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Wednesday 11 February 2009
Is SingTel still defensive amid new challenges?
Singapore Telecommunications (SingTel), touted as a defensive stock in volatile markets, faces new challenges in its overseas businesses that account for 70 per cent of earnings.
Singapore Telecommunications (SingTel), touted as a defensive stock in volatile markets, faces new challenges in its overseas businesses that account for 70 per cent of earnings.
Competition is intensifying in Australia, where a merger between Vodafone and Hutchison Whampoa will challenge SingTel’s associate Optus. Also, overseas earnings are being dented by a strong Singapore dollar.
SingTel shares have fallen over 5 per cent year to date, roughly in line with the broader market. The stock fell 36 per cent in 2008 against the benchmark index’s 49 per cent drop.
Investors are wondering if they should take the plunge or hold back in anticipation for more weakness in the cash-rich firm that has hinted at more acquisitions to grow its international business.
Still defensive
Kelvin Goh, an analyst at CIMB, cited improved margins in Singapore and Australia and strong quarter-on-quarter performances by mobile affiliates Telkomsel and Bharti for his ‘outperform’ recommendation on SingTel.
‘The previous quarters of high acquisition costs are gone,’ he said, referring to expenses incurred during the launch of the Apple i-Phone in Singapore and Australia that involved the use of subsidised handsets to boost take-up rates.
‘The new customer acquisitions will help drive future earnings,’ said Mr. Goh, who has a target price of $3.10 (US$2.07) on SingTel. SingTel shares were trading at $2.43 by the midday break.
‘Telecoms is one of the more defensive industries where earnings will not fall off the cliff although minutes of usage may fall with the economic slowdown,’ said Christopher Wong, a fund manager at Aberdeen Asset Management, which owns SingTel.
Risky to hold Ian Martin, an analyst at ABN Amro Australia, said there were risks involved in holding SingTel, including a deterioration of economic condition in Singapore.
‘Revenue, particularly in Australia, is stronger than expected but there is no margin from it - meaning the generated extra revenue without lifting the Ebitda,’ he said.
Ebitda refers to earnings before interest, tax, depreciation and amortisation.
Citigroup analyst Anand Ramachandran, who has a ‘hold’ recommendation, said SingTel’s valuation of about 11.7 times 2009 earnings is higher than the average for the Singapore market and other telecoms firms. He has a ‘buy’ rating on China Mobile and on India’s Bharti.
‘Earnings uncertainty surrounding SingTel’s NBN (Singapore national broadband network) initiatives and the volatility in the regional currencies could further hamper associates’ contribution,’ he added.
Kuwait, Singapore sovereign funds lose big, partly due to big bets on finance sector
February 10, 2009
NEW YORK (AP) -- Wall Street banks once looked to state-owned sovereign funds in the Middle East and Asia to shore up their own balance sheets. Now the sovereign funds are suffering huge losses of their own, partly thanks to big overseas bets on the financial sector.
On Tuesday, the Kuwait Investment Authority said the oil-rich country's sovereign fund lost 9 billion dinars ($30.73 billion) from March to December of last year, while Singapore's Temasek lost around $39 billion -- 31 percent of its holdings -- in the eight months ending November 30.
Temasek invested $5.9 billion in Merrill Lynch last year, becoming its biggest shareholder. Merrill Lynch was later acquired by Bank of America Corp., and its stock traded then at a fraction of the price it was worth at the time of Temasek's investment.
Temasek also owns significant chunks of Standard Chartered PLC and Barclays PLC.
Earlier this week, Temasek said its chief executive, Ho Ching, would resign and be replaced by former BHP Billiton CEO Charles Goodyear.
The fund fell to 127 Singapore dollars ($85 billion) as of November 30 from SG$185 billion on March 31, a government official told lawmakers.
In January of last year, the Kuwait Investment Authority also invested $2 billion in Merrill Lynch alongside a Korean state fund, as well as $3 billion more in Citigroup Inc.
A recent paper by the Council of Foreign Relations estimated that the KIA was worth $262 billion in Dec. 2007 and $228 billion in Dec. 2008.
A Kuwaiti lawmaker, Walid al-Tabtabai, said KIA officials told the Kuwaiti parliament about the losses from the sovereign fund.
He said the KIA told lawmakers in a closed session that the investments were long-term, the losses "justified" and could be regained.
The state rarely releases figures about its foreign investments affected by the global financial crisis.
The same Council of Foreign Relations paper said Abu Dhabi, the capital of the oil-rich United Arab Emirates, had state-owned funds worth $328 billion in Dec. 2008, compared to $453 billion in Dec. 2007.
One of the funds, the Abu Dhabi Investment Authority, plowed $7.5 billion into Citigroup Inc. in November 2007. Citi's stock is worth about 10 percent now of what it was then.
The International Monetary Fund in March 2008 estimated that the combined value of the various sovereign funds was $2 trillion to $3 trillion.
The Middle East funds use the funds to invest their revenues from oil exports, while Asian funds invest extra cash from trade surpluses.
Determining the true value of sovereign funds is difficult because they disclose few details of their holdings.
Temasek's investment portfolio down 31% to S$127b as of 30 Nov 2008
By Timothy Ouyang 10 February 2009
SINGAPORE: Temasek Holdings' portfolio of investments fell 31 per cent to S$127 billion as of 30 November last year, according to latest data revealed in Parliament on Tuesday.
This was down S$58 billion from S$185 billion eight months earlier in light of the global financial crisis.
Senior Minister of State for Finance and Transport, Lim Hwee Hua, said: "This is less than the corresponding declines in the MSCI Singapore Index of 44 per cent and the MSCI Asia ex-Japan of 45 per cent both in Singapore dollar terms over the same period."
Despite this, the Singapore government said both Temasek as well as the Government of Singapore Investment Corp (GIC) have the ability and resources to weather the ups and downs over multiple economic and market cycles.
Responding to questions in Parliament, Mrs Lim said both Temasek and the GIC have sufficient liquidity to cope with Singapore's funding needs.
Mrs Lim added that Temasek and GIC are long-term investors, and as such they do not have to divest their investments in market downturns.
She said: "They do not have to sell in panic in a market downturn, and are in fact in an advantageous position to invest in good quality assets at prices that are attractive from a long-term perspective during a downturn. The government is confident that they will continue to deliver good long-term returns within the risk limits set."
Mrs Lim said this is not the first major downturn both soveriegn wealth funds had gone through. She noted that both Temasek and GIC had bounced back from significant reductions in asset values in previous slumps, including the 1997 Asian Financial Crisis.
And despite the downturns, the two investment companies had seen credible investment returns over the years.
Mrs Lim said: "In spite of these market gyrations, including the current downturn, for the 20-year period to late 2008, Temasek had achieved annualised returns of about 13 per cent. GIC, which has a diversified and more conservative portfolio, also had credible returns over the 20-year period.
"As at March 2008, the 20-year average return was 5.8 per cent in nominal Singapore dollar terms. The figure for March 2009 would have fallen as a result of the decline in 2008, but would not be sharply down."
Mrs Lim also reiterated that Temasek must continue to operate commercially without government interference. But she does not rule out the possibility of a third investment fund set up to buy into local companies hit by the current downturn. Mrs Lim was addressing suggestions for Temasek to play a role in rescuing local firms that have been affected by the economic crisis.
She said: "If Temasek is asked to undertake a national agenda, it will in fact validate some of the concerns over sovereign wealth funds having political objectives, and may ultimately impede Temasek's ability to participate in investments internationally."
Singapore – Falling profits, a weakened currency and decreased international travel all plagued Singarpore from its largest airline to its telecom company and its sovereign wealth fund.
The sovereign wealth fund Temasek Holdings, which helped bail out Wall Street icon Merrill Lynch, fell 31 percent over eight months last year, a minister said Tuesday, according to local radio.
Senior Minister of State for Finance Lim Hwee Hua told parliament that Temasek’s portfolio of investments fell to $84.7 billion, 31 percent down from $185 billion, in the eight months to the end of November.
But Lim said the fall in Temasek’s portfolio value was less than declines in two stock indices, including the MSCI Singapore Index, which she said dropped 44 percent in Singapore dollar terms over the same period, the report said.
Last August Temasek announced that in the year to March its portfolio rose in value to 185 billion dollars, up 13 percent from 164 billion dollars the previous year.
GIC, one of the world’s largest sovereign wealth funds, in September said its nominal rate of return over the past 20 years was 7.8 percent in US dollar terms.
It said it managed well over $100 billion in investments.
Singapore Airlines (SIA) said its net profit came in to $225 million, from $590 million, on revenue of $4.16 billion, which was down 2.6 percent year on year, the airline said in a statement, Tuesday.
SIA, one of Asia’s major airlines, blamed the decreased earnings on decreasing numbers of international passengers which it said were down 4.2 percent to 4.8 million from the October to December period the year before. It also said it was carrying 14 percent less freight during the quarter.
“Demand for air transportation is expected to remain weak for much of 2009,” SIA warned.
Last month SIA announced the suspension of some international flights, saying it did not want to fly half-empty planes around the world. Flights to India, Southeast Asia, the United States and Europe were among those affected.
Southeast Asia’s largest telecom company was also in trouble, reporting a 16 percent fall in third-quarter net profit blaming it on a depreciating currency which weighed heavily on earnings. SingTel said its performance was strong in Singapore and Australia, but some of its regional mobile associates in Indonesia, the Philippines and Pakistan were weaker.
“The global economic slowdown has started to impact the group,” added the company, which is majority-owned by Temasek Holdings.
Net profit in the three months to December 31 was 799 million Singapore dollars (532.7 million US), down from 952 million during the same quarter a year earlier, the company said.
The net profit was better than the $774 million forecast in a poll of analysts by Dow Jones Newswires.
Operating revenue fell by 3.2 percent to 3.7 billion dollars but would have risen by 14 percent if the Australian dollar - which dropped 23 percent against the Singapore currency - had remained stable, SingTel said.
It reckons that there is a high risk of buyers defaulting under the DPS
By ARTHUR SIM 10 Feb 2009
SINGAPORE – Property developers have side-stepped the issue of write-downs so far - but it won’t go away.
Morgan Stanley, for one, has evaluated the potential negative impact on the income statements and balance sheets of developers in FY 2009 and FY 2010 by making assumptions on the risk of buyers walking away from residential purchase commitments and losses on fair valuation of investment properties.
For instance, in looking at City Developments, CapitaLand, Keppel Land, Allgreen and Wing Tai, Morgan Stanley says that assuming that 20 per cent of buyers walk away from purchase commitments, the estimated FY 2010 defaults will be $251 million, $225 million, $107 million, $19 million and $78 million respectively.
It reckons that there is a high risk of buyers defaulting under the Deferred Payment Schemes (DPS). The numbers of units sold under the DPS and due for completion in 2009, 2010 and 2011 are 50, 57 and 41 per cent respectively as a proportion of sold inventory.
Morgan Stanley believes that the downside risks are highest for these years because the units are likely to have been transacted at much higher prices in 2006 and 2007.
‘In the event that buyers decide to walk away from the original purchases and developers fail to re-sell the units and/or recoup the full amount owed, a write-down of previously recognised profits would have to be made in upcoming reports of the income statement and balance sheets,’ it says.
It has also made the assumption that developers could write down more than $3 billion for FY 2009 based on its estimates of changes in the fair value of investment property, assuming potential losses in fair value equal revaluation gains made between January 2007 and September 2008.
According to Morgan Stanley, this could amount to $1.9 billion, $457 million, $290 million, $490 million and $280 million respectively for for CapitaLand, Keppel Land, Wheelock Properties Allgreen and Wing Tai.
City Developments, it notes, maintains a policy of accounting investment properties at cost less accumulated depreciation.
Morgan Stanley set out to evaluate the potential negative impact on developers’ income statements, balance sheets and stock valuations. It says that while historical valuations may be used for comparison purposes, they may not be the best indicator of future price movements given that ‘both the macro and micro environments are different and many developers have expanded into new geographies and segments from traditional businesses’.
‘In addition, developers are now backed by much stronger balance sheets than historically, which could explain the trading premiums versus the past,’ it says. ‘This is why we stick with NAV (net asset value) estimates as our methodology for determining likely developer stock price movements.’
As such, Morgan Stanley is underweight on City Developments with a target price of $6.16, equal weight on CapitaLand with a price target of $3.28 and equal weight on Keppel Land with a price target of $2.11.
SINGAPORE – No playgrounds or covered walkways in new HDB estates. Nor any barbecue pits. New flats should have very basic floor tiles, meanwhile.
It is hardly the usual call from Members of Parliament (MPs), who tend to push for upgrading in their constituencies. But two among their ranks are making the call for “no—frills” housing.
According to Dr Lim Wee Kiak and Ms Lee Bee Wah, this should be an option for home buyers and one way to provide more affordable housing.
Dr Lim’s residents in Sembawang, for example, have told him HDB flat prices are high and younger residents who want to move out of their parents’ homes after marriage find it hard to do so.
“Many of them have just started work and may not have so much cash,” he told TODAY. “You’re giving them a chance to build something simple, and over the years when their salaries increase, they may want to improve their homes.”
When he first raised this in Parliament on Friday, Dr Lim gave the example of flat prices in the 1970s: S$15,000 and S$20,000 for a three—room and four—room flat respectively. A graduate with a starting salary of S$1,000 could pay off his apartment with 15 to 25 months of his pay, he said.
But today, though their starting salaries are three to five times higher, the prices of new flats have shot up “10 to 30 times”, he added.
“A high cost of housing has many repercussions as it results in higher costs of living, reduction of resources for other pursuits such as education and investment,” he said.
His solution, he envisions, would lower construction costs and allow flats to be sold for “well below S$100,000”.
But covered link—ways, playgrounds and other upgrading works can be done later when the estate is more mature, he added.
Echoing his views, Ms Lee (Ang Mo Kio) said HDB “should avoid building flats with too many value—added features”, which should be left to private developers.
When contacted, other MPs had mixed feelings, however, about whether there is a place for no—frills flats in Singapore’s public housing spectrum.
Mr Teo Ser Luck (Pasir Ris—Punggol) said the biggest gripe, instead, among couples he has spoken to is the long waiting time for a new flat.
The no—frills idea may also not appeal to younger buyers, who aspire more and are more demanding. “They’re more well informed and have specific demands for the quality of life they want,” said Mr Teo.
Mr Zaqy Mohamad (Hong Kah) was concerned that owners who do not like having the bare minimum might “start hacking and doing it up all over again”.
“I don’t think people are saying 'give me no—frills’, but they’re asking for cheaper alternatives,” he said, and suggested that three—room flats — with quality — would be good for younger couples.
“I think we should create more supply in that segment,” he said. “They can always look at upgrading options later.”
In his Parliamentary reply on Friday, National Development Minister Mah Bow Tan said HDB will launch about 3,000 flats for sale in the first half of this year, of which 1,400 will be studio apartments, two— and three—room flats. There will be 4,000 of such flats launched over the next two years.
“We’ll increase the supply of smaller and lower—priced flats further if necessary to meet the demand from the lower income group,” he said.
Dr Lim had other suggestions as well: Price homes based on cost rather than matching them to market conditions, and shorten the lease from the current 99 years.
Some home hunters welcomed his call for no—frills flats.
Technician Chen Yi, 29, got married in November and is staying in a Woodlands executive flat with his wife, parents and two siblings.
Mr Chen has been looking for a matrimonial home but has been unsuccessful because prices of resale flats have been out of reach, and he does not want to wait several years for a new flat.
“I don’t mind if my home has just one bedroom and a hall,” he said. “Even if it’s cramped like those apartments in Hong Kong, I don’t care. I just want a place where I can have privacy.”
Feb. 9 (Bloomberg) -- Orders for Japanese machinery fell for a third month in December and bankruptcies increased as businesses scrapped investment plans amid a collapse in exports and deteriorating earnings.
Bookings slid 1.7 percent from November, when they fell 16.2 percent, the sharpest drop since the survey started in 1987, the Cabinet Office said today in Tokyo. Corporate bankruptcies rose 15.8 percent to 1,360 cases in January, the eighth monthly increase, Tokyo Shoko Research Ltd. said in a separate report.
