Rising market pressures may trigger third wave of credit crisis

Business Times – 11 Mar 2008

Nervous investors hanging on to pronouncements of central bankers

(LONDON) Tight money markets and tumbling stocks and the US dollar are expected to increase worries for investors this week as pressure mounts on central banks facing what looks like the third wave of a global credit crisis.

Last week, money markets tightened to levels not seen since December, when year-end funding problems pushed lending costs higher across the board.

In response, the Federal Reserve unveiled new measures to ease liquidity strains on Friday – injecting US$200 billion into the banking system – and said that it was in close consultation with central bank counterparts.

However, the Fed failed to lift the mood much. Investors, keen to see if any further plan is in the works to prevent a financial market seizure, will scrutinise words from key central bankers including Fed officials this week.

‘It’s another round of the credit crisis. Some markets are getting worse than January this time,’ said Jesper Fischer-Nielsen, interest rate strategist at Danske Bank in Copenhagen. ‘There is fear that something dramatic will happen and that fear is feeding itself. Central banks have shown great resolve to try to solve the problems (on money markets) and I’m sure they will do again.’

Philipp Hildebrand, vice-chairman of the Swiss National Bank, warned last week that the world might be in a new, more dangerous phase of the crisis.

If that is the case, the latest wave is the third one.

The first round began in August when interbank lending dried up as banks realised they did not know which was dangerously exposed to the meltdown in the US sub-prime mortgage market.

Then, late last year, pressure intensified again in the money markets – after some of the world’s biggest banks began writing off colossal sums of money – prompting top central banks to inject billions of dollars into the system.

Renewed problems in the credit market – including fears that US mortgage lender Thornburg might go bankrupt and acute cash flow problems at a Dutch fund – and concerns over slowing world growth led to a sell-off in stocks last week.

World stocks, as measured by MSCI, fell more than 3 per cent on the week while the dollar lost more than one per cent to hit record lows against a basket of six major currencies at one point last week.

Also reflecting investor jitters, two-year US Treasury yields hit a four-year low below 1.5 per cent as investors flocked to government bonds.

The cost of corporate bond insurance hit record high levels on Friday and parts of the debt market are also getting hit.

‘A funding freeze by lenders, that appears already in progress, could cause first-round casualties in Spain, Italy, Ireland, Portugal, Greece and Austria, countries collectively identified as the euro zone liability group,’ a UBS note said.

The G-10 policymakers came up with a cash injection plan late last year, with the top five central banks injecting liquidity into banks.

However, after weeks of calm, stress is building up again in money markets.

‘The level of financial stress is . . . likely to continue to fuel speculation of more immediate central bank action either in the form of increased liquidity injections or an early rate cut,’ Goldman Sachs said in a note to clients\. \– Reuters

When will market slide reach bottom?

Dow, S&P still remain above bear market threshold despite plunge

(NEW YORK) Recession may well be here, given the dismal February employment report last Friday. But on Wall Street, many investors still are having a hard time deciding how worried they should be.

The Dow Jones industrial average slid 146.70 points, or 1.2 per cent, to 11,893.69 for the day, falling through the low of 11,971 it set on Jan 22 and finishing at its weakest point in 17 months.

Yet, by the classic measure of a bear market – a drop of at least 20 per cent in share prices – the Dow is a holdout: It is down 16 per cent from its record high reached in October.

The broader Standard & Poor’s 500 index also remains above the bear- market threshold, despite mounting evidence of recession. It has lost 17.4 per cent from its October peak.

These numbers are handy enough for gauging the damage done. But what every investor would like to know is: How much worse will it get? If you figure that a 17.4 per cent drop in the S&P 500 is just a prelude to a loss of 40 per cent by the time the market’s sell-off has run its course, you might well opt to take some money off the table and wait it out.

You know what you’re going to hear from much of Wall Street at a time like this.

Brenton Luce, a portfolio manager at hedge fund Lakefront Partners in Cleveland, writes on his blog that investment pros’ usual advice to clients in down markets is to ’stay long-term focused’. That, he notes, ‘is code for ‘Yes, we have lost you a bunch of money lately. But we hope that the market turns positive soon and we hope that you stick with us until this happens’.’

It wouldn’t be surprising if the blue-chip stocks in the Dow and the S&P 500 were the last refuge for investors who have given up on other sectors of the market. Smaller stocks, for example, now are in bear-market territory, with the Russell 2,000 index of small-company issues off 22.9 per cent from its all-time high set in July.

Still, you might have expected a lot worse, given the trauma in the financial system from the housing bust and its collateral damage.

The credit crunch stemming from banks’ massive losses on delinquent home loans is showing few signs of un-crunching. Money remains very tight, and money is what financial markets need to move up.

The stock market’s slide last week was fuelled in part by worries about Fannie Mae and Freddie Mac, the two government- sponsored mortgage- finance giants that are supposed to help stabilise the housing market by stepping up their purchases of home loans. The companies’ stocks fell last week to their lowest levels in 12 years, and some investors became reluctant to buy their mortgage-backed bonds, which – in theory – are of the highest-quality.

That might have been too much for the Federal Reserve to brook. Last Friday, the central bank announced a major expansion of its emergency lending programme for banks, aiming to ease the credit squeeze.

Some market pros said that investors’ mood might actually improve if Fed officials and the White House would stop talking as if recession were avoidable.

Despite the credit markets’ continued deterioration, some money managers are betting that the stock market won’t get much worse.

A bottom ‘isn’t that far away’, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. He figured that the S&P 500 could fall another 5 per cent or so, which would take it modestly over the 20 per cent loss mark.

Source: LAT-WP (Business Times 10 Mar 08)

Foreclosure rate of US homes up by 57%

Situation worsens despite efforts to help borrowers manage payments

LOS ANGELES – THE number of United States homes facing foreclosure jumped 57 per cent last month compared to a year ago, with lenders increasingly forced to take possession of homes they could not unload at auctions, a mortgage research company said.

Across the US, 233,001 homes received at least one notice from lenders last month related to overdue payments, compared with 148,425 a year earlier, RealtyTrac said on Monday.

Nearly half of the total involved first-time default notices.

The worsening situation came despite ongoing efforts by lenders to help borrowers manage their payments by modifying loan terms, working out long-term repayment plans and other actions.

‘You have more people going into default and a higher percentage of the properties going back to the banks,’ said Mr Rick Sharga, RealtyTrac’s vice-president for marketing.

The US foreclosure rate last month was one filing for every 534 homes. The tally represented an 8 per cent hike from December.

Lenders typically consider borrowers delinquent after they fall three months behind on mortgage payments.

Attempts to help struggling home owners have fallen short.

‘The loan workout modification programmes aren’t having a significant material effect on keeping properties from going back to the banks,’ Mr Sharga said.

