortgage market are now taking their toll on job growth and on the manufacturing and services sector.

But heavy consumer debt, a growing federal budget gap and rising prices could make any recession worse than Americans have experienced over the past two decades.

‘If we do go into recession, it’s going to be more severe and long-lasting than the last one,’ said Jeffrey Frankel, a Harvard professor and member of the private-sector panel that dates US recessions.

The nation’s last two recessions, in 1990-1991 and 2001, each lasted for just eight months.

But the two downturns that ended in 1975 and 1982, when economic conditions bore some similarities to today, each lasted 16 months, making them the longest recessions since the Great Depression of the 1930s, according to the National Bureau of Economic Research (NBER), the accepted arbiter of US recessions.

The US economy entered the recessions of 1975 and 1982 saddled with huge government budget deficits from spending on social programmes and the Vietnam war, and was suffering double-digit consumer price inflation.

Mr Frankel said members of NBER’s business cycle-dating panel have been in contact with each through e-mail messages other over the prospect of a recession , but it would likely take months, or perhaps even more than a year, for the panel to determine whether the economy had turned down.

Even though the latest data showed a loss of jobs in January, and the largest monthly decline on record in an index of service sector activity, Mr Frankel thinks a recession is not yet at hand. ‘My description is that we are teetering on the edge,’ he said.

Some economists warn against counting on government spending and lower interest rates, the tools commonly used to battle recession, because the fiscal deficit is already large and consumer price inflation rose to its highest level in 17 years in 2007.

‘So far, the Federal Reserve has been having a lot of luck,’ said Eugenio Aleman, senior economist at Wells Fargo in Minneapolis, but Mr Aleman thinks inflation will tie the Fed’s hands.

‘But the Federal Reserve will be pushed to increase interest rates and then we are going to go into a true recession, a longer recession than what we are expecting today,’ he said.

The main factor keeping overall inflation high has been soaring energy prices, the single-largest driver of inflation over the past year. Crude oil prices reached a record US$100 a barrel last month.

‘I would be happier to see if we got a real break on oil prices and that’s not happening and that’s a little bit disconcerting,’ said Bernard Baumohl, managing director at The Economic Outlook Group in Princeton Junction, New Jersey.

While the central bank has said it expects inflation to moderate, there are signs lofty energy prices have begun to filter through to prices more widely.

The government said last week that the Fed’s favourite inflation gauge, the core price index for personal spending excluding food and energy, rose 2.2 per cent last year, above the 2 per cent ceiling seen as the top of the ‘comfort zone’ for the index.

At the same time, the government’s budget is moving further from balance. On Monday, President George W Bush released a budget plan that would see the US deficit widen to US$410 billion for the current fiscal year and US $407 billion for fiscal 2009, not far from the record hit in fiscal 2004.

The last time the economy moved into recession, in 2001, there was a budget surplus, providing an opportunity for extra government spending to boost economic growth.

In addition, consumers were not as heavily in debt and credit was more freely available.

Consumer spending represents for roughly two- thirds of total US economic output and for the 2007 year consumer spending grew at the slowest pace since 2003.

‘My biggest concern right now is the consumer. The consumer is highly levered and when the economy faces a credit crunch on in a highly levered scenario, then you have trouble,’ warned Mr Aleman.

 

Source: Reuters (Business Times 7 Feb 08)

US productivity growth seen slowing in Q4

Economists expect data to show a rise of just 0.5%

(NEW YORK) US worker efficiency probably grew in the fourth quarter at the slowest pace in more than a year, pushing up labour costs, economists said before a government report yesterday.

Productivity, a measure of how much an employee produces for each hour of work, rose at an annual 0.5 per cent rate following a 6.3 per cent pace from July through September that was the highest in three years, according to the median estimate of 71 economists in a Bloomberg News survey.

Businesses are trimming staff to stem the slowdown in productivity and to control labour expenses to avoid having to raise prices. Federal Reserve policymakers are counting on a slowdown in inflation to be able to keep cutting interest rates to stave off a recession.

‘The pace of efficiency gains likely slowed substantially in the fourth quarter as economic activity stalled,’ Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut, said before the report.

The Labor Department’s report was due later in the day in Washington. Estimates in the Bloomberg survey ranged from a drop of 0.6 per cent to a gain of 2.7 per cent.

Labour expenses probably rose at a 3.5 per cent rate in the fourth quarter, after dropping at a 2 per cent pace in the previous three months, according to the survey median. Estimates for labour costs ranged from increases of 1 per cent to 5 per cent.

Productivity gains may be harder to come by as the economy weakens because businesses are usually slow to reduce staff, economists said.

Economic growth slowed to an annual rate of 0.6 per cent in October through December, down from a 4.9 per cent pace in the third quarter, according to government figures last week. A report from the Institute for Supply Management on Tuesday showed that service industries unexpectedly contracted in January at the fastest pace since the 2001 recession.

Still, some businesses have already reacted to the demand slowdown in order to contain costs. Companies added 1,000 workers to payrolls in January, down from 54,000 the previous month, and government agencies reduced staff. The economy lost 17,000 jobs overall, the first decline in more than four years. Hourly wages rose 0.2 per cent last month, less than economists had forecast.

Labour expenses account for about two-thirds of the cost of producing a good or service.

Less growth and fewer price pressures will allow Fed policymakers to keep cutting the benchmark rate, economists said.

Central bankers lowered the benchmark rate by half a percentage point on Jan 30, following an emergency threequarter- point reduction a week earlier. Investors are betting on another half-point cut at or before the next meeting in March, according to futures trading.

Some economists are concerned that the productivity surge that began in 1996 is waning. Efficiency increases have slowed every year since reaching a peak of 4.2 per cent in 2002. Productivity rose just 1 per cent in 2006, the smallest increase since 1995.

 

Source: Bloomberg (Business Times 7 Feb 08)

Slump in services sector signals arrival of US recession

Shockingly weak services data could be final proof of economy shrinking

ANY hope that the United States economy might escape a recession has now all but disappeared, say analysts.

The last straw came when the country’s huge services sector – covering industries such as banking, retail and construction – shrank last month for the first time in five years.

The shockingly weak data released on Tuesday is just about the final proof that the world’s biggest economy started contracting last month, said economists in the US.

Indeed, the surprise slump in the Institute of Supply Management’s (ISM’s) index of non-factory activity led one top analyst to say the looming slowdown may be worse than 2001’s dot.com bust.

For Singapore, economists in the Republic said momentum in Asia will help keep the local economy in positive territory, though some added that a slew of bad US news may prompt the Government to trim its growth forecast for the year.

‘Not only is the economy in a downturn, the abruptness and depth of the decline seen in this report…adds to our concern we are facing a much deeper downturn than we saw in 2001,’ Merrill Lynch economist David Rosenberg wrote in a note to clients.

Mr Rosenberg cited other signals – the collapse in car sales and unprecedented credit tightening conditions – for his bearish prognosis.

The January ISM reading for services fell from 54.4 to 41.9, under the 50-point threshold, indicating a contraction. This was far below market expectations of 53 and was the lowest reading since October 2001.

The dismal data followed another bleak statistic last Friday when the US government reported the economy lost 17,000 jobs last month, the first dip since 2003.

‘This is an indication for the first time that the bulk of the economy is contracting,’ MFR economist Joshua Shapiro told the New York Times. ‘It is sending people into recession panic mode.’

Wells Fargo economist Scott Anderson said: ‘The number’s so terrible it’s almost beyond belief, especially among the optimists.

‘I think the writing’s on the wall. More and more economists are talking about recession and whether it’ll be a severe or mild one.’

A recession is typically defined as two straight quarters of economic shrinkage in quarter-on-quarter terms.

With all indications that a recession is all but certain, economists said the Federal Reserve may spring another surprise cut on benchmark interest rates, possibly by half a percentage point.

‘This keeps the Fed in aggressive rate-cutting mode with a strong chance of an inter-meeting move possible before the March 18 meeting,’ said Merrill economists.

Disappointing data from Europe on Tuesday also signalled that the US slowdown is spreading out, increasing pressure for the European Central Bank to follow the Fed and cut rates, reported Bloomberg News.

Economists in Singapore said with the US slowdown seemingly more severe, US consumers may start to feel the pinch soon and reduce purchases of goods made in the Republic.

OCBC Bank economist Selena Ling said US consumers are being hit by falling home values, rising difficulty in getting credit, a weaker jobs market and tanking bourses.

But CIMB-GK’s Mr Song Seng Wun said it is still too early to be sure how US consumers will adjust spending patterns. ‘It’s still a close call. I wouldn’t get too concerned.’

Action Economics’ Mr David Cohen said momentum from Asia’s fast-growing economies will provide a buffer.

Also, expected monetary easing from the Fed should provide some support.

‘It’s still likely Singapore will show continued growth. Maybe we’ll be at the lower end of the Government’s range, but still positive growth in 2008,’ he said.

Still, Ms Ling reckons that the fast-deteriorating outlook for the US in the past month may prompt the Government to review its forecast of 4.5 to 6.5 per cent growth this year.

‘They may bring it down to 4 to 6 per cent, or at least give an indication that it’ll be at the bottom of their current range.’

 

Source: The Straits Times 7 Feb 08

NEWS ANALYSIS: US slowdown likely to be worse than recent ones

WASHINGTON – THE chances of the United States avoiding a recession appear to be growing dimmer by the day, and any contraction in the economy will likely last longer and be more severe than other downturns in the past 20 years.

Recent reports have shown the US housing market slump and rising defaults in the mortgage market are now taking their toll on job growth and on the manufacturing and services sectors, reported Reuters.

Heavy consumer debt, a growing federal budget gap and rising prices, however, could make any recession worse than Americans have experienced over the past two decades.

‘If we do go into a recession, it’s going to be more severe and long-lasting than the last one,’ said Harvard Professor Jeffrey Frankel, a member of the private sector panel that dates US recessions.

The nation’s last two recessions – in 1990-1991 and 2001 – each lasted for just eight months.

But the two downturns that ended in 1975 and 1982, when economic conditions bore some similarities to today, each lasted 16 months, making them the longest recessions since the Great Depression of the 1930s, according to the National Bureau of Economic Research (NBER), the accepted arbiter of US recessions.

The US economy entered the recessions of 1975 and 1982 saddled with huge government budget deficits from spending on social programmes and the Vietnam war, and was suffering double-digit consumer price inflation.

Prof Frankel said members of NBER’s business-cycle dating panel had been in contact with each other over the prospect of a recession through e-mails, but it would likely take months, or perhaps even more than a year, for the panel to determine whether the economy had turned down.

Even though the latest data showed a loss of jobs last month and the largest monthly decline on record in an index of service-sector activity, Prof Frankel thinks a recession is not yet at hand. ‘My description is that we are teetering on the edge,’ he said.

Some economists warn against counting on government spending and lower interest rates, the tools commonly used to battle recession, because the fiscal deficit is already large and consumer price inflation rose to its highest level in 17 years last year.

‘So far, the Federal Reserve has been having a lot of luck,’ said Mr Eugenio Aleman, a senior economist at Wells Fargo in Minneapolis, but he thinks inflation will tie the Fed’s hands.

‘But the Federal Reserve will be pushed to increase interest rates, and then we are going to go into a true recession, a longer recession than what we are expecting today,’ he said.

The main factor keeping overall inflation high has been soaring energy prices, the largest single driver of inflation over the past year. Crude oil prices reached a record US$100 a barrel last month.

‘I would be happier to see if we got a real break on oil prices. That’s not happening, and that’s a little bit disconcerting,’ said Mr Bernard Baumohl, the managing director at The Economic Outlook Group in Princeton Junction, New Jersey.

While the central bank has said it expects inflation to moderate, there are signs lofty energy prices have begun to filter through to prices more widely.

The government said last week that the Fed’s favourite inflation gauge – the core price index for personal spending, excluding food and energy – rose 2.2 per cent last year, above the 2 per cent ceiling seen as the top of the ‘comfort zone’ for the index.

At the same time, the government’s budget is moving further from balance. On Monday, President George W.

Bush released a budget plan that would see the US deficit widen to US$410 billion (S$579.9 billion) for the current fiscal year and US$407 billion for fiscal 2009, not far from the record hit in fiscal 2004.

The last time the US economy moved into a recession, in 2001, there was a budget surplus, providing an opportunity for extra government spending to boost economic growth.

In addition, consumers were not as heavily in debt and credit was more freely available.

Consumer spending represents roughly two-thirds of total US economic output, and consumer spending grew at the slowest pace last year since 2003.

‘My biggest concern right now is the consumer. The consumer is highly levered and when the economy faces a credit crunch on in a highly-levered scenario, then you have trouble,’ warned Wells Fargo’s Mr Aleman.

The job market could take the biggest hit. According to the Centre for Economic and Policy Research, up to 5.8 million additional workers in the US could join the ranks of the unemployed by 2011, if the economy were to fall into a severe recession.

The report, according to the Seattle Times, comes on the heels of the government’s news on Friday that US employers are already cutting back on hiring. Last month marks the first monthly contraction in non-farm payrolls in four years – data that may be the smoking gun showing that the economy has entered a recession.

 

Source: The Straits Times 6 Feb 08

Americans preoccupied with fears of recession

Financial institutions in Wall Street remain very apprehensive about the many ‘unknowns’

WASHINGTON

INVESTORS in Wall Street were biting their nails early last week as they waited for US Federal Reserve chairman Ben Bernanke and his colleagues to decide whether to slash short-term interest rates for the second time in eight days. But with much of the focus of official Washington centering on heated Democratic and Republicans races for the presidential nomination, not many officials and lawmakers were paying much attention to the deliberations that were taking place among the US central bank’s policymakers on Tuesday and Wednesday.

Indeed, when the Fed announced late on Wednesday that it was lowering its benchmark interest rate by half a percentage point, the news didn’t receive as much play on the 24/7 television news programmes as did the decision by former New York mayor Rudolph Giuliani to withdraw from the Republican presidential race and to endorse his former rival, Senator John McCain who was portrayed now as the Republican ‘front-runner’.

But this perceived divergence between Washington and Wall Street was quite misleading. In fact, the majority of American voters are more and more anxious over the dramatic downturn in the American economy – falling home values, credit crunch, rising unemployment, a weakening dollar, rising costs (inflation?) in the energy and food sectors.

And the presidential election campaign is more and more dominated by economic policy issues. Those who are running for the presidency recognise that the policies embraced by the Fed could have major impact not only on the American economy but also on American politics.

Hence, several political scientists and economists have already developed complex models to forecast the presidential elections based on the changing economic conditions that could figure out, for example, that the chances of a Democratic presidential candidate grow by X per cent if economic growth falls Y per cent.

And observers are starting to criticise Mr Bernanke and the Fed, describing their response to the anxiety in the financial markets as excessive or inadequate or as too little or too late.

There has been a suggestion that the Fed ‘panicked’ when it cut the rate by three quarters of a percentage point two weeks ago. Some pundits are warning that the next White House occupant may not reappoint Mr Bernanke when his first term ends in 2010.

No doubt, politicians in Washington will use Mr Bernanke as a scapegoat if America will find itself in a painful and long economic recession this year, in the same way that his processor, Alan Greenspan, was treated as a superstar when the economy was on a roll. But as economist Alan Reynolds of the Cato Institute pointed out, the US recession that began in July 1990 and ended in March 1991, ‘Fed funds rate did not get as low as it is today until 16 months after the recession had ended (which really was too late)’.

Similarly, in the recession that began in July 2001, the Fed Funds rate remained above 5 per cent until April and did not get down to 3.5 per cent until late August.

From this perspective, Mr Bernanke’s Fed is actually quicker in its response than Mr Greenspan’s Fed. The question is whether the response will also be effective in terms of making the economic downturn shorter and milder.

And in any case, against the backdrop of bad economic news, pointing to a major economic slowdown, including a report showing the economy growing at its slowest rate in five years, soaring foreclosure filings, up 75 per cent last year, and sales of new homes dropping to their lowest level in 12 years in December, Mr Bernanke and his colleagues probably felt enormous pressure to take bold action in the form of an extraordinary amount of easing in a very short period.

The statement issued by the Fed made it clear the policymakers in the central bank were clearly concerned about the economy – pointing to stress in the financial markets, tightening credit conditions for businesses and consumers, a softening labour market, and falling homes prices – and that they were ready to inoculate it as a way of preventing a recession.

The message coming out of the Fed was that downside risks require more interest rate cuts, perhaps in the rest of this year. Most analysts expect the federal funds rate will fall by at least 0.75 per cent more before the year ends.

The Fed’s decision to cut rates raises not only economic issues but creates a political dilemma for Mr Bernanke.

The previous week’s stunning rate cut, which followed the fall in the European markets and the Asian markets, plays into the hands of critics who bash the Fed for paying too much attention to the concerns of investors in Wall Street.

But a refusal to take action, which is bound to create more volatility in the financial markets and will put added pressure on the weak economy and end up igniting other criticism: that Mr Bernanke is too much of a spacey academic who is not ’street-smart’ in terms of what’s happening in the real financial world.

The Fed insists that its response is based on the recognition that a crisis in the stock market could have a devastating effect on the economy. And it hopes that the combination of the Fed moving so dramatically and the president and the Congress embracing a fiscal stimulus package will give a bit of confidence to investors and consumers that the managers of the economy in Washington are in control of the situation.

With the Fed’s key rate now at 3 per cent, it still has enough ammunition in reserve to use if the economy continues to deteriorate. And they certainly could. The financial institutions in Wall Street remain very apprehensive about the many ‘unknowns’ that could result from the housing crisis and the credit problems.

The Fed and the rest of the officials and lawmakers in Washington, as well as the presidential candidates, seem to be entering into an unknown economic territory that could also determine who will occupy the White House next year.

 

Source: Business Times 6 Feb 08

It’s still the economy – but presidents can’t control it

AS THE US economy weakens and the campaign intensifies, Americans will hear more of liberal writer James Carville’s familiar refrain: It’s the economy, stupid.

Well, it ain’t or, at least, shouldn’t be. I’m not claiming that Mr Carville is wrong about voting. People vote their pocketbooks. In the latest Washington Post-ABC News poll, the economy overshadows Iraq as the most important issue by a 39 per cent to 19 per cent margin. What I’m saying is that this sort of voting is short-sighted. It rewards or punishes candidates for something beyond their power.

America has a US$14 trillion economy. The idea that presidents can control it lies between an exaggeration and an illusion. Our presidential preferences ought to reflect judgments about candidates’ character, values, competence, and their views on issues where what they think counts: foreign policy; long-term economic and social policy – how they would tax and spend; healthcare; immigration. Forget the business cycle.

True, presidents try to manipulate it. In 1971, President Nixon imposed wage and price controls in part to prevent inflation from jeopardising his re-election. The economy boomed in 1972. But the controls were a time-delayed disaster. When they were removed, inflation exploded to 12 per cent in 1974. In 1980, the Carter administration adopted credit controls to squelch raging inflation. The result was a short recession – a complete surprise – that probably sealed Mr Carter’s defeat in November.

History’s long view teaches the same lesson. No president tried harder, with good reason, to influence the business cycle than Franklin Roosevelt. When he took office in 1933, unemployment was roughly 25 per cent. By executive order and congressional legislation, FDR effectively abandoned the gold standard, adopted deposit insurance, tried to prop up falling farm and factory prices, rescued many defaulting homeowners, regulated the stock market and embarked on massive public works.

With what result? Well, leaving the gold standard aided recovery. But some economic research suggests that other New Deal measures may have frustrated revival. In any case, all of them together didn’t end the Great Depression. World War II did that. In 1939, unemployment was still 17 per cent.

No matter. When the economy is good, presidents claim credit; when it’s not, their opponents blame them.

Political phrase-making compounds the error by personalising the process. Hence, ‘Reaganomics’ and ‘Clintonomics’. Among Republicans and Democrats alike, there is much myth-making.

To his worshippers, Ronald Reagan’s great economic achievements were tax cuts and spending restraint.

Not so. Mr Reagan’s singular feat was supporting Paul Volcker’s Federal Reserve in suppressing doubledigit inflation, which had destabilised the economy (four recessions between 1969 and 1982). From 1980 to 1983, inflation dropped from 13 per cent to 4 per cent. This set the stage for the long expansions of both the 1980s and 1990s. Mr Reagan’s cut in tax rates probably helped slightly, but the overall tax burden wasn’t much reduced.

Bill Clinton had little to do with the causes of the 1990s’ economic expansion: low inflation, low oil prices, a computer and Internet boom, a stockmarket boom. The claim made for Clintonomics is that paring the federal budget deficit in 1993 provided the essential catalyst by reducing interest rates. But long-term rates in 1994 were actually higher than in 1993. Many forces affect rates aside from the budget deficit: inflation and inflationary expectations, saving behaviour, Federal Reserve policy, overall credit demand. Mr Clinton’s contribution was self-restraint. Unlike Mr Nixon and Mr Carter, he didn’t meddle with the Fed. He was a ‘conservative’ in a pragmatic way.

Of course, presidents do affect the economy. But their greatest influence often occurs after they’ve left office. FDR’s enduring legacy was Social Security; Mr Reagan’s was low inflation. Some policies that are initially popular turn out to be calamitous. Under John Kennedy and Lyndon Johnson, the government followed highly expansionary policies to reduce unemployment. Initially popular, they ultimately spawned high inflation.

Sensible voters should look beyond the cheery or dreary economy of the moment. They should recognise that, if presidents could control the business cycle, recessions would never occur, there would always be ‘full employment’ and inflation would remain forever tame. Instead of judging prospective presidents on what they can’t do, voters ought to concentrate on what they can do. There are plenty of real differences among the remaining candidates. But Mr Carville is probably right. For many, it will be the economy; and it will be stupid.

 

Source: The Washington Post Writers Group (Business Times 6 Feb 08)

US services sector suffers record slide in Jan

ISM index slid to 41.9 in Jan from 54.4 in Dec, stoking recession fears

(NEW YORK) The US services sector retrenched sharply in January to levels not seen since the 2001 recession, renewing fears about an economic slump, according to a survey released on yesterday.

The Institute for Supply Management’s index of non-manufacturing plummeted to 41.9 from 54.4 in December, its largest monthly decline on record and a far greater drop than Wall Street expected.

US stocks tumbled yesterday, led by a sell-off among shares of financial companies, on the ISM report. The S&P 500 index at one point fell more than 2 per cent. The Dow Jones Industrial Average was down more than 200 points in early trade. The Standard & Poor’s 500 Index was down 22.15 points, or 1.6 per cent, at 1,358.67. The Nasdaq Composite Index was down 33.63 points, or 1.41 per cent, at 2,349.22.

The ISM number ‘does bring in a heightened concern about the economy, and it adds further pressures to stock prices’, said Steve Goldman, market strategist at Weeden & Co.

A Reuters poll of economists had produced a median expectation of a slip to 53.0. ‘The recession has indeed arrived,’ said Jane Caron, chief economic strategist at Dwight Asset Management in Burlington, Vermont.

A reading below 50 indicates contraction, and bond prices jumped as the figures reinforced investors’ conviction that the US economy is already in recession.

The employment index fell to 43.9 from 51.8, corroborating last week’s dire US payrolls report, which showed the first net monthly contraction in the labour market in more than four years.

Weakness was evident across the board. A measure of new orders fell to 43.5 from 53.9. ‘It’s another recession marker on the radar screen,’ said Cary Leahy, economist at Decision Economics in New York.

Analysts said the gloom surrounding the services report justified the Federal Reserve’s recent steep interest rate cuts. The Fed slashed rates by 1.25 percentage points in the past two weeks, a rare strong dose of stimulus over such a short period.

A downturn that began in the US housing sector about two years ago has spread to banks, which made many loans to sketchy borrowers and are now grappling with rising mortgage defaults.

 

Source: Reuters (Business Times 6 Feb 08)

TAKING STOCK: Fresh US recession worries, Dow’s fall drag down STI

PROFIT-TAKING on renewed United States recession fears and Wall Street’s overnight dip delivered a one-two punch to abruptly halt the Singapore bourse’s two-day rally yesterday.

A sharp selldown came in the last 30 minutes, as the Straits Times Index (STI) closed 38.66 points lower at 3,038.42, after rising a combined 95 points in the previous two sessions.

A total of 1.55 billion shares worth $1.46 billion changed hands yesterday.

A dealer said: ‘Profit-taking was inevitable, after Monday’s strong pre-Chinese New Year surge and the Dow’s 108-point plunge overnight.’

The chief culprit for the STI’s fall was the financial sector.

Banking counters took a hit after US brokerages downgraded American banks and credit card firms, on signs that consumers are falling behind on debt payments.

United Overseas Bank (UOB) was among the day’s top losers, dropping 38 cents to $18.12. DBS Group Holdings fared no better, slipping by the same amount to $17.60, while OCBC Bank dipped eight cents to $7.55.

DBS Vickers has cut its target price for UOB from $27.50 to $20.80 and that for OCBC from $10.40 to $9.

It noted: ‘While sentiment in Singapore equities remain weak, we believe that earnings momentum for Singapore banks should remain positive, given the strong loans growth and asset quality.’

SingTel came under the spotlight after it announced better-than-expected results for its third quarter. It gained four cents to $3.90 and was the most heavily traded counter by value.

Citigroup said SingTel’s results were ‘better than expected’, while Morgan Stanley kept its ‘overweight’ call, citing healthy operating trends.

AmFraser Securities senior vice-president of research Najeeb Jarhom said: ‘It looks like SingTel may again come to the rescue of the broad market in the event of another downturn after the long holidays.’

There was also cheer for Chinese steelmaker Delong Holdings. It surged a whopping 47 cents, or 30.9 per cent, to $1.99, prompting a query from the Singapore Exchange.

ASL Marine had a bright outing as well, up five cents to $1.30, after the local shipbuilder reported that first half net income rose 67 per cent to $28 million.

The FTSE ST Mid Cap Index slid 0.7 per cent to 784.25 but the Small Cap Index gained 0.1 per cent to 681.31.

 

Source: The Straits Times 6 Feb 08

US services sector contracts, stocks fall

NEW YORK – UNITED States stocks tumbled yesterday, led by a sell-off among shares of financial companies, as a report showing a contraction in the vast services sector last month heightened recession fears.

Data from the Institute for Supply Management (ISM) underscored concerns that the fallout from the housing slump was spreading to the broader economy.

In early trading, the Dow Jones Industrial Average was down 237.93points, or 1.88 per cent, at 12,397.23.

The consensus among ISM’s survey respondents was that the services sector, which included industries such as restaurants, banking, construction, retailing and travel, had ‘come to the end of a long-term period of growth’, Mr Anthony Nieves, chairman of the ISM’s business survey committee, said in a statement.

ISM reported that its index of service sector business activity declined to 44.6 last month from a revised reading of 54.4 in December.

It was the first time the services sector reading contracted since March 2003. A reading above 50 indicates expansion, while a reading below 50 indicates contraction.

Price increases have slowed while costs are up, said Mr Nieves, who is also senior vice- president for supply management at Hilton Hotels.

Survey respondents cited recession fears taking hold and high energy prices dragging down profitability.

ISM said only three service industries reported growth, while 14 showed a contraction.

 

Source: REUTERS, ASSOCIATED PRESS (The Straits Times 6 Feb 08)

US economic woes, rate cuts fuelling HK property boom

Analysts see prices revisiting the heady 1997 peak

(HONG KONG) When first- time buyer Judy Kwan heard a flat was for sale in a street she admired in Hong Kong’s Wanchai district, she snapped it up within 24 hours without even seeing it, inheriting a tenant she had never met.

Now she wants to buy another as the property market surges from a strong economy and mortgages become cheap as local interest rates drop in line with rate cuts in the United States.

Ms Kwan hopes property investment will allow her to retire in five years’ time, aged 50.

‘The price was right and the market’s going up,’ said Ms Kwan, an accountant, who paid US$282,000 for the boxing ring-sized flat in November.

The apartment’s value has risen 10 per cent since then and analysts predict that falling interest rates and rising salaries will propel prices back to a heady 1997 peak.

Hong Kong’s economy is riding on the coat-tails of China’s boom, but its currency peg with the US dollar forces the territory to officially track US interest rate cuts. Local banks have more leeway but have still slashed rates by 100 basis points in the past two weeks as the US federal funds rate has fallen to 3 per cent.

So the housing downturn and mortgage crisis that threatens the US economy has indirectly bolstered Hong Kong property.

Monthly transactions for mass market housing in the final three months of last year were on average 63 per cent higher than in the rest of 2007, hitting their highest level for a decade.

Real Hong Kong mortgage rates are now negative, below inflation of 3.8 per cent and it has become cheaper to buy than rent, analysts say.

A Merrill Lynch property analyst has predicted a 50 per cent rally in property prices in the next two years, prompting several Hong Kong employees at the bank to go on an apartment hunting spree. UBS has the same forecast.

Geoff Lewis, head of investment services at JF Asset Management, said property might ‘catch fire’.

The expected boom fed a price rally late last year in Hong Kong’s biggest developers, including Sun Hung Kai

Properties, Cheung Kong Holdings and Henderson Land Development, but Hong Kong’s property sub-index has see-sawed this year.

Several Hong Kong developers are also expected to get an extra kick from their fast growing mainland China businesses.

But many analysts say buying an apartment is better than buying shares, as equity markets will probably stay volatile. Others suggest investors suffering share losses might have less cash to invest in real estate.

New housing supply in the next three years is forecast at half levels seen during the 1990s boom, and interest rates could fall further while inflation heads above 4 per cent, economists say.

With no control over monetary policy and inflation on the rise, a 50 per cent appreciation in flat prices could pose a risk for an economy that saw property prices nosedive 65 per cent when the last property boom burst 10 years ago.

Economists, however, are not worried about an asset price bubble just yet.

They think a strong property market will create wealth, spur consumer spending, and enable the territory to still notch up 4-5 per cent economic growth even if the US economy tips into recession and hits exports from one of the world’s busiest ports.

Hong Kong’s gross domestic product (GDP) has grown an average 7 per cent annually in the last four years.

‘Mass market property prices are still 35-40 per cent below their peak in 1997,’ said Nicholas Kwan, Asian head of research at Standard Chartered Bank.

‘So even if they rise 30-40 per cent, prices would only be what they were 10 years ago,’ he said. ‘It’s hard to argue that would be a bubble.’

Hong Kong home prices slid after the 1997 Asian economic crisis. Home prices were rocked by the bursting of the dotcom bubble and they slumped in a 2003 outbreak of the Sars respiratory disease, before rebounding about 80 per cent in the last four years.

Clifford Lam at Credit Suisse believes a steady Hong Kong economy could send home prices up 15-20 per cent this year but warns against complacency.

‘If the US goes into recession and China’s economic growth slows, Hong Kong businesses, including exporters and high rollers in the financial industry, are going to get hit,’ he said. ‘Some of the home buyers that are jumping into the market on the assumption property prices will rise 40-50 per cent will be disappointed.’

Prices for luxury property, on a four-year roll, have already returned to 1997 levels, with an Indonesian fund paying US$30 million for a house on Hong Kong’s iconic mountain, the Peak, last month – an Asian record on a per sq ft basis.

With the pegged Hong Kong dollar’s weakening, property has become attractive to foreigners and mainland Chinese.

For Judy Kwan, buying an apartment allows her to diversify out of a Hong Kong stock market that surged 39 per cent in 2007, and get a yield on her investment of 5.6 per cent a year. Bank deposit rates range between 0.75 per cent and zero.

‘I don’t believe in putting money in the bank, inflation is rising,’ said Ms Kwan, who has doubled her money on some mutual fund investments over the past four years. ‘You need to diversify your investments and rental income will cover my mortgage. It’s a win-win situation.’

 

Source:  Reuters (Business Times 5 Feb 08)

Bush unveils record $4.2 trillion budget

Boost in military funding and cutbacks in health schemes mooted

WASHINGTON – THE United States’ first-ever budget to hit US$3 trillion (S$4.2 trillion) has been proposed by President George W. Bush.

It aims to boost military funding, virtually freeze many domestic programmes, and will result in huge fiscal deficits of around US$400 billion for this year and next.

Democrats, who control Congress, are pledging fierce opposition to the spending plan, Mr Bush’s last before he leaves office.

The 2009 budget, sent to Congress yesterday and due to begin on Oct1, would more than double the US$163 billion shortfall recorded last year.

It would approach the US$413 billion budget gap of 2004, which was a record in dollar terms, although the Bush administration emphasises that the deficits in the next few years would likely be around 2.8 per cent of gross domestic product – not far from the historical average.

With the economy possibly teetering on the brink of a recession, revenues are expected to suffer, reversing a trend of the past three years in which annual deficits declined.

A promised US$150 billion stimulus package of tax rebates – reflected in the budget – will add to the deficit, at least in the short term, and funding for the Iraq war is another source of red ink.

In terms of cuts, the Bush plan aims to rein in domestic spending, in areas from home heating-oil assistance to health care.

While many – if not most – of the priorities of the Bush budget will be jettisoned by the Democratic-led Congress, its unveiling will trigger a new round of sparring over Mr Bush’s fiscal policies and economic legacy.

‘Today’s budget bears all the hallmarks of the Bush legacy – it leads to more deficits, more debt, more tax cuts, more cutbacks in critical services,’ said House Budget Committee chairman John Spratt, a South Carolina Democrat, yesterday.

‘Far from proposing a plan to fix the budget, the Bush administration proposes policies that worsen it.’

Last year, when Democrats were newly in the majority, there were drawn-out veto struggles. This year’s fights could be worse because it is an election year.

As in past years, Mr Bush’s biggest proposed increases are in national security. Defence spending is projected to rise by about 7per cent to US$515billion and homeland security money by almost 11per cent, with a big gain for border security.

The bulk of government programmes for which Congress sets annual spending levels would remain frozen at current levels.

The President does shower extra money on some favoured programmes in education and to bolster inspections of imported food.

His spending proposal would achieve sizeable savings by slowing growth in the major health programmes – Medicare for retirees and Medicaid for the poor. There, Mr Bush is asking for almost US$200billion in cuts over five years, about three times the savings he proposed last year.

Democrats say the plan is a continuation of failed policies that have seen the national debt explode under Mr Bush – projected surpluses of US$5.6 trillion wiped out; and huge deficits taking their place, reflecting weaker revenues from the 2001 recession.

The Democrats also blamed Mr Bush’s costly US$1.3 trillion tax cuts during his first term.

‘The Bush administration is going to hand the next president a fiscal meltdown,’ Senate Budget Committee chairman Kent Conrad told Reuters.

 

Source: ASSOCIATED PRESS, REUTERS (The Straits Times 5 Feb 08)

US December factory orders below forecast

WASHINGTON – NEW orders at United States factories rose a less-than-expected 2.3 per cent in December, the steepest gain since July, on strong aircraft sales, a government report showed yesterday.

Orders for durable goods, items intended to last three years or longer, jumped 5 per cent, also the biggest gain since July, as civilian aircraft orders climbed 11.7 per cent, the Commerce Department said. Durables orders were revised down from the 5.2 per cent gain originally reported last week.

When transportation was stripped out, orders rose a modest 0.7 per cent.

Analysts polled by Reuters were expecting a 2.5 per cent gain in factory orders and a 5 per cent rise in durable goods orders.

‘Things that are tied to housing are weakening, but things that aren’t are holding up reasonably well,’ said senior economist Mark Vitner at Wachovia Corp in Charlotte, North Carolina. ‘We may see frustratingly slow economic growth but we will still see growth.’

Non-defence capital goods orders excluding aircraft, considered a gauge of business spending, climbed 4.5 per cent, the largest increase since March.

‘Carmakers and home builders are working off inventories, and that has got to cause further reductions up the pipeline,’ said Mr Vitner.

 

Source: REUTERS (The Straits Times 4 Feb 08)

Flashes of optimism over global economy

Leaders note US system’s strengths and growth in nascent economies

DAVOS (SWITZERLAND) – COATS and jackets are off as blue skies and glorious sunshine soften the stark beauty of the icy Swiss Alps.

And in the nearly non-stop discussions between the world’s top political and business decision-makers gathered for this year’s World Economic Forum, flashes of optimism could be found in the largely gloomy countdown to a slowdown.

The news of a US$150 billion (S$214 billion) deal to revive the world’s largest economy brought cheer and a reminder that policymakers are not sitting on their hands, waiting for the markets to make the ‘healthy correction’ to the excesses in the US economy.

The US package will put between US$300 and US$1,200 in the pockets of more than 115 million Americans – the all-important consumers who drive the world’s economy.

And next Wednesday, Federal Reserve chief Ben Bernanke may present an encore – another interest rate cut to ease the credit crunch and edgy financial markets.

There are inherent strengths in the US economy, India’s Finance Minister Palaniappan Chidambaram told a forum discussing the possibilities and the impact of a US slowdown.

‘The US is a highly knowledge-based, innovative society. Their economy may slow down for two or three quarters…It is resilient and is bound to bounce back,’ he said. He quoted former Fed chief Alan Greenspan, who said in a media interview that there was ‘no clear proof’ of a recession in the data emerging from the US economy.

Another ground for optimism was seen in the number of nascent economies dotting the globe with their ’shiny eyes and can-do spirit’, as a Nigerian leader described them in a session exploring the next emerging markets.

Adding to the ranks of the well-known ‘BRIC’ combination of sunrise economies of Brazil, Russia, India and China, are new investment destinations with promise: Vietnam, South Africa, Turkey, Jordan, Morocco, Nigeria, Colombia and Mexico were mentioned.

‘I remain optimistic about prospects,’ said Mitsubishi president and chief executive Yorihiko Kojima.

He said he saw many opportunities daily as he toured the Japanese giant’s 220 offices in 80 countries.

Sovereign wealth funds with their trillions of investible funds were being counted on, too, to provide the liquidity needed to bail out distressed financial institutions.

They perform the vital task of recapitalising drained-out banks, said KPMG chairman Timothy Flynn. He added that a slowdown could be ‘healthy’ for the global economy to the extent that it would force companies to reexamine their business models, risk architecture and governance.

Still, the slowdown expectations are hard to beat.

For all the excitement about China and India, the world continues to be heavily dependent on the US consumer to keep the factories running.

When asked how much the world could look to Chinese and Indian consumers, Mr Chidambaram shrugged.

‘Not much,’ he said, pointing to some figures that show that while the Americans accounted for annual consumption worth US$9 trillion, the best figure for annual consumption in China and India could not top US $1.75 trillion.

Meanwhile, British Prime Minister Gordon Brown, who also spoke at the forum, urged countries in Europe and elsewhere to open up more to trade and investment to help offset the risk of a downturn in the global economy. ‘We have to be less protectionist,’ he said.

‘I think there is a danger. I see it in parts of Europe where people resort to protectionism,’ he said, without identifying countries he was referring to.

In an op-ed article published in the Financial Times on Thursday, Mr Brown criticised reckless investors for global economic turbulence and called for the International Monetary Fund to be given broader powers to keep watch on the world economy.

 

Source: The Straits Times 26 Jan 08

NEWS ANALYSIS: Spectre of recession spurs US bipartisan economic deal

Republican White House and Democrat-led Congress come together on stimulus package to resuscitate ailing economy

WASHINGTON – DEMOCRATIC House Speaker Nancy Pelosi spoke about ‘bipartisanship’ 10 times.

The combative lawmaker, who has been so critical of the Bush administration’s policies over the past year, took pleasure in announcing a hard-won deal on an economic stimulus package – reached in double quick time between the Republican White House and a Democrat-controlled Congress.

‘Let us praise it for what it does, not disrespect it for what it does not,’ Ms Pelosi said on Thursday. ‘It is timely, it is targeted and it is temporary. And it was done in record time.’ President George W. Bush hailed it as the fruit of ‘patience, determination and good will’ in both parties.

It was a rare victory – and reprieve – for both sides, which have spent most of the past year at loggerheads over many issues, including the Iraq War, children’s health-care and immigration.

Mr Bush vetoed seven Bills in the process – and staged only one signing ceremony with Ms Pelosi and Senate Majority Leader Harry Reid.

The US$150 billion (S$214 billion) rescue package might be the second one if the Senate approves it next month.

What has brought them together after a year of bitter feuding?

Both sides were clearly spooked by fears of an economic downturn in the US. It has become increasingly clear that the economy is teetering on the edge of recession, if it has not already crossed that line.

The crisis in the sub-prime adjustable home loans market has hit many lending institutions hard, cramping credit for almost everyone else.

Economic growth has all but disappeared, companies are reporting big losses and Wall Street continues a losing streak despite the emergency move by the Federal Reserve earlier this week to cut interest rates.

The domestic and foreign turmoil that followed has made the economy the No.1 concern for American voters as the presidential campaign heats up. With recession looming – and threatening to gain political mileage – lawmakers jumped eagerly at the chance to mend the ailing economy.

The package passed on Thursday was aimed at spurring consumption, featuring tax rebates of US$600 to US $1,200 for most tax filers within six months. The hope is that they will spend the money quickly and jolt the economy to life. Businesses would get US$50 billion in incentives to invest in new plants and equipment.

Each side got something out of the deal.

Late in the negotiations that preceded Thursday’s breakthrough, Ms Pelosi agreed not to include two proposals with broad support among congressional Democrats: an extension of unemployment benefits and a temporary increase in food stamps.

In exchange for those concessions, the Bush administration and House Republicans agreed that the stipend of at least US$300 would be paid to all workers who earned at least US$3,000 last year, even those who did not earn enough to pay taxes.

It was unclear, however, how Democrats in the Senate would receive the package without extended unemployment benefits or increased food stamps.

Some, like Massachusetts senator Edward Kennedy and New York senator Charles Schumer, have said that such proposals offered the best prospects for quickly injecting added spending into the economy.

There was some opposition in the House to Ms Pelosi’s compromise.

‘I do not understand, and cannot accept, the resistance of President Bush and Republican leaders to including an extension of unemployment benefits for those who are without work through no fault of their own,’ House Ways and Means Committee chairman Charles Rangel said.

The main obstacle, however, remains the Senate, which very often wins its battles with the House.

But with the power of the administration behind them, House leaders are optimistic – despite criticism from some – that their proposals would go through without any significant changes.

Mr Reid said he hoped to send a completed package to the White House by Feb 15, possibly with increased spending.

With the United States on the road to recession, politics might have taken a temporary back-seat. But there is no guarantee that swift cooperation between the administration and Congress will prevent a downturn in the world’s biggest economy.

Passing a stimulus package might not be enough for an economy dealing with a huge unknown: the ultimate magnitude of the housing crash and credit crunch.

And investors may want to see something more concrete – lower unemployment or higher retail spending.

US Treasury Secretary Henry Paulson, who has led the White House negotiations, made clear the plan would allow the government to mail out tax rebate cheques aimed at stimulating consumer spending within ‘60 days, more or less’ of congressional passage.

Yet some observers have said it may take the government until May or June to get cheques to consumers, making the economic boost somewhat questionable.

There is bipartisanship today. But it might have come too late.

Many economists, instead, portrayed the package as a significant psychological boost for jittery markets around the world.

 

Source: The Straits Times 26 Jan 08

US at the edge of a recession, says Greenspan

VANCOUVER – THE United States is drawing close to a recession, with the odds at 50 per cent or possibly higher, former Federal Reserve chairman Alan Greenspan said on Thursday.

‘The odds have definitely moved up from a year ago, when I was talking of about a third,’ Mr Greenspan told a financial audience.

‘I think we are now at a point that we are at the edge or over,’ he added. ‘The probability of a recession is 50 per cent, maybe more, but we are not there yet.’

Mr Greenspan’s comments were similar to those he made earlier in the month, and he acknowledged it was very difficult to predict exactly when the economy might enter a recession or was actually in one.

The former Fed chairman said a lesson learned from previous downturns in the economy and financial markets, such as after the Sept 11, 2001 attacks, was the need to avoid protectionist trade policies.

‘The economy is exceedingly more resilient than in the past,’ Mr Greenspan said, when asked if he thought if a recession would be shallow or deep, adding later that ‘for that reason, I would argue for a relatively shallow recession’.

On the issue of sub-prime mortgages, which were at the heart of the current economic turmoil, Mr Greenspan said although the loans were risky, he believed that they were worth the risk as they helped broaden home ownership.

The ‘real big surprise’ to him was how the sub-prime crisis migrated across borders to other parts of the world because of securitisation – where the mortgages were bundled together for sale through complex financial instruments.

Mr Greenspan gave a cautious thumbs up to recent injections by sovereign wealth funds of billions of dollars in exchange for stakes in a number of US banks hard-hit by the sub-prime crisis.

‘I must admit I am a little uncomfortable with sovereign wealth funds, but I must admit there is very little evidence that they are being used inappropriately,’ Mr Greenspan said. ‘On balance, I think they are desirable”, he added.

China, Kuwait and Singapore are among the foreign governments that have pumped money into US companies in recent weeks.

 

Source: REUTERS (The Straits Times 26 Jan 08)

US response to downturn worrying

Instead of addressing the cause, policymakers are addressing the symptoms – the collapse of credit quality

THOSE Asian allies and trade partners of the United States who can raise their gaze above stock market gyrations look with concern at the US response to its economic difficulties.

They note a continuing unwillingness to face realities and fear that the medium-term result will be both an enfeebled America and a sharp rise in protectionist sentiment. US policies are dominated by the twin objectives of propping up asset prices and consumer spending. Interest rates have been slashed in a panicky response to Wall Street, and the administration (and all the presidential candidates) favours US$150 billion or so of tax cuts to boost spending (and the budget deficit).

The short-sighted view in Asia is that this is good for the region because interest rates will support market sentiment and stock prices, and consumer spending boosts will help sustain Asian exports. The violent swings of Asian markets over the past few days testify to the extraordinary influence of Wall Street on the world as well as on US policies.

But step back just a little from these daily events. Why should we be so concerned with stock price falls? Even now, the Standard & Poor’s 500 is down only 7 per cent from a year ago and up 50 per cent over five years. Several markets are up 500 per cent or more over that period! Every market in Asia, with the exception of Japan, is still above year-ago levels – in the case of India and China, by a very large margin. Much froth remains to be removed before prices can be considered sustainable. Ironically, Japan has been the exception despite having the lowest interest rates, lowest inflation and a strong trade balance.

In all the talk in the United States about falling asset prices and recession fears, the issue of the savings rate and the trade balance has been forgotten. Yet it is in those issues that the crux of the US problem lies.

In November, according to the Bureau of Economic Analysis, the personal savings rate in the United States was a negative 0.5 per cent. It has been declining steadily since a double-digit level in the early 1980s, a decline that has been in part driven by rising asset prices, which masked the need for saving out of income rather than relying on credit-driven boosts to apparent wealth.

But instead of encouraging savings, the Fed is hell-bent on bailing out Wall Street by reducing its lending rate to 3.5 per cent, barely above the (well-massaged) rate of consumer price inflation. The resulting US dollar weakness will help entrench inflation. Meanwhile, if the attempt to stimulate consumer demand succeeds, the US import bill will remain around current levels. The current account deficit will gradually decline as exports rise, but will probably remain above US$500 billion a year (compared with around US$700 billion in 2007).

This will have two very damaging effects. Firstly, it will enable Asian governments to continue to put off domestic stimulus to offset what should be declining US import demand. Secondly, the continued generation of vast surpluses by Asian and oil exporting countries will lead to a backlash against their sovereign wealth funds. These will be on the prowl for US assets other than low-yielding Treasuries or the dubious financial institutions that have already caused them massive sub-prime losses. Bailing out Citi may be welcome, but will China be allowed to buy 3M and Coca-Cola?

There is already a growing sense in the United States, and elsewhere in the West, that whatever the theoretical benefits of freer trade may be, it is partly responsible for the increased income differentials against which democratic societies eventually tend to rebel. Anti-trade sentiment will be further fuelled by foreign acquisition of US icons on a scale far in excess of the Japanese purchases in the late 1980s.

US profligacy has also spilled over into unsustainable credit booms in China and India originating in the massive global oversupply of US dollars and hence of the monetary base and foreign reserves of these countries. When the dancing ends, there may also be a rethink of market-driven economics in those countries too.

There is a direct connection between easy credit in the United States, Wall Street irresponsibility, consumer excesses, unsustainable trade imbalances, the return of global inflation and the worldwide asset price boom. Yet instead of addressing the cause, US policymakers are addressing the symptoms – the collapse of credit quality, which had been going on for years but was masked by the creation of new and poorly understood new credit instruments. Instead of addressing the savings imbalance, the government proposes to make it worse by substituting government debt for any reduction in consumer debt.

One can only hope that Fed and Washington policies fail and the American consumer adjusts on his own to his true situation, returning the US to a sustainable path and forcing its Asian trade partners to respond appropriately.

 

Source: NYT (Business Times 25 Jun 08)

Bush and Congress join hands to revive economy

They set aside partisan differences to rush out $216b stimulus package

WASHINGTON – JOLTED by global recession fears, US President George W. Bush and leaders of Congress have joined hands in a rare show of cooperation, promising urgent action to pump up the economy with upwards of US$150 billion (S$216 billion) in tax cuts and government spending.

As markets roiled from a sharp sell-off around the world and the Federal Reserve scrambled to slash US interest rates by three-quarters of a percentage point – the largest cut in more than 23 years – Mr Bush met senior lawmakers on Tuesday to work out a compromise on tax breaks for consumers and businesses.

‘All of us understand that we need to work together. All of us understand that we need to do something that’ll be effective. And all of us understand that now’s the time to work together to get a package done,’ he said after the meeting at the White House.

The package, to be out within weeks, is expected to offer rebates of US$800 for individuals, bonus depreciation to allow companies to deduct 50 per cent of business investments made this year as well as boosts in unemployment benefits and food stamp payments for the poor and disabled.

White House spokesman Dana Perino disclosed that the administration was open to the possibility of a larger package, saying that Mr Bush was ‘not closing any doors’.

The current plan could help ‘avoid a potential downturn’, she said. She made clear Washington was not forecasting a recession, which many observers believe the US could face.

For Mr Bush, the economy now looms far larger as a potential crisis in his final year in office, when he had expected to remain focused on Iraq, Iran and the prospect of Middle East peace.

His plan – first mooted five days ago before the stock markets in Asia and Europe started plummeting – has produced some of the most striking bipartisanship of his presidency.

Both Democratic and Republican lawmakers emerged from the talks vowing to pass the package before Congress breaks for a holiday on Feb 18.

‘This week’s downturn in the global markets demonstrates how urgently we need to act to revive our nation’s faltering economy,’ Senate Democratic Majority Leader Harry Reid said.

‘I really feel good that we have the opportunity to do something together. We want this stimulus package to be dealing with the problems of the American people, not ideology.’

The Democrats appeared to be torn initially between compromising with the administration and blaming it for its lethargic response. But the party leadership was impressed with Treasury Secretary Henry Paulson’s willingness to compromise.

In the past, treasury secretaries could not budge because of stiff opposition from conservatives.

