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U.S. economy teeters on the brink
Bush and Federal Reserve chairman endorse $100-billion package in effort to prevent recession as housing mess hammers banks, consumers and investors
BARRIE McKENNA


Thursday, January 17, 2008

WASHINGTON — In a bid to save the world's largest economy from recession, U.S. President George W. Bush and central bank chief Ben Bernanke yesterday endorsed a $100-billion stimulus package as the spreading housing mess continued to hammer banks, consumers and investors.

The rare plug for fiscal action comes as a growing number of economists say the United States is either in recession or perilously close to it. “The United States has now effectively entered into a serious and painful recession,” said economist Nouriel Roubini of New York University.

Prof. Roubini said all of the keys to economic health are headed in the wrong direction, including the housing market, credit availability, the job market and business spending. Add to that a run-up in oil and gas prices, and the consumer is likely to take it on the chin in 2008, he said.

Another major Wall Street investment bank acknowledged yesterday that it vastly underestimated the cost of its misadventures in the subprime mortgage market. Merrill Lynch & Co. – the world's largest stockbroker and one of the major backers of mortgage bonds – reported the worst quarter in its history, losing $9.8-billion (U.S.) in the final three months of last year and wiping more than $16-billion worth of bad loans off its books. That raises Merrill's housing-related losses to nearly $24-billion in 2007.

And the U.S. housing slump apparently isn't over. Builders broke ground on new homes at an annual rate of a million homes in December – the lowest level since 1991 and a 14.2-per-cent drop from November, according to U.S. data released yesterday.

Since the start of the year, a sense of gloom has taken hold on Wall Street amid worries that the housing slump is infecting the broader economy. In the past couple of weeks alone, stocks have quickly shed virtually all of last year's gains. Spooked by the hefty Merrill Lynch loss, investors sent the blue-chip Dow Jones industrial average down 306.95, or 2.46 per cent, to finish the day at 12,159.21.

The S&P/TSX fell 279 points, after dropping 232 points on Wednesday and 382 on Tuesday.

It is typically difficult to determine whether an economy is in recession – generally defined as two consecutive quarters of shrinking economic activity – until it's almost over. The latest figures show that the U.S. economy, like the Canadian economy, was still growing as 2007 ended.

A U.S. recession would have serious consequences for Canada, which sends the bulk of its exports south of the border.

Testifying before a U.S. congressional committee, Mr. Bernanke said that a proposed stimulus package of $100-billion or more would provide a “significant” and “measurable” lift to the economy.

The key, he told the House budget committee, is to put “money into the hands of households and firms in the short term” and make the measures temporary so they don't compound the government's already significant fiscal problems. That means giving consumers and businesses a break this year, he said.

Without endorsing any particular measure, Mr. Bernanke agreed that targeted tax cuts or spending would bolster the U.S. Federal Reserve Board's efforts to stoke the economy with lower interest rates. The Fed has cut its key interest rate by a full percentage point since the summer, and many analysts expect another half- percentage-point reduction at the bank's next meeting on Jan. 30.

“Fiscal action could be helpful in principle” and may provide “broader support for the economy,” he said.

Mr. Bush also agreed that the weakening economy could use a boost.

White House spokesman Tony Fratto said the President has begun talks with congressional leaders on what the plan might look like.

Economist Alec Phillips of Goldman Sachs said Mr. Bernanke's endorsement has raised the likelihood that Congress will act soon.

“There is enough momentum behind it that a deal looks more likely than not,” Mr. Phillips said.

But he cautioned that differences between Democrats and Republicans in Congress could stall or delay fiscal measures. He pointed out that Congress took four months to pass a stimulus package after the 2001 terrorist attacks.

“You know central bankers are concerned about the economy when they condone stimulative fiscal policy,” BMO Nesbitt Burns economist Michael Gregory remarked in a note to clients.

Among the measures on the table: a $600 per household tax rebate, an extension of unemployment benefits by up to 26 weeks, a targeted housing tax break, a research tax credit and an instant tax break for businesses.

Mortgage losses have left several major Wall Street brokers scrambling to shore up their finances with cash infusions from Middle Eastern and Asian investors. Merrill Lynch, for example, raised $6.6-billion this week by selling preferred shares to the Kuwait Investment Authority, a Japanese bank and other investors – part of a $40-billion Wall Street fire sale triggered by mortgage losses.

