Breaking Capital Destruction

Jim Cramer explains how the government plan to insure debt will break the back of the CDS market -- and why that's a good thing.

Five Stages of Grief

Five Stages of Grief - Relative to the Global Financial Crisis

1) Denial - ”this can’t be happening to me” - I think that this stage probably began shortly after of October 2007. The markets had just retested their all time highs and there had been some discussion about mortgage related problems and the housing boom coming to an end.

There was a lot of debate at that time about whether or not housing prices were truly inflated and whether or not we were actually in a housing bubble. There were some defaults and foreclosures starting to take place, but generally speaking investors were still believing in strong markets and felt that any downturn would be relatively short lived. Earning expectations for many companies were still high.

There was a tremendous amount of discussion about “recession” (even recently). Are we in a recession? The experts that label these types of economic phenomena have been slow to actually come out and state emphatically that this is really a recession. This was the denial stage.

2) Anger - ”why me?”, feelings of wanting to fight back or get even - The anger stage of this crisis evidenced itself in the “blame game” phase. As the crisis deepened and it became more apparent that the term of this crisis was going to be longer than most expected, people started to feel angry. Their anger was evidenced in their lashing out and trying to blame those who caused this crisis. If you recall the blame shifted to many different groups. All of these parties have had a finger pointed at them for being the cause of the crisis.

Mortgage Brokers (for giving out loans that people couldn’t afford),

Mortgage Holders (blaming people for borrowing more than they could afford to pay back)

Wall St. Speculators (for investing in commodities and driving up the price of gas and oil),

Government Regulators (for lax regualtion of investment banks),

The Federal Reserve Bank (loose monetary policy, resulting in a lending boom),

SEC - (Christopher Cox - McCain called for his resignation),

Commodities Futures Trading Corp (lax regulation of commodities markets),

Short Sellers (for driving down prices - “short selling is anti-american).

None of these parties are truly to blame. Most of these parties just reacted to the situation that existed at the time. It’s very difficult to lay blame with any one party. The root cause of the crisis is excessive credit.

My opinion is that the Federal Reserve and the US Government are the true culprits, as they permitted the creation of a loose money system. They allowed the lack of regulation over the Banks, Hedge Funds and derivative markets. They permitted the loose money environment to develop and grow over time, years.

3) Bargaining - bargaining often takes place before the loss - I believe that we are currently in the bargaining stage. In this stage we’ve realized that there is a tremendous problem and are now bargaining to try to fix it before we suffer a total complete devastating breakdown of our Global financial system. The problem has existed for a long time.

Fannie Mae, Freddie Mac, loose money, excessive debt as a nation and as individuals. Experts have thrown out solutions for solving the problems. Experts have suggested that if we don’t deal with the problems that there will be a Day of Reckoning. We don’t really know how bad it could get.

If we have a total and complete shutdown of world capital markets it will be like nothing anyone has ever experienced before. Today, World leaders are bargaining to try to avoid the utter destruction and catastrophic losses that will become evident. It may already be too late. The die may have already been cast. It feels that each day there is a new proposal. Governments are trying to support the stock and credit markets at any cost.

They are trying to insure any and all investments in hopes of bringing back confidence to the system. The damage has been done. I believe that each day that the crisis continues, people distrust our government even more. I also believe that as the crisis gets more severe and the losses to people’s portfolios escalate, confidence drips away even more.

4) Depression - overwhelming feelings of hopelessness, frustration, bitterness, self pity, mourning - We are not yet at this stage. This is when the true scope of the losses become evident and people feel that there is no hope.

This is the stage when realization sets in that no matter what steps anyone takes to deal with the crisis, it will have to run its’ course. Here’s where “The ship goes down” and we realize that we’re all on board.

5) Acceptance - there is a difference between resignation and acceptance - Here’s the new day dawning. Here’s where we start to deal with reality. We realize that we are in a new world order. The future may not be the same as the past.

We accept the thoughts that our future will be different from our past. We deal with it. We learn from our mistakes and seek to prevent future occurrences of similar problems.

Is Monday 13 Oct 2008 rally, a true rally

NEW YORK, 16 October 2008 - Investors agonizing over a faltering economy sent the stock market plunging all over again Wednesday 15 Oct 2008 after a stream of disheartening data convinced Wall Street that a recession, if not already here, is inevitable. The market's despair propelled the Dow Jones industrials down 733 points to their second-largest point loss ever, and the major indexes all lost at least 7 percent.

The slide meant that the Dow, which fell 76 points on Tuesday 14 Oct 2008, has given back all but 127 points of its record 936-point gain of Monday 13 Oct 2008, which came on optimism about the banking system in response to the government's plans to invest up to $250 billion in financial institutions.

"People question Monday's 13 Oct 2008 rally and wonder whether it was a true rally, one to be taken with faith or just an opportunity to get out at a higher price," S&P's Stovall said, referring to the Dow's 900-point surge that marked its biggest on record. "That's what we're still trying to figure out."

Wednesday's 15 Oct 2008 sell-off began after the government's report that retail sales plunged in September by 1.2 percent - almost double the 0.7 percent analysts expected - made it clear that consumers are reluctant to spend amid a shaky economy and a punishing stock market.

The Commerce Department report was sobering because consumer spending accounts for more than two-thirds of U.S. economic activity. The reading came as Wall Street was refocusing its attention on the faltering economy following stepped up government efforts to revive the stagnant lending markets.

Then, during the afternoon, the release of the Beige Book, the assessment of business conditions from the Federal Reserve, added to investors' angst. The report found that the economy continued to slow in the early fall as financial and credit market problems took a turn for the worse. The central bank's report supported the market's belief that difficulties in obtaining loans have choked growth in wide swaths of the economy.

