Expect More Rough Times Ahead for US Economy?
Everyone have been closely watching for Verifiable Signs that the US economy is Out from Recession.
What is the status of the US Economy now?
US Economy Is Just An Empty Vase?
US Economy: Emerging from Recession?
U.S. Dollar Dives Against Yen: Another Sign of the Crashing Economy?
What is V-shaped recovery?
- A type of economic recession and recovery that resembles a “V” shape in charting.
- Specifically, a V-shaped recovery represents the shape of the chart of certain economic measures, such as employment, GDP and industrial output.
- A V-shaped recovery involves a sharp decline in these metrics followed by a sharp rise back to its previous peak.
What Does Double Dip Recession Mean?
- When gross domestic product (GDP) growth slides back to negative after a quarter or two of positive growth.
- A double-dip recession refers to a recession followed by a short-lived recovery, followed by another recession.
What Does W-Shaped Recovery Mean?
- An economic cycle of recession and recovery that resembles a “W” in charting.
- A W-shaped recovery represents the shape of the chart of certain economic measures such as employment, GDP, industrial output, etc.
- A W-shaped recovery involves a sharp decline in these metrics followed by a sharp rise back to the previous peak, followed again by a sharp decline and ending with another sharp rise.
- The middle section of the W can represent a significant bear market rally or a recovery that was stifled by an additional economic crisis.
US economy and manufacturing sector are in an expansionary mode.
by Capital Talk
V-SHAPED recovery? Or double-dip or W-shaped? The chart says it all. The jump and strength in the ISM manufacturing index for August surprised many people. At 52.9, the ISM index is saying that the overall US economy and the manufacturing sector are in an expansionary mode.
The ISM index is also recovering in a V-shaped manner and has even gone above the August 2008 level before the collapse of Lehman Brothers knocked everyone out. Frankly, it cannot be more V-shaped than this.
Interestingly, not only did the headline figure jump but a look at the key sub-components shows numerous positive signs as well. Importantly, the index for exports and new orders jumped substantially. Yet, despite all these positive numbers, the New York Stock Exchange (NYSE) sold off. Why?
First, the NYSE has rallied strongly without a meaningful correction. The index has jumped 55% in six months and yet it has not undergone a 10% correction (although no one really knows why it has to be a 10% correction). This makes many people nervous and for those who got in during the panicky lows in early 2009 and have a short-term investment horizon, there is actually plenty of profit to take. Secondly, many investors are looking at September and October and are worried that these two ghostly months will be cruel months. Mark Twain would totally disagree with this stock market superstition but old mother’s tales are hard to dispel.
Nevertheless, from 2003 to 2007, September and October were normal months. The same observation applies to the period from 1991 to 1999. With so much fear and worry still in the air, with still so many analysts, professors, policymakers and investors still warning over the economic outlook, September and October 2009 may turn out to be surprisingly normal months – no great crashes, no catastrophes, no new panics but just the usual ups and downs. Thirdly, most analysts, professors, policymakers and investors are still greatly sceptical that the US economy or the global economy is on a sustainable recovery path. They are still looking for the other shoe to drop as they are still expecting a double-dip or a W or the other 25 letters of the alphabet except V.
It is not surprising that these people are still sceptical. To i Capital, it all boils down to cause and effect. The pessimistic see the most recent recession as being caused by the US subprime and housing problems. The pessimistic see the current recovery as being a result of the various stimulus packages and that once the beneficial impact runs out, the economic recovery will falter.
To i Capital and a very selected few, the recession was all due to the global panic created by the inconsistent US government policy with regards to the rescue or non-rescue of the US financial institutions. Essentially, the collapse of Lehman Brothers triggered the Mother of all Panics.
Once this panic subsides and confidence returns, the economy will recover. Besides generating necessary but temporary demand, the various stimulus packages gave a much-needed boost to confidence, whether it is related to consumers, businesses or the financial markets.
They were necessary to prevent a vicious cycle from happening. After all, more than 90% of US workers are still employed and tens of thousands of small and large US firms are still operating. With their confidence recovering, the economic recovery will then gain impetus from the normal sources again.
From:biz.thestar.com.my/news/story.asp?file=/2009/10/1/business/4817295&sec=business
US Stocks: A flourish end to 2009
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NEW YORK: Wall Street is likely to make a strong showing in the final week of 2009 as the bulls gear up to toast the first annual advance for US stocks in two years on hopes of more economic stability in 2010.
The US stock market’s resiliency since the March bottom has put investors in the mood to celebrate. The trading week will be cut short by the New Year’s Day holiday on Friday, when US financial markets will be closed.
The S&P 500 is poised for what could possibly be its best year since 2003 – in sharp contrast to a year ago, when stocks plummeted in the fallout from the mortgage crisis and panic rocked investors as 2009 got under way.