Merrill Lynch, Citibank, Bear Stearns and others were part of a once-lucrative business of packaging high-risk mortgages into bonds. But as U.S. house prices tumbled and teaser introductory interest rates expired, many borrowers stopped paying their mortgages and the value of those bonds collapsed.

The major Wall Street banks have already racked up losses of $100-billion in the subprime debacle. That's still less than the roughly $170-billion banks lost in the savings-and-loans crisis of the 1980s, or the $2-trillion that investors lost when the technology bubble burst in 2001.

Some experts have predicted that banks could ultimately write off as much as $500-billion in investments.

The toll on household wealth, however, would be much greater. A 10-per-cent decline in house prices would wipe out $2-trillion worth of household wealth.

Earlier this week, Citigroup, the world's largest bank, reported a $9.8-billion fourth-quarter loss. It also wrote down the value of its mortgage-related investments by $18.1-billion.


© The Globe and Mail

Now, a Dow Jones index based on Hinduism

January 15, 2008 18:08 IST

After investments in stock market based on Islamic values, investors would now be able to park money in stocks of companies that operate in accordance with the principles of religions like Hinduism and Buddhism.

Global index developer Dow Jones Indexes, in partnership with Dharma Investments, on Tuesday launched 'Dharma Indexes,' which measure the performance of companies selected according to the value systems of religions, especially Hinduism and Buddhism.

"The Down Jones Dharma Indexes bring together a combination of environmental, social, governance and traditional sin sector filters. As such, the index is unique and will not just have appeal to the religious, but to a far broader audience as well," Dharma Investments CEO Nitesh Gor told reporters in New York.

The first faith-based index was launched in 1999 when Dow Jones came out with an Islamic market index. Presently, there are many Shariah-compliant indices with asset under management of over $500 billion.

The Dharma indices series includes Dow Jones Dharma Global Index, as well as four country indices for the United States, the United Kingdom, Japan and India. For inclusion in the index, a stock must pass a set of industry, environmental, corporate governance and qualitative screenings, Gor said.

Dow Jones will licence the index to mutual funds that may come out with products based on the index.

Dow Jones Indexes Senior Director (Asia Pacific) Sumeet Nihalani said 8-10 mutual funds have already approached the company for the index. The funds will be charged an annual licence fee or a small percentage of the assets under management, he added.


Link: http://news.hinduworld.com/click_frameset.php?ref_url=%2Findex.php%3F&url=http%3A%2F%2Fwww.rediff.com%2Frss%2Fredirect.php%3Furl%3Dhttp%3A%2F%2Fwww.rediff.com%2Fmoney%2F2008%2Fjan%2F15dow.htm


http://www.djindexes.com/mdsidx/?event=showDharmaOverView

Equity markets look ugly this morning,the FTSE was down 5.2%, the DAX was down 6%, the Dow Futures where down 475points (-3.9%) and S&P where down 50 points (-3.8%).

Global stock market correction is beingled by banks and mining companies, as concern that the U.S. will fall into a recession caused equitybenchmarks in Hong Kong, India and Germany to drop the most in morethan three years. Europe's Dow JonesStoxx 600 Index extended its decline from a June 2007 high to more than 20%,which is the common definition of a bear market. The MSCI World Index (inlocal currency) slipped 1.8% extending its drop from an Oct. 31 record high to16%. The MSCI Asia Pacific Index lost 3.9 percent. Australia's S&P/ASX 200 Indexslumped for an 11th day. Hong Kong's Hang SengIndex lost 5.5 percent. Japan'sNikkei 225 Stock Average dropped 3.9 percent as the Finance Ministry cut itsevaluation of five of 11 regional economies as housing investment fell andemployment

worsened. Trading in the U.S. is haltedtoday for Martin Luther King Day. Today's declines follow the worst week forstocks in the U.S.in five years after President Bush's $150 billion plan to revive the economyfailed to allay recession concerns.

The market is finally catching on to thefact that a recession will lead to a sharp contraction in earnings (I thinkmost investors thought that the ‘market’ already knew that buttoday we will test new lows). In turn, we now need to see more aggressivechanges to financial forecasts before investors become more positive aboutlooking through the downturn.

This is a stock market crisis and itdeepens as the market realizes bit by bit that the U.S. is in a bad position. Investors believe that neither a government package nor a huge rate cut isgoing to help evade a recession in the U.S. (this is the new piece ofinformation for investors and a key realization or justification for lowerequity markets).