A wave of firings and canceled spending plans by Japanese manufacturers has heightened the risk of a prolonged recession, as fallout from the global slowdown ripples through the domestic economy. Nissan Motor Co., Japan’s third-largest automaker, said today that it will cut 20,000 jobs after predicting a loss this fiscal year as the global recession cripples car sales.
“Falling exports are forcing companies to cut jobs and earnings forecasts, so it’s not really the time to increase capital spending,” said Hirokata Kusaba, a senior economist at Mizuho Research Institute in Tokyo. “We’ll see a further slowdown in orders, which will be a big drag for the economy.”
The Nikkei 225 Stock Average fell 1.3 percent at the close in Tokyo. The yen traded at 91.19 per dollar at 3:38 p.m. from 92.13 before the machinery report was published. The currency’s 18 percent gain in the past year has compounded exporters’ woes by eroding the value of their sales made abroad.
Japan’s current-account surplus narrowed 92 percent in December as exports slumped, the Finance Ministry said today. Overseas shipments fell a record 35 percent, causing the surplus to shrink for a 10th month, the report said.
Record Decline
Economists predicted an 8.6 percent drop for monthly machinery orders, which signal capital spending in the next three to six months. Bookings slid 16.7 percent in the fourth quarter, a record decline.
Companies surveyed by the government said they expect bookings to increase 4.1 percent in three months ending March 31, a prediction that economists including Richard Jerram say is unrealistic.
“It seems highly unlikely to me,” said Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. “Profits are going down so quickly.”
Manufacturers are likely to delay or halt investment in capacity because of the slump in demand, the Bank of Japan’s chief economist said today. The economy is deteriorating at a pace unseen in the past half century, Kazuo Momma, head of research and statistics at the central bank, said in a speech.
Nissan, Toyota
Automakers are bearing the brunt of the decline. Nissan expects a net loss of 265 billion yen ($2.9 billion) for the year ending March 31, compared with its October estimate of 160 billion yen in net income. Toyota Motor Corp. last week said its loss this fiscal year, the company’s first in seven decades, may be three times bigger than initially estimated.
The International Monetary Fund last month said Japan’s economy will shrink 2.6 percent this year, the bleakest projection for any Group of Seven economy except the U.K. Gross domestic product probably shrank an annualized 11.7 percent last quarter, the worst contraction since the 1974 oil crisis, economists predict a government report will show next week.
The export slump is forcing manufacturers to fire thousands of workers. Panasonic Corp., Hitachi Ltd. and NEC Corp., all of which are forecasting losses for the current fiscal year, announced a combined 39,000 job cuts in the past two weeks.
Camera maker Nikon Corp. slashed its profit forecast by two thirds last week and said it will cut 800 jobs this quarter and scale back construction of a plant.
Rising Unemployment
Layoffs by manufacturers drove the unemployment rate to 4.4 percent in December from 3.9 percent the previous month, the biggest jump in 41 years. A separate report today showed an index of sentiment among Japanese merchants rose to 17.1 in January from a record low of 15.9 a month earlier.
Japan General Estate Co., a property developer, Nakamichi Machinery Co., a Japanese construction machinery trader and Marui Imai Inc., a department store operator, all went bankrupt in the past two weeks.
Borrowing costs for companies are rising as they struggle to raise funds amid a global credit crunch. Bank lending rose 4 percent in January from a year earlier, the central bank said today, as companies who can’t raise money in the markets turn to lenders for financing.
The Bank of Japan, having cut its key rate to 0.1 percent, is trying to spur lending by purchasing shares and corporate debt from banks.
“The funding problems will, unfortunately, continue to weigh on companies through fiscal 2009,” which begins April 1, said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. “It’s unavoidable that an increase in bankruptcies and deteriorating profits will lead to higher credit costs.”
China’s Inflation Slows to 1%, Producer Prices Tumble
By Kevin Hamlin and Yidi Zhao
Feb. 10 (Bloomberg) -- China’s producer prices tumbled by the most in almost seven years and inflation cooled to the weakest pace since 2006 as the government struggled to revive growth in the world’s third-biggest economy.
Consumer prices rose 1 percent in January from a year earlier, the statistics bureau said today, after gaining 1.2 percent in December. Producer prices fell 3.3 percent after a 1.1 percent decline.
Lunar New Year celebrations last month may have prevented a bigger decline in the inflation rate as the economy slumped because of plummeting export demand. Central bank Governor Zhou Xiaochuan said today that China may use interest rates and foreign-exchange policy to cut the nation’s savings rate, boost consumption and sustain economic growth.
“Inflation could have been close to zero or worse if not for the Chinese New Year, because vegetable prices and grain prices went up,” said Wang Tao, China economist at UBS AG in Beijing.
Government bonds climbed, spurring speculation that the central bank may cut interest rates for the sixth time since September. The yuan rose to 6.8330 against the dollar as of 11:42 a.m. in Shanghai, from 6.8338 yesterday.
The global slowdown helped to trigger the drop in producer prices by prompting declines in costs of imports such as metals, the statistics bureau said in a statement.
McDonald’s Cuts Prices
McDonald’s Corp., the world’s biggest restaurant chain, said it cut prices in China last week to keep meals “affordable,” after the nation’s fourth-quarter economic growth was the slowest in seven years.
China’s slumping exports and economic slowdown have cost the jobs of 20 million migrant workers and led to the closure of 4,000 toy factories last year.
Slowing inflation leaves more room for interest-rate cuts to increase domestic demand, as Zhou urges the nation to boost consumption to sustain growth.
“We need a comprehensive package to do the task of lowering the savings rate, including exchange and interest rates,” Zhou told a conference of central bankers in Kuala Lumpur today. “We need to emphasize internal demand, that is domestic consumption, especially in rural areas. We need to change the consumption pattern.”
Inflation was faster than the 0.8 percent median estimate of 15 economists surveyed by Bloomberg News. The slump in producer prices was steeper than the survey’s forecast of a 2.6 percent decline.
Deflation Risk
The drop in producer prices “shows a rate cut is possible in the near term,” said Zhang Liling, a Shenzhen-based fixed income trader at China Merchants Bank Co., the country’s sixth largest lender.
The yield on the 3.68 percent note due in September 2018 fell 1.2 basis points to 3.3 percent, and the price of the security climbed 0.10 per 100 yuan face amount to 103.27, as of 11:32 a.m. in Shanghai.
China may report deflation in the first half of this year because of reduced commodity prices and because comparisons will be with inflation that reached an 11-year high of 8.7 percent in February 2008, said Jing Ulrich, head of China equities with JPMorgan Chase & Co. in Hong Kong.
Consumer prices “should stabilize towards mid-year” as the government’s 4 trillion yuan ($585 billion) stimulus package boosts consumption, Ulrich said.
The nation’s worst drought in 50 years may push up grain prices.
Pressure to Cut Rates
The inflation slowdown “puts more pressure on the central bank to cut interest rates further,” said Peng Wensheng, head of China research at Barclays Capital in Hong Kong. “In the short term, the downward pressure is on prices.”
The key one-year lending rate stands at 5.31 percent after 2.16 percentage points of reductions in 2008 that followed the collapse of Lehman Brothers Holdings Inc. The central bank is yet to make a reduction this year.
Peng expects the rate to be cut a further 81 basis points this year after the economy grows as little as 5 percent this quarter.
China’s economy expanded 9 percent in 2008 after a 13 percent gain in 2007 that pushed it past Germany to become the world’s third-biggest. In the fourth quarter of last year, growth cooled to 6.8 percent, the weakest pace since 2001, on the export decline and a slump in property.
China Needs U.S. Guarantees for Treasuries, Yu Says
By Belinda Cao and Judy Chen
Feb. 11 (Bloomberg) -- China should seek guarantees that its $682 billion holdings of U.S. government debt won’t be eroded by “reckless policies,” said Yu Yongding, a former adviser to the central bank.
The U.S. “should make the Chinese feel confident that the value of the assets at least will not be eroded in a significant way,” Yu, who now heads the World Economics and Politics Institute at the Chinese Academy of Social Sciences, said in response to e-mailed questions yesterday from Beijing. He declined to elaborate on the assurances needed by China, the biggest foreign holder of U.S. government debt.
Benchmark 10-year Treasury yields climbed above 3 percent this week on speculation the government will increase borrowing as President Barack Obama pushes his $838 billion stimulus package through Congress. Premier Wen Jiabao said last month his government’s strategy for investing would focus on safeguarding the value of China’s $1.95 trillion foreign reserves.
China may voice its concerns over U.S. government finances and the potential for a weaker dollar when Secretary of State Hillary Clinton visits China on Feb. 20, according to He Zhicheng, an economist at Agricultural Bank of China, the nation’s third-largest lender by assets. A People’s Bank of China official, who didn’t wish to be identified, declined to comment on the telephone.
Clinton Talks
“In talks with Clinton, China will ask for a guarantee that the U.S. will support the dollar’s exchange rate and make sure China’s dollar-denominated assets are safe,” said He in Beijing. “That would be one of the prerequisites for more purchases.”
Chinese Foreign Ministry Spokeswoman Jiang Yu said yesterday that talks with Clinton would cover bilateral relations, the financial crisis and international affairs, according to the Xinhua news agency.
U.S. government bonds returned 14 percent last year including price gains and reinvested interest, the most since rallying 18.5 percent in 1995, according to indexes compiled by Merrill Lynch & Co. Concern that the flood of bonds would overwhelm demand caused Treasuries to lose 3.08 percent in January, the steepest drop in almost five years, Merrill data show. The yield on the benchmark 10-year U.S. Treasury has risen to 2.80 percent from 2.21 percent at the end of last year.
Blackstone Loss
China’s loss of more than $5 billion from investing $10.5 billion of its reserves in New York-based Blackstone Group LP, Morgan Stanley and TPG Inc. since mid-2007 may increase its demand for the relative safety of Treasuries.
“The government will be a net buyer of Treasuries in the short term because there’s no sign they have changed their strategy,” said Zhang Ming, secretary general of international finance research center at the Chinese Academy of Social Sciences in Beijing. “But personally, I don’t think we should increase holdings because the medium- and long-term risks are quite high.”
Bill Gross, co-chief investment officer of Pacific Investment Management Co., said on Feb. 5 the Federal Reserve will have to buy Treasuries to curb yields as debt sales increase. U.S. central bank officials said Jan. 28 they were “prepared” to buy longer-term Treasuries.
“The biggest concern for China to continue buying U.S. Treasuries is that if Obama’s stimulus doesn’t work out as expected, the Fed may have to print money to cover the deficit,” said Shen Jianguang, a Hong Kong-based economist at China International Capital Corp., partly owned by Morgan Stanley. “That will cause a dollar slump and the U.S. government debt will lose its allure for being a safe haven for international investors.”
Currency Reserves
China’s foreign-exchange reserves, the world’s biggest, grew about $40 billion in the fourth quarter, the smallest expansion since mid-2004 as an end to yuan appreciation since July prompted investors to pull money out.
The world’s third-biggest economy grew 6.8 percent in the fourth quarter, the slowest pace in seven years. Policy makers cut interest rates by the most in 11 years and announced a 4 trillion yuan ($585 billion) economic stimulus plan in November to spur domestic demand.
Yu said China won’t channel its reserves toward stimulating the economy because its trade surplus is sufficient to fund any import needs. China’s trade surplus was $39 billion in December, the second-largest on record.
A decline in reserves “isn’t likely because of China’s huge twin surpluses,” Yu said. China “should diversify its reserves away from U.S. Treasuries if the value of China’s foreign-exchange reserves is in danger of being inflated away by the U.S. government’s pump-priming,” he said.
Linking Disputes
China may try to link trade and currency policy disputes to its future investment in Treasuries, said Lu Zhengwei, an economist in Shanghai at Industrial Bank Co., a Chinese lender partly owned by a unit of HSBC Holdings Plc.
U.S. Treasury Secretary Timothy Geithner accused China on Jan. 22 of “manipulating” the yuan to give an unfair advantage to its exporters in the global market. The currency has dropped 0.16 percent since the start of this year to 6.8342 per dollar, following a 21 percent gain since a peg against the dollar was abandoned in July 2005.
“China can also use this opportunity to get a promise from the U.S. not to make inappropriate requests on bilateral trade and the Chinese yuan,” Lu said. “We can’t afford more yuan appreciation as the economy is facing a serious slowdown.”
U.S. Taxpayers Risk $9.7 Trillion on Bailout Programs
By Mark Pittman and Bob Ivry
Feb. 9 (Bloomberg) -- The stimulus package the U.S. Congress is completing would raise the government’s commitment to solving the financial crisis to $9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages.
The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation have lent or spent almost $3 trillion over the past two years and pledged up to $5.7 trillion more. The Senate is to vote this week on an economic-stimulus measure of at least $780 billion. It would need to be reconciled with an $819 billion plan the House approved last month.
Only the stimulus bill to be approved this week, the $700 billion Troubled Asset Relief Program passed four months ago and $168 billion in tax cuts and rebates enacted in 2008 have been voted on by lawmakers. The remaining $8 trillion is in lending programs and guarantees, almost all under the Fed and FDIC. Recipients’ names have not been disclosed.
“We’ve seen money go out the back door of this government unlike any time in the history of our country,” Senator Byron Dorgan, a North Dakota Democrat, said on the Senate floor Feb. 3. “Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. How much from the FDIC? How much from TARP? When? Why?”
Financial Rescue
The pledges, amounting to almost two-thirds of the value of everything produced in the U.S. last year, are intended to rescue the financial system after the credit markets seized up about 18 months ago. The promises are composed of about $1 trillion in stimulus packages, around $3 trillion in lending and spending and $5.7 trillion in agreements to provide aid. The total already tapped has decreased about 1 percent since November, mostly because foreign central banks are using fewer dollars in currency-exchange agreements called swaps.
Federal Reserve lending to banks peaked at a record $2.3 trillion in December, dropping to $1.83 trillion by last week. The Fed balance sheet is still more than double the $880 billion it was in the week before Sept. 17 when it agreed to accept lower-quality collateral.
The worst financial crisis in two generations has erased $14.5 trillion, or 33 percent, of the value of the world’s companies since Sept. 15; brought down Bear Stearns Cos. and Lehman Brothers Holdings Inc.; and led to the takeover of Merrill Lynch & Co. by Bank of America Corp.
The $9.7 trillion in pledges would be enough to send a $1,430 check to every man, woman and child alive in the world. It’s 13 times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office data, and is almost enough to pay off every home mortgage loan in the U.S., calculated at $10.5 trillion by the Federal Reserve.
‘All the Stops’
“The Fed, Treasury and FDIC are pulling out all the stops to stop any widespread systemic damage to the economy,” said Dana Johnson, chief economist for Comerica Inc. in Dallas and a former senior economist at the central bank. “The federal government is on the hook for an awful lot of money but I think it’s needed to help the financial system recover.”
Bloomberg News tabulated data from the Fed, Treasury and FDIC and interviewed regulators, economists and academic researchers to gauge the full extent of the government’s rescue effort.
Commitments may expand again soon. Treasury Secretary Timothy Geithner postponed until tomorrow an announcement that may invite private investment as a way to clear toxic debt from bank balance sheets. Measures that have been settled include a new round of injections of taxpayer funds into banks, targeted at those identified by regulators as most in need of additional capital, people briefed on the matter said.
Program Delay
The government is already backing $301 billion of Citigroup Inc. securities and another $118 billion from Bank of America. The government hasn’t yet paid out on any of the guarantees.
The Fed said Friday that it is delaying the start a $200 billion program called the Term Asset-Backed Securities Loan Facility, or TALF, to revive the market for securities based on consumer loans such as credit-card, auto and student borrowings.
Most of the spending programs are run out of the Federal Reserve Bank of New York, where Geithner served as president. He was sworn in as Treasury secretary on Jan. 26.
When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and then Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. The Federal Reserve so far is refusing to disclose loan recipients or reveal the collateral they are taking in return. Collateral is an asset pledged by a borrower in the event a loan payment isn’t made.
