On Thursday, stocks in the United States tumbled after more shits were discovered from the credit markets pot hole. Coupled with the lackluster retail sales, everyone now is really worried that the economy is nearing recession.
One of the main culprit from the series of fresh jolts to the market is that there was news that this "jumbo" mortgage lender in US called the Thornburg Morgage Inc, was in default after failing to meet its creditor demands for upfront cash. Needless to say, the share price of Thornburg plunged 51.5%!
Second news was that there is a report that showed the number of foreclosures of US mortgage hit a record high in late 2007. That slapped the S&P financial index (equivalent to KLCI in Malaysia) down 3.7% in its sixth straight daily decline.
It is interesting to note the following statement from Frederic Dickson, senior vice president and market strategist at DA Davidson &Co in Lake Oswego, Oregon (not too sure whether actually) - "We are dealing with a market that at this point is still very, very jittery, wondering what's going to come out of the closet next". What does that tell us as a layman investor? The so-called experts can't even determine what is coming next. So, how can we? Every few days you will hear some good news and share prices rebound (go up) but in the next few days, some bad news slapped share prices down again.
Can the market be timed? I would prefer to take a No as the answer. Best strategy is to invest a portion in the market and half as cash. Let me talk more about the strategy in asset allocation for the Hengdai Equity Fund IV ("HDFIV") in the next post.
Top Stories
Wall Street's credit trading models become unreliable
Credit trading models used by investment banks have failed, causing an increase in borrowing costs for companies even though the Federal Reserve has dropped interest rates. "The credit-default swap market is completely distorting reality," said Henner Boettcher, treasurer of HeidelbergCement. "Given what these spreads imply about defaults, we should be in a deep depression, and we are not." Bloomberg (06 Mar.)
Citigroup to reduce $200 billion mortgage portfolio by 20%
To free up capital and reduce its reliance on low-growth assets, Citigroup is planning to cut its $200 billion mortgage portfolio by 20%. The firm plans to securitise or sell the bulk of its new loans to Fannie Mae and Freddie Mac to move them off its balance sheet. The bank also plans to reduce staff and the number of branches. Financial Times (subscription required) (06 Mar.) , Reuters (06 Mar.)
Japan's foreign currency reserves surpass $1 trillion
Japan's Ministry of Finance said the country's official foreign currency holdings rose to $1.01 trillion at the end of February. The news may encourage ruling-party lawmakers to push harder for the creation of a sovereign wealth fund to capitalize on the country's assets. Bloomberg (07 Mar.)
Pimco's warning could have saved Allianz shareholders billions
Allianz SE, the parent company of Pimco and Dresdner Bank, could have saved its shareholders $45 billion of market value had internal advice been heeded. A year ago, Pimco money managers warned Dresdner Bank traders that subprime-related losses could poison the entire financial industry. "It's staggering that Dresdner bought so much of those crappy investments despite being part of the same group as Pimco," said one outside observer. Bloomberg (07 Mar.)
China says banks have limited exposure to subprime meltdown
China's central bank governor said the U.S. subprime mess will have limited impact on the country's banks and won't significantly affect their bottom line. But Zhou Xiaochuan advised caution as the debt crisis unfolds. "There will be further indirect impact from the U.S. subprime mortgage crisis on China's economy," he said. "It cannot be underestimated since what lies ahead is far beyond our experience." China Daily (Beijing) (07 Mar.)
SocGen takes loss from fraud in 2007 rather than 2008
Societe Generale has sparked furor in accounting circles by reporting the €6.4 billion loss from its recent trading scandal on its 2007 financial statements, even though it happened in January 2008. The bank is invoking the "true and fair" provision of international accounting standards to depart from the rules, raising questions about whether the standards can be consistently applied. International Herald Tribune (06 Mar.)
Oil falls as U.S. jobs data spurs speculation of recession
The price of crude oil dropped for the first time in three days as U.S. unemployment data pointed to a possible slowdown in demand. "There are signals every day confirming a recession," said trader Stanislav Nazarati of Letofin AS in Estonia. Bloomberg (07 Mar.)
Market Activity
Financials lead heavy losses in Asian markets
Declines by Mizuho Financial Group in Tokyo, HSBC Holdings in Hong Kong, Sydney's National Australia Bank and other financials helped drag down Asian markets on Friday. The Hang Seng Index in Hong Kong fell 3%. "Things seem to be getting worse because there is no buying. The (trend of declines) will go on until the end of this quarter and we don't expect any rebound until April," said Francis Lun of Fulbright Securities in Hong Kong. MarketWatch (06 Mar.)
Carlyle affiliate may be unwinding after margin calls
Carlyle Capital Corp., an affiliate of The Carlyle Group, is working with its banks to restructure some of its loans after it failed to meet requests for repayment. Some are concerned that the Dutch-listed firm may be unwinding. It has settled $60 million in margin calls in the past week and is faced with $37 million more. CCC said it was unable to meet some of the new margin calls, resulting in at least one default notice and more expected. The Times (London) (07 Mar.) , The Wall Street Journal (subscription required) (07 Mar.)
Ambac sells $1.5 billion of shares, convertibles
Ambac Financial Group Inc. sold $1.25 billion of common shares and $250 million of mandatory convertible securities Thursday. Some analysts were disappointed Ambac didn't raise more capital. Reuters (07 Mar.) , Bloomberg (07 Mar.)
Chinese official says second board market to launch ASAP
China Securities Regulatory Commission Chairman Shang Fulin said the regulator will seek public comments on the market's management in April, suggesting the long-awaited launch of the second board market is imminent. "We have prepared for the second board market and expect to launch it as soon as possible," Shang said, although he declined to offer more details.
People's Daily (China) (07 Mar.)