"Even though the banking sector may be returning to normal, the economy still isn't. The economy continues to face a host of other problems," said Doug Roberts, chief investment strategist at ChannelCapitalResearch.com. "We're in for a tough ride."

Fed Chairman Ben Bernanke offered a similar opinion, warning in a speech Wednesday 15 Oct 2008 that patching up the credit markets won't provide an instantaneous jolt to the economy.

Speaking in New York, Federal Reserve Chairman Ben Bernanke underscored that view when he said that even if the financial markets stabilize, a "broader economic recovery will not happen right away."

"Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away," he told the Economic Club of New York.

Analysts have warned that the market will see continued volatility as it tries to recover from the devastating losses of the last month, including the nearly 2,400-point plunge in the Dow over the eight sessions that ended Friday 10 Oct 2008. Such turbulence is typical after a huge decline, but the market's anxiety about the economy was also expected to cause gyrations in the weeks and months ahead.

Selling accelerated in the last hour of trading, a common occurrence during the eight days of heavy declines. One reason for the heavy selling: Mutual funds need to unload stock to pay investors who are bailing out of the market.

Investors apparently have come to believe that Monday's 13 Oct 2008 big rebound over the banking sector was overdone given the problems elsewhere in the economy.
"It really doesn't come as a shock after Monday's 13 Oct 2008 gains were, I think, a little bit excessive," said Charles Norton, principal and portfolio manager at GNICapital, referring to the market's pullback.

He contends that the government has taken so many steps to help the financial system that investors must now wait for some of the actions to help steady the economy.

"It seems like all the tools in the tool chest have mostly been used now and now it's back to reality," he said. "We're still faced with the fact that the economy is slowing and earnings aren't very good."

"The difference between bad news and uncertainty is the ability to quantify," Stovall said. "You can quantify earnings being cut in half, but not a global recession that will wreak havoc on earnings."

Doubts about the economy were already surfacing in Tuesday's 14 Oct 2008 session, when investors halted an early rally and began collecting profits from stocks' big Monday 13 Oct 2008 advance. Wednesday's 15 Oct 2008 data confirmed the market's fears that the economy is likely to remain weak for some time, and that corporate profits are likely to suffer.

Mark Coffelt, portfolio manager at Empiric Funds, said moves by European and U.S. government officials to begin investing directly in banks are easing worries about credit. But the steep pullback in stocks that began last month Sept 2008 after the credit markets lurched to a near standstill has now created worries that consumers will spend less after seeing the value of their retirement accounts and other investments drop.

"Markets abhor uncertainty and so we got a lot of that resolved this weekend and we got the reward Monday 13 Oct 2008 but now people are saying 'OK, now what is the economy going to do?'"

"We're definitely going to get a slowdown from the terror of going through that," Coffelt said.

The Dow ended down 733.08, or 7.87 percent, at 8,577.91. On Monday, Sept. 29, the Dow had its largest point drop 777.68. Wednesday's percentage drop was the biggest since the 8.04 percent of Oct. 26, 1987, which followed Black Monday, the Oct. 19 crash that sent the blue chips down 22.6 percent in a single session.

The Dow's massive decline Wednesday 15 Oct 2008 marks its 20th triple-digit move in 23 sessions.

Broader stock indicators also skidded. The Standard & Poor's 500 index fell 90.17, or 9.03 percent, to 907.84, and the Nasdaq composite index fell 150.68, or 8.47 percent, to 1,628.33.

Volume on the New York Stock Exchange topped 1.6 billion, with nine shares on the decline for every issue on the rise. On the Nasdaq, 743 million shares traded, and decliners outran advancers 6 to 1.

It was the lowest close for the Nasdaq since June 30, 2003, when the index finished at 1,622.80. The Dow and the S&P 500 are also at mid-2003 levels.

The Dow is down 39.4 percent from its Oct. 9, 2007 closing high of 14,164.53. The S&P is down 42 percent from its high at the same time of 1,565.15. The Nasdaq's record high was 5,048.62, during the dot-com boom that swelled the index to levels it has not come close to regaining after the high-tech bubble burst.

U.S. stock market paper losses came to $1.1 trillion Wednesday 15 Oct 2008, according to the Dow Jones Wilshire 5000 Composite Index, which represents nearly all stocks traded in America.

Wednesday's 15 Oct 2008 losses came as investors were hoping the market would recover from last week's terrible run, which erased about $2.4 trillion in shareholder wealth and brought the Dow to its lowest level since April 2003. The tumble occurred amid a seize-up in lending stemming from a lack of trust among institutions in response to the bankruptcy of investment bank Lehman Brothers Holdings Inc. and the failure of Washington Mutual Inc., which had been the nation's largest thrift.

The credit markets have been showing tentative signs of recovery, though they remain strained. The three-month Treasury bill on Wednesday 13 Oct 2008 was yielding 0.20 percent, down from 0.30 percent on Tuesday. Overall, yields remain low, showing that demand is so high that investors are willing to earn meager returns as long as their principal is preserved.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.98 percent from 4.03 percent late Tuesday 14 Oct 2008.

About 350 stocks advanced at the New York Stock Exchange, while about 2,800 declined. Consolidated volume came to 6.4 billion shares, down from 7.97 billion traded Tuesday 14 Oct 2008.

The Russell 2000 index of smaller companies fell 52.54, or 9.47 percent, to 502.11.
Light, sweet crude fell $4.09 to settle at $74.54 per barrel on the New York Mercantile Exchange.

