Where the Financial Crisis Is Headed Next

by Lawrence C. Strauss

Three years ago, hedge-fund manager Sy Jacobs told Barron's that serious trouble was brewing in the housing market, predicting that "the bursting of the housing bubble [would] be a dominant theme for investing in financial stocks in the next decade." He was right. Jacobs, 47, is the founder of New York's JAM Asset Management, which runs two funds, both focused on financial stocks and closed to new investors. The larger entity, JAM Partners, follows a market-neutral, long-short strategy and has close to $300 million in assets. As of May 21, the fund's year-to-date total return, net of fees, was 9.6%, versus a 4.5% loss for the S&P 500. Its annualized return since inception in 1995 (through April 30) was 16.6%, compared with 9.9% for the S&P. The $45 million JAM Special Opportunities Fund invests in illiquid private-equity holdings. Jacobs' familiarity with financial stocks dates to the 1980s, when he worked as an analyst at firms like Salomon Brothers and Alex. Brown & Sons. To find out where Jacobs sees new problems emerging in the financials -- surprisingly, they're not in the subprime arena -- read on.

Barron's: You were early in detecting the serious problems in subprime mortgages. That turned out to be a great call.

Jacobs: About three years ago, we were worried about subprime specifically. And that view very much paid off for us as we were short a host of such companies. More than a year ago, in another interview with Barron's, we said subprime was already in a full meltdown mode, but the idea that subprime was somehow isolated was still popular. Our message was that the mortgage-credit tail was going to wag the capital-market and economic dog. That's coming to pass now.

Looking ahead, what do you see for the financials?

We believe the recent rally in financial stocks -- and for the whole market -- is a bit of a head fake that will prove to be a bear-market rally.

What's your premise?

After first ignoring subprime, people now are too focused on it and they're missing the broader storm coming -- that's the head fake. While the bursting of the housing bubble produced all sorts of headline-making losses for some, it is just starting to drag down the rest of the economy. Separate from subprime, you are seeing diminished ability for consumers to spend their home equity. The securitization market, which banks and finance companies use to get funding, has slowed. So we see consumer and business spending slowing; the economy will falter.

In a recent letter to your investment partners, you noted that you were very concerned about the health of construction loans. Could you elaborate on that concern for us?

I spent a week recently in California, visiting some troubled, or soon-to-be-troubled, banks. With home sales down so much, construction lending is becoming a problem. You have a lot of developers and home builders stuck with homes that aren't moving. And they are sitting on lots that have loans against them. Subprime is such a small piece of the banking industry, but construction lending is a core product. If the housing market stays weak for much longer -- and it seems to be getting weaker -- construction-loan losses are going to be a big problem.

After the brutal real-estate recession that occurred in the early 1990s, there was a sense that banks had finally learned their lesson and would be much better fortified for the next downturn. I take it you don't think that's true.

I take a pretty cynical view of whether bankers have gotten smarter. We've had a real-estate bull market ever since the early 1990s. I think you are going to see the same thing again. The number of banks that get taken over by the FDIC and disappear may not be as high as it was in the late-1980s and early 1990s because there is strength in the energy patch now. But real-estate lending institutions are the bulk of the community-bank world, and I think you are going to see a lot of banks disappear.

What's your sense of the prevailing views of the financials right now?

People are trying so hard to believe that the Bear Stearns crisis in March was some sort of financial crescendo and represents the bell that gets rung at the bottom, as if that happens. But just because we got saved from what would have happened that Monday if Bear went down doesn't mean we are saved from all the forces that conspired to get Bear Stearns to the brink in the first place. Bear was not the sacrificial lamb to the market gods. It got knocked down by the same winds that are affecting everybody else. Credit destruction is a process -- not an incident. And avoiding that particular meltdown doesn't mean that things are getting better -- and yet that is how financial stocks in particular and the market in general have acted ever since.

You're a fundamental stockpicker, but are there any interesting trends you see in the financials?

One of our themes on the long side is that local plain-vanilla, over-capitalized community banks, especially thrifts, are in a position to gain back market share in the lending business. And they have real deposit franchises that they can fund themselves with. They have been losing market share to the Countrywide Financials [CFC] of the world for a generation. Now, though, they are going to gain a lot of that market share back, because they suddenly have a funding advantage, relative to the larger financial firms that have been securitizing their loans. That market has been discredited. We're long lots of micro-cap ways to play this, but they're too illiquid to mention here.

Fair enough. Let's discuss some of your holdings, starting on the short side.

The first one is Wells Fargo [WFC], trading at 12 times '08 estimates and 2.7 times tangible book; the group trades at less than two times book. The Wells Fargo name has a storied past and gets the Warren Buffett halo effect because he owns a lot of the shares. But if you look back at the last real-estate recession in the early 1990s, the Wells Fargo side, focused on California, had a lot of credit problems in the real-estate area, and the stock underperformed during that period. The Norwest side, which has more exposure to the Midwest, still has a lot of consumer-credit exposure. Of particular concern is the bank's portfolio of home-equity loans.

What's the big worry there?

Home-equity line of credit (HELOC) is 16% of their portfolio. More than a third of their HELOC exposure is in California, which is now developing very badly on the home-price and employment fronts. And delinquencies and losses are already rising pretty sharply. But they also have a big unfunded exposure to the undrawn lines of credit. Also, despite their reputation for being conservative, their loan-loss reserve at the end of March was lower than their annualized charge-off rate for the first quarter. Given the prospects for rising losses that we see, that's not conservative. We think they will disappoint this year and next and, as a result, their premium multiple will go down.

Wells Fargo, however, is known as a well-run bank. One example of that is the company's reputation for being very effective at cross-selling its products.

We're most concerned with their exposure to home-equity loans at the top of a real-estate bubble. Remember that home-equity lines of credit sit on top of first mortgages. So if home prices depreciate, which is what is happening now, and a home goes into foreclosure, the home-equity line often gets wiped out. The first mortgage holder can get most of their money back, but the home-equity line absorbs all of the loss.

Let's move on to another short position.

BB&T [BBT], which operates in the Southeast. The stock trades at 11 times '08 earnings and 2.5 times tangible book. It's bounced about 30% off its lows in January. They've gotten a pass because, to some extent, their core Carolina and Virginia real-estate markets were among the last to roll into home-price depreciation. So their non-performing assets are still low. But we listened to the Toll Brothers [TOL] conference [call] recently. [Chairman and Chief Executive] Robert Toll graded the markets they operate in and he gave Charlotte an F-minus for current home-building conditions and Raleigh a C-minus. We're also concerned that they have 4% of their portfolio in Alt-A mortgages, which are between prime and subprime, and 20% in construction loans.

As with many of the financials, there was this big relief rally on first-quarter earnings. The thinking was these results weren't so bad, but we think that more credit losses are ahead of us.

How about a different short holding?

Hudson City Bancorp [HCBK], which is based in New Jersey. The shares have gained about 60% from their July '07 lows and now trade at 21 times '08 estimates and two times tangible book. They have a wholesale funding and asset-generation strategy, which allows them to keep expenses low.

Could you elaborate on that?

Basically, they borrow funds from the Federal Home Loan Bank of New York and use repurchase agreements. So they, in effect, purchase money, more so than relying on deposits. In addition, they buy most of their assets, usually through brokers. A big chunk of their assets are first mortgages and mortgage-backed securities. So for the most part, they are not a retail originator of loans, and they are benefiting from the steepness of the yield curve.

And, even with all that, they will earn less than a 10% return on equity this year, so I just don't get the valuation. Furthermore, when you have a wholesale business model, that means you don't really have a valuable franchise that another bank would pay much for. So a recent stock price represented approximately a 100% premium for their core deposits, which is how bank acquisitions typically get priced. And I don't think their deposits are worth nearly that much to a buyer. Everything looks great for them now, if you a call 10% ROE great. But they are not immune to credit risk in a recession and a weak housing market. I also think their loan-loss reserve at 0.15% is very low, relative to others'. When the Fed rate-cutting cycle is over, I don't want to own a spread play with credit risk that's trading at two times book.

Let's move to the long side of the ledger. What financial firms do you like?

One is Hatteras Financial [HTS], based in Winston-Salem, N.C. They are a mortgage REIT. We bought it in a private placement last year and it recently went public at $24 a share. They own all agency adjustable-rate securities, so there is no credit risk here. The market capitalization is about $630 million.

What's the biggest risk for this firm?

I'd say it's yield-curve risk, but, trading at just over one times book value, it's well- factored into the price. We estimate that they will earn $4.50 to $4.75 a share from mid-year '08 to mid-year '09, once the IPO proceeds are invested. As a REIT, they will pay out all -- or nearly all -- of their earnings in dividends. So at 25 recently, the stock was sporting an expected yield of around 19%. We think the stock gets to 30 at least. Between the appreciation and the yield, it's a great total return.

Could you explain their yield-curve risk in a little more detail?

Like all mortgage REITs, they use leverage. They borrow at short-term maturities so they have been benefiting -- and continue to benefit -- from falling federal- funds rates. It's very similar to what Hudson City is doing. They are benefiting from falling short-term interest rates because they use the wholesale market to buy funds. And yet, somehow, the market is paying two times book for that, whereas you can buy Hatteras for 1.1 times book -- and Hatteras earns a 20% ROE, versus Hudson's 10%.

Last pick, please.

This is a more controversial long holding: MGIC Investment [MTG], in which we used to have a short position.

What made you switch to the long side?

The stock's down from north of 70 in early 2007 to around 12, bringing its capitalization down to about $1.5 billion. One reason we like the company is that it was able to raise more capital recently, something its competitors haven't been able to do. In March, they did a common offering that raised about $500 million -- so they've been able to raise liquidity and capital. At the same time, they are raising prices on premiums and tightening underwriting on the business now being written. The new business is being written based on lower home appraisals after the housing bubble burst -- and yet they are still showing good growth despite the fact that the whole industry has slowed down.

Our thesis is that once MGIC gets through writing down its old book of business, the new book will be very profitable and valuable. Even applying our bearish mortgage-credit outlook, we don't see more than another $4 or $5 per share of losses in the next two years. So current book value of $24 should bottom in the high teens in '09 and start rising from there. They'll be quite profitable after that, given their better margins and more conservative underwriting of the current book of business. The stock should trade upward of two times book. So we see the stock, currently at around 12, as a double-to-triple over the next few years.

Thanks very much, Sy.

Oil surge could trim 1.5 points off US economic growth

WASHINGTON - A TOP White House economic aide to President George Bush said that the surge in oil prices could cut at least 1.5 percentage points off US economic growth if it continues.
'The high price of oil has already cost us a significant amount in terms of economic growth,' Mr Edward Lazear, the chairman of the president's Council of Economic Advisers, said in a speech to the Hudson Institute, a Washington-based think tank.

Mr Lazear estimated that each US$10 (S$13) rise in the price of oil per barrel over the course of the year reduces gross domestic product (GDP) growth by about a quarter of a point.

Oil prices have skyrocketed since crossing US$100 for the first time on Jan 2. Prices hit record highs above US$135 last week before easing back on concerns about demand from the sluggish US economy.

The New York benchmark contract rebounded on Wednesday to above US$130.

'If you think about the amount by which oil has gone up in price over the past year, you're talking about 1.5 point or so of GDP growth,' Mr Lazear said.

The economist declined to discuss recession risks facing the world's largest economy.

'Whether it implies a recession or not, it clearly does hit us hard in terms of GDP growth and it will continue to do so unless we think of ways to deal with this,' he added.

His remarks came a day ahead of the government's revision of first-quarter GDP growth, which for the second quarter in a row was a meager 0.6 per cent annual pace, according to the initial estimate.

Most analysts expect that the economy grew by more than first estimated in the January-March period, at an annual 0.9 per cent pace.

The generally accepted technical definition of recession is two consecutive quarters of negative growth, or contraction. -- AFP

Investing Like an Oracle

By Tom Gentile, Profit Strategies.com

Of all the longer-term investors out there, Warren Buffett is probably the most notable. It’s hard not to like this guy. Other than being an astute investor, he is also a notable contributor to various charities. Let's dive into the Oracle of Omaha's investing style and how to trade options using Warren Buffett stocks.

So, why you are reading this article? What you really want to know about Warren Buffett is his criteria for picking value stocks. Okay, here is a breakdown on what we have discovered in the search for Warren Buffett picks:
Warren Buffett is a value investor. That means he doesn’t participate in wildly running growth stocks—in fact, he was ridiculed for staying out of the tech boom in the late '90s. Of course, we all know how right he was just after the year 2000, when everything DotCom collapsed. Warren Buffett has a unique style when it comes to investing, so without writing a novel on the subject, let me get to the point of what he looks for.

Brand Recognition – One of his key criteria… Is the company well known? Does it have a stronghold in its core products with consumers? The company has to be a recognized brand in its industry for Warren Buffett to consider it as part of his holdings.

Earnings Consistency – Warren looks for a growing company with no negative years of earnings growth in past 5 years. If the company has had at least one year of negative earnings growth in the last 5 years, then it will not be considered. By the way, Long-term Earnings Per Share [EPS] growth indicates that the company is growing over time. The EPS of a company must be continually growing.

Long-term debt – This is the company's current long-term or multi-year debt structure. This could include mortgages, long-term bank notes, etc. In order to pass the Warren Buffett test, long-term debt must not be greater than 2 times net income. This is a liquidity measure which ensures that the company has not taken on too much risk through its borrowings.

Return On Equity – Return on Equity [ROE] measures the return on shareholders funds or shareholders equity. ROE is calculated by dividing the net profit by shareholder equity and multiplying it by 100 to express the result as a percentage. The higher the ROE, the better. Buffett requires a return on equity of 15% or more.

Capital Expenditure – Free cash flow per share is the amount of money that is free to be spent. It is cash flow minus all expenses. Buffett likes free cash flow per share to be positive.

Utilization of Returned Earnings – This is all about seeing if management is using retained earnings to increase shareholder value. In order to be increasing shareholder value, according to Buffett’s methodology, retained earnings should provide a return that is 15% or better, but he will accept if a company has a return that is better than 12%.

Meet Your New Recruits: They Want to Eat Your Lunch

by Aili McConnon and Jessica Silver-Greenberg

Thirteen young men and one woman meet in a drafty medieval-style room in a campus residence hall at Yale University. Thick exposed beams cross the ceiling above a large fireplace. A stained-glass panel in the heavy wooden door is decorated with a cobalt "Y." "Anyone interested in finance wants to join the Globalfund," says Philip Uhde, 22, the group's founder and president. "And the smartest of those people are here."

A cross between Yale's secretive Skull & Bones society and a young tycoons club, the Globalfund is one of a growing number of exclusive business groups cropping up at elite colleges across the country. The organizations, fueled by a mix of youthful ambition and careerist anxiety, have become an increasingly important part of the competition for the most lucrative jobs at investment banks, hedge funds, and consulting firms. For many students, it's a race for money and prestige that's starting earlier and earlier. The slumping economy and tens of thousands of layoffs on Wall Street have only aggravated the angst.

Launched in 2006, the invitation-only Globalfund calls its undergraduate members "partners" and evaluates candidates based on their investment ideas. Even among hand-picked aspirants, the partners reject three out of four. Partners pool earnings from summer internships at financial firms to make real, if modest, investments backed by research the students do themselves. One Monday evening in March, Harry Greene, another founding partner, rattles off statistics about China Natural Gas, a small distribution company based in the city of Xi'an that trades over the counter. Glancing periodically at his BlackBerry, Greene, a 23-year-old senior majoring in economics and mathematics, describes to his colleagues how he called a company investor-relations representative from his dorm room and grilled him—in Mandarin, which he mastered after extensive classroom study and a year off from college spent in Beijing.

Most Globalfund partners speak a second language, Greene explains later. "We can often do more-thorough due diligence than Wall Street analysts because we can interview management in their native language." The fund's initial $800 stake in the gas company nearly tripled over four months last year, and the students sold their shares for a profit. A more recent $2,300 position in China Natural Gas has slipped slightly in value, but Greene assures the group it will bounce back soon. After graduation in May, he plans a short stint with a software company before heading to an investment banking job.

Once, merely graduating from an Ivy League college or similarly prestigious rival like Stanford or Swarthmore qualified students for a choice entry-level perch on Wall Street. No longer. "The whole idea of smart people just falling into banking is becoming rarer," says Lance LaVergne, a vice-president and global head of diversity recruiting at Goldman Sachs. "Clubs are essential to preparation, especially for students who are not majoring in traditional disciplines like finance or accounting."

Blue-chip employers are looking for substantive experience and signs of early commitment. Wall Street internship programs that used to seek out students after their junior year now invite motivated freshmen and sophomores. Students feed the frenzy themselves, some showing up at college having already attended summer business-prep camps while still in high school.

Desperately Seeking Distinction

Now the credit crunch is chewing up many of the jobs hyper-directed undergraduates yearn for. As the contest for junior analyst and novice trader slots intensifies, unlikely rumors keep some awake at night. "I have been hearing that a lot of these banks are only taking one student from Harvard," says Anthony Genello, a 21-year-old junior and president of operations of the Harvard Financial Analysts Club. "It definitely hit home and makes everyone more crazed." Desperate to distinguish themselves, students on at least two dozen top campuses have lately formed or expanded high-powered clubs, some of which offer eye-popping opportunities to invest and network. "As markets become more difficult and hiring needs are reduced, it will likely become more difficult for students to just wind up in our business," Goldman's LaVergne says.

Some veterans in business and finance worry that increasing student fascination with pre-professional clubs bespeaks a lack of appreciation for the perspective afforded by a liberal arts education. Etched high on the stone wall of the grand room where Yale's Globalfund holds its weekly meetings, a quote from poet Edgar A. Guest urges the precocious partners to value life's intangible joys:

The thing that we call living isn't gold or fame at all,
It is laughter and contentment and the struggle for a goal,
It is everything that's needful to the shaping of a soul.

But these words seem lost on the Yale students, most of whom look elsewhere for inspiration. "We are followers of Warren Buffett," explains Greene, who says he studies the famed Omaha investor's letters to shareholders as if they were sacred texts.

In dollar terms, the Globalfund is relatively small. At any given time, it has about $25,000 from students' pockets to deploy. The partners liquidate it at the end of the school year and distribute the proceeds on a pro-rata basis. Their counterparts at a cross-campus competitor, the Yale College Student Investment Group, manage no less than $280,000. That money remains within the university's endowment, having grown from seed funds donated by alumni such as investment guru James B. Rogers Jr., who earmarked cash years ago to improve undergraduate investment acumen at the New Haven campus.

As students sense tougher times setting in, many seek to "front-run the process," says Chris Borrero, president of the Yale College Student Investment Group. "People are taking a step back and trying to get a [Wall Street] internship earlier so they have a better résumé for the junior internship." Membership in a finance club is seen as a boost up the career ladder. Borrero, a 21-year-old junior from Westford, Mass., says he began reading The Wall Street Journal aloud to his father in the second grade. He notes that 40% of the investment group's 250 members are freshmen, far more than in the past.

High-revving students scoff at advice they sometimes hear about intellectually browsing before settling on a narrow employment path. "Many of my fellow classmates have been planning out their college choices since middle school, so to tell them not to plan for a future career during freshman year is illogical," says Janet Xu, 22, a senior at Yale and editor of the undergraduate magazine Yale Entrepreneur. She is heading off soon to be an analyst for Sears Holdings in Chicago.

Driving some of the credentials-mania is the impression that campus clubs open doors to summer internships many firms are relying on more heavily for full-time hiring. JPMorgan Chase, for example, says 90% of its entry-level hires last year were former interns, up from 60% five years ago. At the big consulting firm Accenture, "these clubs help us identify the best people for our internship program," says John Campagnino, global recruiting director.

Some of the organizations aim to broaden opportunities for women and minority students. At Columbia University, sophomore Anastasia Alt, 19, helped raise nearly $30,000 from Fidelity, Goldman, Morgan Stanley, and other financial titans for a recent career-networking conference of the 300-member Columbia Women's Business Society, a campus group. Firms use such events as an extra recruiting opportunity beyond visits regulated by career services offices. Alt's pitch to prospective sponsors: "Here are women who are both talented and interested in your company." Currently she's launching a Columbia chapter of Smart Woman Securities, a club started in 2005 at Harvard to give women a crash course in investing.

A trio of minority undergraduates at Harvard created a club last year called Veritas Financial Group as a way to learn the financial basics they couldn't find in the regular curriculum. JPMorgan, Goldman, and Credit Suisse Group have given Veritas a total of $15,000 in startup money. "I feel that I need to be doing everything I can to compete with students who are given the opportunity to have some pre-professional education," says co-founder Ryan Williams, a 20-year-old African American sophomore from Ossining, N.Y. His club already has 90 members, including some white students. It's the 13th undergraduate business organization available on the Cambridge campus alone.

Too Narrow a Focus?

Some prospective employers welcome the abundance of undergrad societies devoted to pecuniary pursuits. "Supporting a club like Veritas is important, as it provides the kind of hands-on, practical experience that can only benefit students who are planning a career in finance," says Brian Marchiony, a JPMorgan spokesman.

But others express reservations. Michael J. Mauboussin, chief investment strategist for Legg Mason Capital Management, worries that a premature narrowing of focus could hurt future employees. "If you are specialized too early, there is a risk you will be less innovative because you have fewer building blocks to combine in new ways," says Mauboussin, 44, who majored in government at Georgetown.

Carly Fiorina, the former CEO of Hewlett-Packard and now an unpaid adviser to Republican Presidential candidate John McCain, agrees. She majored in medieval history and philosophy at Stanford. Such fields help hone judgment and perspective in a way that an investing club cannot, she says: "Judgment is knowing when to act and when to pause. Perspective is the ability to separate the merely interesting from the truly important." Companies can be impaired by too many people with similar backgrounds, she adds. "If everyone is the same, your decisions won't be as sound and you probably won't be as innovative a place."

Frisbee Deficits

More immediately, if everyone in the finance club is fixated on picking stocks, they may not pay very close attention to the lectures and lab sessions for which their parents are paying serious tuition. Students on the executive board of Tufts Financial Group, a newly minted club at Tufts University near Boston, confess that they habitually track their investments from a $30,000 fund created by an alumnus gift to the university's endowment. "I'll take care of e-mails and work on spreadsheets during class if I need to," says Chris Cerrone, 20, a sophomore juggling an internship at Century Capital Management in Boston along with his major in economics.

At Tufts, a school that ranks just below the Ivies, the formation of the finance club's investing arm last year has caused a stir. Membership has swelled to 200. Lindsey Tannenbaum, a 22-year-old senior and president of the group, says some students are listing the club on their résumés even though they barely participate. "It looks good if you're applying for a career in finance," she says. In response, she's now taking attendance at weekly meetings and restricting access to the group's online investment research. After interning for Lehman Brothers last summer, Tannenbaum is returning full-time to the New York investment bank later this year. Meanwhile, at Lehman's request, she's vetting résumés of other students from her club.

In some campus groups, it's a miracle members have time to sleep or eat, let alone study or write papers. Shortly after arriving at Stanford from her home in Houston, Connie Yu applied for admission to Stanford Finance, which helps undergrads find corporate and consulting firm internships. One of the most selective of the 25 undergrad business groups on the sunny Palo Alto (Calif.) campus, Stanford Finance gets about 200 applicants a year for only two dozen spots. Yu, now a 20-year-old junior, was admitted but didn't stop there. She then joined the Blyth Fund, through which 25 undergrads manage a $180,000 stock portfolio begun with a gift from investor Charles R. Blyth, who made similar donations to several California universities in the late 1970s. The Stanford students trade through an account at E*Trade Financial, where the money is registered to the university's endowment-management company but otherwise is controlled by the undergrads.

Completing what Stanford students call a rare "triple crown," Yu also gained admission to Stanford Consulting. That group rejects four out of five applicants with a notorious entrance interview. Yu's included a business-school-style question about how a deodorant company ought to reverse its declining market share. "It's so competitive to get into Stanford, and then it's kind of a shock you still have to apply for the student groups," says Yu, clutching her personalized Stanford Consulting tote bag to her chest.

The reward for getting into 20-member Stanford Consulting is the chance to do volunteer work 15 hours a week for a real consumer-products company, which Yu declines to name because she signed a nondisclosure agreement. She says she's helping management figure out how to gain attention with ads on YouTube. Red-eyed and, by her own admission, sleep-deprived, Yu says she has had to sacrifice her hobbies of playing keyboards and ultimate Frisbee to complete her club obligations, along with classes in international trade and game theory. But she says it's worth it. She worked as an intern at Lehman last summer and is returning to the bank for another stint this year.

Meanwhile, she'll be paid up to $50 an hour to advise other undergraduates on navigating the choppy recruiting waters. She works with a company called Higher Recruiting started last year by students who met at the New York private high school Horace Mann and since have worked at various Wall Street banks. With 32 student consultants serving undergrads on more than 20 campuses, Higher Recruiting pitches itself to those who fear that their career services departments may not be savvy or aggressive enough.

Some career offices seem wary of the profusion of finance clubs, though most hesitate to criticize them explicitly. The Columbia Women's Business Society had planned to give recruiters at their upcoming conference a book of student résumés, but refrained when it learned that the university's career office discourages such contacts out of concern that all students should have equal access to potential employers, regardless of club membership, according to the women's society. Columbia's career staff declined to comment.

Stanford's career center says it established a more formal relationship with student business groups this academic year so it can keep closer tabs on their dealings with recruiters. Beverley Principal, assistant director of employment services at Stanford, frets that some employers might take advantage of applicants they meet outside of the regimented career-office environment: "If a student comes in crying because a potential employer has asked, 'What will you do if you have this job and get pregnant,' we have less of a leg to stand on when we try to help them." A counterpart at Harvard, Bill Wright-Swadel, has similar concerns. "The [career] conversation now begins virtually at Day One" of freshman year, before most students have any clear sense where their skills and proclivities will take them professionally, he says. For the moment, Harvard's career office monitors clubs only informally.

A new addition to Harvard's roster of undergrad business organizations is Williams' Veritas Financial Group. Williams brought some entrepreneurial experience with him to Cambridge in the fall of 2006. As a 13-year-old, he started a personalized sweatband business called Rapappay Active Wear. After classes at his public junior high school, he trekked down to Manhattan's garment district to find inexpensive supplies. "A lot of my Friday and Saturday nights, I spent catching up on sleep or working on my company operations," he recalls. Last year he says he had earnings of $3,500 but has put the operation on hold to focus on his studies.