Economics
ECB, Bank of England hold rates, sending currencies up
The European Central Bank and the Bank of England both held interest rates steady, causing the euro and pound to surge. Comments by ECB President Jean-Claude Trichet along with expectations that cuts to interest rates are not likely in the near future helped boost the euro to a record $1.5372 against the dollar, while the pound broke the $2 mark for the first time in 2008, hitting $2.0066. Bloomberg/ClipSyndicate (07 Mar.) , The Times (London) (07 Mar.) , Telegraph (London) (07 Mar.)
Data reveals fallout from subprime mortgage meltdown
Data from the Mortgage Bankers Association shows that home foreclosures in the U.S. hit a record high in late 2007, while the net wealth of households dropped. The mortgage delinquency rate reached its highest point in more than 20 years in the fourth-quarter of last year. Reports from retailers and the Department of Labor also pointed to an economic slowdown. Bloomberg/ClipSyndicate (07 Mar.) , Reuters (06 Mar.)
Japanese government nominates Muto as Bank of Japan head
The Japanese government has nominated Toshiro Muto, now the Bank of Japan's deputy governor, to lead the central bank. Some fear the nomination and battle over the position may create a policy vacuum while turmoil roils the global financial markets. Toshihiko Fukui, the current BoJ governor, is set to retire in less than two weeks. Reuters (07 Mar.)
Geopolitical/Regulatory
SWF officials warn Congress about regulating the funds
Representatives of Norwegian and Singaporean SWFs testified before Congress that additional regulations on sovereign funds could be seen as protectionism and may prompt foreign governments to invest elsewhere. The fund officials said the processes must remain fair and the markets open if Washington wants the SWFs to invest in the U.S. Bloomberg/ClipSyndicate (07 Mar.) , FinancialWeek (06 Mar.)
Spain heads into election under shadow of economic woes
New data on jobs and manufacturing are adding to Spain's economic gloom just before a general election. Unemployment rose 53,000 last month, while the manufacturing purchasing managers index dropped sharply. Financial Times (subscription required) (05 Mar.)
FSA proposes changes to sponsor regime
A recent consultation paper from the Financial Services Authority outlines proposed changes to the sponsor regime for listed firms. "The sponsor regime is integral to the primary listed equity market," said Alexander Justham, the FSA's director of markets. "With this consultation, we are hoping to ensure the regime is practical, reflects good market practice and ensures that sponsors are clear on the high standards expected of them." Director of Finance (UK) (06 Mar.)
Financial Products
ICICI Prudential's fund promises little downside risk
ICICI Prudential Asset Management has launched an equity-linked fund to offer investors in India upside participation with downside protection. The Fixed Maturity Plan - Series 33 is tied to the National Stock Exchange's Nifty index and aims to provide the low risk of a fixed income-style product with the high returns sought by equity investors. FinanceAsia.com (07 Mar.)
Top Stories
Dollar, pound drop to all-time lows against euro
Mounting anxiety about the economic health of the U.S. and U.K. is forcing the dollar and the pound to record lows against the euro. "Yet again the data is an indication that the U.K. economy is slowing, and that puts further pressure on the (Bank of England)," said Jeremy Stretch, a strategist at Rabobank. "It's a case that sterling continues to be seen as the ugly sister to the dollar." Telegraph (London) (06 Mar.)
Dollar may decline more if Fed cuts rates again: Ben Bernanke, chairman of the Federal Reserve, has suggested he may cut interest rates once again in an attempt to boost the sluggish U.S. economy. Many expect that will push the dollar down even further and cause inflation to swell. CNBC/Reuters (05 Mar.)
Credit crunch continues to spread as banks pull back
Banks in the U.S. and Europe have significantly curbed their support of trading in capital markets as the credit squeeze enters a new phase. Banks are reluctant to provide leverage to speculative investors and are scaling back on buying bonds that go unsold at debt auctions. Financial Times (subscription required) (05 Mar.)
Ambac's recapitalization plan disappoints investors
Shares of Ambac dropped nearly 20% Wednesday on news of the bond insurer's $1.5 billion recapitalization plan. Investors had hoped a group of banks would inject as much as $2 billion into Ambac. Instead, the monoline will sell $1 billion worth of common stock and $500 million of other instruments, substantially diluting values for the firm's existing shareholders.
Bloomberg/ClipSyndicate (06 Mar.) , Financial Times (subscription required) (05 Mar.)
Bank of China sells all CDOs
Bank of China Chairman Xiao Gang said the Chinese lender, which reported nearly $8 billion of subprime-related investments at the end of September, has sold all its collateralized debt obligations. Xiao did not disclose what the bank's subprime-related debt is currently. "It will be in everybody's interest to find out what exactly they are holding," said Dominic Chan, an analyst at CLSA Asia-Pacific Markets. People's Daily (China) (06 Mar.)
OPEC keeps output steady as oil hits all-time high
OPEC ministers, attributing record oil prices to forces beyond their control, decided at their meeting Wednesday to keep output steady. U.S. crude hit $104.64 a barrel. The U.S. had argued that even a small increase in output wold help curb prices and contain damage to the global economy. Reuters (05 Mar.)
Hedge fund accuses UBS of fraudulently marketing CDOs
Pursuit Partners says UBS, already dealing with one major investor lawsuit, marketed collateralized debt obligations as investment grade when the Swiss bank knew Moody's was about to downgrade them. The hedge fund has filed a lawsuit claiming it bought CDOs from UBS based on "fraudulent concealment" of information. BusinessWeek (06 Mar.)
Merrill's China investment banking chairman Feng resigns
After four years with Merrill Lynch & Co., Wilson Feng, the bank's Hong Kong-based chairman of China investment banking, has resigned and said he will pursue a position at a state-owned company. "I want to change my life," said Feng, 40. "It's a nightmare. My father won't recognize me if I stay in investment banking. I didn't see him for almost three years." Bloomberg (06 Mar.)
Gazprom settles natural gas dispute with Ukraine
Gazprom and Naftogaz, the national energy company in Ukraine, said they have resolved differences regarding the price of natural gas without having to disrupt Europe's supply. Gazprom had drastically reduced its natural gas supply to Ukraine to prompt the settlement of the country's $600 million bill. International Herald Tribune (05 Mar.)