One dramatic trend last month was a 90 per cent spike in the number of properties that were repossessed by banks, compared to January last year.

‘It suggests that there’s little or no equity in a lot of these homes, because they are not even being sold to investors at auctions, and it suggests a continuing weakness in a lot of markets in terms of real estate sales,’ Mr Sharga said.

Falling home values and tighter lending standards have extended the housing slump, making it tougher for home owners unable to sell their homes or refinance when they face mortgage payments they cannot afford.

A wave of adjustable rate mortgage resets expected in May and June threatens to push many other home owners into default.

During the past year, 30 states saw an increase in the number of homes that had received at least one filing.

ASSOCIATED PRESS (Source: The Straits Times 27 Feb 08)

NEWS ANALYSIS: Panic and fear, not fundamentals, driving sharp market selldown

Widespread selling creating financial violence people hope to avoid, analysts say

NEW YORK – THE fear is spreading.

For months now, investors have been lured to overseas markets with the promise that surging growth and solid economic fundamentals in Asia and the Middle East would insulate them from the credit squeeze plaguing the United States market.

But the broad international sell-off yesterday and Monday has raised fresh concerns that a looming recession and the fallout from sub-prime mortgages could have global repercussions.

Some analysts saw the sell-off, with leading stock market indexes off 4 per cent to 8 per cent worldwide, as being driven by fear more than by fact.

‘I don’t think it’s warranted by the fundamentals,’ said Mr Edward Yardeni, an independent strategist. ‘The global economy’s resilience in the face of a credit crunch has been impressive.’

Mr Yardeni warned, however, that in a time of panic and fear, less attention is paid to fundamentals, like a fairly tight US job market and strong growth and the extraordinary build-up of foreign exchange reserves in emerging markets. The result is panic selling and the prospect of a global recession.

‘People are creating the financial violence that they hoped to avoid,’ he said.

Other analysts point out that the overseas uncertainty reflects the unpleasant, if not devastating, reality that the excesses of the long-running credit boom will not go away soon.

What makes this correction more dangerous, they say, is that the selling is not being driven by panicky retail investors, as it was in the collapse of the technology bubble, but by hedge funds and investment banks that find themselves saddled with illiquid securities backed by an array of valueless assets.

‘What you see is not a panic of the public. This is a panic of the sophisticated,’ said Mr James Sinclair, a wellknown gold trader who oversees a financial website and who has warned investors for years about the dangers of derivatives.

‘But this will have a tremendous impact on the public. It’s very serious, and drastic emergency economic action is needed.’

Most retail investors have not invested directly in the complex securities that have ruined the reputations of some of Wall Street’s most-respected minds.

Their exposure, however, to plummeting companies like Citigroup and Merrill Lynch, and now a broader basket of stocks affected by the market malaise, will add to the sense of wealth erosion that many are already feeling from the declining values of their houses.

On his blog, JSMineSet, Mr Sinclair has told his readers that as much as US$450 trillion (S$649 trillion) worth of derivatives could disintegrate, leading to a far greater and, in some ways, unpredictable calamity.

He argued that compared with the savings and loan crisis in the late 1980s, when the formation of a trust company for beaten-down institutions established a floor for sinking assets, the inability of the government to form a similar entity for suffering securities had heightened investors’ unease.

While the views of Mr Sinclair, who expects the price of gold to go to US$1,650, up from about US$870 now, might be taken with a grain of salt, other experts have also begun to warn of the dire consequences of the credit market collapse.

Mr Christopher Wood, a strategist based in Asia who publishes a widely read newsletter called Greed & Fear, pointed out in a note published this weekend that the potential insolvency of bond insurers like Ambac, MBIA and ACA Capital signals a larger market correction that has not yet been grasped by policymakers.

‘Greed & Fear’s view is that with the bond insurance business model fast unwinding, a full-scale crisis could be coming,’ he wrote.

The international selling has also stoked a long-held fear that flush Asian and Middle Eastern central banks and governmentbacked

investment funds will cut back on their US dollar-based investments – like Treasury bills and stakes in troubled investment banks – in the face of another round of interest rate cuts and continued weakness in the dollar.

These flows have been a crucial source of liquidity for an economy that produces little of its own domestic savings, and they have been lifelines for capital-starved banks. But no money manager, regardless of how long the timeframe, likes to invest in a falling market, and analysts fear that a spate of additional write-downs and market turmoil will signal to foreigners that the markets in Asia have not yet found their bottom.

One large investor, who asked not to be identified because he did not want to tip his hand, said the sell-off on Monday was a direct response to the stimulus package proposed by the Bush administration – not so much a judgment that the proposal was inadequate as a reflection of the weakness and drift of the world’s largest economy.

‘It is one thing to see the market go from 14,000 to 12,000,’ he said. ‘But when the president of the United States says we are sick, you can’t ignore that.’

 

Source: NEW YORK TIMES (The Straits Times 23 Jan 08)

Asian markets crash while US totters

Recession fears hit home in plunges reminiscent of post-9/11 debacle

(SINGAPORE) It was blood on the floor across Asian bourses yesterday as investors dumped stocks amid intensifying fears of a US economic meltdown.

This, despite President George W Bush last week announcing a massive US$145 billion stimulative tax relief plan and Federal Reserve boss Ben Bernanke stating that more interest rate cuts were in the works.

But all this fell on deaf ears of panic-stricken investors.

The result: a series of institutional programme selling and waves of margin calls which resulted in the most intense one-day rout across Asian bourses in recent memory.

Singapore’s recently revamped Straits Times Index (STI) plunged a massive 6.03 per cent to end at its lowest levels since March 2007 at 2,917.15 points as bellwether stocks and blue chips took a beating. It was its steepest singleday fall since the September 2001 New York bombings, when it had fallen 7.47 per cent.

In Hong Kong, the Hang Seng also posted its worst one-day fall since the same tragedy, as it plunged 5.49 per cent to 23,818.86 – its lowest close since last September. And in Tokyo, the Nikkei 225 sank 3.86 per cent to 13,325.94, while Mumbai’s BSE Sensex 30 plunged 7.41 per cent to 17,605.35 points.

The same depressing scenario was played out in Seoul, Kuala Lumpur, Jakarta, Sydney and elsewhere.

And as Asian investors licked their wounds after a massive beating, European bourses started the day in similar vein in negative territory.

Analysts attributed the selldown to intensifying fears of a US economic recession, brought about by knock-on factors from the widening sub-prime crisis.

That had prompted President Bush to unveil his US$145 billion tax plan over the weekend – which many had hoped would help calm nerves and stabilise markets.

‘Letting Americans keep more of their money should increase consumer spending,’ he declared.

But many in the market now say the plan was too little, too late.

‘We are just seeing the beginnings of what could be a downward spiral which could take months to flatten out,’ said a European fund manager who spoke anonymously on account of the bank’s internal compliance requirements.

