A key measure of consumer confidence fell to an all-time low in October as the financial crisis weighed on American household budgets.
The Conference Board, a New York-based business research group, said Tuesday that its Consumer Confidence Index plummeted to 38 in October from an upwardly revised reading of 61.4 in September.
Last month's decline brings the index to its lowest level since its inception in 1967.
Economists were expecting the index to have declined to 52, according to a survey by Briefing.com.
"The impact of the financial crisis over the last several weeks has clearly taken a toll on consumers' confidence," said Lynn Franco, director of the Conference Board Consumer Research Center, in a statement.
The nation's financial system has been under considerable strain in October as the credit crunch has hampered businesses ability to fund essential activities.
Stock prices have plunged as investors fear the global economy is on the verge of recession. The Dow Jones industrial average has fallen more than 27% in October.
While gas prices have come down significantly, which puts more cash in consumers' pockets, Americans appear more focused on the deteriorating job market.
So far this year, the economy has lost 760,000 jobs, according to the Labor Department's September payrolls report.
A case in point: Whirlpool Corp., the nation's largest home appliance maker, said Tuesday it will cut about 5,000 jobs by the end of 2009 to cope with the credit crisis and weak demand.
"In assessing current conditions, consumers rated the labor market and business conditions much less favorably, suggesting that the fourth quarter is off to a weaker start than the third quarter," Franco said.
Tuesday, October 28, 2008
Monday, October 27, 2008
Fed begins business lending program
The Federal Reserve started buying so-called commercial paper on Monday to jumpstart a critical but faltering lending market used by banks and big businesses.
To boost the $1.45 trillion pool of money - which was about $2 trillion a year ago - the Fed has begun buying high-quality commercial paper with a maturation period of three months. The program, known as the Commercial Paper Funding Facility (CPFF), will continue through the end of April 2009.
"This will be a vital facility until corporations can find an alternative," said Bill Larkin, portfolio manager at Cabot Money Management. "Companies can't operate without access to the commercial paper markets."
Several dozen companies registered for the Fed's program, including General Electric Co. (GE, Fortune 500), which is reportedly the largest issuer of commercial paper. Morgan Stanley (MS, Fortune 500) topped the name of Wall Street firms that registered. Car and home financer GMAC (GMA) said it was approved to make use of the facility, and American Express (AXP, Fortune 500) said it intends to use the facility as early as this week, but it did not yet sell paper to the Fed.
"American Express is always interested in broadening its sources of funding, and the CPFF provides us with access to a reliable source of short-term funding beyond 30 days," said company spokeswoman Jo Lambert.
The Fed could buy about $250 billion of paper to restore the market to its pre-credit-crisis levels, according to Lyle Gramley, a former Fed governor and current Stanford Group economist. And the number of participating companies - and the amount of paper that the Fed will buy up - could grow in coming weeks and months.
The Fed said it will not cap the total amount it lends out, but the central bank will limit purchases of companies' debt to the greatest amount of paper the company had outstanding this year. The amount of paper that the Fed bought will not be known until Thursday, when the central bank will make a weekly announcement about the facility's cost.
Crumbling market
Commercial paper is short-term debt that big businesses and financial institutions sell primarily to money-market fund managers and other institutional investors. The companies use the loans to fund day-to-day business operations, but the market has dried up as confidence on Wall Street has waned.
Since Lehman Brothers filed for bankruptcy on Sept. 15, total commercial paper has plunged by 20% - the greatest drop on record. Commercial paper outstanding is now at its lowest point since April 2005.
"The problem has grown in scope and magnitude over the past month more than anyone could have imagined," said Scott Anderson, senior economist with Wells Fargo. "Liquidity is freezing up in the short-term lending market, which can snowball very quickly into payroll cuts and other nasty developments."
Three-month paper has found the fewest buyers. Investors are worried that they'll end up holding debt for a company that won't be able to pay them back - or won't be there at all at the end of the maturation period. The vast majority of outstanding paper matures in a week or less, so companies have been forced to refinance their debt weekly - or even daily - and many have not been able to meet their credit needs. The lack of longer-term lending is worrisome for companies looking for financing for the last few months of the year.
The fourth quarter is the most critical period for lending, as financial institutions are hesitant to lend with the risk of taking a hit to their balance sheets at the end of the fiscal year. Uncertainty over the looming election has also made investors weary of doling out their funds.
Lower rates may be contagious
The central bank will charge a floating interest rate that will begin at 1.88% for unsecured debt and 3.88% for asset-backed commercial paper. Paper of lower credit quality is often backed with assets to entice borrowing, but rates are higher. The Fed's rates are competitive with current market rates and are lower than the 2.5% to 5% that borrowers were charged when the credit crisis first took hold in mid-September.
Some economists believe that the Fed's commercial paper rates will nudge other rates lower, like the 3-month Libor interbank lending rate, which currently sits at a high 3.51% level. That would be a major boost for the strangled credit market, as more than $350 trillion is assets are tied to Libor.
"The goal of the central banks is to lower Libor rates, because borrowing is so expensive for companies now," Anderson said. "There is no one magic solution, but this program will help lead to lower rates."
The Fed's actions have been criticized by some analysts who believe the facility doesn't address the sellers of lower quality paper, who have suffered the most since the credit crisis put a stranglehold on lending. Still, other economists say the Fed's efforts to buy up large amounts of commercial paper will restore confidence to the market.
To boost the $1.45 trillion pool of money - which was about $2 trillion a year ago - the Fed has begun buying high-quality commercial paper with a maturation period of three months. The program, known as the Commercial Paper Funding Facility (CPFF), will continue through the end of April 2009.
"This will be a vital facility until corporations can find an alternative," said Bill Larkin, portfolio manager at Cabot Money Management. "Companies can't operate without access to the commercial paper markets."
Several dozen companies registered for the Fed's program, including General Electric Co. (GE, Fortune 500), which is reportedly the largest issuer of commercial paper. Morgan Stanley (MS, Fortune 500) topped the name of Wall Street firms that registered. Car and home financer GMAC (GMA) said it was approved to make use of the facility, and American Express (AXP, Fortune 500) said it intends to use the facility as early as this week, but it did not yet sell paper to the Fed.
"American Express is always interested in broadening its sources of funding, and the CPFF provides us with access to a reliable source of short-term funding beyond 30 days," said company spokeswoman Jo Lambert.
The Fed could buy about $250 billion of paper to restore the market to its pre-credit-crisis levels, according to Lyle Gramley, a former Fed governor and current Stanford Group economist. And the number of participating companies - and the amount of paper that the Fed will buy up - could grow in coming weeks and months.
The Fed said it will not cap the total amount it lends out, but the central bank will limit purchases of companies' debt to the greatest amount of paper the company had outstanding this year. The amount of paper that the Fed bought will not be known until Thursday, when the central bank will make a weekly announcement about the facility's cost.
Crumbling market
Commercial paper is short-term debt that big businesses and financial institutions sell primarily to money-market fund managers and other institutional investors. The companies use the loans to fund day-to-day business operations, but the market has dried up as confidence on Wall Street has waned.
Since Lehman Brothers filed for bankruptcy on Sept. 15, total commercial paper has plunged by 20% - the greatest drop on record. Commercial paper outstanding is now at its lowest point since April 2005.
"The problem has grown in scope and magnitude over the past month more than anyone could have imagined," said Scott Anderson, senior economist with Wells Fargo. "Liquidity is freezing up in the short-term lending market, which can snowball very quickly into payroll cuts and other nasty developments."
Three-month paper has found the fewest buyers. Investors are worried that they'll end up holding debt for a company that won't be able to pay them back - or won't be there at all at the end of the maturation period. The vast majority of outstanding paper matures in a week or less, so companies have been forced to refinance their debt weekly - or even daily - and many have not been able to meet their credit needs. The lack of longer-term lending is worrisome for companies looking for financing for the last few months of the year.
The fourth quarter is the most critical period for lending, as financial institutions are hesitant to lend with the risk of taking a hit to their balance sheets at the end of the fiscal year. Uncertainty over the looming election has also made investors weary of doling out their funds.
Lower rates may be contagious
The central bank will charge a floating interest rate that will begin at 1.88% for unsecured debt and 3.88% for asset-backed commercial paper. Paper of lower credit quality is often backed with assets to entice borrowing, but rates are higher. The Fed's rates are competitive with current market rates and are lower than the 2.5% to 5% that borrowers were charged when the credit crisis first took hold in mid-September.
Some economists believe that the Fed's commercial paper rates will nudge other rates lower, like the 3-month Libor interbank lending rate, which currently sits at a high 3.51% level. That would be a major boost for the strangled credit market, as more than $350 trillion is assets are tied to Libor.
"The goal of the central banks is to lower Libor rates, because borrowing is so expensive for companies now," Anderson said. "There is no one magic solution, but this program will help lead to lower rates."
The Fed's actions have been criticized by some analysts who believe the facility doesn't address the sellers of lower quality paper, who have suffered the most since the credit crisis put a stranglehold on lending. Still, other economists say the Fed's efforts to buy up large amounts of commercial paper will restore confidence to the market.
Thursday, October 23, 2008
GM signals more cuts
General Motors expects to meet or exceed its target for a 20% reduction in the cost of its salaried workforce, but a worsening sales outlook is likely to force additional cost and staffing reductions, a company spokesman said Thursday.
Final numbers on an early retirement program announced this summer are not yet available, said GM spokesman Tom Wilkinson, as many who signed up are still within a window during which they can change their mind. The final figure is due on Nov. 1.
GM has 32,000 U.S. salaried employees, and since it has set a 20% cost target rather than a headcount reduction goal, it has yet to say how many employees it expects will be leaving the company under the program. The company has previously announced some changes in health insurance for salaried staff that will meet some of the cost cut target.
Given the continued contraction in both North America and European sales, further moves to cut costs are likely, Wilkinson confirmed, including possible additional job reductions.
"We'll continue to assess our overall staffing needs," Wilkinson said. "Everybody in the business is looking at ways to tighten their belt."
The plans are detailed in a letter from Bill Tate, the head of human resources for GM North America, informing executives that GM (GM, Fortune 500) is taking immediate steps to reduce costs. They include suspending its matching contributions to 401(k) as of Nov. 1, and also suspending tuition reimbursement and adoption assistance as of the end of the year.
GM's U.S. sales have plunged 18% so far this year, while European sales have also fallen.
No additional cost or headcount reduction target is spelled out in the letter. There was also discussion of a potential merger between GM and Chrysler LLC. Talks of a possible combination have been widely reported, but it is not clear such a deal will be able to be completed. To top of page
Final numbers on an early retirement program announced this summer are not yet available, said GM spokesman Tom Wilkinson, as many who signed up are still within a window during which they can change their mind. The final figure is due on Nov. 1.
GM has 32,000 U.S. salaried employees, and since it has set a 20% cost target rather than a headcount reduction goal, it has yet to say how many employees it expects will be leaving the company under the program. The company has previously announced some changes in health insurance for salaried staff that will meet some of the cost cut target.
Given the continued contraction in both North America and European sales, further moves to cut costs are likely, Wilkinson confirmed, including possible additional job reductions.