Coffee demand spurs price hike
Maxwell House owner Kraft Foods has become the latest coffee company to raise prices as the cost of arabica and robusta beans hit their highest level in more than 10 years. With global demand for coffee outpacing supply, the price of robusta coffee futures contracts have soared. The May contract increased by about 40%. Financial Times (subscription required) (05 Mar.)
Other News
Bond insurers may move to set up shop in Bermuda
Financial Times (05 Mar.)
Market Activity
Italy intervenes in debt markets as yields surge
In an unusual move, the Italian treasury has stepped into the bond market to curb the soaring yields on government debt while hedge funds with heavy exposure to the debt are scrambling to raise cash. An Italian newspaper reported that investors have been urged to trade 10-year BTP treasuries for new five-year instruments. Telegraph (London) (06 Mar.)
Economics
ECB, Bank of England expected to hold interest rates steadyThe Bank of England and European Central Bank are expected to hold interest rates steady Thursday to focus on inflation. An expected slowdown in upcoming months, however, will likely spur future reductions in interest rates. MarketWatch (05 Mar.)
Europe's resilience allows Trichet to focus on inflation
Europe's economy is on track to outpace that of the U.S. for the second consecutive year. Europe is better able to withstand the global credit crunch because Europeans save more than Americans and spend less on stocks and homes, thus reducing the need to lower interest rates. That allows Jean-Claude Trichet, president of the European Central Bank, to focus on battling inflation. Bloomberg (06 Mar.)
Fed's "Beige Book" shows U.S. economy slowing this year
The Federal Reserve's "Beige Book" report shows that all 12 Fed districts are experiencing a deceleration of economic growth this year. The survey found that manufacturing was down in half of the Fed regions, while service industries were sluggish in most areas. Most regions are seeing rising costs for materials and energy. Reuters (05 Mar.)
China coping with increased inflation pressure
Financial officials in China say they are confident they can hold inflation rates to the 4.8% target despite increasing pressure for prices hikes due to a credit boom and food shortages. Ma Kai, chairman of China's planning agency, said a tight monetary policy will be maintained while striving to ensure supplies of meat, grain and other food. Forbes/Associated Press (06 Mar.)
Geopolitical/Regulatory
Officials tell Congress SWFs are beneficial to U.S.
Several witnesses testified before a House financial services subcommittee that sovereign wealth funds are not harmful, although better transparency would help. "Sovereign wealth funds have been a beneficial source of capital for U.S. financial institutions," said Scott Alvarez, general counsel for the Federal Reserve Board. Reuters (05 Mar.)
Lawmakers want Pentagon to explain air tanker contract
Members of the U.S. House Appropriations Committee have asked the Pentagon to explain why it gave a multi-billion-dollar contract for air tankers to a European company rather than to U.S.-based Boeing, and are warning they may kill the deal. Sue C. Payton, the Air Force's assistant secretary for acquisition, said the contract was awarded after fair and open bidding. The New York Times (registration required) (06 Mar.)
Financial Products
Merrill creates equity index for "frontier markets"
Aiming for clients with a greater hunger for risk, Merrill Lynch has launched a "frontier markets" equity index. The index will cover stocks from 17 countries, including Kuwait, Pakistan, Vietnam and Morocco. These markets are gaining fans because they are performing well in the credit crunch. CNNMoney.com/Dow Jones Newswires (05 Mar.)
Ethics
FSA discards proposed whistle-blowing rule
The Financial Service Authority as decided not to pursue a proposal that would have required investment banks to report regulatory violations by companies for which they raised equity. The FSA and industry representatives had discussed the proposal, but the regulator bowed to market pressure. Financial Times (subscription required) (05 Mar.)
Fidelity agrees to pay $8 million to settle SEC charges
Fidelity Investments will pay a fine of $8 million to settle charges by the SEC that the company's traders took gifts from brokers who were seeking Fidelity's business. The settlement includes no admission of guilt. The SEC probe targeted 13 former and current Fidelity employees, including Peter S. Lynch, once a star fund manager. The Boston Globe (06 Mar.)
Top Stories
Banks work toward rescue of struggling Ambac
Banks are edging closer to a rescue for Ambac Financial Group, sources say. Ambac's stock gained on news that a deal was near. Although talks could fail at the last minute, people close to the situation are confident of a rescue. CNBC (04 Mar.)
Despite US pressure, OPEC likely to hold output steady
At a meeting today in Vienna, OPEC ministers are prepared to resist calls from the U.S., its largest consumer, to increase output to help the economy. The group says oil prices, hovering around $100 per barrel, are propped up by speculation and a weakening dollar and not lack of supply. Bloomberg/ClipSyndicate (05 Mar.) , Reuters (05 Mar.)
UBS chairman: Wealth management should stay within bank
Marcel Ospel, chairman of UBS, said that while there are risks to its wealth management business from subprime-related write-downs, the division should stay within the bank and not be spun off. He also noted synergies between investment banking and the wealth management operation, which has received new funds. "These are the key reasons why it does make strategic sense to operate those two businesses under the same roof and as closely as possible," Ospel said. Reuters (04 Mar.)
Goldman Sachs may acquire 20% stake in Eurotunnel
Goldman Sachs is likely to become a significant shareholder in Eurotunnel because it was left with the majority of an €800 million holding of deferred shares. The 20% stake would give Goldman influence over the future of the Channel Tunnel operator. Telegraph (London) (05 Mar.)
South Korean government says 50% of grain, bean supply secured
South Korea's Ministry of Agriculture, Fisheries and Food said domestic companies have secured more than half of the wheat, corn and beans that the country is expected to use in 2008. South Korean companies have deals with foreign suppliers for more than 8 million tons of the commodities. The country consumes an average of 14.10 million tons each year. Yonhap News Agency (Korea) (04 Mar.)
