Wall Street showed its relief Monday over the government's plan to bail out Citigroup Inc. — a move it hopes will help address some of the uncertainty hounding the financial sector. Stocks jumped about 3 percent, extending Friday's big rally.
While the markets anticipated late last week that some sort of rescue was likely, investors appeared emboldened by the U.S. government's decision late Sunday to invest $20 billion in Citigroup and guarantee $306 billion in risky assets. The move by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. is only the latest effort this year to support a banking system troubled by bad debt and flagging confidence.
Besides implementing its $700 billion bailout plan for the overall financial industry, the government has bailed out insurance giant American International Group Inc. and taken over lenders Fannie Mae and Freddie Mac.
The market is also a little more optimistic because President-elect Obama is set to introduce his economic team on Monday and has called for another economic stimulus. His plan targets saving or creating 2.5 million jobs during the next two years. Any plan is expected to exceed the $175 billion Obama proposed during the campaign.
The moves by the government to once again step in and help a troubled bank as well as the broader economy helped buoy investor sentiment but investors remain cautious. The nation still faces a difficult economy and the stock market likely will continue to see volatility.
In midmorning trading, the Dow Jones industrial average rose 243.17, or 3.02 percent, to 8,289.59.
Broader stock indicators also jumped. The Standard & Poor's 500 index advanced 26.35, or 3.29 percent, to 826.38, and the Nasdaq composite index rose 41.31, or 2.98 percent, to 1,425.66.
The rise in stocks follows a rally Friday that saw the Dow industrials jump 494 points, or 6.5 percent. The other major indexes also rose sharply. Still, stocks ended the week with a loss after heavy selling Wednesday and Thursday.
Bond prices were mixed Monday as investors examined the government's bailout plan for Citigroup. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.29 percent from 3.20 percent late Friday.
The Treasury bill market showed continuing high demand, a sign of investors' caution. The yield on the three-month T-bill, considered one of the safest investments, fell to 0.02 percent from 0.04 percent late Friday.
The dollar was mostly lower against other major currencies, while gold prices rose.
Wall Street shrugged off a larger-than-expected drop in sales of existing homes last month as investors instead focus on the government's rescue for Citigroup. And while the housing numbers fell short of expectations, Wall Street expected sales would fall sharply after last month's upheaval in the financial markets.
The National Association of Realtors says sales of existing homes fell 3.1 percent to a seasonally adjusted annual rate of 4.98 million in October. That's down from 5.14 million in September.
Citi shares surged $2.18, or 58 percent, to $5.95 on word of the government's injection of capital into the company.
Health care company Johnson & Johnson said Monday it would acquire Omrix Biopharmaceuticals Inc. for $438 million. The move is aimed at expanding J&J's surgical product unit; J&J will pay $25 per share for the company, an 18 percent premium over Omrix's close Friday of $21.16.
J&J rose 54 cents to $58.89, while Omrix rose $3.41, or 16 percent, to $24.57.
Overseas, in afternoon trading Britain's FTSE 100 jumped 5.67 percent, Germany's DAX index rose 5.26 percent, and France's CAC-40 rose 5.24 percent. Hong Kong's Hang Seng index fell 1.59 percent; markets in Japan were closed for a holiday.
Monday, November 24, 2008
Obama Moves Economic Vision
Eager to calm economic anxieties, President-elect Barack Obama is rolling out an economic vision that will require congressional cooperation even before he settles into his new desk in the White House's Oval Office.
Obama will introduce his new economic leadership team Monday, a key step toward enacting a huge new economic recovery plan that aims to save or create 2.5 million jobs over the next two years.
The plan is likely to far exceed the $175 billion Obama proposed during the campaign. It would include an infusion of money for infrastructure projects, new environmental technologies and tax cuts for low- and middle-income taxpayers. It will not call for tax hikes for the wealthy.
Obama aides on Sunday called on the new Congress to pass by the Jan. 20 inauguration legislation that meets Obama's two-year goal of saving or creating 2.5 million jobs. Democratic congressional leaders said they would get to work when Congress convenes Jan. 6 with bigger Democratic majorities in the House and Senate.
Obama will introduce his new economic leadership team Monday, a key step toward enacting a huge new economic recovery plan that aims to save or create 2.5 million jobs over the next two years.
The plan is likely to far exceed the $175 billion Obama proposed during the campaign. It would include an infusion of money for infrastructure projects, new environmental technologies and tax cuts for low- and middle-income taxpayers. It will not call for tax hikes for the wealthy.
Obama aides on Sunday called on the new Congress to pass by the Jan. 20 inauguration legislation that meets Obama's two-year goal of saving or creating 2.5 million jobs. Democratic congressional leaders said they would get to work when Congress convenes Jan. 6 with bigger Democratic majorities in the House and Senate.
Wednesday, October 22, 2008
10 Steps to Retire a Millionaire
Having a million-dollar portfolio is a retirement dream for many people. Making that dream come true requires some serious effort. While success is never a sure thing, the 10 steps outlined below will go a long way toward helping you achieve your objective.
1. Set the Goal
Nobody plans to fail, but plenty of people fail to plan. It's a cliché, but it's true. "Plan" is the leading self-help advice from athletes, business moguls and everyday people who have achieved extraordinary goals.
2. Start Saving
If you don't save, you'll never reach your goal. As obvious as this might seems, far too many people never even start to save. If your employer offers a 401(k) plan, enrolling in the plan is a great way to put your savings on autopilot. Simply sign up for the plan and contributions will be automatically taken out of your paycheck, increasing your savings and decreasing your immediate tax liability.
If your employer offers to match your contributions up to a certain percentage, be sure to contribute enough to get the full match. It's like getting a guaranteed return on your investment. Finding the cash to stash may be a challenge, particularly when you're young, but don't let that stop you from pursuing future riches.
3. Get Aggressive
Studies have shown that the majority of the returns generated by an investment are dictated by the asset-allocation decision. If you are looking to grow your wealth over time, fixed-income investments aren't likely to get the job done, and inflation can take a big chunk out of your savings.
Investing in equities entails more risk, but is also statistically likely to lead to greater returns. For many of us, it's a risk we have to take if want to see our wealth grow. Asset-allocation strategies can help you learn how to make picking the right mix of securities the core of your investing strategy.
4. Prepare for Rainy Days
Part of long-term planning involves accepting the idea that setbacks will occur. If you are not prepared, these setbacks can put a stop to your savings efforts. While you can't avoid all of the bumps in the road, you can prepare in advance to mitigate the damage they can do.
5. Save More
Your income should rise as time passes. You'll get raises, you'll change jobs, and maybe you'll get married and become a two-income family. Every time more cash comes in to your pocket, you should increase the amount that you save. The key to reaching your goal as quickly as possible is to save as much as you can.
6. Watch Your Spending
Vacations, car, kids and all of life's other expenses take a big chunk out of your paycheck. To maximize your savings, you need to minimize your spending. Buying a home you can afford and living a lifestyle that is below your means and not funded by credit cards are all necessities if you want to boost your savings.
7. Monitor Your Portfolio
There's no need to obsess over every movement of the Dow. Instead, check your portfolio once a year. Rebalance your asset allocation to keep on track with your plan.
8. Max Out Your Options
Take advantage of every savings opportunity that comes your way. Make the maximum contribution to tax-deferred savings plans and then open up a taxable account too. Don't let any chance to save get away.
9. Catch-Up Contributions
When you reach age50, you are eligible to increase contributions to tax-deferred savings plans. Take advantage of this opportunity!
10. Have Patience
"Get-rich-quick" schemes are usually just that - schemes. The power of compounding takes time, so invest early, invest often and accept that the road to riches is often long and slow. With that in mind, the sooner you get started, the better your odds of achieving your goals.
The Reality Of Retirement
Retirement might seem far away, but it when it arrives nobody ever complains about having too much money. Some people even question whether a million dollars is enough.
That said, with lots of planning and discipline, you can reach your retirement goals and live a comfortable life after work.
1. Set the Goal
Nobody plans to fail, but plenty of people fail to plan. It's a cliché, but it's true. "Plan" is the leading self-help advice from athletes, business moguls and everyday people who have achieved extraordinary goals.
2. Start Saving
If you don't save, you'll never reach your goal. As obvious as this might seems, far too many people never even start to save. If your employer offers a 401(k) plan, enrolling in the plan is a great way to put your savings on autopilot. Simply sign up for the plan and contributions will be automatically taken out of your paycheck, increasing your savings and decreasing your immediate tax liability.
If your employer offers to match your contributions up to a certain percentage, be sure to contribute enough to get the full match. It's like getting a guaranteed return on your investment. Finding the cash to stash may be a challenge, particularly when you're young, but don't let that stop you from pursuing future riches.
3. Get Aggressive
Studies have shown that the majority of the returns generated by an investment are dictated by the asset-allocation decision. If you are looking to grow your wealth over time, fixed-income investments aren't likely to get the job done, and inflation can take a big chunk out of your savings.
Investing in equities entails more risk, but is also statistically likely to lead to greater returns. For many of us, it's a risk we have to take if want to see our wealth grow. Asset-allocation strategies can help you learn how to make picking the right mix of securities the core of your investing strategy.
4. Prepare for Rainy Days
Part of long-term planning involves accepting the idea that setbacks will occur. If you are not prepared, these setbacks can put a stop to your savings efforts. While you can't avoid all of the bumps in the road, you can prepare in advance to mitigate the damage they can do.
5. Save More
Your income should rise as time passes. You'll get raises, you'll change jobs, and maybe you'll get married and become a two-income family. Every time more cash comes in to your pocket, you should increase the amount that you save. The key to reaching your goal as quickly as possible is to save as much as you can.
6. Watch Your Spending
Vacations, car, kids and all of life's other expenses take a big chunk out of your paycheck. To maximize your savings, you need to minimize your spending. Buying a home you can afford and living a lifestyle that is below your means and not funded by credit cards are all necessities if you want to boost your savings.
7. Monitor Your Portfolio
There's no need to obsess over every movement of the Dow. Instead, check your portfolio once a year. Rebalance your asset allocation to keep on track with your plan.
8. Max Out Your Options
Take advantage of every savings opportunity that comes your way. Make the maximum contribution to tax-deferred savings plans and then open up a taxable account too. Don't let any chance to save get away.
9. Catch-Up Contributions
When you reach age50, you are eligible to increase contributions to tax-deferred savings plans. Take advantage of this opportunity!
10. Have Patience
"Get-rich-quick" schemes are usually just that - schemes. The power of compounding takes time, so invest early, invest often and accept that the road to riches is often long and slow. With that in mind, the sooner you get started, the better your odds of achieving your goals.
The Reality Of Retirement
Retirement might seem far away, but it when it arrives nobody ever complains about having too much money. Some people even question whether a million dollars is enough.
That said, with lots of planning and discipline, you can reach your retirement goals and live a comfortable life after work.
No Simple Answers for Small Business
"Joe the Plumber" and other small-business owners want to know which presidential candidate would give them the best deal on taxes. It's a simple question with no simple answers.
The definition of "small business" is broad, ranging from two-person enterprises such as the one Samuel J. Wurzelbacher – "Joe the Plumber" – of Holland, Ohio, told Sen. Barack Obama he wants to buy, to a factory with fewer than 500 workers, to a construction company with $33.5 million or less in sales, according to the Small Business Administration.
Fewer than 2% of small-business owners take home more than $250,000 a year, according to the Tax Policy Center, a nonpartisan joint venture of the Urban Institute and Brookings Institution. Sen. Obama's plan raises marginal income tax rates only on individuals making $200,000 or more, and families making $250,000. Tax reductions can occur for people below those income levels via various tax credits. About 75% of small-business owners report business income as individual income, according to the Tax Policy Center.
Sen. Obama and Sen. John McCain have focused their discussions of tax proposals mainly on individuals and income thresholds. Sen. Obama's plan would raise the marginal tax rate on incomes above $250,000 a year to 36% and 39.6%, from the current 33% and 35%, effectively returning top tax rates to their levels during the 1990s.
"For the real Joe, if he makes less than $250,000, then he wouldn't see a tax increase. He'd get a targeted tax decrease," under Sen. Obama's plan, said Roberton Williams, principal research associate with the nonpartisan Tax Policy Center.
Mr. Wurzelbacher could also see lower taxes under an Obama administration if he qualifies for a variety of tax credits that the Illinois Senator has proposed, such as a $500 credit to match retirement contributions or an educational tax credit of up to $4,000 of college expenses.
But income taxes aren't the only issue for small-business owners.
Sen. McCain has proposed reducing corporate tax rates from 35% to 25%, but that would only potentially affect about a quarter of small-business owners, probably not including a business as small as Mr. Wurzelbacher's business, A.W. Newell Inc.
Health-care costs are also a consideration because of rising premiums. Only about half of small businesses provide coverage for employees, studies show.
Small-business groups have raised questions about Sen. Obama's health-care plan, which would mandate that some employers provide "meaningful" health-care coverage or give a percentage of payroll to fund a public plan. Sen. Obama has said small businesses would be exempt from that mandate. He has also proposed a 50% tax credit on employee health-care costs to allow more small businesses to cover workers, and the creation of a National Health Insurance Exchange for people to buy more affordable insurance.However, small-business advocates say, they still have some major questions about Sen. Obama's plan. Namely, how he defines "meaningful" health-care coverage and how he defines "small business." Is it 10 employees or fewer? One hundred?
"Clearly, we don't believe mandating employers is the way to go about reform," says Amanda Austin, a health-care analyst at the National Federation of Independent Business. The group has remained neutral on the presidential race.
Sen. McCain has proposed ending the current tax treatment of employer-based health-care plans by making benefits taxable and offering offsetting tax credits. His plan would provide a refundable tax credit of up to $2,500 for individuals ($5,000 for families) to help purchase insurance.
"Both plans try to focus on affordability, but details are light," says Ms. Austin. "How do they get the costs down? If you get the costs down, you'll get more people coverage."
Sen. Obama would raise capital gains tax rates for families earning more than $250,000 to 20% from 15%. But the Obama plan would eliminate capital gains taxes for investors and entrepreneurs in small firms. Sen. Obama has proposed raising the cap on the 6% payroll tax used to fund the Medicare and Social Security systems, a move that would affect small-business proprietors. Sen. Obama has said he would consider levying Social Security taxes at a lower rate on income above $250,000. Currently, payroll taxes are applied only to the first $102,000 of annual income.
The definition of "small business" is broad, ranging from two-person enterprises such as the one Samuel J. Wurzelbacher – "Joe the Plumber" – of Holland, Ohio, told Sen. Barack Obama he wants to buy, to a factory with fewer than 500 workers, to a construction company with $33.5 million or less in sales, according to the Small Business Administration.
Fewer than 2% of small-business owners take home more than $250,000 a year, according to the Tax Policy Center, a nonpartisan joint venture of the Urban Institute and Brookings Institution. Sen. Obama's plan raises marginal income tax rates only on individuals making $200,000 or more, and families making $250,000. Tax reductions can occur for people below those income levels via various tax credits. About 75% of small-business owners report business income as individual income, according to the Tax Policy Center.
Sen. Obama and Sen. John McCain have focused their discussions of tax proposals mainly on individuals and income thresholds. Sen. Obama's plan would raise the marginal tax rate on incomes above $250,000 a year to 36% and 39.6%, from the current 33% and 35%, effectively returning top tax rates to their levels during the 1990s.
"For the real Joe, if he makes less than $250,000, then he wouldn't see a tax increase. He'd get a targeted tax decrease," under Sen. Obama's plan, said Roberton Williams, principal research associate with the nonpartisan Tax Policy Center.
Mr. Wurzelbacher could also see lower taxes under an Obama administration if he qualifies for a variety of tax credits that the Illinois Senator has proposed, such as a $500 credit to match retirement contributions or an educational tax credit of up to $4,000 of college expenses.
But income taxes aren't the only issue for small-business owners.
Sen. McCain has proposed reducing corporate tax rates from 35% to 25%, but that would only potentially affect about a quarter of small-business owners, probably not including a business as small as Mr. Wurzelbacher's business, A.W. Newell Inc.
Health-care costs are also a consideration because of rising premiums. Only about half of small businesses provide coverage for employees, studies show.
Small-business groups have raised questions about Sen. Obama's health-care plan, which would mandate that some employers provide "meaningful" health-care coverage or give a percentage of payroll to fund a public plan. Sen. Obama has said small businesses would be exempt from that mandate. He has also proposed a 50% tax credit on employee health-care costs to allow more small businesses to cover workers, and the creation of a National Health Insurance Exchange for people to buy more affordable insurance.However, small-business advocates say, they still have some major questions about Sen. Obama's plan. Namely, how he defines "meaningful" health-care coverage and how he defines "small business." Is it 10 employees or fewer? One hundred?
"Clearly, we don't believe mandating employers is the way to go about reform," says Amanda Austin, a health-care analyst at the National Federation of Independent Business. The group has remained neutral on the presidential race.
Sen. McCain has proposed ending the current tax treatment of employer-based health-care plans by making benefits taxable and offering offsetting tax credits. His plan would provide a refundable tax credit of up to $2,500 for individuals ($5,000 for families) to help purchase insurance.
"Both plans try to focus on affordability, but details are light," says Ms. Austin. "How do they get the costs down? If you get the costs down, you'll get more people coverage."
Sen. Obama would raise capital gains tax rates for families earning more than $250,000 to 20% from 15%. But the Obama plan would eliminate capital gains taxes for investors and entrepreneurs in small firms. Sen. Obama has proposed raising the cap on the 6% payroll tax used to fund the Medicare and Social Security systems, a move that would affect small-business proprietors. Sen. Obama has said he would consider levying Social Security taxes at a lower rate on income above $250,000. Currently, payroll taxes are applied only to the first $102,000 of annual income.
Boeing's 3Q profit dives 38 percent
Boeing Co., the world's No. 2 commercial airplane maker, said Wednesday its third-quarter earnings plummeted 38 percent as a strike and supplier production problems hurt results. Its shares fell nearly 5 percent in morning trading.
The Chicago-based aerospace company said it earned $695 million, or 96 cents per share in the quarter, down from $1.11 billion, or $1.44 per share, a year earlier. The strike and production problems reduced Boeing's airplane deliveries, cutting profit by 60 cents per share during the period.
Quarterly revenue dipped 7 percent to $15.29 billion.
Analysts polled by Thomson Reuters, on average, expected earnings per share of 98 cents on revenue of $14.61 billion. Analyst estimates typically exclude one-time items.
Boeing shut down its commercial aircraft production facilities in September when about 27,000 workers from its Machinists' union went on strike after talks over a new labor contract failed.
Delivery of some aircraft was delayed by the strike and problems getting galleys from suppliers for certain wide-body planes.
Without the strike, Boeing would have delivered 119 planes during the quarter, but ended up with a total of 84 deliveries, or 35 fewer than planned.
Boeing said it will provide updated financial guidance and information about the schedule for its affected airplanes after the strike ends.