"We'll continue to assess our overall staffing needs," Wilkinson said. "Everybody in the business is looking at ways to tighten their belt."
The plans are detailed in a letter from Bill Tate, the head of human resources for GM North America, informing executives that GM (GM, Fortune 500) is taking immediate steps to reduce costs. They include suspending its matching contributions to 401(k) as of Nov. 1, and also suspending tuition reimbursement and adoption assistance as of the end of the year.
GM's U.S. sales have plunged 18% so far this year, while European sales have also fallen.
No additional cost or headcount reduction target is spelled out in the letter. There was also discussion of a potential merger between GM and Chrysler LLC. Talks of a possible combination have been widely reported, but it is not clear such a deal will be able to be completed. To top of page
Tuesday, October 21, 2008
Oil falls to $71, Opec-style gas cartel possible
Oil prices fell to $71 a barrel Tuesday as investors expected OPEC to try to halt a three-month slide in prices by cutting production quotas by at least 1 million barrels a day.
At the same time, gains by the U.S. dollar against the euro were putting the brakes on any gains in oil prices.
"The general trend is still of uncertainty," said analyst Olivier Jakob of Petromatrix in Switzerland.
By midday in Europe, light, sweet crude for November delivery was down $2.76 to $71.49 a barrel in electronic trading on the New York Mercantile Exchange. Earlier in the session, it rose as high as $75.69. The contract gained overnight $2.40 to settle at $74.25.
Prices closed as low as $69.85 a barrel last week, down 53 % from a record $147.27 on July 11.
In London, November Brent crude was down 62 cents to $71.41 a barrel on the ICE Futures exchange.
"It definitely looks like a cut is in the cards," said Victor Shum, an energy analyst at consultancy Purvin & Gertz in Singapore. "A cut of at least 1 million has been priced in. A cut much larger than 1 million could move prices higher."
OPEC meeting
The Organization of Petroleum Exporting Countries, which accounts for about 40% of global oil supply, plans to announce an output reduction at a meeting on Friday at its headquarters in Vienna, said the group's president, Chakib Khelil.
Khelil has said OPEC may cut output again at a meeting in December, and that the group considers the oil market oversupplied by about 2 million barrels a day.
Investors are also keeping a close eye on whether non-OPEC producers, such as Russia, will reduce supply as analysts lower price expectations for next year. Deutsche Bank on Monday cut its 2009 oil price forecast to $60 a barrel from $92 and predicted $57.50 for 2010.
"Producers are getting concerned about this downward spiral in pricing since the summer," Shum said. "Some governments have based their budgets higher than current prices."
Rising global stock markets have also supported prices this week.
Federal Reserve Chairman Ben Bernanke told the House Budget Committee on Monday that a fresh round of government measures might help ease the country's economic weakness. There were also signs of a reviving credit market as bank-to-bank lending rates eased further.
Stock indexes across Asia rose Tuesday, with Japan's benchmark Nikkei 225 stock average up 3.3 %. The Dow Jones industrials average rose 4.7 `% Monday.
"Lately oil has traded in sync with equities as traders look to equity markets for indications of the macro-economic outlook," Shum said.
Dollar gains
On the negative side for oil, the dollar continued to rise against the euro and the British pound, a trend which can draw investors out of commodities.
By midday in Europe, the euro was down to $1.3240 from $1.3323 in the previous session, while the British pound bought $1.7069 compared with $1.7121 late Monday in New York.
In other Nymex trading, heating oil futures rose 1.01 cents to $2.22 a gallon, while gasoline prices lost 46 cents to $1.7155 a gallon. Natural gas for November delivery gained 2.4 cents to $6.765 per 1,000 cubic feet.
Iran's oil minister says the Islamic republic, Russia and Qatar discussed the formation of an OPEC-style cartel of gas exporting countries.
Gas exporters
Iranian Oil Minister Gholam Hossein Nozari says that the top three countries with natural gas reserves will "seriously pursue the formation of an organization of gas exporting countries."
Nozari spoke on state TV Tuesday after a joint meeting with his Qatari counterpart Abdulla Bin Hamad al-Attiya and the head of Russia's Gazprom Alexei Miller.
He said the three parties decided to further discuss the cartel at the next meeting of their foreign ministers.
The idea of formation of the gas cartel was first raised by Iran when then-president of Russia Vladimir Putin visited Tehran in 2007.
At the same time, gains by the U.S. dollar against the euro were putting the brakes on any gains in oil prices.
"The general trend is still of uncertainty," said analyst Olivier Jakob of Petromatrix in Switzerland.
By midday in Europe, light, sweet crude for November delivery was down $2.76 to $71.49 a barrel in electronic trading on the New York Mercantile Exchange. Earlier in the session, it rose as high as $75.69. The contract gained overnight $2.40 to settle at $74.25.
Prices closed as low as $69.85 a barrel last week, down 53 % from a record $147.27 on July 11.
In London, November Brent crude was down 62 cents to $71.41 a barrel on the ICE Futures exchange.
"It definitely looks like a cut is in the cards," said Victor Shum, an energy analyst at consultancy Purvin & Gertz in Singapore. "A cut of at least 1 million has been priced in. A cut much larger than 1 million could move prices higher."
OPEC meeting
The Organization of Petroleum Exporting Countries, which accounts for about 40% of global oil supply, plans to announce an output reduction at a meeting on Friday at its headquarters in Vienna, said the group's president, Chakib Khelil.
Khelil has said OPEC may cut output again at a meeting in December, and that the group considers the oil market oversupplied by about 2 million barrels a day.
Investors are also keeping a close eye on whether non-OPEC producers, such as Russia, will reduce supply as analysts lower price expectations for next year. Deutsche Bank on Monday cut its 2009 oil price forecast to $60 a barrel from $92 and predicted $57.50 for 2010.
"Producers are getting concerned about this downward spiral in pricing since the summer," Shum said. "Some governments have based their budgets higher than current prices."
Rising global stock markets have also supported prices this week.
Federal Reserve Chairman Ben Bernanke told the House Budget Committee on Monday that a fresh round of government measures might help ease the country's economic weakness. There were also signs of a reviving credit market as bank-to-bank lending rates eased further.
Stock indexes across Asia rose Tuesday, with Japan's benchmark Nikkei 225 stock average up 3.3 %. The Dow Jones industrials average rose 4.7 `% Monday.
"Lately oil has traded in sync with equities as traders look to equity markets for indications of the macro-economic outlook," Shum said.
Dollar gains
On the negative side for oil, the dollar continued to rise against the euro and the British pound, a trend which can draw investors out of commodities.
By midday in Europe, the euro was down to $1.3240 from $1.3323 in the previous session, while the British pound bought $1.7069 compared with $1.7121 late Monday in New York.
In other Nymex trading, heating oil futures rose 1.01 cents to $2.22 a gallon, while gasoline prices lost 46 cents to $1.7155 a gallon. Natural gas for November delivery gained 2.4 cents to $6.765 per 1,000 cubic feet.
Iran's oil minister says the Islamic republic, Russia and Qatar discussed the formation of an OPEC-style cartel of gas exporting countries.
Gas exporters
Iranian Oil Minister Gholam Hossein Nozari says that the top three countries with natural gas reserves will "seriously pursue the formation of an organization of gas exporting countries."
Nozari spoke on state TV Tuesday after a joint meeting with his Qatari counterpart Abdulla Bin Hamad al-Attiya and the head of Russia's Gazprom Alexei Miller.
He said the three parties decided to further discuss the cartel at the next meeting of their foreign ministers.
The idea of formation of the gas cartel was first raised by Iran when then-president of Russia Vladimir Putin visited Tehran in 2007.
Monday, October 20, 2008
Global effort thaws credit freeze
With two more countries entering the global fight to stem the world's financial crisis, lending rates continued to fall Monday, signaling the worldwide effort was working to ease the stranglehold on lending.
Three major gauges of the credit market showed a moderate increase in interbank and corporate lending. Banks are charging each other less for loans, and though still at elevated levels, businesses' fears about issuing loans have begun to subside.
The overnight Libor rate fell to 1.51% from 1.67% Friday, according to Bloomberg.com. Libor is a daily average of what 16 different banks charge other banks to lend money in London and is used to calculate adjustable rate mortgages. The higher the rate, the tougher it could be for homeowners to pay those mortgages.
Two weeks ago, overnight Libor spiked as high as 6.88% after the Treasury's $700 billion bailout bill was signed into law on Oct. 3.
For the first time in more than a month, the overnight bank lending rate is at about the rate that the federal banks charge banks - a sign that credit markets are returning to normalcy. The federal funds rate is at 1.5%.
Longer-term lending, though loosening, is still tight: The 3-month Libor marched lower for the sixth day in a row, falling to 4.06% from 4.42% Friday, according to Dow Jones. Last week, the 3-month Libor surged to 4.82% - the highest since mid-December 2007. By comparison, it was under 3% about a month ago.
Overseas help: The South Korean government said it would guarantee up to $100 billion in foreign-currency loans and pump $30 billion into the banking sector. On Sunday, the Dutch government it would inject $13.4 billion into ING Groep NV to shore up the bank and insurance company.
The moves are similar to actions taken by the U.S. government and European banks in recent weeks to encourage lending between financial institutions.
"The actions seem to be restoring a little confidence," said Kim Rupert, fixed income analyst with Action Economics. "There are signs that there are enough backstops in the market to free up lending a bit."
While banks had already tightened their lending last summer amid the housing implosion, the markets got really squeezed after Lehman Brothers collapsed last month. The fear was that if one major investment bank could go under in a matter of days, then other seemingly secure firms might not be able to repay their loans.
Federal Reserve chairman Ben Bernanke said in testimony before the House Budget Committee Monday that the fear factor made credit become rare and expensive.
"Withdrawals from prime money market mutual funds, which are important suppliers of credit to the commercial paper market, severely disrupted that market; and short-term credit, when available, has become much more costly for virtually all firms," Bernanke said. "Households and state and local governments have also experienced a notable reduction in credit availability."
As a result, governments around the globe have worked with their central banks to cut interest rates, increase currency exchange programs and pour capital into banks to boost liquidity. The Federal Reserve also will begin to backstop short-term corporate lending next Monday in an effort to unclog the credit pipelines.
"I am confident that these initiatives ... will help restore trust in our financial system and allow the resumption of more normal flows of credit to households and firms," Bernanke added.
If banks don't issue loans, and if companies don't lend to one another, it becomes more difficult for Americans to finance a car, a home or college. Businesses have difficulty securing short-term money to pay the bills, and payrolls can get trimmed.
"The government poured a massive amount of liquidity in the system and also guarantees," Rupert said. "The big question is whether or not the intervention is enough to continue to restore confidence in the markets."
Market gauges: But confidence that the global effort to fight the financial crisis was working eased fears in the credit market Monday. That was evident in some market indicators.
The "TED spread" declined to 3.17 percentage points from 3.63 points Friday, signaling some restoration of confidence in banks. The TED spread measures the difference between the 3-month Libor and the 3-month Treasury bill, and is a key indicator of risk. The higher the spread, the more unwilling investors are to take risks. The spread was 1.04 percentage points just a little over a month ago and reached a record high of 4.65 points just over a week ago.
