American "meltdown" reason for Fortis money injection

28th of June, 9:10

BRUSSELS/AMSTERDAM - Fortis expects a complete collapse of the US financial markets within a few days to weeks. That explains, according to Fortis, the series of interventions of last Thursday to retrieve 8 billion. “We have been saved just in time. The situation in the US is much worse than we thought”, says Fortis chairman Maurice Lippens. Fortis expects bankruptcies amongst 6000 American banks which have a small coverage currently. But also Citigroup, General Motors, there is starting a complete meltdown in the US”

Courtesy of CNA forummer - Topsage

I made 5 phone calls to friends who are in the "investment management" line. At least those who I know are somewhat successful ( > 7 yrs, live in private housing).

These is the consensus view (not necessarily the correct view):

1. US slowdown will span 3 quarters starting from beginning of 2008 until Sep 2008.

2. Even after Sep 2008, recover will be slow.

3. Asian markets always follow US stock market down. EVEN when the actual economy is decoupled. One of my friends did an analysis - there are many US recession that did not affect certain Asian economies much, yet the stock market fell.

4. When Asian market rebounds, for economies not in recession, it is expected to be sharp.

5. The market is in grind down mood. "Finding the bottom" mood. This is a slow process and can take weeks if not months and nobody not even the greatest expert can tell you when it is over.

6. Expected markets that will show some decoupling are Taiwan & Thailand (remember Thailand missed out on a large part of 2007 bull due to politics).

7. Commodities like Gold, Oil, Copper will probably rise further but do not buy because the best entry point is behind us.

8. US economy is in big trouble. The best scenario is a shallow weakening with exports sustained by Asian economic strength. Such a scenario will cause investors to switch to Asian which is pulling the US along. But the most likely scenario is not as nice as this, the US can potentially go into an L shape recession because the economy has a very large debt and the implosive effects are potentially damaging.

Whatever it is becareful & defensive but not too pessimistic. Be selective.
Oil may be the wild card. ....a plunge in oil price might help the market along and end the gloom. But still, this may a market with a few bottoms to go through.

BNP head sees worst of global crisis over-report

The worst of the financial crisis is over and markets should start settling from the second half of this year, the head of France's biggest listed bank, BNP Paribas, told Italy's La Repubblica newspaper.

"The worst should be over and I think that from the second half onwards the crisis should normalize: that is, the phase of exceptional turbulence on the markets should end," Baudouin Prot, chief executive of BNP, said in an interview published on Sunday.

"I still expect to stay volatile," he added.

He said BNP had only been touched "lightly" by the crisis in the U.S. subprime mortgage market as the bank had only 200 million euros of exposure.

Prot said he was in favor of a pan-European committee to supervise markets "with strong decision-making powers over banking."

But he added that it was also "important to keep a close eye on sectors of the financial industry which are still not supervised."

Prot reiterated that BNP was not interested in buying rival Societe Generale, as it said in March. "We haven't changed our view," he told La Repubblica.

He added that BNP was "under no pressure to make new acquisitions" but would not let any good opportunities slip.

Turning to Italy, where BNP owns lender BNL, Prot said the French bank would continue to invest in the Italian bank's growth.

He added BNP would not sell its 50 percent holding in consumer credit business Findomestic. The other half of the business is owned by Italy's biggest retail bank, Intesa Sanpaolo, and the two are fighting over control.

More consumers, workers shoplift as economy slows

By Christine Dugas, USA TODAY
One morning last month, the manager of a Stop & Shop in Methuen, Mass., noticed a man, along with his young daughter, leave the store without paying for several bags of shrimp. When police arrived, they found something else on him, too: 20 cans of baby formula.

Call it a sign of the times. Steadily and alarmingly, shoplifting seems to be rising at many retail chains, and experts are pointing at a prime cause: the sputtering economy.

"Wages aren't keeping up with inflation, especially the price of food and energy," says Diane Swonk, chief economist at Mesirow Financial. "It just leaves less money for everything else, and that breeds a lot of temptation."

Retail and law enforcement experts agree that they've seen an increase in store theft during the current slowdown — and not only from customers.

"It's clear that both employee theft and shoplifting are up," says Richard Hollinger, professor of criminology at the University of Florida who compiles the annual National Retail Security Survey. "The most recent rise is being driven by the economy. A lot of people are on the financial edge."

When 116 retailers were surveyed recently about shoplifting, 74% said they believed that shoplifting incidents last year had risen from 2006, according to the National Retail Federation.

And when a smaller group of retailers were asked about shoplifting so far this year, nearly all said it has continued to rise, says Joe LaRocca, vice president of loss prevention at the National Retail Federation. They also said they felt the economy had been a contributing factor.

All told, retail theft is estimated to cost about $40.5 billion a year. And the rest of us, already squeezed by higher gas and food prices, end up paying for it: Stores pass on much of their losses to customers in the form of higher prices.

"Retailers can't afford to just eat that loss," Hollinger says. "Their margins aren't large enough. So this hits right on the bottom line, and they're trying to plug up all of these leaks, because the economy is so tight."

Among the reasons the sluggish economy is thought to be contributing to rising shoplifting by customers and store employees:

•Rising prices and growing debt. "Unfortunately, it's to be expected that when the economy moves into a slowdown, and families have difficulties meeting week-to-week and month-to-month bills, shoplifting is going to go up," says Bruce Hutchinson, professor of economics at the University of Tennessee at Chattanooga.

Most police departments don't collect data on the profiles of shoplifting suspects. But some who deal directly with the problem say they've detected a shift.

"In general, the shoplifter of the past was mostly trying to fuel a drug habit," says Sgt. Alfred Pratt of the Shrewsbury, Mass., Police Department. "But we've seen a change as the economy has declined. More common, everyday items are being stolen, such as groceries."

The district attorney's office in Knoxville, Tenn., says it's seen a similar change. "We get a lot of shoplifters, and I see the trend upward," says Samyah Jubran, a Knox County assistant district attorney general.

Now, she says, there's more food theft, and it tends to come from repeat offenders, many of whom seem to be struggling with financial issues.

•Fewer store clerks. Squeezed by the tightening economy, stores are looking to trim costs. One easy way is to reduce the number of sales clerks on the floor. With fewer employees greeting people at the door and watching shoppers walk the aisles, it's easier for shoplifters to grab and stash merchandise.

In April, when about two dozen retailers were asked about store theft so far this year, LaRocca says, most said they thought that reduced sales and staff cutbacks had been a contributing factor to the rise in theft rates, involving both consumers and employees.

If stores "don't have a lot of people on duty in the store, particularly in these big-box stores," Hollinger notes, "it leaves what are called dead zones. That's where shoppers can stuff things up their shirts or in their pocketbooks, take off the tags and do all sorts of things."

With fewer employees promoting merchandise, some retailers have felt the need to unlock and display high-price products, such as jewelry and watches, outside their usual glass cases. That might help spark more sales. But it's also likely to lead to more theft, says Mike Keenan, director of loss prevention at Mervyns department stores.

Job turnover, whether of sales associates or store managers, is a leading predictor of employee theft, Hollinger says. In 2006, retailers estimated that employee theft had caused 47% of their company losses, according to his most recent National Retail Security Survey. Hollinger's survey found that employees accounted for nearly half the total cost of retail theft.

Many employees who are caught are dismissed but not prosecuted.

"After dismissal, most are also required to provide civil recovery and pay restitution," Hollinger says. "Just because retailers don't always prosecute does not mean that they do not know where their merchandise and money is going."

•Rise in organized retail crime. The economic slowdown has led many shoppers to seek deeply discounted products through the Internet, says Paul Jones of the Retail Industry Leaders Association. Exploiting the opportunity, criminal teams are zeroing in on retail products and selling them cheaply, authorities say.

"It's become more lucrative for them," Jones says.

Gangs of professional thieves account for $15 billion to $30 billion in retail losses every year, the FBI and the retail federation estimated in 2005.

This year, 85% of retailers said they thought they'd been victims of criminal enterprises in the past 12 months, according to a survey the retail federation released this month.

The Internet has made it much easier for thieves to sell more stolen items, because "they used to have to sell at a garage sale or flea market or through a fence, and those were generally local," Keenan says. Now, he notes, it's easier to use the Internet to unload products across the country and the world.

Many people are willing to grab those deals, even if they suspect they might be buying stolen goods.

"Consumers are looking for a big bang for their buck," says Swonk, the economist at Mesirow Financial. "If it's stolen goods, they're going to get it at a better price than at the retailer. It's creating another market."

Questionable medicine

Yet, doing so could carry health risks in some cases.

"We've found that many people buy infant formula through different online auction sites," Jones says. "But they don't know if that merchandise is properly stored, if it has the correct date on it or if it is even the right merchandise."

Last week, after a two-year investigation with the FBI and IRS, the San Jose, Calif., Police Department busted a shoplifting ring whose thieves had stolen merchandise from grocery stores and discount retailers. Products that included Pepcid AC, Claritin and Tylenol were sold on the Internet and at flea markets, police said.

Last year, the FBI joined with the retail industry, which it relies on for shoplifting data, to pool information and help combat organized retail theft.

Only in recent years, though, have a majority of retailers been willing to discuss merchandise theft. "In 1991, when we started this process," Hollinger says, referring to his National Retail Security Survey, "it was like root canal."

But shoplifting and employee theft have imposed such financial burdens on retailers that more of them are seeking answers.

"It's the single largest category of property crime in America, bar none," Hollinger says. "Bank robberies, car theft — nothing comes close to this."

As long as the economy remains weak, many experts think the trend will persist.

"When the economy is down, shoplifting and other crime go up," says Mark Zandi, chief economist of Moody's Economy.com. "People are losing jobs or moving from a full-time to a part-time job. But they still have the mortgage to pay and the credit cards to pay."

Harvard, Buffett Have Bad News for Asia Bulls: William Pesek

June 27 (Bloomberg) -- ``The worst is over.'' One hears some variation of this view constantly when traveling around Asia.

It's a comforting one, predicated on the idea that the U.S. economy will avoid the recession that markets have priced in for some time. It's also a view that could be in for some serious revision as the year unfolds, and not in a good way.

The latest sign comes from a Harvard University report. Growing foreclosures and tighter lending standards are creating an environment that ``is shaping up to be the worst in a generation,'' Harvard's Joint Center for Housing Studies said on June 23.

``The slump in housing markets has not yet run its full course,'' said Nicolas Retsinas, director of the center.

The U.S. market seems likely to remain mired in a recession. And as Retsinas pointed out, housing markets historically recover only after an economy contracts and prices fall enough to improve affordability.

That's a bigger problem for Asia than many investors may want to admit.

There's much relief that Asia is holding its ground as the U.S. economy slows and credit-market woes humble Wall Street's biggest names. While asset markets are heading lower from Tokyo to Jakarta and Shanghai to Mumbai, healthy economic growth has confounded the pessimists -- so far.

Knock-On Effects

The knock-on effects are coming, just more stealthily than many expect. Asia is unlikely to get off easy even if the U.S. skirts a recession. The region hasn't decoupled from America as much as some would say.

The worst-case scenario -- a prolonged U.S. decline -- could be devastating, particularly at a time when record oil and food prices are hurting Asian households. Billionaire investor Warren Buffett laid it out in a June 25 Bloomberg interview. He's unsure when the U.S. will recover.

``It's not going to be tomorrow, it's not going to be next month, and it may not even be next year,'' said the chairman of Omaha, Nebraska-based Berkshire Hathaway Inc.

The idea that Asia will continue to display an impressive immunity to U.S. events ignores how dependent China is on the American economy. It also ignores how reliant Asia is on China's 10 percent growth. Slowing U.S. demand will chip away at that country's export-driven expansion exponentially.

China's Limits

China is one of several Asian economies with negative real interest rates. With its annual inflation above the central bank's benchmark lending rate, China would be hard-pressed to stimulate growth with lower borrowing costs or increased government spending.

Monetary quandaries abound in Asia. Bank of Japan officials, for example, are making it clear interest-rate deliberations have become increasingly challenging over the last two months.

``At the time of the June meeting, both downside and upside risks had risen compared with when we met in May,'' BOJ policy board member Seiji Nakamura said yesterday in Asahikawa, Japan.

The credit crisis that began with U.S. subprime loans is just one force crimping U.S. spending. A new Bloomberg/Los Angeles Times survey shows most Americans are feeling the pain from rising gasoline prices and many are tightening their belts. Seven in 10 of those surveyed said higher gas prices have caused them ``financial hardship.''

Export Woes

That may mean less spending on cars, flat-screen televisions, cellular phones, name-brand clothing items and other goods manufactured in Asia. With U.S. consumers accounting for 70 percent of gross domestic product, any pullback would have an outsized impact on global economies. Housing is arguably the key to all of this.

The U.S. will expand 1.4 percent in 2008, the weakest performance since 2001, according to a Bloomberg survey. U.S. growth may be cut by a half to a full percentage point if consumers spend less and save more, according to Deutsche Bank AG economists. For Asia, that is decidedly bad news.

So is Harvard's housing report and Buffett's concern that the U.S. is heading for stagflation. Rising home prices and easy access to credit have been the major drivers of U.S. growth in recent years. If U.S. housing remains weak, Asia's export- dependent economies are particularly vulnerable.

Here, recent comments by Federal Reserve officials are both good and bad for Asia.

The Fed this week left its benchmark rate at 2 percent, saying ``uncertainty about the inflation outlook remains high.'' Further rate cuts seem unlikely, something that could disappoint some investors. The specter of continued rate moves supported optimism about Asia's export markets.

Yet easy Fed policies also cause problems in Asia. Much of the liquidity that U.S. officials create ends up in Asian markets, increasing so-called hot-money flows. That has made it harder for Asian central banks to control money supply and inflation. Taking a longer-term view, an end to Fed rate cuts isn't a bad thing.

The catch is that with Asia's most important customer in trouble, the region's growth outlook is dimming. Here, the U.S. housing market is more of a linchpin than many in Asia think.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

S'pore stocks - down but not out

Rough ride expected ahead, but counter-inflationary stocks or those that can ride rising oil prices could offer opportunities

Business Times - 28 Jun 2008
By LYNETTE KHOO

(SINGAPORE) Rising inflation and slower economic growth projections are eating away at sentiment on the Singapore stock market. With the picture unlikely to brighten in the near term, stocks could drift further south in the second half of this year, analysts say.

Since January, the Straits Times Index (STI) has lost almost 15 per cent to 2,955.91 points along with the broad sell-off across regional bourses and on Wall Street.

Trading volumes have also slumped 46 per cent from a year ago to some 150.5 billion shares in the first half of this year.

Analysts believe that investors are in for a tougher ride in the next six months as lingering inflationary fears and possible tightening measures by central banks continue to stoke market volatility.

'We started the year thinking that the second half will be better than the first, but we are beginning to doubt it more and more,' says CIMB-GK research head Kenneth Ng.

In May against a backdrop of choppy trading, the main market index was lifted to a high of 3,250 points on positive news of the Bear Stearns rescue, the aggressive interest rate cuts and the stimulus package by the US Federal Reserve.

But that did not last as the index subsequently slid towards March's low of 2,800 on worries over oil price spikes, slowing exports growth and further monetary tightening by central banks.

Already, analysts have priced in higher costs and lower demand into corporate earnings estimates.

They point to a host of concerns that will trouble the market in the second half - high oil prices and inflation, poor performance of US and European banks, slower consumer demand and easing economic growth.

'As these issues are likely to persist for a while and together with the lack of any strong positive leads, the market is already showing signs of a standoff, with a downward bias,' says Carmen Lee, head of research at OCBC Investment Research.

A survey by fund managers by OCBC Bank's wealth management unit released yesterday echoed these views.

Given the slowing consumer demand and rising costs, fund managers are concerned that earning expectations may be too high and warned that potential earnings downgrades could weigh on equity markets in the following months.

Kim Eng's technical chartist Ken Tai noted that the STI could break below 2,800 points in the second half before recovering back towards the end of the year on a potential Santa Claus rally.

'Market yield is 7.1 per cent but inflation is 7.5 per cent. The market has to correct lower in order for it to make sense for investors to buy,' he says.

But not all is lost. Analysts believe that market corrections also present opportunities for investors to accumulate stocks that can ride the inflationary wave, or are less adversely impacted by rising prices.

Offshore marine and oil and gas plays will continue to get attention as long as oil prices do not correct significantly in the near term, analysts say.

Yesterday, oil prices continued to edge up, with light, sweet crude for August delivery hitting a record US$141.71 per barrel in Asian trading.

Also looking good now are companies with pricing power, big cash hoards or high dividend yields as the average retail investor pulls money out of bank deposits in search of a better hedge against inflation.

'We couldn't find any reason to be terribly excited but we think there are still some stocks that investors could consider,' says Kim Eng's regional head of research Stephanie Wong.

She favours counter-inflationary stocks such as SingTel, MobileOne and Singapore Press Holdings (SPH), which she believes have pricing power.

She also likes stocks that may benefit from higher oil prices, such as Keppel Corp and ASL Marine.

Likewise, DBS Vickers' research head Janice Chua said in a recent report that her third-quarter picks were based on the inflationary theme and the 'urgent need to keep it in check'.

Parkway Life Reit is seen as a natural hedge against inflation as the minimum guaranteed rental growth is pegged at one per cent above the consumer price index, Ms Chua said. Shipping trusts and offshore ship charterers are also expected to benefit if the greenback strengthens as anticipated as their earnings are denominated in US dollars.

DBS Vickers is also positioning its strategy on what it reckons to be a rising interest rate environment that will bode well for the banks, and on the Formula One fever ahead of the event in September, the key beneficiaries of which are hotel and tourism-related stocks.

OCBC recommends a flight to safety towards defensive stocks. This would include blue chips for their profit track record and sound business models, while CIMB-GK recommends dividend exposure via SPH and local Reits, as well as some oil and gas exposure.

Analysts are, however, divided on commodity stocks. While most select counters in the agricultural commodities sector, Ms Wong of Kim Eng believes commodity prices could be a bubble in the forming.

'We are talking about investors who are taking a longer-term view - who want to buy into stocks with deep value, downside protection with asset backing, and decent yields,' Ms Wong says.

Citigroup warns of Barclays rights issue deficit

By Philip Aldrick
Last Updated: 12:01am BST 28/06/2008

Barclays' £4.5bn fundraising falls about £9bn short of what is necessary to absorb credit-related writedowns and bring the bank's capital in line with European peers, Citigroup claims in a note to clients.

The British bank's shares came in for more heavy selling following the note, dropping to 289½p at one stage yesterday before ending the day down 5¾ at 298p.

Citi analysts said that simply moving Barclays' core tier one capital in line with its closest peer, Royal Bank of Scotland, would require an extra £2.5bn. If Barclays was to write down its credit-related positions to the same degree as RBS the figure "increases to circa £9bn".

Barclays has taken just £1.7bn of writedowns this year, compared with £5.9bn at RBS, leading some to believe that it has not been sufficiently prudent in its assumptions.

The bank thought it had allayed some concerns this week by securing backing from several existing shareholders as well as new ones from Qatar and Japan for its £4.5bn recapitalisation.

One leading institution said: "Investors of some repute have studied the numbers properly and they've decided the shares are attractive enough to buy. That is clearly positive."

Citi estimates that Barclays will have a tier one capital ratio of 5.8pc at the end of 2008, which would be the "ninth worst [of 66 banks] in Europe". It adds that "Barclays has adopted a somewhat unusual accounting practice" with regard to its credit assets.

Stagflation threat overstated for stocks, bonds, report says

DAVID PARKINSON
Globe and Mail Update

Stagflation might not be the bogeyman for stock and bond markets that it's cracked up to be, a top U.S. market strategist says.

Tobias Levkovich, chief equity strategist at Citigroup Global Markets Inc. in New York, has published a report looking at periods of stagflation - stagnant economic growth coupled with high inflation - over the past 40 years and analyzing returns experienced by various investment asset classes. He found that U.S. stocks and bonds were actually top performers during those periods, outpacing gold, oil, industrial commodities and residential real estate.

The data fly in the face of conventional wisdom, which holds that stagflation is a killer for both stocks, as a result of the lack of economic growth, and bonds, because of the high interest rates that result from inflation. They also suggest high-flying commodities such as gold and oil, which some investors have sought out as a shelter from a possible stagflation storm, might not be such solid bets after all.

"The idea that stock and bond markets may be poor performers during short bursts of so-called 'stagflation' may be more myth than fact, given historical study, while alleged investing in commodity-based protection seems equally unsound," he said.

Data suggest investors who bought high-flying commodities such as oil as a hedge against stagflation might not have made such a solid bet after all.

Mr. Levkovich noted that during the five generally recognized stagflation periods in the past 40 years (1970, 1974-75, 1980, 1982 and 1991), stocks and bonds actually had positive absolute returns in four of them.

On the other hand, gold prices have, on average, actually fallen slightly during stagflation periods, while oil prices have advanced less than 2 per cent - well behind the average gains of 6.2 per cent for the S&P 500 stock index and 6.7 per cent for the U.S. 10-year government bond total return index. Industrial commodities typically slump badly under stagflation: The Commodity Research Bureau's raw-industrials commodity index posted an average decline of 7.4 per cent.

Economists have been quick to point out that the current stagflation threat bears little resemblance to the deep economic malaise of the 1970s that gave the term prominence. In fact, many have qualified their stagflation references in recent weeks with phrases such as "mild stagflation," to differentiate current risks with the rampant inflation and high interest rate environment of the 1970s.

"The running parallels with the 1970s appear to be more thematic than quantitative, both in regards to inflation and economic growth," said Scotia Capital's Gorica Djeric in a report yesterday, who termed the current threat "stagflation lite."

But Mr. Levkovich argued that if the current short-term stagflation threat follows the script of the most recent U.S. stagflation episode in 1991 - the period that represents the best comparison, as both featured relatively mild economic downturn and inflation rates, high energy prices, a slumping housing market and financial institution troubles - then the outlook may be particularly bullish for equities and bearish for oil. In the 1991 stagflation period, the S&P 500 rose 12.4 per cent while oil prices slumped 26 per cent.

That history, combined with oil's massive outperformance of the S&P 500 this year, leaves oil "very vulnerable to a sharp pullback," he said.

"While the desire to continue buying commodities seems appealing, the run to date makes that option very costly."

The best place to put your hard-earned money is where it can make you some more money, the more the merrier. But with the plethora of financial invest

By Joe Bel Bruno, AP Business Writer
Record crude prices biggest difference from last market downturn in 2002

NEW YORK (AP) -- Investors who remember the stock market's steep and prolonged decline earlier this decade may be wondering if the recovery from Wall Street's current morass will also take several years to accomplish.

The dot-com bust, terrorist attacks, recession and corporate wrongdoing combined to send stocks plunging in 2002. Today's market has some similar problems, in particular the troubled economy and a devastated industry -- this time, it's the financial sector. But there's one variable that may be impossible to resolve: oil prices that have more than doubled in a year and show no signs of abating.

"The economic gloom is far greater today then it was in 2002 because we have concern about worldwide inflation and what oil is going to do to the economy," said Alfred E. Goldman, chief market strategist at Wachovia Securities. "The problem for investors is when all of this is going to end, and the bottom line is nobody knows. Nostradamus wouldn't have known, neither would Albert Einstein."

Crude oil has risen nearly 44 percent in the past five months, and OPEC's president said this week he believes oil could rise to between $150 and $170 a barrel this summer; it closed at a record high past $142 a barrel on Friday. That's still lower then the $200 peak recently forecast by economists at investment bank Goldman Sachs.

The uncertainty about where energy prices are going makes it harder for economists to make forecasts. Many believe the high price of energy will eventually reverse after oil goes so high that demand shrivels and supplies increase -- but calculating a timeline is difficult.

That leaves investors "just along for the ride," Wachovia's Goldman said.

Wall Street saw a return this past week of the volatility that had pummeled stocks since last summer but disappeared for a while during the spring. Investors were rattled not only by the uncertainty about oil's impact, but discouraging outlooks for the financial, high-tech and automotive industries.

This past week, the Dow Jones industrials plunged 4.2 percent, the Standard & Poor's 500 shed 3 percent and the Nasdaq composite index fell 3.8 percent.

The market is worried about the direct correlation between the cost of energy, especially gasoline, and consumers' spending habits. Higher pump prices mean Americans might think twice about discretionary items like going out to dinner, buying new clothes, or paying for a new big screen television. Or buying a new car.

Consumer spending accounts for more than two-thirds of U.S. economic growth. Though there are no signs that spending has dried up entirely, many market observers fear it could happen -- especially as gasoline hovers near a national average of $4.08 per gallon.

Wall Street's low point in 2002 was attributed to a host of problems such as the accounting fraud at corporate names like Enron, Adelphia Communications and WorldCom. Global tensions after the Sept. 11, 2001, terror attacks also hung over the market. There was still fallout from the near-collapse of the high-tech industry, and the country's collective problems had also sent the economy into recession.

But, with oil at about $30 a barrel, inflation was under control. The market's troubles were not seen as a systemic risk, as they are today.

"I knew we'd get through all the problems in 2002 because it was your plain vanilla, fairly shallow recession," said Stephen Leeb, president of New York-based Leeb Capital Management and author of "The Oil Factor."

"Right now, I think we're in one of the most threatening crisis of our history, and it is going to take a Manhattan Project to figure out what to do and it will take billions of dollars to implement it," he said, referring to the program during World War II to build the atomic bomb. "It can't immediately be cured because we need long-term answers."

The Federal Reserve, which kept interest rates on hold this past week, is well aware of the problem of expensive oil. The Fed statement released after its rate decision said "the rise in energy prices are likely to weigh on economic growth over the next few quarters."

But, Leeb and others believe this isn't something the Fed can solve on its own. The central bank's weapon against inflation is raising interest rates, which runs the risk of slowing down an already fragile economy.

The higher oil goes, the more important of an issue it will become during the election cycle: "Washington needs to actively take charge if we want to turn this situation around," he said. "People are recognizing that the Fed is now in a total box."

Tips to boost your investment returns

The best place to put your hard-earned money is where it can make you some more money, the more the merrier. But with the plethora of financial investment vehicles that exist today, how do you pick and choose where to park your money? Is a higher return all that matters when you’re saving for your future? While a financial advisor would be the best person to help you with your investing needs, these tips provide an insight to a few time-tested strategies that work in the investment world:

* If you’re not experienced in dabbling in the stock market, put your money in mutual funds – the risks in one stock are balanced by the returns in another.
* For the stock market investor to make money, the knowledge of when to sell and when to buy is a must. Buying when prices are low and selling when they’re high is the most obvious strategy, but things do not always work like clockwork in a market where no one can achieve the perfect timing. The trick here is to adopt the dollar-cost-averaging method where you buy stock for a fixed amount of dollars on a regular basis, irrespective of the price of the stock. Accordingly, the lower the price of the share, the more shares you own, and vice versa. The reasoning behind this strategy is that you’re minimizing your risk because the average cost per share of the stock will become lower with time. Set a time frame that suits you, monthly or fortnightly, and work on this systematic investment.
* Avoid herd mentality by following the crowd and investing in a stock just because most people you know (or don’t know) are doing it. Invest according your needs and capital.
* Take time to plan your portfolio – allocate your assets to various financial vehicles according to your needs. This is the fiscal equivalent of the good old adage “Don’t put all your eggs in one basket”. The reasoning behind this approach is the definition of the term “getting higher returns”. It’s not enough that you manage to beat the market when the going is good – what’s important is being able to protect your downside when the going tough and the markets are down.
* High interest rates are good but they’re not always the focus of an investment. Oftentimes an investment may be made in a low interest-yielding option because of other advantages like tax deductions.

Prepare for global financial storm, warns British bank

Barclays says Fed has unleashed an inflation shock by not raising rates, and that there will be a deep recession over next three years

BARCLAYS Capital has advised clients to batten down the hatches for a worldwide financial storm, warning that the United States Federal Reserve has allowed the inflation genie out of the bottle and let its credibility fall 'below zero'. 'We're in a nasty environment,' Mr Tim Bond, the British bank's chief equity strategist, was quoted as saying in a report by the Telegraph yesterday.

'There is an inflation shock under way. This is going to be very negative for financial assets. We are going into tortoise mode and are retreating into our shell. Investors will do well if they can preserve their wealth.'

Barclays Capital said in its closely watched Global Outlook that US inflation would hit 5.5 per cent by August, and the Fed would have to raise interest rates six times by the end of next year to prevent a wage spiral, the paper reported.

Mr Bond was quoted as saying: 'This is the first test for central banks in 30 years and they have fluffed it. They have zero credibility.'

The Fed on Wednesday halted its run of aggressive interest rate cuts, holding rates steady at 2 per cent as it warned of inflation risks.

The Telegraph said the grim verdict on the Fed not raising rates was underscored by the markets on Thursday as the US dollar fell against the euro, helping to propel oil past US$140 a barrel.

The Barclays team was not the only voice warning of inflation. A former top Fed official said on Thursday that the central bank must quickly raise interest rates to stem inflation, or do lasting harm to the US economy if it fails to act.

Mr William Poole, the former St Louis Federal Reserve Bank president and noted anti-inflation hawk, said soaring energy prices had delivered a severe supply shock to the US economy that has impaired its productive capacity.

US carmakers are idling factories building sport utility vehicles that have become unaffordable with petrol at US$4 a gallon, while the housing downturn had sidelined a large chunk of the construction industry's capacity.

Mr Poole said in an interview with Reuters on Thursday: 'The longer they delay, the greater the risk it will get into inflation expectations and wages. 'A lot of people take comfort from the fact that inflation has not got into wages or core. But if you wait (for it) to get there, it is already too late,' he added.

Barclays' Mr Bond predicted that there would be a deep global recession over the next three years as policymakers try to get inflation back in the box. The bank also said the full damage from the global banking crisis would take another year to unfold.

Mr Rob McAdie, Barclays' credit strategist, was quoted by the Telegraph as saying: 'The core issues have not been addressed. We're still in a very large deleveraging cycle and we're seeing losses continue to mount. 'We think smaller banks will struggle to raise capital. We're very bearish - in the long term - on high-yield debt. The default rate will reach 8 per cent to 9 per cent next year.'

He said investors had taken their eye off the slow-motion disaster engulfing the US bond insurers, which together guarantee US$170 billion of structured credit and US$1 trillion of US municipal bonds.

The two leaders, MBIA and Ambac, were stripped of their top credit ratings by Moody's Investors Service last week. Further downgrades could set off a fresh wave of bank troubles, said Barclays.

Some bank analysts disagreed with the view that inflation is the chief danger, said the Telegraph. Mr Bernard Connolly, global strategist at Banque AIG, told the paper that it would be madness to throw millions out of work by raising interest rates to fight inflation. Real wages are being squeezed by oil, come what may and it may be healthier for society to let it happen gently, he told the Telegraph.

Barclays warns of a financial storm as Federal Reserve's credibility crumbles

US central bank accused of unleashing an inflation shock that will rock financial markets,reports Ambrose Evans-Pritchard

Barclays Capital has advised clients to batten down the hatches for a worldwide financial storm, warning that the US Federal Reserve has allowed the inflation genie out of the bottle and let its credibility fall "below zero".

"We're in a nasty environment," said Tim Bond, the bank's chief equity strategist. "There is an inflation shock underway. This is going to be very negative for financial assets. We are going into tortoise mood and are retreating into our shell. Investors will do well if they can preserve their wealth."

Barclays Capital said in its closely-watched Global Outlook that US headline inflation would hit 5.5pc by August and the Fed will have to raise interest rates six times by the end of next year to prevent a wage-spiral. If it hesitates, the bond markets will take matters into their own hands. "This is the first test for central banks in 30 years and they have fluffed it. They have zero credibility, and the Fed is negative if that's possible. It has lost all credibility," said Mr Bond.

"They will have to slam on the brakes. There is going to be a deep global recession over the next three years as policy-makers try to get inflation back in the box."

The Fed's stimulus is being transmitted to the 45-odd countries linked to the dollar around world. The result is surging commodity prices. Global inflation has jumped from 3.2pc to 5pc over the last year. Mr Bond said the emerging world is now on the cusp of a serious crisis. "Inflation is out of control in Asia. Vietnam has already blown up. The policy response is to shoot the messenger, like the developed central banks in the late 1960s and 1970s," he said.

Barclays Capital recommends outright "short" positions on Asian bonds, warning that yields could jump 200 to 300 basis points. The currencies of trade-deficit states like India should be sold. The US yield curve is likely to "steepen" with a vengeance, causing a bloodbath for bond holders.

David Woo, the bank's currency chief, said the Fed's policy of benign neglect towards the dollar had been stymied by oil, which is now eating deep into the country's standard of living. "The world has changed all of a sudden. The market is going to push the Fed into a tightening stance," he said...

A small chorus of City bankers dissent from the view that inflation is the chief danger in the US and other rich OECD countries. The teams at Société Générale, Dresdner Kleinwort, and Banque AIG all warn that deflation may loom as housing markets crumble under record levels of household debt.

Bernard Connolly, global startegist at Banque AIG, said inflation targeting by central banks had become a "totemism that threatens to crush the world economy".

He said it would be madness to throw millions out of work by deflating part of the economy to offset a rise in imported fuel and food prices. Real wages are being squeezed by oil, come what may. It may be healthier for society to let it happen gently.

Worst of Credit Crisis Yet to Come

By Stewart Bailey and Dale Crofts

June 26 (Bloomberg) -- The global credit crisis will slow construction and U.S. economic growth for at least 18 more months, Nucor Corp. Chief Executive Officer Dan DiMicco said.

``We haven't seen the worst impact on the economy yet,'' the CEO of the largest U.S. steel producer said yesterday in an interview in New York. ``The impact of the tighter credit controls is just starting to affect folks.''

The credit crisis, sparked by U.S. mortgage defaults, caused $400 billion in writedowns at the world's largest banks and securities firms in the past year. Standard & Poor's and Moody's Investors Service have tightened credit-rating measures, making it more difficult for companies to borrow money, DiMicco said.

While the crisis originated in the U.S., it's a worldwide phenomenon that will last through 2009 at least, DiMicco said.

``After that, who knows?'' DiMicco said. ``There are two camps: one saying we're in a recession, the other saying we're getting close to a recession. You don't hear anyone saying we're heading toward a recovery.''

The Federal Reserve said yesterday that ``tight credit conditions'' will curb economic growth in the next few quarters. American Express Co. CEO Kenneth Chenault said credit indicators have deteriorated beyond the company's expectations.

Nucor, based in Charlotte, North Carolina, fell $2.79, or 3.6 percent, to $73.87 at 4:15 p.m. in New York Stock Exchange composite trading. The shares still have gained 25 percent this year.

Tightened Credit

S&P has downgraded 345 companies this year as of June 24, the majority in the U.S., Sudeep Kesh, an associate in S&P global fixed income research, said in a telephone interview from New York.

Nucor has already felt the credit crunch, even with an A1 rating from Moody's and an A+ from S&P, in both cases the fifth- highest rating. Credit-rating companies threatened to withdraw Nucor's investment-grade status earlier this year if the steelmaker borrowed all of the $3 billion it wanted to finance expansion and acquisitions, DiMicco said.

The prospect of a downgrade, which would have cost Nucor ``hundreds of millions of dollars,'' was enough to force it to borrow only $1 billion and to sell new shares for the first time in its history to raise the remainder, DiMicco said.

Turmoil in credit markets has meant that ``even credit- worthy borrowers like Nucor are having to jump through greater hoops,'' said Michelle Applebaum, who runs a steel-equities research firm in Highland Park, Illinois. ``The concept of Nucor being anything other than investment grade seems strange.''

Operating Costs

Tighter credit controls will raise operating costs for property developers and government agencies building bridges, roads, railways and industrial properties, DiMicco said. That is compounded by higher costs for steel and key raw materials such as iron ore and coal, he said.

Nucor produces 22 million tons of flat- and long-steel products a year from mills in states including Louisiana, Ohio and Texas.

``How are the states going to handle the highway work, and where is the federal government going to do anything about the infrastructure?'' DiMicco said. ``You need to be able to borrow more to do the same thing as before.''

Graduating to a Happy, Financially Secure Future

by Laura Rowley

Every year around this time, the New York Times prints a roundup of commencement addresses. I always find a little inspiration there to cut out and stick on my office wall. This year, its author J.K. Rowling's address to Harvard grads about the benefits of failure -- although if I were to nominate a group for the "least likely to fail" award, it would probably be that audience.