The conservatives – in editorial pages of The Wall Street Journal and The Weekly Standard – were making their views loud and clear. They scorned one-time tax rebates to individuals as ineffective pandering and called for permanent breaks aimed at drawing investment.

The liberals also joined in the fray. They argued that Mr Bush’s proposed package favoured the rich.

Democratic Senator Edward Kennedy said on the Senate floor: ‘We’ve tried tax rebates before, but they haven’t worked as well as they should because previous rebates left out those at the very bottom of the economic ladder – the families struggling every day to pay their bills, heat their homes and pay their mortgages.

‘Now the President wants to do the same thing again. He’s proposed a tax break in his stimulus package that would completely leave out the poorest Americans.’

Analysts believe the rescue package might be too late to avert an impending recession at home.

Lowering interest rates or passing a stimulus package may not be enough. People and investors may want to see something more concrete – lower unemployment or higher retail spending, for example.

But the economy is dealing with a huge unknown: the ultimate magnitude of the housing crash and credit crunch.

Washington Post columnist Robert Samuelson said the Bush plan was intended only to distract US consumers from their pain, like giving sweets to a crying child.

‘It’s an election year. Voters feel anxious about a weakening economy,’ he wrote. ‘Send them economic lollipops – say, a US$500 tax rebate for most families. Make them feel better. Show them you are concerned.

Prove that you are trying to improve the economy.’

 

Source: The Straits Times 24 Jan 08

DBS analysts see US slowdown, not recession

WITH the markets falling all around them, DBS analysts are standing out with a contrarian and notably optimistic view on where macroeconomic variables are headed.

The bank’s head of group research, Sanjit Maitra, said at DBS’s annual outlook seminar for corporate and private clients yesterday that he believes that US domestic consumption is not headed for negative territory, although it will slow. He believes that the worst is over, with the turning point not in the last month but actually as far back as the first quarter of last year.

Mr Maitra compared the current US slowdown to the downturn in late 2001. At the time, monthly job losses reached nearly 300,000, with some 2.6 million people losing their jobs over the period, yet growth in consumption never fell below 2 per cent.

‘Now we’re talking about job growth being weak, with losses picking back up to around 100,000 per month. But unless another external dynamic comes into play, it is hard to conclude there will be negative consumption growth,’ he said.

And from looking at historical US GDP growth, the slowdown – which Mr Maitra said was ‘three years old’ – was sharpest in 1Q07, when year-on-year growth slowed to about 1.5 per cent.

Meanwhile, Asian domestic demand has grown to the point where it will represent 93 per cent of US growth in 2008. That means that this year, for every dollar of American consumption Asians will consume about 93 cents – a proportion that has steadily increased from less than 50 cents in the late 1980s.

By 2010, Asia will contribute at least as much as, if not more than, the US to world consumption, Mr Maitra said.

He also reminded the audience that China’s largest trading partner is the European Union – at an average 24.6 per cent of total exports for the last three months – and not the United States, which took in 23.6 per cent of Chinese exports. Another 19 per cent go to Asia ex-Japan and India.

As such, it is actually the US that relies more on foreign demand. Some 19.5 per cent of America’s GDP growth came from a rise in net exports in 2006-2007, compared to 18.5 per cent for China, said Mr Maitra.

In sum, DBS expects US growth for 2008 to slow to 2.4 per cent, but not slip into recession. The euro zone will see steady growth at 2.25 per cent, China’s growth will slow to 10 per cent, and the rest of Asia ex-Japan will stay the pace at 6.25 per cent.

But this does not mean that regional equity markets will bounce back within the week, said Timothy Wong, head of regional equities at DBS Group Research.

Asian markets are still very much driven by liquidity from the US and Europe, and high-risk aversion has led these foreign investors to sell down – in the face of uncertainty, they retreat from what they perceive as risky emerging markets back to their home markets, he said.

 

Source: Business Times 23 Jan 08

Investors abroad don’t feel immune to US woes now

They worry how bad a US recession could get, and how badly it would hit the world

(FRANKFURT) Since late last summer, the US economy has demonstrated an enduring power to surprise. And not for the better.

Investors worldwide are pondering the prospects for a recession in the United States, their latest and furthestreaching preoccupation resulting from a succession of bad news that the US economy, the world’s largest, has delivered since the onset of global financial turmoil.

When credit markets seized up, the product of mounting losses linked to the American mortgage market, stocks dived, then recovered, as investors factored higher borrowing costs into the outlook for corporate earnings. The changes, some reasoned, were an imaginable step away from the easy money of recent years.

But as large banks in the US disclosed losses in November, equity markets plunged again to account for a lending system that, it turned out, needed to purge losses and be recapitalised.

Stocks recovered somewhat in December. Now the focus among overseas investors has jumped to recession, and a conviction that the US cannot avoid it has became embedded in many market watchers’ and investors’ psychology.

‘We have moved from a phase where an assessment was made on the credit situation, which is improving, onto the macroeconomic news flow,’ said Jacques Cailloux, chief euro-area economist at the Royal Bank of Scotland in London. ‘And if you look at the US, the data has not been very encouraging.’

On Monday, investors ignored the assurances last week from Federal Reserve chairman Ben Bernanke that the US might avoid recession; instead, they have begun to ask how bad it could become – and how bad that would make it for the rest of the world.

‘Ten days ago, only a very few people thought this would be a bad one,’ said Erik Nielsen, chief European economist at Goldman Sachs in London. ‘But now you have people debating just that.’

The latest panicky discussion – which ushered Asian and European markets on Monday and yesterday to some of their steepest losses since September 2001 – revolves around whether the normally resilient US economy will suffer a sharp, protracted downturn or a brief, shallow slowing if consumers regain their footing after the long period of free spending by borrowing against the value of their homes.

Emergency proposals with broad support from the Republican White House and many congressional Democrats to stimulate the economy, coupled with further signs that the Fed will again cut borrowing costs to cushion the blow, suggest agreement in the US that the economic downturn is a serious threat and must be addressed immediately.

That sense of urgency is also fuelling further debate among policymakers in Europe and Asia about whether their economies are truly as insulated from US woes as many would like to believe.

Investors in Asia, conditioned by the roaring economies of emerging markets like China and India, had resisted factoring the chances of a recession in the US into equity prices, stock strategists said – a stance that helped ward off losses in recent months. But now that expectation of a recession is wider, the adjustment in the markets has been jarring – a point evident in Monday’s stock losses.

The signals from the US have been strong enough that the financial markets are betting that Europe will take a much bigger hit than previously expected.

This conviction is strong enough that investors are behaving, based on signals from the bond market, as if they expect the European Central Bank (ECB) to ease interest rates later this year – even though the bank has given no such signal.

‘Overall, the market is sending a message to the ECB that the outlook is very different from what the bank has said,’ Mr Cailloux said. ‘The markets are pre-empting the ECB.’

Instead, the European bank has threatened to raise interest rates – rather than lower them, as is happening in the US – if labour unions demand compensation for food and energy price increases in new wage settlements, a move that could be expected to increase inflation, which is already 3 per cent in the euro zone.

Yet even the president of the European bank, Jean-Claude Trichet – who maintains that the euro area can continue to grow solidly despite deteriorating conditions in the US – acknowledged recently that the slowing in the US must be watched carefully.

In trying to estimate how much American consumers might curb their spending, slowing the economy further, some analysts are beginning to make comparisons to Japan’s long stagnation of the 1990s.

This view holds that consumers have overdone things to such a degree on cheap credit and loans from ever more expensive homes, that the adjustment could drag out more than a few quarters. At the least, this thinking goes, corporate earnings could be tame even after the economy stops contracting, slowing any recovery.

 

Source: NYT (Business Times 23 Jan 08)

COMMENTARY: Things are no different after all

FOR months, the warning signs were apparent, but euphoric investors, boosted by a liquidity-driven bull market that had lasted more than three years, chose to ignore them. Furthermore, they were lulled into complacency by repeated bouncebacks from various shocks ranging from Chinese monetary tightening to the yen ‘carry trade’.

Now, in the space of months, markets are making up for lost time, rapidly repricing risks even as abject fear replaces complacency and bewildered investors find themselves firmly in the grip of the bear.

The first whiff of the beast came when global markets were jolted by a Wall Street plunge on Friday, Aug 3 last year, following release of a weaker-than-expected US jobs report and news of massive layoffs at American Home Mortgage Investments because of a collapsing property market.

On Monday, Aug 6, the Straits Times Index (STI) plunged 127 points or 3.7 per cent to 3,308 in response to worries over the exposure of local banks to US collaterised debt obligations (CDOs), but thanks to a slew of immediate ‘buy’ reports from local analysts, it rebounded 111 points the next day. Two months later, it hit an all-time high.

In recommending a ‘buy’ on local banks, one foreign house at the time said ‘(the selling) is clearly an overreaction and we would urge investors to buy the Singapore banks . . . at current prices. The risk from CDOs has been priced in’.

A foreign research house at the same time wrote that its analysis showed that there were no signs of a bear market and urged clients to stay invested. ‘There is plenty of growth outside of the US economy: economic news from China and the rest of Asia has been very strong . . . suffice to say that the world economy is still in a low-inflation boom, driven by enormous supply-side expansion,’ it said.

To be fair, analysts were not entirely to blame for being so wide of the mark. Banks themselves were unaware of the extent of the problem and even normally conservative public sector officials were quick to step forth with reassurances – Mervyn King, the Bank of England governor, on Aug 8, said sub-prime woes were largely confined to the US and there would be no international crisis as a result.

Moreover, until only very recently, US Federal Reserve and Bush administration officials maintained that US growth was robust, the economy was resilient and despite a crashing dollar, there was nothing to worry about.

A further factor at play in fostering complacency in the face of rising risk was market conditioning – for example, a mini-crash in China early in 2007 raised contagion fears that sent stocks diving, but the resulting correction was short-lived because China quickly recovered. Similarly, the unwinding of the yen ‘carry trade’ adversely affected stocks for only a few days before the rally resumed.

Because the bull repeatedly reasserted itself in the face of such adversity, the majority of observers

expected the US sub-prime crisis to blow over just as quickly. The mantra from the bullish camp was ‘this time is different’.

Not all analysts and brokers were bullish – Morgan Stanley was among a small minority to warn of impending danger, writing last August that ‘the market has for some time exhibited excessive optimism, driven by liquidity rather than fundamentals, and hence has been willing to extrapolate the positive and ignore the negative’. It is very likely that just as markets are liable to overshoot on the upside because of irrational exuberance, they can equally overshoot on the downside because of irrational fear. In fact, until the full extent of the US slowdown and its impact on all corporate profits – not just the banks’ – is known, markets could still come under intense pressure. As we noted last August, things are really no different from historical trends.

 

Source: Business Times 23 Jan 08

Soros warns of worst financial crisis since WWII

(VIENNA) Billionaire investor George Soros said the world was facing the worst financial crisis since World War II and the United States was threatened with recession, according to an interview by the Austrian daily Standard.

‘The situation is much more serious than any other financial crisis since the end of World War II,’ Mr Soros was quoted as saying.

He said that, over the past few years, politics had been guided by some basic misunderstandings stemming from something which he called ‘market fundamentalism’ – the belief financial markets tended to act as a balance.

‘This is the wrong idea,’ he said. ‘We really do have a serious financial crisis now.’

Asked whether he thought the US was headed for a recession, he said: ‘Yes, this is a threat in the United States.’

He added that he was surprised how little understanding there had been on how recession was also a threat to Europe.

European shares fell nearly 6 per cent on Monday, their biggest one-day slide since the Sept 11 attacks of 2001, as fears of a US recession and more writedowns in the financial sector sparked a broad-based selloff.

In Washington, US Treasury Secretary Henry Paulson said that the US economy remained resilient and has healthy long-term fundamentals, but has slowed ‘materially’ in recent weeks.

Warning that, in the short term, risks were clearly to the downside, he said that Congress and the administration need to agree quickly on a package of tax cuts and other measures to boost the economy.

‘Time is of the essence and the president stands ready to work on a bipartisan basis to enact economic growth legislation as soon as possible,’ Mr Paulson said in remarks to the US Chamber of Commerce as House Speaker Nancy Pelosi and leaders in both parties prepared to meet President George W Bush at the White House to discuss a stimulus bill.

Such legislation presumably would involve tax rebates, business tax cuts and funding for a Democraticled call for additional food stamp and employment aid.

 

Source: AP, Reuters (Business Times 23 Jan 08)

US economists bearish about America: survey

But they are more upbeat about their own firms’ outlook

(WASHINGTON) Leading business economists are growing more pessimistic about the health of the US economy, but are more upbeat about their own company’s prospects, according to a new survey.

The National Association for Business Economics (NABE) panel yesterday predicted a sharply lower pace of growth in the US gross domestic product (GDP) in the first half of this year, based on its latest quarterly industry survey.

About one in four panellists said that they expected GDP to grow by an annualised rate above 2 per cent in the first half, compared with more than three in five who forecast growth of 0-2 per cent.

One in 10 of the panellists said that they expected GDP to decline in the first six months.

‘This is a much gloomier outlook than respondents reported in previous surveys regarding either the first or second half of 2007,’ NABE said in a statement.

In last October’s survey, almost half of respondents forecast growth in the second half of 2007 of 2-4 per cent, and only one per cent expected GDP to decline.

‘The January NABE industry survey shows a striking dichotomy,’ said Ken Simonson, chief economist of Associated General Contractors of America.

‘Compared to the October survey, respondents are much gloomier about the outlook for the economy as a whole but are more upbeat about their own firms’ pricing, capital spending, and hiring plans,’ he added.

Despite a severe housing slump and tight credit conditions that are leading some analysts to warn of recession, the survey found that 42 per cent of firms plan to create more jobs in the first half, while only 17 per cent will cut jobs.

The hiring outlook was more positive than in the previous four quarters, and ‘an encouraging sign for an economy at risk’, NABE said. In the October survey, only 32 per cent of respondents had planned to increase payrolls, down a notch from the 33 per cent seen in last year’s January poll.

Panellists raised their capital spending plans for 2008. Half said that they expected to increase spending, up from 43 per cent in the October survey.

Expectations of price increases in the first quarter jumped, with 47 per cent planning to hike prices, compared with 33 per cent in October.

While nearly all respondents expected the housing slowdown to continue – and nearly half saw a further ’substantial’ downturn – fewer than in October expected their business to be affected.

The survey of 98 NABE members was conducted between Dec 13 last year and Jan 9.

 

Source: AFP (Business Times 23 Jan 08)

Dramatic 75 basis point cut in US rates

As markets reel, US central bank says it stands ready to act again; its next scheduled meeting is in a week’s time

NEW YORK CORRESPONDENT

IN A stunning response to the panic that triggered two days of frightening sell-offs on world stock markets, the US central bank yesterday slashed interest rates by a dramatic 75 basis points.

The historic move, made shortly before the opening bell of the New York stock market, is the biggest single cut since the US Federal Reserve used the short-term rate as a principal monetary policy instrument around 1990. It is also the first time that the central bank has cut rates in an emergency session since 2001 after the attack on the New York World Trade Center towers.

The Fed’s accompanying statement to the cut in interest rates to 3.5 per cent was brief and to the point: ‘The (Federal Open Market Committee) took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labour markets.’

Wall Street responded in equally dramatic but mixed fashion, as futures markets on the Dow Jones Industrial Average, which had been down more than 500 points an hour before the stock market opened here, quickly cut those losses to the equivalent of a 100-point opening decline.

Within fifteen minutes, however, all the major US stock market indexes were plunging again. When the bell sounded to begin trading on the New York Stock Exchange, the blue chip Dow Jones index registered a 350-point, or 3.5 per cent, plunge that was pared down to 293 points, or 2.5 per cent five minutes later. By 11am New York time when The Business Times went to print, losses were further narrowed to 136 points as the Dow stood at 11,963.39.

Speaking just moments before the opening bell, John Canavan, market analyst at Stone & McCarthy Research Associates, said that he believed that the immediate impact of the Fed’s big move is questionable.

‘Futures initially broke higher when the Fed’s announcement came out, but they quickly fell back… That’s the market telling us that no one believes there’s a quick fix solution to the dangers and turmoil facing the US economy at the moment,’ he said.

In its statement, the Fed made clear that it is not done with interest rate cuts. It stated: ‘Appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.’

Traders were already wondering when the next Fed interest rate cut might occur. ‘The FOMC sent a clear message that it’s not done after this 75 basis point cut. The anticipation of aggressive action should serve as somewhat of a counterpoint to the fears of what a recession in the US will do to the world’s markets,’ said Ryan, Beck chief investment strategist Joe Battipaglia.

‘It’s going to take some time, but the economy and the market will come back,’ he added.

When that comeback might be is certain to keep investors awake at night for many weeks to come. ‘We live in interesting times for better and for worse, and this is definitely one of the worst,’ said Mr Canavan. ‘There is no quick fix here. I expect we’ll see building support in the second half of the year as the Fed continues to cut rates, probably down to three per cent or lower.’

But he added: ‘There are so many wildcards out there right now, it’s impossible to make any predictions.’ The biggest wildcard is how consumer spending will be impacted in the second half of the year by the housing market slump, he said. ‘And until we know how that works out, we’re going to be stuck in a cycle of fear and hope.’

 

Source: Business Times 23 Jan 08

Recession in US, Europe could shake Asia, S’pore

Region still relies heavily on world’s biggest markets, say economists

A RECESSION in the United States and Europe would badly hurt Asian economies, including Singapore’s, which still rely heavily on these two export markets for growth, according to economists.

Indeed, analysts at Lehman Brothers believe economic growth in Singapore could slump to as low as 2.5 per cent this year, if the worst-case scenario of a recession occurs. The official forecast is for growth of 4.5 per cent to 6.5 per cent.

Economists said yesterday that while the region’s economies have managed to stand on their own feet in recent years, their fortunes are still closely tied to external conditions.

Most economists are maintaining forecasts for a more benign slowdown, but they concede that risks of a severe downturn are on the rise.

‘We are probably only one shock away from the US economy tipping into a recession,’ said Lehman chief global economist Paul Sheard. ‘One thing that we will be thinking about the next week or so: Are we seeing that one shock now hitting the US economy in the form of this equity market meltdown that is unfolding this week?’

Global share prices have crashed since the start of the year and are accelerating their declines amid rising fears that a US recession may send the world economy into a tailspin.

Earlier theories that Asia’s booming economies are plotting their own destinies and escaping this plight are dissipating fast.

‘We don’t really buy the decoupling idea in its strong form,’ said Dr Sheard, adding that it is very unlikely that demand from Asia and other emerging markets can offset a slowdown in the US and Europe.

Singapore is especially vulnerable, given its small and open economy, said Mr Robert Subbaraman, who heads Lehman’s economic research for Asia, excluding Japan.

He believes overall Asian growth this year could fall by 4.5 percentage points from last year’s 8.7 per cent, if the rest of the world goes into recession. Singapore’s growth could come down to between 2.5 per cent and 3 per cent, he said.

For the moment, Mr Subbaraman is still hoping that aggressive US interest rate cuts will avert a recession to support a 5.3 per cent growth in Singapore and a 7.6 per cent expansion in the region.

This scenario, however, brings risks of an overheating economy, as foreign capital inflows drive up inflation to form possible asset bubbles in the region, he warned.

United Overseas Bank economist Ho Woei Chen said a US recession would hit Singapore’s export sector very hard.

‘Although exports to China have increased, enddemand is largely still in the US,’ he said.

Citigroup economist Chua Hak Bin said a 1-percentage-point reduction in US growth would cut Singapore growth by 1.7 percentage points.

He said a contraction in the US and Europe could lower Singapore growth from his current forecast of 5.6 per cent to between 3 per cent and 4 per cent. ‘Ultimately, manufacturing will be hit, as well as trade-related services such as wholesale and transport.’

Barclays economist Leong Wai Ho, though, is much more sanguine.

He tips Singapore growth at 6.5 per cent this year, purely on the strength of the domestic economy.

‘We already expect exports to contribute very little to growth,’ he said, pointing out that last year’s strong growth came amid a weak export performance.

Instead, private consumption, fuelled by record tourist arrivals and investments in the construction sector, should provide a buffer.

Projects, like the integrated resorts, are highly unlikely to be disrupted, while the record new manufacturing investments that Singapore won last year will provide support, Mr Leong said.

‘We have never entered a US recession from such a strong position. We are going into this with good quality, broad-based growth.’

 

Source: The Straits Times 23 Jan 08

Fed slashes rates in bid to halt share selloff

‘Emergency’ cut of 0.75 percentage points is its biggest in 26 years

THE United States central bank slashed interest rates last night in a desperate bid to halt a global share market bloodbath and keep recession at bay.

The dramatic ‘emergency’ rate cut of 0.75 percentage points was far higher than expected and the biggest single cut in 26 years. Its surprise move reflects the escalating fears that the US economy will slow down and drag the rest of the world with it.

The Fed hinted that it is prepared to keep cutting rates if necessary, saying that ‘appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks’.

The rate cut was announced an hour before US markets opened and had the desired effect of calming jittery European markets, with London’s Footsie index ending 161.9 points higher at 5,740.1.

On Wall Street, the Dow Jones Industrial Average initially joined the plunge that had shaken world markets for two days. It plunged by more than 460 points after opening but by 2.30am this morning (1.30pm New York time), the Dow was off by 118.52 points, or 1 per cent.

But the cut came too late for Asian bourses, which were battered for a second straight day as investors bailed out and big global funds sold anything they could get their hands on.

Singapore was the region’s best performer after it restricted losses to a mere 50.6 points, thanks to a bluechip rally late in the day. But that brought its loss this year to 17.3 per cent.

Commentators were split on the Fed’s rate cut.

Deutsche Bank analyst John Tierney told Reuters in New York: ‘The Fed is very, very, very worried. Markets may perk up a bit until it figures out what this means.’

But Action Economics’ Ron Simpson said: ‘This is a gutless move by the Fed. (It) just fuels panic trades further. And the markets are pricing in more rate cuts next week.’

Fears also mounted that the Fed may run out of options to fight a global financial crisis. If rate cuts do not work, it has little left.

Global investors have already bought into the recession story and have been rushing for the exits this week, sending markets into free-fall.

The evidence was almost everywhere in Asia yesterday: Hong Kong’s Hang Seng Index suffered a staggering plunge of 2,061.2 points or 8.7 per cent – its biggest-ever one-day drop – while Australia went into a 7.05 per cent nose-dive and the Shanghai Composite Index fell 7.2 per cent.

India looked set for a total meltdown when its market sank by more than 11 per cent early on. A one-hour trading ban calmed nerves and allowed the index to close down about 5 per cent.

The commodities markets were also hit, as crude oil fell US$2.53 (S$3.63) to US$88.04 a barrel.

Singapore traders were struggling to get a handle on the cause of such mayhem, but there was talk that hardpressed hedge funds were behind much of it.

They were being forced to clear their positions after failing to top up the margins on loans they had taken to make massive bets on regional stocks and commodities.

And other predatory funds were adding to the chaos and uncertainty by short-selling in the hope of buying back the shares more cheaply.

With all of that going on, it was little short of a miracle that the Straits Times Index managed to call it a day only 1.73 per cent down at 2,866.55 after plunging by 171 points after lunch.

But many fortunes were lost during the day, as banks force-sold shares of clients pledged as collateral for loans. ‘We have dealers telling us that their clients are threatening to kill themselves if they are hit by further margin calls,’ said a local brokerage’s risk management head.

 

Source: The Straits Times 23 Jan 08

Analysts see Asian economies weathering a US recession

Reason: Asia is now less dependent on the US economy

(BANGKOK) Asia would be able to weather any recession in the United States, analysts say, because rising trade and investment within the region make it less dependent on the US economy than in the past.

While a severe downturn in the US would drag on Asian growth by eroding demand for exports, a rapidly growing middle class is fuelling orders for cars, electronics and housing – much of which will be supplied from Asia itself.

Voracious demand for oil, iron ore and other commodities to build roads, sewage systems, and office buildings – especially in the booming economies of China and India – will also help sustain the region through any US slowdown.

‘The US economy is not that important anymore,’ Hans Timmer, a World Bank economist, said in Singapore earlier this month.

Excluding Japan, 43 per cent of Asia’s exports go to other nations in the region, Lehman Brothers calculates – up from 37 per cent in 1995.

‘China and India represent a bigger presence on the world stage than just a half dozen years ago,’ said David Cohen, director of Asian forecasting at Action Economics in Singapore.

A drop of one percentage point in US economic growth would shave 1.3 percentage points from China’s growth rate due to lower exports, Citigroup estimates.

Since China is growing so fast, that isn’t likely to make much of a dent. China’s economy will still expand 11 per cent this year, slightly slower than in 2007, Citigroup projects.

Lehman Brothers forecasts 2008 growth will drop to 9.8 per cent, still remarkably strong.

Most regional projections show some drop-off from 2007, but still reflect healthy expectations.

The UN Economic and Social Commission for Asia and the Pacific said 38 developing economies in the region – including China and India – will expand an overall 7.8 per cent this year, slightly lower than growth of 8.3 per cent in 2007.

Global growth, meanwhile, will moderate to 3.3 per cent in 2008 from 3.6 per cent last year, with any slowdown in the US largely offset by growth in developing countries, the World Bank projects.

But Rajeev Malik, an economist with JPMorgan Chase in Singapore, cautioned that growth in China and India could not make up all the slack of a US downturn.

‘Demand in industrial countries is still pretty important for the rest of Asia,’ Mr Malik said. ‘While China, and to some extent India, offer some offsetting demand, there will still be some downshifting in activity if the US goes into recession.’

If the US economy does contract, India’s growth will likely slow to 7 per cent from the current rate of about 9 per cent, he predicted.

Asian stock markets have tumbled in recent weeks amid worries that a slowdown in the US will hurt exporters’ profits.

Still, some analysts say some stocks appear oversold and the drop may present a buying opportunity given the region’s growth potential.

Japan, the world’s second-largest economy, may suffer the most from a US contraction.

Ryutaro Kono, chief economist at BNP Paribas in Tokyo, predicts the nation’s economic growth will drop this year to about half of the 2 per cent it has marked in recent years.

Lower demand for exports could even have a silver lining for China by restraining inflation, which has soared to the highest level in more than a decade.

‘If China’s exports slow down significantly, you definitely will see lower prices rather than inflation,’ said Minggao Shen, an economist with Citigroup in Beijing.

But he did warn that weaker export demand could leave Chinese manufacturers with overcapacity problems.

 

Source: AP (Business Times 22 Jan 08)

Investors reckon US already in recession

Markets, key indicators are plunging, reflecting sentiment that outlook appears to be very bleak

NEW YORK – WHILE the chairman of the United States Federal Reserve told Congress on Thursday that a recession could still be averted, Wall Street sent Washington a different message: It is already here.

The Dow Jones Industrial Average plunged 306.95 points to 12,159.21 on Thursday, capping a 14.2 per cent slide from its all-time high in October.

After 12 days of trading, the broader Standard and Poor’s (S&P) 500 Index is off to its worst January on record.

And the Russell 2000 Index, which tracks small companies, sank into a bear market, after falling more than 20 per cent from its year high.

Corrections of this magnitude have coincided with recessions in the past, though not always. In 1990, a steep sell-off presaged a downturn, while a similar drop in 1998 came and went with no apparent effect on the broader economy.

The stock market, however, is not the only part of the financial world that is pointing to trouble.

The Baltic Dry Index, a shipping index considered as a leading indicator of the health of the global economy, has plummeted, and investors have fled high-risk corporate bonds.

A troubling trend is emerging in the S&P 500. Shares of energy and materials companies, last year’s top performers, have fallen to the bottom of the pack.

Investors appear to be betting that those sectors will be hurt by a coming downturn.

The fact that Fed chief Ben Bernanke indicated the need for aggressive interest rate cuts also led investors to believe that the US economic outlook was very bleak.

‘Selling causes more selling. People panic and want to cut their losses,’ said Mr David Kovacs, a quantitative investment strategist at Turner Investment Partners.

Adding to the pessimism, which drowned out the reassurances by Mr Bernanke, were reports that manufacturing activity could be slowing down even more than analysts had expected, and that groundbreakings for new homes last month reached their lowest level in 16 years.

Investors are also worried that write-downs by US banks are making them less willing to lend to consumers and companies, a trend that will cut off a primary source of lifeblood for the US economy.

Mr James Paulsen, a strategist at Wells Capital Management, reflected the view of many investors that help from Washington would come too late to do any good.

‘By the time they actually pass anything, it will be past the time we need it,’ he said.

Some market watchers said the Fed chief was leaning on government support in lieu of aggressively cutting rates.

‘Bernanke said it would be nice to have an economic stimulus package to help him with his fight. You didn’t see Greenspan asking for help,’ Mr Kovacs said, referring to former Fed chief Alan Greenspan.

FEAR IN THE AIR

‘Selling causes more selling. People panic and want to cut their losses.’

MR DAVID KOVACS, a quantitative investment strategist at Turner Investment Partners

Source: The Straits Times 19 Jan 08

Data shows recession in some US states, industries

Economists see signs damage is spreading to states; industries now unaffected

(WASHINGTON) A wide range of data from the government, private corporations and independent analysts paints a picture of a nation that is already in recession in some states and industries, while much of the nation and big parts of the economy have suffered little.

It is a divided economy in which major Wall Street banks are recording multibillion-dollar write-downs even as most regional banks have endured little damage.

While unemployment is rising and consumers are falling behind on their bills in highly populated states such as Florida, California and Michigan, most other states appear to be doing fine. Construction workers are on unemployment lines, but engineering and consulting firms are still getting in bidding wars for staff members.

This divide, reflected in a report released on Wednesday by the US Federal Reserve, shows a nation struggling to fight off the housing and credit crisis. The challenge facing policy-makers is to prevent the problems from spreading without unnecessarily increasing the budget deficit or stoking inflation.

‘We don’t have a full-blown nationwide recession now, or even a full-blown slowdown,’ said Joel Naroff, chief economist of Commerce Bank. ‘But that doesn’t mean it doesn’t ultimately turn into one. What the Fed and Congress need to do is try to make sure this is a soft period rather than a recession.’

The Fed’s ‘beige book’, a compilation of anecdotal reports of business conditions around the country, speaks of ‘robust demand’ in industries such as health care, hotels, insurance and the legal sector. The agricultural sector is enjoying good times as corn prices rise. The beige book said, however, that recent holiday sales were disappointing in much of the country and that manufacturing activity was mixed.

The economic damage appears to be concentrated in hotbeds of the mortgage crisis, states that also include Arizona and Ohio.

By sector, economists said, the damage is worst in the construction, manufacturing and housing-related portions of the financial services industry. The Fed reported on Wednesday that industrial production was flat in December.

‘So far the economic damage has been concentrated in housing and housing-related activities,’ said Mark Zandi, chief executive of Moody’s Economy.com. ‘Where housing is crashing is where economies are contracting.’

Prices for food and energy have been rising rapidly, underscored by fresh data from the Labor Department on Wednesday that consumer prices rose 0.3 per cent in December. That could have the same impact on households as a rise in taxes.

The consumer price index rose 4.1 per cent for all of 2007, compared with a 2.5 per cent increase in 2006.

In this bifurcated economic landscape, the sectors that are suffering are slowing the nation’s overall growth rate.

Some economists see tentative, worrying signs that the damage is spreading to states and industries now unaffected.

If those signs turn into a broad weakness, it would mirror the late 1980s, when there were ‘rolling recessions’, in which one region or industry after another suffered from weak economic conditions. ‘The economy never went into recession but different sectors did, with different regions hit at different times,’ Mr Naroff said.

 

Source: The Washington Post

LATEST US DATA: Housing starts plunge 14% in December

Building permits post biggest fall in 12 years as housing slump deepens

(WASHINGTON) Builders in the US broke ground in December on fewer houses than forecast, making 2007’s decline in homebuilding the worst in almost three decades.

The 14 per cent decrease to an annual rate of 1.006 million, the lowest since 1991, followed a 1.173 million pace the prior month, the Commerce Department said here yesterday. For all of 2007, starts were down 25 per cent, the biggest decline since 1980, to 1.354 million.

Building permits, a sign of future construction, declined by the most in 12 years, suggesting the housing slump will deepen as it enters a third year. Rising foreclosures will throw even more houses onto the market, hurting property values and threatening to push the economy into recession, economists said.

‘Housing will take a big chunk out of growth in the first half’ of this year, Patrick Newport, an economist at Global Insight Inc in Lexington, Massachusetts, said before the report.

‘Builders are cutting back production and discounting heavily but they haven’t really made a significant dent in inventories.’ Starts were projected to fall to a 1.145 million pace from a previously reported 1.187 million rate in November, according to the median forecast of 74 economists polled by Bloomberg News. Estimates ranged from 1.05 million to 1.2 million.

Permits fell 8.1 per cent to a 1.068 million annual rate, bringing 2007’s decline to 25 per cent, the biggest since 1974. Permits were forecast to drop to a 1.135 million annual pace, according to the survey median, after 1.162 million. Projections ranged from 1.05 million to 1.17 million.

Construction of single-family homes decreased 2.9 per cent to a 794,000 rate, yesterday’s report showed. Work on multi-family homes, such as townhouses and apartment buildings, plunged 40 per cent to an annual rate of 212,000 from the prior month.

The decrease in starts was led by a 31 per cent slump in the Midwest and a 26 per cent decline in the Northeast.

Federal Reserve policy makers, including chairman Ben S Bernanke, have signalled they may take more aggressive action in response to the increasing risk of slower growth.

Central bankers are likely to cut interest rates by half a percentage point when they meet this month, according to futures trading.

‘The demand for housing seems to have weakened further, in part reflecting ongoing problems in mortgage markets,’ Mr Bernanke said in a speech here on Jan 10.

Source: Bloomberg (Business Times 18 Jan 08)

Sub-prime losses could near half a trillion dollars: study

TOKYO – Potential losses from US mortgage woes could top US$460 billion worldwide with aftershocks to be felt until late 2008, a Japanese private think tank estimated on Friday.

The Japan Research Institute said in a report that combined losses to be suffered by financial institutions and investors worldwide could reach US$463.6 billion ‘in the worst-case scenario’.

‘We forecast the situation will not subside at least until the latter half of this year as the ratio of default is projected to rise,’ the institute said.

‘2008 is likely to mark a turning point in the picture of global finance due to the sub-prime issue,’ it said.

Global markets have been battered since last year by rising defaults by sub-prime, or high-risk, loans given to US homeowners during a housing boom. The turmoil has raised concern of a credit crunch as banks try to contain losses.

The latest round of bleeding on markets was triggered by weak earnings reports by leading US financial institutions.

Markets on Friday trimmed heavy initial losses with all eyes on an expected stimulus package to be announced by US President George W. Bush. The package will aim to steer the world’s largest economy away from recession.

 

Source: AFP (Business Times 18 Jan 08)

Bush, Bernanke back economic rescue plan

No specifics yet, but package is likely to include tax rebates

(WASHINGTON) US President George W Bush and Federal Reserve chairman Ben Bernanke yesterday embraced calls for an economic stimulus package to avert recession. Mr Bernanke said that such a plan should be quickly implemented and temporary so that it will not complicate longer-term fiscal challenges.

The Fed chief, in a testimony prepared for the House Budget Committee, did not embrace any specific provisions or a specific plan. Rather, he spoke to the general concept of an economic rescue package. It is likely that any such package would include tax rebates.

‘Fiscal action could be helpful in principle’ and may provide ‘broader support for the economy’ than the Fed can furnish alone through reductions in interest rates, Mr Bernanke said in a prepared testimony to the House Budget Committee. However, ‘the design and implementation of the fiscal programme are critically important’, he said.

The Fed chief said that a fiscal package could also ‘prove quite counterproductive’ if the stimulus arrived at the ‘wrong time or compromised fiscal discipline in the longer term’. Mr Bernanke reiterated that the outlook for growth in 2008 ‘has worsened’ and ‘the downside risks to growth have become more pronounced’.

Central bankers and administration officials are trying to prevent the economy from sinking into the first recession since 2001. Retail sales fell last month, unemployment rose, and housing markets are mired in the worst slump in 16 years.

Mr Bernanke noted that banks are trying to protect asset quality and funding, and tightening credit conditions for the rest of the economy as a result.

‘The president does believe that over the short term, to deal with the softening of the economy, that some boost is necessary,’ Mr Bush’s spokesman Tony Fratto said.

Mr Fratto’s comments marked the first White House confirmation that Mr Bush, confronting a deepening economic crisis that has shaken much of the nation, supports government intervention. Until now, the White House has said that the president was just considering some type of short-term boost.

Mr Fratto would not divulge the details of what the stimulus would look like, other than to say that all options are being considered.

Mr Bernanke had already indicated earlier that he was open to efforts to develop a rescue package, and reinforced that position yesterday.

The fragile state of the economy has gripped Wall Street and Main Street and is a rising concern among voters. The situation has galvanised politicians – including those vying to be the next president – and poses the biggest test to Mr Bernanke, who took over the Fed nearly two years ago.

With the economy suffering, one of Mr Bush’s first acts after returning to Washington on Wednesday evening from the Middle East was to hold a conference call yesterday with congressional leaders in both parties to discuss a possible short-term stimulus package.

The White House spoke up after watching a number of indicators of a battered economy. Consumer confidence has plummeted, economic woes have become the top concern of the American public, and the 2008 presidential contenders have scrambled to get in front of the issue.

Mr Fratto said that Mr Bush made the decision that a stimulus was needed while he was away from Washington on the Middle East trip.

But Mr Fratto added that while Mr Bush has decided to pursue some sort of boost, he suggested that Mr Bush has not yet decided what he thinks it should contain. Listening to the congressional leaders’ ideas is one step in that process, he said, as is ‘probably daily conversations’ by Mr Bush’s economic team with people from the financial sector, business leaders and prominent economists, among others.

Mr Fratto declined to say when the president could announce a package, or whether it would be before or after the State of the Union address later this month.

An economic stimulus package, under consideration for weeks, will require congressional approval and would be Mr Bush’s first major effort to confront the broad economic slowdown beyond the steps taken to combat home foreclosures last year.

 

Source: AP, Bloomberg (Business Times 18 Jan 08)

Merrill takes US$11.5b sub-prime writedown

Largest US broker posts first full-year loss since 1989

(NEW YORK) Merrill Lynch reported a second straight quarterly loss after writing down US$11.5 billion of subprime mortgages and bonds, ousting its chief executive officer and losing almost half of its market value in 2007.

New York-based Merrill said yesterday that it suffered a fourth-quarter net loss of US$9.83 billion, or US$12.01 a share, compared with earnings of US$2.35 billion, or US$2.41 a share, a year earlier. Analysts were estimating that the largest US brokerage would post a loss of US$4.82 a share, according to a survey by Bloomberg. The decline resulted in Merrill’s first full-year loss since 1989.

‘While the firm’s earnings performance for the year is clearly unacceptable, over the last few weeks we have substantially strengthened the firm’s liquidity and balance sheet,’ chief executive John Thain said in the statement.

Mr Thain joined Merrill last month, replacing Stan O’Neal, whose gamble on building the sub-prime mortgage business backfired as US homeowner defaults surged to a 20-year high.

Merrill is the third of the five biggest US securities firms to post a loss, capping the companies’ worst quarter ever.

Mr Thain, the former president of Goldman Sachs, Wall Street’s most profitable firm, has replaced senior executives and taken steps to replenish capital during the past month by raising US$12 billion from outside investors.

‘Mr Thain is repositioning the firm to start fresh with a strong balance sheet, once these couple of bad quarters get out of the way,’ said Matthew Albrecht, an analyst at Standard & Poor’s who rates Merrill shares ‘hold’.

The company’s full-year loss came to US$7.78 billion compared with record net income of US$11.6 billion at Goldman and earnings of US$3.2 billion posted by Morgan Stanley, the industry’s No 2 firm.

Morgan Stanley and Bear Stearns, like Merrill, reported their biggest losses in the fourth quarter. Goldman and Lehman Brothers had profits.

Mr Thain has reduced 2007 bonuses in some divisions and cut jobs in the fixed-income unit, where the writedowns originated.

Several executives tied to Mr O’Neal have left, including former US brokerage chief McIntyre Gardner. Mr Thain has also recruited executives from his most recent employer, NYSE Euronext, hiring Nelson Chai to replace Jeff Edwards as chief financial officer.

Merrill, the third-biggest US securities firm, fell 42 per cent last year in NYSE trading, the third-worst performance among the 12 stocks tracked by the Amex Securities Broker/Dealer Index. Goldman, which profited by betting on a decline in prices for mortgage securities, gained 7.9 per cent in the same period.

Merrill, whose market value was greater than Goldman’s as recently as 2006, is now worth half as much. Mr Thain, 52, worked at Goldman from 1979 to 2004, when he left to become chief executive of NYSE Euronext.

The writedowns by Merrill add to more than US$100 billion of sub-prime-related losses reported since May by the world’s largest banks and securities firms. Citigroup posted the biggest loss in its 196-year history earlier this week as the largest US bank’s sub-prime mortgage investments and related securities tumbled in value by US$18 billion.

With its capital depleted, Merrill said on Tuesday that it sold US$6.6 billion of preferred stock to a group of investors including the Korean Investment Corp, Kuwait Investment Authority and Mizuho Corporate Bank. The transaction followed the sale in December of as much as US$6.2 billion in stock.

Before his ouster in October, Mr O’Neal acknowledged that Merrill held onto many of the mortgage securities it created rather than selling them to customers. Mr O’Neal also bought sub-prime lender First Franklin Financial Corp for US$1.3 billion at the end of 2006 just as the market for housing-linked securities was beginning to wither.

Merrill held US$8.8 billion of sub-prime mortgages by June and US$32.1 billion of collateralised debt obligations or CDOs – securities packaged from mortgage bonds, loans and other debt.

Many CDOs were downgraded by ratings agencies S&P and Moody’s as an increasing number of borrowers fell behind on home loan payments, sending prices on some of the securities plunging to as little as 30 cents on the dollar.

 

Source: Bloomberg (Business Times 18 Jan 08)

Fed chief backs quick action to help US economy

But Bernanke says Fed is not forecasting recession; Bush also sees need for fiscal stimulus

WASHINGTON – FEDERAL Reserve chairman Ben Bernanke yesterday threw his support behind efforts to craft a fiscal stimulus package, and repeated that the United States central bank was ready to act aggressively to counter recession risks.

The remarks came shortly after the White House said President George W. Bush had decided that an economic stimulus package was needed to help the sagging economy.

‘Fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary actions alone,’ Bernanke told the U.S. House of Representatives Budget Committee late last night.

But he specified that it was ‘critically important’ that any fiscal measures be designed to kick in quickly and deliver

their maximum impact within the next 12 months. Any other effect could do more harm than good, Bernanke warned.

The Bush administration and lawmakers on Capitol Hill have begun to consider what steps might be appropriate to prop up an economy many fear is on the verge of a recession.

As questioning by committee members began, Bernanke said he did not expect a recession this year but did foresee slow growth this year and into 2009.

President George W. Bush, back from a Middle East trip, was to hold a conference call on stimulus proposals on Thursday afternoon with Democratic and Republican congressional leaders.

‘I think the president does believe that over the short term that to deal with this softening in the economy that some boost is necessary,’ White House spokesman Tony Fratto said, offering the first explicit indication that the administration will propose a plan.

Lawmakers have already begun discussing ideas, and leaders from both parties vowed after a meeting on Wednesday to work together to pull a package together quickly.

Bernanke said that while fiscal stimulus could supplement lower interest rates in giving the economy a boost, it was essential not to compromise longer-term budget discipline and that there was a danger in moving too slowly.

‘Stimulus that comes too late will not help support economic activity in the near term, and it could be actively destabilizing if it comes at a time when growth is already improving,’ he said, adding it should also be ‘explicitly temporary.’

Bernanke repeated a bleak assessment of the economy’s health that he delivered last week that was widely seen as a signal that the U.S. central bank would slash interest rates by a hefty half-percentage point at month’s end.

‘Recently, incoming information has suggested that the baseline outlook for real activity in 2008 has worsened and that the downside risks to growth have become more pronounced,’ Bernanke warned.

‘We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks,’ he said.

The U.S. central bank has already cut benchmark overnight borrowing costs by 1 percentage point to 4.25 per cent since mid-September. Fed policy-makers next meet on Jan. 29-30.

Bernanke noted that financial markets around the world have been under strain since late last summer, largely because of problems in the U.S. subprime mortgage market, where foreclosures have been rising sharply.

He said that if all subprime mortgages that were currently delinquent went into foreclosure, that would imply a loss of about $100 billion.

‘More-expensive and less-available credit seems likely to impose a measure of restraint on economic growth,’ Bernanke said, noting that the financial situation was ‘fragile’ and that many funding markets were ‘impaired.’

Meanwhile, US stocks were witnessing volatile trade yesterday.

At press time, the Dow Jones Industrial Average was down 100.47 points, or 0.81 per cent, at 12365.69. The Nasdaq composite index was down 8.92 points, or 0.37 per cent, at 2385.67.

 

Source: REUTERS (The Straits Times 18 Jan 08)

Forget forecasts, US may be in recession already

Misreading economy not unusual due to mixed signals from various sectoral data

WASHINGTON – FOR all the complex ways in gathering economic data and crunching it at the speed of light, predicting recessions is still an inexact science.

‘It’s the economy, stupid,’ said Mr Bill Clinton and he was elected President in 1992 on promises of ending a recession that had, in fact, ended 18 months earlier. Only later analyses showed that.

Misreading the economy’s body language is not unique to politicians. The National Bureau of Economic Research in the United States had declared that the previous recession began in November 2001. Not really.

It actually ended then, having begun almost a year earlier.

It is an economist’s occupational hazard that Federal Reserve chief Ben Bernanke is certainly aware of as he stands behind – though is unlikely to explicitly endorse – the Bush Administration’s proposal of reviving a sagging economy through measures that include tax cuts.

In his own snapshot of the economy, the so-called beige book containing anecdotal reports of business conditions around the country, Mr Bernanke refuted claims that the US had already entered recession.

The report this week said economic activity ‘increased modestly’ from mid-November to the end of last month.

It noted robust demand in health care, hotels, insurance and the legal sector, while agriculture was upbeat and manufacturing mixed.

The biggest concern is the increasingly frugal US consumer. Hit by the housing slump, credit squeeze and rising petrol prices, he is crimping his spending, and this may trigger a recession.

Analysts were shocked by retail sales figures this week. They dipped 0.4 per cent last month – the sharpest fall for six months.

And sales for last year rose 4.2 per cent, the lowest annual increase since 2002.

The consumer’s unwillingness to spend is partly because he sees his net worth declining as housing prices have tumbled.

Insecurity prevails on the jobs front. Unemployment jumped to 5 per cent last month, the highest in two years. It was that high during the last recession in 2001.

Even then, the signals are mixed, as one US paper noted: ‘Construction workers are on unemployment lines, but engineering and consulting firms are in bidding wars for staff members.’

Inflation also dealt a blow. Recent figures show consumer price inflation hit 4.1 per cent last year, the highest since 1990.

The recession alert has been sounded by many prominent economists and big-name investment houses.

Others tip ‘rolling recessions’ – as seen in the 1980s – where certain sectors or some states enter recession at different times but the economy, as a whole, is spared.

Weak outlook

KEY indicators point to a downturn for the US economy:

• Retail sales grew last year at the slowest pace since 2002.
• Unemployment shot up to 5 per cent last month, a level last seen in the 2001 recession.
• Full-year inflation is at a 17-year high.
• Corporate profits are expected to decline this year by an average 7.5 per cent after tax, according to a Goldman Sachs estimate.

Source: The Straits Times 18 Jan 08

US hurdles force Dubai state fund to look to China

Istithmar among such funds seeking out less developed markets to avoid excessive scrutiny DUBAI government investment agency Istithmar is considering investments in China, after being rebuffed in the United States, The Wall Street Journal reported yesterday.

Istithmar comes under the umbrella of state-owned Dubai World, which also includes Dubai Ports World (DP World), a container port handler that was forced by US lawmakers to sell American assets over security concerns.

‘Everyone is aware of the backlash DP World faced in the US, and as a result, sovereign wealth funds are looking towards non-developed markets to avoid such a backlash,’ Istithmar chief executive officer David Jackson was quoted as saying on the Journal’s website.

‘Countries such as China, where we recently opened an office, are very welcoming to sovereign wealth funds, so more are looking to invest there.’

Asian and Middle Eastern sovereign funds have made headlines recently by acquiring stakes in major financial groups such as Merrill Lynch and Citigroup in the US and Switzerland’s UBS.

Merrill and Citigroup have received billions of dollars in cash infusions from sovereign wealth funds, including those of Singapore. And they are in talks to get even more capital from outside investors – raising eyebrows in Washington, where lawmakers have more closely scrutinised foreign investments in recent years, the Journal said.

DP World was forced to sell its US assets after agreeing to buy British ports and ferries group P&O for US$6.8 billion (S$9.7 billion) last year. P&O operated six terminals in the US.

Dubai World, whose businesses include property developer Nakheel Group, has a multibillion-dollar global portfolio, including P&O, US retailer Barney’s, a stake in British bank Standard Chartered and about US$20 billion in real estate assets around the world outside of Dubai.

‘There is a lack of trust in sovereign wealth funds and better initiatives are needed to curb such suspicions,’ Mr Jackson said. ‘Countries such as the US, Britain and Germany are very reluctant to allow sovereign wealth funds in.’

 

Source: REUTERS (The Straits Times 18 Jan 08)

US may get economic stimulus plan in 30 days

Package on fast track in Congress after rival parties reach agreement

WASHINGTON – AN ECONOMIC stimulus package to avert a possible recession in the United States could be passed within 30 days, a leading US congressman said.

The package is on the fast track in Congress after Democratic and Republican leaders in the US House of Representatives on Wednesday reached a rare agreement to quickly pull together a bipartisan plan.

President George W.Bush was scheduled to host a conference call with lawmakers yesterday to discuss the package after he returns from a Middle-East trip.

‘I believe it can be done in 30 days,’ US House Majority Leader Steny Hoyer, a Maryland Democrat, said on Wednesday. ‘Whether it will be done in 30 days is another question.’

There is a consensus in Congress and the administration that an economic programme must be passed this quarter to boost an economy that is slowing, lawmakers said.

Federal Reserve chairman Ben Bernanke backs a swift response, according to New York Senator Charles Schumer.

‘I called chairman Bernanke personally,’ Mr Schumer, a Democrat, said at a hearing in Washington.

‘He said that while he wasn’t going to endorse a specific plan, if an economic stimulus package was properly designed and enacted so that it entered the economy quickly, it could have a very positive effect.’

Among Democrats, ‘there is a growing consensus’ that to make the stimulus legislation work, they should abandon their commitment to balance any tax cuts or new spending that would increase the deficit with measures to raise revenue, Mr Schumer said.