‘The real crunch-time could come some time during the middle of this year, when the US adjustable rate mortgages come up for review. That could hit the wider US housing market, especially if banks start tightening up.’

Others noted that this was a long overdue correction, with the markets having largely recovered in November and December, after being hit last July and August.

And even while the US economy comes into focus, new fears are emerging about a massive economic slowdown in the euro- zone, no thanks to a sharp appreciation in the euro which is already hurting exports.

Meanwhile in China, there are fears that Chinese banks which have until now remained largely silent about their sub-prime exposure could now start unveiling losses. Some market insiders reckon large players like Bank of China have substantial exposure, which could come to light in the coming weeks.

Meanwhile, the flight to cash has already started across Asian markets and looks likely to continue for the foreseeable future.

 

Source: Business Times 22 Jan 08

TAKING STOCK: Market likely to stay under pressure

Analysts say Bush’s economic rescue plan will do little to assure investors

A FISCAL stimulus package unveiled last week by United States President George W. Bush may not be enough to assuage market fears that the US economy is headed for a slowdown.

The Dow Jones Industrial Average closed at a 10-month low on Friday, losing 59.91 points to 12,099.3, while the Nasdaq Composite Index ended 0.3 per cent lower at 2,340.02.

Some dealers explain that this may be because Mr Bush’s economic stimulus package, which promises as much as US$150 billion (S$215.5 billion) in new measures, will take some time to pass Congress.

There have also been hopes that US Federal Reserve chairman Ben Bernanke would make an early cut to the central bank’s discount rate, but these seem to be quickly evaporating.

The Federal Open Market Committee is set to meet on Jan 29 to 30, and an interest rate cut is all but a done deal.

The Singapore market, as a result, is expected to trade sideways at best this week, following the US market’s dismal performance.

There will be little by way of economic data from the US to give further direction, although the market may take its cue from the earnings reports of US technology giants.

Computer chipmaker Intel has already come in below expectations. Reporting this week, and likely to give some idea of whether the tech sector is slowing down, are Apple, Motorola and Microsoft.

Mr Kevin Scully, the managing director of boutique capital house NRA Capital, is inclined to think that the market is likely to trend downwards.

‘If you see what people were bullish about, it was hopes of a rescue package. However, the underlying concerns, about weakening US consumption, for instance, are still present.’

Some dealers are looking for a technical rebound this week, as they consider Singapore stocks oversold.

The local reporting season has already begun, with Qian Hu’s results among the first out. More companies are expected to report this week, including CapitaMall Trust, which should unveil full-year results tomorrow.

There have been no nasty surprises so far, but some traders say the market is in such a negative mood that whatever good news comes along may not give much of a boost.

Some stocks with richer valuations, such as property counters, could give up some of their gains, as the results start trickling in, Mr Scully said.

Investors will also start taking defensive stocks seriously, he added.

Many investors will be focused on the local banks’ results, in particular those of DBS Group Holdings, which has said it has some exposure to collateralised debt obligations. It is also expected to name a new chief executive soon. It will report its results before the market opens on Feb 15.

SOME CAUTION NEEDED

‘People were bullish about hopes of a rescue package, but the underlying concerns are still present.’

MR SCULLY, of NRA Capital

Source: The Straits Times 21 Jan 08

US shares endure their worst-ever start to a year

Further selldown expected unless this week’s earnings results are first-rate

NEW YORK – STOCKS in the United States, as measured by the Standard and Poor’s (S&P) 500 Index, are off by 9.7 per cent so far this month – their worst start to a year ever. If markets slide again as they did last week, stocks will head into bear territory.

Another major stock index – the Russell 2000 Index of small-cap stocks – is already there. If the S&P 500 falls about 5.5 per cent this week, it will join the Russell 2000. Last Friday, it fell 8.06 points, or 0.6 per cent, to a 16-month low of 1,325.19.

Both the Dow Jones Industrial Average – off 59.91 points, or 0.49 per cent, at 12,099.3 – and the Nasdaq Composite Index – down 6.88 points, or 0.29 per cent, at 2,340.02 – have hit 10-month lows. Over the course of the last week, the Dow fell 4.02 per cent, and the Nasdaq, 4.1 per cent.

The gloom hanging over Wall Street could deepen this week unless bellwether companies such as Apple and United Technologies provide investors with hope that the US can avert a recession.

‘With the market in such a fragile condition, those earnings had better be good or we could see some severe selling,’ said Mr Richard Sparks, a senior equities analyst with Schaeffer’s Investment Research.

Apple, Bank of America and Wachovia are slated to report their results tomorrow; eBay and Motorola on Wednesday; AT&T on Thursday; and Caterpillar on Friday.

The shortened trading week has scant economic data scheduled for release. Markets will be closed today for Martin Luther King Jr Day.

Investors found little solace last week in a US$150 billion (S$215.5 billion) White House rescue plan, as stocks plunged after Citigroup and Merrill Lynch announced huge losses, and after economic data signalled that the US economy was headed for a recession.

The sharp sell-off seen in recent weeks might not be over, said Mr Owen Fitzpatrick, the head of US equities at Deutsche Bank Private Wealth Management.

‘The market seems to be capitulating to some extent,’ he said. ‘I think we’re finding a bottom. That’s not to say we might not find another one.’

Investors will sift through data in efforts to assess the state of the nation’s economic health, as they look at first-time claims for state unemployment insurance benefits and existing-home sales for last month. Both sets of figures will be released on Thursday.

The forecast for jobless claims is 325,000, while the pace of existing-home sales is expected to display an annual rate of 4.95 million, according to Reuters polls.

 

Source: REUTERS (The Straits Times 21 Jan 08)

WALL STREET: White House plan fails to lift stock market gloom

NEW YORK – THE White House’s effort to boost the economy with a US$150 billion (S$216 billion) stimulus plan failed to lift market sentiment as stocks tumbled for a fourth day on Friday, closing out the worst week for the S&P 500 in five years.

Investors’ main worry was that the effort may not prevent a recession.

The Dow Jones Industrial Average was down 59.91 points, or 0.49 per cent, at 12,099.3 on Friday, its lowest close in 10 months. The Standard & Poor’s 500 Index was down 8.06 points, or 0.6 per cent, at 1,325.19, a 16-month low. The Nasdaq Composite Index was down 6.88 points, or 0.29 per cent, at 2,340.02, a 10-month low.

For the week, the S&P fell 5.41 per cent, its biggest weekly percentage drop since July 2002. The Dow fell 4.02 per cent, and the Nasdaq slid 4.1 per cent.

‘The fear is that the plan, and even the Fed, may not have enough firepower to turn the path to recession around,’ said Mr Richard Sparks, senior equities analyst at Schaeffer’s Investment Research in Cincinnati.