In any case, I had some thoughts for my own commencement address. Here's what I would tell the class of 2008 about money.

Believe the Clichés

Personal finance advice is so similar, and so often repeated, it's become a cliché:

• Live within your means.

• Set up an emergency fund with three months of living expenses.

• Stay out of debt.

• Join your company's 401(k) plan or open an individual retirement account; set aside at least 10 percent of your pre-tax income every year.

• Invest in a diversified portfolio of mutual funds to help your money grow over time, and make sure you're not paying too much in fees.

Clichés are easy to take for granted and easy to tune out. But here's the truth: Believe these clichés. Because if you actually follow the advice, it will transform your life.

The Roaring 20s

I'm convinced that real happiness comes from identifying your values, and then being brave enough to expend your strongest talents and best energy in their service. I think genuine happiness comes from naming what you care about most deeply, setting priorities around those values, and then translating them into real, concrete goals. Money is one instrument in the toolbox of resources and people and experiences that help you journey down that path toward the person you were meant to be.

Your 20s represent a personal finance paradox: You have the most financial power that you may ever have because of the phenomenon of compounding. (Someone who saves $2,000 a year for retirement between age 21 and 30 and then stops will have a bigger nest egg than someone who starts at 31 and saves until they're 65.) At the same time, your 20s can be a bit of a bust in terms of figuring out why you were put on the planet.

It's a confusing decade -- you charge out of college knowing everything and ready to rule the world, and spend the next decade realizing you know almost nothing at all. Then, in your 30s and 40s, you recognize that it's OK to know almost nothing -- and is actually a finer way to approach life, because you really listen to and learn from other people, take risks, and benefit from mistakes and failure. (If you continue to simply know everything, you don't grow and become an arrogant bore.)

The Ghosts of Purchases Past

So here's the problem: Many people lurch around in their 20s trying to establish their identities. One day, you pick up a magazine or see a television show that suggests one can establish an identity by buying $500 designer shoes. Or $900 designer golf clubs. Or some other stupid thing that costs a whole lot less to manufacture than you paid for it. Because you weren't just paying for straps of leather or sticks of iron but for an identity attached to a lifestyle that somebody made up in a brainstorming session in an advertising firm somewhere in New York, or in a scriptwriting meeting in Los Angeles.

And this isn't entirely your fault. You're bombarded with signals to buy in a way previous generations were not. There are 1,000 cable channels telling you on a daily basis that your face, body, home, and possessions are in need of an extreme makeover. Technology and credit card companies have made it effortless to act on those impulses.

And then you get into your 30s and 40s and have a better understanding of who you are and why you were put on the planet. You're now ready to use money as a tool to help walk down that road. That's when your 20s can come back to haunt you. Maybe you're still paying the credit card for the $500 shoes and the $900 golf clubs (or for all the money spent in chic bars showing off the shoes, and at golf courses showing off the clubs).

Reality Bites

So you had some fun, but now you're playing catch up. That's usually when the magical thinking starts. You do things like buy a house with an adjustable rate mortgage (because you didn't save up a home down payment). Or you listen to some guru who tells you to put everything you have in gold or oil, or to buy stocks on margin or speculative real estate with no money down.

And maybe you have a couple of kids, and the media that told you to buy the shoes and golf clubs is now suggesting you invest in Suzuki violin lessons, private tutors, and traveling sports teams.

You're scrambling to save for retirement, scrambling to meet your rising mortgage payments, getting in deeper on that credit card to take a few fun vacations with your kids before they grow up and leave you, and God knows how you'll pay for college (since the gold-oil-stocks-real estate thing didn't work for you the way it did for the guru).

And it's really hard to follow your deepest values, and pursue that thing you were meant to do and become that person you were meant to be, because you're really stressed out about money.

Happiness Gained

I was a naïve kid from the Midwest living in New York City in my 20s -- naïve enough to believe all those clichés my father told me about staying out of debt and saving for retirement. So I did both -- it was just something I made a requirement, as routine as brushing my teeth. (And I had a lot of fun at the same time; I just bought my shoes at sample sales, frequented bars with free happy-hour buffets, and traveled to Europe on a shoestring.)

And when I was 37 (which happened a hell of lot sooner than I expected) and working 14 hours a day in television with two kids under age three, I could walk away from my full-time job and start my own thing. My values had shifted, and I knew I had to find a better balance between work and family. I had the luxury of using money to journey down the road in pursuit of my values -- not because I had a big win in oil or gold or sold a bazillion get-rich-quick books, but because I had stayed out of debt and consistently saved for almost two decades.

And that has made me happy.

Commence with Being Happy

So here's my advice:

• Live within your means.

• Set up an emergency fund with three months of living expenses.

• Stay out of debt.

• Join your company's 401(k) plan or open an individual retirement account, and save at least 10 percent of your pre-tax income every year.

• Invest in a diversified portfolio of stocks and bonds to help your money grow over time, and make sure you're not paying too much in fees.

Believe in the clichés. Follow the advice, make it as routine as brushing your teeth. Because one day it will open up a world of options, and transform money from a potentially huge source of stress into a resource to help you follow your values -- and hopefully figure out why you're on the planet.

Bankers’ pay is unfair, say ABN AMRO and OCBC bosses

Simon Mortlock

The heads of ABN AMRO in Asia and OCBC Bank are sick of overpaying their traders. Remuneration in financial services is “inherently unfair”, according to David Conner, chief executive of OCBC. The pay gap between, for example, those in trading and operations roles is too extreme, he told Singapore’s Institute of Banking and Finance (IBF) conference last week.


In an impassioned attack on traditional reward structures, Conner said those pocketing the fattest pay cheques often don’t generate as much revenue for banks as others who get much less money.

Also addressing the annual gathering of banking bigwigs, David Wong, South East Asia chief executive of ABN AMRO, said the solution is to close the gulf in pay between risk takers and risk managers. Wong said firms should consider paying fund managers and risk managers almost the same amount. “The incentive structure has to change,” he added.


Professor Ronald Collard, a partner at PricewaterhouseCoopers, said these disparities are caused by banks rewarding front office staff based on their short-term performance.

DBS chief executive Richard Stanley said banks can help to address employees’ remuneration concerns by giving current staff the first shot at any new job openings.


Criticising the practice of poaching top talent from rivals, Stanley told the IBF conference: “If there are job openings internally, staff must know that they have a better shot at the job rather than it being filled from the outside…The bulk of senior management must be home-grown. We have to find good people and ring fence them.”

Asia not immune from Morgan Stanley’s axe

Sarah Butcher

Morgan Stanley bankers who were hoping John Mack would take pity on them again this year are due to be disappointed. And Asia is no safe haven from the global carnage.

Last December Mack raided the coffers to stump up a 5% increase in average compensation for 2007 over 2006, but he now appears to have decided his people can do without. Whereas the average Morgan Stanley banker had accrued $108.3k in salary and bonus by this time last year, that figure is now down to $63.8k – a drop of 40%.

Instead of hanging on for a paltry bonus, the better bet at Morgan Stanley might be to get yourself laid off. The bank’s Q2 figures show that it made a total of $245m in severance payments to 660 staff last quarter, an average of $371.2k.

A nice new redundancy cheque may be easy to get your hands on later this year, even in Asia. The i-bank’s Q2 revenues fell 25% in the region – against a 14% drop in EMEA. This income slump has already taken its toll on headcount, with Tokyo in particular feeling the full force of Morgan Stanley’s axe. About 90 securitised products jobs have already gone. Real estate financiers have also been dumped.

One recruiter, who did not want to be named, describes the mood at MS: “Morgan Stanley's canning of their entire securitised product group in Japan has caused a lot of dismay. They've cut very deeply in Asia this quarter. It's not a happy place at the moment.”

Yukihiro Koshiishi, at Russell Reynolds in Tokyo, says the layoffs are part of a broader bloodletting by the bulge bracket. While Asian revenues at Morgan Stanley and its rivals are starting to suffer, Koshiishi believes that post-credit crunch troubles at the firms’ US and European headquarters are actually driving most of the staff reductions.

Morgan Stanley would not provide redundancy figures for Singapore and Hong Kong, but recruiters there believe that in most job functions it’s either cutting or resorting to replacement-only hiring.

Staff remain anxious, says one headhunter, who asked not to be named: "There have been rumours about upcoming redundancies in Hong Kong. I was talking to someone at Morgan Stanley this week who said that a lot of people there expect a reshuffle, but don't know exactly what's going to happen."

Worldwide the bank actually managed to end this quarter with 545 more staff than it had in May last year, but in the current belt-tightening climate its headcount now looks set to decline.

Financials: A Long Way from the Bottom

No tears are being shed on Main Street amid reports of more layoffs on Wall Street. But news both Goldman and Citigroup are each cutting 10% of their investment banking staffs is a worrisome sign for investors.

For the past year, many traders have repeatedly sought to find "the bottom" in financials and related stocks (i.e. homebuilders), but the reality is the sector is a long way from a true bottom. Beyond needing to further trim the fat, the financial sector is dealing with the double-whammy of stricter regulation and the 'deleveraging' process after years of massive credit extension.

That combination is going to result in slower earnings growth for the sector and a revaluation of brokerage stocks, which got well above their historic norms during the peak of the boom earlier this decade. Just like big-cap tech stocks like Cisco are still well below their bubble-era levels, it's going to be a long time before the Citis, Goldmans and Lehmans of the world revisit their recent peaks - if ever.

Is China's Economy Slowing?

by: Michael Pettis posted on: June 19, 2008

Much of the focus in China continues to be on the performance of the stock markets. Yesterday the market bounced around both above and below Friday’s close, before ending the day at 2874, up slightly less than 0.2%. That was the first positive day for the SSE Composite in nearly two weeks (after last week’s 14% decline), but a quick look at the trading patterns and trading volume didn’t seem to indicate much conviction.

Wednesday, the market dropped sharply again. It started the day with a little bit of buying – in the first half hour the market traded up nearly 0.7%, but as often happens with any strength, sellers took advantage to unload positions and prices quickly bounced their way down to 2769, down 3.7%, just 30 minutes before the close of day, before staging a late rally to close at 2794, still nearly 2.8% down for the day.

This puts us at 6.9% below the 3000 level which we broke last Wednesday and which, supposedly, was the level below which the government would intervene. As I have been pointing out during the past two months, this kind of rumored intervention means that when the market finally breaks the expected support level, it is likely to drop pretty quickly – and so far it has.

There is still a lot of discussion and rumor-mongering about whether or not the government will eventually intervene, with the introduction of index futures and the permitting of margin trading as being the most likely forms of intervention. My understanding is that Vice Premier Wang Qishan (the new economic “tsar”) and a number of other relevant policy-makers are worried, correctly I think, that China’s history of frenzied intervention has undermined the functioning of the market, and so they are reluctant to continue intervening in response to market behavior, unless of course they get any indication that the drop in the markets might causing social discontent or unrest, especially in the period before the Olympics.

So we are in a very unstable position. As of yet not a whole lot has happened to indicate that investors are furious – there have been small demonstrations and nasty comments about the failure of the government to protect investors on various investor-related websites, but not much more – so perhaps the government will hold off doing anything. I suspect that they are beginning to learn that active intervention brings with it the cost of declining credibility, and this declining credibility undermines their ability to intervene successfully in subsequent periods. Perhaps they want to keep their powder dry in case they have a bigger market problem in the near future.

But I suspect this situation is unstable because the market is still expecting some new measure to prop it up, and if the government continues to hold off intervening, I don’t see prices continuing at this level. In fact I would imagine that a lot of investors are eager to get out and just waiting to see if they can get one last chance to recoup some of their losses before doing so. My guess is that if we don’t get something positive soon, we’ll have another bad week next week, and if it is bad enough it may prompt some action by the government.

Away from the stock market, some more interesting numbers on the economy have come out recently. Fixed asset investment was up 25.6% year on year for the first five months of the year (it was 25.9% up over the same period last year). Industrial output was up 16.0% in May, compared to 18.1% last May. Both numbers may understate the decline in growth relative to earlier periods, especially the latter, because this May the “Golden Week” holiday was cut from five days to two days.

If we assume a five-day work week, presumably that means the working month was about 15% longer this year than in previous years, but I am not sure that this would be the best way to look at the amount of time worked. In fact the typical work week seems closer to six or seven days, and certainly in Chinese universities we were supposed to make up for the holiday by holding extra classes before the holiday (which, I always thought, sort of negated the point of the whole thing for my poor students). I don’t know that the real working hours are for the average Chinese worker and I don’t know if they typically faced pressure anyway to make up for the foregone work during the holidays, but I suspect cutting the holiday from five days to two days might not be as big an adjustment in output as many people think.

It is perhaps an indication of how frothy things are that, although some analysts read these numbers as indicating that Chinese growth is in good shape, many saw the numbers as indications that the Chinese economy is beginning to slow down and may run into trouble if something isn’t done. As I see it, both numbers suggest that the economy is still roaring along, and it may just be a statistical necessity that they begin to slow. After all, the larger the Chinese economy becomes, the harder it is to maintain the same levels of growth – this is partly just a question of arithmetic. This is especially true for export numbers. Still, rising inflation means that an increasing portion of the nominal growth is not real, so we probably are seeing a slowdown in domestic economic activity, driven primarily by a slowdown in global demand.

Needless to say, any perception of economic slowdown will make it all the more difficult for the authorities to achieve the consensus necessary for them to address the monetary imbalances. We may be entering into the toughest period of all – in which as the need for monetary tightening, via the currency regime, becomes all the more obvious, the opposition to monetary tightening becomes even stronger because of weakness in the economy. I guess that means more policy paralysis.

Meanwhile we are being hit with yet another natural disaster. Heavy rains in the past week are causing enormous floods across 20 provinces south of the Yangtze River. Once again we are likely to see pressure on the economy, from inflationary pressure to greater investment in reconstruction. One thing I ma not sure about is what the conditions of China’s food and energy reserves. My suspicion is that they are quite low – in part because of selling to reduce inflationary pressure.

Don’t Buy What Wall Street Is Selling

by: Martin Hutchinson posted on: June 18, 2008

Imagine that you’re the investment director for one of the new sovereign wealth funds (SWFs). A very important guy - you get to invest several hundred billion dollars, with far fewer committees and shareholder interest groups harassing you than if you're the head of U.S. institutions such as CalPERS or TIAA-CREF.

Last winter, you had delegations from all the big banks in New York explaining that they’d just had this teensy weensy hiccup in subprime mortgages and so were giving you an unparalleled opportunity to buy shares - or convertible bonds - at a modest discount to the market price. You bit and you bought - a few billion dollars in each of two or three of them maybe, a fleabite in terms of your overall funds to invest but real money for ordinary mortals.

Now you open The Wall Street Journal handed you by a flunky to see how your investment is doing….

And find it’s down an average of 15%. And that’s in dollars, which themselves appear to be turning into some kind of peso.

The Politburo will not be happy (if yours is the Chinese fund). You may even find yourself minus a hand (if it’s one of the Middle East funds). Worst of all, if you’re from Singapore’s Temasek Holdings, you may have to explain your poor investment decision to the razor-sharp intellect of the 84-year-old island patriarch Lee Kuan-Yew!

The reality is, according to a Financial Times calculation, the sovereign wealth funds, institutions and other investors who have poured $65 billion into cash-starved U.S. financial services companies since last October have lost $9.7 billion, or 15% of their initial investment. In some cases, like the monoline insurers, investors have lost 65% to 70% of their money in less than six months. Yes, that’s a small number compared to the cost of the War in Iraq or Barack Obama’s health plan, but if you’re running a large fund that made several of these investments, it could play merry hell with your job security.

So, when the financial services companies discover their next set of disasters, which they will, and come round for another emergency injection of equity capital, where are they going to find the buyers?

Make no mistake, there will be more disasters - we’re nowhere near through the woods yet. Lehman Brothers Holdings Inc. (LEH), which had previously avoided writeoffs, just declared a $2.8 billion second-quarter loss and is now fighting desperately for survival. American International Group Inc. (AIG), the insurance and finance giant, has written off more than $20 billion and fired its top management, but nobody thinks they’ve found all the problems hidden in their books yet.

Even Goldman Sachs Group Inc. (GS), which has so far been snootily superior about its lack of major write-offs and quarterly losses, now has $96 billion in “Level ” assets, three times its capital. “Level ” assets, for those who haven’t been following the bizarre accounting sub-plot to this saga, are those for which no meaningful market price can be found, so instead they are valued by in-house mathematical models. I hate to be cynical, but if I had borrowed twice my net worth and invested it all in assets for which there was no market price, I might be just a tad worried in a financial storm as big as this one.

There are two forces that make me believe Wall Street investment houses will report another round of unexpected losses.

The first is the continuing decline in house prices. The $300 billion that has been written off Wall Street balance sheets so far represents the worst paper - subprime mortgages that weren’t justified in the first place. Almost certainly that $300 billion figure is still too low, but there might be the hope of an end to the losses if not for the continuing decline of house prices, at a rate of about 2% per month nationwide.

Those declines are exposing huge new tranches of mortgages that were previously in good standing. If the principal amount of even a prime mortgage becomes substantially above the value of the home, and the borrower gets into difficulties, the odds of default increase. The large bumps in property taxes that municipalities are beginning to levy, to cover unexpected gaps in their tax receipts, exacerbate the problem. Future mortgage losses will probably greatly exceed those already written off financial sector balance sheets.

The second force causing further write-downs on Wall Street is all the other lending the banks did during the boom years that is now also turning out to be rubbish. To the extent mortgages default, credit card loans cannot be far behind, and indeed we are already seeing a sharp rise in credit card delinquency ratios, which particularly affects the regional banking sector. Then there are the acquisition loans, and lending in general to overleveraged companies that are turning out not to have the cash flow they had projected.

Finally, there is the new and terrifying area of credit default swaps, now with a total volume of an extraordinary $62 trillion, ten times the size of the U.S. corporate bond market. Theoretically, for every loser on a credit default swap there is a winner. But in practice, many of the losers will turn out to be hedge funds and other non-creditworthy riffraff, and the financial system will be left holding the bag.

The losses investors have suffered on past equity investment in U.S. financial institutions are now probably sufficient enough to deter further investment in such institutions. Thus the market may well be shut out from raising future capital. We are already seeing this problem in Britain, where a $600 million rights issue for the home mortgage lender Bradford & Bingley PLC (BDBYF.PK) was withdrawn, even after it had been underwritten, an extraordinary event that did not happen, for example, during the crash of 1987.

Sovereign wealth funds may be stupid, but they’re not THAT stupid. And nor is the equity market as a whole.

For the financial system, this is likely to bring further bankruptcies or emergency bailouts - except that the Federal Reserve may not be able to find banks to conduct a bailout, as JPMorgan Chase & Co. (JPM) did for Bear Stearns Cos. Inc. (BSC) When JPMorgan Chairman James Dimon says, as he did last week, that he believes the financial crisis is almost over, he may be indulging in desperate wish-fulfillment rather than cold hard analysis - Bear Stearns seems likely to cost Morgan even more money than previously feared.

So if your broker comes to you with a great deal for a U.S. financial institution, I would advise you to hang up. Don’t be lured by the promise of big dividends - soon the banks will be too cash-poor to pay. We’ve already seen dividend cuts from the likes of Citigroup Inc. (C) and Washington Mutual Inc. (WM). More cuts are on the way.

What can investors do about it? Simple - avoid fashionable companies involved in “symbol manipulation” and look for makers of actual PRODUCTS - things you can drop on your foot (possibly crushing it, if we’re talking about Deere & Co.’s (DE) John Deere 3510 sugar cane harvester). Just make sure the companies you invest in won’t need to go to their banks for extra money anytime soon, because the banks won’t have any to give.

Report: Citigroup to slash investment-banking jobs

Report: Citigroup will slash thousands of investment-banking jobs worldwide NEW YORK (AP) -- Citigroup is preparing fire thousands from its worldwide investment-banking division, The Wall Street Journal reported on Sunday.

The Journal, citing people familiar with the matter, said the layoffs are part of a plan to cut about 10 percent of the staff of the 65,000-member investment-banking group.

Messages left with Citigroup spokesmen on Sunday were not immediately returned. The Journal said the fired employees could be notified as early as Monday.

The New York-basked global bank, along with much of Wall Street, is in the throes of recovering from bad investments on mortgages and leveraged loans that cut billions of dollars from its portfolio.

It was not immediately clear if the reported job cuts would be in addition to cuts announced by Citigroup in April. After reporting a $5.1 billion first-quarter loss, the bank said then it was reducing its staff by 9,000, in addition to the 4,200 job cuts the bank announced late last year.

As of the end of last year, Citigroup had about 147,000 full-time employees.

In May, Citigroup unveiled a three-year plan that included getting rid of more businesses, mortgages, real-estate operations and jobs.

The bank called for shedding between $400 billion and $500 billion of its $2.2 trillion in assets and growing revenue by 9 percent over the next few years as it tries to rebound from the huge losses tied to deterioration in the credit markets.

Earlier this month, the bank said it was closing the Old Lane Partners hedge fund that was co-founded by Chief Executive Vikram Pandit. The bank is shuttering the fund just 11 months after it was acquired for more than $800 million.

The good news is that things are predictably bad

By Damian Reece
Last Updated: 12:18am BST 19/06/2008

Life might seem uncertain and unpredictable at the moment but in reality it's proving quite the opposite. The bursting of the property bubble was widely predicted, albeit the nationalisation of a major high street lender was not.

Since then, warnings from various sources of mounting losses amongst the banks have been realised, even though the banks themselves have seemed in denial.

The warnings about consumers being left high and dry by their debt binge have come to pass while the tired old cliché about inflation being like toothpaste - once it's out of the tube it's hard to get it back in - has been in use by the Telegraph since the summer of 2006.

We may have offended some by resorting to the simile a little too much but we, like others, have been trying to make a point on prices for some time.

Yesterday's letter from Mervyn King to Alistair Darling about inflation revealed more about a UK economy that is behaving in line with expectations and therefore posing a set of problems that are fixable with the tools at our disposal.

However, while it's good news that this slowdown is proceeding in fairly predictable fashion, the bad news is that this inevitably means people are going to lose their jobs.

Unemployment will have to rise in order to help deliver the "spare capacity" in the economy that members of the Monetary Policy Committee so euphemistically call redundancies, closures and cancellations. Without these the MPC can't deliver the relatively soft landing it's hoping for and get us back to 2pc inflation by this time in 2010.

The tone of the King letter was relatively dovish. Given the economic slowdown already in train and which will get worse, interest rates are far from certain to rise in order to choke off inflation.

There is a warning, however, from the MPC in its letter. If pay growth does not remain subdued, and evidence suggests it may already be showing signs of taking off, then the economy will have to slow to compensate.

Either this will be delivered by inflation itself squeezing income and consumption, or rates will have to rise. With market interest rates charged by lenders already having risen, even though the base rate has been cut to 5pc, the economy is enduring a period of monetary tightening anyway.

My admittedly contrarian call at the beginning of June that rates might actually fall in August still looks a possibility after yesterday's letter.

Looking at the way the MPC meetings occur, the committee may leave it until September 4 once the next Inflation Report is out on August 13.

One of the reasons I originally gave for an August cut holds truer than ever and that's the rapidly falling growth in money supply - specifically the M4 measure of money supply. King even made specific mention of falling money supply growth in his letter giving us hawks-turned-doves further hope.

So, the good news is that things are predictably bad and getting worse as expected which, given some of the apocalyptic coverage, is a perfectly good reason to be cheerful.

UBM's merger of 'equals' always looked weak

UBM pulls out of £3bn Informa merger talks
"There are no such things as mergers, only takeovers. Mergers are mythical beasts - they prance round the wooded glade, horned foreheads and all, waiting to be shot down. That's what will happen to United Business Media's (UBM's) all-share proposal to merge with Informa." This prediction, which appeared, here on June 10, has taken only seven days to come to pass.

A new bidder, thought to be a financial buyer, has crashed the party holding out the prospect of paying a premium for Informa shares, something that David Levin, the chief executive of UBM, was unwilling to do. His proposal of a nil-premium merger between the two with existing management sharing control always looked weak.

The problem with this deal was that Informa's shareholders were going to have to accept the "jam tomorrow" method of creating shareholder value. This idea of great riches in the future in return for other people running your company has a patchy record in corporate activity of any sort, never mind nil-premium mergers.

Informa shareholders are better off pursuing a potential takeover bid, albeit one that might fail, rather than a flimsy-looking merger of supposed equals.

Sharing delivery trucks is a good way to go

Retail giants share trucks to cut costs and emissions
Today's news that a large part of the food and consumer goods industries have joined forces to collaborate on logistics ought to set every other industry thinking. Clothing retailers ought to consider if they can copy the likes of Nestlé and Tesco in pairing off and making their delivery trucks more efficient.

The drinks industry is another obvious candidate which maintains numerous logistics companies that run their own routes, regardless of their rivals, which results in delivery trucks travelling empty. In these days of high fuel costs, regardless of environmental concerns, that's got to be a scandal as far as shareholders are concerned.

The one shadow over today's truckers' initiative is the risk to competition but I'm sure we can rely on the Office of Fair Trading to be monitoring events with interest, its antennae twitching at the prospect of a new probe.

Net income at S'pore banks seen rising

But 2009 could be tough as economy slows, exports fall, predicts Moody's

Business Times - 20 Jun 2008
By CONRAD TAN

(SINGAPORE) The three Singapore-listed banks should still see growth in net income this year as they pass on higher costs to customers, but could struggle to show growth next year as bad loans start to rise, ratings agency Moody's said yesterday.

The outlook for the banks' credit ratings - which measure their ability to repay their debt and stay solvent - remains stable, as all three have solid capital bases and ready access to funds.

DBS Group, OCBC Bank and United Overseas Bank are all rated 'B' by Moody's. Deborah Schuler, a senior vice-president at Moody's responsible for rating financial institutions in Asia, said that while profit margins are likely to fall this year, 'net income for most banks in the region is going to increase'.

However, fee income from non-lending businesses such as securities brokerage, wealth management and risk management services, is likely to be a 'mixed bag'.

Next year looks much tougher, as the effects of slowing economic growth and falling demand for exports start to hit borrowers, said Ms Schuler.

'Credit expense and non-performing loans are lagging indicators. We don't expect to see much of the stress on loan portfolios from the slower exports and GDP growth to show up till late this year and most of that will show up next year.'

Still, 'in 2009, we expect banks are going to struggle to show growth in net income but we're not expecting losses'.

Moody's says that the outlook for the banking industry in Singapore - which it publishes separately from its ratings outlook for individual banks - is negative. Its industry outlook for the banking sector through the rest of Asia is stable or negative, 'reflecting the global stress' that banks are facing.

That stress includes weakening demand from the US, Europe and Japan, the higher cost of funds due to the turmoil in credit markets and soaring fuel and food prices that are threatening the borrowers and pushing up costs for banks.

Still, banks in Singapore and elsewhere in Asia are expected to maintain their net interest margins - which measure how much profit they make on loans net of funding costs - by passing on some cost increases to borrowers, Ms Schuler said.

The local banks here also have an edge over foreign competitors because most of their loans are funded by retail deposits that are a cheaper source of funds than money borrowed from international markets, she said.

'The Singapore banks are going to be in a good position with a relatively lower cost of funds than the other banks in town. They will be able to bid for loans, charge a bit more for them and earn better spreads.'

Despite the gloomier outlook for the banking industry in Asia over the next few months, the outlook on credit ratings of individual banks is 'overwhelmingly stable', reflecting their generally good health, said Ms Schuler.

But as capital-rich banks benefit from large companies turning to them for funds as other sources of credit dry up, the risk of banks over-exposing themselves to individual borrowers is rising, she said.

In Singapore and Hong Kong especially, the relatively small size of the domestic markets means bank exposure to individual borrowers is higher than elsewhere.

The top 20 exposures for Singapore banks are more than 7.5 times their profits before provisions - 'substantially higher' than in the US.

Indian equity fund inflows plunge as euphoria fades

May's 48b rupees and April's 45.9b rupees a mere drop of Q1's 449b rupees

Business Times - 20 Jun 2008

(MUMBAI) Investors are shying away from Indian equity funds as a sustained slump in the stock market wipes out a major chunk of their stunning gains in 2007, but the industry is not yet facing pressure from redemptions.

Diversified stock funds delivered returns of nearly 60 per cent in 2007, as the benchmark stock index rose 47 per cent.

But with the market down about a quarter so far in 2008, investors have seen the value of their holdings cut by almost a third and have started cutting back on new investments.

'There has been a slowdown in the flows of equity funds in the last two months,' Sanjay Prakash, chief executive of the Indian fund unit of HSBC, told Reuters. 'We are seeing net inflows every day, but very small amounts,' said Mr Prakash, whose firm saw its average monthly assets drop 0.95 per cent to 184.7 billion rupees (S$5.9 billion) in the six months ended May.

Mesmerised by a sixfold rise in the stock market in the five years to the end of 2007, investors saw a 23 per cent drop in the March quarter as a buying opportunity, pouring in 449 billion rupees into the funds, 67 per cent more than a year earlier.

But as the market slump persisted, euphoria has given way to caution. Flows into equity funds slumped to 45.9 billion rupees in April, the lowest since August 2006, and about 48 billion rupees in May, data from the Association of Mutual Funds in India (AMFI) shows.

The money is mainly coming from pre-set investment plans where a fixed sum is deposited regularly into the funds.

The industry body estimates that there are about three million of such accounts.

'Slowdown is in the high net-worth and institutional segment,' said Vikrant Gugnani, the chief executive of India's No 1 fund firm, Reliance Capital Asset Management.

He said that big-ticket investors were no longer looking at stocks, shifting instead into real estate, gold and fixed-maturity plans, which are essentially close-end bond funds investing in securities in line with their maturity profile.

Investors may not be topping up their funds, but they are also not in a hurry to pull out of them. Outflows of 36 billion rupees in May were the lowest since July 2006, AMFI data shows. Outflows in January, when the stock market hit a record high and before dropping sharply, were more than two times those of May, but inflows were even higher at a record of 212.5 billion rupees. Indian shares fell to a 2008 low of 14,645 on June 10\. \-- Reuters

Fund managers gloomiest on equities in 10 yrs

Many now wonder whether monetary policy has become too stimulative

Business Times - 20 Jun 2008
By LYNETTE KHOO

(SINGAPORE) Fund managers' view of global equities has nosedived to a decade low as fears of stagflation heighten, according to the latest Merrill Lynch Survey of Fund Managers.

The June survey shows that the net balance of fund managers who 'underweight' equities rose from 5 per cent in May to 27 per cent in June - the most negative stance that the survey has recorded in 10 years.

Only one per cent of the respondents believe equities are undervalued, down from 25 per cent in March. A net 42 per cent are 'overweight' cash, up from a net 31 per cent in May.

Merrill Lynch noted that investors have reacted to the stagflation fears by reducing their exposure to both equities and bonds and moving into cash, raising their cash positions back to the levels last seen in March.

'The prospect of stagflation is beginning to create a major headwind for equities,' said Karen Olney, chief European equities strategist at Merrill Lynch.

The net balance of fund managers expecting higher core inflation a year from now rose to 33 per cent this month from 25 per cent in May.

A significant number of fund managers now wonder whether monetary policy has become too stimulative. Merrill Lynch noted that it is the first time in 10 months that it is seeing managers expecting short- term interest rates to be higher a year from now.

'The market is waking up to the idea that global interest rates are too low; in fact, they remain below inflation,' Ms Olney said. 'Merrill Lynch expects a double rate hike from the European Central Bank (ECB) by October and would expect other central banks to follow.'

The Eurozone has borne the brunt of investors' shift away from equities into cash and has moved from the most favoured to least favoured over the past 12 months. Investors continue to 'overweight' the US, Japan and the global emerging markets (GEM).

Within GEM, fund managers are most bullish on Russia and Brazil while in the Asia-Pacific ex-Japan region, Taiwan, Hong Kong and Singapore received the most 'overweight' calls.

The Merrill Lynch global survey polled 204 fund managers managing a total of US$718 billion. Some 185 fund managers participated in the regional surveys.

While the credit crunch is losing its sting, inflation has replaced it as the greatest single threat to financial market stability, the survey shows.

The number of investors citing 'credit risk' as the No 1 threat fell from a net 95 per cent three months ago to 81 per cent in June but those who cite 'monetary risk' as the greatest threat rose from a net 23 per cent in May to net 65 per cent this month.

'The inflation shock has already happened,' said Alex Patelis, head of international economics at Merrill Lynch. 'What matters now is how persistent it is and how markets and policymakers react. At a global level, this begs for an accident that will awaken markets and policymakers to the risks.'

But worsening corporate earnings growth may tie the governments' hands in coping with inflation. A net 81 per cent of the panel believe consensus earnings estimates for the next 12 months are too high and a net 77 per cent expect corporate margins to decline.

Given the headwinds in global growth and equities, the risk appetite among fund managers has fallen in June, with the net balance of managers taking a lower-than-normal level of risk in their portfolios falling to an all-time low of 43 per cent. They are, however, increasingly positive about alternative investments.

Inflation bigger threat to Asean growth than US slump

Central banks forced to change direction to combat it: Moody's

Business Times - 20 Jun 2008
By CONRAD TAN

(SINGAPORE) Soaring inflation and the response it triggers from central banks is a greater threat to economic growth in Asia than the downturn in the US, a senior spokesman for ratings agency Moody's said yesterday.

Asian central banks that were previously easing monetary policy to help cushion their domestic economies from the impact of slowing growth in the US, Europe and Japan have now been forced to change direction because of a rapid increase in food and energy prices, said Thomas Byrne, a senior vice-president and regional credit officer for Moody's sovereign risk unit in Asia and the Middle East.

'Inflation has become our foremost concern,' he said at a news briefing to present the Moody's outlook for South-east Asian banks and governments. 'The policy response to inflation - tightening by central banks or reluctance to ease because of the inflationary pressure - this will probably have a greater effect on economic growth in Asia than the sub-prime and credit market crisis.'

Policy-makers who target only 'core' inflation - which exclude changes in food and energy prices on the premise that their volatility distorts the overall price measure - could risk acting too late to stem rising prices because higher food and energy prices do spill over to other goods and services, Mr Byrne said.

'When we look at inflation we tend to look at headline inflation,' he said.

The US economic slowdown and the turmoil in financial markets that started in the sub-prime mortgage market there will have a 'fairly moderate' effect on Asian trade, he said. 'So the trade channel won't transmit this drag very strongly into the Asian economic outlook.'

Instead, 'what's happening is that central banks aren't easing when they previously wanted to ease and some of them are actually starting to tighten or are tightening more vigorously' because soaring food and energy prices are driving up business and household costs.

This will have a greater effect on dampening economies in Asia than slowing exports due to weaker growth in the US, Mr Byrne said.

'Also, high inflation means that in real terms purchasing power is eroded, so the ability of household consumption to support growth is somewhat diminished.'

Still, 'globally, we don't expect this inflationary episode to be as severe as the ones in the 1980s or 1970s', he added.

And Asia as a whole 'won't have as high inflation as other regions - say, the former Soviet Union countries or the Middle East'.

Moody's credit ratings and ratings outlooks on most Asian governments are still stable, 'but the risks are on the downside', Mr Byrne said.

The firm expects the US will suffer slower growth this year but escape a recession. Moody's is forecasting real gross domestic product growth of 1.5 per cent in the US in 2008 and 2.5 per cent next year - well ahead of the International Monetary Fund's forecasts of 0.5 per cent and 0.6 per cent respectively.

But 'a lot of this depends on oil prices and the Fed's response - whether it starts to tighten later this year or not', said Mr Byrne.

The demise of ASEAN Economies

Courtesy of CNA forummer: ringbook


Vietnam as a Prelude
We saw the collapse of the Vietnamese economy in the past 6 weeks. Most people will agree with me that Vietnam has minimal impact on global economy. (Indonesia is the world’s 20th largest economy, Vietnam is only 60th). I asked myself why it happened. Vietnam’s economy is a bubble but not really that big, not worth the effort (you know what I mean?)

I suddenly realized that this is an invitation call for raiders to prepare their assault on ASEAN. To raid the financial system of an economy, there is no meat if it is already in a bad shape (limited downside). Maybe China and India are too big for the predators to swallow (like elephants), but ASEAN is slowly emerging as the deers & buffaloes in the food chain.