Still, the parties differ over what measures should be included in stimulus legislation, and some analysts expressed doubt that an agreement can be reached.

There is a risk ‘that Democrats and Republicans will use the stimulus issue as a political football, making it an issue for the general election’, Mr Tony Crescenzi, the chief bond market strategist at Miller Tabak & Co, said.

 

COMING TO TERMS

Lawmakers say there is a consensus in Congress and the administration that an economic programme must be passed this quarter to boost a slowing economy.

THE two political parties differ on some measures:

• US Democratic lawmakers are proposing a package of US$100 billion to US$125 billion (S$143 billion to S$178.75 billion) that is likely to include tax rebates for ordinary Americans of about US $250 to US$600 per person – to get money quickly into the hands of consumers – as well as expanded unemployment and food-stamp benefits.
• Their Republican colleagues want to slash the corporate tax rate to 25 per cent from 35 per cent, and include temporary incentives for businesses to invest in equipment.

Source: BLOOMBERG NEWS (The Straits Times 18 Jan 08)

All eyes on Fed as main line of defence against recession

Many sceptical that spending measures, tax cuts will help

(CHICAGO) Concern that the Federal Reserve’s interest rate cuts will have a limited impact on economic growth, and may risk fuelling inflation, have led to calls for a fiscal policy boost for the US economy.

But many are sceptical that Congress or the White House can pull a rabbit out of the hat with new spending measures or tax cuts, leaving the Fed as the main line of defence against a recession.

Perhaps with that in mind, Fed chairman Ben Bernanke ’showed a brazen, ‘throw caution to the wind’ approach’ when he vowed last week to act in a decisive and timely manner to support the economy, said Alan Ruskin, chief international strategist with RBS Greenwich Capital in Greenwich, Connecticut.

US President George W Bush has said that he is mulling steps to boost the economy, lawmakers are scrambling to sketch out proposals and a number of leading presidential candidates have thrown their thoughts into the ring.

Prominent economists and former government officials have also joined the fray. Last week, former Treasury secretary Robert Rubin called for US$100 billion in fiscal stimulus to help boost investor confidence.

Rising defaults on US home mortgages led to a near freeze-up in money markets in August as banks, fearful of taking on bad collateral, recoiled from lending to each other.

With credit markets still fragile, the tilt towards a fiscal solution reflects worries that the Fed’s cuts to short-term interest rates will have less impact than usual.

‘Interbank markets are still exhibiting symptoms of increased risk-aversion,’ Bharat Trehan, research adviser at the San Francisco Federal Reserve Bank, said in a report on Monday.

Although risk-related interest rate spreads such as the London Interbank Offered Rate, or Libor, have come down recently, ‘things don’t look nearly as good in the longer-term markets’, he said.

Rates on so-called ‘jumbo mortgages’, those above the US$417,000 upper threshold of what mortgage finance companies Fannie Mae and Freddie Mac can buy, remain high, and although the rates on smaller mortgages have come down as 10-year Treasury yields have declined, the spread to Treasuries is higher, Mr Trehan said.

In addition, some Fed policymakers remain wary of inflation. A report due yesterday was expected to show that the US core consumer price index, which strips out food and energy prices, rose 0.2 per cent last month, which would take the year-on-year rate up to 2.4 per cent from 2.3 per cent.

Aggressive interest rate cuts from the Fed could exacerbate inflation risks, in part by pushing down the value of the US dollar on foreign exchange markets.

‘Fiscal stimulus would probably pose less risks to the dollar than monetary easing, and thus could carry less inflation risk,’ said strategists at 4CAST Ltd.

The stimulus debate inevitably circles back to the sick housing market, the main element driving the US to the brink of recession and the main stumbling block to a return to higher growth.

‘In this cycle, the Fed is likely to get much less real economic traction out of (lower) yields, because of severe limitations to how much they can reflate house refinancing activity,’ Mr Ruskin said.

Many analysts expected US home prices to fall into 2009, limiting buying interest even among the smaller pool of potential buyers able to obtain financing in the more restrictive environment.

While a fiscal boost might be good medicine for the economy, analysts warned that anything to emerge from Congress could be too late. Most forecasts called for economic growth to trough out in the next couple of quarters.

 

Source: Reuters (Business Times 17 Jan 08)

Rise in US consumer prices largest in 17 years

WASHINGTON – UNITED States consumer prices rose 0.3 per cent last month and for all of 2007 they shot up at the fastest rate in 17 years, largely because of soaring energy costs, the US Labour Department reported yesterday.

The Consumer Price Index (CPI), the most broadly used gauge of inflation, rose 4.1 per cent last year, well ahead of the 2.5 per cent increase posted in 2006 and the largest 12-month rise since a 6.1 per cent increase in 1990.

December’s CPI monthly rise followed a sharp 0.8 per cent jump in November and was modestly ahead of Wall Street economists’ forecasts for a 0.2 per cent gain.

Analysts said it underlined the pressure consumer budgets were under but also left room for the Federal Reserve to cut interest rates again at the end of this month to help prop up the economy.

‘What this means for monetary policy, it seems, is that there is some room in there for the Fed to go ahead and cut rates without fear that inflation is going to rear up,’ said Mr Oscar Gonzalez, an economist at John Hancock in Boston.

US stocks opened lower yesterday after the report was out. After one hour of trading, the Dow Jones Industrial Average was down 50.32 points, or 0.4 per cent, at 12,450.79. The Nasdaq Composite Index was off 26.91 points, or 1.11 per cent, at 2,390.68.

For all of last year, core prices – which strip out volatile food and energy items – were up 2.4 per cent following a 2.6 per cent pickup in 2006. That was the smallest 12-month rise in core prices since a 2.2 per cent increase in 2005.

The department said both food and energy costs rose during the full year at the fastest rates since 1990.

Energy costs in the 12 months were up 17.4 per cent, while food prices gained 4.9 per cent.

 

Source: REUTERS (The Straits Times 17 Jan 08)

US recession fears send Asian markets into a tailspin

STI, Hang Seng suffer big drops; bank and tech stocks, energy and base metal prices also hit

STOCK markets across Asia plummeted yesterday amid fears that a gathering financial storm in the United States might tip the global economy into a recession.

Hong Kong was the worst hit as the Hang Seng Index plunged an eye-popping 5.4 per cent, reflecting mainland fears that US consumers will buy fewer China exports.

Yesterday’s slide means Singapore and Hong Kong are now officially ‘bear’ markets, ending an unbroken five-year bull run, along with Tokyo, which went bearish on Jan 7. It means these markets are down 20 per cent or more from peaks in the last year.

In the US, the Dow Jones Industrial Index is down 12 per cent from its October highs.

When Asian markets opened yesterday, they were spooked by a double whammy of bad news from the US.

First, an US$18.1 billion (S$25.8 billion) write-down by financial giant Citigroup over the sub-prime mortgage crisis, then a 2.2 per cent slump in the Dow.

Jumpy investors in Singapore epitomised deepening gloom around Asia as they sent the Straits Times Index (STI) tumbling about 3 per cent at the opening bell. The STI regained about half its losses – only to slide again as the dramatic scale of Hong Kong’s losses became clear.

In its fifth straight day of losses, the STI ended down 96.09 points, or 3.05 per cent, at 3,058.49, its lowest level in 10 months.

The index is now down 20.1 per cent from its peak of 3,831 points on Oct 11. It is down 11.75 per cent for the year, its worst two-week year opening since 2000, after the bursting of the dot.com bubble.

Across Asia, bank stocks were badly hit over fears that other major US banks might unveil massive losses.

Technology stocks also skidded after US tech giant Intel posted disappointing quarterly sales and a cautious outlook for this year.

This suggests a possible slowdown in the key personal computer market, which accounts for major business among Asian manufacturers.

Worries over the health of the US economy also took their toll on the ailing greenback and accelerated its decline against regional currencies. It fell by 1.5 yen to a 32-month low of 106.09 yen.

Even energy and base metal prices took a direct hit from the prospects of a global economic slowdown.

Crude oil fell by US$2.30 to US$91.90 a barrel yesterday, while analysts said major steel producers were cutting back on production targets by as much as 30 per cent.

It all boiled down to a very grim trading session for investors.

‘What is scary is the rapid pace in which investors’ sentiment had soured in the past week,’ said remisier Bernie Lee in Singapore.

In Singapore, banks such as DBS Group Holdings and United Overseas Bank each fell by about 3 per cent.

In Hong Kong, HSBC, which gets about one-third of its revenues from North America, plunged 4.5 per cent.

Investors are now clamouring for the US central bank to announce an emergency interest-rate cut ahead of its next meeting at the end of this month.

‘The Fed is beyond the curve. We are not talking about sub-prime, but an increasing spate of loan and creditcard defaults in the US,’ said Mr Kevin Scully, managing director of corporate finance house NRA Capital.

But for long-term investors, the sell-down presented a good opportunity to buy shares at attractive prices, noted Mr Elan Cohen, JP Morgan Private Bank’s senior portfolio manager.

 

Source: The Straits Times 17 Jan 08

MARKET TUMBLE: Bank stocks hit by US recession, sub-prime fears

Sell-off symptomatic of broader sell-down, slowing in S’pore’s economy: analysts

BANK stocks were clobbered yesterday on continuing concerns of a possible recession in the United States, subprime lending woes and a general slowing down of the Singapore economy.

This comes on the back of the news that Citigroup reported its biggest loss in its 196-year history due to US$18 billion worth of write-downs from the sub-prime crisis. The fall also came on a day when the broad market came under selling pressure.

Shares of DBS Bank, South-east Asia’s largest lender, were among the top losers yesterday, shedding 62 cents or 3.3 per cent to end at $18.20, the lowest in a year.

Shares of United Overseas Bank (UOB), Singapore’s second-largest bank by market capitalisation, also featured among the top losers. They ended yesterday 48 cents or 2.7 per cent lower at $17.08, their lowest price in a year.

OCBC Bank shares dropped seven cents or 0.9 per cent to end at $7.61, their lowest in 11 months.

This mirrors the fate of bank stocks in the Asian region, where Japanese bank shares fell on worries about the persisting US sub-prime crisis. Shares of Mizuho Financial Group and Mitsubishi UFJ – Japan’s largest bank – plummeted after suffering losses related to US sub-prime lending.

Shares of Bank of China, the country’s third-biggest bank, also dropped, as did those of Kookmin Bank, South Korea’s largest lender by market value.

In Australia, shares of Commonwealth Bank of Australia, Macquarie Group and National Australia Bank also declined.

Analysts said the sell-off in shares of Singapore banks was symptomatic of a broader sell-down in the markets, and a slowing in Singapore’s economy due to recession fears in the US.

‘Bank stocks are taking the lead from the US, which appears to be going into recession,’ said Matthew Wilson, a banking analyst at Morgan Stanley. ‘This will be bad for Singapore, given its small and open economy.’

David Lum, an analyst at the Daiwa Institute of Research, said a recession in the US would have a knock-on effect on Singapore bank stocks as these are the bellwether for the economy.

‘GDP growth has slowed in Singapore,’ he said. ‘If financial markets are weak, there will be a spillover effect on banks since they are closely tied to the economy.’

Mr Wilson noted that underlying pressure from sub-prime problems in the US remains and the prospect of collateralised debt obligation (CDO) write-downs still looms. ‘Financial stocks globally are under pressure.’

But Mr Lum was of the view that the prices of local bank stocks were hit by factors other than the US sub-prime lending crisis. ‘The sell-down should not be due to sub-prime problems,’ he said. ‘Singapore banks don’t need capital, and their capital ratio looks strong.’

Operationally too, banks are falling victim to low interest rates, possibly depressing their share prices. ‘The Singapore interbank offered rate (Sibor) is falling, and is likely to stay low as the US cuts its interest rates,’ Mr Wilson noted. ‘This is negative for banks’ net interest margins.’

He also said mortgage loan growth, although strong, generates low earnings for banks with narrow spreads.

The local banks are due to report full-year earnings next month. Analysts are expecting to see more write-downs relating to the CDO exposure. ‘There will be more write-downs though not as much as in the third quarter,’ said Pauline Lee, an analyst at Kim Eng Securities. ‘We won’t see as much write-downs at UOB and OCBC, compared to DBS.’

 

Source: Business Times 17 Jan 08

Oil drops to 3-week low on economic concerns

OIL prices slid below US$91 a barrel yesterday to the lowest level in more than three weeks.

This came ahead of a slate of oil industry data that could show more signs of possible weakening demand and as the Organisation of Petroleum Exporting Countries repeated its pledge to lift output if needed.

US light crude for February delivery fell to a low of US$90.60 and was down US$1.15 at US$90.75 by 1138 GMT (7.38pm Singapore time). It had tumbled by US$2.30 on Tuesday, on a surprise fall in United States retail sales last month and a record quarterly loss at the largest US bank Citigroup.

London Brent crude for February, which was due to expire yesterday, was down 78 US cents at US$90.20 a barrel, after falling to a low of US$89.75 earlier.

Industry analysts expect US crude inventories to have risen last week for the first time in nine weeks, calling for a 600,000 barrel rise as imports recovered.

Meanwhile, the International Energy Agency (IEA) said yesterday that world oil demand growth this year will be lower than expected and could fall further if an economic slowdown in the US, the top consumer, accelerates.

The adviser to 27 industrialised countries, in its monthly Oil Market Report, cut its world oil demand growth forecast to 1.98 million barrels per day (bpd), down 130,000 bpd from its forecast last month.

The IEA, however, said total oil stocks in Organisation for Economic Cooperation and Development economies had slipped below their five-year average, a sign of a tightening oil market.

US oil prices are down by more than 9 per cent from their all-time peak of US$100.09 earlier this month, as concerns about a US economic slowdown has outweighed tightening stockpile levels in major consumer nations.

 

Source: REUTERS (The Straits Times 17 Jan 08)

Familiar strain of worry weighs heavy

SENIOR CORRESPONDENT

THE pattern of trading over the past month or so has been the same and yesterday was no different – shortcovering lifted the index temporarily in the morning before renewed weakness and shorting resumed soon afterward.

The cue for short-covering is usually either an overnight rebound on Wall Street, or a rise in the US futures market, or a rise in Hong Kong, or all of the above. This was very much the case yesterday, when the Straits Times Index (STI) responded to Monday’s rebound on Wall Street with a 35-point bounce in the morning that soon petered out once Hong Kong went into steep decline – the Hang Seng eventually closed 2.4 per cent down – and the March futures on the Dow Jones Industrial Average dropped 60 points.

The question on everyone’s mind is: where might the bottom lie? Tuesday’s report focused on where support for the STI might be following the ease with which the 3,300-mark was lost. The 3,179-mark was suggested as a possibility but after yesterday’s 63.56-point plunge to 3,154.58, few in the market might want to venture any new estimates, at least not yet.

All sectors were hit, led by the banks – losses in DBS, UOB and OCBC cut 23 points off, while a 76-cent crash in the Singapore Exchange’s share price to $10 cut 12 points off. The largest absolute fall within the index was suffered by Jardine Cycle & Carriage, which lost $1.18 to $20.96 with 458,000 shares traded.

With the meltdown in the index, the broad market stood little chance – excluding warrants, there were only 105 rises versus 421 falls.

The STI has now lost 328 points, or 9.4 per cent, since the start of 2008, while Hong Kong is down 7.1 per cent and Japan 8.7 per cent. The source of the selling has been the same for months now – worries over the extent of US sub-prime losses and their impact on Wall Street.

Structured warrants on the Hang Seng Index and STI featured prominently in the top volume and gainers lists. Among the more noticeable falls were Yangzijiang Shipbuilding, Cosco Corp and STX Pan Ocean, all of which came with high volume.

In an Asia-Pacific Strategy report released yesterday, Morgan Stanley (MS) said that its key themes for 2008 are a US-led G7 downturn, domestic Asian resilience, policy divergences, structural fund inflows into Asia, a pro-business political shift and a food shock. On the subject of Asian resilience, it said that low rates, easy financing and the absence of major imbalances lead it to overweight banks, property, telecoms, consumer and infrastructure. It remains overweight on Hong Kong, China, Singapore and Malaysia.

Merrill Lynch released a Pacific Rim report dated Jan 9 entitled ‘Headwinds in the Year of the Rat’, in which it said that US growth outlook has visibly deteriorated and that credit spreads and stockmarket volatility are expected to remain high. ‘These trends represent clear headwinds for the Pacific Rim; however, we see offsetting sources of strength . . . growth momentum remains high, macro policy remains supportive and inflation risks – although rising – appear manageable.’ Merrill Lynch said that it expects equity market returns to be ‘more differentiated’ compared with 2007 and prefers Asean markets such as Singapore, Indonesia, Malaysia and the Philippines.

 

Source: Business Times 16 Jan 08

US recession seen reducing oil demand

(HOUSTON) A US recession will curb demand for energy before high crude oil prices will, Boone Pickens, chairman of Dallas-based hedge fund BP Capital LLC, told an audience of geologists in Houston on Monday.

‘Demand destruction will come from recession; US$100 oil is acceptable,’ Mr Pickens said. It’s likely the US is already in a recession that will eventually lead to lessened energy demand, he said.

‘I don’t think the rest of the world is in recession,’ added Mr Pickens, who founded Mesa Petroleum in 1956. He now manages more than US$4 billion in energy investments.

Mr Pickens correctly predicted in 2004 that oil prices would top US$60 a barrel in 2005. Last February, he said oil could reach US$90 to US$100 a barrel within two years.

New York crude oil futures touched a record US$100.09 a barrel on the New York Mercantile Exchange on Jan 3 amid tight US inventories and political unrest in Nigeria threatening to disrupt production in that region. That’s the highest price since trading began in 1983.

World oil consumption will rise to 87.8 million barrels a day this year, 2.1 million more than in 2007, according to the Paris-based International Energy Agency, an adviser to oil- consuming nations.

 

Source: Bloomberg (Business Times 16 Jan 08)

US either in grip of recession, or near it: Greenspan

He points to recent data such as rise in joblessness in Dec

(NEW YORK) The United States economy is probably in a recession or about to slide into it, former US Federal Reserve chairman Alan Greenspan said in an interview with The Wall Street Journal.

The odds are ‘not overwhelming but they are marginally in that direction’, Mr Greenspan was quoted as saying in the interview, published yesterday.

‘The symptoms are clearly there. Recessions don’t happen smoothly. They are usually signalled by a discontinuity in the market place, and the data of recent weeks could very well be characterised in that manner.’

Last month, Mr Greenspan was reported as saying that he saw chances of a US economic recession at around 50 per cent, compared with his previous view of a 30 per cent chance. In this latest interview, he referred to a drop in the Institute for Supply Management’s purchasing managers index as well as the rise in unemployment in December, and said that the odds of a recession were still close to 50 per cent but ‘more likely higher than lower’.

He has been criticised for keeping the trendsetting federal funds rate at a low one per cent from June 2003 to June 2004, which some say contributed to a housing bubble that is now bursting.

 

Source: Reuters (Business Times 16 Jan 08)

US economy needs stimulus: Bernanke

Economists have said the US is probably slipping into a recession

(WASHINGTON) Federal Reserve chairman Ben Bernanke feels that some economic stimulus is needed, a Democratic aide to US House Speaker Nancy Pelosi said.

Ms Pelosi and Mr Bernanke met at the US Capitol on Monday as President George W Bush and congressional Democrats are considering ways to stimulate an economy that some economists say may be heading toward a recession. Fed spokeswoman Michelle Smith had no comment.

The Democratic aide said Mr Bernanke wasn’t specific about what form of stimulus he would support.

Democrats plan a stimulus package of about US$100 billion, Representative Barney Frank, the chairman of the House Financial Services Committee, said in an interview.

Ms Pelosi said in a written statement after the 30- minute meeting that a stimulus package should be coordinated with Federal Reserve action to stabilise the economy.

‘I hope that we can work together – recognising the independence of the Fed – and coordinate monetary and fiscal policy that will soften the blow for hardworking families affected by an economic slowdown,’ Ms Pelosi said.

Mr Bernanke declined to comment to reporters about the meeting.

A Labor Department report this month showed the nation’s unemployment rate jumped to 5 per cent in December from 4.7 per cent.

Economists at Goldman Sachs Group, Merrill Lynch and Morgan Stanley have said the US is probably slipping into a recession.

Ms Pelosi, a California Democrat, said she is seeking an accord that can get Republican support in Congress.

‘We hope to work in a bipartisan way for an initiative that is targeted, that is timely and is temporary,’ Ms Pelosi told reporters before meeting with the Fed chairman.

Mr Bush is weighing a tax rebate targeted at low- and middle-income Americans, according to a government official. Mr Bush probably will announce the plan in his Jan 28 State of the Union speech.

Democratic leaders in Congress are designing their own package, which may include public works spending, aid for the poor and a tax rebate.

House Minority Leader John Boehner, an Ohio Republican, signalled Republican opposition to any efforts to offset stimulus legislation with any tax increases.

Mr Boehner released a statement saying, ‘I hope that today’s meeting between Speaker Pelosi and chairman Bernanke is a sign that Democratic leaders are prepared to abandon their plans to raise taxes on middle-class families to bankroll their agenda of pork and bigger government.’

Mr Bernanke has agreed to meet with all House Democrats at an annual retreat in Williamsburg, Virginia, from Jan 30-Feb 1, said Sarah Feinberg, a spokeswoman for the House Democratic Caucus.

 

Source: Bloomberg (Business Times 16 Jan 08)

Oil falls below US$94 on fears of potential recession in US

(SINGAPORE) Oil fell yesterday, on fears a potential recession would hurt US demand amid forecasts of higher crude stocks, but the fall was limited by Nigerian supply disruptions and geopolitical concerns about Iran.

US light crude for February delivery dropped 42 cents to US$93.78 a barrel by 0819 GMT after leaping US$1.51 on Monday, snapping a three-day losing streak. The gains were also aided by a weakening US dollar, which lifted the whole commodities complex. London Brent shed 22 cents at US$92.69 a barrel.

Persistent worries of a recession in the world’s biggest economy have kept prices below their record high of US$100.09 hit on Jan 3.

The Organisation of the Petroleum Exporting Countries (Opec) would raise oil output if needed at meetings on Feb 1 and March 5, Opec secretary-general Abdullah al-Badri told Reuters on Monday.

Former US Federal Reserve chairman Alan Greenspan said the US economy was probably in a recession or about to slide into it. The odds are ‘not overwhelming but they are marginally in that direction’, Mr Greenspan was quoted as saying in an interview with The Wall Street Journal.

US crude stocks could also start rebounding. A Reuters poll of analysts forecast data from the US Energy Information Administration showing a 1.2 million-barrel rise in crude inventories in the week to Jan 11, as imports bounced from a sharp drop.

Distillate stocks were seen building by 1.2 million barrels while gasoline should rise by 2.5 million barrels.

‘Macro concerns have been setting the ceiling (for prices), while crude stockdraws, which have continued from the fourth quarter into early January, have been setting the floor,’ analysts at Societe Generale wrote in a research note. But supply disruptions, geopolitical tensions in the Middle East and the weak US dollar continued to offer support, keeping prices in the US$90-100 a barrel range.

‘People realise that oil is going to be relatively tight despite the recession, despite the slowdown in OECD,’ said Tony Nunan, manager at Mitsubishi Corp’s risk management unit.

Royal Dutch Shell declared force majeure on crude shipments from its Forcados export terminal in Nigeria following sabotage to two pipelines last week.

The 380,000 barrels per day (bpd) Forcados field, which was shut for almost two years by a string of militant attacks in February 2006, had partially resumed pumping in the middle of last year. Militant raids since 2006 have knocked out a fifth of the country’s oil output capacity.

Source: Reuters (Business Times 16 Jan 08)

US in or near recession, says Greenspan

NEW YORK – THE United States economy is probably in a recession or about to slide into one, former US Federal Reserve chairman Alan Greenspan has said in an interview with The Wall Street Journal.

The odds are ‘not overwhelming, but they are marginally in that direction’, he was quoted as saying.

‘The symptoms are clearly there. Recessions don’t happen smoothly. They are usually signalled by a discontinuity in the market place, and the data of recent weeks could very well be characterised in that manner,’ he said.

Mr Greenspan was reported last month as saying that he saw the chances of a US economic recession at around 50 per cent, compared with his previous view of a 30 per cent chance.

In the latest interview, he referred to a drop in the Institute for Supply Management’s purchasing managers index, as well as a rise in unemployment last month, and said the odds of a recession were still close to 50 per cent but ‘more likely higher than lower’.

Mr Greenspan first publicly raised the possibility of recession in February last year. He saw a glimmer of hope in the housing market, saying new-home sales might have hit bottom because the number of purchases financed by sub-prime and Alt-A mortgages – a category between sub-prime and prime – had fallen to zero.

Bloated inventories, however, mean housing construction and prices are still bound to fall, he was quoted as saying by the Journal.

Mr Greenspan, whom some blame for fuelling a housing bubble, is signing on as an adviser to hedge-fund firm Paulson & Co, which has profited handsomely from the collapse of that bubble. The firm has assets of US$28 billion (S$40.05 billion).

Mr John Paulson, the company’s founder, is set to make the announcement soon, the Journal said.

Mr Greenspan has been criticised by some for keeping the trendsetting federal funds rate at a low 1 per cent from June 2003 to June 2004, which some say contributed to a housing bubble that is now bursting.

Paulson & Co was among the hedge fund industry’s big winners last year after it bet against sub-prime mortgages.

 

Sources: REUTERS (The Straits Times 16 Jan 08)

Markets brace for news of big losses by banks

Citigroup could write off US$24b, lay off 20,000 staff

(LONDON) Major American banks are expected to unveil substantial losses and secure more cash from abroad in what is shaping up to be a pivotal week for the global credit crisis.

Citigroup could write off as much as US$24 billion and lay off 20,000 workers in a drive to cut costs and boost capital, CNBC said on its website in a report dated Sunday.

CNBC said the plans will be unveiled today when Citi, the largest US bank by assets, reports its fourth-quarter results.

Investment bank Merrill Lynch is just as troubled.

The Financial Times said yesterday that Merrill was seeking about US$4 billion in a second capital raising, and the Kuwait Investment Authority was expected to be a significant investor. A deal could be announced as soon as midweek, the newspaper said, citing people familiar with the matter.

The New York Times on Friday said that Merrill was expected to suffer US$15 billion in losses stemming from bad mortgage investments, almost twice the company’s original estimate, when it releases its results later this week.

FT also reported on Saturday that Citigroup was putting the final touches to its second big fund-raising, seeking up to US$14 billion from Chinese, Kuwaiti and other investors.

The US$200 billion Kuwait Investment Authority had no immediate comment yesterday on the reports that it may buy into the two damaged American banks.

Banks, wrestling with huge losses stemming from mortgages lent to people ill-equipped to repay them, have been seeking cash from sovereign wealth funds.

In December, Merrill secured as much as US$7.5 billion by selling a stake to Temasek Holdings and New York based money manager Davis Selected Advisors.

The month before, Citi agreed to sell up to a 4.9 per cent stake to Abu Dhabi for the same amount.

As well as Merrill and Citi, other big names such as State Street and JP Morgan report results this week.

Wall Street analysts have turned increasingly wary over US financial results for the fourth quarter as well as the first two quarters of 2008, according to a weekly survey by Reuters Estimates yesterday.

The survey showed that analysts expect S&P 500 companies’ fourth-quarter earnings to fall 9.1 per cent from a year earlier.

That was gloomier than the 8.4 per cent decline forecast a week earlier, and the 11.5 per cent growth forecast in an Oct 1 survey.

The Federal Reserve was to auction US$30 billion later yesterday and the European Central Bank and Swiss National Bank will continue their unprecedented US dollar lending to banks as part of coordinated central bank efforts to help calm credit market tensions. The Bank of England will also weigh in.

Results of the latest ‘term auctions’, a plan agreed in December and one which has helped money market rates ease, will come today.

One to three-month Euribor interbank interest rates fell yesterday amid central banks’ moves to inject liquidity into markets.

Most analysts say the threat of further losses at major banks from investments tied to US sub-prime mortgages means the crisis is far from over as crucial lending between commercial banks remains patchy at best.

The Fed is forecast to use its other policy lever – interest rates – before the month is out. It is seen slashing rates by a half-point at its two-day meeting ending on Jan 30 after Fed chairman Ben Bernanke gave a downbeat assessment of the US economy last week and said the central bank was ready to take ’substantive additional action’.

Swiss banking giant UBS appealed to shareholders last week to back a capital injection by Singapore’s Temasek and a Middle East investor and warned it still could not predict how the sub-prime crisis would play out.

And shares in Northern Rock fell as much as 7 per cent early yesterday on fresh concerns that the bank is facing imminent nationalisation. Northern Rock is Britain’s biggest casualty of the credit crunch and has borrowed around 26 billion pounds (S$72.8 billion) from the Bank of England since it requested emergency funds in September.

 

Source: Reuters (Business Times 15 Jan 08)

Citigroup could write down $34b, cut staff

Analysts also expect US’ largest lender to report $5.7b in fourth-quarter losses

NEW YORK – CITIGROUP could make as much as US$24 billion (S$34.3 billion) in write-downs and lay off 20,000 staff as part of a plan to cut costs and boost capital, CNBC has reported.

The report on its website dated Sunday said the plans would be unveiled tomorrow, when it would report its fourth-quarter results.

Citigroup is widely expected to report a quarterly loss and announce big layoffs, as it looks to cut costs in a tough business environment.

Many analysts believe Citigroup will also look to suspend or cut its dividend in a bid to save US$10 billion a year.

The job cuts represent about 10 per cent of Citigroup’s global workforce of 327,000 employees as at end-2006 and come on top of 17,000 layoffs announced in April last year.

Analysts polled by Bloomberg expect Citigroup to report a fourth-quarter loss of US$4 billion (S$5.7 billion), the first for the largest United States bank since its commercial real estate holdings plummeted in value during the early 1990s.

Citigroup will kick off what is expected to be a gloomy season for fourth-quarter bank earnings, after the widening sub-prime mortgage crisis in the US triggered write-downs and capital erosion at big banks.

Merrill Lynch is expected by analysts to report a loss of US$3.23 billion on Thursday, topping the record US $2.24 billion loss it reported in the third quarter.

Bank of America may report that fourth-quarter net income fell by 79 per cent to US$1.08 billion, the biggest drop in at least a decade.

Banks have not lost this much money, in relative terms, since the Great Depression, said New York University’s Professor Richard Sylla.

Citigroup, Bank of America and Merrill probably were profitable last year, earning about US$23 billion on a combined basis, even after the second-half write-downs.

But there may be more bad news in store for US banks, analysts said, particularly after American Express (Amex) said it was cautious about this year and was seeing negative credit trends in some markets.

If Amex’s clients, who tend to be relatively wealthy, are weakening, credit card lenders could find themselves writing off more assets.

‘The American Express announcement was very significant. We have to wait and see what happens,’ said Mr Michael Holland, founder of investment firm Holland & Co.

 

Source: REUTERS, BLOOMBERG NEWS (The Straits Times 15 Jan 08)

Kuwait emerges as key to US banks’ funding plans

KUWAIT’S sovereign wealth fund is emerging as a key investor in plans by Merrill Lynch and Citigroup to raise about US$19 billion (S$27.2 billion) to help shore up their balance sheets, according to media reports.

Merrill is in talks to raise up to US$4 billion worth of fresh capital with the Kuwait Investment Authority (KIA).

The sovereign wealth fund is understood to be one of the big investors in the latest consortium.

The embattled bank is expected to reveal further write-downs of between US$10 billion and US$20 billion related to its exposure to United States sub-prime lending when it announces quarterly earnings on Thursday.

The KIA is reportedly also prepared to invest up to US$3 billion of the US$8 billion to US$14 billion of new investment that Citigroup wants to raise under the helm of Mr Vikram Pandit, its newly installed chief executive.

The US$200 billion KIA had no immediate comment yesterday on a report that it might buy into Merrill and Citigroup, reported Reuters.

A KIA public relations official referred calls to managing director Bader al-Sa’ad, who could not be reached in his office or on his mobile.

The KIA manages the surplus revenue of the Middle East’s fourth-largest oil exporter.

It had at least US$213 billion in assets at the end of March last year, according to official data.

The Wall Street Journal reported last Friday that Saudi Arabian Prince Alwaleed bin Talal will inject new cash into Citigroup.

Prince Alwaleed is Citigroup’s largest individual shareholder.

The Journal also reported that China Development Bank might invest US$2 billion in Citigroup.

The remainder is expected to come from public market investors.

Wall Street firms hit by losses related to their US sub-prime exposure have been turning to outside investors in droves.

In November, the Abu Dhabi Investment Authority, the investment arm of Abu Dhabi, injected US$7.5 billion into Citigroup in return for a 4.9 per cent stake.

Last month, Merrill agreed to deals to raise up to US$5.2 billion from Temasek Holdings, Singapore’s investment company.

Merill also accepted US$1.2 billion from Davis Selected Advisors, the US asset manager.

China Investment Corporation, meanwhile, agreed to inject US$5 billion into Morgan Stanley in return for a 9.9 per cent stake.

 

Source: The Straits Times 15 Jan 08

Slowing sales worry top-end US retailers

NEW YORK – UPSCALE jeweller Tiffany & Co said last Friday that the number of purchases at its American stores dropped during the holiday shopping season, signalling that a pullback in United States consumer spending is percolating up to high-end merchants.

The slowdown was unexpected and sent jitters through the world of luxury-goods makers, which had seemed invulnerable over the last five years, even as energy prices surged and the housing market began to sputter.

Tiffany’s results were among the clearest evidence yet that wealthy consumers – and middle-class shoppers who sometimes splurge on luxury items – were starting to tighten their purse strings.

Saks Fifth Avenue, Coach and Nordstrom have all experienced a slowdown in growth this holiday season.

They have been careful to emphasise that the truly rich are still shopping with abandon – Louis Vuitton merchandise, for instance, was a hit last month. But they concede that just about everybody else is starting to cut back.

At Tiffany, the most disappointing categories were not US$50,000 (S$71,495) engagement rings, but jewellery priced from US$1,000 to US$10,000.

Tiffany’s US retail sales rose 4 per cent between Nov 1 and Dec 31 to US$450 million. Nearly all of that growth, however, can be traced to foreign consumers capitalising on the weak US dollar. Tiffany said without

foreign buyers, domestic sales would have been flat from last year.

The company likewise credited a 10 per cent increase in sales at its flagship Fifth Avenue store in Manhattan to foreign shoppers.

Same-store sales at Tiffany’s American stores fell 2 per cent, a bigger drop than the company had predicted.

A carefully watched barometer in retailing, the measure refers to sales generated only by those stores that have been open at least a year.

Shares of Tiffany dropped $4.52, or 11 per cent, on Friday to close at US$35.80 a share.

Mr Mark Aaron, a vice-president for investor relations, said total sales were below expectations.

‘We entered the holiday season facing well-known, challenging conditions,’ he said. Even so, he added, ‘the magnitude of the softness was more than we expected’.

At the very high end, the number of consumers buying Tiffany jewellery priced over US$50,000 rose, but the average amount spent by those consumers dropped slightly.

Stifel Nicolaus retail analyst David Schick said, ‘Tiffany is not making mistakes in merchandise and marketing.

‘So if Tiffany is doing the right thing and business is down in the US, it gives you a glimpse of how the highend consumer is doing.’

 

Source: NEW YORK TIMES 14 Jan 08

Merrill in hunt for more capital as losses set to hit US$15b

It’s wooing investors in US, Asia, Mid-East to shore up finances

(NEW YORK) Merrill Lynch is expected to suffer US$15 billion in losses stemming from soured mortgage investments, almost double its original estimate, prompting the firm to raise additional capital from an outside investor.

The largest US brokerage firm is expected to disclose the huge writedown when it reports earnings next week, according to people who have been briefed on its plans. The loss far exceeds the US$12 billion hit that many Wall Street analysts had forecast.

To shore up its deteriorating finances, Merrill is now in discussions with investors in the United States, Asia and the Middle East, including American private equity firms, to raise about US$4 billion in the coming days, these people said.

The developments underscore the rising toll that the mortgage crisis is taking on many once-proud Wall Street banks. In recent months, Merrill and several other firms have grabbed financial lifelines from wealthy foreign governments. Further investments by so-called sovereign wealth funds could prompt scrutiny by Congress.

The latest moves at Merrill come as John A Thain, who became the company’s chairman and chief executive in December, struggles to bolster the firm’s capital, burnish its reputation and avoid the toxic internal battles that have hurt the firm in the past.

Mr Thain, who won plaudits as head of the New York Stock Exchange, has wasted little time. After he took over in December, Merrill promptly sold a US$5.6 billion stake to Singapore’s Temasek Holdings, and Davis Selected Advisers, a money management firm based in Tucson, Arizona.

During a meeting in December in London, Mr Thain told anxious employees that Merrill expected further losses after an US$8.4 billion writedown in the third quarter. He also said that the firm would require additional capital.

He said that the fourth quarter would be a ‘very bad quarter’, those attending recalled.

Mr Thain has made clear that Merrill would not sell its 49 per cent stake in BlackRock, the global money management firm. But he has said that the firm is considering selling non-core assets like its stake in Bloomberg, the financial news and information company.

In a research report, Brad Hintz, a securities analyst at Sanford C Bernstein & Co, said that that stake was worth about US$4 billion.

Mr Thain also said at the London meeting that Merrill’s management style needed to change. Recalling his days as a co-president of Goldman Sachs, Mr Thain said that he wanted employees to build consensus.

Among other things, that means Merrill will now pay fewer bonuses based on individual performance and instead focus on the performance of a team. Many employees received bonuses this week that included a greater portion of stock than in the past.

Merrill is hardly alone in seeking capital from overseas. US financial institutions have raised more than US$29 billion from foreign governments and their related investment entities, according to market research firm Dealogic.

 

Source: NYT (Business Times 12 Jan 08)

LATEST US DATA: Record oil prices swell trade deficit

November’s gap jumps by 9.3% to US$63.1b; highest level in 14 months

(WASHINGTON) The US trade deficit in November surged to the highest level in 14 months, reflecting record imports of foreign oil. The deficit with China declined slightly while the weak dollar boosted exports to another record high.

The Commerce Department reported that the trade deficit, the gap between imports and exports, jumped by 9.3 per cent, to US$63.1 billion.

The imbalance was much larger than the US$60 billion that had been expected.

The increase was driven by a 16.3 per cent surge in America’s foreign oil bill, which climbed to an all-time high of US$34.4 billion as the per barrel price of imported crude reached new records. With oil prices last week touching US$100 per barrel, analysts are forecasting higher oil bills in future months.

The big surge in oil pushed total imports of goods and services up by 3 per cent to a record US$205.4 billion.

Exports also set another record, rising by a smaller 0.4 per cent to US$142.3 billion.

Export demand has been growing significantly over the past two years as US manufacturers and farmers have gotten a boost from a weaker dollar against many other currencies.

Through the first 11 months last year, the deficit ran at an annual rate of US$709.1 billion, down 6.5 per cent from last year’s all-time high of US$758.5 billion. Analysts believe that the export boom will finally result in a drop in the trade deficit in 2007 after it set consecutive records for five years.

Critics of President George W Bush’s trade policies, however, say the declining deficits will still leave the imbalance at a painfully high level, which they contend reflects unfair trade practices of other nations that have contributed to the loss of more than three million US manufacturing jobs since 2000.

Trade is expected to be a key issue in this year’s presidential campaign, with many Democrats charging that the Bush administration has not fought hard enough to protect American workers and keep companies from shipping jobs overseas.

Much of their unhappiness is focused on China, where the US trade deficit through the first 11 months of last year totalled US$237.5 billion, the highest annual imbalance ever recorded with a single country – with December still left to tally.

The November deficit with China dipped slightly to US$24 billion, but that was down from a record high of US $25.9 billion set in October, when retailers were boosting orders for toys, games and video equipment to stock their shelves for Christmas.

Analysts predict further increases in the deficit with China in the months to come as US demand has been unfazed by a string of high-profile recalls of a number of Chinese products, everything from tainted toothpaste to toys with lead paint.

China reported on Thursday that its trade surplus through December with the world rose by 47.7 per cent to a record of US$262.2 billion with the December surplus coming in at US$22.7 billion, up 9.5 per cent from a year ago.

 

Source: AP (Business Times 12 Jan 08)

US recession fears push gold to record level

Precious metal hits US$898 and could go even higher as investors seek an alternative store of value

GOLD hit a record US$898 (S$1,286) an ounce yesterday and could reach US$1,000 soon as fears of a US recession drive investors to seek safety in the yellow metal.

A perfect storm of faltering stock markets, global economic uncertainty, Middle East tension and a free-falling US dollar is elevating gold as an alternative store of value.

That view took on even more urgency yesterday after US Federal Reserve chief Ben Bernanke hinted at more interest rate cuts, which would further weaken the greenback.

‘The probability is very high for gold to hit US$1,000 an ounce over the next three months,’ said UBS Asia-Pacific metals distribution head Stephan Schlatter. ‘It’s hard to be negative about gold, given the current situation.’

The gold rush began last year and has increased more than 30 per cent over the past 12 months. It is already up 7 per cent since Jan 1.

It did slip back to US$894 an ounce last night after reaching US$898 earlier in the day.

Ms Mae Leong, who helps manage $183.1 million of gold-related stocks in United Overseas Bank’s United Gold & General Fund, said yesterday that the uncertain times are tailor-made for the precious commodity.

‘With a generally poorer macroeconomic outlook, investors are looking to gold to diversify their assets,’ said Ms Leong.

Ms Leong added that gold prices are also typically higher in December and January, driven by jewellery demand in India and China.

Private banks here said interest in gold among local investors has been rising, whether it is in the form of simple gold certificates or more complex structured instruments.

Jittery investors around the world are so keen to have something solid in their portfolios that prices of other precious metals, such as silver and platinum, have also hit records, but these do not have the same safehaven cachet gold enjoys.

Gold is widely seen as an alternative universal currency to the US dollar. When the greenback falters, gold prospers, as is happening now.

Many experts reckon the metal will keep heading north, given the increasingly negative outlook in the global economy.

Much of gold’s recent allure stems from the gloom in the US.

Mr Bernanke’s speech in Washington made clear that the central bank believes tight credit conditions stemming from the sub-prime mortgage mess are threatening the broader US economy.

But the rate cuts that the Fed is almost certain to announce later this month will devalue the US dollar as investors will seek better returns from other currencies.

Yet those same rate cuts risk adding to inflation, and that will only further boost gold as it is seen as holding its value better against paper assets in such times.

Inflation is also not being helped by soaring oil prices.

And to complete the toxic cocktail, analysts point to geopolitical tensions in the Middle East and Pakistan.

But Mr Schlatter warned that it may not be the right time to dip your toes into the gold market, given its skyhigh price.

Still, for many people, gold is more than a mere investment.

Bank Julius Baer analyst Venkatraman Nageswaran said: ‘Retail investors can kill two birds with one stone and buy gold jewellery.

‘This way, they can keep their wives happy and make a good investment as well.’

 

Source: The Straits Times 12 Jan 08

Job data suggests US recession is here: Merrill

Never in past 60 years has jobless rate risen 60 points without a recession

(SINGAPORE) A US recession is a reality, says Merrill Lynch in a Jan 7 report, calling for a defensive strategy and investments in high-quality bonds.

The firm’s North American economist David Rosenberg said last Friday’s employment data ’strongly suggests’ an official recession. For one, the unemployment rate hit 5 per cent in December against the March 2007 trough of 4.4 per cent. At no time in the past 60 years, he wrote, has the jobless rate risen 60 basis points without the economy slipping into recession.

Back-to-back declines in total hours worked – this indicator saw a 0.4 per cent fall in the fourth quarter, against a 0.6 per cent fall in the third – is also associated with a recession.

Another point is that the level of unemployment is up 13 per cent year-on- year, which is consistent with a recession. The year-on-year rate of change in the level of the unemployed who have been idle for at least 15 weeks is ‘particularly ominous’, he said, at 20 per cent. This was the pace in the early stages of previous downturns in 2001 and 1990.

The typical recession, he said, lasts 10 months, and sees the S&P 500 decline 60 per cent of the way through. ‘… so if you’re in the market for bottom picking, the historical record would be telling you to wait for May or June. Based on how the markets end up behaving peak-to-trough when the economy moves into a recessionary phase, we can see that right now the S&P 500 is priced 32 per cent of the way for a recession; and no sector is fully discounting this condition.’

Mr Rosenberg favours Treasuries and high-quality bonds. ‘We maintain our call not to be afraid of low yields but to focus on adding income and quality to the portfolio’. Treasury bonds, he said, outperform stocks on a total return basis by 2,700 basis points during a cyclical bear market, ’so bonds are the place to be’.

In a recession, the Federal Reserve cuts the funds rate by an average of 400 basis points. Both the Fed funds and long-term yields also continue to decline after the official downturn is over. In recessions, the S&P500 typically corrects by about 25 per cent.

The worst sectors are consumer discretionary and financials; the best performing are defensives like telecom, healthcare and utilities. The latter sectors may outperform the market by 400 basis points. ‘But keep in mind that all 10 S&P sectors are down in a recession, so there is nowhere really to hide.’

Mr Rosenberg warns that the unwinding of the real estate bubble could prolong the current downturn. But assuming a typical scenario, the recession could end around the fourth quarter of 2008. This suggests a market bottom in mid-year, ‘But by that time, an average recession would imply another 15-20 per cent downside to the equity market and is not a train you want to stand in front of… This then means a focus on defensive strategies.’

Separately, Reuters reported Goldman Sachs as saying yesterday it expects the US economy to drop into recession this year, prompting the Federal Reserve to slash benchmark lending rates to 2.5 per cent by the third quarter.

 

Source: Business Times 10 Jan 08

Developing nations to lift world economy amid US slowdown

They will be the biggest drivers of global growth as pace slows to 3.3% this year: World Bank

DEVELOPING nations will be key in helping the global economy mitigate the drag from a slowing United States.

With their domestic economies coming into their own, poor countries will be the world’s biggest growth driver this year, the World Bank said in a report yesterday.

And Singapore is especially well-poised to take advantage of this as it is located amid the hottest of the world’s emerging economies.

‘I do believe that there is an impact from whatever happens in the US economy on the developing regions,’ World Bank lead economist Hans Timmer said at a press conference to present the bank’s outlook for the world economy.

‘But the result is not that the world economy will be on its knees.’

The bank is predicting global economic growth will moderate to 3.3 per cent this year, due mainly to a slowdown in the US, the world’s biggest economy.

The US, mired in a severe housing market downturn that has caused much financial turmoil worldwide, is widely expected to decelerate further this year.

While the World Bank has estimated that the US should manage a modest 1.9 per cent expansion this year, fears of a recession appear to be rising, prompted by recent economic data.

‘We can certainly smell a US recession although we can’t taste one yet,’ said United Overseas Bank economist Thomas Lam.

Against this ominous backdrop, developing economies are emerging as a bright spot for the year. They are expected to grow 7.1 per cent this year, with East Asia’s growth stars clocking in at an average of 9.7 per cent.

‘Singapore benefits from its location in Asia, which has shown the strongest dynamism in the world,’ said Mr Timmers, who cited the region’s red-hot economies of China and Vietnam. He pointed out that developing nations have become much more resilient to external demand shocks in the past few years.

The US housing slowdown, for instance, began two years ago and has been hurting US imports of goods made in poorer countries.

But that has not derailed the developing world from its growth path as its robust domestic economies – bolstered by better economic policies, open borders and stronger supply-side structures – have been picking up the slack.

Many emerging economies have also been largely unscathed by financial problems caused by the US subprime crisis as their direct exposure to the crisis has been limited.

‘With that resilience, with their strong performance, developing countries are now mitigating the slowdown that is occurring in the US,’ said Mr Timmers.

He noted that the developing economies together equal the US economy in size.

‘But they are growing more than three times as fast. That means their contribution to global demand is more than three times as important as the contribution of the United States.’

Still, a sharp and drastic slowdown in the US remains a key risk to the developing world and the global economy.

Also, an overreaction by policymakers might result in bigger problems down the road.

The World bank warned that if central banks overstimulate the economy with over-aggressive rate cuts, asset bubbles could be created.

‘Commodity markets could tighten further, inflationary pressures would mount and financial imbalances would increase rather than recede.

‘Such a scenario could sow the seeds of a much sharper downturn in the medium term.’

 

Source: The Straits Times 10 Jan 08

When US sneezes, Asia now does not catch cold

THE axiom ‘when the US sneezes, Asia catches cold’ does not hold true any more.

Asian economies have become less dependent on the United States market, though not completely immune to its changes.

That, at least, was the consensus at the 6th Annual Business Outlook Forum, jointly organised by the Singapore Chinese Chamber of Commerce & Industry and The Business Times on Monday.

Benjamin Yeo, executive director and head of UBS Wealth Management Research, highlighted the growing importance of emerging markets like China against the declining export markets of the US.

Mr Yeo said: ‘As far as Asian growth is concerned, we remain cautiously optimistic.’

He attributed his optimism to several factors including the increase in export diversification away from the US in Asia.

Currency strategist Idris Nizam analysed the possible directions of the US dollar versus the Singapore dollar and other Asian currencies like the Chinese yuan and the Malaysian ringgit.

Mr Nizam, director of foreign exchange research at UBS AG, said: ‘In my view, global growth has peaked.’

He does not expect a recession in the US, but slower growth is likely.

Asian Property Equities fund manager Frankie Lee discussed the structural growth of the region and the fundamentals of domestic property.

He said that it is not too late to invest in Asia-Pacific property as valuation becomes favourable.

In fact, the timing now is as good as at any point in the past 18 months, Mr Lee said.

Vikram Khanna, associate editor of The Business Times, chaired the panel discussion that followed the analysts’ speeches.

 

Source: Business Times 9 Jan 08

WALL STREET INSIGHT: Outlook for 2008: Big on turmoil, small on gains

Most economists expect US economy to narrowly avoid recession this year

NEW YORK CORRESPONDENT

NO MATTER whether stocks in the US equity market are able to thrive this year or even achieve the slim singledigit gains that most of the Wall Street market strategists The Business Times polled have set for their end of year targets, this year will be amongst the most challenging market environments facing Wall Street in many years.

‘2008 will certainly not be a year short of major storm clouds,’ said Jim Awad, chairman of WP Stewart, who is forecasting gains of 4 to 6 per cent for blue chip stocks and the broader S&P 500. ‘It will be a volatile and difficult year, with the positive pull of export demand from higher growth overseas battling the drag of a domestic slowdown and financial sector troubles.’

The US market’s start to the year reflected the daunting challenge, as the Dow Jones Industrial Average closed 2008’s first day of trading with a 220.86-point loss, or 1.67 per cent to 13,043.96, the worst point decline for the Dow at the start of any trading year.