Even though no “all clear” has been sounded for the US economy, equity strategists said stocks were poised to add to recent gains this week and build a base for a solid start to 2010 as optimism about the recovery grows.
There’s an expectation now that economic indicators will keep showing improvements in key areas like housing and the labour market.
“There’s an upward bias,” said Alan Lancz, president of Alan B. Lancz & Associates Inc, an investment advisory firm, based in Toledo, Ohio. “Economic numbers have been good. It’s been an ideal situation for equities as there aren’t that many other alternatives. I think the smarter money is going into equities.”
The benchmark Standard & Poor’s 500 Index started out November in a tight trading range. But by Christmas Eve, when stock trading ended early for the holiday, the S&P 500 had climbed to a 14-month closing high as investors bet the recovery will be strong enough to justify loftier stock valuations. US markets are closed on Friday for Christmas.
A year to remember
The S&P 500 is up 66.5% from a 12-year closing low set on March 9. Its trading levels now imply a forward price/earnings ratio of 15.5, according to Thomson Reuters data. And oh, what a difference a year makes. The S&P 500 ended 2008 down 38.5%.
But for 2009, the S&P 500 is up 24.7% – a gain that puts the broad market index on track for what could be its best year since 2003. An even stronger advance this week could put the S&P 500 in position for its best year since 1998.
For 2009, the Dow Jones Industrial Average is up 19.9% and the Nasdaq Composite Index is up 45%.
“The market is telling us that the economy is a lot stronger than people are giving it credit” for, said Cleveland Rueckert, market analyst at Birinyi Associates in Stamford, Connecticut.
Although there might be some profit-taking in the final days of the year, the stock market’s underlying tone should still be positive, Reuckert added.
“In our view, the market is going to go higher,” Rueckert said.
The ritual of window-dressing should also support the stock market this week, according to analysts. That strategy involves selling stocks with large losses and buying winners near the end of the year or quarter to improve a portfolio’s performance.
“The fact that it’s year-end is going to cause a fair amount of volatility on probably relatively light volume,” said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles. “I would expect the bias would be to the upside toward the end of the week.”
Volatility may be enhanced in a holiday-shortened week, when the US stock market will be open for only four days.
And volume may be exceptionally light, with many market participants taking time off through New Year’s Day.
Consumer confidence
Economic and corporate calendars are light this week. But there are a few items worth keeping an eye on, including the US Treasury’s auctions of US$118bil of two-year, five-year and seven-year notes.
Investors will watch for how much demand there is for US government debt as efforts to revive the economy pump up government spending.
As the holiday shopping season comes to a close, the Conference Board’s index of December consumer confidence will merit Wall Street’s attention tomorrow. The forecast calls for a December reading of 52.3, up from 49.5 in November, according to economists polled by Reuters.
Investors will note the October S&P/CaseShiller home price index, also due tomorrow.
On Wednesday, the Institute for Supply Management–Chicago’s December index of business activity in the US Midwest region is set for release. The median forecast of economists polled by Reuters puts the ISM-Chicago index at 55 in December, down from 56.1 in November. A reading above 50 indicates expansion.
The government report on weekly jobless claims is set for release on Thursday. Reports on the labour market are being scrutinised closely as investors seek to determine when job growth might resume.
November’s surprisingly upbeat non-farm payrolls report showed the US unemployment rate dipped to 10% from 10.2%. That slight improvement in the job market led investors to wonder about the potential removal of some of the US Federal Reserve’s stimulus measures and the prospects for interest-rate hikes next year.
But to keep the fledgling recovery going, the Fed pledged again on Dec 16 at the end of its last policy meeting to keep interest rates low for an extended period of time.
The Fed is hard-pressed to prevent the economy from sliding back into a slump, which would result in a double-dip recession.
The policy of near-zero interest rates has let investors borrow dollars cheaply in order to invest in higher-yielding assets like stocks.
“We think it’s a good time to be invested in equities, and equities continue to offer the best risk-reward (ratio) among the major financial assets,” said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York.
from:biz.thestar.com.my/news/story.asp?file=/2009/12/28/business/5370801&sec=business
Mida positive on US economy
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Though 2009 was, perhaps, one of the worst years for foreign agencies in New York charged with attracting investments from the United States to their respective countries, they have not abandoned their optimism for 2010.
Silver linings have begun to appear in the hitherto dark economic clouds that have hovered for the past two years.
This sense of optimism also characterises the mood in the New York office of the Malaysian Industrial Development Authority (Mida) whose prime task is to promote investments to and – since recently – also from Malaysia.
“We do see some signs of recovery as the current year comes to a close and we are optimistic that this faint sign of recovery will strengthen and lead to a full-fledged recovery,” Arham Abdul Rahman, Mida’s New York director, said in an interview with Bernama.