In Asian trading, Hong Kong's Hang Seng Index lost nearly 5 percent after rising more than 13 percent the previous two days. Markets in Australia, South Korea, China, India and Singapore also sank. Japan's Nikkei 225 index, however, ended up 1.1 percent after soaring 14 percent in the previous session.

In Europe, Britain's FTSE 100 fell 7.08 percent, Germany's DAX index fell 6.49 percent, and France's CAC-40 fell 6.82 percent.

Market Capitulates

China SWF lost $5Billion in US money market

China's sovereign-wealth has lost an estimated $5 billion after putting the money in a U.S. money-market fund that froze redemptions following losses on its holdings, reports The Wall Street Journal.

An official at China Investment Corp. confirmed it had made the investment. As of Sept. 1, CIC owned 11.13% of institutional-class shares in the Reserve Primary Fund through a unit called Stable Investment Corp., according to a regulatory filing by the fund with the U.S. Securities and Exchange Commission. A spokeswoman for CIC declined further comment.

US$455 billion of US budget deficit

Reprinted from Channel News Asia

WASHINGTON, 15 October 2008: The US budget deficit tripled in the 2007-2008 fiscal year ended September 30, 2008 to 455 billion dollars or 3.2 percent of gross domestic product, official data showed on Tuesday 14 October 2008.

"This year's budget results reflect the ongoing housing correction, and the manifestations of that in strained capital markets and slower growth," said Treasury Secretary Henry Paulson in a statement.

How different 2008 from 1929

"The only thing we have to fear is fear itself." -- Thus spoke Franklin D. Roosevelt 75 years ago.

Looking back on Roosevelt's speech in 1933, 4 years after the infamous crash of '29, he was referring to the economic conditions of the time -- better known as The Great Depression.

In essence he was saying that if we can't shake our pessimistic economic outlook, it will be tough to turn things around. The question is... are things different this time?
The answer is yes and no.

People are still fearful of what the future holds and they have very little confidence in the economy. The big difference between the crash of '08 and the crash of '29 is that we now have India and China on the world stage.

Back in '29, both of these countries were not on the radar. In fact India was under British Rule. Both India and China's economies will suffer with the turn down here in the US.

They are now going to have to generate their own domestic consumption patterns for the goods and services they formerly sold to the US. This is going to be hard to do as so much of their economy is based on exports which are evaporating quickly.

The fact of the matter is that the markets are extraordinarily turbulent. We do not expect, even with the worldwide bailout, for things will be rosy again anytime soon.

However, that does not rule out some extraordinary trading opportunities in the markets. This is a time for rational thinking. It is also a time to eliminate fear from trading. There is no need for fear in one's trading plan if you're running with a diversified program that has proven to be successful over time.

"The only limits to our realization of tomorrow will be our doubts of today." -- Franklin D. Roosevelt

Rates cut and Global show of force.

The co-ordinated rate cuts 8 October 2008 of 0.5% by the Fed, ECB, Bank of England, Bank of Canada, Swiss National Bank and Riksbank are a significant sign of central bank coordination in light of the financial crisis. The 0.27% cut by the People's Bank of China (and 50bp cut in reserve requirements) will be seen by many as a sympathy move in concert with the other central banks.

The European Central Bank trimmed its key rate to 3.75% from 4.25%, and the Bank of England cut its benchmark rate to 4.5% from 5%. The Bank of Japan sat out the move but issued a statement backing the action.

The rate cuts have had an immediate positive impact on risk assets, with equity prices in Europe reversing losses and futures in the US moving higher. That is to be expected, for reasons we outline below. But equally, the coordinated move 'explains' Bernanke's comments from yesterday 7 October 2008, which disappointed markets. The finalization of a joint move was not complete at the time he spoke to the National Association of Business Economists.

We believe easier monetary policy cannot cure what ails the financial system—a shortage of capital. And what today's 8 October 2008 move underscores is that monetary policy coordination—belated though it may have been—is easy compared to the deployment of taxpayer funds to recapitalize banks or fund asset workout entities. Yet the latter are plainly necessary and, indeed, even more important.

The challenge for markets, therefore, is to cope with the seemingly inevitable country-by-country, case-by-case resolution of insolvency pressures in the banking system Finally, however welcome the moves are, they come too late to forestall recessions in the US, UK, Eurozone and Japan—or for that matter, much weaker growth in the emerging complex. Earnings risk, default risk and disinflation will remain key hallmarks of the cycle for considerably longer.

As a consequence, we continue to see further easing from the Fed, Bank of England and ECB in this cycle. We anticipate two more quarter point moves from the Fed before year end, another 0.75% from the ECB and a further 1.25%from the Bank of England in this cycle.

Central banks around the world acted in concert Monday, hoping a 0.5% rate cut would restore confidence to battered markets, WSJ's David Wessel reports. (Oct. 8)

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Top 10 market crashes since 1900

Who gets what in Paulson Bailout plan

U.S. to infuse $250 billion into banks, take stakes

Treasury Secretary Henry Paulson announces plan to recapitalize banks, thaw credit markets with bailout money.

They also come as Neel Kashkari, the newly-appointed Treasury Department official tasked with managing the 700-billion-dollar US rescue package, unveiled plans for the US government to buy stakes in several banks, in the latest move to combat the worst global financial crisis since the 1930s.

The Wall Street Journal reported Monday on its website, citing people familiar with the matter, that the plan calls for the Treasury to take about 250 billion dollars in equity stakes in potentially thousands of banks across the country including several of the nation's largest banking institutions.

Which banks may get the most under the Paulson plan:

Citigroup gets $25 billion

J.P. Morgan gets $25 billion

Wells Fargo gets $20 billion

Bank of America gets $12.5 billion

Merrill Lynch gets $12.5 billion

Goldman Sachs gets $10 billion

Morgan Stanley gets $10 billion

State Street Bank gets $3 billion

Bank of New York gets $3 billion

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Meteoric market rise just a logical response to incredibly oversold situation.