Fed Sued
Bloomberg requested details of Fed lending under the Freedom of Information Act and filed a federal lawsuit against the central bank Nov. 7 seeking to force disclosure of borrower banks and their collateral. Arguments in the suit may be heard as soon as this month, according to the court docket. Bloomberg asked the Treasury in an FOIA request Jan. 28 for a detailed list of the securities it planned to guarantee for Citigroup and Bank of America. Bloomberg hasn’t received a response to the request.
The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).
Merrill Lynch Global Wealth Management Cutting Branch Support Staff
February 09, 2009
NEW YORK -(Dow Jones)- Merrill Lynch Global Wealth Management, a unit of Bank of America Corp. (BAC), plans to cut less than 10%, or under 1,000, support staff positions in its branch offices, according to people familiar with the situation.
The job cuts, which will include some client associate and sales assistant positions, come as Merrill recently let go several hundred rookie brokers based on performance and in an effort to reduce costs. The firm has also lost several key executives, including former Chief Executive John Thain, Robert McCann, former head of the wealth management unit, and Greg Fleming, former chief operating officer and the No. 2 executive at Merrill.
Bank of America, which completed its acquisition of Merrill Jan. 1, has been hammered by a financial crisis and weak economy. The Charlotte, N.C., banking giant's stock has been plagued recently by fears of nationalization. Monday, however, Bank of America's shares rose for the second straight day on news of insider stock purchases, and comments dismissing such a plan.
Last month, Merrill let go financial advisers who had been with the firm less than two years. The staff reductions followed December cuts of brokers who were in the Paths of Achievement training program and had been with the firm between six months and two years.
New brokers have had an especially difficult time building up client asset levels to reach performance goals, given the plunging stock market.
"My view is you need support staff just as much or more in this environment," said a Merrill Lynch broker in the northeast U.S.
Bank of America shares recently traded up 73 cents, or 12%, at $6.85 on Monday.
With evictions on the rise, deputies make the rounds to clear residents out of homes
By TERI FIGUEROA February 7, 2009
Two San Diego County sheriff's deputies escorted the pregnant woman out of her Poway home. It didn't matter that she had no car to drive and nowhere to go. It didn't matter that her baby was due the next day. The uniformed men had no choice.
Foreclosure had led to eviction, and Jan. 29 was D-Day. Ordering the expectant mother and the little girl at her knee to leave the four-bedroom house was part of their job, just the final stop on an otherwise average day that saw them handle 21 evictions.
The two men are among seven deputies in North County tasked with removing people from their homes.
Once the gavel has come down in the courtroom, once the eviction has been ordered, deputies such as Grant Erbe and Pat Morrissey get the call.
They will stay busy. In North County, officials said, the number of eviction notices the deputies will post is projected to be more than 3,200 this year ---- a jump of 38 percent over 2008.
Record foreclosure numbers, layoffs, an ailing economy all have beaten down struggling homeowners and renters.
For some, the eviction hammer will fall. And it is up to deputies such as Erbe and Morrissey to wield it without emotion.
The deputies have no power to give the homeowner an extra day, hour, even 15 minutes. Once they knock on the door, time's up.
"They think we have the final say," Erbe said. "We don't. We are working for the courts. I don't have the authority to do anything."
So when the distraught pregnant woman pleaded with Erbe to take her cell phone, to talk with her husband, it was fruitless.
"I'm not here to listen to the story," Erbe told the woman. "It's not going to do any good to tell me the story."
Nothing in the home was packed. A half-empty pan of scrambled eggs sat on the nearby stove.
Morrissey asked if her husband was coming home.
"No," she replied with a heavy Spanish accent. He can't. "He is working."
"Ma'am, you are going to have to move. Call him back and tell him that is the reality," Morrissey said.
Her daughter tugged at her, crawling under the table and peering up at the armed deputies.
"We don't have nowhere to go," the woman told them. She called a friend to come get her.
Moments later, Morrissey helped the woman carry a few bags and boxes out to the curb. Tears leaking from her eyes, the woman followed him to the sidewalk, the little girl in tow.
Behind them, a locksmith installed a new doorknob under Erbe's watchful eye.
Evictions on the rise
Last year, deputies in North County posted 2,326 eviction notices, up 10 percent from the previous year.
With the economy in a tailspin and foreclosure headlines dominating the front pages, worse is coming, officials say.
Based on the number of eviction notices posted in January, officials are projecting some 3,228 families and businesses in North County will be evicted this year.
"It used to be we'd go to more apartments," Morrissey said. "Now we see more foreclosures."
Erbe said his job is to present a person with the final court documents telling them to get out, and to make sure everyone is escorted out of the house.
"I often refer to myself as a mailman with a gun," Erbe said.
On this warm winter Thursday, Erbe had 21 evictions to enforce: 20 families and one business. The stops are generally scheduled 20 to 30 minutes apart. Erbe, with Morrissey as his backup on this day, doesn't have time to listen to pleas and sob stories.
The tight schedule is pretty standard, but there is no standard day. Most of the time, the residents have cleared out before deputies arrive. When people are still in the house, the scene is not only emotional, it also has a ripple effect on their next scheduled stops. Landlords and locksmiths are waiting at the next site.
"We are on a tight schedule," Erbe said. "We can't individualize service. We've got to move on."
And there are surprises. Morrissey said that last year he walked into an Encinitas place and found the body of a man who had committed suicide. Morrissey also found a note, in which the man had written that he had no place to go.
Another deputy said he served notice on a house, and found four kids at home and Mom at work. But this was the day and time to kick the residents out, so deputies had to call social workers to take the kids into protective custody.
"It's sad to see," Erbe said. "Each situation is unique. But from what I have seen on the foreclosure end, the people are trying. Nobody wants to lose their house.
"I think the ones that get me the most are the elderly on fixed incomes," he said. "They are the forgotten."
Swift and loud knocks
The first house, at the north end of Vista, was a simple, one-story home in an older subdivision.
The approach at the door is always the same: a few swift and loud knocks on the front door, followed by the shout, "Sheriff's Department! Court order!"
No response from inside the home elicited a nod from Morrissey to the locksmith, who hurried forward to work his magic. Seconds later, he stepped back and the deputies walked into the home.
This one, like so many they encounter, was empty. Here, though, pride of ownership was apparent. Everything was clean, from the white kitchen counters to a back bedroom, with blue paint and a playful wall border announcing that a young child once lived here.
The new owner is a bank.
Next, Erbe and Morrissey drove to a home in central Vista. They had to be there in 20 minutes.
The time they show up matters. At each site, real estate agents or their representatives are waiting, having paid the court $125 to have deputies clear the property. When evictions reach this point, the law requires sworn officers to be at the scene, to restore the property to the landlord.
When Erbe and Morrissey pulled up to the second house, a man in a dress shirt approached, offering familiar greetings to the two deputies.
"I should know these guys by name, I see them so often," said the man, a real estate agent who gave his first name as Matthew.
Turning toward the house with a wave, Matthew said he thought the residents had cleared out.
"It was occupied before the weekend," he said. "It looks like they got the message."
Again, a loud knock, a warning yell, and the deputies stepped inside for a security sweep before they handed over the place to Matthew.
This time, the home was not all that empty. Couches and mattresses remained, and the garage was packed with junk. And the smell was overwhelming. Perhaps it was gasoline, perhaps insect poison.
"You might not want to stay in here too long breathing this stuff," Erbe said. A wooden folding table with an open box of baking soda ---- often used in making methamphetamine ---- sat near the door.
Erbe said it crossed his mind that maybe meth had been cooked here, but there was no real evidence of that. Had it been obvious, he and Morrissey would have forced everyone out the door and called a hazardous materials team. This, though, was just a stinky mess. And it was time to move on to stop No. 3.
Coffee still in the pot
Next was an apartment. About half of their stops will be at apartments.
Some of the places are clearly low income, like the two-bedroom in central Escondido that rented for $1,000 a month. Neighbors, curious about the presence of two deputies, told them the family cleared out just hours before the lawmen came knocking.
Even with a late-night flight, the renters left the place clean, even the bathroom.
Not so at the high-end rental the deputies stopped at later in Carmel Mountain Ranch, where small two-bedrooms go for $1,800, and where one set of renters destroyed the carpet before they fled, leaving behind a wretched smell of dog.
At a high-end San Marcos rental, no one was home, but by no means was the apartment empty. It looked more as if everyone was just off at work and school. The carafe in the coffee-maker was still half-full, and family photos graced the fireplace mantle.
In what appeared to be a child's bedroom, video games were splayed out in front of a television and a SpongeBob stuffed toy peeked out from near the unmade bed.
The moment the deputies walked in, all those items fell under the control of the apartment managers.
'Welcome new owners'
Erbe's travels on this day took him past a large Mervyns store, chained shut, a grim reminder of a failing economy. And a harbinger of more evictions in the months to come.
At one house, Erbe and Morrissey stood for a few minutes, waiting for an agent who never showed up.
The deputies shrugged it off and headed to their next stop: a foreclosure, they assumed, because the plaintiff in the lawsuit was a bank.
The former residents of this three-bedroom home on Kenora Street, near Orange Glen High School, had already cleared out.
From the walls and items left behind, one of the rooms had been that of a girl, perhaps a teenager. She left a parting message, written in what appeared to be a grease pencil, on her bedroom window: "Welcome new owners of my home."
At their last stop of the day, the pregnant woman in Poway opened the door. Erbe spoke to her in Spanish, explaining what was happening.
She grabbed her cell phone and called her husband. "The police are here," she said in Spanish.
After hanging up, the woman eased into a chair at her kitchen table and explained her side to a reporter. She said she was aware of the possibility of an eviction, but said she had been told it was being handled and all would be fine. Her English was shaky, it wasn't clear if she was a renter, or the homeowner.
But it didn't really matter. By the time Erbe and Morrissey showed up, her fate had been sealed. It was time for her to go.
Now for Pigs and Food– A Super Short Commodity Super Cycle
By Satyajit Das 09.02.2009
The commodity "super cycle" proved super short. The commodity "boom" is now officially a "bust".
Mark Twain once described a mine as "a hole in the ground with a liar standing next to it". The end of the commodity price cycle has revealed that standing next to the liar is a crowd of hapless bankers, analysts and investors. So what happened?
The rise in commodity prices was driven by the confluence of a number of factors. Debt driven growth in major developed countries drove strong growth (both export and domestic) in emerging markets, such as China and India. This, in turn fuelled, demand for resources. In a virtuous cycle, the growth drove demand in major commodity producers, like Russia, the Gulf, Australia, Canada and South Africa, whose strongly growing economies fuelled further growth globally by way of increased consumption and investment.
The effect of increased demand on prices was exacerbated by decades of significant under investment in commodity infrastructure (mineral processing; refining; transport infrastructure (shipping, ports, pipelines)) driven, in part, by low commodity prices.
The commodity boom was aided and abetted by investors, especially leveraged investors such as hedge funds. Hedge funds used commodities to bet on strong global growth and catch the updraft in emerging markets indirectly reducing problems of direct investment. Commodities also provide significant leverage making them more attractive to hedge funds.
Traditional investors also embraced commodity investments. Commodities were seen as a separate investment class with low correlation to traditional investments enabling investors to improve investment returns and reduce risk simultaneously.
The last factor was inflation. Rising commodity prices and strong growth fuelled rising prices. This encouraged further investment in commodities as a hedge against inflation. The higher prices went the greater the threat of inflation and the increasing flow of funds into commodities. The momentum was irresistible.
Engaging Reverse Gear
In 2008, each one of these factors went sharply into reverse. The global financial crisis ("GFC") resulted in reduced availability and higher cost of debt affecting commodities through several channels. Leveraged investors were forced to liquidate their positions as leverage was reduced and investors redeemed capital. The reduction in debt also reduced global growth sharply and the demand for most resources.
The reversal was exacerbated by several factors. Rising prices and anticipation of higher demand had led to significant investment in certain commodities and infrastructure. The time needed to build capacity meant that this increase in supply coincided with reducing demand further pressuring prices.
The GFC also reduced cross border capital flows and global trade. The Institute for International Finance forecasts net private sector capital flows to emerging markets in 2009 will be less than US$165 billion - 36% of the US$466 billion inflow in 2008 and only one fifth the record amount in 2007. The projected decline in capital flows is around 6 % of the combined gross domestic product of the emerging countries. This compares to a decline of approximately 3.5 % of combined GDP in the Asian financial crisis and 1.5% in the Latin American crisis.
Global trade is also declining. In late 2008, the World Bank forecast a fall in global trade volumes for the first time in over 25 years. The Baltic Dry Index, a measure of supply and demand for basic shipping materials, has fallen 90 % since mid 2008. Exports from Japan, Korea, Taiwan and China fell between 10% and 40% in late 2008 also signalling reduced demand for commodities.
Financing pressures also mean that it is increasingly difficult to finance trade. Some countries have had to resort to barter to obtain essential foodstuffs.
Self Harm
Resources companies compounded the problems by aggressive acquisitions that were sometimes debt financed. Expectations of strong global growth and demand, especially from China and other developing countries, encouraged leading firms in the steel, cement and mining industries to undertake ambitious acquisitions in 2006 and 2007.
For example, steelmaker ArcelorMittal undertook a cash-and-stock-financed merger. India’s Tata Steel completed a leveraged takeover of Anglo-Dutch Corus. France’s Lafarge, the world’s biggest cement producer, bought Orascom Cement of Egypt whilst its competitor Mexico’s Cemex purchased Rinker, a big Australian rival. Xstrata, the mining industry’s serial acquirer, entered into a number of debt financed acquisitions. Rio Tinto purchased Alcan increasing its leverage significantly.
Declining sales and cash flows, debt refinancing requirements, difficulties in selling assets and limited opportunities to raise equity to deleverage further complicates the commodity bust. Some companies are seeking state financial assistance to survive. For example, Corus has sought assistance from the British government
High oil prices also led to aggressive investments in alternative energy technologies that are not economic at lower prices further complicating the price cycle.
Commodities also proved to be yet another "crowded trade". Investors had created highly correlated positions; for example, simultaneously increasing exposure to equities, resources companies, emerging markets, commodities and corporate credit spreads on mining companies. The trades were essentially the same "bet". Correlation between investments has gone to near one in the GFC and the assumption of diversification has proved almost as elusive as the promise of the commodity super cycle.
Laws of Financial Gravity
Commodities posted their worst performance on record in 2008. Commentary on commodity markets reflects Mark Twain’s remark that: "I am not one of those who in expressing opinions confine themselves to facts".
Unlike financial assets, commodities, for the most part, are subject to the laws of economic gravity – supply and demand. Individual commodities are also highly idiosyncratic – you can’t drink oil, nor can you run your car on gold though they seem to go quite well on corn tortillas!
The key to commodities is demand. Higher prices, for example in oil, led to a sharp reduction in demand as people lowered consumption or used substitutes. Falling prices shift this balance, especially in energy importers such as China, Japan and India.
It is not clear how much lower global growth is impounded in commodity prices. The fall-off in exports in Asian countries and the collapse in freight rates is especially worrying. Inevitable protectionism (buy "local" and currency "manipulation" to gain export competitiveness) is also a concern.
Ultimately, commodity prices will depend on recovery in growth, consumption, housing markets, durable goods (especially motor cars) and stability in financial markets and resumption of more normal financing activity. None of this seems likely in the short term.
A key dynamic is whether deflationary pressures (falling prices) emerge. In a deflationary environment, commodities will be hit hard as demand falls further. The lack of income and high real rates of interest will affect prices. In contrast, inflation would be supportive of prices as investors switch from monetary to real assets. Despite strenuous rhetoric and monetary actions by central banks, it is not clear whether debt deflation can be avoided.
Aberrant Tendencies
Short-term factors also affect the outlook. Falling prices have placed enormous pressures on companies and state treasuries dependent on resource based revenues.
Companies with large debt service commitments are being forced to produce at uneconomic prices simply to generate cash flow. Some oil exporters are producing below operating cost to maintain revenues to finance ambitious spending plans conceived in more prosperous times. This overproduction distorts prices.