The Inevitable Collapse of Philippines
The media is exposing the rotten structure of the Philippines economy these days. In the past 10 weeks, Peso is down 10% against USD. No doubt soft commodities are getting expensive due to the increased usage of bio-diesel and change in diets, but since when, did we use rice for bio-diesel or use rice to feed poultry to produce more meat?

It is not easy to raid ASEAN after 1997-2000. The only way to upset the trade balance is to jack up the import prices of staple food. Yes, governments can choose to have price controls, ignore the futures market BUT once there is hunger or death in the country, the government will need to start hoarding from the market and fall into this trap to prevent civil unrest. (This is happening to Haiti now)

Sore Losers in Thailand?
It is weird that the oppositions are protesting against the latest elected parliament. At first I thought these are sore losers. Then I realized it doesn’t make sense for the opposition to do what they are doing right now. (They have been making noises for ten weeks):
- The new parliament is just instated, should they be given more time?
- If the new govt collapse, the Army will still be the one running the economy, not opposition.
- Don’t the opposition remember that they regretted having the military in power last year?

Oh well, we know that high rice prices will not mess up Thailand but we wouldn’t know if there are elements that try to mess up the stability 2nd largest economy in ASEAN.



Everyone is waiting for something to happen.


Hehee, please note that these are my personal opinions and they are not a call to buy USD and JPY. Just for discussion.

U.S. Slowdown,Price Increase Isn't Your Father's Stagflation

By Carlos Torres and Rich Miller

June 19 (Bloomberg) -- Stagflation just ain't what it used to be.

While economic growth has almost stalled, and surging oil prices have doubled the rate of inflation since the start of last year, structural changes in the economy since the 1970s mean the U.S. is unlikely to witness anything like the conditions that ravaged it then.

``It's a mini-stagflation,'' said Allen Sinai, chief economist at Decision Economics Inc. in New York.

Compared to the 1970s, the economy these days is more flexible, thanks to deregulation and advances in information technology. And it's less inflation-prone, because fewer workers are able to win big wage increases, and policy makers including Federal Reserve Chairman Ben S. Bernanke are more aware of the risks of letting prices spiral.

``We learned a lot of lessons in the 1970s,'' said Stephen Cecchetti, economics professor at the Brandeis University International Business School. ``I don't see the same sort of things happening again -- partly because of policy and partly because our economy is a little different.''

The seeds of the 1970s stagflation were sown the previous decade when government spending on social programs and the Vietnam War grew and credit became more readily available. A more rigid economy, including a system of fixed exchange rates, couldn't respond to the challenge of a jump in fuel prices.

Greater Competition

Today's economy is more flexible, fuel efficient and competitive. While the nation produced 10 times more last year than in 1973, energy use rose by only a third during that time, according to figures from Departments of Energy and Commerce.

Companies are also carrying smaller stockpiles, making it less likely they'd need to slash production when faced with an oil shock. The ratio of inventories to sales has been declining since 1982, when it reached a record 1.7 months, according to figures from Commerce. The ratio stood at 1.25 months in April.

``We live in a world where the automakers have their inventory on trucks on the way to the plants,'' said Cecchetti.

Airlines, one of the industries hardest hit by the jump in fuel costs, provide one example of how deregulation has spurred competition and helped hold down prices. Fares rose 1.8 percent last year, compared with a record 38 percent jump in 1980, during another episode of stagflation.

Chinese, European Pressure

``Companies have to price to markets,'' said Torsten Slok, an economist at Deutsche Bank AG in New York. ``Competition today is much more pronounced than in the 1970s. If a manufacturer doesn't price something sufficiently low, then someone from China or Europe will price it lower.''

Gains in worker efficiency and low labor costs also indicate prices won't skyrocket. Since 1996, productivity is up 2.5 percent per year on average. From 1970 to 1995, the gain averaged 1.7 percent.

The shift away from manufacturing and toward services has also contributed to a drop in labor-union membership that's reduced the ability of workers to get larger wage concessions. Union members accounted for 12 percent of the workforce in 2007, down from 20 percent in 1983 when the Labor Department started keeping records.

Average hourly earnings for non-managers and production workers were up 3.5 percent in the 12 months through the end of May, compared with a record gain of 9.5 percent in January 1981. The percentage of union workers with automatic cost-of-living adjustment clauses in their contracts fell from 61 percent in 1976 to 22 percent in 1995, when Labor stopped collecting data.

Volcker Legacy

Finally, Fed officials will be loath to surrender the low- inflation legacy bequeathed to them by former Chairman Paul Volcker, who raised the benchmark interest rate as high as 20 percent to bring prices under control. The cost was one of the worst recessions since World War II.

Sinai worries inflation expectations are already becoming ``unhinged'' and says much depends on how policy makers including those at the Fed react.

Households surveyed in June expected inflation of 3.4 percent over the next five years, according to the Reuters/University of Michigan survey published last week. While that would match the highest level in 13 years, it would still be well below the 9.7 percent reached in February 1980.

Under Chairman Arthur Burns, the central bank lowered interest rates in 1974 and 1975 to combat a slowdown, even as prices began to accelerate. Volcker and Alan Greenspan, who served as chairman from 1987 to 2006, spent most of the next two decades trying to get ahead of inflation.

Bernanke, Vice Chairman Donald Kohn and at least four Fed bank presidents warned over the past weeks that they must keep inflation expectations in check. Investors project the Fed will raise rates as soon as September, futures prices show.

``Monetary policy makers around the world certainly understand what they are doing much better than they did in the early 1970s,'' said Brandeis' Cecchetti. ``I'm sure that policy makers will not allow inflation to rise any more and they'll bring it back down.''

Possible outcomes For July-December 2008

1. A Dollar in distress (EUR 1 = USD 1.75 at the end of 2008): Panic-fear of a US currency and economy collapse eats into the American collective psyche

2. Global financial system: An impossible requirement – placing Washington under international trusteeship – provokes the system's break

3. European Union: The periphery sinks into the recession, the Eurozone only slows down

4. Asia: The « double whammy » inflation/export-collapse

5. Latin America: Difficulties increase but growth remains steady in most parts of the region, Mexico and Argentina in crisis

6. Arab world: Pro-Western regimes go adrift / 60 percent risk of socio-political explosion on Egypt-Morocco axis

7. Iran: 70 percent probability of an attack by October 2008 confirmed

8. Banks/Speculative bubbles: When bubbles collide

Roach: This Time, Stagflation is Different

Roach: This Time, Stagflation is Different


Today's stagflation, sharply rising inflation in a time of slow growth, differs from that experienced in the U.S. more than 30 years ago, says Morgan Stanley Asia CEO Stephen Roach.


Like everything we buy these days, this stagflation comes from Asia and is driven by globalization — as well as by an Asian inflation rate that's rapidly lurching out of control.


“The world remains largely in denial over the outbreak of a new strain of stagflation,” Roach writes in the Financial Times.


“Given Asia’s role as producer to the world, the globalization of trade flows is the new transmission mechanism of worldwide inflation that was not evident in the 1970s.”


Overall exports should hit a record 32.5 percent of world gross domestic product in 2008, far higher than the 21 percent of 1980, when the inflation then was nearing its peak, Roach points out.


Lowering inflation in the developing world depends on lowering food and fuel costs, something that hasn’t happened in six straight years. Depending on currency adjustments to reduce inflation is unrealistic, too, because Asia’s export-led economies don’t want to risk growth by raising interest rates.


The result? Slowing economic growth in the industrial economies will likely put more people out of work and create fewer jobs, pushing down wages even further, says Roach.


"Wages in the developed economies have been de-linked from prices," Roach maintains. "That all but eliminates the automatic indexation features of the once dreaded wage-price spiral, perhaps the most insidious feature of the 'great inflation' of the 1970s."


Consumer price inflation in developing Asia, where hyper-fast growth is viewed as a positive by the aspiring middle class, hit 7.5 percent in April. That's more than double the 3.6 percent pace of a year ago.


The problem is especially visible in China, where the 8.3 percent average annual inflation rate over the past four months shows the sharpest sustained increase on a year-on-year basis since the mid 1990s.


China’s inflation problem isn't just rising food and energy costs, either.


While it’s true that much of the recent price hikes are in food and energy, Roach says, even core inflation in developing Asia surged to 3.8 percent in April, more than double the 1.8 percent pace of a year ago.


Minimum wage increases and negative real short-term interest rates brought on by a policy lending rate below headline inflation also contribute to what Roach describes as “an ominous increase in Chinese inflationary expectations,” eerily reminiscent of those in the developed world in the 1970s and early 1980s.


Roach says that central banks, however, are keeping short-term interest rates far too low to combat inflation throughout most of Asia.


“For developing Asia as a whole, a GDP-weighted average of policy rates is currently about 6.75 percent, fully three-quarters of a percentage point below the 7.5 percent headline inflation rate,” Roach writes.


“The longer such a trend persists, the more wrenching the monetary tightening required to arrest it — and the greater the risk of a subsequent hard landing.”

Consider consequences of Iran attack by Israel

First, even before Iran may try to retaliate to this action by trying to block the flow of oil from the Gulf, oil prices would spike above $200 dollar a barrel.

Second, Iran could react militarily to such Israeli action (that would be taken with the tacit support and the military logistic support of the US) by unleashing its supporters in Iraq against the US military forces there. That would trigger a military reaction by the US that would start a sustained air-led bombing campaign against Iran’s military capabilities (air force, anti-aircraft defenses, radar and other military installations, etc.)

Third, Iran would unleash its supporters in Lebanon and Gaza (Hezbollah and Hamas) in a military confrontation with Israel. A broader war will follow in the Middle East.

Fourth, Iran would use both the threat of blocking the flow of oil out of the Gulf and an actual sharp reduction of its exports of oil (an embargo) to spike the price of oil. Oil prices would rapidly rise above $200 per barrel and the US and global economy would spin into a severe stagflationary recession (like those triggered by the sharp spikes in the prices of oil following the staflationary shocks of the Yom Kippur war in 1973, the Iranian revolution in 1979 and the Iraqi invasion of Kuwait in 1990).

Fifth, while Sunni regimes may – in private – sigh relief following the destruction of the nuclear capabilities of the Shiite Iranian regime – the Sunni Arab street (the masses of poor Sunnis) from Algeria to Egypt and all the way to Pakistan, India and Indonesia may become even more anti-Western and anti-American leading to the risk over time of rise of anti-Western fundamentalist regimes in many Arab countries.

Sixth, the Bush administration whose hands have been tied by the new National Intelligence Estimate (that argued that Iran had suspended its program of development of nuclear weapons) would thus be able to strike Iran – via Israel - before the end of its term. Such October surprise by Israel would also certainly lead to the election of McCain and defeat of Obama as a national security crisis of such an extent would doom the chances of Democrats to win the White House. So both Israel – that prefers McCain to Obama and is hurried to act as it is wary of the constraints that an Obama presidency may put on its ability to act against Iran – and the Bush administration would guarantee the election of McCain.

Now, it is not certain – as argued by Fischer – that Israel will strike that early; this is just a guess and a prediction by one observer even if many others think likewise. But if such action were to be taken by Israel the consequences outlined above would be the clear outcome: a major global recession, wars throughout the Middle East (Iran, Iraq, Gaza, Lebanon, Israel, etc.) and a major increase in geopolitical instability.”

Hindenburg Omen

We got a confirming, second Hindenburg Omen observation Monday, June 16th, so we now have an official Hindenburg Omen potential stock market crash signal on the clock. This means, there is an approximate 25 percent probability that we will see a full blown stock market crash within the next 120 days, taking us into a risk zone through October 2008. This is significant as the odds of getting a stock market crash on any given random day is less than one-tenth of one percent. Further, we can tell you that there has not been a stock market crash over the past 25 years without a confirmed H.O. The odds of a significant stock market decline that is not a crash is higher than 25 percent. For those of you looking for more details, go to our Guest Articles section and read our last article on the H.O. NYSE New 52 week Highs were 80, with New Lows at 78, the lower of the two being 2.40 percent of total issues traded Monday, which were 3,240, above the 2.20 percent threshold. The first of these two observations was June 6th. This is the first confirmed H.O. since October 2007, which led to a mini-crash.

Looking back at historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen within the next 41 days after its occurrence was 77%, the probability of a panic sellout was 41% and the probability of a major stock market crash was 24%. The occurrence of a confirmed Hindenburg Omen does not necessarily mean that the stock market will go down, although every NYSE crash since 1985 has been preceded by a Hindenburg Omen.

Because of the very specific and seemingly random nature of the Hindenburg Omen criteria, it is possible that this phenomenon is simply a case of overfitting. That is, if one backtests through a large data set and tries enough different variables, eventually correlations are bound to be found that don't really have any predictive significance.

However, the fact remains that out of the previous 25 confirmed signals only 8% (two) have failed to predict at least a mild (2-4.9%) decline.

Analysts slash US bank estimates more as

BANGALORE - IT'S not just banks that have persistently underestimated the scope of the credit crisis afflicting them. So have the Wall Street analysts paid to warn their clients what to expect.

Since the start of the year, analysts have slashed their earnings estimates on Standard & Poor's 500 financial companies by a respective 41 per cent, 28 per cent and 25 per cent for the second, third and fourth quarters, according to Lab Thomson, a Thomson Reuters research publication.

Merrill Lynch's Edward Najarian was the latest to turn more downbeat, amid mounting credit losses and growing uncertainty over banks' abilities to preserve capital and pay out dividends. He slashed his earnings estimates for 12 United States banks by an average 22 per cent for 2008 and 19 per cent for 2009.

Mr Najarian joins rivals at Credit Suisse, Deutsche Bank Securities, Goldman Sachs and Lehman Brothers among those in June to slash their outlooks for banks and project more capital raising.

Regional banks may face at least three further rounds of capital raising, Credit Suisse said.

Goldman, meanwhile, projected that US banks will raise US$65 billion (S$89 billion) of additional capital to cope with credit losses.

Bank of America , Regions Financial, SunTrust Banks, Wachovia and the investment bank and brokerage Merrill Lynch are among companies that analysts believe may need to raise more capital.

Among those to raise the most in the current cycle are Citigroup, Wachovia, Washington Mutual and National City, which this year each raised at least US$7 billion.

In afternoon trading, the S&P Financial Index was down about 2 per cent, while the 24-member KBW Bank Index was down 0.36 per cent.

Stocks in capitulation mode
Large-cap banks' stocks now appear to be in 'capitulation mode', said Merrill's Najarian. He expects bank stocks to trade below fair value in the near term as more dividend cuts and capital raises, high credit risk and an uncertain earnings outlook weigh on their share prices.

The analyst expects dividend cuts, capital raising or both at Bank of America, Regions, SunTrust and Wachovia in the year's second half, putting downward pressure on their shares.

Ladenburg Thalmann's Richard Bove, meanwhile, on June 2 said downward pressure on bank stocks is 'overwhelming', and that the catalyst to reverse this is 'unknown'.

Mr Bove, however, said that despite investor fear and uncertainty, the situation might not actually be as dire, because many lenders maintained strong cash flows and were increasing market share.

Lab Thomson, in a report this week, said that despite the downward estimate revisions, some banks could still see earnings improve in the second half of 2008, relative to poor first-half results. -- REUTERS

Bracing for a roller-coaster recovery

An economic rebound may be far in the distance, but stocks usually stabilize first. Here's why the market should wobble in place in the second half of the year.

By Alexandra Twin, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- An economic and housing rebound may be a ways off but Wall Street is already in recovery mode. And that should translate into happier times for investors during the second half of the year.

It won't be a smooth ride, though. In fact, the next six months may feel more like stepping off the Tilt-A-Whirl at an amusement park. You're no longer really moving, but you still feel queasy.

"I think we're in a trading range, but it's a broad one and you can have a lot of volatility," said Beth Dater, chief investment officer at AG Asset Management. In fact, there doesn't appear to be any catalyst for a broad rally or a steeper selloff, Dater explained.

While stocks are still poised to end the year lower, the decline will not nearly be as substantial as the loss accrued in the first half, said Haag Sherman, managing director at Salient Partners.

As the first quarter draws to a close, the Dow, Nasdaq and S&P 500 are all down at least 8% year-to-date as of Thursday.

The low for the S&P 500 over the last 52 weeks was 1,257 in March, while the high was 1,576 last October. Dater said that the market isn't likely to break that lower level, barring a major unforseen crisis. It's also extremely unlikely that it will surpass 1,500 again this year.

There is still much to cheer about.

Stocks lead the news. Stocks typically anticipate a recovery around six months ahead of time. So, while the economic rebound is probably at least a year away, if stocks follow their typical pattern, that could mean a slight pickup by year end.

That has often been the case during other periods in which the U.S. was in a recession, or official "contraction" as defined by the National Bureau of Economic Research.

Technically, the U.S. isn't in a recession. But regardless of semantics, it feels like one to most people right now - gas above $4 a gallon, a weak job market and a battered U.S. dollar will do that for you.

In 3 previous recessions, stocks managed to post gains regardless. March 1991 brought the end of a recession and that year the S&P 500 gained 26.3%. 1980-1982 brought the so-called double dip recession, but stocks still gained soundly in 1980 and 1982, when each of those two recessions ended.

The last official recession bucked the trend. It occurred between March and November 2001, following the bursting of the tech bubble and the aftermath of 9/11. That year the S&P 500 fell 13%.

While it's unlikely the market will see the same type of gains as in recessions past, stocks should strat to stabilize as the year winds down, said Matt King, chief investment officer at Bell Investment Advisors. An improvement in GDP growth, an increase in corporate earnings and some strong seasonal factors could all add to a year-end boost, he said.

"If we get decent earnings for the second and third quarters, that could help," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams. However, financial sector results are expected to remain dismal as the fallout from the credit crisis continues. And as long as financial stocks continue to slump, it's going to be hard for the broader market to move much, he said.

The upcoming presidential election adds a layer of uncertainty, but is not really impacting investment decisions now, said Robert Loest, portfolio manager at Integrity Funds. He said that's because any changes, regardless of which candidate is elected, won't be felt until at least 2009. (For more on Wall Street and the election, click here.)

The Fed, oil and the dollar. Most analysts agree that while the stock market wouldn't like it in the short term, higher interest rates would help in the longer term.

That's because the low interest rate environment, while helpful for the sluggish economy, has hurt the U.S. dollar and contributed to a rise in dollar-traded commodity prices.

It's true that commodity prices were already on the rise because of growing world demand, the role of market speculators and other factors. But Salient's Sherman said that the plunging dollar has added as much as $50 to the price of oil, currently hovering around $135 a barrel.

Sherman doesn't think the Fed will raise rates enough to help the dollar, largely due to the still-struggling economy and credit markets. If the Fed started inching rates higher, it might be taken as a vote of confidence that the Fed thinks the economy can take it, said Steven Rogé, PM at R.W. Rogé & Co.

But Sherman thinks August may be far enough off to bring a rate hike, which is already being anticipated. "If you are faced with a deterioration of credit and home prices anyway, you might as well fight what you can," he said. "Namely, inflation."

Sector-by-sector. Stocks and sectors that can withstand a slowdown and companies that conduct a majority of their business outside the U.S. will likely do best in this period, the analysts said, not to mention international equities.

Companies that are dependent on the U.S. consumer and financial companies are clearly to be avoided, said Integrity Funds' Loest. But companies that deal in raw materials, machinery and anything that contributes to infrastructure building will see growth, due to the international demand, he said. "To the degree that people invest globally, they will do well."

While a stronger dollar could cool energy prices a bit, global demand means that prices will still remain high for some time, said John Merrill, chief investment officer at Tanglewood Capital Management. While that's bad for the economy, it's good for "energy stocks and anything else riding the coattails of the inflation train," he said.

He said that technology and certain chunks of the healthcare sector will do well too. "I think there's a good chance the market will end the year higher than now or not far from where it started the year," he said. But feeding that will be strength in the select sectors mentioned and weakness in the others.

Airline cuts, high gas prices hit Las Vegas

LAS VEGAS - SIN City is facing hard times.
Soaring fuel prices are forcing airlines to cut flights and jack up fares to this desert oasis. Road trips have become luxury travel with gasoline costing more than US$4 (S$5.47) a gallon.

And tourists who do make it to Las Vegas are spending less, leading casinos to offer deals just to keep them in their resorts.

'The overall economic uncertainty this country is facing ... makes the outlook for the next several months very murky,' said Mr Gary Thompson, spokesman for Harrah's Entertainment, owner of seven Las Vegas casinos.

US Airways Group announced last week that it was cutting nearly half its Las Vegas flights as part of companywide belt-tightening. That will leave 74 US Airways flights per day by the end of the year, down from a peak of 141 in September 2007.

The result is more than 8,000 fewer seats available per day, compared to the 2007 peak, according to data from the Clark County Department of Aviation. US Airways was the second-largest carrier to Las Vegas behind Southwest Airlines.

'We've seen airlines increase and decrease service periodically. Clearly, never to this extent all at once,' said Mr Alan Feldman, a spokesman for MGM Mirage, which owns 10 casinos on the Las Vegas Strip and plans to open CityCenter next year.

The flight cuts are another hit in what is shaping up to be a rough year for Las Vegas casinos. Casino officials and industry analysts say the slump is a result of economic complaints felt around the country - rising gas and food prices, home foreclosures and general uncertainty.

'As far as filling the rooms, the lack of airline service I think is going to have an impact on the entire community,' Mr Thompson said.

Nightly room prices were down 4 per cent in Las Vegas compared to one year ago and gambling revenue was down 3.7 per cent, according to data through April from the Las Vegas Convention & Visitors Authority. Total airline passengers through April were down 1.8 per cent and traffic from California was down 4.8 per cent.

Feldman said MGM Mirage has put together programs to entice visitors, wooing them with package deals, free nights and vouchers for show tickets and food.

With the airline industry expected to lose US$2.3 billion this year, airline industry analyst Mr Robert Mann said it may be up to big casinos to subsidize travel into Vegas, by land and by air.

'There's such an interest among hoteliers for arrivals that you may see more charter flying going back into Las Vegas,' he said.

But the gambling industry in Las Vegas and Atlantic City is bracing for a hit this year, too.

Nevada will see revenues dip this year and next year, to US$12.4 billion in 2009 compared to US$12.8 billion in 2007, according to a forecast of worldwide gambling released Wednesday by PricewaterhouseCoopers LLP.

The financial consulting company said it expects Nevada to rebound in 2010 and see gambling revenue grow to US$14.8 billion in 2012.

'It's going to take a little while for the market to right itself, but I do think that that's what will happen,' Mr Feldman said. -- AP

Positive outlook for Asian property

Inflows from outside region rising as a result of credit crisis in US and Europe, says report
By Joyce Teo, Property Correspondent

THE flow of capital into the Asia-Pacific's real estate market from outside the region is accelerating, a new report on property investment has found.
This is the result of the credit crisis in the United States and Europe, said the report by KPMG, FTSE Group and Asian Public Real Estate Association (Aprea).

The acceleration is coming off the back of prolonged steady growth, which has been powered by a combination of opportunistic and increasingly longer-term investments, it found.

'With the credit crisis in the US and Europe, investors are seeing a slowdown there, so they are looking to Asia for growth,' said FTSE Group's head of quantitative research (Asia-Pacific), Mr Jamie Perrett.

Many institutional investors, such as pension funds, are looking to diversify their portfolios and increase their property allocations, he told The Straits Times.

Real estate as an asset class has outshone equities and long-term government bonds over the past decade, providing average returns of 7 per cent to 8 per cent, said the report.

And, while returns on real estate investments are expected to decline in most countries, returns in the Asia-Pacific are expected to remain higher than the global average of slightly over 5 per cent for the coming year, it said.

Market sentiment in Asia has been hit by the credit crunch and it is unclear when a rebound will occur, but the regional outlook should remain positive, said Aprea's chief executive officer, Mr Peter Mitchell.

The interest in investing in Asia remains but there are signs of a wait-and-see approach, he said. 'We need to take a longer-term perspective.'

Real estate investment trusts (Reits) are not growth stocks but good defensive stocks and inflation hedges, said Mr Mitchell. Projections show Asia's Reit market with a capitalisation exceeding US$100 billion (S$136.8 billion) by 2010.

'Despite the current tightening of credit from banks, the deals will continue to take place. But they may take longer, the price may be higher and it could lead to a temporary slowing in the supply cycle,' said Mr Andrew Weir, KPMG's partner in charge of property and infrastructure in China and the Asia-Pacific, in a statement.

'However, the current sub-prime fallout elsewhere may well act as a catalyst for the inevitable further development of the Asia-Pacific as a centre of property and investment management.'

According to the report, real estate funds remain the dominant source of capital for property investments in Asia this year.

Asian real estate, it said, may be experiencing some short-term pain but will eventually benefit from the credit crunch.

'In time, the credit crisis will result in Asia being regarded on a more equal and level-playing field compared to the more mature but struggling markets of the US and Europe.'

Yesterday, FTSE and Aprea also announced that they signed an agreement to develop new indexes for the Asia-Pacific real estate sector.

Said Mr Mitchell: 'It will give more visibility to Asian real estate markets, thereby enhancing the region's access to global capital.'

Julius Baer suggests holding more cash

By Rita Raagas De Ramos,

The wealth manager expects difficult times ahead for equities and recommends cutting back in this asset class, particularly in Asia ex-Japan, Brazil and Russia.
Julius Baer Holdings, Switzerland's leading independent wealth manager, has turned more cautious on equities amid the persistent high volatility in markets worldwide and the lingering uncertainty over global economic growth.

Earlier this month, Julius Baer trimmed its recommended net long equities position to 29%, reflecting a long position of 36% and a short position of 7%. That’s a significantly more conservative stance compared with a recommended net long position of 35% in May, resulting from a long position of 42% and a short position of 7%. Those figures are from Julius Baer’s suggested asset allocation model, which was set up in July 2006.

“This is going to be a difficult equities environment,” says Venkatraman Anantha-Nageswaran, Singapore-based CIO for Asia-Pacific at Bank Julius Baer & Company, a unit of Julius Baer Holdings.

In Julius Baer’s latest global asset allocation model, it suggests holding 17% in cash, sharply higher than last month’s recommendation of 7%. It suggests holding 27% in equities (compared with 31% last month), 20% in emerging market bonds (down from the previous 22%), and 17% in commodities (down from the previous 22%).

Specifically, Julius Baer suggests reducing equity holdings in Asia ex-Japan, Brazil and Russia and putting some money in Japan and holding investments in Korea steady. It also suggests holding some alternative assets now compared with none last month.

Anantha-Nageswaran says the recent changes in allocation recommendations have been significantly more drastic than in the past, when sometimes three months would go by with no changes at all. This reflects the high level of volatility and uncertainty in the market, he says.

There are other equities markets, such as Vietnam, where although Julius Baer’s conviction has weakened, it would be too late to pull back at this point due to the nearly 21% decline in that market’s benchmark index in the month of May alone.

One way investors could take advantage of the current market environment – one that’s characterised by overwhelming concerns over high oil prices and rising inflation – is by latching on to investment themes that would benefit under the current scenario, says Anantha-Nageswaran.

For example, Julius Baer suggests high exposure to food and agricultural commodities, which the firm sees as long-term trends. The firm has a relatively small suggested allocation to crude oil-related plays, however, because there may eventually be a collapse in the demand for oil.

Meanwhile, Anantha-Nageswaran notes that the debate about whether Asia will decouple from the US and prove to be more resilient is over. The more important question now is whether Asia will decouple significantly from the US for the worst.

Crucial to Asia’s “salvation” is the policy response of central banks to the challenge of finding a balance between slowing growth and rising inflation, he says. As of now, Asian central banks – such as those in Indonesia, Malaysia, the Philippines and Thailand, to name a few – have been behind the curve in terms of monetary tightening because there has been a mentality of “keeping growth up at all costs”.

The “obsession with growth and the need to continue to keep growth up” is encouraging central banks in Asia to maintain fairly loose monetary policies, says Anantha-Nageswaran. And the reluctance to raise interest rates more aggressively has actually been fuelling growth which in turn has been keeping oil prices and inflation high.

“High oil prices are not actually causing inflation to rise,” says Anantha-Nageswaran. “Oil prices are nothing but a reflection of inflation.”

But it’s not too late to respond appropriately and allow interest rates to rise at a faster pace, says Anantha-Nageswaran.

“There has been talk of Asia turning to domestic growth but there has not really been a reorientation of priorities because policies are still very much in support of export-led growth,” he says.

Banking turnaround likely in '09: Goldman

The Associated Press June 17, 2008, 12:46PM ET

Four major hurdles must be crossed before a broad recovery in the banking sector, and that might not occur for another six to nine months, according to a new research report from Goldman Sachs.

The sector is only likely to rebound broadly when credit costs have stabilized, banks complete a process of recapitalization, consensus estimate ranges for earnings narrow and the yield curve steepens, Goldman Sachs analysts wrote in the report, which it based on looking at past credit cycles.

Goldman Sachs estimates credit losses resulting from continued deterioration in the mortgage and lending markets will not peak until early 2009, making a broad-based rally in the sector unlikely before the end of 2008. Goldman Sachs estimates peak losses will occur during the first quarter of 2009, with charge-off ratios reaching, on average, 1.39 percent.

Charge-off ratios were at about 0.95 percent during the first quarter, and Goldman Sachs expects them to rise to about 1.12 percent for the second quarter. Charge-offs are loans written off as not being repaid. The ratio measures charge-offs as a percentage of the size of a bank's total loan portfolio.

Banks also must continue to raise new capital before share prices can rebound. Goldman Sachs estimates the recapitalization process is about two-thirds complete for U.S. banks and the risk of insolvency has been significantly reduced. U.S. banks have raised about $120 billion and will need to raise an additional $65 billion, Goldman Sachs wrote in the report.

But with loss estimates still changing and some banks still needing to raise capital, analyst estimates vary widely from bank to bank, Goldman Sachs said.

The variations in future earnings estimates means there is no agreement where earnings or book value of banks will stabilize during the credit downturn, according to the report.

"We watch for a tightening of the consensus range, which is at record highs," Goldman Sachs said in the report. "When the range tightens, it will signal confidence in where book values stabilize."

The one factor likely already completed is the steepening of the yield curve, Goldman Sachs said. The Federal Reserve has significantly cut interest rates to try and help boost the financial markets and the economy, which has led to a steeper yield curve.

But, Goldman Sachs notes a steepening yield curve during this cycle might not provide the benefit of past cycles because banks earn more money on fees now and the easing by the Fed has yet to improve tight credit conditions.

Because of revisions to credit costs and loss estimates, Goldman Sachs also reduced price targets and 2008, 2009 and 2010 earnings estimates for some national, regional and trust banks because of the likely continued increase of credit-related losses.

Among 21 banks it covers in the space, Goldman Sachs, on average, cut 2008 estimates by 9 percent, 2009 estimates by 4 percent and 2010 estimates by 2 percent to account for greater credit losses.

Comerica Inc.'s 2008 estimate was cut the furthest. Goldman Sachs reduced its 2008 estimate for Comerica 34 percent to $1.75 per share.

Shares of Comerica fell 37 cents to $31.65 in afternoon trading as broader markets declined, including much of the financial sector.

Western Alliance Bancorp's 2009 and 2010 estimates were reduced the most. The 2009 estimate was cut 17 percent to $1 per share, while the 2010 estimate was lowered 14 percent to $1.25 per share.

Western Alliance shares fell 21 cents, or 2.3 percent, to $8.94.

Price targets among the group of banks were cut, on average, 14 percent. Huntington Bancshares Inc.'s price target was cut the most as Goldman Sachs reduced the target 43 percent to $6.

Shares of Huntington Bancshares fell 40 cents, or 6 percent, to $6.27.

Missing the boat on international funds

If your adviser is only now recommending you move some of your portfolio into global stocks, it might be time for a new adviser. Watch out for these red flags.

NEW YORK (Money) -- Question: I read your recent article in Money magazine regarding the craze for international investing. This past week my adviser has recommended this move since I have very little money in the international market. She recommended Nationwide International Growth Fund (GIGAX) and the Ivy Asset Strategy Fund (WASAX). What do you think of her advice?

The Mole's Answer: Boy, are the red flags waving. I see at least three warning signs that it's time to start looking for a new adviser.

Red Flag #1 - Previous lack of international stocks

I would first start by asking your adviser why you currently have so little money in the international stock market. We've been a global economy for many years and I'd want to know why your adviser thought putting all of your eggs in a basket of U.S. stocks was the right thing.

When your adviser picks which asset classes she thinks will outperform others, all she is doing is creating unnecessary risk for you. She apparently bet on U.S. stocks which, between 2003 and 2007, earned a nice 82% return. Unfortunately, international stocks more than doubled that return at 168%. In other words, it may have been your adviser's bet to put little of your portfolio in international stocks, but you're the one it ended up costing.

Red Flag #2 - Classic signs of performance chasing

A good adviser can help provide some focus and discipline to your portfolio. Part of that discipline should be to stop you from chasing what's hot. A recent study showed that advisers as a whole performance chase about as much as individuals. That's because it's easier to sell something that's hot than something that's not.

The fact that your adviser is suggesting you get into international stocks after such hot performance, and after underweighting you in international stocks for so long, looks like a sure sign of performance chasing to me. And performance chasing has you taking the old buy high/sell low path that I would avoid like the plague.

Red Flag #3 - Funds that generate high fees

Both funds your adviser recommended have front-end loads that charge as much as 5.75% of your investment the minute you buy the funds. So you start with only 94.25% of the amount you originally invest. Further, their annual fees range from 1.13% for the IVY fund, and 1.57% for the Nationwide fund, according to Morningstar. Fees like those make me cringe.

Plus, both of these funds happen to have turnover well above 100% annually. This means they hold a typical stock for less than a year. The high turnover does two things:

* It creates additional hidden expenses from trading stocks frequently.
* It creates taxes from any gains - and at the highest short-term rates.

Now if your adviser is reading this, she is probably steaming mad and saying to herself that these two funds actually have very high Morningstar ratings and have whomped their peers. While she is absolutely right, that is yet another indication of performance chasing.

Any adviser can screen for the funds that pay us commissions and have performed well in the past. With thousands of mutual funds out there, it's nearly a mathematical certainty that some expensive funds will do well. Some advisers will seek out these funds and sell them to clients, even though the data is compelling that the odds of the stellar performance continuing are quite low.

My advice: Ask your adviser why now is the right time to go from virtually no international stocks to dramatically increasing your allocation. As uncomfortable as it might be, ask her if it is performance chasing that is driving her recommendation. Finally, ask if there are lower fee vehicles that can be used to build your portfolio.

International investing is a critical component of most portfolios, but owning a consistent proportion is far more critical than moving in and out. Performance comes and goes but fees are forever, so do all of your investing with low-cost and broadly-diversified vehicles. And that holds true whether you use an adviser or do it yourself.

RBS Publishes Global Stock and Bond Crash Alert

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist...

RBS said the iTraxx index of high-grade corporate bonds could soar to 130/150 while the "Crossover" index of lower grade corporate bonds could reach 650/700 in a renewed bout of panic on the debt markets.

"I do not think I can be much blunter. If you have to be in credit, focus on quality, short durations, non-cyclical defensive names.

"Cash is the key safe haven. This is about not losing your money, and not losing your job," said Mr Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate.

RBS expects Wall Street to rally a little further into early July before short-lived momentum from America's fiscal boost begins to fizzle out, and the delayed effects of the oil spike inflict their damage.

"Globalisation was always going to risk putting G7 bankers into a dangerous corner at some point. We have got to that point," he said....

The authorities cannot respond with easy money because oil and food costs continue to push headline inflation to levels that are unsettling the markets. "The ugly spoiler is that we may need to see much lower global growth in order to get lower inflation," he said.

"The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets," he said.

Kit Jukes, RBS's head of debt markets, said Europe would not be immune. "Economic weakness is spreading and the latest data on consumer demand and confidence are dire. The ECB is hell-bent on raising rates...

Ultimately, the bank expects the oil price spike to subside as the more powerful force of debt deflation takes hold next year

Seven Tips for Managing Price Increases

Editor's Note: Harvard Business School professor John Quelch writes a blog on marketing issues, called Marketing Know: How, for Harvard Business Online. It is reprinted on HBS Working Knowledge.