As mentioned previously we are going tosee downside risk to earnings and stock performance until we have betterearnings visibility (and a stop to the write-downs).

The slump has made stocks cheap byhistorical standards, Europe's Stoxx 600 isvalued at 11.1 times its companies profits, the lowest since at least 2002,according to data compiled by Bloomberg. The 1,953-member MSCI World has aprice-earnings ratio of 14.3, the cheapest since at least 1998.

Global anxiety about the prospects of a U.S. recession sent stocks prices tumbling around the world Monday, pushing the Toronto Stock Exchange down 604.98 points, or 4.75 per cent – the steepest one-day drop in seven years.

The plunge on the TSX, which closed at 12,132.14, followed sharp drops on the European and Asian stock markets amid investor pessimism over the U.S. government's stimulus plan to prevent a recession – with some stock markets posting their sharpest same-day declines since the terrorist attacks on Sept. 11, 2001.

The U.S. markets were closed for Martin Luther King day Monday, after posting their biggest weekly loss in more than five years last week.

“Without the U.S. markets around to provide leadership, nearly every Canadian share ... offering has traded lower at some point today, which suggests that many investors may be throwing in the towel,” Colin Cieszynski of CMC Markets wrote in his daily market commentary Monday.

Normally, when U.S. markets are closed, Canadian markets tend to trade quietly and finish close to flat, he noted. Not this time.

Douglas Porter, deputy chief economist at BMO Nesbitt Burns, said, “The most disconcerting thing about this steep decline is the fact it happened on a day the U.S. is on holiday because, usually, the U.S. market sets the tone.

“It's just an indication of how downbeat sentiment is around the world now about the U.S. economy in particular and equities more generally,” Mr. Porter said.

Market-watchers are hard-pressed to predict which way the markets will move when Wall Street opens Tuesday, but most tend toward pessimism.

“I think it's a little early yet [for predictions], although it's pretty hard to see what's going to turn sentiment around on a dime at this point,” Mr. Porter said.

Paul Ferley, assistant chief economist at Royal Bank of Canada, said Monday that although U.S. stock markets are closed, “the stock futures market suggests weakness …and that's all spilling into Canadian markets.”

Mr. Ferley said that when the U.S. markets re-open, “We'll get a bit of a deeper market, and that may start stemming some of these declines.

“We'll have to wait and see what happens tomorrow.”

Some analysts said investors were engaging in panic selling, and could not predict when that might abate.

Concerns about the U.S. economy, combined with weakening commodity prices and lower base metal prices, pushed the TSX down.

Craig Wright, chief economist at RBC, told The Canadian Press that financial markets around the globe, and equity markets in particular, “seem to be increasingly pricing in the recession scenario in the U.S.

“Sentiment is so negative right now that anything that could be interpreted as positive news gets ignored and anything that's negative gets exaggerated,” Mr. Wright said.

The losses were felt across the board: In London, the FTSE 100 index plunged 5.48 per cent to close at 5,578.20 points. In Paris, the CAC 40 index lost 6.83 per cent to close at 4,744,45 points and in Frankfurt the DAX shed 7.16 per cent to close at 6,790.19 points, with both markets seeing the biggest single-day losses since the 9/11 terror attacks.

The European markets followed the Asian markets in posting steep declines.

In Asia, India's benchmark stock index tumbled 7.4 per cent, while Hong Kong's blue-chip Hang Seng index plummeted 5.5 per cent to 23,818.86 – its biggest percentage drop since the Sept. 11, 2001, terror attacks.

Japan's benchmark Nikkei 225 index slid 3.9 per cent to close at 13,325.94 points, its lowest close in more than two years. China's Shanghai Composite index plunged 5.1 per cent, partly on worries about mainland Chinese banks' exposure to risky U.S. mortgage investments.

Investors dumped shares because they were skeptical that an economic stimulus plan President George W. Bush announced Friday would shore up an economy that has been battered by problems in its housing and credit markets, analysts said. The plan, which requires approval by Congress, calls for about $145-billion (U.S.) worth of tax relief to encourage consumer spending.

“We've taken our lead from the Asian markets who have not been impressed by the U.S. There's debate if there's going to be a recession in the U.S. I don't think there's much chance of that though,” said Richard Hunter an analyst at Hargreaves Lansdown Stockbrokers Ltd. in London.

