Friday, December 12, 2008
Automaker bailout may trigger CDS payments
12 Dec 2008, Government proposals to bail out ailing US carmakers may trigger payments on credit default swap (CDS) contracts that protect their debt, though the likelihood of this will depend on the final wording of the legislation, Bank of America said.
Likelihood depends on final terms of restructuring Bill.
The White House and congressional Democrats on Tuesday night reached an agreement in principle on a US$15 billion proposal for bailing out US carmakers and forcing them to restructure or fail.
In addition to providing loans, the proposal would force carmakers to answer to a presidentially appointed trustee - or 'car czar' - and make the government their biggest shareholder.
'We find arguments both for and against an autos czar triggering CDS,' Bank of America analyst Glen Taksler said. 'The result may depend on the exact wording of a potential bailout package.'
Sellers of credit default swaps normally make payments to the buyer after a borrower fails to make a payment on their debt, or files for bankruptcy protection. A restructuring can also trigger payments on the contracts.
'Based on the draft Bill, we see two potential triggers for autos CDS, bankruptcy and modified restructuring credit events,' Mr Taksler said. But, 'both are gray areas'.
'We would expect the actual result to become subject to intense debate, with arguments very dependent on the wording of a final Bill, if one is passed.'
There are around US$3.3 billion in net GM CDS exposures outstanding, while Ford CDS exposures stand at around US$2.8 billion, according to data by the Depository Trust & Clearing Corp, which confirms the majority of CDS trades.
If payments on carmakers's swaps are triggered, they are unlikely to have systemic consequences as most of the losses have already been taken as the securities weakened.
Carmakers's credit default swaps are trading at extremely distressed levels. It costs around US$7.8 million to insure US$10 million of GM's debt for five years, in addition to annual payments of US$500,000, according to Markit Intraday.
Insuring US$10 million of Ford's debt for five years costs US$6.9 million, also in addition to annual payments of US$500,000.
Likelihood depends on final terms of restructuring Bill.
The White House and congressional Democrats on Tuesday night reached an agreement in principle on a US$15 billion proposal for bailing out US carmakers and forcing them to restructure or fail.
In addition to providing loans, the proposal would force carmakers to answer to a presidentially appointed trustee - or 'car czar' - and make the government their biggest shareholder.
'We find arguments both for and against an autos czar triggering CDS,' Bank of America analyst Glen Taksler said. 'The result may depend on the exact wording of a potential bailout package.'
Sellers of credit default swaps normally make payments to the buyer after a borrower fails to make a payment on their debt, or files for bankruptcy protection. A restructuring can also trigger payments on the contracts.
'Based on the draft Bill, we see two potential triggers for autos CDS, bankruptcy and modified restructuring credit events,' Mr Taksler said. But, 'both are gray areas'.
'We would expect the actual result to become subject to intense debate, with arguments very dependent on the wording of a final Bill, if one is passed.'
There are around US$3.3 billion in net GM CDS exposures outstanding, while Ford CDS exposures stand at around US$2.8 billion, according to data by the Depository Trust & Clearing Corp, which confirms the majority of CDS trades.
If payments on carmakers's swaps are triggered, they are unlikely to have systemic consequences as most of the losses have already been taken as the securities weakened.
Carmakers's credit default swaps are trading at extremely distressed levels. It costs around US$7.8 million to insure US$10 million of GM's debt for five years, in addition to annual payments of US$500,000, according to Markit Intraday.
Insuring US$10 million of Ford's debt for five years costs US$6.9 million, also in addition to annual payments of US$500,000.
Auto bailout deal failed to materilise by US Senate
The US Senate on Thursday failed to reach a deal on a controversial multi-billion-dollar bailout for the beleaguered auto industry due to a disagreement over wage cuts, senators said.
As part of the revised US$14-billion loan package, Republicans had demanded that US wages be brought in line next year with those paid by foreign automakers, but faced resistance from the US autoworkers' union.
"I'm terribly disappointed that we are not able to arrive at a conclusion," Senate Majority Leader Harry Reid said after lawmakers spent hours trying to hammer out a compromise over proposed federal loans for the Detroit automakers.
"We have tried very, very hard to arrive at a point where we could legislate for the automobile industry," said Reid.
"I dread looking at Wall Street tomorrow. It's not going to be a pleasant sight. Millions of Americans, not only the auto workers but people who sell cars, car dealerships, people who work on cars are going to be directly impacted and affected."
Asian stock markets took an immediate beating on the news, with Hong Kong plummeting 6.5% and Tokyo diving more than five per cent.
The dollar also slumped to a 13-year low of 90.63 yen.
Republican Minority Leader Mitch McConnell said his allies in the Senate felt that the rescue package, which consisted of some US$14 billion in short-term loans, would not succeed in rescuing major automakers from the brink of collapse.
"None of us want to see them go down but very few of us had anything to do with the dilemma that they've created for themselves," said McConnell.
"And so the question was: 'Is there a way out?' And the administration negotiated in good faith with the Democratic majority a proposal that was simply unacceptable to the vast majority of our side because we thought it, frankly, wouldn't work."
The House of Representatives passed its version of the rescue plan for Detroit's automakers Wednesday, but the proposal met stiff opposition from Republicans, sending lawmakers hustling to make adjustments.
The legislation would have provided General Motors and Chrysler bridge loans to operate until March 31, and required a restructuring plan to ensure their long-term survival while repaying government aid.
Republican Senator Bob Corker, who spearheaded the alternative proposal, attributed the breakdown to differences over employee compensation, and said that a union representative from the United Auto Workers was present for the talks.
"This is a highly technical matter, involved volunteer employed benefit accounts, it involved bonds, it involved all kinds of discussions that were technical in nature," Corker said.
"And through all of that, and we had the United Auto Workers representative in the room, we had the three companies in another room. We were talking to bondholders on the phone. Certainly talking to our colleagues," he added.
"We are about three words - three words - away from a deal."
Democrat Chris Dodd, chairman of the Senate baking committee, lamented the breakdown, particularly with the holidays approaching.
"We will leave here tonight and go home for the holiday recesses, but for the literally hundreds of thousands of people whose jobs depend upon this industry, this will not be a joyous season wondering whether or not their jobs, their livelihoods, their homes, their children's futures are at risk," Dodd said.
"It is disheartening to me, to put it mildly, that we were unable to come to that agreement."
After warning it could run out of money within weeks, the largest US automaker GM acknowledged ahead of the vote that it was considering "all options," including bankruptcy, and had hired a team of legal advisers.
As part of the revised US$14-billion loan package, Republicans had demanded that US wages be brought in line next year with those paid by foreign automakers, but faced resistance from the US autoworkers' union.
"I'm terribly disappointed that we are not able to arrive at a conclusion," Senate Majority Leader Harry Reid said after lawmakers spent hours trying to hammer out a compromise over proposed federal loans for the Detroit automakers.
"We have tried very, very hard to arrive at a point where we could legislate for the automobile industry," said Reid.
"I dread looking at Wall Street tomorrow. It's not going to be a pleasant sight. Millions of Americans, not only the auto workers but people who sell cars, car dealerships, people who work on cars are going to be directly impacted and affected."
Asian stock markets took an immediate beating on the news, with Hong Kong plummeting 6.5% and Tokyo diving more than five per cent.
The dollar also slumped to a 13-year low of 90.63 yen.
Republican Minority Leader Mitch McConnell said his allies in the Senate felt that the rescue package, which consisted of some US$14 billion in short-term loans, would not succeed in rescuing major automakers from the brink of collapse.
"None of us want to see them go down but very few of us had anything to do with the dilemma that they've created for themselves," said McConnell.
"And so the question was: 'Is there a way out?' And the administration negotiated in good faith with the Democratic majority a proposal that was simply unacceptable to the vast majority of our side because we thought it, frankly, wouldn't work."
The House of Representatives passed its version of the rescue plan for Detroit's automakers Wednesday, but the proposal met stiff opposition from Republicans, sending lawmakers hustling to make adjustments.