When driving these days, do you look at the prices every time you pass a gas station? Do you notice yourself paying more attention to the prices of everything you buy? You are not alone. Consumers everywhere are more price aware. People who've been indifferent to price increases for years are suddenly amazed at what things now cost. How can marketers cope not just with inflation but with consumer sticker shock?

1. Understand Your Customers. There are at least four ways in which customers can respond to higher gas prices: downgrade from premium to regular; take fewer trips by car, consolidate errands, switch to public transportation; take the same number of trips but reduce the miles driven per trip by, for example, vacationing closer to home; drive more economically and less aggressively to improve miles per gallon; and buy a specific dollar amount of gas rather than filling up every time, even though this may mean more visits to the pump. Some consumers may even trade in (at a loss) the SUV for a hybrid, an example of how price inflation on one product can cause demand shifts in a second, related, category.

2. Invest in Market Research. You must discard your existing customer segmentation assumptions and segment consumers around product usage behavior and price sensitivity. You must get out into the marketplace yourself and talk to consumers directly to understand their pain points and how they are changing attitudes and behaviors in response to price inflation. You must then quantify these shifts and develop product and pricing strategies that balance the need to maintain both profitability and market share.

3. Redefine Value. Customers buying soft drinks can think about price in three ways: the absolute cost per can or bottle, the cost per ounce, and, less common in this category, the monthly consumption cost. Customers short on cash will focus much more on the absolute price. They'll go for the 99 cent soft drink rather than the $1.29 container with 50 percent more volume. To motivate cash-poor consumers, marketers must reverse engineer products and packaging to hit key retail price points. This may mean downsizing package sizes, something the candy industry always does in response to inflation.

4. Use Promotions. If you've always passed through raw material price increases to the end consumer, you don't necessarily need to change that policy. However, lagging competitors in passing on price increases can have the same effect as a temporary price promotion. More customers than usual will be looking out for price promotions, but don't give away the store to those who don't need the discount, and cut prices not across the board but only on items selected as your inflation-busters. For cash poor consumers, these promotions should hit the key price points on small pack sizes. For cash rich consumers, encourage multi-unit purchases ahead of the inevitable next price increase.

5. Unbundle. Customers who previously welcomed the convenience of buying product, options, and services rolled into one may now ask for a detailed price breakdown. Make it easy for your more price-sensitive customers to better cherry-pick the options and services that they truly need by giving them an unbundled menu of options.

6. Monitor Trade Terms. Beware of powerful distributors paying you more slowly than they turn the inventory they buy from you. In an inflationary environment, they're making money on the float by stretching their payables. Manage your inventory on a last-in, first-out basis to insure that increases in your realized selling prices do not trail the increases in your input costs.

7. Increase Relevance. You need to persuade customers to cut back their expenditures on other products, not on yours. In tough times, consumers more than ever need and deserve the occasional treat. So, if you are Haagen Dazs, tell the consumer to substitute private label peas for the name brand but to not forego the comfort of curling up on the sofa with a tub of her favorite ice cream. Strong brands can hold consumer loyalty while increasing retail price points. Weaker brands risk private label and generic substitution.

Clearly, not all marketers are equally affected by price inflation. Commodities like gasoline, where the manufacturer adds little value before the product reaches the end consumer, are more vulnerable, while sales of the most exclusive global luxury brands hold up pretty well regardless of price. Especially challenged are marketers of goods and services for which consumers don't necessarily understand the input costs: decorative candles, for example, are highly sensitive to oil prices and the purchases are discretionary. The key here is to educate the consumer, apologize for the uncontrollable price increases, give price-sensitive consumers some promotional options, and reemphasize product benefits.

Jim Rogers: Oil Bull Market Has Years to Go

The bull market for oil has many years to go before it peters out, says billionaire Jim Rogers, chairman of Rogers Holdings.


There are several factors for this view, but the primary one is that "known sources of petroleum are dwindling," Rogers told Bloomberg in an interview.


Global oil supplies could fall far short of need and expectations in the next 20 years, reported the International Energy Agency in mid-May. The agency long expected supply to rise to meet demand of 116 million barrels a day by 2030.


It now expects oil output to struggle to reach 100 million barrels in that time frame.


These market conditions will make life difficult for airlines — and airline stocks — well past 2010 and will also impact Federal Reserve policy in the coming months, Rogers said.


Rogers has proved astoundingly prescient since suggesting that investors buy into the older, industrial economy back in 1999 when gold and oil were coming off 25-year lows and when the Internet stock market was soaring.


Now in his mid-60s, Rogers retired from full-time work when he was 37, and invests for fun.


Other market watchers reckon that Rogers may well be right.


"Oil prices will stay high because of the lower dollar, increase in domestic energy demand in the oil-producing countries, power shortages, and private generation," A.F. Alhajji, an associate professor of economics at Ohio Northern University, tells Moneynews.


Alhajji says that the U.S. economy was able to mitigate the effects of oil price increases from 2004 to 2007 through a variety of monetary and fiscal policies. But, now "we have too many problems at once," says Alhajji. "That's not enabling us to do what we have to do at this stage."


The problems, however, won't last forever.


Studies show that when the price of oil doubles, consumption declines, especially in industrialized countries.


"Jim Rogers is correct over the short-term," Paul A. Woods, president and CEO of Odyssey Advisors, tells Moneynews. "But there is a light at the end of the tunnel after that."


Woods says that the popularity of hybrid cars — now a major niche market — shows that alternatives to petroleum are being embraced by consumers.


That could cut into the price of oil in the next few years.


"Plug-in hybrids are the next step in the process that will eventually put cars with combustion engines in museums, where that 19th century technology belongs," says Woods.


"Gasoline will not be able to compete with the pennies per mile cost for plug-ins and electric vehicles."

The worst may be behind for Wall Street - or not

By Eileen Aj Connelly, AP Business Writer
Wall Street puzzles over whether market has hit bottom and what catalyst might trigger rebound

NEW YORK (AP) -- Not long ago, it seemed like the worst was over. As the first quarter wound down, the credit crisis appeared to be easing, the housing market seemed like it might get some footing and Wall Street was growing confident that it had finally found a bottom after months of volatility.

No one expected oil would shoot up 30 percent in just three months.

With new record crude prices almost daily and more negative news for the financial sector combining to generate a new round of volatility, Wall Street is left in disagreement over whether there will be any kind of market recovery soon.

"Frankly, my concern is that some folks may be wanting it too badly," said Gregory Miller, chief economist at SunTrust Banks. "There is a bottom out there, we are going to get through this, but I'm in the camp that thinks this is very long process."

Although the major indexes have gone through some wild swings in recent weeks, they have hovered above the low points seen in mid-March. Sam Stovall, chief investment strategist for Standard & Poor's Equity Research, thinks the market will stay there for a while. "Until we get more positive catalysts, we will likely meander within the mid-March through mid-May range," he said, referring to a swing of between 8 percent and 9 percent for the Dow Jones industrial average during those months.

"Because sentiment was so bad at the March bottom, that was one of the reasons our technician thought that the worst was likely over," Stovall said. "It did improve from then."

But while the sentiment on Wall Street gained some momentum, consumer sentiment went in the opposite direction as gas prices climbed.

"Consumer confidence ... has gotten dramatically worse," Stovall said. And with gas prices remaining at record levels, he doesn't expect that measure to improve any time soon.

But Stovall notes that investors tend to be more flexible that pinched consumers. "The confidence of Wall Street, I believe, fluctuates more rapidly than the confidence of Main Street," he said. "You can't really compare one to another."

Barring some new shock, Stovall thinks the market has likely touched, or at least come close, to its bottom. "If we haven't gone any lower as a result of all these worries," he said, "it would have to be some new worries that have yet to be anticipated."

Wall Street is about to get a host of new information that will help it decide what direction to head in. Investment banks start reporting second-quarter results Monday. May producer price and industrial production data, along with new housing figures will come in starting Tuesday, and the Federal Reserve's next decision on interest rates comes the following week.

If that combines to even a modest positive, Stovall said, investors might start to take some chances that could boost the market.

"Investors, in my opinion, are like hyperactive first graders playing musical chairs," he said. "They're always trying to out-anticipate everybody else."

That means they won't wait until they're 100 percent sure that the economy is on solid footing again before jumping back into the market, he said, for fear they would miss out on opportunities.

Adolfo Laurenti, senior economist at Mesirow Financial, is among those who think second-quarter results will help. "The current quarter will begin to come in and it won't look too bad," he said. While the oil spike has somewhat derailed the intended impact of the government stimulus checks, Laurenti said, he thinks positive earnings will help boost investor confidence.

"That should create some sentiment on the upside, especially for the blue chips," he said.

Laurenti thinks the third quarter might look a little weak because of the fading impact of the stimulus checks, and politics may produce some added uncertainty in the fall and going into the new year as a new president takes office.

And it will take some time for the financial industry to right itself. Miller said if large financial firms find they need to raise more capital, that could be a new shock.

But in the end, it all comes back to oil.

"I think the balance between supply and demand is real, and if the supplies are not keeping up with demand, that's basic Economics 101, prices go up," Laurenti said. "And that's exactly what we're seeing."

Miller, however, said people are already changing their behavior because of high prices, which will likely loosen demand and help reduce oil prices.

"Once this domestic economy changes its spending patterns and it appears to be permanent, then fundamentals for petroleum based fuels don't support oil at $125 a barrel," Miller said. "Will they come back down to $30 a barrel for oil? I doubt it. But is there something magic about $125? No. Could we easily come down below $100? We could."

Speculators not to blame for surging oil prices: Paulson

OSAKA - US Treasury Secretary Henry Paulson said on Saturday speculators were not to blame for surging oil prices, with 'all the evidence' pointing to tight supply and strong demand as the main cause.

'In terms of financial investors and speculation and the role that plays, what I emphasise is that we're looking at that, we'll continue to look at that, but all the evidence points to supply and demand,' he said.

'In the world today,' he added, 'what people want to do is look to simple short-term solutions.

'I think there's a danger that if people say 'all this is speculators' then we won't do what we need to do. We don't want to misdiagnose the problem,' he told a press conference here after a meeting of Group of Eight finance chiefs.

He said there had been no significant increase in global oil production capacity for the past 10 years, calling for new investment to tap sources of fossil fuels as well as alternative energy.

'I think we would be making a mistake if we looked away from the major problem and if we thought there could be some short term-fixes here,' Mr Paulson warned.

'Financial investors in my experience don't create trends. They may sometimes follow trends,' he said. 'Commodity prices have moved up based on supply and demand.'

G8 finance ministers called on Saturday for an urgent boost to global oil production and an investigation involving the International Monetary Fund into the recent wild swings in energy prices, including the role of speculators.

They said greater transparency in the oil market and more reliable data were needed, including on 'the size of financial flow coming into the oil market'.

World oil prices have been on a rollercoaster ride recently, soaring close to US$140 (S$193) a barrel on worries about tight supplies, with some blaming market speculators for aggravating the erratic movements.

Oil prices have surged five-fold since 2003 due to a variety of factors, including turbulence in the Middle East and rising demand in emerging economies such as China and India. -- AFP

US airline catastrophe looms under record oil prices

WASHINGTON - THE United States airline industry is set to crash as record oil prices threaten to push several carriers into bankruptcy, threatening 'our American way of life', an industry study said.

'As a consequence of the skyrocketing price of oil, the US commercial aviation industry is in full-blown crisis and heading toward a catastrophe,' said a study issued by AirlineForecasts and the Business Travel Coalition on Friday.

At current oil prices near US$130 (S$179) a barrel, several large and small US airlines will default on their obligations to creditors, beginning at end-2008 and early 2009, the study said.

The grim industry snapshot comes as US airlines cut fleets, jobs and capacity and add fees as they struggle with spiralling jet fuel costs and a weak domestic economy.

On Thursday, United Airlines and US Airways announced they would start charging US$15 for the first checked bag. Both carriers this month became the latest to try downsizing to survive the fuel crisis.

The study shows that oil at US$130 will increase yearly airline costs by US$30 billion, while airlines will be able to generate only US$4 billion in fare increases and incremental fees.

Recently introduced bag-checking charges and other fees would only yield US$1 billion to US$1.5 billion at the industry level.

'The implication is that several large and small airlines will ultimately end up in bankruptcy, and of those, some will be forced to liquidate,' the study said.

'Stabilising this ailing industry must become a national policy priority,' the study said, calling on the White House, Congress, federal regulators and state officials to take action.

Every US$10 increase in the price of oil results in US$4 billion in additional costs for the 40 passenger-only airlines, according to the study, 'Oil Prices and the Looming US Aviation Industry Catastrophe: A Hole In The Transport Grid'.

The airlines are on track to spend US$30 billion more on jet fuel in 2008 versus 2007, it found, with the top 10 carriers accounting for almost US$25 billion.

The study found that with oil prices in the US$135 range, the airline industry 'could be forced to park upwards of 1,000 aircraft and shed over 80,000 employees, and still not return to health'.

'The consequences will be devastating to US jobs, families, businesses, communities and our American way of life.'

Oil spiked to a record US$139 a barrel a week ago, nearly double last year's US$72 average, and settled above US$134 on Friday.

The surge in oil prices is showing no sign of abating amid strong demand, particularly from developing powerhouses China, India and Brazil, and tight supply.

Some analysts are predicting oil will hit US$200 a barrel in the coming months, after crossing US$100 for the first time in early January.

To cover oil prices at US$130 to US$140, fares would have to go up by 21 to 24 per cent and airline seat capacity reduced by 18 to 20 per cent, the study said.

'Were oil to climb toward US$200, as some analysts predict, the damage escalates and the airline industry could be forced to shrink 35 per cent or more,' it said.

'Absent direct policy intervention, the likelihood is several airlines will fail.'

The Business Travel Coalition said it plans to put forward specific proposals to President George W. Bush's administration and Congress to help alleviate the crisis.

'We urgently need a new energy policy that will give the airlines a fighting chance to survive and recover,' the study said. -- AFP

Greenspan sees recession risk lessening

MEXICO CITY - FORMER Federal Reserve chairman Alan Greenspan told the Latin American Economic Forum here that he sees a reduced possibility of a deep recession in the United States.

'I think the worst is over,' Mr Greenspan said of United States economic woes, speaking via video-conference from Washington on Friday.

There is now a 'reduced possibility' of a deep recession, the former Fed oracle said, after telling the Financial Times late last month that a US recession remained a probability.

Mr Greenspan told the paper he believed 'there is a greater than 50 per cent probability of recession', noting, however, that 'that probability has receded a little'. He also told the paper that the likelihood of a severe recession had 'come down markedly' but added it was too soon to tell whether the worst was already over.

The US economy grew at an annual 0.9 per cent pace in the first quarter of the year, the government said in late May, in an upward revision that calmed the nerves of some economists.

The Commerce Department initially pegged first-quarter gross domestic product (GDP) growth at 0.6 per cent, the same lacklustre pace as the 2007 fourth quarter.

The revision, in line with expectations, bolsters the stance of some economists who believe the world's largest economy will avoid a recession despite a deep housing slump, a related credit crunch and soaring oil prices.

A recession, which last hit the US in 2001, is typically defined as two straight periods of negative economic activity. The Federal Reserve has been trying to avert an economic slump by aggressively slashing interest rates. -- AFP

We may all be space aliens: study

PARIS - GENETIC material from outer space found in a meteorite in Australia may well have played a key role in the origin of life on Earth, according to a study to be published on Sunday.

European and US scientists have proved for the first time that two bits of genetic coding, called nucleobases, contained in the meteor fragment, are truly extraterrestrial.

Previous studies had suggested that the space rocks, which hit Earth some 40 years ago, might have been contaminated upon impact.

Both of the molecules identified, uracil and xanthine, 'are present in our DNA and RNA', said lead author Zita Martins, a researcher at Imperial College London.

RNA, or ribonucleic acid, is another key part of the genetic coding that makes up our bodies.

These molecules would also have been essential to the still-mysterious alchemy that somehow gave rise, some four billion years ago, to life itself.

'We know that meteorites very similar to the Murchison meteorite, which is the one we analysed, were delivering the building blocks of life to Earth 3.8 to 4.5 billion years ago,' Martins in an interview.

Competing theories suggest that nucleobases were synthesised closer to home, but Dr Martins counters that the atmospheric conditions of early Earth would have rendered that process difficult or impossible.

A team of European and US scientists showed that the two types of molecules in the Australian meteorite contained a heavy form of carbon - carbon 13 - which could only have been formed in space.

'We believe early life may have adopted nucleobases from meteoric fragments for use in genetic coding, enabling them to pass on their successful features to subsequent generations,' Dr Martins said.

If so, this would have been the start of an evolutionary process leading over billions of years to all the flora and fauna - including human beings - in existence today.

The study, published in Earth Planetary Science Letters, also has implications for life on other planets.

'Because meteorities represent leftover materials from the formation of the solar system, the key components of life - including nucleobases - could be widespread in the cosmos,' said co-author Mark Sephton, also at Imperial College London.

'As more and more of life's raw materials are discovered in objects from space, the possibility of life springing forth wherever the right chemistry is present becomes more likely,' he said.

Uracil is an organic compound found in RNA, where it binds in a genetic base pair with another molecule, adenine.

Xanthine is not directly part of RNA or DNA, but participates in a series of chemical reactions inside the RNA of cells.

The two types of nucleobases and the ratio of light-to-heavy carbon molecules were identified through gas chromatography and mass spectrometry, technologies that were not available during earlier analyses of the now-famous meteorite.

Even so, said Dr Martins, the process was extremely laborious and time-consuming, one reason it had not be carried out up to now by other scientists. -- AFP

Inflation won’t derail equity markets, says Citi

By Rita Raagas De Ramos,

Robert Buckland, chief global equity strategist at Citi Investment Research, says inflation isn’t a serious threat and suggests taking advantage of investment themes related to rising consumer prices.
Global inflation has been rising for about a year, now standing at its highest level since 1999, and is among the main concerns of investors worldwide.

However, Citi Global Wealth Management’s analysis of the inflationary forces around the world suggests that this round of rising consumer and producer prices should not damage the equity markets or undercut their nascent recovery.

While rising costs and lower sales growth can affect corporate profits, the engine of stock market returns, it’s also important to note that commodity prices are not the most critical component of companies’ costs, says Robert Buckland, London-based chief global equity strategist at Citi Investment Research, which is part of Citi Global Wealth Management. That distinction goes to labour, which accounts for around 60% of costs, he notes.

The main concern, from a corporate profits perspective, is whether rising prices will spill over into higher wages, he says, noting that for now, there is no evidence that this is happening in developed countries. In the US, wage growth peaked at 4.2% in the fourth quarter of 2006 and has since slowed to 3.7%. In Europe, the latest figures on wage growth show just a 2.9% gain.

Labour costs in the developing world are growing at a faster clip than in the developed world, Buckland says. In China wages have been increasing by about 15% a year for the last five years and this fact has not had an impact on corporate earnings, mainly because productivity gains have offset the higher pay cheques for workers.

Although Buckland believes inflation does not pose a serious threat to investors at the moment, he suggests some strategies that investors could consider to position themselves if inflation continues to rise.

Buy the causes of inflation, he says. Higher commodity prices mean higher revenues for producers, and this bodes well for energy and mining companies. While Citi’s analysts expect commodity prices to subside, the current elevated prices may lead to higher earnings and better relative returns compared with the broad market indexes.

Follow the money, he notes. Some of the biggest beneficiaries of inflation are recycling their profits into the emerging markets. Governments of commodity-exporting nations have amassed huge reserves, and Citi has observed that emerging markets equities are seeing the biggest flows relative to the size of their stock markets.

Companies with inelastic demand are a good bet, he says. Companies that sell the necessities of life have an easier time raising prices, thereby retaining profit margins. That maxim bodes well for food manufacturers and retailers, along with beverage and tobacco companies.

Investing in companies in regulated industries is yet another worthy theme, he adds. Such companies, often in the utility and infrastructure sectors, usually do not have a hard time passing along price increases. They may benefit from legislation that incorporates an inflation index into their pricing.

“Although you may be hearing a lot about the spectre of inflation,” Buckland says, “from where we sit, it doesn’t seem like it will be severe enough to derail equity markets around the globe.”

Analysts, Thanks For Telling Us To Buy In A Bear Market

Poor stock research costing Singaporean investors billions of dollars. Its time to start grading the performance of brokerages.

Jan 3, 2001

When the Singapore stock market fell one day, an analyst attributed it to the overnight Wall Street decline. Fair enough. But then a few days later when shares rose, another researcher explained it was also due to US weakness.

How was that possible? Because, the man beamed, foreign funds would now return to Singapore. When I heard it I thought that the world of stock analysing had gone bonkers.
Actually, like they say, I ain't seen nothing yet.

Of all the rude awakenings that the bear market brought last year, the one that stands out is the poor standard of stock analysis in Singapore.

Do you remember the October market rally of 1999 when analysts were predicting, almost to a man, that the New Year would be an even stronger year and a ST Index of 3,000-3,200?

It was then hovering around 2,600. As that year ended, the ST Index never reached 3,000 or even 2,000, but only 1,927. Instead of rising, it had fallen by 22.3 per cent.

For Singapore to become a market regional centre and promote public investment there has to be a quantum leap in the industry's advisory capability. At the moment with a small exception, it is poor.

The upgrading is more important with the approach of E-trading. In the future, brokers and remisiers will themselves take on the role of advisors in order to survive. Imagine the harm they will inflict on their customers if standards remain what they are today.

And most of the causes of the recent weak performance were not imponderable ones that caught the world by surprise. They included US interest rate hikes, the collapse of NASDAQ, Indonesia's chaos and Asia's financial instability, where signs had been evident for a long time.

It is, of course, true that investors often under-mention the contribution of researchers when the market is going up but blame them when the rains came. You know what they say: "If I make money, I'm smart. If I lose, the broker is stupid."

But the last phrase is not always wrong in Singapore. Researchers are paid big bucks to give good advice.

They have to be smarter than the taxi driver in stock picking. Besides, if Singapore is to be a regional hub, standards have to be world class.

When 17 of our finest brokerages consistently pronounce a stock a "strong buy" or "overweight" (and one "neutral") and it goes down by 60 per cent in less than a year, something is terribly wrong.

The stock market is full of such stocks. Analysts cannot, of course, be blamed for a bad market, only for failing to warn their customers about it. Otherwise why do we need them?

What is this telling us? Firstly, our analysts are generally below par. Many of them are young, textbook-bound and have poor reading of the market.

Some are doing things wrong like issuing a "buy" advice, then forgetting to follow it in later when fundamentals turn and the price has plummeted.

In other words they tell you to buy at $6.00 and sell at $3.00.

Sure there are researchers and there are researchers. Some are good or very good while the rest cost their clients dearly.

They also missed out on the severity of the Asian financial bug, the ST Index's sharp market from 2000 to 1,000 (a 9 year low) in just 12 months.

Instead they started telling clients to pick up bargains during the early part of the decline when street-wise investors were selling.

You can tell the bad from the good. The bad has twice as many "buy" recommendations in a long bear market as the smart ones, a mini-disaster for people who heed them.

With their noses stuck on what they had learn at business school, they dish out theoretical advice; after a 30 per cent fall, buy.

Another failure - not many brokerages gave early recognition to the new economy as NASDAQ surged or a warning of an imminent sell-down of "old economy" stocks - until too late.

More recently, they were again slow to react to the dot.com collapse.

Few were clever or fast enough to warn people about the impact of Indonesia's rising woes on the Singapore market.

To be fair, the business of giving advice has been made tougher by the IT revolution which is changing life itself. The dot-com business is unpredictable.

Even seasoned global players like George Soros and Warren Buffet threw up their hands and professed bewilderment at the markets. All the rules seem changed forever - until the NASDAQ tanked.

Covering the dot.com companies, in particular, is next to impossible as the savvier Americans are discovering. There were numerous examples recently of companies looking well suddenly going bust.

"An analyst's performance also depends on outside factors beyond his control. One is company transparency," explained a brokerage director.

Unlike in the West, managers here just don't understand that it is their job to grant more access or information to researchers.

On the flip side, inexperienced researchers hunt in packs; what one says today so will say half a dozen tomorrow. Others are just number crunchers, basing their assessments by just looking at accounts and avoiding the harder work of talking to workers, customers and checking warehouses.

But investors suspect there is a more sinister reason why some analysts dish out so many "buy" or "overweight" calls in the early phase of a falling market.

"If I want to believe the worst, I'd say the research department is merely following company policy. More "buy" calls mean more business and in a poor market, they are needed.

Another darker suspicion is that the unscrupulous push out "buy" orders to allow favoured customers to unload - or vice versa.

How can we lift competency and fairness for stock researchers? Have a grading system for their companies to be conducted by a credible institution, like the Singapore Securities Investors Association of Singapore (SIAS) or a government-selected committee.

It should devise a method of grading their research work at least once a year and making the results public.

At the end of the day, analytical work is not just about gathering data and digesting knowledge; good instincts are as important.

Recently, the Asian Wall Street Journal conducted a six-month long, stock-picking experiment, pitching taxi drivers against professional money managers in several cities.

Who came out better? Yes, you guessed it - the drivers. I think the next time I take a cab, I'll work on rearranging my poorly performing portfolio.

Ten investing rules that will help you weather this stormy market

By Jonathan Burton
Ten rules to remember about investing in the stock market

SAN FRANCISCO (MarketWatch) -- Rules may be meant to be broken, but with investing ignoring the rules can break you.

Especially now. Investment rules are tailor-made for tough times, allowing you to stick to a plan just when you need it most. Indeed, a rulebook is important in any market climate, but it tends to get tossed when stocks are soaring. That's why sage investors warn people not to confuse a bull market with brains.

So with the economy looking more and more like the oil-shocked, stagflation-strapped 1970s, and stocks recoiling from rising unemployment, record energy prices and falling home values, it makes sense to dust off the old playbook and see how it applies today.

One of the most relevant lists of rules, from a legendary Wall Street veteran, is also among the least known. Beginning in the late 1950s, Bob Farrell pioneered technical analysis, which rates a stock not only on a company's financial strength or business line but also on the strong patterns and line charts reflected in the shares' trading history. Farrell also broke new ground using investor sentiment figures to better understand how markets and individual stocks might move.

Over several decades at brokerage giant Merrill Lynch & Co., Farrell had a front-row seat to the go-go markets of the late 1960s, mid-1980s and late 1990s, the brutal bear market of 1973-74, and October 1987's crash. Out of those and other experiences came Farrell's 10 "Market Rules to Remember."

These days, Farrell lives in Florida, and efforts to contact him were unsuccessful. Still, the following rules he advocated resonate during volatile markets such as this:

1. Markets tend to return to the mean over time
By "return to the mean," Farrell means that when stocks go too far in one direction, they come back. If that sounds elementary, then remember that both euphoric and pessimistic markets can cloud people's heads.

"It's so easy to get caught up in the heat of the moment and not have perspective," says Bob Doll, global chief investment officer for equities at money manager BlackRock Inc. "Those that have a plan and stick to it tend to be more successful."

2. Excesses in one direction will lead to an opposite excess in the other direction
Think of the market as a constant dieter who struggles to stay within a desired weight range but can't always hit the mark.

"In the 1990s when we were advancing by 20% per year, we were heading for disappointment," says Sam Stovall, chief investment strategist at Standard & Poor's Inc. "Sooner or later, you pay it back."

3. There are no new eras -- excesses are never permanent
This harkens to the first two rules. Many investors try to find the latest hot sector, and soon a fever builds that "this time it's different." Of course, it never really is. When that sector cools, individual shareholders are usually among the last to know and are forced to sell at lower prices.

"It's so hard to switch and time the changes from one sector to another," says John Buckingham, editor of The Prudent Speculator newsletter. "Find a strategy that you believe in and stay put."

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
This is Farrell's way of saying that a popular sector can stay hot for a long while, but will fall hard when a correction comes. Chinese stocks not long ago were market darlings posting parabolic gains, but investors who came late to this party have been sorry.

5. The public buys the most at the top and the least at the bottom
Sure, and if they didn't, contrarian-minded investors would have nothing to crow about. Accordingly, many market technicians use sentiment indicators to gauge investor pessimism or optimism, then recommend that investors head in the opposite direction.

Some closely watched indicators have been mixed lately. At Investors Intelligence, an investment service that measures the mood of more than 100 investment newsletter writers, bullish sentiment rose last week to 44.8% from 37.9% the week before. Bearish sentiment slipped to 31.1% from 32.2%. Meanwhile, the American Association of Individual Investors survey was less positive, with bearish sentiment at 45.8% and bulls at 31.4%

6. Fear and greed are stronger than long-term resolve
Investors can be their own worst enemy, particularly when emotions take hold.

Stock market gains "make us exuberant; they enhance well-being and promote optimism," says Meir Statman, a finance professor at Santa Clara University in California who studies investor behavior. "Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks."

After grim trading days like Friday's nearly 400-point tumble, coming after months of downward pressure on stocks, it's easy to think you're the patsy at this card table. To counter those insecure feelings, practice self-control and keep long-range portfolio goals in perspective. That will help you to be proactive instead of reactive.

"It's critical for investors to understand how they're cut," says the Prudent Speculator's Buckingham. "If you can't handle a 15% or 20% downturn, you need to rethink how you invest."

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
Markets and individual sectors can move in powerful waves that take all boats up or down in their wake. There's strength in numbers, and such broad momentum is hard to stop, Farrell observes. In these conditions you either lead, follow or get out of the way.

When momentum channels into a small number of stocks, it means that many worthy companies are being overlooked and investors essentially are crowding one side of the boat. That's what happened with the "Nifty 50" stocks of the early 1970s, when much of the U.S. market's gains came from the 50 biggest companies on the New York Stock Exchange. As their price-to-earnings ratios climbed to unsustainable levels, these "one-decision" stocks eventually sunk.

8. Bear markets have three stages -- sharp down, reflexive rebound and a drawn-out fundamental downtrend
Is this a bear market? That depends on where you draw the starting line. With Friday's close, the S&P 500 Index (CDNX:SPX.V - News) is down 13.1% since its October 9 peak. Not the 20%-plus decline that typically marks a bear, but a vicious encounter nonetheless.

Where are we now? A chart of the S&P 500 shows a couple of sharp downs and subsequent rebounds in the past six months, with a tighter trading range since April. It remains to be seen if we can avoid a tortured period of the kind seen from 2000 to 2002, when sporadic rallies couldn't snap a slow, protracted decline.

9. When all the experts and forecasts agree -- something else is going to happen
As Stovall, the S&P investment strategist, puts it: "If everybody's optimistic, who is left to buy? If everybody's pessimistic, who's left to sell?"

Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.

10. Bull markets are more fun than bear markets
No kidding.

Wall Street and Main Street: In the Same Boat and Sinking Together

Once upon a time, what happened on Wall Street didn't matter much to the folks on Main Street, and vice versa. But those days are long gone, as I discuss in the accompanying video with Dennis Berman, The WSJ's Global Deals Editor.

This decade, particularly, the U.S. economy has been driven largely by debt financing. As a result, the Wall Street event known as the "credit crunch" has had a definitive impact on U.S. consumers. In turn, the constrained consumer is going to keep the downward pressure on Wall Street firms, whose profitability is tied to the securitization of loans, be they for homes, autos, boats, education, etc.

In other words, we're all in this together, and a long way from the bottom.

Don't look for relief from high prices any time soon.

By Chris Isidore, CNNMoney.com senior writer

For those struggling to deal with record gasoline and soaring food prices, there's bad news and more bad news.

Economists think inflation is here to stay. And it's likely to get worse.

A weak dollar and growing economies in emerging markets have conspired to send commodity prices higher. Those factors are unlikely to change anytime soon.

"We're more open to influences from the rest of the world than we were before," said Jay Bryson, international economist with Wachovia. "That does make it more challenging to keep inflation under control."

What's more, the Federal Reserve is relatively powerless to deal with many of these pressures.

"The Fed can't control prices of commodities determined in a global market," said Rich Yamarone, director of economic research at Argus Research. "If it could, it would have done so already."

On Friday, the Labor Department reported its latest reading on inflation. The Consumer Price Index (CPI) rose 0.6% in May. Economists were expecting a 0.5% increase according to Briefing.com. This was the biggest jump in a year. And over the past twelve months, prices are up 4.2%.

The so-called core CPI, which excludes food and energy, also picked up speed. It rose 0.2%, in line with forecasts. The core CPI was up 0.1% in April.

And the June CPI numbers could wind up showing even bigger gains. So far this month, retail gasoline prices have hit a series of record highs and topped $4 a gallon for the first time.

Futures prices for oil and key commodities such as corn have also climbed to record levels. Corn futures shot above $7 a bushel for the first time Wednesday as flooding in the Midwest trimmed forecasts for this year's harvest.

But it's not just oil and food that are leading to higher prices for consumers. A separate inflation reading reported Thursday showed the price of imports, excluding oil, were up 6.6% in the 12 months ending in May. That's the highest increase in that measure in 20 years.

A weak dollar has overseas exporters demanding more greenbacks for their goods.

Rapid growth of manufacturing and services overseas has workers in developing economies such as China and India winning healthy wage increases. That also raises prices of those countries' exports.

In addition, those countries have seen robust gains in auto sales, which should lead to even more demand for oil in the years ahead.

Another factor lifting prices is a weaker dollar. The dollar has lost about 13% of its value compared to the euro since August. This means it takes more dollars to bid for commodities against traders in Europe and Asia.

The Fed's hands are tied

Much of the weakness in the dollar has been laid at the feet of the Fed, which has slashed interest rates seven times since September. At the same time, central banks elsewhere have made only small cuts to their interest rates.

And even with the Fed now signaling it is likely to keep rates steady in the near term, the dollar has continued to slide as the head of the European Central Bank suggested that the ECB would raise rates soon. Those comments sent oil soaring to a record close of $138.54 on Friday.

Oil analyst Peter Beutel, president of Cameron Hanover, said he believes 90% of the rise in oil prices since last August was due to the Fed's rate cuts and the expectations of rate hikes in Europe.

"If the dollar was where it was last August, there's a very good chance we might never have seen $100 a barrel oil, maybe not even $90," he said.

The Fed, which has a mandate to keep prices in check, has been voicing greater concern about inflation in recent weeks. Most recently, Fed Chairman Ben Bernanke said Monday there is an increased risk of high food and energy bleeding through to the price of other goods and services.

But most economists don't expect the Fed to raise interest rates -- its traditional way of combating inflation -- until the end of the year at the earliest.

Generally, higher rates cool U.S. economic activity and cut demand for goods and services, which in turn leads to lower prices.

However, the Fed also has a mandate to foster sustainable economic growth. And with the unemployment rate registering its biggest spike in 22 years in May, the Fed is not likely to push rates higher soon, economists said.

There's also the fact that the Fed typically prefers to stay on the sidelines in the middle of a presidential election.

"I think you'll see the Fed talk up a storm about the caustic nature of inflation, because that's all they can do now, at least until the election is over," said Yamarone.

To that end, investors are currently pricing only a 20% chance of a hike at the Fed's next meeting, a two-day session that concludes on June 25.

Others say the Fed also has to be worried about the reaction of financial markets if it made a sharp and sudden move to raise rates.

"The Fed is painted into a corner," said Barry Ritholtz, CEO and director of equity research for Fusion IQ. "They don't dare raise rates. The credit crisis is not even remotely behind us. So the Fed has limited options and there's only so much they can do."

With that in mind, Wachovia's Bryson thinks that inflation will peak in the third quarter of the year with an annual rate of 4.3%. Yamarone sees consumer prices getting as high as 5% annually.

But Bryson said even if the rate of price increases retreat late in the year, the new floor for prices will be a lot higher than they used to be.

"Corn and oil are not going to go back to where they were a few years ago," he said.

Has the American Dream Become a Fairy Tale?

Laura Rowley

Once upon a time there was a greedy young man with shiny wingtips and important degrees. His father, an advisor to the king, had paid the young man's way through an Ivy League college and got him a job managing the village's pension investments.

The greedy young man went to his magic mirror and said, "Mirror, mirror, I'm at the top of my field, I'm entitled to a higher yield. I'd like to earn that yield today, so I get a bonus with my pay. Tell me now, because here's the thing -- I'm really entitled to earn more than the king."

The mirror replied, "Call Wall Street please, and invest in mortgage-backed securities. Don't worry whether the yield will last, this way you'll get your bonus fast."

And the greedy young man went on television, where the media declared him a genius.