Arham, who completes a year at the New York office since his arrival at the start of 2009, said that although public investments in the United States had increased, the private sector was cautious with respect to investments.
“Private investments still remain very low, according to my observation,” Arham noted. Consequently, the New York office is taking a “wait-and-watch” approach.
He pointed out the Government had, meanwhile, liberalised 27 sub-sectors in the services sector, including health and social, tourism, transport, business and computer and related services.
“The liberalisation of these sub-sectors is being pursued with the intention of creating a conducive business environment to attract investments and technology, and also to create higher value employment opportunities. “These efforts will enhance the level of competitiveness of the services sector in Malaysia which will benefit foreign investors,” Arham maintained.
He has been making a strong pitch with US corporations to avail of the business opportunities unfolding in Malaysia. “Indeed, I have a list of good companies that want to go to Malaysia but due to economic uncertainties, they are, for the time being, hesitant.
“Consequently, we do not know when they will, finally, be able to go (to Malaysia),” he said, adding that he was “very optimistic” that once the US economy staged a full recovery, US companies would expand and go abroad.
Arham acknowledged that 2009 was a bad year not just for Malaysia but also for all the foreign investment promotion agencies in New York.
“We experienced a sharp decline in investment in 2009 directly attributed to the economic downturn in the United States which was the largest investor in Malaysia’s manufacturing sector in 2008. This year, Malaysia attracted US$2.4bil for 22 projects, 10 were entirely new projects while 12 involved expansion or diversification of existing operations by US companies already operating in Malaysia,” Arham explained.
Some promising sectors inherent with good business include the renewable energy sector, hi-tech industry, electronic and electrical industry.
Arham, who was recently in California to assist in the visit of a Mida delegation from Malaysia, led by its chairman Tan Sri Dr Sulaiman Mahbob, was ”impressed” by the “keen interest” shown by participants at two business seminars organised for the visiting delegation in Los Angeles and San Francisco.
The two seminars attracted a total of 132 participants representing US companies. Sulaiman also had private talks at a round-table meeting with chief executives of 20 companies in Santa Clara and, again, with representatives of another 10 companies in Los Angeles.
Arham said US corporations always preferred to use Malaysia as a base to maintain a strong presence between India and China, two exciting giant markets that US corporations want to tap for business.
“With its well-developed infrastructure, distribution channels and a pool of highly-skilled local workers, Malaysia offers itself as an attractive base not only to tap these two huge markets but also the hinterland market of the Asean region,” he pointed out.
This courtship of US companies, Arham reinforced, would continue and intensify in 2010 when “things will, hopefully, be better than in 2009”.
from:biz.thestar.com.my/news/story.asp?file=/2009/12/28/business/5373383&sec=business
US Fed’s strategy to prevent inflation
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The Federal Reserve on Monday proposed allowing banks to set up the equivalent of certificates of deposit at the central bank, a move that would help the Fed mop up money pumped into the U.S. economy and prevent inflation from taking off later.
Under the proposal, the Fed would offer so-called “term deposits” that would pay interest. Doing so would provide banks with another incentive to park their money at the Fed, rather than having it flow back into the economy.
The proposal comes as no surprise.
Federal Reserve Chairman Ben Bernanke and other Fed officials have repeatedly said the creation of so-called “term deposits” – essentially the equivalent of CDs for banks – would be one of several tools the Fed could use to drain money from the economy when the time is right.
Against that backdrop, the Fed said the proposal “has no implications for monetary policy decisions in the near term.”
With both the economy and the financial system on the mend, the Fed this year started to wind down and scale back some emergency lending programs.
Many of those programs were set up at the height of the financial crisis in the fall of 2008 when some credit markets virtually shut down.
Lending conditions have improved but still aren’t back to normal.
They continue to restrain the economic recovery.
The Fed’s balance sheet has ballooned to $2.2 trillion, reflecting the creation of lending programs intended to ease the financial crisis.
That’s more than double the pre-crisis level.
The Fed will need to mop up that money or it could trigger inflation down the road.
The Fed proposed that the interest rate paid on the term deposit be set through an auction mechanism.
Banks wanting to hold a term deposit would bid in regularly scheduled competitive auctions.
The banks would indicate both the interest rate at which they are willing to be paid and the amount of money they want to deposit into the account at that interest rate.
Given that process, it’s unclear now what the rates on the accounts would be.
The Fed said it anticipated term deposits with “relatively short maturities” likely ranging between one and six months.
It said deposit maturities wouldn’t exceed one year, and no early withdrawals of money in the accounts would be allowed.
The public, the banking industry and other interested parties will be given an opportunity to weigh in on the proposal.
The plan could be revised before a final rule is adopted.
Most economists don’t believe the Fed will start raising its key bank lending rate, which also influences a range of consumer lending rates, until the middle of next year.
