Wednesday, December 18, 2013

Once a friend, a friend forever

No man is an island, no one can live in isolation. We need, first and foremost, a family, and then many great friends. Life is a cobweb of people getting together.

Monday, November 11, 2013

Xin Ning is approaching 6 next January

Soon turning to 6 years old Xin Nning has gradually developed her own personality and preference. She now express stronger desire in what she likes to do, the kind of haircut she preferred, selective in extra-curriculum activities (she prefers swimming, painting, and what else ...???), and list goes on.

Occasionally it crosses my mind on what her peers are doing and how Xin Ning fairs in comparison. Is this mental comparison healthy though (I believe normal for most parents)? How should I help Xin Ning navigates through what she likes, those activities she has not been exposed to and may develop a liking to it once exposed, and those activities her peers are better than Xin Ning? 

My personal preference is to have her develop the reading skills with "I Can Read" and Arts especially painting but are these enough to help her develop her thinking and creativity? In addition, would like to expose Xin Ning to some outdoor activities such as trekking, exposing her to children of different groups or background within her age group, and develop her self confidence, communication skills, and social skills. These are my thinking and preferences which I thought are the best for her but are these what she wants?

More questions than answers. Guess Nelly and I just need to move with it and adjust accordingly. One thing I am certain is to give them attention, love, and values of kindness, determination, positive thinking. 

Tuesday, July 9, 2013

Can't Ask For More

Tomorrow I will be starting a new career in Shanghai for at least a year. The opportunity came at a timing less than ideal given our family has just celebrated the arrival of 欣蒽, and 芯宁 is now enjoying her sister's companion; all the good reasons for me to be at home. At the same time, 丽晶and I are both doing so well together.

Like our past successes, we always need to keep ourselves on the toes and be prepared to take up new challenges that could represent a greenfield for our family. Nelly took up the challenge of being a Private Banker after her surgery in 2005, I took the risk of jumping into Operations at the time banking is most unstable in 2008 and we had just overjoyed with 芯宁arrival. Looking back we are glad to take up the challenges and enjoying the fruits of our decision and hardwork.

I guess now this is another huge leap of faith for me, again, and this time it is Shanghai. It will be a challenging career and tough time managing being away from my 3 lovely girls. I just need to focus on delivering the best outcomes and bring the success back to the family again. 加油!

Wednesday, May 22, 2013

Together, the sisters are stronger

After almost 3 weeks looking after Xin En, and seeing how Xin Ning reacted towards her little sister, I can't help but feeling proud and love the girls more. The feeling is derived from the gratification and proud seeing Xin Ning's continuous affection towards Xin En and her spontaneity in defending her little sister.

Both Nelly and I are extremely delighted to see how these two girls are getting on with each other, so far. We will be patient to see them growing up and surely will enjoy the journey with them.


Daddy and Mommy love both of you very much.

Tuesday, May 14, 2013

Going to Shanghai, my family

In just less than a month, I am probably going to start a new post in Shanghai office, taking care of Trade Finance and Cash Solutions operations. Whilst excited with the opportunity there are several reasons I am feeling a little divided on the following:
1) Leaving family behind especially the three adorable ladies at home
2) Uncertainly on the term of the contracts
3) The extend of the challenge at work

I have been thinking of whether to bring the entire family over or to travel back and forth, and after much consideration the latter prevail for following reasons:
1) It helps keep wife on payroll which serves our family as an insurance in the event my career hit a bump and we still have a bit more to go before we could declare financially free
2) Food safety in Shanghai or China at large is worrying moreso Xin Ex is an infant and on-going health scare
3) Having Nelly being a full-time housewife, while could be enjoying at beginning, could turn into boredom when children grown up and need less time fro mum and potentially erode her self-worth being out of market as compared to her peers who remain gainfully employed
4) My contract is for 2 years period and has no intention to renew based on current trajectory which mean it is within my tolerance threshold

I will remain flexible on future decision should the above consideration change.

Wednesday, May 1, 2013

An important week for the family and the country

Being a Malaysian, married to a girl originated from Indonesia and now a proud Singaporean, who is born on 31 August, in itself is a symbol of national importance. That was 2004. Fast forward to May 1, 2013, I am again about to claim a coincidence of great importance. On 2 May (tomorrow) Nelly and I are excitedly welcoming the arrival of our new born, and 3 days later (May 5, 2013) Malaysians will head to polls to decide the next government.

For us, the arrival of second child will coincide with another significant event in our family, that is, I am awaiting my relocation to Shanghai, a move which I think will boost my career prospect and enhance my experience in a great way.

During the very same week, on this Sunday, Malaysians are gearing up to cast their votes in what many have predicted as the closest battle between the incumbents and the Oppositions led by Anwar Ibrahim. For the first time since Independence the National Front government is facing a real prospect of losing its majority in Parliament house.

In any case, my excitement is on the arrival of our second child tomorrow, and at the same time hoping that the General Election in Malaysia will usher the new reality that bring about better prospect for all include my princesses.

What a great week for the Ongs!!!

Sunday, January 20, 2013

Sabahan and its political struggle

A few month ago, PM Najib's administration has finally acceded to the call for a special commission to investigate Sabahan's unhappiness over allegation on the Ministry of Internal Affair and Security has granted citizenship to foreigners in return for their votes (for National Front's government collision). Disturbing statistics shown that population in Sabah has grown from merely 650,000 in 1970 to 3,500,000 in recently censure data, despite Sabah being one of the poorest states. More disturbing revelation was from Dr Mahathir's own admission that Tunku Abdul Rahman was worst than him for granting more than 1,000,000 citizenships without proper documentation and process prior to Independence. 

In principle I am for the idea of welcoming non-citizens to the country to contribute to nation's development given talents are scare and mobile. They are many benefits in opening our door to talents from all over the world. US and our closest neighbour Singapore have both proven the wisdom of this policy so long as this is done in control and planned manner. 

When it comes to Sabah, the accusation is the arrival of these outsiders are not done with the benefits of the state development in mind but one of political reason, ie, to ensure the National Front collision continues to maintain its majority in balloting box. Even more serious is the accusation that this generous policy was driven by desire to increase moslems population in the state to keep the non-moslem voters at bay. Perhaps this is the key reason for the rising tension between the Moslems who are leading the collision government and the Christians. 

With the General Election around the corner, it will be interesting to see how this investigation will help establish the truth and how the public, particularly the Sabahans react to the outcomes when the findings are made available to public. After nearly 3 decades of distrust it is time to let the truth emerge, to path way for genuine reconciliation between conflicting party, and more critical is what shall the country do to these falsely granted citizens?

Saturday, August 18, 2012

Inner Peace

How could I cut all the noises in my head and just live by holistic principle of full contention, expectation-less, and enjoy everyone as it comes?

Saturday, July 14, 2012

Having Another Child

Few things came into my mind when this topic pop up:
1) Do I have enough financial means to raise this child, giving him / her the best I could afford, when job is hardly secured?
2) What will happen to old days nest egg if we were to allocate substantial resources to support Xin Ning and her brother / sister?
3) Could I be fair to both of them in term of material provision in which I have a wish to provide them top-in-class education and leave them with an equal assets / wealth to launch them to ensure their stay ahead?

For all the considerations above, I do have some inclination towards having a second child for following reasons:
1) Giving Xin Ning a companion and an opportunity to pick up responsibility being an elder; to look after the younger sibling
2) I know having another child will have fulfilled Nelly's wish given how happy she is being a mother and all the fun generated from looking and spending time with Xin Ning

This is a complex situation and I am amazed to see how indecisive I am when come to addressing this matter. The saga continues ...

Tuesday, May 29, 2012

We are building our future together

Last week, Nelly and and I have begun to see how our apartment at M@P is gradually to feel like a home. A few aspects of the apartment have caught a better side of Xin Ning; the yellow light at walk-way to common room, the height of switches means she can now switch on/off the lights at ease, pink writing table, and the purple curtain she has chosen finally got fixed.

Nelly, on the other hand, is excited with the prospect of living at M@P that comes with vast space, resort-like layout, a big pool (Olympic size), and its close proximity to St Nicholas Primary School. I, too, am excited with the fact it is situated next to Upper and Lower Peirce which helps bring nature really close to my weekend running regime.

One other interesting point about moving into M&P is the on-going discussion among netizens on where is the nearest MRT station for next Thomson MRT Line. An engineer from Poh Lian, the main contractor for the project, has speculated with confidence that it is somewhere near Tagore Lane, which means it is just 300 metres away from our apartment, and we are truly lucky if this comes true.

This is a good start, amid a small step towards building a better family life together. I am looking forward to continue building what we have got from here in this new apartment.

Saturday, May 12, 2012

Being married, being financially strong. Is it?

Marriage, to me and people around me, is more a traditional call once a person attains a certain age and in my case it was 31. Years later, i have begun to realise 'marriage' is far from just fulfilling a tradition or family call.

Living in a uber cosmopolitan society and a city-state like Singapore, everything in our daily activities revolve around transaction. From the moment the bread and butter is served on table, to taking bus or train to work, lunch, dinner, and even a small personal indulgent called 'Kopi-O' worth 90 cents; all these transactional activities call for exchanging and circulating of money within the society. And these particular transactions are meant for me but the concept in itself is universal. Given I am pretty low maintenance in term of cost of living, these transactions are within my mean. Now think about having 2 persons' transactions in a household, it does not take long for us to conclude the transactions could easily double in value, and in all likelihood it could end up more than just double values depending on the consumption behaviour of the union / household. For example certain transactions are add-on such as the need to have a TV when the other just need a radio; so ended up with a TV and a Radio in the house and this is what actually happened to me :)

Now, the key question is does marriage actually boost or strain a household's financial?