Williams was alarmed to learn that Harvard doesn't offer any undergraduate classes on accounting. He and classmates Charles Cole and Derrick Barker started Veritas to help undergrads, especially minority students, who might lack personal contacts with the business world, to learn basic skills. Sitting on beanbag chairs, surrounded by half-eaten granola bars, rifled cereal boxes, and other dorm room detritus, the three friends cobbled together their own curriculum from financial texts they lugged from the Harvard Business School's Baker Library, across the Charles River from the college. They blasted Harvard's entire B-school faculty with e-mails explaining their mission and asking for help.

The business school doesn't permit undergrads to cross-register for classes; those who sneak in anyway are known as "sharks." But Veritas' call for assistance was heard. Professor Arthur Segal, an expert on real estate, met with Williams to provide counsel. Craig Canton, a 29-year-old second-year student at the B-school on his way to a Wall Street sales job, leads a seminar on finance for Veritas once a week. At one session, 14 undergrads from a wide variety of ethnic backgrounds listened as Canton dissected the subprime mortgage mess and explained exotic financial instruments known as collateralized debt obligations.

While he's eager to help, Canton observes that some Veritas members seem overwrought. "These students are a lot more focused and seem to be having a lot less fun," he says. "I was scooping ice cream as a sophomore. There is a lot more worry than I felt."

Williams says a ruthless business world demands focus: "It's extremely competitive and cutthroat out there, so you have to take initiative." Last summer he worked for JPMorgan's private equity arm; this summer he heads to Merrill Lynch.

McConnon is a staff editor for BusinessWeek in New York. Silver-Greenberg is a reporter for BusinessWeek.com.
Copyrighted, Business Week. All rights reserved.

Soros: 'We face the most serious recession of our lifetime

George Soros, 'the man who broke the Bank of England', tells Edmund Conway of his fears for the economy

'This is a period of wealth destruction. The people who make money will be few and far between. There will be a lot more money lost than made." When George Soros - the phenomenally successful hedge fund manager - says this, you know something is wrong, very wrong. And indeed it is. The 77-year-old billionaire sinks back into the sofa in his Chelsea townhouse and exhales.

He has managed to make money almost consistently for over half a century - from his early days as one of the world's first major hedge fund traders to his involvement in Black Wednesday as the man who "broke the Bank of England", and in the latter years generating multi-billion-dollar annual profits throughout the 1990s. The conditions today are almost uniquely dismal, however.


Telegraph TV: George Soros on the Bank of England


"I think this is probably more serious than anything in our lifetime," he says. In short, his feeling is that the United States and Britain are facing a recession of a scale greater than the early-1990s, greater even than the 1970s.

"I think the dislocations will be greater because you also have the implications of the house price decline, which you didn't have in the 1970s - so you had stagflation and transfer of purchasing power to the oil producing countries, but here you also have the housing crisis in addition to that."

The financial crisis in full
Such apocalypticisms would be less worrying were it not that Soros was among the few prominent experts who warned of the dire consequences facing the American economy years ago, when the housing bubble was still inflating.

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But even cottoning on to the big economic story early on hasn't meant guaranteed success. He returned from retirement last summer, and no sooner had he started trading than he pulled hundreds of millions of dollars of investment out of the US and the UK. It was enough to help him to a 32pc return last year. But amid the turbulence of 2008, he admits he is barely breaking even.

One of the problems is that leverage, the juice that has driven the hedge fund and finance trade in recent years, has all but dried up; the other is that the impending economic slump will be far-reaching and painful.

In the UK, the economic clouds are particularly dark, he says. "House prices have risen over the years and are further away from sustainable than in practically any other country, in terms of household indebtedness and the relationship of house prices to incomes." The slump may be more gentle than in the US, he adds, but it will be more drawn out.

"This is going to be compounded by the fact that the financial industry weighs more heavily on the economy than in other countries, because London is the centre of the global financial system, and you have the unfortunate condition that the Bank of England is bound into inflation targeting, and is not in a position to lower interest rates until you have an economic slowdown."

The nice decade, he says, borrowing a phrase from Bank Governor Mervyn King, is over and now the Bank has struck a "Faustian bargain between economic slowdown and inflation".

Ah, the Bank of England. There can be few more eventful relationships between one man and a bank than this one. There is no doubt he remains proud of his central role in Black Wednesday, when he helped drive Britain out of the Exchange Rate Mechanism, making around a billion dollars in the process. He is reminded of it by the fact that sterling has recently fallen some 20pc against the euro.

"It's much better than the straitjacket sterling was in when I broke the Bank of England."

For which, by the way, he is, rightly, unapologetic: "The ERM would have been abandoned even if I had never been born."

The son of the ERM, meanwhile, the euro, looks unbreakable in comparison - by speculators, at least.

But as hedge funds and other speculators pile in to the current crude oil boom, the Hungarian-born investor instead focuses on the wider picture - maintaining his estimated $8.5bn (£4.3bn) fortune, much of which he spends on his philanthropic and political ventures - most notably his Open Society Institute, which has a particular focus on Eastern Europe. However, don't try to read any of his politics into his trades, he insists.

"As a hedge fund manager, I do not claim to be serving the public interest. I am in the business to make money," he says. "It's a difficult point for people to understand and there's a general attitude when they see people profiting to say that markets are immoral, or making money by speculating is immoral.

"It's really the job of the authorities to set the rules, and there are times when some people break the rules or engage in improper activities, like the sub-prime mortgages. The impact fell particularly heavily on black and Hispanic minorities.

"It is a scandal, and I think you can blame [former Federal Reserve chairman Alan] Greenspan for not regulating the mortgage industry. But that's very different from speculating in government bonds or financial instruments, and that's a difficult point to get across, but I feel very strongly.

"Markets play a very useful role and they are amoral, not immoral."

Evolution of flu strains points to higher risk of pandemic

CHICAGO - SOME strains of bird flu are coming ever closer to developing the traits they need to cause a human pandemic, a study released on Monday said.
Researchers who analysed samples of recent avian flu viruses found that a few H7 strains of the virus that have caused minor, untransmissible infections in people in North America between 2002 and 2004 have increased their affinity for the sugars found on human tracheal cells.

Subsequent tests in ferrets suggested that these viral strains were not readily transmissible.

But one strain of the H7N2 virus, a low pathogenic avian flu strain isolated from a man in New York in 2003, replicated in the ferret's respiratory tract and was passed between infected and uninfected ferrets suggesting it could be transmissible in humans.

The investigators said the evidence suggests that the virus could be evolving towards the same strong sugar-binding properties of the three worldwide viral pandemics in 1918, 1957 and 1968.

'These findings suggest that the H7 class of viruses are partially adapted to recognize the receptors that are preferred by the human influenza virus,' said Mr Terrence Tumpey, a senior microbiologist with the US Centers for Disease Control and Prevention in Atlanta.

The authors said that if the viruses continue to evolve in this direction, the avian flu viruses could travel more easily between other animals and humans. They called for strict surveillance of avian flu viruses and continuing federal preparations for a possible future pandemic.

The study appears in the Proceedings of the National Academy of Sciences. -- AFP

US recession still probable: Greenspan

LONDON - A RECESSION in the United States remains a probability, former Federal Reserve chairman Alan Greenspan said in an interview published on Tuesday.
Speaking to the Financial Times from Washington, Mr Greenspan said he believed 'there is a greater than 50 per cent probability of recession'. He noted, however, that 'that probability has receded a little'.

The likelihood of a severe recession had 'come down markedly', he added: but it was too soon to tell whether the worst was already over.

According to the Financial Times, Mr Greenspan estimated that house prices in the United States would drop by a further 10 per cent from their levels in February, which comes to a 25 per cent drop from their peak.

'Such house price declines imply a major contraction in the level of equity in owner-occupied homes, the ultimate collateral for mortgage-backed securities,' he said.

United States economic growth has slowed dramatically in recent months and a growing number of economists believe the world's largest economy will experience a recession during 2008 amid a housing slump and related credit crunch. -- AFP

It was not Bear Stearns but JPMorgan that was bankrupt

Courtesy of Johnlaw2012 from CNA forum

The Highly Suspicious Out-of-the-Money Puts

That was one of many questions raised by John Olagues, an authority on stock options, in a March 23 article boldly titled “Bear Stearns Buy-out . . . 100% Fraud.” Olagues maintains that the Bear Stearns collapse was artificially created to allow JPMorgan to be paid $55 billion of taxpayer money to cover its own insolvency and acquire its rival Bear Stearns, while at the same time allowing insiders to take large “short” positions in Bear Stearns stock and collect massive profits. For evidence, Olagues points to a very suspicious series of events, which will be detailed here after some definitions for anyone not familiar with stock options:

A put is an option to sell a stock at an agreed-upon price, called the strike price or exercise price, at any time up to an agreed-upon date. The option is priced and bought that day based upon the current stock price, on the presumption that the stock will decline in value. If the stock’s price falls below the strike price, the option is “in the money” and the trader has made a profit. Now here’s the evidence:

On March 10, 2008, Bear Stearns stock dropped to $70 a share -- a recent low, but not the first time the stock had reached that level in 2008, having also traded there eight weeks earlier. On or before March 10, 2008, requests were made to the Options Exchanges to open a new April series of puts with exercise prices of 20 and 22.5 and a new March series with an exercise price of 25. The March series had only eight days left to expiration, meaning the stock would have to drop by an unlikely $45 a share in eight days for the put-buyers to score. It was a very risky bet, unless the traders knew something the market didn’t; and they evidently thought they did, because after the series opened on March 11, 2008, purchases were made of massive volumes of puts controlling millions of shares.

On or before March 13, 2008, another request was made of the Options Exchanges to open additional March and April put series with very low exercise prices, although the March put options would have just five days of trading to expiration. Again the exchanges accommodated the requests and massive amounts of puts were bought. Olagues contends that there is only one plausible explanation for “anyone in his right mind to buy puts with five days of life remaining with strike prices far below the market price”: the deal must have already been arranged by March 10 or before.

These facts were in sharp contrast to the story told by officials who testified at congressional hearings on April 4. All witnesses agreed that false rumors had undermined confidence in Bear Stearns, making the company crash despite adequate liquidity just days before. On March 10, 2008, Reuters was citing Bear Stearns sources saying there was no liquidity crisis and no truth to the speculation of liquidity problems. On March 11, the Chairman of the Securities and Exchange Commission himself expressed confidence in its “capital cushion.” Even “mad” TV investment guru Jim Cramer was proclaiming that all was well and the viewers should hold on. On March 12, official assurances continued. Olagues writes:

“The fact that the requests were made on March 10 or earlier that those new series be opened and those requests were accommodated together with the subsequent massive open positions in those newly opened series is conclusive proof that there were some who knew about the collapse in advance . . . . This was no case of a sudden development on the 13 or 14th, where things changed dramatically making it such that they needed a bail-out immediately. The collapse was anticipated and prepared for. . . .

“Apparently it is claimed that some people have the ability to start false rumors about Bear Stearns’ and other banks’ liquidity, which then starts a ‘run on the bank.’ These rumor mongers allegedly were able to influence companies like Goldman Sachs to terminate doing business with Bear Stearns, notwithstanding that Goldman et al. believed that Bear Stearns balance sheet was in good shape. . . . The idea that rumors caused a ‘run on the bank’ at Bear Stearns is 100% ridiculous. Perhaps that’s the reason why every witness was so guarded and hesitant and looked so mighty strained in answering questions . . . .

“To prove the case of illegal insider trading, all the Feds have to do is ask a few questions of the persons who bought puts on Bear Stearns or shorted stock during the week before March 17, 2008 and before. All the records are easily available. If they bought puts or shorted stock, just ask them why.”5

Suspicions Mount

Other commentators point to other issues that might be probed by investigators. Chris Cook, a British consultant and the former Compliance Director for the International Petroleum Exchange, wrote in an April 24 blog:

“As a former regulator myself, I would be crawling all over these trades. . . . One question that occurs to me is who actually sold these Put Options? And why aren’t they creating merry hell about the losses? Where is Spitzer when we need him?”6

In an April 23 article in LeMetropoleCafe.com, Rob Kirby agreed with Olagues that it was not Bear Stearns but JPMorgan that was bankrupt and needed to be “recapitalized” with massive loans from the Federal Reserve. Kirby pointed to the huge losses from derivatives (bets on the future price of assets) carried on JPMorgan’s books:

“. . . J.P. Morgan’s derivatives book is 2-3 times bigger than Citibank’s – and it was derivatives that caused losses of more than 30 billion at Citibank . . . . So, it only made common sense that J.P. Morgan had to be a little more than ‘knee deep’ in the same stuff that Citibank was – but how do you tell the market that a bank – any bank – needs to be recapitalized to the tune of 50 - 80 billion?”7

Kirby wrote in an April 30 article:

“According to the NYSE there are only 240 million shares of Bear outstanding . . . [Yet] 188 million traded on Mar. 14 alone? Doesn’t this strike you as being odd? . . . What percentage of the firm was owned by insiders that categorically did not sell their shares? . . . Bear Stearns employees held 30 % of the company’s stock . . . 30 % of 240 million is 72 million. If you subtract 72 from 240 you end up with approximately 170 million. Don’t you think it’s a stretch to believe that 186+ million real shares traded on Friday Mar. 14? Or do you believe that rank-and-file Bear employees, worried about their jobs, were pitching their stocks on the Friday before the company collapsed knowing their company was toast? But that would be insider trading – wouldn’t it? No bloody wonder the SEC does not want to probe J.P. Morgan’s ‘rescue’ of Bear Stearns . . .”8

If real shares weren’t trading, someone must have been engaging in “naked” short selling – selling stock short without first borrowing the shares or ensuring that the shares could be borrowed. Short selling, a technique used by investors to try to profit from the falling price of a stock, involves borrowing a stock from a broker and selling it, with the understanding that the stock must later be bought back and returned to the broker. Naked short selling is normally illegal; but in the interest of “liquid markets,” a truck-sized loophole exists for “market makers” (those people who match buyers with sellers, set the price, and follow through with the trade). Even market makers, however, are supposed to cover within three days by actually coming up with the stock; and where would they have gotten enough Bear Stearns stock to cover 75% of the company’s outstanding shares? In any case, naked short selling is illegal if the intent is to drive down a stock’s share price; and that was certainly the result here.9

On May 10, 2008, in weekly market commentary on FinancialSense.com, Jim Puplava observed that naked short selling has become so pervasive that the number of shares sold “short” far exceeds the shares actually issued by the underlying companies. Yet regulators are turning a blind eye, perhaps because the situation has now gotten so far out of hand that it can’t be corrected without major stock upheaval. He noted that naked short selling is basically the counterfeiting of stock, and that it has reached epidemic proportions since the “uptick” rule was revoked last summer to help the floundering hedge funds. The uptick rule allowed short selling only if the stock price were going up, preventing a cascade of short sales that would take the stock price much lower. But that brake on manipulation has been eliminated by the Securities Exchange Commission (SEC), leaving the market in unregulated chaos.

Eliot Spitzer has also been eliminated from the scene, and it may be for similar reasons. Greg Palast suggested in a March 14 article that the “sin” of the former New York governor may have been something more serious than prostitution. Spitzer made the mistake of getting in the way of a $200 billion windfall from the Federal Reserve to the banks, guaranteeing the mortgage-backed junk bonds of the same banking predators responsible for the subprime debacle. While the Federal Reserve was trying to bail the banks out, Spitzer was trying to regulate them, bringing suit on behalf of consumers.10 But he was swiftly exposed and deposed; and the Treasury has now broached a new plan that would prevent such disruptions in the future. Like the Panic of 1907 that justified a “bankers’ bank” to prevent future runs, the collapse of Bear Stearns has been used to justify a proposal giving vast new powers to the Federal Reserve to promote “financial market stability.” The plan was unveiled by Treasury Secretary Henry Paulson, former head of Goldman Sachs, two weeks after Bear Stearns fell. It would “consolidate” the state regulators (who work for the fifty states) and the SEC (which works for the U.S. government) under the Federal Reserve (which works for the banks). Paulson conceded that the result would not be to increase regulation but to actually take away authority from state regulators and the SEC. All regulation would be subsumed under the Federal Reserve, the bank-owned entity set up by J. Pierpont Morgan in 1913 specifically to preserve the banks’ own interests.

On April 29, a former top Federal Reserve official told The Wall Street Journal that by offering $30 billion in financing to JPMorgan for Bear’s assets, the Fed had “eliminated forever the possibility [that it] could serve as an honest broker.” Vincent Reinhart, formerly the Fed’s director of monetary affairs and the secretary of its policy-making panel, said the Fed’s bailout of Bear Stearns would come to be viewed as the “worst policy mistake in a generation.” He noted that there were other viable options, such as looking for other suitors or removing some assets from Bear’s portfolio, which had not been pursued by the Federal Reserve.11

Jim Puplava maintains that naked short selling has now become so pervasive that if the hedge funds were pressed to come in and cover their naked short positions, “they would actually trigger another financial crisis.” The Fed and the SEC may be looking the other way on this widespread stock counterfeiting scheme because “if they did unravel it, everything really would unravel.” Evidently “promoting market stability” means that whistle-blowers and the SEC must be silenced so that a grossly illegal situation can continue, since the crime is so pervasive that to expose it and prosecute the criminals would unravel the whole financial system. As Nathan Rothschild observed in 1838, when the issuance and control of a nation’s money are in private hands, the laws and the people who make them become irrelevant.

It was not Bear Stearns but JPMorgan that was bankrupt

Courtesy of Johnlaw2012 from CNA forum

The Highly Suspicious Out-of-the-Money Puts

That was one of many questions raised by John Olagues, an authority on stock options, in a March 23 article boldly titled “Bear Stearns Buy-out . . . 100% Fraud.” Olagues maintains that the Bear Stearns collapse was artificially created to allow JPMorgan to be paid $55 billion of taxpayer money to cover its own insolvency and acquire its rival Bear Stearns, while at the same time allowing insiders to take large “short” positions in Bear Stearns stock and collect massive profits. For evidence, Olagues points to a very suspicious series of events, which will be detailed here after some definitions for anyone not familiar with stock options:

A put is an option to sell a stock at an agreed-upon price, called the strike price or exercise price, at any time up to an agreed-upon date. The option is priced and bought that day based upon the current stock price, on the presumption that the stock will decline in value. If the stock’s price falls below the strike price, the option is “in the money” and the trader has made a profit. Now here’s the evidence:

On March 10, 2008, Bear Stearns stock dropped to $70 a share -- a recent low, but not the first time the stock had reached that level in 2008, having also traded there eight weeks earlier. On or before March 10, 2008, requests were made to the Options Exchanges to open a new April series of puts with exercise prices of 20 and 22.5 and a new March series with an exercise price of 25. The March series had only eight days left to expiration, meaning the stock would have to drop by an unlikely $45 a share in eight days for the put-buyers to score. It was a very risky bet, unless the traders knew something the market didn’t; and they evidently thought they did, because after the series opened on March 11, 2008, purchases were made of massive volumes of puts controlling millions of shares.

On or before March 13, 2008, another request was made of the Options Exchanges to open additional March and April put series with very low exercise prices, although the March put options would have just five days of trading to expiration. Again the exchanges accommodated the requests and massive amounts of puts were bought. Olagues contends that there is only one plausible explanation for “anyone in his right mind to buy puts with five days of life remaining with strike prices far below the market price”: the deal must have already been arranged by March 10 or before.

These facts were in sharp contrast to the story told by officials who testified at congressional hearings on April 4. All witnesses agreed that false rumors had undermined confidence in Bear Stearns, making the company crash despite adequate liquidity just days before. On March 10, 2008, Reuters was citing Bear Stearns sources saying there was no liquidity crisis and no truth to the speculation of liquidity problems. On March 11, the Chairman of the Securities and Exchange Commission himself expressed confidence in its “capital cushion.” Even “mad” TV investment guru Jim Cramer was proclaiming that all was well and the viewers should hold on. On March 12, official assurances continued. Olagues writes:

“The fact that the requests were made on March 10 or earlier that those new series be opened and those requests were accommodated together with the subsequent massive open positions in those newly opened series is conclusive proof that there were some who knew about the collapse in advance . . . . This was no case of a sudden development on the 13 or 14th, where things changed dramatically making it such that they needed a bail-out immediately. The collapse was anticipated and prepared for. . . .

“Apparently it is claimed that some people have the ability to start false rumors about Bear Stearns’ and other banks’ liquidity, which then starts a ‘run on the bank.’ These rumor mongers allegedly were able to influence companies like Goldman Sachs to terminate doing business with Bear Stearns, notwithstanding that Goldman et al. believed that Bear Stearns balance sheet was in good shape. . . . The idea that rumors caused a ‘run on the bank’ at Bear Stearns is 100% ridiculous. Perhaps that’s the reason why every witness was so guarded and hesitant and looked so mighty strained in answering questions . . . .

“To prove the case of illegal insider trading, all the Feds have to do is ask a few questions of the persons who bought puts on Bear Stearns or shorted stock during the week before March 17, 2008 and before. All the records are easily available. If they bought puts or shorted stock, just ask them why.”5

Suspicions Mount

Other commentators point to other issues that might be probed by investigators. Chris Cook, a British consultant and the former Compliance Director for the International Petroleum Exchange, wrote in an April 24 blog:

“As a former regulator myself, I would be crawling all over these trades. . . . One question that occurs to me is who actually sold these Put Options? And why aren’t they creating merry hell about the losses? Where is Spitzer when we need him?”6

In an April 23 article in LeMetropoleCafe.com, Rob Kirby agreed with Olagues that it was not Bear Stearns but JPMorgan that was bankrupt and needed to be “recapitalized” with massive loans from the Federal Reserve. Kirby pointed to the huge losses from derivatives (bets on the future price of assets) carried on JPMorgan’s books:

“. . . J.P. Morgan’s derivatives book is 2-3 times bigger than Citibank’s – and it was derivatives that caused losses of more than 30 billion at Citibank . . . . So, it only made common sense that J.P. Morgan had to be a little more than ‘knee deep’ in the same stuff that Citibank was – but how do you tell the market that a bank – any bank – needs to be recapitalized to the tune of 50 - 80 billion?”7

Kirby wrote in an April 30 article:

“According to the NYSE there are only 240 million shares of Bear outstanding . . . [Yet] 188 million traded on Mar. 14 alone? Doesn’t this strike you as being odd? . . . What percentage of the firm was owned by insiders that categorically did not sell their shares? . . . Bear Stearns employees held 30 % of the company’s stock . . . 30 % of 240 million is 72 million. If you subtract 72 from 240 you end up with approximately 170 million. Don’t you think it’s a stretch to believe that 186+ million real shares traded on Friday Mar. 14? Or do you believe that rank-and-file Bear employees, worried about their jobs, were pitching their stocks on the Friday before the company collapsed knowing their company was toast? But that would be insider trading – wouldn’t it? No bloody wonder the SEC does not want to probe J.P. Morgan’s ‘rescue’ of Bear Stearns . . .”8

If real shares weren’t trading, someone must have been engaging in “naked” short selling – selling stock short without first borrowing the shares or ensuring that the shares could be borrowed. Short selling, a technique used by investors to try to profit from the falling price of a stock, involves borrowing a stock from a broker and selling it, with the understanding that the stock must later be bought back and returned to the broker. Naked short selling is normally illegal; but in the interest of “liquid markets,” a truck-sized loophole exists for “market makers” (those people who match buyers with sellers, set the price, and follow through with the trade). Even market makers, however, are supposed to cover within three days by actually coming up with the stock; and where would they have gotten enough Bear Stearns stock to cover 75% of the company’s outstanding shares? In any case, naked short selling is illegal if the intent is to drive down a stock’s share price; and that was certainly the result here.9

On May 10, 2008, in weekly market commentary on FinancialSense.com, Jim Puplava observed that naked short selling has become so pervasive that the number of shares sold “short” far exceeds the shares actually issued by the underlying companies. Yet regulators are turning a blind eye, perhaps because the situation has now gotten so far out of hand that it can’t be corrected without major stock upheaval. He noted that naked short selling is basically the counterfeiting of stock, and that it has reached epidemic proportions since the “uptick” rule was revoked last summer to help the floundering hedge funds. The uptick rule allowed short selling only if the stock price were going up, preventing a cascade of short sales that would take the stock price much lower. But that brake on manipulation has been eliminated by the Securities Exchange Commission (SEC), leaving the market in unregulated chaos.

Eliot Spitzer has also been eliminated from the scene, and it may be for similar reasons. Greg Palast suggested in a March 14 article that the “sin” of the former New York governor may have been something more serious than prostitution. Spitzer made the mistake of getting in the way of a $200 billion windfall from the Federal Reserve to the banks, guaranteeing the mortgage-backed junk bonds of the same banking predators responsible for the subprime debacle. While the Federal Reserve was trying to bail the banks out, Spitzer was trying to regulate them, bringing suit on behalf of consumers.10 But he was swiftly exposed and deposed; and the Treasury has now broached a new plan that would prevent such disruptions in the future. Like the Panic of 1907 that justified a “bankers’ bank” to prevent future runs, the collapse of Bear Stearns has been used to justify a proposal giving vast new powers to the Federal Reserve to promote “financial market stability.” The plan was unveiled by Treasury Secretary Henry Paulson, former head of Goldman Sachs, two weeks after Bear Stearns fell. It would “consolidate” the state regulators (who work for the fifty states) and the SEC (which works for the U.S. government) under the Federal Reserve (which works for the banks). Paulson conceded that the result would not be to increase regulation but to actually take away authority from state regulators and the SEC. All regulation would be subsumed under the Federal Reserve, the bank-owned entity set up by J. Pierpont Morgan in 1913 specifically to preserve the banks’ own interests.

On April 29, a former top Federal Reserve official told The Wall Street Journal that by offering $30 billion in financing to JPMorgan for Bear’s assets, the Fed had “eliminated forever the possibility [that it] could serve as an honest broker.” Vincent Reinhart, formerly the Fed’s director of monetary affairs and the secretary of its policy-making panel, said the Fed’s bailout of Bear Stearns would come to be viewed as the “worst policy mistake in a generation.” He noted that there were other viable options, such as looking for other suitors or removing some assets from Bear’s portfolio, which had not been pursued by the Federal Reserve.11

Jim Puplava maintains that naked short selling has now become so pervasive that if the hedge funds were pressed to come in and cover their naked short positions, “they would actually trigger another financial crisis.” The Fed and the SEC may be looking the other way on this widespread stock counterfeiting scheme because “if they did unravel it, everything really would unravel.” Evidently “promoting market stability” means that whistle-blowers and the SEC must be silenced so that a grossly illegal situation can continue, since the crime is so pervasive that to expose it and prosecute the criminals would unravel the whole financial system. As Nathan Rothschild observed in 1838, when the issuance and control of a nation’s money are in private hands, the laws and the people who make them become irrelevant.