The legislation would have provided General Motors and Chrysler bridge loans to operate until March 31, and required a restructuring plan to ensure their long-term survival while repaying government aid.
Republican Senator Bob Corker, who spearheaded the alternative proposal, attributed the breakdown to differences over employee compensation, and said that a union representative from the United Auto Workers was present for the talks.
"This is a highly technical matter, involved volunteer employed benefit accounts, it involved bonds, it involved all kinds of discussions that were technical in nature," Corker said.
"And through all of that, and we had the United Auto Workers representative in the room, we had the three companies in another room. We were talking to bondholders on the phone. Certainly talking to our colleagues," he added.
"We are about three words - three words - away from a deal."
Democrat Chris Dodd, chairman of the Senate baking committee, lamented the breakdown, particularly with the holidays approaching.
"We will leave here tonight and go home for the holiday recesses, but for the literally hundreds of thousands of people whose jobs depend upon this industry, this will not be a joyous season wondering whether or not their jobs, their livelihoods, their homes, their children's futures are at risk," Dodd said.
"It is disheartening to me, to put it mildly, that we were unable to come to that agreement."
After warning it could run out of money within weeks, the largest US automaker GM acknowledged ahead of the vote that it was considering "all options," including bankruptcy, and had hired a team of legal advisers.
Singapore Remisiers push for alternative to buying-in market
SINGAPORE - The Society of Remisiers (SOR) has proposed that the Singapore Exchange (SGX) introduce an immediate delivery, or ID, market that would complement current measures against short-selling.
Remisiers push for alternative to buying-in market.
SOR president Albert Fong, in a Dec 3 letter to the exchange, also requested that SGX consider scrapping fines of at least $1,000 for 'naked' shorts and $50,000 for failed delivery in the buying-in market.
In his letter, Mr Fong said that the ID market would function as a secondary market similar to the now-defunct cash market where shares can be bought and sold for immediate delivery.
'We envisage that SGX will impose a surcharge on transactions done in this ID market to deter rampant abuse of such a market and to compensate for loss of revenue by the exchange with the exclusion of the buying-in market . . . the mechanics of this ID market can be meticulously drawn up and fine-tuned gradually . . . we are fully convinced that this secondary market will enhance transparency and offer a systematic and logical extension to our financial system,' said Mr Fong.
Referring to the fines for naked shorting, Mr Fong said that they are punitive and disproportionate and, as a result, could deter investors by adding to already-high costs and risks. Mr Fong said the SOR believes that these measures, although possibly needed when markets are volatile, should be rescinded when the market stabilises and reintroduced if needed later.
Under the present settlement system of T+3, shares that have been short sold at the end of each day and thus cannot be delivered on the due date will be forcibly bought in by the exchange on the next trading day, that is T+4. This is conducted in SGX's buying-in market, a segment of the market that is visible only to dealers and remisiers and where prices are progressively raised by the exchange until all short positions are filled.
This arrangement had previously come under some criticism for being relatively opaque and on Sept 25, SGX announced that it would publish the list of stocks to be bought in every day half an hour before the scheduled commencement time of 11.30am, as well as impose the fines outlined above. It did, however, add that it would allow appeals for genuine mistakes.
Earlier this month, the exchange supplemented those measures with a consultation paper which proposed full disclosure of daily short-sold positions. Public feedback for this paper closes on Dec 22.
When contacted by BT yesterday, Mr Fong said that the SOR supports the disclosure measures as they would improve transparency and provide useful information to investors.
'Our main problem is with the heavy fines for short-selling which all our members are very upset about,' he said. 'Also, with the ID market, shares can be bought by the public, member companies and SGX itself, thus eliminating the need for a buying-in market altogether.'
In response to a BT query, SGX yesterday said: 'SGX's public consultation on the proposed revised penalty framework for the non-delivery of securities was closed on Dec 4, 2008. SGX is currently assessing the feedback received from various market participants, including comments received from the Society of Remisiers.'
In an Aug 30, 2007 letter to BT in response to a call to reintroduce the cash market, which was a segment of the market where cash was paid for immediate delivery of shares and was thus similar to the SOR's proposed ID market, SGX executive vice-president and head of operations Chew Hong Gian said that the cash market was a feature of scrip-based trading that was introduced for the sole purpose of allowing shareholders to sell physical share certificates to stockbrokers if they needed payment on the same day.
'When trading went fully scripless in 1994, the cash market was abolished to protect shareholders from shares being sold without their knowledge, as physical certificates no longer had to be produced.'
Remisiers push for alternative to buying-in market.
SOR president Albert Fong, in a Dec 3 letter to the exchange, also requested that SGX consider scrapping fines of at least $1,000 for 'naked' shorts and $50,000 for failed delivery in the buying-in market.
In his letter, Mr Fong said that the ID market would function as a secondary market similar to the now-defunct cash market where shares can be bought and sold for immediate delivery.
'We envisage that SGX will impose a surcharge on transactions done in this ID market to deter rampant abuse of such a market and to compensate for loss of revenue by the exchange with the exclusion of the buying-in market . . . the mechanics of this ID market can be meticulously drawn up and fine-tuned gradually . . . we are fully convinced that this secondary market will enhance transparency and offer a systematic and logical extension to our financial system,' said Mr Fong.
Referring to the fines for naked shorting, Mr Fong said that they are punitive and disproportionate and, as a result, could deter investors by adding to already-high costs and risks. Mr Fong said the SOR believes that these measures, although possibly needed when markets are volatile, should be rescinded when the market stabilises and reintroduced if needed later.
Under the present settlement system of T+3, shares that have been short sold at the end of each day and thus cannot be delivered on the due date will be forcibly bought in by the exchange on the next trading day, that is T+4. This is conducted in SGX's buying-in market, a segment of the market that is visible only to dealers and remisiers and where prices are progressively raised by the exchange until all short positions are filled.
This arrangement had previously come under some criticism for being relatively opaque and on Sept 25, SGX announced that it would publish the list of stocks to be bought in every day half an hour before the scheduled commencement time of 11.30am, as well as impose the fines outlined above. It did, however, add that it would allow appeals for genuine mistakes.
Earlier this month, the exchange supplemented those measures with a consultation paper which proposed full disclosure of daily short-sold positions. Public feedback for this paper closes on Dec 22.
When contacted by BT yesterday, Mr Fong said that the SOR supports the disclosure measures as they would improve transparency and provide useful information to investors.
'Our main problem is with the heavy fines for short-selling which all our members are very upset about,' he said. 'Also, with the ID market, shares can be bought by the public, member companies and SGX itself, thus eliminating the need for a buying-in market altogether.'
In response to a BT query, SGX yesterday said: 'SGX's public consultation on the proposed revised penalty framework for the non-delivery of securities was closed on Dec 4, 2008. SGX is currently assessing the feedback received from various market participants, including comments received from the Society of Remisiers.'
In an Aug 30, 2007 letter to BT in response to a call to reintroduce the cash market, which was a segment of the market where cash was paid for immediate delivery of shares and was thus similar to the SOR's proposed ID market, SGX executive vice-president and head of operations Chew Hong Gian said that the cash market was a feature of scrip-based trading that was introduced for the sole purpose of allowing shareholders to sell physical share certificates to stockbrokers if they needed payment on the same day.
'When trading went fully scripless in 1994, the cash market was abolished to protect shareholders from shares being sold without their knowledge, as physical certificates no longer had to be produced.'
New details about Reserve Primary fund breaking the buck
Thursday, November 27, 2008.
The Reserve Primary Fund did break the buck, just not when everyone thought it did.
The fund, whose announcement on Sept. 16 that its per-share value had fallen below a dollar touched off a panic in the money market, corrected its timeline of events on Wednesday.
Initially, the $62 billion fund said its per-share value had fallen to 97 cents at 4 p.m. on Sept. 16, after its Lehman Brothers investments were written down to zero.