Australia lifts limits on wheat exporters
Following the AWB scandal, Australia is easing restrictions on how many companies are allowed to export wheat. "Once somebody is given an export license they will not have limitations placed on them as to tonnage and export destination," said Agriculture Minister Tony Burke. The new rules are expected to take effect July 1. The Sydney Morning Herald (05 Mar.)
Germany's airport workers plan to strike today
The Verdi union said workers at eight German airports are planning to strike today over wages. Lufthansa expects to cut 142 flights and is urging passengers to take the train. A separate strike in Berlin, however, will likely reduce train services as well. BBC (05 Mar.)
Market Activity
Most Asian markets down as credit crunch continues
Australian stocks withdrew early gains to close at a loss for the fifth consecutive session, while Shanghai-listed stocks continued to slide on fears of monetary policy tightening. Japanese stocks wavered between negative and positive territory, dragged down by financials. "The continuation of credit issues and data showing slowing growth is obviously disheartening to anybody trying to be bullish," said Matt McKeith of First State Investments in Hong Kong. MarketWatch (04 Mar.)
Most auction-rate bonds failed this week
Nearly 70% of auction-rate bonds failed this week and the market shows no signs of reversing as investment banks have stopped purchasing the securities that have been abandoned by investors. Average yields on the bonds, which were at 3.63% before demand plummeted in January, hit 6.52% at the end of February. Bloomberg (05 Mar.)
Economics
Europe pressures Washington to stop dollar's decline
With the dollar at a record low against the euro, policymakers in Europe are pressuring their U.S. counterparts to stop the greenback's slide. "It's up to ... U.S. authorities, who repeat that they are in favor of a strong dollar but who should reaffirm their words," said Guy Quaden, a representative for Belgium at the European Central Bank. Reuters (04 Mar.)
Premier says China needs to curb inflation, lending
Wen Jiabao, China's premier, told nearly 3,000 of the country's lawmakers that the government must do more to curb inflation and lending, indicating that the central bank may increase interest rates. Wen said China's biggest challenge, despite the global slowdown, is overheating. Bloomberg (05 Mar.)
Bush, Fed inch toward housing rescue
The Federal Reserve and the Bush administration are making slow progress toward a government-backed rescue of mortgage lenders and struggling homeowners, despite their ideological opposition. While not calling for a government bailout, Fed Chairman Ben Bernanke said industry and the government could do more. Meanwhile, the White House has begun increasing the government's response to the crisis. The New York Times (registration required) (05 Mar.)
Bernanke puts pressure on Paulson over homeowner aid: In a speech to bankers in Florida, Federal Reserve Chairman Ben Bernanke encouraged lenders to help struggling homeowners by forgiving parts of some mortgages. The request goes beyond the plan backed by Treasury Secretary Henry Paulson, which focuses on interest rate negotiations. "This puts enormous pressure on Paulson," said Michael Barr, a professor at the University of Michigan Law School. "Treasury's response so far has been insufficient." Bloomberg (05 Mar.)
Geopolitical/Regulatory
Lawmakers blast bank regulators for not warning about risks
U.S. senators grilled bank regulators Tueday about the risky lending practices that led to the mortgage market meltdown and why they failed to intervene. Donald Kohn, Federal Reserve vice chairman, and John Dugan, comptroller of the currency, both said they were aware of the risks, discussed them with banks and tried to warn others. Kohn acknowledged, though, that they may have needed to be more "forceful" in their warnings. CNNMoney.com (04 Mar.)
Clinton wins Texas, Ohio; Pennsylvania up next
Sen. Hillary Rodham Clinton silenced naysayers by defeating Sen. Barack Obama in the pivotal states of Ohio and Texas, as well as Rhode Island. Obama, whose winning streak was snapped at 12 states, was victorious in Vermont. The Democrats now gear up for the April primary in Pennsylvania. Meanwhile, Sen. John McCain wrapped up the Republican nomination. Bloomberg/ClipSyndicate (05 Mar.) , The Washington Post (05 Mar.)
Qatar balances relations with U.S., IranSheikh Hamad bin Jasmin bin Jaber al-Thani, prime minister and chief diplomat for Qatar, has learned to balance relations with nations that have contradictory political interests, such as the U.S. and Iran. The small Middle Eastern nation has become adept at using its natural gas resources to increase its influence on the global landscape. Bloomberg (04 Mar.)
Financial Products
UBS index allows investors to profit from food inflation
UBS is launching a new commodities index so that investors can profit from the increasing food inflation. The UBS Bloomberg Constant Maturity Commodity Food Index will include soy oil, orange juice, high-quality winter red wheat, lean hogs and other raw materials not generally included in commodity indexes. Financial Times (subscription required) (04 Mar.)
Ethics
FSA cold-calls for insider trading evidence
The Financial Services Authority has been calling investors and traders directly as it works to gather evidence of insider trading. The U.K. regulator had previously given individuals several weeks' notice before interviewing them, but now it is conducting interviews immediately. Financial Times (subscription required) (04 Mar.)
EC proposes ways to clamp down on tax havens
Fresh from the Lichtenstein tax scandal, the European Commission has started to put the screws to tax havens with proposals to broaden laws against tax evasion. Countries in the European Union say tax evasion costs them billions of euros each year. Germany alone estimates the figure to be as much as €30 billion. International Herald Tribune (04 Mar.)
Recession... a scary word? Not exactly unless you are in certain industries that are popular with retrenchment. In the United States, investment bankers are the first to be retrenched when it's recession. Simply because no one in the market would like to do any deals at all. Back in 1997 when Asia experienced a recession, increments and promotions were all frozen. Some got retrenched but generally Malaysian paymasters are humane enough to retain its employees. Senior management are able to retain their seats but pay cuts are inevitable in order to ensure survivability of the firm.
By technical definition, an economy is said to be in recession when it records two consecutive quarters of negative growth. Economists have split views on whether US is already in a recession mode, both by technical definition or common sense definition. Economic datas such as number of unmployment, sale of houses and interest rate are all closely watched in order for the economists to tell themselves or whoever listening to them that the US is or is not in a recession.