"While the suspension of commercial airplane deliveries had a major impact on the quarter, we effectively executed the remainder of our business and kept our focus on the strong balance sheet we have built over the past few years," Jim McNerney Boeing's chairman, president and chief executive, said in a statement.
Demand for new, fuel-efficient commercial planes remains strong and exceeds supply, the company said.
Boeing's new 787 passenger jet, which has been hampered by lengthy production delays, has been touted for its promise of greater fuel efficiency due to its construction from lightweight carbon-fiber composite parts.
Work on the plane progressed during the quarter, Boeing said, with a successful hydraulic system test, landing gear test and pressurization test of the static airframe. The company also began testing the flight controls and started final assembly of its fourth flight-test plane. Fifty-eight customers have ordered 895 of the planes to date.
Boeing said it may need to finance some airplane deliveries beginning in 2009, the first such financing since 2006, but declined to specify the deliveries.
Boeing has made backstop financing commitments for 3 percent of its commercial airplane backlog, mostly for 787s, related to deliveries through the end of the next decade, the companies said.
Shares of Boeing slid $2.20, or 4.8 percent, to $44.20 in morning trading on Wednesday.
The Chicago-based aerospace company said it earned $695 million, or 96 cents per share in the quarter, down from $1.11 billion, or $1.44 per share, a year earlier. The strike and production problems reduced Boeing's airplane deliveries, cutting profit by 60 cents per share during the period.
Quarterly revenue dipped 7 percent to $15.29 billion.
Analysts polled by Thomson Reuters, on average, expected earnings per share of 98 cents on revenue of $14.61 billion. Analyst estimates typically exclude one-time items.
Boeing shut down its commercial aircraft production facilities in September when about 27,000 workers from its Machinists' union went on strike after talks over a new labor contract failed.
Delivery of some aircraft was delayed by the strike and problems getting galleys from suppliers for certain wide-body planes.
Without the strike, Boeing would have delivered 119 planes during the quarter, but ended up with a total of 84 deliveries, or 35 fewer than planned.
Boeing said it will provide updated financial guidance and information about the schedule for its affected airplanes after the strike ends.
"While the suspension of commercial airplane deliveries had a major impact on the quarter, we effectively executed the remainder of our business and kept our focus on the strong balance sheet we have built over the past few years," Jim McNerney Boeing's chairman, president and chief executive, said in a statement.
Demand for new, fuel-efficient commercial planes remains strong and exceeds supply, the company said.
Boeing's new 787 passenger jet, which has been hampered by lengthy production delays, has been touted for its promise of greater fuel efficiency due to its construction from lightweight carbon-fiber composite parts.
Work on the plane progressed during the quarter, Boeing said, with a successful hydraulic system test, landing gear test and pressurization test of the static airframe. The company also began testing the flight controls and started final assembly of its fourth flight-test plane. Fifty-eight customers have ordered 895 of the planes to date.
Boeing said it may need to finance some airplane deliveries beginning in 2009, the first such financing since 2006, but declined to specify the deliveries.
Boeing has made backstop financing commitments for 3 percent of its commercial airplane backlog, mostly for 787s, related to deliveries through the end of the next decade, the companies said.
Shares of Boeing slid $2.20, or 4.8 percent, to $44.20 in morning trading on Wednesday.
AT&T 3Q profit up 5.5 pct
NEW YORK (AP) -- AT&T Inc.'s earnings rose 5.5 percent in the third quarter, but missed analyst expectations in part because of strong sales of iPhones, which the carrier subsidizes.
The country's largest telecommunications company said Wednesday it earned $3.23 billion, or 55 cents per share, in the July-September period, up from $3.06 billion, or 50 cents per share, in the same period a year ago.
Excluding $1.1 billion in merger-related costs, the Dallas-based company earned 67 cents per share. That number was reduced by $900 million, or 10 cents per share, in subsidies for the 2.4 million iPhones it sold, and 2 cents per share in hurricane damage. Analysts polled by Thomson Reuters were expecting 71 cents per share.
Revenue rose 4 percent to $31.3 billion from $30.1 billion a year earlier, matching analysts' estimates.
The figure for iPhone subsidies was considerably higher than the company had forecast. When the second model of the handset, the iPhone 3G, went on sale on July 11, the company predicted that the subsidies would cost it 10 cents to 12 cents per share this year, and the same amount next year. It apparently reached the lower bound of that range in one quarter.
The iPhone subsidy works out to about $375 per unit. The final price is stores is $199 or $299 depending on the model. AT&T says the subsidy is an investment, because iPhone owners are voracious consumers of data services and pay 60 percent more month in service fees than owners of other phones. They're also more likely to stay with AT&T, which is the sole carrier for the phone in the U.S.
Strong iPhone results were expected from AT&T after Apple Inc. late Tuesday said it had sold 6.9 million phones worldwide in the quarter.
AT&T shares jumped 3 percent in extended trading Tuesday evening after that announcement, but after its own results were released Wednesday morning, the shares were down 48 cents, or 1.9 percent, at $25.73.
Overall, AT&T added 2 million new wireless subscribers, at the high end of analyst estimates. It ended the quarter with 74.9 million subscribers. Of the iPhone buyers, 40 percent, or nearly 1 million, came from other carriers.
In the traditional phone company business, AT&T lost 10.6 percent of its voice lines compared to a year ago as customers continued to go wireless-only or sign up for phone service from cable companies. Calling revenue declined 8.1 percent to $9.5 billion.
However, AT&T reversed a declining trend in broadband and added 148,000 new subscribers, up from 40,000 additions in the second quarter. It introduced promotions on DSL service in the quarter to win back market share from cable companies.
AT&T also added 179,000 customers to its own cable-like video service, for a total of 781,000.
Sales to large corporate customers enterprise customers were $4.7 billion, down 1.4 percent from a year ago due in part to economic pressures.
The country's largest telecommunications company said Wednesday it earned $3.23 billion, or 55 cents per share, in the July-September period, up from $3.06 billion, or 50 cents per share, in the same period a year ago.
Excluding $1.1 billion in merger-related costs, the Dallas-based company earned 67 cents per share. That number was reduced by $900 million, or 10 cents per share, in subsidies for the 2.4 million iPhones it sold, and 2 cents per share in hurricane damage. Analysts polled by Thomson Reuters were expecting 71 cents per share.
Revenue rose 4 percent to $31.3 billion from $30.1 billion a year earlier, matching analysts' estimates.
The figure for iPhone subsidies was considerably higher than the company had forecast. When the second model of the handset, the iPhone 3G, went on sale on July 11, the company predicted that the subsidies would cost it 10 cents to 12 cents per share this year, and the same amount next year. It apparently reached the lower bound of that range in one quarter.
The iPhone subsidy works out to about $375 per unit. The final price is stores is $199 or $299 depending on the model. AT&T says the subsidy is an investment, because iPhone owners are voracious consumers of data services and pay 60 percent more month in service fees than owners of other phones. They're also more likely to stay with AT&T, which is the sole carrier for the phone in the U.S.
Strong iPhone results were expected from AT&T after Apple Inc. late Tuesday said it had sold 6.9 million phones worldwide in the quarter.
AT&T shares jumped 3 percent in extended trading Tuesday evening after that announcement, but after its own results were released Wednesday morning, the shares were down 48 cents, or 1.9 percent, at $25.73.
Overall, AT&T added 2 million new wireless subscribers, at the high end of analyst estimates. It ended the quarter with 74.9 million subscribers. Of the iPhone buyers, 40 percent, or nearly 1 million, came from other carriers.
In the traditional phone company business, AT&T lost 10.6 percent of its voice lines compared to a year ago as customers continued to go wireless-only or sign up for phone service from cable companies. Calling revenue declined 8.1 percent to $9.5 billion.
However, AT&T reversed a declining trend in broadband and added 148,000 new subscribers, up from 40,000 additions in the second quarter. It introduced promotions on DSL service in the quarter to win back market share from cable companies.
AT&T also added 179,000 customers to its own cable-like video service, for a total of 781,000.
Sales to large corporate customers enterprise customers were $4.7 billion, down 1.4 percent from a year ago due in part to economic pressures.
McDonald's profit
McDonald's Corp (NYSE:MCD - News) reported better-than-expected quarterly profit on Wednesday, fueled by strong sales in the United States and abroad, sending its shares up 3.4 percent in premarket trade.
The world's largest hamburger chain said third-quarter net income rose to $1.19 billion, or $1.05 per share, from $1.07 billion, or 89 cents per share, a year ago.
Analysts on average were expecting 98 cents per share, according to Reuters Estimates.
Total revenue rose 6 percent to $6.27 billion, helped by a 7.1 percent increase in global same-store sales.
"As we enter the final quarter of the year, October sales trends remain strong and I am optimistic about McDonald's outlook," said McDonald's Chief Executive Jim Skinner.
McDonald's shares rose to $57 in premarket trade, up from their close at 55.13 on the New York Stock Exchange.
The world's largest hamburger chain said third-quarter net income rose to $1.19 billion, or $1.05 per share, from $1.07 billion, or 89 cents per share, a year ago.
Analysts on average were expecting 98 cents per share, according to Reuters Estimates.
Total revenue rose 6 percent to $6.27 billion, helped by a 7.1 percent increase in global same-store sales.
"As we enter the final quarter of the year, October sales trends remain strong and I am optimistic about McDonald's outlook," said McDonald's Chief Executive Jim Skinner.
McDonald's shares rose to $57 in premarket trade, up from their close at 55.13 on the New York Stock Exchange.
Merck 3Q net drops 28 percent; to cut 7,200 jobs
Drugmaker Merck & Co. said Wednesday it will slash 7,200 jobs as part of a new restructuring program that comes as its third-quarter profit plunged 28 percent, due to a hefty restructuring charge and flat sales.
The maker of allergy and asthma treatment Singulair and cervical cancer vaccine Gardasil said it will cut nearly 13 percent of its work force, including many executives, to lower overhead and become more competitive, in its second major restructuring in less than three years.
Whitehouse Station, N.J.-based Merck & Co. said that because of a $612 million charge for restructuring, net income for its third quarter amounts to $1.09 billion, or 51 cents per share. That's down from $1.53 billion, or 70 cents per share, a year earlier.
The $612 million charge, after taxes, includes a $720 million pretax charge for the new restructuring program, plus $127 million in costs related to the prior restructuring program, announced in December 2005.
Excluding the restructuring charge, which amounts to 29 cents per share, Merck would have posted earnings of 80 cents, 1 cent better than Wall Street was expecting.
The company narrowed its 2008 earnings forecast, to $3.28 to $3.32 per share excluding one-time items. The prior forecast, issued in April, was for $3.28 to $3.38 per share.
Third-quarter revenue was down 2 percent at $5.9 billion, from $6.07 billion in 2007. Analysts surveyed by Thomson Reuters were expecting sales of $6.1 billion.
Sales were hurt by a further decline in Merck's cholesterol franchise, lower sales for nearly all its vaccines and generic competition for former blockbuster osteoporosis drug Fosamax, which lost U.S. patent protection in February and saw sales cut in half this quarter to $354 million.
The cholesterol drugs Vytorin and Zetia, which Merck jointly markets with partner Schering-Plough Corp., saw sales dip about 15 percent to $1.1 billion in the quarter, cutting Merck's equity income from the joint venture by 17 percent, to $400 million.
Singulair sales edged up 1 percent, to $1.03 billion, and blood pressure drugs Cozaar and Hyzaar rose 9 percent to $888 million. Some new products, including HIV drug Isentress and diabetes drugs Januvia and Janumet, also sold well.
The new restructuring program announced Wednesday aims to eliminate about 7,200 jobs, 400 of them currently vacant, across the company worldwide by the end of 2011. As part of the program, Merck will streamline management layers by eliminating about 25 percent of senior and mid-level executives. The company currently has a total of about 56,700 employees.
The new job cuts come on top of a massive December 2005 restructuring program, just about completed, that eliminated 10,400 jobs.
The company said the new cuts are expected to produce cumulative pretax savings of $3.8 billion to $4.2 billion from 2008 to 2013, but it will cost between $1.6 billion and $2 billion through the end of 2011, when the program is expected to be completed.
For the first nine months, net income jumped nearly 26 percent to $6.16 billion, or $2.86 per share, compared with $4.9 billion, or $2.24 per share, in the January-September period of 2007. Much of that improvement was due to one-time items this year, particularly a $2.2 billion gain related to Merck's partnership with AstraZeneca LP. Sales for the first nine months were down about 1 percent, to $17.82 billion from $17.94 billion.
The maker of allergy and asthma treatment Singulair and cervical cancer vaccine Gardasil said it will cut nearly 13 percent of its work force, including many executives, to lower overhead and become more competitive, in its second major restructuring in less than three years.
Whitehouse Station, N.J.-based Merck & Co. said that because of a $612 million charge for restructuring, net income for its third quarter amounts to $1.09 billion, or 51 cents per share. That's down from $1.53 billion, or 70 cents per share, a year earlier.
The $612 million charge, after taxes, includes a $720 million pretax charge for the new restructuring program, plus $127 million in costs related to the prior restructuring program, announced in December 2005.
Excluding the restructuring charge, which amounts to 29 cents per share, Merck would have posted earnings of 80 cents, 1 cent better than Wall Street was expecting.
The company narrowed its 2008 earnings forecast, to $3.28 to $3.32 per share excluding one-time items. The prior forecast, issued in April, was for $3.28 to $3.38 per share.
Third-quarter revenue was down 2 percent at $5.9 billion, from $6.07 billion in 2007. Analysts surveyed by Thomson Reuters were expecting sales of $6.1 billion.
Sales were hurt by a further decline in Merck's cholesterol franchise, lower sales for nearly all its vaccines and generic competition for former blockbuster osteoporosis drug Fosamax, which lost U.S. patent protection in February and saw sales cut in half this quarter to $354 million.
The cholesterol drugs Vytorin and Zetia, which Merck jointly markets with partner Schering-Plough Corp., saw sales dip about 15 percent to $1.1 billion in the quarter, cutting Merck's equity income from the joint venture by 17 percent, to $400 million.
Singulair sales edged up 1 percent, to $1.03 billion, and blood pressure drugs Cozaar and Hyzaar rose 9 percent to $888 million. Some new products, including HIV drug Isentress and diabetes drugs Januvia and Janumet, also sold well.
The new restructuring program announced Wednesday aims to eliminate about 7,200 jobs, 400 of them currently vacant, across the company worldwide by the end of 2011. As part of the program, Merck will streamline management layers by eliminating about 25 percent of senior and mid-level executives. The company currently has a total of about 56,700 employees.
The new job cuts come on top of a massive December 2005 restructuring program, just about completed, that eliminated 10,400 jobs.
The company said the new cuts are expected to produce cumulative pretax savings of $3.8 billion to $4.2 billion from 2008 to 2013, but it will cost between $1.6 billion and $2 billion through the end of 2011, when the program is expected to be completed.
For the first nine months, net income jumped nearly 26 percent to $6.16 billion, or $2.86 per share, compared with $4.9 billion, or $2.24 per share, in the January-September period of 2007. Much of that improvement was due to one-time items this year, particularly a $2.2 billion gain related to Merck's partnership with AstraZeneca LP. Sales for the first nine months were down about 1 percent, to $17.82 billion from $17.94 billion.
Oil falls below US$69 on US recession fears
Oil prices fell below US$69 a barrel Wednesday as investors shrugged off a looming OPEC production cut after company forecasts suggested the U.S. may be headed for a severe economic slowdown that would crimp demand for crude.
Light, sweet crude for December delivery dropped US$3.37 to US$68.81 a barrel in electronic trading on the New York Mercantile Exchange by mid-afternoon in Europe.
The November contract expired Tuesday and fell US$3.36 to settle at US$70.89. Last Thursday, that contract had declined as low as US$68.57 a barrel, the lowest since June 2007.
Crude investors have followed equity markets this week, looking for signs on how the U.S. economy will weather the current global financial turmoil. On Tuesday, DuPont, Sun Microsystems and Texas Instruments reported disappointing earnings and bleak forecasts, sending the Dow Jones industrials average down 2.5 percent.
"Oil is now highly correlated with the stock market," said Clarence Chu, a trader with market maker Hudson Capital Energy in Singapore. "People are looking to the Dow for sentiment on the economy."
The Organization of Petroleum Exporting Countries, which accounts for about 40 percent of global oil supply, has signaled it plans to announce an output quota reduction at an emergency meeting Friday in Vienna.
But investors are skeptical about how much of the cut will be implemented, given the history of OPEC members exceeding their production quotas.
"There should be a short-term boost to prices when they announce a cut on Friday," Chu said. "But OPEC production has always been above their quotas, so there's a credibility problem."
Russia's top energy official said Wednesday that Russia, the largest oil producer outside of OPEC, may set aside an oil reserve to influence global prices -- but won't cut output, according to news reports.
Deputy Prime Minister Igor Sechin said the government was considering creating an oil production reserve "which would allow it to work more efficiently with prices on the market."
Sechin would not name the amount of the reserves, but said they should be "enough to reach efficient pricing parameters," Russian news agencies reported.
He confirmed that Russia wouldn't cut oil output, unlike OPEC nations which are expected to slash production by 1 million barrels.
Crude oil is down 53 percent from its peak of US$147.27 reached in mid-July.
A stronger dollar this week has also pushed oil prices lower. Investors often buy commodities like crude oil as an inflation hedge when the dollar weakens and sell those investments when the dollar rises.
The euro fell below US$1.28 for the first time in nearly two years on Wednesday. The 15-nation euro dipped as low as US$1.2736 in morning trading before rising slightly to US$1.2873, down from US$1.3003 late Tuesday in New York.
Investors are also watching for signs of slowing U.S. demand in the weekly oil inventories report to be released Wednesday from the U.S. Energy Department's Energy Information Administration. The petroleum supply report was expected to show that oil stocks rose 2.9 million barrels last week, according to the average of analysts' estimates in a survey by energy information provider Platts.
The Platts survey also showed that analysts projected gasoline inventories rose 3.0 million barrels and distillates went up 600,000 barrels last week.
In other Nymex trading, heating oil futures fell 6.22 cents to US$2.11 a gallon, while gasoline prices dropped 6.57 cents to US$1.63 a gallon. Natural gas for November delivery jumped 3.8 cents to US$6.88 per 1,000 cubic feet.
In London, December Brent crude was down US$2.64 to US$67.08 a barrel on the ICE Futures exchange.
AP writer Alex Kennedy contributed to this report from Singapore.
Light, sweet crude for December delivery dropped US$3.37 to US$68.81 a barrel in electronic trading on the New York Mercantile Exchange by mid-afternoon in Europe.
The November contract expired Tuesday and fell US$3.36 to settle at US$70.89. Last Thursday, that contract had declined as low as US$68.57 a barrel, the lowest since June 2007.
Crude investors have followed equity markets this week, looking for signs on how the U.S. economy will weather the current global financial turmoil. On Tuesday, DuPont, Sun Microsystems and Texas Instruments reported disappointing earnings and bleak forecasts, sending the Dow Jones industrials average down 2.5 percent.