US already in recession, says world's richest man Buffet

BERLIN (AFP) - - While economists quibble, the world's richest man has decided: the United States is already in recession. So Warren Buffett tells German magazine Der Spiegel in an interview to be published on Monday.

"It is perhaps not a recession in the way that economists would understand it... but people are already feeling the effects and it will be deeper and longer than people think," Buffett said on a visit to Frankfurt.

Buffett, the 77-year-old chief of the Berkshire Hathaway holding company, blamed financial institutions for introducing instruments "they can no longer control" and said the "genie can no longer be put back in the bottle."

Buffett, who overtook Bill Gates this year as the world's richest man, said he believed the financial markets should be more tightly regulated.

According to the Forbes annual billionaire's list published in March, Buffett saw his wealth jump from 52 billion dollars last year to 62 billion, pushing Microsoft co-founder Gates into third position after 13 years at the top.

US economic growth has slowed dramatically in recent months and a growing number of economists believe the world's largest economy will experience a recession during 2008 amid a housing slump and related credit crunch.

The Fund Mgt Activities in Singapore", by Valerie Wu

EXECUTIVE SUMMARY

Singapore's booming asset management industry saw its sixth consecutive year of double-digit growth in 2006, boosted by continuing worldwide interest in Asia's rapid economic.

According to the Monetary Authority of Singapore’s (MAS) latest survey of the asset management industry, the amount of assets managed by Singapore-based fund managers swelled by 24 per cent last year, reaching $891 billion at end-2006, compared to $720 billion a year earlier. Since the mid-nineties, the Singapore Government has identified the investment management industry as one of the key financial sectors to develop. With this in mind, the MAS has introduced a variety of incentives and reforms to encourage the growth of the investment management industry.

 The MAS and the Government of Singapore Investment Corporation (GIC) have committed to place out a total of S$35 billion of funds to external fund managers over the next few years. This will serve as seed money to grow the Singapore fund management industry.

 The Central Provident Fund (CPF) Investment Scheme for unit trusts was also revamped to increase the number of quality asset managers and products available to CPF members.

 MAS also liberalized the investment guidelines for both CPF and non-CPF unit trusts to give asset managers the flexibility they need to diversify their portfolios. Restrictions on regular savings plans were also lifted so that asset managers can decide whether they want to offer regular savings plans, and their structure.

 To improve and streamline the regulatory structure for asset management companies, MAS reduced the minimum group shareholders' funds requirement for an investment adviser's license from S$500 million to S$100 million. The minimum amount of global funds that the company must manage was also lowered from S$5 billion to S$1 billion.

 Steps have been taken to make rules more transparent. For example, new disclosure requirements and investment guidelines for unit trusts are now set out in the Handbook of Unit Trusts, issued by MAS and the Registry of Companies and Businesses (RCB).

 MAS raised the disclosure standards for unit trusts so that investors would be adequately informed of the returns and risks associated with their investments, and can compare the performance and charges of different unit trusts and asset managers.

 In March 1999, MAS introduced measures aimed at nurturing the local boutique fund management (BFM) industry, including a new Approved Boutique Fund Managers (ABFMs) Scheme, which allowed investment income earned by foreign investors from funds managed by ABFMs in Singapore to be tax-exempt.

 To attract new asset managers to Singapore and encourage existing firms to expand their operations, the Government has introduced various tax incentive schemes for the asset management industry. For example, the Enhanced Fund Manager scheme allows fund management companies who manage at least S$5 billion of foreign investors' funds to enjoy tax exemption for the fee income earned from providing investment management or advisory services.

 SGX has also allowed the listing of hedge funds from June 2006.

These efforts appear to have met with some success, as many international fund management firms have set up offices in Singapore and do business there. Singapore is certainly fast emerging as a major centre for fund management activities in the region.

INTRODUCTION

Fund management is defined as collecting funds from individual investors and invest those funds in a potentially wide range of securities and other assets. Pooling of assets is the key idea behind investment companies.

There are two types of fund structure: open-ended funds and close-ended funds. Open-end funds stand ready to redeem or issue shares at their net asset value while close-end funds do not issue or redeem shares, so investors who wish to cash out must sell their shares to other investors.

Singapore’s fund management industry here has benefited from rising private wealth worldwide, boosted by the strong global economy and robust stock markets, and keen interest among investors in Asia's economic growth led by China and India.

NATIONAL DEVELOPMENT STRATEGY

The national development strategy for the fund management sector is to build on existing strengths, address weaknesses, prioritize likely market niches, and take into account related activities and their support factors, and leading edge global developments.

 Expanding the government’s role in developing the asset management industry by:
(1) developing start ups and small and medium sized fund management firms;
(2) extending fund management mandates granted by the GIC and the MAS;
(3) providing funds to attract private equity players.

 Boosting competitiveness as pre-eminent asset management centre by
(1) improving tax treatment;
(2) reviewing CPF structure;
(3) improving investor education;
(4) improving professional training.

 Increasing focus on developing alternative assets (ie hedge funds) cluster by
(1) raising developmental focus and regulatory responsiveness;
(2) establishing the limited partnership structure (ie for an investment vehicle, as in the US) in Singapore;
(3) reforming the Trustees Act;
(4) streamlining tax incentives for private equity into a single package;
(5) increasing tax certainty for private equity;
(6) establishing a favorable tax environment for alternative investments;
(7) upgrading professional skills in private equity;
(8) using private equity as an option to help Government-Linked Companies (GLCs) to spin-off non-core assets.

 Developing ancillary services by:
(1) developing trustee and custody services;
(2) developing specialized legal, custody and other ancillary services.

FUND MANAGEMENT ACTIVITIES: GOVERNMENTAL MEASURES

Singapore aims to be the premier asset management hub in Asia. To achieve this aim, various measures have been put in place.

1) Central Provident Fund
The Central Provident Fund (CPF), a compulsory government-managed retirement savings scheme, was set up in 1955. Current contribution rates are very high – up to 20% of salary from the employee and 16% from the employer, subject to a cap. The CPF absorbs much of the population’s savings and majority of which is invested in Government bonds. However, in recent years, CPF account holders have been permitted more flexibility in usage of their accounts. Drawdowns for major items such as house purchases are permitted, and CPF account holders may even invest a portion of their fund in stocks.

2) Handbook on Unit Trusts
MAS, together with the Registry of Companies and Businesses (RCB), has also published a Handbook on Unit Trusts. The Handbook provides easy reference to industry practitioners on the legal requirements as well as administrative guidelines for the offer, management and operation of unit trusts.

MAS has raised the disclosure standards for unit trusts so that investors are adequately informed of the fees and charges, risks and performance associated with each unit trust. Such disclosure helps investors to compare different unit trusts, enabling them to make informed investment decisions.

The Central Provident Fund Investment Scheme for unit trusts was revamped to increase the number of quality asset managers and products available to CPF members. This would further increase the pool of domestic funds available for professional management.
However, “The Code on Collective Investment Schemes” replaces the “Handbook on Unit Trusts” with effect from 1 Jul 2002. The Code is issued pursuant to Part XIII of the Securities and Futures Act (Offers of Investments).

3) Outplacing Government Funds for Private Management
In 1998, MAS has adopted a strategic approach towards developing the fund management industry. Following the Asian Financial Crisis, which hit Singapore’s neighbours such as Indonesia particularly hard, the Singaporean authorities redoubled their efforts.MAS and the Government of Singapore Investment Corporation (GIC) have decided to place out a total of S$35 billion to external fund managers over three years till 2000. This will act as seed money to grow the Singapore fund management industry.

4) Revised Requirements and Tax Incentives for Fund Management Companies
To attract more fund managers to operate out of Singapore, the minimum shareholders' funds requirement for an Investment Adviser's licence was reduced in February 1998 from S$500 million to S$100 million. The minimum amount of global funds that the company must manage was also lowered from S$5 billion to S$1 billion. The government also introduced tax incentives which allow qualifying fund management companies to enjoy tax exemption for the fee income earned from providing investment management or advisory services.

Fund management companies are entitled to the following fiscal concessions:

i) Fee income received by fund management companies in respect of services rendered are exempt from corporate income tax for a period of 5 years provided the fund management company manages an asset portfolio with a value in excess of S$5m (at the time of writing). The exemption period can be 10 years if the fund managers can make suitably strong commitments to significantly increase their level of fund management activities in Singapore. The exemption is granted by the monetary authority of Singapore on a case by case basis.

ii) Dividends: In Singapore there are no withholding taxes levied on dividends. Instead dividends are taxed at 20% with a tax credit being given for any corporate tax levied on the profits out of which dividends are paid. Where there is a shortfall between the tax credit and the 20% charge levied on dividends the shortfall must be made up by the company paying the dividend and not by the shareholder receiving it. Companies engaged in fund management are exempt from any further taxation on the shortfall in so far as that shortfall is caused by the concessionary fiscal status granted to the company.

Regulatory changes introduced in 2004 mean that international fund managers are no longer required to maintain a physical presence in the territory, and are permitted to make their funds available via private banks.

5) Licensing Regime for Boutique Fund Managers
In March 1999, MAS introduced a streamlined licensing scheme aimed at admitting more boutique fund management firms (BFMs) to add greater depth to the fund management industry. BFMs are owned and operated by experienced fund management professionals, provide specialised investment advisory services to selected institutional and high net-worth clients.

Singapore's Prime Minister Lee Hsien Loong announced in his 2005 budget that start-up fund managers would be given a 12-month grace period to meet the requirement that 80% of share capital must come from foreign investors to qualify for a 10% tax rate on fee income.

Foreign fund managers, ie those based overseas, are actively solicited to set up offices in Singapore. The authorities also recognize the value of innovation and are keen to get the leading edge firms to set up in Singapore. In accordance with this policy, Singapore has been welcoming to hedge funds, and has granted them mandates of government money to encourage them to set up in Singapore.

The other aspect of hedge fund taxation that industry participants called for to be changed was the level of the 10% tax, considered somewhat high by many. By cutting this levy to 5%, observers believed that Singapore would be able to continue to carve out a niche as a centre for the management of Indian, Japanese and Korean-based funds, in addition to capturing some of the growing interest in specialist Islamic hedge funds.

6) SGX Listing of Hedge Funds
In June 2006, Singapore Exchange Ltd (SGX) announced that it would accept listings of hedge funds. Although eligible hedge funds are listed, however there is no trading in their units on SGX. Typically, issue and redemption takes place in the over-the-counter market.

The new listing rules for hedge funds have the following key features:
i) Hedge funds must be authorised or recognised under section 286 or 287 of the Securities and Futures Act; or be offered only to institutions and/or accredited investors;
ii) They must have a minimum asset size of at least S$20 million or US$20 million for Singapore and foreign currency denominated funds respectively.

Under additional rules, fund managers are required to have in place an independent risk management function. The investment management team of a hedge fund is expected to have at least one principal with a minimum of five years relevant investment management experience. A hedge fund will have to announce its net asset value per unit, as soon as practicable after each month end, but in any event no later than seven business days. In addition, a fund must immediately announce any material change relating to its operations, including but not limited to, any change in its investment manager, custodian, administrator or independent auditor.

FUND MANAGEMENT ACTIVITES: STATISTICS

“Fund managers continue to use Singapore as their regional HQ because they see Singapore as a prime location to service clients, raise capital from the region, as well as invest into the region and beyond,” said MAS chairman and Senior Minister Goh Chok Tong, speaking to equity investors and business leaders from around the world at the fourth annual Asia Equity Forum organized by Japan's largest brokerage, Nomura.

Most of the growth was contributed by foreign traditional asset managers, which accounted for 85 per cent of the rise in total assets under management. The rest of the growth came from local asset management firms and alternative asset managers like hedge fund managers.

Hedge fund services are seriously lacking in the region, especially the early stage arena in Singapore, even though there has been an increase in the number of hedge fund managers in Singapore.

The number of hedge funds based in Singapore grew from just eight in 2001 to more than 50 in 2004 and rose sharply to about 190 at end-2006, a 76 per cent jump from a year earlier. Together, they managed more than $40 billion worth of assets, a 150 per cent increase from 2005.

Over the year, the total number of portfolio managers, investment analysts and other investment professionals rose 23 per cent to reach 1,786 at end-2006. Of these, a third are employed by local asset management firms.

As at 2005, more than 80 per cent of the funds managed out of Singapore last year was sourced from abroad. About half the total funds came from institutional investors; the rest were assets managed on behalf of other investors, including individuals and collective investment schemes.

Forty-three per cent of the funds was sourced from Asia Pacific, while the US contributed 11 per cent and Europe 24 per cent. The proportions were broadly unchanged from 2005. Asset managers here also reported a surge in funds from South Asia and the Middle East; funds sourced from these regions grew by 36 per cent and 21 per cent respectively.

According to the latest World Wealth Report published by Merrill Lynch and Capgemini in June 2007, Singapore saw a 21 per cent jump in its population of people with more than US$1 million in assets in 2006 - the fastest increase among the 71 countries covered in the report.

The total number of such high-net-worth individuals worldwide rose by 8.3 per cent to 9.5 million, while their combined wealth grew 11.4 per cent to US$37.2 trillion. In the Asia Pacific region, high-net-worth wealth rose 10.5 per cent to US$8.4 trillion, and is projected to grow at an average rate of 8.5 per cent a year to reach US$12.7 trillion by 2011.

A measure of the continuing keen interest in Asia was demonstrated in the data published by MAS on 4 July 2007 - 57 per cent of the total assets under management in Singapore last year were invested in the Asia Pacific region, up from 53 per cent in 2005.

The share of assets invested in Europe rose slightly to 12 per cent from 10 per cent in 2005, while the proportion of funds allocated to the US - the other main investment destination - was unchanged at 7 per cent. As stock markets worldwide soared, the proportion of assets invested in equities grew to 55 per cent in 2006, up from 47 per cent in 2005. This ate into the share of funds invested in bonds and other assets.

FUND MANAGEMENT ACTIVITIES: INSURANCE

In recent years, we have seen a very significant increase in the number of unit trusts and investment-linked life insurance products in the Singapore market place. Singapore is one of the most open insurance markets in the world. As at 17th March 2000, the market became fully open to foreign insurers and the 49% limit on foreign shareholdings was also removed.

Singapore's development as a leading insurance centre has seen a rich pool of 56 direct insurers (including Life, General and Composite), 28 professional reinsurers, and 60 captives today. We are currently the largest domicile for captive insurers in Asia and 20 of the top 25 reinsurers globally are based in Singapore.

Some of the incentives in the recent years for the insurance industry include:
i) Tax Incentive Scheme for Offshore Insurance Business.
A concessionary tax rate of 10 percent can be granted to insurance companies on income derived from writing offshore insurance business.

ii) Tax Exemption Scheme for Offshore Marine Hull & Liability Insurance Business. This scheme aims to encourage all general direct insurance and reinsurance companies in Singapore to tap the insurance potential of the shipping communities in the Asia Pacific region. It provides tax exemptions for income derived from underwriting profits of offshore marine hull and liability business as well as non-Singapore dividends, realized capital gains, and interest including Asian Currency Unit (ACU) deposits derived from investing premium income from offshore marine hull and liability insurance business and shareholders’ funds used to support the offshore marine hull and liability insurance business.

iii) Abolition of Withholding Taxes on Financial Guarantee Insurance Contracts. To promote financial guarantee business, claim payments made under financial guarantee insurance policies by approved financial guarantee insurers to nonresidents are exempt from withholding tax.

FUND MANAGEMENT ACTIVITIES: REITS

A report released by Standard & Poor's (S&P) Ratings Services in September 2004, entitled 'Securitizing Real Estate in Asia: Is Singapore a Prelude of Things to Come?' noted that Singapore, with over US$1 billion in capital raised since 2002, is increasingly seen as a factor in the region's REIT and securitized real estate market arena. The report also pointed out that Singapore's many other advantages including location, a highly skilled and educated workforce, its 'AAA' sovereign rating, and clear legal system are also standing the city-state in good stead within the international real estate market.

According to S&P, the marriage of these factors with relevant tax benefits is making Singapore the preferred location to list shares for many regional real estate owners. Singapore has emerged as an inviting market for local and regional REITS issuers with pressures from investors and regulators driving the market toward international valuation, governance, and transparency standards.

In his 2005 budget speech, Prime Minister and Minister of Finance, Lee Hsien Loong announced that foreign non-individual investors would be encouraged to invest in the Singapore property market with a proposed reduction in the withholding tax on REIT distributions to 10% from 20%, for a period of five years. Additionally, to attract more REIT listings, the government will waive stamp duty on the instruments of transfer of Singapore properties into REITS to be listed, or already listed on the SGX, for a five-year period.



FUND MANAGEMENT ACTIVITIES: HEDGE FUNDS

Singapore is also emerging as the most popular Asian location amongst hedge fund managers for fund start ups, and the city state saw more new fund registrations than either Hong Kong or Australia in 2004. Singapore saw 19 fund launches last year, compared to 13 each in Hong Kong and Australia. Institutional asset managers accounted for 85% of the increase, with hedge funds adding impetus – there were 190 hedge funds in Singapore at the end of 2006, compared to 107 at the end of 2005.

Singapore has recognized the opportunity presented by the ambiguous tax stance of the Hong Kong Inland Revenue Department towards unauthorized funds (i.e. most hedge funds); and it has been soliciting Hong Kong-based fund managers to relocate to the island state.

The factor that appears to be spurring hedge fund growth in Singapore is the relatively short time taken to register a fund in the city-state, an issue identified by hedge fund managers as the most crucial.

In his 2006 budget, Lee Hsien Loong announced a range of tax and other initiatives aimed at spurring growth in the financial services and asset management industry. Among the measures designed to promote the development of Singapore as a financial centre were enhanced tax incentives for asset and wealth management, capital and treasury markets, and captive insurance.

The current stable cost structure and clear and conducive regulatory and tax environment has primed Singapore into one of the most desirable places in Asia for fund managers to open their own boutique hedge funds. Singapore overtook Hong Kong in terms of hedge fund launches in 2004 – 13 new set-ups in Singapore compared to 12 in Hong Kong. In the first half of 2003, 12 new hedge funds opened their doors in Singapore, while only 6 were launched in Hong Kong.

According to Eurekahedge, as at 6 September 2006, across all strategies, there are pproximately 84 hedge fund firms located in Singapore, 134 in Hong Kong, 58 in Japan and 115 in Australia.

The growth in assets employed in the region, across all strategies, has been impressive in recent years, rising from USD 16 billion in 2000 to USD 90 billion in 2005. During that period, the number of single manager funds dedicated to Asian markets has also grown from approximately 180 to 650.

The high remuneration and independence of hedge funds, compared with traditional fund houses, means they tend to attract the best and brightest of the profession. The transfer of knowledge from these practitioners promotes the general development of the financial market in which they are based. Through the high fees they earn and active trading, hedge funds generate fee income for their suppliers. Hedge fund activities also boost GDP, tax revenues and stimulate quality employment in firms from which they purchase services, such as prime brokers, custodians and accountants and lawyers.

CONCLUSION

In accordance with its government-led economic philosophy, the Singapore authorities have expressly targeted the development of the fund management as a key element of the financial sector. A range of incentives are provided by the government to encourage international fund managers to set up in island state. Factors that support fund managers aggregating in a centre like Singapore include good infrastructure, availability of quality legal and accounting services, sound regulatory environment, low tax rates and a clear tax regime, and the potential demand for their products from the individuals and businesses in the economy. With these, Singapore’s fund management industry is set for exponential growth.

Valerie Wu
10 August 2007

What's Next for Commodities

By Katy Marquardt

How much juice is left in this commodity boom? The managers of the RS Global Natural Resources fund--which has shot up an annualized 34 percent over the past five years--contend that we're still in the early stages of a bull run, yet the easy money has been made. According to MacKenzie Davis and Ken Settles, who manage the $2.2 billion fund along with Andy Pilara, the best deals now aren't in the commodities themselves but in the stocks of commodity producers. U.S. News spoke recently with Davis and Settles about bubbles, "advantaged" companies, and why they don't invest in $125-a-barrel oil. Excerpts:

What's your outlook for commodities? Settles: We believe that we are in the early stages of a 10-to-20-year uptrend for commodities, driven largely by the rising costs to add new supply. As such, we don't see commodities as a speculative bubble. However, we do believe that the natural resource stocks are much more attractively priced than the commodities themselves. In fact, using long-term commodity price assumptions that are well below current spot prices, valuations for many natural resources stocks remain quite attractive. The opportunity is as good today as it was two to three years ago.

Davis: But the easy money, driven by the homogenous rise of commodities over the past five to six years, has been made. Going forward, investors will need to take a more nuanced approach when investing in the sector to reflect the expected differentiation in performance between commodities and commodity producers. We look for advantaged companies that can generate attractive returns in a much lower commodity price environment. That helps to protect our investors on the downside.

Settles: One thing that is important to realize is that there is a big difference between low-cost producers and high-cost producers. For example, there are some oil projects today that require $100 oil in order to generate a decent rate of return on the investment, and there are other projects that can generate attractive returns it at $30 to $40 oil. Rather than invest in companies that need extremely high oil prices to generate a decent rate of return, what we do is invest in companies that have the ability to reinvest in low-cost projects.

I would ask where you see the price of oil going, but I hear that you don't forecast commodity price levels. Settles: We don't spend a lot of time forecasting short-term moves in spot price, but we have pretty strong opinions about the long-term outlook. Although commodities will continue to be cyclical, we see the cost of most commodities continuing to rise, thus driving prices higher over time. If you're a longer-term investor, it's more important to pick the right company than to speculate on the near-term direction for the commodity.

What's a stock that fits your investing strategy? Settles: Denbury Resources owns a large, naturally occurring source of carbon dioxide in Mississippi, which puts it at an advantage in the Gulf Coast area. Injecting carbon dioxide into a reservoir allows previously inaccessible oil to be recovered, at very low capital costs. Finding and development costs in North America are running $20 to $30 a barrel, and we think Denbury's enhanced oil recovery projects will come in around $5 to $10 a barrel.

Davis: The CO2 deposit is a structural advantage that can't be competed away. The geology gives them a competitive advantage which can't be replicated.

Settles: We think there's very limited downside for Denbury in a multiyear period. We don't need to invest in $125 oil; we can find companies that can profitably produce at $40 a barrel.
What's a nonoil stock you like? Davis: Century Aluminum, a relatively small aluminum company based in Monterey, Calif. They have a collection of U.S.-based smelters [smelters process alumina into aluminum] which sit in the middle of the industry cost curve. Several years ago, they took on a significant project in Iceland, where they're developing a series of new smelters. Power is a key determinant of the aluminum cost curve, and in Iceland, Century has access to inexpensive hydro and geothermal power. The value of owning those assets in Iceland grows over time because of the structural challenges facing power on a global basis. They've locked up long-term power contracts at very low rates, which should allow Century to remain at the low end of a cost curve which continues to steepen.

Do you invest in renewable energy? Davis: We're focused on the economics and understanding the math behind projects. Broadly speaking, what we've seen so far in the alternative energy space is that the projects don't necessarily work without government subsidies, and the stocks don't work unless you're willing to assume very significant rates of growth over long periods of time.

However, we're looking for free options inside larger companies. For example, we have a number of coal investments that are putting significant funding toward clean coal technologies. That's a way to get access to their development without having to pay for it. We also try to follow the food chain with things like the nuclear renaissance and the water shortage, which we think we're getting closer to on a global basis. We won't necessarily invest in a General Electric, which is building a lot of the infrastructure, but we'll look at who the parts suppliers are and who's supplying alloys and metals.

How much of a portfolio should be dedicated to commodities? Davis: What's happening in commodities is probably the same thing that happened to real estate 10 to 15 years ago. Real estate went from being an optional allocation to pretty much a permanent allocation in portfolios. Whether it's a 5 percent or 15 percent allocation to commodities and natural resources varies by individual. It's also an interesting way, we think, to get exposure to the emerging economies, where much of the demand is coming from.

US Fed sees slower growth, higher unemployment this year

WASHINGTON - FEDERAL Reserve officials strongly suggested they won't be inclined to cut interest rates further even as they sharply downgraded their forecast for economic growth this year, citing damage from a housing slump, credit crunch and galloping energy prices.
Wall Street took a tumble as investors faced the weaker outlook and the possibility that the Fed's rate-cutting campaign was winding down. The Dow Jones industrials plunged more than 200 points.

In fact, the Fed's decision to lower interest rates at its April 29-30 meeting was a 'close call,' according to minutes of those private deliberations released Wednesday.

The Fed hopes that its series of powerful rate cuts ordered since last September and the government's US$168 billion (S$228 billion) stimulus package of tax rebates for people and tax breaks for businesses will help energize growth somewhat in the second half of this year.

Fed officials viewed economic activity 'as likely to be particularly weak in the first half of 2008; some rebound was anticipated in the second half of this year,' the documents stated.

The Fed also forecast higher unemployment and inflation for this year.

Given the hope of a second-half economic pickup but worried about inflation, Fed officials signaled last month that their one-quarter-point rate reduction, which dropped their key rate to 2 per cent, might be their last rate cut for some time.

'Most members viewed the decision to reduce interest rates at this meeting as a close call,' the documents showed.

'Although downside risks to growth remained, members were also concerned about the upside risks to the inflation outlook, given the continued increases in oil and commodity prices.'

Many economists believe the Fed will hold its key rate steady when it meets next, on June 24-25.

That sentiment was borne out in the Fed's documents as well as recent speeches by Fed officials.

Looking ahead, some Fed members - not identified in the documents - noted that it was 'unlikely to be appropriate to ease policy in response to information suggesting that the economy was slowing further or even contracting slightly in the near term, unless economic and financial developments indicated a significant weakening in the economic outlook,' according to the Fed papers.

Separately, Fed Governor Kevin Warsh, in remarks Wednesday, also suggested the Fed was not inclined to cut rates again. 'Even if the economy were to weaken somewhat further, we should be inclined to resist expected, reflexive calls to trot out the hammer again,' Warsh said.

Under its new projections, the Fed now believes gross domestic product will grow between just 0.3 per cent to 1.2 per cent this year.

That's lower than a previous Fed forecast, released in late February, that estimated growth to be between 1.3 per cent and 2 per cent.