The Investment Banker

Once upon a time there was a greedy investment banker with shiny high heels and important Ivy League degrees. She went to her magic mirror and said, "Mirror, mirror on the wall, I'm clearly entitled to a windfall. I'm putting upon you the onus -- what's the best way to boost my bonus?"

The mirror replied, "Here you'll find the recipe -- sell this hot security: Bundle good and bad mortgages together, slice and dice them and sell them as treasure. Don't worry about what's really inside -- anything foul the rating agencies can hide. If you follow my advice today, surely you'll increase your rate of pay."

And the greedy investment banker went on television, where the media declared her a genius.

The Bank President

Once upon a time there was a greedy bank president with a fancy gold watch and important degrees. He went to his magic mirror and said, "I find myself on the executive floor -- I'm really entitled to be earning more. If the stock went up I'd have no cares, since I own about a million shares. Ten other banks have opened on my block -- tell me how to boost my stock."

The mirror replied, "Hand out mortgages across the land, and sell them to Wall Street as fast as you can. Heed my word in this endeavor, and your stock will go up and up forever."

And the greedy bank president went on television, where the media declared that his bank's stock would likely go up forever.

The Mortgage Broker

Once upon a time there was a greedy young man with a not-so-fancy degree and a leased Porsche. He went to his magic mirror and said, "Mirror, mirror, I want to be rich, tell me where I can find my niche. I've read 'The Secret' and I'm ready for action, I'm familiar with the laws of attraction. My ambition is so thoroughly unbridled, I think you'll agree that I'm entitled."

The mirror replied, "Now my friend don't fret or frown, but make some loans with no money down. Become a mortgage broker and get on the phone; get some expertise in the 'liar loan.' Find suckers with no income to sign on the line, tell them when the rate adjusts things will be fine. Or sign yourself, who needs permission? Just make sure the loan has the biggest commission. Since you're lending the bank's money there's no hitch, just close those loans and you'll be rich."

And the mortgage broker went on television, where he starred in a commercial as Crazy Morty the Mortgage Broker, urging would-be homeowners to call him at 1-800-555-4567.

The Greedy Townsperson

Once upon a time there was a greedy townsperson who lived in his parents' basement and spent most of his time watching television. He saw the mortgage broker's commercial, went to his magic mirror, and said, "I don't have a job or a fancy degree, but I'm smarter than those geniuses on TV and I'm entitled to a home for free. Should I call the number that I see?" And the mirror replied, "Yes, and then cash out your equity."

He bought a McMansion and, six months later, cashed out the equity and bought a Lexus.

The Hard-Working Townsperson

Once upon a time there was a hardworking townsperson, the neighbor of the man who bought the McMansion. The hardworking man toiled in IT for the bank, where he received raises of 4 percent a year. Unfortunately, his expenses -- food, gas, utilities, taxes, health insurance, college tuition, even the cleats for his kids' soccer shoes -- were rising much faster. He drove an 8-year-old minivan, and had scrimped and saved to buy a house he could afford -- even putting 20 percent down.

He went to his magic mirror and said, "Mirror, mirror, I'm exhausted. Today at work I almost lost it. I come home from my toil and fall into bed. What can I do to get ahead?" And the mirror replied, "I have no schemes for such an honest dude -- I sincerely hope you don't get screwed."

The Moral

And as it turned out, the mortgage-backed securities were not treasure, and the pension fund went broke. The king made up for the loss by doubling taxes. The greedy young man and the greedy investment banker both got lucrative new jobs at a hedge fund run by an Ivy League pal.

The bank stock didn't go up forever -- it crashed to $5 a share -- but the bank president received a bailout worth $160 million and retired to the Caribbean. The mortgage broker moved to the Caribbean as well, where he was recognized by the banker who had enjoyed his Crazy Morty TV commercials. The banker got him a job running the country club's caddy shack.

The townsperson who bought the McMansion couldn't afford his mortgage when the rate reset, so the government bailed him out. The hardworking townsperson was laid off with no severance (that money had been given to the bank president). The hardworking townsperson's home plunged in value and his taxes went up (to bail out his neighbor and the kingdom's pension fund). His IT job was sent overseas, where the bank hired a programmer for $8,000 a year.

And the mirror just sighed at all the trouble. "Another mania, another bubble. The winners get out before it bursts, the man who follows the rules is cursed. With a sense of entitlement and plenty of greed, you can win this game with lightning speed. I've told the tale, and now I'm finished."

And the American Dream was greatly diminished.

How to invest in hot commodities

By Brian O'Keefe, senior editor

Back in 2001, the executives running Australian mining giant BHP Billiton sensed that China's economic growth was gaining critical mass. So they commissioned a study on how the country's rapid industrialization might affect the global markets for copper, coal, iron ore, oil - all the stuff that the company pulls out of the earth and sells.

"The results were quite - well, 'outrageous' is probably the right word," CFO Alex Vanselow told me when I visited BHP's headquarters in Melbourne a few months back. "Because we didn't believe it. We thought something must be wrong. If our models were right, the pressure China would put on the world would be tremendous."

But the more they tinkered with their models, the more unbelievable the results became. The fast-growing per-capita income of China's billion-plus people pointed toward a massive thirst for raw materials. When the researchers added India's potential for growth - and its own billion-plus population - the numbers got even more extraordinary. And when they factored in the industry's inadequate investment in new production capacity, they concluded that over the next two decades there would be a historic demand-driven boom in the resources world.

Today, of course, the commodities boom that the BHP study anticipated is in full swing - and impossible to ignore. You see it every day in the $100-plus it now costs to fill up your SUV. Or the 39% increase in the cost of electricity over the past eight years. Or the fact that you're paying 20% more for that box of pasta than you were a year ago.

As painful as all those rising prices can be for consumers, the bull market in raw materials has proved to be an awesome investment opportunity. Over the past five years the S&P 500 has had a total return of 59%. But over the same period, the diversified Dow Jones-AIG Commodity index has risen some 110%, and the S&P GSCI Commodity index, another broad measure, has jumped 141%. The price of gold has more than doubled, and crude oil and copper have soared more than fourfold. If you were prescient enough to go long on rice on New Year's Day, you've already seen a return of 33% this year.

No wonder, then, that money is flooding into resource markets. According to Gresham Investment Management, institutional investors like pension funds and endowments had $175 billion in commodities at the end of 2007, up from $18 billion in 2003. Just as predictably, Wall Street has rushed out a flurry of new products geared toward individual investors.

But unless you happen to have a degree in mining and a cousin who works at the Chicago Mercantile Exchange, the idea of putting some of your precious retirement savings into commodities right now probably seems pretty risky. Isn't it too late? Aren't these markets way too volatile for investors planning for retirement anyway? And isn't investing in commodities too complicated for average investors? In short, the answers to those questions are: probably not, no, and no.

Let's start with the biggest, scariest question: Is the commodities boom now like Cisco stock in 2000 or Miami Beach condos in 2006 - i.e., a bubble?

Some of Wall Street's big brains seem to think so. In recent weeks strategists at Lehman Brothers, Citigroup, and Brown Brothers Harriman, among others, have volunteered the B-word and warned of a painful sell-off. The surging price of oil has prompted particular handwringing.

One enlightened observer who's not worried about a commodities collapse is Jim Rogers. The maverick investor, author, and one-time partner of George Soros famously predicted the bull market in hard assets back in the late 1990s and began putting his money in resources when most of us were still enthralled by the dot-coms. According to Rogers, the current highs may represent a market top, but hardly the peak.

"The bull market still has a long way to go," says Rogers. "Is it time for a short-term correction? I have no idea. And even if we are due for a pullback, that's not necessarily true for all commodities. Oil might be ready for a shock, but that doesn't mean that zinc is." (The price of zinc has, in fact, fallen by half over the past year because of a glut. Rogers says he's monitoring industrial metals for the right moment to buy more.)

History is on Rogers's side. As he likes to point out, research shows that over the past 140 years the typical commodities bull market has lasted about 18 years. Rogers calculates that the current boom kicked off in early 1999, which means that if it conforms to precedent, we have almost another decade left.

Even if you believe that most of the easy gains have already been gotten, there are other reasons for adding commodities to your portfolio. For starters, studies show that the performance of commodities as an asset class has very low correlation to stocks and bonds. That means that when stocks are up, commodities tend to be down. And vice versa. "You have to be prepared for bumps on the way," says Karen Dolan, director of fund analysis at Morningstar. "Commodities can be volatile, but adding them to a portfolio can actually reduce overall volatility."

A second important reason to add commodities to your investment mix - one that's especially relevant to those approaching retirement age - is to offset inflation. "As an investor you are exposed to a variety of risks," says Don Coxe, global portfolio strategist at BMO Capital Markets and another commodities bull. "If you own agriculture and oil, then you put in a built-in hedge for yourself because you're now somewhat independent of rising food and fuel prices."

For both of those reasons a growing number of financial planners and money managers are following the lead of institutional investors and spicing up traditional stock and bond recipes by putting 5% or 10% of a portfolio in commodities. "I think there's a new wave," says Tom Lydon, a financial advisor whose Global Trends Investments in Newport Beach, Calif., manages $75 million. "It's not overly aggressive to propose a 10% allocation at this point."

How do you begin? One way to get exposure, of course, is to invest either in mutual funds that focus on stocks of miners like BHP and energy companies like ExxonMobil, or to invest directly in the companies themselves. If you pick the right fund or stock, it can work out great. But because resource stocks are affected by the direction of the broader market, you lose the advantage of not being correlated with equities. During the past year, for instance, Exxon's stock rose less than 5%, while the price of oil doubled. From a portfolio-planning standpoint, it would be better to put your money directly into the hard assets themselves.

Luckily, this is one case in which Wall Street's marketing zeal works in favor of the individual investor. In the past couple of years dozens of new products have appeared that track both broad commodities indexes and narrower slices of the resource world. The main vehicles are exchange-traded funds. ETFs, as they're known, are funds that track indexes but trade like stocks. "It's very easy to build a well-rounded portfolio with just two or three ETFs," says Lydon, who also runs the website ETFTrends.com.

You can start with a single fund that tracks a basket of various commodities. For a basic foundation, Lydon recommends the PowerShares DB Commodity Index Tracking fund, an ETF that is pegged to the Deutsche Bank Liquid Commodity index. There are also exchange-traded securities that track the energy-heavy S&P GSCI Commodity index, the less concentrated Dow Jones-AIG Commodity index, and the wide-ranging Rogers International Commodity index.

Some of these products are structured in the form of Wall Street's newest fad: the exchange-traded note. Like their ETF cousins, ETNs can be bought and sold freely like stocks. But they are actually long-term debt securities. Essentially, when you buy an ETN you are lending your money to the issuing financial institution in return for a promise that it will pay you the equivalent of the return of a given index. One potential downside is that you are taking on the credit risk of the issuer. (So, for instance, you might want to wait a little while before buying the new Opta ETNs from Lehman Brothers, given questions about the bank's liquidity.) But most experts regard them as a safe and relatively efficient way to invest in basic indexes.

If you're looking for a more specific commodities bet with big upside, the best place to invest right now, say many observers, is agriculture. While the prices of corn, rice, and wheat have spiked recently - and food shortages have sparked rioting in Egypt and other countries - they have only just begun to catch up with the rest of the resources world.

Over the past five years the Dow Jones-AIG agriculture index is up 33%, vs. 59% for the Dow Jones-AIG energy index, for instance. But grain reserves worldwide are at lows not seen for decades. And new strain is causing increased volatility. Earlier this year the price of wheat shot up 61% before correcting. Again, the main driver is Asia's economic growth. "Billions of people are changing the way they eat, adding protein and calories to their diets," says analyst Sean Brodrick of Weiss Research. "That's a demand story you just can't shrug off. We need bumper crops to keep up with what people are eating now." If you're interested in adding some fiber to your portfolio, check out a pair of securities with comically unwieldy names: the iPath Dow Jones-AIG Agriculture Total Return Sub-Index ETN and the Elements Linked to Rogers International Commodity Index-Agriculture ETN.

Strategist Coxe of BMO Capital Markets is also bullish on an old commodities standby: gold. He sees it as a further hedge against both currency risk and the ongoing financial contagion on Wall Street. When investors panic about the prospects of banks, gold - a.k.a. "the one true currency" - tends to rise.

But investors might also investigate another precious metal: silver. Whereas gold touched new all-time highs above $1,000 an ounce earlier this year before pulling back, silver remains 60% below its 1980 record price of $44 an ounce, even after more than tripling over the past five years. Plus, potential new industrial uses for silver in cutting-edge batteries and nanotechnology could add to demand. The two-year-old iShares Silver Trust ETF makes it easy to add the metal to your portfolio, but, like many other ETFs, there is an annual management fee. This might be one commodities play where it pays to keep it old-school and buy some coins.

Reporter Associate Doris Burke contributed to this article.

Cut exposure to emerging Asian stocks on inflation: HSBC

SINGAPORE - Investors should avoid exposure to emerging Asian shares as rising inflation threatens to hurt regional currencies, HSBC said in a report. The investment bank said overall it is cutting global equity exposure by 5 percentage points to 54.5 per cent, and turning neutral on stocks in the developed markets as central banks become worried about inflation more than growth.

HSBC advised investors to raise cash holdings to 11 per cent from 6 per cent. 'Inflation looks a very real problem in Asia and the risk, as we've said before, is that investors lose faith in the region's currencies,' HSBC strategists wrote in a report on June 11.

'Although markets have fallen savagely from their peaks, they're still looking pricey, especially in context of rapidly rising inflation,' HSBC said.

Asian stocks fell to two-month lows on Thursday after oil prices jumped US$5 to near record highs on a report showing four weeks of tightening supply, adding fears about rising inflation.

The MSCI index for Asian stocks excluding Japan has fallen almost 16 per cent this year, and is down almost 25 per cent from a peak in November. The MSCI index for global stocks is down 9.2 per cent this year.

HSBC said investors should have no exposure to emerging Asian stocks, compared with its previous stance that investors should invest 2.5 per cent in emerging Asian stocks in a model portfolio.

India's central bank raised its key lending rate for the first time in more than a year on Wednesday. Central banks in China, Indonesia and the Philippines have tightened policy in the past week to counter inflation.

In Vietnam, inflation has been running at more than 25 per cent and in developed Singapore inflation surged to a 26-year high of 7.5 per cent in April. -- REUTERS

US economy getting more sluggish: Fed

WASHINGTON - US economic conditions are getting more sluggish with consumers squeezed by high energy costs and bank lending tighter, the Federal Reserve said in its Beige Book report on Wednesday.

The Federal Reserve's latest survey of the US economy, suggested price pressures are weighing on businesses amid surging food and energy costs.

In the Beige Book survey of the 12 Fed regions 'economic activity remained generally weak' from late April through early May.

The latest report, to be used by the central bank at its monetary policy meeting later this month, continued a trend starting last October of each successive Beige Book showing a weaker economy than the one before.

Three of the 12 Fed banks used words such as softer, weaker or lower. Five reported little change in conditions. Four said they saw sluggish growth.

'Consumer spending slowed since the last report as incomes were pinched by rising energy and food prices,' the report said.

Retailers were beginning to report some concern about rising inventories and a few were laying off workers.

Auto sales were weak, although hybrids and fuel-efficient cars were selling better.

Manufacturing was 'generally soft' except for export demand. Housing- and auto-related manufacturers had the worst situation.

Across businesses, 'reports of higher input costs were widespread.'

Manufacturers 'noted some ability to pass along higher costs to consumers.' Wage pressures in most districts were 'moderate or limited' due to 'some loosening of labor market conditions.'

The regional Fed banks said housing was 'generally weak across the nation' with flat or declining home sales and high or rising inventories.

For banks across the country, 'reports of softening in the consumer segment persisted,' and commercial and industrial lending was 'mostly unchanged or declining,' the report said.

'All districts reporting on credit standards noted further tightening for consumer, residential and commercial loans,' the Beige Book said. -- AFP

Merrill's Thain predicts industry consolidation

NEW YORK - MERRILL Lynch's Chief Executive John Thain on Tuesday said he expects further consolidation among US banks and brokers, and contends there are steps they can take to avoid collapse amid the current credit turmoil.

Mr Thain listed raising capital to manage losses as one way investment banks can survive. Financial companies have been forced to find outside investors after taking nearly US$300 billion (S$412 billion) in write-downs since last year from bad mortgage debt.

He said there will continue to be interested investors, and pointed to Lehman Brothers Holdings. The brokerage on Monday announced that it raised US$6 billion in new capital after posting a nearly US$3 billion second-quarter loss.

Lehman has been 'raising capital to make up for the losses, and I wish them well,' Mr Thain said.

'We all have concerns about what we read in the papers,' he said, speaking at a conference in New York sponsored by The Wall Street Journal.

Mr Thain said that consolidation 'has been a process on Wall Street.'

He believes weaker firms will be snapped up as in the past, but warns that bigger companies are not immune to being broken up.

'Some can get too big,' he said.

There have been calls that Citigroup might consider splitting parts of its business to find greater efficiency. There has also been speculation that JPMorgan Chase - after its recent acquisition of a near-collapsed Bear Stearns - might be looking to expand its retail bank.

As for managing Wall Street's risk levels, Mr Thain said Merrill continues to diversify overseas. He also doesn't see an end to the nation's housing crises or the risky mortgage-backed securities tied to souring home loans.

'Retail mortgage-backed securities are still going to be problems as housing prices continue to fall,' he said. 'The problem in the housing market will continue for some time.' -- AP

BP chairman rejects 'apocalyptic' talk of US$250 oil

BRUSSELS - THE chairman of British oil major BP rejected as 'apocalyptic' a prediction by the head of Russian gas giant Gazprom of oil prices soaring to $250 (S$343) a barrel by the end of next year.

BP chairman Peter Sutherland told the European Policy Centre on Wednesday there was no problem with available supplies of fossil fuels in the medium term, but there was a need for more investment to develop those resources.

'(I) personally don't believe in some of the more apocalyptic predictions,' Mr Sutherland said when asked about Tuesday's forecast by Gazprom CEO Alexei Miller.

'I don't believe we're in for a spike to $250 as suggested in price per barrel.'

Oil traded at just above $132 a barrel in Asia on Wednesday.

Mr Sutherland also said he did not believe speculation was a major cause of the quadrupling of the oil price in the last five years, contrary to recent comments by Saudi Oil Minister Ali al-Naimi.

The main factors were increased demand, a shortage of investment in developing new oil and gas resources and political instability risks in production areas such as Iraq, Venezuela and Nigeria, Sutherland said.

'I'm hopeful that we won't have dramatic further escalations in the price per barrel,' the former European Commission and World Trade Organisation chief said.

Speaking in Deauville, France, on Tuesday, Gazprom's Miller said he expected the price of crude oil to almost double within 18 months and to take gas prices hither with it.

'We think it will reach $250 a barrel in the foreseeable future,' he said.

Oil costs will push some Asian airlines under

RECORD-HIGH oil prices have sparked the biggest crisis in the Asian airline industry since the Severe Acute Respiratory Syndrome (Sars) scare, and analysts say some carriers are likely to go under if prices do not let up soon.

They say many of the region's airlines are ill-prepared to cope with the price surge, which saw oil top US$139 (S$190.75) per barrel last week amid wide expectation prices will only keep rising in the months ahead.

'No one is going to escape this crisis unscathed', said Mr Derek Sabudin, an analyst from the Sydney-based Centre for Asia Pacific Aviation consultancy.

He said airlines face a 'severe shakeout' if extremely high fuel prices continue, with the industry already coping with the fallout from a US-led global economic slowdown.

'Carriers will be exiting the market', Mr Sabudin said. 'The weaker ones will go, and stronger carriers will shrink in size, if we see prices where they are above US$120 beyond the summer peak.'

Mr Shukor Yusof, an aviation analyst with Standard and Poor's Equity Research, said most carriers had not factored in prices at such 'stratospheric' levels - and that they were now not moving quickly enough in response.

'If prices continue rising and hit US$150 a barrel or even higher, he said, 'expect to see a rash of Asian carriers grounded and go bust.'

The International Air Transport Association (IATA), which had predicted an industry profit of US$4.5 billion this year, is now projecting a loss of US$2.3 billion.

The IATA, which represents more than 200 carriers that account for 94 per cent of global traffic, says that every one dollar rise in oil prices will increase airline operating costs by US$1.6 billion annually.

Airlines already expected to pay about US$176 billion for fuel expenses this year based on oil prices of US$106.5 per barrel, said IATA, adding fuel accounts for 34 per cent of operating costs.

Overall, analysts say, it is the worst crisis to hit Asia's aviation industry since Sars killed almost 800 people in 32 countries in a 2002-2003 outbreak.

The health scare led to a massive slump in regional travel as well as financial losses for major carriers including Japan Airlines Group, China Airlines of Taiwan, and Singapore Airlines (SIA).

To deal with the crisis, SIA slashed capacity by 30 per cent while Philippine low-cost carrier Cebu Pacific suspended its route to Singapore.

In the face of the current situation, some regional carriers have begun to replicate the cost-cutting measures rolled out by US airlines trying to cope with the steep oil price rise.

Australian flag carrier Qantas announced plans last month to slash domestic capacity by five per cent, cut payroll, and retire several aircraft. The airline also reduced service to Asia.

Thai Airways said last Friday it is cancelling its direct flight from Bangkok to New York, starting July, and selling four planes used on that route.

Malaysia Airlines said it would freeze recruitment and was considering axing more routes as part of cost-cutting measures triggered by rising fuel prices.

Apart from their financial reserves, the strategies adopted by Asian carriers will determine whether they can survive this latest crisis, said Jason Pereira, a senior associate with Las Vegas-based Globalysis consultancy.

'It is a combination of financial reserve strength and smart strategy that will see some airlines come out on top', said Mr Pereira, who monitors the region from Singapore.

Some analysts say the region's low-cost carriers are more vulnerable to rising oil prices because they are typically managed on a tight budget.

Tiger Airways and AirAsia, two leading budget airlines in South-east Asia, have both said that they will survive the turbulence - and even emerge stronger. -- AFP

StanChart private bank sees modest growth

* sees slowdown in asset growth
* very worried about financial markets
* has cut equity exposure to 40% from 50%

THE private bank of Standard Chartered expects asset growth from rich clients to slow this year after a 28 per cent jump in 2007, on worries about rocky markets, its top executive said on Wednesday.

The warning underscores rising concern about the outlook this year for private banks, who in the past three years have enjoyed rapid business and asset growth in booming Asia.

Peter Flavel, global head of the Singapore-based private bank, told Reuters he is still very worried about financial markets and has reduced clients' equities exposure to 40 per cent from 50 per cent last year, increasing cash holdings instead.

'We are in very volatile times,' Mr Flavel said in an interview.

'Nobody knows how long this stuff in the (United) States is going to continue to go and a quarter of the world's consumption comes from the States.'

'If you ask me what the most likely scenario is, it is that asset growth will be modest. It is coming off from growth of 20 odd per cent,' he said, adding he 'absolutely' expected to keep growing the business.

Swiss bank Julius Baer also said in January that revenue growth may slow in Asia this year due to choppy markets, but stuck with plans to expand its regional wealth management.

Standard Chartered formally launched its global private banking from Singapore in the middle of last year and has expanded into 11 markets, mostly in Asia - catering to clients investing assets of at least $1 million.

Mr Flavel said the bank is now managing client assets worth $40 billion, ranking it seventh in Asia, from where it derived 37 per cent of its assets.

It has 350 relationship managers and plans to hire another 150 within three years, he said.

UBS , Citigroup and HSBC are the top three players in the Asian private banking market, where clients had assets of $8.4 trillion at the end of 2006, according to a report from Merrill Lynch/Capgemini.

Dead cat bounce
Australian-born Flavel said he was cautious of the recent 'dead cat bounce' that saw financial markets recovering last month from the aftermath of the US subprime mortgage crisis but dipping again in the last few days on runaway oil prices .

Mr Flavel said his clients' appetite for exposure to commodities and energy had risen, while he was also bullish on the Australian and Kiwi dollar but long-term bearish on the US dollar.

Clients were typically keeping 40 per cent in equities, 25 per cent in alternative assets, 25 per cent in bonds and 10 per cent in cash, he said.

'This means we are relatively underweight equities, overweight cash and neutral on alternatives and bonds.'

He said for local clients the bank would have an Asia-centric investment model, with a higher Asian equities portfolio in stocks such as CapitaLand and SingTel .

Mr Flavel, an avid cricket fan who went to the same school in Adelaide as former Australian cricket captain Greg Chappell, said his bank's strength lies in Asia and emerging markets.

The unit's parent earns most of its profits from Asia and is 19 per cent owned by Singapore sovereign wealth fund Temasek Holdings .

Mr Flavel said the acquisition of American Express Bank last year partly boosted its private banking assets and the full integration would be completed by the middle of next year.

The bank's focus was now on growing its existing business, he said.

The bank could take advantage by getting clients from some of the big global lenders, who have been stung by losses due to their exposure to the US housing crisis.

'It has surprised me. I had lunch a couple of weeks ago in Singapore with a big corporate client and he said to me - we like what the bank is doing, we like what the private bank is doing and we are moving our money to you - because he was worried about where he was.' -- REUTERS

Prices of some new properties going down

Move may signal end of months-long stand-off between buyers and sellers

By Fiona Chan, Property Reporter

GOOD news for homebuyers: The prices of some new developments are finally starting to come down. At least two new projects have been tagged with prices below what they were expected to fetch just months ago. This may be because developers are faced with no sign of improvement in the cooling property market, consultants say. They may be choosing to move units by making their projects more affordable rather than continuing to wait out the gloomy sentiment. One example is Dakota Residences in Dakota Crescent, a 99-year leasehold project by Ho Bee Investment and NTUC Choice Homes. Sales of its 348 units will start next Saturday at an average of about $950 per sq ft (psf) - below the $1,000 psf to $1,100 psf that Ho Bee had previously targeted. This means a 1,300 sq ft three-bedroom unit would cost about $1.24 million, down from as much as $1.43 million previously. 'After the land cost and building cost, the break-even price is actually almost $900 psf,' said a property agent, who asked not to be named. The Straits Times understands that about 120 units will be released in the first phase, and prices may go up by at least 5 per cent for the remaining units, depending on demand. For now, the two- and three-bedroom units that face away from Geylang River are said to cost $950 psf to $970 psf, while the bigger four-bedroom units facing the river will go for $1,000 psf. City Developments' (CDL) Shelford Suites in Shelford Road has also started previews for its 77 units at about $1,600 psf on average. Market watchers said this was lower than expected, as two units were sold in March for $1,869 psf and $1,905 psf. Shelford Suites' launch had been delayed for months as CDL waited for sentiment to improve.

How gold will perform in a U.S. recession

Commentary: Economic slowdown unlikely to have major impact

By Natalie Dempster

Natalie Dempster is investment research manager with the World Gold Council.

NEW YORK (MarketWatch) -- Macro economic data and the U.S. Federal Reserve Bank's swift loosening in monetary policy underline the risk that the U.S. economy is on the brink of, or already in, recession. Not surprisingly, consumers are distinctly less confident now than they were just one quarter ago and leading indicators suggest that worse is to come.

There are obvious winners and losers in terms of asset performance in a recession.
Cyclical stocks, such as car manufacturers and homebuilders, as well as financial stocks tend to under perform as consumption is cut back and bank lending slows.
But it is not true of all stocks. "Defensive" stocks like biotechs or foodstuffs whose markets are largely unaffected by the economic cycle tend to perform well. So do fixed-income assets, as interest rates are lowered in a bid to boost consumer demand. Commodities, on the other hand, tend to under perform as slower economic growth reduces demand for the metals and energy used in the production of cyclical goods or in the provision of services.

During the recession that followed the high-tech bust, the Dow Jones Industrial Average index and Reuters/Jefferies CRB Commodities Index fell by 0.3% and 8.4% respectively, while U.S. 10-year bond futures rose by 1.9% and the NASSAQ Biotech index rose by 23.4%. But what about gold: how is the yellow metal likely to fare if the economy falls into recession?

An independent asset

Gold moves independently from the economic cycle. It's not difficult to understand why when one considers the diversity of its supply and demand base, the ultimate determinants of price movements.

Commodities typically fall during a recession, as noted, as the raw materials used in the production of non-essential goods and services declines. However, demand for gold as an intermediate good is relatively small in comparison to many other commodities. Last year, just 14% of gold demand came from the industrial sector (mainly electronics). This is in stark contrast to base metals and even other precious metals, where the vast majority of demand comes from industry. As a result, gold is much less vulnerable to the vagaries of the economic cycle. That said, demand for gold in electronics is likely to fall if the economy falls into recession as consumer spending on non-essential electronics goods declines.

A U.S. recession would undoubtedly have negative implications for gold jewelry demand in America, as consumer spending slows. However, this negative implication could be at least partially offset by the higher share of gold jewelry in the retail market. Moreover, gold is much less vulnerable than other jewelry materials, such as diamonds or platinum, to a U.S. recession as far more demand for gold comes from outside of the U.S. -- 70% of diamond jewelry demand comes from the U.S. market, compared with just 10% for gold.

The final source of demand comes from investors. Investors buy gold for many reasons. Chief among these are gold's inflation and dollar-hedging properties, both of which have been proven over long periods of time. How a recession affects investment demand would depend, in part, on how inflation and the dollar react.

The brewing recession has so far been positive for gold on both fronts. The dollar has continued its downward trajectory, while inflation has (unusually) headed higher. U.S. consumer prices increased at an annual rate of 4.0% in February this year, up from 2.4% just a year earlier. If these trends continue, investment demand for gold as an inflation and dollar hedge is likely to remain strong. And if the recession deepens concerns over the health of the U.S. banking sector, demand for gold as a safe haven asset is also likely to remain robust.

On the supply side, there are three main sources of gold supply: mine production, official sector sales and scrap or recycled gold. Mine production is by far the largest element, accounting for 70% of total supply last year. Changes in annual mine supply bear no relation to changes in U.S. or even global GDP growth. The upward trend in mine production that was underway in the late 1980s was not arrested by the 1990 recession (the U.S. economy suffered an outright contraction, while world GDP growth slowed to 1.6% from 2.9% the previous year). Nor was the downtrend in mining output that began in 2001 reversed by the sharp acceleration in world growth that followed.

Mine production is influenced by very specific factors, such as the level of exploration spending, the success or otherwise in discovering new gold deposits and the cost of extraction (some new discoveries may not be economically viable). Lead times in gold mining are often very long. It can take years to re-open a closed mine, let alone find and mine new reserves.

Central bank decisions to buy or sell gold (they remain net sellers) are also usually strategic in nature, rather than reactive to the economic cycle. The decision to buy or sell gold is often made years in advance and then carried out over a period of years. In Switzerland, for example, the proposition to sell gold (the first gold sales program) was first recommended by a group of experts in 1997. However, the actual sales program did not commence until May 2000, with the sales then taking place over a period of five years.

Scrap supply is influenced by many factors, perhaps the most important being price and price volatility, but recessions and periods of economic distress have also had an impact. The most dramatic example is when Korea was pushed into recession during the 1998 Asian currency crisis; its scrap supply increased by almost 200 tonnes as the government bought gold from the local populace in exchange for won-denominated bonds. It then sold the gold on the international market in order to raise the dollars necessary to avoid defaulting on its external debt.

In summary, a U.S. recession does not have negative implications for the gold price thanks to the unique drivers of gold demand and supply. The only element of demand likely to be affected by a recession is investment demand, but that in turn will depend on the "type" of recession. So far, the brewing recession has been positive for gold, as it has been accompanied by a rise in inflation and a falling dollar, which has boosted demand for gold as a dollar and inflation hedge.

Dive into the Dow's (Cheap) Valuation

By Jeffrey Ptak, CFA, CPA

Is it time to buy?

We get this question a lot from subscribers. Some are trying to time the market--a strategy we frown upon. Others are simply looking for another opinion to add to their thought process, which is laudable.

Motives aside, we think the market looks undervalued, blue-chip names especially so. For that reason, we'd be enthusiastic buyers of ETFs that invest primarily in higher-quality, large-cap stocks, such as Diamonds Trust (AMEX:DIA - News), which tracks the Dow Jones Industrial Average. That fund was recently trading at a 19% discount to our estimate of the portfolio's aggregate fair value. Ordinarily, we'd be buyers of a portfolio like the Dow when it's trading at an 8% or greater discount to our fair value estimate. Thus, we think Diamonds Trust is a plum deal at these levels.

But what are we seeing in the Dow that the market isn't? And is it through rose-colored glasses?

Those questions loom larger given blue-chip stocks' influence on the valuation of many ETFs. Indeed, the Dow components pop up in a number of ETFs, reflecting the way market-cap weighting--which most funds employ--vaults the biggest firms into the upper rungs of many portfolios. (Better than one in 10 ETFs owned IBM (NYSE:IBM - News) shares as of April 30, 2008, for instance.) And with blue chips looking inexpensive, on balance, that largely explains why we're seeing a lot of undervalued ETFs these days.

With that in mind, we thought it would be useful to peer deeper into some of the key assumptions that underpin our fair value estimates for the 30 Dow components. The most important of those assumptions--our growth and profitability forecasts--essentially dictate the timing and magnitude of the cash flows we're expecting these businesses to generate in the future. Those cash flows, in turn, form the basis for each fair value estimate that we place on a business.

Growth
If you thought that we were expecting the Dow components to take off in the coming years, think again. In fact, our growth assumptions are relatively sober on the whole.

Let's start with sales growth: In aggregate, our forecasts assume that the Dow components will increase revenue at a 5% compound annual growth rate from 2008 to 2011. When we decompose that figure by sector, the range is surprisingly narrow, bracketed by 8% at the high end (industrials) and -3% at the bottom (energy). Indeed, we're expecting most of the major economic sectors represented in the Dow to increase between 3% and 6% per annum, with financials (7.5%) and software ( Microsoft (NasdaqGS:MSFT - News), 7.5%, for example) being notable exceptions.

Where's the growth in industrials and financials coming from? We're expecting Boeing (NYSE:BA - News)(11% CAGR) and Caterpillar (NYSE:CAT - News) (9%) to pace growth among the industrial names. With respect to financials, generally speaking we're forecasting a widening of net interest margins (i.e, the profit a bank pockets when it borrows short and lends long) and also expect certain fee-based businesses to perk up. However, a big chunk of the growth is simply snap-back from a dreadful 2007 campaign.

As for individual names, we're forecasting double-digit annualized revenue growth for just two Dow components-- Citigroup (NYSE:C - News) (10% annualized) and Boeing (11%)--with a handful of others including American Express (NYSE:AXP - News) (9%), Intel (NasdaqGS:INTC - News) (9%), and Caterpillar (9%) touching high-single digits. At the opposite end of the spectrum one finds Chevron (NYSE:CVX - News), where we expect revenue to contract slightly, reflecting our belief that oil prices will gradually trend down in 2011.

Our operating income growth forecasts generally track the trajectory of sales, albeit at a slightly steeper angle in some cases. (Operating income, sometimes referred to as pretax income, is a firm's operating revenue less its operating costs.) The most conspicuous example is the financial sector, where we're forecasting 16% annualized operating income growth, or roughly double our top-line growth forecast. How can this be? As write-offs gradually decline, which we expect, operating margins (operating income as a percentage of revenue) should revert to levels that more closely approximate the historical norm. By contrast, we're forecasting a roughly 10% annualized operating income decline for energy names Chevron and ExxonMobil (NYSE:XOM - News). This is a function both of our revenue forecast (i.e., declining oil prices come 2011) and the degree of operating leverage in those businesses (i.e., scale is a blessing when sales are ramping higher, a curse when it's fading).

Our 7% forecasted earnings per share growth rate for the Dow more or less tracks the growth in operating income. A similar story holds for our 5% annualized free cash flow growth forecast (i.e., operating cash less capital expenditures; it's a reasonable proxy for the cash flows that form the basis for our fair value estimates) only slightly lags operating income growth. Cash flow can diverge from operating income for a number of reasons, not least of which is a firm's capital-intensiveness. By that standard, it's somewhat surprising that we're forecasting 16% annualized free cash flow growth for the Dow's industrial components, a tally that surpasses all other sectors, as industrials tend to be more, rather than less, capital-intensive. However, that's largely a function of one name--Boeing--where we're expecting cap-ex to gradually tail-off as a percentage of revenue, goosing free-cash flow generation in the process.