"Oil is now highly correlated with the stock market," said Clarence Chu, a trader with market maker Hudson Capital Energy in Singapore. "People are looking to the Dow for sentiment on the economy."
The Organization of Petroleum Exporting Countries, which accounts for about 40 percent of global oil supply, has signaled it plans to announce an output quota reduction at an emergency meeting Friday in Vienna.
But investors are skeptical about how much of the cut will be implemented, given the history of OPEC members exceeding their production quotas.
"There should be a short-term boost to prices when they announce a cut on Friday," Chu said. "But OPEC production has always been above their quotas, so there's a credibility problem."
Russia's top energy official said Wednesday that Russia, the largest oil producer outside of OPEC, may set aside an oil reserve to influence global prices -- but won't cut output, according to news reports.
Deputy Prime Minister Igor Sechin said the government was considering creating an oil production reserve "which would allow it to work more efficiently with prices on the market."
Sechin would not name the amount of the reserves, but said they should be "enough to reach efficient pricing parameters," Russian news agencies reported.
He confirmed that Russia wouldn't cut oil output, unlike OPEC nations which are expected to slash production by 1 million barrels.
Crude oil is down 53 percent from its peak of US$147.27 reached in mid-July.
A stronger dollar this week has also pushed oil prices lower. Investors often buy commodities like crude oil as an inflation hedge when the dollar weakens and sell those investments when the dollar rises.
The euro fell below US$1.28 for the first time in nearly two years on Wednesday. The 15-nation euro dipped as low as US$1.2736 in morning trading before rising slightly to US$1.2873, down from US$1.3003 late Tuesday in New York.
Investors are also watching for signs of slowing U.S. demand in the weekly oil inventories report to be released Wednesday from the U.S. Energy Department's Energy Information Administration. The petroleum supply report was expected to show that oil stocks rose 2.9 million barrels last week, according to the average of analysts' estimates in a survey by energy information provider Platts.
The Platts survey also showed that analysts projected gasoline inventories rose 3.0 million barrels and distillates went up 600,000 barrels last week.
In other Nymex trading, heating oil futures fell 6.22 cents to US$2.11 a gallon, while gasoline prices dropped 6.57 cents to US$1.63 a gallon. Natural gas for November delivery jumped 3.8 cents to US$6.88 per 1,000 cubic feet.
In London, December Brent crude was down US$2.64 to US$67.08 a barrel on the ICE Futures exchange.
AP writer Alex Kennedy contributed to this report from Singapore.
Wachovia reports $23.9B loss for 3Q
NEW YORK (AP) -- Wachovia Corp. on Wednesday reported a staggering $24 billion loss as it took a goodwill impairment charge of nearly $19 billion ahead of its acquisition by Wells Fargo & Co.
The Charlotte, N.C.-based bank reported a loss after paying preferred dividends of $23.89 billion, or $11.18 per share, in the period ended Sept. 30, compared with earnings of $1.62 billion, or 85 cents per share, a year earlier.
Excluding goodwill impairment of $18.7 billion and merger-related and restructuring expense of $414 million, the bank lost $4.76 billion, or $2.23 per share.
Analysts polled by Thomson Reuters, on average, had expected earnings of 2 cents per share. Analyst estimates typically exclude one-time items.
The bank said its acquisition by Wells Fargo, in an all-stock deal currently valued at about $14 billion, is on track to close in the fourth quarter.
"Wachovia's third-quarter results were very much in line with our expectations," said Wells Fargo President and Chief Executive John Stumpf in a statement. "We're more encouraged than ever by what we've seen in their franchise, and we're pleased that Wachovia's team continues to focus on serving customers."
A majority of the $18.7 billion writedown relates to the bank's retail and small business unit, under which Wachovia's troubled Pick-a-Pay mortgage portfolio is included. "The unprecedented, almost unimaginable, events of the third quarter and the consideration for our pending merger with Wells Fargo, created a scenario that required goodwill impairment for that and other sub-segments," said Chief Financial Officer David Zwiener during a recorded message reviewing the quarterly results.
Essentially, Wachovia was forced to write down the value of these assets because they were considered overvalued compared with the market value -- or what Wells Fargo was willing to pay. The charge has no impact on Wachovia's capital levels.
During the quarter, Wachovia set aside a $6.63 billion provision for credit losses, including $3.4 billion to build its reserves to cover losses in its Pick-a-Pay loan portfolio.
Net interest income, the difference between how much it costs a bank to borrow money and how much it receives from lending money to customers, rose 10 percent to $5.04 billion from a year earlier. Total average loans grew 11 percent to $478.49 billion, representing 20 percent growth in average commercial loans and 6 percent growth in average consumer loans.
Period-end core deposits declined 8 percent from the second quarter to $370 billion, due to "sizable and abrupt" end-of-quarter outflows in commercial deposits sparked by the failure of West Coast rival Washington Mutual Inc.
Since quarter end, Wachovia said it has begun to see commercial deposit trends improve.
Net charge offs, or loans written off as unpaid, totaled $1.87 billion, or 1.57 percent of average net loans on an annualized basis. Total non-performing assets, including loans held for sale, were $15 billion.
Fee and other income dropped 75 percent to $733 million from nearly $3 billion in the prior-year quarter, due to losses on investments.
The bank's Tier 1 capital ratio, essentially a measure of a company's cash versus debt, totaled 7.4 percent at the end of the quarter, down from 8 percent at the end of the second quarter.
Wachovia's problems stem largely from its acquisition of mortgage lender Golden West Financial Corp. in 2006 for roughly $25 billion, at the height of the nation's housing boom. With that purchase, Wachovia inherited a deteriorating portfolio of Pick-A-Pay loans, Golden West's specialty, which let borrowers skip some payments.
The current Pick-a-Pay mortgage loan balance totals $118.7 billion. Wachovia expects total cumulative losses of $26.1 billion on this portfolio, with about 90 percent of the credit costs incurred by the end of next year.
Despite its problems, Wachovia recently found itself at the center of a bitter battle between two of the country's largest banks, as Citigroup and Wells Fargo fought for its lucrative deposits.
Wachovia had been struggling for some time, but the rush to a deal was prompted by a $5 billion run on deposits in late September that threatened the future of the bank, according to court documents.
Citigroup Inc. agreed to step in and buy Wachovia's banking operations for $2.1 billion in a deal brokered by the Federal Deposit Insurance Corp.
But only four days later, Wells Fargo made a higher offer that did not hinge on any government support. Originally, the deal was valued at $15.1 billion, or $7 a share, but Wells Fargo stock has declined since it was announced and the deal is now valued at about $14 billion.
After the fight for Wachovia moved to court, the parties agreed to a legal standstill at the urging of federal regulators. But following several days of negotiations, Citigroup walked away from the deal after the suitors failed to reach an agreement over how to split up Wachovia.
While Citigroup decided not to block the Wells Fargo-Wachovia deal, the bank is seeking $60 billion in damages for alleged interference in its agreement with Wachovia.
The deal is still subject to a vote by Wachovia shareholders.
Wells Fargo, which reported a better-than-expected 25 percent drop in third-quarter profit last week, has been weathering the mortgage crisis much better than many of its peers as it largely avoided subprime loans, which have been the undoing of the financial industry. The bank has said it expects to write down Wachovia's loan portfolio by about $74 billion, but will likely minimize the blow by taking advantage of recently approved tax deductions.
The combined company will have total assets of $1.4 trillion and $787 billion in deposits.
Wachovia shares fell 17 cents, or 3 percent, to $5.92 in morning trading. Wachovia has lost nearly 84 percent of its market value in 2008. Wells Fargo shares, meanwhile, slipped 69 cents, or 2 percent, to $31.91.
The Charlotte, N.C.-based bank reported a loss after paying preferred dividends of $23.89 billion, or $11.18 per share, in the period ended Sept. 30, compared with earnings of $1.62 billion, or 85 cents per share, a year earlier.
Excluding goodwill impairment of $18.7 billion and merger-related and restructuring expense of $414 million, the bank lost $4.76 billion, or $2.23 per share.
Analysts polled by Thomson Reuters, on average, had expected earnings of 2 cents per share. Analyst estimates typically exclude one-time items.
The bank said its acquisition by Wells Fargo, in an all-stock deal currently valued at about $14 billion, is on track to close in the fourth quarter.
"Wachovia's third-quarter results were very much in line with our expectations," said Wells Fargo President and Chief Executive John Stumpf in a statement. "We're more encouraged than ever by what we've seen in their franchise, and we're pleased that Wachovia's team continues to focus on serving customers."
A majority of the $18.7 billion writedown relates to the bank's retail and small business unit, under which Wachovia's troubled Pick-a-Pay mortgage portfolio is included. "The unprecedented, almost unimaginable, events of the third quarter and the consideration for our pending merger with Wells Fargo, created a scenario that required goodwill impairment for that and other sub-segments," said Chief Financial Officer David Zwiener during a recorded message reviewing the quarterly results.
Essentially, Wachovia was forced to write down the value of these assets because they were considered overvalued compared with the market value -- or what Wells Fargo was willing to pay. The charge has no impact on Wachovia's capital levels.
During the quarter, Wachovia set aside a $6.63 billion provision for credit losses, including $3.4 billion to build its reserves to cover losses in its Pick-a-Pay loan portfolio.
Net interest income, the difference between how much it costs a bank to borrow money and how much it receives from lending money to customers, rose 10 percent to $5.04 billion from a year earlier. Total average loans grew 11 percent to $478.49 billion, representing 20 percent growth in average commercial loans and 6 percent growth in average consumer loans.
Period-end core deposits declined 8 percent from the second quarter to $370 billion, due to "sizable and abrupt" end-of-quarter outflows in commercial deposits sparked by the failure of West Coast rival Washington Mutual Inc.
Since quarter end, Wachovia said it has begun to see commercial deposit trends improve.
Net charge offs, or loans written off as unpaid, totaled $1.87 billion, or 1.57 percent of average net loans on an annualized basis. Total non-performing assets, including loans held for sale, were $15 billion.
Fee and other income dropped 75 percent to $733 million from nearly $3 billion in the prior-year quarter, due to losses on investments.
The bank's Tier 1 capital ratio, essentially a measure of a company's cash versus debt, totaled 7.4 percent at the end of the quarter, down from 8 percent at the end of the second quarter.
Wachovia's problems stem largely from its acquisition of mortgage lender Golden West Financial Corp. in 2006 for roughly $25 billion, at the height of the nation's housing boom. With that purchase, Wachovia inherited a deteriorating portfolio of Pick-A-Pay loans, Golden West's specialty, which let borrowers skip some payments.
The current Pick-a-Pay mortgage loan balance totals $118.7 billion. Wachovia expects total cumulative losses of $26.1 billion on this portfolio, with about 90 percent of the credit costs incurred by the end of next year.
Despite its problems, Wachovia recently found itself at the center of a bitter battle between two of the country's largest banks, as Citigroup and Wells Fargo fought for its lucrative deposits.
Wachovia had been struggling for some time, but the rush to a deal was prompted by a $5 billion run on deposits in late September that threatened the future of the bank, according to court documents.
Citigroup Inc. agreed to step in and buy Wachovia's banking operations for $2.1 billion in a deal brokered by the Federal Deposit Insurance Corp.
But only four days later, Wells Fargo made a higher offer that did not hinge on any government support. Originally, the deal was valued at $15.1 billion, or $7 a share, but Wells Fargo stock has declined since it was announced and the deal is now valued at about $14 billion.
After the fight for Wachovia moved to court, the parties agreed to a legal standstill at the urging of federal regulators. But following several days of negotiations, Citigroup walked away from the deal after the suitors failed to reach an agreement over how to split up Wachovia.
While Citigroup decided not to block the Wells Fargo-Wachovia deal, the bank is seeking $60 billion in damages for alleged interference in its agreement with Wachovia.
The deal is still subject to a vote by Wachovia shareholders.
Wells Fargo, which reported a better-than-expected 25 percent drop in third-quarter profit last week, has been weathering the mortgage crisis much better than many of its peers as it largely avoided subprime loans, which have been the undoing of the financial industry. The bank has said it expects to write down Wachovia's loan portfolio by about $74 billion, but will likely minimize the blow by taking advantage of recently approved tax deductions.
The combined company will have total assets of $1.4 trillion and $787 billion in deposits.
Wachovia shares fell 17 cents, or 3 percent, to $5.92 in morning trading. Wachovia has lost nearly 84 percent of its market value in 2008. Wells Fargo shares, meanwhile, slipped 69 cents, or 2 percent, to $31.91.
Global recession
WASHINGTON (AP) -- A barrage of poor earnings Wednesday from major corporations revived worries of a global recession and showed the depth of the financial crisis the Bush administration is trying to tackle.
Wachovia Corp., which is being bought by Wells Fargo for about $14 billion in stock, said it lost $23.89 billion in the third quarter. It earned $1.62 billion in the same quarter a year ago. Airplane maker Boeing reported its earnings slumped 38 percent as a strike halted production of commercial jets.
Merck & Co. said it will slash 7,200 jobs as part of a new restructuring program. The drugmaker's third-quarter profit plunged 28 percent, partly due to flat sales.
Tech companies are taking a hit, too, as the economy slows and spending by consumers and businesses drops. Yahoo is slashing 1,500 jobs while it braces for a deep downturn likely to extend well into 2009.
"We are going into what is very clearly a recession mode," Blake Jorgensen, Yahoo's chief financial officer, said in a Tuesday interview.
Even with the aggressive steps the government has already taken, Treasury Secretary Henry Paulson says it will take time before things get turned around.
"Clearly, we're going to have a number of difficult months ahead of us in terms of the real economy," Paulson said Tuesday in an interview on "The Charlie Rose Show."
Wall Street headed for a sharply lower open Wednesday when investors shifted their focus away from improving credit markets and fixated on corporate earnings.
Asian markets veered sharply lower Wednesday, with Tokyo's Nikkei index tumbling 6.79 percent. Hong Kong's Hang Seng was down 6.2 percent, while South Korea's main index shed 5.1 percent. European markets also opened lower.
A week after Paulson announced the administration would spend $250 billion to buy stakes in U.S. banks, the Federal Reserve stepped up Tuesday with a new program to help money market mutual funds that have been squeezed by worried investors demanding to cash out their holdings.
The Fed said it would provide up to $540 billion in financing though a program run by JPMorgan Chase & Co. to purchase from mutual funds certificates of deposit, bank notes and commercial paper. The program, to be called the Money Market Investor Funding Facility, is designed to revive the market for commercial paper, short-term loans that are critical for keeping businesses running.
"If these money markets are not working properly, then the economy is significantly threatened because this is where businesses get their short-term financing for their day-to-day operations," said Mark Zandi, chief economist at Moody's Economy.com.
Money market funds hold about one-third of all commercial paper and Fed officials said that about $500 billion had flowed out of prime money market funds since August as investors became increasingly worried about their ability to redeem shares. On Sept. 18, the Treasury Department announced that it was tapping a $50 billion Treasury fund to provide guarantees for the assets in the money market accounts.
The Fed has already announced that starting next Monday it will begin making direct purchases of commercial paper in a further effort to bolster this market.
In other government actions to deal with the unfolding crisis, the Treasury Department announced that it had selected two major accounting firms to help manage the government's $700 billion financial-system rescue program passed by Congress on Oct. 3.
The program to buy distressed assets from banks is expected to spend $100 billion initially, while Paulson announced last week that another $250 billion would be committed to buying stock in banks as a way of shoring up their capital reserves so that they will resume more normal lending operations.
Paulson said in his television interview that banks might use part of the money they receive from the government to make acquisitions of weaker banks.
"There will be some situations where it is best for the economy and for the banking system for there to be a consolidation," he said.
That element of the program could prove controversial if strong banks employ the money they receive from the government not to make new loans but to swallow up rivals.
When the $700 billion bailout program was going through Congress, Paulson never mentioned the possibility that the money could be used to provide capital to banks, stressing instead that the other part of the program, having the government use the money to purchase distressed mortgage-related assets from the banks.
Paulson said that the emphasis in the program was changed in reaction to rapidly moving events as the situation in credit markets "became even more dire." He said that before changing emphasis he got input from a number of people including billionaire investor Warren Buffett.
The initiatives seem to be having a positive effect. Yields on Treasury bills and the interest rates banks charge to other banks have both fallen back to late-September levels, but analysts said financial markets will see more turbulence before the credit crisis is over.
Meanwhile, members of Congress are moving forward with efforts to overhaul the regulatory system with what could be the most sweeping changes since the 1930s, another period when Congress revamped how the financial system was regulated in response to the 1929 stock market crash and a wave of bank failures.
House Financial Services Committee Chairman Barney Frank, who held hearings Tuesday on what changes should be made, said that what Congress produces next year will be "as important a set of economic decisions I think this country will be making since the Depression."
Democrats in Congress are also pushing efforts to assemble a second economic stimulus program that could total $150 billion or more. The White House has yet to endorse the idea, but has said President Bush was at least willing to consider a second stimulus measure.
Associated Press writer Michael Liedtke in San Francisco contributed to this report.
Wachovia Corp., which is being bought by Wells Fargo for about $14 billion in stock, said it lost $23.89 billion in the third quarter. It earned $1.62 billion in the same quarter a year ago. Airplane maker Boeing reported its earnings slumped 38 percent as a strike halted production of commercial jets.
Merck & Co. said it will slash 7,200 jobs as part of a new restructuring program. The drugmaker's third-quarter profit plunged 28 percent, partly due to flat sales.
Tech companies are taking a hit, too, as the economy slows and spending by consumers and businesses drops. Yahoo is slashing 1,500 jobs while it braces for a deep downturn likely to extend well into 2009.
"We are going into what is very clearly a recession mode," Blake Jorgensen, Yahoo's chief financial officer, said in a Tuesday interview.
Even with the aggressive steps the government has already taken, Treasury Secretary Henry Paulson says it will take time before things get turned around.
"Clearly, we're going to have a number of difficult months ahead of us in terms of the real economy," Paulson said Tuesday in an interview on "The Charlie Rose Show."
Wall Street headed for a sharply lower open Wednesday when investors shifted their focus away from improving credit markets and fixated on corporate earnings.
Asian markets veered sharply lower Wednesday, with Tokyo's Nikkei index tumbling 6.79 percent. Hong Kong's Hang Seng was down 6.2 percent, while South Korea's main index shed 5.1 percent. European markets also opened lower.
A week after Paulson announced the administration would spend $250 billion to buy stakes in U.S. banks, the Federal Reserve stepped up Tuesday with a new program to help money market mutual funds that have been squeezed by worried investors demanding to cash out their holdings.
The Fed said it would provide up to $540 billion in financing though a program run by JPMorgan Chase & Co. to purchase from mutual funds certificates of deposit, bank notes and commercial paper. The program, to be called the Money Market Investor Funding Facility, is designed to revive the market for commercial paper, short-term loans that are critical for keeping businesses running.
"If these money markets are not working properly, then the economy is significantly threatened because this is where businesses get their short-term financing for their day-to-day operations," said Mark Zandi, chief economist at Moody's Economy.com.