There are growing supply constraints in some markets. Junior miners are unable to bring resource properties into production because of financing pressures. New investment and expansion has been deferred or abandoned. These bottlenecks may cause short-term supply disruptions creating significant volatility in prices.
A ‘known unknown’ is the performance of the US dollar. There is a complex and unstable relationship between commodity prices and the dollar. An IMF study noted that a 1% increase in the value of the dollar results in a decrease in oil and gold prices of greater than 1%. This means the elasticity is around 1. It appears to be higher for gold than oil prices. Continued volatility in currency markets, reflecting pressures as sovereigns attempt to finance their budget and financial system bailout requirements, will be mirrored in commodity prices.
The impact of lower shipping costs on individual commodities is also a factor. At the height of the commodity boom, one apocryphal story told of containers shipping goods to America being scrapped upon arrival in the US. This reflected the lack of US-China traffic and the cost of shipping back the containers. Shipping resources that were previously uneconomic to ship, for example, bulky items with low price to volume ratios such as cement, are now tradable reflecting the collapse of freight rates. This means that local pricing variations and protected niches may be affected.
Individuals All!
Oil prices may have further downside, in the short run, reflecting continued reduction in demand as growth slows. Production cuts by OPEC may not be effective as revenue strapped sovereign producers adjust volumes to generate cash flow. Ultimately, the laws of supply and demand, production costs and a finite, constrained resource will support the price.
The outlook for alternative energies is less sanguine. Most alternatives require high oil prices to be economic. Support for alternative cleaner energy is likely to wane as the GFC forces governments to defer climate change initiatives in the face of harsh economic conditions.
The dislocation in financial markets has benefited gold. The gold price has performed well reflecting increasing suspicion about "paper" money and lower interest rates. Governments continue to attempt to reflate domestic economies by traditional Keynesian spending, increasing concern about possible inflation providing support for gold. There is a fear of a return to a gold standard leading to hoarding of gold stock. Emerging market demand for gold, a traditional store of purchasing power, may be fuelled by the threat of increased social unrest.
Other precious metals, platinum, palladium and silver, are likely to be affected by decreased demand, especially the problems in the automobile sector globally.
Industrial metals (aluminium, copper, lead, nickel, zinc and tin) and bulk commodities (iron ore and coking coal) have been a major proxy for global economic growth, particularly demand from a rapidly industrialising and urbanising China and India. Slower growth and problems related to inventories and oversupply may mean a continuation of weakness.
The performance of agricultural prices is puzzling. After falling in line with commodities generally throughout 2008, in December agricultural products decoupled from other assets. For example, some grains rose sharply in prices by 10% to 20%.
Prices (adjusted for inflation) are around 40% below long run average prices. Grain inventory levels are low – around 2 months of global demand. Problems affecting financing of crops and trade, low prices and difficulty of hedging (increased in margins and hedging costs) have meant that plantings have been low. Major seed producers report a sharp decline in sales. The increased problems of food production from climate change also means the risk of supply disruption cannot be discounted.
Historically, agricultural products have performed well in economic recessions. Tightening supply, risk of supply shocks and the appeal of a recession resistance asset may underpin prices in relative terms.
Agricultural products that have been linked to oil prices (such as corn, palm oil, soybeans and rapeseed) will be dependent on the broader performance of energy prices.
Bridges to Nowhere & Velocity of Pigs
During commodity booms excesses abound. Oil rich countries enjoying rapid growth in commodity revenues embarked on grand and expensive projects. For example, in this cycle, Dubai undertook an ambitious expansion program based on real estate, luxury hotels, airlines, financial services and English premier league soccer clubs.
The excesses are notable. The recently opened Atlantis Hotel is at the end of the first (and so far only completed) Dubai Palm, a piece of reclaimed land designed to resemble a palm tree. The Atlantis has its own theme park next door, every shop and restaurant conceivable and a mammoth aquarium (featuring 65,000 marine animals). The Palazzo Versace hotel, currently under construction, features a beach with artificially cooled sand to save guests from the hot sand as they walk from water to the hotel.
The most emblematic project of this cycle is a project proposed by Tarek bin Laden, one of Osama bin Laden’s many half-brothers. The project entails twin cities on either side of the Bab al-Mandib (Gate of Tears) strait at the mouth of the Red Sea linked by a 29 km bridge across the strait. The project cost was estimated at $200 billion.
Recently an acquaintance in financial markets announced his retirement to a life of rustic simplicity in Umbria, Italy. He had acquired a farm and was restoring it with the help of local ‘serfs’ (his word not mine!). The farm would be self sufficient producing essentials of life - wheat, milk, wine and meat. The plan was to avoid the coming financial Armageddon in financial markets and the money economy.
The newly minted farmer was especially excited by the farm’s black pigs that reproduce three times each year. He referred to this as the ‘velocity’ of the pig population. The porcine velocity is much greater, ironically, than the current velocity of money in financial markets as the recession sets in and the implosion of the financial system becomes institutionalised.
Grandiose plans tend to be launched towards the end of the boom cycle. Pigs and food may be well be where the smart money heads in these troubled times.
Fundamental demand for food and energy may emerge as key investment drivers – everybody needs to eat and we are still a fossil fuel driven society.
IN the last 82 years — the history of the Standard & Poor’s 500 — the stock market has been through one Great Depression and numerous recessions. It has experienced bubbles and busts, bull markets and bear markets.
But it has never seen a 10-year stretch as bad as the one that ended last month.
Over the 10 years through January, an investor holding the stocks in the S.& P.’s 500-stock index, and reinvesting the dividends, would have lost about 5.1 percent a year after adjusting for inflation, as is shown in the accompanying chart.
Until now, the worst 10-year period, by that measure, was the period that ended September 1974, with a compound annual decline of 4.3 percent.
That decline was strongly influenced by inflation. Ignoring inflation, stocks over that decade returned half a percent a year, not a very good showing but not a loss. But with inflation taking off, the real, inflation-adjusted return was negative.
For the current period, the total return was negative, at minus 2.6 percent a year, even before factoring in inflation.
Perhaps surprisingly, the 10 years after the 1929 crash were not that bad by this measure — which may say as much about the measure as it does about the performance of the stock market. The deflation of the 1930s helped the after-inflation of the stock market to look better.
For the 10 years after the crash, through Sept. 30, 1939, the compound annual decline of the stock market, with dividends reinvested, was 5 percent a year before considering inflation. That remains the worst 10-year period. But after factoring in deflation, the loss was 2.8 percent a year, which is still bad but not horrid.
Compounding interest rates over a 10-year period can magnify differences that look small. For example, over the 10 years through January, the total losses in nominal dollars from the S.& P. 500, with dividends reinvested, was 23.5 percent. But with inflation added in, the decline was 40.4 percent.
The numbers in the chart assume that the Consumer Price Index was unchanged in January from December. But the accuracy of that assumption does not matter. Even if consumer prices rose or fell sharply during the month, the decade would still have been the worst one.
The decade was not a smooth one. It started with the market nearing the peak it would reach in early 2000, as the technology stock bubble expanded. Prices tumbled through late 2002, then doubled from those depressed levels by late 2007. Since then, a rapid decline has brought them back close to the lows of 2002 before considering dividends and inflation.
Taking inflation and dividends into account, an investor who put money into the market any time after the end of 1996, and held on, now has less value than when he or she started.
Many things influence stock prices, of course, and there is no guarantee that continued economic and financial woes will not drive the market down from here. But long-term investors may be able to take comfort from the fact that bad decades are often followed by 10-year periods that are better than the long-term average, which shows a gain of 6.2 percent a year.
Obama team eyes renewables, seeks more input on Atlantic, Pacific coasts
Feb. 10, 2009
WASHINGTON - The Obama administration on Tuesday overturned another Bush-era energy policy, setting aside a draft plan to allow drilling off the Atlantic and Pacific coasts.
"To establish an orderly process that allows us to make wise decisions based on sound information, we need to set aside" the plan "and create our own timeline," Interior Secretary Ken Salazar announced in a statement.
Alleging that the Bush administration "had torpedoed" offshore renewable energy in favor of oil and natural gas, Salazar said he was extending the public comment period by 6 months.
"The additional time we are providing will give states, stakeholders, and affected communities the opportunity to provide input on the future of our offshore areas," he said.
Salazar also ordered Interior Department experts to compile a report on the Outer Continental Shelf's energy potential — not just oil and gas, but also renewables like wind and wave energy.
"In the biggest area that the Bush administration’s draft OCS plan proposes for oil and gas drilling — the Atlantic seaboard, from Maine to Florida — our data on available resources is very thin, and what little we have is twenty to thirty years old," he said. "We shouldn't make decisions to sell off taxpayer resources based on old information."
The Interior Department oversees 1.75 billion acres on the Outer Continental Shelf, an area that's about three fourths the size of the entire United States.
Environmentalists and some tourism-dependent coastal states oppose the drilling, citing the potential for spills and urging an emphasis on renewable energy instead. Energy companies counter that drilling has become safer over the years and that royalties from any finds would be in the billions of dollars.
"I intend to issue a final rulemaking ... in the coming months, so that potential developers know the rules of the road," Salazar said. "This rulemaking will allow us to move from the 'oil and gas only' approach of the previous administration to the comprehensive energy plan that we need."
"We need a new, comprehensive energy plan that takes us to the new energy frontier and secures our energy independence," he added. "We must embrace President Obama's vision of energy independence for the sake of our national security, our economic security, and our environmental security."
Moratorium ended last year
The Bush administration had authorized the Interior Department to open areas off both coasts to oil and gas drilling during a five-year period. That move came after a moratorium on drilling there expired last year. Offshore drilling is already allowed in the Gulf of Mexico.
Both Obama and Salazar have said that expanding offshore oil drilling should be worked out with Congress as part of a broad energy blueprint, and not independent action by the Interior Department.
The move comes a week after the Interior Department shelved energy leases on 130,000 acres near two national parks and other federally protected lands in Utah.
In Congress, Democrats have long wanted to rewrite the rules on royalties from offshore drilling, arguing that energy companies have been paying too little.
Rep. Ed Markey, D-Mass., praised the move as an end to "drill first and ask questions later".
"The tide has turned back towards reason and a comprehensive energy plan for our country that sees promise in the winds and the tides, not just in drills and rigs," added Markey, who chairs the select committee on energy independence and global warming.
But House Republicans last week urged Obama not to close areas off the Atlantic and Pacific coastlines.
"We respectfully urge that you allow the five-year offshore drilling plan to continue because it is vital to our economy," the lawmakers, led by House Republican leader John Boehner, said in a letter. "Our country needs to remain on the path to American energy independence, and we believe this is a critical and achievable goal."
Jack Gerard, president of the American Petroleum Institute, which represents the large oil companies, said Salazar's announcement "means that development of our offshore resources could be stalled indefinitely."
31 lease sales were proposed
The preliminary plan drawn up by the Bush administration would have authorized 31 energy exploration lease sales between 2010 and 2015 for tracts along the East Coast and off the coasts of Alaska and California.
The Republican lawmakers cited a study that concluded the untapped offshore oil and gas reserves would create more than 160,000 jobs by 2030 and provide the government with $1.7 trillion in royalties on the oil and gas drilled.
Congress last year failed to renew the long-standing moratorium on oil and gas exploration across 85 percent of the nation's Outer Continental Shelf, leaving all waters potentially open to drilling.
Then, four days before leaving office, officials in the Bush administration issued the draft plan, which called for energy leases in areas that until recently had been off limits for a quarter century.
The Interior Department estimates — using 30-year-old studies — that the offshore waters lifted from drilling bans last year contain at least 18 billion barrels of oil, about half of it off California.
Bad bank program should provide as much as $1 trillion in financing
By Ronald D. Orol Feb. 10, 2009
WASHINGTON (MarketWatch) - In its latest effort to stabilize the broken financial system, the U.S. government will use mostly private money to create a fund of at least $500 billion to recapitalize banks and another fund of $1 trillion to support consumer and business lending, Treasury Secretary Tim Geithner announced Tuesday.
As part of the plan, all major U.S. banks will be required to undergo a rigorous stress test to determine if they can survive a more severe economic downturn. If they can, they'll be eligible for government capital.
"The battle for economic recovery must be fought on two fronts," Geithner said as he unveiled the much-anticipated financial stability plan. "We have to both jump start job creation and private investment, and we must get credit flowing again to businesses and families."
Financial markets appeared to be underwhelmed by Geithner's plan, with the Dow Jones Industrial Average selling off as much as 300 points.
The plan is short on details and "short on the confidence factor that this will all work out fine," said Alan Ruskin of RBS Greenwich Capital.
To get credit flowing again, Geithner's plan has six parts, including the creation of a public-private partnership to buy illiquid assets from banks to help them recapitalize.
In partnership with the Fed and the Federal Deposit Insurance Corp., the Treasury will take a portion of the remaining money from the $700 billion Troubled Asset Relief Program and leverage it 10 to 1 with private-sector funds to create a $500 billion investment fund to buy toxic assets.
Geithner added that the fund, which could grow to as much as $1 trillion, will allow the private sector to "determine the prices for current troubled and previously illiquid assets." It is expected to encourage private investors to acquire illiquid mortgage securities from troubled financial institutions, Geithner said.
In a second part of the plan, the Treasury will invest funds from the TARP directly in banks that have passed the stress test. The taxpayers will receive dividends and securities that can be converted into equity in the banks. Banks will have to be more forthcoming about what they'll do with the money, and will have to accept restrictions on executive pay, dividends, stock repurchases, and acquisitions.
Banks with $100 billion or more in assets, roughly 18 to 20 financial institutions, will only need to complete a stress test. Smaller banks will also be eligible after they pass a supervisory review. A Treasury official said the stress test is not a capital standard and after it is finished the result will not be "pass or fail." If the result of the test shows that banks need more capital, it will be encouraged to raise capital in the private markets or through the Treasury's program.
The official declined to comment on how much of the remaining $350 billion in the bank bailout program would be allocated to recapitalizing banks.
"This program will provide government capital and government financing to help leverage private capital to help get private markets working again for the legacy loans and assets that are now burdening the entire financial system" Geithner said.
"We're going to require banking institutions to go through a carefully designed comprehensive stress test, to use the medical term," Geithner said. "We want their balance sheets cleaner, and stronger. And we are going to help this process by providing a new program of capital support for those institutions which need it."
The third part of the plan will have the Federal Reserve greatly expand its still-in-the-works program to support consumer and business lending. The Term Asset-Backed Securities Loan Facility (TALF) will take $100 billion from the Treasury and leverage it into $1 trillion of capital to "kick start lending by focusing on new loans."
Assets purchased by the TALF will be limited to AAA-graded securities. They can include securities backed by consumer as well as business loans, including commercial mortgage-backed securities.
Facing criticism from lawmakers on Capitol Hill, Geithner is not asking for additional funds for the program until it is clear to him that the measures are not having their intended effect of reviving the financial markets.
The Treasury will release details later about parts of the plan to back up small-business lending and a program that would use at least $50 billion to help troubled homeowners on the verge of foreclosure.
Details of toxic asset plan
A Treasury official briefing reporters that the fund would provide "longer-term financing" to private institutions so they can buy and hold assets. The official said that the "design features" of the program will be released in the next several weeks.
A number of private institutions have expressed an interest in participating, but none have committed any capital, the official said.
The Treasury official added that the Treasury considered both an asset guarantee program and the formation of a so-called bad bank that would use only government dollars to buy troubled assets from financial institutions, before it settled on creation of a public-private investment fund.
"While each of those has many attractive features, at the end of the day we determined that it would be better to draw in private capital to make our dollars go further and to address the problems with pricing assets," the official said.
Critics chided the agency for not inserting a provision requiring banks that receive assistance to lend it out. However, Treasury officials said they are requiring banks that receive assistance to submit a plan for how they are going to increase lending as a result of the assistance. These financial institutions must also make sure the funds are not being allocated to hike executive pay packages.
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Is SingTel still defensive amid new challenges?
Reuters
11 February 2009
Singapore Telecommunications (SingTel), touted as a defensive stock in volatile markets, faces new challenges in its overseas businesses that account for 70 per cent of earnings.