"This stock market still cannot be trusted," Cramer told viewers bluntly. He called the meteoric market rise just a logical response to what had become incredibly oversold conditions.

In sorting out whether Monday's monster rally was sustainable or simply a flash in the pan, he looked at the news on which it was based. He said without details on the Treasury Department's latest banking bailout plans, there's no way to know whether it will help or not. Which banks get the money? How much will they get? How will it be implemented and when? All of these questions remain unanswered, said Cramer.

The other "positive" news of the day came when it appeared Morgan Stanley won't be going out of business. "What kind of positive news is that?" asked Cramer.

According to Cramer, the pressing issues of the day still remain. He has yet to see details on how anything the federal government has done to get credit flowing to consumers and help small businesses get financing. While another Great Depression may be off the table, the chance of a severe recession still remains on the table, he said.

Cramer continued to advise investors to exercise caution and invest in only recession stocks with large, safe dividends and those whose beaten down value is almost equal to that of the cash they have on hand.

Equity markets soar on U.S. Treasury’s plan to buy stakes in banks

Equity markets soar on U.S. Treasury’s plan to buy stakes in several big banks. US prepares $250bn banks push.

(Financial Times) - Global stock markets staged a historic rally on Monday as European governments pledged a total of €1,873bn ($2,546bn) to shore up their financial sector and the US prepared to unveil its own comprehensive rescue plan today.

In New York , the S&P 500, which last week fell 18.2 per cent, rose 11.6 per cent – the biggest daily gain since the volatile trading of the Great Depression.

The US was expected to announce that it would commit $250bn, out of the $700bn rescue package agreed earlier this month, to a recapitalisation programme, provide a temporary sovereign guarantee for bank borrowing and expand depositor protection.

About half the money would be invested in bigger US banks including Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley – with the largest lenders receiving as much as $25bn. The rest of the $250bn would go to as yet unspecified smaller financial institutions.

Bankers said the Treasury offered to purchase a specific amount of three-year preferred stock in each bank on a take-it-or-leave-it basis.

The Treasury summoned top bankers including JPMorgan’s Jamie Dimon, Morgan Stanley’s John Mack and Goldman’s Lloyd Blankfein to brief them on the plan. The heads of the country’s largest banks were on Monday 13 October 2008 night trying to decide whether to participate in the programme.

Earlier, Germany unveiled a far-reaching plan closely modelled on last week’s British initiative. It will issue up to €400bn in credit guarantees for inter-bank lending and set aside a €100bn fund to inject capital in financial institutions and acquire illiquid assets. France meanwhile said it would guarantee up to €320bn in inter-bank loans and provide €40bn in new capital for banks. Christine Lagarde, French finance minister, said French banks should use the funds to raise their tier one capital ratios to 9 per cent, so that they are on “a level playing field” with British banks.

The Netherlands, Spain, Italy, Austria, Portugal and Norway joined the effort, committing a total of €501bn in guarantees and capital, while the British government said it would provide £37bn ($64bn) in new capital to three of the country’s largest banks – as part of its already announced £400bn bail-out plan.

The yen and the dollar tumbled yesterday 13 October 2008 as risk appetite improved after central banks in U.S. and Europe announced a string of measure to help stabilize the financial system. The yen and the dollar have been major beneficiaries of increased risk aversion but faced strong pressures on Monday after plans that the U.S. Treasury may take stakes in several big banks.

Gold declined 2 percent on Monday 13 October 2008 as investors reversed previous safe-haven trades after the U.S. and Europe announced plans to inject billions of dollars into the financial system and restore confidence. Spot gold reached a low of $821 but moved off its low as the dollar weakened against other currencies such as the euro.

Crude oil futures rose more than 4 percent on Monday 13 October 2008 , rebounding as stock markets soared on news that the U.S. Treasury will be buying stakes in several big banks. Weakness in the dollar and news that Saudi Arabia will cut supplies next month to one major Europe-based refiner with a global system also support oil prices higher.

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Dow one big jump after 8 down day

Monday 13 October 2008, Dow biggest one day jump in 75 years.

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Countries like Malaysia, India, China likely to escape recession

Reprinted from 'The Edge Daily"

KUALA LUMPUR, 13 October 2008: After claiming Singapore and New Zealand as its first casualties, the ongoing financial crisis is set to push more economies in the Asia-Pacific region into recession. But which countries are likely to head in the same direction as the two nations?

The short answer is that there is no clear prime candidate owing to the unpredictability of the financial market, analysts say. However, they agree that there are fundamental indicators that may help stave off economic contraction.

According to some analysts, the indicators show three countries in the region capable of avoiding a contraction — China and India, which are being propped up by vast consumer demand, and Malaysia, which has ample liquidity.

In China, retail spending in 1H08 stood at 5.97 trillion yuan (about RM3 trillion), up 21.4% year-on-year. Meanwhile, India’s domestic spending in 2007 was 13.3 trillion rupees (RM962.92 billion).

There are also suggestions that Indonesia and Thailand might stave off recession, the former because of its large population and the latter because of its sound financial fundamentals.

In the case of Singapore and New Zealand, their economies were crippled when external demand for their exports fell and as their interests in the foreign capital market turned sour.

However, as RAM Holdings Bhd chief economist Dr Yeah Kim Leng explained, export is not the only factor determining the economic growth of a country. If domestic spending is sufficient to maintain growth and if this spending can be maintained, then the country may very well be sustained by domestic demand alone.