The latest version now goes like this: On Monday, Sept. 15, the Lehman notes were written down to 80 cents on the dollar, which did not immediately cause the fund to break the buck. The fund correctly reported a per-share value of $1 all that day, the fund said in a statement.
But the next day, the employees who calculated the fund's share prices did not reflect the new Lehman values in their equations. If they had, given a sharp jump in redemptions, they would have realized that the fund broke the buck at 11 a.m. with a share price of 99 cents, not the $1 quoted most of the day. Then at 4 p.m., after the Lehman assets were cut to zero from 80 cents, the per-share price was accurately reported as 97 cents.
This means that those who submitted redemption orders between 11 a.m. and 4 p.m. on Sept. 16 expected a penny a share more than they were entitled to. That adds a fresh knot to the legal macramé already entangling the fund but poses no practical problems because redemptions have been suspended for more than two months and no one has actually received the undeserved penny.
The Reserve Primary Fund did break the buck, just not when everyone thought it did.
The fund, whose announcement on Sept. 16 that its per-share value had fallen below a dollar touched off a panic in the money market, corrected its timeline of events on Wednesday.
Initially, the $62 billion fund said its per-share value had fallen to 97 cents at 4 p.m. on Sept. 16, after its Lehman Brothers investments were written down to zero.
The latest version now goes like this: On Monday, Sept. 15, the Lehman notes were written down to 80 cents on the dollar, which did not immediately cause the fund to break the buck. The fund correctly reported a per-share value of $1 all that day, the fund said in a statement.
But the next day, the employees who calculated the fund's share prices did not reflect the new Lehman values in their equations. If they had, given a sharp jump in redemptions, they would have realized that the fund broke the buck at 11 a.m. with a share price of 99 cents, not the $1 quoted most of the day. Then at 4 p.m., after the Lehman assets were cut to zero from 80 cents, the per-share price was accurately reported as 97 cents.
This means that those who submitted redemption orders between 11 a.m. and 4 p.m. on Sept. 16 expected a penny a share more than they were entitled to. That adds a fresh knot to the legal macramé already entangling the fund but poses no practical problems because redemptions have been suspended for more than two months and no one has actually received the undeserved penny.
Trading Currencies
In today’s markets one must understand the importance of economic indicators.
On a regular basis each country publishes different results, gauging the strength of various parts of the economy. These indicators tell traders whether the economy is continuing to grow at a steady pace, or if there is a current slowdown due to an economic contraction. Understanding the value of these results normally indicates to traders whether monetary measures need to be taken or not, in order to control the economy.
Monetary Policy- To keep economic growth under control, preventing inflation or hyperinflation, each central bank uses numerous tools to insure gradual growth or to stimulate it after economic slowdowns. One of the most common tools used in today’s economic cycles are interest rates.
During economic growth, increasing interest rates are used to offer consumers an alternative to their money. This attracts them to invest in higher yielding programs, therefore allowing central banks to control consumer consumption.
On a regular basis each country publishes different results, gauging the strength of various parts of the economy. These indicators tell traders whether the economy is continuing to grow at a steady pace, or if there is a current slowdown due to an economic contraction. Understanding the value of these results normally indicates to traders whether monetary measures need to be taken or not, in order to control the economy.
Monetary Policy- To keep economic growth under control, preventing inflation or hyperinflation, each central bank uses numerous tools to insure gradual growth or to stimulate it after economic slowdowns. One of the most common tools used in today’s economic cycles are interest rates.
During economic growth, increasing interest rates are used to offer consumers an alternative to their money. This attracts them to invest in higher yielding programs, therefore allowing central banks to control consumer consumption.
A Decrease of interest rates is often used to encourage consumption spending, making returns on savings less attractive.
One has to remember that by nature traders will always look for higher returns on their money, encouraging investors/traders to move their money from currency to currency according to interest rates differentials.
Economists: Worst Still to Come
The results of the latest survey showing economists believe the current recession will last into June 2009, making it the longest since the Great Depression.
China inflation down to 2.4%
China’s consumer price inflation fell to a 22-month low of 2.4% in November, giving the central bank free rein to cut interest rates further to offset an abrupt slump in the world’s fourth largest economy.
Economists had expected inflation to moderate to 3% from 4% in the year to October. In the event, the reading was the lowest since January 2007.
In further signs that price pressures are fading fast, annual non-food inflation – considered a less volatile gauge of underlying conditions – fell to 0.6% in the year to November from 1.6% in the 12 months to October.
And between October and November, consumer prices fell 0.8%, the National Bureau of Statistics reported.
Economists had expected inflation to moderate to 3% from 4% in the year to October. In the event, the reading was the lowest since January 2007.
In further signs that price pressures are fading fast, annual non-food inflation – considered a less volatile gauge of underlying conditions – fell to 0.6% in the year to November from 1.6% in the 12 months to October.
And between October and November, consumer prices fell 0.8%, the National Bureau of Statistics reported.
Malaysia can no longer be a centre for cheap labour
THE signs are everywhere, the global economy is slumping and it will be a while before growth becomes part of the landscape again.
In its latest report, the World Bank said the world economy was now expected to slow to 0.9% growth next year from 2.5% growth in 2008.
That would be the weakest expansion since the bank started keeping records in 1970.
“For developing countries, the situation has really changed since the beginning of September,” said Hans Timmer, who directs the bank’s international economic analyses and projections.
The extent of the downward shift in developing country growth rates is expected to be more dramatic than even during the Asian financial crisis in the late 1990s or the bursting of the dot.Com bubble earlier this decade, with growth expected to slow from 7.9% last year to 6.3% in 2008 and 4.5% in 2009.
Malaysia has been spared the worst, thanks to the reforms the Government introduced in the wake of the 1997-98 Asian financial crisis and its huge foreign exchange reserves.
Economists note that Malaysia has enough financial resources to mitigate any fiscal adversity and domestic banks are also in a strong position to weather an economic downturn.
But we will feel some pain.
We will not feel the pinch as badly as Singapore, Taiwan and other countries with less diversified economies but we will feel the pain.
The number of jobless Malaysians will increase as the demand for goods and services in our export markets contracts.
Sales of cars and houses will slow as Malaysians zip up their wallets in anticipation of a slower economic growth.
In 1998, during the peak of the Asian financial crisis, some 80,000 Malaysians were rendered jobless.
It may be too early for the Human Resources Ministry officials and those in the manufacturing sector to estimate how severe the retrenchments will be.
But we should take pre-emptive steps.
We should set up a retraining fund so that those laid off can have their skill sets upgraded.
At the same time, these workers should be given a monthly allowance of between RM500 and RM1,000 to tide them over during the downturn.
The Government should also be more flexible in allowing the private sector to tap funds from the Human Resources Development Fund.
The downturn will also present the Government with a slew of opportunities. For a start, how about making structural changes to the economy?
Malaysia can no longer be a centre for cheap labour and low-cost production. The country simply cannot compete with the likes of China, Vietnam and Cambodia.
What the Government has to do is repatriate the 600,000 foreign workers as promised and cut down dependence on foreign labour.
Until that happens, companies will not favour innovation and measures to improve productivity.
During this time, the National Economic Council, comprising ministers and representatives from the private sector and the unions, must also take the approach that nothing is sacred.
If the Foreign Investment Committee is an impediment to foreign investments flowing into the country, it must be abolished.
If the New Economic Policy has to be tweaked or held in abeyance during this difficult period, so be it.
It is heartening to hear that the National Economic Council and the International Trade and Industry Ministry are on the verge of liberalising the services sector and keen to push through the free trade agreement with the United States.
The point is this: Malaysia and the rest of the world are going to be facing a rocky ride in 2009 and possibly 2010. But at some point, recovery will happen.
Malaysia must be in a stronger position to ride the upswing then.
It can only happen if the Government presses ahead with structural changes to the economy.
In every crisis, there is an opportunity.