Competition is intensifying in Australia, where a merger between Vodafone and Hutchison Whampoa will challenge SingTel’s associate Optus. Also, overseas earnings are being dented by a strong Singapore dollar.
SingTel shares have fallen over 5 per cent year to date, roughly in line with the broader market. The stock fell 36 per cent in 2008 against the benchmark index’s 49 per cent drop.
Investors are wondering if they should take the plunge or hold back in anticipation for more weakness in the cash-rich firm that has hinted at more acquisitions to grow its international business.
Still defensive
Kelvin Goh, an analyst at CIMB, cited improved margins in Singapore and Australia and strong quarter-on-quarter performances by mobile affiliates Telkomsel and Bharti for his ‘outperform’ recommendation on SingTel.
‘The previous quarters of high acquisition costs are gone,’ he said, referring to expenses incurred during the launch of the Apple i-Phone in Singapore and Australia that involved the use of subsidised handsets to boost take-up rates.
‘The new customer acquisitions will help drive future earnings,’ said Mr. Goh, who has a target price of $3.10 (US$2.07) on SingTel. SingTel shares were trading at $2.43 by the midday break.
‘Telecoms is one of the more defensive industries where earnings will not fall off the cliff although minutes of usage may fall with the economic slowdown,’ said Christopher Wong, a fund manager at Aberdeen Asset Management, which owns SingTel.
Risky to hold Ian Martin, an analyst at ABN Amro Australia, said there were risks involved in holding SingTel, including a deterioration of economic condition in Singapore.
‘Revenue, particularly in Australia, is stronger than expected but there is no margin from it - meaning the generated extra revenue without lifting the Ebitda,’ he said.
Ebitda refers to earnings before interest, tax, depreciation and amortisation.
Citigroup analyst Anand Ramachandran, who has a ‘hold’ recommendation, said SingTel’s valuation of about 11.7 times 2009 earnings is higher than the average for the Singapore market and other telecoms firms. He has a ‘buy’ rating on China Mobile and on India’s Bharti.
‘Earnings uncertainty surrounding SingTel’s NBN (Singapore national broadband network) initiatives and the volatility in the regional currencies could further hamper associates’ contribution,’ he added.
Kuwait, Singapore funds lose on finance bets
Kuwait, Singapore sovereign funds lose big, partly due to big bets on finance sector
February 10, 2009
NEW YORK (AP) -- Wall Street banks once looked to state-owned sovereign funds in the Middle East and Asia to shore up their own balance sheets. Now the sovereign funds are suffering huge losses of their own, partly thanks to big overseas bets on the financial sector.
On Tuesday, the Kuwait Investment Authority said the oil-rich country's sovereign fund lost 9 billion dinars ($30.73 billion) from March to December of last year, while Singapore's Temasek lost around $39 billion -- 31 percent of its holdings -- in the eight months ending November 30.
Temasek invested $5.9 billion in Merrill Lynch last year, becoming its biggest shareholder. Merrill Lynch was later acquired by Bank of America Corp., and its stock traded then at a fraction of the price it was worth at the time of Temasek's investment.
Temasek also owns significant chunks of Standard Chartered PLC and Barclays PLC.
Earlier this week, Temasek said its chief executive, Ho Ching, would resign and be replaced by former BHP Billiton CEO Charles Goodyear.
The fund fell to 127 Singapore dollars ($85 billion) as of November 30 from SG$185 billion on March 31, a government official told lawmakers.
In January of last year, the Kuwait Investment Authority also invested $2 billion in Merrill Lynch alongside a Korean state fund, as well as $3 billion more in Citigroup Inc.
A recent paper by the Council of Foreign Relations estimated that the KIA was worth $262 billion in Dec. 2007 and $228 billion in Dec. 2008.
A Kuwaiti lawmaker, Walid al-Tabtabai, said KIA officials told the Kuwaiti parliament about the losses from the sovereign fund.
He said the KIA told lawmakers in a closed session that the investments were long-term, the losses "justified" and could be regained.
The state rarely releases figures about its foreign investments affected by the global financial crisis.
The same Council of Foreign Relations paper said Abu Dhabi, the capital of the oil-rich United Arab Emirates, had state-owned funds worth $328 billion in Dec. 2008, compared to $453 billion in Dec. 2007.
One of the funds, the Abu Dhabi Investment Authority, plowed $7.5 billion into Citigroup Inc. in November 2007. Citi's stock is worth about 10 percent now of what it was then.
The International Monetary Fund in March 2008 estimated that the combined value of the various sovereign funds was $2 trillion to $3 trillion.
The Middle East funds use the funds to invest their revenues from oil exports, while Asian funds invest extra cash from trade surpluses.
Determining the true value of sovereign funds is difficult because they disclose few details of their holdings.
Temasek's investment portfolio down 31% to S$127b as of 30 Nov 2008
By Timothy Ouyang
10 February 2009
SINGAPORE: Temasek Holdings' portfolio of investments fell 31 per cent to S$127 billion as of 30 November last year, according to latest data revealed in Parliament on Tuesday.
This was down S$58 billion from S$185 billion eight months earlier in light of the global financial crisis.
Senior Minister of State for Finance and Transport, Lim Hwee Hua, said: "This is less than the corresponding declines in the MSCI Singapore Index of 44 per cent and the MSCI Asia ex-Japan of 45 per cent both in Singapore dollar terms over the same period."
Despite this, the Singapore government said both Temasek as well as the Government of Singapore Investment Corp (GIC) have the ability and resources to weather the ups and downs over multiple economic and market cycles.
Responding to questions in Parliament, Mrs Lim said both Temasek and the GIC have sufficient liquidity to cope with Singapore's funding needs.
Mrs Lim added that Temasek and GIC are long-term investors, and as such they do not have to divest their investments in market downturns.
She said: "They do not have to sell in panic in a market downturn, and are in fact in an advantageous position to invest in good quality assets at prices that are attractive from a long-term perspective during a downturn. The government is confident that they will continue to deliver good long-term returns within the risk limits set."
Mrs Lim said this is not the first major downturn both soveriegn wealth funds had gone through. She noted that both Temasek and GIC had bounced back from significant reductions in asset values in previous slumps, including the 1997 Asian Financial Crisis.
And despite the downturns, the two investment companies had seen credible investment returns over the years.
Mrs Lim said: "In spite of these market gyrations, including the current downturn, for the 20-year period to late 2008, Temasek had achieved annualised returns of about 13 per cent. GIC, which has a diversified and more conservative portfolio, also had credible returns over the 20-year period.
"As at March 2008, the 20-year average return was 5.8 per cent in nominal Singapore dollar terms. The figure for March 2009 would have fallen as a result of the decline in 2008, but would not be sharply down."
Mrs Lim also reiterated that Temasek must continue to operate commercially without government interference. But she does not rule out the possibility of a third investment fund set up to buy into local companies hit by the current downturn. Mrs Lim was addressing suggestions for Temasek to play a role in rescuing local firms that have been affected by the economic crisis.
She said: "If Temasek is asked to undertake a national agenda, it will in fact validate some of the concerns over sovereign wealth funds having political objectives, and may ultimately impede Temasek's ability to participate in investments internationally."
Major Singapore industries in peril
11 February 2009
Singapore – Falling profits, a weakened currency and decreased international travel all plagued Singarpore from its largest airline to its telecom company and its sovereign wealth fund.
The sovereign wealth fund Temasek Holdings, which helped bail out Wall Street icon Merrill Lynch, fell 31 percent over eight months last year, a minister said Tuesday, according to local radio.
Senior Minister of State for Finance Lim Hwee Hua told parliament that Temasek’s portfolio of investments fell to $84.7 billion, 31 percent down from $185 billion, in the eight months to the end of November.
But Lim said the fall in Temasek’s portfolio value was less than declines in two stock indices, including the MSCI Singapore Index, which she said dropped 44 percent in Singapore dollar terms over the same period, the report said.
Last August Temasek announced that in the year to March its portfolio rose in value to 185 billion dollars, up 13 percent from 164 billion dollars the previous year.
GIC, one of the world’s largest sovereign wealth funds, in September said its nominal rate of return over the past 20 years was 7.8 percent in US dollar terms.
It said it managed well over $100 billion in investments.
Singapore Airlines (SIA) said its net profit came in to $225 million, from $590 million, on revenue of $4.16 billion, which was down 2.6 percent year on year, the airline said in a statement, Tuesday.
SIA, one of Asia’s major airlines, blamed the decreased earnings on decreasing numbers of international passengers which it said were down 4.2 percent to 4.8 million from the October to December period the year before.
It also said it was carrying 14 percent less freight during the quarter.
“Demand for air transportation is expected to remain weak for much of 2009,” SIA warned.
Last month SIA announced the suspension of some international flights, saying it did not want to fly half-empty planes around the world. Flights to India, Southeast Asia, the United States and Europe were among those affected.
Southeast Asia’s largest telecom company was also in trouble, reporting a 16 percent fall in third-quarter net profit blaming it on a depreciating currency which weighed heavily on earnings. SingTel said its performance was strong in Singapore and Australia, but some of its regional mobile associates in Indonesia, the Philippines and Pakistan were weaker.
“The global economic slowdown has started to impact the group,” added the company, which is majority-owned by Temasek Holdings.
Net profit in the three months to December 31 was 799 million Singapore dollars (532.7 million US), down from 952 million during the same quarter a year earlier, the company said.
The net profit was better than the $774 million forecast in a poll of analysts by Dow Jones Newswires.
Operating revenue fell by 3.2 percent to 3.7 billion dollars but would have risen by 14 percent if the Australian dollar - which dropped 23 percent against the Singapore currency - had remained stable, SingTel said.
Morgan Stanley factors in writedowns
It reckons that there is a high risk of buyers defaulting under the DPS
By ARTHUR SIM
10 Feb 2009
SINGAPORE – Property developers have side-stepped the issue of write-downs so far - but it won’t go away.
Morgan Stanley, for one, has evaluated the potential negative impact on the income statements and balance sheets of developers in FY 2009 and FY 2010 by making assumptions on the risk of buyers walking away from residential purchase commitments and losses on fair valuation of investment properties.
For instance, in looking at City Developments, CapitaLand, Keppel Land, Allgreen and Wing Tai, Morgan Stanley says that assuming that 20 per cent of buyers walk away from purchase commitments, the estimated FY 2010 defaults will be $251 million, $225 million, $107 million, $19 million and $78 million respectively.
It reckons that there is a high risk of buyers defaulting under the Deferred Payment Schemes (DPS). The numbers of units sold under the DPS and due for completion in 2009, 2010 and 2011 are 50, 57 and 41 per cent respectively as a proportion of sold inventory.
Morgan Stanley believes that the downside risks are highest for these years because the units are likely to have been transacted at much higher prices in 2006 and 2007.
‘In the event that buyers decide to walk away from the original purchases and developers fail to re-sell the units and/or recoup the full amount owed, a write-down of previously recognised profits would have to be made in upcoming reports of the income statement and balance sheets,’ it says.
It has also made the assumption that developers could write down more than $3 billion for FY 2009 based on its estimates of changes in the fair value of investment property, assuming potential losses in fair value equal revaluation gains made between January 2007 and September 2008.
According to Morgan Stanley, this could amount to $1.9 billion, $457 million, $290 million, $490 million and $280 million respectively for for CapitaLand, Keppel Land, Wheelock Properties Allgreen and Wing Tai.
City Developments, it notes, maintains a policy of accounting investment properties at cost less accumulated depreciation.
Morgan Stanley set out to evaluate the potential negative impact on developers’ income statements, balance sheets and stock valuations. It says that while historical valuations may be used for comparison purposes, they may not be the best indicator of future price movements given that ‘both the macro and micro environments are different and many developers have expanded into new geographies and segments from traditional businesses’.
‘In addition, developers are now backed by much stronger balance sheets than historically, which could explain the trading premiums versus the past,’ it says. ‘This is why we stick with NAV (net asset value) estimates as our methodology for determining likely developer stock price movements.’
As such, Morgan Stanley is underweight on City Developments with a target price of $6.16, equal weight on CapitaLand with a price target of $3.28 and equal weight on Keppel Land with a price target of $2.11.
No—frills housing please, say some MPs
9 February 2009
SINGAPORE – No playgrounds or covered walkways in new HDB estates. Nor any barbecue pits. New flats should have very basic floor tiles, meanwhile.
It is hardly the usual call from Members of Parliament (MPs), who tend to push for upgrading in their constituencies. But two among their ranks are making the call for “no—frills” housing.
According to Dr Lim Wee Kiak and Ms Lee Bee Wah, this should be an option for home buyers and one way to provide more affordable housing.
Dr Lim’s residents in Sembawang, for example, have told him HDB flat prices are high and younger residents who want to move out of their parents’ homes after marriage find it hard to do so.
“Many of them have just started work and may not have so much cash,” he told TODAY. “You’re giving them a chance to build something simple, and over the years when their salaries increase, they may want to improve their homes.”
When he first raised this in Parliament on Friday, Dr Lim gave the example of flat prices in the 1970s: S$15,000 and S$20,000 for a three—room and four—room flat respectively. A graduate with a starting salary of S$1,000 could pay off his apartment with 15 to 25 months of his pay, he said.
But today, though their starting salaries are three to five times higher, the prices of new flats have shot up “10 to 30 times”, he added.
“A high cost of housing has many repercussions as it results in higher costs of living, reduction of resources for other pursuits such as education and investment,” he said.
His solution, he envisions, would lower construction costs and allow flats to be sold for “well below S$100,000”.
But covered link—ways, playgrounds and other upgrading works can be done later when the estate is more mature, he added.
Echoing his views, Ms Lee (Ang Mo Kio) said HDB “should avoid building flats with too many value—added features”, which should be left to private developers.
When contacted, other MPs had mixed feelings, however, about whether there is a place for no—frills flats in Singapore’s public housing spectrum.
Mr Teo Ser Luck (Pasir Ris—Punggol) said the biggest gripe, instead, among couples he has spoken to is the long waiting time for a new flat.
The no—frills idea may also not appeal to younger buyers, who aspire more and are more demanding. “They’re more well informed and have specific demands for the quality of life they want,” said Mr Teo.
Mr Zaqy Mohamad (Hong Kah) was concerned that owners who do not like having the bare minimum might “start hacking and doing it up all over again”.
“I don’t think people are saying 'give me no—frills’, but they’re asking for cheaper alternatives,” he said, and suggested that three—room flats — with quality — would be good for younger couples.
“I think we should create more supply in that segment,” he said. “They can always look at upgrading options later.”
In his Parliamentary reply on Friday, National Development Minister Mah Bow Tan said HDB will launch about 3,000 flats for sale in the first half of this year, of which 1,400 will be studio apartments, two— and three—room flats. There will be 4,000 of such flats launched over the next two years.
“We’ll increase the supply of smaller and lower—priced flats further if necessary to meet the demand from the lower income group,” he said.
Dr Lim had other suggestions as well: Price homes based on cost rather than matching them to market conditions, and shorten the lease from the current 99 years.
Some home hunters welcomed his call for no—frills flats.
Technician Chen Yi, 29, got married in November and is staying in a Woodlands executive flat with his wife, parents and two siblings.
Mr Chen has been looking for a matrimonial home but has been unsuccessful because prices of resale flats have been out of reach, and he does not want to wait several years for a new flat.
“I don’t mind if my home has just one bedroom and a hall,” he said. “Even if it’s cramped like those apartments in Hong Kong, I don’t care. I just want a place where I can have privacy.”
Japan’s Machinery Orders Slide, Bankruptcies Climb
By Jason Clenfield
Feb. 9 (Bloomberg) -- Orders for Japanese machinery fell for a third month in December and bankruptcies increased as businesses scrapped investment plans amid a collapse in exports and deteriorating earnings.
Bookings slid 1.7 percent from November, when they fell 16.2 percent, the sharpest drop since the survey started in 1987, the Cabinet Office said today in Tokyo. Corporate bankruptcies rose 15.8 percent to 1,360 cases in January, the eighth monthly increase, Tokyo Shoko Research Ltd. said in a separate report.