“An economy does not necessarily go into a recession when external demand falls. It also depends on how much of the country’s growth is driven by domestic demand,” he said.

“If domestic demand, private-sector spending and government spending can be maintained, then the economy is strongly positioned to not slip into a recession. Fiscal and monetary stimuli could help.”

CIMB Research’s chief economist Lee Heng Guie agreed that macro-economic policy flexibility will be a key determining factor, at least until the financial situation stabilises.

“At this juncture, it’s hard to assess where the global economy is going. If equity prices and asset prices continue to fall, eventually it would have an impact on the real economy,” he said.

He added that government fiscal spending would be critical to maintain growth momentum. In that regard, a healthy balance of payments and sustained reserves would supply the state with sufficient ammunition should the economy require an injection of funds.

While China and India would be carried on the back of their strong consumer demand, Malaysia, which traditionally follows the performance of Singapore, would be saved by its financial system and ample liquidity, said Yeah.

“Our banking system’s lending is still growing at 10% to 11%. This is very unlike the (Asian financial) crisis 10 years ago where credit lines were clogged,” he said.

“There are still more job vacancies than job-seekers, so the employment situation is still strong. All this goes to show that we are looking at a strong buffer against a decline in exports.”

According to numbers from the finance ministry, exports accounted for less than 30% of Malaysia’s economic growth, so even if the export industry were to collapse, growth could still be sustained domestically.

However, export growth has begun to shrink, dropping to a five-month low in August with a y-o-y growth of 10.6% compared with 23.5% in July.

A report by CIMB Research also suggests that Indonesia is more likely to escape a growth crunch than Malaysia. A worst-case scenario suggests that Malaysia would be able to maintain 5.3% growth in 2008, before shrinking to -0.5% in 2009 and rebounding to 1.5% growth in 2010.

Indonesia, on the other hand, would be able to maintain positive growth throughout the same timeframe, according to CIMB. The report also suggests that Thailand would likely escape recession owing to its strong fundamentals and balance of payments surplus.

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New Stock Market Terms

CEO --Chief Embezzlement Officer.

CFO-- Corporate Fraud Officer.

BULL MARKET -- A random market movement causing an investor to mistake himself for a financial genius.

BEAR MARKET -- A 6 to 18 month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no sex.

VALUE INVESTING -- The art of buying low and selling lower.

P/E RATIO -- The percentage of investors wetting their pants as the market keeps crashing.

BROKER -- What my broker has made me.

STANDARD & POOR -- Your life in a nutshell.

STOCK ANALYST -- Idiot who just downgraded your stock.

STOCK SPLIT -- When your ex-wife and her lawyer split your assets equally between themselves.

FINANCIAL PLANNER -- A guy whose phone has been disconnected.

MARKET CORRECTION -- The day after you buy stocks.

CASH FLOW -- The movement your money makes as it disappears down the toilet.

YAHOO -- What you yell after selling it to some poor sucker for $240 per share.

WINDOWS -- What you jump out of when you're the sucker who bought Yahoo @ $240 per share.

INSTITUTIONAL INVESTOR -- Past year investor who's now locked up in a nuthouse.

PROFIT -- An archaic word no longer in use.

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Singapore (MAS) shifted to a neutral policy stance

Reprinted from Business Times

11 Oct 2008, MAS moves to neutral; US$ may head higher - S$1.50 by end-'08, S$1.52 to S$1.55 possible in 2009, say analysts

THE Monetary Authority of Singapore (MAS) shifted to a neutral policy stance yesterday 10 October 2008 as many had predicted, citing a deteriorating global economy and moderating price pressures, thus ending a policy of modest and gradual appreciation for the trade-weighted Singapore dollar that had been in place since April 2004.

In its semi-annual Monetary Policy Statement yesterday 10 October 2008, the MAS announced that it was moving to a zero appreciation stance for the trade-weighted Singapore dollar - or S$NEER - policy band. The current level of that band will be maintained, and there will be no re-centring of its mid-point or its width, it added.

And, in what was a likely response to recent volatile moves in currency markets, it said: 'MAS stands ready to intervene to dampen excessive volatility in the S$NEER should this become necessary.'

In pictorial terms, yesterday's 10 October 2008 policy change means that the band within which the MAS fine-tunes the external value of the Singapore dollar will now flatten out to a horizontal one, compared with an upward sloping one before. DBS and OCBC researchers, who predicted the MAS change, warn the US dollar may end the year closer to S$1.50.

Explained DBS: 'In US$/S$ terms, this implies that the topside is now estimated at S$1.4890 (at the time of writing yesterday 10 October 2008), with the mid-point located at S$1.4670. This suggests that our mid-2009 target of S$1.49 is too conservative given our expectation for more euro weakness to US$1.32. Hence, we now see the US dollar hitting S$1.50 by end-2008 before proceeding higher to S$1.52 in mid-2009.'

UK-based research firm Forecast, which expects the euro to fall even further to US$1.25, warns that a further move to S$1.55 cannot be ruled out over the course of the next 12 months.
Boosted by its broad gains elsewhere, the US dollar rose to a fresh one-year high of S$1.4850 yesterday, but thereafter ended the Asian session lower at S$1.4792.

Since the early 1980s, the MAS has fine-tuned the value of the S$NEER as its main monetary policy tool.

This value, in turn, is determined by the value of a basket of currencies chosen to reflect their importance in trade terms to the local economy. In terms of weighting, some of the largest components of this basket are believed to be the US dollar, Malaysian ringgit, Japanese yen and euro.

Thus, explained DBS: 'The neutral S$NEER policy does not ensure that the US$/S$ will head up indefinitely if the US dollar chooses to reverse gear and head down again.'