At its meeting earlier this month, the Fed kept rates at record low and pledged to hold them there for an “extended period” to foster the recovery.
Separately, in a weekly report issued Monday, the Fed said banks cut back on emergency loans from the central bank, a fresh sign credit problems have eased.
The Fed said banks averaged $18.7 billion in daily borrowing over the week ending Dec. 23.
That was a decrease of $344 million from the prior week.
Banks also drew fewer short-term loans – just $75.9 billion – from another Fed program called the term auction credit facility.
That marked a decrease of $9.9 billion from the previous week
from:biz.thestar.com.my/news/story.asp?file=/2009/12/29/business/20091229081400&sec=business
Earnings to test Wall St bet on recovery
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Wall Street’s confidence in the nascent US economic recovery is about to be tested as fourth-quarter earnings season gets under way this week.
The horrid fourth quarter of 2008 means year-on-year comparisons will be stellar for most companies. But investors will scrutinise whether outlooks point to sustainable growth.
The last two periods of earnings were driven by cost-cutting, but analysts expect to see stronger revenues, or top-line growth. They are also eager for 2010 prospects to validate the bullishness that has propelled the S&P 500 and the Dow Jones Industrial Average to 15-month highs and the Nasdaq to 16-month highs.
“What we want to hear is that the employment situation has stabilised and that companies are beginning to consider or have already begun to incrementally increase fixed capital spending programmes,” said Frederic Dickson, market strategist at D.A. Davidson & Co in Lake Oswego, Oregon. “Investment spending was cut to the bone in 2009.”
Dow component Alcoa Inc is set to post quarterly results today, marking the unofficial kickoff to earnings announcements, though several companies have reported last week.
S&P 500 companies are expected to post earnings of US$15.81 a share for the fourth quarter after losing money for the same period a year ago.
A positive fourth quarter would mark the first quarter that S&P 500 company earnings grew year-on-year since the second quarter of 2007. The 2008 fourth quarter was the worst earnings quarter in the history of the S&P 500 index.
Sectors set to lead are materials companies, seen posting a 161.2% rise in earnings; consumer discretionaries, seen posting 113.5% in earnings growth; telecoms, with a 51.6% runup in earnings; and technology, seen posting a 30.2% jump in profit growth. But in order for stocks to sustain momentum, investors would have to see signs that reinforced data suggesting the economy was on the mend, analysts said.
“Investors are looking for more top-line (growth), even more so than the last quarter, that we start to see sequential improvement in top-line growth either during the quarter or companies project it out into 2010,” said Owen Fitzpatrick, head of Deutsche Bank Private Wealth Management’s US equity group.
The extensive cost-cutting last year should make income statements “more taut in that a minor boost to the top line trickles down much faster to the bottom line,” said John Lynch, managing director and chief market analyst at Evergreen Investments.
Corporate outlooks, he said, would be more important. So far, the ratio of negative fourth-quarter earnings outlooks to positive is about the same as the third quarter, according to Reuters data. The ratio for both quarters is 1.5, though there have been more announcements in this quarter overall. — Reuters
Investors will also be on the lookout for anything said about likely demand and when companies plan to resume capital investment to rebuild inventories after the worst recession since the 1930s.
They will also be alert for any comment about curbing layoffs.
More signs of renewed vigour in profitability, analysts say, should provide further fuel for equities and possibly lift the S&P 500 toward 1,200. The benchmark index has risen 68.6% since US stocks hit bottom in early March.
The current expectation for 2010 earnings per share for the S&P is US$77.59, according to Thomson Reuters data. At an average multiple of 15 times earnings, that would put the S&P at about 1,163, so if the pace of growth improves, it would justify a higher level for the stock market.
Per-share earnings of US$77.59 would represent earnings growth of 30% in 2010; the estimate for 2011 is for growth of 21.6%. But should analysts start to see those forecasts as too lofty based on poor company outlooks, the market will feel it.
“I just think expectations are too high for 2010,” said Lynch, whose firm is an investment management arm of Wells Fargo & Co and has more than US$150bil under management. “I don’t see the leadership coming from the consumer, financials, housing and from leverage which enabled us to peak in profitability at the last cycle.”
fr:biz.thestar.com.my/news/story.asp?file=/2010/1/11/business/5446326&sec=business
If you are confused about the market and economy you have company
NEW YORK: If you’re confused about the outlook for the U.S. economy and stocks one year after the market hit bottom, then you’ve got good company – the Wall Street economists and strategists who are supposed to have this all figured out.
Rarely have the experts seemed so divided about the future.
We’re either beginning the type of robust recovery that typically follows a deep recession, or we’re on the cusp of another contraction, the dreaded double dip.