A wave of firings and canceled spending plans by Japanese manufacturers has heightened the risk of a prolonged recession, as fallout from the global slowdown ripples through the domestic economy. Nissan Motor Co., Japan’s third-largest automaker, said today that it will cut 20,000 jobs after predicting a loss this fiscal year as the global recession cripples car sales.
“Falling exports are forcing companies to cut jobs and earnings forecasts, so it’s not really the time to increase capital spending,” said Hirokata Kusaba, a senior economist at Mizuho Research Institute in Tokyo. “We’ll see a further slowdown in orders, which will be a big drag for the economy.”
The Nikkei 225 Stock Average fell 1.3 percent at the close in Tokyo. The yen traded at 91.19 per dollar at 3:38 p.m. from 92.13 before the machinery report was published. The currency’s 18 percent gain in the past year has compounded exporters’ woes by eroding the value of their sales made abroad.
Japan’s current-account surplus narrowed 92 percent in December as exports slumped, the Finance Ministry said today. Overseas shipments fell a record 35 percent, causing the surplus to shrink for a 10th month, the report said.
Record Decline
Economists predicted an 8.6 percent drop for monthly machinery orders, which signal capital spending in the next three to six months. Bookings slid 16.7 percent in the fourth quarter, a record decline.
Companies surveyed by the government said they expect bookings to increase 4.1 percent in three months ending March 31, a prediction that economists including Richard Jerram say is unrealistic.
“It seems highly unlikely to me,” said Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. “Profits are going down so quickly.”
Manufacturers are likely to delay or halt investment in capacity because of the slump in demand, the Bank of Japan’s chief economist said today. The economy is deteriorating at a pace unseen in the past half century, Kazuo Momma, head of research and statistics at the central bank, said in a speech.
Nissan, Toyota
Automakers are bearing the brunt of the decline. Nissan expects a net loss of 265 billion yen ($2.9 billion) for the year ending March 31, compared with its October estimate of 160 billion yen in net income. Toyota Motor Corp. last week said its loss this fiscal year, the company’s first in seven decades, may be three times bigger than initially estimated.
The International Monetary Fund last month said Japan’s economy will shrink 2.6 percent this year, the bleakest projection for any Group of Seven economy except the U.K. Gross domestic product probably shrank an annualized 11.7 percent last quarter, the worst contraction since the 1974 oil crisis, economists predict a government report will show next week.
The export slump is forcing manufacturers to fire thousands of workers. Panasonic Corp., Hitachi Ltd. and NEC Corp., all of which are forecasting losses for the current fiscal year, announced a combined 39,000 job cuts in the past two weeks.
Camera maker Nikon Corp. slashed its profit forecast by two thirds last week and said it will cut 800 jobs this quarter and scale back construction of a plant.
Rising Unemployment
Layoffs by manufacturers drove the unemployment rate to 4.4 percent in December from 3.9 percent the previous month, the biggest jump in 41 years. A separate report today showed an index of sentiment among Japanese merchants rose to 17.1 in January from a record low of 15.9 a month earlier.
Japan General Estate Co., a property developer, Nakamichi Machinery Co., a Japanese construction machinery trader and Marui Imai Inc., a department store operator, all went bankrupt in the past two weeks.
Borrowing costs for companies are rising as they struggle to raise funds amid a global credit crunch. Bank lending rose 4 percent in January from a year earlier, the central bank said today, as companies who can’t raise money in the markets turn to lenders for financing.
The Bank of Japan, having cut its key rate to 0.1 percent, is trying to spur lending by purchasing shares and corporate debt from banks.
“The funding problems will, unfortunately, continue to weigh on companies through fiscal 2009,” which begins April 1, said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. “It’s unavoidable that an increase in bankruptcies and deteriorating profits will lead to higher credit costs.”
China’s Inflation Slows to 1%, Producer Prices Tumble
By Kevin Hamlin and Yidi Zhao
Feb. 10 (Bloomberg) -- China’s producer prices tumbled by the most in almost seven years and inflation cooled to the weakest pace since 2006 as the government struggled to revive growth in the world’s third-biggest economy.
Consumer prices rose 1 percent in January from a year earlier, the statistics bureau said today, after gaining 1.2 percent in December. Producer prices fell 3.3 percent after a 1.1 percent decline.
Lunar New Year celebrations last month may have prevented a bigger decline in the inflation rate as the economy slumped because of plummeting export demand. Central bank Governor Zhou Xiaochuan said today that China may use interest rates and foreign-exchange policy to cut the nation’s savings rate, boost consumption and sustain economic growth.
“Inflation could have been close to zero or worse if not for the Chinese New Year, because vegetable prices and grain prices went up,” said Wang Tao, China economist at UBS AG in Beijing.
Government bonds climbed, spurring speculation that the central bank may cut interest rates for the sixth time since September. The yuan rose to 6.8330 against the dollar as of 11:42 a.m. in Shanghai, from 6.8338 yesterday.
The global slowdown helped to trigger the drop in producer prices by prompting declines in costs of imports such as metals, the statistics bureau said in a statement.
McDonald’s Cuts Prices
McDonald’s Corp., the world’s biggest restaurant chain, said it cut prices in China last week to keep meals “affordable,” after the nation’s fourth-quarter economic growth was the slowest in seven years.
China’s slumping exports and economic slowdown have cost the jobs of 20 million migrant workers and led to the closure of 4,000 toy factories last year.
Slowing inflation leaves more room for interest-rate cuts to increase domestic demand, as Zhou urges the nation to boost consumption to sustain growth.
“We need a comprehensive package to do the task of lowering the savings rate, including exchange and interest rates,” Zhou told a conference of central bankers in Kuala Lumpur today. “We need to emphasize internal demand, that is domestic consumption, especially in rural areas. We need to change the consumption pattern.”
Inflation was faster than the 0.8 percent median estimate of 15 economists surveyed by Bloomberg News. The slump in producer prices was steeper than the survey’s forecast of a 2.6 percent decline.
Deflation Risk
The drop in producer prices “shows a rate cut is possible in the near term,” said Zhang Liling, a Shenzhen-based fixed income trader at China Merchants Bank Co., the country’s sixth largest lender.
The yield on the 3.68 percent note due in September 2018 fell 1.2 basis points to 3.3 percent, and the price of the security climbed 0.10 per 100 yuan face amount to 103.27, as of 11:32 a.m. in Shanghai.
China may report deflation in the first half of this year because of reduced commodity prices and because comparisons will be with inflation that reached an 11-year high of 8.7 percent in February 2008, said Jing Ulrich, head of China equities with JPMorgan Chase & Co. in Hong Kong.
Consumer prices “should stabilize towards mid-year” as the government’s 4 trillion yuan ($585 billion) stimulus package boosts consumption, Ulrich said.
The nation’s worst drought in 50 years may push up grain prices.
Pressure to Cut Rates
The inflation slowdown “puts more pressure on the central bank to cut interest rates further,” said Peng Wensheng, head of China research at Barclays Capital in Hong Kong. “In the short term, the downward pressure is on prices.”
The key one-year lending rate stands at 5.31 percent after 2.16 percentage points of reductions in 2008 that followed the collapse of Lehman Brothers Holdings Inc. The central bank is yet to make a reduction this year.
Peng expects the rate to be cut a further 81 basis points this year after the economy grows as little as 5 percent this quarter.
China’s economy expanded 9 percent in 2008 after a 13 percent gain in 2007 that pushed it past Germany to become the world’s third-biggest. In the fourth quarter of last year, growth cooled to 6.8 percent, the weakest pace since 2001, on the export decline and a slump in property.
China Needs U.S. Guarantees for Treasuries, Yu Says
By Belinda Cao and Judy Chen
Feb. 11 (Bloomberg) -- China should seek guarantees that its $682 billion holdings of U.S. government debt won’t be eroded by “reckless policies,” said Yu Yongding, a former adviser to the central bank.
The U.S. “should make the Chinese feel confident that the value of the assets at least will not be eroded in a significant way,” Yu, who now heads the World Economics and Politics Institute at the Chinese Academy of Social Sciences, said in response to e-mailed questions yesterday from Beijing. He declined to elaborate on the assurances needed by China, the biggest foreign holder of U.S. government debt.
Benchmark 10-year Treasury yields climbed above 3 percent this week on speculation the government will increase borrowing as President Barack Obama pushes his $838 billion stimulus package through Congress. Premier Wen Jiabao said last month his government’s strategy for investing would focus on safeguarding the value of China’s $1.95 trillion foreign reserves.
China may voice its concerns over U.S. government finances and the potential for a weaker dollar when Secretary of State Hillary Clinton visits China on Feb. 20, according to He Zhicheng, an economist at Agricultural Bank of China, the nation’s third-largest lender by assets. A People’s Bank of China official, who didn’t wish to be identified, declined to comment on the telephone.
Clinton Talks
“In talks with Clinton, China will ask for a guarantee that the U.S. will support the dollar’s exchange rate and make sure China’s dollar-denominated assets are safe,” said He in Beijing. “That would be one of the prerequisites for more purchases.”
Chinese Foreign Ministry Spokeswoman Jiang Yu said yesterday that talks with Clinton would cover bilateral relations, the financial crisis and international affairs, according to the Xinhua news agency.
U.S. government bonds returned 14 percent last year including price gains and reinvested interest, the most since rallying 18.5 percent in 1995, according to indexes compiled by Merrill Lynch & Co. Concern that the flood of bonds would overwhelm demand caused Treasuries to lose 3.08 percent in January, the steepest drop in almost five years, Merrill data show. The yield on the benchmark 10-year U.S. Treasury has risen to 2.80 percent from 2.21 percent at the end of last year.
Blackstone Loss
China’s loss of more than $5 billion from investing $10.5 billion of its reserves in New York-based Blackstone Group LP, Morgan Stanley and TPG Inc. since mid-2007 may increase its demand for the relative safety of Treasuries.
“The government will be a net buyer of Treasuries in the short term because there’s no sign they have changed their strategy,” said Zhang Ming, secretary general of international finance research center at the Chinese Academy of Social Sciences in Beijing. “But personally, I don’t think we should increase holdings because the medium- and long-term risks are quite high.”
Bill Gross, co-chief investment officer of Pacific Investment Management Co., said on Feb. 5 the Federal Reserve will have to buy Treasuries to curb yields as debt sales increase. U.S. central bank officials said Jan. 28 they were “prepared” to buy longer-term Treasuries.
“The biggest concern for China to continue buying U.S. Treasuries is that if Obama’s stimulus doesn’t work out as expected, the Fed may have to print money to cover the deficit,” said Shen Jianguang, a Hong Kong-based economist at China International Capital Corp., partly owned by Morgan Stanley. “That will cause a dollar slump and the U.S. government debt will lose its allure for being a safe haven for international investors.”
Currency Reserves
China’s foreign-exchange reserves, the world’s biggest, grew about $40 billion in the fourth quarter, the smallest expansion since mid-2004 as an end to yuan appreciation since July prompted investors to pull money out.
The world’s third-biggest economy grew 6.8 percent in the fourth quarter, the slowest pace in seven years. Policy makers cut interest rates by the most in 11 years and announced a 4 trillion yuan ($585 billion) economic stimulus plan in November to spur domestic demand.
Yu said China won’t channel its reserves toward stimulating the economy because its trade surplus is sufficient to fund any import needs. China’s trade surplus was $39 billion in December, the second-largest on record.
A decline in reserves “isn’t likely because of China’s huge twin surpluses,” Yu said. China “should diversify its reserves away from U.S. Treasuries if the value of China’s foreign-exchange reserves is in danger of being inflated away by the U.S. government’s pump-priming,” he said.
Linking Disputes
China may try to link trade and currency policy disputes to its future investment in Treasuries, said Lu Zhengwei, an economist in Shanghai at Industrial Bank Co., a Chinese lender partly owned by a unit of HSBC Holdings Plc.
U.S. Treasury Secretary Timothy Geithner accused China on Jan. 22 of “manipulating” the yuan to give an unfair advantage to its exporters in the global market. The currency has dropped 0.16 percent since the start of this year to 6.8342 per dollar, following a 21 percent gain since a peg against the dollar was abandoned in July 2005.
“China can also use this opportunity to get a promise from the U.S. not to make inappropriate requests on bilateral trade and the Chinese yuan,” Lu said. “We can’t afford more yuan appreciation as the economy is facing a serious slowdown.”
U.S. Taxpayers Risk $9.7 Trillion on Bailout Programs
By Mark Pittman and Bob Ivry
Feb. 9 (Bloomberg) -- The stimulus package the U.S. Congress is completing would raise the government’s commitment to solving the financial crisis to $9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages.
The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation have lent or spent almost $3 trillion over the past two years and pledged up to $5.7 trillion more. The Senate is to vote this week on an economic-stimulus measure of at least $780 billion. It would need to be reconciled with an $819 billion plan the House approved last month.
Only the stimulus bill to be approved this week, the $700 billion Troubled Asset Relief Program passed four months ago and $168 billion in tax cuts and rebates enacted in 2008 have been voted on by lawmakers. The remaining $8 trillion is in lending programs and guarantees, almost all under the Fed and FDIC. Recipients’ names have not been disclosed.
“We’ve seen money go out the back door of this government unlike any time in the history of our country,” Senator Byron Dorgan, a North Dakota Democrat, said on the Senate floor Feb. 3. “Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. How much from the FDIC? How much from TARP? When? Why?”
Financial Rescue
The pledges, amounting to almost two-thirds of the value of everything produced in the U.S. last year, are intended to rescue the financial system after the credit markets seized up about 18 months ago. The promises are composed of about $1 trillion in stimulus packages, around $3 trillion in lending and spending and $5.7 trillion in agreements to provide aid. The total already tapped has decreased about 1 percent since November, mostly because foreign central banks are using fewer dollars in currency-exchange agreements called swaps.
Federal Reserve lending to banks peaked at a record $2.3 trillion in December, dropping to $1.83 trillion by last week. The Fed balance sheet is still more than double the $880 billion it was in the week before Sept. 17 when it agreed to accept lower-quality collateral.
The worst financial crisis in two generations has erased $14.5 trillion, or 33 percent, of the value of the world’s companies since Sept. 15; brought down Bear Stearns Cos. and Lehman Brothers Holdings Inc.; and led to the takeover of Merrill Lynch & Co. by Bank of America Corp.
The $9.7 trillion in pledges would be enough to send a $1,430 check to every man, woman and child alive in the world. It’s 13 times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office data, and is almost enough to pay off every home mortgage loan in the U.S., calculated at $10.5 trillion by the Federal Reserve.
‘All the Stops’
“The Fed, Treasury and FDIC are pulling out all the stops to stop any widespread systemic damage to the economy,” said Dana Johnson, chief economist for Comerica Inc. in Dallas and a former senior economist at the central bank. “The federal government is on the hook for an awful lot of money but I think it’s needed to help the financial system recover.”
Bloomberg News tabulated data from the Fed, Treasury and FDIC and interviewed regulators, economists and academic researchers to gauge the full extent of the government’s rescue effort.
Commitments may expand again soon. Treasury Secretary Timothy Geithner postponed until tomorrow an announcement that may invite private investment as a way to clear toxic debt from bank balance sheets. Measures that have been settled include a new round of injections of taxpayer funds into banks, targeted at those identified by regulators as most in need of additional capital, people briefed on the matter said.
Program Delay
The government is already backing $301 billion of Citigroup Inc. securities and another $118 billion from Bank of America. The government hasn’t yet paid out on any of the guarantees.
The Fed said Friday that it is delaying the start a $200 billion program called the Term Asset-Backed Securities Loan Facility, or TALF, to revive the market for securities based on consumer loans such as credit-card, auto and student borrowings.
Most of the spending programs are run out of the Federal Reserve Bank of New York, where Geithner served as president. He was sworn in as Treasury secretary on Jan. 26.
When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and then Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. The Federal Reserve so far is refusing to disclose loan recipients or reveal the collateral they are taking in return. Collateral is an asset pledged by a borrower in the event a loan payment isn’t made.