The undisclosed bands within which the S$NEER are allowed to move have been widely estimated to be between 1.5 and 2.5 per cent on either side of the policy mid-point, and this was re-centred higher when the MAS issued its previous semi-annual Monetary Policy Statement in April this year 2008.

Indeed, some currency strategists, such as those at JPMorgan and UBS, believe that the S$NEER was already trading close to the weakest part of that policy band yesterday.

UBS, in particular, questioned if it was really an easing in de facto terms.

Argued its strategist, Nizam Idris, yesterday: 'With the S$NEER having already drifted down to the policy floor before the MAS announcement, the new policy leaves almost no more room for the Singapore dollar to weaken against the policy basket.

'Conversely, the new policy leaves almost 4 per cent upside room for the S$NEER.

'In other words, the new policy would allow for either a neutral policy if the S$NEER sticks to the policy floor, or tighten, leaving no room for any easing from current levels. Further upside in the US$/S$ would be purely driven by broad-US dollar moves.'

Elsewhere, researchers at Barclays Capital, who also expect the greenback to trek higher to S$1.50 if the current climate of risk aversion persists, spoke of other possible fiscal policy options further out if things get worse, or even cuts to employers' CPF contribution rate.

They suggested: 'This could be coordinated with an inter-meeting move to re-centre the midpoint of the (S$NEER policy) band lower, ahead of the April 2009 monetary policy meeting. This is more likely to occur in Q1 09, when the threat of job losses seems greater.'

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Singopre NEER - monetary exchange policy

Singapore recession with risks on downside

Reprinted from Business Times

11 Oct 2008 , S'pore slips into recession, risks skewed on downside, official 2008 growth estimate cut to 3%, but market economists already shaving 2009 forecasts

Even with the market primed for recession, the Q3 flash GDP estimates still fell below expectations. And, with no quick rebound in sight, economists are looking ahead at a lean 2009 as well.

The early estimates produced yesterday by the Ministry of Trade and Industry (MTI) show a broad-based sharp slowdown, with the economy contracting not only sequentially as widely expected, but in year-on-year terms too. MTI now expects the economy to grow 'around 3 per cent' in 2008, down from its August forecast of 4-5 per cent.

Based only on July 2008 and August 2008 data, GDP fell 6.3 per cent in Q3 from Q2 in adjusted, annualised terms. Coming straight after a 5.7 per cent decline in the preceding quarter, this spells a technical recession - Singapore's first since the second half of 2002.

But, against expectations, GDP has also fallen from a year ago in Q3, by 0.5 per cent. The last time the economy went into the red in year-ago terms was in Q2 2003 when GDP fell 1.8 per cent during the Sars outbreak.

Both MTI and the Monetary Authority of Singapore (MAS) - which yesterday 10 October 2008 eased monetary policy by moving to a neutral stance, from the 'modest and gradual' currency appreciation policy it had maintained since April 2004 - yesterday described the Singapore economy's near-term prospects in plain stark terms.

The external risks remain on the downside as the ongoing financial turmoil has presented 'new uncertainties' for the Singapore economy, MAS says. A more severe global downturn cannot be discounted, and Singapore's economic growth will 'likely remain below its potential rate over the next few quarters', the central bank adds.

A slip into technical recession here had been widely flagged, following months of sluggish manufacturing output due to pharmaceutical peculiarities. But now the precision engineering and chemicals clusters have also slowed because of weaker external demand, MTI says.

The ministry also expects the global financial crisis to take its toll in the months ahead on Singapore's financial services sector, particularly 'sentiment-sensitive' activities such as stocks trading and fund management.

MAS also sees services industries such as the transport-hub and tourism being hit by the global downturn.

As for the construction sector, 'despite a strong pipeline of projects, a shortage of contractors, a tight labour market for engineers and project managers, and longer waiting times for equipment' have delayed the projects, MTI notes.

Market economists share the official concerns - just more bearishly. Most had pared their forecasts of Singapore's 2008 GDP growth well before the latest official revision, and some now cite the risks of the growth falling below 3 per cent - probably between 2.5 and 3.0 per cent, they reckon.

Indeed, OCBC Bank's economists have belatedly cut their 2008 forecast to 2 per cent, and see the economic weakness extending into the first half of 2009.

UBS Investment Bank strategist Nizam Idris said the latest data show the economy to be in 'deep recession', with all the key figures 'well below expectations'.

The Q3 flash figures - which will eventually be updated with the September data - imply that industrial production probably grew modestly by 1-2.5 per cent last month, economists estimate. Any lower and the final Q3 GDP figure could well be worse than the already weak flash figures, United Overseas Bank's economists note. And, short of a strong pharma rebound soon, the manufacturing slump could extend into Q1 2009, they add.

Nanyang Technological University economist Choy Keen Meng notes wryly that his 'worse-case scenario' forecasts issued in March 2008 - of US recession and Singapore growing 3 per cent in 2008 - are coming true.

But he expects some recovery in year-on-year GDP growth to 3-4 per cent in Q4, partly on account of a low base in Q4 2007.

'Sluggish growth of 2-3 per cent is expected in the first half of next year. If the financial turmoil can be brought under control by then, we might be lucky to see a gradual recovery beginning in the second half.

All in all, the economic outlook for 2009 is not looking good. GDP growth is likely to come in at about 4 per cent or even lower, barring a protracted global economic slump.'

Others such as Standard Chartered Bank economist Alvin Liew recently halved his 2009 growth forecast for Singapore to 2 per cent.

One silver lining, perhaps, amid the gloom and doom: Inflationary pressures will ease. MAS sees Singapore's headline inflation rate falling to 2.5-3.5 per cent in 2009, from 6-7 per cent this year. Not fast enough, says Stanchart's Mr Liew, pointing out that Singapore's 'historical comfort zone' for inflation is just 1-2 per cent.