So, is Malaysia in a recession? By technical definition, no. For whole of 2007, the economy expanded by 6.3%, slightly up from 5.9% in 2006. Fourth quarter itself accelerated by 7.3% year on year from 6.6% in third quarter.
The KLCI fell 2.2% to a five-month low of 1,285 mid today (Wednesday), dragged down by losses in plantation stocks as crude palm oil (CPO) prices retreated, and also on some foreign selling of index-linked stocks and heavyweights. Why is KLCI taking the beating when the economy is growing, earnings are good and not forgetting that the local banks do not need to suffer any losses arising from the subprime morgage crisis? The answer is what the fundamental investors are patiently waiting for. Fear and greed, and in this current scenario is fear. Investors are fear now as they do not know how they are being affected by development worlwide. One selling leads to another. Cut loss limits or sell-down programmes in placed by mutual funds or asset management companies are not helping the situation (fear) either.
Bottom line, hang on to your cash and bargains will come. I am not timing the market but merely hunting for cheap stocks. When market is down, stocks can become real cheap. Let's wait.
Top Stories
Demand prompts Korean banks to tap subprime market
Banks in Korea are responding to demand for riskier but potentially lucrative loans by tapping into the subprime loan market. The country's largest lender, Kookmin Bank, is planning to launch a subsidiary to handle subprime loans. Other banks are discussing ways to enter the market. The Korea Times (03 Mar.)
Ambac opts not to split as it completes recapitalization
Troubled bond insurer Ambac has decided to remain one company rather than split its municipal bond insurance business from its structured finance business, sources say. The insurer is completing a recapitalization of as much as $3 billion.
Bloomberg/ClipSyndicate (04 Mar.) , Financial Times (subscription required) (04 Mar.)
Buffett withdraws bond insurer offer, says U.S. in recession: Warren Buffett said the U.S. economy has already entered a recession by a "common sense definition," although his long-term view is that the economy will be fine. The billionaire investor also said he has withdrawn his offer to guarantee $800 billion in municipal bonds currently backed by FGIC and Ambac. "We tossed our hat into the ring, and they tossed it right back," he said. CNBC (03 Mar.)
Dubai says Citigroup rescue requires "a lot more money"
Sameer al-Ansari, CEO of Dubai International Capital, said that despite investments by Kuwait, Abu Dhabi and Prince Alwaleed of Saudi Arabia, rescuing Citigroup would require "a lot more money." Citigroup suffered a fourth-quarter loss of $9.83 billion. DIC has invested in India's ICICI Bank and HSBC Holdings. Reuters (04 Mar.)
Gold, platinum hit record highs as dollar continues fall
After reaching a record high of $992 an ounce, gold futures closed on Monday with significant gains. Oil also hit a new high. "Technical strength, a weak dollar and a continued bid into commodities are spurring gold and oil higher," said Zachary Oxman, a Wisdom Financial senior trader. Bloomberg/ClipSyndicate (04 Mar.) , MarketWatch (03 Mar.)
HSBC says selling U.S. business would be "irresponsible"
Stephen Green, chairman of HSBC, has rejected a proposal from Knight Vinke to sell its struggling U.S. Household business, which suffered $11.7 billion in losses on bad debt in 2007. "Would we walk away from Household leaving bondholders high and dry?" Green asked. "This is as unreasonable as it is unrealistic." HSBC's group pre-tax profits rose 10% to $24.2 billion nonetheless. Telegraph (London) (04 Mar.)
Standard Chartered buys American Express Bank
Standard Chartered has purchased American Express Bank for $823 million, the London-based banking group announced Monday in Hong Kong. Standard Chartered said the acquisition will help with its expansion goals and "add capability, scale and momentum in the strategically important financial institutions and private banking businesses." People's Daily (China) (03 Mar.)
Gazprom cuts Ukraine's gas supply to force debt settlement
Gazprom has slashed its natural gas supply to Ukraine in an effort to get the country to pay its bill. Ukrainian officials say an unseasonably warm winter has reduced demand, giving them time to negotiate with the state-controlled Russian company. International Herald Tribune (03 Mar.)
China SWF seeks more foreign fund managers
Wang Jianxi, deputy general manager of China Investment Corporation said the fund is in talks with dozens of foreign fund managers in an effort to gain favorable returns from its overseas investments. Wang said he believes the risk of stock market fluctuations can be eased through long-term investments. People's Daily (China) (03 Mar.)
Market Activity
Trading of City Pacific shares halted after drop
City Pacific requested that trading of its shares be temporarily halted after a stock crash wiped out more than half of the Brisbane property group's value. Concern is mounting that City Pacific's First Mortgage Fund may not be able to repay a $240 million debt facility by the May 31 deadline. The Sydney Morning Herald (04 Mar.)
CEO says FirstRand won't meet earnings targets
Paul Harris, CEO of FirstRand Ltd., said inflation and higher interest rates will keep the South African bank from reaching its full-year earnings targets. South Africa's interest rates and inflation are at their highest levels in four years, stifling consumer spending. Harris also offered a cautious outlook for the upcoming year. Bloomberg (04 Mar.)
Economics
Europe's growing economy helps ECB work on inflation issues
The European Central Bank is bolstering its defence against calls for cuts to interest rates with signs that economic growth in Europe is healthy, fueled partly by demand for exports in emerging markets. Now, the central bank is starting to feel pressure to raise rates to curb predicted inflation. Bloomberg (03 Mar.)
European officials concerned about soaring euro
Finance officials throughout Europe say the advance of the euro against the dollar is worrisome as it may further a slowdown in the economy. The euro hit a record $1.5275 on Monday and has increased 16% against the dollar in the past year. Bloomberg (04 Mar.)