Stocks erased earlier gains after President George W. Bush said a government plan to stimulate the economy should be about 1 per cent of gross domestic product, or as much as US$150 billion.

‘There is so much fear in the market that gains just don’t stick. Traders are using any attempt at a rally to sell out of their positions,’ Mr Sparks said.

Said Mr Michael Mullaney of Fiduciary Trust Co in Boston: ‘There’s still a general malaise in the overall equity market, and even this may not be enough to keep us out of a recession. Part of the problem is it’s just not as much as was anticipated by the market.’

Meanwhile, there continues to be a debate among economists on measures announced to give a kick to the economy.

The Congressional Budget Office, for example, said that temporary, one-time-only changes in tax policy like those suggested in the stimulus package may have only a moderate effect relative to permanent changes like lower income tax rates.

Many economists also say that a drawback to Mr Bush’s proposals, as outlined so far, is that they might not put cash in the hands of people most likely to spend it: those at the lower end of the income spectrum.

Mr Bush signalled that he would limit rebates to people who pay federal income taxes, which rules out many low and middle income people.

Mr Robert Greenstein, executive director of the Centre on Budget Policy and Priorities, is one of many liberal economists urging that the tax rebate be in the form of a credit for children, or some form of credit for the Social Security taxes they pay.

Without such improvements, he said, Mr Bush’s plan ‘would save fewer jobs and do less to shore up a weak economy than it should’.

 

Source: Reuters, New York Times (The Straits Times 20 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

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)

WALL STREET INSIGHT: Investors brace for another harrowing week

Earnings, economic reports ahead add to worries over US economy’s health

NEW YORK CORRESPONDENT

IT was another dizzying and harrowing week for US stocks, and with Wall Street’s perception of the economy’s health turning sour, investors should brace for more of the same in the coming week, ahead of a wave of rough earnings and economic reports.

‘It’s hardly a surprise that the stock market keeps slipping back into selling,’ said Jim Herrick, head of equity trading at RW Baird. ‘It’s very hard to gain any kind of buying traction when you get another piece of data pointing to a recession or more financial troubles for the banks every couple of days,’ he said.

Indeed, while stocks seemed on the brink of putting together a rally in the middle of the week, advancing on Wednesday and Thursday, those two days were sandwiched between big losses on Tuesday amid fears of bankruptcy at mortgage lender Countrywide Financial, and again on Friday, despite Bank of America’s announced takeover of Countrywide.

Since the start of January, economists have on average raised their likelihood of a recession occurring from just below 40 per cent to 50 per cent as of the end of the week. Goldman Sach’s Jan Hatzius was the latest and most noteworthy economist to throw his hat into the recession ring, with a report that estimated a better than 60 per cent chance of an economic downturn of about one per cent a quarter, lasting about six months.

‘The market is still reconciling the fact that the economy is slowing and might be in a recession,’ said Paul Nolte, director of investments with Hinsdale Associates. ‘Valuations may be too high compared to the low earnings.’

Investors will have plenty of opportunity to begin judging just how out of whack valuations are on an earnings basis as the fourth quarter earnings season shifts into high gear this week. Last Friday, investors reacted with a big sell-off to a downbeat report from American Express which took a charge of US$440 million on missed payments and estimated lower profits throughout the year.

American Express’s 10 per cent decline helped drag the Dow Jones Industrials to a 246.79 points, or 1.92 per cent decline to 12,606.30. The S&P 500 did a little better with a dip of 19.31 points, or 1.36 per cent to 1,401.02, while the Nasdaq Composite did a little worse than blue chips, giving up 48.58 points, or 1.95 per cent, at 2,439.94.

The major averages each finished the week with heavy losses. The Dow shed 1.5 per cent, and the S&P 500 ended down 0.7 per cent. The Nasdaq was the worst performer with a loss of 2.6 per cent. Over the first 10 trading days of 2008, the Dow is down 5 per cent, while the S&P 500 is off 4.2 per cent, and the tech-heavy Nasdaq has plunged by 8 per cent.

Investors will have more big-name companies’ earnings reports and forecasts this week, with fourth quarter results expected from major banks and bellwether technology firms.

Genentech kicks things off today, followed tomorrow by Citigroup, US Bancorp and Intel. Wednesday brings reports due from JP Morgan Chase and Wells Fargo, Thursday from Merrill Lynch, Washington Mutual and IBM.

On Friday, it’s General Electric’s turn.

Thomas Lee, JP Morgan chief equities strategist, has a dour outlook on the fourth quarter profit season’s effect on the market. ‘The fourth quarter is unlikely to turn bears into bulls,’ he wrote in a research report, predicting a 10 per cent profit decline for the S&P 500 in the quarter, following a 5 per cent decline in the third quarter.

But investors will likely be paying as much attention to the week’s economic reports as the earnings reports, and that could prove to stocks’ advantage, as the Federal Reserve’s upcoming interest rate meeting looms larger.

The rising spectre of a recession has also raised the chances that the Fed will chop rates by 50 basis points at its Jan 30 meeting. Goldman also predicted that the Fed will cut the Fed Funds rate to 2.5 per cent this year to stimulate the economy.

Based on chairman Ben Bernanke’s comments last week, the Fed appears ready to knock rates down by half a per cent right away, but with oil prices in the US$90’s and other commodities soaring, strong inflation numbers could make it hard for the Fed to be very aggressive, said Lehman Brothers’ economist Ethan Harris.

Reports to be released this week include December producer prices and retail sales on Tuesday, the consumer price index, industrial production data, a housing market index, and the Fed’s Beige Book on Wednesday. On Thursday, housing starts, weekly jobless claims and the Philadelphia Fed survey will be released. Friday will bring a key consumer sentiment survey along with leading economic indicators.

 

Source: Business Times 14 Jan 08

wallstreet: Stocks dip for third straight week on news of belt-tightening

NEW YORK – US STOCKS fell sharply on Friday, capping a third consecutive weekly decline, on a warning by American Express Co of mounting credit-card defaults and a slowdown in consumer spending.

Worries about consumer belt-tightening hit stocks – from fast-food chain McDonald’s Corp to Tiffany & Co, which cut its profit forecast on weak consumer spending.

Evidence that individuals reined in their usual holiday spending last year came from SpendingPulse, a private retail data service, which said spending, excluding sales of petrol and cars, fell 0.7 per cent last month.

‘Consumers were not expected to spend much and they spent even less than that,’ said Mr Fred Dickson, director of retail research at D.A. Davidson & Co in Lake Oswego. ‘The markets right now are very much in recession mentality.’

The Dow Jones Industrial Average ended down 246.79 points, or 1.92 per cent, at 12,606.3. The Standard & Poor’s 500 Index fell 19.31 points, or 1.36 per cent, to 1,401.02. The Nasdaq Composite Index dropped 48.58 points, or 1.95 per cent, to 2,439.94.