It is a simple question amid an important one. My answer is it helps boost a great deal given our low material expectation hence simple lifestyle and having the discipline in savings and investment. This is for me but not everyone or every couple are the same. It is a matter of choice and ability to stick to the decision made. I consider my fortunate in this particular expect :)

Saturday, May 5, 2012

2 years later

Time flies.

Xin Ning is now 4 years old.

And we are about to move into our first brand new apartment, and pretty excited about it. With the move come a new school for Xin Ning, Carpe Diem. Both Nelly and I are hoping she will enjoy this school and make best use of the new learning experience and environment, and make more friends. Next target is to get her into St. Nicholas Primary; this will be a tall order but we will remain hopeful.

Intend to keep this blog alive so promise to visit and post more. Got to go now.

Saturday, January 23, 2010

The risk of high growth

China has posted 10.7% growth rate for the last quarter year-on-year. This rate of growth, by any standard, is above impressive and give rise to inflationary pressure on China's economy. The government is now confronting with serious challenge in containing assets bubble and rapid increase in prices of daily consumable goods and services. My view is the government will soon perform withdrawal of its massive stimulus package amid gradually, and begin the tightening of credit creation to reign in lending activities, particularly to property sector, consumer credits, and speculative investment activities. Having said that, any measure to cool the economy invites unwanted potential surge in unemployment, which could threaten the societal stability that form the pivotal hold for the government's stability. One other concern is should the cooling effect proved to be potent, the 'over capacities' in China manufacturing could pose deflationary risk and this problem could only get magnified in the sluggish global recovery that just set itself in the path of slow recovery.

Sunday, January 17, 2010

What do you think of China's appetite for oil consumption in the future?

China has surpassed US as the biggest car market in the world with 13.6 million cars sold last year. Assuming the average size engine is 1.5L, with average monthly petrol consumption at 60 litres, the annual petro consumption for these 13.6 million cars will be 9.8 billion litres. On average, 1 barrel of crude oil could process out 19.5 gallons of petrol (1 gallon:3.785 litres) so it will take 504 million barrels of crude oil to produce 9.8 billion litres of petrol. On daily term, China will require 1.38 million barrels of crude oil to power these 13.6 million new cars. What do you think of China's appetite for oil consumption in the future?

Saturday, January 16, 2010

The word 'Allah'

I don't see any issue in using the word 'Allah' by other religions. Those who protest are clearly misled. For the record, the word 'Allah' has been used for a long time by other religions in their holy scripts hence set the precedent to illustrate the point this issue is not new. In Indonesia, this is more prevalent. The recent attacks on Churches and a Sikh temple have crossed the 'sensitive' line. Now, more than ever, the polarization is more visible and the trust between races is probably at new low. I even see a great divide among the Malays between the moderate and 'protests'. This is not an issue to press for 'winning attitude' but one of understanding of self and others living in the context of coexistence. The rights to worship should be a universal doctrine for all to accept just like how it was practised during the Prophet's time. The slow response from government in this episode further convinced me it is always politics over the-right-thing-to-do, but clearly this approach may backfire. 1Malaysia has a long way to go and I remain sceptical if it will ever reach its destination.

Saturday, November 7, 2009

Robert Kuok the Wise Man

Tan Sri Robert Kuok Hock Nien (born 6 October 1923, in Johor Bahru, Johor), is an influential Malaysian Chinese businessman. According to Forbes his net worth is estimated to be around $10 billion on May 2008, making him the richest person in Southeast Asia. He is media shy and discreet; most of his businesses are privately held by him or his family. Apart from a multitude of enterprises in Malaysia , his companies have investments in many countries throughout Asia . His business interests range from sugarcane plantations (Perlis Plantations Bhd), sugar refinery, flour milling, animal feed, oil and mining to finance, hotels, properties, trading, freight and publishing.

Robert Kuok Hock Nien's notes on the past sixty years

(On the occasion of Kuok Group’s 60th Anniversary 10 April 2009)

(1) My brothers and I owe our upbringing completely to Mother. She was steeped in Ru-Jiao – the teachings of Confucius, Mencius, Laozi and other Chinese sages. Ru-Jiao teaches the correct behaviour for a human being on his life on earth. Mother gently, and sometimes strongly, drummed into the minds of her three boys the values of honesty, of never cheating, lying, stealing or envying other people their material wealth or physical attributes.

(2) Father died on 25 December 1948 night without leaving a will. Following the Japanese surrender, he had re-registered the firm as a sole proprietorship. We went to court to get an appointment as managers, permitting us to continue to manage Tong Seng & Co. The judge said that, as there were two widows, the firm and the estate should be wound up.

(3) We decide to establish Kuok Brothers Limited. In mid-January 1949, five of us met at a small roundtable in our home in Johore Bahru. Present were my MOTHER, cousin number five HOCK CHIN, cousin number twelve HOCK SENG, my brother HOCK KHEE nicknamed Philip (a..k.a. cousin number seventeen), and myself (a.k.a. cousin number twenty). We sat down and Mother said, “Nien, would you like to start?” I said, “Fine, yes I will start.” To cut the long story short, we got started, and commenced business from a little shop house in Johore Bharu on 1 April 1949.

(4) As a young man, I thought there was no substitute for hard work and thinking up good, honest business plans and, without respite, pushing them along. There will always be business on earth. Be humble; be straight; don’t be crooked; don’t take advantage of people. To be a successful businessman, I think you really need to brush all your senses every morning, just as you brush your teeth. I coined the phrase “honing your senses” in business: your vision, hearing, sense of smell, touch and taste. All these senses come in very useful.

(5) Mother was the captain of our ship.. She saw and sensed everything, but being a wise person she didn’t interfere. Yet she was the background influence, the glue that bound the Group together. She taught my cousins and my brothers and me never to be greedy, and that in making money one could practise high morality. She stressed that whenever the firm does well it should make donations to the charities operating in our societies. She always kept us focused on the big picture in business. For example: avoid businesses that bring harm, destruction or grief to people. This includes trades like gambling, drugs, arms sales, loan-sharking and prostitution.

(6) We started as little fish swimming in a bathtub. From there we went to a lake and now we are in the open seas.. Today our businesses cover many industries and our operations are worldwide but this would not have been possible without the vision of the founding members, the dedicated contributions and loyalty of our colleagues and employees, and very importantly the strong moral principles espoused by my mother.

(7) When I hire staff, I look for honest, hardworking, intelligent people. When I look candidates in the eye, they must appear very honest to me. I do not look for MBAs or exceptional students. You may hire a brilliant man, summa cum laude, first-class honours, but if his mind is not a fair one or if he has a warped attitude in life, does brilliance really matter?

(8) Among the first employees were Lau Teo Chin (Ee Wor), Kwok Chin Luang (Ee Luang), Othman Samad (Kadir) and an Indian accountant called Joachim who was a devout Roman Catholic and who travelled in every day from Singapore where he lived.

(9) I would like on this special occasion to pay tribute to them and in particular to those who were with us in the early days; many of whom are no longer here. I have already mentioned Lau Teo Chin (Ee Wor) and Kwok Chin Luang (Ee Luang) and Othman Samad (Kadir), there are others like Lean Chye Huat, who is not here today due to failing eyesight, and Yusuf Sharif who passed away in his home country India about one and a half years ago and the late Lee Siew Wah, and others who all gave solid and unstinting support and devotion to the Company. It saddens me that in those early difficult years these pioneers did not enjoy significant and substantial rewards but such is the order of things and a most unfortunate aspect of capitalism. However through our Group and employee Foundations, today we are able to help their descendants whenever there is a need to.

(10) I have learnt that the success of a company must depend on the unity of all its employees. We are all in the same boat rowing against the current and tide and every able person must pull the oars to move the boat forward. Also, we must relentlessly endeavour to maintain and practise the values of integrity and honesty, and eschew and reject greed and arrogance.

(11) A few words of caution to all businessmen and women. I recall the Chinese saying: shibai nai chenggong zhi mu (failure is the mother of success). But in the last thirty years of my business life, I have come to the conclusion that the reverse phrase is even truer of today’s world: chenggong nai shibai zhi mu. Success often breeds failure, because it makes you arrogant, complacent and, therefore, lower your guard.

(12) The way forward for this world is through capitalism. Even China has come to realise it. But it’s equally true that capitalism, if allowed to snowball along unchecked, can in many ways become destructive. Capitalism needs to be inspected under a magnifying glass once a day, a super-magnifying glass once a week, and put through the cleaning machine once a month.

In capitalism, man needs elements of ambition and greed to drive him. But where does ambition end and greed take over? That’s why I say that capitalism, if left to its own devices, will snowball along, roll down the hill and cause a lot of damage. So a sound capitalist system requires very strongly led, enlightened, wise governments. That means politician-statesmen willing to sacrifice their lives for the sake of their people. I don’t mean politicians who are there for fame, glory and to line their pockets.

(13) To my mind the two great challenges are the restoration of education in morals and the establishment of a rule of law. You must begin from the root up, imbuing and infusing moral lessons and morality into youth, both at home and from kindergarten and primary school upward through university. To accept the principle of rule of law; then you have to train upright judges and lawyers to uphold the legal system.

(14) Wealth should be used for two main purposes. One: for the generation of greater wealth; in other words, you continue to invest, creating prosperity and jobs in the country. Two: part of your wealth should be applied to the betterment of mankind, either by acts of pure philanthropy or by investment in research and development along the frontiers of science, space, health care and so forth.