Reserve Bank of Australia boosts interest rate to 7.25%
The Reserve Bank of Australia has increased interest rates by a quarter of a percentage point, resulting in the highest official cash rate in nearly 12 years. The country's banks will likely pass on the rate hike and then some to consumers as the banks face higher borrowing rates due to the global credit squeeze. The Sydney Morning Herald (04 Mar.)
U.S. companies significantly increase savings
American companies, unlike consumers, have drastically built up their savings, offering a bright spot in the dismal U.S. economy. Now, economists and analysts are speculating about what the corporations plan to do with the money, and how that might affect the sputtering economy. The New York Times (registration required) (04 Mar.)
U.S. consumer bankruptcy filings soar 15% in February
The American Bankruptcy Institute said consumer bankruptcy filings were up 15% last month to 76,120. A steeper increase is expected as the subprime mortgage mess continues to plague consumers. "February's bankruptcy spike -- the highest single month since the 2005 (bankruptcy) law changes -- forecasts the start of more to come for the balance of 2008," said the institute's executive director, Samuel Gerdano. Reuters (03 Mar.)
Geopolitical/Regulatory
Financial turmoil forces many to rethink risk rules
The US housing meltdown and ensuing global financial turmoil has forced banks and regulators to reconsider risk guidelines drafted by some of the top banking minds in the world. Some of the Basel II guidelines were set to be phased in soon in the US. The basic tenet is that banks, not regulators, should be allowed to decide how much risk the banks can take on, but the current financial situation is causing many to rethink fundamental assumptions. The Wall Street Journal (free content) (04 Mar.)
Venezuela looks to OPEC in battle with Exxon Mobil
Rafael Ramirez, Venezuela's energy minister, plans to ask OPEC to discuss Exxon Mobil Corp.'s pursuit of court orders freezing the assets of Petroleos de Venezuela SA. "We are interested in explaining in detail what they pretend to do against us," he said. "They could do the same against Algeria, Saudi Arabia, any other country within OPEC." Chakib Khelil, president of OPEC and the Algerian Energy Minister, said OPEC will discuss the issue. Bloomberg (03 Mar.)
Financial Products
CDOs come back to bite Merrill, Citigroup
After lagging behind other investment banks in the sale of collateralized debt obligations, Merrill Lynch worked to get on top of the market. By 2007, it was there, with Citigroup Inc. a close second. But when the CDO market collapsed last summer, it turned out Merrill Lynch and Citigroup had set themselves up for a big fall. Bloomberg
(03 Mar.)
UBS analysts predict financial firms' losses to hit $600B
UBS AG analysts are predicting that financial firms, including brokers, banks and insurers, will experiences losses of $600 billion or more in the crisis stemming from the subprime mortgage market meltdown. So far, financial institutions have revealed write-downs and credit losses of more than $181 billion. Bloomberg (29 Feb.)
Seane Lynch says, that's another $419 billion (2.3 times more!) from how much financial institutions have revealed so far. These numbers are analysts' expectations but in view of the more conservative approach that auditors might adopt, the amount could be worst come the audit on the financial numbers of the affected companies. Audited figures are expected to be released by mid to end March itself.
But but but, most of us, the people on the streets are confused with what these losses are. The write-downs and credit losses madness are basically paper/unrealised losses that arose due to mark to market valuation of the instruments. In layman term, there are no one in the market that would like to buy these investments, hence the market value is marked down tremendously based on a very steep discount. Fair to do so? Accountants called it the "fair value accounting", hence it is supposed to be fair and reflect the most accurate valuation of these instruments. Again, accounting can and will always strive to provide the best valuation but most of the time can be challenged.
Top Stories
UBS analysts predict financial firms' losses to hit $600B
UBS AG analysts are predicting that financial firms, including brokers, banks and insurers, will experiences losses of $600 billion or more in the crisis stemming from the subprime mortgage market meltdown. So far, financial institutions have revealed write-downs and credit losses of more than $181 billion. Bloomberg (29 Feb.)
Investment bank fees to plunge as M&As decline
Investment banks took in a record $42.4 billion in advisory fees for mergers and acquisitions last year, with Goldman Sachs leading the way, followed by Morgan Stanley and Citigroup. This year, the number and size of M&A deals are down significantly, so the fees paid to investment banks are plummeting. Bloomberg/ClipSyndicate (03 Mar.) , Bloomberg (03 Mar.)
Japan to develop activist SWF with £10 billion portfolio
While Japanese corporations are being criticized for ignoring shareholder demands, the government plans to develop an activist sovereign wealth fund that is shareholder-friendly. The plan is to focus on domestic investments with an emphasis on higher performance. Sources say a worldwide search is underway to recruit fund managers. The Times (London) (03 Mar.)
Buffett: SWF investments result of U.S. economic policies
In his annual letter to shareholders, billionaire investor Warren Buffett said recent high-profile investments by sovereign wealth funds are the result of U.S. economic policies and not "some nefarious plot by foreign governments." He also said he has four candidates for the chief investment officer position at Berkshire Hathaway. Buffett's letter predicts a sharp fall in margins for the insurance industry. Financial Times (subscription required) (29 Feb.)
Bank of America had most days of trading losses
Bank of America traders lost money on 29% of the trading days last year, more than any other U.S. investment bank, according to SEC filings. "Excluding the discrete write-downs on our super senior collateralized debt obligation exposure, 21% of trading days had losses greater than $10 million, and the largest loss was $159 million," the filing said. Financial News Online (03 Mar.)
Bank of Montreal may pull out of commercial-paper rescue
Bank of Montreal, faced with new write-downs in excess of $500 million, has indicated it may abandon an effort to rescue $33 billion in asset-backed commercial paper. Sources say the bank has advised some investors that, despite its previous commitment, it may not be able to contribute to the $14 billion line of credit, which is central to the rescue plan. The Globe and Mail (Toronto) (29 Feb.)