The S&P 500’s year-to-date decline of 4.59 per cent makes it the fourth-worst start to any year in the history of the benchmark, according to Mr Howard Silverblatt, senior index analyst at Standard & Poor’s.

For the week, the Dow shed 1.5 per cent, the S&P lost 0.8 per cent and the Nasdaq declined 2.6 per cent.

American Express shares dropped more than 10 per cent to US$44 after the credit card company gave a profit warning. It was the steepest plunge in the company’s shares since the first day the stock markets reopened following the Sept 11 terror attacks.

Also on Friday, Bank of America Corp said it would buy battered mortgage lender Countrywide Financial Corp for US$4 billion (S$5.7 billion) in stock in a transaction that could help avert one of the biggest collapses arising from the US housing crisis.

Moody’s Investors Service said it may cut Bank of America’s credit rating.

Elsewhere in the financial sector, AllianceBernstein Holding shares dropped nearly 10 per cent to US$69.70 after the money manager said it sees lower 2007 earnings per share, partly due to lower hedge fund fees.

 

Source: Reuters (The Sunday Times 13 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)

Inflation fears drag global stock markets down

LONDON – ASIAN and European stocks tumbled yesterday as last week’s strong United States inflation data reduced expectations that the US Federal Reserve would deliver further interest rate cuts soon.

Also, in a sign that rising food and agricultural prices may push inflation up globally, US wheat futures surged more than 3 per cent and surpassed US$10 a bushel for the first time.

Investors took their cue from Wall Street’s sell-off last Friday in the wake of unexpectedly strong inflation figures.

US consumer prices jumped 0.8 per cent last month. On a 12- month basis, inflation hit 4.3 per cent, the fastest since June last year. New York’s Dow Jones Industrial Average tumbled 1.32 per cent last Friday in a volatile session as the price data raised fears of stagflation – a combination of slower growth and stubborn inflation pressures.

Inflation concerns generally weigh on equities as they erode corporate profits.

They are also nagging the world’s central banks as they wrestle with persistent tensions in money markets, which are showing only modest signs of easing after policymakers announced a plan last week to inject liquidity. The plan started yesterday.

Markets are now pricing in around a 78 per cent chance of a January Fed cut in benchmark interest rates to 4 per cent, which will follow three easing moves since the credit crisis broke in August.

Earlier this month, markets fully priced in a cut.

Developments in money markets are key in a week when investors will receive more evidence of how the financial sector is coping with the US sub-prime mortgage fallout as major US banks release quarterly earnings.

In morning trade, London’s FTSE 100 index of leading shares dropped 1.44 per cent, while Frankfurt’s DAX 30 slid 1.2 per cent, and Paris’ CAC 40 shed 1.88 per cent.

Earlier in Asia, Tokyo closed down 1.7 per cent, Hong Kong slumped 3.51 per cent, Seoul shed 2.9 per cent, Shanghai gave up 2.6 per cent, and Mumbai lost 3.8 per cent.

 

Source: REUTERS, AGENCE FRANCE-PRESSE (The Straits Times 18 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)

Traders consider Fed rate cut a certainty

Renewed turbulence in markets puts pressure on Fed to pump up economy

(WASHINGTON) Federal Reserve chairman Ben S Bernanke may have to risk becoming the proverbial ‘fool in the shower’ to keep the US economy out of recession.

Renewed turbulence in financial markets puts Mr Bernanke, 53, under pressure to open the monetary spigots wider to pump up the economy.

Traders in federal funds futures are betting it’s a certainty the Fed will cut its benchmark interest rate from 4.5 per cent today, and they see a better-than- even chance the rate will be 3.75 per cent or below by April.

‘The Fed has to assure the markets that it’s ready to ride to the rescue and cut rates by as much as necessary,’ says Lyle Gramley, a former Fed governor who’s now a senior economic adviser in Washington for the Stanford Group Co, a wealth-management firm.

The danger of such a strategy is that Mr Bernanke may become like the bather, in an analogy attributed to the late Nobel- Prize-winning economist Milton Friedman, who gets scalded after turning the hot water all the way up in a chilly shower.

The monetary-policy equivalent would be faster inflation or another asset bubble in the wake of aggressive Fed action to tackle the slowdown in the economy.

Mr Bernanke opened the door to a rate cut at today’s meeting when he signalled in a speech on Nov 29 that the market turmoil had led to tighter credit conditions that might slow economic growth.

‘The odds of something more than a 25 basis-point cut in the funds rate are pretty good,’ says Louis Crandall, a former New York Fed official and now chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based bond research firm.

He expects the Fed to twin a quarter percentage-point cut in the funds rate, charged on overnight loans between banks, with a half-point reduction in the Fed’s 5 per cent discount rate. That’s the rate the central bank charges on its direct loans to commercial banks.

Narrowing the difference between the two might encourage more banks to borrow from the Fed and help relieve some of the stress in the money markets.

Former Fed governor Lawrence Meyer, who also expects a quarter-point cut in the funds rate, says the central bank needs to signal in its statement after the meeting that it’s open to doing more.

‘It would damage the market’s confidence if they don’t,’ says Mr Meyer, now vice-chairman of economic forecaster Macroeconomic Advisers LLC in St Louis. ‘You don’t want to send a message that we’ll only ease policy over our dead bodies.’

Money-market interest rates have jumped during the last month as lenders hoarded cash to buttress year-end balance sheets. Also driving rates up: concerns about losses on securities linked to mortgages at risk of default. The rate on three-month loans between banks rose to 5.14 per cent on Dec 7 from 4.9 per cent on Nov 7.

The credit squeeze poses a double-barrelled risk for the economy. In the short run, there’s the danger that a major institution might encounter financing problems before the end of the year.

‘The risk of a financial accident is vastly greater than it was three months ago,’ says Mr Crandall, whose firm is a unit of ICAP plc, the world’s largest broker for banks and other financial institutions. ‘A lot of firms are running on Plan C in dealing with the turmoil, and they don’t have a Plan D.’

 

Source: Bloomberg (Business Times 11 Dec 07)

WALL STREET INSIGHT – Mixed signals point to uncertainty

Investors focus on Tuesday’s Fed meeting: will it be 25 or 50 pt cut?

A RECESSION or simply a period of slow economic growth in which the economy glides gently to a soft landing before lifting off again? A modest 25 basis point cut in short-term interest rates, or a hefty 50 basis point reduction?

Considering the debates raging through the stock market over the outcome of the turmoil in the credit markets, the severe housing slump and the huge losses being suffered by the banks and investment houses due to their holdings in mortgage-backed securities, investors are left with those two essential, and closely related questions, and a high degree of uncertainty over their outcomes that’s likely to keep stocks volatile and range-bound.