Saturday, August 22, 2009

P Siantar - An Observation

Recently we made a trip back to Pematang Siantar, some sort of annual visit for us, and spent a good week there with family and friends. The town has not changed much physically, but the variaties of shops have somewhat improved. I have made several observation during a week along there:

One observation is price hike. I have noticed an over the board increase in food prices. These days, the popular Mie Pangsit, is selling at least Rp10,000 (SGD 1.50); I consider this price expensive given the fact I could enjoy a bowl of noodle in hometown for 2/3 of that price though it is not similar noodle to compare.

Another observation is the frequent power outage. As far as i can remember, the power outage is a norm in Siantar so no surprise to find most big shops are having electric generators powered by fuel as backup. I wonder if this is a sign of power shortage to a growing economy of Indonesia or simply due to inefficiency in power distribution, or both?

Third observation is the condition of road. I have not notice any major improvement in the road condition from Medan-Siantar and Siantar-Parapat. What is needed is widening of existing road to accomodate the surge in traffic. There are compelling arguments for improvement in the road condition for this part of Sumatera Utara, among others, it is a major commercial area for a huge Sumatera and Lake Toba being a major tourist attraction.

Fourth, there is a visible sign of fast growing young middle class population in Sumut. For example, the number of motobikes on the road has increased rapidly. Mobile phones are selling like a hotcake. Consumption of meats is on the surge. More locals visit the popular local spots like Lake Toba during festive seasons. Bigger shopping mall like Sun Plaza has joint the skyline of Medan city, and good mixed of shoppers were visible at Hypermarket.

Lastly, I find the people in this part of Sumatera are enterprising, adaptive, and quick in response to opportunities. When I bought a few boxes of Kueh Lapis and knowing I am going to carry it overseas, the shop has a ready special box to cater for such special - the box comes with special string for ease of hand carry or check-in. Another example is a Chinese operates a Sundanese restaurant - the foods are delicious and very popular among locals. Then I saw a local distributor of Panasonic batteries having its Key Performance Indicators on softboard displaying target versus actual for each saleman. All these points to good things in Indonesia and my wish is the Pemerintah could elevate its governance standard, reduce corruption, avoid wastage, open to more feedback, be flexible, and continue to empower its people but at the same reigns in on extremism, then I would think the country can expect a better tomorrow.

Friday, March 20, 2009

The 20 Golden Rules of Investment

Investing your own money is a complicated and potentially dangerous business. One slip in the tricky world of stocks and shares can prove very costly. So Times Money offers a guide on how to survive and profit in the investment jungle.

1) Buy low; sell high.

2) Don’t chase performance. If you like a stock or fund, buy on the dips.

3) Run your winners. In other words let your profts roll up and don't be in too much of a hurry to kiss goodbye to your best-performing investments.

4) Cut your losses before they become excessive.

5) Never get too attached to a share or a fund. As the late Sir John Harvey Jones once said: “You sometimes have to kill your favourite children.”

6) In general, think long-term. As Warren Buffett, the great US investor once said: “Never buy a stock unless you would be happy with it if the stock exchange closed down for the next 10 years.”

7) But don’t let that stop you reviewing your portfolio regularly. You need to check that your portfolio is properly balanced.

8) Reinvest your dividends. The power of compounding your reinvested share or fund dividends makes a massive difference to your overall return.

9) Don’t put all your eggs in one basket. If you had had all your money in tech stocks in March 2000 you would probably have had about 90 per cent of the value of your portfolio wiped out over the next couple of years.

10) Although it makes sense to hold shares for the long term you don’t necessarily want to hold them forever. In the end shares are for buying and selling not for buying and forgetting about.

11) To that end make sure you spend as much time thinking about selling shares as you do about buying them. Most investors neglect this vital discipline.

12) Make sensible use of tax-privileged investment vehicles such as pensions and Individual Savings Accounts (Isas) but never let the tax tail wag the investment dog.

13) If you don’t understand how a particular investment works it’s probably not a good idea to put money into it.

14) Don’t be afraid to ask the ‘what if’ question. In the late 1990s many investors bought supposedly ‘low risk’ savings products linked to the performance of the stock market. Few asked what would happen if the stock market fell off a cliff, as it did from 2000 onwards, slashing the value of the so-called ‘precipice bonds’.

15) Be flexible and don’t back yourself into a corner. If you bought a stock for 500p and it’s now languising at 50p, don’t stubbornly hold on to it indefinitely in the misguided belief that it’s bound to recover to 500p - it may never do so.

16) Don’t be afraid to go against the crowd - some of the most successful investors have been contrarian investors.

17) Never be influenced by ‘special offers’ such as the discounts sometimes advertised by fund groups for purchasing funds within a specific time. It’s much better to buy the right fund than to get a few pounds knocked off the purchase price of the wrong fund.

18) Ignore all stock market ‘tips’, whether offered in the workplace or at the nineteenth hole of the local golf course. Remember the old stock market adage that “where there’s a tip there’s a tap”.

19) Never get too carried away by investment euphoria, whether for stocks and shares or bricks and mortar - nothing goes up for ever.

20) Remember that if something looks too good to be true - it probably is.

The Ten Biggest Stock Market Crashes of All Time

Some investors might think they have had a rough ride on the stock market over the past seven or eight months. But the recent share price gyrations pale into insignificance when compared with the biggest stock market falls of all time.

10) Wall Street 1901-03: -46%The market was spooked by the assassination of President McKinley in 1901, coupled with a severe drought later the same year.

9) Wall Street 1919-21: -46%There were fears that the new automobile sector was becoming overheated and that car ownership had reached saturation point.

8) Wall Street 1906-07: -48%Markets took fright after President Theodore Roosevelt had threatened to rein in the monopolies that flourished in various industrial sectors, notably railways.

7) Wall Street 1937-38: -49%This share price fall was triggerd by an economic recession and doubts about the effectiveness of Franklin D Roosevelt's New Deal policy.

6) London 2000-2003: -52%The UK took sixth place in the table with a 52 per cent market fall between 2000 and 2003 as investors suffered the consequences of the collapse of the technoogy bubble

5) Hong Kong 1997-98: -64%The Hong Kong stock market’s heavy fall in 1997-1998 came as investors deserted emerging Asian shares, including a very overheated Hong Kong stock market
4) London 1973-74: -73%Next came the UK stock market’s 73 per cent drop in 1973 and 1974. set against the backdrop of a dramatic rise in oil prices, the miners’ strike and the downfall of the Heath government.

3) Japan 1990-2003: -79%In third place, with a 79 per cent decline, was the Japanese stock market, which suffered a protracted slide in price from 1990 to 2003 as a share and property price bubble burst and turned into a deflationary nightmare.

2) US Nasdaq 2000-2002: -82%The second biggest collapse came from the technology-rich US Nasdaq index, which fell by 82 per cent following the bursting of the bubble in 2000

1) Wall Street 1929-32: -89%The Wall Street Crash heads the list, with the US stock market falling by 89 per cent between 1929 and 1932. The bursting of the speculative bubble led to further selling as people who had borrowed money to buy shares had to cash them in in a hurry when their loans wre called in.

David Shwartz, the stock market historian, says: “The very big stock market crashes are invariably triggered by a series of different events which unfold one after the other. For example the biggest UK stock market slump in 1973-74 was started by the fear of stagflation, but was then fuelled by the dramatic rise in oil prices of late 1973, followed by the Miners’ strike and the downfall of the Heath government. One heavy blow is not enough to produce a market crash. It requires several different blows to bring a market to its knees.”

The Ten Biggest Stock Market Crashes of All Time

Some investors might think they have had a rough ride on the stock market over the past seven or eight months. But the recent share price gyrations pale into insignificance when compared with the biggest stock market falls of all time.

10) Wall Street 1901-03: -46%The market was spooked by the assassination of President McKinley in 1901, coupled with a severe drought later the same year.

9) Wall Street 1919-21: -46%There were fears that the new automobile sector was becoming overheated and that car ownership had reached saturation point.

8) Wall Street 1906-07: -48%Markets took fright after President Theodore Roosevelt had threatened to rein in the monopolies that flourished in various industrial sectors, notably railways.

7) Wall Street 1937-38: -49%This share price fall was triggerd by an economic recession and doubts about the effectiveness of Franklin D Roosevelt's New Deal policy.

6) London 2000-2003: -52%The UK took sixth place in the table with a 52 per cent market fall between 2000 and 2003 as investors suffered the consequences of the collapse of the technoogy bubble

5) Hong Kong 1997-98: -64%The Hong Kong stock market’s heavy fall in 1997-1998 came as investors deserted emerging Asian shares, including a very overheated Hong Kong stock market
4) London 1973-74: -73%Next came the UK stock market’s 73 per cent drop in 1973 and 1974. set against the backdrop of a dramatic rise in oil prices, the miners’ strike and the downfall of the Heath government.

3) Japan 1990-2003: -79%In third place, with a 79 per cent decline, was the Japanese stock market, which suffered a protracted slide in price from 1990 to 2003 as a share and property price bubble burst and turned into a deflationary nightmare.

2) US Nasdaq 2000-2002: -82%The second biggest collapse came from the technology-rich US Nasdaq index, which fell by 82 per cent following the bursting of the bubble in 2000

1) Wall Street 1929-32: -89%The Wall Street Crash heads the list, with the US stock market falling by 89 per cent between 1929 and 1932. The bursting of the speculative bubble led to further selling as people who had borrowed money to buy shares had to cash them in in a hurry when their loans wre called in.