“It's another horrible day,” said Francis Lun, a general manager at Fulbright Securities in Hong Kong. “Today it's because of disappointment that the U.S. stimulus [package] is too little, too late, and investors feel it won't help the economy recover.”

Investors took cues from the negative reaction to the President's plan on Wall Street on Friday, when the Dow Jones industrial average slid 0.5 per cent to 12,099.30, bringing its loss for the year so far to nearly 9 per cent.

Traders also have shrugged off assurances from Federal Reserve Board Chairman Ben Bernanke that the U.S. central bank is ready to act aggressively — which means a likely big interest rate cut this month — to help the sagging economy.

“A gloomy U.S. climate has affected the global markets. Even if those markets recover, it will take some time for the recovery to reach India because today's fall has been so drastic,” said Jayant Pai, of the Mumbai investment company IL&FS Ltd.

Still, Ms. Pai and others suggested that the declines could proffer a buying opportunity.

“The selloff today takes us close to the bottom,” she said.

Mr. Cieszynski of CMC Markets said, “The lack of liquidity on a U.S. holiday seems to have exacerbated investor fears over the potential for a U.S. recession and a significant market decline.

“It does appear, however, that a panic may be developing, which could set the stage for a significant washout and a potential rebound.”

Richard Hunter of Hargreaves Lansdown noted Monday that investors “aren't buying the U.S. bailout story.”

He added: “The other thing we're seeing today is a lack of buying interest – people are battening down the hatches while they see what happens in the U.S.”

Mr. Porter said: “What I'd like to believe is that what we've seen today is, Toronto [has] already built in the potential for a fairly hefty decline tomorrow in New York.”

However, he added: “I guess the thing I'm concerned about is that the market is so sour right now …that we could come back tomorrow and people are still in a selling mood.”

Gareth Watson, associate director of Canadian equity adviser at Scotia McLeod in Toronto, told The Canadian Press that “we're going to have to see some positive data come out before people regain confidence, and that's really what's missing here, is confidence.”

Mr. Watson added: “Investors just don't have any confidence at all and when we start to get that confidence restored — which could easily take at least another six months, minimum — I don't think people are expecting a sustainable material rally in the marketplace.”

Investorsgave a big ‘thumbs down’ on President Bush's economicstimulus package unveiled Friday. The U.S. stimulus plan calls for aboutUS$145 billion worth of tax relief to encourage consumer spending but some sayit's too little, too late and instead want the U.S. Federal Reserve to cutinterest rates aggressively at the end of this month. There is a chancethe Bank of Canada will step up to the plate and cut rates 50 (basis points) attomorrow's meeting instead of 25 (basis points), and there is also a chancethat the Fed comes to the market earlier than its January 30 scheduled meetingand lowers rates 50-75 (basis points).

TheToronto Stock Exchange's main index lost 600 points today! The index hasfallen over 12% sincethe beginning of 2008 and more than 16.8% since its high on October 31, 2007,as continued fallout from the U.S.sub-prime mortgage fiasco, the global credit crunch, and high energy pricesstoke fears of a U.S.recession.

Upuntil late 2007, many analysts had said the Canadian economy would be largelyunaffected by a U.S.slowdown but a string of weak Canadian data in recent weeks has dashed thattheory (Canada sends aroundthree-quarters of its exports to the United States).

WithNew York markets closed for Martin Luther KingJr. Day, the TSX's tumble echoed dismal performances in Europe and in Asia andanalysts say a bottom to the declines is proving elusive as markets continue tobehave in an irrationally rational state (see first ask questions later). London's FTSE 100 index fell 323.5 points or 5.5%, Frankfurt's DAX 30 retreated 523.98 points or 7.15% andthe Paris CAC 40 fell 347.95 points or 6.8%. In Asia, India's benchmark stock index tumbled 7.4%,while Hong Kong's blue-chip Hang Seng indexdeclined 5.5%. Japan'sbenchmark Nikkei 225 index slid 3.9% to close at 13,325.94, its lowest close inmore than two years. China'sShanghai composite index declined 5.1%, partlyon worries about mainland Chinese banks' exposure to risky U.S. mortgage investments.

Investorsjust don't have any confidence at all and when we start to get that confidencerestored - which could easily take at least another six months minimum - Idon't think people are expecting a sustainable material rally in themarketplace in the near term (unless we see further stock marketdeclines).

Here is what Nandu Seth has to say about the imm future.