Gold hits record high as dollar plunges to historic low
Gold hit a record high of $979.20 per ounce in Asia, prompted by a fall in the U.S. dollar and strong oil prices. "Gold has more room to rise considering that its pace of rise has been slower relative to other commodities," said Tatsuo Kageyama, an analyst at Kanetsu Asset Management. "Gold should reach $1,000 very soon." CNBC/Reuters (02 Mar.)
Pentagon awards $40B air tanker contract to European group
Critics are attacking the Pentagon's decision to award a $40 billion contract for air tankers to a European consortium that includes Airbus rather than to U.S.-based Boeing. Most analysts and experts expected Boeing, with its strong ties to the U.S. military and powerful lobbying in Washington, to get the contract for 179 air tankers, one of the biggest defense contracts ever. Telegraph (London) (03 Mar.)
Zinifex to merge with Oxiana to form massive zinc producer
Zinifex and Oxiana have ended months of speculation by announcing their plans to combine. Owen Hegarty, managing director of Oxiana, said the merger will create a "base and precious metals powerhouse" with a "terrific financial position of great strength." The union will create the second-largest zinc producer in the world. The Herald Sun (Melbourne, Australia) (03 Mar.)
Market Activity
Tokyo leads Asian market plunge
The Nikkea 225 Index dropped almost 4% to 13,075.08 as the yen rose against the dollar and Takefuji, a consumer lender, disclosed unexpected subprime-related losses. As the strong yen weighs on exporters, Honda Motor dropped 5.2%, Sony was down 4.2% and Canon plunged 6.1%. Hong Kong's Hang Seng Index followed Tokyo's tumble by falling 840.1 points after the opening bell. In Australia, the S&P/ASX 200 was down 3% in late afternoon trading.
Forbes (03 Mar.)
Municipal bond slump expected to continue
With U.S. states and local governments seeking to replace more than $160 billion of auction-rate securities, the municipal bond slump is expected to continue. Failed auctions have prompted California, Duke Energy Corp., and Boston's largest hospital to convert their bonds to other types of debt, thus flooding the municipal bond markets with excess supply. Bloomberg (03 Mar.)
Chinese economist says stock market may undergo correction
Li Yining, a renowned Chinese economist, said that the local stock market will not turn bearish despite fluctuation. "The stock market was bullish last year in general. But as the split-share structure reform has drawn to an end, it may undergo correction," Li said. People's Daily (China) (03 Mar.)
HSBC reports $17.2 billion writedown on credit-related losses
HSBC annual profits increased 10% to $24.2 billion despite a higher-than-expected $17.2 billion loss on investments tied to the credit squeeze. Faced with pressure from activist investors, the UK's largest bank is conducting an internal review of HFC, its struggling US banking business. Bloomberg/ClipSyndicate (03 Mar.) , BBC (03 Mar.) , The Times
Economics
Several factors force dollar's declineComments by Federal Reserve Chairman Ben Bernanke suggesting another reduction in interest rates, along with dismal
U.S. economic reports, are contributing to the dollar's sudden drop. But other factors are also playing on the dollar, including momentum trading and crosscurrents with commodities, especially oil. MarketWatch (01 Mar.)
China says exports will withstand subprime turmoil
Chen Deming, China's commerce minister, said that while the government is closely watching the global financial crisis, Chinese exports will see limited impact from the subprime meltdown. Chen said exports, which grew by 25.7% last year to $1.218 trillion, will continue to grow but at a slower rate. Reuters (03 Mar.)
Geopolitical/Regulatory
Medvedev wins Russian presidential election by landslide
Dmitry Medvedev, the Kremlin favorite, easily won Russia's presidential election, according to preliminary results. Medvedev had received 70% of the vote, with 99% of ballots counted. Communist Party leader Gennady Zyuganov, Medvedev's nearest rival, took 18% of the votes in an election that saw a record turnout of nearly 70% of Russia's 109 million eligible voters casting ballots. Bloomberg/ClipSyndicate (03 Mar.) , RIA Novosti (Russia) (03 Mar.)
Chavez threatens war on Colombia
Barroso says protectionist pressures up across Europe
European Commission President Jose Manuel Barroso said increasing protectionist pressures are being felt throughout Europe. "Political forces in Europe that were traditionally pro-market are today – let's put it elegantly – more prudent," he said. "Some on the center-right are now more conservative in that regard." Barroso also said the idea of developing a pan-European financial regulator has been dismissed. Financial Times (subscription required) (02 Mar.)Venezuelan President Hugo Chavez mobilized troops, fighter jets and tank units close to the Venezuelan-Colombian border after Colombian security forces killed rebels with warm ties to his government. On Saturday, 17 members of the Revolutionary Armed Forces of Colombia were killed in Ecuadorean territory. International Herald Tribune (03 Mar.)
Europe, U.S. to complain about China's ban on financial info
The European Union and the U.S. plan to file a complaint with the World Trade Organization against China for prohibiting foreign firms from offering financial news directly to clients in China. The long-expected complaint will increase the pressure on already strained economic ties. International Herald Tribune/Reuters (02 Mar.)
Financial Products
Non-profit group to issue rand-denominated bond in JapanGavi Alliance will give retail investors in Japan the opportunity to invest in South African rand-denominated bonds. The non-profit group will use the proceeds to immunise needy children around the world. The issue will be Gavi's second through its finance division, the International Finance Facility for Immunisation. Financial Times (subscription required) (02 Mar.)
Top Stories
Private equity boss: U.S. may face "lost decade"
Tim Collins, head of Ripplewood Holdings, said the U.S. economy may suffer a "lost decade" similar to what Japan went through in the 1990s. Collins said the Federal Reserve, which has repeatedly cut interest rates, is "running out of policy alternatives" in its attempt to avoid a long recession. Telegraph (London) (28 Feb.)
Emerging markets boost issuance of depositary receipts
As liquidity in developed countries dried up, Brazil, Russia, India and China began issuing record numbers of depositary receipts. "Emerging market companies can benefit more from listing depositary receipts than those in developed countries because of the signal it sends to foreign investors that they are willing to observe more rigorous disclosure," said Deborah Pretty of Oxford Metrica. Financial News Online (29 Feb.)