David Shwartz, the stock market historian, says: “The very big stock market crashes are invariably triggered by a series of different events which unfold one after the other. For example the biggest UK stock market slump in 1973-74 was started by the fear of stagflation, but was then fuelled by the dramatic rise in oil prices of late 1973, followed by the Miners’ strike and the downfall of the Heath government. One heavy blow is not enough to produce a market crash. It requires several different blows to bring a market to its knees.”

Thursday, February 5, 2009

Warren Buffett On The Stock Market

What's in the future for investors--another roaring bull market or more upset stomach? Amazingly, the answer may come down to three simple factors. Here, the world's most celebrated investor talks about what really makes the market tick--and whether that ticking should make you nervous.

By Warren Buffett; Carol Loomis
December 10, 2001

(FORTUNE Magazine) – Two years ago, following a July 1999 speech by Warren Buffett, chairman of Berkshire Hathaway, on the stock market--a rare subject for him to discuss publicly--FORTUNE ran what he had to say under the title "Mr. Buffett on the Stock Market" (Nov. 22, 1999). His main points then concerned two consecutive and amazing periods that American investors had experienced, and his belief that returns from stocks were due to fall dramatically. Since the Dow Jones Industrial Average was 11194 when he gave his speech and recently was about 9900, no one yet has the goods to argue with him.

So where do we stand now--with the stock market seeming to reflect a dismal profit outlook, an unfamiliar war, and rattled consumer confidence? Who better to supply perspective on that question than Buffett?

The thoughts that follow come from a second Buffett speech, given last July at the site of the first talk, Allen & Co.'s annual Sun Valley bash for corporate executives. There, the renowned stockpicker returned to the themes he'd discussed before, bringing new data and insights to the subject. Working with FORTUNE's Carol Loomis, Buffett distilled that speech into this essay, a fitting opening for this year's Investor's Guide. Here again is Mr. Buffett on the Stock Market.
The last time I tackled this subject, in 1999, I broke down the previous 34 years into two 17-year periods, which in the sense of lean years and fat were astonishingly symmetrical. Here's the first period. As you can see, over 17 years the Dow gained exactly one-tenth of one percent. --DOW JONES INDUSTRIAL AVERAGE Dec. 31, 1964: 874.12 Dec. 31, 1981: 875.00

Dow Jones Industrial Average
• Dec. 31, 1964: 874.12
• Dec. 31, 1981: 875.00

And here's the second, marked by an incredible bull market that, as I laid out my thoughts, was about to end (though I didn't know that). --DOW INDUSTRIALS Dec. 31, 1981: 875.00 Dec. 31, 1998: 9181.43

Dow Jones Industrial Average
• Dec. 31, 1981: 875.00
• Dec. 31, 1998: 9181.43

Now, you couldn't explain this remarkable divergence in markets by, say, differences in the growth of gross national product. In the first period--that dismal time for the market--GNP actually grew more than twice as fast as it did in the second period. --GAIN IN GROSS NATIONAL PRODUCT 1964-1981: 373% 1981-1988: 177%

Gain in Gross National Product
• 1964-1981: 373%
• 1981-1988: 177%

So what was the explanation? I concluded that the market's contrasting moves were caused by extraordinary changes in two critical economic variables--and by a related psychological force that eventually came into play.

Here I need to remind you about the definition of "investing," which though simple is often forgotten. Investing is laying out money today to receive more money tomorrow.

That gets to the first of the economic variables that affected stock prices in the two periods--interest rates. In economics, interest rates act as gravity behaves in the physical world. At all times, in all markets, in all parts of the world, the tiniest change in rates changes the value of every financial asset. You see that clearly with the fluctuating prices of bonds. But the rule applies as well to farmland, oil reserves, stocks, and every other financial asset. And the effects can be huge on values. If interest rates are, say, 13%, the present value of a dollar that you're going to receive in the future from an investment is not nearly as high as the present value of a dollar if rates are 4%.

So here's the record on interest rates at key dates in our 34-year span. They moved dramatically up--that was bad for investors--in the first half of that period and dramatically down--a boon for investors--in the second half. --INTEREST RATES, LONG-TERM GOVERNMENT BONDS Dec. 31, 1964: 4.20% Dec. 31, 1981: 13.65% Dec. 31, 1998: 5.09%

Interest rates, Long-term government bonds
• Dec. 31, 1964: 4.20%
• Dec. 31, 1981: 13.65%
• Dec. 31, 1998: 5.09%

The other critical variable here is how many dollars investors expected to get from the companies in which they invested. During the first period expectations fell significantly because corporate profits weren't looking good. By the early 1980s Fed Chairman Paul Volcker's economic sledgehammer had, in fact, driven corporate profitability to a level that people hadn't seen since the 1930s.

The upshot is that investors lost their confidence in the American economy: They were looking at a future they believed would be plagued by two negatives. First, they didn't see much good coming in the way of corporate profits. Second, the sky-high interest rates prevailing caused them to discount those meager profits further. These two factors, working together, caused stagnation in the stock market from 1964 to 1981, even though those years featured huge improvements in GNP. The business of the country grew while investors' valuation of that business shrank!

And then the reversal of those factors created a period during which much lower GNP gains were accompanied by a bonanza for the market. First, you got a major increase in the rate of profitability. Second, you got an enormous drop in interest rates, which made a dollar of future profit that much more valuable. Both phenomena were real and powerful fuels for a major bull market. And in time the psychological factor I mentioned was added to the equation: Speculative trading exploded, simply because of the market action that people had seen. Later, we'll look at the pathology of this dangerous and oft-recurring malady.

Two years ago I believed the favorable fundamental trends had largely run their course. For the market to go dramatically up from where it was then would have required long-term interest rates to drop much further (which is always possible) or for there to be a major improvement in corporate profitability (which seemed, at the time, considerably less possible). If you take a look at a 50-year chart of after-tax profits as a percent of gross domestic product, you find that the rate normally falls between 4%--that was its neighborhood in the bad year of 1981, for example--and 6.5%. For the rate to go above 6.5% is rare. In the very good profit years of 1999 and 2000, the rate was under 6% and this year it may well fall below 5%.

So there you have my explanation of those two wildly different 17-year periods. The question is, How much do those periods of the past for the market say about its future?

To suggest an answer, I'd like to look back over the 20th century. As you know, this was really the American century. We had the advent of autos, we had aircraft, we had radio, TV, and computers. It was an incredible period. Indeed, the per capita growth in U.S. output, measured in real dollars (that is, with no impact from inflation), was a breathtaking 702%.

The century included some very tough years, of course--like the Depression years of 1929 to 1933. But a decade-by-decade look at per capita GNP shows something remarkable: As a nation, we made relatively consistent progress throughout the century. So you might think that the economic value of the U.S.--at least as measured by its securities markets--would have grown at a reasonably consistent pace as well.

That's not what happened. We know from our earlier examination of the 1964-98 period that parallelism broke down completely in that era. But the whole century makes this point as well. At its beginning, for example, between 1900 and 1920, the country was chugging ahead, explosively expanding its use of electricity, autos, and the telephone. Yet the market barely moved, recording a 0.4% annual increase that was roughly analogous to the slim pickings between 1964 and 1981. --DOW INDUSTRIALS Dec. 31, 1899: 66.08 Dec. 31, 1920: 71.95
Dow Industrials
• Dec. 31, 1899: 66.08
• Dec. 31, 1920: 71.95

In the next period, we had the market boom of the '20s, when the Dow jumped 430% to 381 in September 1929. Then we go 19 years--19 years--and there is the Dow at 177, half the level where it began. That's true even though the 1940s displayed by far the largest gain in per capita GDP (50%) of any 20th-century decade. Following that came a 17-year period when stocks finally took off--making a great five-to-one gain. And then the two periods discussed at the start: stagnation until 1981, and the roaring boom that wrapped up this amazing century.

To break things down another way, we had three huge, secular bull markets that covered about 44 years, during which the Dow gained more than 11,000 points. And we had three periods of stagnation, covering some 56 years. During those 56 years the country made major economic progress and yet the Dow actually lost 292 points.

How could this have happened? In a flourishing country in which people are focused on making money, how could you have had three extended and anguishing periods of stagnation that in aggregate--leaving aside dividends--would have lost you money? The answer lies in the mistake that investors repeatedly make--that psychological force I mentioned above: People are habitually guided by the rear-view mirror and, for the most part, by the vistas immediately behind them.

The first part of the century offers a vivid illustration of that myopia. In the century's first 20 years, stocks normally yielded more than high-grade bonds. That relationship now seems quaint, but it was then almost axiomatic. Stocks were known to be riskier, so why buy them unless you were paid a premium?

And then came along a 1924 book--slim and initially unheralded, but destined to move markets as never before--written by a man named Edgar Lawrence Smith. The book, called Common Stocks as Long Term Investments, chronicled a study Smith had done of security price movements in the 56 years ended in 1922. Smith had started off his study with a hypothesis: Stocks would do better in times of inflation, and bonds would do better in times of deflation. It was a perfectly reasonable hypothesis.

But consider the first words in the book: "These studies are the record of a failure--the failure of facts to sustain a preconceived theory." Smith went on: "The facts assembled, however, seemed worthy of further examination. If they would not prove what we had hoped to have them prove, it seemed desirable to turn them loose and to follow them to whatever end they might lead."
Now, there was a smart man, who did just about the hardest thing in the world to do. Charles Darwin used to say that whenever he ran into something that contradicted a conclusion he cherished, he was obliged to write the new finding down within 30 minutes. Otherwise his mind would work to reject the discordant information, much as the body rejects transplants. Man's natural inclination is to cling to his beliefs, particularly if they are reinforced by recent experience--a flaw in our makeup that bears on what happens during secular bull markets and extended periods of stagnation.