The window of opportunity is now. It is time to make the changes.
In its latest report, the World Bank said the world economy was now expected to slow to 0.9% growth next year from 2.5% growth in 2008.
That would be the weakest expansion since the bank started keeping records in 1970.
“For developing countries, the situation has really changed since the beginning of September,” said Hans Timmer, who directs the bank’s international economic analyses and projections.
The extent of the downward shift in developing country growth rates is expected to be more dramatic than even during the Asian financial crisis in the late 1990s or the bursting of the dot.Com bubble earlier this decade, with growth expected to slow from 7.9% last year to 6.3% in 2008 and 4.5% in 2009.
Malaysia has been spared the worst, thanks to the reforms the Government introduced in the wake of the 1997-98 Asian financial crisis and its huge foreign exchange reserves.
Economists note that Malaysia has enough financial resources to mitigate any fiscal adversity and domestic banks are also in a strong position to weather an economic downturn.
But we will feel some pain.
We will not feel the pinch as badly as Singapore, Taiwan and other countries with less diversified economies but we will feel the pain.
The number of jobless Malaysians will increase as the demand for goods and services in our export markets contracts.
Sales of cars and houses will slow as Malaysians zip up their wallets in anticipation of a slower economic growth.
In 1998, during the peak of the Asian financial crisis, some 80,000 Malaysians were rendered jobless.
It may be too early for the Human Resources Ministry officials and those in the manufacturing sector to estimate how severe the retrenchments will be.
But we should take pre-emptive steps.
We should set up a retraining fund so that those laid off can have their skill sets upgraded.
At the same time, these workers should be given a monthly allowance of between RM500 and RM1,000 to tide them over during the downturn.
The Government should also be more flexible in allowing the private sector to tap funds from the Human Resources Development Fund.
The downturn will also present the Government with a slew of opportunities. For a start, how about making structural changes to the economy?
Malaysia can no longer be a centre for cheap labour and low-cost production. The country simply cannot compete with the likes of China, Vietnam and Cambodia.
What the Government has to do is repatriate the 600,000 foreign workers as promised and cut down dependence on foreign labour.
Until that happens, companies will not favour innovation and measures to improve productivity.
During this time, the National Economic Council, comprising ministers and representatives from the private sector and the unions, must also take the approach that nothing is sacred.
If the Foreign Investment Committee is an impediment to foreign investments flowing into the country, it must be abolished.
If the New Economic Policy has to be tweaked or held in abeyance during this difficult period, so be it.
It is heartening to hear that the National Economic Council and the International Trade and Industry Ministry are on the verge of liberalising the services sector and keen to push through the free trade agreement with the United States.
The point is this: Malaysia and the rest of the world are going to be facing a rocky ride in 2009 and possibly 2010. But at some point, recovery will happen.
Malaysia must be in a stronger position to ride the upswing then.
It can only happen if the Government presses ahead with structural changes to the economy.
In every crisis, there is an opportunity.
The window of opportunity is now. It is time to make the changes.
Malaysia's Public Bank resilient despite tough times
Impact of overnight policy rate cut just a ‘drop in the ocean’ for Malaysia Public Bank.
Malaysia's Public Bank, currently one of the most expensive banks trading at three times book value, is expected to remain relatively unscathed from the impact of the worldwide financial crisis and interest rate cuts.
“We are confident that their management is ‘on-the-ball’ and that its growth path is on track despite visibly tougher operating conditions,’’ said ECM Libra Investment Research acting head of research Ching Weng Jin.
He estimated that the impact from the recent 25 basis-point cut in overnight policy rate (OPR), from which base lending rate is calculated, was a “drop in the ocean’’ for Public Bank. This is despite the fact that a floor has been set for deposit rates.
“On a net basis, it could be 1% to 2% of forecast net profit for next year (consensus for this year is RM2.4bil),’’ he said. This takes into account income earned from about RM300mil that will be released from the recent reduction in statutory reserve requirements (SRR) that banks place with the central bank.
On an immediate basis, this money can be lent to the interbank market and earn income. In the current environment, banks will assess carefully how they are going to spend this money.
Public Bank managing director Tan Sri Tay Ah Lek told StarBiz in an e-mail reply: “The reduction in the SRR mitigates the impact of the reduction in the OPR on the bank’s net interest income. The net impact of the cut in OPR and the reduction in the SRR is at the low end of the analysts’ estimates, which are quite marginal.”
“Loan loss provisioning at 160% (compared with the banking industry average of 83%) is prudent,’’ said Ching. “Asset quality is the best in the industry, with net non-performing loans at 0.9% against the industry’s 2.4%.’’
Loans-deposit ratio, at 75%, is fairly good. Banks with lower loans-deposit ratio – the amount of loans divided by the amount of deposits – will be in a better position to capitalise on any further drop in OPR, but the 75% ratio is definitely more manageable than the 90% ratio during the 1997 Asian financial crisis, which gave banks hardly any room to manoeuvre.
The focus would be on core segments such as retail banking and financing services, complemented by corporate banking services, including Islamic banking, said Tay.
“In the lending business, the group will continue to promote both consumer financing (home mortgages, hire-purchase and personal financing) and retail commercial lending to small and medium enterprises (SMEs). On deposit taking, the group will continue to promote retail and wholesale deposits to maintain its healthy loans-to-deposit ratio. Foreign currency deposits and structured deposit products will also be promoted.
“Efforts to expand the fee-based activities such as sales of unit trust funds, bancassurance and general insurance products, remittance services, trade finance and treasury activities will be accelerated,’’ Tay said.
“Based on earnings outlook for this year, Public Bank is in a position to deliver the dividend yield (of 6% to 7%) as expected by analysts.’’
Ching said the bank’s exposure to SMEs was not too much of a concern as close to 80% of it was to importers of consumer goods which fed the still vibrant domestic services sector.
Malaysia's Public Bank, currently one of the most expensive banks trading at three times book value, is expected to remain relatively unscathed from the impact of the worldwide financial crisis and interest rate cuts.
“We are confident that their management is ‘on-the-ball’ and that its growth path is on track despite visibly tougher operating conditions,’’ said ECM Libra Investment Research acting head of research Ching Weng Jin.
He estimated that the impact from the recent 25 basis-point cut in overnight policy rate (OPR), from which base lending rate is calculated, was a “drop in the ocean’’ for Public Bank. This is despite the fact that a floor has been set for deposit rates.
“On a net basis, it could be 1% to 2% of forecast net profit for next year (consensus for this year is RM2.4bil),’’ he said. This takes into account income earned from about RM300mil that will be released from the recent reduction in statutory reserve requirements (SRR) that banks place with the central bank.
On an immediate basis, this money can be lent to the interbank market and earn income. In the current environment, banks will assess carefully how they are going to spend this money.
Public Bank managing director Tan Sri Tay Ah Lek told StarBiz in an e-mail reply: “The reduction in the SRR mitigates the impact of the reduction in the OPR on the bank’s net interest income. The net impact of the cut in OPR and the reduction in the SRR is at the low end of the analysts’ estimates, which are quite marginal.”
“Loan loss provisioning at 160% (compared with the banking industry average of 83%) is prudent,’’ said Ching. “Asset quality is the best in the industry, with net non-performing loans at 0.9% against the industry’s 2.4%.’’
Loans-deposit ratio, at 75%, is fairly good. Banks with lower loans-deposit ratio – the amount of loans divided by the amount of deposits – will be in a better position to capitalise on any further drop in OPR, but the 75% ratio is definitely more manageable than the 90% ratio during the 1997 Asian financial crisis, which gave banks hardly any room to manoeuvre.
The focus would be on core segments such as retail banking and financing services, complemented by corporate banking services, including Islamic banking, said Tay.
“In the lending business, the group will continue to promote both consumer financing (home mortgages, hire-purchase and personal financing) and retail commercial lending to small and medium enterprises (SMEs). On deposit taking, the group will continue to promote retail and wholesale deposits to maintain its healthy loans-to-deposit ratio. Foreign currency deposits and structured deposit products will also be promoted.