Prices could climb fast as they did in the U.S. during the 1970s, or fall to devastating effect as they did in Japan during the 1990s.
Stocks? We’re on the verge of a long bull market a la the 1980s.
Then again, maybe not.
To hear some tell it, the present is more like the 1930s, when stocks were viewed less as vehicles to riches and more as a boring source of dividends.
The collapse we feared last March 9 when the major stock indices fell to their lowest levels since 1997 never did come to pass. But what replaced it is still unnerving – bewilderment.
The Dow Jones industrial average returned 61 percent during the past year, up 4,019 points to 10,566.20.
The Standard & Poor’s 500 returned 68 percent.
The Nasdaq Stock Market did even better, surging 81 percent.
Those gains were largely a payoff on a correct bet that corporate profits would surge from their recession lows.
This year the Dow and S&P 500 have lost momentum, rising 1 percent or less.
And the Dow is still 25 percent off its all time high of 14,164.53 set in October 2007.
Part of the problem in predicting the future lately is that the economic signals that drive the market have been so mixed.
The U.S. gross domestic product grew at a 5.9 percent annual rate in last year’s final quarter, its best showing in six years.
But it’s expected to expand at a slower rate this year.
Consumer confidence plunged unexpectedly in February.
But last Thursday retailers posted their biggest sales increase in more than two years.
The so-called fear index, the VIX, which measures expectations of future stock market volatility, is hovering at a 1 1/2-year low, suggesting calm seas ahead.
But new home sales have fallen to their lowest level in nearly five decades.
The experts can’t even agree on what to make of a single number.
Pessimists see bad news in good news and optimists vice versa.
Encouraged by the Commerce Department report on March 1st showing a surprising surge in consumer spending in January?
Not so fast, says David Rosenberg, chief economist at money manager Gluskin Sheff in Toronto.
He notes in a report that some items bought in great quantities – books, up 2.1 percent and sewing items, up 1.6 percent – suggest a “frugal stay-at-home” or “do-it-yourself” mood among Americans.
The end is nigh.
Or you can listen to James Paulsen, the chief strategist at Wells Capital Management in Minneapolis.
Not even high unemployment can get this man down. His interpretation of the near double-digit unemployment rate: All the more reason to buy shares.
In a report looking back over the past half century he notes that periods of high unemployment rates – greater than 6.6 percent – have been great for stocks, which have generated average annual returns of 20 percent.
One reason, he says, is that high unemployment often presages big recoveries, and investors drive the market up in anticipation of the recovery.
Of course, you can find Wall Street soothsayers staking out extreme positions in any era.
But the hunt is perhaps never so easy as in the aftermath of a deep recession.
One reason is the shock of the downturn feeds fears that the natural corrective forces of the economy won’t kick in.
Barclays Capital economist Dean Maki calls it the “This Time Is Different” school of thought.
He says such worries were rife after the two recessions of the early 1980s.
Indeed, oldtimers may recall some investors expected a “triple dip,” sidelining them during the start of one of the greatest bull markets in history.
Maki is not mincing words about his view on the recovery today.
The title of one of his reports: “This Time Is Not Different.” He predicts the U.S. economy will grow by 3.6 percent this year, a percentage point higher than the average estimate.
Seth Glickenhaus, who worked on Wall Street as a trader in the Great Depression, calls the optimist-pessimist divide now the “big gulf.”
For his part, the 95-year-old Glickenhaus, who still oversees $1 billion in assets, is siding with the pessimists.
He thinks the Dow Jones industrial average will flatline, trading no higher than 11,000 for at least another 5 years.
One reason he’s so glum: The unemployment picture is actually a lot worse than the widely cited headline number suggests because many people have stopped looking for work and aren’t counted.
Last Friday, the Labor Department reported unemployment held at 9.7 percent in February.
A broader measure that includes frustrated part-timers and other discouraged workers was 16.8 percent.
Glickenhaus likens Wall Street optimists to the guys he used to beat in bridge games as a student at Harvard in the early 1930s.
“They were great scholars but not necessarily bright,” he says.
His winnings “paid all my tuition, though it wasn’t much back then.”
The professional bulls today, he says, are “just stupid.”
But money manager Richard Bernstein, the former Merrill Lynch strategist who created a stir years ago with bearish reports, says he’s turned bullish on stocks now – though it hasn’t been easy.
“People who thought I was so insightful as a bear think I’m an idiot,” he says.
He adds, wistfully, “Hopefully, I’m still a likable guy.”
Bernstein says he’s optimistic because much of Obama’s $787 billion stimulus plan passed last year has yet to be spent, and that means a big boost to growth is still to come.
He also notes a reliable predictor of a strong recovery – a big gap between yields on short- and long-term bonds – is at a historical high.
But perhaps the best reason is also the quirkiest.