To report what Edgar Lawrence Smith discovered, I will quote a legendary thinker--John Maynard Keynes, who in 1925 reviewed the book, thereby putting it on the map. In his review, Keynes described "perhaps Mr. Smith's most important point ... and certainly his most novel point. Well-managed industrial companies do not, as a rule, distribute to the shareholders the whole of their earned profits. In good years, if not in all years, they retain a part of their profits and put them back in the business. Thus there is an element of compound interest (Keynes' italics) operating in favor of a sound industrial investment."

It was that simple. It wasn't even news. People certainly knew that companies were not paying out 100% of their earnings. But investors hadn't thought through the implications of the point. Here, though, was this guy Smith saying, "Why do stocks typically outperform bonds? A major reason is that businesses retain earnings, with these going on to generate still more earnings--and dividends, too."

That finding ignited an unprecedented bull market. Galvanized by Smith's insight, investors piled into stocks, anticipating a double dip: their higher initial yield over bonds, and growth to boot. For the American public, this new understanding was like the discovery of fire.
But before long that same public was burned. Stocks were driven to prices that first pushed down their yield to that on bonds and ultimately drove their yield far lower. What happened then should strike readers as eerily familiar: The mere fact that share prices were rising so quickly became the main impetus for people to rush into stocks. What the few bought for the right reason in 1925, the many bought for the wrong reason in 1929.

Astutely, Keynes anticipated a perversity of this kind in his 1925 review. He wrote: "It is apply to the future inductive arguments based on past experience, unless one can distinguish the broad reasons why past experience was what it was." If you can't do that, he said, you may fall into the trap of expecting results in the future that will materialize only if conditions are exactly the same as they were in the past. The special conditions he had in mind, of course, stemmed from the fact that Smith's study covered a half century during which stocks generally yielded more than high-grade bonds.

The colossal miscalculation that investors made in the 1920s has recurred in one form or another several times since. The public's monumental hangover from its stock binge of the 1920s lasted, as we have seen, through 1948. The country was then intrinsically far more valuable than it had been 20 years before; dividend yields were more than double the yield on bonds; and yet stock prices were at less than half their 1929 peak. The conditions that had produced Smith's wondrous results had reappeared--in spades. But rather than seeing what was in plain sight in the late 1940s, investors were transfixed by the frightening market of the early 1930s and were avoiding re-exposure to pain.

Don't think for a moment that small investors are the only ones guilty of too much attention to the rear-view mirror. Let's look at the behavior of professionally managed pension funds in recent decades. In 1971--this was Nifty Fifty time--pension managers, feeling great about the market, put more than 90% of their net cash flow into stocks, a record commitment at the time. And then, in a couple of years, the roof fell in and stocks got way cheaper. So what did the pension fund managers do? They quit buying because stocks got cheaper! --PRIVATE PENSION FUNDS % of cash flow put into equities 1971: 91% (record high) 1974: 13%

Private Pension Funds % of cash flow put into equities
• 1971: 91% (record high)
• 1974: 13%

This is the one thing I can never understand. To refer to a personal taste of mine, I'm going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the "Hallelujah Chorus" in the Buffett household. When hamburgers go up, we weep. For most people, it's the same way with everything in life they will be buying--except stocks. When stocks go down and you can get more for your money, people don't like them anymore.

That sort of behavior is especially puzzling when engaged in by pension fund managers, who by all rights should have the longest time horizon of any investors. These managers are not going to need the money in their funds tomorrow, not next year, nor even next decade. So they have total freedom to sit back and relax. Since they are not operating with their own funds, moreover, raw greed should not distort their decisions. They should simply think about what makes the most sense. Yet they behave just like rank amateurs (getting paid, though, as if they had special expertise).

In 1979, when I felt stocks were a screaming buy, I wrote in an article, "Pension fund managers continue to make investment decisions with their eyes firmly fixed on the rear-view mirror. This generals-fighting-the-last-war approach has proved costly in the past and will likely prove equally costly this time around." That's true, I said, because "stocks now sell at levels that should produce long-term returns far superior to bonds."

Consider the circumstances in 1972, when pension fund managers were still loading up on stocks: The Dow ended the year at 1020, had an average book value of 625, and earned 11% on book. Six years later, the Dow was 20% cheaper, its book value had gained nearly 40%, and it had earned 13% on book. Or as I wrote then, "Stocks were demonstrably cheaper in 1978 when pension fund managers wouldn't buy them than they were in 1972, when they bought them at record rates."

At the time of the article, long-term corporate bonds were yielding about 9.5%. So I asked this seemingly obvious question: "Can better results be obtained, over 20 years, from a group of 9.5% bonds of leading American companies maturing in 1999 than from a group of Dow-type equities purchased, in aggregate, around book value and likely to earn, in aggregate, about 13% on that book value?" The question answered itself.

Now, if you had read that article in 1979, you would have suffered--oh, how you would have suffered!--for about three years. I was no good then at forecasting the near-term movements of stock prices, and I'm no good now. I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two.

But I think it is very easy to see what is likely to happen over the long term. Ben Graham told us why: "Though the stock market functions as a voting machine in the short run, it acts as a weighing machine in the long run." Fear and greed play important roles when votes are being cast, but they don't register on the scale.

By my thinking, it was not hard to say that, over a 20-year period, a 9.5% bond wasn't going to do as well as this disguised bond called the Dow that you could buy below par--that's book value--and that was earning 13% on par.

Let me explain what I mean by that term I slipped in there, "disguised bond." A bond, as most of you know, comes with a certain maturity and with a string of little coupons. A 6% bond, for example, pays a 3% coupon every six months.

A stock, in contrast, is a financial instrument that has a claim on future distributions made by a given business, whether they are paid out as dividends or to repurchase stock or to settle up after sale or liquidation. These payments are in effect "coupons." The set of owners getting them will change as shareholders come and go. But the financial outcome for the business' owners as a whole will be determined by the size and timing of these coupons. Estimating those particulars is what investment analysis is all about.

Now, gauging the size of those "coupons" gets very difficult for individual stocks. It's easier, though, for groups of stocks. Back in 1978, as I mentioned, we had the Dow earning 13% on its average book value of $850. The 13% could only be a benchmark, not a guarantee. Still, if you'd been willing then to invest for a period of time in stocks, you were in effect buying a bond--at prices that in 1979 seldom inched above par--with a principal value of $891 and a quite possible 13% coupon on the principal.

How could that not be better than a 9.5% bond? From that starting point, stocks had to outperform bonds over the long term. That, incidentally, has been true during most of my business lifetime. But as Keynes would remind us, the superiority of stocks isn't inevitable. They own the advantage only when certain conditions prevail.

Let me show you another point about the herd mentality among pension funds--a point perhaps accentuated by a little self-interest on the part of those who oversee the funds. In the table below are four well-known companies--typical of many others I could have selected--and the expected returns on their pension fund assets that they used in calculating what charge (or credit) they should make annually for pensions.

Now, the higher the expectation rate that a company uses for pensions, the higher its reported earnings will be. That's just the way that pension accounting works--and I hope, for the sake of relative brevity, that you'll just take my word for it.

As the table shows, expectations in 1975 were modest: 7% for Exxon, 6% for GE and GM, and under 5% for IBM. The oddity of these assumptions is that investors could then buy long-term government noncallable bonds that paid 8%. In other words, these companies could have loaded up their entire portfolio with 8% no-risk bonds, but they nevertheless used lower assumptions. By 1982, as you can see, they had moved up their assumptions a little bit, most to around 7%. But now you could buy long-term governments at 10.4%. You could in fact have locked in that yield for decades by buying so-called strips that guaranteed you a 10.4% reinvestment rate. In effect, your idiot nephew could have managed the fund and achieved returns far higher than the investment assumptions corporations were using.

Why in the world would a company be assuming 7.5% when it could get nearly 10.5% on government bonds? The answer is that rear-view mirror again: Investors who'd been through the collapse of the Nifty Fifty in the early 1970s were still feeling the pain of the period and were out of date in their thinking about returns. They couldn't make the necessary mental adjustment.

Now fast-forward to 2000, when we had long-term governments at 5.4%. And what were the four companies saying in their 2000 annual reports about expectations for their pension funds? They were using assumptions of 9.5% and even 10%.

I'm a sporting type, and I would love to make a large bet with the chief financial officer of any one of those four companies, or with their actuaries or auditors, that over the next 15 years they will not average the rates they've postulated. Just look at the math, for one thing. A fund's portfolio is very likely to be one-third bonds, on which--assuming a conservative mix of issues with an appropriate range of maturities--the fund cannot today expect to earn much more than 5%. It's simple to see then that the fund will need to average more than 11% on the two-thirds that's in stocks to earn about 9.5% overall. That's a pretty heroic assumption, particularly given the substantial investment expenses that a typical fund incurs.

Heroic assumptions do wonders, however, for the bottom line. By embracing those expectation rates shown in the far right column, these companies report much higher earnings--much higher--than if they were using lower rates. And that's certainly not lost on the people who set the rates. The actuaries who have roles in this game know nothing special about future investment returns. What they do know, however, is that their clients desire rates that are high. And a happy client is a continuing client.

Are we talking big numbers here? Let's take a look at General Electric, the country's most valuable and most admired company. I'm a huge admirer myself. GE has run its pension fund extraordinarily well for decades, and its assumptions about returns are typical of the crowd. I use the company as an example simply because of its prominence.