GDP is the value of all goods and services produced within the United States and is the best barometer of the country's economic fitness.

These forecasts are based on what the Fed calls its 'central tendencies,' which exclude the highest three forecasts and the lowest three forecasts made by Fed officials. The Fed also gives a range of all forecasts that showed some Fed officials projecting no growth in 2008.

With economic growth slowing, the Fed projected that the national unemployment rate will rise to between 5.5 per cent and 5.7 per cent this year. That is higher than the central bank's old forecast for the rate to climb as high as 5.3 per cent. Last year, the unemployment rate averaged 4.6 per cent.

And, with energy prices marching upward, the Fed raised its projection for inflation. The Fed now expect inflation to be between 3.1 per cent and 3.4 per cent this year. That's higher than its old forecast for inflation, which was estimated to come in at around 2.1 per cent to 2.4 per cent. -- AP

Banks see plunge in home prices in next two years

New homes, rising vacancy rates, unsold condos and fewer rental deals cited as reasons

By Fiona Chan, Property Reporter

THE slowdown in the Singapore housing market has prompted two banks to predict a dramatic plunge in home values in the next two years.

In two starkly bearish reports, Barclays Capital and Credit Suisse have forecast drops of up to 40 per cent in home rents and prices, as demand and supply dynamics move in favour of buyers.

The reports, issued in the last two weeks, pointed to the malign cocktail of a flood of new homes coming on the market, climbing vacancy rates, a rising number of unsold condominiums and fewer rental transactions.

They also raised concerns about the possible dumping of units by speculators. Barclays said that should this happen, private home prices could slide 28 per cent to 30 per cent by 2010.

Credit Suisse predicted a possible 40 per cent drop in rents and prices. Its analysis showed that sub-sale prices recently started to dip at several developments.

Both banks also noted that developers were now more generous with price cuts, stamp duty rebates and agent commissions in an effort to move units. They warned that smaller developers were likely to 'break' first.

'Just six months ago, City Developments and a few others gave zero commissions to agents,' Credit Suisse said. By March, most were giving 1 per cent to 5 per cent, an increase of three to 10 times in just six months.

'When Singaporean developers start to reach out to agents with higher commissions, you know they are feeling the pain,' it said.

The pain is coming from slower growth in home rents and prices, as the effects of the United States sub-prime mortgage crisis takes its toll on market sentiment in Singapore.

Private home prices rose a smaller-than-forecast 3.7 per cent in the first quarter. Even then, Barclays analysts said this could have been boosted by a handful of high-priced transactions and 'may not reflect the depth of pessimism in the market'.

Sales and launches of new homes also fell sharply last month, extending the slump.

Mr Colin Tan, the head of research and consultancy at Chesterton International, agreed with the Barclays report about a correction in prices.

As more new homes are completed over the next few years, he said, rents will feel the pressure and prices will start to fall.

Not all property analysts, however, have such a gloomy take on the housing sector.

Kim Eng analyst Wilson Liew believes the oversupply situation may be overstated. While there are 32,000 units being built and 42,000 more in the pipeline, current market sentiment could help slow the rate at which the planned units come onstream.

'It is likely that most of these units would be deferred indefinitely until sentiment returns or when construction resources ease,' he said.

Developers could also keep lands in their landbank rather than develop them if there is no demand, suggested Macquarie Securities' head of Asean research, Mr Soong Tuck Yin.

Both he and Mr Liew believe the upcoming integrated resorts will give Singapore a boost and, while there may be a temporary weakness, home prices are unlikely to collapse.

Mr Soong also said developers had stronger balance sheets now than in previous market troughs, and the current low interest rates and high inflation could lead people to buy properties as a hedge against inflation.

The Credit Suisse report, however, said negative real interest rates - often touted as a driver for property purchases - had not historically helped home sales. It also said that even with construction delays, actual completions had usually come in higher than forecast.

Buffett: US Probably Less Than Halfway Through Effects of Credit Crisis

The stock market is up so far today on mixed readings of the tea leaves. The Conference Board's index of leading indicators rose unexpectedly, which elicited some positive reports, but Reuters was not impressed, noting that the 0.1% rise showed weakness but not a formal recession. The Wall Street Journal attributed the rise to analyst upgrades of tech stocks and a softening of oil prices.

Warren Buffett, however, is not convinced the US economy is in the clear, discounting cheery talk that the credit crisis is soon to be over. From Bloomberg:


Billionaire Warren Buffett said the U.S. economy is less than halfway through a credit crisis that already sent home foreclosures to a record and sparked the collapse of Wall Street's fifth-largest securities firm.

``I don't necessarily think we're halfway through or necessarily a quarter of the way through the effects throughout the general economy,'' Buffett, 77, told reporters today in Frankfurt, Germany. ``The initial effects are felt by the people who really did the silliest things, but you can have a whole bunch of domino-type effects that eventually can get to people who are doing fairly sound things.''....

The danger of multiple investment bank failures probably ended when the Federal Reserve orchestrated the takeover of Bear Stearns Cos. by JPMorgan Chase & Co., said Buffett, chairman of Omaha, Nebraska-based Berkshire Hathaway Inc. Yet the damage to the economy and individuals will keep mounting, he said.

``In my judgment, there's a good chance that most of that is not over,'' said Buffett.

Trichet Says Worst of Credit Crisis May Lie Ahead

The warning from the ECB's chief Jean-Claude Trichet. that the worst of the credit crunch may lie ahead, deserves to be taken far more seriously than other cautionary warnings. First, he has a reasonably good reading on what is happening with European banks (and our sources with inside connections have maintained for some time that they are in worse shape than is generally acknowledged). Second, he talks to other central bankers. Third, and most important, someone in his position usually understates looming problems so as not to get the public unduly alarmed.

Even with this concerned outlook, Trichet, in stark contrast to Bernanke, is not willing to risk stoking inflation via overly aggressive rate cuts. From the Telegraph:


Jean-Claude Trichet, the head of the European Central Bank, has indicated that the worst of the credit crisis may not be behind us.

Mr Trichet said that we were seeing "an ongoing, very significant market correction."

He compared the recent hikes in energy and food prices to the oil crisis of the 1970s, when higher wages undermined Europe's ability to compete, resulting in widespread unemployment.

He warned that despite the economic slowdown, central banks should not be tempted to cut interest rates because that could lead to more serious problems.

While the Bank of England and the US Federal Reserve have made a series of interest rate cuts since the crisis in the financial markets began, the ECB has held interest rates at 4pc in response to inflation.

In an interview with the BBC today, Mr Trichet implied that the ECB was unlikely to cut interest rates in the short term.

He said however that high inflation "will not last forever."

US entered recession in Q1: Merrill

NEW YORK - THE United States economy is currently in a recession that began last quarter, Merrill Lynch said.

The call comes despite the fact that gross domestic product grew 0.6 per cent in the January-March period, a meagre but still-positive rate.

GDP readings are subject to sharp revisions and, due to their quarterly nature, tend to lag other indicators like spending and confidence, according to Mr David Rosenberg, the bank's chief economist for North America.

'Last week's data flow confirmed that a recession began in the first quarter of this year,' Mr Rosenberg said in a research note on Monday.

'How can there be a recession with real GDP growth still positive? Well, this happened in the first quarter of 1980, the third quarter of 1990 and initially, the first quarter of 2001. And, all were the onset of official recessions,' Mr Rosenberg said. -- REUTERS

Forecasters see weak economy, higher unemployment

By Jeannine Aversa, AP Economics Writer

Forecasters foresee weak economy, higher unemployment even if housing, credit woes ebb WASHINGTON (AP) -- First the good news: The worst of the painful housing slump and the credit crunch might come to an end this year. Now the bad: The economy will weaken further and unemployment will rise.

That's the latest outlook from forecasters in a survey to be released Monday by the National Association for Business Economics, also known by its acronym NABE. It will take time for any rays of light to poke through the economic clouds, though.

A growing number of economists believe the country is on the brink of a recession or in one already, dragged down by all the problems in housing, credit and financial markets. Now 56 percent of the economists think the economy has started or will enter a recession this year. That's up from 45 percent in a survey in February. If there is a recession, it probably will be short and shallow, economists said.

Forecasters downgraded their projections for economic growth. They now predict the economy, which grew by 2.2 percent last year, will slow to 1.4 percent this year. That's lower than the 1.8 percent growth projected in February. If the new figure proves correct, it would mark the weakest growth since the last recession in 2001.

Next year, the economy should grow by 2.3 percent, less than previously forecast and a pace that is still considered subpar.

"Although housing and credit markets will gradually loosen their grip, U.S economic growth is expected to only slowly return to health," said Ellen Hughes-Cromwick, president of NABE and chief economist at Ford Motor Co.

Given the outlook for sluggish overall economic activity, companies are likely to remain cautious in their spending and hiring.

The unemployment rate, which averaged 4.6 percent last year, will move higher. Forecasters predict the jobless rate will hit 5.3 percent this year and 5.6 percent next year.

Forecasters are hopeful that the housing slump -- in terms of home sales -- will hit bottom this year. However, economists were divided over whether the low point would be reached in the second, third or fourth quarters of this year. House prices, though, are still expected to drop this year and next.

On the credit front, economists predict conditions will improve in the second half of this year.

"The economy is still going to be weak in the very near term, but the worst is likely to end this year with respect to the housing decline and the credit crunch," said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group, who was involved in the NABE survey. The survey of 52 forecasters was conducted April 17 through May 1.

Weakness in housing was cited as the factor most responsible for the economy's troubles. That was closely followed by credit problems and high energy, food and commodity prices.

With food prices marching upward, gasoline prices closing in on $4 a gallon nationwide and oil hitting a record high near $128 a barrel, inflation should rise. Consumer prices will increase 3.6 percent this year, up from a previous forecast of a 3 percent rise. Next year, prices should calm down a bit, with the inflation rate clocking in at 2.4 percent.

To bolster the economy, the Federal Reserve has been cutting a key interest rate since last September. However, when the Fed last lowered rates, in April to 2 percent, policymakers signaled that their rate-cutting campaign may be drawing to a close. Fed policymakers are concerned that moving rates lower could aggravate inflation. At the same time, they are hopeful that their powerful rate cuts plus the government's $168 billion stimulus package of tax rebates for people and tax breaks for businesses will lift the country out of its slump.

The forecasters believe the Fed will hold its key rate steady at 2 percent though the rest of this year. However, they predict the Fed will start bumping up rates next year to ward off inflation. They believe the Fed's key rate will rise to 3 percent by the end of 2009.

Economists, meanwhile, had mixed thoughts about the extent to which tax rebates will be spent this year. The more spent, the more energizing effect they will have on the economy. Roughly 35 percent thought households will spend 26 to 50 percent of the rebates, while a quarter believe 25 percent or less would be spent. Thirty-one percent thought 51 to 75 percent would be spent.

"We're likely to see the boost from tax rebates fading later in the year," Reaser predicted. "The recovery is expected to be quite muted."

How to Tell if a Rally Is Real

In fits and starts, blue-chip stocks have been climbing higher since mid-March. But many market watchers aren’t convinced that the worst of this market storm, which began in October, is behind us.

“This was certainly a market bottom, and a pretty good market bottom,” said Duncan W. Richardson, chief equity investment officer at Eaton Vance, the asset management firm in Boston. “But I don’t know if it was the bottom.”

For that, investors will have to look for signposts in the future — not the past.

For instance, if stocks are rallying on the belief that the economy is indeed on the mend, investors will need to see signs that it is actually strengthening. “There’s been a lot of stimulus put into place, and you’ve got to look for evidence that that’s working,” Mr. Richardson said.

One important gauge will be corporate earnings — namely, profits among companies outside the financial services sector.

“The world has figured out that the financial sector has serious problems, but the assumption is that the rest of corporate America seems to be doing O.K.,” said Ben Inker, director of asset allocation at GMO, an investment management firm in Boston.

While overall earnings of the Standard & Poor’s 500-stock index are expected to fall nearly 6 percent in the second quarter, profits for the nine nonfinancial sectors are predicted to rise nearly 8 percent.

But can investors count on this trend continuing?

“It’s our significant worry that corporate profits in the nonfinancial part of the system are likely to be weak over the next couple of years,” Mr. Inker said. “If we’re right, and corporate profits are going to start to deteriorate outside the financials, it will cause another round of problems.”

Here are some other factors to watch in coming weeks:

SMALL-STOCK PERFORMANCE

An indication that investors are gaining courage after a market scare is a renewed willingness to own speculative assets.

Small stocks generally perform better than large-capitalization shares in the first few months of market recoveries. Since 1979, for example, the median gain for small stocks in the three months after market bottoms, has been 19.6 percent, according to a study by Ned Davis Research. By comparison, big, blue-chip shares have risen more modestly — by 13.6 percent.

Since March 17, the S.& P. 600 index of small stocks has gained 9.3 percent while the S.& P. 500 index of large stocks is up 8.8 percent. Continuing strength in small stocks through June could offer confirmation that this rally is for real. GROWTH VS. VALUE As markets recover from severe downturns, “growth stocks eventually come back into favor,” said Robert E. Turner, chairman and chief investment officer at Turner Investment Partners in Berwyn, Pa.

Because growth stocks are considered a more aggressive bet than dividend-paying value shares, a growth rally is an indication that “the sellers are done selling and the buyers are ready to come in,” Mr. Turner said.

Since mid-March, growth stocks in the Russell 1000 index of blue-chip stocks are beating their value counterparts — but by less than a percentage point. So this indicator is sending mixed signals for the moment.

SENSITIVE SECTORS

If markets are rallying because the economy is on the mend, it stands to reason that the most economically sensitive stocks should fare best after a market bottom.

The two sectors that have historically led market recoveries are technology and consumer discretionary stocks.

On average since 1974, the tech sector has gained 27.7 percent in the three months after a market bottom and consumer discretionary stocks have risen 23.3 percent in the same period, according to Ned Davis.

Since March, technology has been one of the best performers, but consumer discretionary stocks are trailing the overall S.& P. A surge in the consumer sector would be expected, if the market has hit rock-bottom.

STRENGTH OF THE DOLLAR

A climb in the dollar against the euro for the remainder of this year would suggest that the Fed was nearly done trimming interest rates and that the economy was truly on the mend.

A strengthening dollar would also tell global investors that this could be a good time to invest in United States stock markets.

“If people get a double benefit because our markets are rising and our currency is improving,” Mr. Turner said, “it will only add interest in U.S. equities.”

And that, in turn, would provide yet more support for a market rally.

Paul J. Lim is a senior editor at Money magazine.

U.S. Recession to End by September, Business Economists Say

By Steve Matthews

May 19 (Bloomberg) -- The U.S. economy will probably exit from a recession by the end of the next quarter as credit markets improve after a year of turmoil, according to a survey by the National Association for Business Economics.

The worst of the U.S. credit crunch and housing slump is about over, and growth will pick up to 2.1 percent in the second half, according to the poll of 52 professional forecasters taken April 17 to May 1. More than 60 percent of the economists surveyed predicted that businesses and consumers will find it easier to borrow in the final six months of the year.

The share of analysts who said the U.S. is in or will have a recession this year rose to 56 percent from 45 percent in February. They anticipate that the Federal Reserve's steepest interest-rate cuts in two decades, tax rebates, record exports and some stabilization in housing will lead to a recovery this quarter or next.

``We are most of the way through the downturn, or the worst of it,'' said Lynn Reaser, a Bank of America Corp. economist in Boston who chairs the economic survey committee. ``Recovery forces are in place and conditions should improve over the next year and a half.''

The worst housing recession in a quarter century, turmoil in financial markets and higher energy prices are taking a toll on current growth.

Second-Half Growth

The economists predicted the expansion will slow to an annual pace of 0.4 percent in the second quarter, following two straight periods of 0.6 percent gains. Second-half growth forecasts were cut to 2.1 percent from 2.8 percent in February. Still, about three-quarters of those predicting a recession said it will end in the second or third quarter.

The *censored* survey points to gradual improvement into 2009, when U.S. gross domestic product may increase 2.7 percent, a forecast trimmed from 2.9 percent in the February survey.

``Although housing and credit markets will gradually loosen their grip, U.S. economic growth is expected to only slowly return to health,'' Ellen Hughes-Cromwick, the group's president and chief economist at Ford Motor Co., said in a statement.

The growth projections were slightly higher than those in a Bloomberg News survey of economists taken May 2 to May 8. The Bloomberg survey predicted average GDP gains of 1.5 percent in the second half and a 2009 expansion rate of 2 percent.

Lower Rates

The Fed will keep its benchmark overnight lending rate between banks at 2 percent this year, and raise the rate to 3 percent by the end of 2009 as the central bank fights the threat of faster inflation, according to the *censored* survey median.

Futures markets show traders expect the rate to hold at 2 percent through October. The Fed's next policy meeting is June 24-25.

Policy makers indicated last month they may take a breather after lowering the benchmark rate by 2.25 percentage points this year, the most aggressive reductions in two decades.

Fed Chairman Ben S. Bernanke, speaking last week, said financial markets remain unsettled and the central bank will increase its auctions of cash to banks as needed. Markets remain ``far from normal,'' he told an Atlanta Fed conference in Sea Island, Georgia.

Stronger Dollar

The U.S. dollar is expected to gradually strengthen as the economy grows and the Fed raises rates. The survey predicted the dollar will advance to $1.50 per euro at the end of 2008 and $1.40 at the end of 2009. The U.S. currency reached a record low of $1.6019 on April 22.

Slowing growth didn't stop analysts from raising their inflation projections, the survey showed. The economists forecast the consumer price index will rise 3.1 percent in the final three months of 2008 from the same period a year before, compared with the 2.5 percent pace predicted in February.

Weakness in housing was cited as the greatest single cause for pushing the economy into a recession.

A recession hasn't been officially declared. The economy likely peaked in December or January and then started to decline, Martin Feldstein, a Harvard University professor and president of the National Bureau of Economic Research, said in an interview this month. The bureau's business cycle dating committee officially determines recessions.

The *censored* panel was divided on how effective the tax rebates will be in stimulating consumer spending. Thirty-five percent said households will spend between one quarter and one half of the money, while 31 percent expected a majority of the rebates to be spent.

'Recession-proof' Las Vegas hit by US economic downturn

LAS VEGAS (Nevada) - FOR almost any other tourist hotspot, greeting nearly 10 million visitors and earning US$2.9 billion (S$4 billion) from convention business in three months would be a cause for cheer.

But for Las Vegas, those figures reflect the cold truth that, in a break from its history as a recession-proof oasis in the American economy, Sin City is hurting in the nationwide downturn, too.

Latest economic figures, released last week by the Las Vegas Convention and Visitors Authority, show that through March 31 several important indicators are either flat or down.

The US$2.9 billion in convention revenues represents a 7.1 per cent decline and is due partly to a 12.6 per cent drop in the number of conventions.

It all adds up to an unfamiliar feeling for a destination that has long prided itself on being impervious to the harshest sides of swings in the national economy.

'This is different from prior downturns,' said Mr Bill Lerner, a Vegas-based Deutsche Bank gaming sector analyst.

'Now that there's a lot more non-gaming amenities in Las Vegas, the visitation mix is leaning toward non-gamblers, and the consumer coming to Vegas is different now than it was in prior recessions.'

Since 1970, Las Vegas saw gambling revenues fall only once - in the aftermath of the Sept 11, 2001 terror attacks, when gaming revenues in 2002 were less than one per cent lower than 2001.

As in earlier tough times, Vegas resorts get creative in finding new niche markets to pursue.

The 2001 downturn prompted the advent of aggressive marketing to gays, Hispanics and blacks.

This time, casinos are focusing on lucrative overseas markets where the weak dollar makes coming to Las Vegas a bargain.

'Bachelor parties in Vegas are now all the rage for soon-to-be-wed fellows from Australia and the UK, for instance, because it's so cheap to get there,' said Mr Robert LaFleur, a gaming-stock analyst for Susquehanna Financial Services.

'If the Hispanic market's been tapped, the gay market's been tapped, the cat-lover market's been tapped, you go find business where you can find it.

'Right now, it's an easy sell to get people from overseas.'

As for the hard facts, gambling revenues for the top casinos were down 4.8 per cent in March for a 3 per cent drop thus far in 2008; the average daily room rates dropped 2.7 per cent and the stock prices of Las Vegas Sands, owner of the Venetian and Palazzo, fell 38 per cent and MGM Mirage, owner of Bellagio, Mirage and eight other Strip resorts, have fallen 42 per cent since November.

Overall visitor volume is up 0.4 per cent so far in 2008, but experts say it would be down had it not been for this leap year's extra day in February.

The thinking in past recessions has been that gamblers tended to come to Las Vegas even when times were tough hoping to win something.

But the Las Vegas of 2008 earns just 40 per cent of its revenues from gaming sources and the rest from upscale leisure amenities such as restaurants, spas, nightclubs and shows that downturn-damaged Americans can't afford.

In 1992, the last comparable recession, the calculus was reversed; gaming revenues represented 58 per cent of overall cash flow.

That makes it harder for Vegas to stay above the economic mire because leisure and business travellers cut discretionary spending, Mr Lerner said.

'It's an easy sell now to get people from overseas'
Indeed, several major annual conventions have seen fewer attendees show up and have seen those that come stay for shorter periods.

The National Association of Broadcasters convention in April is one such example, greeting 105,000 registrants, down from 111,000 in 2007, said NAB executive vice-president Chris Brown.

Those figures could have been worse, but advance registrations were so far down that several hotel-casinos voluntarily offered to cut room rates by US$10 or more to encourage attendance, he said.

'That's never happened before,' Mr Brown said.

Every facet of the nation's economic woes is rearing its ugly head in Vegas.

The credit crunch has forced several major construction projects on the Strip to be delayed, including a second tower for Mr Donald Trump's newly opened condo-hotel and a US$6-billion version of New York's Plaza Hotel.

Nearly four per cent fewer cars crossed the Nevada-California border along Interstate 15 through March, reflecting in part that record high gasoline prices are curtailing drive-in visitors from California.

In the past six weeks, three airlines with substantial service to Las Vegas - Aloha, ATA and Champion - have announced they are going out of business.

And if the Strip is slumping, the many casinos that cater to local Las Vegans are facing double-digit drops in gaming revenues in a city that has one of the highest home foreclosure rates in the nation.

The downturn has also prompted some layoffs, most significantly the elimination of 440 middle-management jobs at MGM Mirage for a savings of US$75 million annually.

Still, there are some silver linings. More than US$30 billion in new construction continues unabated, promising to deliver another 40,000 hotel rooms to the current 136,000 by 2011 and creating more than 100,000 new jobs.

Travel deals are flooding the e-mail boxes of many frequent Las Vegas visitors, including cut-price US$68 weekend rooms at the MGM Grand and airfares as low as US$37 each way from San Francisco.

Some of the top shows are, for the first time, on sale for discounts at various half-price ticket vendor kiosks around the Strip. -- AFP

Oil price may dampen market progress: IMF

WASHINGTON - RISING global oil prices could significantly dampen progress that has been made so far in calming financial markets, the International Monetary Fund's chief economist said.

Mr Simon Johnson said in an interview on Friday that banks that suffered losses as a result of a United States-originated mortgage lending crisis have had greater-than-expected success in raising new money but he worried that progress could be undone by soaring energy costs.

'News from credit markets has been good and that is reassuring people,' Mr Johnson said, 'I think though that we are worried the oil price increase, depending on what happens if oil prices stay at this level, will have significant dampening effects,' he added.

Mr Johnson said the large increase in oil prices since March, from about US$100 (S$140) a barrel to US$125, not only hurt consumers but also has effected inflation expectations and makes policy harder to run.

'The developments since March are mixed,' he said.

Mr Johnson said while the US tax rebate that is part of an economic stimulus package was 'almost magical in terms of timing', it was hard to know how much of the money consumers would spend on at the pump due to higher gas prices .

Earlier on Friday, US Treasury Secretary Henry Paulson said there has been significant progress in calming financial markets since the acute turmoil of March, but he too urged banks to keep raising new capital so they can continue lending.

Mr Johnson said the rise in stock markets reflected success by banks in raising capital. Still, he said, the US Federal Reserve's senior loan officers' survey indicates banks may be tightening or reluctant to lend to many customers.

'I don't know if (markets) have fully absorbed or thought about the less good news,' said Mr Johnson, adding that the IMF's last forecast in April for the United States and global economy 'remained pretty much unchanged'.

He said the IMF still held the view that the value of the US dollar was on the 'stronger side', and the recent rise in the currency reflected a somewhat more positive view of the US economy. -- REUTERS

World economy is 'teetering on brink' of downturn: UN

UNITED NATIONS - THE world economy is 'teetering on the brink' of a severe downturn and will grow by only 1.8 per cent in 2008, the United Nations said in its midyear economic projections.
That's down from a global growth rate of 3.8 per cent in 2007 - and the downturn is expected to continue in 2009 with only slightly higher economic growth of 2.1 per cent, the UN report said on Thursday.

The midyear update of the UN World Economic Situation and Prospects 2008 blamed the downturn on further deterioration in the US housing and financial sectors in the first quarter which 'is expected to continue to be a major drag for the world economy extending into 2009.' But the UN said developing countries won't suffer as badly.

They should grow by 5 per cent this year and 4.8 per cent next year, compared to a robust 7.3 per cent in 2007.

The UN economists said the deepening credit crisis in major market economies triggered by the US-led slump in house prices, the declining value of the US dollar, persistent global imbalances, and soaring oil and commodity prices 'all pose considerable risks to economic growth' in both developed and developing countries.

'The baseline forecast projects a pace for world economic growth of 1.8 per cent in 2008,' the UN report said.

But it said the final figure will largely depend on developments in the United States.

Global growth this year could fall to 0.8 per cent if the US sub-prime mortgage market turmoil has a more serious impact on developing countries and countries in transition, the UN report said.

But if the monetary and fiscal measures the US government has take to stimulate the economy - including tax refunds and lower interest rates - boost consumer spending and restore confidence in the business and banking sector, the world economy would only slow to 2.8 per cent growth this year and 2.9 per cent in 2009, it said.

US economic growth to decline, slight recovery in 2009
The report, prepared by the UN Department of Economic and Social Affairs, forecast that US economic growth will decline from 2.2 per cent in 2007 to -0.2 per cent this year, with only slight recovery in 2009 to 0.2 per cent growth.

'At issue is how deep and long this contraction will be,' the report said. 'As the housing slump continues and the credit crisis deepens, a broad array of ... indicators are already hinting at a recession.'