Another indicator, the Libor-OIS spread, also edged slightly lower to 2.93 percentage points from 3.28 points Friday. The Libor-OIS spread measures how much cash is available for lending between banks, and is used for determining lending rates. The bigger the spread, the less cash is available for lending.
Still, the gauges remain high and still have room to fall.
"It's still dicey out there," Rupert said. "We'll probably need to get through the year end without any bumps before we can return to normalcy."
Treasurys: Government debt prices were lower Monday, as the stock market rose on the global coordinated effort to fix the financial crisis. Investors also cheered Bernanke's suggestion that Congress offer another economic stimulus package.
With investors showing more appetite for risk, the benchmark 10-year note was down 1/32 to 100-16/32 and its yield rose to 3.94% from 3.93% late Friday. Bond prices and yields move in opposite directions.
The 2-year note fell 2/32 to 100-21/32 and its yield rose to 1.66% from 1.62% late Friday.
The 30-year bond was unchanged at 102-31/32, and the yield held at 4.34%.
The yield on the 3-month bill rose to 0.90%, up from 0.79% on Friday. The yield on the 3-month Treasury bill is closely watched as an immediate reading on investor confidence. Investors and money-market funds shuffle funds into and out of the 3-month bill frequently, as they assess risk in the rest of the marketplace. A higher yield indicates that investors are slightly more optimistic.
Three major gauges of the credit market showed a moderate increase in interbank and corporate lending. Banks are charging each other less for loans, and though still at elevated levels, businesses' fears about issuing loans have begun to subside.
The overnight Libor rate fell to 1.51% from 1.67% Friday, according to Bloomberg.com. Libor is a daily average of what 16 different banks charge other banks to lend money in London and is used to calculate adjustable rate mortgages. The higher the rate, the tougher it could be for homeowners to pay those mortgages.
Two weeks ago, overnight Libor spiked as high as 6.88% after the Treasury's $700 billion bailout bill was signed into law on Oct. 3.
For the first time in more than a month, the overnight bank lending rate is at about the rate that the federal banks charge banks - a sign that credit markets are returning to normalcy. The federal funds rate is at 1.5%.
Longer-term lending, though loosening, is still tight: The 3-month Libor marched lower for the sixth day in a row, falling to 4.06% from 4.42% Friday, according to Dow Jones. Last week, the 3-month Libor surged to 4.82% - the highest since mid-December 2007. By comparison, it was under 3% about a month ago.
Overseas help: The South Korean government said it would guarantee up to $100 billion in foreign-currency loans and pump $30 billion into the banking sector. On Sunday, the Dutch government it would inject $13.4 billion into ING Groep NV to shore up the bank and insurance company.
The moves are similar to actions taken by the U.S. government and European banks in recent weeks to encourage lending between financial institutions.
"The actions seem to be restoring a little confidence," said Kim Rupert, fixed income analyst with Action Economics. "There are signs that there are enough backstops in the market to free up lending a bit."
While banks had already tightened their lending last summer amid the housing implosion, the markets got really squeezed after Lehman Brothers collapsed last month. The fear was that if one major investment bank could go under in a matter of days, then other seemingly secure firms might not be able to repay their loans.
Federal Reserve chairman Ben Bernanke said in testimony before the House Budget Committee Monday that the fear factor made credit become rare and expensive.
"Withdrawals from prime money market mutual funds, which are important suppliers of credit to the commercial paper market, severely disrupted that market; and short-term credit, when available, has become much more costly for virtually all firms," Bernanke said. "Households and state and local governments have also experienced a notable reduction in credit availability."
As a result, governments around the globe have worked with their central banks to cut interest rates, increase currency exchange programs and pour capital into banks to boost liquidity. The Federal Reserve also will begin to backstop short-term corporate lending next Monday in an effort to unclog the credit pipelines.
"I am confident that these initiatives ... will help restore trust in our financial system and allow the resumption of more normal flows of credit to households and firms," Bernanke added.
If banks don't issue loans, and if companies don't lend to one another, it becomes more difficult for Americans to finance a car, a home or college. Businesses have difficulty securing short-term money to pay the bills, and payrolls can get trimmed.
"The government poured a massive amount of liquidity in the system and also guarantees," Rupert said. "The big question is whether or not the intervention is enough to continue to restore confidence in the markets."
Market gauges: But confidence that the global effort to fight the financial crisis was working eased fears in the credit market Monday. That was evident in some market indicators.
The "TED spread" declined to 3.17 percentage points from 3.63 points Friday, signaling some restoration of confidence in banks. The TED spread measures the difference between the 3-month Libor and the 3-month Treasury bill, and is a key indicator of risk. The higher the spread, the more unwilling investors are to take risks. The spread was 1.04 percentage points just a little over a month ago and reached a record high of 4.65 points just over a week ago.
Another indicator, the Libor-OIS spread, also edged slightly lower to 2.93 percentage points from 3.28 points Friday. The Libor-OIS spread measures how much cash is available for lending between banks, and is used for determining lending rates. The bigger the spread, the less cash is available for lending.
Still, the gauges remain high and still have room to fall.
"It's still dicey out there," Rupert said. "We'll probably need to get through the year end without any bumps before we can return to normalcy."
Treasurys: Government debt prices were lower Monday, as the stock market rose on the global coordinated effort to fix the financial crisis. Investors also cheered Bernanke's suggestion that Congress offer another economic stimulus package.
With investors showing more appetite for risk, the benchmark 10-year note was down 1/32 to 100-16/32 and its yield rose to 3.94% from 3.93% late Friday. Bond prices and yields move in opposite directions.
The 2-year note fell 2/32 to 100-21/32 and its yield rose to 1.66% from 1.62% late Friday.
The 30-year bond was unchanged at 102-31/32, and the yield held at 4.34%.
The yield on the 3-month bill rose to 0.90%, up from 0.79% on Friday. The yield on the 3-month Treasury bill is closely watched as an immediate reading on investor confidence. Investors and money-market funds shuffle funds into and out of the 3-month bill frequently, as they assess risk in the rest of the marketplace. A higher yield indicates that investors are slightly more optimistic.
Friday, October 17, 2008
Stocks cut losses
Stocks retreated near midsession Friday, although not by as much as earlier in the day, as renewed recession fears were tempered by Google's earnings and bullish comments from influential investor Warren Buffett.
Treasury prices rallied, lowering the corresponding yields, and the dollar weakened against other major currencies. The credit market showed some signs of loosening, as several key lending rates declined.
The Dow Jones industrial average (INDU) lost 1% over two hours into the session after having fallen as much as 261 points in the early going. The Standard & Poor's 500 (SPX) index lost 0.7%, erasing bigger losses. The Nasdaq composite (COMP) was little changed.
The Dow rose 401 points Thursday at the end of a seesaw session that saw the blue-chip indicator fall as much as 380 points in the morning.
Early Friday, the tone was decidedly negative as investors focused on poor readings on housing and consumer sentiment. But the volatile market rebounded a little shortly after.
Home construction tumbles: Housing starts fell to a 17-year low in September, according to a government report released Friday before the market opened. Starts fell to a seasonally adjusted 817,000 in the month from 872,000 the previous month. Economists were expecting a smaller decline.
Applications for building permits, considered a good indicator of future activity, fell to a seasonally adjusted rate of 786,000 in September, down from a revised 857,000 in August. Economists were expecting a smaller decline. (Full story)
Another economic report, the University of Michigan's consumer sentiment index, fell to 57.5 in October from 70.3 at the end of October, the biggest month-over-month slide in the history of the report. Economists surveyed by Briefing.com thought it would slide to 65.
Company news: Google (GOOG, Fortune 500) reported higher-than-expected third-quarter earnings Thursday night, on revenue that was in line with forecasts. The search engine's shares rose 7% Friday morning. (Full story)
Also late Thursday, Advanced Micro Devices (AMD, Fortune 500) reported a narrower quarterly loss, while IBM (IBM, Fortune 500) reported higher profit that beat estimates, after pre-announcing the results last week. AMD shares jumped 7% while IBM shares were little changed.
In financial services news, AIG (AIG, Fortune 500) said late Thursday that it has tapped another $12 billion in emergency government funding, bringing its total to $82.9 billion as it struggles to stay afloat. AIG fell 6%. (Full story)
Among other movers, Merck (MRK, Fortune 500) gained 4% after UBS upgraded it to "neutral" from "buy," Briefing.com reported.
Bush and Buffett: President Bush, speaking early Friday, reiterated the steps that the government has taken to try to stabilize roiling financial markets. (Full story)
While investors have welcomed many of the steps the government and world banks have taken to get money flowing again, stocks have remained volatile and mostly negative. Year-to-date, the Dow, S&P and Nasdaq are all down at least 30%.
On Friday, Berkshire Hathaway (BRK.A) head honcho Warren Buffett said in a New York Times commentary that he is moving to stocks from Treasurys in his personal portfolio.
The influential investor said business activity will continue to dwindle and the economy to struggle. But the fear surrounding the economic slowdown and the credit crisis has left stocks with attractive valuations. (Full story)
Credit market: Lending rates have improved this week, as the government initiatives have started to have an impact. (Full story)
Libor, the overnight bank-to-bank lending rate, fell to 1.67% from 1.94% late Thursday, according to Bloomberg.com, a more than 4-year low. But longer-term rates have fallen more slowly. The three-month Libor, what banks charge each other to borrow for three months, fell to 4.42% from 4.50% Thursday.
Another indicator, the Libor-OIS spread, a measure of cash scarcity, fell to 3.31% from 3.39% Thursday.
The TED spread, which is the difference between what banks pay to borrow from each other for three months and what the Treasury pays, narrowed to 3.83% from 4.11% late Thursday. The spread hit a record 4.65% last week. The wider the spread, the more reluctant banks are to lend to each other.
Credit froze up in the wake of the housing market collapse, the subsequent subprime lending fallout and contraction in the bank sector. The lack of available credit has punished the already weak economy, making it difficult for businesses to function on a daily basis and for consumers to get loans.
The Federal Reserve has made potentially trillions of dollars available to banks. Earlier this week, the U.S. government said it would invest at least $250 billion in the nation's banks as part of the $750 billion bank bailout plan.
Treasury prices were little changed, with the yield on the 10-year note at 3.97%. Treasury prices and yields move in opposite directions.
The yield on the 3-month Treasury bill, seen as the safest place to put money in the short term, rose modestly to 0.61% from 0.48% late Tuesday. The low yield shows investors are still willing to take a meager return on their money rather than risk the stock market.
Last month, the yield on the 3-month bill skidded to a 68-year low around 0%.
Other markets: Global markets were mixed. In Asia, Hong Kong's Hang Seng index fell 4.4%, while Japan's Nikkei gained 2.8%. European markets were mostly higher in afternoon trading there, with the London FTSE up 4.5%.
U.S. light crude oil for November delivery rose $1.19 to $71.04 a barrel on the New York Mercantile Exchange after ending the previous session at a 13-month low.
Bets that demand is slowing have sent oil prices lower since crude hit an all-time high of $147.27 a barrel on July 11. So far, instead of providing relief to investors, the decline has been seen as another indication of the global economic slowdown.