Fed Sued
Bloomberg requested details of Fed lending under the Freedom of Information Act and filed a federal lawsuit against the central bank Nov. 7 seeking to force disclosure of borrower banks and their collateral. Arguments in the suit may be heard as soon as this month, according to the court docket. Bloomberg asked the Treasury in an FOIA request Jan. 28 for a detailed list of the securities it planned to guarantee for Citigroup and Bank of America. Bloomberg hasn’t received a response to the request.
The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).
Merrill Lynch Global Wealth Management Cutting Branch Support Staff
February 09, 2009
NEW YORK -(Dow Jones)- Merrill Lynch Global Wealth Management, a unit of Bank of America Corp. (BAC), plans to cut less than 10%, or under 1,000, support staff positions in its branch offices, according to people familiar with the situation.
The job cuts, which will include some client associate and sales assistant positions, come as Merrill recently let go several hundred rookie brokers based on performance and in an effort to reduce costs. The firm has also lost several key executives, including former Chief Executive John Thain, Robert McCann, former head of the wealth management unit, and Greg Fleming, former chief operating officer and the No. 2 executive at Merrill.
Bank of America, which completed its acquisition of Merrill Jan. 1, has been hammered by a financial crisis and weak economy. The Charlotte, N.C., banking giant's stock has been plagued recently by fears of nationalization. Monday, however, Bank of America's shares rose for the second straight day on news of insider stock purchases, and comments dismissing such a plan.
Last month, Merrill let go financial advisers who had been with the firm less than two years. The staff reductions followed December cuts of brokers who were in the Paths of Achievement training program and had been with the firm between six months and two years.
New brokers have had an especially difficult time building up client asset levels to reach performance goals, given the plunging stock market.
"My view is you need support staff just as much or more in this environment," said a Merrill Lynch broker in the northeast U.S.
Bank of America shares recently traded up 73 cents, or 12%, at $6.85 on Monday.
With evictions on the rise, deputies make the rounds to clear residents out of homes
By TERI FIGUEROA
February 7, 2009
Two San Diego County sheriff's deputies escorted the pregnant woman out of her Poway home. It didn't matter that she had no car to drive and nowhere to go. It didn't matter that her baby was due the next day. The uniformed men had no choice.
Foreclosure had led to eviction, and Jan. 29 was D-Day. Ordering the expectant mother and the little girl at her knee to leave the four-bedroom house was part of their job, just the final stop on an otherwise average day that saw them handle 21 evictions.
The two men are among seven deputies in North County tasked with removing people from their homes.
Once the gavel has come down in the courtroom, once the eviction has been ordered, deputies such as Grant Erbe and Pat Morrissey get the call.
They will stay busy. In North County, officials said, the number of eviction notices the deputies will post is projected to be more than 3,200 this year ---- a jump of 38 percent over 2008.
Record foreclosure numbers, layoffs, an ailing economy all have beaten down struggling homeowners and renters.
For some, the eviction hammer will fall. And it is up to deputies such as Erbe and Morrissey to wield it without emotion.
The deputies have no power to give the homeowner an extra day, hour, even 15 minutes. Once they knock on the door, time's up.
"They think we have the final say," Erbe said. "We don't. We are working for the courts. I don't have the authority to do anything."
So when the distraught pregnant woman pleaded with Erbe to take her cell phone, to talk with her husband, it was fruitless.
"I'm not here to listen to the story," Erbe told the woman. "It's not going to do any good to tell me the story."
Nothing in the home was packed. A half-empty pan of scrambled eggs sat on the nearby stove.
Morrissey asked if her husband was coming home.
"No," she replied with a heavy Spanish accent. He can't. "He is working."
"Ma'am, you are going to have to move. Call him back and tell him that is the reality," Morrissey said.
Her daughter tugged at her, crawling under the table and peering up at the armed deputies.
"We don't have nowhere to go," the woman told them. She called a friend to come get her.
Moments later, Morrissey helped the woman carry a few bags and boxes out to the curb. Tears leaking from her eyes, the woman followed him to the sidewalk, the little girl in tow.
Behind them, a locksmith installed a new doorknob under Erbe's watchful eye.
Evictions on the rise
Last year, deputies in North County posted 2,326 eviction notices, up 10 percent from the previous year.
With the economy in a tailspin and foreclosure headlines dominating the front pages, worse is coming, officials say.
Based on the number of eviction notices posted in January, officials are projecting some 3,228 families and businesses in North County will be evicted this year.
"It used to be we'd go to more apartments," Morrissey said. "Now we see more foreclosures."
Erbe said his job is to present a person with the final court documents telling them to get out, and to make sure everyone is escorted out of the house.
"I often refer to myself as a mailman with a gun," Erbe said.
On this warm winter Thursday, Erbe had 21 evictions to enforce: 20 families and one business. The stops are generally scheduled 20 to 30 minutes apart. Erbe, with Morrissey as his backup on this day, doesn't have time to listen to pleas and sob stories.
The tight schedule is pretty standard, but there is no standard day. Most of the time, the residents have cleared out before deputies arrive. When people are still in the house, the scene is not only emotional, it also has a ripple effect on their next scheduled stops. Landlords and locksmiths are waiting at the next site.
"We are on a tight schedule," Erbe said. "We can't individualize service. We've got to move on."
And there are surprises. Morrissey said that last year he walked into an Encinitas place and found the body of a man who had committed suicide. Morrissey also found a note, in which the man had written that he had no place to go.
Another deputy said he served notice on a house, and found four kids at home and Mom at work. But this was the day and time to kick the residents out, so deputies had to call social workers to take the kids into protective custody.
"It's sad to see," Erbe said. "Each situation is unique. But from what I have seen on the foreclosure end, the people are trying. Nobody wants to lose their house.
"I think the ones that get me the most are the elderly on fixed incomes," he said. "They are the forgotten."
Swift and loud knocks
The first house, at the north end of Vista, was a simple, one-story home in an older subdivision.
The approach at the door is always the same: a few swift and loud knocks on the front door, followed by the shout, "Sheriff's Department! Court order!"
No response from inside the home elicited a nod from Morrissey to the locksmith, who hurried forward to work his magic. Seconds later, he stepped back and the deputies walked into the home.
This one, like so many they encounter, was empty. Here, though, pride of ownership was apparent. Everything was clean, from the white kitchen counters to a back bedroom, with blue paint and a playful wall border announcing that a young child once lived here.
The new owner is a bank.
Next, Erbe and Morrissey drove to a home in central Vista. They had to be there in 20 minutes.
The time they show up matters. At each site, real estate agents or their representatives are waiting, having paid the court $125 to have deputies clear the property. When evictions reach this point, the law requires sworn officers to be at the scene, to restore the property to the landlord.
When Erbe and Morrissey pulled up to the second house, a man in a dress shirt approached, offering familiar greetings to the two deputies.
"I should know these guys by name, I see them so often," said the man, a real estate agent who gave his first name as Matthew.
Turning toward the house with a wave, Matthew said he thought the residents had cleared out.
"It was occupied before the weekend," he said. "It looks like they got the message."
Again, a loud knock, a warning yell, and the deputies stepped inside for a security sweep before they handed over the place to Matthew.
This time, the home was not all that empty. Couches and mattresses remained, and the garage was packed with junk. And the smell was overwhelming. Perhaps it was gasoline, perhaps insect poison.
"You might not want to stay in here too long breathing this stuff," Erbe said. A wooden folding table with an open box of baking soda ---- often used in making methamphetamine ---- sat near the door.
Erbe said it crossed his mind that maybe meth had been cooked here, but there was no real evidence of that. Had it been obvious, he and Morrissey would have forced everyone out the door and called a hazardous materials team. This, though, was just a stinky mess. And it was time to move on to stop No. 3.
Coffee still in the pot
Next was an apartment. About half of their stops will be at apartments.
Some of the places are clearly low income, like the two-bedroom in central Escondido that rented for $1,000 a month. Neighbors, curious about the presence of two deputies, told them the family cleared out just hours before the lawmen came knocking.
Even with a late-night flight, the renters left the place clean, even the bathroom.
Not so at the high-end rental the deputies stopped at later in Carmel Mountain Ranch, where small two-bedrooms go for $1,800, and where one set of renters destroyed the carpet before they fled, leaving behind a wretched smell of dog.
At a high-end San Marcos rental, no one was home, but by no means was the apartment empty. It looked more as if everyone was just off at work and school. The carafe in the coffee-maker was still half-full, and family photos graced the fireplace mantle.
In what appeared to be a child's bedroom, video games were splayed out in front of a television and a SpongeBob stuffed toy peeked out from near the unmade bed.
The moment the deputies walked in, all those items fell under the control of the apartment managers.
'Welcome new owners'
Erbe's travels on this day took him past a large Mervyns store, chained shut, a grim reminder of a failing economy. And a harbinger of more evictions in the months to come.
At one house, Erbe and Morrissey stood for a few minutes, waiting for an agent who never showed up.
The deputies shrugged it off and headed to their next stop: a foreclosure, they assumed, because the plaintiff in the lawsuit was a bank.
The former residents of this three-bedroom home on Kenora Street, near Orange Glen High School, had already cleared out.
From the walls and items left behind, one of the rooms had been that of a girl, perhaps a teenager. She left a parting message, written in what appeared to be a grease pencil, on her bedroom window: "Welcome new owners of my home."
At their last stop of the day, the pregnant woman in Poway opened the door. Erbe spoke to her in Spanish, explaining what was happening.
She grabbed her cell phone and called her husband. "The police are here," she said in Spanish.
After hanging up, the woman eased into a chair at her kitchen table and explained her side to a reporter. She said she was aware of the possibility of an eviction, but said she had been told it was being handled and all would be fine. Her English was shaky, it wasn't clear if she was a renter, or the homeowner.
But it didn't really matter. By the time Erbe and Morrissey showed up, her fate had been sealed. It was time for her to go.
Now for Pigs and Food– A Super Short Commodity Super Cycle
By Satyajit Das
09.02.2009
The commodity "super cycle" proved super short. The commodity "boom" is now officially a "bust".
Mark Twain once described a mine as "a hole in the ground with a liar standing next to it". The end of the commodity price cycle has revealed that standing next to the liar is a crowd of hapless bankers, analysts and investors. So what happened?
The rise in commodity prices was driven by the confluence of a number of factors. Debt driven growth in major developed countries drove strong growth (both export and domestic) in emerging markets, such as China and India. This, in turn fuelled, demand for resources. In a virtuous cycle, the growth drove demand in major commodity producers, like Russia, the Gulf, Australia, Canada and South Africa, whose strongly growing economies fuelled further growth globally by way of increased consumption and investment.
The effect of increased demand on prices was exacerbated by decades of significant under investment in commodity infrastructure (mineral processing; refining; transport infrastructure (shipping, ports, pipelines)) driven, in part, by low commodity prices.
The commodity boom was aided and abetted by investors, especially leveraged investors such as hedge funds. Hedge funds used commodities to bet on strong global growth and catch the updraft in emerging markets indirectly reducing problems of direct investment. Commodities also provide significant leverage making them more attractive to hedge funds.
Traditional investors also embraced commodity investments. Commodities were seen as a separate investment class with low correlation to traditional investments enabling investors to improve investment returns and reduce risk simultaneously.
The last factor was inflation. Rising commodity prices and strong growth fuelled rising prices. This encouraged further investment in commodities as a hedge against inflation. The higher prices went the greater the threat of inflation and the increasing flow of funds into commodities. The momentum was irresistible.
Engaging Reverse Gear
In 2008, each one of these factors went sharply into reverse. The global financial crisis ("GFC") resulted in reduced availability and higher cost of debt affecting commodities through several channels. Leveraged investors were forced to liquidate their positions as leverage was reduced and investors redeemed capital. The reduction in debt also reduced global growth sharply and the demand for most resources.
The reversal was exacerbated by several factors. Rising prices and anticipation of higher demand had led to significant investment in certain commodities and infrastructure. The time needed to build capacity meant that this increase in supply coincided with reducing demand further pressuring prices.
The GFC also reduced cross border capital flows and global trade. The Institute for International Finance forecasts net private sector capital flows to emerging markets in 2009 will be less than US$165 billion - 36% of the US$466 billion inflow in 2008 and only one fifth the record amount in 2007. The projected decline in capital flows is around 6 % of the combined gross domestic product of the emerging countries. This compares to a decline of approximately 3.5 % of combined GDP in the Asian financial crisis and 1.5% in the Latin American crisis.
Global trade is also declining. In late 2008, the World Bank forecast a fall in global trade volumes for the first time in over 25 years. The Baltic Dry Index, a measure of supply and demand for basic shipping materials, has fallen 90 % since mid 2008. Exports from Japan, Korea, Taiwan and China fell between 10% and 40% in late 2008 also signalling reduced demand for commodities.
Financing pressures also mean that it is increasingly difficult to finance trade. Some countries have had to resort to barter to obtain essential foodstuffs.
Self Harm
Resources companies compounded the problems by aggressive acquisitions that were sometimes debt financed. Expectations of strong global growth and demand, especially from China and other developing countries, encouraged leading firms in the steel, cement and mining industries to undertake ambitious acquisitions in 2006 and 2007.
For example, steelmaker ArcelorMittal undertook a cash-and-stock-financed merger. India’s Tata Steel completed a leveraged takeover of Anglo-Dutch Corus. France’s Lafarge, the world’s biggest cement producer, bought Orascom Cement of Egypt whilst its competitor Mexico’s Cemex purchased Rinker, a big Australian rival. Xstrata, the mining industry’s serial acquirer, entered into a number of debt financed acquisitions. Rio Tinto purchased Alcan increasing its leverage significantly.
Declining sales and cash flows, debt refinancing requirements, difficulties in selling assets and limited opportunities to raise equity to deleverage further complicates the commodity bust. Some companies are seeking state financial assistance to survive. For example, Corus has sought assistance from the British government
High oil prices also led to aggressive investments in alternative energy technologies that are not economic at lower prices further complicating the price cycle.
Commodities also proved to be yet another "crowded trade". Investors had created highly correlated positions; for example, simultaneously increasing exposure to equities, resources companies, emerging markets, commodities and corporate credit spreads on mining companies. The trades were essentially the same "bet". Correlation between investments has gone to near one in the GFC and the assumption of diversification has proved almost as elusive as the promise of the commodity super cycle.
Laws of Financial Gravity
Commodities posted their worst performance on record in 2008. Commentary on commodity markets reflects Mark Twain’s remark that: "I am not one of those who in expressing opinions confine themselves to facts".
Unlike financial assets, commodities, for the most part, are subject to the laws of economic gravity – supply and demand. Individual commodities are also highly idiosyncratic – you can’t drink oil, nor can you run your car on gold though they seem to go quite well on corn tortillas!
The key to commodities is demand. Higher prices, for example in oil, led to a sharp reduction in demand as people lowered consumption or used substitutes. Falling prices shift this balance, especially in energy importers such as China, Japan and India.
It is not clear how much lower global growth is impounded in commodity prices. The fall-off in exports in Asian countries and the collapse in freight rates is especially worrying. Inevitable protectionism (buy "local" and currency "manipulation" to gain export competitiveness) is also a concern.
Ultimately, commodity prices will depend on recovery in growth, consumption, housing markets, durable goods (especially motor cars) and stability in financial markets and resumption of more normal financing activity. None of this seems likely in the short term.
A key dynamic is whether deflationary pressures (falling prices) emerge. In a deflationary environment, commodities will be hit hard as demand falls further. The lack of income and high real rates of interest will affect prices. In contrast, inflation would be supportive of prices as investors switch from monetary to real assets. Despite strenuous rhetoric and monetary actions by central banks, it is not clear whether debt deflation can be avoided.
Aberrant Tendencies
Short-term factors also affect the outlook. Falling prices have placed enormous pressures on companies and state treasuries dependent on resource based revenues.
Companies with large debt service commitments are being forced to produce at uneconomic prices simply to generate cash flow. Some oil exporters are producing below operating cost to maintain revenues to finance ambitious spending plans conceived in more prosperous times. This overproduction distorts prices.