While at Merrill, he came up with something called the “sell-side indicator.” It tells you whether to buy or sell stocks based on changes by Wall Street strategists in their recommended allocations.
The quirky part: Bernstein discovered that strategists were wrong on stocks so often that it paid to do the opposite, that is, buy when they’re selling and vice versa.
Right now, he says they’re underweight stocks, on average, or telling people to sell. So he thinks you should buy.
Or maybe the real takeaway here is to just ignore the professionals and do what you think is right – if amid the data you can figure that out.
fr:biz.thestar.com.my/news/story.asp?file=/2010/3/9/business/20100309091111&sec=business
A possible double-dip recession
NEWS reports over recent months have pointed to a slow down in the economy in the second-half as the effects from the stimulus measures crafted in response to the global recession last year lessens.
Although the data coming out of Malaysia has been positive, with exports up 26.6% in April from a year earlier and economic growth of 10.1% for the quarter to March 31 this year compared to the same period a year ago, still there are fears that any slowdown externally may mean a slower economic expansion at home.
This is despite the fact that Malaysia’s economic destiny may not be as tied to the US and the EU as before with more intraregional trade and rising domestic consumption playing more important roles today.
In fact, in the past two weeks, analysts and news commentators are now saying that 2010 may not be as smooth-sailing for the global economy after all with some even saying that a double-dip recession may be around the corner.
The overall message in recent months has been that the concerns over possible sovereign-debt defaults in the euro-zone will drag growth lower as EU governments rush to embrace austerity measures and private consumption falls.
“There is a risk that the European economy will go into a double-dip recession,” Nobel Prize winner and Columbia University finance and economics professor Joseph Stiglitz says in a June 15 commentary in London’s The Independent newspaper.
He says the measures taken by EU nations collectively may be disastrous as “what is good for one nation can be disastrous for all”.
Stiglitz adds that the fiscal conservatism of the US will make things worse for the developed economies as a whole.
Analysts are also saying that although China’s and Japan’s latest exports data have not shown any impact from the EU’s austerity measures, this will not last.
The question is how can investors here protect their investments as the situation becomes less rosy?
Kurnia Asia Bhd chief investment officer Pankaj Kumar Bipinchandra tells StarBizWeek that for investors who want to stay invested in the equity markets, this will mean going into dividend-yielding stocks that are defensive in nature.
“Pick consumer stocks that can provide some protection in terms of risks such as Aeon and Hai-O,” he says, adding that real estate investment trusts are also quite good in terms of yields.
Pankaj says the quarter to March 31 may likely be the best quarter in terms of growth in 2010 for Malaysia and economies around the world, boosted in large part by the base-effects of last year’s contractions.
“The current quarter will not be as good and the second-half will be slower than the first-half,” Pankaj says.
Inter-Pacific Asset Management Sdn Bhd chief executive officer Robbin Khoo suggests that those with a medium-risk profile should just stay in the market.
“Technically, I don’t see the market sliding downwards in a steep slope and watch currency movements at the same time, in particular the US dollar,” he says.
Khoo says since the market here is still very much dependant on foreign funds, a weaker US dollar will mean less foreign funds coming in, but when the currency strengthens, then the market will move up again.
However, for those with a low-risk profile, he says its preferable to exit the market as it will take some time to pick up.
“I foresee the market will be very quiet for the next two quarters and will slowly move up in the first quarter of next year barring any more corrections due to external factors,” Khoo says.
He adds that for those with a high-risk profile and have the extra funds, they should pick up more shares but in a selective manner.
“My advise is to look at the banking sector as they are usually the forerunners of an economic pick-up plus they’re more stable, otherwise consumer stocks are still a good bet,” Khoo says.
fr:biz.thestar.com.my/news/story.asp?file=/2010/6/19/business/6491315&sec=business
Fed keeps interest rates low, but cautious on US recovery
WASHINGTON: The Federal Reserve struck a more cautious tone about the strength of the U.S. economic recovery, indicating Europe’s debt crisis poses a risk to it.
Wrapping up a two-day meeting Wednesday, the Fed in a 9-1 decision retained its pledge to hold rates at record-low levels for an “extended period.”
Doing so is intended to energize the rebound.
The Fed expressed confidence that the recovery will stay intact despite threats from abroad and at home.
But Chairman Ben Bernanke and his colleagues offered a slightly more reserved outlook than the last time they convened.
The Fed said the economic recovery is “proceeding.”
That was a bit less upbeat than the view at the April meeting when the Fed said economic activity continued to “strengthen.”
The Fed also said the labor market is “improving gradually.”
While not mentioning Europe by name, the Fed said “financial conditions have become less supportive of economic growth … largely reflecting developments abroad.”
The fragile economic picture increases pressure on President Barack Obama and lawmakers in Washington.