Merrill Lynch to close First Franklin mortgage lending unit
Deterioration in the mortgage markets has prompted Merrill Lynch & Co to shut down the majority of its First Franklin subprime mortgage lending division, which may result in the loss of up to 500 jobs. Merrill is likely to retain the firm's loan servicing business. CNBC/Reuters (28 Feb.)
Trading, not supply and demand, is driving price of oil
Normally, the price of oil is driven by supply and demand, but these days supply is up yet the price of crude has bounced to $100 per barrel. Some analysts blame speculators and predict investors are in for an unpleasant surprise. Bloomberg/ClipSyndicate (29 Feb.) , Spiegel Online (28 Feb.)
Next president not likely to open lands to oil drilling: The oil and gas industry continues to push for drilling access to U.S. lands, but policies banning that access are not likely to change after the election. Barack Obama, Hillary Clinton and John McCain, the leading presidential candidates, all oppose opening the Arctic National Wildlife Refuge to oil development and want to keep most federal waters closed to drilling. Reuters (28 Feb.)
Weak dollar, high oil prices boost gold to record in Asia
Record oil prices and a weakening dollar sparked demand for gold, boosting it to a record in Asia as investors seek a hedge against inflation. "The U.S. dollar is falling precipitously and that's a major boost for gold," said Wallace Ng, Fortis Bank's chief trader for precious metals in Asia Pacific. "We saw funds continue to pile into gold." Bloomberg (29 Feb.)
Market Activity
South Korean banks plan to use Malaysian bond market
The global credit squeeze has prompted several South Korean banks to look to the Malaysian bond market to raise funds. Malaysia has recently developed a corporate debt market that has grown increasingly mature and more attractive to foreign issuers. Financial Times (subscription required) (28 Feb.)
AIG posts record quarterly loss of $5.29 billion
The American International Group, the largest insurer in the world by assets, on Thursday posted the largest quarterly loss in its 89-year history: $5.29 billion. Analysts say the insurer's woes point to broader problems in financial services, which will likely result in more bad news.
The New York Times (registration required)/Reuters (29 Feb.)
Economics
Fed, ECB take different stances on inflation
The Federal Reserve is likely to cut interest rates yet again in March, while the European Central Bank is expected to keep its benchmark rate at 4%, as it has done throughout the credit crunch. The ECB stance shows it worries more about inflation than about economic growth. The divergence has helped the euro surge against the dollar. The Economist (subscription required) (28 Feb.)
Bernanke avoids saying "recession" but still implies it
Analysts listening to Federal Reserve Chairman Ben Bernanke's testimony to Congress this week say that while he avoided voicing the word "recession," he came as close as he dared. The Fed, concerned with overreaction in the markets, has remained cautious about predicting that economic conditions in the US could worsen. Bloomberg/ClipSyndicate (29 Feb.) ,
Reuters (28 Feb.)
Jobs data, GDP figures add to U.S. recession concerns
Two separate government reports, one on jobs and the other on gross domestic product, signal trouble in the U.S. economy. Data from the Labor Department show an increase in first-time claims for unemployment benefits to a level that some consider to be near-recessionary. Meanwhile, GDP in the fourth quarter rose at a mere 0.6% annual rate. Reuters (28 Feb.)
India's economy cools slightly on monetary tightening
Economic growth in India cooled to a rate of 8.4% in the third quarter, according to official data, which was in line with a forecast that put growth at 8.7% for the year that ends in March. India's economy has cooled in the past year because of tighter monetary policies and an increase in the country's currency against the U.S. dollar, which has hurt export earnings. Forbes/AFX News Limited (29 Feb.)
Geopolitical/Regulatory
Bush concerned about slowdown, but says recession not imminent
President George W. Bush is keeping a rosy outlook on the economy, saying the country is not headed for a recession. "We'll see the effects of this pro-growth package. Why don't we let stimulus package 1, which seemed like a good idea at the time, have a chance to kick in?" Bush said. Many economists say that if the country isn't already in a recession, it will be soon. Forbes/Associated Press (29 Feb.)
Democrats, Republicans spar over preventing more housing woes
Washington is divided over how best to keep the housing crisis from spreading. The Bush administration rejected a Democratic proposal that the government to buy up delinquent home loans to rescue homeowners and mortgage lenders. Meanwhile, Senate Republicans blocked a Democratic bill that would have allowed bankruptcy judges to change mortgage terms and provided funding for homeowner counseling. The New York Times (registration required) (29 Feb.)
FASB to consider rules on off-balance-sheet vehicles
The Financial Accounting Standards Board plans to re-examine the way banks deal with off-balance-sheet financing vehicles, a source of billion-dollar bank losses. The agency will consider whether accounting rules, disclosure requirements or faults in compliance were to blame.
Reuters (29 Feb.)
Financial Products
Investor demand spurs State Street to launch derivatives system
With more institutional investors interested in the alternatives world, State Street plans to launch an enhanced derivatives processing system later this year. The growth in high-alpha products has created a challenge for traditional managers launching the products, forcing custodian banks to improve their operations. Financial News Online (28 Feb.)
Ethics
Rogue broker triggers $141.5 million loss for MF GlobalMF Global Ltd. said a commodities broker named Evan Dooley made early morning trades on wheat contracts that caused $141.5 million in losses for the brokerage firm. The losses sent MF Global's stock down almost 28%. According to the company, an entry-order system failed to block Dooley's unauthorized trades. The Commercial Appeal (Memphis, Tenn.) (free registration) (29 Feb.)
Conrad Black denied bond, must report to prison Monday
The Seventh Circuit Court of Appeals has denied Conrad Black an appeal bond, dealing a major blow to the former media mogul. Last year, the former chief executive of Hollinger International was convicted of fraud and obstruction of justice. Black, who has consistently maintained his innocence, must report to prison on Monday. Chicago Tribune (free registration) (28 Feb.)