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Global downturn will hit hard on Singapore

Reprinted from Business Times

(SINGAPORE) 10 Oct 2008, Economists look into 2009 and stare into more gloom, SMEs warned of possible contraction; some predict easier monetary policy

Expect the global downturn to hit Singapore hard, as GDP growth in Q4 and 2009 weakens, economists said at a Singapore Business Federation seminar yesterday.

They also warned SME managers of the worst-case possibility of a contraction next year.

Some predicted an easing of monetary policy allowing the Singapore dollar to depreciate. They were speaking ahead of two key announcements today - advance GDP data for the third quarter, and an exchange rate review from the Monetary Authority of Singapore (MAS).

'This downturn is unlike previous ones,' said CIMB-GK economist Song Seng Wun.

'It shouldn't be compared to the Asian financial crisis or the dotcom bubble, where there were still pockets of growth. What we now see is a synchronised slowdown across the world,' he said.

His base case forecast for GDP growth is 2.5 per cent for this year, and 0 to 2 per cent for 2009.

Anticipating that accelerated fiscal spending takes time to work its way through the economy, whereas falling demand hits headline GDP rates far quicker, Mr Song's worst case projection for 2009 is a negative 3 to 5 per cent in GDP growth.

Slowed growth and tapering inflation has led many to expect MAS to shift to at least a neutral stance, from the hawkish policy adopted in April to curb inflation.

OCBC economist Selena Ling said, 'The SGD has been trading at the lower end of the band, so there's actually room for the MAS to re-centre lower.'

This 'double-edged sword' though would lead to an interest rate rise. 'There is no lack of liquidity yet, though I think MAS will likely inject cash to ensure the interest rate doesn't surge excessively,' she said.

Mr Song added that Singapore's relatively strong corporate sector, the government's fiscal surplus and consumers who are not heavily in debt are favourable silver linings in these 'very trying times'.

Also, while job creation will slow, employment is unlikely to fall sharply with the integrated resorts contributing jobs, and the relative resilience of the construction sector serving to cushion, though not offset, recessionary effects.

Although most SMEs at yesterday's seminar said banks' tightened lending had not hit them yet, Singapore Manufacturers' Federation president Renny Yeo said this will likely be more keenly felt when the renewal of leases for their facilities comes round.

Mr Song said the fundamental question of how to restore confidence remains. 'We can cut interest rates to zero but if banks refuse to lend, it doesn't solve the problem.'

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Singapore recession and its GDP

SGP facing recession, government have to keep credit flowing

Reprinted from Business Times

11 Oct 2008, Facing up to recession; Government should intervene to keep credit flowing to corporate sector

THIS time last year 2007, with the stock market near its all-time high, the property market booming and the Singapore economy cantering towards a growth rate of 7.5 per cent for 2007, who would have thought we were, in fact, on the cusp of a recession?

But here we are this year 2008, entering our first technical recession - two consecutive quarters of negative growth - since 2001; the flash estimate for Q3 growth was a worse-than-expected minus 6.3 per cent. We're also in the first quarterly contraction on a year-on- year basis (minus 0.5 per cent) since the time of Sars, in the second quarter of 2003.

It's a sobering reminder of how vulnerable even a fundamentally sound and well-run economy like Singapore can be to global economic headwinds; except that what we're facing now is no mere headwind, but a gale-force storm.

There is nothing Singapore could have done to prevent this. There is not much that any Asian country could have done. And the financial market turbulence we are seeing is only the beginning of a long spell - at least a couple of years - of pain for any economy that depends heavily on doing business with the United States and Europe.

After the current phase of the financial storm subsides - which depends on what the G-7 finance ministers decide to do at their meetings in Washington - the theatre of action will shift to the real economy. The US, Europe and Japan will experience a marked slowdown, if not outright recession, and rising unemployment. The great American consumption machine, in particular, which accounts for more than two-thirds of US GDP, will be reduced to a shadow of its former self.

While the International Monetary Fund still resists calling a global recession - it forecasts 3 per cent global growth next year - that view could change.

But global recession or not, few Asian countries - certainly not those with export-oriented economies - will be spared from the backwash of slowing growth in the major economies. Not even China; while its growth rate will probably still be respectable at around 7-8 per cent, the economy of the coastal provinces, where hundreds of thousands of factories have to depend for their livelihoods on the American consumer, will be devastated. Thousands of SMEs in China have gone bust already this year 2008.

India, for its part, has seen its financial markets ravaged as a result of selloffs by foreign institutional investors; but the real economy - which is still overwhelmingly domestically focused - will be relatively resilient.

But even if China and India boom, they cannot come close to compensating for a US slowdown: a mere 20 per cent reduction in consumption in the US wipes out the equivalent of all of the consumption of China and India combined. Add in a European slowdown as well and the problem is multiplied.

So in the circumstances, what are the policy options for a small open economy like Singapore? The focus would have to be on, first, ensuring that banking functions as normally as possible and businesses keep running.

Right now, banking is not functioning normally; the credit crunch and fear of counterparty risk has spread here too. Despite liquidity injections by the Monetary Authority of Singapore, interbank rates remain elevated. Banks have pulled in their credit lines to even well-run companies. If this continues, layoffs will inevitably rise.

There could well be more financial accidents, or at least strains, in the US and Europe in the months ahead, which suggests local banks will remain unusually risk averse. There is a strong case here for temporary government intervention to keep credit flowing to the corporate sector - whether through direct loans by government agencies such as SPRING (via their several loan schemes, which can be enhanced) or through credit guarantees.