Money market funds hold about one-third of all commercial paper and Fed officials said that about $500 billion had flowed out of prime money market funds since August as investors became increasingly worried about their ability to redeem shares. On Sept. 18, the Treasury Department announced that it was tapping a $50 billion Treasury fund to provide guarantees for the assets in the money market accounts.
The Fed has already announced that starting next Monday it will begin making direct purchases of commercial paper in a further effort to bolster this market.
In other government actions to deal with the unfolding crisis, the Treasury Department announced that it had selected two major accounting firms to help manage the government's $700 billion financial-system rescue program passed by Congress on Oct. 3.
The program to buy distressed assets from banks is expected to spend $100 billion initially, while Paulson announced last week that another $250 billion would be committed to buying stock in banks as a way of shoring up their capital reserves so that they will resume more normal lending operations.
Paulson said in his television interview that banks might use part of the money they receive from the government to make acquisitions of weaker banks.
"There will be some situations where it is best for the economy and for the banking system for there to be a consolidation," he said.
That element of the program could prove controversial if strong banks employ the money they receive from the government not to make new loans but to swallow up rivals.
When the $700 billion bailout program was going through Congress, Paulson never mentioned the possibility that the money could be used to provide capital to banks, stressing instead that the other part of the program, having the government use the money to purchase distressed mortgage-related assets from the banks.
Paulson said that the emphasis in the program was changed in reaction to rapidly moving events as the situation in credit markets "became even more dire." He said that before changing emphasis he got input from a number of people including billionaire investor Warren Buffett.
The initiatives seem to be having a positive effect. Yields on Treasury bills and the interest rates banks charge to other banks have both fallen back to late-September levels, but analysts said financial markets will see more turbulence before the credit crisis is over.
Meanwhile, members of Congress are moving forward with efforts to overhaul the regulatory system with what could be the most sweeping changes since the 1930s, another period when Congress revamped how the financial system was regulated in response to the 1929 stock market crash and a wave of bank failures.
House Financial Services Committee Chairman Barney Frank, who held hearings Tuesday on what changes should be made, said that what Congress produces next year will be "as important a set of economic decisions I think this country will be making since the Depression."
Democrats in Congress are also pushing efforts to assemble a second economic stimulus program that could total $150 billion or more. The White House has yet to endorse the idea, but has said President Bush was at least willing to consider a second stimulus measure.
Associated Press writer Michael Liedtke in San Francisco contributed to this report.
European Market Losses
LONDON (AP) -- European stock markets were sharply lower Wednesday following losses in Asia and an expected retreat on Wall Street amid spreading pessimism over corporate earnings around the world.
Britain's FTSE 100 index of leading shares was down 177.13 points, or 4.2 percent, at 4,052.60, while Germany's DAX was down 189.29 points, or 4.0 percent, at 4,595.12. The CAC-40 in France, Europe's best-performing index on Tuesday, was 146.45 points, or 4.2 percent, lower at 3,328.95.
Europe's losses echoed those in Asia. Japan's Nikkei 225 stock average fell for the first time in three days, dropping 631.56 points, or 6.79 percent, to 8,674.69, while Hong Kong's Hang Seng sank 5.2 percent and South Korea's main index shed 5.1 percent.
U.S. stocks are also expected to drop again when Wall Street opens. Dow Jones industrial average futures fell 126, or 1.4 percent, to 8,909. On Tuesday, the Dow retreated 231 points after a host of companies such as chemical manufacturer DuPont Co., Sun Microsystems and Caterpillar Inc., downplayed their prospects for the coming months.
"Wall Street tumbled before the close last night and then with Yahoo! posting some poor Q3 numbers, this is certainly the sort of news that is setting the mood right now," said Matt Buckland, a dealer at CMC Markets.
All eyes will be on earnings updates in the U.S. later. Among the companies reporting Wednesday are Amazon.com Inc., AT&T Inc., Boeing Co., McDonald's Corp. and Merck & Co.
Fears about the economic outlook have become the markets' primary concern as worries over the banking system have been assuaged, for now at least, by concerted government attempts to shore up banks, as well as massive liquidity boosts from the world's leading central banks.
Commodity stocks have been particularly hit in Europe. Mining company BHP Billiton PLC was down more than 9 percent after it warned of uncertain economic conditions in China, the main driver of global economic growth in recent years. Another major mining firm, Anglo American PLC, was also down over 6 percent following BHP's warning.
"It's not a good day for commodity stocks and they're dragging the indexes down," said David Jones, chief markets strategist at IG Index.
Oil stocks were also weighed down by another $2.50 fall in oil prices to $69.67 a barrel despite expectations that the OPEC oil cartel will cut production later this week in an attempt to shore up prices, which have fallen by 50 percent in just three months.
The biggest oil loser was Spain's Repsol YPF SA, which was down 14 percent, over mounting concerns about the state of the Argentine economy. Argentina's President Cristina Fernandez proposed on Tuesday that the government take over nearly $30 billion in private pension funds, saying retirees must be protected from the global financial crisis. Her move spooked investors and triggered steep falls in Argentine stocks and bonds. Repsol has a large bulk of its business in South America.
Some relief to the growing earnings gloom has been provided by the continuing fall in interbank lending rates. The rate on three-month loans in dollars, known as the London Interbank Offered Rate or Libor, has fallen sharply, by 0.29 percentage point, to 3.54 percent, while the so-called European Interbank Offered Rate for three-month euro-denominated loans has fallen 0.03 percentage point to 4.936 percent, the lowest rate since June 5.
Abnormally high interbank lending rates have been the catalyst for the crisis in the financial markets over recent weeks, raising fears they would choke off credit to businesses and individuals.
Earlier, Asian markets suffered as markets fretted about the profit outlook ahead. Particularly hard hit were Japan's megabanks, which slumped after The Nikkei financial daily reported that Mitsubishi UFJ would miss its net profit projection for the April-September period by about two-thirds due to higher bad loan costs and the falling value of its shareholdings.
A stronger yen added to the misery in Japan, dragging down exporters such as automakers and consumer electronics firms. A stronger yen reduces the value of overseas profits when repatriated to Japan. Sony Corp. plunged 9.3 percent, Canon Inc. was off 6.1 percent and Panasonic Corp. stumbled 8.4 percent.
In Hong Kong, conglomerate Citic Pacific Ltd. plunged another 25 percent as local securities regulators announced a formal investigation into the company. Shares in the the firm, the Hong Kong arm of the Chinese government's main investment company, crashed more than 55 percent in the prior session after it revealed HK$15.5 billion (nearly $2 billion) in possible losses due to unauthorized currency bets made by a top executive.
In China, the benchmark Shanghai Composite Index fell 3.2 percent to 1,895.82.
In the currency markets, the euro was down to near two-year lows below $1.30, while the British pound slumped to near five-year lows around US1.63 after Bank of England governor Mervyn King hinted at further rate cuts to come.
AP Writers Tomoko A. Hosaka in Tokyo and Business Writer Jeremiah Marquez in Hong Kong contributed to this report.
Britain's FTSE 100 index of leading shares was down 177.13 points, or 4.2 percent, at 4,052.60, while Germany's DAX was down 189.29 points, or 4.0 percent, at 4,595.12. The CAC-40 in France, Europe's best-performing index on Tuesday, was 146.45 points, or 4.2 percent, lower at 3,328.95.
Europe's losses echoed those in Asia. Japan's Nikkei 225 stock average fell for the first time in three days, dropping 631.56 points, or 6.79 percent, to 8,674.69, while Hong Kong's Hang Seng sank 5.2 percent and South Korea's main index shed 5.1 percent.
U.S. stocks are also expected to drop again when Wall Street opens. Dow Jones industrial average futures fell 126, or 1.4 percent, to 8,909. On Tuesday, the Dow retreated 231 points after a host of companies such as chemical manufacturer DuPont Co., Sun Microsystems and Caterpillar Inc., downplayed their prospects for the coming months.
"Wall Street tumbled before the close last night and then with Yahoo! posting some poor Q3 numbers, this is certainly the sort of news that is setting the mood right now," said Matt Buckland, a dealer at CMC Markets.
All eyes will be on earnings updates in the U.S. later. Among the companies reporting Wednesday are Amazon.com Inc., AT&T Inc., Boeing Co., McDonald's Corp. and Merck & Co.
Fears about the economic outlook have become the markets' primary concern as worries over the banking system have been assuaged, for now at least, by concerted government attempts to shore up banks, as well as massive liquidity boosts from the world's leading central banks.
Commodity stocks have been particularly hit in Europe. Mining company BHP Billiton PLC was down more than 9 percent after it warned of uncertain economic conditions in China, the main driver of global economic growth in recent years. Another major mining firm, Anglo American PLC, was also down over 6 percent following BHP's warning.
"It's not a good day for commodity stocks and they're dragging the indexes down," said David Jones, chief markets strategist at IG Index.
Oil stocks were also weighed down by another $2.50 fall in oil prices to $69.67 a barrel despite expectations that the OPEC oil cartel will cut production later this week in an attempt to shore up prices, which have fallen by 50 percent in just three months.
The biggest oil loser was Spain's Repsol YPF SA, which was down 14 percent, over mounting concerns about the state of the Argentine economy. Argentina's President Cristina Fernandez proposed on Tuesday that the government take over nearly $30 billion in private pension funds, saying retirees must be protected from the global financial crisis. Her move spooked investors and triggered steep falls in Argentine stocks and bonds. Repsol has a large bulk of its business in South America.
Some relief to the growing earnings gloom has been provided by the continuing fall in interbank lending rates. The rate on three-month loans in dollars, known as the London Interbank Offered Rate or Libor, has fallen sharply, by 0.29 percentage point, to 3.54 percent, while the so-called European Interbank Offered Rate for three-month euro-denominated loans has fallen 0.03 percentage point to 4.936 percent, the lowest rate since June 5.
Abnormally high interbank lending rates have been the catalyst for the crisis in the financial markets over recent weeks, raising fears they would choke off credit to businesses and individuals.
Earlier, Asian markets suffered as markets fretted about the profit outlook ahead. Particularly hard hit were Japan's megabanks, which slumped after The Nikkei financial daily reported that Mitsubishi UFJ would miss its net profit projection for the April-September period by about two-thirds due to higher bad loan costs and the falling value of its shareholdings.
A stronger yen added to the misery in Japan, dragging down exporters such as automakers and consumer electronics firms. A stronger yen reduces the value of overseas profits when repatriated to Japan. Sony Corp. plunged 9.3 percent, Canon Inc. was off 6.1 percent and Panasonic Corp. stumbled 8.4 percent.
In Hong Kong, conglomerate Citic Pacific Ltd. plunged another 25 percent as local securities regulators announced a formal investigation into the company. Shares in the the firm, the Hong Kong arm of the Chinese government's main investment company, crashed more than 55 percent in the prior session after it revealed HK$15.5 billion (nearly $2 billion) in possible losses due to unauthorized currency bets made by a top executive.
In China, the benchmark Shanghai Composite Index fell 3.2 percent to 1,895.82.
In the currency markets, the euro was down to near two-year lows below $1.30, while the British pound slumped to near five-year lows around US1.63 after Bank of England governor Mervyn King hinted at further rate cuts to come.
AP Writers Tomoko A. Hosaka in Tokyo and Business Writer Jeremiah Marquez in Hong Kong contributed to this report.
Dow opens slide
NEW YORK (Reuters) - Stocks tumbled at the open on Wednesday as mounting concern that the global economy is hurtling toward recession, diminishing investors' appetite for risk and sending world markets lower.
Uncertainty about the profit outlook weighed on sentiment despite more signs that the costs for banks to borrow from each other continued to fall.
The Dow Jones industrial average slid 206.85 points, or 2.29 percent, to 8,826.81. The Standard & Poor's 500 Index tumbled 21.25 points, or 2.23 percent, to 933.80. The Nasdaq Composite Index declined 25.94 points, or 1.53 percent, to 1,670.74.
Uncertainty about the profit outlook weighed on sentiment despite more signs that the costs for banks to borrow from each other continued to fall.
The Dow Jones industrial average slid 206.85 points, or 2.29 percent, to 8,826.81. The Standard & Poor's 500 Index tumbled 21.25 points, or 2.23 percent, to 933.80. The Nasdaq Composite Index declined 25.94 points, or 1.53 percent, to 1,670.74.
Tuesday, October 21, 2008
Macquarie Fortress Notes NAV Falls to Zero
The net asset value of Macquarie Fortress Notes has fallen to zero amid a continued deterioration in global financial markets, the notes' trustee said Tuesday.
Still, investors could get a final return of up to 83 cents per note when the securities underlying the instruments mature, but not for at least another four years.
The Fortress Notes were issued on three ...
Still, investors could get a final return of up to 83 cents per note when the securities underlying the instruments mature, but not for at least another four years.
The Fortress Notes were issued on three ...
Citic Pacific Shares Fall 55% Amid Forex Losses
HONG KONG -- Citic Pacific Ltd. lost 55% of its market value Tuesday after disclosing huge forex losses, then scrambled to repair the damage by punishing employees, including the chairman's daughter, over their alleged roles in the debacle.
Managing Director Henry Fan told Dow Jones Newswires that Chairman Larry Yung's daughter, Frances Yung, had been removed from the company's finance department and would be reassigned to a new post to be determined later.
Citic Pacific had said Monday a board-level executive, Group Finance Director Leslie Chang, had made unauthorized trades that are expected to cost Citic Pacific around 15.5 billion Hong Kong dollars (US$2 billion) and give it a net loss for full-year 2008.
Mr. Fan said by telephone that Frances Yung "was involved in this case" and aware of the trading, but he didn't elaborate. Frances Yung, whose title had been director, finance group, didn't return several phone messages from Dow Jones Newswires seeking comment.
Mr. Chang and another board-level executive lost their jobs in the scandal.
Analysts pounded Citic Pacific on Tuesday with downgrades and sharp criticisms, saying it would be difficult for the blue-chip conglomerate to restore its once excellent reputation.
Citic Pacific shares ended at HK$6.52, after falling as much as 55.4% to a low of HK$6.47. Its market capitalization fell to HK$14.3 billion from HK$31.84 billion Friday.
Citigroup analyst Anil Daswani attacked Citic Pacific's "cowboy hedging policy" and downgraded his rating to sell from buy. Mr. Daswani cut his target price to HK$6.66 from HK$28.
"This episode has revealed deeply defective internal controls at a member of Hong Kong's blue-chip index," said David Webb, a prominent shareholder activist who used to be an independent director at the local stock exchange.
Mr. Webb said Citic Pacific, with interests in steel, iron ore, property and infrastructure, had waited too long to disclose the problem.
Citic Pacific said Monday its board had learned of the problem on Sept. 7, and it began investigating while arranging for its top shareholder, China's state-owned Citic Group, to step in with a US$1.5 billion standing loan.
Fan said Tuesday that Citic Pacific had gotten legal advice "for every step we took, including when to disclose the event."
Fan said more employees from the company's finance department had been demoted and had their salaries cut, but he didn't name them or say how many were punished.
Citic Pacific said Monday the currency trades would give it a loss for full-year 2008, with no impact expected on 2009 results. Mr. Fan told Dow Jones Tuesday the company has HK$9 billion on hand in cash and loan facilities.
"There should not be any short-term liquidity concern," J.P. Morgan analyst Billy Ng said in a research note, but he cut his rating on Citic Pacific to underweight from overweight.
"However, we believe the damage to the company's reputation is significant and it will take a long time to restore investors' confidence," Mr. Ng said.
Citic Pacific said Mr. Chang made the currency trades as the company was working on an iron ore mining project in Australia that required purchases in Australian dollars and euro. Fan said the trades began in July.
The trades were made under an arrangement known as an "accumulator" that gave Citic Pacific limited upside but unlimited downside, and they ran into deep trouble when the U.S. dollar unexpectedly rallied.
Mr. Fan named three banks as counterparties to Citic Pacific's trades: HSBC Holdings PLC, BNP Paribas S.A. and Citigroup Inc.
The Citic Pacific chairman, Larry Yung, said Monday the company had realized losses of HK$807.7 million on the forex contracts as of Friday.
He said the company would face a loss of about HK$14.7 billion based on current forex levels; however, as it intends to mark the contracts to market on Dec. 31, the actual loss could be higher or lower.
Managing Director Henry Fan told Dow Jones Newswires that Chairman Larry Yung's daughter, Frances Yung, had been removed from the company's finance department and would be reassigned to a new post to be determined later.
Citic Pacific had said Monday a board-level executive, Group Finance Director Leslie Chang, had made unauthorized trades that are expected to cost Citic Pacific around 15.5 billion Hong Kong dollars (US$2 billion) and give it a net loss for full-year 2008.
Mr. Fan said by telephone that Frances Yung "was involved in this case" and aware of the trading, but he didn't elaborate. Frances Yung, whose title had been director, finance group, didn't return several phone messages from Dow Jones Newswires seeking comment.
Mr. Chang and another board-level executive lost their jobs in the scandal.
Analysts pounded Citic Pacific on Tuesday with downgrades and sharp criticisms, saying it would be difficult for the blue-chip conglomerate to restore its once excellent reputation.
Citic Pacific shares ended at HK$6.52, after falling as much as 55.4% to a low of HK$6.47. Its market capitalization fell to HK$14.3 billion from HK$31.84 billion Friday.
Citigroup analyst Anil Daswani attacked Citic Pacific's "cowboy hedging policy" and downgraded his rating to sell from buy. Mr. Daswani cut his target price to HK$6.66 from HK$28.
"This episode has revealed deeply defective internal controls at a member of Hong Kong's blue-chip index," said David Webb, a prominent shareholder activist who used to be an independent director at the local stock exchange.
Mr. Webb said Citic Pacific, with interests in steel, iron ore, property and infrastructure, had waited too long to disclose the problem.
Citic Pacific said Monday its board had learned of the problem on Sept. 7, and it began investigating while arranging for its top shareholder, China's state-owned Citic Group, to step in with a US$1.5 billion standing loan.
Fan said Tuesday that Citic Pacific had gotten legal advice "for every step we took, including when to disclose the event."
Fan said more employees from the company's finance department had been demoted and had their salaries cut, but he didn't name them or say how many were punished.
Citic Pacific said Monday the currency trades would give it a loss for full-year 2008, with no impact expected on 2009 results. Mr. Fan told Dow Jones Tuesday the company has HK$9 billion on hand in cash and loan facilities.
"There should not be any short-term liquidity concern," J.P. Morgan analyst Billy Ng said in a research note, but he cut his rating on Citic Pacific to underweight from overweight.
"However, we believe the damage to the company's reputation is significant and it will take a long time to restore investors' confidence," Mr. Ng said.
Citic Pacific said Mr. Chang made the currency trades as the company was working on an iron ore mining project in Australia that required purchases in Australian dollars and euro. Fan said the trades began in July.
The trades were made under an arrangement known as an "accumulator" that gave Citic Pacific limited upside but unlimited downside, and they ran into deep trouble when the U.S. dollar unexpectedly rallied.