“Efforts to expand the fee-based activities such as sales of unit trust funds, bancassurance and general insurance products, remittance services, trade finance and treasury activities will be accelerated,’’ Tay said.
“Based on earnings outlook for this year, Public Bank is in a position to deliver the dividend yield (of 6% to 7%) as expected by analysts.’’
Ching said the bank’s exposure to SMEs was not too much of a concern as close to 80% of it was to importers of consumer goods which fed the still vibrant domestic services sector.
A Turbulent Year for Money Funds
A look back at how money market funds performed in 2008. Peaking in the summer, money funds fell hard in September. And some did the unthinkable, breaking the buck. (Dec. 8, 2008)
Worst hit by credit crisis but first to recover from it
Singapore may be the worse-hit Southeast Asian country in the current economic crisis, but it could well be the first economy in the region to rebound, according to economic forecaster Thierry Apoteker.
A jump in US consumer confidence in November is just one of the indicators that could signal signs of a global recovery next year. Consumer confidence index rose in November to 44.9, up from 38.8 in October which was the lowest on record.
Coupled with signs of liquidity tensions loosening up, it is suggested that banks may start lending to corporations soon which could put the US on a recovery path.
"We have the initial tentative signs that this is taking place. The spreads between money market rates and the fed rates have declined substantially. Not yet to the normal zone but substantial, compared to the rates of 300 basis points that we have seen after the Lehman collapse," said Dr Apoteker.
Increased spending in the US and Eurozone would translate to an increase in demand for exports from Asia.
And while global trade numbers may pick up, Dr Apoteker expects a slower growth rate of between 4 and 5 per cent, as opposed to the almost 10 per cent growth in 2006.
He added that he expects the US and Eurozone to see signs of recovery in the second quarter of 2009, with Asia following suit in the third quarter.
And although Singapore will be hit by slowing trade, its strong asset base and robust financial sector will boost its economic recovery.
The managing director of TAC said: "Clearly, trade transmission is incredibly strong for Singapore because you are a trading nation by construction, so in that sense there is nothing you can do. There is no policy management that can avoid when the whole demand in the world is collapsing. As a major exporting nation, you are very bluntly, brutally affected, but symmetrically, you will be the first one to come out of it.
"What's very interesting is that the other transmission mechanism – both on the asset market and the financing mechanism in Singapore – is pretty strong, much stronger than most.
"We've done an exercise of mapping the banking systems of all the Asian countries to look at where the strengths and the weaknesses are, and you might be interested to know it is rated 1 to 64 in binary ranking.
"Singapore is the only country, apart from Japan and Korea, to have a number one ranking. The financial background is very strong, so as a trading outpost you will be very badly affected, but you will be the first to recover after that."
But a recovery in Asia could also depend on what happens in China.
"The very critical question to what happens in Asia is what happens in China because even if we have a mild recovery in the West, a catastrophe in China will impact the rest of Asia very negatively due to the growing integration of Asia and China," said Dr Apoteker.
He warned that if Chinese companies are unable to export surplus stocks financed on credit, the losses they chalk up could impact their trade with other Asian economies.
But for the moment, the decline in Chinese exports is expected to be short-lived, with the country's growth rate still expected to come in at 7.5 per cent next year.
A jump in US consumer confidence in November is just one of the indicators that could signal signs of a global recovery next year. Consumer confidence index rose in November to 44.9, up from 38.8 in October which was the lowest on record.
Coupled with signs of liquidity tensions loosening up, it is suggested that banks may start lending to corporations soon which could put the US on a recovery path.
"We have the initial tentative signs that this is taking place. The spreads between money market rates and the fed rates have declined substantially. Not yet to the normal zone but substantial, compared to the rates of 300 basis points that we have seen after the Lehman collapse," said Dr Apoteker.
Increased spending in the US and Eurozone would translate to an increase in demand for exports from Asia.
And while global trade numbers may pick up, Dr Apoteker expects a slower growth rate of between 4 and 5 per cent, as opposed to the almost 10 per cent growth in 2006.
He added that he expects the US and Eurozone to see signs of recovery in the second quarter of 2009, with Asia following suit in the third quarter.
And although Singapore will be hit by slowing trade, its strong asset base and robust financial sector will boost its economic recovery.
The managing director of TAC said: "Clearly, trade transmission is incredibly strong for Singapore because you are a trading nation by construction, so in that sense there is nothing you can do. There is no policy management that can avoid when the whole demand in the world is collapsing. As a major exporting nation, you are very bluntly, brutally affected, but symmetrically, you will be the first one to come out of it.
"What's very interesting is that the other transmission mechanism – both on the asset market and the financing mechanism in Singapore – is pretty strong, much stronger than most.
"We've done an exercise of mapping the banking systems of all the Asian countries to look at where the strengths and the weaknesses are, and you might be interested to know it is rated 1 to 64 in binary ranking.
"Singapore is the only country, apart from Japan and Korea, to have a number one ranking. The financial background is very strong, so as a trading outpost you will be very badly affected, but you will be the first to recover after that."
But a recovery in Asia could also depend on what happens in China.
"The very critical question to what happens in Asia is what happens in China because even if we have a mild recovery in the West, a catastrophe in China will impact the rest of Asia very negatively due to the growing integration of Asia and China," said Dr Apoteker.
He warned that if Chinese companies are unable to export surplus stocks financed on credit, the losses they chalk up could impact their trade with other Asian economies.
But for the moment, the decline in Chinese exports is expected to be short-lived, with the country's growth rate still expected to come in at 7.5 per cent next year.
Wednesday, December 10, 2008
AIG owes billion on trades gone bad
Fallen US insurance giant American International Group owes financial firms some 10 billion dollars on speculative trades that turned sour, the Wall Street Journal reported on Wednesday.
The trades have not been explicitly revealed before and would not be covered by the US government's bailout package of more than 150 billion dollars for the troubled company, the Journal reported, citing unnamed sources.
Details of the trades mark the first indication that AIG may have been gambling with its own capital, the Journal wrote.
The government intervened to rescue AIG from collapse in September and has since dramatically expanded its rescue funds as the firm suffers from failed bets on complex financial instruments.
An AIG spokesman told the Journal that the trades were not speculative bets but "credit protection instruments".
He said the trades have been fully disclosed already and amount to less than 10 billion dollars of the firm's 71.6 billion dollars exposure to derivative contracts on debt pools, or collateralized debt obligations, as of September 30.
AIG was the world's largest insurer before the global credit crisis brought it down.
The trades have not been explicitly revealed before and would not be covered by the US government's bailout package of more than 150 billion dollars for the troubled company, the Journal reported, citing unnamed sources.
Details of the trades mark the first indication that AIG may have been gambling with its own capital, the Journal wrote.
The government intervened to rescue AIG from collapse in September and has since dramatically expanded its rescue funds as the firm suffers from failed bets on complex financial instruments.
An AIG spokesman told the Journal that the trades were not speculative bets but "credit protection instruments".
He said the trades have been fully disclosed already and amount to less than 10 billion dollars of the firm's 71.6 billion dollars exposure to derivative contracts on debt pools, or collateralized debt obligations, as of September 30.
AIG was the world's largest insurer before the global credit crisis brought it down.
Italy officially in recession
Italy's economy shrank 0.5 per cent in the third quarter, putting the country in recession, official data showed on Wednesday, confirming figures released in mid-November.
Gross domestic product in the eurozone's third largest economy contracted 0.4 per cent in the second quarter, with recession counted as two successive quarters of falling output.
Compared with the third quarter of 2007, GDP contracted 0.9 per cent in the same period this year, the national statistics agency ISTAT said.
Also Wednesday, ISTAT said industrial production fell 1.2 per cent in October, slightly better than analyst forecasts for a 1.3 per cent decline surveyed by Dow Jones Newswires.