Nandu is one of the top fund managers of CI and his fund returned 87% last year.


You thought the first six innings were bad?
Derek DeCloet


Tuesday, January 22, 2008

'A victory lap?" asks the bespectacled man at the end of boardroom table. "This isn't something I'm happy about."

But he is smiling. Perhaps he can't help it. Everyone likes to be right. Nandu Narayanan saw the train wreck coming before almost anyone else did, predicted chaos in the capital markets, and placed his bets accordingly. He's a whole lot richer today than he was six months ago, and really, how many investors can say that?

Even fewer can now, after one of the most ghastly days on the stock market this decade. In virtually every time zone, bourses were bleeding. Equity prices in Canada, Europe, South America and Asia were slashed indiscriminately. About the best thing that can be said about Ugly Monday is that no major U.S. lenders or insurance companies filed for bankruptcy protection or announced multibillion-dollar losses.

But then, it was a holiday in the United States.

This is the kind of market where the permanently bearish often look smarter than they really are. Mr. Narayanan, though, says he does not fit the description (indeed, the hedge fund manager made outsized returns in the great bull market of 1999 and 2000, when most Apocalypse Now-types were hiding in their bunkers, clutching their bars of gold). He'd really like to be positive. America is his home and has been good to his family. His sister, Indra Nooyi, runs PepsiCo, an icon of Corporate America.

But ...

"The implications of what's going on for the U.S. economy ... are not that pleasant to think of."

We first told you about Mr. Narayanan in July, back when the phrase "credit crunch" was first popping up in the news. Be prepared for things to get much worse, he said. Wall Street, with its prolific machine churning out mortgage-backed securities and credit derivatives and other funky stuff, has set up a house of cards. The losses will be massive and are still undisclosed. Banks and bond insurers are dangerously overleveraged. Expect failures on Wall Street. "The reckoning has started," he said then.

And since? The S&P 500 financials index has fallen 24 per cent; the heads of Merrill Lynch and Citigroup were kicked out; Countrywide Financial, one of the largest U.S. mortgage lenders, seemed headed for Chapter 11 before being bailed out by Bank of America; one bond insurer is on death's door and more may follow. In other words, the universe has unfolded the way he said it would (and the CI Trident Global Opportunities Fund, which he manages, earned 87.6 per cent last year.)

Given that, we're inclined to listen to the man again. So, what now? First, the good news: "We're in the sixth inning," Mr. Narayanan says. Now for the bad: Just as the most excruciating moments of a baseball game come in the last innings, so it is in the stock market.

That means bankruptcies. Not Citigroup - which is probably one of the few financial institutions that policy makers consider too big to fail - but other, smaller banks and insurers.

A purge of the irresponsible is necessary, maybe even unavoidable, especially if his next prediction comes true. You know the subprime debacle? That story is so 2007. Get ready for losses on so-called "prime" mortgages, where the borrowers have decent credit scores but will default because the equity in their home has already been zapped by falling prices, so why not just send the keys back to the bank? The market for U.S. mortgage-related securities, by the way, is about $7-trillion (U.S.), and most of that is not subprime.

The result is that 2008 suddenly looks like a mirror image of 2005: Back then, anyone could qualify for a mortgage; now, "people who can actually afford a house are barely able to get a loan," Mr. Narayanan says. In November, sales of existing homes fell 20 per cent, seasonally adjusted, from the year before. Amusingly, the U.S. National Association of Realtors disclosed this number in a press release that claimed the property market is "likely stabilizing."

It's not and it won't for a while yet. The median price for an existing home in November fell 3.3 per cent, according to that same realtors' association data; yet the inventory of unsold homes is nearly twice what it was in 2004. "Another 20-per-cent decline [in property prices] is hardly out of the realm of possibility," says Mr. Narayanan, who holds a PhD in economics from MIT. "In fact, it's almost a certainty in most of these markets."

But the end of the bad news will come, eventually. Home prices will fall enough to make buying a home more competitive with renting one (that isn't the case right now). Banks will work away at cleaning up the mortgage mess, much wiser for their mistakes. Investors will be able to pick away at decently priced stocks. Mr. Narayanan is bullish on Japan, Canada, agricultural stocks, gold - oh, and alcohol companies, too.

"Hopefully, if this turmoil continues," he says, "people are going to drink a lot more beer."

© The Globe and Mail

Here goes to Bond, Hi Yield Bond.
That was a brilliant piece.