‘That’s not the way you want to start off a new year, it’s certainly bearish as omens go,’ said Ryan & Beck senior market strategist Joseph Battipaglia. ‘But still, it’s only the first day of the year.’

Indeed, and with hundreds more trading sessions to go in 2008, Wall Street analysts expect the good to outweigh the bad this year, if only by the slimmest of margins.

First, the good news. Most stock market strategists expect the US equities markets to move up during the 12 months, registering modest gains. Large capitalisation, multinational companies, especially makers of information technology equipment and software, should lead the way. The US economy should narrowly avoid a recession, beginning to show signs of recovery by the end of the year, most Wall Street economists say.

Economists like Merrill Lynch’s David Rosenberg believe the US Federal Reserve will be active in cutting short term interest rates this year, bringing solace to investors focused on the economic slowdown. Mr Rosenberg thinks that data like Wednesday’s weak manufacturing report could push the rate-setting committee to order a cut of fifty basis points at its January meeting. ‘The voting members are becoming more sanguine about inflation and more concerned about tightening credit conditions and deterioration in the financial market, as noted in the minutes of their last meeting,’ he said.

The bad news: That’s the best-case scenario for what is expected to be a tumultuous 2008 for stock investors.

Despite the US housing market’s year-long collapse in 2007 and over US$40 billion in write-offs by banks looking to clear their books of sub-prime loans and investments, the coming year presents the threat of more of the same. A severely wounded housing market, coupled with loan-wary credit markets, could act together to pull the US economy into a prolonged recession, with several quarters of falling profits for US corporations in the wider economy, not just financial businesses.

‘We certainly shouldn’t expect to be rescued by corporate profits this year,’ said Charles Crane, investment strategist at Scotsman Capital. ‘But companies could also end up faring more solidly than many investors seem to be expecting, and that could provide a boost mid-year,’ he said.

FedEx, a leading indicator for the US economy, is a good example. The logistics company was one of the first to top out in 1999 and one of the first to bottom out in 2000.

In its last quarterly report FedEx offered downward guidance for the current quarter, which ends next month. But it sounded a more confident note for its first quarter of 2008, which ends in May, indicating it sees a pick-up in business as early as the spring.

Mr Battipaglia believes that, short of an outright melt-down and panic, ‘all of the bad stuff is out there already. It could get worse, but it’s already very high and printed in bold on investors’ radar screens,’ positioning stocks for a solid bounce-back later in the year.

Although the increased chance of recession, inflation and even stagflation cannot be dismissed, said Citigroup chief investment strategist Tobias Levkovich, ’should recession be averted, as we currently expect, some of the most beaten-up groups like diversified financials and retailers would most likely act as coiled springs and lead markets higher this year.’

He claimed that market fundamentals ’still argue for double-digit stock price appreciation after a disappointing 2007. Valuation, implied earnings expectations and select sentiment approaches all support respectable upside potential.’ He set year-end market targets at 1,675 for the S&P 500 and 15,100 for the Dow.

Mr Crane is not as bullish as Mr. Levkovich, forecasting single digit gains for the major indexes, but he agrees that many stocks are venturing into oversold territory. ‘There will be plenty of opportunities to make better returns in individual stocks,’ he said.

 

Source: Business Times 7 Jan 08

THE 2008 CAMPAIGN: US economy slipping towards recession: Hillary Clinton

The economy is likely to become a bigger factor in the US presidential campaign in the coming weeks as it moves beyond Iowa and this week New Hampshire primary into more populous states such as California and Florida

(MANCHESTER, New Hampshire) Democratic presidential contender Hillary Clinton believes that the US economy is heading towards a recession.

Citing jobs data on Friday that showed the US unemployment rate rising to its highest level in more than two years, Mrs Clinton said on Saturday, ‘I think the economy is slipping towards recession.’ US employers added only 18,000 jobs in December, underlining a dramatically slowing economy. In addition, oil prices hit US$100 a barrel last week.

‘The unemployment figures on Friday hitting 5 per cent, US$100-a-barrel oil that we also hit this week, the fall of the dollar, there’s a lot of pressure on middle-class families and a kind of cost that they have to keep up with have all gone up astronomically,’ the New York senator said in a debate with Democratic rivals before New Hampshire’s tight nominating contest tomorrow.

The thinking on Wall Street is that a recession cannot be avoided without serious help from the US Federal Reserve and only if troubles in the housing and credit markets have bottomed out, analysts say. Mrs Clinton also launched a searing attack on surging rival Barack Obama, as polls showed on Sunday he could inflict a second body blow to her White House hopes in the upcoming New Hampshire primary.

Mrs Clinton on Saturday used a tense face-to-face debate, three days before the next crucial 2008 test to argue her rival was inconsistent, inexperienced, and more fond of words than action.

‘He could have a pretty good debate with himself,’ a steely Mrs Clinton said, trying to pin the damaging ‘flip-flop’ label on Mr Obama on hot-button issues like healthcare, national security and Iraq. Mrs Clinton came out swinging after a humiliating third place in Thursday’s leadoff Iowa caucuses, which validated Mr Obama’s soaring message of hope, change and cleansing America’s poisoned politics.

‘You have changed positions within three years on a range of issues that you put forth when you ran for the Senate and have changed,’ she said. ‘You said that records matter.’ She also argued his powerful rhetoric did not mean he would be effective in driving reform, and said her quest to be the first woman president showed she was an agent of change. ‘Words are not actions. And as beautifully presented and passionately felt as they are, they are not action.’

Mr Obama, stature enhanced by his Iowa triumph, avoided serious gaffes, appeared unruffled by Mrs Clinton’s attacks, and smoothly deflected them with his own political message. ‘What I think is important that we don’t do is try to distort each other’s records as election day approaches here in New Hampshire,’ Mr Obama said.

 

Source: Reuters, AFP (Business Times 7 Jan 08)

Fed will cut rates by 50pts this month, says Goldman

Slowing economy will prompt aggressive move, it says

(WASHINGTON) Goldman Sachs Group, one of the 20 primary dealers that trade directly with the Federal Reserve, said the central bank will reduce its target rate by half a percentage point to 3.75 per cent on or before Jan 30.

The securities firm still projects a cut of 75 basis points, or three-quarters of a percentage point, by the end of the first quarter. On Friday, Goldman said 50 basis points of that will come this month as the deteriorating economy prompts the Fed to act more aggressively.

‘The information has been sufficiently negative that we think they need to cut by 50′ basis points, said Jan Hatzius, chief US economist at Goldman in New York. ‘There is a possibility of a move before the meeting. I think the more likely outcome is they will wait until the meeting, but I do think they will be doing 50′ basis points.

Consumer spending would have to drop unexpectedly for the Fed to cut rates before the next scheduled meeting on Jan 29-30, the firm said in a note on Friday.

Payrolls rose by 18,000 in December, capping the worst year for job creation since 2003, the Labor Department said on Friday in Washington. The jobless rate rose to 5 per cent in December, the highest in two years, fuelling concern the economy may be slipping into recession.

A slowing economy in 2008 points to a ‘more benign’ outlook for inflation, giving the Fed room to lower rates, Mr Hatzius said.

Barclays Capital also revised its forecast for January and now expects a 50 basis point cut, said Michael Pond, a New York-based interest rate strategist at the firm. Barclays is another of the 20 primary securities dealers that trade with the Fed. 

 

Source: Bloomberg (Business Times 7 Jan 08)

wallstreet: Fears of recession send US stocks tumbling

NEW YORK – US STOCKS tumbled on Friday, dragging the Dow to its worst three-day start to a year since the Great Depression, as a sharp rise in the unemployment rate heightened fears that the economy is heading into a recession.

Technology shares were the worst performers in a broad-based decline after chipmaker Intel Corp skidded 8.1 per cent on concern that businesses are unlikely to upgrade computer equipment in the face of a slowdown.

The Nasdaq fell 3.77 per cent, bringing the index to its worst three-day kick-off to a new year since it was created in 1971.

The US Labour Department reported that job creation had nearly ground to a halt last month. Unemployment rose to a two-year high of 5 per cent.

‘The payroll numbers are showing that we don’t have the jobs, and if you don’t have job income, you don’t have consumers doing any spending,’ said Mr Gary Shilling, president of A. Gary Shilling & Co of Springfield, New Jersey. ‘I don’t think there’s much question we’re in a recession now.’

In a sign that investors were hunkering down for hard economic times, the market’s rare gainers were from defensive sectors such as electric utilities, drugmakers, food and other products seen as essential to daily life.

The Dow Jones Industrial Average was down 256.54 points, or 1.96 per cent, at 12,800.18. The Standard & Poor’s 500 Index was down 35.53 points, or 2.46 per cent, at 1,411.63, and the Nasdaq Composite Index was down 98.03 points, or 3.77 per cent, at 2,504.65.

The Nasdaq’s decline brought it to a six-day losing streak, the first time since August that it had marked six straight losses. The index is now off more than 10 per cent from its 52-week closing high set on Oct 31.

The S&P had its worst three-day year open since 2000.

Intel, the world’s top semiconductor maker, which was downgraded by JP Morgan on Friday, fell to US$22.67 and was off more than 15 per cent since Wednesday.

Coca-Cola Co was the sole gainer in the 30-share Dow average, adding 0.2 per cent to US$61.85.

 

Source: Reuters (The Sunday Times 6 Jan 08)

WEEKLY MARKET REPORT: Is a coming US recession fully priced in yet?

SINGAPORE – By now, you’d have to wonder whether an aggressive cutting of US interest rates really is the answer, or instead of doing so and inflating yet more bubbles the best medicine for an ailing US economy is to simply let its excesses and imbalances correct themselves, lengthy though the process may be.

Financial markets however – like funds managers – are typically short-sighted when it comes to suffering pain, so for now, the pressure is on the US Federal Reserve to cut its fed funds rate by 50 points at the Jan 30 Open Markets Committee meeting – after Friday’s rout on Wall Street, the futures market priced in a 60 per cent probability of this occurring.

You’d have to wonder if this would really be of any help, given that rates have already been lowered by 75 points in the fourth quarter but the markets have not recovered.

You’d then have to wonder whether it’s the economy that comes first or the stock market as far as the Fed is concerned, though this being an election year the answer is that propping up both must surely be priorities because there’s nothing like those large plus signs next to the major indicators and indices to inject confidence into the population, even if it is misplaced.

Speaking of which, you’d have to conclude that the large plus signs next to the Straits Times Index in 2007’s final fortnight were most probably thanks to a combination of window-dressing and the ‘buy in anticipation of window-dressing’ that we suggested would take place in this column a fortnight ago.

Readers might also recall that the full suggestion made back then was to buy in anticipation the large index blue chips such as SingTel, the banks, SGX and Keppel but to quickly sell into strength because the likelihood of a rally heading into the new year was slim.

In other words, the best bet for the time being is to trade the market, buying selectively into dips but selling as quickly as possible into strength.

It goes without saying that the same strategy should apply for at least the next two weeks, at least until the days leading up to the Jan 30 FOMC meeting when another ‘buy in anticipation, sell on news or into strength’ window should present itself.

One main reason for this is that by now, 50-75 basis points interest rate cuts during the first six months of 2008 must surely already be in the price. Markets have for a long time been clamouring for aggressive cuts and as stated earlier, this being a US election year, it’s difficult to see the Fed resisting. So even though there will be interest rate-led bounces before and after each FOMC, it’s likely they will not last long.

The second reason is an extended recoupling with Wall Street, or rather no sign of any decoupling as some analysts had predicted. Linked by programme trades, all markets in this part of the world have shown an increasing – not decreasing – dependency on the US for direction over the past six months and there’s no reason to expect any change soon.

In fact, recoupling is very much a theme in Morgan Stanley’s Critical Macro Investment Themes dated Jan 3 by chief economist Richard Berner.

‘Although it has yet to begin, our call for a mild US recession is intact: we expect domestic demand to contract significantly in each of the next three quarters, essentially no growth in overall GDP for the year ending Q3 2008 and earnings to contract by 5-10 per cent over that period…global recoupling may well be a dominant theme this year’ wrote Mr Berner, who unlike most other analysts, believes the US dollar will strengthen in 2008.

One problem is that Wall Street may not have fully priced in the risk to earnings bought on by the coming slowdown and that other markets are still overly complacent about their own impending slowdowns and earnings forecasts.

Still, the volatility that is very likely to result from all this uncertainty will create plenty of trading opportunities (structured warrant issuers, whose instruments thrive in volatile markets, must be rubbing their hands in glee) for those with the stomach for heightened risk.

The upshot of all this is that all markets will be stuck in a trading range for a while yet, there is no decoupling from Wall Street yet on the horizon, technical factors like supports and resistances will become important, there’s a strong likelihood that a coming US slowdown is not yet in local prices and investors should take overly bullish call to keep buying with a healthy dose of salt.

 

Source: Business Times 5 Jan 08

US economy – waiting for the other shoe to drop

With forces building up, some economists expect a verdict soon

(NEW YORK) For months, the American economy has been assailed by a wave of troubling news, from plunging housing prices to the soaring cost of oil, provoking gloomy talk of a possible recession. Yet so far the economy has found a way to shrug it all off and keep growing.

How much longer can the expansion carry on? As a new year unfolds, analysts expect a verdict soon: Either the negatives finally metastasise and drag the economy down, or a fresh source of growth emerges, helping to sustain consumer spending despite the ongoing worries about housing and tight credit.

‘There are even odds of a recession,’ said Mark Zandi, chief economist at Moody’s Economy.com. ‘It literally could go either way.’ The year that just ended was not for the faint of heart. As mortgage debt became synonymous with toxic waste, banks got spooked and tightfisted. Job growth slowed. Inflation fears grew. Still, consumers kept spending, and unemployment stayed flat. American companies found enough sales abroad to compensate for weakness at home.

The bursting housing bubble remains a focus of concern. An era of free-flowing credit and speculation has led to a far-flung empire of vacant, unsold homes – 2.1 million, or about 2.6 per cent of the nation’s housing stock, Mr Zandi said. Even in the worst years of recessions in the early 1980s and 1990s, the share of vacant homes did not exceed 1.9 per cent.

This assemblage of unsold properties will not be whittled down to normal levels, economists suggest, until national home prices fall by at least 15 per cent from their peak, reached in the summer of 2006. So far, prices have dropped a little more than 5 per cent, according to the Standard & Poor’s Case-Shiller home price index.

The glut could be exacerbated if an already alarming wave of foreclosures continues to broaden, claiming even those with supposedly good credit.

Last year, the trouble in the mortgage market was largely confined to sub-prime loans extended to homeowners with weak credit. Nearly one-fourth of such loans were in default as of November, according to data from First American LoanPerformance and the Federal Reserve Bank of New York.

Though default rates on loans to homeowners with relatively good credit are far lower, they are rising sharply, too.

In November, 6.6 per cent of so-called Alt-A home loans – those deemed somewhat less risky than sub-prime – were either delinquent by 60 days or more, in foreclosure, or had been repossessed. That was up from 4.3 per cent in August.

This is a potentially ominous sign, because sub-prime and Alt-A mortgages issued in 2006 together made up about 40 per cent of all mortgages. Like many of the sub-prime loans that have landed in trouble, Alt-A loans often begin with a low introductory interest rate that then jumps.

The spike in foreclosures is happening even before many mortgages have reset to higher rates, suggesting that borrowers are falling behind because their homes are worth less. Many are having trouble refinancing as banks tighten lending standards.

All of which explains why many economists expect national housing prices to fall by 5 to 10 per cent more in 2008, and perhaps into 2009 as well, before hitting bottom.

Such a drop could ripple out to the broader economy by depressing consumer spending, which accounts for about 70 per cent of all economic activity.

‘It’s almost inconceivable that there won’t be severe constraints on the US consumer economy,’ said Bernard Connolly, chief global strategist at Banque AIG in London.

Forecasting the demise of consumer spending, however, is notoriously risky. The willingness of Americans to spend, whatever the size of their debts, seems to transcend the rules of economics.

But conditions suggesting a slowdown have been taking shape: The labour market cooled last year, creating new jobs at roughly half the rate of 2006. Wages grew slower than inflation during the last two months. Early indications suggest Americans were relatively thrifty during the holiday season.

‘You have to ask yourself: Where does the consumer continue to get his or her spending power?’ said Jared Bernstein, senior economist at the liberal Economic Policy Institute in Washington. ‘If consumption falters, it’s good night nurse for the American economy.’

 

Source: NYT (Business Times 3 Jan 08)

Slow growth and inflation eating into US corporate gains

Analysts cut forecasts for first quarter as profit margins shrink, due to higher costs

WASHINGTON – CORPORATE profit margins are set for an uncomfortable squeeze this year, as companies pay more for materials but yet have little leeway to raise prices.

Inflation is tricky enough on its own but when it comes along with slowing economic growth, the pain is magnified because cash- strapped consumers often force companies to absorb the bulk of the pricing pressure.

Recent inflation reports suggest that many businesses are doing just that. The rate of inflation at the factory gate far outstripped consumer price increases in both the United States and Britain in November.

This week, investors will get an early peek at inflation data for last month, with surveys of global purchasing managers – the people who make buying decisions for businesses – from both the manufacturing and services sectors.

The November reports showed input prices spiked, as oil, food and other commodities remained stubbornly high, powered by demand from fast-growing emerging markets such as China.

Last month’s numbers are likely to reflect more of the same, and with oil once again approaching US$100 per barrel, inflationary pressures look likely to linger.

Last Friday, Australia’s survey of purchasing managers showed slowing orders and rising input prices for last month.

In Japan, manufacturers’ output and new orders rose but inflation kept creeping up, straining margins.

Mr Jack Ablin, chief investment officer at Harris Private Bank in Chicago, noted that when the difference between producer prices and consumer costs widens, it is often a prelude to an economic downturn.

Wall Street analysts are beginning to trim profit forecasts, and many market-watchers think estimates will fall further this month, when companies start reporting fourth-quarter results and commenting on prospects for the full year.

Earnings for companies in the Standard & Poor’s 500 Index are expected to grow by 6.7 per cent in the first quarter of this year, according to data compiled by Reuters Estimates. As recently as Nov 12, analysts were looking at first-quarter earnings growth of 10.9 per cent.

While the projections have come down sharply, they still look relatively rosy when compared to bleak forecasts for just 0.5 per cent earnings growth in the final quarter of last year.

Those estimates were slashed as financial companies announced billions of dollars in losses tied primarily to bad mortgage loans.

Mr David Rosenberg, an economist with Merrill Lynch, said US corporate profits were likely to have peaked in the third quarter of last year.

‘While the debate rages over whether the real economy is going into a recession, the reality is that the earnings recession has already arrived,’ he wrote in a recent note to clients.

Corporate America is raising prices where it can but must tread carefully for fear of scaring away potential customers as household budgets strain under the weight of rising mortgage payments, petrol prices and other costs.

General Motors (GM) announced earlier this month that it will increase prices by as much as US$1,500 (S$2,172) on its 2008 model vehicles, though it was holding the line on some cars in hotly contested segments such as four-door sedans.

General Mills, the food company best known for Cheerios cereal and Progresso soup, said it planned to raise prices again after inflation outpaced its forecasts.

Kroger, the largest American grocery chain, reported weaker margins for its latest quarter as costs headed up.

European companies find themselves in a similar situation.

Companies such as Nestle have been raising prices to offset rising commodity costs and expect further increases in the coming year.

As European consumer spending shows signs of fading, the worry is that customers may seek cheaper alternatives.

Source: REUTERS (The Straits Times 1 Jan 08)

Bombs, security fears mar revelry as world greets 2008

(NEW YORK) Millions staged midnight parties at iconic landmarks around the world to ring in 2008, but bomb attacks and security fears quickly darkened New Year festivities in places.

In New York, hundreds of thousands of revellers crowded the fabled Times Square, braving cold temperatures and stringent security measures to see Mayor Michael Bloomberg release the New Year’s Eve ball on its 100th lowering, with a dazzling display of new environmentally-friendly lights.

But it was Sydney that got the global party going as more than a million people lined the harbour for fireworks. The giant steel archway of the Sydney Harbour Bridge was again the centrepiece of the traditional display in Australia’s main city, with a giant neon hourglass illustrating the theme of time passing.

An estimated 700,000 people were out on the damp London streets and crammed on riverbanks to watch the 10-minute fireworks display on the Thames, which focused on the giant London Eye observation wheel, police said.

However, bombs planted by suspected separatist rebels at discos and other entertainment centres rocked Thailand’s troubled south as revelry was at its peak. In Pakistan’s biggest city, Karachi, police stopped thousands from attending a traditional gathering on a beach overlooking the Arabian Sea amid security fears after the assassination of Opposition leader Benazir Bhutto.

Belgian authorities cancelled a traditional fireworks show in Brussels as the country went on maximum alert over possible terror threats. French authorities put 13,000 police on the streets of Paris and its troubled suburbs to deter any repeat of riots last month. But an estimated 400,000 French and foreign visitors still turned the Champs Elysees into a mass of car-honking festivities. Even more people – around one million according to police – packed streets around the Brandenburg Gate in what German media billed as the world’s biggest New Year’s party.

In China – set to host the 2008 Olympics in Beijing – President Hu Jintao called for world peace and development in his New Year address. ‘We sincerely hope people of all nations live under the same blue sky freely, equally, harmoniously and happily, and enjoy the achievements in peace and development of the humankind,’ he said. Thousands in Hong Kong ignored unusually low temperatures to see the fireworks in Victoria Harbour. In the northern Chinese city of Harbin, tourists strolled through a display of ice structures and some toasted the New Year in a bar made from ice blocks.

As tens of thousands of people flocked to Moscow’s Red Square, Russia’s President Vladimir Putin used his final New Year address as president to congratulate Russians on a ‘national renaissance’ driven by ‘colossal resources’, in a pre-recorded broadcast.

In Iraq, crowds surged into the streets of strife-torn Baghdad, setting off firecrackers and firing weapons and dancing in a rare moment of freedom from the daily violence that has recently eased.

 

Source: AFP (Busines Times 2 Jan 08)

Analysts hoist red flag over greenback

Currency watchers look into the new year, and see more selling pressure on the US dollar

By LARRY WEE

(SINGAPORE) The US dollar will face more selling pressure in the early months of 2008, say traders and strategists. And the greenback’s losses could even accelerate against its most favoured Asian counterparts – despite a possible rebound elsewhere later in the year.

Despite having tumbled to its worst levels in 10 years or more against currencies like the Singapore dollar in 2007, forecasters warn that the greenback could fall even further to fresh lows, like 6.6 Chinese yuan and S$1.34, by the end of 2008.

Even less aggressive forecasts expect it to end the coming year weaker, at somewhere between 6.7 and 6.85 yuan and between S$1.37 and S$1.40 – compared to 7.3 yuan and S$1.44 at the close of 2007.

Barclays Capital researchers, who made the S$1.34 forecast for end- 2008, expect local inflation to peak at more than 5 per cent in the first half of 2008 – compared to the current official forecast of 3.5 to 4.5 per cent for the whole year.

This, they explain, will encourage the Monetary Authority of Singapore to maintain a tightening bias despite any concerns about slower global growth in 2008.

Elaborating, they add: ‘We project a current account surplus of US$46.9 billion (24.6 per cent of GDP) and net FDI inflows of US$7.5 billion (3.9 per cent of GDP). Net portfolio outflows will recycle only part of the surplus, leaving the Monetary Authority of Singapore to accumulate further foreign currency reserves.’

And, in the bigger picture, DBS researchers warn: ‘On a 12-month rolling basis, net purchases of US long-term securities by foreigners have already fallen below the US current account deficit. If sustained, a repeat of the 1992- 95 period could not be discounted, when the US dollar fell continuously against the yen and many Asian currencies.’

Other negatives which could add to the selling pressure on the US currency in 2008 include persistently high oil prices, a worsening in the current US credit crunch and a sharper fall in US house prices – all of which could combine to force the US economy into a recession.

In yield terms, these could in turn drive short-term US interest rates to lows of between 2.5 and 3.5 per cent, compared to 4.25 per cent currently.

UOB researchers say a combination of domestic Asian inflationary pressures and more aggressive Fed cuts would translate into more upside pressure on Asian currencies in 2008, because Asian central banks now appear more willing to let their currencies appreciate to counter higher price pressures.

And in a disorderly worst-case scenario, warned UK-based research firm IDEAglobal, the greenback’s losses could even deepen towards 90 yen and US$1.70 per euro.

‘Fed rate cuts to around 2 per cent would have to be accompanied by a significant loosening of US fiscal policy.

Financial asset deterioration in the US would be deeper, US dollar pegs would be broken and the carry trade could take a big multi-quarter hit,’ they say.

And even if not acknowledged publicly, it has been suggested by some that rapidly growing external imbalances have also made Asia and the US more accepting of further downside adjustment for the US currency – especially if this happens in an orderly fashion rather than as a panic sell-off.

US investment bank Merrill Lynch explains that in Asia, such a change in attitude will take hold as more technocratic regimes come to the fore in places like China, South Korea, Taiwan and Thailand over the course of 2008.

As for the US, DBS researchers say: ‘Despite the US Treasury’s attempts to reassure its G-7 partners that it still has a ’strong dollar’ policy, we believe that in reality, US policymakers do not mind a weaker US dollar.

‘Increasingly, they have been pointing to the economic cushion provided by the export sector in their bid to keep up confidence in the US economy.’

By the second half of 2008, however, there’s a chance that the US currency might manage some kind of recovery as US growth prospects improve with continued Fed interest rate cuts – especially against now-overvalued currencies like the euro, Australian dollar and New Zealand dollar, all of which registered far stronger gains than their Asian counterparts in 2007.

In terms of the Australian and New Zealand currencies, Merrill Lynch warns: ‘By H2 2008, business cycle concerns and pressure on commodity prices should begin forcing both currencies back towards long-term valuations. The New Zealand dollar is expected to under-perform, and there are already signs that RBNZ hikes and New Zealand dollar strength are placing downward pressure on housing prices and activity.’

A simple average of the forecasts from five research firms polled by BT suggests that the New Zealand dollar could finish 2008 as much as 8 per cent weaker in US dollar terms, even as the latter chalks up a sharper 7.4 per cent loss versus the Chinese yuan.

 

Source: Busines Times 2 Jan 08

Brazilian economy at its most robust in 25 years

With 5.3% growth, it may have turned corner to stability

(SAO JOSE DOS CAMPOS, Brazil) For years, the joke in this country was that Brazil’s economy was the economy of the future. The morose punchline, of course, was that the future never arrives. But finally, it seems, the future is now.

Just peek into Embraer’s Hangar F220 in this city north of the capital, where the high-flying commercial aircraft maker was putting finishing touches last month on a dozen gleaming new aircraft being readied for delivery to airlines around the world, including Northwest, Air Canada, Tame of Ecuador and VirginAustralia.

Or visit Oderbrecht construction company, in Salvador in Brazil’s north-east. It is managing billions of dollars worth of international public works projects, including its second US$1 billion bridge over Venezuela’s Orinoco River and a piece of the Panama Canal expansion.

And then there’s Petrobras, the quasi-state oil company, whose engineers have launched deep-water drilling projects in places as far afield as Angola, Colombia and the Gulf of Mexico. Petrobras announced last month it had discovered what may be the world’s largest oil find in 25 years in Brazil’s offshore Tupi field. If it pans out, Tupi could propel Brazil into the ranks of significant oil exporters.

After several boom and bust cycles in recent decades, Brazil is in the midst of its best sustained economic growth since the 1970s.

Optimism here is high that the country may have turned the corner on the road to stability. And the emergence of companies such as Embraer, Odebrecht and Petrobras is one major factor in Brazil’s improved fiscal health.

‘The Brazilian economy is probably at its best moment in 25 years,’ said Paulo Levy, economist at the Rio-based think tank known by its Portuguese initials IPEA, citing four years of good economic growth.

Exports of manufactured goods and services have given Brazil’s economy balance and helped foreign reserves climb to US$167 billion, double the figure of September 2006. The country has paid down its debt, lowered interest rates and kept a lid on spending.

Economic growth is expected to come in at 5.3 per cent last year, lower than the hemisphere’s 5.7 per cent, but quite a feat for a country that over the previous 10 years averaged only 2.5 per cent annual expansion.

Foreign investors have taken notice, evidenced by the 44 per cent increase in the Bovespa stock index last year, the fifth year of growth. That’s a bigger percentage gain than in Russia, Chile or South Korea, even though Brazil’s GDP growth rate last year will fall short of those countries.

Brazilian companies held a record 100 initial public stock offerings last year, five times the number in 2006, with 70 per cent of the money raised supplied by foreigners.

‘That’s good for Brazilian companies because it’s a cheaper source of financing,’ said Reginaldo Takara, senior director in the Sao Paulo office of Standard & Poor’s credit rating agency. ‘Now they have partners instead of creditors.’

Improved investor perceptions of Brazil are also evident in the US$30 billion that foreigners have plowed directly into Brazilian companies in so-called foreign direct investment last year, a 60 per cent increase from 2006. The flood of foreign cash washing over Brazil has helped cause the value of the currency here, the real, to double in value against the dollar in four years.

Also giving Brazil an enormous boost is the jump in commodity prices in recent years. The country is the world’s leading exporter of chicken, coffee, sugar, soy, beef and orange juice.

Much of the foreign investment now flowing into Brazil is coming from investors who expect the country’s debt to receive an investment-grade rating from major firms such as Standard & Poor’s over the next couple of years, said Gustavo Franco, former head of Brazil’s central bank and now an executive with Rio Bravo Financial Services in Sao Paulo.

‘If the experiences of Russia, Chile, and Mexico are an indication, a ratings upgrade will produce a boost in equity prices, (price-to-earnings) stock multiples and earnings,’ Mr Franco said. ‘That’s what investors are anticipating.’

Some institutional investors, such as pension funds, can only invest in countries with top debt ratings, Mr Franco noted. If Brazil is able to secure a top rating, that will drive demand and raise prices, he predicted.

 

Source: LAT-WP (Busines Times 2 Jan 08)

Wheat price surges above US$10 for first time

(NEW YORK) Wheat rose above US$10 a bushel for the first time, leading other grains and oilseeds higher in a food price spiral that threatens to derail global economic growth.

Chicago wheat futures jumped as much as 30 cents, or 3.1 per cent, to US$10.095 a bushel as dry weather threatened crops in Argentina, renewing concern that the world’s farmers may not be able to grow enough to meet rising demand for bread, pasta and livestock feed.

Rice also advanced to a record, while soybeans gained to the highest in 34 years and corn to a nine-month peak.

Kellogg Co, the largest US cereal maker, General Mills Inc, Nissin Food Products Co and Kikkoman Corp are among companies that have raised prices.

‘We are seeing a broad-based increase in cost pressures,’ Brian Redican, senior economist at Macquarie Group Ltd, said in an interview from Sydney yesterday. ‘The increase in soft commodity prices is really the next stage in that process.’

The price of wheat has more than doubled in the past year as adverse weather reduced output from Australia to the US and Canada. Dry, warm weather may hurt yields in Argentina, the fourth-largest exporter, forecaster Meteorlogix LLC said on Dec 14.

‘Global supply is really tight at this time,’ Tobin Gorey, a commodity strategist at Commonwealth Bank of Australia, said by phone. ‘Saying there’s a near-term top in the price is a very dangerous thing to do.’

A smaller Argentine crop may reduce global wheat inventories that the US government says will drop 11 per cent by May 31 to 110.1 million metric tons.

Wheat for March delivery, the most-active contract, rose the exchange-imposed daily limit of 30 cents before trading at US$10.05 a bushel, up 2.6 per cent, in after-hours electronic trading on the Chicago Board of Trade on Friday.

 

Source: Bloomberg (Business Times 18 Dec 07)

World economy smaller than previously estimated

New measure puts GDP in perspective, but world order remains similar

(SINGAPORE) The size of the world economy is apparently smaller than previously thought, according to new estimates of GDP from the world’s biggest statistical initiative.

But the global economic pecking order remains more or less the same, with the five biggest economies – the United States, China, Japan, Germany and India, in that order – accounting for almost half of world output.

New data from the International Comparison Program (ICP) by the World Bank and various partners put the value of global economic output at $55 trillion in 2005 US dollars, adjusted for purchasing power parity – or at least 15 per cent smaller than previous estimates.

The ICP produced estimates of purchasing power parities (PPPs) for 146 economies to take into account price levels in each economy.

Direct conversions of GDP into US dollars would not only be affected by exchange rate movements but the GDP values would be under- or over-stated by the currency’s purchasing power.

And even in nominal US dollars, the ICP’s estimate of 2005 world GDP, at US$44 trillion, is also almost 10 per cent smaller than earlier estimates.

Among individual countries, the new data amount to ‘more statistically reliable estimates’ of GDP and price levels of China and India, says the preliminary global ICP report released in Washington yesterday. ‘The previous, less reliable, methods led to estimates of their GDPs that were 40 per cent larger.’

Says Paul Cheung, director of the United Nations Statistics Division and a member of the ICP executive board: ‘The previous estimates overstate the true extent (of GDP) because they were based on really old data. These new data set a new benchmark for future use.’

And in PPP terms, the Asian economies (excluding high-income and oil exporting members) are now one-third smaller. But Asia still accounts for over 20 per cent of the world’s output.

In all, 12 economies account for more than two-thirds of the world’s output. The five developing (or ‘transitional’) economies – China, India, Russia, Brazil and Mexico – among the 12 account for more than 20 per cent of global output and over 27 per cent of world investment spending.

The US also accounts for the lion’s share of world investment spending, at 21 per cent. That’s closely followed by China with 18 per cent. The 10 biggest economies account for more than two-thirds of the world’s investment.

Other findings :

Collectively, the five richest economies – with per capita GDP ranging between almost US$45,000 and US$70,000 in PPP terms – account for less than one per cent of world output. The five are Luxembourg, Qatar, Norway, Brunei and Kuwait.

At US$41,478 in PPP terms, Singapore’s is not too far behind – and second highest in Asia, behind Brunei. In nominal US dollars, Singapore’s per capita GDP – and also Hong Kong’s – exceeds Brunei’s.

Another indicator of wealth and living standards is per capita consumption, which tracks what or how much households spend. By this measure, the five richest economies are Luxembourg, the US, Iceland, UK and Norway.

Also from the ICP is a measure called price level index – the ratio of a country’s PPP to its US dollar market exchange rate – which shows which economies are the most and least expensive. An index above 100 means that prices are, on average, higher than in the US.

The most pricey economies – no surprises – are Iceland, Denmark, Switzerland, Norway and Ireland, with indices ranging from 154 to 127. The US ranks 20th, lower than most other high-income economies.

Singapore’s price level index is only 65, but that is based on a 2005 exchange rate of 1.7. And Singapore’s GDP in PPP terms, according to the ICP, was US$180 billion in 2005.

The ICP – which collects price data for more than 1,000 goods and services, and involves a host of national, regional and global agencies – is said to be the most extensive and thorough effort ever to measure PPPs across countries.

 

Source: Business Times 18 Dec 07

US faces risk of slipping into stagflation

Global growth this quarter and next may be slowest in four years: analysts

(WASHINGTON) The world economy is facing the risk of both recession and faster inflation.

Global growth this quarter and next may be the slowest in four years, while inflation might be the fastest in a decade, say economists at JPMorgan Chase & Co.

The worst US housing slump in 16 years, coupled with a tightening of credit by banks, has brought the world’s largest economy ‘close to stall speed’, according to former Federal Reserve Chairman Alan Greenspan. At the same time, rapid growth in China and other emerging markets is driving energy and food prices higher worldwide.

‘What lies ahead is a period of stagflation – slow or no growth combined with rising inflation – in the advanced economies,’ said Joachim Fels, co-chief global economist at Morgan Stanley in London.

Harvard University economist Martin Feldstein is among those who say it would be just a mild case of what the world endured in the 1970s and early 1980s, when a 10-fold increase in oil prices drove both unemployment and inflation above 10 per cent.

Still, it poses a dilemma for the Fed and other central banks as they struggle to decide which problem they should tackle first.

How they respond will go a long way in determining which danger proves to be the biggest: a slumping global economy or rising prices worldwide.

For now, traders in futures markets are betting the Fed will remain focused on supporting growth, even after the latest government inflation reading last week showed consumer prices rose in November at the fastest pace in more than two years.

As of Dec 14, investors put a 74 per cent probability on another quarter percentage-point cut in the Fed’s benchmark overnight rate in January, down from 100 per cent the day before.

‘Central banks don’t have as much flexibility as they’d like, with inflation rising and demand slowing,’ says David Hensley, director of global economic coordination at JP Morgan Chase in New York. His team sees global growth of 2.4 per cent this quarter and next and inflation at 3.5 per cent.

That’s a far cry from the bad old days more than a generation ago, when world growth slowed to just 0.7 per cent in 1982 while inflation ran at an annual rate of 13.7 per cent, according to data compiled by the International Monetary Fund.

‘The numbers now are very different than what they were then,’ Mr Feldstein said in a Dec 14 interview. ‘We are not back to the very high inflation rates we had in the late 1970s and early 1980s, fortunately.’

Speaking on ABC’s This Week programme aired yesterday, Mr Greenspan said a period of ‘remarkable disinflation’ is ending. ‘We are beginning to get not stagflation, but the early symptoms of it,’ he said.

‘This is a much tougher monetary-policy environment than anything I experienced,’ Mr Greenspan told the Wall Street Journal on Dec 14. Through the first 11 months of this year, consumer prices rose at an annual rate of 4.2 per cent. That’s up from 2.5 per cent for all of 2006 and, if maintained in December, would be the highest rate in 17 years.

‘The numbers are scary,’ says Stephen Cecchetti, former director of research at the New York Fed, who’s now professor of international economics at Brandeis University’s International Business School in Waltham, Massachusetts.

It isn’t just a US concern. Inflation in Europe last month rose at its fastest annual pace since May 2001, increasing by 3.1 per cent as food costs soared.

 

Source: Bloomberg (Business Times 18 Dec 07)

Global economy facing threat of stagflation

Growth may slow to 4-year low and inflation could hit 10-year high

WASHINGTON – THE world economy is facing the risk of stagflation – the double whammy of suffering both recession and faster inflation.

Global growth this quarter and next may be the slowest in four years, while inflation might be the fastest in a decade, say economists at JPMorgan Chase.

The worst United States housing slump in 16 years, coupled with a tightening of credit by banks, have brought the world’s largest economy ‘close to stall speed’, according to former US Federal Reserve chairman Alan Greenspan.

At the same time, rapid growth in China and other emerging markets is driving energy and food prices higher worldwide.

‘What lies ahead is a period of stagflation – slow or no growth combined with rising inflation – in the advanced economies,’ says Morgan Stanley co-chief global economist Joachim Fels.

Harvard University economist Martin Feldstein is among those who say it would be just a mild case of what the world endured in the 1970s and early 1980s, when a tenfold increase in oil prices drove both unemployment and inflation above 10 per cent.

Mr Feldstein, who heads the national bureau that serves as the arbiter of when US recessions begin and end, said the combination of a stalled economy and rising inflation could be seen as a form of stagflation.

‘It depends on how you want to define it,’ he said. ‘If you say an inflation rate of 3.5 per cent and a recession is stagflation, then we could have stagflation.’

Mr David Hensley, director of global economic coordination at JPMorgan, sees global growth of 2.4 per cent this quarter and next, and inflation at 3.5 per cent.

That is a far cry from the bad old days more than a generation ago, when world growth slowed to just 0.7 per cent in 1982 while inflation ran at an annual rate of 13.7 per cent, according to data compiled by the International Monetary Fund.

Even so, no less an authority than Mr Greenspan himself expressed concerns.

Speaking on ABC’s This Week programme aired last Sunday, he said a period of ‘remarkable disinflation’ is ending.

‘We are beginning to get not stagflation, but the early symptoms of it,’ he said.

The situation poses a dilemma for the Fed and other central banks as they struggle to decide which problem they should tackle first. How they respond will go a long way in determining which danger proves to be bigger: a slumping global economy or rising prices worldwide.

For now, traders in futures markets are betting the Fed will remain focused on supporting growth, even after the latest government inflation reading last week showed consumer prices rose last month at the fastest pace in more than two years.

As of last Friday, investors put a 74 per cent probability on another quarter percentage-point cut in the Fed’s benchmark overnight rate next month, down from 100 per cent the day before.

If the global economy faced only the risk of faster inflation, the policy prescription would be clear: higher interest rates.

Yet, with growth slowing in the US and Europe, central banks remain under pressure to cut rates

 

Source: BLOOMBERG NEWS (The Straits Times 18 Dec 07)

WALL STREET INSIGHT: Fear of prolonged credit crunch hangs over market

Investors expect to get glimpse of 2008 outlook from earnings reports of 3 major broking houses

 

BY many measures, the global credit crisis is back to its worst levels since August. The prospects for a prolonged credit crunch that limits lending to businesses will be hanging like a black cloud over Wall Street this week, despite the efforts of the US central bank, which announced it is coordinating efforts with other central banks to add liquidity through a series of auctions of term funds and currency swap lines to help ease current credit market pressures.

The prospects for a so-called Santa Claus rally in US stocks, which just finished their worst weekly drop in five weeks despite a quarter percentage point interest rate cut by the Federal Reserve, or rather because of the Fed’s decision not to cut rates by fifty basis points, were also not helped by ugly inflation data last week.

The consumer price index rose 0.8 per cent, as against expectations of a 0.7 per cent increase. This roiled the markets as investors fretted that the Fed won’t be able to act as aggressively in cutting rates as it would otherwise be able to if inflation was lower. The Fed funds futures market’s odds for a rate cut at the January Federal Open Market Committee meeting slid to 84 per cent from 100 per cent following the release of the data.

The market’s only chance to reverse the downslide afflicting stocks in the week ahead could very well be earnings reports from three major Wall Street firms, which are at the very heart of the financial sector that has been beset by – and helped to cause – the sub-prime mortgage fiasco that set off the credit crunch.

It’s hard to imagine US stocks moving beyond the turmoil that has besieged markets since the end of November, but traders and investment strategists said that the outlook for 2008 provided by the big brokers in their fourth quarter earnings announcements could hint at an end in sight for the heavy-duty write-downs and losses at the banks and provide optimism for investors.

‘I would expect stocks to move more on what the future looks like for financials than what they say has already happened to them in the last quarter,’ said Art Hogan, chief market strategist at Jeffries & Co. ‘The forward looking statements are probably going to be the biggest driver for the market this week,’ he said.

On Friday, the Dow Jones Industrials tumbled by 178.11 points, or 1.32 per cent, to 13,339.85 and the S&P 500 gave up 20.46 points, or 1.37 per cent, following the higher than expected consumer inflation data. The Nasdaq Composite gave up 1.23 per cent.

For the week, blue chips slumped 285 points or 2.1 per cent to 13,339, the lowest close since Dec 4 and their worst week since early November.

The Dow is up 7 per cent for the year. The S&P 500 erased 36.71 points in the past week, or 2.4 per cent, finishing Friday at 1,467.95. For the year, it is up 3.5 per cent. The Nasdaq fell 70 points or 2.6 per cent, and is up 9.1 per cent for the year.

While two of the three major brokerage houses reporting this week – Morgan Stanley on Wednesday and Bear Stearns on Thursday – are likely to post major writedowns, investors will be looking beyond their fourth quarter reports to get a glimpse into their expectations for the first quarter of 2008. Goldman Sachs, which is expected to log a healthy profit, reports tomorrow.

After last week’s troubling producer and consumer price data, hopes for more rate cuts will rise and fall on every new inflation indicator. That will come on Friday, when the Fed’s preferred measure, the core personal consumption expenditures report, is scheduled for release.

Analysts expect core prices by that gauge will have risen 0.2 per cent in the month.

The same day brings reports on personal income and personal consumption gains, which will also be closely watched.

Today, the Fed conducts its first US$20 billion auction of new term loans under the plan it announced this past week with four other central banks to ease liquidity and credit concerns. The second auction is Thursday.

‘If the Monday auction goes well, it could be a real confidence booster for financial markets, and thus for stocks, which have been beaten down by fears that credit markets will continue to seize,’ said Kathy Camilli, president of Camilli Economic Advisors.

Other economic news includes the Empire State Manufacturers survey today. Final third quarter GDP is reported on Thursday as are leading indicators for November.

 

Source: Business Times 17 Dec 07

IMF expects to lower global growth outlook

(ZURICH) The International Monetary Fund will lower its growth outlook as the continued credit crisis hurts the US and European economies, while global imbalances also weigh on growth, its top economist was quoted as saying.

‘Given this background, the numbers will indeed be weaker than in our latest World Economic Outlook,’ IMF chief economist Simon Johnson told Switzerland’s Finanz und Wirtschaft business newspaper in an interview on Saturday.

The IMF already lowered the forecasts from its July World Economic Outlook in October. But the numbers would in all likelihood have to be revised down again at the Fund’s next update in January, when it gives a preview of its April official forecasts. ‘We will not be able to stick to 1.9 per cent 2008 gross domestic product growth for the United States, nor to 2.1 per cent for Europe,’ Mr Johnson said. ‘By how much we will have to lower our GDP forecasts, we will know in January.’

The Fund already warned in November that the global economic growth outlook had dimmed, because of a troublesome mix of tighter credit terms and rising energy prices. The US dollar remained overvalued despite its continued drop since 2002, Mr Johnson said, which could be an obstacle for the US trade deficit to gradually diminish. Too high oil prices and the undervalued Chinese currency boosting exports in US trading partners formed the other side of the trade imbalance equation, he added.

The IMF did not have a foreign exchange target in mind for the greenback, but it should fall even further despite its persistent decline, to help diminish the US trade deficit and the chance of disorderly currency movements.

 

Source: Reuters (Business Times 17 Dec 07)

US on recession course: Morgan

(SYDNEY) The US is heading for a recession and the rest of the world would be ‘dead wrong’ to think this will not impact growing Asian economies, Morgan Stanley senior executive Stephen Roach said yesterday.

In an interview with Sky News in Australia, Mr Roach said that the US Federal Reserve Bank would ‘most assuredly’ cut interest rates again soon to boost the economy, following last week’s 25 basis point reduction. ‘The US is going into recession,’ he said.

‘They (the Federal Reserve) have a lot more work to do. They could cut their policy short-term interest rate by one to one-and-a- half percentage points over the next nine to 12 months.’

Mr Roach, who is chairman of the investment bank and trading firm’s Asian arm, said that it was wrong to think that the rapidly developing economies of China and India could fully compensate for a US recession.

‘What is interesting, and potentially disturbing, is that the rest of the world just doesn’t think this is a big deal any more,’ he said of the potential of a US recession. ‘There is a view that the world is somehow decoupled from the American growth engine.

‘I think that view will turn out to be dead wrong, and this is a global event with consequences for Asia and Australia.’

Mr Roach, in Australia for a business roundtable, said that economies outside of the US needed to determine how their internal consumer demand compared with demand from American consumers in terms of keeping their economies booming. ‘My conclusion is: not nearly as much as you would like,’ said Mr Roach.

Growth in Asia was export-led, with the American consumer often the ‘end game’ of the Asian growth machine, he said.

‘The US is a US$9.5 trillion consumer. China is a US$1 trillion consumer. India’s a US$650 billion consumer,’ he said.

 

Source: AFP (Business Times 17 Dec 07)

Odds of US recession clearly rising: Greenspan

This is due to slowing rate of economic growth, says ex-Fed chief

(NEW YORK) The odds of a recession in the United States are ‘clearly rising’ due to the slowing rate of economic growth, former Federal Reserve chairman Alan Greenspan said.

‘We are getting close to stall speed … and we are far more vulnerable at levels where growth is so slow than we would be otherwise,’ he said in an interview with National Public Radio on Thursday.

Asked about the possibility of recession, the former Fed chief said: ‘It’s too soon to say, but the odds are clearly rising.’ Earlier on Thursday, Mr Greenspan said he raised his view of chances of a US recession to 50 per cent from 30 per cent, according to CNBC television.

The US economy grew 4.9 per cent in the third quarter in real terms, but is expected to slow sharply in coming quarters.

The economy will barely grow this quarter and have a lacklustre 2008, according to forecasts by Lehman Brothers delivered on Thursday.

Lehman expects the US economy to post a sluggish growth rate of just 0.4 per cent in the final three months of this year, said the firm’s chief financial officer, Erin Callan. For full-year 2008, the economy is expected to grow just 1.8 per cent, Mr Callan said in a conference call.

 

Source: Reuters (Business Times 15 Dec 07)

Biggest rise in US consumer inflation in 2 years

WASHINGTON – UNITED States consumer prices rose the most in more than two years last month on record energy costs, reinforcing the Federal Reserve’s concern that inflation remains a risk to the economy.

The consumer price index increased 0.8 per cent after a 0.3 per cent gain in October, the Labour Department said yesterday. Prices excluding food and energy climbed 0.3 per cent, also more than anticipated.

The report sent stocks skidding in early trading, with the Dow Jones Industrial Average dropping by 110.47 points to 13,407.49 half an hour after the market opening.

A separate report showed that industrial production rose last month after falling in October.

The figures may re-ignite concern that inflation will accelerate, as higher energy costs filter through to other goods and services. That leaves less room for the Fed to cut interest rates should the credit crisis intensify and the economy falter, economists said.

‘There is no question inflation is going to remain a concern for policymakers,’ said Mr David Resler, chief economist at Nomura Securities International in New York.

‘This certainly will give some policymakers pause about the advisability and desirability of further rate cuts.’

Consumer prices increased 4.3 per cent in the 12 months to November, the most since June 2006. The monthly gain was the biggest since September 2005.

The core rate increased 2.3 per cent in the 12 months to November, up from a 2.2 per cent year-on-year gain in October.

Meanwhile, industrial production increased 0.3 per cent last month, exceeding the median forecast of 0.2 per cent, after a 0.7 per cent drop in October that was bigger than previously estimated, Fed figures showed yesterday.

 

Source: BLOOMBERG NEWS (The Straits Times 15 Dec 07)

Asia at risk if US growth slows: ADB

Region still depends on outside markets despite growing intra-Asian trade

IN TOKYO

ASIA’S emerging economies are likely to be hit hard by any serious slowdown in the wake of the US sub-prime mortgage crisis, the Asian Development Bank warns in a report published yesterday.

Asia still depends heavily on the US and other outside markets despite growing trade between the region’s emerging economies, the report says.

The cautious tone contrasts with that of an up-beat report published recently by the World Bank, which suggested emerging Asian economies including China would suffer only marginally even if GDP growth in the US were to slump to zero in 2008.

ADB forecasts that economic growth in emerging East Asia will ease from 8.5 per cent in 2007 to 8 per cent in 2008 amid volatility in financial markets and rising oil prices.