If we may retreat to 1982 again, GE recorded a pension charge of $570 million. That amount cost the company 20% of its pretax earnings. Last year GE recorded a $1.74 billion pension credit. That was 9% of the company's pretax earnings. And it was 2 1/2 times the appliance division's profit of $684 million. A $1.74 billion credit is simply a lot of money. Reduce that pension assumption enough and you wipe out most of the credit.

GE's pension credit, and that of many another corporation, owes its existence to a rule of the Financial Accounting Standards Board that went into effect in 1987. From that point on, companies equipped with the right assumptions and getting the fund performance they needed could start crediting pension income to their income statements. Last year, according to Goldman Sachs, 35 companies in the S&P 500 got more than 10% of their earnings from pension credits, even as, in many cases, the value of their pension investments shrank.

Unfortunately, the subject of pension assumptions, critically important though it is, almost never comes up in corporate board meetings. (I myself have been on 19 boards, and I've never heard a serious discussion of this subject.) And now, of course, the need for discussion is paramount because these assumptions that are being made, with all eyes looking backward at the glories of the 1990s, are so extreme. I invite you to ask the CFO of a company having a large defined-benefit pension fund what adjustment would need to be made to the company's earnings if its pension assumption was lowered to 6.5%. And then, if you want to be mean, ask what the company's assumptions were back in 1975 when both stocks and bonds had far higher prospective returns than they do now.

With 2001 annual reports soon to arrive, it will be interesting to see whether companies have reduced their assumptions about future pension returns. Considering how poor returns have been recently and the reprises that probably lie ahead, I think that anyone choosing not to lower assumptions--CEOs, auditors, and actuaries all--is risking litigation for misleading investors. And directors who don't question the optimism thus displayed simply won't be doing their job.
The tour we've taken through the last century proves that market irrationality of an extreme kind periodically erupts--and compellingly suggests that investors wanting to do well had better learn how to deal with the next outbreak. What's needed is an antidote, and in my opinion that's quantification. If you quantify, you won't necessarily rise to brilliance, but neither will you sink into craziness.

On a macro basis, quantification doesn't have to be complicated at all. Below is a chart, starting almost 80 years ago and really quite fundamental in what it says. The chart shows the market value of all publicly traded securities as a percentage of the country's business--that is, as a percentage of GNP. The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment. And as you can see, nearly two years ago the ratio rose to an unprecedented level. That should have been a very strong warning signal.

For investors to gain wealth at a rate that exceeds the growth of U.S. business, the percentage relationship line on the chart must keep going up and up. If GNP is going to grow 5% a year and you want market values to go up 10%, then you need to have the line go straight off the top of the chart. That won't happen.

For me, the message of that chart is this: If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%--as it did in 1999 and a part of 2000--you are playing with fire. As you can see, the ratio was recently 133%.

Even so, that is a good-sized drop from when I was talking about the market in 1999. I ventured then that the American public should expect equity returns over the next decade or two (with dividends included and 2% inflation assumed) of perhaps 7%. That was a gross figure, not counting frictional costs, such as commissions and fees. Net, I thought returns might be 6%.

Today stock market "hamburgers," so to speak, are cheaper. The country's economy has grown and stocks are lower, which means that investors are getting more for their money. I would expect now to see long-term returns run somewhat higher, in the neighborhood of 7% after costs. Not bad at all--that is, unless you're still deriving your expectations from the 1990s.

Buffett's metric says it's time to buy

According to investing guru Warren Buffett, U.S. stocks are a logical investment when their total market value equals 70% to 80% of Gross National Product.

By Carol J. Loomis and Doris Burke
February 4, 2009: 9:49 AM ET

According to both this 85-year chart and famed investor Warren Buffett, it just might be. The point of the chart is that there should be a rational relationship between the total market value of U.S. stocks and the output of the U.S. economy - its GNP.

Fortune first ran a version of this chart in late 2001 (see "Warren Buffett on the stock market").

Stocks had by that time retreated sharply from the manic levels of the Internet bubble. But they were still very high, with stock values at 133% of GNP. That level certainly did not suggest to Buffett that it was time to buy stocks.

But he visualized a moment when purchases might make sense, saying, "If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you."
Well, that's where stocks were in late January, when the ratio was 75%. Nothing about that reversion to sanity surprises Buffett, who told Fortune that the shift in the ratio reminds him of investor Ben Graham's statement about the stock market: "In the short run it's a voting machine, but in the long run it's a weighing machine."

Not just liking the chart's message in theory, Buffett also put himself on record in an Oct. 17 New York Times op-ed piece, saying that he was personally buying U.S. stocks after a long period of owning nothing (outside of Berkshire Hathaway (BRKB) stock) but U.S. government bonds.

He said that if prices kept falling, he expected to soon have 100% of his net worth in U.S. equities. Prices did keep falling - the Dow Jones industrials have dropped by about 10% since Oct. 17 - so presumably Buffett kept buying. Alas for all curious investors, he isn't saying what he bought.

Thursday, January 29, 2009

Global outlook: big spenders and penny-pinchers

In the US, extravagance is a normal way of life. In China, it is a sin. Such contrasting consumer psyche between the two economies needs to be evened out before a sustained recovery of the post-bubble global economy can be achieved in the longer run, says Stephen Roach, chairman of Morgan Stanley Asia.

In a talk given to the Asia Society Hong Kong Centre entitled “Pitfalls in a Post-Bubble World,” Roach warns that the pain of the global recession caused by the bursting of asset and credit bubbles has only just begun to take its toll on export-dependent Asian economies.
“Obviously we’re in a global recession. It’s a severe one. But it is a unique one. It is a post-bubble recession brought about by the bursting of multiple-asset credit bubbles around the world. So do not go back to your economic history or your textbook to try to figure out how to calibrate this cycle.”

“The cycle, itself prompted by the bursting of asset and credit bubbles, is very much intertwined with the unsustainability of imbalances that have built up over the last decade, in large part between savings-short current account deficit nations like the US and surplus-savings countries like those in Asia, in particular China,” Roach says.

The next couple of years are expected to be a much weaker period for the global economy – Roach estimates average annual growth for at least the next three to five years to be “a number closer to three per cent” – and how quickly the world returns to a stable economic climate will rest largely on two main pieces of the equation: the American consumer driving the demand side and the Chinese producer driving the supply side, he adds.

“Many of the adjustments that are now occurring, especially those in the US and China, I think, will be viewed with a little bit of hindsight as a long overdue and ultimately a constructive rebalancing of an unbalanced world.”

The US, which has spent itself into oblivion, will have to become a saver and China, which has spent too little and saved too much, will need to develop more of an indigenous, autonomous private consumption culture. “Neither of these developments will be easy, but they are essential and, if the world can pull it off, I think there will be a more stable and sustainable global climate than we have today,” he says, noting that US consumption as a share of GDP peaked at 72 per cent in the first half of 2007, as compared to around 67 per cent during the pre-bubble years from 1975 to 2000.

“Unfortunately, the (US consumption) binge was not supported by the economy’s internal income-generating capacity. The consumption binge was supported by the confluence of property and credit bubbles, both of which have now burst.”

The fact that Asian economies are being hit hard by global recession also goes to show that previous talk of ‘Asian decoupling’ was a myth, Roach adds. “With the monster external demand shock, with America, Japan and Europe all in recession simultaneously, external-dependent Asia, much more dependent today than it was 10 years ago, is in trouble,” he notes.

Anyone who is counting on China to lead Asia, or the world, out of recession, will also be in for a nasty shock. “China gets hit by a powerful external demand shock and the economy has hit a wall. Now you don’t know this from the numbers because they publish numbers on a year-over-year basis. The last number was 9 per cent (growth) in the third quarter. Our guesstimate is maybe 6.5 per cent. If you back out, the quarter-to-quarter comparison from the year-over-year changes …. tells you that growth in China in the second half of 2008 basically went to zero.”

Roach sees little room this time for proactive fiscal stimulus, a tool used by the Chinese government during 1997-98 and 2001-2002 to boost the economy. “It worked because the external environment was much more supportive and constructive to the Chinese export machine than the case today. So it’s much more of an uphill battle,” he notes.

The second option for China and other Asian countries, Roach says, will be to push ahead hard in developing internal private consumption.

“I think that will be an important outcome of this global crisis. But it won’t be easy, and it won’t be quick because what’s missing throughout the region, especially in China, is the absence of a safety net. Given the massive lay-offs that have occurred in China through the reform of state enterprises, a safety net is really important to temper the fears of income and job insecurity that have resulted in … excessive levels of fear-driven precautionary savings.”

Asia also needs to be mindful of one wild card, Roach says. “The risk is that Washington, especially the US Congress, believes that one way to obtain that fair share (of labour compensation in national income) is to impose trade sanctions on America’s largest trade deficit nation, China. It’s emotional politics of a Congress with broad bi-partisan support to take action that would shelter beleaguered middle-class American workers.”

“The big challenge for Barack Obama will be to move to the centre of this debate, and resist the Congressional efforts to use trade protectionism to shield workers. The consequences of him not doing it are severe and very worrisome for all of us here in Asia.”

Stephen Roach was speaking at a luncheon organised by the Asia Society Hong Kong Centre on January 15, 2009.

Sunday, January 18, 2009

Two points of light in the gloom

THE economic outlook looks grim over the next two years, says Blackrock head of asset allocation and economics Richard Urwin. But there are opportunities in the credit space, for instance, as clients seek yields higher than cash.