Near-double-digit unemployment is certain to factor into the way Americans vote in congressional midterm elections this fall.
If it fails to come down after that, the jobless rate could play a significant role in the 2012 presidential election.
At the same time, the president has limited options. Congress has run into opposition on extending unemployment benefits and providing more aid to cash-strapped states.
While some liberal Democrats maintain that government spending is the best way to stimulate the economy, a growing number of moderate and conservative Democrats share Republican concerns that the government’s exploding budget deficits is poses a greater risk.
The subtle shift in the Fed’s outlook drew little reaction from stock investors. The Dow Jones industrial average was essentially flat after announcement.
The decision to keep rates at record lows boosted demand for safe-haven assets like Treasurys, sending interest rates lower.
The yield on the 10-year Treasury note, a widely used benchmark for mortgages and other consumer loans, fell to 3.13 percent from 3.25 percent late Tuesday.
The 10-year note hasn’t closed at that level in more than a year.
Rates had already fallen earlier in the day after the government said new-home sales dropped 33 percent last month.
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, for the fourth straight meeting was the sole member to dissent from the Fed’s decision to retain the “extended period” pledge.
Hoenig fears keeping rates too low for too long could lead to excessive risk-taking by investors and feed new speculative bubbles in the prices of stocks, bonds and commodities.
He’s also expressed concern that low rates could eventually unleash inflation. And Hoenig said he worries that keeping the “extended period” pledge will limit the Fed’s stated “flexibility” to start modestly bumping up rates.
Given the risks to the recovery, the Fed left a key bank lending rate at between zero and 0.25 percent.
The rate has remained at that level since December 2008.
That means rates on certain credit cards, home equity loans, some adjustable-rate mortgages and other consumer loans will remain low. Commercial banks’ prime lending rate would stay at about 3.25 percent, the lowest point in decades.
Low rates serve borrowers who qualify for loans and are willing to take on more debt.
But they hurt savers. Low rates are especially hard on people living on fixed incomes who are earning scant returns on their savings.
Still, if the rates spur Americans to spend more, they would help invigorate the economy.
That’s why the Fed maintained its pledge, in place for more than a year, to keep rates at record lows for an “extended period.”
Because the fragile recovery is more vulnerable to shocks, from home and overseas, economists increasingly say the Fed probably won’t start boosting rates until next year – or possibly into 2012.
That’s a change from a few months ago, when economists thought the Fed would begin raising rates at the end of this year.
“Increased market volatility and uncertainty on the economic outlook may cause the Fed to delay raising rates until well into next year,” said Kurt Karl, chief U.S. economist at Swiss Re.
The Fed has leeway to hold rates at record lows because inflation is essentially nonexistent.
In fact, the Fed noted that the price of energy and other commodities have dropped in recent months, and that underlying inflation has “trended lower.”
That seems to suggest that Fed policymakers are a bit more concerned about the remote prospect of deflation, versus inflation.
T.J. Marta, a market strategist at Marta on the Markets, called the Fed’s policy statement “more dovish” and reinforces the belief that the central bank won’t need to start boosting rates any time soon to fend off inflationary pressures.
After suffering the worst recession since the 1930s, the economy has been growing again for nearly a year.
Manufacturing activity is picking up.
Businesses are spending more.
And Bernanke has expressed confidence that the nation won’t fall back into a “double dip” recession.
Still, the strength of the recovery could be affected by the European debt crisis, an edgy Wall Street, cautious consumers, a fragile housing market and high unemployment.
If the U.S. recovery were to flash signs of a relapse, the Fed would likely take other steps to get it back on course.
The Fed has left the door open to resuming purchases of mortgage securities, a move that would drive down mortgage rates and bolster the housing market.
It ended a $1.25 trillion mortgage-buying program in March.
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US and global stocks tumble; Dow below 10,000
Standard & Poor’s 500 index closed at its lowest level since October
NEW YORK: Stocks and interest rates tumbled Tuesday after signs of slowing economies around the world spooked U.S. traders, who were already uneasy about a global recovery.
The Dow Jones industrial average fell 268 points, or 2.7 percent, and dropped below 10,000.
The benchmark Standard & Poor’s 500 index closed at its lowest level since October.
Interest rates fell in the Treasury market after demand for the safety of government debt grew.
The yield on the 10-year note dropped to as low as 2.96 percent, the first time it has fallen below 3 percent since April 2009.
The yield is used as a benchmark for many consumer loans and mortgages.
The markets began the day by following Asian and European markets lower.
Asian stocks fell after an index that forecasts economic activity for China was revised lower.
European indexes continued the slide after Greek workers walked off the job to protest steep budget cuts.
Then, shortly after U.S. trading began, the market was hit with news that consumer confidence in the U.S. fell sharply this month because of worries about jobs and the overall economy.