Gasoline prices fell another 4.4 cents overnight, to a national average of $3.04 a gallon, according to a survey of credit card activity by motorist group AAA. It was the 30th consecutive day that prices have decreased - in the past month alone, they're down more than 81 cents a gallon.
COMEX gold for December delivery slumped $21.50 to $783 an ounce. A variety of other commodities declined as well.
In currency trading, the dollar fell against the euro and the yen.
Treasury prices rallied, lowering the corresponding yields, and the dollar weakened against other major currencies. The credit market showed some signs of loosening, as several key lending rates declined.
The Dow Jones industrial average (INDU) lost 1% over two hours into the session after having fallen as much as 261 points in the early going. The Standard & Poor's 500 (SPX) index lost 0.7%, erasing bigger losses. The Nasdaq composite (COMP) was little changed.
The Dow rose 401 points Thursday at the end of a seesaw session that saw the blue-chip indicator fall as much as 380 points in the morning.
Early Friday, the tone was decidedly negative as investors focused on poor readings on housing and consumer sentiment. But the volatile market rebounded a little shortly after.
Home construction tumbles: Housing starts fell to a 17-year low in September, according to a government report released Friday before the market opened. Starts fell to a seasonally adjusted 817,000 in the month from 872,000 the previous month. Economists were expecting a smaller decline.
Applications for building permits, considered a good indicator of future activity, fell to a seasonally adjusted rate of 786,000 in September, down from a revised 857,000 in August. Economists were expecting a smaller decline. (Full story)
Another economic report, the University of Michigan's consumer sentiment index, fell to 57.5 in October from 70.3 at the end of October, the biggest month-over-month slide in the history of the report. Economists surveyed by Briefing.com thought it would slide to 65.
Company news: Google (GOOG, Fortune 500) reported higher-than-expected third-quarter earnings Thursday night, on revenue that was in line with forecasts. The search engine's shares rose 7% Friday morning. (Full story)
Also late Thursday, Advanced Micro Devices (AMD, Fortune 500) reported a narrower quarterly loss, while IBM (IBM, Fortune 500) reported higher profit that beat estimates, after pre-announcing the results last week. AMD shares jumped 7% while IBM shares were little changed.
In financial services news, AIG (AIG, Fortune 500) said late Thursday that it has tapped another $12 billion in emergency government funding, bringing its total to $82.9 billion as it struggles to stay afloat. AIG fell 6%. (Full story)
Among other movers, Merck (MRK, Fortune 500) gained 4% after UBS upgraded it to "neutral" from "buy," Briefing.com reported.
Bush and Buffett: President Bush, speaking early Friday, reiterated the steps that the government has taken to try to stabilize roiling financial markets. (Full story)
While investors have welcomed many of the steps the government and world banks have taken to get money flowing again, stocks have remained volatile and mostly negative. Year-to-date, the Dow, S&P and Nasdaq are all down at least 30%.
On Friday, Berkshire Hathaway (BRK.A) head honcho Warren Buffett said in a New York Times commentary that he is moving to stocks from Treasurys in his personal portfolio.
The influential investor said business activity will continue to dwindle and the economy to struggle. But the fear surrounding the economic slowdown and the credit crisis has left stocks with attractive valuations. (Full story)
Credit market: Lending rates have improved this week, as the government initiatives have started to have an impact. (Full story)
Libor, the overnight bank-to-bank lending rate, fell to 1.67% from 1.94% late Thursday, according to Bloomberg.com, a more than 4-year low. But longer-term rates have fallen more slowly. The three-month Libor, what banks charge each other to borrow for three months, fell to 4.42% from 4.50% Thursday.
Another indicator, the Libor-OIS spread, a measure of cash scarcity, fell to 3.31% from 3.39% Thursday.
The TED spread, which is the difference between what banks pay to borrow from each other for three months and what the Treasury pays, narrowed to 3.83% from 4.11% late Thursday. The spread hit a record 4.65% last week. The wider the spread, the more reluctant banks are to lend to each other.
Credit froze up in the wake of the housing market collapse, the subsequent subprime lending fallout and contraction in the bank sector. The lack of available credit has punished the already weak economy, making it difficult for businesses to function on a daily basis and for consumers to get loans.
The Federal Reserve has made potentially trillions of dollars available to banks. Earlier this week, the U.S. government said it would invest at least $250 billion in the nation's banks as part of the $750 billion bank bailout plan.
Treasury prices were little changed, with the yield on the 10-year note at 3.97%. Treasury prices and yields move in opposite directions.
The yield on the 3-month Treasury bill, seen as the safest place to put money in the short term, rose modestly to 0.61% from 0.48% late Tuesday. The low yield shows investors are still willing to take a meager return on their money rather than risk the stock market.
Last month, the yield on the 3-month bill skidded to a 68-year low around 0%.
Other markets: Global markets were mixed. In Asia, Hong Kong's Hang Seng index fell 4.4%, while Japan's Nikkei gained 2.8%. European markets were mostly higher in afternoon trading there, with the London FTSE up 4.5%.
U.S. light crude oil for November delivery rose $1.19 to $71.04 a barrel on the New York Mercantile Exchange after ending the previous session at a 13-month low.
Bets that demand is slowing have sent oil prices lower since crude hit an all-time high of $147.27 a barrel on July 11. So far, instead of providing relief to investors, the decline has been seen as another indication of the global economic slowdown.
Gasoline prices fell another 4.4 cents overnight, to a national average of $3.04 a gallon, according to a survey of credit card activity by motorist group AAA. It was the 30th consecutive day that prices have decreased - in the past month alone, they're down more than 81 cents a gallon.
COMEX gold for December delivery slumped $21.50 to $783 an ounce. A variety of other commodities declined as well.
In currency trading, the dollar fell against the euro and the yen.
Wednesday, October 15, 2008
Oil ends at 13-month low
Oil prices sank Wednesday as investors saw further signs of economic weakness and worried that a U.S. recession could kill demand for fuel.
U.S. crude for November delivery ended the day down $4.09 to $74.54 a barrel, the lowest settlement since Aug. 31, 2007 when the front-month contract closed at $74.04 a barrel.
Oil investors have been concerned about falling demand since crude futures peaked at a record $147.27 a barrel in mid-July.
As the economy slows energy spending is often among the first areas where consumers and businesses cut back, according to analysts.
"Indeed, the U.S. economy appears to be in a recession," San Francisco Fed president Janet Yellen told financial executives on Tuesday night.
"If you go back over the last 30 or 40 years, you see no example of a recession without lower oil prices," said James Williams, energy economist with WTRG Economics in Arkansas.
Some of that demand loss may be permanent, according to Williams.
"If you traded in your 10-year-old SUV for a Prius (hybrid), you can drive the same amount, and you're going to use less gasoline and thus less oil," he said. "Consumption is reduced for the lifetime of that Prius."
Economic worries: A report released Wednesday showed that U.S. retail sales fell 1.2% in September, nearly twice the 0.7% decline economists expected, and the largest drop in three years.
The retail sales report, which accounts for about half of all consumer spending, the other half being spending on services, will weigh heavily on the current quarter's gross domestic product (GDP), according to Robert Brusca, economist with FAO Economics in New York.
The GDP, the sum of all goods and services produced, is calculated each quarter by the Commerce Department. A recession is loosely defined as two or more consecutive quarters in which the country's GDP contracts.
"It looks like we're going to get a pretty negative GDP number in the quarter," said Brusca.
The economic slowdown is spreading to Europe and Japan as well, he added.
In her Tuesday speech, Yellen pointed to economists surveyed by the Blue Chip Economic Indicators, who predicted three consecutive quarters of negative GDP readings starting with the third quarter.
On a brighter note, U.S. and international efforts to shore up the ailing banking system and keep money flowing through the economy appear to be having an impact as credit markets continue to thaw.
However, Fed chairman Ben Bernanke warned Wednesday that even if bank confidence returns to normal, the economy will take a while to recover.
Predicted surplus: Investors were also concerned about a possible build-up in crude supplies - an indicator of lower crude demand from refineries in the U.S.
The official government report that details crude, gasoline, and distillate inventories, as well as demand, is scheduled for release Thursday at 11 a.m. ET. The report is delayed due to the Columbus Day holiday.
Analysts polled by Platts, the energy research division of McGraw-Hill, expect to see a 3.1 million barrel build-up in crude stockpiles, even though more than half of production in the Gulf of Mexico remains offline in the wake of this year's hurricane season.
U.S. crude for November delivery ended the day down $4.09 to $74.54 a barrel, the lowest settlement since Aug. 31, 2007 when the front-month contract closed at $74.04 a barrel.
Oil investors have been concerned about falling demand since crude futures peaked at a record $147.27 a barrel in mid-July.
As the economy slows energy spending is often among the first areas where consumers and businesses cut back, according to analysts.
"Indeed, the U.S. economy appears to be in a recession," San Francisco Fed president Janet Yellen told financial executives on Tuesday night.
"If you go back over the last 30 or 40 years, you see no example of a recession without lower oil prices," said James Williams, energy economist with WTRG Economics in Arkansas.
Some of that demand loss may be permanent, according to Williams.
"If you traded in your 10-year-old SUV for a Prius (hybrid), you can drive the same amount, and you're going to use less gasoline and thus less oil," he said. "Consumption is reduced for the lifetime of that Prius."
Economic worries: A report released Wednesday showed that U.S. retail sales fell 1.2% in September, nearly twice the 0.7% decline economists expected, and the largest drop in three years.
The retail sales report, which accounts for about half of all consumer spending, the other half being spending on services, will weigh heavily on the current quarter's gross domestic product (GDP), according to Robert Brusca, economist with FAO Economics in New York.
The GDP, the sum of all goods and services produced, is calculated each quarter by the Commerce Department. A recession is loosely defined as two or more consecutive quarters in which the country's GDP contracts.
"It looks like we're going to get a pretty negative GDP number in the quarter," said Brusca.
The economic slowdown is spreading to Europe and Japan as well, he added.
In her Tuesday speech, Yellen pointed to economists surveyed by the Blue Chip Economic Indicators, who predicted three consecutive quarters of negative GDP readings starting with the third quarter.
On a brighter note, U.S. and international efforts to shore up the ailing banking system and keep money flowing through the economy appear to be having an impact as credit markets continue to thaw.
However, Fed chairman Ben Bernanke warned Wednesday that even if bank confidence returns to normal, the economy will take a while to recover.
Predicted surplus: Investors were also concerned about a possible build-up in crude supplies - an indicator of lower crude demand from refineries in the U.S.
The official government report that details crude, gasoline, and distillate inventories, as well as demand, is scheduled for release Thursday at 11 a.m. ET. The report is delayed due to the Columbus Day holiday.
Analysts polled by Platts, the energy research division of McGraw-Hill, expect to see a 3.1 million barrel build-up in crude stockpiles, even though more than half of production in the Gulf of Mexico remains offline in the wake of this year's hurricane season.
Monday, October 13, 2008
Goldman applies for N.Y. charter
Recently minted commercial bank Goldman Sachs Inc. has applied for a New York state banking charter, state officials said Monday.
Governor David Patterson praised the decision, calling Goldman Sachs the "bedrock" of New York's financial community and that it reflects the state's ability to "effectively regulate" banks.