The upshot is that while we hardly expect these businesses to stand in place, our forecasts aren't predicated on lofty growth projections. In fact, we expect most of these businesses to churn out sales, profits, and cash flow in the mid-to-high single-digit range.

Click here to see the table. http://news.morningstar.com/articlenet/article.aspx?id=240665

Profitability
We've already touched on some aspects of our profit outlook. After all, operating income, free cash flow, and earnings per share growth are all partly a function of a firm's profitability. But it's still helpful to examine our profit forecasts in gaining a sense of which firms and industries we expect to rake it in.

What do we find? You'd have to be blind to miss it--this is a very nicely profitable group of businesses. In aggregate, we're expecting the Dow components to notch a 19% average operating margin from 2008 to 2011, a haul that well exceeds the norm across our coverage universe. While that profit forecast might seem fanciful, these are firms that wield durable competitive advantages--ranging from intellectual property rights ( Merck (NYSE:MRK - News), 3M (NYSE:MMM - News)), impregnable scale ( Wal-Mart (NYSE:WMT - News), ExxonMobil), and iconic brands (Coca-Cola (NYSE:KO - News), Procter & Gamble (NYSE:PG - News))--to keep competitors at bay and consistently churn out profits. Moreover, while we're generally expecting the Dow components to see some operating margin expansion, we're not projecting dramatic changes. For instance, we're expecting Johnson & Johnson's operating margins to average roughly 26% from 2008 to 2011, which essentially matches the firm's operating profitability from 2003 to 2007.

Which are the most profitable industries and names of the lot? We expect Microsoft--the software sector's lone representative in the Dow--to mint profits to the tune of a nearly 40% average operating margin. We're also forecasting robust profitability anew in the health-care sector, where we expect Johnson & Johnson (NYSE:JNJ - News), Merck, and Pfizer (NYSE:PFE - News) to churn out about 31 cents in operating profit, on average, for every dollar of revenue they pull down. By contrast, we're only expecting a 13.8% average operating margin from the Dow's consumer-services names, which include Wal-Mart (6% average operating margin), McDonald's (NYSE:MCD - News) (25%), and Home Depot (NYSE:HD - News) (9%).

But cash is king, right? In that spirit, we've also taken a look at these businesses' free cash flow margins (essentially, free cash flows as a percentage of revenue). As one might expect, the free cash flow margins are a tad less eye-popping--we expect the Dow to churn out an 11.3% free cash flow margin, on average. But the overall profitability trends across sectors and names hold more-or-less constant, with less-capital intensive firms (software, health care) expected to generate plumper free cash flows than their counterparts in capital-heavy sectors like the oil patch, industrials, and consumer-related realms.

Secret doors to special deals

I went 'undercover' and discovered special products with better than usual returns
By Larry Haverkamp (Doc Money)

THIS is the year of the pig, which is a misunderstood animal.

It isn't really lazy. In fact, it is good at making money. But can it boost its earnings even more with the help of a private banker?

You need to deposit about half a million dollars to open a private banking account. That excludes most of us.

Are we missing anything?

Do private bankers really have a money-making formula not available to the rest of us?

Last week, I set out to find the answer. I took my most exclusive mystery shopping trip to visit private bankers and see if they really are so great.

A friend, who wants to be known only as Kelvin, is one of his bank's 200-plus private banking clients.

He let me tag along as his 'adviser'. We met his bankers at their Shenton Way headquarters.

SPECIAL TREATMENT

A receptionist took our names and escorted us to a waiting room. It was pure luxury. Even the walls were carpeted.

A sexy girl with one of those slits in her skirt came up and introduced herself as Ms Wong.

She asked what we would like. My friend, Kelvin asked, 'What do you have?'. She said, 'Anything you like, sir. Just ask.'

Whew. As we were contemplating the implications of that, a no-nonsense older lady showed up and said, 'Gentlemen, you may see your private bankers now. Follow me.'

We followed and she walked straight into the carpeted wall. She gave it a little push and, incredibly, it swung open. It was a concealed door that opened into a long corridor with small conference rooms on each side.

These were not the kind of rooms where you could get anything you like. There were no sofas and no karaoke, just a table and chairs.

We took a seat, someone served us tea, and private banker No 1 arrived. This guy wore the perfect suit with the perfect tie. He looked like he had just stepped out of an ad for private bankers.

Kelvin introduced me as his financial adviser which seemed to worry Banker No 1. He said clients usually didn't bring along financial advisers.

Maybe he thought I was a financial columnist on a mystery shopping tour. Of course, that's what I was.

Private bankers work in teams of two. One is the salesman and the other is the brain.

The brain entered five minutes later with a pile of papers under his arm. He didn't wear a tie and his shirt wasn't tucked in. He looked like an absent-minded professor.

He launched into an explanation of their investments like unit trusts, investment-linked products, structured products, hedge funds, private equity funds and more.

After 15 minutes, I said: 'Excuse me. This is interesting, but my friend Kelvin can buy any of these at your public lobby on the first floor. Do you offer anything special up here?'

At that point, the brain looked at the salesman and said: 'Heavenly?'

The salesman answered: 'Yeah. Show them Heavenly.'

The brain handed us two white brochures from the bottom of his stack of papers and launched into a new sales pitch. It soon became apparent this was a structured product with returns linked to the US Nasdaq stock index.

But it was more than that. It was the 'other side' of a structured product - the side taken by the issuer, in this case a large European bank.

Issuers begin their work by structuring a 'fair deal' product. It might limit the downside to, say, a 2 per cent annual return and cap the upside at 8 per cent.

Then, the issuer adds something for itself. Supposedly, it compensates for risk, but it also includes a profit.

The effect of the issuer's risk/profit cushion is to reduce the minimum and maximum returns the customer gets. Instead of 2 to 8 per cent, the customer might get 0 to 6 per cent.

For many types of products, this cost is included in the price structure and is invisible to buyers.

BETTER RETURNS

For the issuers, the added cushion turns a fair deal into a very good one. The seller can still suffer a loss if the market drops sharply, but the cushion increases expected returns and reduces the risk of loss.

The issuer's side of this structured product earned a whopping 39 per cent last year.

Of course, you need a private banker to get it since there is no way you could partner an issuer or big bank on your own.

I quickly advised Kelvin to take it. Sure enough, he bought half a million dollars of Heavenly 'for starters'. He said he would buy more if it earns 39 per cent in 2007, as it did last year.

Everyone left happy. Except me. I felt a bit grumpy, thinking about the unsuspecting customers down on the first floor buying structured products. They are the ones paying for the higher returns available to issuers and their associates, like Kelvin.

On our way out, I looked for Ms Wong. She was nowhere to be seen. That made me even grumpier.

Should you trust them to invest your money?

COULD you use a wealth manager? This story is about the granddaddy of them all, Swiss bank, UBS.

It is the world's biggest and possibly best, with $3 trillion under management. That would be equivalent to a whopping $3 million per Singapore household.

But can wealth managers really make you money?

It is hard to say since wealth managers don't disclose the average returns of clients.

They also don't publish returns on their own investments. These benefit the shareholders and are separate from clients' money.

Now, because of unprecedented losses, the rules have changed.

Suddenly, banks have no choice but to disclose their investment performance. For many, it has been a disaster. Some even needed fresh cash injections to replace money lost.

It happened to Citibank a few weeks ago. Riding to the rescue was the government of Abu Dhabi, which invested $11b.

Last week, it happened again at UBS. The bank disclosed huge investment losses and went looking for new capital.

UBS approached the Government of Singapore Investment Corporation (GIC) for a $14b cash infusion. GIC accepted. It is likely to be a good investment for GIC.

An unspoken irony is this: If these guys are so smart, why did they lose all that money?

More pointedly: Can you trust wealth managers with your money when they have so much trouble managing their own?

It goes beyond UBS.

BILLION DOLLAR LOSSES

Multi-billion dollar losses have been reported at Citibank, Merrill Lynch, Bear Stearns, Morgan Stanley, HSBC, Barclays and others. Most are the result of the credit crisis stemming from US home loans.

How could it happen? The answer may lie within the random walk theory. It says all good and bad news is already included in a stock's price.

So it doesn't matter if you buy companies that are doing well or poorly. Poor performers are cheap, while good stocks are expensive. But all are fairly priced.

Because the price is fair, it is difficult for wealth managers or anyone else to pick the under-priced counters and make a quick fortune.

So why pay wealth managers to select shares for you? It works better to simply buy a little bit of everything. Or buy an index fund, which is the same thing.

In academia, this surprising result has been known since the 1960s. Dozens of studies support it. (See Fama and French, 1992.)

Caveat 1: This is not to say that wealth managers don't add value.

Besides investments, they offer useful consulting services on legal secret bank accounts, legal tax avoidance and donations to charity.

But these services can be purchased separately and cheaply. To justify the high fees, you need superior investment returns - and the evidence is that these are not achieved.

Caveat 2: Even if you don't need a wealth manager, it may not matter to a bank's profits.

Wealth managers can sell their services as long as people think they have this ability.

In the case of UBS, it reported huge losses in October. But surprisingly, its wealthy clients invested a record-setting $38b in October and November. Salesmanship counts.



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GIC bails out UBS


PAST: UBS announces $6.4billion losses in October, large part in subprime US home loans. Losses absorbed.


PRESENT: UBS says it lost additional $14.5b last Monday. It also announces it has found investors to replace lost money.

Government of Singapore Investment Corporation to invest $14b. Others invest another $10.6b.

Total investments of $24.6b exceed total loss of $21b.


FUTURE: UBS still holds $42b in subprime exposure, but because of last week's investments, it is unlikely to require another bail out.

The big picture - The short term looks bright, the long term doesn't

BACK in my university days, a rich student from Indonesia was among our group of friends.

His name was Yacob, but everyone called him Mr Fixit.

It's because no matter what the problem, he could fix it. If you needed help in Maths, he would pay for the tutor.

Once, he ordered 50 pizzas for everyone who was studying at the library at 11pm. And for his girlfriend's birthday, he bought her a new car.

Everyone liked Mr Fixit.

One day, we learnt his grandmother had died. She raised him when he was young and he loved her dearly. But the end came suddenly and, of course, his wealth couldn't save her.

THE BIG FIX

Governments around the world are like Mr Fixit. They have four tools to revive economies.

(i) First, they create money from thin air when Central Banks make loans to commercial banks. It is called printing money, and has been crucial to alleviating the current US credit crisis.

They can also (ii) lower interest rates; (iii) reduce exchange rates and; (iv) encourage spending, like with tax cuts and subsidies.

If none of that works the first time, they simply do it again and again.

The US Congress, for example, is already talking about a second round of tax cuts if the current one isn't sufficient.

These tools mean no more great depressions. The worst you will get is a short and mild recession.

As Mr Fixit would say: 'All problems have solutions.'

Well, all except one. Get ready for a shock.

It is death.

It can't be avoided. Not by people. Not by planets. Unfortunately, ours is dying. And moving to another, like Mars, is difficult.

A permanent surge in demand is depleting the world's natural resources.

They should last another 50 years - 100 if we are lucky.

Take oil, for example.

When the last drop is gone, that is it. To get more, you need to compress vegetation and animals, like dinosaurs, for millions of years, in perfect underground rock formations.

Creating new minerals is equally impossible.

As for food, it seems we could simply grow more. The problem is, population and incomes are expanding faster than crop yields plus new land under cultivation.

It produces long-run shortages of rice, wheat, corn and other foods.

The solution: Sorry, but there is none.

There are no more dinosaurs to squish. Even if there were, it takes a million years to convert them into oil.

GOLDEN AGE

Think of it this way: We now live in a golden age.

In the past, children could expect a better life than their parents. Not any more.

Future generations will find life difficult as we deplete the limited supplies of energy, minerals and food.

High inflation is merely a symptom of serious shortages. Ironically, the hefty prices will prove beneficial as they help to ration what is left. It puts off judgment day when the last drop of oil is used up.

When that time comes, our golden age will end.

Philosophically, we will be able to say 'we had our moment in the sun'.

We can be grateful for that.

Get ready for hard times

Some reasons that high inflation could be here to stay

GET ready for a new, more frugal lifestyle. It is because the world's resources are diminishing. That changes everything, as I will explain.

Worldwide demand has exploded along with rising incomes in the Middle East, China and India. The new middle class want their share of the good life and they want it now.

While you can't blame them, it is putting a strain on our planet's limited resources.

Oil is the biggest concern since everything uses it. Last week, oil prices rose another 10 per cent, hitting an all-time high of US$135 ($183) per barrel.

In a way, high prices are beneficial since they help allocate scarce resources. But it is a painful process.

Singapore's inflation hit an annual rate of 6.6 per cent for the past three months, the fifth highest on record.

At my favourite fruit stall, the boss told me: 'My suppliers have been raising prices for the past four months. But I didn't pass them on. I have been selling at a loss and can't take it anymore.

'I have just increased the price of all my fruits by 20 per cent and I still only break even. Die, die.'

I suspect he is exaggerating and makes a small profit. But it shows how higher prices eventually get passed along to us. When they do, they act like a tax, reducing our incomes and spending. The risk is it will lower economic growth.

PERMANENT RECESSIONS?

On 21 April, Dr Tony Tan, deputy chairman of the Government of Singapore Investment Corporation, said: 'We could be facing a recession which is longer, deeper and wider than any recession that we have encountered in the last 30 years.'

This was the most pessimistic of his three scenarios, but could things really get that bad?

Worse. We are seeing unlimited demand meet limited supplies. It produces a problem with no solution.

Consider the basics: Without concrete and steel, we can't build buildings. Without petrol, we can't drive cars or airplanes. Without food, we can't eat.

Without raw materials, economic output will decline, pushing us into a new era of perpetual recessions.

To postpone the inevitable, nations are furiously competing to lock-in whatever resources remain.

China is perhaps the most effective, buying up natural resources from Australia to Africa. Most recently, it bought a 12 per cent stake in Australian mining giant Rio Tinto.

In the past, we have always had continuous economic growth with an occasional recession every 10 or 15years.

Now, supply shortages are turning things around. Expect permanent recessions with the odd year of positive economic growth.

PERMANENT INFLATION?

Not everyone agrees. Some feel this is just a speculative bubble and prices will soon return to normal, like they did after the high inflation in the early '70s and mid '80s.

It was a happy ending. Oil prices ultimately reached a low of US$11.40 per barrel in Feb 1999, less than a decade ago. Could it happen again?

It is a nice thought. The problem is demand from developing nations is real while the supply of resources may be more limited than we had thought.

For example, there is no way to know if producing countries have all the oil reserves they claim. No Opec nation has ever permitted an independent audit of its oil fields.

Combine increasing demand with decreasing supplies and what do you get?

Disaster. Expect continuously rising prices, not just for oil but other natural resources as well.

What's worse is that higher prices are merely a reflection of resource shortages.

The world's economies need food, fuel and minerals to operate. Even the most clever technology cannot produce output without inputs.

If resources eventually decline to zero in a few generations, output will also fall to zero.

Then, we will revert to subsistence living, like sophisticated cavemen. Call us the Cro-Magnon smarties.

Of mice, men... and recession

Playing it safe may not be the best thing todo during times of economic turmoil

THE chief information officer of a large US bank said his boss told him: 'Please hold off on new software purchases for the next six months.

'The bank has decided to wait until the US economic outlook is clearer.'

Many US firms are taking a 'wait and see' approach. Consumers are too.

That attitude could trigger a recession. It is called a self-fulfilling prophecy.

First, fear leads to caution. It reduces spending. The economy slows. It produces more caution, less spending, more caution, less spending...

The next thing you know, you've got a recession.

On Friday, fear got the upper hand when the US stock market took its second biggest plunge of the year. That is what the Singapore and other Asian markets are looking at today.

Could things go from bad to worse? Yes. Here's how:

1) STOCK AND HOME PRICES

US and Asian stock markets hit their highs last October.

Now, the US market is 20 per cent off its highs. Our Straits Times Index is 30 per cent lower.

Home prices have levelled off here, but are dropping fast in the US. During October to December, US home prices fell 9 per cent, the biggest three-month drop in history.

When stock and home prices fall, people see their wealth evaporate. They feel poorer and spend less. It accelerates the economic decline.

Next stop: Recession.

2) CREDIT LOSSES

Most stem from US housing defaults, which seem to be never ending.

Last week's shock came from insurer AIG, parent of AIA. It had an incredible $800 billion of debt insurance called 'credit default swaps'. Of that, it wrote down $15 billion that it doesn't expect will be repaid.

UBS bank estimated on Friday that credit losses will total $840 billion. Of that, it estimates that $615b has not been disclosed yet. It is a huge number.

Next stop: Recession.

3) LESS BORROWING

At the centre of the storm is a new debt type, called CDOs, some of which hold shaky US home loans.

High defaults have made CDOs difficult to sell. There have been no new sales since November.

That's a problem since banks used to re-sell their home loans as CDOs. It made US bankers sales agents instead of lenders. They invested no capital and took no risks. Life was good.

Now, without CDOs, banks are back to old-fashioned lending that puts their own money at risk. It means fewer mortgages get made and at higher interest rates.

Of course, when money isn't borrowed, it isn't spent. The economy slows.

Next stop: Recession.

4) FEAR

Fear keeps interest rates high. A remarkable study by stock broker Merrill Lynch showed the interest rate cuts of the US Federal Reserve (central bank) aren't doing the job.

Consider this: The US Fed reduced its key interest rate from 5.25 to 3.0 per cent in the last five months. Such a big drop would normally encourage borrowing and spending.

This time, however, home loan rates haven't budged. They fell from 5.90 per cent in September to 5.88 per cent today. It's almost no change.

The same for car loans: A five-year car loan was 6.91 percent in September. It is now 6.95 per cent, which is slightly higher.

Things are a little better for all consumer loans. On average, they fell 0.45 percentage points since September compared with the Fed's interest rate cuts of 2.25 percentage points.

This means only one-fifth of the rate cuts (0.45/2.25) have reached the man on the street. It's no wonder the US economy has not perked up.

Next stop: Recession.

Investors punish U.S. hedge funds for poor returns

Reuters, Tuesday June 10 2008

BOSTON, June 10 (Reuters) - Investors pulled a net $5.9 billion out of U.S. hedge funds in April, marking the industry's biggest outflow in 6-1/2 years as they punished managers for their worst-ever returns at the start of 2008.

According to new data released by TrimTabs Investment Research and BarclayHedge late on Monday evening, investors took $9.4 billion away from individual hedge fund managers and added $3.5 billion to funds of hedge funds, portfolios that spread select a group of individual hedge funds.

"April's outflow from hedge funds was not surprising because hedge funds underperformed the S&P 500 in both March and April," said Sol Waksman, chief executive officer of BarclayHedge. "Market volatility and weak inflows into funds of hedge funds suggest hedge fund flows were also depressed in May," he added in a statement.

In March, the $1.8 trillion hedge fund industry, where assets have doubled in the last three years, took in $22 billion.

The researchers found that April's outflow was the first since December 2005 and the largest since October 2001.

More financial land mines ahead

The worst of subprime mortgage crisis may now be out in the open. But more problems are lurking in prime mortgages, credit cards and auto loans.

By Chris Isidore, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- When Lehman Brothers reported a stunning $2.8 billion loss Monday, it was just the latest sign that bad mortgage loans continue to be a problem for the financial markets and the economy.

But subprime mortgages could only be the beginning. Many economists and market experts are worried that other problems are lurking that could cause a new credit crisis for consumers and businesses.

Meredith Whitney, the banking analyst for Oppenheimer & Co., estimates that the credit problems will continue to dog financial markets into 2009. She thinks future losses will dwarf the roughly $25 billion set aside by Wall Street firms so far to cover them -- perhaps reaching $170 billion by next year.

Other experts agree that the worst is not yet over.

There are several types of loans raising concerns, ranging from prime mortgage loans to credit cards. Much like subprime mortgages, many of these loans were packaged into securities traded on Wall Street. And many of these loans are beginning to see rising defaults and delinquencies, just as subprime mortgages were a year ago.

These defaults are nowhere near subprime loan levels and few think they will ever get that bad. But if defaults keep rising, this can cause the same kind of problems in the markets for those securities, leading to widespread losses for investors.

"There are plenty of additional problems on bank balance sheets," said Kevin Giddis, head of fixed income sales, trading and research for investment bank Morgan Keegan. "The bigger problem is we don't know how far it goes. Those problems remain well hidden for a reason."

But if they do eventually surface, it would mean higher costs and tighter credit for consumers. And that in turn could lead to an even longer slump for the economy than currently forecast.

Prime loans "the next shoe" to drop
Giddis worries most about prime mortgage loans, those made to borrowers with good credit histories.

A survey from the Mortgage Bankers Association showed that at the end of the first quarter, nearly 2% of prime loans were either 90 days or more past due, or already in foreclosure. That's more than twice the rate from a year ago, an even bigger spike than the jump in subprime delinquencies during that period.

"We've pretty much gone to the wall on subprime," said Giddis. "The problem that is going to face financial institutions now is the good borrower. It's the other shoe to drop."

Jay Brinkman, the MBA's vice president for research and economics, said the problem for prime loans isn't as much bad loans being made but a weakening economy causing job losses for borrowers. Making matters worse, many homeowners find it tough to sell because of a record drop in home values.

This unprecedented drop in home values is therefore likely to lead to record prime loan foreclosures, losses that were never forecast when the mortgages were written and then sold to Wall Street.

Will wheels come off of auto loans?
Prime mortgages aren't the only part of the credit market showing early signs of rising problems. Auto loan defaults are also increasing steadily, according to figures from the American Bankers Association.

The delinquencies on the most prevalent type of car loan rose to 3.13% at the end of the fourth quarter of last year, according to the ABA, the highest rate since 1990. Delinquencies were up 22% from a year earlier.

In addition, high gas prices have led to a continued decline in the resale value of many light trucks, such as SUVs and pickups. That's lead to a loan-to-value ratio of 94% for all autos in the most recent reading for April, up from 88% as recently as 2005.

John Silvia, chief economist with Wachovia, said this raises worries about consumers dumping vehicles they can no longer afford to drive in a period of $4 gas.

"If someone has a durable good that is inefficient, they're going to be more willing to walk away from it," he said.

Equity lines, credit card woes also rising
Credit cards and home equity line delinquencies are rising even faster than those of auto loans, according to the ABA figures. Nearly 1% of home equity lines of credit were delinquent in the fourth quarter, according to its report, up 68% from a year earlier. Delinquencies reached their highest level since 1991.

In addition, 4.5% of the money owed on credit cards was delinquent in the period, up from 3.54% a year earlier. James Chessen, ABA's chief economist, expects that delinquency rates for credit cards and home equity loans will continue to rise throughout the year.

"No relief for consumers is in sight as food and gas prices remain stubbornly high and income growth is anemic," Chessen said.

And while credit card delinquency rates are not high by historic standards, the Federal Reserve's most recent loan officer survey shows tighter credit standards for both those loans and home equity. That's a sign that lenders and investors are trying to back away from those markets as well, said Scott Hoyt, senior director of consumer economics at Moody's Economy.com.

Add all that up and it's just more bad news for consumers, and the economy that depends on their spending.

"This obviously impacts their ability to spend, their confidence, their ability to service their debt and it's going to continue even as the economy recovers," said Hoyt.

Growth in China, India can't offset US downturn

Advanced countries' weakness will hit growth in emerging markets: Fitch

Business Times - 10 Jun 2008

By CONRAD TAN

(SINGAPORE) Emerging economies such as China and India are not big enough to offset a likely recession in the US and weakening growth in other advanced economies, the head of Asia-Pacific sovereign ratings at Fitch Ratings warned yesterday.

Since most developing economies are net exporters to the US and Europe, continued growth in emerging economies will not provide support for the developed economies that are still the dominant sources of world demand, said James McCormack, who is responsible for analysis and ratings of sovereigns in Asia.

While Fitch expects growth in emerging markets to continue to outpace that of developed economies, 'the fact that China and India are growing quickly doesn't mean the US is going to grow any faster', he said. 'It's not really going to help offset weakness in advanced economies. The trade flows suggest quite the opposite.'

Mr McCormack, who is usually based in Hong Kong, was speaking at a structured finance conference in Singapore organised by Fitch.

India accounted for just 2 per cent of global economic output last year as measured by gross domestic product at market exchange rates, according to the International Monetary Fund's April World Economic Outlook.

'And it's not a very open economy - imports are only 13 per cent of its GDP. So it doesn't really matter how fast India grows - it is not going to contribute to stronger growth in other markets,' said Mr McCormack. 'It doesn't import that much and it's just too small.'

China's contribution was six times larger, at 6 per cent of world GDP in 2007, he said. 'And it's a much more open economy as well.' Imports accounted for more than a quarter of China's GDP last year at market exchange rates, so faster growth in China should benefit those economies it imports from.

'But China is running very large trade surpluses with the US and the European Union. And that would suggest that China is a net supplier to those markets - it doesn't really demand very much from the US and the EU,' said Mr McCormack.

Collectively, the four so-called BRIC countries - Brazil, Russia, India and China - are running trade surpluses with the US and EU to the tune of more than US$500 billion, he said. 'What that tells us is that the trade flows are going from exports from the emerging markets to the advanced economies.

'So if there's weakness in the advanced economies, you're going to see weakness in the emerging markets. It's not the other way around, where you see strength in the emerging markets followed by strength in the advanced economies.'

If purchasing-power- parity exchange rates - the amount of currency needed to buy the same common basket of goods and services as one US dollar - are used rather than market exchange rates to measure GDP, China's share of world output in 2007 jumps to 10.8 per cent, while India's rises to 4.6 per cent.

But even by this revised measure, the 23 developing economies in Asia - excluding Japan, Hong Kong, Singapore and Taiwan - account for just 20.1 per cent of world output, less than the 21.4 per cent contributed by the US alone, according to the IMF report.

The UK and the 15 euro-area countries make up another 19.4 per cent of the world economy, while Japan accounts for 6.6 per cent of the total.

The Next Real Estate Crisis

By April, 2009, hundreds of thousands of option ARM mortgages will begin resetting, bringing on a fresh wave of foreclosures

The American homeowner must feel like one of those characters in an old cartoon who has just been hit by a falling piano. After dusting himself off and touching the large bump on his head, he probably doesn't expect another piano to be dangling overhead. But he'd be wrong.

But what's often funny in a cartoon is anything but in real life. With the subprime mortgage crisis already crippling the U.S. economy, some experts are warning that the next wave of foreclosures will begin accelerating in April, 2009. What that means is that hundreds of thousands of borrowers who took out so-called option adjustable-rate mortgages (ARMs) will begin to see their monthly payments skyrocket as they reset. About a million borrowers have option ARMs, but only a fraction have already fallen due.

That was the catch to option ARMs; borrowers were offered low initial payments that would recast higher after several years. Many home buyers thought they could resell their homes before their payments increased. But instead, many of them got trapped. According to Credit Suisse, monthly option recasts are expected to accelerate starting in April, 2009, from $5 billion to a peak of about $10 billion in January, 2010. Some of these loans have already started to recast. About 13% of option ARMs that were issued in 2006 were delinquent by 60 days by the time they were 18 months old, Credit Suisse said.

California: Problem's Bellwether

Among the states expected to be worst-hit is already battered California. Today, outstanding option ARM loans in the U.S. total about $500 billion, about 60% of which were sold to California homeowners, according to Credit Suisse. Option ARMs were especially popular in the state, where they were heavily marketed during the boom by such companies as Countrywide Financial in Calabasas, Calif.; Washington Mutual in Seattle; and Wachovia in Charlotte, N.C. Moreover, on top of their ARMs, many homeowners also refinanced their homes, driving themselves even deeper into a debt they thought they could escape by flipping their homes.

But California won't be alone. Homeowners are also frighteningly vulnerable in states such as Arizona, Florida, New Jersey, and others.

The Mortgage Bankers Assn. said on June 5 that the option ARM problem is growing. The group reported that the national rate of foreclosure starts for prime ARMs, including option ARMs, increased to 1.55% in the first quarter, up from 0.53% a year earlier. In California the foreclosure start rate in the first quarter was 2%, vs. 0.5% a year earlier. In Florida, the rate was 2.57%, compared with 0.5% in the first quarter of 2007. "California, Florida, Arizona and Nevada combined…represent 62% of all foreclosures started on prime ARM loans, and 84% of the increase in prime ARM foreclosures," the group said.

The option ARM loan defaults could accelerate next year even if subprime defaults subside, said Chandrajit Bhattacharya, vice-president and mortgage strategist at Credit Suisse Securities. He said California will see the bulk of the option ARM foreclosures and the rest will be spread out across the country.

Underwater and Gasping for Air

"Most of the public is thinking that the subprime thing is over, but this is another thing waiting," Bhattacharya said. "The problem for these borrowers is that once you go underwater, it's very hard to refinance, and if you cannot refinance there is very little option for you."

But it gets worse.

Option ARMs, which were originally designed for self-employed people with fluctuating incomes, gained popularity with other workers during the peak of the real estate boom in 2004, when rapidly rising home values would have otherwise kept many buyers out of the market.

The loans, which were generally given to borrowers with better-than-subprime credit, give homeowners the option of making a minimum monthly payment, which covers none of the principal and only a portion of the interest, the rest of which is added to the loan balance. With years of unpaid interest accumulating and house prices falling, some homeowners have seen their equity disappear and now owe even more than their initial loan balance.

The loans automatically recast after five years, but many will recast sooner as loan balances hit specific principal caps—typically between 110% and 125% of the initial loan amount. Many of these loans are expected to recast within the next two years, meaning that borrowers' monthly payments will swell to include both principal and interest.

Walking Away from a Collapse

Some borrowers say they signed up for the complicated loans without understanding the terms, or expected to be able to refinance or sell their homes before the loans recast. Instead, home prices fell and the credit crunch made refinancing impossible for many borrowers.

Some homeowners are simply walking away because with their equity vanishing, there's little incentive to stay.

William Purdy, a lawyer at Simmons & Purdy in Soquel, Calif., a firm that specializes in home refinance issues, said some borrowers with option ARMs are defaulting before the loans recast because they couldn't afford even marginal increases in the minimum payments.

"It's a ticking time bomb inside your house that you can't get rid of," Purdy said. "They can try to slow down the inevitable, but sooner or later their loan is going to cap. …This year is going to be a blood bath. Next year, we'll start out just about the same."

Crushed by the Slump

The option ARM was initially a blessing and then a curse for Deborah Shaw, a 52-year-old systems analyst for Santa Cruz County, Calif. In 2004 she bought a $575,000 two-bedroom house with her boyfriend with a 40-year fixed mortgage. But when she and her boyfriend split, Shaw could no longer make the payments. She refinanced into an option ARM, which allowed for a $1,600 minimum payment (she was paying $2,300 on the fixed loan).

Shaw planned to avoid a recast by selling the house in a couple of years, but the housing slump changed everything.

Shaw now thinks her loan has already recast, which means that her monthly payment would more than double. Shaw doesn't know for sure, because she stopped answering her lender's daily phone calls and, since April, stopped making payments entirely. She says foreclosure is her only option.

"I call the house my albatross," Shaw said. "I feel a sense of relief knowing I won't have that house to deal with anymore. I'm not looking forward to moving and selling everything. But I am looking forward to not having stress about something I can't afford."

New FHA Loan Guarantees

But options are available—even if refinancing isn't possible. Lenders have been working with borrowers to reduce loan amounts and interest rates and, in some cases, simply accept the deed in lieu of foreclosure.

The Mortgage Bankers Assn. says it appears that a growing number of homeowners are avoiding foreclosure by getting help from the Hope Now hotline (888 995-HOPE), a mortgage-counseling phone line backed by lenders and the federal government that gets 4,000 calls a day. Hotline counselors help borrowers negotiate with banks and offer advice on refinancing options. Even though foreclosure rates are rising in California and Florida, they've slowed elsewhere, the bankers association said.

Some callers to the hotline have complained about long wait times, but the group says it has beefed up its counseling staff and now gets to calls quickly.

Other option ARM borrowers could benefit from government plans now in the works. A bill approved by the House in May would allow the Federal Housing Administration to guarantee up to $300 billion in new loans to help homeowners facing foreclosure. Borrowers could get more affordable loans worth no more than 90% of the home's value, meaning that participating lenders would have to take a significant loss on the loan. The bill was sponsored by House Financial Services Committee Chairman Barney Frank (D-Mass.). Senate Banking Chairman Christopher Dodd (D-Conn.) has a similar measure.

Foreclosure Is Not Inevitable

"The fact is that people didn't really understand the transaction at the outset and were counting on being able to refinance when the loan got recast," said Colleen Hernandez, president of Minneapolis nonprofit Homeownership Preservation Foundation, which owns and operates the hotline. "That combination means a lot of risk, a lot of danger in the situation. But it isn't inevitable that they foreclose, and foreclosure isn't the best option."

Moe Bedard, founder of LoanSafe.org in Corona, Calif., a free online forum that helps homeowners negotiate loan modifications, said the larger problem is that banks, many of which laid off scores of loan officers, are so swamped that many borrowers can't get the attention they need.

Many California homeowners, including some with $2 million homes, are simply making their minimum payment, waiting for the recast. Then they plan to walk away, even if it damages their credit, Bedard said.

"A lot of people are just walking," Bedard said. "It's just a business decision; they don't have a lot of skin in the game." But for many others it will be devastating.

Buffett's bet: Hedge funds can't beat the market

By Carol J. Loomis, senior editor at large

Will a collection of hedge funds, carefully selected by experts, return more to investors over the next 10 years than the S&P 500?

That question is now the subject of a bet between Warren Buffett, the CEO of Berkshire Hathaway, and Protégé Partners LLC, a New York City money management firm that runs funds of hedge funds - in other words, a firm whose existence rests on its ability to put its clients' money into the best hedge funds and keep it out of the underperformers.

You can guess which party is taking which side.

Protégé has placed its bet on five funds of hedge funds - specifically, the averaged returns that those vehicles deliver net of all fees, costs, and expenses.

On the other side, Buffett, who has long argued that the fees that such "helpers" as hedge funds and funds of funds command are onerous and to be avoided has bet that the returns from a low-cost S&P 500 index fund sold by Vanguard will beat the results delivered by the five funds that Protégé has selected.

We're way past theory here. This bet, being reported for the first time in this article (whose author is both a longtime friend of Buffett's and editor of his chairman's letter in the Berkshire annual report), has been in existence since Jan. 1 of this year.

It's between Buffett (not Berkshire) and Protégé (the firm, not its funds). And there's serious money at stake. Each side put up roughly $320,000. The total funds of about $640,000 were used to buy a zero-coupon Treasury bond that will be worth $1 million at the bet's conclusion.

That $1 million will then go to charity. If Protégé wins, it has asked that the money be given to Absolute Return for Kids (ARK), an international philanthropy based in London. If Buffett wins, the intended recipient is Girls Inc. of Omaha, whose board includes his daughter, Susan Buffett.

And who's holding the money, by way of owning the zero-coupon bond? That's an esoteric institution most readers of this article will never have heard of, the Long Now Foundation, of San Francisco, which exists to encourage long-term thinking and combat what one of its founders, Stewart Brand (of the Whole Earth Catalog), calls the "pathologically short attention span" that seems to afflict the world.

Six years ago the foundation set up a mechanism for - what else? - Long Bets. The foundation receives wagers as donations, oversees the bets until they are decided, and then pays off the winner's designated charity. For this work, the foundation normally gets a $50 fee from each side and then shares fifty-fifty with the charitable winner-to-be in the returns earned on the funds being held. In the Buffett-Protégé bet, however, there will be no such sharing; each side simply made a $20,000 charitable gift to the Long Now Foundation.

To see today's Long Bets listings, go to http://www.longbets.org/. Some bets catalogued there sound as though they were made in sports bars: Actor Ted Danson garnered $2,000 for a charity when the Red Sox won the World Series before a U.S. men's soccer team won the World Cup.

On a more cosmic front, Lotus founder Mitchell Kapor and inventor and futurist Ray Kurzweil have a $20,000 bet on the proposition that "by 2029 no computer - or 'machine intelligence' - will have passed the Turing Test," meaning that a computer won't have successfully impersonated a human. Kapor made that prediction; Kurzweil disagrees with it. Each man, following the rules of Long Bets, has supported his point of view with a brief statement that is posted on the Web site. Buffett's and Protégé's arguments will appear there as well (and are listed here).