The Conference Board’s Consumer Confidence Index fell to 52.9 from a revised 62.7 in May.
It was the steepest drop since February and economists polled by Thomson Reuters had forecast only a modest dip.
Companies have indicated that business is getting better, yet there are few signs they are ready to hire in big numbers.
The Labor Department’s monthly employment report due Friday is expected to show the unemployment rate rose 0.1 percentage point to 9.8 percent in June.
Industrial stocks suffered some of the steepest drops on fears that a stalled global rebound will cut demand.
Aircraft maker Boeing Co. led the Dow lower with a drop of 6.3 percent.
Caterpillar Inc., the maker of construction and mining equipment, lost 5.5 percent.
Shares of coal producers pulled energy stocks lower on worries about a slowdown.
Investors have been so burned by the financial crisis of 2008-09 that they fear any hint of a slowdown means the economy will start tanking again.
And they’re selling heavily at the end of the day, fearful about negative economic news that could start coming out of Asia just hours after U.S. trading ends.
Paul Zemsky, head of asset allocation at ING Investment Management in New York, said investors are wrestling with two opposing ideas of where the economy is headed.
He said the more likely case is that the recovery continues and corporate earnings growth make stocks look cheap right now.
The darker scenario is that government budget cuts, the end of fiscal stimulus, problems in Europe and a slowdown in China lead to a double-dip in the global economy.
Investors’ indecision and uneven economic reports have brought big swings to stocks since late April when debt problems in Greece began to pound world markets.
“The central issue that any investor faces today is fire or ice,” Zemsky said.
“There’s no in-between. It’s either one or the other.”
The Dow fell 268.22, or 2.7 percent, to 9,870.30, its lowest close since June 9.
The Standard & Poor’s 500 index fell 33.33, or 3.1 percent, to 1,041.24. It was the lowest close for the S&P since Oct. 5.
The Nasdaq composite index fell 85.47, or 3.9 percent, to 2,135.18.
Meanwhile world markets slid Tuesday as debt worries in the euro zone mounted and investors trimmed bets before the release of crucial data from the world’s two biggest economies, Japan and the United States.
European investors were cautious ahead of bank repayments of euro442 billion in liquidity credits to the European Central bank later this week as well as debt auctions in France and Spain, which will test investors’ faith in the solvency of EU nations.
Such factors were making the euro “the currency market’s whipping boy,” said CMC Markets analyst Michael Hewson.
The euro was trading down 1 percent at $1.2156 as worries about Europe again rattled the market.
The currency has been seen as a proxy for confidence in Europe’s economy following Greece’s near bankruptcy and steep budget cuts around the continent to combat rising deficits.
Britain’s FTSE 100 stock index closed below 5,000, down 2.69 percent at 4,935.24, attributed by IG Index chief market strategist David Jones to heavy falls in the mining sector.
Germany’s DAX was 3.33 percent lower at 5,952.03.
France’s CAC-40 was down 4 percent at 3,432.99.
The losses came amid a shutdown of Greek public services as workers walked off the job in a new nationwide general strike protesting austerity measures to reduce the country’s yawning debt – a problem afflicting a number of European nations.
In Asia, markets slid after mammoth share sale in China dragged Shanghai stocks down and dour Japanese economic data that could foreshadow weaker business confidence when the Bank of Japan’s “tankan” survey is released on Thursday.
The Shanghai Composite Index dived 4.3 percent to a 14-month low of 2,427.05 as investors fretted that Agricultural Bank of China’s record-breaking initial public offering will draw money away from other stocks and depress prices overall.
The IPO, which has separate listings in Hong Kong and Shanghai, is expected to raise $23.2 billion, making it the world’s largest.
“The market is facing a huge pressure on liquidity. It fell rapidly after a sluggish week because not much new capital is flowing in,” said Zhang Fan, analyst at Debon Securities in Shanghai.
Japan’s benchmark Nikkei 225 stock index lost 123.27 points, or 1.3 percent, to 9,570.67.
Sentiment was sluggish in Tokyo after government figures showed Japan’s economic recovery faltered in May as moderating export demand dented factory output, household spending fell and the jobless rate unexpectedly rose for a third straight month.
South Korea’s Kospi shed 1.4 percent to 1,707.65.
Australia’s S&P/ASX 200 dropped 0.9 percent to 4,345.70.
Elsewhere, Hong Kong’s Hang Seng retreated 2.3 percent to 20,248.90.
Taiwan was off 1 percent and Singapore tumbled 1.6 percent.
In currencies, the dollar fell to 88.64 yen 89.36 yen in New York late Monday.
Benchmark crude for August delivery tumbled $1.53 to $76.76 a barrel in electronic trading on the New York Mercantile Exchange.
The contract fell 61 cents to settle at $78.25 on Monday
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