The new figures bode ill for the fourth quarter.
The Organisation for Economic Cooperation and Development has forecast that Italy's GDP will shrink 0.4 per cent this year and 1.0 per cent in 2009, while the International Monetary Fund (IMF) has predicted slumps of 0.2 per cent and 0.6 per cent, respectively.
Compared with a year earlier, October industrial production fell 6.9 per cent and for the first 10 months of the year, it fell 2.9 per cent.
Economists had predicted a smaller year-on-year drop of 5.0 per cent.
Production in September shrank 2.6 per cent, according to ISTAT, revising an earlier estimate of 2.1 per cent.
The contraction in October was attributed to lower output in intermediate goods, down 2.1 per cent, and investment goods, off 1.5 per cent.
Production of consumer goods rose 0.8 per cent.
Gross domestic product in the eurozone's third largest economy contracted 0.4 per cent in the second quarter, with recession counted as two successive quarters of falling output.
Compared with the third quarter of 2007, GDP contracted 0.9 per cent in the same period this year, the national statistics agency ISTAT said.
Also Wednesday, ISTAT said industrial production fell 1.2 per cent in October, slightly better than analyst forecasts for a 1.3 per cent decline surveyed by Dow Jones Newswires.
The new figures bode ill for the fourth quarter.
The Organisation for Economic Cooperation and Development has forecast that Italy's GDP will shrink 0.4 per cent this year and 1.0 per cent in 2009, while the International Monetary Fund (IMF) has predicted slumps of 0.2 per cent and 0.6 per cent, respectively.
Compared with a year earlier, October industrial production fell 6.9 per cent and for the first 10 months of the year, it fell 2.9 per cent.
Economists had predicted a smaller year-on-year drop of 5.0 per cent.
Production in September shrank 2.6 per cent, according to ISTAT, revising an earlier estimate of 2.1 per cent.
The contraction in October was attributed to lower output in intermediate goods, down 2.1 per cent, and investment goods, off 1.5 per cent.
Production of consumer goods rose 0.8 per cent.
China posts another record trade surplus in Nov 2008
China said on Wednesday its trade surplus hit a monthly all-time high of US$40.1 billion in November on the back of a drop in imports.
The customs authority said the surplus surged despite a 2.2 per cent decline in the value of Chinese exports to US$115 billion.
Xinhua news agency said it was the first time since June 2001 that exports saw a year-on-year drop.
That decline was more than offset, however, by a 17.9 per cent fall in imports.
The data marked the latest evidence that China's trade-reliant economy was being hit hard by the global financial crisis, which has shrunk demand for the country's manufacturers in export markets.
The trade surplus for the first 11 months of the year was US$256 billion,
The customs authority said the surplus surged despite a 2.2 per cent decline in the value of Chinese exports to US$115 billion.
Xinhua news agency said it was the first time since June 2001 that exports saw a year-on-year drop.
That decline was more than offset, however, by a 17.9 per cent fall in imports.
The data marked the latest evidence that China's trade-reliant economy was being hit hard by the global financial crisis, which has shrunk demand for the country's manufacturers in export markets.
The trade surplus for the first 11 months of the year was US$256 billion,
High oil prices erode value of trade exports from ASEAN
High oil prices have the greatest effect on Southeast Asia, a study showed, and it is likely to impact trade exports from the region.
The value of trade between ASEAN and the West is expected to fall by 30 per cent over five years if oil prices double, as in 2008.
That’s according to a study by the Economist Intelligence Unit and Deutsche Post World Net.
The study shows that every one per cent increase in the price of oil reduces the value of trade exports from ASEAN by 0.3 per cent.
That is because Asian exports have a much higher proportion of trade centred on low-value goods.
The value of trade between ASEAN and the West is expected to fall by 30 per cent over five years if oil prices double, as in 2008.
That’s according to a study by the Economist Intelligence Unit and Deutsche Post World Net.
The study shows that every one per cent increase in the price of oil reduces the value of trade exports from ASEAN by 0.3 per cent.
That is because Asian exports have a much higher proportion of trade centred on low-value goods.
Worst of recession upon US
After several months of a relatively mild contraction, the U.S. economy has now fallen into a really nasty recession, according to top forecasters at IHS Global Insight.
"We are in the worst part of the recession now," said Brian Bethune, an economist for Global Insight. Bethune and his colleague Nigel Gault have won their second consecutive Forecaster of the Month award from MarketWatch, based on their predictions on 10 key economic indicators in November.
The economy has gotten much worse in the past few months, Gault said. The November payrolls report released last Friday "was a truly awful report," he said. The news was twice as bad as it looked, because not only did payrolls shrink by 533,000 in November, "but things were an awful lot worse in September and October than we thought."
"You can't find any rays of hope" in the November report, Gault said.
In winning the November contest, Gault and Bethune had the most accurate forecasts on two of the 10 indicators, and were among the 10 most accurate forecasters on five others. They bested 43 other economists.
They accurately predicted the big drop in payrolls and the stunning decline in the Institute for Supply Management index. They also nailed the big decline in durable-goods orders and the 16-year low in new-home sales.
Looking ahead, the pair of economists thinks the December payrolls report will probably be "another very bad number," although no one's predicting another 500,000 job loss. "We've got to anticipate that firms are struggling to cut back staffing as rapidly as possible," Gault said.
The job losses are coming from everywhere, from construction and manufacturing, and from financial services and retailing. "The shakeout in financial services will take several more months," Bethune said. The people losing jobs in financial services industries may have never been laid off before, he said, and many of them don't have the ability to quickly adapt to the informal sector.
Construction workers may be able to get work that's paid under the table, or to barter their services, but no one needs the services of an investment banker in exchange for a haircut or a tune-up.
Those investment bankers will have to think of something, however, because the industry is "permanently downsizing," Bethune said.
Bethune said it's important for the Federal Reserve to keep lowering rates and flooding the economy with money. With the economy weakening so rapidly no, "there's no use leaving any ammunition in the bunker."
"The lower they can go on short-term rates, the better," Bethune said. The Fed also needs to keep up the quantitative easing as well. "You're in a classic liquidity trap," he said, so "the Fed has to use every tool" at its disposal, including buying Treasury and agency bonds.
The runners-up in the November contest were Maury Harris and Jim O'Sullivan of UBS, independent consultant Brian Jones, RBS Greenwich Capital chief economist Stephen Stanley, and Dean Maki and Ethan Harris of Barclays Capital Management.
Bethune and Gault have dominated the MarketWatch contest over the past three months, winning twice and finishing second in September. But they aren't alone. Over the past three months, the UBS team has finished first, second and third; Jones has finished second and third; Stanley of RBS Greenwich has finished third and fourth; and Barclays' team has finished fifth twice.
Most of that group has been near the top of the charts all year long.
The median forecasts that MarketWatch publishes each week in the Economic Calendar come from the forecasts of the 10 economists who've scored the highest in our contest over the past 12 months, as well as the forecasts of the most recent winner and the forecasts of MarketWatch chief economist Irwin Kellner. See Economic Calendar.
Over the past 12 months, the top economists are, in order: Stanley of RBS Greenwich Capital; Gault and Bethune of Global Insight, Harris and O'Sullivan of UBS; Maki and Harris's team at Barclays Capital; David Greenlaw and Ted Wieseman of Morgan Stanley; Michael Feroli at J.P. Morgan; Jan Hatzius's team at Goldman Sachs; Stephen Gallagher of Societe Generale; Neal Soss's team at Credit Suisse; and Avery Shenfeld's team at CIBC World Markets.
"We are in the worst part of the recession now," said Brian Bethune, an economist for Global Insight. Bethune and his colleague Nigel Gault have won their second consecutive Forecaster of the Month award from MarketWatch, based on their predictions on 10 key economic indicators in November.