"We look forward to working with [Goldman Sachs] as they transition a substantial portion of their business from an investment bank to a new regulatory scheme," Patterson said in a statement.
Goldman Sachs (GS, Fortune 500) and fellow brokerage Morgan Stanley (MS, Fortune 500) were the last remaining investment banks on Wall Street before federal officials granted the firms' requests to become bank holding companies last month.
The decision to become commercial banks came as rival brokerages Bear Stearns and Lehman Brother collapsed in the fallout of the nation's credit crisis.
As commercial banks, Goldman and Morgan have the ability to purchase other retail banks, which could give them a more steady foundation of cash. It also gives them access to loans from the Federal Reserve that were not available to brokerages.
But it also puts Goldman and Morgan under the Fed's supervision, increasing the agency's regulatory oversight and possibly forcing them to raise additional capital. As banks, Morgan and Goldman will be forced to take less risk, which will mean fewer profits.
A call to Goldman Sachs requesting comment was not immediately returned Monday.
The decision to apply for a New York state charter will not preclude Goldman from expanding its business or opening branches outside of the state, according to Bert Ely, principal of Ely & Co., a financial institutions and monetary policy consulting firm in Virginia.
"Banks can have multiple charters," Ely said. Having a New York charter "does not bar them from having other charters," he added.
Governor David Patterson praised the decision, calling Goldman Sachs the "bedrock" of New York's financial community and that it reflects the state's ability to "effectively regulate" banks.
"We look forward to working with [Goldman Sachs] as they transition a substantial portion of their business from an investment bank to a new regulatory scheme," Patterson said in a statement.
Goldman Sachs (GS, Fortune 500) and fellow brokerage Morgan Stanley (MS, Fortune 500) were the last remaining investment banks on Wall Street before federal officials granted the firms' requests to become bank holding companies last month.
The decision to become commercial banks came as rival brokerages Bear Stearns and Lehman Brother collapsed in the fallout of the nation's credit crisis.
As commercial banks, Goldman and Morgan have the ability to purchase other retail banks, which could give them a more steady foundation of cash. It also gives them access to loans from the Federal Reserve that were not available to brokerages.
But it also puts Goldman and Morgan under the Fed's supervision, increasing the agency's regulatory oversight and possibly forcing them to raise additional capital. As banks, Morgan and Goldman will be forced to take less risk, which will mean fewer profits.
A call to Goldman Sachs requesting comment was not immediately returned Monday.
The decision to apply for a New York state charter will not preclude Goldman from expanding its business or opening branches outside of the state, according to Bert Ely, principal of Ely & Co., a financial institutions and monetary policy consulting firm in Virginia.
"Banks can have multiple charters," Ely said. Having a New York charter "does not bar them from having other charters," he added.
Friday, October 10, 2008
Home deals go bust
The Dow has shed thousands of points and the global economy is in crisis.
So who wants to buys a house right now? Not many people, it turns out.
The National Association of Home Builders, for instance, has seen its contract cancellations spike recently to as high as 30%, compared with an average rate of about 20%. During the housing boom, as few as 5% of sales were cancelled.
"The events of the past couple of weeks have people's heads spinning," said Steve Melman, NAHB's director of economic surveys.
The National Association of Realtors estimates that about 25% of the clients its members are working with are staying on the sidelines. They're looking at homes and intend to buy at some point, but right now they're worried about their jobs, their declining investments and falling housing prices.
"You have to have a lot of confidence to make this kind of big-ticket purchase in the current environment," said NAR spokesman Walter Molony.
Real estate agent Bob Rose was helping one couple look for an investment property in battered Contra Costa County, Calif., hoping to find a bargain that they could sell in a few years.
Then, on Sept. 29 the Dow dove nearly 800 points and the couple decided not to buy. "They told me they had lost about a quarter of their retirement portfolio," said Rose, and that they could no longer afford it.
Even some buyers who are already in contract are managing to pull out of sales amidst all the economic turmoil.
Deal or no deal
Two weeks ago, one Washington state couple, Sharif Tai and Gaby Ghafari, went into contract on a new $450,000, three bed, three bath, house in central Seattle. Soon afterwards, the stock market began its steep descent.
"It wasn't that we lost money [in the market] or that we were worried about our jobs," said Tai, a software developer in his mid-20s. "We thought we could get a better deal, so we decided to wait."
The couple backed out of the deal by citing problems with the inspection, but they haven't given up on making a purchase.
"We're keeping our eyes out," said Tai. "We want to see how things shake out. If we see a great deal, we'll take it."
Other buyers are demanding sweeteners before they close a deal during such a rocky time. San Francisco agent Jim Holt had clients go into contract on Sept. 29, on a $750,000 home in town. But by the end of the week the Dow had lost over 800 points and the buyer demanded a whopping $50,000 price cut.
"Buyers are seeing the [market implosion] as an opportunity to get concessions," said Holt. In the end, the seller only agreed to reduce the price by $5,000 - but that's better than nothing.
Other house hunters are managing to wring more concessions out of sellers even on top of existing discounts.
Rich Machado, an agent with the Smart Homebuyer Team in New Bedford, Mass., had already helped one buyer get a seller to take $9,000 off the price of a house listed for $229,000, and throw in $6,000 in closing costs, $1,800 for an electric upgrade and $400 for a home service contract.
The deal went into contract two weeks ago. Despite that impressive array of incentives, "the buyer is balking," said Machado. "He's asking for another $10,000 off the price."
The seller hasn't caved in yet - but with demand drying up, he may be forced to come around.
As the losses mount on Wall Street - the Dow lost 678 points on Thursday alone - things will undoubtedly become even more difficult for sellers.
"In the midst of such chaos, everyone is just shaking their heads," said NAHB's Melman.
So who wants to buys a house right now? Not many people, it turns out.
The National Association of Home Builders, for instance, has seen its contract cancellations spike recently to as high as 30%, compared with an average rate of about 20%. During the housing boom, as few as 5% of sales were cancelled.
"The events of the past couple of weeks have people's heads spinning," said Steve Melman, NAHB's director of economic surveys.
The National Association of Realtors estimates that about 25% of the clients its members are working with are staying on the sidelines. They're looking at homes and intend to buy at some point, but right now they're worried about their jobs, their declining investments and falling housing prices.
"You have to have a lot of confidence to make this kind of big-ticket purchase in the current environment," said NAR spokesman Walter Molony.
Real estate agent Bob Rose was helping one couple look for an investment property in battered Contra Costa County, Calif., hoping to find a bargain that they could sell in a few years.
Then, on Sept. 29 the Dow dove nearly 800 points and the couple decided not to buy. "They told me they had lost about a quarter of their retirement portfolio," said Rose, and that they could no longer afford it.
Even some buyers who are already in contract are managing to pull out of sales amidst all the economic turmoil.
Deal or no deal
Two weeks ago, one Washington state couple, Sharif Tai and Gaby Ghafari, went into contract on a new $450,000, three bed, three bath, house in central Seattle. Soon afterwards, the stock market began its steep descent.
"It wasn't that we lost money [in the market] or that we were worried about our jobs," said Tai, a software developer in his mid-20s. "We thought we could get a better deal, so we decided to wait."
The couple backed out of the deal by citing problems with the inspection, but they haven't given up on making a purchase.
"We're keeping our eyes out," said Tai. "We want to see how things shake out. If we see a great deal, we'll take it."
Other buyers are demanding sweeteners before they close a deal during such a rocky time. San Francisco agent Jim Holt had clients go into contract on Sept. 29, on a $750,000 home in town. But by the end of the week the Dow had lost over 800 points and the buyer demanded a whopping $50,000 price cut.
"Buyers are seeing the [market implosion] as an opportunity to get concessions," said Holt. In the end, the seller only agreed to reduce the price by $5,000 - but that's better than nothing.
Other house hunters are managing to wring more concessions out of sellers even on top of existing discounts.
Rich Machado, an agent with the Smart Homebuyer Team in New Bedford, Mass., had already helped one buyer get a seller to take $9,000 off the price of a house listed for $229,000, and throw in $6,000 in closing costs, $1,800 for an electric upgrade and $400 for a home service contract.
The deal went into contract two weeks ago. Despite that impressive array of incentives, "the buyer is balking," said Machado. "He's asking for another $10,000 off the price."
The seller hasn't caved in yet - but with demand drying up, he may be forced to come around.
As the losses mount on Wall Street - the Dow lost 678 points on Thursday alone - things will undoubtedly become even more difficult for sellers.
"In the midst of such chaos, everyone is just shaking their heads," said NAHB's Melman.
Thursday, October 9, 2008
Shorts blamed for Morgan Stanley plunge
Bank stocks sank across the board Thursday and some market watchers blamed the drop on expiration of the short selling ban on financial stocks.
Wells Fargo (WFC, Fortune 500), Wachovia (WB, Fortune 500) and Morgan Stanley (MS, Fortune 500) were particularly hard hit, with each posting double-digit percentage declines.
Morgan tumbled over 15% as of midday as the investment bank continued to be plagued by rumors that Japan's Mitsubishi UFJ (MTU) agreement to buy a 20% stake in Morgan was in jeopardy.
A Morgan spokesman dismissed such rumors, saying the deal will close this coming Tuesday under the same terms announced earlier this week.
Mitsubishi also said in a statement Wednesday morning that the rumors are not true and that it expects the deal to close next Tuesday.
A source familiar with the Morgan-Mitsubishi deal blamed the slide in Morgan Stanley's stock Thursday on the expiration of the short selling ban.
Jack Ablin, chief investment officer at Harris Private Bank in Chicago, also blamed the drop in Morgan's shares on short selling.
The Securities and Exchange Commission barred stock traders from shorting most financial stocks on Sept. 19 as the credit crisis unfolded. The SEC extended the ban last week and said that if a bank bailout bill was signed into law, the ban would end three business days after that.
Short sellers borrow stock at one price and sell it with the hopes of buying the stock later at a lower price so they can pocket the difference. Some have blamed short sellers for spreading false rumors about banks in order to send the stocks drastically lower.
But the ban was controversial, with some arguing that short sellers do a service to the market by identifying overvalued stocks and that prohibiting short selling was nothing more than an artificial manipulation of the market.
Still, even with the short selling ban in place, bank stocks took a beating. The S&P Banking Index plunged 30% since the ban took effect.
Short selling may not be the only thing weighing on bank shares Thursday. The U.S. government is also thinking about buying bank stocks, the White House said.
The move would be an attempt to directly inject capital into banks - which have been starved of cash as homeowners default on mortgages and inter-bank lending dries up.
But banks would issue new shares for the government to purchase, diluting the value of existing shares for current stock holders. Also, analysts said the government would likely buy shares of the banks facing the most financial trouble, which isn't exactly a vote of confidence for the industry.
Wells Fargo (WFC, Fortune 500), Wachovia (WB, Fortune 500) and Morgan Stanley (MS, Fortune 500) were particularly hard hit, with each posting double-digit percentage declines.
Morgan tumbled over 15% as of midday as the investment bank continued to be plagued by rumors that Japan's Mitsubishi UFJ (MTU) agreement to buy a 20% stake in Morgan was in jeopardy.