There are growing supply constraints in some markets. Junior miners are unable to bring resource properties into production because of financing pressures. New investment and expansion has been deferred or abandoned. These bottlenecks may cause short-term supply disruptions creating significant volatility in prices.
A ‘known unknown’ is the performance of the US dollar. There is a complex and unstable relationship between commodity prices and the dollar. An IMF study noted that a 1% increase in the value of the dollar results in a decrease in oil and gold prices of greater than 1%. This means the elasticity is around 1. It appears to be higher for gold than oil prices. Continued volatility in currency markets, reflecting pressures as sovereigns attempt to finance their budget and financial system bailout requirements, will be mirrored in commodity prices.
The impact of lower shipping costs on individual commodities is also a factor. At the height of the commodity boom, one apocryphal story told of containers shipping goods to America being scrapped upon arrival in the US. This reflected the lack of US-China traffic and the cost of shipping back the containers. Shipping resources that were previously uneconomic to ship, for example, bulky items with low price to volume ratios such as cement, are now tradable reflecting the collapse of freight rates. This means that local pricing variations and protected niches may be affected.
Individuals All!
Oil prices may have further downside, in the short run, reflecting continued reduction in demand as growth slows. Production cuts by OPEC may not be effective as revenue strapped sovereign producers adjust volumes to generate cash flow. Ultimately, the laws of supply and demand, production costs and a finite, constrained resource will support the price.
The outlook for alternative energies is less sanguine. Most alternatives require high oil prices to be economic. Support for alternative cleaner energy is likely to wane as the GFC forces governments to defer climate change initiatives in the face of harsh economic conditions.
The dislocation in financial markets has benefited gold. The gold price has performed well reflecting increasing suspicion about "paper" money and lower interest rates. Governments continue to attempt to reflate domestic economies by traditional Keynesian spending, increasing concern about possible inflation providing support for gold. There is a fear of a return to a gold standard leading to hoarding of gold stock. Emerging market demand for gold, a traditional store of purchasing power, may be fuelled by the threat of increased social unrest.
Other precious metals, platinum, palladium and silver, are likely to be affected by decreased demand, especially the problems in the automobile sector globally.
Industrial metals (aluminium, copper, lead, nickel, zinc and tin) and bulk commodities (iron ore and coking coal) have been a major proxy for global economic growth, particularly demand from a rapidly industrialising and urbanising China and India. Slower growth and problems related to inventories and oversupply may mean a continuation of weakness.
The performance of agricultural prices is puzzling. After falling in line with commodities generally throughout 2008, in December agricultural products decoupled from other assets. For example, some grains rose sharply in prices by 10% to 20%.
Prices (adjusted for inflation) are around 40% below long run average prices. Grain inventory levels are low – around 2 months of global demand. Problems affecting financing of crops and trade, low prices and difficulty of hedging (increased in margins and hedging costs) have meant that plantings have been low. Major seed producers report a sharp decline in sales. The increased problems of food production from climate change also means the risk of supply disruption cannot be discounted.
Historically, agricultural products have performed well in economic recessions. Tightening supply, risk of supply shocks and the appeal of a recession resistance asset may underpin prices in relative terms.
Agricultural products that have been linked to oil prices (such as corn, palm oil, soybeans and rapeseed) will be dependent on the broader performance of energy prices.
Bridges to Nowhere & Velocity of Pigs
During commodity booms excesses abound. Oil rich countries enjoying rapid growth in commodity revenues embarked on grand and expensive projects. For example, in this cycle, Dubai undertook an ambitious expansion program based on real estate, luxury hotels, airlines, financial services and English premier league soccer clubs.
The excesses are notable. The recently opened Atlantis Hotel is at the end of the first (and so far only completed) Dubai Palm, a piece of reclaimed land designed to resemble a palm tree. The Atlantis has its own theme park next door, every shop and restaurant conceivable and a mammoth aquarium (featuring 65,000 marine animals). The Palazzo Versace hotel, currently under construction, features a beach with artificially cooled sand to save guests from the hot sand as they walk from water to the hotel.
The most emblematic project of this cycle is a project proposed by Tarek bin Laden, one of Osama bin Laden’s many half-brothers. The project entails twin cities on either side of the Bab al-Mandib (Gate of Tears) strait at the mouth of the Red Sea linked by a 29 km bridge across the strait. The project cost was estimated at $200 billion.
Recently an acquaintance in financial markets announced his retirement to a life of rustic simplicity in Umbria, Italy. He had acquired a farm and was restoring it with the help of local ‘serfs’ (his word not mine!). The farm would be self sufficient producing essentials of life - wheat, milk, wine and meat. The plan was to avoid the coming financial Armageddon in financial markets and the money economy.
The newly minted farmer was especially excited by the farm’s black pigs that reproduce three times each year. He referred to this as the ‘velocity’ of the pig population. The porcine velocity is much greater, ironically, than the current velocity of money in financial markets as the recession sets in and the implosion of the financial system becomes institutionalised.
Grandiose plans tend to be launched towards the end of the boom cycle. Pigs and food may be well be where the smart money heads in these troubled times.
Fundamental demand for food and energy may emerge as key investment drivers – everybody needs to eat and we are still a fossil fuel driven society.
A 10-Year Stretch That’s Worse Than It Looks
By FLOYD NORRIS
February 6, 2009
IN the last 82 years — the history of the Standard & Poor’s 500 — the stock market has been through one Great Depression and numerous recessions. It has experienced bubbles and busts, bull markets and bear markets.
But it has never seen a 10-year stretch as bad as the one that ended last month.
Over the 10 years through January, an investor holding the stocks in the S.& P.’s 500-stock index, and reinvesting the dividends, would have lost about 5.1 percent a year after adjusting for inflation, as is shown in the accompanying chart.
Until now, the worst 10-year period, by that measure, was the period that ended September 1974, with a compound annual decline of 4.3 percent.
That decline was strongly influenced by inflation. Ignoring inflation, stocks over that decade returned half a percent a year, not a very good showing but not a loss. But with inflation taking off, the real, inflation-adjusted return was negative.
For the current period, the total return was negative, at minus 2.6 percent a year, even before factoring in inflation.
Perhaps surprisingly, the 10 years after the 1929 crash were not that bad by this measure — which may say as much about the measure as it does about the performance of the stock market. The deflation of the 1930s helped the after-inflation of the stock market to look better.
For the 10 years after the crash, through Sept. 30, 1939, the compound annual decline of the stock market, with dividends reinvested, was 5 percent a year before considering inflation. That remains the worst 10-year period. But after factoring in deflation, the loss was 2.8 percent a year, which is still bad but not horrid.
Compounding interest rates over a 10-year period can magnify differences that look small. For example, over the 10 years through January, the total losses in nominal dollars from the S.& P. 500, with dividends reinvested, was 23.5 percent. But with inflation added in, the decline was 40.4 percent.
The numbers in the chart assume that the Consumer Price Index was unchanged in January from December. But the accuracy of that assumption does not matter. Even if consumer prices rose or fell sharply during the month, the decade would still have been the worst one.
The decade was not a smooth one. It started with the market nearing the peak it would reach in early 2000, as the technology stock bubble expanded. Prices tumbled through late 2002, then doubled from those depressed levels by late 2007. Since then, a rapid decline has brought them back close to the lows of 2002 before considering dividends and inflation.
Taking inflation and dividends into account, an investor who put money into the market any time after the end of 1996, and held on, now has less value than when he or she started.
Many things influence stock prices, of course, and there is no guarantee that continued economic and financial woes will not drive the market down from here. But long-term investors may be able to take comfort from the fact that bad decades are often followed by 10-year periods that are better than the long-term average, which shows a gain of 6.2 percent a year.
Bush-era offshore drilling plan is set aside
Obama team eyes renewables, seeks more input on Atlantic, Pacific coasts
Feb. 10, 2009
WASHINGTON - The Obama administration on Tuesday overturned another Bush-era energy policy, setting aside a draft plan to allow drilling off the Atlantic and Pacific coasts.
"To establish an orderly process that allows us to make wise decisions based on sound information, we need to set aside" the plan "and create our own timeline," Interior Secretary Ken Salazar announced in a statement.
Alleging that the Bush administration "had torpedoed" offshore renewable energy in favor of oil and natural gas, Salazar said he was extending the public comment period by 6 months.
"The additional time we are providing will give states, stakeholders, and affected communities the opportunity to provide input on the future of our offshore areas," he said.
Salazar also ordered Interior Department experts to compile a report on the Outer Continental Shelf's energy potential — not just oil and gas, but also renewables like wind and wave energy.
"In the biggest area that the Bush administration’s draft OCS plan proposes for oil and gas drilling — the Atlantic seaboard, from Maine to Florida — our data on available resources is very thin, and what little we have is twenty to thirty years old," he said. "We shouldn't make decisions to sell off taxpayer resources based on old information."
The Interior Department oversees 1.75 billion acres on the Outer Continental Shelf, an area that's about three fourths the size of the entire United States.
Environmentalists and some tourism-dependent coastal states oppose the drilling, citing the potential for spills and urging an emphasis on renewable energy instead. Energy companies counter that drilling has become safer over the years and that royalties from any finds would be in the billions of dollars.
"I intend to issue a final rulemaking ... in the coming months, so that potential developers know the rules of the road," Salazar said. "This rulemaking will allow us to move from the 'oil and gas only' approach of the previous administration to the comprehensive energy plan that we need."
"We need a new, comprehensive energy plan that takes us to the new energy frontier and secures our energy independence," he added. "We must embrace President Obama's vision of energy independence for the sake of our national security, our economic security, and our environmental security."
Moratorium ended last year
The Bush administration had authorized the Interior Department to open areas off both coasts to oil and gas drilling during a five-year period. That move came after a moratorium on drilling there expired last year. Offshore drilling is already allowed in the Gulf of Mexico.
Both Obama and Salazar have said that expanding offshore oil drilling should be worked out with Congress as part of a broad energy blueprint, and not independent action by the Interior Department.
The move comes a week after the Interior Department shelved energy leases on 130,000 acres near two national parks and other federally protected lands in Utah.
In Congress, Democrats have long wanted to rewrite the rules on royalties from offshore drilling, arguing that energy companies have been paying too little.
Rep. Ed Markey, D-Mass., praised the move as an end to "drill first and ask questions later".
"The tide has turned back towards reason and a comprehensive energy plan for our country that sees promise in the winds and the tides, not just in drills and rigs," added Markey, who chairs the select committee on energy independence and global warming.
But House Republicans last week urged Obama not to close areas off the Atlantic and Pacific coastlines.
"We respectfully urge that you allow the five-year offshore drilling plan to continue because it is vital to our economy," the lawmakers, led by House Republican leader John Boehner, said in a letter. "Our country needs to remain on the path to American energy independence, and we believe this is a critical and achievable goal."
Jack Gerard, president of the American Petroleum Institute, which represents the large oil companies, said Salazar's announcement "means that development of our offshore resources could be stalled indefinitely."
31 lease sales were proposed
The preliminary plan drawn up by the Bush administration would have authorized 31 energy exploration lease sales between 2010 and 2015 for tracts along the East Coast and off the coasts of Alaska and California.
The Republican lawmakers cited a study that concluded the untapped offshore oil and gas reserves would create more than 160,000 jobs by 2030 and provide the government with $1.7 trillion in royalties on the oil and gas drilled.
Congress last year failed to renew the long-standing moratorium on oil and gas exploration across 85 percent of the nation's Outer Continental Shelf, leaving all waters potentially open to drilling.
Then, four days before leaving office, officials in the Bush administration issued the draft plan, which called for energy leases in areas that until recently had been off limits for a quarter century.
The Interior Department estimates — using 30-year-old studies — that the offshore waters lifted from drilling bans last year contain at least 18 billion barrels of oil, about half of it off California.
Treasury, Fed unveil $1.5 trillion rescue plan
Bad bank program should provide as much as $1 trillion in financing
By Ronald D. Orol
Feb. 10, 2009
WASHINGTON (MarketWatch) - In its latest effort to stabilize the broken financial system, the U.S. government will use mostly private money to create a fund of at least $500 billion to recapitalize banks and another fund of $1 trillion to support consumer and business lending, Treasury Secretary Tim Geithner announced Tuesday.
As part of the plan, all major U.S. banks will be required to undergo a rigorous stress test to determine if they can survive a more severe economic downturn. If they can, they'll be eligible for government capital.
"The battle for economic recovery must be fought on two fronts," Geithner said as he unveiled the much-anticipated financial stability plan. "We have to both jump start job creation and private investment, and we must get credit flowing again to businesses and families."
Financial markets appeared to be underwhelmed by Geithner's plan, with the Dow Jones Industrial Average selling off as much as 300 points.
The plan is short on details and "short on the confidence factor that this will all work out fine," said Alan Ruskin of RBS Greenwich Capital.
To get credit flowing again, Geithner's plan has six parts, including the creation of a public-private partnership to buy illiquid assets from banks to help them recapitalize.
In partnership with the Fed and the Federal Deposit Insurance Corp., the Treasury will take a portion of the remaining money from the $700 billion Troubled Asset Relief Program and leverage it 10 to 1 with private-sector funds to create a $500 billion investment fund to buy toxic assets.
Geithner added that the fund, which could grow to as much as $1 trillion, will allow the private sector to "determine the prices for current troubled and previously illiquid assets." It is expected to encourage private investors to acquire illiquid mortgage securities from troubled financial institutions, Geithner said.
In a second part of the plan, the Treasury will invest funds from the TARP directly in banks that have passed the stress test. The taxpayers will receive dividends and securities that can be converted into equity in the banks. Banks will have to be more forthcoming about what they'll do with the money, and will have to accept restrictions on executive pay, dividends, stock repurchases, and acquisitions.
Banks with $100 billion or more in assets, roughly 18 to 20 financial institutions, will only need to complete a stress test. Smaller banks will also be eligible after they pass a supervisory review. A Treasury official said the stress test is not a capital standard and after it is finished the result will not be "pass or fail." If the result of the test shows that banks need more capital, it will be encouraged to raise capital in the private markets or through the Treasury's program.
The official declined to comment on how much of the remaining $350 billion in the bank bailout program would be allocated to recapitalizing banks.
"This program will provide government capital and government financing to help leverage private capital to help get private markets working again for the legacy loans and assets that are now burdening the entire financial system" Geithner said.
"We're going to require banking institutions to go through a carefully designed comprehensive stress test, to use the medical term," Geithner said. "We want their balance sheets cleaner, and stronger. And we are going to help this process by providing a new program of capital support for those institutions which need it."
The third part of the plan will have the Federal Reserve greatly expand its still-in-the-works program to support consumer and business lending. The Term Asset-Backed Securities Loan Facility (TALF) will take $100 billion from the Treasury and leverage it into $1 trillion of capital to "kick start lending by focusing on new loans."
Assets purchased by the TALF will be limited to AAA-graded securities. They can include securities backed by consumer as well as business loans, including commercial mortgage-backed securities.
Facing criticism from lawmakers on Capitol Hill, Geithner is not asking for additional funds for the program until it is clear to him that the measures are not having their intended effect of reviving the financial markets.
The Treasury will release details later about parts of the plan to back up small-business lending and a program that would use at least $50 billion to help troubled homeowners on the verge of foreclosure.
Details of toxic asset plan
A Treasury official briefing reporters that the fund would provide "longer-term financing" to private institutions so they can buy and hold assets. The official said that the "design features" of the program will be released in the next several weeks.
A number of private institutions have expressed an interest in participating, but none have committed any capital, the official said.
The Treasury official added that the Treasury considered both an asset guarantee program and the formation of a so-called bad bank that would use only government dollars to buy troubled assets from financial institutions, before it settled on creation of a public-private investment fund.
"While each of those has many attractive features, at the end of the day we determined that it would be better to draw in private capital to make our dollars go further and to address the problems with pricing assets," the official said.
Critics chided the agency for not inserting a provision requiring banks that receive assistance to lend it out. However, Treasury officials said they are requiring banks that receive assistance to submit a plan for how they are going to increase lending as a result of the assistance. These financial institutions must also make sure the funds are not being allocated to hike executive pay packages.
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