Mr. Fan named three banks as counterparties to Citic Pacific's trades: HSBC Holdings PLC, BNP Paribas S.A. and Citigroup Inc.
The Citic Pacific chairman, Larry Yung, said Monday the company had realized losses of HK$807.7 million on the forex contracts as of Friday.
He said the company would face a loss of about HK$14.7 billion based on current forex levels; however, as it intends to mark the contracts to market on Dec. 31, the actual loss could be higher or lower.
Monday, October 20, 2008
SBI MF set the record date for dividend announcement
SBI Mutual Fund declares to announce dividend, under the dividend option of SBI Debt Fund - Series 15 - months 2.
The fund house set Apr. 22, 2008 as the record date for the announcement of dividend. It will announce the complete distributable surplus available on the record date, as dividend.
Pursuant to payment of dividend, the NAV will fall to the extent of dividend payout and statutory levy, if applicable. The NAV of the dividend option of the plan stood at Rs 10.37 per unit, as on Apr. 9, 2008.
All unit holders registered on or earlier than the record date will be eligible to get the dividend.
The fund house set Apr. 22, 2008 as the record date for the announcement of dividend. It will announce the complete distributable surplus available on the record date, as dividend.
Pursuant to payment of dividend, the NAV will fall to the extent of dividend payout and statutory levy, if applicable. The NAV of the dividend option of the plan stood at Rs 10.37 per unit, as on Apr. 9, 2008.
All unit holders registered on or earlier than the record date will be eligible to get the dividend.
Sharemarket basics: dollar cost averaging
Whether the sharemarket is rising or falling, you can do well if you pick its highs and lows. Trouble is, of course, it's not a simple thing to pick those peaks and troughs. Correctly timing your entry into and out of the markets is the Holy Grail of investment and virtually impossible to do repeatedly without an operative crystal ball.
Financial planners constantly warn about the hazards of trying to time your movements into and out of the markets, pointing out that unless luck is on your side you're likely to be out of the markets when you should be in them, and vice versa. It's better, they say, to be in the markets all the time, and ride out the inevitable ups and downs.
The logic underpinning this advice is that over the long term, mainstream markets rise in value. So, invest in them and stay invested, and only sell when you need the money for some worthwhile purpose.
The maxim is: "It's time in the market, not timing the market [that works]."
It's a fact that the Australian sharemarket, for instance, since its inception has never failed — up until November last year, that is — to rise after a downturn to a higher level than its previous peak. Is this trend now likely to have permanently ended? History, and the odds, would strongly suggest not.
Furthermore, according to ipac securities, very long-term returns from Australian (commercial) property have been in the range of 3% to 5% above inflation, while Australian shares have historically returned 5% to 8% above inflation — with every likelihood of this long-term pattern continuing.
Human nature being what it is though, lots of us do try to time the market — after all, like having a good day at the races, if you get it right you’ll make a killing. But our track record in this department, generally, is not encouraging. Propelled often by a dicey combination of factors including fear, greed, ignorance, and AAA ratings being given to ZZZ-class investments, we often buy into investments when they're overheated, and sell when they've gone cold — buying high and selling low — which is a surefire way of losing money.
Enter dollar cost averaging, the antidote to market timing. With this very straightforward concept, you simply decide to invest a set amount on a set schedule into a set investment, and stick to it, e.g. $1500 on the first day of every third month into an Australian share fund.
Market timing thus becomes irrelevant. It doesn't matter if the market is up or down, you just keep on investing — on the premise, which history supports — that being invested long term is better for you than not being invested.
A mathematical aspect of dollar cost averaging is that when markets are down, your set, regular investment will buy you more shares/units, and when markets are up, it will buy you less. Long term, this has the effect of averaging out the price you pay, meaning that while you may not get your shares or units at a bargain price, you won’t pay too much either.
What's also significant is that through dollar cost averaging you will in fact build an investment portfolio, as opposed to not building one. Furthermore, you will have built this portfolio without having had to worry once about when to invest, how much to invest, and perhaps even what to invest in (assuming all this is set prior). It's not surprising therefore that dollar cost averaging has its band of adherents
Financial planners constantly warn about the hazards of trying to time your movements into and out of the markets, pointing out that unless luck is on your side you're likely to be out of the markets when you should be in them, and vice versa. It's better, they say, to be in the markets all the time, and ride out the inevitable ups and downs.
The logic underpinning this advice is that over the long term, mainstream markets rise in value. So, invest in them and stay invested, and only sell when you need the money for some worthwhile purpose.
The maxim is: "It's time in the market, not timing the market [that works]."
It's a fact that the Australian sharemarket, for instance, since its inception has never failed — up until November last year, that is — to rise after a downturn to a higher level than its previous peak. Is this trend now likely to have permanently ended? History, and the odds, would strongly suggest not.
Furthermore, according to ipac securities, very long-term returns from Australian (commercial) property have been in the range of 3% to 5% above inflation, while Australian shares have historically returned 5% to 8% above inflation — with every likelihood of this long-term pattern continuing.
Human nature being what it is though, lots of us do try to time the market — after all, like having a good day at the races, if you get it right you’ll make a killing. But our track record in this department, generally, is not encouraging. Propelled often by a dicey combination of factors including fear, greed, ignorance, and AAA ratings being given to ZZZ-class investments, we often buy into investments when they're overheated, and sell when they've gone cold — buying high and selling low — which is a surefire way of losing money.
Enter dollar cost averaging, the antidote to market timing. With this very straightforward concept, you simply decide to invest a set amount on a set schedule into a set investment, and stick to it, e.g. $1500 on the first day of every third month into an Australian share fund.
Market timing thus becomes irrelevant. It doesn't matter if the market is up or down, you just keep on investing — on the premise, which history supports — that being invested long term is better for you than not being invested.
A mathematical aspect of dollar cost averaging is that when markets are down, your set, regular investment will buy you more shares/units, and when markets are up, it will buy you less. Long term, this has the effect of averaging out the price you pay, meaning that while you may not get your shares or units at a bargain price, you won’t pay too much either.
What's also significant is that through dollar cost averaging you will in fact build an investment portfolio, as opposed to not building one. Furthermore, you will have built this portfolio without having had to worry once about when to invest, how much to invest, and perhaps even what to invest in (assuming all this is set prior). It's not surprising therefore that dollar cost averaging has its band of adherents
US stocks hit again by economic data
Economic reports point their fingers towards a clear recession in US economy
A weak batch of economic data sent US stocks deep down in the red on Wednesday, 15 October, 2008. The Dow witnesses another more than 700 point drop as sell-off intensified in the last couple hours of trading. Market had started the day in the red. Signs of recession got all the more intensified overshadowing all types of global efforts to sort out the current financial crisis. Better than expected earning reports from three Dow components failed to inject any sort of positive momentum among traders. Energy sector continued to be the main laggard following drop in crude prices.
The Dow Jones Industrial Average ended the day down by 733 points, to 8,577. The Nasdaq Composite Index, finished lower by 150 points at 1,628. S&P 500 finished lower by 90 points at 907.
Among the Dow components, all but one of the thirty Dow components ended in the red today. Exxon Mobil, Caterpillar and Alcoa were the main Dow laggards. The only Dow winner was Coco Cola. CoCo Cola, JP Morgan Chase and Intel – the three components came out with their earning reports. All three beat market expectations. JP Morgan announced a 85% drop in quarterly profit. JP Morgan and Intel closed lower by 5.5% and 6% respectively.
Among major economic reports for the day, the Commerce Department reported today that U.S. retail sales fell 1.2% in September, 2008, the worst drop in three years and the third decline in a row. It just sent another signal that the US economy has sunk into a recession. The 1.2% decline came against a forecast figure of 0.8% decline.
Sales in July and August were revised marginally lower, signaling that real consumer spending likely fell in the quarter for the first time in 17 years. It was the first time sales had fallen three months in a row since early 1991.
As per the report, sales were weak in September in almost all kinds of stores. Excluding the 3.8% drop in auto sales, retail sales fell 0.6%. Hurricanes Gustav and Ike may had reduced sales in the Gulf Coast states.
The Commerce Department also reported today that U.S. businesses added to their inventories in August as their sales slumped. Total Sales fell 1.8%, the biggest decline in two years, while inventories rose 0.3%. The key inventory-to-sales ratio ticked up to 1.27 from 1.24 in July, a sign that inventories are building up from very low levels. Inventories at retail auto dealers plunged 1.6%.
In another separate report, the Labor Department in US reported today, that producer prices fell 0.4% while core prices rose 0.4%. For the producer prices, it was the second consecutive monthly decline as energy dropped but food rose. Excluding food and energy, core producer prices rose 0.4% last month.
Stocks extend their declines in the afternoon as Fed Chairman Bernanke spoke at the Economic Club of New York. In Bernanke's text, he said that during past economic crises the government took too long to act, but during the current turmoil the government acted swiftly, which will help to restore market functioning quicker. Despite the swift action, Bernanke noted that credit markets "will take some time to unfreeze" and the economic recovery "will not happen right away."
Volume on the New York Stock Exchange topped 1.6 billion, with nine shares on the decline for every issue on the rise. On the Nasdaq, 743 million shares traded, and decliners outran advancers 6 to 1.
Crude prices slipped today below the $75 mark for the first time in a year on Wednesday, 15 October, 2008 despite the recovery effort by US to solve the financial crisis. The expectations among investors were left largely intact that the financial crisis will hasten a decline in consumption of oil. At the same time, The Organization of Petroleum Exporting Countries (OPEC) cut its 2009 demand forecast because of ``dramatically worsening'' conditions in financial markets.
Crude-oil futures for light sweet crude for November delivery closed at $74.54/barrel (lower by $4.09 or 5.2%) on the New York Mercantile Exchange. Prices fell to a low of $73.66 during intra day trading. Prices reached a high of $147 on 11 July but have dropped almost 49% since then. Crude coughed up 17% last week. On a yearly basis, crude price is lower by 13%. For this year in 2008, crude prices have dropped 22%.
Earnings announcements will dominate from tomorrow onwards. Citigroup, Merrill Lynch, and United Technologies are expected to report results. Among economic reports for the day, the September Consumer Price Index and the weekly jobless claims report are both due prior to Wednesday's opening bell. Industrial Production data for September are due just ahead of tomorrow's start followed by the Philadelphia Fed Survey for October and the department of energy’s weekly inventory data.
A weak batch of economic data sent US stocks deep down in the red on Wednesday, 15 October, 2008. The Dow witnesses another more than 700 point drop as sell-off intensified in the last couple hours of trading. Market had started the day in the red. Signs of recession got all the more intensified overshadowing all types of global efforts to sort out the current financial crisis. Better than expected earning reports from three Dow components failed to inject any sort of positive momentum among traders. Energy sector continued to be the main laggard following drop in crude prices.
The Dow Jones Industrial Average ended the day down by 733 points, to 8,577. The Nasdaq Composite Index, finished lower by 150 points at 1,628. S&P 500 finished lower by 90 points at 907.
Among the Dow components, all but one of the thirty Dow components ended in the red today. Exxon Mobil, Caterpillar and Alcoa were the main Dow laggards. The only Dow winner was Coco Cola. CoCo Cola, JP Morgan Chase and Intel – the three components came out with their earning reports. All three beat market expectations. JP Morgan announced a 85% drop in quarterly profit. JP Morgan and Intel closed lower by 5.5% and 6% respectively.
Among major economic reports for the day, the Commerce Department reported today that U.S. retail sales fell 1.2% in September, 2008, the worst drop in three years and the third decline in a row. It just sent another signal that the US economy has sunk into a recession. The 1.2% decline came against a forecast figure of 0.8% decline.
Sales in July and August were revised marginally lower, signaling that real consumer spending likely fell in the quarter for the first time in 17 years. It was the first time sales had fallen three months in a row since early 1991.
As per the report, sales were weak in September in almost all kinds of stores. Excluding the 3.8% drop in auto sales, retail sales fell 0.6%. Hurricanes Gustav and Ike may had reduced sales in the Gulf Coast states.
The Commerce Department also reported today that U.S. businesses added to their inventories in August as their sales slumped. Total Sales fell 1.8%, the biggest decline in two years, while inventories rose 0.3%. The key inventory-to-sales ratio ticked up to 1.27 from 1.24 in July, a sign that inventories are building up from very low levels. Inventories at retail auto dealers plunged 1.6%.
In another separate report, the Labor Department in US reported today, that producer prices fell 0.4% while core prices rose 0.4%. For the producer prices, it was the second consecutive monthly decline as energy dropped but food rose. Excluding food and energy, core producer prices rose 0.4% last month.
Stocks extend their declines in the afternoon as Fed Chairman Bernanke spoke at the Economic Club of New York. In Bernanke's text, he said that during past economic crises the government took too long to act, but during the current turmoil the government acted swiftly, which will help to restore market functioning quicker. Despite the swift action, Bernanke noted that credit markets "will take some time to unfreeze" and the economic recovery "will not happen right away."
Volume on the New York Stock Exchange topped 1.6 billion, with nine shares on the decline for every issue on the rise. On the Nasdaq, 743 million shares traded, and decliners outran advancers 6 to 1.
Crude prices slipped today below the $75 mark for the first time in a year on Wednesday, 15 October, 2008 despite the recovery effort by US to solve the financial crisis. The expectations among investors were left largely intact that the financial crisis will hasten a decline in consumption of oil. At the same time, The Organization of Petroleum Exporting Countries (OPEC) cut its 2009 demand forecast because of ``dramatically worsening'' conditions in financial markets.
Crude-oil futures for light sweet crude for November delivery closed at $74.54/barrel (lower by $4.09 or 5.2%) on the New York Mercantile Exchange. Prices fell to a low of $73.66 during intra day trading. Prices reached a high of $147 on 11 July but have dropped almost 49% since then. Crude coughed up 17% last week. On a yearly basis, crude price is lower by 13%. For this year in 2008, crude prices have dropped 22%.
Earnings announcements will dominate from tomorrow onwards. Citigroup, Merrill Lynch, and United Technologies are expected to report results. Among economic reports for the day, the September Consumer Price Index and the weekly jobless claims report are both due prior to Wednesday's opening bell. Industrial Production data for September are due just ahead of tomorrow's start followed by the Philadelphia Fed Survey for October and the department of energy’s weekly inventory data.
How to avoid a margin call
Some margin lending may be more marginal than you think. And that's where many of the clients of Opes Prime and Lift have come unstuck.
But there are plenty of other investors who have used margin lending and to date have had no regrets.
Margin lending has grown in popularity over recent years as a way for many Australians to help fund their retirement.
According to figures from the Reserve Bank, total investment lending as at December 2007 stood at $37.8 billion, almost double the $19.9 billion as at December 2005 and three times the level of $12.5 billion at December 2003.
But despite its healthy growth over the last four years, margin lending is not a new-fangled investment strategy but merely a mechanism for funding an investment that has been around for many a year.
It's basically a means of gearing not dissimilar to taking out a mortgage on your home — you are putting down a deposit and borrowing the balance to fund the investment.
The key difference is that with margin lending for shares you may — as the name suggests — be asked to make a margin call.
This occurs when the loan to value ratio (LVR) — the amount of borrowings versus the amount of equity in the total investment — rises above a certain level. Say you have $3000 and want to buy shares at $10 each, you could either buy 300 shares or perhaps borrow a further $7000 and buy 1000 shares instead.
That would give you a loan-to-valuation ratio of 70 percent which is traditionally has been the maximum amount that lenders will let you borrow for margin lending.
If the shares in the above example were to fall to $9 a share, your LVR would increase to 78 percent and you would be asked to make up the shortfall to bring your LVR back to 70 percent. This can be achieved by simply making the payment but it might be that you have to sell some of your shareholding to fund the shortfall.
In a falling market, those already at the top end of the LVR range have found themselves subject to margin calls, particularly those who used the strategy to invest in companies outside the top 300 stocks on the Australian Stock Exchange.
And this has been part of the problem with the likes of Opes and Lift, although it has been compounded by further actions that passed over ownership of the shares.
Those investors who have been more conservative have not necessarily been affected.
Indeed Peter van der Westhuyzen division director at Macquarie Investment Lending, says that 99 percent of Macquarie's margin lending clients have not had margin calls in the latest quarter despite the market losing ground.
"Some 99 percent of our clients have not had margin calls in the last quarter," says van der Westhuyzen. "And we have had clients who have had loans for 10 years and been through two market cycles who have never had to make margin calls. They have been conservatively geared with good quality stocks and diversification in their portfolio and understand their cash flow requirements so pay off their interest as it's due. These people have been very effective at creating wealth."
In contrast Opes and Lift have allowed investors to borrow less conservatively to invest in stocks outside the top 300.
Van der Westhuyzen says in order to break into the established brokerage markets, some smaller players have been willing to offer a higher LVR, a broader range of securities and at lower interest rates.
"We didn't think that this model was sustainable in all market conditions," he says. "You should never use margin lending to borrow against a small company with a market capitalisation of $10 million for example."
But at the end of the day, always read the small print when making an investment — it can be the difference between a good and a bad outcome.
But there are plenty of other investors who have used margin lending and to date have had no regrets.
Margin lending has grown in popularity over recent years as a way for many Australians to help fund their retirement.
According to figures from the Reserve Bank, total investment lending as at December 2007 stood at $37.8 billion, almost double the $19.9 billion as at December 2005 and three times the level of $12.5 billion at December 2003.
But despite its healthy growth over the last four years, margin lending is not a new-fangled investment strategy but merely a mechanism for funding an investment that has been around for many a year.
It's basically a means of gearing not dissimilar to taking out a mortgage on your home — you are putting down a deposit and borrowing the balance to fund the investment.
The key difference is that with margin lending for shares you may — as the name suggests — be asked to make a margin call.
This occurs when the loan to value ratio (LVR) — the amount of borrowings versus the amount of equity in the total investment — rises above a certain level. Say you have $3000 and want to buy shares at $10 each, you could either buy 300 shares or perhaps borrow a further $7000 and buy 1000 shares instead.
That would give you a loan-to-valuation ratio of 70 percent which is traditionally has been the maximum amount that lenders will let you borrow for margin lending.
If the shares in the above example were to fall to $9 a share, your LVR would increase to 78 percent and you would be asked to make up the shortfall to bring your LVR back to 70 percent. This can be achieved by simply making the payment but it might be that you have to sell some of your shareholding to fund the shortfall.
In a falling market, those already at the top end of the LVR range have found themselves subject to margin calls, particularly those who used the strategy to invest in companies outside the top 300 stocks on the Australian Stock Exchange.
And this has been part of the problem with the likes of Opes and Lift, although it has been compounded by further actions that passed over ownership of the shares.
Those investors who have been more conservative have not necessarily been affected.
Indeed Peter van der Westhuyzen division director at Macquarie Investment Lending, says that 99 percent of Macquarie's margin lending clients have not had margin calls in the latest quarter despite the market losing ground.