A Morgan spokesman dismissed such rumors, saying the deal will close this coming Tuesday under the same terms announced earlier this week.
Mitsubishi also said in a statement Wednesday morning that the rumors are not true and that it expects the deal to close next Tuesday.
A source familiar with the Morgan-Mitsubishi deal blamed the slide in Morgan Stanley's stock Thursday on the expiration of the short selling ban.
Jack Ablin, chief investment officer at Harris Private Bank in Chicago, also blamed the drop in Morgan's shares on short selling.
The Securities and Exchange Commission barred stock traders from shorting most financial stocks on Sept. 19 as the credit crisis unfolded. The SEC extended the ban last week and said that if a bank bailout bill was signed into law, the ban would end three business days after that.
Short sellers borrow stock at one price and sell it with the hopes of buying the stock later at a lower price so they can pocket the difference. Some have blamed short sellers for spreading false rumors about banks in order to send the stocks drastically lower.
But the ban was controversial, with some arguing that short sellers do a service to the market by identifying overvalued stocks and that prohibiting short selling was nothing more than an artificial manipulation of the market.
Still, even with the short selling ban in place, bank stocks took a beating. The S&P Banking Index plunged 30% since the ban took effect.
Short selling may not be the only thing weighing on bank shares Thursday. The U.S. government is also thinking about buying bank stocks, the White House said.
The move would be an attempt to directly inject capital into banks - which have been starved of cash as homeowners default on mortgages and inter-bank lending dries up.
But banks would issue new shares for the government to purchase, diluting the value of existing shares for current stock holders. Also, analysts said the government would likely buy shares of the banks facing the most financial trouble, which isn't exactly a vote of confidence for the industry.
Friday, October 3, 2008
California asks Fed for $7B loan
California may need a $7 billion emergency loan from the Federal government for day-to-day operations and to pay teachers' salaries, nursing homes, law enforcement and every other State-funded service this month, Gov. Arnold Schwarzenegger warned in a letter sent Thursday to the U.S. Treasury secretary.
The California governor's letter, published in Friday's Los Angeles Times, was written on the eve of an expected vote in the U.S. House on the Federal bailout of the financial system.
"The federal rescue package is not a bailout of Wall Street tycoons - it is a lifeboat for millions of Americans whose life savings, businesses, retirement plans and jobs are at stake," Schwarzenegger said.
California State Treasurer Bill Lockyer issued a statement a day earlier saying because of the national financial crisis, California "has been locked out of credit markets for the past 10 days."
"Absent a clear resolution to this financial crisis that restores confidence and liquidity to the credit markets, California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the Federal Treasury for short-term financing," Schwarzenegger wrote.
California's governor warned that a number of states are facing the same cash flow crunch this month, but his state is "so large that our short-term cash flow needs exceed the entire budget of some states."
Schwarzenegger said his state would attempt to sell "$7 billion in Revenue Anticipation Notes for short term cash flow purposes in a matter of days."
Lockyer said that unless the national economic crisis subsides and California can secure private short-term loans "the State's cash reserves would be exhausted near the end of October."
"Payments for teachers' salaries, nursing homes, law enforcement and every other State-funded service would stop or be significantly delayed," Lockyer said. "And California's 5,000 cities, counties, school districts and special districts would face the same fate."
The Federal bailout, which passed the Senate Wednesday night, would permit the Treasury to buy up $700 billion of bad assets - most of which are backed by mortgages - from banks in an effort to clean up their balance sheets so that they can resume lending.
The credit crunch, a decline in state tax collections and a delay in adoption of a state budget have combined to aggravate California's cash flow troubles.
"The economic fallout from this national credit crisis continues to drain state tax coffers, making it even more difficult to weather the continuation of frozen credit markets for any length of time," Schwarzenegger said.
The California governor's letter, published in Friday's Los Angeles Times, was written on the eve of an expected vote in the U.S. House on the Federal bailout of the financial system.
"The federal rescue package is not a bailout of Wall Street tycoons - it is a lifeboat for millions of Americans whose life savings, businesses, retirement plans and jobs are at stake," Schwarzenegger said.
California State Treasurer Bill Lockyer issued a statement a day earlier saying because of the national financial crisis, California "has been locked out of credit markets for the past 10 days."
"Absent a clear resolution to this financial crisis that restores confidence and liquidity to the credit markets, California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the Federal Treasury for short-term financing," Schwarzenegger wrote.
California's governor warned that a number of states are facing the same cash flow crunch this month, but his state is "so large that our short-term cash flow needs exceed the entire budget of some states."
Schwarzenegger said his state would attempt to sell "$7 billion in Revenue Anticipation Notes for short term cash flow purposes in a matter of days."
Lockyer said that unless the national economic crisis subsides and California can secure private short-term loans "the State's cash reserves would be exhausted near the end of October."
"Payments for teachers' salaries, nursing homes, law enforcement and every other State-funded service would stop or be significantly delayed," Lockyer said. "And California's 5,000 cities, counties, school districts and special districts would face the same fate."
The Federal bailout, which passed the Senate Wednesday night, would permit the Treasury to buy up $700 billion of bad assets - most of which are backed by mortgages - from banks in an effort to clean up their balance sheets so that they can resume lending.
The credit crunch, a decline in state tax collections and a delay in adoption of a state budget have combined to aggravate California's cash flow troubles.
"The economic fallout from this national credit crisis continues to drain state tax coffers, making it even more difficult to weather the continuation of frozen credit markets for any length of time," Schwarzenegger said.
Manhattan real estate: Pricey but headed for a fall
The crisis on Wall Street hasn't hit the high cost of Manhattan real estate, but the economic slowdown has curbed the number of deals in the Big Apple, according to reports out Friday.
Sales figures from four major New York real estate agencies showed the average price for a Manhattan apartment rose in the third quarter over last year. At the same time, the number of apartments sold in the quarter declined sharply.
"The events of the second half of September in the financial markets and Washington have not shown up in the market data for the quarter, aside from the lower level of sales activity compared to last year's record levels," said Jonathan Miller, president of New York real estate firm Miller Samuel.
The average price of a Manhattan apartment ranged from $1.4 million to $1.48 million in the third quarter of 2008, according to separate reports released Friday by Brown Harris Stevens, the Corcoran Group, Halstead Property and Prudential Douglas Elliman. That represents an increase of anywhere between 8% and 12% over average apartment prices in the third quarter of 2007.
But the rise in third quarter sale prices was skewed by a large number of deals in new luxury buildings, which went into contract as much as a year or two ago, before economic conditions deteriorated, but only closed recently, according to Corcoran Group CEO Pamela Liebman.
"The average sales price is going to trend down," Liebman said. After soaring to unprecedented heights in 2007, "we're going to get back to a more normal range," she added.
Dwindling deals
Already the number of properties sold during the quarter saw a steep decline from the record highs hit in the third quarter of last year.
Corcoran sold fewer than 3,000 properties last quarter, down 45% from the nearly 5,500 properties the agency sold in the third quarter of 2007.
At the same time, the number of properties on the market is increasing. Listing inventory rose 34% during the third quarter, according to Miller's research.
"Clearly, inventory is moving higher as sales activity has fallen," said Miller, who attributed the slowdown at least in part to the fact that mortgages have become more expensive and harder to get.
And economic turmoil in Europe has crimped the flow of overseas buyers to the city. Miller estimates that foreign buyers made up one-third of all purchases in new developments in New York last year.
While the labor market in New York has remained relatively stable, the fallout from the crisis on Wall Street, and the corresponding rise in unemployment in the financial sector, will probably further undermine the city's real estate market.
"We're going into an uncertain economic period with volume at low levels and a low likelihood of new development," Miller said.
Miller said the direction of the real estate market could hinge on Washington's proposed financial intervention, which is currently being debated in Congress and the outcome of this year's presidential election.
One of the main goals of the bailout plan is to free up the frozen credit markets, which have been a major drag on economic activity - particularly in the housing market.
"The question of housing is almost moot unless you get a handle on where credit is going," Miller said.
Sales figures from four major New York real estate agencies showed the average price for a Manhattan apartment rose in the third quarter over last year. At the same time, the number of apartments sold in the quarter declined sharply.
"The events of the second half of September in the financial markets and Washington have not shown up in the market data for the quarter, aside from the lower level of sales activity compared to last year's record levels," said Jonathan Miller, president of New York real estate firm Miller Samuel.
The average price of a Manhattan apartment ranged from $1.4 million to $1.48 million in the third quarter of 2008, according to separate reports released Friday by Brown Harris Stevens, the Corcoran Group, Halstead Property and Prudential Douglas Elliman. That represents an increase of anywhere between 8% and 12% over average apartment prices in the third quarter of 2007.
But the rise in third quarter sale prices was skewed by a large number of deals in new luxury buildings, which went into contract as much as a year or two ago, before economic conditions deteriorated, but only closed recently, according to Corcoran Group CEO Pamela Liebman.
"The average sales price is going to trend down," Liebman said. After soaring to unprecedented heights in 2007, "we're going to get back to a more normal range," she added.
Dwindling deals
Already the number of properties sold during the quarter saw a steep decline from the record highs hit in the third quarter of last year.
Corcoran sold fewer than 3,000 properties last quarter, down 45% from the nearly 5,500 properties the agency sold in the third quarter of 2007.
At the same time, the number of properties on the market is increasing. Listing inventory rose 34% during the third quarter, according to Miller's research.
"Clearly, inventory is moving higher as sales activity has fallen," said Miller, who attributed the slowdown at least in part to the fact that mortgages have become more expensive and harder to get.
And economic turmoil in Europe has crimped the flow of overseas buyers to the city. Miller estimates that foreign buyers made up one-third of all purchases in new developments in New York last year.
While the labor market in New York has remained relatively stable, the fallout from the crisis on Wall Street, and the corresponding rise in unemployment in the financial sector, will probably further undermine the city's real estate market.
"We're going into an uncertain economic period with volume at low levels and a low likelihood of new development," Miller said.
Miller said the direction of the real estate market could hinge on Washington's proposed financial intervention, which is currently being debated in Congress and the outcome of this year's presidential election.
One of the main goals of the bailout plan is to free up the frozen credit markets, which have been a major drag on economic activity - particularly in the housing market.
"The question of housing is almost moot unless you get a handle on where credit is going," Miller said.
Venture firms brace for cash crunch
Harold Bradley manages $2.1 billion for the Kansas City, Mo.-based Ewing Marion Kauffman Foundation. If you are a venture capitalist looking for a new limited partner, he's got something to tell you. "Don't stop in here," he says. "Don't try and sell me on a new fund, and good luck trying with everyone else."
Venture capital, as every VC is happy to tell you, operates on seven-to-ten-year cycles. Firms don't, for the most part, use debt to fund their companies. So in theory they should be shielded from the financial mess that has laid waste to some of the largest financial institutions in the world. But no one is getting out of this unscathed, and certainly not the gang that occupies Sand Hill Road in Silicon Valley.
The conversation among limited partners in VC funds these days is all about liquidity, Bradley says. Who's got it, and who doesn't. Hiding your money in illiquid venture capital funds looked pretty good six or 12 months ago. But if you are an endowment or pension fund with a huge exposure to a mega-buyout firm that is cratering, a hedge fund that is being wiped out or a venture fund that is on a seven-year runway to returns (in a market with no exits), what you want is cash now - not a one, three or five year wait to cash in.