It cited a decline in US employment, consumer confidence at its lowest level in a decade, household spending growth slowing sharply, and business equipment spending slowing alongside large inventories of housing and a 30 per cent decline in residential investment.

This strongly suggests 'that the implosion of housing activity will not stabilise until 2009,' the UN report said.

As for other developed countries, the UN forecast that Japan's economic growth will decline from 2.1 per cent in 2007 to 0.9 per cent in 2008, and that Western Europe's growth rate will drop from 2.6 per cent last year to 1.1 per cent this year.

Despite the slowdown in global economic growth in 2008, the UN said global inflation is expected to accelerate this year to 3.7 per cent.

The report said the recent sharp rise in commodity prices, and the continued rise in oil prices are key factors spurring inflation along with higher wages.

The growth of world trade also slowed from 7.2 per cent in 2007 to 4.7 per cent in early 2008, largely due to weak US demand for imported goods, it said.

The UN report said 'a number of developed countries with some weight in the world economy like Japan, Germany, Switzerland, the Netherlands, Norway and Canada, as well as the emerging-market economies in East Asia and the main oil exporters have a decisive role in engineering a more balanced and sustainable path of economic growth.'

These countries 'have much to gain' from deploying some of their vast accumulated monetary reserves to improve infrastructure, social services, and further diversify their domestic economies, it said. -- AP

In a Tough Economy, Self-Understanding Is Key

by Laura Rowley

With a sluggish economy and prices for food, gas, and other necessities escalating, many consumers are taking proactive steps to shore up their finances, according to a recent survey of 2,000 adults by Yahoo! Finance and research firm Decipher.

Getting Proactive

In the past six months, 68 percent held off on a major purchase; 60 percent have begun proactively paying down debt; and 41 percent have proactively increased their savings.

Some 90 percent of people surveyed believe the United States is already in or headed for a recession, and 8 in 10 say they expect the recession to last more than a year. In addition, 20 percent report that someone in their family has lost a job within the past six months.

Since fear tends to beget irrational economic behaviors, here are some suggestions to maximize decision-making for people reorganizing their household budgets.

Understand the Dynamics of Self-Control

In response to current economic conditions, some 56 percent of survey respondents say they'll "only buy the essentials, as opposed to what they want." But a resolve to go cold turkey on all but the necessities will likely break down (and lead to whipping out credit cards to seize a must-have temptation).

Roy Baumeister, a social psychologist at Florida State University who studies self-control, suggests that human beings have a limited capacity for resisting temptation. Acts of discipline have a cumulative effect: each instance of self-restraint weakens us a little more. His experiments have found self-regulation was weakest among people who had already performed a prior act of self-control.

Moreover, Baumeister has found that willpower tends to dissolve when we have to make multiple decisions. Uncertain or conflicting goals also undermine the basis for self-control. That's why a vague vow to "spend only on necessities" is doomed to fail.

Instead, target just one or two specific and measurable goals, such as keeping grocery spending to $100 a week; reducing utility bills by $50 a month; or increasing earnings by $100 a month. Nearly two-thirds of respondents in the Yahoo! Finance poll say they're making clear-cut changes to reduce their spending, including carpooling, brown-bagging lunches, and reducing clothing expenditures.

Know What Your Time Is Worth

When you're cutting your budget, make sure the cutbacks actually leave you better off financially. This is easier said than done. For example, I made a somewhat irrational decision and eliminated the weekly service that cuts my lawn and blows away the pollen and leaves. My lawn is pretty small, I reasoned, and we could do it ourselves if we purchased a leaf blower.

There were numerous downsides to this decision: I got a leaf blower for Mother's Day. The only lawnmower we own is a push job from the 1950s that our neighbor gave us when we moved in. It took my daughter and me about an hour to cut the grass, during which I was sneezing my head off because of pollen allergies and nearly cut off one of my toes. (Now I know why the lawn guys don't wear flip-flops.)

Most important, since my spouse and I are both self-employed, we have the opportunity to increase our income if we work another hour. Thus it actually makes more sense for me to stick with my computer and have this job done professionally, since our time is worth more than the cost of the service. My solution for the moment is to assign the yard chores to my kids (wearing sneakers and protective goggles), which means it'll cost half as much, help develop their work ethic, and keep the dough in the family.

Manage Your Emotions

Researchers have found that it's just as important to manage your emotions around spending as it is to manage your behavior. Gregory Berns, an Emory University neuroscientist, has found that the brain is wired for novelty, surging with the chemicals dopamine and cortisol when we encounter something new. Would-be budgeters have to consciously move their thoughts and emotions away from spending traps -- reducing exposure to television, ad-laden magazines, and catalogs in the mailbox.

And, obviously, avoid the shopping mall like the plague. Carnegie Mellon economist George Loewenstein has studied what he calls the "hot/cold empathy gap," which leads to errors in predicting feelings and behavior.

When people are in a "cold" or neutral emotional state, they often have trouble imagining how they would feel or what they would do if they were in a "hot" state -- angry, hungry, in pain, or surrounded by "50 percent off!" signs. When we're experiencing a hot state, we have difficulty imagining that we'll cool off at some point. One study found that people who aren't in a shopping situation underestimate the "urge to splurge" that takes over when they enter a mall.

Get a Handle on Mental Accounting

Half of households report maintaining a budget, according to a Yahoo! Finance survey conducted last year. But even those who don't budget usually keep separate accounts in their heads that they typically group into current income, current assets, and future income.

Economists and psychologists call this "mental accounting." It can be helpful -- it keeps us from withdrawing money from a 401(k) retirement plan to pay for groceries -- but it can also lead to irrational behavior. Credit cards tend to obliterate good mental accounting; see my blog for that story.

In one classic experiment by Nobel laureate Daniel Kahneman and the late Amos Tversky of Stanford, participants were asked to imagine that they'd paid $10 for a ticket to see a play, and lost the ticket. Would they go to the ticket booth and buy another? Some 54 percent of respondents said no. Then participants were asked to imagine they decided to see a play that cost $10, but as they enter the theater discover that they lost a $10 bill. Would they still pay $10 to see the play? Some 88 percent of people said yes -- although in both instances, the economic impact is exactly the same.

Going Mental

How can you make mental accounting work for you? Create a separate category for bonuses and windfalls. For instance, don't treat your tax rebate as regular income and use it to pay monthly bills (which 38 percent of Yahoo! Finance survey respondents plan to do). Instead, direct special windfalls toward savings or debt pay-down. (That's what 43 percent and 32 percent of survey respondents, respectively, say they'll do.)

When you make a decision from a single mental account, recognize that the money is fungible, as economists like to say -- or interchangeable. In other words, we should appreciate the fact that the lost theater ticket is equivalent to the lost $10 bill. Compare large expenditures to other purchases that might offer more utility -- that $3,000 couch could be a $3,000 vacation, for instance.

US still competitive but risks Japan-style recession: IMD

GENEVA - THE United States remains the world's most competitive economy but risks plunging into economic recession just like Japan in the 1990s due to structural weaknesses, a new study warned on Thursday.
The US once again ranked number one in an annual competitiveness survey by the Swiss-based Institute for Management Development (IMD), but risks being toppled from its plinth with both Singapore and Hong Kong close behind.

'Singapore is closing the gap with the US and 2008 might be the turning point where the US falls from its leadership of top competitors,' the IMD said in a statement.

IMD economist Stephane Garelli said the US situation bears hallmarks of Japan's position twenty years ago, just before it slid into a decade of recession, and when the Lausanne-based institute carried out its first competitiveness survey.

'The past crisis in Japan bears some resemblance with the present turmoil in the US,' he said.

In 1989, 'Japan's competitiveness seemed unassailable, with a strong domination in economic dynamism, industrial efficiency and innovation.'

'Then all hell broke loose: the stock market went into reverse in 1989, land prices collapsed in 1992, credit cooperatives and regional banks came under attack in 1994, large banks teetered on the edge of bankruptcy in 1997 and a major credit crunch occurred in 1998.'

'Does this ring a bell?,' Mr Garelli asked rhetorically.

The US economy has been badly hit by the subprime mortgage crisis and the International Monetary Fund has forecast a 'mild recession' with annual growth at a paltry 0.5 per cent for 2008.

However, Mr Garelli said the comparison with Japan was not watertight, noting that 'because of its openness, resilience and entrepreneurship, (it) always seems to find the means to reinvent itself in ways that Japan (and much of Europe) often lacks.'

Washington has also learned from Tokyo's mistakes in some respects, particularly in supplying liquidity to embattled financial institutions, he said.

'The Federal Reserve and the Treasury were thus quick to realise the magnitude of the risk, and will continue to take drastic action.'

Significant challenges remain, however: 'the structural deficits in the US (balance of trade, budget and, as a consequence, national debt) have ultimately to be addressed otherwise the dollar will remain weak,' Mr Garelli warned.

'In the 20 years that we have ranked and analysed competitiveness, we have learned one thing: no nation, however competitive, is immune to a breakdown, especially when it stems from the financial sector.'

Ten European countries featured among the 55 surveyed, including Switzerland in 4th place, Luxembourg 5th, Sweden 9th, the Netherlands 10th, Norway 11th and Ireland 12th.

Britain, France and Italy, the European members of the G8 group of key industrialised economies, languished in 21st, 25th and 46th place respectively. -- AFP

Soros: Global investing's godfather

George Soros retired as a multibillionaire. But now he's back, hedging his wealth against what he calls the worst economic crisis in 75 years.

(Money Magazine) -- Broke and friendless in postwar London, having just spent his last penny on food, 22-year-old George Soros made the first of a lifetime of prescient economic calls. "I have touched bottom," he told himself, "and I am bound to rise."

As it turned out, the Hungarian-born survivor of both Soviet and Nazi occupations would do more than merely rise. He would parlay an uncanny flair for anticipating global economic trends into one of the great investing records of all time - not to mention a fortune estimated at $9 billion.

Soros retired in 2000 from running hedge funds and delegated control over a large part of his endowment fund to outside managers. But when subprime defaults began to ricochet around the world, he decided, at 77, to start investing again and to put his take on the crisis into a book, "The New Paradigm for Financial Markets." He recently spoke to managing editor Eric Schurenberg.

Question: In your 50 years in finance you've seen any number of crises. Why is this so bad?

Answer: Because two bubbles are deflating at once. There's the collapse of housing prices, of course. On top of that there's the end of what I call the superboom of credit expansion that has been going on for 25 years. That was made possible by a stable global financial system in which the dollar was the world's primary currency. Now, for many reasons, the system is in question and nothing has taken its place. That has created great uncertainty.

Q. And for us regular people it means...?

A. The days of rapid financial wealth creation are over. We're now in a period of wealth destruction. It is going to be very hard to preserve your wealth in these circumstances.

Q. Don't feel you have to sugarcoat your answer just for my sake.

A. Since the 1980s, the global financial system has been dominated by an ideology I call market fundamentalism - the idea that markets are perfect and regulations are always flawed. But markets aren't perfect. Left to their own devices, they always go to extremes of either euphoria or despair. The Federal Reserve and other regulators should recognize this, since they've had to bail out the markets in crisis after crisis since the 1980s.

Q. Can't the Fed just bail us out again?

A. The Fed's first duty is to prevent the financial system from collapsing. It's shown it can do that, and the markets are breathing a sigh of relief. But we can't avoid the fallout in the real economy. We're facing not only recession but also inflation and a flight from the dollar. To fight recession, the Fed needs to increase the money supply, but that only makes the dollar weaker and inflation worse. That's why I think this crisis is so serious. The Fed's power to intervene is limited.

Q. Where is your money now?

A. Mostly in my endowment fund, a good portion of which I had farmed out to other money managers. When I saw what I considered the most serious financial crisis of my lifetime, I came out of retirement and set up an account to hedge their positions.

Q. How?

A. I went short [bet against] the dollar, U.S. and European stocks and Treasury bonds. I went long [invested in] emerging markets. That worked last year, but this year bonds kept going up and emerging markets down. So I'm about even.

Q. Should Money readers do the same?

A. You'd have to be pretty nimble. I think most investors would be best off in safe, inflation-indexed Treasuries, even though they're quite expensive now.

Q. Growing up in Nazi-occupied Hungary must help you keep today's risky markets in perspective.

A. I'd agree that the prospect of extermination was a formative experience for me. [Laughs.] The Nazis taught me that the abnormal can become normal.

Q. And the lesson in that?

A. It's important in life and in investing always to question yourself. Understand that you may be wrong, especially when you believe too firmly that you're right.

Q. Have your billions made you happy?

A. I'm reasonably happy, but the money's not the point. It's an indication that I've succeeded in the grand adventure of understanding reality.

Asian economies holding up: Merrill Lynch

ASIA'S strong economic growth will persist despite an ailing US economy as the region diversifies its export markets and a new breed of young and wealthy citizens drive consumption, investment bank Merrill Lynch said on Wednesday.

Inflation is a bigger risk to the region than a slowdown induced by a recession in the United States, the world's biggest economy, said Timothy Bond, Merrill Lynch's chief Asia economist.

Despite a global credit crunch resulting from a crisis in the US housing market, Asian economies expanded 9.5 per cent and China grew 11.5 per cent in the second half of last year, he said at a Merrill Lynch conference in Singapore.

In the first quarter of this year, the region is expected to grow a slower but still robust 9.0 per cent, and China 10.5 per cent, he said.

'I think we have a lot of evidence to support the decoupling view,' he said, referring a view that Asian economies are now in a better position to withstand the impact of a US recession, unlike in the past.

Mr Bond also noted that while Asian exports to the US were flat last year, shipments of made-in-Asia goods to the rest of the world expanded 19 per cent.

'I think the message here is that there is a lot of strength in the global economy despite some very clear headwinds in the US economy, and this is a region that exports to the world, not just the United States,' he said.

Asian exports to Europe have been growing 25 to 28 per cent annually due mainly to the stronger euro currency which makes Asian goods cheaper, he said, adding that intra-Asian trade has also increased.

'Europe has been the number one driver of Asian exports over the past few years, not the United States,' Mr Bond said.

Any slowdown in exports should be offset by an acceleration in consumption, powered by the emergence of younger and wealthier Asians who, unlike their parents, would like to spend their money, Merrill Lynch experts said.

'In the last five years, you have seen people become wealthier in this region... There's many more millionaires in Asia now than there were five years ago,' said Mark Matthews, chief Asia equities strategist at Merrill Lynch.

'So even if their costs are going up and they are complaining about the gasoline (and) their food, the fact is that they are living in nicer places, they are going on longer holidays and they are spending more.' -- AFP

Turn $451 a Month Into a Million Bucks

If you're 30 years old, you need to set aside $448 per month for next 35 years to become a millionaire -- if you earn a reasonable 8% annualized return in a retirement account. Don’t have $448 to spare -- or even $248? Maybe you do and don't realize it. Let's take a look at how you can come up with the cash.

Save $219 Per Month on Taxes

Here’s How: The average refund for the 2008 filing season so far is about $2,500. If you received an average refund and you are in the 25% federal tax bracket, you could be entitled to three extra exemptions worth $3,500 each. That would boost your take-home pay by $219 a month. A couple of reasons you might be eligible for more exemptions: becoming a new parent or buying a house.

Save $100 Per Month on Food

Here’s How: Bring your lunch and snacks to work. Considering that the average meal at McDonald’s costs $5 and Dunkin’ Donuts charges $2 for a large cup of coffee, the brown-bag windfall can be substantial.

Save $80 Per Month on Entertainment

Here’s How: We're talking about one fewer dinner-and-a-movie night every month. That assumes you and your significant other pay the average $33 per person for a restaurant meal (according to a recent Zagat survey) and that you spend $7 per ticket, the average price at the movies (according to the Motion Picture Association of America).

Save $28 Per Month on Health Care

Here’s How: The typical family spends $1,321 on out-of-pocket health expenses each year, says the U.S. Department of Health and Human Serv­ices. You can pay those costs with a flexible spending account, which lets you set aside pretax dollars.

Save $10 Per Month on Auto Insurance

Here’s How: The average consumer pays $829 annually for car insurance, according to the National Association of Insurance Commissioners. Raising your deductible from $250 to $1,000 can save you 15% or more.

Save $8 Per Month on a Well Maintained Car

Here’s How: Keep your car’s engine tuned and tires inflated to the proper air pressure. Those minor improvements can save you up to $100 on gas each year.

Save $6 Per Month on Generic Non-Prescription Medicines

Here’s How: The average American spends $185 annually on over-the-counter medications. Generics cost up to 40% less than their brand-name counterparts and work just as well.

$451 Saved in Total!

Invest the found money every month in a retirement account that earns an average of 8% return over the next 35 years, and you'll have $1 million. That wasn't too hard, right?

Copyrighted, Kiplinger Washington Editors, Inc.

Economic 'misery' more widespread

By Chris Isidore, CNNMoney.com senior writer

Americans are feeling a lot more economic pain than the government's official statistics would lead you to believe, according to a growing number of experts.

They argue that figures for unemployment and inflation are being understated by the government.

Unemployment and inflation are typically added together to come up with a so-called "Misery Index."

The "Misery Index" was often cited during periods of high unemployment and inflation, such as the mid 1970s and late 1970s to early 1980s.

And some fear the economy may be approaching those levels again.

The official numbers produce a current Misery Index of only 8.9 - inflation of 3.9% plus unemployment of 5%. That's not far from the Misery Index's low of 6.1 seen in 1998.

But using the estimates on CPI and unemployment from economists skeptical of the government numbers, the Misery Index is actually in the teens. Some worry it could even approach the post-World War II record of 20.6 in 1980.

"We're looking at government numbers that are really out of whack," said Kevin Phillips, author of the book "Bad Money."

No inflation if you don't eat or drive

According to the government's most recent Consumer Price Index, a key inflation reading, consumer prices rose 3.9% in the 12 months ending in April, down slightly from the 4% annual inflation rate in March despite record gasoline prices.

But Phillips argues that consumer prices are probably up at least 5% and perhaps more than 10%.

Part of the disconnect may be due to the fact that nondurable goods, such as food and gasoline, makes up only 12% of CPI.

In addition, food and energy prices are eliminated from the so-called core CPI, which many economists tend to focus more closely on because they claim food and gas prices are volatile.

But food and energy costs are a very important part of household budgets. And those prices have been skyrocketing: Gas prices were up about 21% over the 12 months ending in April.

However, due to seasonal adjustments in the CPI, the government reported that gas prices were down 2% in April, even though on a non-adjusted basis, gas prices rose 5.6% from March.

And even that number may be too low. Measures of gasoline prices by AAA and the Department of Energy suggested prices rose as much as 10% in April.

Meanwhile, food prices rose 5.1% over the last 12 months, according to the report. The nearly 1% one-month jump in food prices in April was the biggest spike in 18 years.

To that end, nearly half of the respondents of a recent CNN/Opinion Research Corp. poll said inflation was the biggest problem they face.

CPI missed the housing bubble...and bust

Another problem with the CPI figures, according to skeptics, is that it doesn't accurately reflect what's going on in the housing market. That's significant because the cost of buying a home has twice the impact on CPI as does the prices of all nondurable goods combined.

The CPI showed only an 11% rise in home ownership costs from 2002 through 2006, a time that the National Association of Realtors reported that existing home prices soared 34%.

The reason for the low CPI reading is because the CPI looks at equivalent rents, rather than home prices. So inflation was understated during this period, according to Phillips. He argues this may have helped feed the housing boom since it kept mortgage rates lower than they should have been.

Now that the housing boom has gone bust, the CPI appears to be missing the declines in home prices as well; it estimates that the cost of owning a home posted a 12-month increase of 2.6% in April.

But because the CPI figure was so far behind tracking the increase in home values, the housing component of CPI still is leading to a lower inflation reading than what it should be, Phillips said.

The inflation 'con job'

The unusual way that housing prices are estimated isn't the only peculiarity of the CPI report. Over the past ten years, there have been other changes in the calculations, particularly for big ticket items.

Cuts to estimated prices for items like electronics and cars that are thought to have improvements in quality year-after-year have lowered the overall CPI. In addition, changes in the way certain products, such as food, are tracked by the government, have also contributed to lower readings than otherwise expected.

Bill Gross, the manager of Pimco Total Return, the nation's largest bond fund, refers to the CPI as a "con job" that deliberately understates the price pressures faced by Americans in order to keep Social Security payments and other government costs pegged to the index unduly low.

In a report about the CPI, he noted that some of the adjustments don't accurately reflect how much consumers pay for goods. Pimco estimates that the changes have shaved more than a percentage point off the CPI.

"Did your new model computer come with a 25% discount from last year's price?" Gross wrote. "Probably not. What is likely is that you paid about the same price for memory improvements you'll never use."

Another flaw with the CPI numbers is that the government now assumes that higher prices for one item will lead consumers to buy more of a substitution item. That may be true. But if people buy fewer steaks and more hamburgers, for example, it's unrealistic to say that inflation isn't a problem, skeptics maintain.

"The government can claim there's no inflation but all they're measuring is a reduced standard of living," argues Peter Schiff, president of Euro Pacific Capital, an investment firm specializing in overseas investments.

With all this in mind, California economist John Williams argues that CPI is understating inflation by at least 3 percentage points and perhaps as much as 7 percentage points. So instead of an annual inflation rate of 4%, the true number could be between 7% and 11%.

Unemployed, but not counted

Finally, there's the unemployment rate. It was at a relatively low 5% in April. But according to Williams' Web site, ShadowStats.com, the actual rate may be between 8% and 12% if you use a more accurate reading of those out of work.

Even the government's own numbers show there are many unemployed people not showing up in the unemployment rate. The official reading does not include 4.8 million people who want to work but haven't found a job, for example.

Many of these people are dropped from the official calculation because they have become so discouraged from looking without success that they haven't looked in the previous four weeks. Simply adding those people to the number of unemployed takes the current unemployment rate to 7.8%.

The Bureau of Labor Statistics, which produces both the CPI and unemployment readings, says changes in both measures were made to more accurately reflect the real world. The BLS also says the changes have resulted in changes of less than 1% for each measure.

Still, the Labor Department's own broadest measure of unemployment, which includes as jobless those working part-time jobs because they can't find full-time positions as well as some discouraged job seekers, puts the unemployment rate at 9.2% in April, the highest level for that reading in more than three years.

So if you take that number and add that to the 7% that Williams thinks is a more likely annual inflation rate, you're looking at a "Misery Index" of 16.2, much worse than the 8.9 you get from the official numbers.

And while that may seem a bit high, it's probably a more accurate gauge of how bad the economy is for many Americans.

JPMorgan may cut 4,000 jobs on Bear deal, markets

NEW YORK - JPMORGAN Chase could cut as many as 4,000 of its own employees worldwide as the bank prepares to take on staff from Bear Stearns at the same time it deals with turmoil in financial markets, people familiar with the situation said.
In addition to roughly 2,000 JPMorgan employees who will be replaced by counterparts acquired through its takeover of Bear Stearns, the sources said that an additional 1,000 to 2,000 JPMorgan employees may lose their jobs because of the slowdown in investment banking activity and credit market crisis.

Final decisions dealing with specific employees have not been made, though JPMorgan is expected to decide on market-related cuts by early June, the sources said on Tuesday.

JPMorgan, which expects to complete its takeover of Bear Stearns around June 1, told investors on Monday the bank had made decisions on about 10,000 of Bear's nearly 14,000 employees.

Morgan Chief Executive Jamie Dimon told investors the bank had extended job offers to about 6,000 Bear staffers, leaving decisions still to be made on the remaining 3,500 Bear staffers. Most of these employees work in technology and operations, a person familiar with the matter said.

The sources also said that of 6,000 Bear staffers offered jobs, a little more than half are regarded as 'lift and drops', meaning employees who can be lifted from businesses where JPMorgan is not strong, such as prime brokerage, clearing, energy trading and some investment banking coverage.

Among 2,500 to 2,700 Bear staffers who have been offered jobs, some will fill operations, finance and other roles required in a larger company. But an unspecified number of these staffers overlap with existing JPMorgan staffers, and JPMorgan is expected to cut roughly 2,000 of its own employees.

On a net basis, the Bear merger would boost JPMorgan's total headcount by 4,000 to about 184,000 worldwide, the sources said.

JPMorgan came under fire in March after it acquired a nearly-insolvent Bear with involvement of the Federal Reserve and at a fire-sale price. Since then, Morgan executives have worked carefully around personnel decisions, worried that wholesale job cuts would generate more bad publicity. -- REUTERS

Bernanke says crisis not over; prices worry others

MIDLAND (Texas) - United States Federal Reserve Chairman Ben Bernanke said the credit crisis was not over, even as his colleagues revealed growing concerns about inflation that could signal a pause in interest rate cuts.
'Conditions in financial markets are still far from normal,' Mr Bernanke said on Tuesday. 'Ultimately, market participants themselves must address the fundamental sources of financial strains. This process is likely to take some time.'

A string of other Fed officials in separate speeches seemed increasingly worried that rising energy costs would put upward pressure on inflation, potentially dampening their fervour to cut rates further.

The comments highlighted the Fed's ongoing predicament: It must prevent economic growth from slumping too deeply even as it grapples with price pressures that are largely out of its control.

Bonds sold off sharply following the comments and rate future markets began pricing in strong prospects for higher interest rates by year-end. Stocks improved on the comments, with the Dow industrials and the benchmark S&P 500 paring losses, while the Nasdaq rose.

Dallas Fed President Richard Fisher spoke to the difficulty faced by the central bank, saying a slower US economy would not necessarily bring down commodity costs.

'There still is growth in the world economy, even if we slow down,' Mr Fisher said. 'It's difficult for me to see a supply response that will feed into that demand to relieve all the price pressures we see on oil.'

Like Mr Bernanke, Mr Fisher noted some improvements in market conditions but said the financial sector was 'not out of the woods yet'.

Separately, the Cleveland Fed's Sandra Pianalto said that although core US price measures were climbing faster than she wanted, Fed monetary policy was compatible with low inflation.

Oil prices continue to set new records, and were trading above US$125 (S$172) a barrel on Tuesday, after earlier setting another record high near US$127.

Such steep increases have have erased at least one full percentage point from US economic growth, according to Mr Thomas Hoenig, president of the Kansas City Fed.

Mr Hoenig said the economy faced a difficult set of circumstances because of high oil prices, the housing downturn and subsequent credit contraction, but growth should pick up later this year.

Mr Fisher, who has dissented against the Fed's more aggressive rate-cutting efforts, said predictions of a very deep recession were misguided.

'I'm not sure how deep the economic slowdown will be,' he said at a community event in Midland, Texas, even as he admitted the softness could linger for some time.