And, Asia may yet see a recovery ahead of developed markets as monetary stimulus is likely to show benefits sooner. 'Easier monetary policies have the best chance of working probably in Asia where the financial system is under less pressure and the banking system is less leveraged. At some stage Asian equities could start to do better (than developed markets).'

Earlier, Blackrock vice-chairman Bob Doll issued his predictions for 2009, markedly more muted than his predictions for 2008 which had been off the mark. The deterioration in markets and economies since the Lehman Brothers' failure has taken most strategists and analysts by surprise.

Mr Urwin told journalists yesterday that the macro environment is 'very challenging' and while a recovery will ensue later this year, it will be 'pretty subdued'. 'This leads us to a world which by the end of the year begins to improve, but slowly, painfully and erratically. We're not going back to normal cyclical conditions for two years. But there are investment opportunities that beat putting money in the bank.'

One opportunity, he says, is in non-US government bonds and another is investment-grade corporate debt. Government bonds are expensive, he says, but interest rates cuts are expected to be significant even in emerging markets. Hence low government bond yields may not be unreasonable 'in an environment of zero interest rates, recession and subdued growth and with the emphasis on deflation risk, investors are not content to earn nothing in the bank'.
Treasuries will begin to sell off when conditions become 'more cyclically normal'. Ten year Treasuries are yielding around 2.3 per cent. 'We are some months from that, maybe not this year. When there are more signs of a sustainable upturn, bond yields will rise. Outside the US, there is scope for yields to fall further.'

Investment-grade credit spreads have tightened from 320 basis points to about 270 over the past few weeks. 'Credit spreads at this magnitude discount an incredibly high default rate...You are being offered an extraordinary opportunity to buy corporate credit as measured by the spreads.

'We're in an environment where people lost money last year. They will reach for yields.' He adds that while it is consensus opinion that investment grade credits are attractive, few have moved to invest. 'It's not a crowded trade.' Bonds, however, remain fairly illiquid with a substantial liquidity premium built into the spreads.

As for high yield or sub-investment- grade bonds, he believes it is not yet time to invest even though yields are at fairly high double digit levels. This is because default rates are expected to escalate. Equity markets, on the other hand, are expected to be weak on the back of earnings weakness. Earnings, he says, may 'collapse' by 30 to 50 per cent. Valuations, however, are already almost at historical lows. The Hong Kong market is at all-time lows; the US market values are at 1980 levels.

'Equities are as cheap as they have been for 20 to 30 years. But that does not tell us there will be an immediate strong rebound. What this tells us is the equity investor is expecting earnings to collapse. These are the valuations we get in a steep cyclical downturn. The good news is I think they are widely expected.'

He adds that markets may have hit bottom - with a '60 to 70 per cent degree of probability. 'It's feasible to revisit the lows but our best guess is we do not break them.' He expects equity markets to end 2009 higher than current levels. On alternative assets, he likes the global macro hedge fund strategy and gold. The latter is a hedge against two events, which he says are not in Blackrock's base case scenario. One is a collapse of the US dollar, and the second is that the financial system continues to struggle to a greater extent than expected.

To some extent, deflation, he says, is beneficial as it lowers costs for households. 'What we have to worry about is an environment where price cuts are more widespread, deep and sustained. That is a genuine deflationary environment.'

Meanwhile, Mr Doll, in his 2009 forecast, said 2009 is likely to see a 'slow but noticeable' return to risky assets over safe assets. An equity bottoming process began in October, he wrote. 'Bottoming processes typically take months to complete with re-tests of lows possible. However, increasingly attractive valuations coupled with high degrees of scepticism, supported by massive sideline cash, lead us to believe that equities will have a positive, albeit volatile, year.


Here are Blackrock vice-chairman Bob Doll's predictions for 2009:

The US economy faces its first nominal GDP decline in 50 years.

Global growth falls below 2 per cent for the first time since 1991.

Inflation falls close to zero in many developed countries, but widespread deflation is avoided.
The US Treasury curve ends 2009 higher and steeper than where it began.

Earnings fall by double digit percentage again in 2009, the first back-to-back drop since the 1930s.

High yield, municipal and investment grade bond spreads narrow in 2009.

US stocks record double digit percentage gain.

US stocks outperform European stocks, while emerging markets outperform developing ones.
Energy, healthcare and information technology outperforms utilities, financials and materials.
Stock market volatility remains elevated as periodic double digit percentage rallies and declines occur.

Oil and other commodities bottom and move higher by year-end as emerging market economies begin to recover.

The US federal budget deficit soars past US$1 trillion as the government continues to grow.

Wednesday, January 14, 2009

2009: A year of two halves

AS unprecedented stress struck the core of the global financial system last year, it was clear to many observers that a worldwide recession was on the way. Citi analysts expect major industrial economies to contract well into 2009 as adjustments occur to raise the level of savings in these economies. And while the pace of contraction in global growth is expected to ease moving into the second half of the year, next year's expected economic recovery is forecast to be modest, with growth likely to remain below trends seen before the current crisis.

From a market perspective, this backdrop suggests investors should continue to expect 2008-style volatility in the early part of this year. Looking further ahead, though, downside risks to economic growth are expected to dissipate as global fiscal stimulus efforts gather speed and de-leveraging pressures ease. When this happens, the extreme valuations in equity and credit markets seen today should provide attractive opportunities for investors. For more tactically oriented investors, as we observed in our December column, a global recession does not preclude bear market rallies, even as markets continue on an underlying trend of decline. Such rallies, as seen in previous downturns, may be big, providing opportunities for more trading-oriented investors.

The Japanese experience of the 1990s has served us well so far in navigating the current crisis, and our experience with the latest global equity rally has been no different. During the 1990s when the Japanese market declined to below 1.5x book value, sizeable fiscal stimulus proposals tended to coincide with bear market rallies. On three occasions, prices rose as much as 45 per cent.

Likewise, after global equities fell to 1.2x book value in mid-November last year, and sizeable fiscal stimulus plans were announced around the same time, global markets rallied 25 per cent at their peaks last week. Fiscal stimulus proposals to date have come up relatively short of the stimulus delivered by Japan in the 1990s, which came up to 4-10 per cent of GDP. As a result, it is no surprise then that the recent rally was less robust.

Looking forward and with this sizeable rally behind us, investment returns are expected to shift from a focus on valuation and fiscal stimulus back towards the trends of economic contraction and earnings risk, as seen last September to October. Once again, drawing on Japan's experience in the 1990s, investors should find that, just as signs signalling the start of bear market rallies existed, a similar set of signs signalling their end existed. In particular, the Japanese bear market rallies of the 1990s tended to end near valuation peaks before the start of the valuation bubble years, or near 2.3x book value. Going back to the 1970s, Japanese equities tended to trade in a relatively stable range between 1.5x and 2.3x book value before they were dramatically re-rated during the Japanese asset bubble in the late-1980s. So, coincidentally or not, as the Japanese asset bubble burst, valuations proceeded to return to their pre-bubble valuation ranges of 1.5x to 2.3x book value. Putting the Japanese framework into the context of global equities, the equivalent pre-bubble range was about 1.0x to 1.6x book value. At last week's highs, global valuations, as measured through the MSCI World index, stood at near 1.5x to 1.6x book value, close to the high end of their pre-bubble range. This suggests that the supportive backdrop for a bear market rally, prospective fiscal stimulus notwithstanding, has eroded with the market rally.

For longer-term investors, Citi analysts believe further progress in the current downcycle is needed to create attractive opportunities to enter the accumulation phase for long-term equity exposure. In particular, moderation in expectations for global equity markets, such as 14 per cent year-on-year consensus earnings growth for global equities in 2010, is likely necessary before markets begin to bottom out in coming quarters.

Driving this troughing process, we anticipate, should be an easing of de-leveraging pressures in the global financial system. While large-scale capital raisings took place among global financials in the fourth quarter of 2008, to a large extent these fund-raisings have served only to stabilise balance sheets following losses earlier in the year. In 2009, we anticipate further capital-raisings and asset sales to drive the needed de-leveraging. Only as these catalysts emerge do we expect to see an increase in the historically extreme valuations and a sustained rally in equity and credit markets.

Norman Villamin is head of investment analysis & advice, global wealth management & global consumer group, Citi, Asia Pacific.

Smart money is on bailout winners

(NEW YORK) THE collapse of the US housing market helped Bill Gross outperform 99 per cent of his fund-manager peers over the past five years. Now he's betting on securities that may benefit from rescue efforts in Washington.

The 64-year-old co-chief investment officer at Pacific Investment Management Co is urging investors to anticipate which assets will benefit as the government struggles to boost the economy. Last week he recommended municipal bonds, inflation-protected Treasuries and debt the US government plans to buy. In the past six months, Mr Gross bought senior bank debt, agency mortgage securities and preferred shares in financial companies, all before the government did the same.

Mr Gross, who keeps the attention of investors through a combination of performance, monthly commentaries and television appearances, navigated through the worst credit crisis since the Great Depression, said Lawrence Jones, a senior mutual fund analyst with Morningstar Inc. Mr Gross's US$128 billion Total Return Fund, the world's largest bond fund, returned an average 5.4 per cent annually over the past five years, in part by avoiding riskier debt and asset-backed securities as early as 2005.

'If you are beating the competition, some people will idolise you,' said Mr Jones, who is based in Chicago. 'And some people will hate you and envy you. That's a natural thing.' Morningstar named Mr Gross manager of the year three times, including for 2007.