The fate of the US economy is a long-term question, one which will only be answered over the next three or four months. But the question over how the Fed will choose to deal with the liquidity crunch and the threat to the economy will be answered tomorrow when the Federal Open Market Committee meets to decide on whether and by how much to cut the target interest rate for short-term loans.

‘This market is in dire need of help and reassurance right now, and we got some of that on Friday from Treasury Secretary (Henry) Paulson’s plan for sub-prime mortgage borrowers, and now Wall Street is waiting on pins and needles to see what the Fed is going to do for it on Tuesday,’ said Joe Kalinowski, chief investment strategist at Grace Financial.

The Fed is widely expected to trim at least a quarter point from its 4.50 per cent target Fed funds rate, but the market believes that a half point cut is needed to ease the liquidity problems besetting the economy and help stave off a recession. Some Wall Street economists believe that Fed chairman Ben Bernanke and the other members of the FOMC will agree.

‘The risk of a recession is better than 50 (per cent) at this point, with jobs growth slowing, businesses having trouble getting credit, and home prices continuing to fall,’ said David Rosenberg, Merrill Lynch’s chief economist.

‘While the inflation hawks on the committee will not make this an easy decision, I think there’s a better than 50 (per cent) chance that the Fed will choose to cut 50 basis points in order to stave off a recession and send the right signal to the market,’ he said.

But after the release of the November jobs report last Friday, showing moderate jobs gains and strong wage increases, Joel Naroff, president of Naroff Economic Advisors, said he believes the Fed will have a hard time making the case for a half percentage point cut in the Fed funds rate.

‘The economic data is sending us mixed signals over the health of the economy, and that should result in a fierce debate within the FOMC over how much to cut. It is likely we will get a rate cut, but that will probably be 25 basis points at best,’ he said.

Stocks in New York closed little changed on Friday after the latest mixed signal – an employment report that showed that job growth fell precipitously from 170,000 in October, but still came in at fairly robust 94,000 last month.

While the Dow Jones Industrial Average gained 5.69 points at 13,625.58, the S&P 500 slipped 2.68 points, or 0.2 per cent, to 1,504.66. The Nasdaq too closed the day down, by 2.87 points, or 0.1 per cent, to 2,706.16.

For the week, the Dow gained 1.8 per cent, the S&P 1.6 per cent and the Nasdaq 1.7 per cent.

With the Federal funds futures market on the Chicago Board of Trade reflecting a 40 per cent chance of a 50 basis point cut, an interest rate cut of half a percentage point will likely be greeted with a strong celebratory rally tomorrow, traders said.

‘Even if the Fed only gives us a 25 point cut, we could see a rally if the FOMC says in its statement that it’s prepared to cut more if the conditions warrant,’ said Bruce Bittles, chief investment strategist at Robert W Baird & Co.

While the Fed meeting is expected to be the climactic event of the week, there will still be three days of trading left for investors to consider and reconsider their positions. Traders said they are braced for more of the same volatility that has defined the stock market for more than a month now.

Indeed, the durability of any gains will hinge on what the news of the week tells investors about another big short term uncertainty vexing the market, namely how the financial sector is weathering the sub-prime shakeout. That begins on Thursday with Lehman’s fourth quarter earnings report.

Goldman Sachs and Morgan Stanley report the following week. Brokerage reports will be watched very closely for signs of more sub-prime related credit writedowns. During the third quarter, Lehman wrote off more than US$1 billion of loans.

Investors won’t lose their focus on the economy, as inflation data, in the form of both producer and consumer prices, are reported on Thursday and Friday, respectively. Another big item is retail sales for November, also released on Thursday.

 

Source: Business Times 10 Dec 07

Wondering about Wall Street’s mood? Look up

Research shows that the stock market goes up on sunny days and dips on gloomy ones.

FORGET about buying low and selling high. If you are worried about the recent volatility in the stock market, perhaps you should let the weather be your guide.

Buy cloudy. Sell sunny.

If you consistently bought stocks when the sky was grey and overcast and consistently sold stocks when the weather was bright and sunny, and you did this over a period of 16 years across 26 stock markets around the world, you would…well, let’s just say you would be lounging on a hot beach right now with a long, cool drink next to you.

Research into the psychological effect of weather on the stock market has a surprisingly long history, and no, this is not goofy theorising by armchair investors. Data reveal strong correlations between sunshine, and possibly other weather-related factors, and the performance of the stock market.

The data obviously do not suggest that stocks always rise in sunny weather or that they always fall when it is cloudy. But the data do suggest that, on average, markets tend to go down when the sky is grey and to go up on sunny days.

In one large study of 26 stock markets around the world between 1982 and 1997, researchers David Hirshleifer and Tyler Shumway showed that the annualised average return on perfectly sunny days was 25 per cent, while the annualised average return on overcast days was only 9 per cent.

The researchers examined how each market performed on every trading day during a 16-year-period and compared the returns with daily meteorological data on whether it was sunny or overcast in the cities where the stock markets were located.

Dr Hirshleifer, a financial economist at the University of California at Irvine, said he was initially sceptical that there was a connection between sunshine and stocks.

‘We feel it is hard to argue with the data,’ said Dr Hirshleifer, who published his study in the Journal of Finance. ‘The evidence is quite strong…The difference is large and statistically significant and indeed comes from cloud cover.’

Various researchers have unearthed other weather-related effects.

Stock markets generally tend to do better in the winter, for example, than in the summer.

Several theories have emerged to explain the findings, and some theories contradict others. One school of thought has attributed the better performance of stock markets in winter months to the willingness of people to take more risks when it is cold. Others have pointed to a more prosaic explanation: At least in Europe and North America, people tend to go on vacations during the summer.

Dr Mark J. Kamstra, a finance professor at York University in Toronto, argued that seasonal variations in the markets might be linked with a psychological condition known as seasonal affective disorder, which is linked to diminished amounts of sunlight starting in autumn.

Dr Kamstra based his argument on a study he conducted that looked at the number of daylight hours and stock market performance in countries located at different latitudes – where the amount of sunlight varies naturally.

People with seasonal affective disorder tend to become depressed as the days grow shorter.

Since people with depression are often risk-averse, he said, this might explain why markets do poorly in autumn. By November, however, nearly everyone who is going to get the disorder has got it (and presumably got out of the market), which is why Northern Hemisphere stock markets typically do better between December and February.

Professor Ben Jacobsen, a finance professor at Massey University in Auckland, New Zealand, argued against that explanation, saying his own analysis does not support the theory. Besides, he added, if investors were making mistakes because of a disorder linked to a lack of sunshine, they ‘would probably be fighting it now using sun beds’.

Dr Hirshleifer said his study of 26 stock markets found that sunshine was the only factor that mattered, even in countries that were warm and sunny all year round.