A Philadelphia Fed survey of professional economists seemed to counter that optimism, however, finding that the chances of an outright contraction in gross domestic product have risen.

In an attempt to prevent such an outcome, the Fed has slashed interest rates by 3.25 percentage points since mid-September, bringing its benchmark rate to 2.00 per cent, and pumped billions of dollars into financial markets to stop them seizing up amid a global credit crunch sparked by the US subprime mortgage crisis.

But the wave of speeches on inflation could signal the Fed's intention to leave rates on hold from here on out, analysts said.

Controversially, the Fed's emergency steps also included a massive cash line that enabled JPMorgan Chase to rescue faltering investment bank Bear Stearns. Defending the Fed's actions, Mr Bernanke said a Bear Stearns bankruptcy could have touched off a much broader liquidity crisis.

Mr Bernanke acknowledged that intervention risked a moral hazard that investors would renew risky behaviour in the expectation of being protected by the central bank. But he said regulation ahead of a crisis was the best way to address that risk. -- REUTERS

INVESTMENT BANKING: An inside story

The following article is based largely on the author’s summer internship experience at Banc of America Securities, as well as on interviews conducted with the other analysts at the bank.

Investment banking. For an eager job seeker, these two words conjure up magical images of skyscrapers silhouetted against the night sky, high-powered men in pin-striped suits making deals that change the course of the stock market, and glamorous lifestyles paid for by huge bonuses. Looking in from the outside, investment banking may indeed seem like a dream job. The mysterious and oh-so-enticing world of high finance lures the unwary with promises of big paychecks and even bigger opportunities, and hapless econ majors flock to Wall Street like bees to a honey pot. While many of them know what they are getting themselves into, having had internships or otherwise done extensive research, a fairly large portion enters investment banking with only a vague idea of what it entails or the sacrifices that it demands.


Investment Banking: The Job

So what is investment banking? On a big-picture level, i-bankers (or just “bankers,” as they call themselves) help companies raise capital and provide them with strategic advice. What that basically means is that they assess a company’s financial capabilities and decide what would be best for that company. A company that decides to go public—Google, for instance—needs investment bankers to arrange an IPO (initial public offering). A company in need of cash may turn to an investment bank in order to raise funds through the issuance of either equity (stocks) or debt (bonds). Investment bankers also act as advisors when companies are being bought (the buy side) or sold (the sell side) and when companies merge. Additionally, there is something called a leveraged buyout (LBO), in which a public company is bought by a small group of private investors. These investors — known as “the buyout group”—finance the acquisition by levering a ton of debt on the target company and then using that company’s profits to pay off the loans. Once the debt has been paid off, the company’s cash flows can be used to line the pockets of the investors.

At this point, unless you have developed an immunity from repeated exposure, all of these financial terms are probably giving you a brain rash. Leverage, mergers, acquisitions, LBOs, equity, debt, blah, blah, blah. It’s all good and well that investment bankers do all of these things, you probably want to say, but what do they actually do? There are two things that define the life of an investment banking analyst: Microsoft Excel and PowerPoint. Analysts spend so much time using one or both of these programs that they often have dreams—and nightmares—about them. Aarthi Sowrirajan, a summer analyst at Banc of America Securities (B of A), dreamed about being trapped inside an Excel cell and unsuccessfully trying to use the shortcut keys to get out. Similarly, I once woke up to find myself trying to edit a PowerPoint presentation with the joystick of my cell phone. For an analyst, spreadsheets and slides become a way of life.

In general, there are four common activities that the analysts engage in. The first—and usually most hated—is spreading comps. In order to seem smarter than the average Joe who can look up a company’s financial information on Yahoo, investment banks maintain files on the companies that they do business with and on their competitors (hence the name, comps—comparable companies). Every time a company releases new financial information, analysts update the files by inputting the new data into the Excel spreadsheets that have been created expressly for that purpose. However, since companies exist only to make the bankers’ lives more difficult, each company has a slightly different method of reporting its financials. To make these companies truly comparable, analysts have to go through the companies’ public filings and adjust the financials for any nonrecurring items, hidden charges, and so forth. One of the main goals of spreading a comp is to accurately calculate the EBITDA (earnings before interest, taxes, depreciation, and amortization), which is then used by the investment bankers to approximate the company’s cash flows.

Comps usually take anywhere from 20 minutes to a couple of hours, depending on the speed of the analyst and the number of nonrecurring charges that he has to adjust for. (Notice my politically incorrect use of “he” as a general pronoun. I’m allowed to do this because (a) I’m a female and (b) investment banking is a very male-dominated profession.) The company’s filings with the SEC, usually a 10-K or a 10-Q, range in size from 30 pages to 400, and the analysts have to go through all the footnotes and the management’s discussion of the operating results in order to sniff out any unusual and nonrecurring items. Unless you have the hots for accounting and financial statements, you will enjoy spreading comps about as much as going to the dentist. “I have forty comps to do, forty!” gasps David Tompkins, a first-year analyst at B of A, during his second week on the job. Yep, that’s forty visits to the dentist for poor David right there.

Another common task is putting together a PIB (Public Information Book) on a company. This is considered a very simple job and analysts usually try to pass it off to the summer interns, if such creatures are present. Making a PIB involves gathering all the recent company filings and information about the company from sources such as Hoover’s and Bloomberg, making copies of the gathered materials, and binding everything together to make several books. At B of A, we had Presentation Services that would make copies and bind books for us, but at many smaller banks, the analysts have to do everything manually. In the latter case, hole-punching and fitting pages onto a spiral spine take up quite a bit of an analyst’s time. After they are made, the PIBs are distributed to everyone on the deal team and used by the team members to get smart about the company.

A step above comps and PIBs is the third task—making a pitch book. This is something that investment bankers at all levels, from managing director to a lowly analyst, take part in. Pitching is key to investment banking—and it has nothing to do with baseball. Making a pitch refers to the investment bank offering its services to a prospective client—a salesman’s pitch, if you will. “It’s a sales-driven profession, a sales-driven world,” says Rebecca Jarvis, a second-year analyst at B of A. Investment bankers pitch an idea to some company (potential acquisition or divestiture, debt or equity offering, merger, etc.), with the implication that if the clients like the idea, they hire the bank.

Associates and senior people usually make all the decisions about what goes into a pitch book and how to arrange the information. All that remains for the analyst to do is follow the directions and create whatever graphs and charts the senior people deem appropriate. The biggest challenge here is making sure that everything is nicely formatted and all the numbers tie together. Attention to detail is of utmost importance because prospective clients often form their opinion of the bank based on the materials presented. A sloppy pitch book could lose a bank millions of dollars in revenue. To make everything as perfect as possible, a pitch book undergoes over a dozen revisions (turns). Turning a pitch book may be as simple as inserting a footnote and taking out a few words, or it could mean making additional slides. Either way, the quest for a perfect pitch book has led to many sleepless nights for the analysts and associates.

Finally, there is financial modeling, generally considered to be the “fun” part of being an analyst or an associate. It is also the most skill-intensive task that an analyst gets to do, requiring knowledge of the company’s operations, accounting, corporate finance, and Excel. As a simplified representation of a company’s past and future performance, a good model allows you to test your assumptions and analyze their impact on the company. There are earnings models, financing models, merger consequences models, discounted cash flow (DCF) models, and LBO models. As a new analyst or summer intern, you are unlikely to do a lot of financial modeling, but exceptions do occur.

Although the abovementioned tasks are the most common, they are far from being the only activities that analysts engage in. An analyst’s life has no routine and duties vary from day to day. You might be asked to come up with an idea for a deal toy (an object to commemorate the completion of a transaction) or to prepare an interoffice newsletter, to find data on tea bags or to attend a meeting with a client. In short, you will do whatever needs to be done.


The Life of an Investment Banker

Now that the mystery of the actual investment banking activity has been cleared up a bit, you probably want to know if the rumors about long hours and big paychecks are true. Well, let us begin with the good part—the paychecks.

The earnings of an investment banker are closely tied to how the economy is doing. Bonuses make up a large portion of the earnings, and they tend to shrink together with the Dow Jones when recession hits. Now that the economy is improving, the bonuses are going up again. A first-year analyst can expect 35-45K in bonus, a second-year analyst about 20K above that, and a third-year analyst’s bonus is about eighty grand. At the associate level and above, the bonuses can be simply huge. In contrast, the base salaries are good without being outstanding. A common figure floating around this year is 55K for starting base salary. There is also a sign-up bonus for full-time hires of about 10K. To learn more about the salaries, check out www.careers-in-finance.com/. The information there is a bit dated, but can give you a rough idea of what to expect.

In addition to the salary and the bonus, investment banking comes with a few other perks. At Banc of America Securities, bankers who stay in the office past 6:30 pm (as analysts and associates always do) can order dinner worth $25 and have it be paid for. Same goes for the weekend, plus $15 for breakfast or lunch. The bank also pays for cab rides in the evening and on the weekends. And, for some unfathomable reason, the bank provides cell phones and takes care of up to $40 in monthly bills.

Furthermore, if the bank wants to recruit you, you can expect to be wined and dined in high style. Events for the summer interns in Chicago have included outings to the Cubs and White Sox games (where we had front row or box seats and were booed at by the crowd for wearing suits) and dinners in great restaurants and bars. My junior mentor, Rebecca Jarvis, even treated me to a pedicure. After the recruiting is over, the new full-time hires get their share of the corporate treatment during their five-week training in New York, where they live in a hotel right on Times Square and have events every week.

Having heard all this, you may be wondering why people do anything other than investment banking. It is the perfect job, right? Well, not quite. The hours that an investment banking analyst puts in are beyond anything that regular people with their nine-to-five jobs can imagine. Analysts spend 80-120 hours a week in the office. To give you some idea of what that entails, an eighty-hour week means that you’re in the office from 9 am to midnight every day of the week and five additional hours on the weekend. A 120-hour week means that you’re pulling a couple of all-nighters and working straight through the weekend. Think of the worst finals week you’ve ever had at the U of C and you might come close to what investment bankers experience on a regular basis.

There is also a lot of pressure that comes with the job. Deadlines are looming every day. Everyone from an associate to a managing director (MD) wants things done yesterday. If there is a pitch book going out to a client next Monday, the MD wants to see it this Friday. This means that the vice president (VP) wants to see it on Wednesday, and the associate wants it completed by Tuesday morning. You, as an analyst, probably got the assignment this Monday and now have less than one day to complete the presentation. Needless to say, you are not going to be sleeping much that night. You are also likely to be working that weekend, making all the changes that the MD comes up with on Friday. The unpredictability of the business is often what makes it so difficult. Kurt Sunderman, a summer associate with B of A, admits that he had to cancel plans twice during his ten-week internship. “The worst part about this job is when, after a difficult couple of weeks, you think you have Friday night off, only to learn on Friday afternoon that you would be working that entire weekend,” reveals second-year analyst Rebecca Jarvis. She has also discovered that people unfamiliar with the business often find it difficult to comprehend the all-consuming nature of investment banking and often think that she chooses to stay in the office on a Friday or a Saturday night to avoid socializing. The lack of control over their own lives can be very frustrating to analysts, who are on call 24-7 thanks to a handy device known as a Blackberry.

In general, investment banking wreaks havoc with an analyst’s social life. Juggling family and friends when you have only one night a week free becomes a virtual impossibility. That is why, Rebecca says, many of her friends are themselves analysts at B of A. They know exactly what she is going through on those late nights and are always willing to lend a hand to help her get done faster. Being friends with the people in the office mitigates the stress of the job and makes those 100-hour weeks tolerable. For Rebecca, the level of camaraderie and teamwork that she found in the office is the most surprising—and pleasant—aspect of the job.


Investment Banking as a Career Choice

Now that you know something about investment banking, the big question is whether this job is right for you. Although you only work as an analyst for two or three years, it is not a decision to be made lightly. According to summer analyst Himal Agarwal, your time as an analyst can be “the hardest two years of your life,” and a summer internship is “a must” for anyone considering this profession. Vikas Sekhri, a first-year analyst, agrees with that assessment. “Definitely do an internship before doing this full-time,” he advises. Ask yourself if you would be willing to give up your life for two years and whether you will enjoy the work itself. If not, then no amount of money will be enough to make up for the hell that you will go through.

Should you decide to make the sacrifices that being an investment banking analyst requires, the world is your oyster. Because of the steep learning curve and the hours spent on the job, just two years of investment banking gives you a wealth of experience and a set of marketable skills that make you a highly desirable employee. Hedge funds and private equity firms will be knocking on your door trying to hire you. If you really enjoy investment banking and wish to continue in the profession, it is possible as well. Although investment banking is never a nine-to-five job, the hours beyond the analyst level definitely improve. Associates usually get to leave the office before 9 pm on a semi-regular basis, while the senior people tend to go home before 7 pm. There are exceptions to everything, of course, and I have seen some managing directors in the office at midnight, but those instances are rare. In general, bankers above the analyst level do have some kind of life outside of work, so a long-term career in investment banking is feasible.

So now you know the truth about investment banking. Is it glamorous? At times. Is it difficult and demanding? Oh, yes. Is it worth it? You decide.

What Bear Market? What Recession?

Commentary: The facts just don't add up
By Howard Gold

NEW YORK (MarketWatch) -- If you read the papers, go online, or watch television these days, it seems indisputable that the U.S. is in a recession. Some 80% of the American public thinks so, and so do such investment geniuses as George Soros and Warren Buffett.

Meanwhile, many strategists and analysts talk about "bear market rallies" and other such things.

But there's one problem: There's little evidence that we're in either a bear market or a recession, defined, respectively, as a 20% drop in the major stock market averages and two consecutive quarters of negative gross domestic product growth.

Far from just a technical issue, whether we are or not will set the direction of the market in the months ahead and determine whether the recent rally from the March lows continues strongly or peters out.

So, let's go to the videotape, as they used to say.
The bear market issue is the easiest to settle. Unless the Dow Jones Industrial Average and THE Standard & Poor's 500 Index ultimately fall well beneath their January and March lows, we just ain't in one.

From its closing peak at 14,164.53 last October the Dow fell 17% to its closing low on March 10th. The S&P 500 slid 18.4% from its October high to its March low. The broadest measure of the U.S. market, the Dow Jones Wilshire 5000, showed a 19% high-to-low decline. (Using intraday prices it's a closer call.)
In fact, as I pointed out a few weeks ago, the U.S. market has outperformed many of its overseas peers. Want to find a real bear market? Then look to last year's can't-miss superstars, China and India. The Shanghai Composite Index lost more than half its value from its all-time high above 6,000, and the Bombay Sensex Index (XX:1803532: news, chart, profile) declined almost 30% from its peak. That's a bear market.

The reason why the U.S. markets are holding up so well relative to much faster growing parts of the world is that our economy just isn't as bad as the gloom merchants say it is.
Again, let's look at the record.

First, despite the subprime mortgage crisis and a wave of home foreclosures, gross domestic product (GDP) growth was still in positive territory in the first quarter -- albeit an anemic 0.6%. It's not worth breaking out the bubbly over that, but it's not a recession, either.

Then there's the Conference Board's index of Leading Economic Indicators, which turned positive in March, after five consecutive negative months. The stock market, which rallied in April, will no doubt help bolster last month's reading.

Unfortunately, the LEI has correctly predicted seven recessions since World War II, but also forecasted five others that never happened.

Weekly jobless claims also are considered a good reference point for the health of the economy. If they top 400,000 for a while, some economists say it indicates a recession.

Despite a one-week spike after Easter, the claims have remained comfortably below 400,000--and last week they fell to 365,000, well below economists' forecasts. Contrast that with the 2001 recession, when they moved sharply above that level and stayed there for two years, even topping 500,000 for a while. We still may get there, but again, no sign of it yet.
And oh, yes, the unemployment rate actually dropped a bit in April, to 5%. It averaged nearly 10% in 1982 and 1983, roughly 7% in 1991-1993 and 6% in 2002-2003--during real recessions.
Which brings us to the consumer. Given all that's happened -- the housing bust, higher food prices, crude oil over $120 a barrel and gasoline above $4 a gallon in some places, it's no wonder U.S. consumers are feeling besieged. (Alarmist pundits and politicians don't help in this area, either.)

So, it's no surprise that surveys of consumer sentiment are bleaker than the movies that were nominated for Best Picture last year.

In early April, the University of Michigan's consumer sentiment index fell to 63.2, its lowest reading since 1982, when, remember, the unemployment rate was twice as high as it is now. (The Conference Board's survey showed similar results.)
Yet plenty of anecdotal evidence suggests consumers may be tightening their belts, but they're not ready to don hair shirts.
Retailers reported surprisingly good sales in April, although people are doing more shopping at Wal-Mart and Costco and less trading up to Nordstrom.

And last weekend, InterShow, the company originally behind Moneyshow.com, celebrated its 30th anniversary by sending all its employees to Disney World. Epcot and the Magic Kingdom were packed to the gills, the hotels were fully booked, and it was hard to get into some restaurants--even in the off-season. And the accents I heard were overwhelmingly American, not British, French, or German.

In fact, Disney reported double-digit increases in theme-park sales in the first quarter, and Richard Kinzel, chief executive of Cedar Fair Entertainment, said amusement-park attendance should hold up well this summer.

And Buffett himself told CNBC that Berkshire Hathaway's Nebraska Furniture Mart did record business last weekend.
So, what does it all mean? Thus far, despite a housing bust, sharply higher oil prices, and many, many warnings, we haven't seen either a recession or a bear market in the U.S. It still could happen, especially if the credit crunch worsens or oil prices head much higher.

But I don't expect that to happen. In fact, I wouldn't be surprised to see oil prices retreat in the short run as we move into the summer driving season and investors realize we've got very high inventories available. And the actions by Ben Bernanke and the Federal Reserve Board to restore confidence and add liquidity should keep whatever recession we do have a mild one -- or prevent one entirely.

Earlier this year I predicted we'd narrowly avoid a recession and a bear market, and stocks would hit new highs this year. Until we see evidence to the contrary, I'm sticking to my guns.

Editor's note: Howard R. Gold is executive editor of MoneyShow.com. The opinions expressed here are his own and do not necessarily reflect the views of InterShow.

School joke

School Joke

A first-grade teacher, Ms Tulip (Age 2 was having trouble with one of her students. The teacher asked," Boy, what is your problem?"

Boy answered, "I'm too smart for the first-grade. My sister is in the third-grade and I'm smarter than she is! I think I should be in the third-grade too!"

Ms Tulip had enough. She took Boy. to the principal's office. While Boy. waited in the outer office, the teacher explained to the principal what the situation was. The principal told Ms Tulip he would give the boy a test and if he failed to answer any of his questions he was to go back to the first-grade and behave. She agreed.

Boy. was brought in and the conditions were explained to him and he agreed to take the test.

Principal: "What is 3 x 3?"
Boy: "9".

Principal: "What is 6 x 6?"
Boy: "36".

And so it went with every question the principal thought a third-grade should know. The principal looks at Ms Tulip and tells her, "I think Boy can go to the third-grade. "

Ms Tulip says to the principal, "I have some of my own questions.

Can I ask him ?" The principal and Boy both agreed.

Ms Tulip asks, "What does a cow have four of that I have only two of?
Boy., after a moment "Legs."

Ms Tulip: "What is in your pants that you have but I do not have?"
Boy: "Pockets."

Ms Tulip: What starts with a C and ends with a T, is hairy, oval, delicious and contains thin whitish liquid?
Boy: Coconut

Ms Tulip: What goes in hard and pink then comes out soft And sticky? The principal's eyes open really wide and before he could stop the answer, Boy. was taking charge.
Boy: Bubblegum

Ms Tulip: What does a man do standing up, a woman does sitting down and a dog does on three legs? The principal's eyes open really wide and before he could stop the answer...
Boy: Shake hands

Ms Tulip: Now I will ask some "Who am I" sort of questions, okay?
Boy: Yep.

Ms Tulip: You stick your poles inside me. You tie me down to get me up. I get wet before you do.
Boy: Tent

Ms Tulip: A finger goes in me. You fiddle with me when you're bored. The best man always has me first. The Principal was looking restless, a bit tense and took one large Vodka peg.
Boy: Wedding Ring

Ms Tulip: I come in many sizes. When I'm not well, I drip. When you blow me, you feel good.
Boy: Nose

Ms Tulip: I have a stiff shaft. My tip penetrates. I come with a quiver.
Boy: Arrow

Ms Tulip: What word starts with a 'F' and ends in 'K' that means lot of heat and excitement?
Boy: Fire truck

Ms Tulip: What word starts with a 'F' and ends in 'K' & if u don't get it u have to use your hand.
Boy: Fork

Ms Tulip: What is it that all men have one of it's longer on some men than on others, the pope doesn't use his and a man gives it to his wife after they're married?
Boy: SURNAME

Ms Tulip: What part of the man has no bone but has muscles, has lots of veins, like pumping, & is responsible for making love ?
Boy: HEART.

The principal breathed a sigh of relief and said to the teacher,
"Send this Boy to OXFORD UNIVERSITY EVEN I GOT THE LAST TEN QUESTION WRONG MYSELF"

Greenspan: Worst of Credit Crisis Is Over

By Reuters | 08 May 2008 | 03:38 PM

Former Federal Reserve Chairman Alan Greenspan said on Thursday that the worst of the credit crisis is over, according to attendees at a New York speech.

Greenspan also said house prices still had a long way to fall and it was unlikely they would stabilize by year-end, according to meeting attendees who provided Reuters details of the speech delivered at the Alternative Public Strategies Conference.

The attendees, who declined to be identified by name, said Greenspan mentioned that U.S. growth was likely to be sluggish for an extended period of time.

The U.S economy is reeling from a housing-led slowdown, with some analysts convinced it is already in a recession despite a 0.6 percent growth rate in the first quarter.

Market Rally Signals Stocks Looking Past Recession

Albert Bozzo

The April rally in stocks is suggesting that Wall Street may be looking past recession, if indeed the US economy is even in one.

“What the market is saying is so far it doesn't look like a disaster, so we're going to gain back some of what we lost in the first quarter,” says veteran money manager James Awad, who’s currently chairman at WP Stewart Asset Management. “I see this as a wait-and-see period.”

One big question for investors is whether the market’s decline in recent months was more a reaction to the ongoing credit crunch or anticipation of a more conventional economic recession, which lends itself to greater historical comparison.

“We're of the opinion that the market has likely seen the worst,” says Standard & Poor’s Chief Investment Strategist Sam Stovall, who studied market behavior in and around the 11 recessions since 1945. On average, the S&P 500 declined a combined 25.9 percent ahead of and during the recession.

Data compiled by S&P shows stocks typically fall from their highs nine and a half months before the onset of a recession and bottom out three–fifths of the way into the downturn, but Stovall sees “eerie similarities” between today and the 1990-1991 recession, which did not follow that script.

Back then, the market peaked in July, the same month—history would later show—the eight-month recession began. The market fell almost 20 percent in three months (rather than the usual 12-14-month period), and then staged an impressive rebound in October.

This time around, the market peaked in October and fell 18.6 percent during a three-month period, while the recession—if one is underway—is commonly thought to have begun in December (maybe January) and is likely to end in July, according to S&P's and a growing number of forecasts.

There are also similarities between the extent of the market’s decline and significant Fed interest rate cuts.

Fed policy action has done a lot to calm investors about the credit crunch and may even have softened the front end of the recession, which may help explain why recent economic data has provided weak fodder for the recession argument.

“The credit system is working—slowly, but working—so that crisis seems to be over,” says Awad. “On the economy, if it's ever going to get worse, then consensus is it should be this quarter.”

Positive first-quarter GDP, a slight decline in the March jobless rate and generally modest job losses in recent months have given some economists pause.

“The stock market isn't acting like there's a recession,” says Robert Brusca, chief economist at Fact & Opinion Economics, who’s still not totally convinced such a downturn is underway. “We've been dealing with the credit crunch.”

Brusca’s doubts about the recession partly reflect his own historical analysis of stock market declines during the past six recessions dating back to 1970, which CNBC.com replicated.

At some point during most of the past six recessions, the S&P suffered steep year-over-year losses, ranging from 11.60 percent in 1990 to 36.80 in 1973. At its worst, the market benchmark was down an average of 20 percent.

Though the S&P 500 and other major indices have fallen sharply from the record highs of October 2007, the year-over-year decline for any given month since then is much smaller. The biggest year-over-year decline is 6.5 percent from April 2007-April 2008. The previous three months showed slightly smaller losses.

By comparison, the S&P 500's maximum decline from its Oct. 9, 2007 peak of 1565.15 was 18.6 percent, and occurred on March 10. (The index came within points of that level on March 17.

That happens to be right before the Bear Stearns rescue and the Fed’s 75-basis point rate cut on March 18.

Further analysis of historical market data by CNBC also shows that monthly stock market losses tend to accelerate as a recession matures.

In the 16-month 1981-1982 recession, for instance, the market registered single-digit monthly declines for the first few months, then double-digit ones, peaking at 16.8 percent.

Analysis also shows up months such as April 2008 are quite rare during any recession—especially in what is thought to be the middle of the cycle—dating back to 1970.

Which leads back to the recession debate that has been confounding many since December.

“If we have a recession coming, the stock market hasn't taken account of it,” says Brusca.

How to Build a Simple, Low-Stress Portfolio

By Andrew Gunter

It has been about a year since subprime contagion swept the nation, and what a year it's been. We've seen a gold rally, fast and deep interest-rate cuts, and oil prices that remain stubbornly near all-time highs. The uncertainty has taken its toll on stock markets: From May 2007 through April 2008, the S&P 500 lost about 4.7%. Much of the pain came in this year's first quarter, the index's worst in more than five years.

This return of heightened volatility in both stock and bond markets has prompted a lot of worried questions from our readers regarding what kind of overhaul might be appropriate for their portfolios. But making big adjustments to your portfolio based on short-term market news is rarely a good idea. Instead, investors attempting to get their sea legs amid all the volatility should focus on building simple portfolios that can withstand market ebbs and flows.

Two Assumptions
I made a few assumptions as I went about suggesting simple portfolios. The first is that investors have fairly long time horizons of 10 years or more and are comfortable weathering the periodic ups and downs of equity investing. The portfolios therefore have fairly aggressive asset allocations: 50% to 60% in U.S. equities, 30% to 40% in international equities, and 10% to 20% in bonds.

The second assumption I made is that investors are holding these portfolios in tax-deferred accounts such as IRAs or 401(k)s (for the sake of picking bond funds, etc.).