‘Risks are tilted more to the downside on expectations of a sharper slowdown in the US economy, further tightening of global credit, an abrupt adjustment in exchange rates and continued rises in oil and commodity prices,’ it says.

Growth in China is forecast to slow to 10.5 per cent next year from an expected 11.7 per cent in 2007, as government measures to cool the economy take hold.

But growth in Asean is tipped to moderate only slightly, from an expected 6.3 per cent in 2007 to 6.1 per cent in 2008.

Inflation is rising in many economies and price pressures are likely to remain in 2008. ‘Slower growth but rising inflationary pressures, despite appreciating currencies, pose major challenges for the region’s policymakers.’

The report warns that a hard landing of the US economy could have a significant impact on East Asia because the region’s trade with the major industrialised economies remains strong despite increasing intra-regional trade.

‘If we take into account the total share of intra-regional trade that is ultimately destined for the G3 markets (Japan, Europe and US), the share of G3 markets in the region’s total exports is still over 60 per cent,’ ADB says.

‘The region’s macro-economic managers will gain by adopting greater flexibility of exchange rates and exploring ways to maintain stability among intra-regional exchange rates.’

ADB says boosting domestic demand, managing capital inflows and strengthening financial systems would help underpin growth in East Asia.

‘So far the turmoil in the US sub-prime market has not spilled over into emerging East Asian markets and economies as exposure of regional banks to such portfolios remain limited,’ it says. ‘However, the region remains vulnerable as its banking sector expands into new lines of businesses and exposes itself to unknown risks.

‘The changing structure of capital inflows, with volatile short-term capital accounting for more than 60 per cent of total inflows, remains a cause for worry. The sharp rise in asset prices is also at risk of correction if swings in global financial markets spread to the region. Changes in asset prices could impact growth through wealth effects and higher cost of capital.

‘Despite resurgent capital inflows after the August market turmoil, a sharp reversal in investor risk appetite remains a possibility in this climate of heightened uncertainty. This could lead to a broader re-pricing of risk and unwinding of so-called carry trades.’

 

Source: Business Times 14 Dec 07

Central bankers’ liquidity plan fails to impress Asian investors

China and HK biggest losers in Asia; STI down 2%

(SINGAPORE) Investors in Asian stock markets, clearly sceptical that a plan by central banks to inject liquidity into the system to ease sub-prime pressure would work, yesterday braced themselves for an expected Wall Street sell-off by first dumping stocks throughout the region.

The losses were greatest in China and Hong Kong, where the major indices lost 2.5-3.7 per cent, while here, the Straits Times Index caved in by 69.94 points or 2 per cent to 3,479.31.

However, the STI had already risen 300 points or 8.5 per cent in little under the previous three weeks in anticipation of a US interest rate cut and/or bailout packages.

Similarly, although Hong Kong’s Hang Seng Index yesterday plunged 777 points or 2.7 per cent to 27,744.45, it had surged almost 3,300 points or 13 per cent over the same period.

Dealers said investors, who on Wednesday had apparently embraced news that the Fed is to join hands with other central banks in injecting money into the system by pushing Wall Street higher, had seemingly suffered a change of heart – the December futures contract on the Dow Jones Industrial Average yesterday suffered a loss during Asian trading, suggesting a weak session on Thursday.

‘Just like interest rate cuts, they’ve done it before and it hasn’t helped,’ said a dealer. ‘So markets are understandably cautious and sceptical.’

The New York Fed injected US$62 billion into the US banking system on Aug 9 and 10 in order to ease the credit market’s problems and followed this up with a discount rate cut a week later, but after initially rallying in response, stock markets have continued to suffer from a series of sub-prime related blows.

The suggestion was also made that the pressure of the past two days was due to disappointment over Tuesday’s 25 basis points cut in short-term US interest rates since 50 might have signalled greater Fed resolve to aid the credit market and stave off a recession.

An increasing number of economic commentators have been highlighting the increased likelihood of a US recession, most prominently Morgan Stanley.

In an Asia-Pacific Economics report released yesterday, it said the risk of credit problems attacking the heart of US growth, that is, household consumption, has increased significantly.

‘We believe that Asia ex-Japan (AXJ) will face the real test during the first quarter of 2008 as the US dips into recession,’ said Morgan Stanley.

‘We believe that the market may first be surprised on the downside as the growth trend slows in AXJ in 2008 before it builds the conviction for soft decoupling.’

The US bank also warned of potential turbulence in US equities. ‘In the past few years, globalisation of financial markets has meant that we cannot ignore the possible transmission of growth shocks through financial market linkages . . . during 2000-6, the average correlation between MSCI Asia-Pacific ex-Japan and MSCI US was 72.6 per cent,’ it said.

 

Source: Business Times 14 Dec 07

US recession fears overblown: IMF

But official says US growth outlook has become subject to greater risks

(WASHINGTON) World economic growth may be hobbled by financial market turmoil and the risks to the United States have mounted, said IMF first deputy managing director John Lipsky, but fears of a recession still look overdone.

‘Never say never, but the latest indicators do not justify such a conclusion,’ Mr Lipsky told an internal IMF publication in an interview posted on its website on Tuesday.

He had been asked whether a US recession was looming, but professed that he was ‘cautiously optimistic’.

‘Employment growth and wage increases have decelerated, but they both continue to grow. So long as US household income continues to expand, it’s reasonable to expect consumption expenditures to increase,’ he said.

A credit crunch spurred by the collapse of the US sub-prime mortgage market is expected to slow growth, and last month the IMF signalled it would cut its 2008 world economic growth forecast from the 4.8 per cent predicted in October.

Mr Lipsky did not indicate the scale on which the forecast would be revised. But he reiterated the challenges facing major economies like the United States, Europe and Japan, from tightening credit conditions and mounting energy prices.

‘In particular, the US growth outlook, which we had perceived already as likely to be sub par in 2008, has become subject to somewhat greater risks,’ he said.

‘In Europe and Japan, growth appears to be decelerating after solid advances in the third quarter, and their outlooks would be affected if risks to US growth were to materialise,’ Mr Lipsky added.

Emerging markets have been holding up so far but would be unlikely to weather a sustained downturn in the world’s largest economies – tensions forcing up currencies like the euro, which Mr Lipsky said now looked overbought.

‘Most recently, we find that the euro is by now somewhat on the strong side with regard to our views of mediumterm equilibrium,’ he said.

The Fund said Germany has staged a ‘remarkable and enviable’ economic recovery in recent years but faces slowing growth in 2008. It needs to press forward with reforms to improve productivity.

In conclusions from its Article IV consultation with Germany, the IMF said the country’s gross domestic product growth will slow to 1.9 per cent in 2008 from 2.5 per cent in 2007, due largely to a slowing US economy.

‘Growth will also be dampened, though to a more modest extent, by the stronger euro and higher oil prices,’ the IMF said in a statement.

The IMF said the effect of a strong euro on Germany ’should remain modest’ if global trade imbalances continue to unwind in an orderly way. But it said a disruptive unwinding of such balances that leads to sharply lower world growth would amplify the consequences of a strong euro.

The IMF said a pause or reversal in Germany’s reform agenda could undermine some of its recent economic gains.

Stepping up productivity is key to sustaining growth, particularly for services sectors that have absorbed unskilled workers, it added.

There is a shortage of skilled labour in the country as highly trained Germans seek employment abroad for lower tax rates, higher compensation or better opportunities. The IMF said to address this, Germany must focus on improving education and training and encouraging immigration of skilled workers.

 

Source: Reuters (Businness Times 13 Dec 07)

Wall St upset with Fed’s quarter-point cut

Move in line with forecasts; some observers had hoped for more

WASHINGTON – THE United States Federal Reserve cut interest rates by a modest quarter-percentage point on Tuesday.

The move disappointed Wall Street’s hopes for bolder action but offered some help to an economy facing credit strains and a deep housing slump.

The central bank’s decision takes the bellwether federal funds rate, which governs overnight lending between banks, down to 4.25 per cent.

While the action was widely expected, some economists had thought the Fed might offer a bolder half- point reduction.

In a related move, the Fed trimmed the discount rate it charges for direct loans to banks by a matching quarter point to 4.75 per cent.

Here, too, some market participants were dissatisfied. Many had thought the Fed would lower the discount rate by more than the federal funds rate to loosen tight credit markets.

The blue-chip Dow Jones Industrial Average closed down 294.26 points, or 2.1 per cent, to 13,432.77, while prices for US government bonds surged as investors sought safer assets.

‘This was not what the market was looking for and did not move to clarify Fed intentions or assuage concerns of market participants of another leg down in the economy and resurgence of financial turmoil,’ said Mr Joseph Brusuelas, chief US economist of IDEAglobal in New York.

A Fed source, who asked not to be named, said the central bank was aware that credit market strains had grown worse and was actively considering ways to ease the pressure.

In a statement outlining its rate decision, the Fed noted that financial strains had increased in recent weeks.

But it also said some inflation risks remain.

It refrained from offering its usual assessment of the balance of risks facing the economy, catching off guard some economists who had looked for the Fed to underscore its concerns about weakening economic growth.

‘Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation,’ it said.

The Fed has now cut overnight rates – its key economic policy lever – by a full percentage point since mid-September, in an effort to put a floor under an economy increasingly seen at risk of falling into recession.

‘Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time,’ the Fed said.

Boston Federal Reserve Bank president Eric Rosengren dissented against the decision, preferring a half- point reduction in the federal funds rate.

While the Fed stopped short of saying weakness was the greatest economic risk, it left the door open to further rate reductions. A survey conducted after the rate announcement showed that a majority of Wall Street dealers polled expect the Fed to lower borrowing costs again next month.

‘The Fed is trying to navigate through a storm, in which risks to growth have risen at the same time that inflation expectations have drifted higher, a difficult balancing act,’ said Mr Michael Darda, chief economist of MKM Partners in Greenwich, Connecticut.

The Fed’s decision follows renewed deterioration in credit markets, after major financial institutions around the world reported billions of dollars worth of write-downs due to extensive exposure to delinquent mortgages.

 

Source: REUTERS (The Straits Times 13 Dec 07)

wallstreet – US stocks flat as oil prices drop and job data show resilience

NEW YORK – US STOCKS ended little changed on Friday as a sharp drop in oil prices and signs of resiliency in the job market offset worries that tighter credit is hurting consumer spending.

A drop of more than 2 per cent in oil prices buoyed shares of big manufacturers like Boeing Co and 3M Co.

Data showing modest payrolls growth last month helped ease recession fears and showed the job market remains resilient despite the crumbling housing market and tight credit conditions.

Credit card companies’ shares fell, however, after brokers downgraded the stocks and said tightening credit was pressuring consumer credit performance.

Shares of American Express Co fell more than 4 per cent, while Capital One Financial fell 5 per cent.

‘What looked like an economy that was falling apart as recently as two weeks ago suddenly sees news that

seems to be better than expected,’ said Mr Eric Kuby, chief investment officer at North Star Investment Management Corp.

The jobs report, he said, may have tempered expectations for a far more aggressive cut in interest rates next week when the Federal Reserve’s policy-setters meet on Tuesday.

The Dow Jones industrial average finished up 5.69 points, or 0.04 per cent, at 13,625.58. But the Standard & Poor’s 500 Index closed down 2.68 points, or 0.18 per cent, at 1,504.66. The Nasdaq Composite Index slipped 2.87 points, or 0.11 per cent, to 2,706.16.

For the week, however, all three major US stock indexes finished with gains – with the Dow up 1.9 per cent, the S&P 500 rising 1.6 per cent and the Nasdaq gaining 1.7 per cent.

Source: Reuters (The Sunday Times 9 Dec 07)

US investment banks fall to analysts’ knife

Cuts made to profit, share price forecasts in the face of continued credit market turmoil

(LONDON/NEW YORK) Citigroup, the biggest US bank, and Goldman Sachs, the largest securities firm, had their earnings estimates cut by analysts who say credit-market ‘turmoil’ would generate losses into next year.

The collapse of the US sub-prime mortgage market has also prompted analysts to reduce earnings estimates for New York-based Morgan Stanley, Merrill Lynch, Lehman Brothers and JPMorgan Chase & Co.

CIBC World Markets’ Meredith Whitney, whose downgrade of Citigroup last month helped wipe out US$369 billion of US stockmarket value, has cut her 2008 profit estimate for the bank by 10 per cent and predicts more losses from mortgages.

Additional writedowns would add to the US$66 billion that securities firms and banks have already announced for mortgage-related assets hurt by the worst US housing recession in 16 years.

‘Stability will only be reached when sellers ultimately clear assets, cleansing their balance sheets,’ Ms Whitney wrote in a note to investors. ‘We anticipate that timing to be nearer to the second half of 2008 than the first.’

Mortgages to borrowers with home equity of less than 10 per cent will generate 2008 losses of as much as US$6.5 billion for New York-based Citigroup, Ms Whitney said.

Goldman’s fourth-quarter earnings estimate has been cut to US$7 a share from US$8.15 by Citigroup analysts.

Citi Investment Research analyst Prashant Bhatia now expects Merrill, the third-largest US securities firm by market value, to report a loss of US$2.50 a share for the fourth quarter. He had previously estimated a profit of 85 US cents. The analyst has also cut his share price forecast to US$85 from US$90.

CIBC has also lowered its 2008 and 2009 earnings-per-share estimates for JPMorgan, the third-biggest US bank, by 10 per cent. Ms Whitney has cut her share price estimate for Morgan Stanley, second to Goldman among securities firms, to US$68 from US$78 because of the ‘intense credit-market disruptions’ of the past three weeks.

She has also reduced her 2008 profit prediction to US$7.50 a share from US$9.30.

JPMorgan, also based in New York, will fare better than its rivals because of greater ‘flexibility provided by its excess capital’, according to Ms Whitney.

JPMorgan has fallen the least this year among the top five US banks listed on the New York Stock Exchange, with a 7 per cent decline. The stock was up 75 US cents, or 1.7 per cent, at US$44.90 in composite trading at 4pm on Wednesday.

Citigroup, down 40 per cent this year, climbed US$1.14 to US$33.69. New York-based Morgan Stanley, the second-largest US securities firm by market value, has lost 26 per cent this year. It rose 10 US cents to US$50.11 on Wednesday.

Goldman shares rose to US$218.26 from US$215.22.

Citigroup analysts’ Q4 earnings estimates for Lehman, the No 4 US securities firm, have been cut to US$1.40 a share from US$1.90.

Merrill rose 62 US cents to US$57.75 on Wednesday and Lehman advanced to US$60.01 from US$59.61.

 

Source: Bloomberg (Business Times 7 Dec 07)

CLOSING MARKET REPORT: US stocks end higher as data calms recession fears

NEW YORK – Major US stock indexes rose more than 1 per cent on Wednesday, after strong economic data calmed recession fears and helped halt a two-day sell-off.

The data, including a report that showed unexpected vigor in the job market, stoked expectations for corporate spending and sparked a robust recovery in technology shares.

The Dow Jones industrial average finished up 196.23 points, or 1.48 per cent, at 13,444.96. The Standard & Poor’s 500 Index closed up 22.22 points, or 1.52 per cent, at 1,485.01. The Nasdaq Composite Index added 46.53 points, or 1.78 per cent, to 2,666.36.

Optimism about the economy’s health also buoyed shares of manufacturers and energy producers, as well as other stocks sensitive to the economic cycle.

Home builders, one of the market’s most beaten-down sectors, were also a standout, with the Dow Jones Home construction index ending up 3.5 per cent.

On the Nasdaq, shares of Apple, the maker of the iPhone, led advancers, with a gain of 3.2 per cent to US $185.50, while software maker Microsoft ended at US$34.15, up 4.2 per cent, the biggest one-day advance in more than a month.

Shares of chip maker Intel Corp gained 3.5 per cent to US$27.22. Analysts said prospects for big-cap technology were also underpinned by hopes of continued growth abroad.

Shares of financial services companies headed higher after insurer American International Group Inc said its exposure to the housing and credit crisis was manageable. AIG shares jumped 4.9 per cent, rising US $2.70 to US$58.15 on the New York Stock Exchange. Shares of Citigroup, the No. 1 US bank, advanced 3.5 per cent to US$33.69 on the NYSE.

On the energy front, shares of oil company Exxon Mobil Corp rose 2.0 per cent to US$89.92.

Among the home builders, shares of Beazer Homes USA, the No. 7 U.S. home builder, surged 6.6 per cent to US$8.38, while shares of Hovnanian Enterprises, an upscale home builder, ended up 5.8 per cent at US$7.66.

Even so, jitters about the credit crisis lingered. Indexes cut gains briefly after ratings agency Moody’s Investors Service said mortgage insurer MBIA was at greater risk of capital shortfall than previously communicated. Shares of MBIA finished down 16.0 per cent at US$27.42. Shares of PMI Group, another mortgage insurer, declined 4.8 per cent to US$12.45.

 

Source: REUTERS (Business Times 6 Dec 07)

Fed sees slower US growth amid market fallout

Economic concerns indicate it may cut rates again at next week’s meeting

SEATTLE – UNITED States Federal Reserve policymakers have given a sober assessment of the US economy, as renewed financial market turmoil cast a shadow on growth prospects.

Such views reinforced market expectations that the US central bank will cut short- term interest rates next week for a third consecutive time when its Federal Open Market Committee (FOMC) meets.

The Fed has cut its benchmark federal funds rate by a cumulative 75 basis points since mid-September to prevent economic fallout from market turmoil that originated with problems in the US mortgage market.

‘Since the October FOMC meeting, financial conditions have deteriorated and we have seen some unexpected softening in economic data,’ San Francisco Federal Reserve Bank president Janet Yellen said in a speech to business leaders in Seattle on Monday.

‘These developments necessitate some rethinking of my growth forecast and have highlighted the downside skew in the risks to that forecast,’ said Dr Yellen, a non- voting member this year on the Fed’s rate-setting committee.

Renewed credit concerns were the main focus of markets on Monday. Benchmark 10-year Treasury yields fell to 3.88 per cent, while stock markets retreated as financial shares sank.

After the October FOMC meeting, the Fed said the risks of slower growth were balanced with those of higher inflation, and subsequent remarks by various Fed policymakers had implied that the central bank did not see the need for further easing.

But last week, both Fed chairman Ben Bernanke and vice-chairman Donald Kohn said that renewed financial turmoil may have a larger adverse effect on the economy, signalling that downside risks had increased.

The Fed will hold its next policy meeting next Tuesday.

Dr Yellen echoed Mr Bernanke and Dr Kohn, saying the outlook was particularly uncertain now due to financial conditions.

‘Developments have been fast-moving,’ she told reporters after the speech. ‘A lot of things have happened in financial markets.’

Boston Fed president Eric Rosengren, speaking in Boston, said the US economy will grow ‘well below’ potential in the coming quarters, and the foreclosure crisis plaguing the housing and banking sectors is likely to worsen.

Dr Rosengren, a voting member on the FOMC this year, did not elaborate further on the economy and focused most of his speech on sub-prime mortgage problems.

He said lenders and borrowers should work together to modify loans to avoid even greater pain for both sides.

 

Source: REUTERS (The Straits Times 5 Dec 07)

US growth may slow sharply in Q4, early ‘08: Citigroup

But it is expected to recover in 2nd half next year

(SINGAPORE) Economic growth in the US is likely to slow sharply in the fourth quarter and early next year, but is expected to recover in the second half of 2008, Citigroup’s chief economist said yesterday.

‘We don’t think the US is going to have a recession, but the risks of that have certainly gone up,’ said Lewis Alexander, who was in Singapore to speak to the banking group’s institutional clients in the region. He said he expects the US Federal Reserve to cut its main interest rate another full percentage point from the current 4.5 per cent to 3.5 per cent by the middle of next year.

He also warned that any move led by the US government to force banks and other lenders to delay the sale or repossession of homes whose owners default on their mortgage payments could worsen the US housing market downturn by reducing the amount of funds companies are willing to lend to new buyers.

US media reports last week suggested that the government there could be working with banks to extend the lowinterest rate period of ‘teaser rate’ mortgages, many of which are due to reset to higher interest rates next year.

Economists and policymakers fear that when the interest rates on such mortgages jump after the reset, many more homeowners will default on payments, triggering more home repossessions which would in turn reduce personal spending and drag the US economy into recession.

The impact of any sharp slowdown in US economic growth – let alone a full-blown recession – will definitely be felt in Asia, said Mr Alexander.

Although Asia’s economies have done well despite slower US economic growth in recent months, most of the drag on US growth has so far been focused on the residential construction sector – ‘one that doesn’t naturally generate a lot of spillover’, he said. ‘That’s why the rest of the world including Asia has done pretty well when the US

economy has been weak. If you have a more intense slowdown in the US, Asia would be vulnerable.’

Still, ‘the underlying fundamentals in Asia are pretty strong’, he said. But the recent spurt of growth in Asia has turned the spotlight on rising consumer price inflation driven by a combination of higher oil and food prices.

The expected interest rate cuts by the US Fed to avert an economic recession could place Asian economies with currencies closely linked to the US dollar in the difficult situation of trying to control price inflation – which requires higher interest rates or a stronger local currency – while keeping exchange rates stable by allowing interest rates to follow those in the US downwards, he said. ‘That does raise risks for economies like Singapore.’

The current turmoil in the financial markets will last at least till early next year, when banks and other major financial institutions report their full-year results, Mr Alexander said.

 

Source: Business Times 4 Dec 07

Oil price falls below US$90

(LONDON) The price of oil fell back below US$90 yesterday as the market speculated about the chances of an increase in Opec output at the cartel’s meeting next week, dealers said.

They said prices also fell after it appeared more likely that an explosion on a key pipeline from Canada into the United States would have only a limited impact on supply.

Yesterday, New York’s main contract, light sweet crude for January delivery, was down US$1.75 to US $89.35 per barrel, after earlier striking a one-month low of US$88.52. Brent North Sea crude for January tumbled US$1.32 to US$88.93.

The Organization of the Petroleum Exporting Countries (Opec) meets in Abu Dhabi on Wednesday with many participants expecting the group to boost output to help counter record- breaking prices.

‘All eyes will be on Opec now ahead of the group’s meeting on Dec 5,’ said Nimit Khamar, analyst at the Sucden brokerage here. ‘Many expect the group to hike supplies in order to cool off prices.’

The oil producers’ group is a key player in the energy market because it produces about 40 per cent of the world’s crude.

Opec last decided to raise production in September when it agreed to provide an extra 500,000 barrels a day to the market from Nov 1. ‘The forthcoming Opec conference now looms large over the oil market,’ the Commonwealth Bank of Australia (CBA) said in a report to clients.

‘It appears that oil markets are considering the possibility that there will be an increase in Opec production ceilings of at least 0.5 million barrels per day.’

Earlier this week, Saudi Oil Minister Ali Al-Nuaimi said the market was well supplied and that high prices did not properly reflect supply and demand. Asked whether Saudi Arabia, the world’s biggest oil exporter, would push for an increase in production at next Wednesday’s meeting, Mr Nuaimi said the cartel would first need to see market data.

Since striking record peaks just under US$100 last week, prices have slumped by about US$10 in New York and almost US$8 here.

 

Source: AFP (Business Times 1 Dec 07)

US consumer spending up 0.2% in Oct

For 2008, the White House also expects real GDP growth of 2.7 per cent

(WASHINGTON) Battered by a slumping housing market and a credit crunch, US personal spending edged up 0.2 per cent in October, the smallest amount in four months, while prices rose at a modest pace, Commerce Department data showed yesterday in a report that may heighten concerns about the health of the US consumer.

Personal income grew at a 0.2 per cent annual rate in October, the poorest showing in six months, below the 0.4 per cent reading in September.

The weak gains in spending and incomes were likely to raise new worries about spreading economic weakness caused by a severe slump in housing and a credit crisis triggered by rising mortgage defaults.

In addition, consumers are also being battered by surging prices for petrol and other energy products.

A gauge of core inflation tied to consumer spending edged up just 0.2 per cent in October and is up only 1.9 per cent over the past year. That increase is within the Fed’s one per cent to 2 per cent comfort range for core inflation, which excludes energy and food.

‘Consumer spending is under serious pressure,’ Joshua Shapiro, chief US economist at Maria Fiorini Ramirez Inc in New York, said before the report.

‘A slowdown in the labour market, higher energy prices and the collapse in housing are coming home to roost.’ The personal consumption expenditure (PCE) price index, a key measure of inflation, rose 0.3 per cent. Core PCE prices, which strip out food and energy items, rose at a 0.2 per cent rate, matching economists’ expectations.

Prices for US government securities recovered some losses, while stock futures held sharp gains after the figures were released.

The report comes as economists and investors worry that the triple-blow of a weak housing market, tightening credit terms and high energy prices will curb consumer spending, which is the driving force behind the US economy.

Meanwhile, a separate Commerce report showed that construction spending fell by 0.8 per cent last month, the biggest decline since July. Activity in the besieged housing industry fell for a 20th straight month while nonresidential construction weakened as well.

Separately, the National Association of Purchasing Management-Chicago reported that its barometer of business activity climbed in November. The group’s index rose to 52.9, from 49.7 the previous month.

The White House raised its US economic growth forecast for 2007 on Thursday but lowered its projection for next year as trouble in the housing and credit markets along with high energy prices take their toll.

In its twice-yearly forecast, which will be incorporated in the Bush administration’s fiscal 2009 budget proposal due early next year, the White House said it now expects 2007 real gross domestic product growth of 2.7 per cent, up from its June forecast for 2.3 per cent.

For 2008, it also expects real GDP growth of 2.7 per cent, which compares with its earlier outlook for 3.1 per cent growth.

‘While the difficulties in housing and credit markets and the effects of high energy prices will extract a penalty from growth, the US economy has many strengths and I expect the expansion to continue,’ US Treasury Secretary Henry Paulson said in a statement.

 

Source: AP, Reuters, Bloomberg (Business Times 1 Dec 07)

US banks may agree to freeze sub-prime rates

Treasury, mortgage firms ironing out plan, say sources

(NEW YORK) The Bush administration is close to agreeing on a pact with major financial institutions that would temporarily freeze interest rates on certain sub-prime loans, the Wall Street Journal reported yesterday, citing sources familiar with the negotiations.

The plans’ details, which could be announced as soon as next week, are still being ironed out, the report said.

According to it, the accord is being negotiated between regulators including the US Treasury Department and a group of mortgage-related firms, including Citigroup, Wells Fargo & Co, Washington Mutual and Countrywide Financial Corp.

Sources with knowledge of the negotiations told the Journal that individual members have agreed to abide by any agreement reached by the coalition, which is called the Hope Now Alliance.

The newspaper said the coalition and the government have largely agreed to extend the lower introductory rate on mortgages for certain borrowers who will have trouble making payments when their mortgages increase.

To be determined, however, are exactly which borrowers would qualify for the freeze and for how long it would last, the Journal said, adding one scenario envisions a freeze lasting as long as seven years.

In California, four top mortgage lenders have agreed to a deal brokered by Governor Arnold Schwarzenegger to allow borrowers facing unaffordable resets to keep their lower initial rates five more years if they live in their homes and continue to make payments on time.

About US$890 billion of sub-prime US mortgages will have their rates reset next year, peaking in March, according to a report by the Organisation for Economic Co-operation and Development.

The Bush administration cut its growth forecast on Thursday, reflecting a deepening housing recession that’s roiled financial markets since August. The Commerce Department reported the same day that the median price of a new house fell 13 per cent in October from a year earlier, while fewer homes were sold than economists anticipated.

Delinquencies on sub-prime mortgages, which account for less than 15 per cent of the US$11.5 trillion US home mortgage market, climbed after what Fed officials have labelled ‘lax’ lending standards spread the past two years.

Homeowners were behind on 17 per cent of adjustable-rate sub-prime loans in June, compared with 4.2 per cent for prime mortgages of the same type, Mortgage Bankers Association data show.

The rout will get worse because defaults on home loans are likely to rise, analysts said. The Federal Deposit Insurance Corp estimates that 1.54 million non-prime mortgages valued at US$331 billion will reset by the end of next year.

Rising defaults ‘will take the housing market down another level’, said Mark Zandi, chief economist at Moody’s Economy.com. ‘In the context of an economy that is not in recession, but pretty close, we will be in a recession right in the teeth of a presidential election.’

More US homeowners fell behind on mortgage payments or even lost their homes last month compared to a year ago, a mortgage research company said on Thursday.

A total of 224,451 foreclosure filings were reported in October, up 94 per cent from 115,568 in the same month a year ago, according to Irvine-based RealtyTrac Inc.

The number of filings in October rose 2 per cent from September’s 219,850.

The US had one foreclosure filing for every 555 households in October, RealtyTrac said.

 

Source: Reuters, Bloomberg (Business Times 1 Dec 07)

Top Fed official hints at rate cut in December

NEW YORK – THE Federal Reserve’s second-in-command on Wednesday signalled a readiness to cut interest rates again, acknowledging that financial market turmoil could slow the United States economy and that the central bank must be flexible.

‘Uncertainties about the economic outlook are unusually high right now,’ Fed vice-chairman Donald Kohn told the Council on Foreign Relations in New York. ‘These uncertainties require flexible and pragmatic policymaking – nimble is the adjective I used a few weeks ago.’

US banks have written off billions of dollars in recent weeks due to losses in the sub-prime credit market, provoking fresh turmoil in financial markets that had only just recovered from the extreme jitters set off by credit fears in August.

Mr Kohn sent Wall Street stocks soaring, with the Dow Jones Industrial Average advancing by more than 300 points, as investors read his remarks as a strong hint of another quarter-point cut at the next Fed rate-setting meeting on Dec 11.

His sober assessment also coincided with a separate Fed report underlining the drag being exerted on the wider US economy by the weak housing sector.

Mr Kohn explicitly pointed to the deterioration since the Fed last met to discuss policy, on Oct 30 and Oct 31.

At that meeting, it lowered rates by a quarter of a point to 4.5 per cent, but said the risks to growth and inflation were roughly balanced.

Since then, investors have grown alarmed by weak economic data, opening a clear divergence between market expectations for future rate cuts and the impression created by the Fed in October that its easing campaign was finished.

Mr Kohn helped to close that gap by acknowledging that the recent drying up of liquidity, as banks hoard cash to offset further possible credit-related losses, had caught him off guard and was a cause for concern.

‘I have to admit that, speaking for myself…the degree of deterioration that has happened over the last couple of weeks was not something that I had personally anticipated,’ he said in response to questions after his speech.

‘Financial institutions became more cautious, and I think this process is one that we are going to have to take a look at when we meet in a couple of weeks,’ he said, adding the central bank was looking at ‘lots’ of different ways to supply liquidity to the markets.

 

Source: REUTERS (The Straits Times 30 Nov 07)

Recession worries grow as credit flows slow

NEW YORK – CREDIT flowing to American companies is drying up at a pace not seen in decades, threatening the creation of new jobs and the expansion of businesses.

It also intensifies worries that the economy may be headed for a recession.

The combined value of two major sources of credit – outstanding commercial and industrial bank loans, and short-term loans known as commercial paper – peaked at about US$3.3 trillion (S$4.77 trillion) in August, according to data from the Federal Reserve. By mid-November, such credit was down to US$3 trillion, a drop of nearly 9 per cent.

Not once in the years since the Fed began tracking such numbers in 1973 have these arteries of finance constricted so rapidly. Smaller declines preceded three recessions going back to 1975.

‘This is a very big deal,’ said Mr Andrew Tilton, a senior economist in the US economic research group at Goldman Sachs. ‘You’re basically crimping the growth of the more vulnerable companies. If they can’t borrow the money, their options are much more limited. They’d have to have less ambitious hiring plans, buy less machinery and cancel projects.’

When credit to business slows significantly, a drop-off in investment by businesses has generally followed closely, he added, suggesting that the tightening increases the prospect of a recession.

Because it has the world’s largest economy, any recession in the United States would probably have a ripple effect across the globe because US consumers would be buying fewer goods from abroad.

Europe, so far at least, has not been subjected to a similar tightening of credit that would prompt a broader economic contraction, though available statistics provide an incomplete picture, analysts said.

Anecdotal evidence suggests that sectors depending heavily on the free flow of credit, notably construction, no longer have ready access to the cash that seemed plentiful just a year ago. Like in the US, big leveraged buyouts are now harder to finance.

But household borrowing in the 13 nations that use the euro has kept growing at about the same levels as before the onset of the credit crisis in August.

And bank lending to non-financial corporations has actually increased since August, according to the European Central Bank, a fact that reflects the peculiarities of this credit crisis.

 

Source: INTERNATIONAL HERALD TRIBUNE (The Straits Times 30 Nov 07)

US economy expands 4.9% in third quarter

But fourth-quarter growth may drop as full impact of credit crisis is felt

WASHINGTON – ECONOMIC growth in the United States surged in the third quarter, before the full impact of the worsening housing recession and turmoil in credit markets took hold.

The world’s largest economy grew at an annual rate of 4.9 per cent, the most in four years, according to revised data yesterday from the Commerce Department in Washington.

The pace was a percentage point stronger than estimated last month and followed a 3.8 per cent rate in the second quarter.

Consumers and businesses are spending less, as home prices fall, energy costs rise and banks make getting loans more difficult and costly.

Federal Reserve vice-chairman Donald Kohn signalled that he was open to lowering interest rates again following the deterioration in credit markets.

The odds of a recession ‘are much too close for comfort’, said Mr Douglas Porter, deputy chief economist at BMO Capital Markets in Toronto, who correctly forecast the gross domestic product (GDP) revision. ‘We are likely to see growth of less than 1 per cent in the fourth quarter.’

The Dow Jones Industrial Average struggled early on but turned upwards slightly to be down 15.28 points at 13,274.17 after about one and a half hours of trading.

Another government report showed the number of Americans filing first-time claims for unemployment benefits rose more than forecast to their highest in nine months, pointing to a further slowing in the labour market.

Third-quarter GDP growth matched the median estimate of 75 economists surveyed by Bloomberg News.

Estimates ranged from 3.9 per cent to 5.5 per cent.

‘Stronger growth in the third quarter implies weaker growth in the fourth quarter due to a partial payback in both trade and inventories,’ said Mr Drew Matus, a senior economist at Lehman Brothers Holdings in New York.

Fewer new homes than forecast were sold in the US last month, even as prices dropped by the most in almost four decades, deepening the real estate slump that threatens to stall economic growth.

A total of 728,000 new houses were purchased at an annual rate, compared with a median forecast of 750,000 by economists surveyed by Bloomberg News.

The figure was up from a revised 716,000 pace in September that was the lowest in almost 12 years, the Commerce Department reported yesterday.

A worsening housing slump will be the biggest constraint on the economy well into next year, economists said.

Declines in home construction have reduced growth since the start of last year and lobbed off 1 percentage point in the third quarter.

Economic growth slowed in seven of the 12 Fed regions, with retailers ’slightly pessimistic’ about year-end holiday sales, the central bank said in its regional business survey known as the Beige Book.

‘The national economy continued to expand during the survey period of October through mid-November but at a reduced pace,’ it said.

 

Source: BLOOMBERG NEWS (The Straits Times 30 Nov 07)

Bond insurers affected by credit crunch

(NEW YORK) INVESTORS already burned by turmoil from the credit crunch are now worried about unwanted surprises in the industry that insures bonds. In the face of mounting losses in US mortgages, rating agencies are reviewing eight leading bond insurers, which could lead to downgrades. Such a move could ripple across the financial sector, because if a bond insurer is downgraded, most of the securities it has blessed as virtually risk-free are likely to follow. That could spark a new round of sell-offs and writedowns.

‘It would have a domino effect on all of the entities that hold these vehicles,’ said Ed Rombach, a senior analyst at Thomson Financial. ‘They would have to have more write-offs. It’s a vicious cycle.’

Moody’s Investors Service and Fitch Ratings are examining the capital levels and structured debt these firms have insured because they are worried that the deterioration in the mortgage market may expose them to greater losses. Moody’s is expected to finish its review next week. Fitch said that it would complete its review within three weeks. If any company is put on what’s known as negative watch, it would be given a month to increase its capital and have its rating affirmed.

Bond insurers play a critical role in the capital markets because they issue insurance that boosts the credit ratings of more than US$2 trillion in debt securities held in portfolios around the world, including municipal bonds, mortgage-backed securities and complicated debt instruments. The stock prices of leading insurers have been plummeting as investors worry that they may not have enough capital to cover projected losses from securities tied to delinquent mortgage loans. This has put pressure on guarantors to shore up their capital reserves to protect their coveted triple-A ratings. Last Thursday, the parent company of one bond insurer, CIFG Holding, gave it a US$1.5 billion capital infusion. Soon after, Fitch affirmed CIFG’s triple-A rating.

‘The triple-A rating is really the product that they’re selling,’ Thomas Abruzzo, an analyst with Fitch, said in reference to bond insurers in general. ‘They’re selling high financial strength. It’s the highest rating out there and, really, without that rating it’s going to be significantly more difficult to potentially sell your services.’

Jittery times

Just how much of a downgrade would devalue securities these companies insure is unclear, analysts said.

For example, if a company was downgraded to a double-A rating from triple-A, the impact might be minimal, since the spreads, or perceived risk, of owning similar securities with those two ratings may not be that wide.

However, these are jittery times. ‘The people watching this are not going to say, ‘I’m so happy they’re going to be downgraded only to double-A’,’ said Sylvain Raynes, a founding principle of R&R Consulting, a structured-finance consultancy. ‘They’re going to say, ‘This is the beginning of the end.’ And they’re going to want to go before everyone else goes. This is a stampede.’

Any downgrade of a financial guarantor would likely be more than just one notch, said Stanislas Rouyer, senior vice-president of Moody’s financial guarantors team. A downgrade, he said, would need to incorporate not only the reason for the downgrade but also the consequences of the downgrade on the business.

For years, the insurers mostly guaranteed bonds issued by municipalities, public schools and water authorities. Defaults were few, and bond insurers prospered. Triple-A ratings were a given. In recent years, however, many bond insurers have ventured into the business of insuring complicated mortgage securities such as collateralised debt obligations. And with credit markets deteriorating, they have had to write down the value of their insurance contracts on complicated debt and have posted some of their poorest quarterly results in years.

Some veterans on Wall Street are now questioning the viability of their business model. ‘As the credit market continues to weaken, our confidence that the guarantors will survive the credit meltdown is waning,’ Ken Zerbe, an analyst at Morgan Stanley, wrote in a research note this month. ‘At the current stock price, we believe the market is pricing in the loss of their triple-A ratings. Previously, we would have dismissed this as nearly impossible – now we are not so sure.’

The two largest bond insurers, Ambac Financial Group and MBIA, were recently described by Fitch and Moody’s as having moderate to little risk of falling below adequate capital levels. Nonetheless, their shares have fallen by at least half since the beginning of October.

Ambac spokesman Peter Poillon said last Friday that based on where the stock is trading, investors appeared to be doubting the company’s ability to hold on to its triple-A rating. He disagreed with that assessment, saying that the company has sufficient capital to meet the rating agencies’ requirements. ‘We value our triple-A. We know it’s our franchise and we will do anything to maintain it,’ he said.

 

Source: The Washington Post (Business Times 28 Nov 07)

Sub-prime crisis takes its toll on European markets

But stability can be expected if the US avoids recession: DTZ

(SINGAPORE) Shockwaves from the US sub-prime mortgage crisis a few months ago are reverberating through the real estate markets of the UK and Europe, with deals shelved or abandoned.

In its European Quarterly 2007 report, DTZ says the volume of transactions could fall at least 15-20 per cent in the third and fourth quarters this year, from record volumes of 48 billion euros (S$102.7 billion) and 53 billion euros in the first and second quarters respectively.

However, if the US avoids recession, stability can be expected.

DTZ group chief executive Mark Struckett says that in the UK other than central London, a price correction in commercial estate market has been underway since the second half of 2006, so the sub-prime fallout is less of a shock.

The current situation is also being ‘accepted by vendors’, he says.

DTZ says the effect so far is not so much the delaying of deals but renegotiation of price with the re-pricing of risk as providers of debt capital become much more risk-averse.

Given upward pressure on yields in many locations, DTZ believes property returns will be heavily dependent on sound occupier fundamentals and effective asset management.

Making a comparison between current market conditions and the period following the Sept 11, 2001 terrorist attacks in the United States, Mr Struckett says that unlike five years ago, ‘occupational demand still looks good’.

In general, DTZ does not expect rental prospects to be substantially undermined by recent developments, though there may be increased downside risk for areas such as London’s West End, where hedge funds and private equity firms are important players.

There could be wider adverse repercussions in the City of London and in Canary Wharf if reduced profitability affects the expansion plans of some banking sector firms.

Even so, Mr Struckett says a slowdown in new developments could lead to a supply shortage in 2010-2011, possibly curtailing any prolonged crisis.

So while debt-driven investors will find it more difficult to make deals add up, DTZ believes a correction in yields in some markets could present attractive opportunities for equity buyers such as life insurance and pension funds which to some extent may have been priced out of the market by highly leverage investors.

Quality assets in prime locations could benefit in a generally more risk-averse market.

DTZ believes a flight to quality is likely to put deals involving secondary locations or older stock most at risk, with investors increasingly willing to pay a premium for covenant strength and reliable rental income.

 

Source: Business Times 27 Nov 07

CLOSING MARKET REPORT – Wall St lifted higher by retailers, banks

NEW YORK – US stocks rebounded on Friday in an abbreviated session as the start of holiday shopping lifted retail stocks, while progress in a plan to relieve the credit market’s strain aided bank shares.

Shares of JPMorgan Chase, Bank of America and Citigroup all rose more than 2 per cent. The three banks, spearheading an effort to establish a superfund to ease problems in the credit market, are expected to seek support from others in the industry, The Wall Street Journal reported.

Discount chain Target led retailers higher as droves of shoppers turned out – in some cases before dawn – for Black Friday, the official beginning of the holiday shopping season.

Trading volume was thin in the shortened session. US financial markets were closed on Thursday for Thanksgiving. On Wednesday stocks suffered heavy losses on credit market and housing sector worries.

The Dow Jones industrial average was up 181.84 points, or 1.42 per cent, at 12,980.88. The Standard & Poor’s 500 Index was up 23.93 points, or 1.69 per cent, at 1,440.70. The Nasdaq Composite Index was up 34.45 points, or 1.34 per cent, at 2,596.60.

JPMorgan shares rose 3 per cent to US$41.90. Bank of America stock was up 2.4 per cent to US$43.13 and Citigroup stock climbed 3.2 per cent to US$31.70.

Consumers, many with the day off from work, visited stores and shopping centers in search of bargains.

Chains refer to the day after Thanksgiving as ‘Black Friday’ because it once marked the day many retailers turned a profit and went into the black for the year.

Shares of J.C. Penney, which last week cut its forecast for the holiday season, were up 3.1 per cent to US $41.30. Target’s stock jumped 5.7 per cent to US$57.17.

Boeing’s stock rose after the chief executive of Airbus, Boeing’s chief rival, said the weakness of the dollar is ‘life-threatening’ for the European aircraft maker. Boeing shares were up 2.4 per cent to US $89.54.

 

Source: REUTERS (24 Nov 07)

ADB warns sub-prime fallout could get worse

Financial volatility, repricing of credit risk may lead to capital flight: report

IN TOKYO

FALLOUT in Asia from the US sub-prime mortgage crisis, through financial and other channels, may prove heavier than expected, the Asian Development Bank warned in a report published yesterday.

This came as a Bank of Japan Policy Board member cautioned that the impact of the crisis is likely to be longlasting, and is also on the heels of US Treasury Secretary Henry Paulson’s warning that US financial defaults could accelerate next year.

Strong economic growth and improved financial systems, plus limited exposure to US sub-prime mortgages, have helped limit the regional impact from global credit problems, the ADB said. But ‘though there are no signs of widespread problems in emerging East Asia, downside risks to regional economic and financial market trends remain and wider ramifications cannot be ruled out’, it suggested.

Prolonged global financial market volatility, a rise in risk aversion and re-pricing of credit risk could lead to a reversal of capital flows into Asia, Jong-Wha Lee, head of the ADB’s Office of Regional Economic Integration, said in the Bank’s latest Asian Bond Monitor publication.

The ADB called for improved transparency in credit markets through better valuation and accounting of offbalance sheet instruments, strengthening of risk management and enhancing the enabling environment for local currency bond markets. It also urged stronger regional cooperation in monitoring and regulating financial markets and in developing financial institutions’ risk management techniques.

The ADB’s comments echoed the increasing concern being voiced in various quarters about the spreading impact of the sub-prime crisis. Bank of Japan Policy Board member Seiji Nakamura said yesterday that problems were taking longer to settle than expected and that their impact could broaden from here on.

Mr Paulson also cautioned this week that potential US financial defaults would be markedly bigger in 2008 than this year as less creditworthy mortgages are exposed.

The OECD (Organisation for Economic Cooperation) has calculated that some US$890 billion of poor credit quality mortgages will need to have their interest rates reset next year. Cumulative losses in the US$200 billion to US$300 billion range from the mortgage market crisis ’seem feasible’, as a result, it has suggested.

Following a series of write-offs by leading US banks, Japan’s Mitsubishi UFJ Financial Group on Wednesday reported a near 50 per cent drop in first-half profits owing to losses of 24 billion yen (S$320.4 million) on subprime related investments and on its credit card unit.

Other Japanese banks have also declared significant sub-prime related losses this week. Mizuho Financial Group, another of Japan’s three megabanks, booked the largest loss related to recent financial market turmoil. It took 70 billion yen of losses in the first half of the current financial year while the third megabank, Sumitomo Mitsui Financial Group, took losses of 32 billion yen in the first half while indicating that these could rise to 87 billion yen for the full year.

 

Source: Business Times 23 Nov 07

US sub-prime losses may reach $434b, says OECD

Organisation says worst is not over and credit turmoil could wreak more havoc on markets

LONDON – OVERALL losses caused by the United States mortgage market crisis could feasibly hit US$300 billion (S$434 billion), and the broader credit crunch could yet inflict greater damage on equity markets, the OECD said.

‘Thus far, equity investors seem to have shrugged off the negative sentiment that prevailed over the summer, but it may be too soon to draw firm conclusions,’ the Organisation for Economic Cooperation and Development (OECD) said in a report.

‘As adjustments have often occurred in waves, and as higher funding costs take typically several months to have their full impact on companies or consumers, it may well be that the recent correction is only a precursor of a more protracted downturn.’

Financial institutions and policymakers needed to buy time to ensure an orderly end to the trouble which spilled from the US mortgage sector to financial markets globally in July and August, the report said.

The OECD said the super fund being set up by Citigroup, Bank of America and JPMorgan Chase to pool securities of ailing special investment vehicles – thus preventing a further fire sale of these asset-backed securities – was a useful mechanism.

The Paris-based forum said the US housing market downturn had further to run and would continue to depress mortgage-linked debt held by banks, hedge funds and insurance firms.

‘We still have not hit the worst point in resets, delinquencies and ultimate losses on mortgages,’ the OECD said, adding that about US$890 billion of sub-prime mortgages, or poor credit quality loans, will have rates reset next year – and peaking in March.

The OECD report said a hypothetical 14 per cent loss rate on sub-prime mortgages being reset next year could deliver an overall US$125 billion hit to lenders.

Including Alt-A, or ‘near prime’, mortgages, cumulative losses in the US$200 billion to US$300 billion range ’seem feasible’, it said.

The financial sector’s exposure to these losses lies mainly in holdings of mortgage-backed securities repackaged within complex collateralised debt obligations (CDOs) held by hedge funds, banks and bank-sponsored structured investment vehicles.

The OECD said hedge funds held 21 per cent, or US$650 billion, of riskier BB-rated and equity tranches of

CDOs. Banks held just 5 per cent, or US$150 billion, of these.

With mortgage-related assets constituting about 56 per cent of the backing for CDOs, the direct mortgage exposure in these investments could be reduced to US$360 billion for hedge funds and US$90 billion for banks.

Assuming the US$3 billion total CDOs outstanding has been cut over the past six months due to lower prices and asset restructuring, the US$200 billion to US$300 billion estimate of total losses due seems reasonable, the OECD said.

 

Source: REUTERS (The Straits Times 23 Nov 07)

US sub-prime woes ’should not deter Asian bond growth’

ASIAN bond markets must continue to grow and develop, even though it was their relative lack of sophistication that spared them from the worst of the United States sub-prime crisis.

A conference on regional bonds in Singapore yesterday heard that the highly complex financial products used by American and European banks are still not that prevalent in the Republic. Yet it is these same products that are at the heart of the credit mess now.

This has led some observers to ask if Asia should slow the pace of innovation in its bond and credit markets.

But Mr Ong Chong Tee, deputy managing director of the Monetary Authority of Singapore, said: ‘It is important to avoid the mistake of planning only based on the last crisis.

‘Each financial crisis or shock will bring with it unique circumstances and lessons. But in and by themselves, they should not become reasons to dampen market development and growth.’

He was echoing Senior Minister Goh Chok Tong’s remarks at the Barclays Asia Forum earlier this month.

Mr Goh had urged Asian institutions to press on with efforts to develop capital markets and create robust and efficient systems.

Developed financial markets across the world have been shaken by problems in the US housing market, with big-name American and European banks reporting billion-dollar losses on investments linked to poor-quality home loans.

By contrast, banks in the region have been largely unscathed as their exposure, if any, to these complex instruments has been small, said Dr Lee Jong Wha, who heads the Asian Development Bank’s (ADB’s) regional economic integration office.

But Mr Ong stressed that bonds and other capital market products are good alternatives to bank loans for firms.

The heads of the fixed-income sections at various banks told the seminar, which was organised by The Asset magazine and the ADB, that growth momentum has eased for more complex instruments but deals have not dried up.

Standard Chartered Bank’s capital markets global head, Mr Brad Levitt, said Asian currency-denominated bonds have outgrown issues in the US dollar, euro and yen.

 

Source: The Straits Times 23 Nov 07

US credit crunch – will history repeat itself?

IT was about two months ago on Sept 18 that the US Federal Reserve cut its short-term lending rate by 50 basis points to 4.75 per cent, sparking a worldwide rally in relieved stock markets. After a rise that lasted about two weeks, however, the rally then stalled. This was followed by a 25 basis point cut on Oct 30 but again, after a brief spike-up, markets have failed to respond.

Hopes are now high among analysts that the Fed will play saviour once again at its next meeting on Dec 11 – indeed, the futures market is certain that rates will be lowered again.

But given that the two cuts totalling 75 basis points have not provided the necessary stimulus yet, will more cuts really do the trick?

In his book, The Age of Turbulence, former Fed chairman Alan Greenspan wrote about the savings and loan (S&L) crisis of the late 1980s and the related property market crash that led to the closure of several banks and a recession in 1990-1992. The subsequent credit tightening meant that businesses found it hard to get loans and this, in turn, made the recession difficult to overcome.