‘There is evidence that on sunny days, people give larger tips in restaurants, while suicides go up on cloudy days,’ he said. On bright and cheerful days, people also tend to give more optimistic answers about how long they expect to live and whether their marriages will be stable or end in divorce, he said.

Given the transaction costs of buying and selling stocks, Dr Hirshleifer said it is impractical to use sunshine as a stable investment strategy, although an investor who is planning to sell some stocks anyway might want to time the sale to a sunny day of the week instead of a cloudy day.

‘The main lesson for investors is something broader,’ said Dr Hirshleifer. ‘It is important to discount for your moods in making investment decisions.’

 

Source: Washington Post (The Sunday Times 9 Dec 07)

US sub-prime bailouts help stocks but STI runs into headwinds

IT HAS been bailout week as far as stock markets were concerned but judging by the performance of the past two days, scepticism abounds.

First, it was Fed officials dropping blatant hints about cutting interest rates at their Dec 11 meeting, then came the Bush administration’s mortgage-freeze offer to ease the sub-prime pressure.

It looks like everyone is pulling out the stops to try and make sure there’s no 2008 recession which, if it does occur, would be disastrous given that it’s an election year.

Even though many experts believe lower interest rates and the Bush bailout package are only temporary band-aids for a gaping housing wound, the short-term response last week was a large bounce in the major indices led by those on Wall Street.

The outcome here was that the Straits Times Index managed to rise 36 points or one per cent over the five days to 3,557.95.

But looking at the aggregate performance over the week doesn’t tell the whole story – on Thursday, the index reversed a 55-point rise to finish a nett 7 points down, a pattern that was repeated yesterday when it first shot up by 60-odd points only to collapse to a nett gain of just 5.4 points.

SingTel and the banks were the main index drivers throughout the week, displaying heightened volatility as the days passed. For SingTel there were no fresh broking reports to justify the vast swings. However, for the banks, several ‘overweight’ calls were issued, including those from Kim Eng, DBS-Vickers, Credit Suisse and BNP Paribas.

Most of these were written after the latest loan figures were issued. Using varying valuation methodologies, analysts still believe the banks to be undervalued, though upside from current levels appears to be between 10 and 20 per cent.

In the second line there was continued play on oil palm/commodity stocks such as Golden Agri, Indoffod Agri, Wilmar and Olam, supposedly because of rising oil prices. Also in focus was the construction sector, mainly featuring Lian Beng and Koh Brothers, while penny stocks such as E-Nets, Jade Technologies and Armada enjoyed some respite from the pressure they sustained throughout November.

In its weekly roundup, AMP Capital Investors said it expects equities to move higher into the year-end, thanks to the prospects of more US interest rate cuts and positive seasonal forces. ‘December has been the strongest month of the year on average over the last 20 years so . . . January is also a strong month.’

However, the fund manager said the next six months will be volatile because of US-led uncertainty.

US investment bank Morgan Stanley said in a Dec 6 currency report that the odds of a US recession are now about one in two.

‘As we expected, and despite the Fed cut, credit market conditions have deteriorated considerably and equity market performance has taken a dive. Accordingly, our preferred model implies a risk of US recession of 48 per cent in the coming 12 months,’ said MS.

In a Dec 3 US Economics report, Morgan Stanley said it believes an earnings recession has already begun, judging by Q3 reported profits. It said the market has not priced this in yet and thus poses a downside risk.

‘Earnings disappointments likely will drag equities lower,’ it said.

 

Source: Business Times 8 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)

US home prices plunge by record 4.5%

WASHINGTON – HOME prices in the United States fell in the third quarter by the most in at least two decades, as the sub-prime lending crisis caused sales to slump.

Home values retreated 4.5 per cent in the three months ended Sept 30 from the same period last year, the most since records began in 1988, according to S&P/Case-Shiller. It followed a 3.3 per cent drop in the second quarter.

US consumer confidence was also weak, falling this month for the fourth straight month to its lowest in two years, on concerns about rising energy prices and financial market volatility.

The Conference Board said its index of consumer sentiment fell to 87.3 from a revised 95.2 last month, a sharper fall than expected.

The Dow Jones Industrial Average gained 144.69 points after one hour and 45 minutes of trade to 12,888.13.

Source: BLOOMBERG NEWS, REUTERS (The Straits Times 28 Nov 07)

TAKING STOCK – Bourses buckle across Asia on US, oil worries

ST Index falls 91 points, marking its fourth slump in five sessions

REGIONAL bourses including Singapore suffered a rout yesterday in the face of fresh worries about a slowdown in the United States and record crude oil prices.

The Straits Times Index (STI) plunged 91.07 points, or 2.65 per cent, to end at 3,347.20 – its fourth slide in five sessions.

About 1.83 billion shares worth $2.18 billion were traded, with gainers trailing way behind losers by 176 to 677.

Said CIMB-GK research head Song Seng Wun: ‘It doesn’t take much to knock the wind out of the market’s sails at the moment.

‘Today, it was a continuation of US recession worries, sub-prime fears and high oil prices.’

Earlier, the Federal Reserve slashed its US growth forecast for next year to between 1.8 per cent and 2.5 per cent, down from the 2.5 per cent to 2.75 per cent range forecast in June.

More bad news battered the markets as crude oil continued its charge towards the psychologically significant US$100 mark, hitting a peak of US$99.29 during intra-day trade due to a weakening greenback.

Market players also pointed to Japan’s Nikkei index, saying its early dive had set the scene for a bearish regional trading session.

Said a Singapore dealer: ‘The Nikkei slid quite heavily in late morning trading, which affected regional sentiment.

‘Here, we saw the herd mentality at work, which sparked a selldown.’

The Nikkei dipped 2.46 per cent to 14,387.66 points, while bloodletting on Hong Kong’s Hang Seng Index sent it down by 1,153.02 points or 4.15 per cent to 26,618.19.

Here in Singapore, traders’ fears that Tuesday’s modest recovery was just a ‘dead cat bounce’ – a mild recovery before another fall – were realised.

Singapore Exchange shares led the STI’s decline, as they dived 70 cents to $12.40. That alone accounted for a 10.8-point fall in the index. Dealers said hedge funds were largely responsible for this selldown.

SingTel shares continued their southward spiral as they fell another six cents to $3.72. Investors are concerned about the fallout from an unfavourable ruling by Indonesia’s competition watchdog, but some analysts feel such fears might be overdone.

A Credit Suisse report noted: ‘Concerns over the political and regulatory risk are unlikely to affect short-term or possibly even long-term forecasts. Thus, a further correction could signal a buying opportunity.’

Bank stocks also took a hit, with United Overseas Bank dropping 60 cents to $19. DBS Group Holdings fell 40 cents to $19.20, while OCBC Bank slipped 15 cents to $8.25.

There was no bright debut for Z-Obee Holdings, which managed only 28.5 cents – below its issue price of 34 cents.