"Some 99 percent of our clients have not had margin calls in the last quarter," says van der Westhuyzen. "And we have had clients who have had loans for 10 years and been through two market cycles who have never had to make margin calls. They have been conservatively geared with good quality stocks and diversification in their portfolio and understand their cash flow requirements so pay off their interest as it's due. These people have been very effective at creating wealth."
In contrast Opes and Lift have allowed investors to borrow less conservatively to invest in stocks outside the top 300.
Van der Westhuyzen says in order to break into the established brokerage markets, some smaller players have been willing to offer a higher LVR, a broader range of securities and at lower interest rates.
"We didn't think that this model was sustainable in all market conditions," he says. "You should never use margin lending to borrow against a small company with a market capitalisation of $10 million for example."
But at the end of the day, always read the small print when making an investment — it can be the difference between a good and a bad outcome.
Key Points
There's certainly no shortage of forecasts for investors to choose from
If you are looking for forecasts of earnings, yields or even future share prices, plenty of brokers and share tipsters provide them
Forecasts have their place but add that they are just one element in the armoury of information available to investors
If you are looking for forecasts of earnings, yields or even future share prices, plenty of brokers and share tipsters provide them
Forecasts have their place but add that they are just one element in the armoury of information available to investors
Understanding forecasts and stock tips
Tips, forecasts, projections all have their merits but don't put your house on them without question.
According to the renowned economist J.K. Galbraith there are two types of forecasters — those who don’t know and those who know they don’t know. It’s a useful maxim for sharemarket investors to bear in mind because while forecasts have their place, markets have a knack of delivering twists and turns that even the experts can't foresee.
There's certainly no shortage of forecasts for investors to choose from. A smorgasbord of sharemarket tip sheets provide forecasts, for a fee, while broker groups and investment houses regularly issue forecasts of their own You'll also come across various share forecasts peppered through the financial press. Adding to the pool, many listed companies provide forecasts of profit figures.
However Henry Jennings, a broker with Cube Financial, says in the current volatile climate, "companies are becoming increasingly reluctant to provide profit forecasts". Not only is it getting harder to stick to a forecast, he adds, "the market tends to severely punish those companies that get it wrong".
Among the variety of forecasts available, Jennings says that banks generally provide earnings forecasts because their revenue stream tends to be reasonably stable. Resource companies on the other hand typically limit their forecasts to production quantities simply because there is no certainty about either the grade of what’s being dug out of the ground, or the price that will be paid for it.
If you are looking for forecasts of earnings, yields or even future share prices, plenty of brokers and share tipsters provide them. These are usually determined according to various modelling scenarios that factor in current and likely future market conditions. Jennings says that analysts must be able to back up their forecasts, though he notes "they tend to change frequently, often in response to changing market conditions or unexpected events like takeover bids".
And that's where the weakness in forecasts lies — they are essentially predictions of the future based on information available today. According to Colin Whitehead, an analyst with investment group Fat Prophets: "The data used to generate some forecasts may have originated in a business environment that won't prevail in the future."
He cites the credit crunch as a classic example of how a swiftly changing playing field can render forecasts meaningless. Even within a stable environment, Whitehead notes that forecasts can "chop and change according to the news flow".
Whitehead points out an additional downside, saying: "Forecasts tend to take on a consensus (or average) estimate" with few individuals prepared to voice an opposing view. According to Whitehead: "This is why there is a great deal of risk associated with relying on forecasts, and it's when investors become attached to a set of numbers that things can go awry. A much better approach is to develop a strong understanding of a company’s business model."
Jennings believes forecasts can be useful for smaller stocks which are typically more difficult to research. However he cautions: "It's easy for investors to be misled by forecasts, especially when they are constantly being revised." Whitehead and Jennings agree that forecasts have their place but add that they are just one element in the armoury of information available to investors. As Whitehead puts it: "Your view needs to be balanced with other information."
According to the renowned economist J.K. Galbraith there are two types of forecasters — those who don’t know and those who know they don’t know. It’s a useful maxim for sharemarket investors to bear in mind because while forecasts have their place, markets have a knack of delivering twists and turns that even the experts can't foresee.
There's certainly no shortage of forecasts for investors to choose from. A smorgasbord of sharemarket tip sheets provide forecasts, for a fee, while broker groups and investment houses regularly issue forecasts of their own You'll also come across various share forecasts peppered through the financial press. Adding to the pool, many listed companies provide forecasts of profit figures.
However Henry Jennings, a broker with Cube Financial, says in the current volatile climate, "companies are becoming increasingly reluctant to provide profit forecasts". Not only is it getting harder to stick to a forecast, he adds, "the market tends to severely punish those companies that get it wrong".
Among the variety of forecasts available, Jennings says that banks generally provide earnings forecasts because their revenue stream tends to be reasonably stable. Resource companies on the other hand typically limit their forecasts to production quantities simply because there is no certainty about either the grade of what’s being dug out of the ground, or the price that will be paid for it.
If you are looking for forecasts of earnings, yields or even future share prices, plenty of brokers and share tipsters provide them. These are usually determined according to various modelling scenarios that factor in current and likely future market conditions. Jennings says that analysts must be able to back up their forecasts, though he notes "they tend to change frequently, often in response to changing market conditions or unexpected events like takeover bids".
And that's where the weakness in forecasts lies — they are essentially predictions of the future based on information available today. According to Colin Whitehead, an analyst with investment group Fat Prophets: "The data used to generate some forecasts may have originated in a business environment that won't prevail in the future."
He cites the credit crunch as a classic example of how a swiftly changing playing field can render forecasts meaningless. Even within a stable environment, Whitehead notes that forecasts can "chop and change according to the news flow".
Whitehead points out an additional downside, saying: "Forecasts tend to take on a consensus (or average) estimate" with few individuals prepared to voice an opposing view. According to Whitehead: "This is why there is a great deal of risk associated with relying on forecasts, and it's when investors become attached to a set of numbers that things can go awry. A much better approach is to develop a strong understanding of a company’s business model."
Jennings believes forecasts can be useful for smaller stocks which are typically more difficult to research. However he cautions: "It's easy for investors to be misled by forecasts, especially when they are constantly being revised." Whitehead and Jennings agree that forecasts have their place but add that they are just one element in the armoury of information available to investors. As Whitehead puts it: "Your view needs to be balanced with other information."
Commodity exchanges
Commodity exchanges are trading in futures contract on those commodities, which have some regional relevance. It is not going to be as easy as a share of a company to get listed in a different exchange.
Delivery of commodity is a physical activity; delivery of shares is an electronic activity
Commodity exchange members are stakeholders in those commodities where in stock exchange members were never the owners of the stock to control where the stock should get traded.
Importance of commodity exchanges are linked to the stakeholders of that particular commodity wherein the success of a stock exchange is more on transparency and low transaction cost.
Understanding the regulatory frame work, FMC faces the highest challenge with the onset of national exchange & electronic trading. A national exchange in commodities would give rise to commercial pressures from participants in terms of trade practices followed by exchanges, regulatory measures by the regulator and exchange and arbitrational aspects pertinent to difference in governing laws among the states. FMC and the exchange are required to be well equipped with such challenges in the shortest possible time.
India’s & the WTO: India being a signatory of the WTO & a major consumption market could extend an invitation to the rest of the world to explore the Indian market; this in turn will simultaneously create an opportunity for the Indian producers & traders to explore the global market. What could be underlined for India would be price risk management & quality consciousness - which will act as the determinant for success.
India could witness an increased international participation in trading activities and investments once the national exchanges become fully operational. A greater convergence of markets – equity, commodities, forex, and debt could enhance the businesses with diversified portfolios. Such integration would create specialized treasuries and fund houses that would offer a gamut of services to provide comprehensive risk management solutions to India’s corporate & trade community.
Price fluctuations in commodities futures markets have been observed to be less volatile when compared to the equities or bond markets thus providing an efficient portfolio diversification option.
Delivery of commodity is a physical activity; delivery of shares is an electronic activity
Commodity exchange members are stakeholders in those commodities where in stock exchange members were never the owners of the stock to control where the stock should get traded.
Importance of commodity exchanges are linked to the stakeholders of that particular commodity wherein the success of a stock exchange is more on transparency and low transaction cost.
Understanding the regulatory frame work, FMC faces the highest challenge with the onset of national exchange & electronic trading. A national exchange in commodities would give rise to commercial pressures from participants in terms of trade practices followed by exchanges, regulatory measures by the regulator and exchange and arbitrational aspects pertinent to difference in governing laws among the states. FMC and the exchange are required to be well equipped with such challenges in the shortest possible time.
India’s & the WTO: India being a signatory of the WTO & a major consumption market could extend an invitation to the rest of the world to explore the Indian market; this in turn will simultaneously create an opportunity for the Indian producers & traders to explore the global market. What could be underlined for India would be price risk management & quality consciousness - which will act as the determinant for success.
India could witness an increased international participation in trading activities and investments once the national exchanges become fully operational. A greater convergence of markets – equity, commodities, forex, and debt could enhance the businesses with diversified portfolios. Such integration would create specialized treasuries and fund houses that would offer a gamut of services to provide comprehensive risk management solutions to India’s corporate & trade community.
Price fluctuations in commodities futures markets have been observed to be less volatile when compared to the equities or bond markets thus providing an efficient portfolio diversification option.
Commodity Trading
May be defined as a process through which a physical substance such as food grains or metals which are interchangeable with another product of a similar type, which an investor buys or sells usually through a futures contract, the price of the commodity in question being subject to supply and demand.
In order to facilitate commodity trading, the Govt. in India initiated a few policies which embarked upon a nation-wide multi-commodity exchange, expansion of permitted list of commodities under the forward contracts act & many more…To elaborate, nation-wide multi-commodity exchange would essentially make the availability of the futures contract in the most cost effective price, also futures market would improve the price risk management systems & maintain the financial integrity of the economy. With the setting up of three Multi Commodity Exchanges, retail investors can now trade in Commodity Futures without having to take delivery of physical stocks.
In fact to understand better, forward contracting necessarily facilitates to manage the supply – demand risk, further, forward contract gives rise to price discovery & price risk …this is where furthers contract come in picture. We can say that Forward & Futures compliment each other. Essentially trading in futures options is banned by the FMC / Govt. of India, but this will be discouraged once the price discovery & risk management will be in place (i.e. it will happen with the increase in the list of commodities traded).
Trends indicate a surge in the trade volumes – which essentially depicts a remarkable performance of the industry, which is being revived. The year 2007-08 shows an average trade volume of Rs.1, 40,000 Cr. (Inc. MCX & NCDEX) Of the country’s GDP of Rs.13, 20,720 Crores, Commodities related businesses constitute about 58%.. The turnover of the Indian Commodity exchanges led by this Multi Commodity Exchange of India Ltd. is slated to achieve Rs. 50 Trillion by the next financial year.
Having given the mandate (by Govt. of India) to 4 entities namely: MCX, NCDEX, NMCE, and MMTC to set up national commodity exchange, the government is willing to set the platform for trade nationally rather than regionally for all commodities.
These 4 entities would not essentially be a threat to the regional commodity exchange specifically because of the following reasons:
In order to facilitate commodity trading, the Govt. in India initiated a few policies which embarked upon a nation-wide multi-commodity exchange, expansion of permitted list of commodities under the forward contracts act & many more…To elaborate, nation-wide multi-commodity exchange would essentially make the availability of the futures contract in the most cost effective price, also futures market would improve the price risk management systems & maintain the financial integrity of the economy. With the setting up of three Multi Commodity Exchanges, retail investors can now trade in Commodity Futures without having to take delivery of physical stocks.
In fact to understand better, forward contracting necessarily facilitates to manage the supply – demand risk, further, forward contract gives rise to price discovery & price risk …this is where furthers contract come in picture. We can say that Forward & Futures compliment each other. Essentially trading in futures options is banned by the FMC / Govt. of India, but this will be discouraged once the price discovery & risk management will be in place (i.e. it will happen with the increase in the list of commodities traded).
Trends indicate a surge in the trade volumes – which essentially depicts a remarkable performance of the industry, which is being revived. The year 2007-08 shows an average trade volume of Rs.1, 40,000 Cr. (Inc. MCX & NCDEX) Of the country’s GDP of Rs.13, 20,720 Crores, Commodities related businesses constitute about 58%.. The turnover of the Indian Commodity exchanges led by this Multi Commodity Exchange of India Ltd. is slated to achieve Rs. 50 Trillion by the next financial year.
Having given the mandate (by Govt. of India) to 4 entities namely: MCX, NCDEX, NMCE, and MMTC to set up national commodity exchange, the government is willing to set the platform for trade nationally rather than regionally for all commodities.
These 4 entities would not essentially be a threat to the regional commodity exchange specifically because of the following reasons:
Tips on how to Invest in the Indian Stock Market
Do you have some extra dollars to spare? Are you ready to take a little risk and try and make some money? If yes, one option you definitely cannot ignore is investing in the Indian Equity Market.
Stock trading is like running a business and it is no different in India. It involves money, strategy and close monitoring of stocks. It is essential that you follow a few rules of the game:
Plan your investment carefully. Decide on an investment amount and a strategy and believe in your strategy.
Invest wisely – in sound and undervalued stocks.
Do what Warren Buffet did. Invest some money in shares from companies, which have made their Initial Public Offering (IPO) at least 10 years ago.
Look at earnings per share (EPS) of stocks and not net profits. Track the past history of growth of EPS and carefully analyze the Book Value of a stock rather than its net worth.
You must avoid over-diversification of your portfolio by investing in too many stocks from different industries.
Never invest in a stock without understanding the potential risk of investing in the stock. Be absolutely sure about your investment. Keep yourself informed about the companies’ fundamentals. The least you should do is to monitor whether sales and net profits of the organization are rising. If the results are consistently poor, it’s best to get rid of such stocks.
Invest a fixed sum regularly as in a systematic investment plan (SIP). It’s best to keep rotating the money, which you get back when you short sell some stocks. For this, invest in some stocks, which are short-term investments, and some, which are long-term investments.
Book your profits when a stock starts yielding returns beyond your expectations. For example, you have purchased a stock valued at USD 2.5 per share with an expectation of a 50% return over the next one-year. You observe that the stock value is rising by 15-20% within a month. At this point it is wise to sell a part of your total holdings of the stock. This ensures that your holding cost for this stock is reduced, while you get some money in hand for other investments. For example, if you sell 25% of your current holding at USD 3 per share, your cost for the remaining 75% of the stock gets reduced to USD 2 .27 per share.
Try and keep at least 15 % of your total money earmarked for trading as cash. This will help you invest this amount in fundamentally strong scrips, which can be bought at cheap rates during market corrections and crashes.
Carefully consider the debt to equity ratio in your portfolio. Always have some debt instruments too in your portfolio.
Stock trading is like running a business and it is no different in India. It involves money, strategy and close monitoring of stocks. It is essential that you follow a few rules of the game:
Plan your investment carefully. Decide on an investment amount and a strategy and believe in your strategy.
Invest wisely – in sound and undervalued stocks.
Do what Warren Buffet did. Invest some money in shares from companies, which have made their Initial Public Offering (IPO) at least 10 years ago.
Look at earnings per share (EPS) of stocks and not net profits. Track the past history of growth of EPS and carefully analyze the Book Value of a stock rather than its net worth.
You must avoid over-diversification of your portfolio by investing in too many stocks from different industries.
Never invest in a stock without understanding the potential risk of investing in the stock. Be absolutely sure about your investment. Keep yourself informed about the companies’ fundamentals. The least you should do is to monitor whether sales and net profits of the organization are rising. If the results are consistently poor, it’s best to get rid of such stocks.
Invest a fixed sum regularly as in a systematic investment plan (SIP). It’s best to keep rotating the money, which you get back when you short sell some stocks. For this, invest in some stocks, which are short-term investments, and some, which are long-term investments.
Book your profits when a stock starts yielding returns beyond your expectations. For example, you have purchased a stock valued at USD 2.5 per share with an expectation of a 50% return over the next one-year. You observe that the stock value is rising by 15-20% within a month. At this point it is wise to sell a part of your total holdings of the stock. This ensures that your holding cost for this stock is reduced, while you get some money in hand for other investments. For example, if you sell 25% of your current holding at USD 3 per share, your cost for the remaining 75% of the stock gets reduced to USD 2 .27 per share.
Try and keep at least 15 % of your total money earmarked for trading as cash. This will help you invest this amount in fundamentally strong scrips, which can be bought at cheap rates during market corrections and crashes.
Carefully consider the debt to equity ratio in your portfolio. Always have some debt instruments too in your portfolio.
Suzlon News
Suzlon has presence in all key markets that have actively provided policy support for renewable sources of energy. A number of States in the US and few other nations have initiated Renewable Portfolio Standard — a tool that facilitates countries to set targets to enhance their renewable energy portfolio. Similarly, the European Union has an aggressive target of generating 20 per cent of its energy needs through renewable sources by 2020 with major contribution expected to arise from wind power.
China too is looking to expand its wind power capacity to 1,00,000 MW by 2020. India’s planned targets and fiscal supports are also not any less when compared to these nations. With a global market share of 10.5 per cent, low cost bases in India and China and a local manufacturing centre for blades in the US, Suzlon appears well placed to tap these markets. Hansen’s gear box facility has provided an edge for Suzlon at a time when most global players are suffering from shortage in component supply.
Suzlon has also resorted to backward integration by setting up its own foundry, forging and machining units — key areas that cause supply disruption globally. And, now, with a majority stake in REpower, Suzlon can be expected to improve its presence in Europe and possibly access its high end technology at a later date.
Financials
Post its acquisition of Hansen, Suzlon had to deal with a cash-strapped company generating poor profit margins. Hence while the initial quarters of 2007-08 witnessed dip in operating profit margins, the end of FY08 saw the company’s OPMs at 13 per cent, still superior to industry averages. The sales realisation of the company’s wind business also improved to Rs 6.2 crore per MW in the first quarter of FY-09 from Rs 4.7 crore per MW a year ago.
In the coming years, Suzlon’s consolidated profitability could be further supported by REpower’s lucrative offshore wind farm segment. While the current depreciating rupee would favour the company’s export-tilted revenues, local base in countries such as the US may provide natural hedge to some extent against foreign currency fluctuations.
Concerns
Suzlon has planned a rights issue for Rs 1,800 crore to fund its stake acquisition from Martifer. Assuming it is at the current market price, the offer could lead to a 12-14 per cent expansion of equity base. While in a different market, the company would have typically resorted to debt, in a high interest and low liquidity scenario, the option of tapping the equity market and keeping leverage under check (given that Suzlon has traditionally remained highly leveraged) appears prudent. However, recent rights offers have faced hardships in the current challenging stock market conditions. Given this risk, Suzlon may have to look at alternative financing options as well. Interestingly, even in difficult times such as this, the company’s forging subsidiary has received Rs 400 crore through a 17 per cent stake sale to IDFC Private Equity, suggesting that the company’s business may yet have other funding channels.
Suzlon appears to have also cleaned up its quality issues on defective blades to some extent, by obtaining certification from Germanischer Lloyd, a certification body accredited to certify in accordance with relevant global wind energy standards. This may provide it an image boost especially in the US.