‘Nothing we did at the Fed seemed to work,’ wrote Mr Greenspan. ‘We’d begun lowering interest rates well before the recession hit but the economy had stopped responding. Even though we lowered the fed funds rate no fewer than 23 times in the three-year period between July 1989 and July 1992, the recovery was one of the most sluggish on record.’

Those words must have an uncannily familiar ring to those who have tracked the current sub-prime crisis.

In its latest quarterly economic projections, for example, the Fed has cut its outlook for 2008 US economic growth to 1.8-2.5 per cent, down from 2.5-2.75 per cent. The downward revision stemmed from a number of factors, ‘including the tightened terms and reduced availability of sub-prime and jumbo mortgages, weaker-than-expected housing data, and rising oil prices’.

Worse, the situation today is potentially more damaging than during the S&L crisis because of the opacity surrounding the collateralised debt obligations market. Bad loans with questionable payment streams were embedded within complicated packages that were then marketed as being of good investment grade.

To further complicate the picture, derivative products are involved, which means the effect of a collapse could be magnified by leverage.

Investors – and central bankers – would therefore do well to note this insight from Mr Greenspan in his book: ‘Historically, societies that seek high levels of instant gratification and are willing to borrow against future incomes to achieve it have more often than not suffered inflation and stagnation.

‘ The economies of such societies tend to run larger government deficits financed with fiat money from a printing press . . . Eventually, the ensuing inflation leads to a recession or worse, often because central banks are forced to clamp down . . . I regret that the US may not be wholly immune to it.’

 

Source: Business Times 22 Nov 07

No deep recession in the US, going by consensus forecasts

WHEN the respected Business Times of Singapore takes a stick to the World Bank’s humble East Asia and Pacific Update (‘World Bank’s analysis wide of the mark’, BT, Nov 20) , I sit up and take notice. What a pity, then, that your editorial, while high on sound and fury, adds little worth to either the facts or valid arguments about the outlook for East Asia. The Business Times seems quite upset that we are projecting a rise in East Asian growth to 8.4 per cent this year. Is your paper really unaware that most of the larger economies have already released GDP growth numbers through the third quarter of 2007 and that the outcome for the year is therefore already pretty much ‘in the bag’.

China grew 11.5 per cent on average in the first three quarters and growth has also accelerated over the course of the year in other large economies like Korea and Indonesia. The fact is that East Asia will have a hard time not growing more than 8 per cent this year.

Turning to next year, we note that the risk of recession in the United States has clearly increased but that the bulk of reputable economic forecasters still forecast an extended period of weak growth in the US and in other major developed economies in 2008 rather than an outright recession. We tend to stick fairly closely to consensus or mainstream forecasts for the developed world and are unable to assume ‘deep recession’ quite as airily as The Business Times. If that, in fact, is how conditions in the developed world turn out next year, then we argue that East Asia could also well be able to maintain its solid performance of recent times. Just look at what has happened in 2007; US GDP and import growth have already slowed sharply and, as would be expected, East Asian export growth has also slowed. But, despite slower exports, East Asian GDP growth has actually accelerated in 2007, because domestic demand growth in the region has picked up, a development related to quite favourable domestic macroeconomic, financial and corporate sector conditions in many countries. This is another among the set of important recent developments that seems to have escaped your newspaper’s attention.

What if the US does go into recession? We have taken the laborious route of looking at some of the historical facts about how East Asia has responded to past recessions, as well as some formal econometric studies of the issue. These suggest that the impact varies a lot across countries and also at different times, depending on what other factors are in play.

The downturn of 2001 was particularly severe because it was combined with a huge recession in global high-tech demand at a time when domestic demand in many East Asian economies was still very weak, in the aftermath of the financial crises. Neither of those conditions applies today. Of course, it is possible that some other combination of factors could cause a more severe downturn in East Asia and so the evolving economic situation in the region has to be closely monitored. But to claim that a recession is inevitable merely because of ‘increased economic integration’ and that past trends should be ignored simply because ‘the world has changed’ – these are surpassingly crude and simplistic assertions.

Milan Brahmbhatt

Lead Author

World Bank East Asia and Pacific Update

The World Bank

Washington, DC

BT’s editor replies: The main focus of our editorial was the World Bank’s projections for 2008, not 2007, which was only mentioned in passing. For next year, we had flagged a ‘possible deep recession’ in the US.

We do not believe we are in disreputable company here. Other forecasters who have indicated this same possibility include Goldman Sachs, which has pointed to the risk of a ’substantial recession’, Prof Joseph Stiglitz (a Nobel laureate and former World Bank chief economist) who said that the US faces a ‘very major slowdown’ and Prof Nouriel Roubini of the Stern School of Business of NYU, widely acknowledged to have been one of the earliest to anticipate the US housing bust, who has, in fact, predicted a hard landing and an outright recession for the US economy – although we have not taken that position.

We also noted that China’s own government has a decidedly less upbeat (and more realistic) view of its country’s future growth prospects than the World Bank’s East Asia and Pacific update.

We stand by our editorial as constituting fair comment.

 

Source: Business Times 22 Nov 07

Lower US forecast again prompts flight to safety

FRIGHT turned to flight once again in financial markets yesterday, when overnight news of a lowered Fed US growth forecast for 2008 spawned yet more painful losses for Asian equities, punished favourite high-yield carry trades, but lifted the euro and Swiss franc to record highs again.

Overnight, it was revealed that the US central bank’s key Federal Open Market Committee or FOMC had lowered its growth forecast for 2008 to a 1.8 to 2.5 per cent target range, compared with an earlier forecast of 2.5 to 2.75 per cent. And by the time Asian stock markets had closed, stock indices like the Straits Times Index and Nikkei had chalked up more painful losses of at least 2.5 per cent each, South Korea’s Kospi was 3.5 per cent worse off, and Hong Kong’s Hang Seng had tumbled more than 4 per cent.

As for the flight to safer destinations, the euro responded by elbowing its way to a fresh post-launch peak of US$1.4856 yesterday, and a new 31-month high of S$2.1519. Against the Swiss franc, another saferefuge favourite, the US dollar plunged to an all-time low of 1.1025 francs in Asian trading. The unit was also lifted to a fresh 18-month high of S$1.3141.

Indeed, the start of higher euro forecasts such as US$1.60 to US$1.70 was already being discussed before the end of Asian trading hours yesterday. An economic adviser to the German government was quoted as saying that the euro could well hit US$1.60, while UK-based research firm IDEAglobal warned in an FX alert that a US$1.6 to US$1.7 euro could not be ruled out if sub- prime mortgage debt problems in the US spread next year to other parts of the US bond market like corporate junk bonds and so-called ‘Alt-A’ debt offerings.

Gold, meanwhile, found its way back above US$800 per ounce with a handsome US$15 jump – as oil continued its almost inexorable climb to the US$100 per barrel mark yesterday. This time, however, such gains were not enough to lift either the Australian or Canadian dollar – due to another heavy sell-off for high-yield carry trade favourites, as risk aversion sentiment continued to mount.

In percentage terms, it was therefore the Japanese yen that finished with the most impressive gains, ahead of a US holiday today and an extended Japanese weekend break starting tomorrow. By the close, it had chalked up handsome gains of more than one per cent each versus the US and Singapore dollars, and recorded even larger gains against erstwhile carry-trade favourites like the trio of Australian, Canadian and New Zealand dollars.

The US dollar was eventually forced past our first key yen support at 108.8 yen to finish 1.5 per cent weaker at 108.62 yen, while the Australian, Canadian and New Zealand dollars ended over 2 per cent worse off each at 95.54 yen, 82.13 yen and 110.65 yen. Against the Chinese yuan, the greenback slipped a further 0.2 per cent to close just a whisker above its post-depeg low of 7.4103 yuan. Closer to home, the greenback rose between 0.5 and 0.7 per cent to close at 9,395 Indonesian rupiah, 928.9 South Korean won and 3.3810 Malaysian ringgit, and ended a more modest 0.2 per cent better at S$1.4498.

 

Source: Business Times 22 Nov 07

Asian stocks rebound as US dollar steadies

Hedge funds, traders snap up blue chips, hot China plays across Asia on greenback’s gain

REGIONAL stock markets, including Singapore’s, made startling recoveries in late trading yesterday after nosediving early in response to a big drop on Wall Street.

The Straits Times Index (STI) collapsed by 85 points right after the opening bell but finished in positive territory – up 26.55 points at 3,438.27.

The catalyst for the dramatic comeback was a steadying of the greenback against the Japanese yen, alleviating fears of an exodus of funds and sparking a buying spree in Tokyo that spread to the rest of Asia.

Hedge funds and big-time traders snapped up blue chips and hot China plays across the region.

Some dealers attributed the big shift in mood to a rumour that the United States Federal Reserve might consider another rate cut.

Fears are growing that the US may be tipped into a recession by the worsening mortgage crisis.

Market watchers, however, dismissed the rumour as too far-fetched to explain the region’s strong recovery.

‘It has become a no-brainer trading Asian shares. Prices swing in tandem with the movements of the US dollar against the yen,’ said a dealer.

Traders have been reacting to every tiny movement in the foreign exchange market for any possible unravelling of yen carry trades – massive loans taken out by hedge funds in Japan, where interest rates are low, to make huge bets on higher-yielding assets elsewhere.

The STI’s early plunge came as the US dollar shed almost one yen to 109.63 in early trade. Once the currency bounced back to 110.43 yen after lunch, a rally swept across the region.

Market sentiment also got a boost from a rise in US stock futures in Asian trades, fuelling hopes of a rebound on Wall Street. The Dow Jones Industrial Average plunged by 213 points on Monday.

Other Asian bourses saw similar trading patterns. Hong Kong’s Hang Seng Index closed 311 points higher at 27,771 after losing 1,056 points in the morning, while Tokyo’s Nikkei 225 Index rose 169 points to 15,211.52, recovering from a morning loss of 114 points.

Among the biggest gainers in Singapore were badly battered bank stocks and China plays. DBS Group Holdings closed 20 cents higher at $19.60 after plunging to a four-month low of $18.80, while United Overseas Bank rose 40 cents to $19.60.

China plays mostly ended on the upside, led by gains in giant shipbuilders Cosco Corp, which rose five cents to $6.45, and Yangzijiang, which went up three cents to $2.09.

While the rebound brought cheers to traders glum at recent mounting losses, some felt the rebound was too good to be true.

CIMB-GK research head Song Seng Wun said: ‘The market has been sold so hard and for so long that it doesn’t take much effort to get a rebound. But can this last?’

Many traders now fear yesterday’s rebound may turn out to be a ‘dead cat bounce’ – a small recovery like last Wednesday’s one-day rebound.

Many also worry that foreign funds may have used the rebound as an excellent opportunity to get rid of their investments in the region.

A Citigroup report showed that as turmoil engulfed regional markets last week, about US$5.6 billion (S$8.1 billion) of stocks were sold off by foreign investors. Among the worst-hit markets was China, with US$1.1 billion worth of shares offloaded by foreigners.

Other hard-hit markets included Hong Kong, where US$191.1 million worth of shares were sold by funds investing only in Asian stocks, and Singapore, with US$51 million worth of shares offloaded.

UNITED States stocks rose yesterday, rebounding from three-month lows, after a gain in the price of oil boosted energy companies and Credit Suisse Group said shares of Google may reach US$900 next year.

ExxonMobil and Chevron both climbed the most in three months.

Google rallied after Credit Suisse said the most-popular search engine will expand its share of the mobile advertising market.

Benchmark indexes gained even after Freddie Mac, the second-largest source of money for US home loans, said it may cut its dividend and reported a US$2 billion (S$2.9 billion) loss – three times what some analysts had estimated.

The Dow Jones Industrial Average rose 125.27 points, or 1 per cent, to 13,083.71 after two hours of trading. The Nasdaq Composite Index increased 40.24 points, or 1.6 per cent, to 2,633.62.

Crude oil rose for a third day after the US dollar touched a new record low against the euro. The greenback’s 11 per cent slide this year has made oil, metals and other commodities denominated in the US currency cheaper for foreign investors.

 

Source: BLOOMBERG NEWS (The Straits Times 21 Nov 07)

Things get hotter as shrinking dollar goes pop

US dollar’s image losing currency as emblem of extravagance, success

NEW YORK – WHEN people start talking about rappers and supermodels shunning the US dollar, you know there’s a problem.

As the greenback recently hit historic lows against other major currencies, rap mogul Jay-Z released a new video in which he flashed euros, not dollars. It was also widely reported recently that one of the world’s richest supermodels, Gisele Bundchen, opted to be paid in euros because of the dollar’s weak outlook.

Her spokesman denied that the model was spurning the dollar, saying Bundchen was paid in the currency of a job’s location.

Nevertheless, the euro bought an all-time record US$1.4752 earlier this month, and the British pound had also been trading at its highest levels against the dollar since the early 1980s.

The Canadian dollar, often called the ‘Loonie’, reached parity with the US dollar in September for the first time since 1976.

While investors, multinational businesses and travellers have been witnessing the dollar’s slide for years, pop culture is new territory.

Jay-Z’s Blue Magic video seems to have been an attempt to acknowledge the dollar’s decline in an ironic way and to paint the artist as an international superstar who is smarter than those accepting greenbacks.

‘It is probably a particularly good strategy as the ‘image of the dollar’ loses its ‘currency’ as an emblem of extravagance and success,’ Mr Steven Tepper, associate director of Vanderbilt University’s Curb Centre for Art, Enterprise and Public Policy, said in an e-mail.

‘So, you have the combination of a weakening visual icon – the dollar – and a growing international audience that will understand and connect to the image of the euro.’

As for Bundchen, she would not have been the first to favour contracts in other currencies. Others included billionaire investor Warren Buffett and Pimco managing director Bill Gross.

‘Any international business person that is moving assets around the world will want to do as many deals in the strongest currency available, which is certainly not the dollar these days,’ Mr Tepper added.

The dollar’s decline represents expectations that the United States economy will slow relative to other economies. Recent cuts to the Federal Reserve’s key interest rate have also weakened the dollar.

A weaker dollar also makes American goods cheaper and more competitive in foreign markets, tightening the trade deficit. It helps some US companies with operations abroad, whose profit is greater when converted into dollars. But at the same time, a cheaper dollar makes foreign goods and travel more expensive.

Source: ASSOCIATED PRESS (The Straits Times 21 Nov 07)

China supports strong US dollar, says official

Beijing hopes for an orderly solution following recent market turbulence

(CAPE TOWN) China supports a ’strong dollar’ because it would be conducive to fostering a healthy global economic system, the country’s central bank governor Zhou Xiaochuan said yesterday.

Speaking to reporters, Mr Zhou said that Beijing hoped for an orderly solution following recent market turbulence stirred by defaults of US mortgages. ‘So in this sense, actually we hope to see a strong dollar,’ he said. ‘We support a strong dollar,’ he added.

The US dollar’s recent slide was a major topic of discussion at a weekend summit of financial leaders of the Group of 20 (G-20) economic powers and is expected to top the agenda at a current meeting of central bank governors in Cape Town.

The opinions of different central banks towards the US dollar were ‘close to each other’ in the context of international gatherings such as the G-20 and the International Monetary Fund (IMF), Mr Zhou said.

Turning to the domestic economy, Mr Zhou said that Beijing need not raise interest rates too frequently given that current inflationary pressures were coming mainly from rising food prices.

But China could not rule out further interest rate rises although none were on the cards ‘next week’.

Given excess liquidity in the economy, however, China would continue to raise banks’ reserve ratios, he said.

China’s central bank has raised interest rates five times this year to curb inflation and prevent real returns on bank deposits from sinking too far into negative territory.

Earlier this month, China announced that it would raise banks’ reserve ratio by 0.5 percentage points to 13.5 per cent, a record high. The central bank said that the move would take effect on Nov 26.

China would also consider letting its currency move more freely if necessary although it is comfortable with current settings, Mr Zhou said. China will gradually widen the band within which the yuan is allowed to trade, he said.

 

Source: Reuters, AFP (Business Times 20 Nov 07)

Crude prices rise on weakening greenback

Dollar’s decline has prompted investors to switch funds into gold, silver and oil

(LONDON) Crude oil prices rose on speculation the weakening US dollar will spur demand for the commodity from buyers holding other currencies.

The dollar’s 10 per cent decline this year has prompted investors to switch funds into gold, silver and oil. Saudi Arabian Foreign Minister Prince Saud Al-Faisal rejected calls by Iran and Venezuela at an Opec summit in Riyadh to abandon the US currency for oil sales, saying the kingdom doesn’t want the dollar to ‘collapse’.

‘Fears of continued dollar weakness and no loosening of Opec’s quotas are keeping the market firm,’ said Christopher Bellew, a broker at Bache Commodities here.

Crude oil for January delivery rose as much as US$1.21, or 1.3 per cent, to US$95.05 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at US$94.54 at 11:08am here.

Oil prices have eased 4.1 per cent from the record US$98.62 reached in New York on Nov 7. The dollar was at US$1.4682 per euro from US$1.4662 late last week.

Oil prices declined last week after US stockpiles unexpectedly rose and the nation’s weather service forecast mild temperatures during the three months through February.

Stockpiles jumped 2.8 million barrels to 314.7 million as of Nov 9, or 2.9 per cent more than the five-year average for the period, the energy department said.

Brent crude oil for January settlement climbed as much as US$1.19, or 1.3 per cent, to US$92.81 a barrel on the London-based ICE Futures Europe exchange. It was at US$92.06 at 11:08am London time.

‘The oil price will go up with the weakening dollar,’ said Gerrit Zambo, an oil trader at BayernLB in Munich. ‘If the dollar gets weaker, it’s cheaper for countries with other currencies to buy oil.’

The Organization of the Petroleum Exporting Countries (Opec), supplier of more than 40 per cent of the world’s oil, held its third heads of state summit this weekend since being founded in 1960.

Saudi Arabia’s Prince Al-Faisal rejected last week a push by Iran and Venezuela to debate pricing oil in currencies other than the US dollar. The kingdom, the world’s largest oil exporter, won’t consider the proposal, Prince Al- Faisal said at a meeting of oil and finance ministers that was accidentally broadcast to journalists.

Opec leaders didn’t discuss increasing oil production to ease near-record prices. Oil ministers from the group meet in Abu Dhabi on Dec 5 to discuss output quotas.

‘The link between the dollar and oil is ’spurious’,’ analysts at Goldman Sachs Group including London-based Jeffrey Currie said in a report yesterday.

Oil’s gains are ‘driven by declining inventories and escalating cost inflation in the industry’, Goldman said.

US crude inventories fell to their lowest in more than two years in the week ended Nov 2, according to energy department data.

Last week, prices fell as hedge-fund managers and other large speculators reduced their bets on rising oil prices to an 11-week low, according to US Commodity Futures Trading Commission data.

The net-long position in New York oil futures, the difference between orders to buy and sell the commodity, plunged 74 per cent to 27,566 contracts at Nov 13, the commission said. Contracts to sell oil jumped 35 per cent.

 

Source: Bloomberg (Business Times 20 Nov 07)

Recession risk ‘due to mess left by Greenspan’

LONDON – MR JOSEPH Stiglitz, a Nobel-prize winning economist, said the United States economy risks tumbling into recession because of the sub-prime crisis and a ‘mess’ left by former Federal Reserve chairman Alan Greenspan.

‘I’m very pessimistic,’ Professor Stiglitz said in an interview in London yesterday. ‘Alan Greenspan really made a mess of all this. He pushed out too much liquidity at the wrong time. He supported the tax cut in 2001, which is the beginning of these problems. He encouraged people to take out variable-rate mortgages.’

Prof Stiglitz said there was a 50 per cent chance of a recession in the US, and that growth would slow to less than half its 3 per cent potential.

The comments add to criticism of Mr Greenspan’s 18 years in control of the US central bank. He stepped down in January last year.

After the 2001 recession, the Fed cut its benchmark rate to a four-decade low of 1 per cent. That move, along with a hands-off approach to regulation, have brought Mr Greenspan under fire, as the bursting of the housing bubble and the sub-prime mortgage crisis again threaten to sink the economy.

Mr Greenspan, 81, said on Nov 7 that he predicted a ‘less than 50:50′ probability of a US recession, reiterating previous remarks made late last month. Home prices in the world’s largest economy have not bottomed out, he said.

Prof Stiglitz, an author and professor of economics at Columbia University in New York, estimated that US consumers borrowed up to US$950 billion (S$1.38 trillion) last year against the value of their homes to finance spending.

‘That game is over,’ Prof Stiglitz said. ‘As house prices are going down, people are not going to be able to take more money. We are looking at a major slowdown. The impact of that is going to be a very major slowdown, maybe recession.’ He also faulted US President George W. Bush for cutting taxes in 2001 and, thus, widening the US’ budget deficit and allowing political support for free-market trading to wane.

 

Source: BLOOMBERG NEWS (The Straits Times 17 Nov 07)

US credit woes hurt foreign funds to Asia

While inflow is fast slowing for HK, China and India, S’pore is experiencing outflow

THE flood of foreign funds surging into Asian bourses over the past four weeks has been reversed by the ongoing credit woes in the United States.

Singapore has started experiencing an outflow, with a net sale of US$2.1 million (S$3 million) last week by funds investing exclusively in Asian equities, according to Citigroup Investment Research.

This is a striking contrast to the situation in end-September, when US$110.4 million flowed into local equities in the space of a week.

And in other bullish regional markets such as Hong Kong, China and India, the inflow of foreign funds into equities has slowed down considerably.

Only US$84.3 million was invested in H-shares – shares of China firms listed in Hong Kong – between Nov 1 and Nov 7, compared with US$576.5 million between Sept 27 and Oct 3.

Over the same period, foreign funds spent just US$29.9 million on Hong Kong stocks, excluding H-shares, an 86 per cent plunge from the US$216.5 million they spent in the week of Sept 27 to Oct 3.

The slowdown in fresh investments in Asian equities coincided with the bearish mood in the US, where banks have been writing down billions of dollars in their pool of debts.

That has been coupled with the greenback plunging against regional currencies following two US interest rate cuts.

It raises fears of an unravelling in the carry trade – hedge funds taking out huge yen loans because of Japan’s low interest rates to invest in higher-yielding assets.

Sentiment has also been spooked by perception that H-shares have shot up too fast, fuelled by foreign investors entering Hong Kong and Singapore in anticipation of China allowing domestic funds to invest in overseas equities.

Fund managers’ appetite for risk has also weakened considerably. Merrill Lynch’s latest survey of Pacific Rim fund managers showed that defensive sectors – insurance, retail and consumer products – are now preferred over sexy growth stocks.

And despite oil soaring close to US$100 a barrel, fund managers have started to pare down positions in the energy sector.

Despite the falls in regional markets, the Merrill Lynch report noted that fund managers are still ‘overweight’ on shares, having reduced cash holdings to 2.8 per cent from 3.7 per cent last month.

And even as Hong Kong’s Hang Seng Index has dropped by more than 10 per cent from its record high in September, Merrill Lynch said fund managers continue to favour Hong Kong and ’sharply increase their enthusiasm for frontier markets’.

‘Fund managers have also returned to Singapore and reduced their exposure in other Asean markets,’ it added.

But Morgan Stanley’s head of global emerging markets equity strategy, Mr Jonathan Garner, said that next year may be more difficult than this year.

While the focus is on the impact any slowdown in the US economy could have on emerging markets, Europe is a much bigger export market for developing countries. ‘Weakness in the US economy could spill over to the euro zone. Emerging markets may survive a slowdown in the US, but not the US and Europe combined,’ said Mr Garner.

He expressed particular concern over a possible ‘contraction in valuations’ in China and India, after their exceptional stock market performances this year. ‘H-shares valuations are back at the 1997 and 2000 peak levels.’

Morgan Stanley has adopted a defensive posture, adding Telekom Malaysia and removing China Mobile and Hyundai Heavy from its focus list last week.

 

Source: The Straits Times 17 Nov 07

US consumer prices, jobless claims increase

Market expectation of another interest rate cut next month rises to 90%

WASHINGTON – CONSUMER prices in the United States rose a brisk 0.3 per cent last month, driven by the sharpest rise in energy costs in five months, a government report showed yesterday.

Another report, meanwhile, showed that jobless claims were higher than anticipated.

The Consumer Price Index, the most broadly used gauge of inflation, rose at the same rate as in September, which was the steepest rise since a 0.7 per cent jump in May, according to the Labour Department report. But core prices, which strip out volatile energy and food costs, rose a more modest 0.2 per cent last month, also in line with expectations. Both the overall and core inflation readings were directly in line with expectations.

 

Wall Street shares opened lower yesterday, extending the previous day’s retreat. The Dow Jones Industrial Average fell 39.83 points, or 0.3 per cent, to 13,191.18 after half an hour of trading and the Nasdaq Composite Index dropped 5.09 points, or 0.19 per cent, to 2,639.23.

 US government bonds were steady, as the data was in line with forecasts and the US dollar showed little reaction.

‘It shows that there’s still growth – slow growth, but still growth – and as long as inflation stays within consensus, I think that it’s a net positive for the market,’ said Mr Marc Pado, a US market strategist at Cantor Fitzgerald in San Francisco.

At the same time, markets boosted chances that the Federal Reserve will cut rates at its meeting next month to 90 per cent, from 72 per cent late on Wednesday.

 Consumer prices were 3.5 per cent higher than a year ago, the biggest 12-month increase since August last year, when they rose 3.8 per cent, a Labour Department official said. Core prices were up 2.2 per cent on a year-on-year basis.

So far this year, prices have climbed by a seasonally adjusted annual rate of 3.6 per cent, driven by higher food and energy costs. That compares with a 2.5 per cent gain in all of last year.

 

Energy costs have surged at a 12.3 per cent annual rate this year, more than four times higher than the 2.9 per cent gain in all of last year.

 A separate Labour Department report showed new applications for US jobless aid rose more than expected to a seasonally adjusted 339,000 last week, and the more-reliable four-week moving average held steady at a six-month high.

Added to that weakening labour market picture was a report showing softening in the New York area manufacturing sector. A report from the New York Federal Reserve showed that manufacturing sector growth in New York state slowed this month, with new orders and inventory activity weakening and a big spike in material costs.

Source: REUTERS, AGENCE FRANCE-PRESSE (The Straits Times 16 Nov 07)

Credit crisis, inflation threaten world growth, says Fukui

GLOBAL economic growth is under increasing threat from two fronts – the United States sub-prime crisis and soaring commodities prices that may push up inflation.

The warning came from Bank of Japan governor Toshihiko Fukui at a function in Singapore last night. He said the sub-prime turmoil could severely disrupt financial markets, which could then have a ripple effect on economic growth. The risk of inflation is just as potent, presenting a challenge to central bankers who will need to use monetary policy to maintain price stability amid strong growth, added Mr Fukui, who spoke as part of the Monetary Authority of Singapore Lecture series.

 

Inflation expectations have been ‘generally contained’ in many markets. But rising oil prices, driven by high economic growth worldwide, especially in oil-hungry emerging markets, have increased the ‘risk of a rise in inflation expectations in the longer term’, Mr Fukui said.

 

Rising commodity prices will also ‘inevitably impair terms of trade for oil-consuming countries’, he added. Mr Fukui acknowledged that ‘downside risks for the US economy’ persisted, but the risk of stagflation – stagnant growth accompanied by high inflation – in the US and other economies was ‘muted compared to the 1990s’.

 

The credit market turmoil, linked to high-risk sub-prime home loans, was actually the result of many years of favourable growth and benign conditions in the world economy.

 

‘The crux of the problem, as I understand it, is that risk evaluation had become too lax under those benign conditions, and this has led to a correction through market forces,’ said Mr Fukui.

 Financial imbalances were allowed to accumulate that, in turn, triggered corrections and posed a risk to economic stability.

Central bankers, like goalkeepers in football teams, must, therefore, defend against turbulence arising from the increasing complexity in the international flow of funds, he said. They must accurately read the risks of the global economy and financial markets to ’stabilise the market when it is under pressure’. Source: The Straits Times 16 Nov 07

High oil price demands good policies

IT would be a fallacy to imagine that the prospect of a US$100 price tag for a barrel of oil will lead to a push for renewable fuels any time soon. Simply put, there is nothing definitive yet on the horizon offering a reliable, continuous and cheap alternative in the face of mounting energy demand.

Oil prices have remained resilient in their upward trajectory. Producers remain steadfast about the adequacy of supply in the system even as large consumers clamour for more.

Traders focus on the thin inventories to push the price up. When oil was at half the current price level, it was seen as compelling enough for the big competitive initiatives. Yet there is no excited talk of renewable sources of energy or even theories that high prices would yield new oil supplies, driving prices down. Instead we have ever higher-priced oil.

Yes, consumers are in a fix, for which they should share the blame. Have they been willing to make the necessary sacrifices and use pressure to accelerate the shift? In countries that matter to oil consumption, people have not been pushy enough.

Politicians may make noises but will act only if they are convinced that a change – putting at risk trillions of dollars of infrastructure investment and millions of jobs – is politically worth their effort.

Then subsidies and legislation will follow for a meaningful change of direction. Until then, some countries will do their bit but no cohesive global policy or focus on the next big thing will emerge. Big energy companies spend scant sums on research and development on renewable fuels. Independent R&D betting on the new future have surged but their budgets are small beer.

Unless the existing big players like car, energy and power companies as well as governments line up behind a change and consumers show a determination to support the drive, we will continue to grope for good answers for years, if not decades. Not convinced? ExxonMobil has forecast energy demand will grow 1.3 per cent a year, a tad lower than at the current rate, requiring a third more energy by 2030.

It says hydrocarbons would still meet 80 per cent of demand then, though renewable energy supply will grow at a faster clip of 9 per cent a year from now.

Rich nations’ energy adviser, the International Energy Agency, is also equally bleak. Unless governments embark on low-carbon policies, it sees the unprecedented rise in energy demand accelerating climate change, threatening global energy security and possibly creating a supply crunch. By 2030, the world will have to find an additional 30 million barrels per day, equivalent to Opec’s current total daily production.

Such an enormous challenge demands good policies and determined execution. Global R&D cooperation and conservation, not bitter recrimination by rich polluters, should be the way forward.

 

Source: Business Times 15 Nov 07

Sub-prime crisis could cost insurers more than US$2b

Big losses likely to be incurred on D&O policies

(LONDON) The cost to insurers of claims brought against directors of companies caught up in the US sub-prime mortgage crisis could exceed US$2 billion, according to Guy Carpenter, the reinsurance broker.

Guy Carpenter, part of Marsh & McLennan, estimates that this level of insured losses could be incurred on directors and officers (D&O) policies, which protect a director or officer of a company from paying out from their own pocket in a case arising from their duties as a director of a corporation, according to the Financial Times.

‘There was never any doubt that the sub-prime mortgage market collapse would have an insurance impact. The question was one of extent,’ FT quoted the broker as saying. ‘While estimates vary from US$1 billion to US$3 billion, it looks like the reality may settle at the upper end of the scale. The final answer will not come until 2008 or maybe even 2009, but history, litigation tendencies and capital markets point toward the worst case scenario,’ Guy Carpenter said in an update on the professional liability market last week.

The estimate comes amid growing worries about insurance and reinsurance claims arising from the sub-prime mortgage crisis, following the slew of write-downs announced by investment banks over recent weeks and a broadening of the impact of the sub-prime debacle.

It also comes as American International Group, one of the biggest writers of D&O policies, requests information from insured companies about their exposure to the sub-prime crisis, FT said.

AIG said this was routine and that when it became aware of a new area of possible exposure among its customers and potential customers, it conducted an information gathering exercise. It had carried out similar research with regard to stock option backdating.

‘We have received claim notices related to sub-prime events. At this point it is not a significant claim issue, however . . . we continue to monitor the activity,’ it said.

Thomas Sheffield, technical director in Aon’s global directors and officers division, said that, across the market, claims were being brought against those originating and writing subprime mortgages under professional indemnity policies. However, the most serious claims would be those arising from class actions against directors and officers of companies caught up in the crisis, which were also being brought, the Financial Times said.

 

Source: Business Times 15 Nov 07

Still positive on Asian equities

Region will continue to expand at a respectable pace even if below-potential US growth extends into 2008.

DESPITE a credit crisis emanating from the US and fresh highs in oil prices, global stock markets have broken records again this year. In Asia, especially since the August turmoil, investors have experienced impressive returns. Most regional equity indices boast year-to-date gains well above the returns seen in the US or Europe. Economic growth has been strong and regional markets have risen on the back of robust earnings growth, PE multiple re-rating, and strong currencies.

Naturally, the question arises: Can this continue in 2008?

We believe it can. Valuations have increased but do not seem stretched. With the exception of China, PE multiples are not at astronomically high levels. Current PE ratios for the Asian indices (excluding China, India and Japan) range from 14 to 23, which are not a far cry from 18 for the S&P500.

We believe Asia will continue to grow at a respectable pace in 2008, which keeps us positive on Asian equities as an asset class. Asian economies should remain healthy, ie, continue to see more broad-based growth, current account surpluses and lower debt levels. They will also continue to see stronger intra-regional trade – rising dependence on China, in particular, and falling dependence on US demand.

Our central scenario is that Asia will continue to expand at a respectable pace even if below-potential US growth extends into 2008. A gloomier US growth outlook is not good news for Asia, but weak US growth for the past two years has not prevented Asia from accelerating modestly all the while.

Another year of 2 per cent growth in the US, should it be that weak, would make little discernible difference to Asia.

We believe the US economy will avoid a recession as the drag from housing construction fades and core consumption remains resilient. We continue to take confidence from the fact that in the far sharper downturn of 2000-01, when 2.5 million Americans lost their jobs, consumption growth remained above 2 per cent year-on-year.

Major risks

It is true that the balance sheets of Asian corporates, like the economies they operate in, are in much better shape than 10 years ago, before the financial crisis of 1997-1998. But although Asian stock markets are less vulnerable than in the past, they are not insulated from developments in the rest of the world.

There are, as always, a number of risks for Asian markets. What are they?

First, on a PE basis, Asia’s emerging markets no longer trade at a discount to developed markets.

Valuations have been catching up and re-rating (ie, stock price increases per dollar of earnings) over the recent years has helped push many Asian markets to a premium (Table 1). Clearly, investors are seeing better long-term earnings growth potential in Asia.

Second, on a price-to-book basis many Asian markets trade at higher multiples now than in 2004.

China and India, in particular, trade at huge premiums to developed markets. Thailand and Taiwan are the only exceptions, with the SET and the TWSE trading below and near 2004 levels (Table 2).

Third, borrowing costs have risen, as uncertainty has increased and risk has been repriced. This is evidenced by tighter liquidity and wider credit spreads in money markets and steeper yield curves. It has become more difficult for businesses to obtain loans, not only in the US but also in Europe.

Money markets are unlikely to normalise in the near-term but they should function normally again in 2008 after more information on financial sector exposure to certain credit markets has surfaced. If history is any guide, it will take a while before the credit crunch subsides.

Fourth, there is the risk that inflation will eat more aggressively into returns. Markets seem to have forgotten about this amid US growth concerns but policy makers have not. Inflation risk will almost certainly return as a major theme in markets in 2008. Central bankers are sure to remind markets of this.

Bottom line, we remain positive on the outlook for Asian equity markets, but risks surrounding this central scenario have increased slightly in recent months and the earnings outlook has become more cloudy.

Bonds, commodities

The outlook for Asian bond markets is bearish as yields are expected to rise. Inflation risks suggest that central banks will be biased towards tighter monetary policy in 2008. Moreover, inflation expectations, while currently very low, are likely to rise. Sentiment among bond investors is hence likely to be weak and returns in 2008 will be less impressive than in 2007. After a strong showing in 2007 and with slower global growth expected, the outlook for commodities appears less certain now and there are material downside risks in many markets.

Taking all the above into consideration, investors will have to come to terms with the idea that volatility is returning. The recent turmoil in markets likely marks the end of the low-volatility period we have witnessed from 2004 to 2006. But this is not a bad thing. As the swings in financial markets increase, opportunities for investors to achieve high returns increase too. But, as there is no more easy money, it also means that the portfolio approach to investing, ie, risk diversification, is becoming even more important.

The Chicago Board Options Exchange SPX Volatility Index (VIX) reflects a market estimate of future volatility in the S&P 500, based on the weighted average of the implied volatilities for a wide range of options. The Merrill Option Volatility Estimate (MOVE) is a yield curve weighted index of the implied volatility on Treasury options and reflects a market estimate of future Treasury bond yield volatility.

According to modern portfolio theory, investors should assess portfolios based on overall risk-reward characteristics rather than the individual risk-reward characteristics of the constituent securities. Put differently, investors should not assess the risks and rewards of securities individually but in a portfolio context, ie, how they affect the portfolio’s overall risk and return. This is because a portfolio’s risk is not only a function of the individual securities’ risks but also of their correlations.

Exposure to risk is reduced by combining a variety of securities, all of which are unlikely to move in the same direction. Because not all markets move up and down in value at the same time or at the same rate, a portfolio approach promises more consistent performance under a wide range of economic conditions.

Our asset allocation model, which helps us find portfolios that have optimal risk/return characteristics, suggests that for a 12-month allocation horizon 54 per cent of funds should be allocated to equities, 28 per cent to bonds, 18 per cent to cash and zero to commodities (Figure 1). The resulting portfolio has an expected return (annualised hedged return in SGD terms) of 15 per cent and expected risk (annualised standard deviation of daily hedged returns) of 8.4 per cent. It is an optimal portfolio, given our hedged-return expectations, historical risks, and the historical correlations between markets.

Within the portfolio context we favour Singapore, Hong Kong, China, Taiwan, and Malaysia among regional equity markets; and China, the Philippines, Korea, India, and Thailand among regional bond markets. While some markets are not accessible to all investors, we believe that keeping these markets in our framework provides the best summary of our investment outlook.

 

Source: Business Times 14 Nov 07

Rising oil prices may mean US recession

US growth expected to slow to less than 2% in the fourth quarter

(NEW YORK) Rising fuel prices that businesses and consumers took in stride earlier this year may now be near the point of pushing the weakened US economy into recession.

‘We are in a danger zone,’ says Nariman Behravesh, chief economist at Global Insight and a former Federal Reserve economist.

‘It would take two shocks to bring the economy to its knees. We got one shock in the form of the credit crunch. Oil could be that second shock.’

Crude-oil prices are poised to cross the US$100-a-barrel mark while the US economy is still reeling from a surge in corporate borrowing costs.

Europe and Japan are vulnerable as well, after the US sub-prime mortgage collapse contaminated their credit markets.

Even before the latest jump in energy costs, economists expected US growth to slow to less than 2 per cent in the fourth quarter – half the third quarter’s pace.

Andrew Cates, UBS economist in London, said his models suggest a 45 per cent chance of a US recession next year, up from 33 per cent last month, as oil prices prove a ‘growing concern’.

Japan risks its fourth recession since the early 1990s, with its index of leading economic indicators falling to zero for the first time in a decade.

The European Commission last week cut its 2008 growth forecast for the 13 nations that share the euro to 2.2 per cent from 2.5 per cent, partly because of costlier crude.

The economy grew 2.8 per cent last year.

The world economy may still dodge recession as emerging markets continue to expand.

A report last week by Deutsche Bank said gains in energy efficiency mean the effect of more expensive oil will ‘remain muted’. Even so, gloom is spreading at a speed that suggests ‘we’re walking a really fine line’, says John Silvia, chief economist at Wachovia Corp.

‘Even a month ago, you probably wouldn’t have thought we’d be seeing a sustained credit problem and oil holding up above US$85 a barrel.’

Crude oil traded at a record US$98.62 last week on the New York Mercantile Exchange and ended the week at US $96.32, bringing its increase this year to 58 per cent.

Prices adjusted for inflation exceed the previous record, set in 1981 when Iran cut exports.

The dilemma for central banks is how to balance oil’s drag on their economies against the risk of higher inflation.

Fed chairman Ben S Bernanke told Congress last week that oil prices threaten both ‘renewed upward pressure’ on inflation and ‘further restraint on growth’.

Such concerns prompted the European Central Bank to keep interest rates on hold last week, and president Jean-Claude Trichet said he still sees a danger that inflation will accelerate.

 

Source: Bloomberg (Business Times 13 Nov 07)

HIGH OIL PRICES – A bubble that’s hard to prick

OIL prices are testing US$100 (S$144) a barrel, a key psychological threshold. Once over that hump, how much higher will the price go? Of course, given oil’s limited supply and the world’s expanding appetite, lowpriced oil will never come again.

That, however, is different from another consideration: Whether current high prices are truly reflective of supply and demand, or are prices being pushed up to a significant extent by speculation? And if the latter, is there an ‘oil bubble’?

The answer to that is wrapped up in arcane terms such as ‘backwardation’ and ‘contango’, which affect the prices of commodities, as well as in developments in the American prairie town of Cushing, Oklahoma. But more on this later.

In fact, an oil bubble may not necessarily be bad news. For if current prices reflect a bubble, there is the hope that the market will eventually readjust to equilibrium and there is the possibility of relief; it means the time for US$100 oil has not yet truly arrived. The oil bubble would be one whose pricking would benefit far more people than it would hurt.

The bad news is that if there is an oil bubble, it is unlike other bubbles – in Internet stocks, in properties and so on. An oil bubble would be more difficult to deflate.

That’s because, unlike equities, oil is a much more complex trading class. Buyers and sellers are users and producers, but also large trading houses, hedge funds and institutional investors like pension funds. Although exchange- traded funds now allow retail investors to diversify into oil, the big moves depend far more on the large players than on the collective calculations of small investors. If this is a bubble, it’s also one with more discipline.

Indeed, over the past three years, any number of analysts and economists have said that oil should be in the US$50 range, the US$60-plus level and so on. Yet it’s remained stubbornly stuck on a steeper trajectory. In fact, here we are today, knocking on US$100.

Those who say oil is priced correctly point to China’s increasing hunger for energy, India’s demand for power and the US dollar’s steep decline. Others might cite the correlation between oil and gold, which in recent periods has seen oil priced at 7.5-8 barrels to an ounce of gold. With oil just under US$100 and gold comfortably above US$800, you might well reckon that oil has legs yet.

But is Chinese and Indian demand, coupled with the weakness of the US dollar, enough to explain a more than threefold rise in oil’s price since 2001? Is this justified under the calculus of demand and value? The week before the Sept 11, 2001, attacks in New York and Washington, oil was trading at US$28.

Terrorism, wars, civil unrest and weather uncertainties – all have been kneaded into prices as well. Yet have these resulted in enough of a consistent constriction in supply to justify prices of nearly US$100?

India’s petroleum secretary, Mr M.S. Srinivasan, isn’t likely to think so. He was reported by the International Herald Tribune last Friday as saying there are ‘no supply constraints right now, and demand has not escalated out of control’. Mr Srinivasan has a suggestion for cooling the market: stop trading crude oil on commodity exchanges, which he believes contributes greatly to high prices. Do this much, and we’d see a ‘drastic reduction’ in the price of oil, Mr Srinivasan said.

His suggestion is unlikely to gain traction. For however much exchange trading contributes to speculative positions, it also provides price transparency. Without this, we’d have backroom brokering instead, which would more likely exacerbate the situation than help.

Yet Mr Srinivasan’s frustration is understandable. And this can be seen in how prices have been bubbling up lately.

Yes, demand is strong. No arguing. But the recent surge is also connected to how the premium in prices has shifted from later to earlier delivery.

Because of a complicated series of events, oil prices in the past several months are in a situation called backwardation. This means prices are higher for oil about to be delivered than for oil for later delivery. The opposite is contango, when prices are higher for future delivery than for supply sooner – reflecting the expense of storage and other carrying costs.

Until the middle of this year, conditions in the market were such that it was more profitable to buy lots of oil and hold it in storage tanks until later. But suddenly, it became more profitable to sell than to hold. The subprime mortgage crisis in the US, for one thing, has also made financing for holding oil more expensive.

So in backwardation, those who hold oil have an incentive to drain their tanks – kept in places like Cushing.

This Oklahoma prairie town is one of the biggest storage sites for oil, with capacity possibly as high as 35 million barrels. Since 1983, Cushing has been the New York Mercantile Exchange’s official delivery point for futures contracts in light, sweet crude, the global benchmark. So the market pays close attention to what happens in Cushing.

Maybe too much.

What the market has noticed is that the tanks in Cushing are down to perhaps 15 million barrels. Attention drawn to this decline in inventory is helping push up prices.

Yet, as Opec’s head of petroleum market analysis, Mr Mohammad Alipour-Jeddi, has said: ‘There is enough crude in the markets.’

Thus, it isn’t a huge mismatch between supply and demand that’s yanking up prices. Instead, backwardation is causing a draw-down of inventory, starting what’s called a ‘backwardation vortex’. By focusing on places like Cushing, the market has worked itself into a frenzy – whatever the real ability at the moment of producers to supply users.

Prices can be high in contango and oil investments profitable; but in backwardation there is an incentive to sell existing stocks, resulting in lowered inventories that spark market anxieties. As a result, some investors are reaping big profits and setting up conditions for even more gains.

Does speculation in oil amount to a bubble, then? Look again at the correlation between oil and gold.

Over a longer period of a half century, oil has been priced at 15 barrels to an ounce of gold. At gold’s current price, that means oil should be in the mid-US$50 level. Sure, there’s some wiggle room on the up side. But even then, there’s going to be enough of a gap between the implied and actual price to suspect that oil’s frothier than natural.

The question, in turn, is how do you prick this bubble?

LOGIC OF ITS OWN

If there is an oil bubble, it is unlike other bubbles – in Internet stocks, in properties and so on. An oil bubble would be more difficult to deflate.

 

Source: The Straits Times 12 Nov 07

WEEKLY MARKET REPORT – A troubled and turbulent week driven by Wall St

SINGAPORE – So ended another turbulent week in which Wall Street called the shots, dogged by continuing sub-prime, slowdown and inflation worries. The two US interest rate cuts of the past seven weeks are now a distant memory, replaced by a nagging unease that lower rates may not necessarily provide the desired relief.

As a result, the local market, which was closed on Thursday for Deepavali, played catch-up yesterday to the rest of Asia, which plunged on Thursday in response to a large Wednesday drop on Wall Street.

At the end of a soft day for the entire market, the Straits Times Index finished 73.34 points down at 3,599.67, though it was off its low of 3,580 thanks to late short-covering, probably triggered by a stable opening in Europe and a 40-point rise in the December futures contract on the Dow Jones Industrial Average.

The broad market excluding warrants managed just 108 rises versus 394 falls, with 324 counters either not traded or unchanged.

For the week, the index lost 116 points or 3.1 per cent, on each day displaying a by-now familiar pattern of tracking Hong Kong and the US futures market, though not necessarily in that order. Brokers complained of uncertainty cloaking the market, especially with oil closing in on the US$100 per barrel mark.

Although all sectors were hit, banks were probably worst off because of their association with the US subprime market via their collateralised debt obligations (CDOs).

Early in the week, OCBC attracted a fair bit of attention when it made a CDO-related write-down of more than $200 million (US$139 million) to ensure a clean slate going forward.

This may have cushioned the blow somewhat for OCBC – although its stock price weakened, the decline was smaller than those of UOB and DBS. Over the four trading days, OCBC dropped only 20 cents or 1.7 per cent – versus DBS’s loss of $1.10 or 5.1 per cent and UOB’s loss of 70 cents or 3.4 per cent.

Another large index loser was Singapore Exchange, which dropped about $1 or 6.5 per cent over the week to $14.30.

There were only a handful of plays that marked what was otherwise a drab week for the bulls, among them a big push on palm oil/commodities plays such as Wilmar, Golden Agri and Indfood Agri, and a huge play on the structured warrants on Hong Kong-listed e-commerce firm Alibaba.com.

The palm oil play had been brewing for more than a week on talk of coming shortages and was therefore not much of a surprise. The listing of Alibaba.com was highly anticipated since the company boasts Internet giant Yahoo as a major shareholder, notwithstanding the fact that at HK$13.50 (US$1.74) the stock was offered at more than 100 times FY07 earnings. Its first-day performance lived up to the hype, the counter tripling to finish at HK$39.50 on Tuesday. The momentum, however, was not sustained as the week wore on, and it closed yesterday at HK$29.

Boosted by active trade in new warrants issued on Alibaba.com by SG, Macquarie and Rabobank, warrant turnover was robust, the daily average being $213 million or twice recent averages.

 

Source: Business Times 11 Nov 07

wallstreet – Stocks tumble as banks warn of debt write-offs

NEW YORK – WALL Street finished a turbulent week with another huge drop on Friday after major banks warned of further losses on their debt portfolios.

That raised investor concerns that the credit market slump showed no sign of abating.

Record-high crude oil prices and a sagging dollar further undermined sentiment.

The Dow Jones Industrial Average tumbled 4.07 per cent in the week ended Friday to close at 13.042.74.

The broad market Standard & Poor’s 500 slid 3.7 per cent to 1,453.7 and the tech-heavy Nasdaq plunged 6.5 per cent to 2,627.94 amid a sharp shift in sentiment on technology companies like Google, which fell US $29.87 to US$663.97.

Apple Inc, maker of Macintosh computers and iPod music players, dropped US$10.10 to US$165.37.

Markets have been getting more bad news from the financial sector all week, starting with a shakeup at Citigroup as the US banking titan said it would have to write off up to US$11 billion in soured real-estate investments, far higher than anticipated.

Other banks, including Wachovia, Bank of America and JP Morgan Chase, also warned of write-downs.

‘The major hurdle for the market has been and will continue to be the fate of the financials,’ said Mr Larry Wachtel at Wachovia Securities.

He said the market feared ’subprime contagion’ and was waiting to see the magnitude of write-downs against non-performing mortgage debt.

‘Something on the order of US$20 billion has been revealed and estimates for full damage range from as low as US$60 billion to as high as US$250 billion,’ he said.

The weak dollar and surging fuel prices have also added to the gloomy picture.

Bonds were mixed in the past week. The yield on the 10-year Treasury bond fell to 4.225 per cent from 4.291 per cent a week earlier, and that on the 30-year Treasury rose to 4.602 per cent from 4.595 per cent. Bond prices and yields move in opposite directions.

This week, the markets will see a snapshot of consumer health with a report on retail spending, as well as data on inflation and industrial production. Key earnings reports are due from Wal-Mart and other retailers.

Source: AFP, Bloomberg (The Sunday Times 11 Nov 07)

Sub-prime crisis: New push to review rating firms’ role

IN TOKYO

US Securities and Exchange Commission (SEC) chairman Christopher Cox promised yesterday that regulators would ‘aggressively’ pursue the new mandate they have been given to review the role that rating agencies played in the sub-prime mortgage loan crisis.

He was speaking at a briefing in Tokyo as new evidence emerged that the fallout from the crisis is continuing to spread to Japanese financial institutions.