Through 2007 the Kapor-Kurzweil bet of $20,000 was the largest on Long Bets. The Buffett-Protégé bet obviously vaults the stakes to the stratosphere. And to that there is a certain history, which began at Berkshire's May 2006 annual meeting.

Expounding that weekend on the transaction and management costs borne by investors, Buffett offered to bet any taker $1 million that over 10 years and after fees, the performance of an S&P index fund would beat 10 hedge funds that any opponent might choose. Some time later he repeated the offer, adding that since he hadn't been taken up on the bet, he must be right in his thinking.

But in July 2007, Ted Seides, a principal of Protégé but speaking for himself at that point, wrote Buffett to say he'd like to make the bet - or at least some version of it.

Months of sporadic negotiation ensued. The two sides eventually agreed that Seides would bet on five funds of funds rather than 10 hedge funds.

Seides, stepping way beyond his usual stakes - say, the cost of a meal - suggested that he and Buffett make the bet for $100,000 (which, he noted, was Buffett's annual salary). Buffett, not knowing then that Long Bets even existed, said that considering his age - he's now 77 - and the complications that a 10-year bet might add to his estate's being settled, he'd only be interested in wagering at least $500,000. Even then, he wrote Seides, "my estate attorney is going to think I'm out of my mind for complicating things."

If $500,000 seemed too steep to Seides, Buffett (for whom it's obviously more of a trifle) had no problem with Seides recruiting partners to help out. And that's what in effect happened, by way of Protégé Partners LLC making the bet rather than Seides.

Protégé, which manages around $3.5 billion, is principally owned by Seides, 37, and two other men, CEO Jeffrey Tarrant, 52, and Scott Bessent, 45. Each has a strong investment background, and two of the three have worked with well-known market practitioners: Seides learned the world of alternative investments under Yale's David Swensen; Bessent worked with both George Soros and short-seller Jim Chanos.

Upon its founding in 2002 by Tarrant and Seides, Protégé set up a fund of funds and began recruiting the kind of sophisticated investors - both institutions and wealthy individuals - who put their money in such funds.

Very aware that the Securities and Exchange Commission prohibits broad-scale marketing by hedge funds and funds of funds, neither Seides nor Tarrant will disclose the precise names of the funds they now run, much less their performance records.

But a London publication, InvestHedge, whose parent runs a hedge fund database, provided Fortune with several years of returns for the firm's flagship U.S. fund, Protégé Partners LP.

From its inception in July 2002 through the end of 2007, the Protégé fund gained 95% (after all fees), soundly beating the Vanguard S&P 500 index fund's 64%.

Protégé's performance was hugely helped by the fact that by mid-2006 the firm was extremely bearish on subprime mortgage securities, including CDOs, and had dispersed its investments in hedge funds to capitalize on that opinion. Most significant, it made an investment in Paulson & Co.'s hedge funds, which under John Paulson made a highly publicized killing in 2007 by short-selling securities linked to subprimes.

All that's history, of course, so let's get back to the bet: Buffett and Seides agreed that they'd periodically disclose where the wager stood. Seides wanted this disclosure to take place whenever the market fell by 10%, because he believes that one of the virtues of hedge funds is their ability to weather tough times. Indeed, in the first quarter of this year, during a down market, Protégé Partners LP fell by only 1.9%, while the Vanguard fund dropped 9.5%.

Buffett insisted, though, that the logical time for disclosure was at Berkshire's annual meeting every spring - and that was the final agreement.

Just how much Buffett will have to say about the bet every year may be limited by one fact: The names of the five funds of funds that Protégé has selected are to be kept confidential. Of course, Buffett knows what the names are, because Protégé must supply him with the audited results of these funds every year. But other than that, the designated funds of funds saw no advantage (at least for now) to declaring their participation in the bet and agreed to go along only if confidentiality was promised. The first fund that Protégé tried to recruit, in fact, wouldn't sign up even then.

Seides and Tarrant do have a few general things to say about the five funds picked. They are equity-oriented (favoring stocks over bonds), tend to invest in hedge funds that avoid in-and-out trading, and are run mostly run by seasoned investment folk rather than tenderfoots.

And we can probably assume that Protégé Partners LP is one of the five, if only because its exclusion would leave the firm with the difficult job of explaining to its investors why the firm didn't care to bet on the success of its own hedge fund choices.

Fees: Big hurdle for Protégé

As for the fees that investors pay in the hedge fund world - and that, of course, is the crux of Buffett's argument - they are both complicated and costly.

A fund of funds normally charges a 1% annual management fee. The hedge funds it puts that money into charge an annual management fee of their own, which for funds of funds is typically 1.5%. (The fees are paid quarterly by an investor and are figured on the value of his account at the time.)

So that's 2.5% of an investor's capital that continually goes for these fees, regardless of the returns earned during a year. In contrast, Vanguard's S&P 500 index fund had an expense ratio last year of 15 basis points (0.15%) for ordinary shares and only seven basis points for Admiral shares, which are available to large investors. Admiral shares are the ones "bought" by Buffett in the bet.

On top of the management fee, the hedge funds typically collect 20% of any gains they make. That leaves 80% for the investors. The fund of funds takes 5% (or more) of that 80% as its share of the gains. The upshot is that only 76% (at most) of the annual return made on an investor's money accrues to him, with the rest going to the "helpers" that Buffett has written about. Meanwhile, the investor is paying his inexorable management fee of 2.5% on capital.

The summation is pretty obvious. For Protégé to win this bet, the five funds of funds it has picked must do much, much better than the S&P.

And maybe they will. Buffett himself assesses his chances of winning at only 60%, which he grants is less of an edge than he usually likes to have.

Protégé figures its own probabilities of winning at a heady 85%. Some people will say, of course, that just by making this bet, Protégé has acquired some priceless publicity.

But then, Protégé clearly wants to win, and it's up against a man who hasn't made a lot of losing bets in his life.

Seides himself sees one strong ray of light: "Fortunately for us, we're betting against the S&P's performance, not Buffett's."

Who do you think will win this bet? Tell us what you think.

Danger of 'substantial downturn' has faded: Bernanke

WASHINGTON - DESPITE a recent spike in the unemployment rate, the danger that the US economy has fallen into a 'substantial downturn' appears to have waned, Federal Reserve Chairman Ben Bernanke said on Monday.
Addressing a Fed conference in Chatham, Massachusetts, on Monday night, Mr Bernanke said a government report last week showing the unemployment rate rising from 5 per cent in April to 5.5 per cent in May - the biggest one-month jump in two decades - was 'unwelcome.'

However, the Fed chief said other forces should 'provide some offset to the headwinds that still face the economy.'

The Fed's powerful doses of interest rate cuts, the government's US$168 billion (S$230 billion) stimulus package, further progress in the repair of problems in financial and credit markets, a gradual ebbing of the drag from the deep housing slump and still solid demand from abroad for US exports should help the economy over the remainder of this year, he said.

Although economic activity is 'likely to be weak' during the current April-to-June quarter, Mr Bernanke said 'the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.'

Last Friday, fears were rekindled that the country could be headed for a deep recession after the unemployment rate zoomed and oil prices registered their biggest single-day leap.

However, Mr Bernanke said, 'Recent incoming data, taken as a whole, have affected the outlook for economic activity and employment only modestly.'

Still, soaring energy prices are a double-edged sword for the country. Oil prices closed on Monday at US$134.35 a barrel, down from last week's high of US$139.12 a barrel. They risk putting a further damper on growth as well as spreading inflation through the economy, Mr Bernanke said.

High inflation
'Inflation has remained high,' largely reflecting sharp increases in the prices of globally traded commodities, Mr Bernanke said. 'The latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations,' he said.

The Fed is paying close attention to the extent to which consumers, investors and businesses believe prices will rise in the future, he said. If consumers, investors and businesses believe inflation will continue to go up, they will change their behaviour in ways that aggravate inflation, turning it into a self-fulfilling prophecy.

The Fed 'will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilising for growth as well as for inflation,' Mr Bernanke said.

Mr Bernanke spoke on Monday evening to a conference on understanding inflation and the implications for Fed policymakers in setting interest rates. The forum was sponsored by the Federal Reserve Bank of Boston. His comments on the economy's outlook were fairly brief and were part of a larger, mostly academic speech.

Last week, Mr Bernanke sent his strongest signal yet that the Fed's rate-cutting campaign was probably over for now because of growing concerns that soaring oil and other commodity prices - along with a weakened dollar - are aggravating inflation.

To help brace the economy, the Fed dropped rates in late April to 2 per cent, a nearly four-year low, continuing a rate-cutting campaign that started last September.

Many economists believe the Fed will hold rates steady at its next meeting on June 24-25 and probably through much, if not all, of this year. However, some believe inflation could flare up and force the Fed to begin boosting rates later this year or next year.

Inflation forecasting
Inflation forecasting is important to Fed policymakers when determining the best course on interest rates. Even with extensive research over the years, much remains to be learned about both inflation forecasting and inflation control, Mr Bernanke said. And there are areas where additional research could prove helpful.

Policymakers and analysts often have relied on information from commodity futures markets to help shape inflation forecasts, Mr Bernanke said. In recent years, though, information from futures markets has 'underpredicted commodity price increases ... leading to corresponding underpredictions of overall inflation,' he said.

The 'poor recent record' on that front raises the question of whether policymakers should continue to use this source of information and, if so, how, Mr Bernanke said.

Despite the recent record, Mr Bernanke said he didn't think it was reasonable to ignore information about supply and demand culled by futures markets. However, it does seem reasonable, he said, to treat such information as highly uncertain.

Working to make economic data timelier and more accurate also would be useful to policymakers trying to divine inflation's direction.

Moreover, it would also be helpful for policymakers to know more about how people's inflation expectations are influenced by Fed interest rate actions, Fed communications and economic developments such as oil price shocks.

'Much evidence suggests that expectations have become better anchored than they were a few decades ago, but that they nonetheless remain imperfectly anchored,' Mr Bernanke said. -- AP

Buffett bets that S&P 500 will outperform hedge funds over 10 years

OMAHA (Nebraska) - BILLIONAIRE Warren Buffett has wagered roughly US$320,000 (S$437,000) of his own money that the S&P 500 will outperform a collection of hedge funds.
The bet covers a decade and says that all the fees, costs and expenses must be included.

The terms of the bet between the chairman and CEO of Berkshire Hathaway Inc and the money managers who own Protege Partners LLC are outlined on the Long Bets website. That group will hold the wager until the bet concludes at the end of 2017.

The specifics of the wager were first reported online on Monday by Fortune magazine. The wager is invested in a bond so that the winner will be able to donate US$1 million to a charity at the end.

Mr Buffett has long been critical of hedge funds because of the high fees they charge investors. At Berkshire Hathaway's 2006 annual meeting, he offered to bet US$1 million that an index fund would beat any 10 hedge funds over a decade if all the fees were included.

One of Protege's co-founders, Mr Ted Seides, sent Mr Buffett a note last summer to take him up on the offer.

'The idea is to settle a long-standing debate in the investment community over the value of active and passive management,' said Mr Seides, whose company invests in hedge funds.

They agreed to the terms of the current bet, which is based on the performance of five portfolios of hedge funds.

Mr Seides declined to name the funds involved because of concerns about the Securities and Exchange Commission rules that bar hedge funds from promoting themselves.

Mr Buffett's spokesman Jackie Wilson did not immediately respond to a message left on Monday.

But Mr Buffett has detailed his concerns about hedge fund managers and their fees in his recent letters to shareholders in his holding company, which owns more than 60 subsidiaries.

Buffett often refers to hedge fund managers as the 2-and-20 crowd because they routinely charge investors 2 per cent of their principal and 20 per cent of their profits each year. Those high fees diminish the returns active investors receive.

'Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds,' Mr Buffett wrote on the Long Bets site.

In 2006, Mr Buffett devoted two pages of his letter to the perils of the 2-and-20 crowd in a fable titled 'How to Minimise Investment Returns.' The story described the fictional Gotrock family which owned all American corporations, and the Helpers - brokers, managers, consultants and hedge fund managers - who consume more and more of the family's earnings.

'The burden of paying Helpers may cause American equity investors, overall, to earn only 80 per cent or so of what they would earn if they just sat still and listened to no one,' Mr Buffett wrote.

His company has performed well over the past decade with its stock price advancing from US$78,000 on June 9, 1998, to US$129,400 on Monday. It set a new high of US$151,650 in December, and Berkshire remains the most expensive US stock.

Mr Seides said he hopes this wager will help more people learn about hedge funds and their purpose. He said hedge funds aren't trying to beat the market; they're using a variety of strategies to deliver positive results in all kinds of conditions.

He cautioned that hedge funds aren't for everyone. Only knowledgeable investors with more than US$1 million in assets are allowed to invest in them, according to SEC rules.

Berkshire owns a variety of companies including insurance, clothing, furniture, jewelry and candy companies, restaurants, natural gas and corporate jet firms and has major investments in such companies as Coca-Cola Co, Anheuser-Busch Cos and Wells Fargo & Co. -- AP

Why the oil boom will eventually bust

By Shawn Tully, editor at large

High-flying tech stocks crashed. The roaring housing market crumbled. And oil, rest assured, will follow the same path down.

Not everyone agrees. In an echo of our most recent market frenzies, some experts pronounce that the "world has changed," and that the demand spikes, supply disruptions, and government bungling we face now will saddle us with a future of $4, $5 or even $10 a gallon gasoline.

But if you stick to basic economics, it's clear that the only question is when - not if - prices will succumb.

The oil bulls are correct in their explanations of why prices have jumped. It's indisputable that worldwide demand has surged, chiefly driven by strong growth in China, India and the Middle East. It's also true that most of the world's reserves are controlled by governments in places like Russia and Venezuela that mismanage production, thus curtailing supply growth.

But rather than forming a permanent new plateau for prices - as the bulls contend - those forces are causing a classically unstable market that's destined for a steep fall.

In a normal oil market, the cost of producing the last, most expensive barrel of oil needed to satisfy worldwide demand sets the price for every barrel the world over. Other auction commodity markets work much the same way.

So even if Saudi Arabia produces at $4 a barrel, if the final, multi-millionth barrel required to heat houses and run cars costs $50, and is produced, for argument's sake, at a flagging field in West Texas, the world price is $50. That's what economists call the equilibrium price: It's where the price that customers are willing to pay meets the production cost, including a cushion, naturally, for profit or "the cost of capital."

But today, the sudden surge in demand and the production bottlenecks have thrown the market radically out of balance.

Almost exactly the same thing happened in the housing market. And both housing and oil supply react to a surge in demand with a long lag. In housing, the lag is caused by restrictive zoning and development laws, especially in coastal markets like California and Florida.

So when the economy roared back in 2002 and 2003, builders couldn't turn out homes fast enough for buyers armed with those cheap mortgages. As a result, prices spiked. They no longer bore any relation to the actual cost of buying and improving land, or constructing and marketing a new house (at some reasonable profit margin). Instead, frenzied buyers were setting the price.

Because builders were reaping huge windfall profits, they rushed to buy and develop land. And sure enough, those new houses were ready just as buyers were retreating to the sidelines because they could no longer afford to buy a home. That vast overhang of unsold homes is what's driving down prices today.

The story is much the same with oil, with a twist. A big swath of the market isn't really paying that $125 a barrel number you hear about seemingly every hour. In China, India and the Middle East, governments are heavily subsidizing oil for their consumers and corporations, leading to rampant over-consumption - and driving up prices even more.

But sooner or later the world won't keep paying those prices: Eventually, the price must fall back to the cost of that last barrel to clear the market.

So what does that barrel cost today? According to Stephen Brown, an economist at the Dallas Federal Reserve, that final barrel costs just $50 to produce. And when the price is $125, the incentive to pour out more oil, like homebuilders' incentive to build more two years ago, is irresistible.

It takes a while to develop new supplies of oil, but the signs of a surge are already in place. Shale oil costing around $70 a barrel is now being produced in the Dakotas. Tar sands are attracting investment in Canada, also at around $70. New technology could soon minimize the pollution caused by producing oil from our super-plentiful supplies of coal.

"History suggests that when there's this much money to be made, new supplies do get developed," says Brown.

That's just the supply side of the equation. Demand should start to decline as well, albeit gradually.

"Historically, the oil market has under-anticipated the amount of conservation brought on by high prices," says Brown. Sales of big cars are collapsing; Americans are cutting down on driving. The airlines are scaling back flights.

We've learned another important lesson from the housing market: The longer prices stay stratospheric, the worse the eventual crash - simply because the higher the prices and bigger the profit margins, the bigger the incentive to over-produce.

It's even possible that, a few years hence, we could see a sustained period of plentiful oil supplies and low prices, meaning $50 or below.

A similar scenario occurred following the price explosion in the 1970s and early 1980s. The price spike caused the world to cut back sharply on oil consumption. By the mid-80s, oil prices had fallen from almost $40 to around $15. They remained extremely low for two decades.

It's impossible to predict how the adjustment this time will take shape, just as it was in housing. There the surge in supply came in places the experts swore there was "no supply," and wouldn't be any. Builders found a way to extend vast tracts of homes into California's Inland Empire and Central Valley, and even build "in-fill" projects near the densely-populated coasts.

An earlier bubble is also instructive. In the early 1980s silver prices jumped from $10 to $50 on the theory that the world was facing a permanent shortage of silver. Suddenly ads appeared asking homeowners to bring their tea sets and jewelry to Holiday Inns for a big price. Silver supplies poured from seemingly nowhere, out of America's cupboards, of all places.

And so it will be with oil. We don't know where the new abundance will come from, from shale, or tar sands or coal or an OPEC desperate to regain market share. We just know that it will appear. With prices like these, it always does.

Financial Stocks Still Shaky Despite Lehman's Rebound

Lehman Brothers appears to have escaped the investor panic that brought down Bear Stearns, but many investment pros say it's too early to jump back into financial stocks.

"I'm just not a buyer in the financials. It's just not time to it yet," says Michael Cohn, of Atlantis Asset Management. "You have to wait for the housing to stabilize, which I think is going to happen this summer."

Kathy Boyle, president of Chapin Hill Advisors, is pointedly bearish on the market, particularly because of the troubles posed by financials.

She expects the market to drop significantly over the summer, with the S&P 500 falling to 1,080, the Dow tumbling below 10,000, and the Nasdaq sinking to 1,530.

As such, she recommends bearish plays, such as Proshares inverse ETFs that benefit from bearish moves in the major indexes. Among them: The UltraShort Financials ProShares (NasdaqGS:SKF - News).

As a general rule for stocks, Boyle likes defensive issues in the consumer staples category such as Procter & Gamble (NYSE:PG - News) and Colgate (NYSE:CL - News). Conversely, she warns against stocks like fertilizer producer Potash (NYSE:POT - News) that have dramatic run-ups which will be subject to profit taking during market downturns.

"I honestly still don't think the market has priced in everything that's out there because nobody really understands the complexities of some of these derivatives and some of these swaps," Boyle says. "I think this is a black box and we don't know what's in it."

Still, there are some analysts and portfolio managers who think that now could be a time to find some bargains in bank stocks. That's even in the face of warnings by a Federal Reserve official that the institutions have been plagued by excessive sloppiness and will need to raise cash to compensate for losses.

Lehman (NYSE:LEH - News) itself has rebounded in the past two days, after plunging earlier in the week, amid increasing optimism about the firm. Lehman has taken steps to clean up its balance sheet, slashing its risky debt holdings by as much as 25 percent and raised $8 billion in capital this year to shore up its balance sheet, according to an internal memo obtained by CNBC.

Deutsche Bank reiterated its "buy" rating on Lehman stock. That comes a day after Merrill Lynch upgraded its rating on Lehman to "buy" from "underperform."

"I do like Lehman Brothers historically. I have been an investor. I probably would put some more in there, but I wouldn't make a pick based on one company,"| says Michael Kresh, president of M.D. Kresh Financial Services, who prefers to play the entire sector through mutual funds and ETFs. "Realistically we know some of these players are going to go down." (See the WSJ's Greg Zuckerman warn on financials in the accompanying video)

In addition to Lehman, Kresh believes Merrill Lynch (NYSE:MER - News) also will make its way through the current financial slump relatively unscathed. He's not as optimistic about Citigroup (NYSE:C - News).

"It's done a very bad job of trying to integrate into a fully diversified financial services empire, and now they're trying to split it back apart,"| he says.

A Change in Thinking

Financial advisers are shifting strategies in the wake of the renewed banking tumult, which also featured news this week that leading bond insurers MBIA (NYSE:MBI - News) and Ambac (NYSE:ABK - News) might lose their treasured triple-A credit ratings, a move seen as crippling to their businesses. Standard & Poor's on Thursday lowered the firms' financial strength to AA.

"I still believe that we're probably going to see one of the monoline insurers go under, and when that happens I don't know what the response is going to be," says Peter Miralles, president of Atlanta Wealth Consultants. "It will be interesting to see the market response over 48 hours once they declare one of them dead."

Miralles looked at Merrill Lynch's move Wednesday to upgrade Lehman with caution and anticipates sideways trading in US stocks until investors can get more confidence in the market. He recommends international markets and ETF plays in gold, which he calls "portfolio insurance."

A leading gold ETF is streetTRACKS Gold Shares (NYSE Arca: GLD) which is up 2.5 percent this year.

"I think you're going to have this volatility for quite some time until the market is truly convinced that this is behind us and get a good month or even two with no surprising news," says Charles Massimo, president of CJM Fiscal Management, who also favors international investing. "If you're an investor and all you do is focus on the US market you're going to suffer."

Massimo's firm practices passive investing and he does not recommend specific stock plays. But he believes small-caps and value moves will be the best way to navigate the financials minefield, and recommends index funds as well.

Others are even more cautious.

Atlantis's Cohn says biotechnology and health care appear to be stronger plays now, but the broader market will be subject to the whims of the big financials.

"Right now the market is hostage to Lehman and Citibank," he says. "Just watch Lehman and Citibank and that will tell you exactly what the market is going to be doing."

BlackRock:Credit crisis to last another two to four years

Fund manager BlackRock expects the global credit crisis to last another two to four years as a weakening U.S. economy triggers more writedowns by banks, its chief investment officer for equities said on Monday.
Mark Lennihan / AP
BlackRock's headquarters in New York.
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"The credit crisis will be with us for a long time," said Bob Doll, CIO and also vice chairman of the U.S. money manager, which managed $1.36 trillion in assets at the end of March.

"The deleveraging of the financial system, which is the outgrowth of the credit crunch, will likely last a couple of more years -- two, three, four," he said.

Financial institutions around the globe such Citigroup and UBS have suffered more than $300 billion of write-downs and credit losses during a credit crisis triggered by the collapse of the U.S. subprime mortgage market.

Doll said Blackrock BlackRock IncBLK
213.51 UNCH 0% NYSE

[BLK 213.51 --- UNCH (0%) ] is underweight on financials, but overweight on U.S. stocks since some large multinationals such as technology firms are benefiting from growth outside the United States and from a weaker U.S. dollar.

He said the worst of the crisis has passed after the Federal Reserve-led rescue of Bear Stearns in March, but he warned an economic slowdown in the U.S. threatens more credit-related problems in the months and years ahead.

"We've seen the worst of it in terms of crisis, writeoffs, but there is still more to come," Doll told a group of reporters during a visit to Singapore.

"A slowing below-trend growth in the economy will expose more of them. Whether it is in the mortgage area...or in other consumer loans, auto loans, credit card loans -- there are more writeoffs to come," he said.

Ratings agency Standard & Poor's said on Friday the number of companies around the world at risk of getting a credit downgrade climbed to a record in May amid the credit squeeze.

Doll said the U.S. economy was in for a period of slower economic growth but a recession was unlikely unless oil and commodities continue to rally.

"If these commodities continue to move up at a pace they've been moving up of late, all bets are off. The U.S. will be in a recession," he said.

U.S. crude's dramatic near-$11 jump on Friday -- its biggest-ever one-day spike in dollar terms -- fuelled concerns about inflation and consumers' spending power, a key driver of economic growth.

U.S. stocks slumped on Friday after the government said that the May unemployment rate jumped the most in 22 years and on oil's rally to another record, renewing fears that the U.S. economy faces 1970s-style stagflation.

Oil seen hitting $150 this summer: Goldman analyst

KUALA LUMPUR (Reuters) - Oil prices are likely to hit $150 a barrel this summer season, the global head of commodities research at Goldman Sachs (NYSE:GS - News) said on Monday, as tighter supplies outweigh weakening demand.

"I would suggest that the likelihood of that happening sooner has increased tremendously ... sometime in summer," Jeffrey Currie told an oil and gas conference in the Malaysian capital, referring to oil at $150 a barrel.

Goldman Sachs, the most active investment bank in energy markets and one of the first to point to triple-digit oil more than two years ago -- a once unthinkable level -- said last month oil could shoot up to $200 within the next two years as part of a "super spike."

Forecasts that oil could head towards $150 and above have multiplied over the past month as prices broke through several records, the latest being last Friday, when oil soared more than $11 a barrel on Friday, its biggest one-day gain ever.

Oil hit an all-time high of $139.12 on Friday on the back of a weak U.S. dollar and mounting tensions between Israel and Iran.

Goldman Sachs forecast almost a month ago that U.S. crude would average $141 a barrel in the second half of 2008, up from a previous projection of $107, due to tight supplies.

"Demand for oil is weak but supplies are even weaker," Jeffrey Currie told the conference, citing supply disruptions in Nigeria and struggling output rise in Russia.

Investment bank Morgan Stanley, another big Wall Street energy player, said on Friday that crude may reach $150 by July 4 due to robust Asian demand and falling inventories.

(Reporting by Chua Baizhen, writing by Maryelle Demongeot; Editing by Ben Tan)

Going bust younger - and owing much more

Going bust younger - and owing much more
Average bankrupt this year owes $360K, compared to $180K in 2007

By SIOW LI SEN

(SINGAPORE) The economy has been humming along for several years now, so more people could be taking risks by borrowing larger amounts than before. Some have got burnt and bankrupted. What seems troubling is that not only are bankrupts owing bigger sums of money but more younger people are staring at financial ruin than before.

Last year saw bankruptcy orders taken out against 2,716 people who owed a total of $489 million, according to data from credit analysis firm Amequity Pte Ltd. In other words, each person bankrupted owed an average of $180,000.

This amount has almost doubled in the first four months of this year. From Jan 1 to April 24 this year, 621 people owing some $223.6 million were made bankrupt. This means each of them owed $360,000 on average.

Even as they owe more, the bankrupts are also getting younger. Of those who went bust in the first four months this year, 263 (42 per cent) were younger than 40; in 2007, this younger group comprised 34 per cent of those bankrupted. In Singapore, an individual must be over 21 before taking out a loan.

Observers say lenders are able to reach more young people to sell them loans via the Internet - a channel that was less pervasive, say, three years ago. 'Lenders are more aggressive reaching the young via the Internet . . . whose lifestyle expectations have gone up,' said Aaron Chan of Advent Law Corp.

Others say banks are lending out more and are also harsher on delinquent creditors as they move faster to recover overdue payments because the cost of funding has increased.

Many borrowers are in trouble because their businesses are finding it hard to make ends meet from higher wage demands and, in particular, rising rentals.

'A lot of business people are going bankrupt because they can't meet the rentals,' said Leong Sze Hian, president of the Society of Financial Service Professionals. He also volunteers at the Official Assignee's office.

Mr Leong said banks now have to turn over loan volumes faster than ever and have to make more frequent collections as the cost of funding has risen due to the US sub-prime crisis and also Basel II rules adopted by local banks in January this year. Basel II refers to the capital banks have to hold for different kinds of risks.

Some people go bust because they can't pay up credit card bills but there are also some among the young who are in over their heads because their businesses got into trouble.

Some stood as guarantors or are also directors of their companies which are being wound up, the data showed. Among them are two directors of a leasing company, aged 33 and 35, who owe $5.49 million.

Last year, a 25-year-old hawker who sold cooked food and drinks was a partner in a few companies which went into liquidation with $5.5 million debts.

More writs of summons filed by major banks and other lenders were sent to those under 40 than before, data from Amequity showed. A writ of summons is typically the first step towards recovering money past the payment date. Lenders would send these writs usually for amounts of at least $5,000 and past due after 90 days, said litigation lawyer William Lai, who is also the founder of Amequity.

Last year, for United Overseas Bank (UOB) - which was the top bank in terms of writs filed - some 90 per cent of the amount owed was by those 40 and older. But so far this year, the writs filed by UOB against those younger than 40 made up almost 40 per cent of the overdue debt.

Standard Chartered Bank and OCBC Bank, the other leading banks in filing writs, showed a similar pattern. This year, writs filed by Stanchart against those under 40 made up almost 51 per cent of the bad debt, compared to 31 per cent in 2007. The corresponding figures for OCBC are 47 per cent this year versus 22 per cent last year.

The majority of bankrupts live in HDB flats. One is a female director of companies engaged in construction and development. The companies are being liquidated with some $73 million debts. She used to live in a private property which was sold in 2006 for less than $2 million, according to Amequity.

Tharman Shanmugaratnam says S'pore not headed for a recession

By Chio Su-Mei, Channel NewsAsia

SINGAPORE : Finance Minister Tharman Shanmugaratnam on Sunday gave the assurance that Singapore is not heading for a recession.

Speaking at a community event, Mr Tharman said, "From all indications we have at this point, I don't think we're heading for a recession. But there will be discomfort on the ground. Unfortunately, the fuel price increase in Malaysia does mean that vegetable, poultry and some other prices will go up. We can't avoid that. Fortunately, rice prices globally are coming down.

"But overall, we're in a situation which isn't temporary - this will be with us for a while. Commodity prices are much higher than what they used to be. But we're tackling it, and we're confident of tackling it - both through the government's measures, the Growth Dividends, the GST Credits, as well as the way in which you see a lot of community initiatives on the ground."

Mr Tharman was speaking to reporters at the Entrepreneur-in-You Carnival at Republic Polytechnic, where some 7,000 people turned up to pick up tips on starting their own business.

The carnival included forums, workshops and an exhibition to nurture business acumen.

There were also winning business presentations by tertiary institutions, and a presentation of the 2008 Youth Enterprise Awards.

The People's Association organised the event to encourage Singaporeans to be entrepreneurial. - CNA/ms

Fewer, pricier flights and job cuts: airlines' response to oil prices

PARIS - AS oil prices soar, airlines are coming back down to earth with a bump - cutting routes and capacity, ramping up prices and axing jobs as bosses freely admit the industry is in the 'worst crisis since 9/11.'

Oil prices on Friday broke through the US$139-a-barrel (S$190) level for the first time in New York and US$138 in London, powered by a wilting dollar.

A weakening US currency lowers the cost of dollar-priced goods, such as oil, for foreign buyers and drives up demand.

With sober analysts such as Goldman Sachs suggesting the price could reach US$200 a barrel within two years, the aviation industry appears to be in a nose-dive.

Airlines are particularly susceptible to hikes in the oil price, as jet fuel makes up a substantial part of their operating costs.

For customers, already facing escalating food prices, and, at least in Europe, rising inflation and higher interest rates thanks to a credit-crunch, the effect is likely to be steep rises in ticket prices.

'The industry needs to raise average fares 15 per cent to 25 per cent to be profitable with crude at US$125,' according to an analysis by Credit Suisse.

'As one carrier raises fares, we feel comfortable others will follow,' it warned.

So far US airlines are taking the brunt of the hit. Continental Airlines said on Thursday it would cull 3,000 jobs and ground 67 aging planes in a massive retrenchment due to the price of fuel.

'The airline industry is in a crisis. Its business model does not work with the current price of fuel and the existing level of capacity in the marketplace,' Continental's chairman and chief executive Larry Kellner and president Jeff Smisek said in a statement this week.

'The industry faces its worst crisis since 9/11,' the pair wrote in a letter to employees.

Continental's cuts on Thursday came a day after United Airlines's parent company, UAL, announced it was removing 100 aircraft and cutting up to 1,100 jobs.

Two weeks earlier, AMR, the parent company of US market leader American Airlines, announced big cuts in domestic flights, shed workers and raised some fees for passengers.

So far this year the industry has eliminated nearly 22,000 jobs, compared with 21,710 for the whole of 2007, according to global outplacement firm Challenger, Gray and Christmas.

Where the US leads, others follow, from Australia to east Asia to the low-cost budget airlines that have opened up so many routes for holiday-makers in Europe.

Dublin-based no-frills airline Ryanair said this week it had taken a 10.3 per cent hit in net profits for 2007-2008 and would break even next year - but predicted other low-cost carriers would go to the wall.

'The airlines who will survive this period of higher oil prices and industry turndown are those with cheaper fuel efficient aircraft, lower costs, substantial cash balances, low net debt and management who are ready to exploit downturns to drive costs lower and increase efficiency,' Chief Executive Michael O'Leary said on Tuesday.

The famously combative CEO also announced Ryanair would ground up to 10 per cent of its fleet this winter and increase fares by an average of five per cent.

Silverjet, the British no-frills business-class carrier, went into administration at the end of May.

'Several airlines in Europe will go out of business,' the head of the German unit of Britain's Easyjet, John Kohlsaat, told German daily Der Tagesspiegel last week.

'Theoretically, 50 are endangered,' he added.

According to the International Air Transport Association (IATA), 24 airlines have gone bust in the past six months, with its member companies facing potential losses of US$6.1 billion this year if oil remained around US$135 per barrel.

'The industry is in crisis, perhaps the biggest crisis we have ever faced,' IATA Secretary General Giovanni Bisignani told its annual conference in Istanbul last week.

At the same conference the head of Malaysia Airlines said his company would freeze recruitment and consider axing more routes as part of cost-cutting plans.

Australia's Qantas will cut several of its Asia flights, while two major Chinese airlines, China Southern Airlines and China Eastern Airlines, have announced temporary reductions in their international routes.

Although more fuel-efficient aircraft are in the pipeline - a new Airbus consumes 20 per cent less fuel than old Boeing 737, according to Easyjet's Kohlsaat - many airlines and their passengers need to brace for an emergency landing. -- AFP

Former JP Morgan banker spun lies to slash maintenance payments to ex-wife

Published June 7, 2008

'Bus driver' who lived in Cairnhill Crest to pay his dues
Former JP Morgan banker spun lies to slash maintenance payments to ex-wife

By SIOW LI SEN

(SINGAPORE) A high-flying banker based in Singapore tried to tell a UK court that he was too poor to afford maintenance payments for his ex-wife and two children in England. He tried to show that he was jobless and might end up being a bus driver. He applied for the payments to be slashed.

The court has now ruled against Simon Andrew Sywak and, in fact, has increased the maintenance payments.

Mr Sywak said he had lost his job as a hedge fund manager in London and was now living in accommodation that belonged to his new wife's mother in Bromley. He insisted he would not be able to earn more than £pounds;40,000 (S$107,000) a year and there was no way that he could pay a monthly maintenance of about £pounds;2,750 to his ex-wife and two sons.

He said he 'might drive a bus, write a book, go on benefit'. In fact, he said he had applied for a driver's licence.

What Mr Sywak hid from both his ex-wife and the British Court was this: He had already moved to Singapore and taken up a high-paying job with investment bank JP Morgan as vice-president. He was being paid $350,000 a year and living with his new wife in the upmarket Cairnhill Crest. He was sending her children to an international school.

The truth emerged only when the banker was tracked down by a private detective hired by ex-wife Helen Sywak.

'We found out he was living in Cairnhill Circle and working with JP Morgan,' the former Mrs Sywak told BT.

Units in Cairnhill Crest when sold by the developer in 2006 cost an average $3.2 million - at a time when the market was still subdued.

Mr Sywak, who is Australian, stopped paying maintenance to his ex-wife and two sons - now aged eight and 10 - in February last year.

Ironically, it was on Feb 1, 2007, that he took up his new job in Singapore.

Yet, on May 15 last year, he was still claiming that he was living with his mother-in-law and indicating that he was short of funds.

Confronted with his lies he told the Brighton County Court that he did not disclose his employment to his ex-wife as 'she would go to any lengths to destroy my career because she is evil'.

It was then shown in court that far from his circumstances worsening, his salary at JP Morgan had actually increased to $380,000 a year.

At this point, in February this year, Mr Sywak tried to claim that he was thinking of taking up a job in New York that paid only about half of what he earned in Singapore. His new wife told the court that 'she hated Singapore'.

Mr Sywak also tried to throw mud at his ex-wife. He said she was cohabiting with another man who was supporting her financially. The court found no evidence of this.