Option One: The Simplest Portfolios Around
The simplest way to a good-looking portfolio is to invest in an aptly titled target-date fund. These funds are hassle-free. Once you buy one, the fund company directs assets to underlying funds that it also manages across various asset classes (think large caps, small caps, international stocks, bonds, etc.), in weightings appropriate to your time horizon. As different asset classes post hot or cold streaks, the managers rebalance these funds. Also, the managers gradually adjust asset allocation over time to become more conservative as the retirement year approaches. These funds even work for investors who are nearing retirement or are already in it; they can opt for a fund with a target year of 2005 or 2010. Such funds already have tilted assets more heavily toward bonds and cash equivalents.

Fund companies small and large offer target-date offerings, and some of them are better than others. We recommend seeking one with the following characteristics: Low fees (including expenses from underlying funds), ample diversification, and a dose of equities even in funds whose retirement year is has passed. Click here to learn more about target-date funds, including our favorites.

Option Two: Join the Bogleheads
Index providers continue to slice up markets into ever-narrower pieces, but some of the best indexes remain the broadest ones. As for the best index funds, they are the ones that offer ultralow fees and, of course, by their very nature, eschew active management. These funds' low fees are part of the strong case for using them versus actively managed funds, and low fees have helped index funds beat the majority of actively managed rivals over long time periods.

An easy way to build an all-index portfolio is to buy just three or four funds: One that invests in the whole U.S. bond market, another one that invests in the whole U.S. stock market, and a third that invests in international stocks. (Vanguard will soon roll out a global stock index fund--combining U.S. and foreign stocks--that will further simplify equity exposure for index fans.) A few large fund families offer extremely low-cost index funds, with Fidelity and Vanguard continuously competing for "cheapest index fund" rights. For the sake of single-fund-family investing, here's how I'd build an all-index portfolio of Vanguard funds. (Investors could easily build a similar portfolio of all Fidelity funds, but with the caveat that Fidelity Spartan International Index (NASDAQ:FSIIX - News) doesn't include emerging-markets stocks).

--55%: Vanguard Total Stock Market (NASDAQ:VTSMX - News), expenses of 0.15%. This fund owns more than 3,500 U.S. stocks--the whole market from blue chips to micro-caps.
--35%: Vanguard Total International Stock (NASDAQ:VGTSX - News), expenses of 0.27%. That expense ratio includes underlying funds, because this is a fund of three funds: Vanguard European Stock Index (NASDAQ:VEURX - News), Vanguard Pacific Stock Index (NASDAQ:VPACX - News), and Vanguard Emerging Markets Stock Index (NASDAQ:VEIEX - News).
--10%: Vanguard Total Bond Market Index (NASDAQ:VBMFX - News), expenses of 0.19%. There are good reasons this investment-grade bond fund is home to more than $60 billion in assets. Low expenses combined with sturdy index-portfolio management, which comes with its own set of traps in the bond sector.

Two notes here: Although we recommend dollar-cost averaging--buying in little by little over time--investors who want to build a portfolio all at once should consider Vanguard's exchange-traded funds for the domestic index, Total Stock Market Index ETF (AMEX:VTI - News), and the bond index, Total Bond Market Index (AMEX:BND - News). They're less expensive.

Option Three: Index Funds Complemented By Specialty Funds
All-index portfolios can be highly effective, but if you'd like a chance to juice returns a bit, building a portfolio to do that is still simple. Use index funds as core holdings for the majority of assets, but then pick a few actively managed funds for the fringes of your portfolio. Here's an example of how to do that within the 55%/35%/10% broad asset-class weightings

Credit crisis may be fading: Paulson

WASHINGTON - THE worst of the US's credit crisis may have passed, Treasury Secretary Henry Paulson said, though he acknowledged rising gas prices will blunt the effect of 130 million economic stimulus checks.

He ruled out a second stimulus package for now.

In an interview on Wednesday, Mr Paulson said the turmoil that has gripped Wall Street and that took a turn for the worse again in March has eased somewhat. 'There's progress', he said. 'I think we're closer to the end of this' than to the beginning.

A prolonged housing slump, a severe credit crisis and soaring energy costs have pushed the economy to the edge of a recession. To help cushion the blow, the Bush administration and Congress speedily enacted a US$168 billion (S$230.7 billion) stimulus package of tax rebates for people and tax breaks for businesses.

With oil costs surging to record levels and gasoline prices hovering around all-time highs above US$3.60 a gallon, Mr Paulson acknowledged that pain at the pump would diminish the impact of the stimulus payments that are designed to give the economy a jump-start.

'Obviously, the high price of gasoline is unwelcome and is a challenge and is a headwind,' he said.
The first batch of rebate payments started hitting bank accounts last week through direct deposits. Mr Paulson, Vice President Dick Cheney and other Bush administration officials will head to government check printing centers around the country on Thursday for events highlighting the fact that millions of rebate checks are in the mail.

'We will get some help from the stimulus,' Mr Paulson said in the interview. 'Later this year, I expect growth will pick up.' Still, he acknowledged that the country was facing 'tough times' as people struggle with soaring gasoline prices, higher medical costs and a weak jobs market.
Mr Paulson said the steep slump in housing, which has depressed home sales and prices, remained 'the biggest risk to the economy'. Although he said he did not know when the worst of housing's problems will pass, he suggested there will still be strains in the months ahead.

'Even the optimists here believe that you're going to continue to see in the next several months' newspaper headlines that will say prices have declined even further and foreclosures have increased, he said. 'That's what happens during a correction.' However, Paulson said he believes the turmoil that began last August in credit markets has calmed since mid-March when the crisis claimed its largest victim with the forced sale of Bear Stearns, the US's fifth largest investment firm, to JP Morgan Chase & Co.

'Again, I think we're on the right path,' he said.

Even though the markets are 'somewhat calmer now', Mr Paulson said large portions of the credit markets - ranging from mortgages to student loans to loans that banks make to each other - still are not functioning in a normal way. 'I wouldn't be surprised at all to see more bumps in the road,' he said.

No plans for second stimulus bill

Mr Paulson rejected for now the notion of a second stimulus bill, including such things as extending unemployment benefits, an idea pushed by Democrats in Congress. He said it would be unprecedented to extend unemployment benefits from the current 26 weeks with unemployment at the relatively low level of five per cent.

He said the administration's focus at the moment is on getting the current 130 million stimulus payments into the people's hands.

The administration believes the rebates will energise overall economic growth and will create an additional 500,000 jobs later this year.

'Some families will use them to help fill up their gas tank, for a family vacation, or to help (buy) back-to-school clothes and a lot of other things that people are going to like to get done', Mr Paulson predicted.

The Treasury chief spoke on a day when President George W. Bush threatened to veto a broad housing rescue package being considered by Congress. Mr Paulson said the measure being pushed by House of Representatives Financial Services Committee Chairman Barney Frank, a Democrat, was too broad in its effort to insure up to $300 billion in new mortgages for homeowners facing the threat of default.

Mr Paulson said the administration would continue negotiating with Congress to come up with an acceptable bill, but he did not offer any details of what type of mortgage relief the administration would support.

'Housing is an important area and there are certain things that we need to get done there from Congress', he said. 'I view my job as to work to get something that is acceptable and that the president can sign.' The administration favours a narrower legislative housing fix - including strengthening oversight of mortgage giants Fannie Mae and Freddie Mac, which play a major role in financing mortgages, and modernizing the Federal Housing Administration, which insures mortgages.

In addition, the administration has been promoting a voluntary effort by the mortgage industry to modify current loans to keep distressed borrowers in their homes. Treasury officials met for six hours with industry executives on Tuesday, and Mr Paulson said he was encouraged by the progress, although he did not give details.

On other subjects, Mr Paulson said it made sense to re-examine the government's mandate to boost production of ethanol in light of high food costs. However, he argued that the demand for ethanol was being pushed up because oil prices have risen sharply, not because of the government's order to increase ethanol production.

'I think it always makes sense to rethink everything as conditions change', Mr Paulson said. 'But I would just say to you that we looked at this and let's recognise that the ethanol mandate is not what is driving this right now.' -- AP

'The Worst Is Behind Us': Paulson Joins Street Luminaries, Declares Victory

With Treasury Secretary Hank Paulson and Merrill's John Thain chiming in, there's now near unanimity of opinion on Wall Street: The worst of the credit crisis is over.

Such comments seem outrageous given the latest batch of scary headlines from UBS, Fannie Mae, Legg Mason, Lazard, et al. But hope springs eternal on Wall Street, and the reality is the crisis in the debt markets has eased since JPMorgan's Fed-engineered purchase of Bear Stearns, which Paulson called "an inflection point." (Critics have used similar terms, but with a far different meaning.)

Meanwhile, even Henry "Mr. Sunshine" Blodget is starting to come around to the idea that the housing market may be hitting bottom, thanks to an op-ed by Cyril Moulle-Berteaux, managing partner of Traxis Partners, in The Wall Street Journal.

In making the case for a housing-market bottom, Moulle-Berteaux notes house price affordability has improved dramatically and the inventory of new homes is falling. (The piece appeared prior to Wednesday's weak report on pending sales of existing homes for March.)

The fund manager makes a compelling case, but omits the key element of financing. While demand for housing remains fairly stable and mortgage rates are still historically low, even buyers with high credit scores and large down payments are reportedly struggling to secure as lenders like Countrywide and WaMu grapple with the bubble's aftermath.

S'pore to be 'City of Millionaires': Barclays survey

SINGAPORE will have the highest concentration of wealthy households in the world within a decade as economic expansion and the growth of its financial services industry draw investors, said Barclays Plc.

Almost 41 per cent, or 436,000, of Singapore's households will have assets of at least $1 million by 2017, compared with 39 per cent in Hong Kong and 28 per cent in Switzerland, according to a survey by Barclays Wealth, the bank's wealth management unit.

Singapore was second in 2007 with 23 per cent, while Hong Kong had 26 per cent, the report said.

Singapore's US$132 billion economy grew last quarter at the fastest pace since 2003 as tax breaks and efforts to draw banks and manufacturers to expand or set up new businesses in the city offset slowing demand for electronics. Growth is expected to moderate this year because of a US slowdown, Bloomberg news reported on Wednesday.

'It's a little premature to assume that growth will continue in a straight line, but the underlying trend remains one where Asian countries are generating plenty of economic activity and employment opportunities,' said Song Seng-Wun, an economist at CIMB-GK Securities Pte. in Singapore.

Economic growth elsewhere in Asia is also boosting wealth creation. China, the world?s fastest-growing major economy, is estimated to become the third-wealthiest nation in the world by 2017 by total net worth, lagging behind only the US and Japan, while India will be ranked eighth, according to Barclays Wealth.

'Unprecedented Wealth Creation'
'Not only are we seeing unprecedented wealth creation in Asia, but the structure of the region's economies have fundamentally changed,' Didier von Daeniken, chief executive officer of Barclays Wealth in Asia, said in a press release.

'Education, technology and globalization are driving wealth creation, resulting in a shift of economic power to the East.'

Singapore households with more than $1 million held about $672 billion in assets last year, and will grow to US$1.6 trillion by 2017, according to Barclays Wealth.

The survey takes into account assets such as cash, shares, bonds and property.

Buffett says US in recession; banks to face pain

OMAHA (Nebraska) - MR Warren Buffett, the world's richest person, said the United States economy is in recession, putting him at odds with a government report that showed weak growth.

Mr Buffett offered his assessment during a wide-ranging news conference on Sunday, a day after a record 31,000 shareholders of Berkshire Hathaway attended the insurance and investment company's annual meeting in Omaha.

Last Wednesday, the Commerce Department said the economy grew at a 0.6 per cent annual rate in the first quarter. But Mr Buffett said the nation's population also grew, making the real growth rate lower. He also said that, even if the data do not show the economy retracting, people feel as though it is.

'The US is in recession as I define it,' Mr Buffett said. 'I would define that as a situation where people are doing less well than they were three months, six months or eight months earlier and most businesses find themselves in that position too.

'If were are in a non-recession, I don't think people want to see it going in the same direction as it is and saying it's wonderful.'

Weakness at Berkshire units that sell bricks, carpets and other products dependent on a healthy housing market contributed to a 64 per cent decline in overall first-quarter profit.

Housing remains a critical problem, he said, as hundreds of thousands of homeowners find their mortgage payments heading higher, or that their homes are worth less than they owe.

Mr Buffett said he wrote US Treasury Secretary Henry Paulson a letter in which he favoured giving people taking out mortgages one-page statements, headlined 'Warning' in red, describing the maximum rates they could face.

While Mr Buffett said the government could help borrowers who were misled on what they would owe, he opposed helping people simply because their home values have dropped, or investors who bought mortgage securities without understanding the risks.

Borrowers, he said, 'shouldn't be penalised for being misled, but shouldn't be protected against mistakes'. He estimated that more than 80 per cent of borrowers with 'option' or 'pick-a-payment' mortgages that let them pay less than the principal due, in fact did so, and that many now owe more than their homes' values.

'Surprise, surprise,' he added.

Bear Stearns a 'watershed'
Mr Buffett said housing problems will weigh down bank results for 'a couple of years' and the industry's large losses and write-downs due to bad debts are not over 'by a long shot'. 'There's going to be more pain, sure,' he said.

Yet Mr Buffett said the US Federal Reserve's brokering in March of JPMorgan Chase's purchase of the nearly bankrupt investment bank Bear Stearns averted a 'contagion', including possible runs on other investment banks.

'The idea of a financial panic ... has been pretty well taken care of,' he said. 'That was a watershed event.' But shareholders could still be hurt.

Alluding to a large stock offering last week by Citigroup, which lost close to US$15 billion (S$20 billion) over the last two quarters, Mr Buffett said: 'Citigroup is replenishing its stock at US$25 when it was buying it back not too long ago at US$50. Many institutions not only grew the Kool-Aid, but drank it ... They paid a price, but the price was really paid by shareholders.'

And Mr Buffett said banks need better risk management. He said he recently considered the prospects of a large investment bank, which he did not identify, by reading its 270-page annual report. He said he highlighted 25 pages where he did not understand what he had read.

'I decided not to pick that one,' Mr Buffett added.

Heightened risk may also affect government-sponsored enterprises Fannie Mae and Freddie Mac. Mr Buffett said the government 'is asking (them) to take on more risk per mortgage and more (risk in) their portfolio. By any other standard of government operation, they wouldn't be able to borrow another dime'.

Buying in Britain
Mr Buffett, 77, said Berkshire still has three internal candidates to replace him eventually as chief executive officer, including one who would step in immediately, and four candidates to succeed him as chief investment officer. He has not publicly identified any of the candidates.

Since taking it over in 1965, Mr Buffett has built Berkshire into a US$207 billion conglomerate of about 76 operating units, and about US$147 billion of stocks, bonds and cash.

On Sunday, Mr Buffett said Berkshire may be 'close' to buying a medium-sized British company and 'will look' at Royal Bank of Scotland's insurance operations, including its Direct Line home and car insurance business. RBS said last month it may sell all or some insurance operations.

Mr Buffett also said some bond insurers that rival his new Berkshire Hathaway Assurance do not deserve their 'triple-A' credit ratings. He said this may be one reason Berkshire, also rated triple-A, was able to capture US$400 million of business in its first full quarter.

'The US$400 million we wrote in the first quarter were entirely secondary market transactions,' he said. 'We see every day that people are coming to us and paying us more than they paid to the original bond insurer.' -- REUTERS

Buffett to investors: Think small

Lower your expectations, advised Warren Buffett and Charlie Munger at Berkshire's annual meeting Saturday. They also answered questions ranging from succession plans to the Cubs.

By Jason Zweig, Money Magazine senior writer/columnist

OMAHA (CNNMoney.com) -- In the Q&A session Saturday morning at Berkshire Hathaway's annual meeting, CEO Warren Buffett and vice chairman Charlie Munger repeatedly warned investors to lower their expectations. When a shareholder asked whether Buffett's recent purchases of publicly traded stocks were likely to generate returns greater than 7% to 10% over time, Buffett promptly said no.

Note: What follows is based on a best-effort attempt to take accurate notes of a fast-moving discussion and does not purport to be an exact transcript of Buffett and Munger's remarks.

"We would be very happy if we earned 10%, pre-tax" on the additions to Berkshire's equity portfolio, said Buffett. "Anyone that expects us to come close to replicating the past should sell their stock; it isn't going to happen. We'll get decent results over time, but not indecent results." Added Munger: "You can take what Warren said to the bank. We are very happy at making money at a rate in the future that's much less than the past... and I suggest that you adopt the same attitude."

"We think Berkshire is an attractive investment [at today's price]," said Buffett. "We don't think it's the most attractive in the world."

Both men made it clear that their preference now is to acquire 100% ownership of private businesses at a "fair" price and to increase BRK's interest in companies that get substantial portions of their earnings in non-U.S. currencies.

"We are happy to invest in businesses that earn their money in euros in France or Italy or sterling in the UK, because I don't have a feeling that those currencies are likely to depreciate against the dollar," said Buffett. "Overall I think that the U.S. continues to follow policies that will make the dollar weaken against other major currencies.... I feel no need to hedge purchases of companies that earn profits in other currencies." Buffett added that major U.S. multinationals, like Coca-Cola (KO, Fortune 500), are a natural hedge against the dollar, since they earn most of their profits offshore -- which, he said, "will be a net plus over time."

Asked what's in store for the economy, Buffett said he doesn't have a clue and doesn't care.

"I haven't the faintest idea," he said. "We never talk about it, it never comes up in our board meetings or other discussions. We're not in that business [of economic forecasting], we don't know how to be in that business. If we knew where the economy was going, we'd do nothing but play the S&P futures market."

His simple point: As an investor, you don't need to predict the economic cycle (or even pay much attention to it). Instead, you should focus on evaluating individual businesses if you pick your own stocks -- or, simply buy the entire market in the form of an index fund. When a shareholder asked for the single best specific investment idea Buffett could recommend to an individual in his 30s, Buffett said: "I would just have it all in a very low-cost index fund from a reputable firm, maybe Vanguard. Unless I bought during a strong bull market, I would feel confident that I would outperform...and I could just go back and get on with my work."

In response to a similar question from an investor asking how Berkshire (BRKA, Fortune 500) would invest differently if it had only a few million dollars to put to work, Buffett advised him to think small. "That would open up thousands of opportunities," said Buffett. Earlier this year there were "very mispriced bonds" that "we could buy nowhere near enough of to make a difference to Berkshire," but a smaller investor could have exploited. "Most of the opportunities would probably be in small stocks or in specialized bond situations."

On succession

Asked about succession, Buffett (who is 77) and Munger (who is 84) had this to say:

"On the CEO front, we have three [internal candidates] who could step in," said Buffett. "The board is unanimous in knowing which one it would be, although the answer might change with time.... In terms of the [chief] investment officer, the board has four names, any one or all of whom would be good at my job. They all are happy where they are now [working outside of Berkshire], but any would be here tomorrow if I died tonight, they all are reasonably young, and compensation would not be a big factor.... There will be no gap after my death in terms of having someone manage the money. They'll be much more energetic [than I am] and may even have a better record."

Added Munger: "We still have a rising young man here named Warren Buffett. And I think we want to encourage this rising young man to reach his full potential." At this point, Buffett interjected: "At the average age of 80, we're aging at the average rate of only 1 1/4% per year. That's a lot better than younger people."

From the Cubs, to China

Later, asked by a teen shareholder whether he is interested in buying the Chicago Cubs (currently on sale by the Tribune Co. for roughly $700 million), Buffett said he did not need the "psychic income" and would not swing at the offer.

Asked whether Berkshire will seek to purchase entire private companies based in China or India, Buffett responded: "We would like to. If we get lucky, we'll buy one or two in the next three or four years. I don't know if it will be in China, India, Germany, the U.K. or Japan -- there's a lot of luck in that in terms of families thinking of us specifically.... But you will see the day that BRK owns businesses in both countries [India and China]."

Despite its huge cash hoard, Berkshire won't be paying a dividend anytime soon. "The test," said Buffett, "is whether you can continue to create more than $1 for every $1 you're retaining." He and Munger feel they still can put surplus cash to work and earn a higher return with it than shareholders could on their own, after tax, if BRK paid it out. "If we can turn $1 in dividends into $1.10 or $1.20 on a present-value basis, they're better off if we don't pay out. When the day comes, it should be paid out. But because we still have this ability to redistribute money in a tax-efficient way within the company, we can reallocate it," he said, where it will earn a higher return than shareholders may be able to on their own."

Analysts await UBS move on job cuts, any further writedowns

ZURICH - SWISS banking giant UBS, currently the bank worst hit by the subprime crisis, is likely to announce job cuts when it posts financial results for the first quarter next week, analysts said on Sunday.

UBS is likely to announce the results on Tuesday, and according to some analysts it may also reveal further losses.

In early April UBS had already warned it would probably post a loss of 12 billion Swiss francs (S$15.4 billion) for the first quarter.

'The market is keenly awaiting first quarter results from UBS next week, which could determine the direction the entire sector takes in the near term,' said Bank Vontobel in a note to investors.

Banque Cantonale Vaudoise said UBS 'should be announcing a plan to cut jobs.' UBS, which has already cut 1,500 jobs could cut another 8,000 - about 10 per cent of its total staff - according to a report last week by Swiss newspaper Sonntag.

The newspaper estimated that fresh writedowns could reach 10 billion Swiss francs during the quarter, adding to the 19 billion already announced in the first quarter.

For Bank Wegelin, what is important would be 'the future strategy and the measures taken by the management' to put back on track the bank, as well as to restore confidence of the clients and investors.

UBS has so far been the bank worst hit by the subprime crisis, with writedowns reaching over US$37 billion (S$50.5 billion). To plug the blackhole, UBS has already had to seek recapitalisation.

The first of the new capital was raised from Singapore sovereign fund Government of Singapore Investment Corporation (GIC) and an unnamed Middle Eastern investor. Betwen them, they put in 13 billion Swiss francs.

Later, UBS asked its shareholders for an additional 15 billion Swiss francs.

During its annual general meeting on April 23, chief executive Marcel Rohner said the bank would reassess its investment banking unit, which has drawn criticism for being responsible for most of the subprime losses.

'We no longer aim to offer everything to everyone in investment banking,' he said then.

'We do not need an oversized balance sheet. We do not need an oversized inventory of trading portfolios. And we do not need an unnecessary concentration of risk.' The investment bank should in the future generate its own capital which it needs for its future growth, said Mr Rohner, fuelling expectations that the unit, which employs about 22,000 people, would be cut back. -- AFP

Investment guru Warren Buffett says the worst of the global credit crunch is over for Wall Street, but not for the man or woman on the street.

The chief executive of Berkshire Hathaway said there would be "a lot of pain to come" for mortgage holders.

He made the comments as Berkshire Hathaway's annual meeting got under way in Omaha, Nebraska, attended by a record 31,000 people.

The meeting has become known as "Woodstock for Capitalists".

Mr Buffet's investment decisions often go against the market and are followed religiously by many.

However, Berkshire Hathaway, the company Mr Buffet took over in 1965, has not escaped the credit crisis.

It saw its first quarter profit tumble 64%, hurt by losses tied to derivatives contracts and a steep slide in insurance premiums.

"The worst of the crisis in Wall Street is over," Mr Buffett told Bloomberg Television shortly before the weekend meeting began.

"In terms of people with individual mortgages, there's still a lot of pain left to come," he added.

JPMorgan says no near end to financial crisis: report

FRANKFURT - JPMorgan Chase & Co does not expect the U.S. financial crisis to end soon and will remain very cautious, its top executive said in comments published by a German weekly on Saturday.

"We can only speculate how deep and how long the recession in the United States will really be and how that in turn will impact banks," James : report told "Welt am Sonntag."

"But we are not done with the crisis for a long time," Dimon said, adding that it was not the company's job to make bets on the future.

"Imagine we would need to walk up to our shareholders one day and say, sorry but the recession in the USA is so bad, we're broke. We need to be able to rule out at all times that it will not come to that," Dimon said.

JPMorgan said last month it was on the lookout for regional banks to take over but Dimon said in the report the bank was not interested in purchasing the German consumer lending business of Citigroup Inc. .

"From my point of view today a takeover like that would be a waste of time," he said.

JPMorgan announced in March it is buying investment bank Bear Stearns , once the fifth-largest investment bank, which collapsed after a run on the bank.

Dimon hopes the transaction to be concluded by June 30, earlier than expected, the report quoted him as saying.

Why you shouldnt accept diamond rings

Econ-Atrocity Bulletin:

Ten Reasons Why You Should Never Accept a Diamond Ring from Anyone, Under Any Circumstances, Even If They Really Want to Give You One (2/14/02)
By Liz Stanton, CPE Staff Economist

1. You've Been Psychologically Conditioned To Want a Diamond
The diamond engagement ring is a 63-year-old invention of N.W.Ayer advertising agency. The De Beers diamond cartel contracted N.W.Ayer to create a demand for what are, essentially, useless hunks of rock.

2. Diamonds are Priced Well Above Their Value
The De Beers cartel has systematically held diamond prices at levels far greater than their abundance would generate under anything even remotely resembling perfect competition. All diamonds not already under its control are bought by the cartel, and then the De Beers cartel carefully managed world diamond supply in order to keep prices steadily high.

3. Diamonds Have No Resale or Investment Value
Any diamond that you buy or receive will indeed be yours forever: De Beers� advertising deliberately brain-washed women not to sell; the steady price is a tool to prevent speculation in diamonds; and no dealer will buy a diamond from you. You can only sell it at a diamond purchasing center or a pawn shop where you will receive a tiny fraction of its original "value."

4. Diamond Miners are Disproportionately Exposed to HIV/AIDS
Many diamond mining camps enforce all-male, no-family rules. Men contract HIV/AIDS from camp sex-workers, while women married to miners have no access to employment, no income outside of their husbands and no bargaining power for negotiating safe sex, and thus are at extremely high risk of contracting HIV.

5. Open-Pit Diamond Mines Pose Environmental Threats
Diamond mines are open pits where salts, heavy minerals, organisms, oil, and chemicals from mining equipment freely leach into ground-water, endangering people in nearby mining camps and villages, as well as downstream plants and animals.

6. Diamond Mine-Owners Violate Indigenous People's Rights
Diamond mines in Australia, Canada, India and many countries in Africa are situated on lands traditionally associated with indigenous peoples. Many of these communities have been displaced, while others remain, often at great cost to their health, livelihoods and traditional cultures.