The economy has gotten much worse in the past few months, Gault said. The November payrolls report released last Friday "was a truly awful report," he said. The news was twice as bad as it looked, because not only did payrolls shrink by 533,000 in November, "but things were an awful lot worse in September and October than we thought."
"You can't find any rays of hope" in the November report, Gault said.
In winning the November contest, Gault and Bethune had the most accurate forecasts on two of the 10 indicators, and were among the 10 most accurate forecasters on five others. They bested 43 other economists.
They accurately predicted the big drop in payrolls and the stunning decline in the Institute for Supply Management index. They also nailed the big decline in durable-goods orders and the 16-year low in new-home sales.
Looking ahead, the pair of economists thinks the December payrolls report will probably be "another very bad number," although no one's predicting another 500,000 job loss. "We've got to anticipate that firms are struggling to cut back staffing as rapidly as possible," Gault said.
The job losses are coming from everywhere, from construction and manufacturing, and from financial services and retailing. "The shakeout in financial services will take several more months," Bethune said. The people losing jobs in financial services industries may have never been laid off before, he said, and many of them don't have the ability to quickly adapt to the informal sector.
Construction workers may be able to get work that's paid under the table, or to barter their services, but no one needs the services of an investment banker in exchange for a haircut or a tune-up.
Those investment bankers will have to think of something, however, because the industry is "permanently downsizing," Bethune said.
Bethune said it's important for the Federal Reserve to keep lowering rates and flooding the economy with money. With the economy weakening so rapidly no, "there's no use leaving any ammunition in the bunker."
"The lower they can go on short-term rates, the better," Bethune said. The Fed also needs to keep up the quantitative easing as well. "You're in a classic liquidity trap," he said, so "the Fed has to use every tool" at its disposal, including buying Treasury and agency bonds.
The runners-up in the November contest were Maury Harris and Jim O'Sullivan of UBS, independent consultant Brian Jones, RBS Greenwich Capital chief economist Stephen Stanley, and Dean Maki and Ethan Harris of Barclays Capital Management.
Bethune and Gault have dominated the MarketWatch contest over the past three months, winning twice and finishing second in September. But they aren't alone. Over the past three months, the UBS team has finished first, second and third; Jones has finished second and third; Stanley of RBS Greenwich has finished third and fourth; and Barclays' team has finished fifth twice.
Most of that group has been near the top of the charts all year long.
The median forecasts that MarketWatch publishes each week in the Economic Calendar come from the forecasts of the 10 economists who've scored the highest in our contest over the past 12 months, as well as the forecasts of the most recent winner and the forecasts of MarketWatch chief economist Irwin Kellner. See Economic Calendar.
Over the past 12 months, the top economists are, in order: Stanley of RBS Greenwich Capital; Gault and Bethune of Global Insight, Harris and O'Sullivan of UBS; Maki and Harris's team at Barclays Capital; David Greenlaw and Ted Wieseman of Morgan Stanley; Michael Feroli at J.P. Morgan; Jan Hatzius's team at Goldman Sachs; Stephen Gallagher of Societe Generale; Neal Soss's team at Credit Suisse; and Avery Shenfeld's team at CIBC World Markets.
US Treasury 3-month bill yield below zero for first time
The yield on the three-month US Treasury bill Tuesday fell below zero for the first time as worried investors snapped up government bonds in search of shelter from the global financial firestorm.
The yield on the three-month T-bill fell as low as negative 0.051 percent around 1500 GMT, and three hours later stood at negative 0.001 percent.
In another historic first, the US government borrowed 30 billion dollars interest-free for 28 days on the bond market.
All the buyers of the 28-day obligations agreed to the zero rate offered in a sale where demand was four times higher than supply, the Treasury said on its website.
The previous record low was reached five days earlier, when the Treasury sold 36 billion dollars' worth of 29-day bills at a rate of 0.04 percent.
Other Treasury bonds Tuesday held slim positive yields, including the four-week bill at 0.010 percent at 1800 GMT.
Bond yields and prices move in opposite directions. The low yields reflect a surge in demand for these instruments, seen as the safest in the world during times of turmoil.
Analysts say the fear factor has pushed up demand for Treasuries, since investors are virtually certain the US government will not default.
Other factors include worries about deflation and the overall trend in interest rates, with the Federal Reserve having cut its base lending rate to a historic low of 1.0 percent, and further reductions possible.
In the case of the three-month T-bill Tuesday, investors bought the bond at a price above the face value promised if they were kept to maturity, three months after their issue.
The minus-zero yield suggests that investors were seeking greater security from a government instrument and also were betting on deflation in the coming months.
The yield decline allows the Treasury to refinance its coffers at a modest price.
On Monday the Treasury issued 27 billion dollars in three-month bills at an interest rate of 0.005 percent, which had been the lowest rate since the bonds were first issued in 1929.
The yield on the three-month T-bill fell as low as negative 0.051 percent around 1500 GMT, and three hours later stood at negative 0.001 percent.
In another historic first, the US government borrowed 30 billion dollars interest-free for 28 days on the bond market.
All the buyers of the 28-day obligations agreed to the zero rate offered in a sale where demand was four times higher than supply, the Treasury said on its website.
The previous record low was reached five days earlier, when the Treasury sold 36 billion dollars' worth of 29-day bills at a rate of 0.04 percent.
Other Treasury bonds Tuesday held slim positive yields, including the four-week bill at 0.010 percent at 1800 GMT.
Bond yields and prices move in opposite directions. The low yields reflect a surge in demand for these instruments, seen as the safest in the world during times of turmoil.
Analysts say the fear factor has pushed up demand for Treasuries, since investors are virtually certain the US government will not default.
Other factors include worries about deflation and the overall trend in interest rates, with the Federal Reserve having cut its base lending rate to a historic low of 1.0 percent, and further reductions possible.
In the case of the three-month T-bill Tuesday, investors bought the bond at a price above the face value promised if they were kept to maturity, three months after their issue.
The minus-zero yield suggests that investors were seeking greater security from a government instrument and also were betting on deflation in the coming months.
The yield decline allows the Treasury to refinance its coffers at a modest price.
On Monday the Treasury issued 27 billion dollars in three-month bills at an interest rate of 0.005 percent, which had been the lowest rate since the bonds were first issued in 1929.
Short selling must be disclosed
Ambiguous rules limiting naked short selling must be clarified, attorneys say
A top adviser to President-elect Barack Obama on securities regulation on Tuesday said he wants the Securities and Exchange Commission to require public disclosure of short selling.
"We're looking for disclosure of positions, with a small delay, after a short sale is made," said Roel Campos, a former Democratic SEC commissioner and member of Obama's transition team.
After the precipitous drop in stocks of major investment and some commercial banks including Citigroup Inc. and the collapse of Lehman Brothers in September, the agency implemented a series of short sell rules, many of which were temporary in nature. Among these, the SEC temporarily banned short sales in roughly 800 financial institutions. That ban expired on October 8.
Regulators and others argued that many short sellers -- who make bets that a stock price will decline -- contributed heavily to the financial crisis and the collapse of many financial institutions.
The next agency chairman is expected to grapple with whether the agency is doing enough to chill manipulative short selling of shares, particularly when it comes to financial institutions.
Campos is seeking to have the next SEC chairman introduce new rules requiring short sellers to publicly disclose their positions in a manner that is similar to how equity investors are required to reveal their equity stakes.
For example, to comply with the SEC's 13F rule, investors with $100 million in capital or more are required to publicly disclose their positions 45 days after every calendar quarter. Equity investors with 5% or greater stakes are also required to disclose that information to the agency in either an activist Schedule 13D or passive Schedule 13G filing.
But Campos argues that four-times-a-year public disclosure of short sell positions isn't enough. He wants to see a requirement that hedge funds and other short sellers disclose their positions publicly more quickly after stakes are made, perhaps as fast as two weeks after each position is taken.
Among the temporary regulations put into place in the fall is a requirement for confidential weekly disclosure of short positions to the agency.