Suzlon has issued bonds convertible into equity at Rs 360-371. While this does pose a threat, given the stock’s current market price, its expiry date (2012), still a couple of years away, provides comfort on the conversion front.
China too is looking to expand its wind power capacity to 1,00,000 MW by 2020. India’s planned targets and fiscal supports are also not any less when compared to these nations. With a global market share of 10.5 per cent, low cost bases in India and China and a local manufacturing centre for blades in the US, Suzlon appears well placed to tap these markets. Hansen’s gear box facility has provided an edge for Suzlon at a time when most global players are suffering from shortage in component supply.
Suzlon has also resorted to backward integration by setting up its own foundry, forging and machining units — key areas that cause supply disruption globally. And, now, with a majority stake in REpower, Suzlon can be expected to improve its presence in Europe and possibly access its high end technology at a later date.
Financials
Post its acquisition of Hansen, Suzlon had to deal with a cash-strapped company generating poor profit margins. Hence while the initial quarters of 2007-08 witnessed dip in operating profit margins, the end of FY08 saw the company’s OPMs at 13 per cent, still superior to industry averages. The sales realisation of the company’s wind business also improved to Rs 6.2 crore per MW in the first quarter of FY-09 from Rs 4.7 crore per MW a year ago.
In the coming years, Suzlon’s consolidated profitability could be further supported by REpower’s lucrative offshore wind farm segment. While the current depreciating rupee would favour the company’s export-tilted revenues, local base in countries such as the US may provide natural hedge to some extent against foreign currency fluctuations.
Concerns
Suzlon has planned a rights issue for Rs 1,800 crore to fund its stake acquisition from Martifer. Assuming it is at the current market price, the offer could lead to a 12-14 per cent expansion of equity base. While in a different market, the company would have typically resorted to debt, in a high interest and low liquidity scenario, the option of tapping the equity market and keeping leverage under check (given that Suzlon has traditionally remained highly leveraged) appears prudent. However, recent rights offers have faced hardships in the current challenging stock market conditions. Given this risk, Suzlon may have to look at alternative financing options as well. Interestingly, even in difficult times such as this, the company’s forging subsidiary has received Rs 400 crore through a 17 per cent stake sale to IDFC Private Equity, suggesting that the company’s business may yet have other funding channels.
Suzlon appears to have also cleaned up its quality issues on defective blades to some extent, by obtaining certification from Germanischer Lloyd, a certification body accredited to certify in accordance with relevant global wind energy standards. This may provide it an image boost especially in the US.
Suzlon has issued bonds convertible into equity at Rs 360-371. While this does pose a threat, given the stock’s current market price, its expiry date (2012), still a couple of years away, provides comfort on the conversion front.
Buy Suzlon Energy
The approval of the much-debated renewable energy production tax credit (PTC) by both the US Congress has brought renewed hope for the US wind energy market.
The renewal in PTC through December 2009 is a shot in the arm for global wind energy players. With an order book concentrated in the US, Suzlon Energy is likely to benefit from the tax credit renewal in the fastest growing wind energy market in the world.
Sound low-cost manufacturing bases in India and China and access to higher end technology through acquisitions have provided the right grounds for Suzlon’s take-off as a leading wind energy company. Globally too, the stage appears set for steady ramp up in renewable energy sources, what with several nations setting targets to generate a certain percentage of their energy needs from this source.
Investors with a three-five year perspective can consider investing in the stock of Suzlon Energy. At the current price of Rs 86, Suzlon trades at 5.7 times its projected FY-10 earnings. The stock price and its price-earnings multiple are at all-time lows, providing an attractive entry point.
However, given that the stock markets themselves appear short of any support, investors can consider adding the stock on declines linked to broad markets.
A long-term perspective on the stock is a pre-requisite as the benefits of synergies arising from the Hansen and REpower acquisitions would accrue only over time. Meanwhile, the company could also be burdened with short-term challenges such as high debt and muted profit margins as a result of acquisitions.
The renewal in PTC through December 2009 is a shot in the arm for global wind energy players. With an order book concentrated in the US, Suzlon Energy is likely to benefit from the tax credit renewal in the fastest growing wind energy market in the world.
Sound low-cost manufacturing bases in India and China and access to higher end technology through acquisitions have provided the right grounds for Suzlon’s take-off as a leading wind energy company. Globally too, the stage appears set for steady ramp up in renewable energy sources, what with several nations setting targets to generate a certain percentage of their energy needs from this source.
Investors with a three-five year perspective can consider investing in the stock of Suzlon Energy. At the current price of Rs 86, Suzlon trades at 5.7 times its projected FY-10 earnings. The stock price and its price-earnings multiple are at all-time lows, providing an attractive entry point.
However, given that the stock markets themselves appear short of any support, investors can consider adding the stock on declines linked to broad markets.
A long-term perspective on the stock is a pre-requisite as the benefits of synergies arising from the Hansen and REpower acquisitions would accrue only over time. Meanwhile, the company could also be burdened with short-term challenges such as high debt and muted profit margins as a result of acquisitions.
Friday, October 10, 2008
Dow Jones
The Dow Jones Industrial Average dipped below 8,000 but then recovered and was down 0.05% at 8,574 points.
In Europe share prices falls have been much steeper. In London the FTSE 100 share index was down 6.9%, Paris was down 8.4%, and Frankfurt was down 8.9%.
Investors increasingly fear a global recession, despite interest rate cuts and cash injections by central banks.
Wall Street has lost more than 20% of its value in the past ten trading days and is heading for one of its biggest weekly falls since the Dow was created 112 years ago.
Finance ministers from the G7 are to meet in Washington later.
As well as the G7 meeting, talks will be held at the International Monetary Fund (IMF) in Washington.
In Europe share prices falls have been much steeper. In London the FTSE 100 share index was down 6.9%, Paris was down 8.4%, and Frankfurt was down 8.9%.
Investors increasingly fear a global recession, despite interest rate cuts and cash injections by central banks.
Wall Street has lost more than 20% of its value in the past ten trading days and is heading for one of its biggest weekly falls since the Dow was created 112 years ago.
Finance ministers from the G7 are to meet in Washington later.
As well as the G7 meeting, talks will be held at the International Monetary Fund (IMF) in Washington.
Major Deveopments
* The British pound tumbled to a five-year low against the US dollar to trade at $1.6902 at one point, but recovered slightly later. It also fell against the euro to 1.245 euros
* Tokyo's shares plunged 24% during the week, double their weekly fall during the 1987 market crash
* Oil prices plummeted to a one-year low in European trading, with the price of Brent crude oil dropping to $77.2 a barrel at one stage.
* The three-month rate at which banks lend dollars to each other - known as Libor - has risen to 4.8%
* Moscow and Jakarta stock markets remain suspended because of excessive volatility
* The Vienna stock market fell 10% on re-opening after trading was suspended on Friday morning.
* Tokyo's shares plunged 24% during the week, double their weekly fall during the 1987 market crash
* Oil prices plummeted to a one-year low in European trading, with the price of Brent crude oil dropping to $77.2 a barrel at one stage.
* The three-month rate at which banks lend dollars to each other - known as Libor - has risen to 4.8%
* Moscow and Jakarta stock markets remain suspended because of excessive volatility
* The Vienna stock market fell 10% on re-opening after trading was suspended on Friday morning.
12558 - 11900 range
Last week, the Sensex opened at 13109.96 attained a high at 13203.86 and fell to a low of 12153.55 before closing the week at 12526.32 and thereby showed a net fall of 575 points on a week-to-week basis. The low registered last week was 12153 against the support range of 12558-12316. On 30 September 2008, the Sensex opened gap down below the support of 12558-12316 but recovered immediately to close above it at 12860. Finally, the week closed in the support zone of 12558-12316.
The entire rise was from 2594 (September 2001) to 21206 (January 2008). The 50% retracement level is placed at 11900 and 61.8% is placed at 9720.
The Sensex support range now is at 12316-12153 and 11900. Resistance will be at 12627-13102-13204. A close above 13204 could temporarily halt the fall.
Support will be tested. In case of a close below 11900, expect the slide to be sharper. Ultimately, we could see a slide down towards 9720 at least and may be to an outer extent to 8799.
The entire rise was from 2594 (September 2001) to 21206 (January 2008). The 50% retracement level is placed at 11900 and 61.8% is placed at 9720.
The Sensex support range now is at 12316-12153 and 11900. Resistance will be at 12627-13102-13204. A close above 13204 could temporarily halt the fall.
Support will be tested. In case of a close below 11900, expect the slide to be sharper. Ultimately, we could see a slide down towards 9720 at least and may be to an outer extent to 8799.
Tuesday, September 23, 2008
Lehman bond holders
London, Sep 23 (PTI) Bondholders of the beleaguered Lehman Brothers may loose USD 110 billion (about Rs five lakh crore) on account of decline in the asset-value of the fourth-largest investment bank in the US, media reports say. The value of the bonds of Lehman Brothers witnessed a major fall after the investment bank filed for bankruptcy protection, the Financial Times report said adding, "further losses on its derivatives positions, which are still being unwound, could leave even less on the table for bond investors.
" According to the FT report, Loomis Sayles Vice-Chairman Dan Fuss has said, "I don't know how this will play out for bondholders, but I doubt if its going to be good." Loomis Sayles has a small holding in Lehman bonds.
The losses would have a far-reaching effect on ordinary investors, FT said as Lehman bonds were widely held by investors such as pension funds and mutual funds. Meanwhile, those who sold protection against a default or Lehman bankruptcy will possibly recover 18 cents on the dollar when the contracts settle in a complicated auction October 10, the report added.
Before Lehman filed for bankruptcy, its 110 billion- dollar of senior bonds were quoted around 95 cents on the dollar. Bond prices then plunged to 35 cents a week ago.
They are now trading at about 18 cents to the dollar. PTI.
" According to the FT report, Loomis Sayles Vice-Chairman Dan Fuss has said, "I don't know how this will play out for bondholders, but I doubt if its going to be good." Loomis Sayles has a small holding in Lehman bonds.
The losses would have a far-reaching effect on ordinary investors, FT said as Lehman bonds were widely held by investors such as pension funds and mutual funds. Meanwhile, those who sold protection against a default or Lehman bankruptcy will possibly recover 18 cents on the dollar when the contracts settle in a complicated auction October 10, the report added.
Before Lehman filed for bankruptcy, its 110 billion- dollar of senior bonds were quoted around 95 cents on the dollar. Bond prices then plunged to 35 cents a week ago.
They are now trading at about 18 cents to the dollar. PTI.
Saturday, September 13, 2008
INFOSYS Trends
Most of us hear these words on TV and press:
“Don’t buy now as the price is too high” or “Buy on correction” or “Buy Low and Sell High”.And many times we see a stock “never correcting” and continuing to keep its upward journey.
If you see my posts I advocate “buying high and selling higher” which to many people seems like going against the ‘conventional wisdom”.
To show how this philosophy actually works and how it can help us, I ran one of my trading systems which is a long term trend following system on INFOSYS to explain and understand the results.
Please note that all prices used in the analysis are adjusted for splits and bonuses.
INFOSYS was available in 1995 at a price of Rs. 7.
My algorithmic trading System gave its first BUY in April 1996 at Rs. 8.75 and this was all time high for stock then! The price moved up and then went down giving an exit at around Rs 10 in June 97 after reaching an all time high of 11.25 (Yes,we are not trying to pick the top!). The gain was around 15%.
The stock again moved up again after that to give a BUY ENTRY at 11.30 in Dec 96. This time the trend was stronger and the stock continued up to Rs 50 by Oct 97. The Exit came when stock moved back to around 40-41 levels,giving a gain of almost 300% in 10 months.
The stock again continued its upward journey in March 1998 when it moved up the 50 levels and reached all time high of 51. Again you enter on a stronger trend upward at 51 and try to ride the trend. This time trend is really a big one and the stock continues to move for two years and reaches a high of 1742 in March 2000 (The height of IT boom).
The EXIT comes when the stock starts to move back to 1100 levels (a full 600 points from the top!). Still we made 22 times our money in 2 years!
Now comes the most interesting part. Instead of moving up the stock this time begins to go downhill.From 1700 to 1100 to a low of 265 in Oct 01. Now we were not caught on the wrong foot in this fall as we did not try to “pick the bottom” or “buy low” .
The stock stayed like that till Oct 03 when again a buy signal came after the stock started to move up beyond 600. The entry point was 600 but the trend didn’t develop, so there was an exit at around 590 levels. So there was small loss of around 2%. (Also avoiding the May 04 crash)
Now the Stock again moves up in July 04 giving a BUY entry at around 760 levels and trend continues till Feb 2007 at 2095.The returns was almost 300% in 2.5 years.
The current trend in INFOSYS is downward/sideways.
Now lets summarize how much we made or lost on each trade by “buying high” and “selling higher”.
Trade 1 :15%
Trade 2:+300%
Trade 3:+2100%
Trade 4:-2%
Trade 5: 300%
So whats the moral of the story?
There are couple of observations by following this approach:
a) You are able to pick infosys at Rs 8
b)You are on the “right” side of the market most of the market cycles.
c) You are able to “stay out” of bear markets.
d) Sometimes trends continue for extended periods of time because of fear and greed factor in the markets.
e) One can never tell what is the absolute the “top” and the “bottom”. A “top” is only visible when you look back in time.When the stock made the first top of 11, who could have told you that the stock will be making a top of 2400 ?
Now the bull market in India has been continuing for last 4 years and no one can “predict” how long it might continue-5 years,10 years or 25 years!
So if it continues for another 5 years, you will be riding the “full wave” till the end and get out at the right time with your profits.
You might not believe it but the same system gave an entry in UNITECH at Rs 2.20 and gave an exit at 400. The System is still long something in PRAJ Industries after giving an entry at Rs 10.
If it gets out in 5 days, you will be out with your small losses only so that you can again wait for the right opportunity.
People might have been lucky that INFOSYS came back to 1800 levels in seven years but there were many stocks which never came back!They fell from 2000 to 20 levels and just stayed there.
So just think and when you say I am “buy” and “hold” investor or I am a long term investor.
In next post I will try to discuss how a “fundamental analyst” would have dealt with the INFOSYS stock price. It might give you a different perspective about how we view markets.
We will also try to understand how so called ‘technical analysts’ manage to create so much hoopla around their craft.
“Don’t buy now as the price is too high” or “Buy on correction” or “Buy Low and Sell High”.And many times we see a stock “never correcting” and continuing to keep its upward journey.
If you see my posts I advocate “buying high and selling higher” which to many people seems like going against the ‘conventional wisdom”.
To show how this philosophy actually works and how it can help us, I ran one of my trading systems which is a long term trend following system on INFOSYS to explain and understand the results.
Please note that all prices used in the analysis are adjusted for splits and bonuses.
INFOSYS was available in 1995 at a price of Rs. 7.
My algorithmic trading System gave its first BUY in April 1996 at Rs. 8.75 and this was all time high for stock then! The price moved up and then went down giving an exit at around Rs 10 in June 97 after reaching an all time high of 11.25 (Yes,we are not trying to pick the top!). The gain was around 15%.
The stock again moved up again after that to give a BUY ENTRY at 11.30 in Dec 96. This time the trend was stronger and the stock continued up to Rs 50 by Oct 97. The Exit came when stock moved back to around 40-41 levels,giving a gain of almost 300% in 10 months.
The stock again continued its upward journey in March 1998 when it moved up the 50 levels and reached all time high of 51. Again you enter on a stronger trend upward at 51 and try to ride the trend. This time trend is really a big one and the stock continues to move for two years and reaches a high of 1742 in March 2000 (The height of IT boom).
The EXIT comes when the stock starts to move back to 1100 levels (a full 600 points from the top!). Still we made 22 times our money in 2 years!
Now comes the most interesting part. Instead of moving up the stock this time begins to go downhill.From 1700 to 1100 to a low of 265 in Oct 01. Now we were not caught on the wrong foot in this fall as we did not try to “pick the bottom” or “buy low” .
The stock stayed like that till Oct 03 when again a buy signal came after the stock started to move up beyond 600. The entry point was 600 but the trend didn’t develop, so there was an exit at around 590 levels. So there was small loss of around 2%. (Also avoiding the May 04 crash)
Now the Stock again moves up in July 04 giving a BUY entry at around 760 levels and trend continues till Feb 2007 at 2095.The returns was almost 300% in 2.5 years.
The current trend in INFOSYS is downward/sideways.
Now lets summarize how much we made or lost on each trade by “buying high” and “selling higher”.
Trade 1 :15%
Trade 2:+300%
Trade 3:+2100%
Trade 4:-2%
Trade 5: 300%
So whats the moral of the story?
There are couple of observations by following this approach:
a) You are able to pick infosys at Rs 8
b)You are on the “right” side of the market most of the market cycles.
c) You are able to “stay out” of bear markets.
d) Sometimes trends continue for extended periods of time because of fear and greed factor in the markets.
e) One can never tell what is the absolute the “top” and the “bottom”. A “top” is only visible when you look back in time.When the stock made the first top of 11, who could have told you that the stock will be making a top of 2400 ?
Now the bull market in India has been continuing for last 4 years and no one can “predict” how long it might continue-5 years,10 years or 25 years!
So if it continues for another 5 years, you will be riding the “full wave” till the end and get out at the right time with your profits.
You might not believe it but the same system gave an entry in UNITECH at Rs 2.20 and gave an exit at 400. The System is still long something in PRAJ Industries after giving an entry at Rs 10.
If it gets out in 5 days, you will be out with your small losses only so that you can again wait for the right opportunity.
People might have been lucky that INFOSYS came back to 1800 levels in seven years but there were many stocks which never came back!They fell from 2000 to 20 levels and just stayed there.
So just think and when you say I am “buy” and “hold” investor or I am a long term investor.
In next post I will try to discuss how a “fundamental analyst” would have dealt with the INFOSYS stock price. It might give you a different perspective about how we view markets.
We will also try to understand how so called ‘technical analysts’ manage to create so much hoopla around their craft.
Stock Watch- Glenmark Pharma, Aban Offshore,Rolta
Glenmark pharma remains my favourite pick in the pharma space as it continues to trend up nicely. Watch out for the stock.
Similarly Aban Offshore is one of my favourite stocks in the oil exploration space. We had traded the stock last time from 3000 to 5000 and it seems that the stock is ready to make some explosive moves in the coming times.
In IT ,Rolta looks promising once it crosses 330-340 levels.
Still I would be cautious around 5050 levels. We need a strong momentum on the upside to really take a dash at 5300 levels. One good thing is the abundant “scepticism”,so that might limit the downside.
For aggressive traders,there are many good short term trading opportunities. If you are good in managing your risk, you can make some decent money.
Similarly Aban Offshore is one of my favourite stocks in the oil exploration space. We had traded the stock last time from 3000 to 5000 and it seems that the stock is ready to make some explosive moves in the coming times.
In IT ,Rolta looks promising once it crosses 330-340 levels.