So what does the financial crisis mean for VCs and for startups? For starters, if you are a second or third-tier venture firm trying to raise another fund, you can, as Bradley suggests, forget about it.
Before the market meltdown it might have been OK for a pension fund or university endowment to park money in an underperforming VC fund as a limited partner. But going forward, all bets are off.
Venture capital operates via commitments. A limited partner pledges a certain amount to a fund, and as the VC firm needs it, it makes capital calls to get that money to fund its portfolio companies. If you don't pony up when asked, you typically lose all your prior investment and are frozen out going forward. After the dotcom crash, capital calls came from VC firms and some limited partners simply said no - whether it was because they were wiped out in the Internet implosion, or they didn't want to throw good money after bad.
It could be worse this time around. "My expectation is that it will start first in some private equity funds, that there will be a substantial miss on a capital call, and we'll see it next in venture capital," says Paul Kedrosky, an investor and academic focused on the future of risk capital and writer of the business blog Infectious Greed. "No one is going to stiff Kleiner Perkins, but the second or third-tier guys will get stiffed all day long."
If you are a startup backed by a VC firm with loads of limited partners that are exposed to the Wall Street meltdown, or are mostly funded by angel investors without the deep pockets, now is when you start to worry and need to consider a future without that next round of funding.
"Any LP can be at risk," says Mark Tluszcz, co-founder and managing partner at one of the leading European venture firms, Mangrove Capital. "If there is a big LP, whether it is a bank or an insurance company, if they are facing serious financial issues they are going to cut back on their commitments."
Says Warren Weiss, a partner with Palo Alto-Calif.-based VC firm Foundation Capital: "If you are a company with a big cash burn, you are in for some pretty tough times. We're going to see more fire sales than mergers. You'll see a lot of companies in the $200-$400 million range that can't go public now, get acquired. The weak will get weeded out."
With hedge funds, buyout shops, even venture debt funds mostly on the sidelines, money is about to get really tight. The pressure will fall on VCs to decide which of their portfolio companies live and which die. Weiss believes liquidity is the key to navigating the next 12 t 18 months. "If you are a startup or a limited partner, it's no cash, no company," Weiss says.
Bryan LeBlanc, CFO of Portland, Ore.-based startup Jive Software, agrees. "If you are not cash-flow positive you are in a tough spot right now," says LeBlanc, whose company develops collaboration software for the workplace.
Jive is in relatively good shape, because it has significant revenue, was bootstrapped for the first six years, and only recently raised its first round of funding from Sequoia Capital. "To the extent you haven't figured out your business model yet you are in trouble, because it's going to be hard to get another round," LeBlanc says. "You aren't going to get a second life this time."
Brian Jacobs, a partner with San Mateo, Calif.-based Emergence Capital, is anticipating a shakeout. "There will be some realignment among firms and startups," he says, "but the bottom line is it just got a lot harder to make money in the venture capital business than a year ago - and maybe that is the way it should be."
Venture capital, as every VC is happy to tell you, operates on seven-to-ten-year cycles. Firms don't, for the most part, use debt to fund their companies. So in theory they should be shielded from the financial mess that has laid waste to some of the largest financial institutions in the world. But no one is getting out of this unscathed, and certainly not the gang that occupies Sand Hill Road in Silicon Valley.
The conversation among limited partners in VC funds these days is all about liquidity, Bradley says. Who's got it, and who doesn't. Hiding your money in illiquid venture capital funds looked pretty good six or 12 months ago. But if you are an endowment or pension fund with a huge exposure to a mega-buyout firm that is cratering, a hedge fund that is being wiped out or a venture fund that is on a seven-year runway to returns (in a market with no exits), what you want is cash now - not a one, three or five year wait to cash in.
So what does the financial crisis mean for VCs and for startups? For starters, if you are a second or third-tier venture firm trying to raise another fund, you can, as Bradley suggests, forget about it.
Before the market meltdown it might have been OK for a pension fund or university endowment to park money in an underperforming VC fund as a limited partner. But going forward, all bets are off.
Venture capital operates via commitments. A limited partner pledges a certain amount to a fund, and as the VC firm needs it, it makes capital calls to get that money to fund its portfolio companies. If you don't pony up when asked, you typically lose all your prior investment and are frozen out going forward. After the dotcom crash, capital calls came from VC firms and some limited partners simply said no - whether it was because they were wiped out in the Internet implosion, or they didn't want to throw good money after bad.
It could be worse this time around. "My expectation is that it will start first in some private equity funds, that there will be a substantial miss on a capital call, and we'll see it next in venture capital," says Paul Kedrosky, an investor and academic focused on the future of risk capital and writer of the business blog Infectious Greed. "No one is going to stiff Kleiner Perkins, but the second or third-tier guys will get stiffed all day long."
If you are a startup backed by a VC firm with loads of limited partners that are exposed to the Wall Street meltdown, or are mostly funded by angel investors without the deep pockets, now is when you start to worry and need to consider a future without that next round of funding.
"Any LP can be at risk," says Mark Tluszcz, co-founder and managing partner at one of the leading European venture firms, Mangrove Capital. "If there is a big LP, whether it is a bank or an insurance company, if they are facing serious financial issues they are going to cut back on their commitments."
Says Warren Weiss, a partner with Palo Alto-Calif.-based VC firm Foundation Capital: "If you are a company with a big cash burn, you are in for some pretty tough times. We're going to see more fire sales than mergers. You'll see a lot of companies in the $200-$400 million range that can't go public now, get acquired. The weak will get weeded out."
With hedge funds, buyout shops, even venture debt funds mostly on the sidelines, money is about to get really tight. The pressure will fall on VCs to decide which of their portfolio companies live and which die. Weiss believes liquidity is the key to navigating the next 12 t 18 months. "If you are a startup or a limited partner, it's no cash, no company," Weiss says.
Bryan LeBlanc, CFO of Portland, Ore.-based startup Jive Software, agrees. "If you are not cash-flow positive you are in a tough spot right now," says LeBlanc, whose company develops collaboration software for the workplace.
Jive is in relatively good shape, because it has significant revenue, was bootstrapped for the first six years, and only recently raised its first round of funding from Sequoia Capital. "To the extent you haven't figured out your business model yet you are in trouble, because it's going to be hard to get another round," LeBlanc says. "You aren't going to get a second life this time."
Brian Jacobs, a partner with San Mateo, Calif.-based Emergence Capital, is anticipating a shakeout. "There will be some realignment among firms and startups," he says, "but the bottom line is it just got a lot harder to make money in the venture capital business than a year ago - and maybe that is the way it should be."
Wednesday, October 1, 2008
What investors should do now
It's time to panic.
Okay, now that we've got your attention, let's be clear: We're exaggerating - at least a little. We don't think the financial system is on the verge of collapse. But the complacency exhibited by many market pundits in the wake of the most wrenching episode in modern financial history is sufficiently shocking that it almost demands some scare-tactic response.
By our count some 300 articles were published last month telling investors "don't panic" or "not to panic." Urging calm is one thing. But too much soothing talk implies that there are no lessons to be learned. What's the use of a vertigo-inducing bout of market turbulence if the only conclusion is "stay the course"?
At the very least, it's a good reminder to take a hard look at your financial plans and to reevaluate how much market risk you can truly withstand in your portfolio. Because - don't panic! - this might not be completely over.
Richard Bernstein, the chief investment strategist at Merrill Lynch, worries that investors still don't appreciate the scope of the credit crisis.
"It's weird - the canary in the mineshaft has fallen over, and now everyone thinks there's a problem with canaries," says Bernstein, who, despite sounding the alarm about a global credit bubble as far back as 2006, could find himself out of a job after Merrill's forced sale to Bank of America. (Too bad Bernstein's Merrill bosses didn't heed his warnings.)
In Bernstein's eyes, the canary is the U.S. mortgage market, but the silent killer of loose credit was an international epidemic. "I don't perceive that most investors fully appreciate either the depth of the credit bubble or how broad-reaching it was in terms of emerging markets and hedge funds and commodities and all these other inflated asset classes that were dependent on easy credit," he says.
If consumers suddenly can't refinance their mortgages and credit cards and if more corporations can't issue bonds or tap lines of bank credit, their ability to weather any slowdown will be diminished. "The fundamentals are still extremely scary," says star financial-sector analyst (and recent Fortune cover subject) Meredith Whitney of Oppenheimer & Co. "It all gets down to how much liquidity will be created for consumers and corporations, and at the moment there's still less and less by the hour."
Here's another reason to be concerned: The professionals managing your money haven't gotten this market right. Consider that at the market low on Sept. 17, only five diversified U.S. equity mutual funds - out of a universe of 9,100 - had positive total returns for the year, according to Morningstar. FIVE! Even after the market rebounded, there were still only three funds with returns this year of 10% or better: Parnassus Small-Cap, Heartland Value Plus, and Forester Value.
If you haven't heard of any of those funds, that's the point. The investing world's best and brightest appear to be just as confused as the rest of us. Like Bill Miller. His streak of beating the S&P 500 now a distant memory, the Legg Mason Value Trust manager is down 35% this year. CGM Focus's Ken Heebner, whom Fortune dubbed "America's hottest investor" in June, is down 16%, while FPA Capital's Bob Rodriguez ("the best fund manager of our time," according to our sister magazine Money) is down 3%.
So how did the three 10%-plus returners beat the odds? One common thread is that they all stayed away from bank stocks. Beyond that, each went his own way. Thomas Forester, who runs his eponymous $20 million fund out of his study in suburban Chicago, made a successful bet on consumer staples - names like Anheuser-Busch, J.C. Penney, and Wal-Mart (WMT, Fortune 500). Brad Evans, manager of Heartland Value Plus, got into and out of oil stocks at the right times.
And Jerome Dodson, the 65-year-old manager of Parnassus Small-Cap, was king of the contrarians, earning his double-digit returns with an assist from the unlikeliest of sectors: homebuilders.
"Every one of my analysts said, 'Don't do it,'" Dodson says of his early-year decision to buy the builders. But Dodson was convinced that the companies' stocks would bounce back long before their plummeting earnings did. He wound up taking sizable positions in Pulte Homes and Toll Brothers, which are up 40% and 17%, respectively this year. Dodson himself admits he got a little lucky.
You can't count on hitting that kind of jackpot. But by taking a hard look at your portfolio, you can minimize your losses and prepare yourself to take advantage of new opportunities. And this is one time when following simple financial-planning tips could be worth more to your bottom line than picking the right stocks or funds. So let's start with some strategy before we get to our specific investment recommendations.
Take some tax losses. If you buy and sell stocks in a taxable portfolio, it's likely that you have some holdings trading for well below what you originally paid. Our advice: Sell your losers pronto and book the capital losses.
Those losses can be carried forward from one tax year to the next (and the next and the next) and thus used to offset future capital gains whenever the market rebounds. Not only that, but Boston accountant Gale Raphael of Raphael & Raphael points out that taxpayers can deduct up to $3,000 in capital losses from ordinary income. That amounts to a tax savings of $990 a year to someone in the 33% tax bracket.