Given the volatile times and cautious mood, market experts urge investors to switch from speculative stocks to those with a proven track record and a low price-earnings ratio.

Mr Song added: ‘There are still buying opportunities, despite the uncertain environment. Blue chips, defensive stocks and resource sector counters still continue to be attractive.’

 

Source: The Straits Times 22 Nov 07

Dow down 163 points

UNITED States stocks plunged in early trading on fears that the fallout from credit losses and mortgage defaults will hurt economic growth.

After two hours of trading, the Dow Jones Industrial Average was down 163.14 points or 1.2 per cent at 12,847.

The Standard & Poor’s 500 Index fell by 20.3 points, or 1.4 per cent to 1,419.11 while the Nasdaq Composite Index shed 45.99 points or 1.7 per cent to 2,550.82.

Stocks extended losses after data showing consumer sentiment fell this month to its lowest in two years.

US Treasury Secretary Henry Paulson’s remarks that the number of potential home-loan defaults will be significantly bigger next year also dampened sentiments.

Source: REUTERS (The Straits Times 22 Nov 07)

SELLDOWN IN FINANCIAL FIRMS – Wall St plunges on Citi, economic worries

NEW YORK – STOCKS in the United States slid yesterday as a brokerage downgrade of Citigroup sparked a selloff in financial services companies on concerns about credit losses and the housing slump.

Goldman Sachs cut Citigroup to ’sell’ and said the bank may have to write off US$15 billion (S$21.8 billion) over the next two quarters as mortgage losses reduce earnings.

After two hours of trading, the Dow Jones Industrial Average was down 167.05 points, or 1.27 per cent, at 13,009.74. The Standard & Poor’s 500 Index was down 19.41 points, or 1.33 per cent, at 1,439.33. The Nasdaq Composite Index was down 32.93 points, or 1.25 per cent, at 2,604.31.

In addition, a brokerage said Freddie Mac, the No.2 US home funding source, may suffer between US$1 billion and US$5 billion of US sub-prime mortgage losses.

‘Financials keep on going down,’ said OakBrook Investments head trader Giri Cherukuri. ‘You had the Citigroup downgrade and there are general worries about how many more write-offs there are to come.’

Citigroup shares fell 5.2 per cent to US$32.26 on the New York Stock Exchange, while shares of Bank of America declined 3.3 per cent to US$42.89.

 

Source: REUTERS (The Straits Times 20 Nov 07)

wallstreet – Bargain-hunting lifts volatile stock markets

NEW YORK – US STOCKS rose on Friday after a day of sharp price swings.

The S&P 500 narrowly averted a third straight week of losses as bargain-hunting lifted the beaten-down technology sector while shares of oil companies advanced on buoyant crude prices.

After see-sawing through most of the day as the market was buffeted by worries over the housing slump and the credit crisis, major indexes mounted a swift upturn in the last half-hour of trade as investors bid up shares of technology companies such as BlackBerry maker Research In Motion and computer and printer maker Hewlett-Packard Co.

Plans for an additional US$10 billion (S$14.5 billion) share repurchase by network equipment maker Cisco Systems also buoyed sentiment in tech shares, helping the Nasdaq to snap a two-day losing streak.

‘I am buying here,’ said Mr Jeffrey Kleintop, who helps to oversee about US$163 billion as chief market strategist at LPL Financial Group in Boston. ‘It’s very hard to push this market down.’

Investors also bought up shares of companies seen as better positioned to withstand an economic slowdown, such as consumer products maker Procter & Gamble Co, helping to underpin the broader market.

But shares of financial services companies, including Citigroup Inc, fell on persistent worry that losses from mortgage defaults and the housing slump may worsen.

The Dow Jones Industrial Average rose 66.74 points, or 0.51 per cent, to close at 13,176.79. The Standard & Poor’s 500 Index gained 7.59 points, or 0.52 per cent, to end at 1,458.74. The Nasdaq Composite Index added 18.73 points, or 0.72 per cent, to finish at 2,637.24.

For the week, the Dow gained 1.03 per cent while the S&P 500 and the Nasdaq each ended 0.35 per cent higher.

Among tech companies, shares of Research In Motion, Garmin, Apple, Cisco and digital map maker Tele Atlas NV rose; while among energy company shares, Chevron Corp was a winner.

Among financials, Citigroup Inc, the No. 1 US bank and a Dow component, fell 1.7 per cent to US$34.

 

Source: Reuters (The Sunday Times 18 Nov 07)

HSBC writes off US$3.4b on mortgages in Q3

But it says those losses were more than offset by revenue growth in the group

(LONDON) HSBC Holdings is taking a US$3.4 billion charge against third-quarter profits because of accelerating losses in its HSBC Finance Corp mortgage business in the United States.

However, in a trading update the company said that those losses were ‘more than offset by revenue growth in the group’ as a whole and that third-quarter operating income was up compared with a year ago. ‘There is the probability of further deterioration if the current housing market distress continues and further impacts the broader economy,’ the company said.

HSBC, Europe’s biggest bank by market value, said pretax profit in the third quarter rose from a year ago. Shares of the London-based bank rose 3.6 per cent after it said pretax profit in the corporate, investment banking and markets unit in the quarter was ‘broadly in line’ with the year-earlier quarter.

‘Given that they have increased provisions by US$1 billion, for them to say pretax profit in the third quarter is ahead is little short of amazing,’ said Alex Potter, a London-based bank analyst at Collins Stewart. HSBC, helped by lending in Asia and Latin America, has held up better than most of Europe’s banks this year. Still, US bad loans have increased since HSBC first said almost a year ago that sub-prime loans would hurt revenue growth. The bank set aside US$10.6 billion for bad loans in 2006 and may need reserves of US$13.6 billion this year, Sanford C Bernstein & Co estimates.

HSBC shares rose 30.5 pence to 873 pence at 8.50am in London, valuing the company at 103 billion pounds (S$308 billion). They have fallen 6.2 per cent this year, outperforming the 15 per cent drop for the Bloomberg Europe Banks and Financial Services Index and the 19 per cent decline for the FTSE All-Share Bank Index.

The collapse of the sub-prime market in the US, where borrowers with impaired credit got mortgages before home foreclosures rose to a record, spread to global credit markets and triggered about US$45 billion in writedowns among the world’s largest banks. Citigroup, the biggest US bank by assets, said it may have to write down as much as US$11 billion of assets on top of US$6.5 billion of third-quarter credit- market losses.

HSBC chief executive officer Michael Geoghegan has said it may take two to three years to resolve HSBC’S sub-prime problems. The 142-year-old bank, which paid US$15.5 billion for Household International Inc in 2003 and became one of the largest US sub-prime lenders, has since ousted managers, closed mortgage units and stopped trading and selling mortgage-backed securities.

 

Source: AP (Business Times 15 Nov 07)

Bloomberg

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