There is a case, too, for an off-budget package of fiscal measures - particularly increases in public spending, as well as help to businesses and vulnerable groups - to cushion the impact of the slowdown. The last budget did not, and could not, see it coming, but it is here. And help can't wait till the next budget. A philosophy of prudent economic management practised over decades has yielded a legacy of fiscal surpluses. It's now time to put them to work.

This crisis is also an opportunity - for example, to ramp up infrastructure, to develop new capabilities through higher outlays on training and retraining, and promote new technologies.

Storms don't last forever and Singapore's recession, like so many before it, will pass. What matters now is how productively and creatively we handle it, and what shape we will be in when the global economy comes back.

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Country up for sale in eBAY due to credit crunch

Reprinted from Business Times

11 Oct 2008 , Want to buy Iceland? eBay bidding soars to £10 million (London).

GREAT scenery and wildlife but financial situation in need of repair - collect in person.

Iceland, which is going cap in hand to Russia for a four billion euro (S$8 billion) loan to bail out its failed banks, was offered for sale as a wholesale lot on eBay yesterday.

Bidding started at 99 pence but had reached £10 million (S$25.4 million) by mid-morning yesterday.

Globally renowned singer Bjork was 'not included' in the sale, according to the notice, but there were nonetheless 26 anonymous bidders and 84 bids.

'Located in the mid-Atlantic ridge in the North Atlantic Ocean, Iceland will provide the winning bidder with a habitable environment, Icelandic horses and admittedly a somewhat sketchy financial situation,' the notice read.

Bidders' questions included: 'Do you offer volcano, earthquake insurance?', 'Is it possible that my payment will be frozen?', and 'Will you accept COD as a form of payment?'

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An entire economy may go belly up due to credit crunch

Reprinted from Business Times

10 Oct 2008, Global Financial Crisis have cost Iceland's dalliance with high finance is pushing tiny Nordic nation to the brink bankruptcy.

(REYKJAVIK, Iceland) Iceland suspended trading on its stock exchange for two days and took control of the country's largest bank as it grappled with a banking crisis that is treatening to bankrupt the country.

The government's decision to take control of Kaupthing, the country's leading bank that has assets and debts across Europe, means that the country's Financial Services Authority now has control of all three of the country's major banks. The other two, Landsbanki and Glitnir, are in receivership.

The crisis is having a ripple effect throughout the continent, where tens of thousands of people have accounts with subsidiaries of the Icelandic banks. More than 20 British local government authorities as well as some universities also have hundreds of millions of dollars deposited in Icelandic banks because of their relatively higher interest rates.

The main opposition Conservative Party estimated that councils across the United Kingdom may have had as much as £1 billion (S$2.53 billion) saved with Icelandic banks.

Iceland is struggling to get a grip on the collapse of its top-heavy banking system, a situation that Prime Minister Geir Haarde has warned is putting Iceland at risk of 'national bankruptcy'.

The Financial Supervisory Authority said on Wednesday that it took control of Glitnir Bank, the country's third-largest lender, annulling a previous move by the government to buy a 75 per cent stake in the bank. A day earlier the watchdog seized Landsbanki Islands amidst concern the second-biggest bank may default.

Kaupthing, Landsbanki and Glitnir make up about three quarters of the benchmark ICEX 15 Index.

The index has decreased 52 per cent so far this year 2008, making it the third-worst performer among 88 indexes worldwide tracked by Bloomberg. Kaupthing has declined 26 per cent this year while Glitnir has plunged 82 per cent. Landsbanki has lost 43 per cent of its market value.

The banks are saddled with about US$61 billion of debt, 12 times the size of the economy, according to data compiled by Bloomberg. Mr Haarde said on Wednesday 8 October 2008, that the banking sector had 'become too big' as he acknowledged that it will take the tiny Nordic nation of just 320,000 people several years to recover from the current crisis.

The government is seeking a loan from Russia and may ask for aid from the International Monetary Fund to help guarantee deposits.

The authority said that the action was necessary to ensure the 'continued orderly operation of domestic banking and the safety of domestic deposits'.

It also used emergency powers, rushed in by parliament earlier this week, to hive off most of the domestic assets of Landsbanki into a separate entity to be called 'New Landsbanki' that is fully owned by the government.

'The decision means that the new bank takes over all the bank's deposits in Iceland, and also the bulk of the bank's assets that relate to its Icelandic operations, such as loans and other claims,' it said. 'The decision ensures continued banking operations for Icelandic families and businesses,' it added.

In an attempt to curb any panic, the regulator stressed that both Kaupthing and Landsbanki were open for business as usual yesterday and that all domestic deposits of the bank were guaranteed under Icelandic law.

However, the move leaves the international operations of Landsbanki, which have already caused a diplomatic spat with Britain, open to question.

British Prime Minister Gordon Brown has threatened to sue Iceland to recover the lost deposits of some 300,000 Britons who hold accounts with IceSave, the online arm of Landsbanki.

With local governments also holding accounts worth tens of millions of pounds in Icelandic banks, the British government has used powers under terrorism laws to freeze Landsbanki's assets until the status of the deposits is resolved. Mr Haarde said on Wednesday that discussions between the two countries had begun to find a 'mutually satisfactory solution'.

Wall Street dizziness

Reprinted from Business Times

11 Oct 2008, stocks gyrated wildly on Wall Street 11 Oct 2008 morning, plunging more than 700 points at the open before rebounding and then diving 432.89 points to 8,146.30 by midday.

'We are witnessing one of the biggest and fastest market meltdowns in the last 60 years,' said Fred Dickson, chief market strategist at DA Davidson & Co.

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