The court also agreed that she and her children depended almost entirely on the maintenance that they got from Mr Sywak.

'I find the evidence of the Applicant (Mr Sywak) to be totally unreliable and he has been shown to have actively misled the court virtually throughout this current application,' said Judge Paul Gamba.

'He now asks me to accept that he will now relocate to New York. I understand that his new wife does not like Singapore. But to ask me to accept that on relocation he will take a drop of £pounds;5,000 a month in salary when (he claims) he has debts of £pounds;290,000 is just beyond belief and I reject that evidence.'

The judge ordered Mr Sywak to pay arrears of £pounds;30,600 and increased the maintenance payment to £pounds;3,250 a month.

A JP Morgan corporate communications executive told BT that Mr Sywak had resigned since April 21 this year. Calls to Mr Sywak's home number were not answered.

His former wife said he had resumed the monthly payments since March but has yet to pay the arrears.

12 New 'Necessities' That Drain Your Cash

by Jay MacDonald

True essentials never really change -- food, water, shelter and clothing.

However, modern life has created a host of "new necessities" that many people swear they cannot live without -- a daily latte, premium cable, a weekly manicure, a new leased automobile and cell phones for the family.

In reality, there's a more accurate word for those pricey add-ons: entitlements.

If you want to significantly cut spending, it's important to take a closer look at what you consider to be needs.

"Basically, what we need has nothing to do with Starbucks coffee," says money coach and psychotherapist Olivia Mellan, author of "Overcoming Overspending."

"A lot of us in wealthy, overspending America are either born or raised with a tremendous sense of entitlement. We say to ourselves, 'I work hard or, I work at a job I hate -- at least I should be able to have a Starbucks coffee every day or eat out for lunch.' But of course, those are not needs, they're wants. They're pleasures."

Mary Hunt, author of "Debt-Proof Living" and a recovering overspender, fell into the entitlement trap to the tune of $100,000 in obligations before she realized that so-called bare necessities were burying her in debt.

Today, Hunt avoids malls, shares a car with her husband, and spends much of her time helping groups wake up and smell the Folgers.

"When financial ignorance and availability of credit meet ugly attitudes of entitlement, that is a recipe for a horrible disaster," she says. "I know; I've been there. That's why I tell people the road's out up ahead -- turn around!"

The Cost of New 'Necessities'

We all need the basics: food, water, shelter and clothing. However, is that daily latte really a "necessity"? Does our happiness depend on having premium cable?

Eliminating any of the following modern-day "necessities" can save you money for the really important things in life.

Jeff Yeager, who has long lived the frugal lifestyle he espouses in "The Ultimate Cheapskate's Road Map to True Riches," says the irony is that the more we consume, the more we are consumed.

"When you simplify, you almost always save money, but the really great thing is it makes us happier," he says. "We take 'stuff' as being such a positive in our lives, but I'm not convinced that it is. It's certainly costing us more money. Not only does it not make us any happier, it arguably makes us less happy. It makes the quality of our life decrease."

Dialing back the entitlements not only saves you money, it can start a domino effect. For instance, doing your own lawn care and dog walking can eliminate the "need" for an expensive health club.

Meanwhile, commuting by bike or public transit can eliminate the "need" for a second car.

Dirty dozen

Many of today's new "necessities" actually are entitlements that leave people deeper in debt. Here are 12 "new necessities" you might find you can downsize or even live without. Average prices quoted are courtesy of Costhelper.com except where noted:

Daily Latte

The notion of giving up your daily latte and getting rich has become a cliché for a reason: A barista-made latte costs roughly 100 times what a homebrewed cup of Joe does.

Would you pay $1,000 for a pizza? Get real.

Brew your own and save $25 a week, or $1,300 a year.

Cable TV

Bruce Springsteen described cable TV succinctly in his song "57 Channels (And Nothin' On)." But even if you can't imagine living without C-SPAN, you can save by dropping premium cable while holding onto basic service.

Dropping premium channels should save you about $25 to $30 a month, or $300 to $360 a year.

If you're more ambitious, you can save a bundle by dropping premium and basic service. Basic service often runs about $30 to $35 a month, or $360 to $420 a year. So if you drop cable entirely, you'll save $55 to $65 a month, or $660 to $780 annually.

Manicure/Pedicure

Standard manicures average $10 to $15 at nail shops and $20 to $25 at spas and salons. Standard pedicures run $15 to $25 (nail shops) and $35 to $40 (spas and salons). Acrylic nails run $25 to $35 (nail shops) and $35 to $45 (spas and salons).

If you only skipped one of each per month, you would save $50 to $110 a month, or $600 to $1,200 a year. Just doing your own weekly manicure will save you $520 to $1,300 annually.

Botox

What, give up Botox? Don't frown. Those treatments -- typically scheduled every three months -- cost on average between $300 and $1,200 per visit.

Let nature take its course and save $1,200 to $4,800 a year.

Bottled Water

Some people consider bottled water a necessity, even though the perfect low-cost alternative is available from any faucet in their home.

"Bottled water drives me crazy," Hunt says. "There are so many studies that show that tap water is better for our kids because it has fluoride and it's not stripped of all the minerals."

Drink tap water and pocket the $25 to $40 monthly fee for bottled water delivery, based on online averages.

Second Car

Hands down, a second car is the highest-ticket "new necessity" in America today. It's so prevalent that Yeager is doing his book promotion tour by bike just to point up the sheer absurdity of our one-person, one-car paradigm.

Hunt, who routinely leased a new car every three years for 22 years until her finances crashed and burned, tried carpooling with her husband 10 years ago and never bought another car.

"I said, 'You know what? Oprah has a driver,'" she says. "That was such a wakeup call to me, because a car had become a necessity of life."

Not only does she not miss the car payment, maintenance, license, registration, insurance fees and outlay for gas ("We save at least $1,000 a month," she estimates), but there's that domino effect: She no longer zooms off to the mall to shop at the hint of a sale.

Cell Phone

Those TV ads that feature parents distraught over their family's cell phone bill may qualify as truth in advertising for once.

"This drives me crazy," Hunt says. "I'm sorry, a 4-year-old does not need a cell phone. I think even a family with teenagers could get by with one or two prepaid phones that they pass around."

You can save $40 to $60 per month on average, or $480 to $720 per year, for every cell phone you eliminate. A prepaid plan used sparingly will save you money over a contract plan.

Lawn Service

Here's the rationalization for a lawn service: My time is worth more than I'm paying them to cut my grass. Heck, it's actually a savings!

Well, yes -- if you were mowing your lawn during business hours instead of at night or on the weekend with the rest of us.

The average cost for weekly mowing, hedge trimming and leaf blowing is $65 to $90. It's hardly a savings to shell out $260 to $360 a month, is it? Mow your own and save the dough.

If you do enough lawn and garden work, you may even save the $35 to $40 you shell out each month for your fitness club membership.

Clothes

Where would retailers be if we only bought clothes we need?

"I'm not a fashion-conscious guy, but I've observed that clothes, even the cheapest clothes, last forever," Yeager says. "When was the last time you truly wore something out?"

While we're not suggesting you dress in rags -- or worse, go without clothes altogether -- satisfying your wardrobe jones with a measure of frugality can save a bundle.

"I think most Americans could easily go for one year without buying any new clothes," Yeager says.

Private School

Give up private school? Are you crazy?!

"A lot of parents almost feel that they are abusing their children if they don't send them to private school," Hunt says. "I don't agree with that."

Instead, Hunt believes parents can save a bundle -- and provide their children with a top-notch education -- by sticking with public schools.

"I'm a huge proponent of public school," she says. "I think some private schools are actually inferior because sometimes their instructors don't have to be credentialed."

Oh, did we mention that you're already paying for public school anyway? Go public and save anywhere from $8,000 to $35,000 per year, according to the Boarding School Review Web site.

Childhood Parties

If you don't have kids, you probably can't appreciate how out-of-control children's birthday parties have become.

"Every kid has to have a bouncy house for their birthday," says Hunt, who lives in Southern California. "It's not enough to have just a cake; you have to have a meal. And now you have to invite the parents."

Hunt adds that such celebrations no longer are restricted to "big" birthdays, but occur every year.

"And they celebrate graduations, from preschool, for kindergarten, for elementary, junior high," she says. "When they get to be teens, the whole group has to go somewhere. By the time you graduate high school, now you go to Aruba."

Young parents, you've been warned.

Pet grooming/Walking

The cost of grooming your dog averages $30 to $50 for small breeds, $50 to $70 for midsize breeds and $70 to $90 for large breeds. A pet walker on average runs $15 to $27 per walk.

To save money, invest in a $25 set of electric clippers and learn online about how to groom your pet. You'll pay for the razor with the first haircut.

And wouldn't a daily walk do you both some good?

Copyrighted, Bankrate.com. All rights reserved.

Banker's 3Rs: review, realign, rebalance

Take charge of your money and get out fast if need be, says OCBC private banking head Olivier Denis

By Lorna Tan Finance Correspondent

If you peep into the wallet of OCBC Bank's private banking head, Mr Olivier Denis, you will find only two credit cards. This is far fewer than the four to six that most Singaporeans hold.

The Frenchman and Singapore permanent resident prefers to keep just two cards because he is a 'points junkie'. He said: 'I try to put every single dollar on my card to accumulate points that I can convert them into Krisflyer miles and redeem flights.'

He manages his investment portfolios even more aggressively because he feels long-term passive buy- and-hold investment strategies are 'no longer relevant under current market conditions'.

'The world is changing at an accelerated pace and the financial market is no exception. Investors need to actively and dynamically engage and manage their portfolios. As the markets are volatile now, they must regularly rebalance their portfolios and realign their strategies to market situations.'

His portfolios are all short-term, and he reviews and rebalances them every month as the need arises. For instance, if the Aussie dollar depreciates, he will immediately stop holding cash in that currency.

Mr Denis has more than 20 years' experience in wealth management and private banking. He was in charge of the Singapore market at American Express Bank before joining OCBC Private Bank in September 2006.

He is no stranger to Asia, having lived in this region for the first 17 years of his life. He has been in Singapore for seven years and worked in Asia for 13.

He recalled how thrilled he was when presented with the opportunity to manage OCBC Private Bank. After all, OCBC was the first Singapore bank to introduce private banking in the Republic.

'Having spent most of my life in Asia, I see great synergy in my move as I understand the culture, behaviour and investment mindset of Asian clients.'

Mr Denis, 49, is married to Frederique, 45. They have two sons, Archibald, 17, and Constantin, 14.

Q: What are your money habits?
I earn and save while my family spends it for me! Jokes aside, I do not spend on unnecessary items. I make it a point to pay my bills on time, via direct debit or Giro through my account.

Q: What financial planning have you done for yourself?
I adopt a currency and an investment strategy. Both are flexible and I can rebalance at any point by changing the mix. I also ensure that my investment strategy has no currency exposure as I prefer to manage it on my own. A 20 per cent return can be wiped out in no time by currency movements.

I currently have investments in Singdollars, euros, Aussie dollars and US dollars. I keep the Aussie dollars in cash as interest rates are high; the euros are in market-neutral funds; the US dollars are in commodity futures and private banking products; and the Singdollars are in a variety of Asian equities and Asian funds.

At this point, the United States doesn't have the right indicators for market growth, but there are some tactical opportunities. Asia is the world's engine economically, so it has lots of potential to grow. That's why I go 'long' into Asian equities and funds. Europe has no clear trends, so I'm market-neutral there.

Q: What kind of returns are you aiming for?
I manage the risk-return ratio very carefully by minimising the potential downside before looking at the potential upside. The returns range from 10 to 15 per cent a year. Anything more is a bonus.

Q: What about insurance planning?
As a French national, I contribute 20 per cent of my pay to schemes under France's statutory retirement system. It covers my insurance needs. In a few years, I might invest in a Universal Life plan for my two boys.

Q: Any other investments?
I have a 0.5ha family property in France. To me, property is for personal use and not so much for investment. I leave property-related investments to professional developers. I am looking at one property in Singapore but I'm waiting for the market to correct.

I invest in wine but purely for personal consumption. Having a nice wine cellar is part of the French culture and tradition. My collection is meant to be enjoyed with friends and family, not transacted.

Q: Moneywise, what were your growing-up years like?
I lived in Asia till I was 17. I was the eldest in a family of five. I remember staying in a big house. My father worked for a French civil engineering firm before he became the Asian head of a French bank.

You can imagine, after the expat lifestyle I enjoyed growing up, the shock I suffered at boarding school in France. The other students and I were practically from different planets, but it was a good reality check.

Q: How did you get interested in investing?
During my college years in France, I was part of an investment club. Every student contributed to a fund that the club invested in European equities. The club provided regular reports on the fund's performance.

Q: What has been a bad investment?
The apartment I bought in Paris in 1982 - my one attempt at property investment. I did not make any returns and my capital was locked up for five years. After inflationary adjustments, I actually lost money.

Q: Your best investment to date?
Deciding to live and work in Singapore. Living here is a privilege we sometimes take for granted. Where else can you get this quality of life? If you want to balance your work, quality of life and family, there are not many places that can offer such a good package.

Q: Any investment tips for the man in the street?
Don't invest in or buy products you don't fully understand. Don't try to out-smart the market. Investment is about adopting a disciplined approach based on your strategy and risk appetite. It is not about listening to rumours or timing the market.

Q: What's your retirement plan?
I'll spend my summers in the south of France and winters in Singapore. The rest of the time, I'll travel in Asia, where I still have so much to discover even after 28 years in the region.

Q: And your home now is...?
I live in an apartment in the East Coast.

Q: And your car is...?
A black BMW 5 series.

Stagflation in the 1970s

From U.S. Department of State

The term "stagflation" -- an economic condition of both continuing inflation and stagnant business activity, together with an increasing unemployment rate -- described the new economic malaise. Inflation seemed to feed on itself. People began to expect continuous increases in the price of goods, so they bought more. This increased demand pushed up prices, leading to demands for higher wages, which pushed prices higher still in a continuing upward spiral. Labor contracts increasingly came to include automatic cost-of-living clauses, and the government began to peg some payments, such as those for Social Security, to the Consumer Price Index, the best-known gauge of inflation.

While these practices helped workers and retirees cope with inflation, they perpetuated inflation. The government's ever-rising need for funds swelled the budget deficit and led to greater government borrowing, which in turn pushed up interest rates and increased costs for businesses and consumers even further. With energy costs and interest rates high, business investment languished and unemployment rose to uncomfortable levels.

In desperation, President Jimmy Carter (1977-1981) tried to combat economic weakness and unemployment by increasing government spending, and he established voluntary wage and price guidelines to control inflation. Both were largely unsuccessful. A perhaps more successful but less dramatic attack on inflation involved the "deregulation" of numerous industries, including airlines, trucking, and railroads. These industries had been tightly regulated, with government controlling routes and fares. Support for deregulation continued beyond the Carter administration. In the 1980s, the government relaxed controls on bank interest rates and long-distance telephone service, and in the 1990s it moved to ease regulation of local telephone service.

But the most important element in the war against inflation was the Federal Reserve Board, which clamped down hard on the money supply beginning in 1979. By refusing to supply all the money an inflation-ravaged economy wanted, the Fed caused interest rates to rise. As a result, consumer spending and business borrowing slowed abruptly. The economy soon fell into a deep recession.

The Economy in the 1980s
The nation endured a deep recession throughout 1982. Business bankruptcies rose 50 percent over the previous year. Farmers were especially hard hit, as agricultural exports declined, crop prices fell, and interest rates rose. But while the medicine of a sharp slowdown was hard to swallow, it did break the destructive cycle in which the economy had been caught. By 1983, inflation had eased, the economy had rebounded, and the United States began a sustained period of economic growth. The annual inflation rate remained under 5 percent throughout most of the 1980s and into the 1990s.

The economic upheaval of the 1970s had important political consequences.
The American people expressed their discontent with federal policies by turning out Carter in 1980 and electing former Hollywood actor and California governor Ronald Reagan as president. Reagan (1981-1989) based his economic program on the theory of supply-side economics, which advocated reducing tax rates so people could keep more of what they earned. The theory was that lower tax rates would induce people to work harder and longer, and that this in turn would lead to more saving and investment, resulting in more production and stimulating overall economic growth. While the Reagan-inspired tax cuts served mainly to benefit wealthier Americans, the economic theory behind the cuts argued that benefits would extend to lower-income people as well because higher investment would lead new job opportunities and higher wages.

The central theme of Reagan's national agenda, however, was his belief that the federal government had become too big and intrusive. In the early 1980s, while he was cutting taxes, Reagan was also slashing social programs. Reagan also undertook a campaign throughout his tenure to reduce or eliminate government regulations affecting the consumer, the workplace, and the environment. At the same time, however, he feared that the United States had neglected its military in the wake of the Vietnam War, so he successfully pushed for big increases in defense spending.

The combination of tax cuts and higher military spending overwhelmed more modest reductions in spending on domestic programs. As a result, the federal budget deficit swelled even beyond the levels it had reached during the recession of the early 1980s. From $74,000 million in 1980, the federal budget deficit rose to $221,000 million in 1986. It fell back to $150,000 million in 1987, but then started growing again. Some economists worried that heavy spending and borrowing by the federal government would re-ignite inflation, but the Federal Reserve remained vigilant about controlling price increases, moving quickly to raise interest rates any time it seemed a threat. Under chairman Paul Volcker and his successor, Alan Greenspan, the Federal Reserve retained the central role of economic traffic cop, eclipsing Congress and the president in guiding the nation's economy.

Dark day on Wall Street

The Dow's 395-point drubbing is its biggest one-day point loss in 15 months, after crude prices' largest one-day advance ever and a poor jobs report.

By Alexandra Twin, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Stocks tanked Friday, with the Dow industrials shedding 395 points, after oil prices spiked more than $11 a barrel and the May jobs report showed a big jump in the unemployment rate.

Bond prices surged, as investors sought safety in government debt, while the dollar tumbled versus the yen and euro.

The Dow Jones industrial average (INDU) lost 395 points, or 3.1%, its biggest one-day decline on both a point and percentage basis since February of 2007, at the start of the subprime mortgage crisis.

The broader Standard & Poor's 500 (SPX) index lost 3.1%, while the Nasdaq composite (COMP) lost 3%. Both saw their biggest one-day declines on both a point and a percentage basis in more than four months.

The unemployment rate shot up to 5.5% in May from 5.0% in April, the government reported, marking the biggest one-month surge in over 20 years. The report was a clear indication that the economy could be in a recession after all, despite some recent bets that one could be narrowly avoided.

As rattling as the unemployment number was, the stock market was even more spooked by the spike in oil prices, said Bill Stone, chief investment strategist at PNC Wealth Management.

"I think more than anything, it's the shock of oil prices being up this substantially two days in a row," Stone said.

Crude jumped more than $16 in two sessions, with prices settling up $10.75 to $138.54 a barrel Friday on the weak dollar and in response to a Morgan Stanley note that said oil could hit $150 a barrel by July 4.

The spike exacerbated worries about consumer spending, already stretched as gas prices near a national average of $4 a gallon.

"You're definitely seeing the fear trade today, with the dollar down, commodity prices up and bonds rallying," Stone said.

Stocks could be vulnerable to further declines in the week ahead, after the S&P 500 closed below a key technical level that has previously given a floor to the selling. Traders said stocks could be in danger of moving back to the lows of March and January, which were seen as something of a bottom after months of stock declines.

Jobs market deteriorates: The unemployment rate surged to 5.5% from 5.0%, beating forecasts for a rise to 5.1% and showing the biggest one-month jump since 1986.

The spike really caught people by surprise, said Stuart Hoffman, chief economist at PNC Financial Services Group. He said the report makes it clear that at least for so-called Main Street and the labor market, "we are in a recession, regardless of how we economists define it."

He was referring to the fact that GDP has been limping higher and the economy has not been officially declared to be in a recession by the National Bureau of Economic Research.

However, with non-farm payrolls dropping for a fifth consecutive month, it feels to many people like it's a recession, he said. Employers cut 49,000 from their payrolls, the report showed, versus forecasts for a decline of 60,000.

Dollar falls, oil spikes: The dollar continued its slide versus the euro on the weak jobs report and comments Thursday that the European Central Bank could potentially raise interest rates. The dollar also tanked versus the yen.

The dollar's decline contributed to a rally in dollar-traded commodity prices, with U.S. light crude oil for July delivery settling at $138.54 a barrel, a jump of $10.75. The increase was the biggest single-day price gain since record-keeping began in 1983 - taking out the previous session's record.

Oil prices spiked to a record trading high of $139.12 after the close, before pulling back a bit.

Gold and other commodities rallied too. COMEX gold for August delivery rose $23.50 to settle at $899 an ounce.

Gas backs off record: The national average price for a gallon of regular unleaded gas fell to $3.986 from the previous day's record of $3.989, AAA reported. Gas prices had set new records for 28 of the previous 29 days.

Other markets: Treasury prices rallied, lowering the yield on the 10-year note to 3.93% from 4.05% late Thursday. Bond prices and yields move in opposite directions.

On the move: Stock declines were broad based, with all 30 Dow issues falling.

The Dow's financial components were hit the hardest, with American Express (AXP, Fortune 500) and Citigroup (C, Fortune 500) both down 5%, and Bank of America (BAC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) down more than 4%.

AIG (AIG, Fortune 500) slumped more than 7% on reports that the Securities and Exchange Commission is looking into whether the insurer overstated the value of contracts connected to subprime markets, something AIG denies. Additionally, it was reported that federal prosecutors have asked the SEC for material related to the investigation.

Other big blue-chip losers included General Motors (GM, Fortune 500), down nearly 5%, and Boeing (BA, Fortune 500), down 5.4%.

Intel (INTC, Fortune 500), Oracle (ORCL, Fortune 500), Cisco (CSCO, Fortune 500) and Qualcomm (QCOM, Fortune 500) were among the biggest technology decliners.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by over 4 to 1 on 1.48 billion shares. On the Nasdaq, decliners topped advancers by nearly 4 to 1 on volume of 2.20 billion shares.

Stocks spiked Thursday on a surprise dip in weekly jobless claims, stronger-than-expected May retail sales and a merger in the telecom sector. But the advance was short-lived as Friday's barrage of discouraging economic news and spiking oil prices brought out the sellers.

Corporate America is getting nervous

A big spike in unemployment is the latest sign that businesses are starting to feel the pinch from the weak economy. But some see hope on the horizon.

By Paul R. La Monica, CNNMoney.com editor at large

NEW YORK (CNNMoney.com) -- Businesses, like consumers, are starting to get much more nervous about the economy.

The significant spike in the unemployment rate in May, coupled with another month of job losses, is a certain indication that businesses are feeling the need to cut costs.

What's more, two separate reports about the health of Corporate America released today provide even more somber news about business confidence.

Talkback: How much worse will the job market get?

According to a survey of nearly 2,400 chief executive officers of small and mid-sized businesses by executive coaching firm Vistage International, CEO confidence is at an all-time low.

"It is clear the state of the economy is factoring into stress levels for CEOs as more and more companies adjust their business plans in the United States to survive," said Rafael Pastor, Vistage's chairman and CEO in the report. "CEOs are telling us they are more stressed."

But what's worrisome is how CEOs are dealing with this stress.

According to the survey, only 43% of the CEOs said they now plan to increase their headcount in the next year. That's down from 57% a year ago. And one in six CEOs said they planned to cut jobs this year.

Online recruiting firm Dice Holdings (DHX), which specializes in career Web sites geared toward the technology and financial services industries, issued a report with similarly gloomy forecasts this morning.

Dice surveyed more than 1,100 companies and recruiters and found that more than half of the respondents said they would cut back their hiring plans over the next six months. And 20% said they thought layoffs were either very likely or likely at their companies in the next six months.

"We're seeing a mixed and uncertain hiring environment," said Dice chairman and CEO Scot Melland in the report. "Roughly half of employers are sticking with their hiring plans, but with a degree of caution and hesitancy you might expect, given the lukewarm economy."

Companies aren't just cutting back on hiring either.

Executives in the Vistage survey said they also plan on investing less in their businesses, another troubling sign. Only 33% of the CEOs said they would boost spending on new plants and equipment, compared to 46% from a year ago.

This is particularly problematic since the Federal Reserve's series of interest rate cuts since last September, in theory, should help make credit more available for businesses that want to grow. That doesn't appear to be happening just yet though.

"Despite declines in market interest rates, firms are finding it more difficult to obtain financing," the Vistage report indicated.

That said, there are some bright spots amid the gloom.

According to the Dice survey, 52% of new hires are receiving salaries that are higher than a year ago while 45% of new hires are getting paid about the same. That's a good sign. Given how rapidly food and gas prices rising, it's crucial that workers continue to see wage increases.

"The weakness in the employment market is not impacting compensation. In many categories, this still is a tight labor market and companies realize they have to pay competitive wages and take into account the cost of living," Melland said in an interview.

In addition, nearly 60% of those surveyed by Dice said that the main reason it's taking them longer to fill positions is because it's harder to find qualified candidates, not because they are cutting back due to the economy.

"Interestingly, the major reason for the extended period to hire people isn't concern about the economy or a lack of urgency to fill a position. It's finding the right people," the Dice report said.

And according to Vistage's Pastor, he said more and more small and mid-sized businesses are increasing their businesses abroad, lured by a weaker dollar, stronger growth overseas and the relative ease of reaching international customers via the Web.

Along those lines, many large multinational corporations have been holding up reasonably well because they have stronger growth opportunities outside of the United States. Plus, many of them have relatively low debt loads and lots of cash to keep them afloat.

Pastor also said that corporate confidence, while low, is not declining precipitously. He said this may suggest that CEOs think the economy, while not ready yet to turn a corner, is not going to plunge significantly from here.

The executives surveyed by Dice shared that sentiment. "The majority of companies do not appear to be forecasting a dire turn for the worse any time soon," Melland said in the report.

What does a US recession imply for the gold price?

Recent research from the World Gold Council is particularly pertinent following the revision to the US First Quarter GDP figures.

Author: RhonaO’Connell
Posted: Wednesday , 04 Jun 2008

LONDON -

The most recent figures from the United States suggest that the first quarter GDP came in at +0.9%, an upward revision from the flash estimate of 0.6%. At first pass this is encouraging, but closer inspection shows a rather gloomier picture. Much of the growth in the real GDP figure was due, in the words of the US Department of Commerce, to an upturn in inventory investment that was partly offset by a deceleration in the Personal Consumption Expenditure (PCE)". Positive contributions also came from exports of goods and services, federal government spending and private inventory investment, while the durable goods PCE was negative, as was residential fixed investment (which should not come as a surprise), which dropped by 26%. Inventory adjustments contributed 0.2% to the GDP figure while the automotive sector shaved off 0.4%

Without the underpinning from durable goods, therefore, and with the latest Consumer Sentiment Index registering a 28-year low, the words "stagflation" and "recession" are again populating the vocabulary of market commentators. This makes one of the latest pieces of research from the World Gold Council partially interesting.

Natalie Dempster, the Investment Research Manager at the Council, has produced a paper that studies the performance of gold in recessionary conditions and one of the primary conclusions is that regression and correlation analysis suggest that there is no relationship between changes in US GDP growth and changes in the gold price. A US recession, therefore, would not have negative implications for the gold price. This is a reflection of the unique drivers of the gold market, and underpins the advection of gold's role as a diversifying asset, even in times of recession.

The World Gold Council analysis notes that both macro data and the Federal reserve's rapid loosening in monetary policy, both in terms of interest rate shifts and the massive injections of liquidity, suggest that the US is "at serious risk of, or possibly already in, a recession". The technical definition of a recession is two consecutive quarters of negative growth in real Gross Domestic Product, although the National Bureau of Economic Research (NBER) Business Cycle Dating Committee definition is of "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales" and in truth the debate over the most accurate definition could fill many pages. Perhaps we should be thinking in terms of "perception" of a recession, since perception is so important in defining activity - and this is why the Consumer sentiment Index is currently so important. The latest survey from Reuters / University of Michigan came in at 51.1, the lowest since July 1979 when it was 44.1. Over the following twelve months, real consumer spending dropped by 0.3%, and the figures suggest that we are heading for a downturn again this time around, although probably somewhat shallower than in 1979/80 (when gold, incidentally, was hitting the then record of $850/ounce, although there were a number of other forces at work other than just economic - including an oil shock).

The Council research points out that there are obvious winners and losers in terms of asset performers in a recession. While car manufacturers and homebuilders, along with financial stocks, suffer as result of reduced consumption and slowing bank lending, defensive stocks such as biotechs or foodstuffs tend to perform well, as do fixed-income assets as interest rates are lowered in an effort to stimulate consumer demand. Commodities tend to underperform on the back of reduced demand.

There have been five recessionary periods since gold was released from its price peg in 1971, on the basis of the NBER definition. Two have each lasted 16 months, namely November 1973-March 1975 and July 1981 - November 1982; two have been of eight months' duration each, from July 1990 - March 1991 and March 2001 - November 2001; the fifth was just six months from January to July 1980. There has been no clear pattern in gold's price performance. Between November 1973 and March 1975 it gained 88% and in the second 16 month recession it rose by 7%. In the first eight month recession the price declined, as it did in the six month recession in early 1980 while in the recession following the bursting of the dot.com bubble it rallied by 7%.

The study notes that there is "no relationship between the gold price and economic activity full stop", with slowing growth sometimes accompanied by a falling gold price and on other occasions, most notably in recent months, gold has rallied strongly during a slowdown.

Regression and correlation analysis back up this statement. The correlation coefficient between quarterly GDP growth and the gold price from 1973 to 2007 is a paltry 0.02 (on a scale of zero to one). Similarly a ten-year rolling correlation coefficient between the two (where the scale is measured from minus one to plus one) has fluctuated merely between -0.2 and +0.2 - with the exception of two quarters in 1983. This, given the number of observations in the analysis, is effectively zero.

Compare this with other assets; the study points out, for example, that the correlation coefficient between ten-year bond futures has been "continuously negative and statistically significant" for much of 1972 - 2007.

Backing this analysis with an overview of the characteristics of gold's supply and demand dynamics, this is a useful study to illustrate how gold does, or more to the point does not, react to changes in GDP and, thus bends to the Council's argument for the use of gold as a diversifying asset within a portfolio.

Global Financial Meltdown Ahead

By James West

The third phase of the "mortgage meltdown" or "real estate bubble" or "credit crunch", or whatever you prefer to think of it is, will be nothing short of a re-ordering of the financial universe. We will one day (hopefully) look back on this time and shake our heads in awe at the depression-era hardships many are on the verge of suffering.

Lehman Brothers (NYSE:LEH) is the institution in the spotlight today, as the frightening prospect of a Bear Stearns-style demise looms for the U.S.’s fourth largest securities firm. I created a "Google Alert" for the term "Lehman Brothers Collapse" a couple of weeks ago, and the number of stories being delivered with that phrase included has today peaked at 10.

Previously, the stories included in the daily alert were from blogs and commentaries, what most of us would consider "fringe" sources. Today, the stories are in Forbes, Bloomberg, Associated Press, New York Times, and Fox Business, among others.

Shares of Lehman fell $3.22, or 9.52 percent, to $30.61, despite the company’s assurances that the investment bank had enough liquidity and was not borrowing from the Federal Reserve’s discount window.

Meanwhile, in a speech Fed Chairman Ben Bernanke re-iterated his position that the U.S. economy would rebound in the second half of this year on the stimulus of interest rate cuts, Fed loans to banks and tax rebates.

Poor Ben. Under siege and mostly on his own, he’s left with nothing but platitudes in his arsenal to defend against the dark hordes gathering at the gate.

The complete meltdown scenario referenced in the title of this article envisions a scenario whereby Lehman Brothers and a few other major investment banks find themselves so starved for cash as a result of illiquid holdings that continue to plummet in value, that the Fed can’t print money fast enough, the banks can’t help them simply because the sums required to stave off collapse are too great, and the entire sector is left to its own devices for survival.

Closely following on the heels of one then two then three or more institutional implosions, the U.S. dollar will resume its dead weight drop, which will in turn drive the prices of energy and raw materials up so high that farmers won’t be able to afford to bake bread from their own wheat. The nation will become, on a broad scale, impoverished. Crime will skyrocket. I’ll be up north.

The bright side to all this doom and gloom is for investors in gold. The complete meltdown scenario would see gold take off in a northerly trajectory just as fast as the dollar goes south.

The effect would, however, be the opposite for oil. While the dollar value for gas at the pump would certainly rise due to the diminished purchasing power of the greenback, U.S. demand for hydrocarbon energy would ease as the un-affordability of gasoline would see huge shifts to alternative transportation methods. Already, bicycle sales are on fire throughout the United States.

But the big kicker that is going to make the recession a global depression is the sudden slowdown in growth in India and China.

I was horizontal in the dentist’s chair yesterday when BBC’s World News reported a slowdown in the rate of growth in India. I had an hour of construction going on in my mouth to ponder on that before the good ole BBC news loop came round again, and I heard it repeated. The drill’s vibration was insufficient to thwart the bells ringing in my head.

The entire bull market in base and industrial metals is, according to many institutional investors and economic theologians, based on the fact of India and China’s unstoppable growth. Admittedly, one quarter’s statistic indicating a deceleration in the rate of growth is hardly cause for alarm. However, should this pan out to be the first iteration of a change in the pattern we’ve grown accustomed (actually…more like addicted) to, we could be in for some serious trouble.

The world over, observers have been watching the ripple effect initiated by the real estate and credit bubble implosions comfortable in the knowledge that the Asian growth machine was proceeding seemingly unaffected by the carnage in London, New York and Berlin. So if India is now to fall victim to higher capital, energy and raw material costs, is China right on its heels? What is the greater implication for the United States and the rest of the G8 nations if this last bastion of economic fortitude is also to crumble?

According to the BBC (and yes I was taking notes while the dental crew was unleashing its own economic expansion in my yarp), “Growth is expected to continue to slow this year, but will remain higher than most other economies in the world.

"There will be deceleration this year coming from industry and high interest rates," said economist Saugata Bhattacharya, from the Mumbai-based Axis Bank.

"Industrial impulses will be curtailed. However, there will be a partial offsetting if agriculture and monsoons will be good," he said.

If agriculture and the monsoons are good?!

Isn’t this the nation where 17,500 farmers commit suicide in their fields each year precisely because agriculture and the monsoons are not good?

That’s right. 17,500 farmers every year between 2003 and 2006 took their own lives standing in their fields because they owed, on average, US$1,000 or less. If I committed suicide every time I owed somebody a thousand dollars, it would be a most disagreeable movie version of Groundhog Day.

At least 160,000 farmers have committed suicide since 1997, said K. Nagaraj of the Madras Institute of Development Studies.

The BBC's Karishma Vaswani in Mumbai said the rising cost of living had had a negative impact on consumer spending and the situation was likely to get worse before it got better.

India’s main growth slowdown occurred in the manufacturing sector. As it turns out, the same thing is happening in China. A Reuters story crossed the wire at 1:05 a.m. Eastern stating that "China's manufacturing sector slowed last month for the first time since January as export orders and domestic investment both weakened”.

And why should we be surprised?

China has essentially become the world’s manufacturer. If the G8 nations are in a pinch because the credit they’ve been “spending” for the last 10 years has in fact turned out to be play-dough, and the dismantling of the Betty Crocker Easy Bake credit oven has eliminated the clay ducats we’ve been using to acquire overpriced bricks and mortar, the obviously the world’s manufacturer is going to experience a reduction in demand, and by extension, Gross National Product.

Dare I say it? Is this the onset of global recession?

Do you ever feel like you’re on the Titanic, and you’re looking over the rail at the icebergs thinking, "Shouldn’t we be proceeding a little bit more cautiously?", while the men in uniform keep shouting, "Full speed ahead!"?

Alas, that is the world we live in. If our elected officials declare "Full Speed Ahead", then full speed ahead it is. Democracy’s Achilles heel, apparently.

So now what? Is it time to sell base metals, precious metals and all the juniors exploring for same? What about the big boys – the producers? As I said, this is the first news of diminished growth in Chindia (no disrespect intended), and so a knee jerk reaction would be just that, at this point.

But it’s a nervous eye watching the data today on my part. If the Asian juggernaut has exhausted its momentum, all the gold, silver, oil and metals stocks in the world won’t feed a planet torn by food riots and civil warfare.

James West
Publisher

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