Still I would be cautious around 5050 levels. We need a strong momentum on the upside to really take a dash at 5300 levels. One good thing is the abundant “scepticism”,so that might limit the downside.
For aggressive traders,there are many good short term trading opportunities. If you are good in managing your risk, you can make some decent money.
Friday, September 12, 2008
SUN TV Launches DTH
New Delhi (PTI): South India's leading direct-to-home service provider Sun Direct TV, the JV between the Maran family and Malaysia's Astro Group, on Friday expanded its foothold in the western and the northern markets as part of its pan-India service launch.
With this, the services are set to rollout across the country except for east, the company said in a statement.
The DTH player launched its services in Punjab, Himachal Pradesh, Haryana, Jammu and Kashmir and Gujarat.
"We are all set for a pan-India launch of our services. Going by what we have achieved in the four Southern states we are confident of replicating the same model across other markets and our aim is to quickly ramp up operations to emerge as the second largest DTH player in the country," Sun Direct Chief Operating Officer Tony D'silva said.
The company has also plans to start ventures in unexplored North East, Orissa, Maharashtra and West Bengal and thereafter it will also expand to UP, MP, Bihar, it said. It plans to ramp up its pan India operations within the next 40 days.
Sun Direct, an 80:20 joint venture between the Maran family and the Astro Group, has 1.4 million subscribers across South India, the release said.
As an introductory offer, the company is offering a basic package of over 130-plus channels at a price of Rs 999 for 10 months subscription along with free dish and set top box There is Rs 1000 as installation charges.
With this, the services are set to rollout across the country except for east, the company said in a statement.
The DTH player launched its services in Punjab, Himachal Pradesh, Haryana, Jammu and Kashmir and Gujarat.
"We are all set for a pan-India launch of our services. Going by what we have achieved in the four Southern states we are confident of replicating the same model across other markets and our aim is to quickly ramp up operations to emerge as the second largest DTH player in the country," Sun Direct Chief Operating Officer Tony D'silva said.
The company has also plans to start ventures in unexplored North East, Orissa, Maharashtra and West Bengal and thereafter it will also expand to UP, MP, Bihar, it said. It plans to ramp up its pan India operations within the next 40 days.
Sun Direct, an 80:20 joint venture between the Maran family and the Astro Group, has 1.4 million subscribers across South India, the release said.
As an introductory offer, the company is offering a basic package of over 130-plus channels at a price of Rs 999 for 10 months subscription along with free dish and set top box There is Rs 1000 as installation charges.
Hong Kong stocks soared on
Wednesday, buoyed by property and financial shares, amid a broad
regional rally after a Lehman Brothers (LEH.N: Quote, Profile, Research) share offering
sparked hopes that the worst of the credit crisis may have ended.
Analysts said the strong rebound came after sub-prime gloom
and recession fears lifted, and the market bounced back from
first-quarter lows, but profit-taking pressure loomed.
"Once the fears of the sub-prime crisis subsided, investors
moved their funds from commodities back to equities," said Alex
Tang, research director at Core Pacific-Yamaichi International.
"But we are looking at resistence between the 24,000 and
24,500 levels in the local market."
The benchmark Hang Seng Index .HSI had risen 4.4 percent to
24,154.75 points by the midday break, with banks such as HSBC
(0005.HK: Quote, Profile, Research), China Construction Bank (0939.HK: Quote, Profile, Research) and ICBC (1398.HK: Quote, Profile, Research)
leading the gains.
The China Enterprises Index of Hong Kong-listed mainland
companies .HSCE, or H shares, leapt 6 percent to 12,973.09.
Mainboard turnover soared to HK$65.70 billion ($8.44
billion), compared with HK$38.39 billion on Tuesday morning, as
investors crammed into the rally.
Earlier in the week, Hong Kong stocks ended their worst
quarterly performance in six years, sliding 18 percent during the
period.
China's main stock index in Shanghai .SSEC rebounded more
than 3 percent on Wednesday on the back of strength in overseas
markets but analysts said the rise might just be a brief bounce
in a longer-term downtrend.
"We're not out of the woods yet," Tang said.
Heavyweight China Mobile (0941.HK: Quote, Profile, Research) gained nearly 5.2 percent,
lifting the index over 160 points.
Financial plays soared after strong demand for Lehman
Brother's $4 billion share offering raised hopes that the worst
was over for the financial sector.
HSBC climbed 2.25 percent to HK$131.90, ICBC leapt nearly 6.9
percent to HK$5.92, Bank of China (3988.HK: Quote, Profile, Research) jumped 5 percent to
HK$3.57 and Bank of Communications (3328.HK: Quote, Profile, Research) soared 7.9 percent
to HK$9.99.
China's second-largest life insurer, Ping An (2318.HK: Quote, Profile, Research) --
coming off lows after announcing its multibillion-dollar
fundraising plan in January -- jumped 9.35 percent to HK$60.80.
Swiss bank UBS (UBSN.VX: Quote, Profile, Research) rattled investors on Tuesday with
news of $19 billion in fresh writedowns [ID:nL01419180] but
markets took the view that banks are wiping their books clean of
investments tied to the U.S. subprime crisis.
Property stocks continued to rebound as investors looked
for bargains after recent lows.
Hang Lung (0101.HK: Quote, Profile, Research) gained nearly 8.8 percent to HK$30.35.
New World Development (0017.HK: Quote, Profile, Research) climbed 8.5 percent to HK$20.40,
and Sun Hung Kai Properties (0016.HK: Quote, Profile, Research), Asia's top developer by
market value, jumped 4.9 percent to HK$129.90.
Refiners and airlines also leapt as oil prices stayed off
highs. Sinopec Corp (0386.HK: Quote, Profile, Research) (600028.SS: Quote, Profile, Research), Asia's top refiner,
soared 8.5 percent to HK$7.40.
Hong Kong's dominant carrier Cathay Pacific (0293.HK: Quote, Profile, Research) gained
3.6 percent to HK$16.16, Air China (0753.HK: Quote, Profile, Research) climbed 2.8 percent
to HK$7.02 and China Eastern (0670.HK: Quote, Profile, Research) rose 1.3 percent to
HK$3.97.
regional rally after a Lehman Brothers (LEH.N: Quote, Profile, Research) share offering
sparked hopes that the worst of the credit crisis may have ended.
Analysts said the strong rebound came after sub-prime gloom
and recession fears lifted, and the market bounced back from
first-quarter lows, but profit-taking pressure loomed.
"Once the fears of the sub-prime crisis subsided, investors
moved their funds from commodities back to equities," said Alex
Tang, research director at Core Pacific-Yamaichi International.
"But we are looking at resistence between the 24,000 and
24,500 levels in the local market."
The benchmark Hang Seng Index .HSI had risen 4.4 percent to
24,154.75 points by the midday break, with banks such as HSBC
(0005.HK: Quote, Profile, Research), China Construction Bank (0939.HK: Quote, Profile, Research) and ICBC (1398.HK: Quote, Profile, Research)
leading the gains.
The China Enterprises Index of Hong Kong-listed mainland
companies .HSCE, or H shares, leapt 6 percent to 12,973.09.
Mainboard turnover soared to HK$65.70 billion ($8.44
billion), compared with HK$38.39 billion on Tuesday morning, as
investors crammed into the rally.
Earlier in the week, Hong Kong stocks ended their worst
quarterly performance in six years, sliding 18 percent during the
period.
China's main stock index in Shanghai .SSEC rebounded more
than 3 percent on Wednesday on the back of strength in overseas
markets but analysts said the rise might just be a brief bounce
in a longer-term downtrend.
"We're not out of the woods yet," Tang said.
Heavyweight China Mobile (0941.HK: Quote, Profile, Research) gained nearly 5.2 percent,
lifting the index over 160 points.
Financial plays soared after strong demand for Lehman
Brother's $4 billion share offering raised hopes that the worst
was over for the financial sector.
HSBC climbed 2.25 percent to HK$131.90, ICBC leapt nearly 6.9
percent to HK$5.92, Bank of China (3988.HK: Quote, Profile, Research) jumped 5 percent to
HK$3.57 and Bank of Communications (3328.HK: Quote, Profile, Research) soared 7.9 percent
to HK$9.99.
China's second-largest life insurer, Ping An (2318.HK: Quote, Profile, Research) --
coming off lows after announcing its multibillion-dollar
fundraising plan in January -- jumped 9.35 percent to HK$60.80.
Swiss bank UBS (UBSN.VX: Quote, Profile, Research) rattled investors on Tuesday with
news of $19 billion in fresh writedowns [ID:nL01419180] but
markets took the view that banks are wiping their books clean of
investments tied to the U.S. subprime crisis.
Property stocks continued to rebound as investors looked
for bargains after recent lows.
Hang Lung (0101.HK: Quote, Profile, Research) gained nearly 8.8 percent to HK$30.35.
New World Development (0017.HK: Quote, Profile, Research) climbed 8.5 percent to HK$20.40,
and Sun Hung Kai Properties (0016.HK: Quote, Profile, Research), Asia's top developer by
market value, jumped 4.9 percent to HK$129.90.
Refiners and airlines also leapt as oil prices stayed off
highs. Sinopec Corp (0386.HK: Quote, Profile, Research) (600028.SS: Quote, Profile, Research), Asia's top refiner,
soared 8.5 percent to HK$7.40.
Hong Kong's dominant carrier Cathay Pacific (0293.HK: Quote, Profile, Research) gained
3.6 percent to HK$16.16, Air China (0753.HK: Quote, Profile, Research) climbed 2.8 percent
to HK$7.02 and China Eastern (0670.HK: Quote, Profile, Research) rose 1.3 percent to
HK$3.97.
Lehman Share Price
Lehman Brothers looks as though it's going to sell its asset management arm, Neuberger Berman, for a sorely-needed $10 billion or so. That's got to be good news for the stock, right? No: Lehman shares are down more than 10% today, and its credit default swaps have gapped out as well.
There's no doubt that if Lehman shares had risen today, everybody would know why. But the fact that they're down puts financial journalists into a quandary: they have to pretend that there's some reason, and the best they can do is "writedown fears".
That said, DealBook has a good post today on why selling Neuberger might be a bad idea for Lehman: it could harm the bank's credit rating, send its compensation ratios soaring, and make future cashflows almost impossible to predict (and therefore to price). "Selling the unit would be tantamount to selling a ship's anchor in the midst of a storm," says the piece, citing no one in particular.
And the "writedown fears" reason isn't as silly as it looks at first glance: Lehman's drop of $1.66 a share today is smaller than the per-share losses that the likes of Kenneth Worthington are now forecasting in the third quarter.
But my feeling is that there isn't a reason -- certainly not a nice clean easy-to-fit-into-a-headline one -- why Lehman's stock is tanking today. Sometimes stocks move and we know why. More often, stocks move and we don't know why, which doesn't stop journalists from guessing. And sometimes stocks move for no particular reason at all -- especially when they're surrounded by uncertainty, they're highly leveraged, and there's a good chance that the CEO will be out within a month.
There's no doubt that if Lehman shares had risen today, everybody would know why. But the fact that they're down puts financial journalists into a quandary: they have to pretend that there's some reason, and the best they can do is "writedown fears".
That said, DealBook has a good post today on why selling Neuberger might be a bad idea for Lehman: it could harm the bank's credit rating, send its compensation ratios soaring, and make future cashflows almost impossible to predict (and therefore to price). "Selling the unit would be tantamount to selling a ship's anchor in the midst of a storm," says the piece, citing no one in particular.
And the "writedown fears" reason isn't as silly as it looks at first glance: Lehman's drop of $1.66 a share today is smaller than the per-share losses that the likes of Kenneth Worthington are now forecasting in the third quarter.
But my feeling is that there isn't a reason -- certainly not a nice clean easy-to-fit-into-a-headline one -- why Lehman's stock is tanking today. Sometimes stocks move and we know why. More often, stocks move and we don't know why, which doesn't stop journalists from guessing. And sometimes stocks move for no particular reason at all -- especially when they're surrounded by uncertainty, they're highly leveraged, and there's a good chance that the CEO will be out within a month.
Lehman Brothers 11th Annual Retail Conf
Family Dollar Stores Inc announced that the Company will make a presentation to the investment community at the Lehman Brothers Eleventh Annual Retail and Restaurant Conference on April 30, 2008.
A webcast of this presentation can be accessed live at approximately 10:15 a.m. EDT through the Company’s website in the “Investors” section under “Presentations & Webcasts.” A replay of the webcast will be available through May 14, 2008.
Operating small store locations, Family Dollar is one of the fastest growing discount retail chains in the United States.
Family Dollar Stores Inc
A webcast of this presentation can be accessed live at approximately 10:15 a.m. EDT through the Company’s website in the “Investors” section under “Presentations & Webcasts.” A replay of the webcast will be available through May 14, 2008.
Operating small store locations, Family Dollar is one of the fastest growing discount retail chains in the United States.
Family Dollar Stores Inc
Thursday, September 11, 2008
Crude oil today
Crude oil traded near new all-time highs above $124 today after the OPEC cartel insisted the market is well-supplied and being driven by speculators.
New York's main oil futures contract, light sweet crude for June delivery, rose 62 cents to $124.31 a barrel in Asian trade after closing at a record $ 123.69 yesterday at the New York Mercantile Exchange.
In after-hours deals, the New York futures contract soared to an all-time high of $124.57. Brent North Sea crude for June delivery was 78 cents higher at $123.62 a barrel.
In London yesterday the contract crossed $123 for the first time and jumped to a new intraday peak of $123.87 before settling at a record $122.84.
Oil prices have smashed one record after another in recent days. "The oil market is so overwhelmingly bullish at this point... It is looking at the $125 mark as its next target," said Victor Shum, senior principal at Purvin and Gertz energy consultancy in Singapore.
OPEC Secretary General Abdalla Salem El-Badri yesterday said that there was no shortage of crude oil, brushing aside US calls for higher output to dampen runaway prices.
"There is clearly no shortage of oil in the market," he said. David Moore, a commodity strategist at the Commonwealth Bank of Australia in Sydney, said El-Badri was reiterating OPEC's view and "his words are not a surprise to the market."
New York's main oil futures contract, light sweet crude for June delivery, rose 62 cents to $124.31 a barrel in Asian trade after closing at a record $ 123.69 yesterday at the New York Mercantile Exchange.
In after-hours deals, the New York futures contract soared to an all-time high of $124.57. Brent North Sea crude for June delivery was 78 cents higher at $123.62 a barrel.
In London yesterday the contract crossed $123 for the first time and jumped to a new intraday peak of $123.87 before settling at a record $122.84.
Oil prices have smashed one record after another in recent days. "The oil market is so overwhelmingly bullish at this point... It is looking at the $125 mark as its next target," said Victor Shum, senior principal at Purvin and Gertz energy consultancy in Singapore.
OPEC Secretary General Abdalla Salem El-Badri yesterday said that there was no shortage of crude oil, brushing aside US calls for higher output to dampen runaway prices.
"There is clearly no shortage of oil in the market," he said. David Moore, a commodity strategist at the Commonwealth Bank of Australia in Sydney, said El-Badri was reiterating OPEC's view and "his words are not a surprise to the market."
60% oil speculations
Perhaps 60% of oil prices today pure speculation
Goldman Sachs and Morgan Stanley today are the two leading energy trading firms in the United States. Citigroup and JP Morgan Chase are major players and fund numerous hedge funds as well who speculate.
In June 2006, oil traded in futures markets at some $60 a barrel and the Senate investigation estimated that some $25 of that was due to pure financial speculation. One analyst estimated in August 2005 that US oil inventory levels suggested WTI crude prices should be around $25 a barrel, and not $60.
That would mean today that at least $50 to $60 or more of today’s $115 a barrel price is due to pure hedge fund and financial institution speculation. However, given the unchanged equilibrium in global oil supply and demand over recent months amid the explosive rise in oil futures prices traded on Nymex and ICE exchanges in New York and London it is more likely that as much as 60% of the today oil price is pure speculation. No one knows officially except the tiny handful of energy trading banks in New York and London and they certainly aren’t talking.
By purchasing large numbers of futures contracts, and thereby pushing up futures
prices to even higher levels than current prices, speculators have provided a financial incentive for oil companies to buy even more oil and place it in storage. A refiner will purchase extra oil today, even if it costs $115 per barrel, if the futures price is even higher.
As a result, over the past two years crude oil inventories have been steadily growing, resulting in US crude oil inventories that are now higher than at any time in the previous eight years. The large influx of speculative investment into oil futures has led to a situation where we have both high supplies of crude oil and high crude oil prices.
Compelling evidence also suggests that the oft-cited geopolitical, economic, and natural factors do not explain the recent rise in energy prices can be seen in the actual data on crude oil supply and demand. Although demand has significantly increased over the past few years, so have supplies.
Over the past couple of years global crude oil production has increased along with the increases in demand; in fact, during this period global supplies have exceeded demand, according to the US Department of Energy. The US Department of Energy’s Energy Information Administration (EIA) recently forecast that in the next few years global surplus production capacity will continue to grow to between 3 and 5 million barrels per day by 2010, thereby “substantially thickening the surplus capacity cushion.”
Goldman Sachs and Morgan Stanley today are the two leading energy trading firms in the United States. Citigroup and JP Morgan Chase are major players and fund numerous hedge funds as well who speculate.
In June 2006, oil traded in futures markets at some $60 a barrel and the Senate investigation estimated that some $25 of that was due to pure financial speculation. One analyst estimated in August 2005 that US oil inventory levels suggested WTI crude prices should be around $25 a barrel, and not $60.
That would mean today that at least $50 to $60 or more of today’s $115 a barrel price is due to pure hedge fund and financial institution speculation. However, given the unchanged equilibrium in global oil supply and demand over recent months amid the explosive rise in oil futures prices traded on Nymex and ICE exchanges in New York and London it is more likely that as much as 60% of the today oil price is pure speculation. No one knows officially except the tiny handful of energy trading banks in New York and London and they certainly aren’t talking.
By purchasing large numbers of futures contracts, and thereby pushing up futures
prices to even higher levels than current prices, speculators have provided a financial incentive for oil companies to buy even more oil and place it in storage. A refiner will purchase extra oil today, even if it costs $115 per barrel, if the futures price is even higher.
As a result, over the past two years crude oil inventories have been steadily growing, resulting in US crude oil inventories that are now higher than at any time in the previous eight years. The large influx of speculative investment into oil futures has led to a situation where we have both high supplies of crude oil and high crude oil prices.
Compelling evidence also suggests that the oft-cited geopolitical, economic, and natural factors do not explain the recent rise in energy prices can be seen in the actual data on crude oil supply and demand. Although demand has significantly increased over the past few years, so have supplies.
Over the past couple of years global crude oil production has increased along with the increases in demand; in fact, during this period global supplies have exceeded demand, according to the US Department of Energy. The US Department of Energy’s Energy Information Administration (EIA) recently forecast that in the next few years global surplus production capacity will continue to grow to between 3 and 5 million barrels per day by 2010, thereby “substantially thickening the surplus capacity cushion.”
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