7. Slave Laborers Cut and Polish Diamonds
More than one-half of the world's diamonds are processed in India where many of the cutters and polishers are bonded child laborers. Bonded children work to pay off the debts of their relatives, often unsuccessfully. When they reach adulthood their debt is passed on to their younger siblings or to their own children.

8. Conflict Diamonds Fund Civil Wars in Africa
There is no reliable way to insure that your diamond was not mined or stolen by government or rebel military forces in order to finance civil conflict. Conflict diamonds are traded either for guns or for cash to pay and feed soldiers.

9. Diamond Wars are Fought Using Child Warriors
Many diamond producing governments and rebel forces use children as soldiers, laborers in military camps, and sex slaves. Child soldiers are given drugs to overcome their fear and reluctance to participate in atrocities.

10. Small Arms Trade is Intimately Related to Diamond Smuggling
Illicit diamonds inflame the clandestine trade of small arms. There are 500 billion small arms in the world today which are used to kill 500,000 people annually, the vast majority of whom are non-combatants.

References:

Collier, Paul, "Economic Causes of Civil Conflict and Their Implications for Policy," World Bank, June 15, 2000.

Epstein, Edward Jay, "Have You Ever Tried to Sell a Diamond?", The Atlantic Monthly, February 1982. www.theatlantic.com/issues/82feb/8202diamond1.htm

Global Witness, "Conflict Diamonds: Possibilities for the Identification, Certification and Control of Diamonds," A Briefing Document, June 2000, www.globalwitness.org/text/campaigns/diamonds/reports.html


Human Rights Watch/Asia, "The Small Hands of Slavery: Bonded Child Labor In India," Human Rights Watch Children's Rights Project, www.hrw.org/reports/1996/India3.htm .

Human Rights Watch, "Children�s Rights: Stop the Use of Child Soldiers;" www.hrw.org/campaigns/crp/index.htm .

Kerlin, Katherine "Diamonds Aren�t Forever: Environmental Degradation and Civil War in the Gem Trade," The Environment Magazine, www.emagazine.com/september-october_2001/0901gl_consumer.html .

Le Billon, Philippe, "Angola�s Political Economy of War: The Role of Oil and Diamonds, 1975-2000," African Affairs, (2001), 100, p.55-80.

Mines and Communities, "The Mining Curse: The roles of mining in �underdeveloped� economies," Minewatch Asia Pacific/Nostromo Briefing Paper, February 1999, www.minesandcommunities.org/Country/curse.htm .

Other Facets, Number 1, April 2001; Number 2, June 2001; Number 3, October 2001, www.partnershipafricacanada.org/hsdp/of.html .

� 2002 Center for Popular Economics

Diamonds?

Be enlightened. Get informed.

Worth-less
About 130 million carats (26,000 kg) are mined annually, with a total value of nearly USD $9 billion. Now if you do the math - that works out to be US$69.20 per carat! The prices of diamond is artificially controlled and inflated. Mined diamonds are bought by cartels and kept in vaults to control supply and keep prices high, in truth there is nothing rare or precious about the stones.

For a detailed exposé of the De Beers cartel, read this article by Edward Jay Epstein in the February 1982 issue of The Atlantic Monthly - www.theatlantic.com/doc/print/198202/diamond

Have you heard of conflict diamonds?
Roughly 49% of diamonds originate from central and southern Africa - that's the majority of diamonds in retail. But this is the same region where conflict diamonds get worked into the system.

A conflict diamond (also called a blood diamond or a war diamond) is a diamond mined in a war zone and sold, usually clandestinely, in order to finance an insurgent or invading army's war efforts - http://www.amnestyusa.org/diamonds/index.do

In some cases, the United Nations has prohibited the export of conflict diamonds, arguing that their trade finances armies in fighting against legitimate governments and perpetrating human rights abuses, and prolongs devastating wars. It points to the UNITA rebels in Angola and to the Revolutionary United Front rebels in Sierra Leone (who it states were financed by the government of Liberia, also through diamond sales) as purveyors of conflict diamonds.

The UN is attempting to implement certification procedures to decrease the number of illicit diamonds on the world market. On July 19, 2000, the World Diamond Council adopted at Antwerp a resolution to strengthen the diamond industry's ability to block sales of conflict diamonds.

In 2002, the UN approved the Kimberley Process scheme aimed at preventing conflict diamonds entering the market.
See - http://en.wikipedia.org/wiki/Kimberley_Process

Still there is no guarantee the Kimberly Process can enforce 100% that no conflict diamonds make it to the market - see National Geogrpahic interview with reporter Dominic Cunningham - http://news.nationalgeographic.com/news/2003/02/0212_030212_diamonds.html

Natural mined diamonds have been coming under a lot of heat recently. Award-winning journalist Cecil Adams sums it up the best in a recent article: “diamonds are a scam, pure and simple.” Most people in the new millennium understand that between the DeBeers diamond cartel, the issue of child labor in Third World diamond processing operations, and “blood diamonds” used to finance oppression and genocide in Third World African countries, not to mention your snooty and pretentious local jeweler, diamonds are just not worth the hassle, guilt, and let’s not forget thousands and thousands of questionably spent dollars.


7 Reasons Why You Should NEVER Buy a Diamond:

1. The price of diamonds has been artificially inflated since the 1880's via the De Beers diamond cartel. Read this article by Edward Jay Epstein in the February 1982 issue of The Atlantic Monthly - www.theatlantic.com/doc/print/198202/diamond

2. Current public perception of diamonds is the direct result of a masterfully executed marketing campaign by De Beers that began in 1938, not inherent scarcity or value. If you've read the article by Edward Epstein (you really should), you know all of the gory details. Isn't it amazing (and scary) how brainwashed people are about the "value" of diamonds, even though they're not actually worth that much?

3. A diamond is an illiquid asset, not an "investment". Try to sell a second-hand diamond ring on eBay or at a pawn shop. Do you really think you'll get anything close to what you paid for it? Do you really think the price of any diamond you purchase today is going to go up significantly over time? Why do you think they say a diamond is forever? It's because once you buy it, it's a 'lost' investment so you'll have no choice but to hold on to it. Love is forever but a diamond is for never (if you are enlightened enough).

4. The diamond industry funds warfare, genocide, and terrorism. A conflict diamond (also called a blood diamond or a war diamond) is a diamond mined in a war zone and sold, usually clandestinely, in order to finance an insurgent or invading army's war efforts. Profits from conflict diamonds are used to finance warlords in Angola, Sierra Leone, and Liberia, who use their weapons to kill and maim innocent people. You won't be able to tell if your diamond is a conflict diamond or not?
Read BBC reports
- http://news.bbc.co.uk/2/hi/programmes/correspondent/1604165.stm
- http://news.bbc.co.uk/1/hi/world/africa/3581799.stm

5. A diamond is - by nature - just a pretty rock. Think of the oft-quoted "rule" of diamond ring buying: the ring should cost a minimum of two month's salary (pre-tax), and you should spend as much on a ring as you can afford. Let's put this rule in its proper context: according to the people who sell pretty rocks, you're supposed to trade a full two months of your time and effort for one of their pretty rocks. Does that seem wise?

6. People notice the setting more than the diamond itself. To the naked human eye, most decent quality diamonds look the same. Unless the stone is yellow, has major inclusions, or has a distinctly lopsided cut, no one will be able to distinguish an ideal cut, E color, VS-1 stone from a lesser-quality diamond just by looking at it. What people do notice is the setting - how the stone is featured or placed, side stones, and the craftsmanship and artistry of the band. Knowing this - does it make more sense to focus your attention and dollars on a better stone, or on a better setting?

7. The opportunity cost of buying a diamond is huge. Opportunity cost is what you give up by spending your scarce resources on a single option. In other words, if you drop ten grand on a diamond ring, you have $10,000 less to spend on other things, like a fantastic honeymoon, a car, furniture, a down payment on a house, investing for the future, or further education. Are all of these options worth giving up for a little piece of colorless carbon?

More readings...

Not Forever
The death of South African diamond magnate Harry Oppenheimer last month might mark the end of global domination for one of the world's most infamous cartels.
By Susan Emerling
http://www.salon.com/business/feature/2000/09/27/diamonds/index.html

Nice ice
Lab-made diamonds are as dazzling as those mined by third-world labor. This bling may be easier on your conscience -- and your wallet.
By Corrie Pikul
http://www.salon.com/mwt/the_big_idea/2004/12/24/diamonds/index.html

What you can do?
http://www.globalwitness.org/pages/en/what_you_can_do.html

No US economic recovery this year: IMF chief

WASHINGTON - INTERNATIONAL Monetary Fund chief Dominique Strauss-Kahn said that he does not see the United States economy recovering from its current doldrums this year.

Describing a US government labour report on Friday that showed fewer than expected job losses as a 'flash in the pan', the IMF managing director said on Friday 'the medium-term trend remains what has been forecast and the US economy would not be on the road to recovery before the end of the year'.

The IMF has forecast a 'mild recession' in the United States, with annual growth a paltry 0.5 per cent.

Mr Strauss-Kahn, speaking to reporters after meeting with French Prime Minister Francois Fillon at IMF headquarters, cautioned that 'one must wait to see the next US data'.

The US Labor Department reported US employers cut 20,000 nonfarm jobs in April, far fewer than private economists' forecasts of 75,000.

The jobless rate fell a tenth of a percentage point to 5.0 per cent, the department said, instead of the expected rise to 5.2 per cent.

While still a weak number, it reinforced the view that the US economy is stabilising and that the Fed may therefore take a pause in its rate-cutting campaign.

Mr Strauss-Kahn, a former French finance minister who took the top IMF post in November, said the numbers were 'not bad but I fear that is only a flash in the pan'. The US Commerce Department this week estimated the economy grew at an annual 0.6 per cent in the first quarter, the same pace as in the fourth quarter.

The expansion was stronger than economists' consensus forecast and helped ease fears that the world's largest economy was slumping amid a severe housing downturn and credit crisis. -- AFP

Slowdown may stretch into next year: PM Lee

For S'pore, much depends on the shape of the US downturn - whether it's V, U or L

(SINGAPORE) To the eternal optimists who think that the Singapore economy will rebound from its lean patch in the months to come, Prime Minister Lee Hsien Loong offered a sobering projection: he expects the slowdown to continue into next year.

While the economy is on track to hit 4-6 per cent growth this year, Mr Lee sees its momentum slowing in the next few quarters as the United States economy limps along, dragged down by still-unfixed sub-prime mortgage problems.

And whether it's a V-shaped or U-shaped downturn in the US, it could extend the slowdown in Singapore's economy into 2009, Mr Lee told some 1,500 unionists yesterday at a National Trades Union Congress May Day Rally.

'The first quarter is good,' he said. 'Second, third, fourth quarters - prepare ourselves that it will slow down. And the slowdown may last into next year.'

It could be worse if the US falls into an L-shaped economic trajectory - the gloomiest scenario, when there is a severe and extended downturn in the US, like the decade-long recession Japan went into in the 1990s.

'If that happens, then America is in trouble,' Mr Lee said. 'So too Europe, so too Japan. And Singapore will be caught up in this and we will be in serious difficulties too.'

But he noted that most analysts don't think this is on the cards.

The best scenario for the US is a V-shaped downturn - a quick recession followed by a quick rebound - which is also the best scenario for Singapore, Mr Lee said. 'But it is hoping for the best'.

He said the US could easily slip into a U-shaped downturn because its underlying housing problems remain unsolved. The actions taken so far have only postponed the problems into the future.

'The property prices have to go down further,' Mr Lee said. 'When they go down, the banks will have more problems. When the banks have problems, they shrink. That will cause the economy to have more problems.'

In a U-shaped downturn, the bottoming will last longer and the US economy will take some time to sort itself out - perhaps until 2009, according to him.

'This could well happen and then Singapore too will be slowed down significantly,' Mr Lee warned.

'But whatever it is, we have to stay on our guard and stay prepared,' he said. 'Overall, I would expect V-shaped if we are lucky (or a) U-shaped downturn in the US - better plan on that.'

Whatever shape the US downturn takes, Mr Lee said the impact on the Singapore economy will be uneven. Construction, marine engineering, ports and shipyards will be 'all right', according to him.

'Construction will be okay because we have so many things building in Singapore,' Mr Lee said.

'Marine engineering will be okay because the shipyards are doing well. Ports will be okay because the port is highly competitive and bringing in a lot of business.'

But tourism, financial services and perhaps information technology will feel at least some pain.

All this suggests that Singapore's year-on-year economic growth in the coming quarters will fall below the surprisingly strong 7.2 per cent gain estimated for Q1.

'Essentially, Singapore has to be prepared for fairly rough weather ahead,' said Manu Bhaskaran of Centennial Group, a US-based economic consultancy.

He sees a prolonged period of 'meagre' economic growth in the US - and Europe and Japan are not going to take up the slack, because the leading indicators for these two large economies also point to a slowdown, according to him.

Mr Bhaskaran said Singapore has built up some resiliency in its services sector, which puts it in a better position than before to absorb the impact of a US recession. But even then, it remains an open economy and a downturn in the US, Europe and Japan at the same time will hit Singapore.

How to Ask for a Raise When Times Are Hard

by Tara Weiss

When the economy is in a downturn, employees hunker down and avoid drawing attention to themselves. Asking for a raise? Out of the question.

Not true. If your company is filing for bankruptcy, that's one thing. But work goes on and the best performers—especially the ones who bring on new clients and save their firm money—are justified in asking for a salary hike. The trick is showing your manager how much you're worth.

"The need to reward good employees doesn't change if the economy is in a recession or an upturn," says Doug Arms, chief talent officer for Ajilon Professional Staffing. "Companies make employee investments at different times, and some do it purposely during a recession so they're prepared to come out of it stronger. Employers need to consider what would happen if their best employees leave. The search process is painful since it's so hard to find a good match."

Like with any salary negotiation, find out what people in your market and your position are making. There are several ways to get that information. First, consult a recruiter that specializes in your industry. "Nobody has a better finger on the pulse than a recruiter," says Arms. "They know exactly what your competitors are paying."

You can also find this data on Web sites like PayScale.com. More than 10 million people were surveyed to build the salary database. To find out what you're worth, click on the "Evaluate salary for current job" option. Users must answer 20 questions related to their experience and job responsibilities to find out what others are getting paid.

Once you know your market value, request a conversation with your manager about salary. Don't threaten that you'll leave if you don't get a raise, and stay away from mentioning financial hardship. Instead, remind your manager of the strong contributions you've made. During an economic downturn, highlight new clients you've brought to the firm and cost-saving measures you've enacted. Include the key projects you've completed and goals you've met.

"Yes, your employer might be losing money because of a downturn," says Sherrie Campbell, a workplace expert from PayScale.com. "But if you can prove that you're vital to getting the company through the recession, then a raise is assured."

Next, present your manager with the research you collected on what others in your market are making. If you completed the PayScale salary survey, bring it with you. If you contacted recruiters, mention that. But you want to take a conversational tone instead of a confrontational one. Bring it up as if it's a discussion in which you're presenting research.

"Don't say, 'You're underpaying me,'" says Arms. "Say something like, 'Over the last year we had very specific targets in the organization that I had a vital role in assisting the company with. That, combined with the research I've done on current market conditions, makes me feel that my position here is worth the fair market value. I'd like to have a conversation to discuss my value to the organization.'"

Don't expect to get rejected but be prepared just in case. One route is to consider perks outside of salary. For instance, many people consider additional vacation time just as valuable as money. Other options include health benefits, reimbursement for commuting and professional training in a job-related skill. If you are denied the raise, tell your manager, 'I appreciate that finances are tough now. Can we discuss non-salary perks?'

Another way to deal with rejection is to ask what you can do in the next six months to make this conversation successful the next time. Ask the boss to be as specific as possible.

Says Campbell: "It lets the boss know you're serious and that you're willing to improve to get this raise."

Copyrighted, Forbes.com. All rights reserved.

Quick Study: Money and Happiness Under the Microscope

by Laura Rowley

University of Southern California professor Richard Easterlin, the father of research on well-being, began studying happiness in the late 1960s, when happiness wasn't cool. I've interviewed him a number of times over the years.

Early in his career, Easterlin examined data on economic growth and reported happiness in a range of countries, and discovered that big jumps in growth in nations such as the United States and Japan were accompanied by declines, or only marginal increases, in reported happiness. This became known as the "Easterlin Paradox."

A Paradox Revisited

Recently, Betsey Stevenson and Justin Wolfers, two economists at the University of Pennsylvania, reexamined the data, and suggest that economic growth does indeed correlate with happiness, according to a New York Times report. They found that people in countries with higher incomes report higher life satisfaction.

National economic growth and happiness is one thing, personal wealth and happiness is something else entirely. So amid this debate, I think it's worth re-examining what studies say about money and individual well-being. Here are my conclusions:

1. Money buys moments of pleasure -- but they don't last long.

The problem is the more we have the more we want. In a separate study, Easterlin analyzed the results of a survey that asked adults about their material aspirations and achievements. People were presented with a list of items -- a lot of money, a home, a swimming pool, a vacation home, cars, travel abroad, etc. -- and asked which things fit their definition of "the good life." Then, researchers asked them to go down the list and name all the things they had. The study was conducted twice -- once in 1978 and again in 1994.

Because the two surveys were conducted 16 years apart, Easterlin was able to analyze whether people's aspirations shift as they age and their circumstances change. He found that as consumers moved through each stage of the life cycle -- early, midlife, and older years -- they generally acquired more of the goods on the list. But as they accumulated more, their aspirations for material goods also rose in proportion to the amount of things they owned.

In other words, the study offered scientific proof of the old saying "the more you have the more you want." Researchers call it the "hedonic treadmill." It means -- we quickly adapt to the improvement in our circumstances, and then seek more.

2. We constantly want more because we're bad at predicting what will make us happy.

In 2002, Daniel Kahneman of Princeton won the Nobel Prize in economics for his work in this area. A fundamental rule of economics says that people are motivated by self-interest: They know what they want, can predict the most desirable outcome, and choose the best course of action to maximize their welfare. But Kahneman and a burgeoning group of behavioral economists have found that's not always true: We don't always act rationally.

One reason is the way our brains recall experience. Kahneman had people record how they were feeling about an event in real time, and then interviewed them after the fact. He discovered their accounts didn't match. Our brains pay attention to the peak and the end of an experience, and tend to forget what happens in between.

If we only remember the peak and end of an experience, we can make poor decisions. For instance, a salesperson will remember the rush of closing a big deal, but might not remember what it cost in time away from family, lost sleep, high stress, or poor health -- so he'll repeat the behavior. A shopper will remember the thrill of buying a Louis Vuitton suitcase, but she might not remember how long or hard she had to work to pay for it (or worse, pay for the bag and the finance charges on a credit card) -- and dig herself ever-deeper in the hole. If we aren't consciously in touch with what we really value, we can make career and money decisions that make us unhappy.

3. Money might buy interesting experiences, but researchers say cheap thrills create happiness.

I recently interviewed Sonja Lyubomirsky, a psychologist at the University of California, Riverside, and author of "The How of Happiness." Her book examines research suggesting that 40 percent of our happiness is inherited, and 10 to 15 percent is based on life circumstances like money, health, where you live, whether you're married or have kids, and so on.

But the rest of well-being -- a good 45 to 50 percent -- comes from your choices: Should I work extra hours for more money, or spend that time with my friends? Should I watch television, or go running or biking? Should I go to the mall, or spend time volunteering? Should I browse through the catalogs in my mailbox, or spend that half-hour meditating on what I'm grateful for?

As you can probably guess, researchers have found it's the latter choice in each pair that promotes happiness. Everyday decisions have a huge impact on your happiness, and many of those happiness-inducing choices -- socializing, volunteering, exercising, meditating -- don't have to cost anything at all.

4. People chase money because they think it's something else.

We tend to place a lot of symbolic meaning on money. We think money is security, power, freedom, happiness, or love. Money can certainly buy us a measure of freedom or security, but money itself is none of those things. If we think money is security, we'll never amass enough to feel secure. If we think it's freedom, we'll never earn enough to be free. The problem is, instead of consciously setting and pursuing goals to create a life in which we feel free or secure, we shortcut to money as a proxy.

Tim Kasser, associate psychology professor at Knox College, and Richard Ryan of the University of Rochester have found that people who make the pursuit of money a significant goal score lower for mental health. They suffer a greater risk of depression; have more anxiety and lower self-esteem; experience more physical, behavioral, and relationship problems; and score lower on indicators testing for self-actualization and vitality (or feeling alive and vigorous). The findings were similar across different countries, income levels, and age groups.

Once we remove the emotional baggage, we can acknowledge that money is just one component to achieve our goals instead of an all-encompassing solution. If freedom is a value, we have to ask which people, qualities, and experiences have made us feel most free in the past: Where do I need to live to be around those people? What should I do for my work, and how should I spend my leisure time? How much money do I need to help me create a life with those qualities and experiences? Being as specific as possible about how to manifest these qualities in our lives will keep us from running on the hedonic treadmill.

Feel Blessed, Not Happy

Finally, there's the issue of what people mean when they tell a pollster they're "happy."

In one of my favorite studies, researchers had subjects go into a phone booth to make a call. The researchers put a quarter in the coin return of the telephone; some people find it, others don't. Immediately afterward, the researchers asked them to rate their overall satisfaction -- and it's the people who found the quarter who rate life the best.

The study underscores the importance of separating temporary euphoria from genuine happiness. I subscribe to Aristotle's notion of eudaimonia -- which is translated from the Greek as "happiness," but is probably closer to the word "flourishing." And long-term flourishing requires discipline, persistence, hard work, faith, and, most important, pursuing goals that are close to your heart and based on your personal gifts.

This isn't the smiley-face, instant-gratification kind of "happiness" that popular culture promotes. As Thomas Carlyle once said, "There is something higher than happiness, and that is blessedness."

S'pore economy faces dark storm clouds: PM

SINGAPORE - The United States is probably in a recession and the Singapore economy will be more severely affected if the turmoil in global financial markets worsens, Singapore's prime minister said on Wednesday.


The Southeast Asian country was ready to respond if the situation in the United States worsens, said Lee Hsien Loong in a statement to mark May Day.

'Dark storm clouds have gathered... A US recession has probably already started,' Mr Lee said.

'We must watch closely how the situation in the US unfolds, and be ready to respond if things take a turn for the worse. We have the resources and the ability to do so.'

Mr Lee acknowledged that the rising cost of living in the Republic was a major issue but said Singapore could not be completely insulated from rising global inflation.

'We need not worry about a food shortage, because we have adequate supplies, and can buy what we need from many sources,' he said.

Mr Lee said that the central bank's policy to allow the Singapore dollar to rise had moderated the impact of imported inflation.

Singapore's central bank earlier this month tightened monetary policy by allowing a rise in the Singapore dollar, its main policy tool .

Inflation in the city-state accelerated to a 26-year high of 6.7 per cent in March. The central bank expects inflation to hit the upper-end of a 4.5-5.5 per cent range this year, although some economists said inflation for the year could average 6 percent.

Mr Lee reiterated the government's official forecast that the economy would grow at 4-6 per cent this year.

Booming construction, tourism and marine engineering will help lessen the impact of a US recession on Singapore, he said.

Mr Lee also said the labour market would remain tight, and that more jobs will be created as the country builds two multi-billion dollar casinos, the first of which is set to open late next year.

Singapore's unemployment rate rose to a seasonally adjusted 2 per cent in the first quarter amid mounting uncertainties in the global economy, advance government estimates showed on Wednesday, and analysts warned the jobless rate may climb higher in the months ahead. -- REUTERS

Job Market Worries? Not for Very Long

by Marshall Loeb

Though we wisely worry about rising unemployment during this recession of 2008, there is another, quite different problem that soon will confront the nation: a shortage of workers.

The challenge will not be too few jobs, but too few people to hold them.

Americans of childbearing age simply are not producing enough kids to meet the economy's future need for workers, notably in fast-growing fields such as medicine and engineering. The shortfall is coming largely because the fabled baby boom generation was so huge—75 million Americans born in the 18 years from 1946 to 1964—that no other generation can be expected to match it any time soon.

Now the baby boomers are aging—they range from 44 to 62 years old—and their overall numbers in the labor force are shrinking.

They are being replaced by two younger generations, each with its own desires regarding the opportunities and rewards available at work. The challenge for hiring managers is to figure out what these workers' needs are, so that employers will be able to find them, hire them, and keep them on the job.

The different generations are being intensely studied by W. Stanton Smith, a human relations specialist and a principal of Deloitte LLP, the consulting firm. In his recent book, Decoding Generational Differences, Smith identifies three generations, and what each wants from employers.

The baby boomers: They place a heavy emphasis on work and successfully climbing the corporate ladder. Work is an anchor in their lives.

The Gen Xers, born between 1965 and 1980: They enjoy work but are more concerned about the work-life balance.

Generation Y, also known as Millennials, born after 1980 and now age 28 or younger: They often have different priorities than their Gen X and baby boomer counterparts, Smith says.

"Because of their reliance on technology, [Millennials] think they can work at any time and any place and believe they should be evaluated on the basis of work produced—not on how, when or where they got it done. Curiously, most Millennials want long-term relationships with employers, but on their own terms," Smith says.

"The real change in their work-force attitudes is a decrease in ambition in favor of more family/personal time and less pressure in life generally speaking," he says.

Also, the Millennials have been raised to question authority and demand value for money. They came of age in a world of layoffs and corporate scandals, fostering the belief that businesses in general, and big businesses in particular, value their own financial gain above all else, and that business talk about the importance of people is largely insincere.

The Millennials respond poorly to those who act in an authoritarian manner and those who expect to be respected due to higher rank alone. They believe they can learn quickly, take on significant responsibility and make major contributions far sooner than baby boomers think they can.

In the next decade, according to Smith, the American professional work force will continue to age and shrink. The median age of the overall population and the labor force will increase as the majority of the baby boomers move into their 50s and 60s, and the oldest into their 70s. From now until 2015, workers aged 55 to 64 will be the fastest-growing segment of the labor force.

Between 2003 and 2008, an estimated 24 million baby boomers will have left the active workforce, primarily from executive, administrative, and managerial jobs.

Gen X presents a much smaller pool of available workers, and will not be able to fill the positions left vacant by retirements. The pool of available workers among those aged 25 to 44 will have decreased by 7% from the level of 2003, resulting in a significant labor shortage.

"In fact," says Smith, "every year for the next 30 years, there will be fewer young people to replace retiring workers. The labor shortages will continue well into the future, as average annual growth of the work force is projected to hover at around 1% through 2015."

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