In Tokyo for a meeting of the International Organisation of Securities Commissions (IOSCO), Mr Cox stressed the need to restore faith in ‘honest markets’ following the debacle caused by the collapse of the sub-prime mortgage sector and associated financial derivative products.

He said: ‘I hope that in two or three years’ time we will be able to look back on lessons we have learned’ from the crisis.

This week IOSCO set up a special task force to examine issues facing securities regulators following recent events in the global credit markets. One of its jobs will be to examine the role of credit-rating agencies and how they relate to the sub-prime crisis.

Mr Cox said the task force hopes to produce a report by February as part of wider crisis analysis being conducted by the Financial Stability Forum.

Credit-rating agencies have claimed they have only limited responsibility for the crisis that has resulted in massive losses at leading Wall Street financial institutions. Being responsible only for default risk and not for liquidity risk or other forms of market failure, the agencies cannot be held to account more widely, they have claimed.

Mr Cox said yesterday that he hoped in future it would not be possible to ‘draw distinctions’ which allow certain institutions to minimise blame for the crisis. He suggested that the role of ’structured finance mechanisms’ which have been at the heart of the current financial system crisis and in whose formation rating agencies have played a part would be ‘redefined’ in future.

The ‘transparency’ of these structured finance vehicles, which has enabled banks and others to keep their exposure to sub-prime-related mortgage products off their balance sheets and therefore out of the view of investors and regulators, needs to be improved, Michael Prada, chairman of IOSCO’s technical committee, suggested in a speech to the Tokyo conference. The ‘role of rating agencies with regard to structured products’ needs to be examined, he said.

Meanwhile, reports emerged in Tokyo that Mizuho Securities, the unlisted brokerage arm of Mizuho Financial Group, may post a sub-prime-related loss of over 100 billion yen (S$1.3 billion) and delay a planned merger.

The report in the Nikkei business daily raised fears that more such losses may lie ahead and dragged financial stocks, such as Mizuho Financial, sharply lower. The Nikkei 225 stock average hit a three-month closing low of 15,583.42.

 

Source: Business Times 10 Nov 07

A troubled and turbulent week driven by Wall Street

SENIOR CORRESPONDENT

SO ENDED another turbulent week in which Wall Street called the shots, dogged by continuing subprime, slowdown and inflation worries. The two US interest rate cuts of the past seven weeks are now a distant memory, replaced by a nagging unease that lower rates may not necessarily provide the desired relief.

As a result, the local market, which was closed on Thursday for Deepavali, played catch-up yesterday to the rest of Asia, which plunged on Thursday in response to a large Wednesday drop on Wall Street.

At the end of a soft day for the entire market, the Straits Times Index finished 73.34 points down at 3,599.67, though it was off its low of 3,580 thanks to late short-covering, probably triggered by a stable opening in Europe and a 40-point rise in the December futures contract on the Dow Jones Industrial Average.

The broad market excluding warrants managed just 108 rises versus 394 falls, with 324 counters either not traded or unchanged.

For the week, the index lost 116 points or 3.1 per cent, on each day displaying a by-now familiar pattern of tracking Hong Kong and the US futures market, though not necessarily in that order. Brokers complained of uncertainty cloaking the market, especially with oil closing in on the US$100 per barrel mark.

Although all sectors were hit, banks were probably worst off because of their association with the US subprime market via their collateralised debt obligations (CDOs).

Early in the week, OCBC attracted a fair bit of attention when it made a CDO-related write-down of more than S$200 million to ensure a clean slate going forward.

This may have cushioned the blow somewhat for OCBC – although its stock price weakened, the decline was smaller than those of UOB and DBS. Over the four trading days, OCBC dropped only 20 cents or 1.7 per cent – versus DBS’s loss of S$1.10 or 5.1 per cent and UOB’s loss of 70 cents or 3.4 per cent.

Another large index loser was Singapore Exchange, which dropped about S$1 or 6.5 per cent over the week to S$14.30.

There were only a handful of plays that marked what was otherwise a drab week for the bulls, among them a big push on palm oil/commodities plays such as Wilmar, Golden Agri and Indfood Agri, and a huge play on the structured warrants on Hong Kong-listed e-commerce firm Alibaba.com.

The palm oil play had been brewing for more than a week on talk of coming shortages and was therefore not much of a surprise. The listing of Alibaba.com was highly anticipated since the company boasts Internet giant Yahoo as a major shareholder, notwithstanding the fact that at HK$13.50 the stock was offered at more than 100 times FY07 earnings. Its first-day performance lived up to the hype, the counter tripling to finish at HK$39.50 on Tuesday. The momentum, however, was not sustained as the week wore on, and it closed yesterday at HK$29.

Boosted by active trade in new warrants issued on Alibaba.com by SG, Macquarie and Rabobank, warrant turnover was robust, the daily average being S$213 million or twice recent averages.

 

Source: Business Times 10 Nov 07

US stocks fall on fresh credit worries

NEW YORK – UNITED States stocks dropped to the lowest in two months early yesterday, as financial institutions such as Wachovia, Fannie Mae and State Street reignited concern about the plummeting value of mortgage bonds.

Wachovia, the fourth-largest US bank, tumbled to the lowest since 2003 after some of its debt securities lost US$1.1 billion (S$1.6 billion) last month.

Fannie Mae, the top source of money for US home loans, slid to a two-year low after defaults spurred a thirdquarter loss.

A Standard & Poor’s report that a collateralised debt obligation managed by State Street began liquidating assets helped drag financial shares to the lowest since October 2005.

The Dow Jones Industrial Average lost 225.74 points, or 1.7 per cent, to 13,040.55, after one hour and 45 minutes of trading. About nine stocks fell for every two that rose on the New York Stock Exchange.

Benchmark indexes retreated in Europe and Asia yesterday amid speculation that Barclays and Mizuho Financial Group will report losses on sub-prime-related assets.

Earlier, it was announced that the US trade deficit unexpectedly narrowed in September, as the greenback’s slump helped push exports to a record high, giving the economy a lift even as the housing recession deepened.

The gap shrank 0.6 per cent to US$56.5 billion, the smallest since May 2005, from a revised US$56.8 billion in August, the Commerce Department said.

The report will probably prompt economists to boost their earlier estimates for growth in the third quarter.

Last quarter’s 3.9 per cent gross domestic product growth rate may be revised closer to 5 per cent, economists said prior to the report.

Faster growth overseas is also making up somewhat for slower demand at home.

But the trade deficit with China widened 5.5 per cent to US$23.8 billion. Imports from China were the second biggest on record. So far this year, China has shipped more goods to the US than Canada, America’s biggest trading partner.

 

Source: BLOOMBERG NEWS (The Straits Times 10 Nov 07)

US$ slips to record low against euro

Greenback also hit by fears of more loss disclosures by financial sector firms

LONDON – THE greenback hit a record low against the euro yesterday as fears grew that more United States financial firms will be hit by credit market turmoil, reinforcing expectations of further Federal Reserve interest rate cuts.

Such worries came to the fore again after ratings agency Standard & Poor’s said on Thursday that a collateralised debt obligation (CDO) managed by State Street Global Advisors may have started selling assets.

CDOs are products packaged from risky mortgages in the US.

A downbeat economic forecast from Fed chairman Ben Bernanke on Thursday cemented market views that the Fed will cut rates more, further eroding the greenback’s appeal.

This contrasts with continued hawkish rhetoric from the European Central Bank (ECB) – despite its warnings on ‘brutal’ foreign exchange moves – and the Bank of England’s (BOE’s) decision not to cut yet.

‘With the BOE on hold yesterday and…at the same time those downside warnings from Bernanke on growth, the market continue to anticipate additional Fed cuts, so those interest rate spreads continue to work against the dollar,’ said Mr Jeremy Stretch, a currency strategist at Rabobank.

The euro rose as high as US$1.4738, before trimming gains to reach US$1.4686 by 0807 GMT (4.07pm Singapore time). It is now up more than 11 per cent against the euro since the start of the year.

The pound hit a fresh 26-year high at US$2.1144 as the BOE’s on-hold decision on Thursday wrong-footed a minority of investors who had bet on a rate cut.

Mr Bernanke told US lawmakers that the Fed expected economic growth to slow noticeably in the fourth quarter of this year and the first half of next year, citing credit industry turmoil and the likelihood of the housing sector slump deepening.

That contrasted with ECB president Jean-Claude Trichet’s vow on Thursday to keep a grip on inflation, leaving a chance that the ECB may raise interest rates further from the current 4 per cent.

He also said that ‘brutal’ currency moves are not welcome.

Calyon said in a research note: ‘Dollar bashing in the media and market has raised the spectre that dollar weakness will discourage investors from holding US assets.

‘Talk of diversification out of the dollar has ranged from official foreign exchange holding to supermodels. Such coverage could…provide a further rationale for dollar weakness.’

The dollar eased to 112.46 yen, closing in on Thursday’s three-month low of 111.99.

Traders said the yen received a bit of a boost from the yuan, which jumped to record highs against the dollar in the spot market and posted its biggest gain in one-year non-deliverable forwards since its July 2005 revaluation.

 

Source: REUTERS (The Straits Times 10 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

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)

Merrill reveals $9b more in risky debts

NEW YORK – MERRILL Lynch said on Wednesday that its total exposure to risky collateralised debt obligations (CDOs) and sub-prime mortgages is US$27.2 billion (S$39.3 billion) – about US$6.3 billion (S$9.1 billion) more than the sum disclosed late last month.

The larger figure comes about 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 sub-prime mortgages in the United States at Merrill Lynch Bank USA, a Utah-chartered industrial bank, and Merrill Lynch Bank & Trust, a full-service thrift institution.

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 it had 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. An US$8.4 billion write-down, mostly related to sub-prime mortgages and CDOs, triggered the loss.

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

Source: REUTERS (The Straits Times 9 Nov 07)

US$ slumps as China looks to park reserves elsewhere

Greenback is losing status as world currency, says China central bank official

THE US dollar slumped to a record low against the euro after Chinese officials signalled plans to diversify the nation’s US$1.43 trillion of foreign exchange reserves in response to a falling US currency.

‘We will favour stronger currencies over weaker ones, and will readjust accordingly,’ Cheng Siwei, vice-chairman of China’s National People’s Congress, told a conference in Beijing.

The US dollar is ‘losing its status as the world currency’, Xu Jian, a central bank vice-director, said at the same meeting.

The US dollar fell against all 16 of the most active currencies, declining to the weakest versus the Canadian dollar since the end of a fixed exchange rate in 1950, a 26-year low against the pound and a 23-year low versus the Australian dollar.

‘We’re likely to see further pressure on the dollar,’ said Thomas Harr, senior foreign exchange strategist in Singapore at Standard Chartered. ‘The potential for diversification is quite big.’

The US currency slumped to US$1.4666 per euro, the lowest since the 13-nation currency made its debut in January 1999. The US dollar traded as low as 113.69 yen, the lowest since Oct 22. The euro was little changed at 166.87 yen.

In Singapore, the US dollar ended half a per cent lower at S$1.4412 yesterday.

Chinese investors have reduced their holdings of US Treasuries by 5 per cent to US$400 billion in the five months to August. China Investment Corp, which manages the nation’s US$200 billion sovereign wealth fund, said last month that it may get more of the nation’s reserves to invest to improve returns.

‘The world’s currency structure has changed; the dollar is losing its status as the world currency,’ Mr Xu from the People’s Bank of China said at the conference.

Mr Cheng, speaking to reporters after his speech, said that his comments do not mean that China will buy more euros.

Gains in the euro may be limited by speculation that European economic growth may slow, reducing the need for higher interest rates. Europe’s single currency will trade at US$1.43 versus the US dollar by year-end, according to the median forecast of 42 analysts and brokerages surveyed by Bloomberg News.

The US dollar’s decline helped to drive the price of crude oil to a record and gold to a 27-year high, encouraging investors to buy assets in commodity- producing nations. The US dollar’s 9.8 per cent drop against the euro this year boosted the competitiveness of US exports, helping to shrink the nation’s trade deficit to US$57.6 billion in August, the smallest since January.

Against the pound, the US dollar declined to US$2.0955, the lowest since May 1981. It fell to US$1.1010 per Canadian dollar. The currency slid against the Australian dollar to 93.89 US cents, the lowest since April 1984, from 92.87 US cents.

‘This is an asset story and shows sentiment for the dollar continues to be quite negative,’ said David Forrester, currency economist at Barclays Capital in Singapore.

The US dollar also fell as losses from sub-prime mortgage defaults added to pressure on the Federal Reserve to lower its target for the overnight lending rate between banks to 4.25 per cent next month.

‘The interest-rate outlook is dragging down the dollar against major currencies such as the euro and the Australian dollar,’ said Seiichiro Muta, director of foreign exchange in Tokyo at UBS AG, the world’s second largest currency trader. ‘I cannot see the bottom of the dollar depreciation yet.’

 

Source: Bloomberg (Business Times 8 Nov 07)

US$ won’t fall further against euro: Greenspan

But greenback will weaken against Asian units over the long term, he says

(TOKYO) Former Federal Reserve chairman Alan Greenspan said the US currency is unlikely to weaken further against the euro, though over the long term it will fall against Asian currencies.

‘The euro-US currency adjustment is already finished,’ Mr Greenspan said at a forum in Tokyo via satellite, according to Richard Tabor Greene, a professor at Kwansei Gakuin University in Osaka, who attended the event.

‘The East Asian adjustment hasn’t happened yet,’ Mr Greenspan said, according to Mr Tabor Greene.

The dollar is the worst performer of the world’s 16 most-traded currencies this year, falling 8.8 per cent against the euro.

The US currency has also fallen this year against nine of the 10 most traded currencies in Asia outside Japan, losing 11.1 per cent against the Indian rupee and 10.6 per cent versus the Philippine peso.

Mr Greenspan said the US current-account deficit has already been factored into the euro-dollar exchange rate, according to V Sriram, senior vice-president at Infosys Technologies Ltd in Tokyo.

The comments echoed those from a month ago when Mr Greenspan said it would be a mistake to conclude that the US current account deficit, which fell to US$190.8 billion in the second quarter, would continue to push the dollar lower.

The dollar traded at US$1.4475 per euro as of 12:34pm in Tokyo after declining as low as US$1.4528 on Nov 2, the weakest since the European currency’s debut in January 1999.

Mr Greenspan told the audience Asian currencies would keep rising against the dollar because their economies are growing faster and living standards are improving, Mr Sriram said.

On the US housing recession, Mr Greenspan said there was an ‘overhang of supply’ and that home prices would have to fall further before the market settles. He said that cutting excess home inventories in the United States was key to stabilise the financial system at home and the rest of the world.

‘The critical issue on the whole sub-prime, and by extension, the international financial system rests very narrowly on getting rid of probably 200,000-300,000 excess units in inventory,’ Mr Greenspan told the business leaders’ forum.

The former Fed chairman urged central banks to avoid suppressing asset bubbles, which is ‘exceptionally difficult’ to do.

Mr Greenspan also said that the global economy can handle higher commodity prices through strong monetary policies by central banks and that he expected major increases in commodity demand from rapidly developing nations.

Central banks avoid worldwide inflation by maintaining monetary tightness at appropriate levels, he said.

‘I’m concerned that we were moving from this 20- to 18-year disinflationary period and beginning to move in the other direction,’ Mr Greenspan pointed out.

Despite crude oil prices being above US$90 a barrel, the global economy is still functioning, he said, indicating that the ‘underlying structure is doing well’.

 

Source: Bloomberg, AP (Business Times 7 Nov 07)

Citi shares fall on mounting woes, downgrades

Bank fails to reassure investors; stocks down 5% on Monday at 4 1/2-year low

NEW YORK – CITIGROUP’S problems deepened, as its nearly pristine credit ratings were downgraded and with the United States banking giant unable to assure investors that a potential US$11 billion (S$16 billion) writedown for US sub-prime mortgages will not grow.

‘There’s no way I think anyone can give you an assurance of how things are going to move,’ Citigroup chief financial officer Gary Crittenden said at a conference call on Monday. ‘We’ve taken what we think is a reasonable stab.’

Citigroup’s struggles came as it faced a leadership void, following the resignation of chairman and chief executive Charles Prince on Sunday.

Mr Prince left after a four- year tenure during which the bank’s stock fell 17 per cent amid criticism that Citigroup had grown unwieldy and lacked direction. Some investors want the bank, which has US$2.35 trillion in assets, to be broken up.

Former US Treasury secretary Robert Rubin, who led the bank’s executive committee, was named chairman.

Sir Winfried Bischoff, head of the European business, became acting chief executive.

Citigroup shares closed down US$1.83, or 5 per cent, at US$35.90 on Monday on the New York Stock Exchange – a 4 1/2-year low.

News of the expected write- down of US$8 billion to US$11 billion, on top of an earlier US$6.5 billion, helped drag down shares of Bank of America, Goldman Sachs, Merrill Lynch and Morgan Stanley. Investors are worried that write-downs for US sub-prime mortgages and other debt may not be isolated.

Analysts said Merrill,which ousted its chief executive last week, may add to its own announced US$8.4 billion write- down.

Moody’s Investors Service cut Citigroup’s credit rating one notch to Aa2, its third-highest rating, from Aa1.

Fitch Ratings made a similar downgrade – to AA from AA-plus – citing ’severe pressure’ on capital markets operations and ‘an inhospitable consumer credit environment’ as mortgage delinquencies soar.

Both agencies’ rating outlooks are ‘negative’, meaning further cuts are possible within two years.

Much of Citigroup’s trouble is related to US$43 billion of collateralised debt obligations, which are linked to lower-quality mortgages. While the securities were once considered rock solid, Mr Crittenden said investors have stopped buying them.

Meanwhile, Saudi Prince Alwaleed bin Talal, Citigroup’s largest individual investor, endorsed bringing back Mr Sanford Weill, who built Citigroup and handpicked Mr Prince to succeed him, to run the company on an interim basis, CNBC television said.

Mr Weill said he was not interested, but will do what is needed to help.

Source: REUTERS (The Straits Times 7 Nov 07)

Citigroup’s losses are just the tip of the iceberg

Escalating fallout raises worries that investors do not have basic data to judge severity of crisis

NEW YORK – CITIGROUP’S bombshell that it faces as much as US$11 billion (S$16 million) more in credit losses has made one thing clear. No one really knows what evil lurks in the sub-prime bond basement.

JPMorgan thinks that total losses stemming from writing down the value of mortgage-linked securities could be as high as US$200 billion, with financial institutions sitting on at least US$60 billion in losses that have not yet been disclosed.

JPMorgan analyst Chistopher Flanagan said on Monday that only US$30 billion to US$40 billion has thus far been recognised in financial reporting.

Not all losses will be at financial companies, though banks, brokers, mortgage companies and insurers will bear the brunt of this loss recognition, he said.

In an interview on CNBC, Mr Bill Gross, manager of Pacific Investment Management, the world’s biggest bond fund, said the sub-prime mortgage market is a ‘US$1 trillion problem’ made up of ‘garbage loans’.

Whatever the number, the lack of clarity is raising worries that Wall Street and investors do not have the basic information to judge the severity of the current crisis.

Two massive write-downs by Citigroup since early last month and a rash of related losses for Merrill Lynch, the world’s biggest brokerage, illustrate how difficult it is to evaluate risky debt tied to sub-prime mortgages.

The write-downs stem from banks’ exposure to giant, complicated bonds. Many investors did not realise they could lose their entire investments due to a decline in sub-prime loan values that was largely masked by the repackaging of the bonds and opaque accounting.

Banks and brokerages generate fees for creating these structures, which they then sell to investors. As the sales dried up, they are forced to hold on to collateralised debt obligations (CDOs) that are rapidly losing their value.

Analysts and investors expect the situation to worsen, as banks reveal more losses and rating companies continue to downgrade some top bonds that trade like junk.

‘We will see a train wreck happening if the industry does not get together to develop a systematic way to deal with these distressed loans,’ Ms Sheila Bair, chairman of the Federal Deposit Insurance, said in an interview.

‘Right now, nobody knows what is going to happen,’ she said. ‘If this is a train wreck, you are just going to see greater scepticism about the value of these mortgages.’

Citigroup said on Sunday that it expected potentially US$11 billion in losses from its exposure to bad mortgages which banks had bundled together into CDOs. A month ago, Citigroup said it had cut the value of those assets by US$5.9 billion.

Merrill Lynch last month announced a US$7.9 billion write-down, up from US$4.5 billion just a few weeks earlier.

‘No one is going to believe anybody anymore about CDOs,’ said Cantor Fitzgerald chairman and chief executive (CEO) Howard Lutnick.

Mr Lutnick, whose firm controls one of the world’s largest bond brokerages, said the CDO market has shut down.

‘The big CDO market is gone,’ he told the Reuters Finance Summit. ‘The buyers are gone.’

Citigroup and Merrill’s revelations led to the departure of Citigroup CEO Charles Prince on Sunday, about a week after the resignation of Merrill chief Stanley O’Neal.

Of course, the market could recover and Citigroup could sell its positions. However, right now there are ‘no observable trades’ for the CDOs the company holds, according to its chief financial officer.

Source: REUTERS (The Straits Times 7 Nov 07)

US dollar’s fall expected to end next year

Investor appetite for greenback will return as growth outside the US slows: Lehman

THE US dollar’s tumble to a record low against the euro and its weakest in 26 years against the British pound will end next year, said Lehman Brothers head of currency research Jim McCormick.

Slowing economic growth will spread from the United States, curtailing demand for the euro and the pound, Mr McCormick, who is based in London, said in an interview during a visit to Singapore.

Investor appetite for the dollar will return as the pace of growth outside the US declines, he said.

‘The dollar has historically been used as the funding vehicle for financial market booms,’ Mr McCormick said.

‘When those booms are slowing, then the dollar tends to see a lot of that capital come back to the US.’

Mr McCormick joins former Federal Reserve chairman Alan Greenspan in predicting the US currency would not fall further versus the euro. The dollar slid 1.5 per cent against the euro last month after the Fed indicated it is reluctant to cut interest rates after two reductions so far this year.

‘The dollar’s going to remain weak for the rest of this year, but I would contemplate a dollar recovery some time in early to mid- 2008,’ Mr McCormick said.

The US currency traded at US$1.448 per euro as of 2.04pm in Tokyo (1.04pm Singapore time) yesterday, from US$1.4469 late on Monday in New York. It had weakened to US$1.4528 last Friday, the lowest since the euro’s debut in January 1999.

The euro will fall to a level in the high US$1.30s by the middle of next year while the pound will fall to US $1.85 by the end of next year, Mr McCormick said.

Debt-market traders are starting to prepare for a rate cut from the Bank of England, he said.

‘The British pound is the currency that is most vulnerable to the credit shocks of the past couple of months,’ he said. ‘The rate market has already started to price in some rate cuts. We see a lot of downside risks for sterling over the next six to 12 months.’

Among other Asian currencies, the South Korean won erased earlier declines as the benchmark Kospi Index approached its record high. Policymakers will meet tomorrow to decide on borrowing costs, which are at a six-year high of 5 per cent. ‘The surprise this year has been how strong the Korean economy has been,’ said Mr McCormick. ‘The won has outperformed our expectations.’

The won closed at 907.80 against the dollar, up from 908.00 late in Asian trading yesterday.

Source: BLOOMBERG NEWS (The Straits Times 7 Nov 07)

Markets shudder as Citigroup’s profit engine stalls, writedowns rise

CEO steps down; bank’s sub-prime hit may reach US$11b

(NEW YORK) Citigroup Inc, the profit engine built by Sanford ‘Sandy’ Weill, has seized up.

The biggest US bank by assets said yesterday that sub-prime mortgages and related securities lost as much as US $11 billion of their value in the past month, a decline that may wipe out half of the company’s profit so far this year.

The New York-based company also said in a statement that Charles Prince, Mr Weill’s hand-picked successor, has stepped down. Former Treasury Secretary Robert Rubin will become chairman and Citigroup’s most senior executive in Europe, Win Bischoff, will be interim CEO.

Citigroup’s woes left international banks and stock markets reeling yesterday, feeding fears that more banks will have to confess to major losses. British banks Barclays and Royal Bank of Scotland saw their stock shed about 3.0 per cent in value. In Tokyo, Mitsubishi UFJ Financial, Sumitomo Financial and Mizuho Financial fell by a similar amount.

The Morgan Stanley Capital International Asia Pacific Index lost 1.9 per cent to 165.43 as of 5:33 pm in Tokyo, having on Nov 2 slipped 2.2 per cent from a record close. Financial shares were the biggest drag among the benchmark’s 10 industry groups yesterday.

Japan’s Nikkei 225 Stock Average slid 1.5 per cent to 16,268.92 while Hong Kong’s Hang Seng Index slumped 5 per cent. Most South-east Asian stock markets also extended losses on credit fears. The Straits Times Index fell 45.14 points to close at 3,670.18.

Citigroup said that credit-market upheaval in October impaired by as much as a fifth its US$55 billion book of subprime mortgages and related bonds. The writedown costs, which will be recorded in the fourth quarter if markets do not recover, add to the almost US$7 billion of costs for bad debt, bond and loan losses recorded in the third quarter.

The fourth-quarter charges may leave the company with a loss of 26 cents a share, Punk Ziegel & Co analyst Dick Bove wrote in a Nov 5 report. It would be Citigroup’s first quarterly loss since at least 1998.

Before the announcement, the company was expected to report US$5.32 billion of profit in the fourth quarter, the average estimate of six analysts surveyed by Bloomberg.

‘Significant uncertainty continues to prevail in financial markets,’ Citigroup said in the statement. The company said that its capital ratios ‘will return within the range of targeted levels by the end of the second quarter of 2008′, allowing it to maintain the current dividend, the company said.

Citigroup is participating in a US$80 billion fund being set up by banks to draw investors back into the market for short-term debt. The fund, also backed by Bank of America and JPMorgan, was announced last month with the encouragement of Treasury Secretary and former Goldman Sachs CEO Henry Paulson.

The performance of remaining sub-prime investments, which totalled US$55 billion as of Sept 30, is partly dependent on ‘the underlying performance of the economy’, chief financial officer Gary Crittenden said in an interview.

Analysts at CIBC World Markets and Morgan Stanley told clients last week to get rid of Citigroup shares. CIBC’s Meredith Whitney said that Citigroup may have to sell assets because it needs to raise US$30 billion of capital.

The combination of US$25 billion of acquisitions in the past 19 months and the lowest cushion for losses ‘in decades’ increases the risk of owning the stock, she said.

Mr Prince, 57, is the third banking chief ousted amid a credit contraction that has saddled the world’s biggest lenders and securities firms with more than US$40 billion of writedowns during the past four months. The worst housing slump in 16 years has led to record US foreclosures and losses in the market for home loans to borrowers with poor credit histories or heavy debts.

Merrill Lynch & Co, the world’s biggest brokerage, ousted Stan O’Neal last week, after the New York-based firm disclosed US$8.4 billion of writedowns. UBS AG, the largest Swiss bank, fired CEO Peter Wuffli in July.

While the writedowns at Citigroup finally brought Mr Prince down, he had been under pressure for years because Citigroup’s performance under his leadership did not match what investors came to expect from Mr Weill, who demanded 15 per cent annual profit increases during his 17 years as CEO of Citigroup, Travelers Group and their predecessors. Powered by a series of blockbuster deals, climaxing with Travelers’ US$36 billion acquisition of Citicorp in 1998, Mr Weill delivered a 160 per cent stock gain during his last five years as CEO.

Mr Prince spent most of his career as Mr Weill’s top lawyer, advising on acquisitions. It was he who untangled Citigroup and Mr Weill from the federal and state probes of analysts who had allegedly talked up stocks to win underwriting business.

Mr Prince’s own stint has been hobbled by the sub-prime crisis. This year, he vowed to eliminate or reassign more than 26,500 jobs. Citigroup’s quarterly profit meanwhile has sunk to its lowest level in three years and the stock has plunged 32 per cent in 2007, twice as much as Bank of America and JPMorgan Chase.

‘I don’t think that all of a sudden, because of the credit crisis, the Citigroup model is broken,’ said Tim Ghriskey, cofounder of Solaris Asset Management in New York. ‘This isn’t a broken machine at all. It just needs some leadership that really understands the business.’

 

Bloomberg, Reuters, AFP (Business Times 6 Nov 07)

US sub-prime fallout set to linger

Jitters may further lower US interest rates, dollar value

IN TOKYO

FINANCIAL and economic fallout from the sub-prime mortgage crisis in the US will continue for a long time and will lead to further significant falls in US interest rates and in the value of the dollar, a senior global investment manager predicted in Tokyo yesterday.

He spoke at an Asian bond market conference as Tokyo stock prices slumped by more than 2 per cent following the plunge on Wall Street on Thursday.

‘After the Asian financial crisis (of 1997), it took two years for financial markets to re-establish their equilibrium, but it will take longer in the US market because housing assets are involved,’ said Douglas Hodge, Asia Pacific area managing director for global bond management company Pimco.

US interest rates are likely to go down by a further 0.5 to 0.75 percentage points over the next 12 months as the crisis continues to unfold, while the dollar will decline by a further 10-15 per cent against other major currencies, Mr Hodge told the conference, which was co-sponsored by the Asian Development Bank and by the Japanese and Thai finance ministries.

The meeting took place as the Nikkei 225 stock average declined by 352.92 points or 2.1 per cent to 16,517.48.

Bank of Japan governor Toshihiko Fukui alerted parliament to dangers, saying: ‘There could be unexpectedly large swings in financial markets. That risk has not materialised yet, but we think it is fairly big.’

Mr Hodge suggested that Asian financial markets were becoming increasingly attractive to global investors even as growing turmoil envelopes those elsewhere.

‘Macro-economic fundamentals will continue to push Asian currencies higher,’ he suggested. Economic growth in Asia and elsewhere should compensate for falls in the US, he said, adding that, ‘we are bullish on Asia’.

Thai finance minister Chalongphob Sussangkarn told the Tokyo conference that huge external capital flows into Asia were a mark of global confidence but at the same time they were complicating the task of managing exchange rates in the region.

Other experts also warned that the growth of huge official foreign exchange reserves could create financial and currency instability.

 

Source: Business Times 3 Nov 07

Asian bourses hit by fresh fears of US credit crunch

Investors spooked by concerns that big Western banks may face losses; STI down 2.3%

ASIAN markets fell into a tailspin yesterday, a day after renewed fears over the health of the United States economy sparked a swoon on Wall Street.

Hong Kong led the falls, tumbling 1,024 points, or 3.25 per cent. Taiwan fell 3.39 per cent, while South Korea dropped 2.12 per cent.

Singapore managed to escape with flesh wounds. The Straits Times Index lost 88.24 points, or 2.3 per cent, to 3,715.32 – its biggest one-day fall in two weeks. About $11.7 billion was wiped off the value of shares.

The spark for Wall Street’s 364-point plunge on Thursday was a renewed worry that more credit-market turmoil was on the horizon.

That fear, plus the increasingly likely prospect of US$100-a-barrel oil, led to new concerns about the health of the American economy, and sent stocks diving.

Another factor: The US Federal Reserve’s signal on Wednesday – after it shaved interest rates by 0.25 percentage point – that it had no further rate cuts in mind to help ease the credit crunch.

The worries were eased somewhat late last night with the release of better-than-expected employment figures, but Wall St remained wary, losing over 100 points at press-time to reverse early gains from an upbeat start.

In Asia, investors were rattled by concerns that big Western banks have huge losses lurking on their balance sheets.

Singapore remisier Paul Lee said: ‘Share prices were still holding up pretty well at opening bell. Then all hell broke loose, and it was like knives falling all over the place, with nowhere to hide.’

Traders were taken aback by the sudden change in sentiment, given the optimism that infected the market after the Fed’s rate cut.

Market experts are divided over whether shares are headed for a further thrashing, given the mixed bag of data coming out of the US.

Phillip Securities’ managing director, Mr Loh Hoon Sun, said: ‘Because prices have gone up so much already, investors are very sensitive to any bad news, so this type of volatility will persist.’

The ignition for yesterday’s Wall Street sell-down was a 7 per cent plunge in Citigroup after an analyst warned that the banking giant might have to cut dividend or sell assets to raise capital.

That revived worries that US and European banks may have to unveil further write-offs linked to the US mortgage markets.

Asian banks felt the collateral damage. Some do have exposure to risky financial instruments known as collateralised debt obligations, but it is more the fear of the unknown that is spooking investors.

Local banks felt the pain, with DBS down 4.4 per cent and United Overseas Bank off 1.9 per cent.

Elsewhere, Japan’s Mitsubishi UFJ Financial Group lost 6 per cent, while in Hong Kong, Bank of China was down 2.5 per cent.

Given the heavy weightage given to financial stocks in most regional indexes, analysts warn that investors should brace themselves for more turmoil.

One concern expressed by many dealers is the large operations that these banks run in major financial centres such as Singapore and Hong Kong.

Said one analyst: ‘The fear is that they may stop enlarging operations in Asia and sound the retreat to cope with problems back home. This may cause our real estate prices to feel the pinch if they start chopping heads and cutting prime office space.’

JP Morgan Private Bank’s senior portfolio manager, Mr Elan Cohen, believes that while share prices will be ‘volatile for the next couple of days, it is not the beginning of a bear market’.

‘For regional markets that have risen so sharply this year, a 2 to 3 per cent correction is common.’

 

Source: The Straits Times 3 Nov 07

US jobs growth picks up strongly

WASHINGTON – AMERICAN employers added almost twice as many jobs last month as forecast, helping steer the economy clear of recession even as the housing slump deepens.

Payrolls climbed by 166,000 after a 96,000 increase in September, the Labour Department said yesterday.

The jobless rate held at 4.7 per cent.

Economists said the report makes an interest-rate cut by the Federal Reserve even less likely next month. The central bank lowered the benchmark rate by a quarter point on Wednesday.

‘The labour market continues to be inconsistent with fears of a recession,’ said Mr Dean Maki, the chief United States economist at Barclays Capital in New York and a former senior economist at the Fed.

‘This report will increase the Fed’s conviction that it should keep rates unchanged in coming months.’

Although the report helped the Dow Jones Industrial Average open higher, the index fell 72.35 points, or 0.5 per cent, to 13,495.52 after 30 minutes of trading.

Source: BLOOMBERG NEWS (The Straits Times 3 Nov 07)

US rate cut seen buying Fed breathing space

(CHICAGO) The Federal Reserve’s decision on Wednesday to cut interest rates for a second consecutive meeting could buy policymakers a few months’ grace to watch incoming US economic data before deciding whether to move rates again. The Federal Open Market Committee, as expected, lowered its target for the federal funds rate to 4.5 per cent from 4.75 per cent, taking the benchmark rate back to early – 2006 levels.

In their statement, policymakers said that upside risks to inflation now roughly balance downside risks to growth.

‘The data and the circumstances suggest to me that the Fed need not commit itself and it probably has time to see what direction the data will go in,’ said Marvin Goodfriend, a professor at Carnegie Mellon University in Pittsburgh.

After reading the statement, dealers shifted their bets to guess that the Fed is more likely to hold rates steady than to cut them at its next meeting on Dec 11 as it evaluates how the growth and inflation outlook is evolving.

Short-term rate futures, which measure market expectations on Fed policy, knocked the implied chances of a December rate cut as low as 40 per cent from 64 per cent overnight.

Already hanging over the market before the FOMC decision was Wednesday’s surprisingly strong reading on third-quarter gross domestic product which rose at a solid 3.9 per cent annual rate. ‘There will be no additional rate cuts unless the economic outlook deteriorates further,’ said Chris Low, chief economist at FTN Financial in New York.

In the immediate term, the Fed decision probably will not do much for banks struggling with rising credit losses as the housing market retreats.

The cut will lower a variety of rates pegged to short-term market rates. Yet, because rate cuts typically take six months to work into the economy, the latest reduction and even the cut in September would need time to have their full effect.

 

Source: Reuters (Business Times 2 Nov 07)

US rate cuts won’t defuse sub-prime mess: ‘Mr Yen’

Asia, though not much affected so far, must be vigilant

(SINGAPORE) Interest rate cuts by the US Federal Reserve – which have amounted to 75 basis points since Sept 18 – are unlikely to defuse the US sub-prime mortgage crisis, according to the influential economist Eisuke Sakakibara.

Mr Sakakibara, formerly Japan’s vice-minister for finance and international affairs and now a professor at Tokyo’s Waseda University, also warned that global financial markets are likely to face further bouts of volatility. What we have seen thus far ‘is only the tip of the iceberg’, he said, adding that the problem will probably linger for 6-18 months.

Speaking at a lunchtime forum organised by newly listed Uni-Asia Finance Corporation, Mr Sakakibara pointed out that interest rate cuts by the Fed were likely to be ineffective in addressing the problems emanating from the US sub-prime mortgage sector because the cost of funding is not the key issue; rather it is the uncertainty surrounding the valuations of sub-prime assets and other structured products held by many financial institutions.

He indicated, however, that the ’superfund’ proposed by some major American banks (including Citigroup, Bank of America and JPMorgan) to buy sub-prime assets could be helpful, as might a move to provide government financial support to distressed borrowers, which is being discussed in the US Congress. But such initiatives would take time to work.

Mr Sakakibara, who was Japan’s vice-minister for finance during the Asian crisis of 1997/98, cautioned that although Asia has been relatively unaffected by the US sub-prime woes thus far, it needs to be vigilant. He recalled that during the Asian crisis, US policymakers thought that the American economy would be relatively insulated – until they were shocked by the Russian bond default of 1998 and the ensuing collapse of a large hedge fund.

The world economy is highly integrated now, he said, and it is highly possible that the US – still its primary engine – will slow down sharply or even go into recession. In such an event, Asia cannot be unaffected.

While Asian economies are doing well and will account for an increasing share of the global economy, right now, Asian asset markets are ’somewhat bubbly’, Mr Sakakibara said. ‘The situation in Asia seems too good, and usually a ‘too good’ situation doesn’t last.’

When it does turn, the decline could happen ‘very abruptly’.

Of all the Asian markets, China is ‘the biggest bubble’, Mr Sakakibara added, with both investment and GDP growth expanding at breakneck speed.

Chinese policymakers know they have to tighten monetary policies sooner or later, and a major adjustment in China’s asset markets is inevitable, perhaps in 2008, after the Olympics. If China’s economy slows down in tandem with the US, that would exacerbate the problems for the global economy, Mr Sakakibara warned.

The economist – who was known as ‘Mr Yen’ when he was a policymaker because his statements were viewed as affecting currency markets – said that as long as the Bank of Japan is unable to raise interest rates, the Japanese yen will remain undervalued. The bank actually did want to raise rates in September, he added, but refrained from doing so on account of the US sub-prime mortgage problem.

With near-zero interest rates at home, Japanese investors are continuing to seek higher-yielding investments overseas, and while this trend persists the yen will probably continue to trade within the range of 110-115 to the US dollar, he said. But if, owing to some trigger such as a dramatic US slowdown, the outflows from Japan dry up or reverse, the yen would rebound sharply from its ‘really cheap’ current level, he said.

 

Source: Business Times 2 Nov 07

Sovereign funds pose little risk to the world

UK Chancellor Alistair Darling doesn’t like them.

Italian Prime Minister Romano Prodi and European Union Trade Commissioner Peter Mandelson don’t either.

Sovereign wealth funds, the huge pools of capital built up by a small group of mainly oil-rich nations to invest their assets around the world, are becoming very unpopular. As the funds grow in power and wealth, the clamour for more regulation of their investments will only get louder.

It’s all nonsense. The funds don’t pose a threat to anyone. There is no coherent case to be made against them. And any cure is likely to be worse than the problem it is trying to fix.

That won’t stop the politicians from trying. Mr Darling said in October the UK government would protect strategic industries from takeovers by foreign state-controlled investment funds, such as those run by Kuwait, Saudi Arabia and China. ‘Sovereign wealth funds or companies owned by governments need to play by the rules,’ he said.

Juergen Stark, a board member of the European Central Bank, has called for a code of conduct for the funds. And in July, Mr Mandelson said the EU may need to take a golden share in strategic industries to prevent companies falling into the hands of the funds, according to the Italian newspaper Il Sole 24 Ore.

In fairness, you can see why there is a debate. Sovereign wealth funds, which invest currency reserves in foreign assets, control an estimated US$2.5 trillion, more than all the world’s hedge funds combined. With high commodity prices translating into surging reserves in emerging economies, their stockpiles of cash will only get bigger. Russia said this month it may get in on the act by investing some of the US$141.1 billion in its Stabilisation Fund in major foreign companies. If Putin Inc starts buying German airports or French motorways, watch the sparks fly.

‘There has been much political angst about SWFs,’ Morgan Stanley economist Stephen Jen said in an analysis, referring to the funds. ‘It does not seem to make sense for regulatory authorities and politicians to single out SWFs.’

It is hypocritical to attack the funds. Nobody minded when emerging economies recycled all those dollars, pounds and euros by putting cash on deposit in our banks, or buying bonds issued by our governments. So why should we mind when they start buying companies? They are just diversifying their holdings, like any prudent investor would. If we don’t like them purchasing our equities, shouldn’t we tell them to stop buying our bonds and currencies as well?

In a global economy, few companies are owned domestically. Stocks are traded across frontiers. It doesn’t make much difference whether your local supermarket or service station is owned by a hedge-fund manager in Zurich, a pension fund in California or an investment firm in Dubai. What counts is whether there is enough competition to make sure it offers good service and fair prices. So long as it does, there is no problem.

Lastly, the only way to protect against the funds, as Mr Mandelson realises, would be through some kind of golden share held by the government.

Businesses would then be shielded from takeovers that their governments don’t want. But what kind of impact would that have? Management would become idle and inept as they realise they couldn’t be challenged or kicked out. The damage that would do to the performance of your economy would far outweigh any danger posed by the funds.

The funds are no more of a threat than any other investment vehicle. They aren’t making the economy more volatile. By buying whole companies, they are committing themselves to long-term investment.

They are no more secretive than many hedge or private-equity funds, or big private companies. Nor does their ownership by foreign governments override the laws applicable in the countries where they are investing. If they break UK or German laws, they will be in trouble, just like anyone else.

There may be some limits. You might not want a defence manufacturer owned by a foreign power. But there are very few of those companies. In reality, all the evidence suggests the more open your economy is, the better you do – and sovereign wealth funds are no exception to that rule.

 

Source: Bloomberg (Business Times 1 Nov 07)

Why the US dollar party may yet end…

… And why the Singapore dollar is the investment holding currency of choice

FOR all the foolish chatter about an ‘unprecedented’ meltdown, the ongoing CDO (collateralised debt obligations) crisis is but a re-run of a regular occurrence in the banking industry: that of a cycle of extremely poor credit decisions by professional lenders, in this case matched by extremely poor investment decisions by professional investors.

Common in the emerging markets, that this happened in the world’s richest and most developed economy in the era of sophisticated Basel II credit risk standards speaks volumes about the triumph of hubris in American ’sell or die’ business practices.

Many professionals appear to have forgotten, or simply didn’t know, that these events happen somewhere in the world as regularly as a really decent British summer – that is, around once in five years. Indeed, they are regular enough to keep some people in almost permanent employment cleaning them up, myself included.

There is one difference this time around. In the good old days of the traditional bank crises, that is, reckless lending to those with no ability, or intention, to ever pay back, the bank suffered the consequences. Now that we have the fabulous invention of a structured market with a cool name to pass on such stupidity to even more foolish investors, it becomes a market crisis instead.

Of course, most of the world’s major hedge fund joined in, but as we all know most hedge funds don’t really know anything about anything. The surprise was that the very large, sophisticated banks with top-quality credit risk management one would have expected never to have written these risks themselves were only too happy to buy such poor-quality risk written by lenders with no standards.

As usual, Wall Street got paid handsomely for the privilege of selling garbage dressed up – tech stocks yesterday, CDOs today. Even worse, nobody ends up knowing quite who actually owns this junk or who the end-risk is. The ratings agencies went along for the ride and the regulators appeared asleep at the wheel.

I see no reason for undue pessimism on the broad economy outside the US. The US has been slowing for at least four quarters. While problems in the housing sector appear to be amplifying this trend and hurting the American consumer, the damage to the US$13 trillion US economy is containable. Corporate balance sheets, profits and debt levels remain in good shape.

Too much is made of the level of export dependency of Asia on the US, and some pain over the next six months will not derail the largest, consumer-based Asian countries – China, India and Indonesia. For the medium term, I maintain my long-held bullish view on both Asia broadly and the Asean economies as well as Asian currencies.

Other than some tech exporters, and employees of the wrong banks, I do not believe you should be unduly worried.

Given my focus on long-term fundamental trends with the background of the sorry tale of US sub-prime, this seems an appropriate time to revisit my favourite worry – the greenback. I have not voluntarily held a US dollar, other than as a short, for over four years. However, consistent dollar bears have often been in the wrong, particularly versus the yen. From March 2002, the yen did strengthen through to March 2005 with the recovery in the Japanese economy, but then turned negative again. Within a year the US dollar was back to 120 yen and has range-traded ever since until recent events. The yen remains the most undervalued major currency. The euro has followed the script better, although again from March 2005 it gave back some of its gains and only reverted to strength against the dollar from May last year.

The core of the bear argument has always been an economic fundamentalist view that goes like this: US debt levels are unsustainably high and continue to grow at an alarming rate; this debt has to be externally financed demanding high relative yields, US interest rates and the level of the dollar are supported by dollar demand via external financing, principally by Asian nations retaining dollars in trade and purchasing dollar debt; and that in doing so, these nations maintain lower yields and weaker currencies than their economic fundamentals would otherwise suggest.

A decade ago Asian nations held one third of global reserves. Now they hold two thirds, mostly in dollars.

The core of the argument for the dollar bears, such as myself, has always been that such a cosy arrangement eventually would have to slow and revert to norm, and that with the purchase of dollars on this magnitude even a slowdown of buying would depress the currency in the process.

For dollar bulls, their argument has been that if Asian and other nations continue to believe in the perpetual cycle of US economic strength and dollar dominance, the attractiveness of US assets, and the exporting advantages of maintaining relatively weaker currencies; then there is no reason at all why the party should ever end.

Asia will continue to export to the US consumer, and simply recycle the dollars back by building dollar reserves and buying US debt.

For a long while it seemed as if dollar bulls were right and a sort of perpetual motion had been built up with the understanding of all parties that this was the game. Capital saving countries, read Asia, have continued until recently to buy and hold US dollars at an unprecedented rate. But all parties eventually come to an end.

I believe that we may be finally seeing the beginning of the end of a long-awaited, slow decline of an aged warhorse, just as the sterling gracefully declined a generation ago.

Of course, the dollar has some uses, which I am sure will continue. I do admit that a wad of dollars has no equivalent for bellboys, and visas-on-arrival in Asian airports. For buying oil, and weapons, dollar remains the currency of choice, as I hear it is for the drug trade and other interesting segments of the cash economy. But even that may change over time.

If the greenback remains on my short list, what then is our currency of choice? Of course, if you are a speculator, going long, the Asian units undervalued on a purchasing power parity basis makes sense – particularly the yen, the ringgit, and the won.

But as economic fundamentalists we do not believe in currency speculation, despite the modern trend to call it an asset class. What an investor in real assets needs is a currency that provides all of the upside potential of the Asian economic growth story, with stability and smart management against extreme volatility.

The ideal would be a balanced currency basket of a weighted proportion of the best of those currencies, continually managed and adjusted relative to macro economic movements. There is such a basket. Even better, it is managed by some very bright folks who charge nothing for the service. It is called the Singapore dollar, and it remains our investment holding currency of choice.

The author is managing director of the Calamander Group and the economic spokesman of the British Chamber of Commerce in Singapore.

 

Source: Business Times 1 Nov 07

Won, pound latest stars of US$ slide

IT WAS the turn of the British pound and the Korean won to stand out in Asian currency trading yesterday, as the US dollar continued its slide to new multi-year lows in anticipation of another US interest rate cut. After the sharper-than-expected fall in US consumer confidence for October reported overnight, traders are fearful that more weak US data this week will further damage the already weak greenback. US jobs data for October are due out tomorrow evening.

The US currency eventually ended the day close to the day’s fresh post-depeg low of just above 7.46 yuan.

According to reports, this obliged the Hong Kong Monetary Authority to buy at least half a billion US dollars yesterday to stop the greenback from falling through the base of its allowed HK$7.75 to HK$7.85 range. Closer to home, meanwhile, the greenback was forced to fresh 10-year lows of S$1.4477 and 3.3375 Malaysian ringgit.

It was the Korean won which recorded the day’s largest 0.7 per cent gain versus the falling US dollar. It ended the day at 900.7 won per US dollar despite warning grumbles from the Korean central bank – just about recovering all of the losses it has suffered versus the latter since the 1997-98 Asian crisis.

More sharp gains could now be in store for the won, suggested DBS researchers yesterday, citing its tendency to make periodic spurts to the upside, and other supporting statistics by way of strong surpluses, a red-hot stock market, and interest rates higher than that for the US dollar. ‘Taking a conservative stance, we estimate the present period of won appreciation (which began with the US dollar at 950 won on Aug 17) could amount to 10 per cent or more, still less than the 13-15 per cent gains seen in previous episodes,’ they said. ‘This would put the won at around 850 per dollar by end-08.’

On our charts, that forecast is supported by the breakdown of what chartists would call a double-top formation, formed by the US dollar’s two 752 won peaks in March and August this year. For as long as the US currency is capped below the 912 to 913 won area, this opens up an eventual downside objective of at least 870 won.

Elsewhere in Asian trading, a trio of European favourites also probed fresh highs. A stronger-thanexpected spurt in October house prices in the UK propelled the pound to a 23-year high of US$2.0743 yesterday. Likewise, hawkish remarks from the European front overnight boosted the euro to a fresh postlaunch high of US$1.4467 yesterday, and pressed the greenback half a per cent lower even against the lowyield Swiss franc, to end at 1.1598 francs – its weakest showing since March 2005.

Down Under, traders reported fresh interest to sell the yen versus the Australian dollar in preference to the higher-yielding New Zealand dollar – citing more strong housing and credit data out of Australia, and the possibility of a larger than expected US interest rate cut overnight.

By the Asian close, the Australian dollar had advanced a further 0.2, 0.3 and 0.6 per cent to finish at S $1.3363, 92.27 US cents and 106.25 yen respectively.

 

Source: Business Times 1 Nov 07

An age of market resilience?

BIOLOGISTS believe that diversity increases stability and resilience in an ecosystem – a complex system where participants go about looking out for their own interest with the ultimate goal of surviving and thriving. What is true of a biological ecosystem may also hold good for the financial system, which, too, is complex. In which case, there are grounds to believe that the financial system of today is more stable and resilient than before.