According to the rule, investors with $100 million or more in capital must disclose on a weekly basis to the agency their short positions. However, these investors only must provide that position information to the agency on a confidential basis. The expiration date for the provision was extended in October to Aug. 1 of 2009.
Short seller critics argue that public disclosure will mean their proprietary strategies will be disclosed, enabling rivals to copy their approach. Campos said the delay in public disclosure is intended to protect some proprietary strategies, but that there should be some parity with equity disclosure requirements.
Other ways to rein in short selling
In addition to disclosure, securities attorneys and academics discussed other mechanisms that the SEC could impose that could reign in short selling at an event hosted by the Coalition Against Market Manipulation in Washington.
Participants argued that the agency needs stronger rules limiting illegal naked short selling, the practice of selling shares without arranging to borrow the securities up-front.
The SEC in September adopted rules requiring short sellers and their broker dealers to deliver securities within three days of a trade. Participating investors who fail to arrange to borrow shares in advance are prohibited from making future short sales in the same securities.
But securities attorneys at the event argued that there are too many qualifiers on the naked short selling rule.
Rex Staples, general counsel for the North American Securities Administrator's Association Inc., said there is a "reasonable" qualification on the delivery requirement. "To the extent you can qualify a word like reasonable, you are going to get that time after time," said Rex Staples, general counsel for the North American Securities Administrator's Association Inc.
Former SEC chairman Harvey Pitt, who participated in the discussion agreed that the SEC should eliminate ambiguity when it comes to the agency's naked short selling provision. The agency should also take steps to enforce the rules.
"The agency must make it extremely clear that any naked short selling is illegal and it has to remove the ambiguities so the rules are very clear," Pitt said.
Participants also debated bringing back the so-called up-tick rule, a regulation removed last year that allowed short sales only if a preceding trade boosted a company's stock price.
Georgetown Finance professor James Angel said he wants to see an up-tick rule that would take effect when a stock has fallen 5%. He also sought additional prohibitions when a stock price falls 10% and 15%. Staples argued that the SEC should bring back the same up-tick rule it eliminated in 2007. "It is very helpful in times of financial turmoil," Staples said.
Tuesday, December 9, 2008
$40 a barrel of crude oil is unlikely
Oil prices, which have fallen 70 percent since July, are unlikely to fall below $40 a barrel, billionaire hedge-fund manager Boone Pickens said today.
“I don’t think you will stay at that level very long because you are going to start shutting down a lot of projects,” he said at a press conference in New York. “It will be obvious we can’t sustain anything like that.”
Crude, which rose to a record $147.27 a barrel on July 11, dropped to $40.50 a barrel on Dec. 5, the lowest in almost four years, after a credit squeeze earlier this year sent the U.S. and Europe into recession, cutting energy demand.
Oil may rise to $100 a barrel by “this time next year” if there is an economic recovery, said Pickens, who manages funds linked to energy commodities and equities through Dallas-based BP Capital LLC.
“I don’t think you will stay at that level very long because you are going to start shutting down a lot of projects,” he said at a press conference in New York. “It will be obvious we can’t sustain anything like that.”
Crude, which rose to a record $147.27 a barrel on July 11, dropped to $40.50 a barrel on Dec. 5, the lowest in almost four years, after a credit squeeze earlier this year sent the U.S. and Europe into recession, cutting energy demand.
Oil may rise to $100 a barrel by “this time next year” if there is an economic recovery, said Pickens, who manages funds linked to energy commodities and equities through Dallas-based BP Capital LLC.
U.S. Cuts Oil Price Forecast 19% on Demand Outlook
The U.S. reduced its forecast for oil prices next year by 19 percent as slowing economies may send global demand to its first drop in 25 years.
West Texas Intermediate crude oil, the U.S. benchmark, will average $51.17 a barrel in 2009, down from $63.50 estimated in November, the Energy Department said in its monthly Short-Term Energy Outlook, released today in Washington.
World demand will average 85.75 million barrels a day in 2008, down 50,000 barrels from 2007 and the first yearly decline since 1983, the report showed. The worsening economic outlook is the main reason for cuts in price and demand forecasts, said Tancred Lidderdale, an economist who supervises the report.
“The world economy and what that will mean for demand is the major focus,” Lidderdale said. “A decline in world oil consumption for next year is now showing up for the first time.”
The price for the West Texas crude will average $100.40 a barrel this year, down from $101.45 a barrel estimated last month, the report from the department’s Energy Information Administration showed. Oil futures in New York have dropped 71 percent to about $43 a barrel from a record $147.27 in July.
Global oil demand will average 85.3 million barrels a day next year, down 0.5 percent from 2008, according to the report. Last month the department forecast that demand would rise 40,000 barrels next year.
U.S. Consumption
U.S. oil demand will average 19.28 million barrels a day in 2009, down 200,000 barrels a day from 2008. Next year’s demand forecast was reduced by 30,000 barrels from last month. Consumption will drop 1.2 million barrels a day this year to an average 19.48 million barrels a day, the report showed.
Regular gasoline at the pump, averaged nationwide, will cost $2.03 a gallon in 2009, down 14 percent from $2.37 estimated in the November report. The fuel will average $3.27 a gallon this year, down 0.6 percent. Prices last week fell to $1.669 a gallon, the lowest since February 2004, the department said yesterday.
“The good news is that consumers will see lower prices,” Lidderdale said. “The bad news is that we still might not be able to afford them.”
The government cut its estimate of winter fuel costs from last month as prices fell. The heating season runs from October through March.
Heating oil users will spend an average $1,570 this winter, down 7.3 percent from $1,694 forecast last month and 20 percent lower than the average $1,953 spent by households last winter.
Homeowners using natural gas will see average heating costs for the season of $860, down 3.3 percent from $889 forecast in the November report. The estimate is up 0.2 percent from an average $858 last winter, the report showed.
West Texas Intermediate crude oil, the U.S. benchmark, will average $51.17 a barrel in 2009, down from $63.50 estimated in November, the Energy Department said in its monthly Short-Term Energy Outlook, released today in Washington.
World demand will average 85.75 million barrels a day in 2008, down 50,000 barrels from 2007 and the first yearly decline since 1983, the report showed. The worsening economic outlook is the main reason for cuts in price and demand forecasts, said Tancred Lidderdale, an economist who supervises the report.
“The world economy and what that will mean for demand is the major focus,” Lidderdale said. “A decline in world oil consumption for next year is now showing up for the first time.”
The price for the West Texas crude will average $100.40 a barrel this year, down from $101.45 a barrel estimated last month, the report from the department’s Energy Information Administration showed. Oil futures in New York have dropped 71 percent to about $43 a barrel from a record $147.27 in July.
Global oil demand will average 85.3 million barrels a day next year, down 0.5 percent from 2008, according to the report. Last month the department forecast that demand would rise 40,000 barrels next year.
U.S. Consumption
U.S. oil demand will average 19.28 million barrels a day in 2009, down 200,000 barrels a day from 2008. Next year’s demand forecast was reduced by 30,000 barrels from last month. Consumption will drop 1.2 million barrels a day this year to an average 19.48 million barrels a day, the report showed.
Regular gasoline at the pump, averaged nationwide, will cost $2.03 a gallon in 2009, down 14 percent from $2.37 estimated in the November report. The fuel will average $3.27 a gallon this year, down 0.6 percent. Prices last week fell to $1.669 a gallon, the lowest since February 2004, the department said yesterday.
“The good news is that consumers will see lower prices,” Lidderdale said. “The bad news is that we still might not be able to afford them.”
The government cut its estimate of winter fuel costs from last month as prices fell. The heating season runs from October through March.
Heating oil users will spend an average $1,570 this winter, down 7.3 percent from $1,694 forecast last month and 20 percent lower than the average $1,953 spent by households last winter.
Homeowners using natural gas will see average heating costs for the season of $860, down 3.3 percent from $889 forecast in the November report. The estimate is up 0.2 percent from an average $858 last winter, the report showed.
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