What if you think your losers are about to rebound? IRS rules prevent you from buying them back for 30 days. But if you can't wait, try using the proceeds from your tax-loss sale to purchase stocks similar to the ones you're selling.
If you take a loss on United States Steel, for instance, replace it with rival steelmaker Nucor (NUE, Fortune 500). John Maloney, who manages high-net-worth accounts with M&R Capital in New York, says the IRS rules even allow you to take a tax loss on, say, Schlumberger, and replace it right away with an oil-services exchange-traded fund in which Schlumberger is a major holding. Says Maloney: "It won't trigger an objection unless it's materially the same security
Okay, now that we've got your attention, let's be clear: We're exaggerating - at least a little. We don't think the financial system is on the verge of collapse. But the complacency exhibited by many market pundits in the wake of the most wrenching episode in modern financial history is sufficiently shocking that it almost demands some scare-tactic response.
By our count some 300 articles were published last month telling investors "don't panic" or "not to panic." Urging calm is one thing. But too much soothing talk implies that there are no lessons to be learned. What's the use of a vertigo-inducing bout of market turbulence if the only conclusion is "stay the course"?
At the very least, it's a good reminder to take a hard look at your financial plans and to reevaluate how much market risk you can truly withstand in your portfolio. Because - don't panic! - this might not be completely over.
Richard Bernstein, the chief investment strategist at Merrill Lynch, worries that investors still don't appreciate the scope of the credit crisis.
"It's weird - the canary in the mineshaft has fallen over, and now everyone thinks there's a problem with canaries," says Bernstein, who, despite sounding the alarm about a global credit bubble as far back as 2006, could find himself out of a job after Merrill's forced sale to Bank of America. (Too bad Bernstein's Merrill bosses didn't heed his warnings.)
In Bernstein's eyes, the canary is the U.S. mortgage market, but the silent killer of loose credit was an international epidemic. "I don't perceive that most investors fully appreciate either the depth of the credit bubble or how broad-reaching it was in terms of emerging markets and hedge funds and commodities and all these other inflated asset classes that were dependent on easy credit," he says.
If consumers suddenly can't refinance their mortgages and credit cards and if more corporations can't issue bonds or tap lines of bank credit, their ability to weather any slowdown will be diminished. "The fundamentals are still extremely scary," says star financial-sector analyst (and recent Fortune cover subject) Meredith Whitney of Oppenheimer & Co. "It all gets down to how much liquidity will be created for consumers and corporations, and at the moment there's still less and less by the hour."
Here's another reason to be concerned: The professionals managing your money haven't gotten this market right. Consider that at the market low on Sept. 17, only five diversified U.S. equity mutual funds - out of a universe of 9,100 - had positive total returns for the year, according to Morningstar. FIVE! Even after the market rebounded, there were still only three funds with returns this year of 10% or better: Parnassus Small-Cap, Heartland Value Plus, and Forester Value.
If you haven't heard of any of those funds, that's the point. The investing world's best and brightest appear to be just as confused as the rest of us. Like Bill Miller. His streak of beating the S&P 500 now a distant memory, the Legg Mason Value Trust manager is down 35% this year. CGM Focus's Ken Heebner, whom Fortune dubbed "America's hottest investor" in June, is down 16%, while FPA Capital's Bob Rodriguez ("the best fund manager of our time," according to our sister magazine Money) is down 3%.
So how did the three 10%-plus returners beat the odds? One common thread is that they all stayed away from bank stocks. Beyond that, each went his own way. Thomas Forester, who runs his eponymous $20 million fund out of his study in suburban Chicago, made a successful bet on consumer staples - names like Anheuser-Busch, J.C. Penney, and Wal-Mart (WMT, Fortune 500). Brad Evans, manager of Heartland Value Plus, got into and out of oil stocks at the right times.
And Jerome Dodson, the 65-year-old manager of Parnassus Small-Cap, was king of the contrarians, earning his double-digit returns with an assist from the unlikeliest of sectors: homebuilders.
"Every one of my analysts said, 'Don't do it,'" Dodson says of his early-year decision to buy the builders. But Dodson was convinced that the companies' stocks would bounce back long before their plummeting earnings did. He wound up taking sizable positions in Pulte Homes and Toll Brothers, which are up 40% and 17%, respectively this year. Dodson himself admits he got a little lucky.
You can't count on hitting that kind of jackpot. But by taking a hard look at your portfolio, you can minimize your losses and prepare yourself to take advantage of new opportunities. And this is one time when following simple financial-planning tips could be worth more to your bottom line than picking the right stocks or funds. So let's start with some strategy before we get to our specific investment recommendations.
Take some tax losses. If you buy and sell stocks in a taxable portfolio, it's likely that you have some holdings trading for well below what you originally paid. Our advice: Sell your losers pronto and book the capital losses.
Those losses can be carried forward from one tax year to the next (and the next and the next) and thus used to offset future capital gains whenever the market rebounds. Not only that, but Boston accountant Gale Raphael of Raphael & Raphael points out that taxpayers can deduct up to $3,000 in capital losses from ordinary income. That amounts to a tax savings of $990 a year to someone in the 33% tax bracket.
What if you think your losers are about to rebound? IRS rules prevent you from buying them back for 30 days. But if you can't wait, try using the proceeds from your tax-loss sale to purchase stocks similar to the ones you're selling.
If you take a loss on United States Steel, for instance, replace it with rival steelmaker Nucor (NUE, Fortune 500). John Maloney, who manages high-net-worth accounts with M&R Capital in New York, says the IRS rules even allow you to take a tax loss on, say, Schlumberger, and replace it right away with an oil-services exchange-traded fund in which Schlumberger is a major holding. Says Maloney: "It won't trigger an objection unless it's materially the same security
In debt markets, the cost of buying insurance against a U.S. default is rising.
What odds would you lay that Uncle Sam is going to be a deadbeat?
Until a few weeks ago, that sounded like a ludicrous question. And even amidst bailout insanity, the market has shown that the vast majority of investors still hold the view that U.S. Treasury bonds are the safest of safe havens, the kind of investment you'd bring into your bunker in the event of a nuclear attack.
But a few skeptics are willing to put money their money where their doubts are.
One day after the failure to pass a Wall Street bailout plan sent the bond market into convulsions, skittishness about Uncle Sam's prospects was felt in the market for credit default swaps, insurance-like contracts in which buyers pay a premium and sellers agree to compensate them in the event of a specified event - most often the default of a bond.
In New York trading Tuesday, prices rose to a record 31.3 basis points (each basis point is 1/100 of a percentage point) to "insure" Treasury debt, compared to as little as 7.5 basis points in January, according to information provided by CMA DataVision.
In other words, it would've cost you $7,500 per year to protect $10 million in Treasury bonds in January - but $31,300 today. Of course, even the latter figure remains negligible compared to, say, the $2 million up front - plus $500,000 per year - that you would have needed to pay for the same amount of default swap protection on Morgan Stanley (MS, Fortune 500) bonds when the firm was under fire two weeks ago. But the increase is telling nonetheless.
A wild market
Credit default swaps are a wild, unregulated market - see "The $55 Trillion Question" - in which participants make bets on the failure of corporate bonds, municipal bonds and, yes, U.S. government bonds.
Default swaps on U.S. bonds have been bought and sold for at least four years, says Simon Mott of CMA DataVision. But the market is still little known. One prominent trader in U.S. debt, when asked about swaps on Treasurys, expressed surprise and started asking co-workers, "Did you guys know that there are credit default swaps on U.S. bonds"? (The other traders seemed to know, though one could be heard saying "it's the biggest joke" in the background.) U.S. government issues are not the only sovereign debt covered by swaps. Large banks such as JPMorgan Chase (JPM, Fortune 500) will match swap buyers and sellers for, say, U.K. debt or Icelandic government bonds.
Prices on U.S. government swaps may have peaked - at least for a day or two. The underlying market for U.S. bonds seemed to be stabilizing Tuesday, according to Tom di Galoma, the head of U.S. Treasurys trading at Jefferies & Co., as investors began anticipating that the government will provide some form of relief for the holders of toxic mortgage debt would pass. "We've seen the low in yields," di Galoma says. "Who else can go out of business at this point?"
Of course, if the past month has taught investors anything, it's how unsettling the answer to that question can be. But the U.S. failing to make its payments? Now that would be a shocker (yes, a Moody's spokesman confirms that it re-affirmed the U.S. government's AAA rating last week). And if it did, the swap player who bet the right way may not feel much like celebrating
Until a few weeks ago, that sounded like a ludicrous question. And even amidst bailout insanity, the market has shown that the vast majority of investors still hold the view that U.S. Treasury bonds are the safest of safe havens, the kind of investment you'd bring into your bunker in the event of a nuclear attack.
But a few skeptics are willing to put money their money where their doubts are.
One day after the failure to pass a Wall Street bailout plan sent the bond market into convulsions, skittishness about Uncle Sam's prospects was felt in the market for credit default swaps, insurance-like contracts in which buyers pay a premium and sellers agree to compensate them in the event of a specified event - most often the default of a bond.
In New York trading Tuesday, prices rose to a record 31.3 basis points (each basis point is 1/100 of a percentage point) to "insure" Treasury debt, compared to as little as 7.5 basis points in January, according to information provided by CMA DataVision.
In other words, it would've cost you $7,500 per year to protect $10 million in Treasury bonds in January - but $31,300 today. Of course, even the latter figure remains negligible compared to, say, the $2 million up front - plus $500,000 per year - that you would have needed to pay for the same amount of default swap protection on Morgan Stanley (MS, Fortune 500) bonds when the firm was under fire two weeks ago. But the increase is telling nonetheless.
A wild market
Credit default swaps are a wild, unregulated market - see "The $55 Trillion Question" - in which participants make bets on the failure of corporate bonds, municipal bonds and, yes, U.S. government bonds.
Default swaps on U.S. bonds have been bought and sold for at least four years, says Simon Mott of CMA DataVision. But the market is still little known. One prominent trader in U.S. debt, when asked about swaps on Treasurys, expressed surprise and started asking co-workers, "Did you guys know that there are credit default swaps on U.S. bonds"? (The other traders seemed to know, though one could be heard saying "it's the biggest joke" in the background.) U.S. government issues are not the only sovereign debt covered by swaps. Large banks such as JPMorgan Chase (JPM, Fortune 500) will match swap buyers and sellers for, say, U.K. debt or Icelandic government bonds.
Prices on U.S. government swaps may have peaked - at least for a day or two. The underlying market for U.S. bonds seemed to be stabilizing Tuesday, according to Tom di Galoma, the head of U.S. Treasurys trading at Jefferies & Co., as investors began anticipating that the government will provide some form of relief for the holders of toxic mortgage debt would pass. "We've seen the low in yields," di Galoma says. "Who else can go out of business at this point?"
Of course, if the past month has taught investors anything, it's how unsettling the answer to that question can be. But the U.S. failing to make its payments? Now that would be a shocker (yes, a Moody's spokesman confirms that it re-affirmed the U.S. government's AAA rating last week). And if it did, the swap player who bet the right way may not feel much like celebrating
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