The stock market crash of 1987, while its real cause is still being debated, can be said to have been exacerbated by the widespread use of portfolio insurance at that time. In theory, portfolio insurance sounded like a superb idea. Just by giving up a bit of the upside – premium for buying the insurance – a portfolio can be protected on the downside. The simplest form of insurance is to buy a put option which gives a portfolio manager the right to sell stocks or an index at a fixed price. So the floor that the portfolio value can fall to is that fixed price on its put option. Other forms of portfolio insurance involve the use of index futures or dynamic trading. A dynamic portfolio trading strategy, also called program trading, allows investors to replicate the payoff from derivatives. It basically triggers sell orders as stock prices fall, so that the portfolio value does not fall below the floor. By 1987, about US$60 billion – a significant sum at that time – in equity assets were covered by different varieties of portfolio insurance. What happened was, in the three days prior to Oct 19, Wall Street had corrected by some 10 per cent as investors became more risk averse. That fall triggered the sell programs in the numerous insured portfolios. Everybody rushed for the exit at the same time, and there was nary a buy order.

As the story goes, some professional traders who were not portfolio insurers had anticipated this pent-up selling demand and sold in advance. As the day unwound, other investors who had never heard of portfolio insurance may have misinterpreted the price changes as conveying something fundamental about the market and may have sold in a mistaken response. So, at a time when all participants were making similar kinds of bets, the market could not be trusted to provide diversification and liquidity.

How have things changed today? For one thing, there are a lot more players with more diverse views of the markets. And many have the liberty to act on those views. A hedge fund which thinks a market or a stock is overvalued has the option to short sell it, in a way keeping a check on the price. The securitisation of risks – a much vilified practice in the current sub-prime mortgage crisis – has the effect of spreading the risks to many players. This reduces the systemic risk to the global markets.

Meanwhile, the emergence of sovereign funds with typically very long investment horizons, in contrast to most commercial funds, adds another level of diversity.

The fact that markets globally have repeatedly been able to find their feet, despite numerous bouts of ‘risk aversion’ attacks in the last two years, is perhaps testament to what may be a new age of resilience – or at least greater resilience than before – that we are now entering.

 

Source: Business Times 31 Oct 07

LATEST US DATA – Consumer confidence falls in Oct to lowest in 2 years

Slide due to concerns of weakening business conditions and impact on jobs

(NEW YORK) A key barometer of US consumer sentiment dropped for the third month in a row, to its lowest level in two years, on growing concerns about weakening business conditions and the impact that could have on the job market as well as igniting concerns that the upcoming holiday shopping season would be lukewarm. The New York-based Conference Board said yesterday that its Consumer Confidence Index fell to 95.6 from a revised 99.5 in September. It was the lowest reading since 85.2 in October 2005 when gas and oil prices soared after hurricanes Katrina and Rita pummelled the Gulf Coast. Analysts had expected 99.5.

‘Further weakening in business conditions has, yet again, tempered consumers’ assessment of current-day conditions and may very well be a prelude to lacklustre job growth in the months ahead,’ said Lynn Franco, director of The Conference Board Consumer Research Center.

In addition, consumers are growing more pessimistic about the short-term future and their rather bleak outlook suggests a less-than-stellar ending to this year.

The Present Situation Index, which measures how shoppers feel now about the economy, declined to 118.8 in October from 121.2 in the prior month. The Expectations Index, which measures shoppers’ outlook over the next six months, declined to 80.1 from 85.0.

‘Sentiment is taking the next step down,’ said Carl Riccadonna, an economist at Deutsche Bank Securities here.

‘Housing is clearly the root of the problem. If consumer spending falls apart, the Fed will have much bigger problems to contend with.’

Economists closely monitor confidence since consumer spending accounts for two-thirds of US economic activity.

Yesterday’s report heightens worries for retailers, who are already bracing for a challenging holiday shopping season after a disappointing fall.

Shoppers are contending with a slew of problems: higher food and gas prices, a deepening housing slump and tighter credit, among them.

And while the Federal Reserve is expected to cut interest rates today to boost the economy and lure more investors into the troubled credit markets, economists say the move is probably too late to aid the holiday season. The index was at its lowest since October 2005, when it read 85.2, the Conference Board said in a press release.

‘The decline . . . amounts to confirmation that there is a quite profound confidence deterioration under way,’ said Pierre Ellis, senior economist at Decision Economics here. Consumer spending is responsible for driving about two-thirds of the US economy’s growth.

 

Source: AP, Reuters, Bloomberg (Business Times 31 Oct 07)

UBS hit by bigger than expected loss

First quarterly loss in 5 years, investment bank unlikely to break even in Q4

(ZURICH) UBS AG reported a higher-than-expected third-quarter loss after hefty writedowns on sub-primerelated investments, but said it expects to turn in a group profit in the last quarter.

The Swiss bank, which took charges of 4.2 billion Swiss francs (S$5.22 billion) on sub-prime-related losses in fixed income in the third quarter, said yesterday its investment bank was unlikely to break even in the final quarter.

‘While we are still disappointed with the result, we have a very strong set of numbers in particular in assetgathering and the commission-based businesses,’ chief executive officer Marcel Rohner told journalists on a conference call.

It was UBS’s first quarterly loss in five years and the first significant loss in a three-month period since 1998, when the bank was hit by the economic crisis in Russia.

UBS repeated warnings of further write-downs, but Mr Rohner declined to give any detailed forecasts. ‘The range of possible outcomes is widening,’ he said.

UBS made a 726 million franc pretax loss in the third quarter, after a 2.199 billion francs net profit a year ago.

The third-quarter net loss was 830 million francs, higher than a Reuters poll of 14 analysts giving an average forecast of a 668 million franc loss.

Analysts said they were now bracing for more writedowns in the final quarter of the year. ‘At the moment it looks like further writedowns are probable,’ said Andreas Venditti, an analyst at ZKB here.

Banks worldwide have taken charges totalling more than US$20 billion on holdings in mortgage-backed securities which have been hit by a meltdown in US sub-prime mortgages – loans extended to borrowers with patchy credit histories.

‘The first quarter will depend on where we end with the US housing market,’ Mr Rohner said in a conference call.

The fourth quarter had started profitably for all businesses, including the investment bank, he said.

‘However the FICC (fixed income, currencies and commodities) business remains exposed to further deterioration in the US housing and mortgage markets,’ a UBS statement said.

Ratings downgrades by credit ratings agencies for mortgage-related securities could trigger more writedowns on the bank’s securities portfolio, it said.

Net new money in wealth management was 40.2 billion francs in the third quarter, up from 26.8 billion francs in the third quarter of 2006. Net new money inflows were 35.2 billion francs in the second quarter of 2007.

‘Our third quarter result was unquestionably disappointing. However, we have introduced a number of measures to improve performance,’ Mr Rohner said in a statement. ‘We are also taking steps to strengthen our market risk management.’

UBS made a second-quarter net profit of 5.62 billion francs, including a windfall from the sale of a minority stake in Swiss private bank Julius Baer.

UBS on Monday confirmed guidance issued at the start of October that it faced a third-quarter pretax loss of 600 million to 800 million francs.

 

Source: Reuters (Business Times 31 Oct 07)

A ‘reluctant’ Fed may cut rates at ongoing meeting after all

If it disappoints traders, it risks upsetting markets and hurting economy

(WASHINGTON) US Federal Reserve chairman Ben Bernanke and his colleagues sound as if they would prefer to just say no to an interest-rate cut this week. The financial markets may not let them.

Policy-makers from Mr Bernanke on down have avoided signalling they want to reduce benchmark lending rates at their two-day meeting which began yesterday, ever since lowering them by a larger- than-anticipated half percentage point in September. Instead, Fed officials have stressed how uncertain the outlook is and, in words Mr Bernanke used twice in a single week, how ‘challenging’ it is to make policy.

Traders don’t agree. They consider the chances of a rate cut this week as a cinch, judging from federal funds futures prices at the end of last week. If the Fed disappoints them, it risks upsetting still-fragile markets and hurting the economy.

‘The Fed is reluctant to ease,’ says Louis Crandall, chief economist at Jersey City, New Jersey-based Wrightson ICAP LLC, a unit of ICAP plc, the world’s largest broker for banks and other financial institutions. ‘But it also doesn’t want to unsettle the financial markets unnecessarily.’

The likely rationale if the Fed cuts: a desire to prevent the worst case, in which renewed market tumult, rising oil prices and falling home values drive the US economy into recession.

The Fed, though, may combine such a move with an open-ended statement that does not promise further cuts. Its goal would be to dissuade investors from anticipating a series of reductions, an outlook that could further weaken the dollar and revive inflation concerns.

‘They’ll use the statement to try to temper expectations of further rate cuts,’ says Michael Feroli, a former Fed economist who is now with JPMorgan Chase & Co in New York.

Speculation about what the Fed will do this week has swung widely since the central bank cut its target for the federal funds rate – the rate banks charge each other for overnight loans – to 4.75 per cent from 5.25 per cent on Sept 18.

Traders in federal funds futures initially bet heavily on a rate cut today, pushing the odds of such a move to 75 per cent or more at the beginning of October. They then scaled their expectations back below 50 per cent after the government on Oct 5 revised August payroll numbers to show a gain instead of a decline.

Further weakness in housing, along with dismal earnings reports from Citigroup Inc and other big banks, helped trigger fresh market turmoil during the last two weeks, prompting traders to again raise the odds of a rate cut, with some even expecting a half-point reduction.

‘The markets are yo-yoing all over the place,’ says former Fed governor Lyle Gramley, now a senior economic adviser at Stanford Group Co in Washington. ‘The Fed ought to have a cooler head.’

Mr Gramley is among a minority of economists who expect the Fed to stand pat. He says policy-makers may not have enough evidence of a weaker economy to support another rate reduction now. Indeed, Fed officials don’t depict an economy in as dire straits as some in the markets do, suggesting they would prefer to wait and see how conditions develop before cutting rates again.

While housing keeps weakening, the rest of the economy is holding up. Retail sales rose 0.6 per cent in September, double the increase of the previous month. Business investment in computers and machinery also increased, prompting some economists to raise estimates for third-quarter growth.

Anecdotal information the Fed has gathered from business contacts, which has more weight in uncertain times, shows the economy expanding, albeit at a slower pace than when the central bank’s Federal Open Market Committee (FOMC) met last month.

In a regional survey known as the Beige Book, none of the 12 Fed banks reported signs of a sharp contraction in growth, based on information collected through Oct 5.

‘On balance, I would characterise the data we have received on the real economy since the last FOMC meeting as supporting our baseline forecast,’ Chicago Fed president Charles Evans said in on Oct 22.

That forecast calls for the economy to pick up over the next year to a growth rate closer to 2.5 per cent after slowing below that level in the final quarter of this year.

 

Source: Bloomberg (Business Times 31 Oct 07)

US sub-prime losses slow BOC Q3 net growth

(SHANGHAI) Bank of China Ltd (BOC), the nation’s third-largest bank, reported third-quarter profit growth that trailed rivals as losses related to US sub-prime mortgages dented earnings.

Net income climbed to 15.9 billion yuan (S$3.1 billion), or 0.06 yuan a share, from 13 billion yuan, or 0.05 yuan a year earlier, the Beijing-based bank said in a statement yesterday. Profit growth slowed to 22 per cent after a US$322 million writedown on US securities linked to borrowers with poor credit.

BOC’s US$7.9 billion of sub-prime-linked holdings countered gains from a domestic market where the fastest economic growth in a decade stoked loan demand. Industrial & Commercial Bank of China Ltd (ICBC), the nation’s largest, posted 76 per cent profit growth for the quarter and China Merchants Bank Co said earnings surged 144 per cent.

‘We are really downbeat on Bank of China,’ said Jim Antos, a Hong Kong-based analyst at Bear Stearns Asia Ltd who rates the stock ‘underperform’. ‘What we’ve seen so far is more like 90 per cent average growth for Chinese banks.’ BOC gets about 35 per cent of profit from outside the mainland, compared with less than 5 per cent for ICBC.

Most Chinese banks have little direct investment in securities linked to US home loans to people with poor credit, compared with their global peers. The fallout from rising sub-prime mortgages cost financial firms worldwide more than US$30 billion in the third quarter in writedowns and bad debt.

 

Source: Bloomberg (Business Times 31 Oct 07)

No certainty of Fed rate cut this week

(TOKYO) A Federal Reserve interest rate cut this week is no sure thing and officials are not seriously considering a half-point reduction in overnight rates, The Wall Street Journal reported yesterday without citing sources.

The article by Greg Ip, the Journal’s Fed watcher who is known for sometimes reflecting the views of senior central bankers, said that policymakers view this week’s decision as a choice between a quarterpoint cut to 4.5 per cent and not moving at all.

Investors have widely expected the Fed to cut rates at a two-day meeting ending today, following a halfpoint slash in September, to limit the economic damage from the housing market’s incessant slide. Futures on the fed funds rate have shown a small chance of a half-point cut.

Currency traders in Tokyo said that the article helped nudge the US dollar up slightly from near record lows against the euro and multi- decade lows against other major currencies.

Mr Ip said that perhaps the biggest risk for the Fed is that the market’s certainty on a pending rate cut puts a burden on the central bank to deliver. ‘But the current market environment is more fragile than usual, and thus the consequences of disappointing the market are potentially more damaging. Against that, the Fed will have to weigh the risk that a cut will stoke inflationary psychology,’ Mr Ip writes in the article on the Journal’s website.

The Fed can mitigate such risks with its post-meeting statement by either leaving the door open to a future cut if it does not move this week or by dampening expectations for future monetary easing if it does lower rates, Mr Ip said.

He added that the case for keeping policy on hold comes down to the economic outlook. While the housing market has deteriorated further, there has been little evidence of spillover into the broader economy, he said.

 

Source: Reuters (Business Times 31 Oct 07)

US retail stocks hit by housing, credit crisis

(NEW YORK) When home builders’ stocks plunged in 2006, Wall Street was confident that the problems would not spill over into the larger economy. Exhibit A – department store stocks rose steadily despite the housing woes.

Not this time around. Housing stocks have fallen again and this time, the department store stocks have marched down with them.

Since April, when investors voiced optimism that the housing slide had been contained, shares of the country’s biggest department store chains have fallen by about 30 per cent.

With the sagging prices, investors have rendered a harsh judgment on the coming holiday shopping season, predicting that consumers will severely cut back on spending.

The gloom since April 20 has been spread evenly across the big chains: shares of JC Penney are down 33 per cent, Macy’s by 27 per cent, Kohl’s by 28 per cent and Sears by 28 per cent.

Robert J Barbera, the chief economist of Investment Technology Group, said: ‘The conventional wisdom of a year ago was that we would have a soft landing in housing.’

But today, ‘the stock market message is a hard landing for housing, with clear damage to consumer discretionary spending’.

In interviews, retail executives conceded that the slumping housing market was taking its toll. ‘We are in the window covering business, and you don’t cover windows in houses you don’t build,’ said Myron E Ullman III, the chief executive of JC Penney.

But some executives remained at least a little upbeat, complaining that investors are lumping the department stores together.

‘I believe in the fourth quarter, people will continue to buy,’ said Terry J Lundgren, the chief executive of Macy’s. Analysts, he said, ‘are speculating that the consumer is going to withdraw and not spend at the same levels as she has in the past several seasons’.

And over at Saks, the view is that the housing and credit crisis is somebody else’s problem. ‘The underlying strength in the luxury market is there,’ said Stephen I Sadove, the chief executive. ‘That consumer is driven more by confidence in the stock market than in the housing market.’ Investors appeared less certain that Saks will suffer. Its shares are off just 7 per cent since April 20.

Still, the stocks of other higher-priced department store chains, which have been largely immune to housing market troubles over the last several years, have plunged this year. Nordstrom is down almost a third.

Economic slowdowns traditionally hurt stores catering to a less affluent customer base, like Wal-Mart and Target. But in a reversal, those discount chains have not done as poorly as department stores.

‘The problems have crept up the consumer food chain,’ said Bill Dreher, an analyst at Deutsche Bank Securities.

Behind the falling stock prices are slipping sales at stores. After a strong performance early this year, sales at department stores open at least a year have fallen three of the last six months, according to Deutsche Bank.

The stores have blamed a variety of factors, like an unseasonably warm August and September, which hurt back-to-school clothing sales, and poor sales of household goods, tied to the slowing housing market.

Sales at Macy’s and JC Penney have fallen five of the last six months. Kohl’s sales have fallen four of the last six.

 

Source: NYT (Business Times 29 Oct 07)

US sub-prime solution flies in face of ‘97 advice to Asia

ASIANS could be excused for looking askance at Henry Paulson’s plan to calm credit markets. The reason: It’s the sort of thing that had US Treasury secretaries browbeating Asians a decade ago. One thinks back to the whistle-stop Asian tours then-treasury secretary Robert Rubin did 10 years ago. Such trips became more numerous as Asia’s financial crisis spread from Bangkok to Jakarta to Seoul to Kuala Lumpur and beyond.

At every stop, Treasury bigwigs lectured leaders to scrap the financial socialism and crony capitalism feeding the excesses behind Asia’s turmoil. They counselled fiscal belt-tightening, higher interest rates, stronger currencies, avoiding asset bubbles and for limits on bailing out reckless investors.

Basically, the US told Asia to avoid doing much of what the US is doing today amid its own crisis. Take the Federal Reserve, which cut interest rates twice and hinted at doing more. Investor Marc Faber is absolutely right when he says the Fed acted ‘like a bartender’ and that its actions are contributing to asset bubbles. The US also has avoided reining in imbalances, including huge current-account and budget deficits.

The US is arguably devaluing its way to faster growth, something Treasury officials chastised Asians for in 1997. Mr Paulson puts on a good poker face, saying he favours a strong US dollar to placate Europe’s concerns. He hardly seems bothered by the euro’s 14 per cent surge against the dollar this year. As for crony capitalism, Asians can turn the mirror on the US with one word: Halliburton. The region also watched with a mixture of horror and satisfaction when free-market symbols such as WorldCom Inc and Enron Corp blew up a few years back.

Asians were berated for a lack of transparency. In the late 1990s, the US demanded that reserves figures be published and that clear lines be drawn between governments and private sectors. In the US, dubious mortgage products were sold, repackaged and resold with negligible transparency, while ratings companies approved of the process. The government and the Fed just stood by.

Now, the US is at the centre of what Nouriel Roubini, chairman of Roubini Global Economics LLC in New York, calls the ‘first crisis of financial globalisation and securitisation’. And what is the US doing?

Playing a role in hypocritically bailing out those who should have known better.

Mr Paulson’s team brokered negotiations between US banks, leading to the creation of what is essentially a bailout fund. His involvement is drawing criticism that the US is shielding gamblers from the consequences of poor bets. It doesn’t help that White House officials are simultaneously deflecting calls for regulation to keep the sub-prime crisis from happening again.

The advent of what investors are terming a ’superfund’ is hardly in the best interest of the world’s No 1 economy. Just as Asians did a decade ago, the US is bailing out financiers who made bad decisions. But it’s one thing for Bank of America Corp to throw Countrywide Financial Corp a US$2 billion lifeline. It’s another thing for the Treasury to involve itself in creating a company that will buy assets from structured investment vehicles (SIVs), which were set up to purchase securities such as bank bonds and sub-prime mortgage debt.

Mr Paulson and Robert Steel, the Treasury’s top domestic finance official, seem to think the end justifies the means. Their plan would help SIVs to avoid dumping their US$320 billion in holdings, further roiling the credit markets. The banks would instead create a fund to absorb the debt, using the proceeds of new commercial paper sales to finance the purchases. The new assets would be financed by selling mediumterm notes and commercial paper to investors.

Appearances matter. To many Asians, there’s a whiff of two former Goldman Sachs Group Inc guys – Mr Paulson and Mr Steel – helping their buddies out of a rough spot, including Mr Rubin, now head of the executive committee of Citigroup Inc, the bank that stands to gain most from such a bailout.

Critics such as former Fed chairman Alan Greenspan and former International Monetary Fund managing director Michel Camdessus are right to warn about the so-called moral hazard being created here. If banks and investors avoid the consequences of their mistakes, they will make even bigger ones next time. The notion that a safety net will be rolled out each time things go awry makes the global economy more dangerous.

It’s this and other lessons the US tried to teach Asia 10 years ago. Officials in Washington may want to begin listening to their own lectures.

 

Source: Bloomberg (Business Times 26 Oct 07)

US$ hits new lows after more bad news

THE US dollar was punished once again by more bad news for the US economy overnight, while in contrast the Chinese yuan clocked fresh highs after yet more strong numbers for the Chinese economy. By the Asian close, the greenback had tumbled to fresh post-depeg lows of 7.4820 Chinese yuan and 3.3560 Malaysian ringgit, and established a fresh 10-year low of S$1.4565 as well.

For Singapore dollar-based readers, it is important to make the additional point that the local unit has been able to hold its own versus both the strengthening yuan and ringgit over the past couple of months.

In terms of this year’s highs and lows, the two have traded in a 2007 range of S$0.1944 to S$0.2026 and 43.15 to 45.28 Singapore cents, respectively. Yesterday, the yuan and ringgit finished towards the lower end of those ranges – at S$0.1947 and 43.4 Singapore cents respectively.

On the US side, however, some traders suggested that it may well have taken the rumour of an emergency discount rate cut to help Wall Street recover from a sharp slide in early Wednesday trading – following more bad news from both the US housing sector as well as yet more fallout from the US sub-prime mortgage loan front.

In contrast, news yesterday morning from China suggested the opposite possibility of more rate hikes and higher reserve requirements for Chinese banks.

For the first nine months of 2007, the Chinese economy grew at a blistering double-digit pace of 11.5 per cent, while inflation averaged 4.14 per cent – quite a bit higher than the 3 per cent targeted by China’s central bank.

On the other hand, US financial markets started Wednesday trading with the bad news that existing US home sales for September had registered a slightly worse than expected month-on-month fall of 8 per cent, and a larger than expected US$7.9 billion write-down by US investment bank Merrill Lynch – the latter caused in large part by losses related to sub-prime mortgage lending activities or assets.

And externally, news of another jump in oil prices also weighed heavy on the greenback in Asian trading yesterday. Brent crude for December delivery vaulted above the US$86 per barrel mark at the start of London trading to mark out more unexplored territory – just one day after making fresh highs in excess of US$85 per barrel.

And, following the overnight rumours of further US interest rate cuts, it was the high-yielding Australian and New Zealand dollars that finished with some of the day’s best gains yesterday.

All told, however, it was gold that emerged as the day’s top performer, surging more than one per cent to finish the session at US$765 per ounce, just US$5 shy of this month’s 17-year peak of US$770.

Meanwhile, the Australian and New Zealand dollars chalked up gains of up to 0.7 per cent, to 90.32 and 75.58 US cents respectively. And elsewhere in Asian trading, the besieged greenback closed with further losses of 0.4 to 0.6 per cent – at S$1.4565, 44.05 Philippine pesos, 3.3560 ringgit, 1.1690 Swiss francs, and US$1.4280 per euro.

 

Source: Business Times 26 Oct 07

Merrill stuns market with US$7.9b writedown

US stocks fall on worries of more sub-prime pain for finance sector

(NEW YORK) Merrill Lynch & Co, the world’s biggest brokerage, yesterday said that the summer’s credit crisis has triggered a bigger-than-expected US$7.9 billion writedown for the third quarter.

US stocks swung lower in opening trade yesterday as the massive writedown from Merrill fuelled worries that the finance sector will feel more pain from troubles in real estate.

In the first trades, the Dow Jones Industrial Average slipped 42.52 points (0.31 per cent) to 13,633.71, after two days of gains. The Nasdaq composite lost 26.53 points (0.95 per cent) to 2,772.73 and the Standard & Poor’s 500 broad-market index shed 7.06 points (0.46 per cent) to 1,512.53.

Bad bets on mortgage securities and leveraged loans used for corporate takeovers caused Merrill to post its first loss in six years.

The blow makes Merrill the hardest-hit investment bank on Wall Street amid the recent market turmoil.

Merrill reported a loss after paying preferred dividends of US$2.31 billion or US$2.82 per share, compared to a profit of US$3 billion, or US$3.50 per share, a year earlier.

Revenue, after factoring in some of its losses, fell 94 per cent to US$577 million from US$9.83 billion a year earlier.

The results missed Wall Street expectations for a loss of 45 US cents per share on US$3.25 billion of revenue, according to analysts polled by Thomson Financial.

Merrill’s failure to meet its own projection showed how chief executive officer Stanley O’Neal misjudged the severity of the decline in the credit markets since July, after late mortgage payments from borrowers with poor credit histories surged.

The charge is the biggest in the firm’s 93-year history and the first major setback in Mr O’Neal’s five-year tenure.

‘It sends a very poor message to the marketplace that Merrill doesn’t have a good handle on their risk,’ said William Fitzpatrick, a financial services analyst at Johnson Asset Management in Racine, Wisconsin, which oversees US $1.7 billion and does not own Merrill shares.

Merrill, like many of its rivals, was battered as concerns about mortgage securities triggered a global aversion to risk. The brokerage also said that it wrote down US$463 million related to leveraged loans, which dried up significantly during the quarter.

The losses were a big miss from what Merrill said it expected on Oct 5. The company warned Wall Street at that time that it would take an almost US$5 billion writedown for the quarter, because of its exposure to risky mortgagerelated securities.

The bulk of the losses came from marking down the value of complex financial instruments known as collateralised debt obligations, or CDOs, and from declines in sub-prime mortgages – loans to customers with shaky credit.

Mr O’Neal said that the company continues to face uncertainty on the impact of its mortgage-related investments.

‘In light of difficult credit markets and additional analysis by management during our quarter-end closing process, we re-examined our remaining CDO positions with more conservative assumptions,’ he said in a statement. ‘The result is a larger writedown of these assets than initially anticipated.’

The biggest trouble spot for Merrill was its fixed-income business, which is typically one of the company’s top earnings drivers. Revenue from the unit was actually negative, some US$5.6 billion in total, because of its CDO and sub-prime mortgage exposure.

Though there were questions among Wall Street analysts about Merrill’s risk management, the company said that its liquidity position remains strong while it navigates through choppy market conditions.

It currently has about US$15.2 billion of CDO exposure and some US$5.7 billion of sub-prime exposure, both down substantially from levels at the end of June. Shares in Merrill fell 2.2 per cent to US$65.63 in pre-market trading from a close of US$67.12 on Tuesday.

 

Source: AP, AFP, Bloomberg (Business Times 25 Oct 07)

US, China face risk of protectionism: officials

(WASHINGTON) China and the US face growing threats of a backlash to their close economic ties, threatening both the Chinese economy and the interests of American companies, US officials warned here on Tuesday.

China is pursuing measures including favouritism in government contracting and tailor-made technical standards aimed at propping up domestic producers and keeping out foreign competition, top Bush administration officials said on Tuesday. In the US, the threat comes from consumers who blame China for all their economic anxiety, and lawmakers considering measures aimed at reversing the record trade gap, they said.

‘We are at a pivotal – and in some ways awkward – moment in our economic relationship,’ US Trade Representative Susan Schwab told a business conference. ‘There are forces both in China and the US that would move us away from engagement.’

Ms Schwab, Treasury Secretary Henry Paulson and other members of the administration used a series of speeches to the George HW Bush US-China Relations Conference to take aim at what they called the protectionist tendencies in both countries.

The US aims to use an economic summit in December to persuade China to reduce barriers to foreign investment in industries such as telecommunications and insurance and subsidies to Chinese exporters, Commerce Secretary Carlos Gutierrez said. ‘There is a risk that some in China are stepping away from longstanding policies of closer global economic integration.’

Mr Gutierrez said the US will also complain that China’s government hasn’t followed through on its previous pledges to eradicate the widespread piracy of copyrighted movies, music, books and software.

Mr Schwab made similar complaints about Chinese actions, and also issued a warning to Congress, which she predicted would consider legislation this year aimed at forcing China to raise the value of its currency.

Many Democrats, who took control of Congress in last year’s elections, complain that China’s yuan is undervalued, giving Chinese exporters an unfair advantage and acting as a de facto subsidy to producers there.

‘Members of Congress now in positions of responsibility would be wise to be deliberate and proceed with caution,’ Ms Schwab said. ‘What they say and do matters – much more than it did prior to the 2006 elections – and the markets are watching.’

The US and China will hold their regular economic summit, called the Joint Commission on Commerce and Trade, in Beijing in December. 

 

Source: Bloomberg (Business Times 25 Oct 07)

Merrill incurs $3.4b loss on massive write-downs

Charges surge to $11.6b due to credit crunch, leading to deficit in 3rd quarter

NEW YORK – MERRILL Lynch, the world’s biggest brokerage, said yesterday that the summer’s credit crisis triggered a bigger-than-expected US$7.9 billion (S$11.6 billion) write-down during the third quarter.

Bad bets on mortgage securities and leveraged loans used for corporate takeovers caused it to suffer its first loss in six years.

The blow makes Merrill the hardest-hit investment bank on Wall Street amid the recent market turmoil.

Merrill reported a loss of US$2.31 billion (S$3.4 billion), or US$2.82 a share, after paying preferred dividends.

This compared to a profit of US$3 billion, or US$3.50 per share, a year earlier.

Revenue, after factoring in some of its losses, fell 94 per cent to US$577 million from US$9.83 billion a year earlier.

Results missed Wall Street expectations for a loss of 45 US cents per share on US$3.25 billion of revenue, according to analysts polled by Thomson Financial.

Merrill, like many of its rivals, was battered as concerns about mortgage securities triggered a global aversion to risk. The brokerage also said it wrote down US$463 million related to leveraged loans, which dried up significantly during the quarter.

The losses were a big miss from what Merrill said it expected on Oct 5.

The company warned Wall Street at that time that it would take an almost US$5 billion writedown for the quarter, because of its exposure to risky mortgagerelated securities.

The bulk of the losses came from marking down the value of complex financial instruments known as collateralised debt obligations, or CDOs, and from declines in sub-prime mortgages – loans to customers with shaky credit.

Chairman and chief executive Stan O’Neal said the company continues to face uncertainty on the impact of its mortgage-related investments.

‘In the light of difficult credit markets and additional analysis by management during our quarter-end closing process, we re-examined our remaining CDO positions with more conservative assumptions,’ he said in a statement.

‘The result is a larger write-down of these assets than initially anticipated.’

The biggest trouble spot for Merrill was its fixed-income business, which is typically one of the company’s top earnings drivers. Revenue in the unit was negative to the tune of US$5.6 billion in total, because of its CDO and sub-prime mortgage exposure.

Though there are questions among Wall Street analysts about Merrill’s risk management, the company said its liquidity position remains strong while it navigates through choppy market conditions.

It currently has about US$15.2 billion of CDO exposure and around US$5.7 billion of sub-prime exposure, both down substantially from levels at the end of June.

Merrill shares fell 2.2 per cent to US$65.63 in pre-market trading from a close of US$67.12 on Tuesday.

Source: ASSOCIATED PRESS (The Straits Times 25 Oct 07)

PROBLEM SECTOR

The biggest trouble spot for Merrill was its fixed-income business, which is typically one of the top earnings drivers. Revenue in the unit was negative, because of its CDO and sub-prime mortgage exposure.

Dow hit by poor US existing home sales

WASHINGTON – SALES of previously owned homes in the United States fell 8 per cent last month to a record low 5.04 million-unit pace, thus sending US stocks crashing down yesterday.

After two hours of trading, the Dow Jones Industrial Average was down 198.43 points, or 1.45 per cent, at 13,477.8. The Nasdaq Composite Index slid 78.82 points, or 2.82 per cent, to 2,720.44.

It was the lowest sales pace since the National Association of Realtors (NAR) began tracking both single-family and condominium sales jointly in 1999, said the group yesterday.

‘Home sales fell in September, but it was certainly due to the August credit crunch,’ said NAR economist Lawrence Yun.

Total existing home sales, which include condos, fell last month from a downwardly revised pace of 5.48 million in August. Economists polled by Reuters were expecting home sales to fall to a 5.25 million-unit sales pace.

‘The housing data…tells us that we are not out of the woods yet. It increases the uncertainty regarding the US economic outlook and reinforces the view the Fed may have to cut rates at its meeting next week,’ said Mr Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.

The slower pace of sales helped drive up the inventory of homes available for sale by 0.4 per cent at the end of last month to 4.4 million units, which represent a 10 1/2-month supply at the current sales pace.

‘Housing has weakened more over the past few months, and chances are this is not the bottom,’ said senior economist James O’Sullivan at UBS Securities. ‘This certainly helps make the case for the Federal Reserve to keep lowering interest rates.’

Single-family home sales fell 8.6 per cent last month to a seasonally adjusted 4.38 million-unit pace from 4.79 million units, which was the slowest pace in nearly 10 years.

The national median existing home price for both single-family and condos dropped 4.2 per cent from a year ago to US$211,700 (S$310,268).

Source: REUTERS (The Straits Times 25 Oct 07)

Sub-prime crisis negligible: Infosys CEO

The challenge to the company was the sudden appreciation of the rupee

(NEW YORK) India’s No 2 software services exporter, Infosys Technologies Ltd, has felt a ‘negligible’ impact on its business from the US sub-prime mortgage crisis, its chief executive said on Monday. ‘Given our size, impact has been negligible,’ S Gopalakrishnan said in an interview.

US clients, who account for more than half of the company’s business, have not pulled back on information technology (IT) spending or cancelled projects with it, Mr Gopalakrishnan said, despite the sub-prime mortgage crisis that has sparked fears of an economic downturn in the US.

Adding to those worries is the rupee’s steep appreciation – it has gained up to 12.5 per cent against the US dollar this year. ‘What challenged Infosys was this sudden appreciation,’ Mr Gopalakrishnan said. He added that he expects the rupee, which has hit 91/2-year highs against the US dollar, to be very volatile in the short term.

Infosys, which has about 80,000 employees, has previously said that margins may fall by 50 to 100 basis points in the fiscal year that ends in March.

The company has also said that it will lose about 20 billion rupees (S$734 million) in revenue in the year, given the rupee’s strength against the US dollar.

But Infosys, whose clients include ABN AMRO, Goldman Sachs and Royal Philips Electronics, would be able to cope if the rupee appreciates gradually in the medium to long-term, Mr Gopalakrishnan said.

‘If the appreciation is gradual, we are able to grow our business, sustaining margins,’ he said.

The company was in deal talks with 14 to 15 companies in Europe and the US at any given time, for an aggregate value of about US$1 billion, he said, but declined to elaborate.

 

Source: Reuters (Business Times 24 Oct 07)

People crush, grape rush put squeeze on California

The population in California will climb to 60 million from 36 million today

(TEMECULA, California) California wine country in autumn is picture-perfect as vines turn gold and orange and workers harvest plump grape bunches to crush for cabernets, chardonnays and pinot noirs.

But just as the juice ferments, so does resentment over the use of the precious land. From north to south of the leading US wine state, battle lines are being drawn through the vineyards.

In the south, vintners struggle to keep home development from encroaching, while northern California wine grape growers are expanding up the slopes and into the forests, much to the dismay of environmental groups.

Land conflicts surrounding the wine industry are likely to worsen as the people crush and the so-called ‘grape rush’ show no signs of abating in the most populous US state.

Vines grow today along Los Angeles freeways and amid the giant redwood forests of the misty north.

‘The cost of the land has skyrocketed, which forces (winegrowers) to sell or subdivide to put houses on it,’ said Jeff Wiens, general manager of Wiens Family Cellars, in Temecula, Riverside County, southeast of Los Angeles.

The state estimates Riverside County will double its population to 4.7 million by the year 2050, making it the second-largest county in California.

The overall population in California will climb to 60 million from 36 million today.

Wine production here began in the 1960s and housing development expanded later, as residents priced out of San Diego, Orange and Los Angeles counties looked for more affordable housing.

‘It’s very hard for vineyards and housing to co-exist,’ says Jim Carter, owner of South Coast Winery, one of Temecula’s largest vintners. ‘Farming can never produce the dollars that housing can produce.’

As the number of residents rises, so do the politics of land use.

‘We’re probably where Napa, California, was in the 1970s and 1980s,’ said Ray Falkner, president of the Temecula Valley Wine Growers Association.

A decade ago, he said, Napa winegrowers were free to operate their vineyards and wineries. Restrictions imposed by the area’s homeowners eventually changed the way wine- growers operated there.

As with Napa, the lure to live in the rolling hills of Temecula’s wine country is strong.

Top Temecula developer Dan Stephenson is in the planning stages for ‘Europa Village’, a 135-hectare project that will merge wine-making and country living. Fifty-eight homes will intermingle with three wineries.

So far, he says, there has been little resistance from vintners, who are welcoming the wineries and tolerating the housing.

‘We’re going to knock the socks off wine country,’ said Mr Stephenson.

But in practicality, grape farming is far less romantic than most imagine.

Pesticides are sprayed, tractors growl down bumpy roads and the stench of fertiliser permeates the air.

Mr Falkner and other vintners worry that outsiders may eventually upset operations.

‘The more residents, the more pressure,’ Mr Falkner said.

While ordinances are in place to constrain urban sprawl, Mr Falkner still worries.

‘To be truthful, the big test is yet to come,’ he said. ‘Let’s see what happens in another 10 years.’

Meanwhile, up north in Sonoma and Mendocino counties, vineyards battle with environmentalists for expansion into woodlands and even redwood forests – fertile ground for the popular yet delicate pinot noir grape.

Members of the Sierra Club are fighting to keep Premiere Pacific Vineyards from developing about 690 hectares of forest land.

They argue that the project, dubbed Preservation Ranch, poses a risk of water pollution and would upset wildlife and the ecosystem.

‘The loss of the 1,650 acres of trees is a substantial loss,’ said Jay Halcomb, chair of the Redwood Chapter of the Sierra Club.

But Preservation Ranch says the project will reserve 6,000 hectares out of 8,000 hectares to plant over one million trees – and that is only viable because a vineyard is in its midst.

‘We believe it’s an environmentally sound project. The value added from the vineyard makes the whole thing possible,’ said attorney Eric Koenigshofer.

 

Source: Reuters (Business Times 23 Oct 07)

US housing slump may extend into 2009

There’s a 50 to 60% chance of a recession as consumers curb spending: analyst

(CHICAGO) Ivy Zelman’s view of the US housing market is gloomy, but it’s probably the most realistic.

A veteran Wall Street analyst, Zelman, chief executive of the research firm Zelman & Associates, says it’s unlikely the US housing market will recover before 2009, adding there’s a ‘50 to 60 per cent chance of a recession’, as the housing slump curbs consumer spending.

Ms Zelman paints a much darker picture than Federal Reserve chairman Ben Bernanke, who said last week that housing will be a ’significant drag’ on the economy into next year.

When you consider the huge home inventories and tight-as-a-drum mortgage restrictions, it’s easy to conclude that the housing slump could extend well past 2008. Unless financing loosens up and buyers return, her prophecy will become a reality.

‘I’ve never seen the market as bad as this,’ Ms Zelman said. ‘And it could get worse. The home-price decline could range from 16 per cent to 22 per cent.’

Monitoring inventory, builder incentives and demand, Ms Zelman is also watching adjustable-rate mortgage resets.

Homeowners with these loans will automatically face higher monthly payments that they may not be able to afford, another trigger for foreclosures or sales. Some US$500 billion of these loans will re-adjust through 2008, Ms Zelman says.

While foreclosures have declined somewhat from August to September, they still doubled from a year ago, according to RealtyTrac Inc, which monitors the housing market. Since more homes are coming on the market, Ms Zelman says that will only add to the misery.

‘These are the worst inventories we’ve seen as a nation,’ she says. Ms Zelman originally presented her report Oct 10 to the Home Improvement Research Institute, a Tampa, Florida-based trade group.

Ms Zelman’s words carry some weight because she was one of the few major Wall Street analysts to warn of a housing decline months before it began late last year.

She was alarmed that home prices far outpaced personal-income increases during the boom, which is how the economic disconnect began. A bubble created artificially high demand that had to deflate sometime. Now economists and analysts are trying to assess the collateral damage of the bust and sub-prime mortgage meltdown.

Meanwhile, builders are stuck with thousands of new homes they can’t sell and potential buyers are cancelling in droves or are unable to get a mortgage. Housing starts fell to a 14-year low in September.

Mass psychology

‘Builders are desperate now and blowing through inventory,’ says Ms Zelman of homebuilders who are doing anything they can to sell homes. ‘Their revenues are shrinking so fast, they can’t keep up.’ The mass psychology that amplifies and spreads the angst of home sellers will put a brake on overall consumer spending, Ms Zelman predicts.

‘Some 74 per cent of consumer expenditures are correlated to housing. I don’t think the consumer will hold up. They will cut back on things like buying cars and vacations.’

While Ms Zelman forecasts that sales will drop for the next two years, she isn’t as optimistic on home prices, which she says may continue falling until 2010 or 2011.

‘We’d be better off if prices corrected all at once. It will get worse before it gets better.’ Places where sales were strongest and speculators were most active before the bust will be bedevilled by high home inventories for more than a year.

Not every market will get pummelled, though. Manhattan seems to be holding up for certain kinds of housing.

Prices of co-op apartments with four bedrooms or more, for example, rose 19 per cent in the third quarter from a year earlier.

‘Boston is pretty moderate in terms of risk,’ says Mike Ela, president of the service. ‘Lenders have pulled back aggressively.’

Don’t expect to land properties at bargain-basement prices. One assumption is that the best values will be in areas glutted with properties. Yet many sellers will be holding out for prices that they saw at the peak of the boom.

Motivated property owners, though, may be willing to deal.

If you are buying a second home or investment properties, keep in mind that your credit record should be up-todate.

You may also find it easier dealing with institutions that sell ‘real-estate-owned’ homes, or properties that went into foreclosure.

Mr Ela, who has ‘low-ball offers’ pending on two bank-owned properties, prefers dealing with institutions ‘because you’re not dealing with the emotion of the seller. It won’t take too long to get a decision.’

Because lending standards have tightened, if there are any errors on your credit report that show missed payments or outstanding balances, you should get them corrected.

Don’t open any new lines you won’t use and pay your bills on time. These variables will affect your score and may disqualify you from obtaining financing.

Keep in mind that job growth and consumer spending bear close scrutiny. If Ms Zelman is right about a recession coming, then prices may fall more, plunging the housing market into an even sorrier state.

 

Source: Bloomberg (Business Times 23 Oct 07)

Sub-prime rescue bid will do more harm than good

By PAUL KRUGMAN

IT pains me to say this, but this time former Federal Reserve chairman Alan Greenspan is right about US housing. Mr Greenspan was wrong in 2004, when he sang the praises of adjustable-rate mortgages. He was wrong in 2005, when he dismissed the idea that there was a national housing bubble, suggesting that at most there was some ‘froth’ in the market. He was wrong last autumn, when he suggested that the worst of the housing slump was behind us. (Housing starts have fallen 30 per cent since then.) But his latest pronouncement – that the market rescue plan being pushed by US Treasury Secretary Henry Paulson is likely to make things worse rather than better – looks all too accurate.

To understand why, we need to talk about the nature of the mess. First of all, there was indeed a huge national housing bubble. What even those of us who realised that there was a bubble didn’t appreciate, however, was how much of a threat the bursting of that bubble would pose to financial markets. Today, when a bank makes a home loan, it doesn’t hold on to it. Instead, it quickly sells the mortgage off to financial engineers, who chop up, repackage and resell home loans pretty much the way supermarkets chop up, repackage and resell meat. It’s a business model that depends on trust. You don’t know anything about the cows that contributed body parts to your package of ground beef, so you have to trust the supermarket when it assures you that the beef is USDA prime.

You don’t know anything about the sub-prime mortgage loans that were sliced, diced and pureed to produce that mortgage-backed security, so you have to trust the seller – and the rating agency – when they assure you that it’s an AAA investment. But in the case of housing-related investments, investors’ trust was betrayed. Supposedly safe investments suddenly turned into junk bonds when the housing bubble burst. High profits reported by hedge funds – profits that were reflected in huge payments to the fund managers – turn out to have been based on wishful thinking.

Thus, when two hedge funds run by Ralph Cioffi of Bear Stearns imploded last summer, it came as a huge shock to many investors, and helped trigger a market panic. But a recent BusinessWeek report shows that the funds were a disaster waiting to happen. The funds borrowed huge amounts, and invested the proceeds in questionable mortgage-backed securities. Even worse, ‘more than 60 per cent of their net worth was tied up in exotic securities whose reported value was estimated by Cioffi’s own team’. We’re profitable because we say we are – just trust us.

That hasn’t ever caused problems, has it? Stories like this have led to a crisis of confidence. The current yield on one-month US government bills is only 3.41 per cent, an amazingly low number, and a sign that people are parking their money in government debt because they don’t trust private borrowers. And the result is a shortage of liquidity that is greatly damaging the economy.

Which brings us to the rescue plan proposed by a group of large banks, with Mr Paulson’s backing. Right now, the bleeding edge of the crisis in confidence involves worries that there may be large losses hidden inside so-called ’structured investment vehicles’ – basically hedge funds that borrow from the public and invest the proceeds in mortgage-backed securities.

The new plan would create a ’super-fund’, the Master Liquidity Enhancement Conduit, which would seek to restore confidence by, um, borrowing from the public and investing the proceeds in mortgage-backed securities. The plan, in other words, looks like an attempt to solve the problem with smoke and mirrors.

That might work if there was no good reason for investors to be worried. But in this case, investors have very good reasons to worry: the bursting of the housing bubble means that someone, somewhere, has to accept several trillion dollars in losses. A significant part of these losses will fall on mortgage-backed securities. And given this reality, the ‘conduit’ looks like a really bad idea.

I’d put it like this: Investors aren’t putting their money to work because they don’t know where the bad debts are. And when investors need clarity, the last thing you want to be doing is pumping out more smoke. Mr Greenspan’s take, expressed in an interview with the magazine Emerging Markets, seems broadly similar. ‘If you believe some form of artificial non-market force is propping up the market,’ he said, ‘you don’t believe the market price has exhausted itself.’ Translated: This rescue scheme could be seen as an attempt to hide the bad debts everyone knows are out there, and as a result could delay any return of trust to the markets.

Alan Greenspan is making sense.

The writer is a professor of economics at Princeton University

 

Source: Business Times 23 Oct 07

Credit crunch puts global growth at risk: IMF chief

Champions of super fund to rescue mortgage market seen losing case

(WASHINGTON/ZURICH) World credit markets ‘have lived through an earthquake’ and the question is now whether the global economy has reached a turning point after five years of strong growth, the head of the International Monetary Fund said yesterday.

Addressing the IMF’s 185 member countries, IMF managing director Rodrigo Rato warned of aftershocks in markets, saying the full effects of the credit crunch, which began in the US sub-prime mortgage market, were still not fully understood.

‘We already know that we should not try to regulate crises out of existence: that would be like trying to ban earthquakes,’ he said. ‘But the weaknesses in our infrastructure that have been exposed need to be addressed.’ Mr Rato added: ‘The question is now whether the global economy is at an inflection point.’

The outgoing IMF chief noted that in developed countries, corporate balance sheets were strong and labour markets generally healthy.

‘For these reasons, we expect a slowdown in growth but not a recession in the United States, and a smaller slowdown in other advanced countries,’ Mr Rato said, adding that emerging economies had become a source of stability in the global economy.

Mr Rato said risks to global growth were higher than just six months ago and the market turmoil was a warning that good times may not last forever.

Further disruption in financial markets and falls in housing prices could lead to a steeper global downturn, he warned.

So far, movements in exchange rates have been orderly and in line with fundamentals, Mr Rato said, further warning that if the dollar should abruptly fall, it could provoke a loss of confidence in dollar assets.

There was also a risk that the rise of other currencies, such as the euro, could hurt those regions’ growth prospects, he added.

Furthermore, there was a risk that emerging economies that have relied on external financing to fund large current account deficits could be tipped into crisis by a combination of reduced demand for their exports and tighter financial market conditions.

Meanwhile, whether a US$75 billion fund to rescue the battered mortgage-backed securities market takes off or not, its sponsor US Treasury Secretary Henry Paulson seems to be losing the argument over its merits, strategists and economists said.

The fund, announced recently by Citigroup, Bank of America and JP Morgan with Mr Paulson’s support, aims to prevent structured investment vehicles (SIVs) from making panic sales of bonds linked to US sub-prime mortgages.

Many of the SIVs – off-balance sheet vehicles holding some US$370 billion in assets that rely on short-term financing to make a return – are struggling to stay afloat as investors shy away from buying their commercial paper.

The plan has faced a rising tide of criticism, not least from former Federal Reserve chairman Alan Greenspan, who said last Friday the super fund may do more harm than good.

Financial strategists contacted by Reuters said time is running out for the plan’s champions to regain the initiative and the fund risks being still-born.

‘I think they are losing the intellectual argument,’ Ian Harnett, a director at financial consultancy Absolute Strategy in London said yesterday.

The fund was nevertheless more likely than not to go ahead because of the potential embarrassment for the three US banks and for Mr Paulson himself if the idea is scrapped, said Mr Harnett.

‘I would still put it at 70 to 30 that it does happen because of the reputational risk,’ he said.

A global credit crunch, originating from huge losses in US sub-prime mortgage lending, has put acute pressure on SIVs, as demand dried up among investors for the short-term paper SIVs issue to fund investments in high-yielding asset-backed securities with longer maturities.

A fire-sale of assets by the SIVs, set up mainly by banks, would force banks into a fresh round of writedowns of securities held on their balance sheets and result in them granting fewer of the loans that are the life-blood of the global economy.

 

Source: Reuters (Business Times 23 Oct 07)

Developing markets little hit by turmoil: World Bank

Central bankers see need for multilateral talks to strengthen risk management

(WASHINGTON) The impact of recent turbulence in financial markets on developing countries has been limited, and global economic growth remains strong, the World Bank said on Sunday.

Finance ministers and central bankers agreed at weekend meetings that while the global economy was on the mend after recent turbulence, they will need to pay close attention to prevent future crises from erupting.

They also said the turmoil demonstrated how interconnected economies across the world are and the need for multilateral discussions to strengthen risk management.

‘The consensus was that markets are better than in August,’ US Treasury Secretary Henry Paulson told reporters. ‘It has been slowly improving, but it is going to take awhile.’

The World Bank called on donor governments to meet their commitments to boost aid for development and said countries with fast-growing economies and mounting currency reserves could bring new resources to the effort.

In a statement, the bank’s policy-setting Development Committee said its members agreed that more support for the inclusion and empowerment of the poorest countries, especially in sub-Saharan Africa, and more engagement in conflict-afflicted countries are key.

The bank also should help developing countries deal with the causes and impacts of climate change, it said.

The committee session followed a meeting of the bank’s sister institution, the International Monetary Fund. In a lecture sponsored by the IMF, former US Federal Reserve chairman Alan Greenspan warned that rising protectionism could undermine the ability of the US to deal with large deficits.