Newport Beach, California-based Pimco's Total Return Fund rose 4.8 per cent in 2008, while corporate and government bond funds tracked by Morningstar declined an average 8.1 per cent, according to data compiled by Bloomberg. The US$128 billion fund's five-year return was better than 99 per cent of its peers.

Mr Gross, a yoga enthusiast, credits a brainstorm that emerged while meditating with helping him steer clear of the credit market debacle that sent returns on high-risk, high-yield bonds down 26 per cent in 2008. Mr Gross wasn't available for comment, Pimco spokesman Mark Porterfield wrote in an e-mail.

Now, Mr Gross says debt sold by cities and states and some investment-grade companies is attractive. In early 2008, he started buying securities of New York-based JPMorgan Chase & Co and Charlotte, North Carolina-based Bank of America Corp, viewing them as getting protection from the Federal Reserve.

'It was a bold move,' Mr Jones said. 'Now we're seeing a rebound in various risky assets. Pimco is placing its bets by sticking to companies at the top of the economy's capital structure.' Mr Gross had his share of misses in the past year. Pimco held Lehman Brothers Holdings Inc bonds in at least 12 of its funds, including the Total Return Fund, and Mr Gross was buying the debt as recently as June 2008, data compiled by Bloomberg show. Lehman filed the world's biggest bankruptcy in September.

He started loading up on high-quality mortgage-backed securities guaranteed by Freddie Mac and Fannie Mae in 2008, while easing on Treasuries. Last year was the best for US government debt since 1995, with a 14 per cent gain, while municipal bonds lost 3.95 per cent and Treasury Inflation- Protected Securities, or Tips, lost 1.13 per cent, according to data compiled by Merrill Lynch & Co.

Mr Gross's decision to back out of a US$38 billion bond swap for GMAC LLC debt last year also helped drive his performance. The debt soared as much as 83 per cent to 80.5 cents on the US dollar after the auto financing company won approval to become a federally backed bank. Other holders participating in the exchange accepted as little as 60 cents on the dollar.

Pimco's prominence provides Mr Gross with opportunities that aren't available to all his rivals, said Geoff Bobroff, a mutual fund consultant in East Greenwich, Rhode Island. The firm, a unit of Munich-based Allianz SE, has about US$790 billion in assets under management.

The Total Return Fund has 81 per cent of its assets in mortgage-related securities and 16 per cent in investment-grade corporate debt, two of the fund's biggest positions as at Nov 30, according to information posted on the company's website.

The fund's biggest holding as at September was a 6 per cent Fannie Mae mortgage bond, according to data compiled by Bloomberg. 'A lot of his comments can be viewed as self-serving,' Mr Bobroff said. 'That's the problem of a manager who is so visible in the marketplace. Is he touting current advice or is he touting what he's already done?'

'Pimco's view is simple: shake hands with the government,' Mr Gross wrote in his commentary this month. 'Make them your partner by acknowledging that their chequebook represents the largest and most potent source of buying power in 2009 and beyond.'

Mr Gross, born in 1944 in the Ohio steel-company town of Middletown, graduated from Duke University with a psychology degree in 1966. He spent three years in the Navy and served in Vietnam.

Mr Gross joined Pimco after earning a master of business administration degree from the University of California in Los Angeles in 1971. He began using yoga more than a decade ago and credits his meditation sessions with clearing his head and helping him absorb unexpected news, such as a Fed half-point interest rate cut in January 2001. -- Bloomberg

Tuesday, January 13, 2009

We Love You So Much

Happy Birthday to you, Xin Ning.
From Mama & Daddy

This Recession Was Brought to You by the Letters U, V and L

A popular question [1] for economists lately has been what shape this recession will take. Will it be a “U,” a “V,” or maybe an “L”? Could we even find ourselves caught up in the roller coaster of a “W,” just when we think we’ve finally voted out that letter once and for all? What’s with the alphabet soup?

This categorization is a kind of verbal shorthand for describing the shape of the ups and downs of the gross domestic product and the broader economy. It’s not an exact science, which is part of the reason there’s so much debate [2] about which type the United States is experiencing. There’s no governing body or think tank tasked with crunching the numbers and officially declaring a recession one letter or another.

In general, V-shaped recessions are those that last for a few quarters, while the more unpleasant U-shaped recessions can drag on for up to a couple of years. It’s the difference between a head cold that clears your system in a week and a case of bronchitis that leaves you hacking into tissues all month.

V-shaped recessions are also considered to be shallower and less devastating in their scope, although this isn’t reflected in the letter-labeling. (No one’s asking about uppercase versus lowercase U’s and V’s, at least not yet.) V-shaped recessions are those in which GDP and correlating metrics like employment and sales don’t slide as much.

A V-shaped recession is what happened after the tech bust earlier this decade: GDP bounced back in a period of months rather than years. A U-shaped recession, on the other hand, is what the United States saw between November 1973 and March 1975: a 16-month slog the 1975 Economic Report of the President [3] characterized as “severe.” In describing U-shaped downturns, MIT economics professor and former IMF chief economist Simon Johnson used the visual [4] of a bathtub with steep, slippery sides.

Since World War II, the U.S. economy has tended more toward U-shaped recessions. Out of 11 recessions since 1945 (not counting this one), we’ve had six U’s, three V’s, and a W, which we’ll get to in a minute.

So, where are we now? Given that, as per the National Bureau of Economic Research’s recent announcement [5], we’ve officially been in recession for a year already and that prominent economists don’t think the big picture’s going to improve until at least the middle of next year, it’s safe to say we’ve already missed the boat for a quickie V-shaped recession.

There may be a silver lining to this gloomy prospect, though. Anirvan Banerji, director of research for the Economic Cycle Research Institute [6], points out that following the last two recessions, there was no large-scale domestic job creation (in fact, outsourcing spiked). By contrast, when the United States came out of its last two big U-shaped recessions—in 1975 and again in 1982—new jobs were created. While past results are no guarantee of future performance, as the disclaimer goes, there’s historical precedent to be hopeful.

Economists’ big worry is whether we could be headed for yet another letter of the alphabet: L. An L-shaped recession is when the economy falls off a cliff—and stays there for as long as several years. If this happened, it would more closely resemble the Depression or the Japanese economy during the 1990s (the only true L’s within the past century). NYU economics professor Nouriel Roubini puts the probability at one-third, with the greater likelihood being a U-shaped recession. But don’t start breathing into a paper bag just yet. L-shaped recessions are very rare; economists point out [7] that the Fed is policing the current economic downturn much more aggressively than its Japanese counterparts did in the 1990s, and Fed Chairman Ben Bernanke is well-known for his study of the government’s missteps in the 1930s.

There’s also yet another alphabetical term used to characterize recessions: W-shaped, which is a pair of back-to-back V’s. Think of them as “oops” recessions, since they happen when a nascent recovery is derailed—usually by poor monetary-policy decision-making—and the economy hits another trough before turning up again. For instance, the twin V-shaped recessions of the early ’80s are more properly considered a single W. In this case, the economy was collateral damage in the Fed’s battle against inflation. While cartoonists have a field day [8] with this, it’s not actually a Dubya-specific phenomenon.

By martha.c.white

Friday, January 2, 2009

CRISIS TIMELINE: Two years of financial mayhem

Since the start of 2007, the world's biggest banks, insurers and mortgage finance companies have collectively reported US$1.01 trillion of asset writedowns and credit losses and slashed 240,000 jobs - more than half of them in the US. Below is a timeline of the key events as the financial crisis unfolded. Compiled by CONRAD TAN

February 2007: In an early sign of the trouble ahead, London-based banking giant HSBC warns on Feb 8 that provisions for losses on its US sub-prime mortgages could exceed analysts' estimates by 20 per cent, reaching almost US$11 billion.

July 2007: Two hedge funds run by US investment bank Bear Stearns collapse on July 17 under the weight of losses from investments linked to US sub-prime mortgages, despite attempts by Bear in June to save them.

August 2007: Bear Stearns co-president Warren Spector is ousted on Aug 5. On Aug 9, France's largest bank, BNP Paribas, halts redemptions on three funds heavily invested in sub-prime mortgage-related securities.

September 2007: The Bank of England provides an emergency loan to UK mortgage lender Northern Rock on Sept 14, triggering the first run on a British bank in 140 years.
October 2007: Swiss bank UBS and US bank Citigroup reveal huge losses on investments linked to US sub-prime mortgages on Oct 1. On Oct 19, US stocks plunge on the 20th anniversary of Black Monday in 1987.

On Oct 30, UBS confirms a third-quarter net loss of 830 million Swiss francs (S$1.11 billion) after writing down US$3.6 billion on its sub-prime mortgage exposure.

The same day, US investment bank Merrill Lynch says its CEO Stan O'Neal is leaving, a week after the bank reported writedowns of almost US$8 billion.

November 2007: Crude oil prices hit a record high of more than US$96 a barrel on Nov 1 after an unexpected fall in US oil reserves. Swiss banking group Credit Suisse writes down US$1.9 billion and reports a 31 per cent drop in Q3 net profit.

On Nov 4, Citigroup chairman and chief executive Chuck Prince is forced to step down. Three days later, US investment bank Morgan Stanley announces a US$3.7 billion hit from its exposure to sub-prime mortgage securities.

On Nov 16, UK's Northern Rock announces the departure of its chief executive Adam Applegarth and most of its board.

On Nov 26, UK-based HSBC says it will provide up to US$35 billion in funding for two of its off-balance-sheet investment vehicles and move them on to its balance sheet to prevent a forced sale of their assets.

The next day, Citigroup announces a US$7.5 billion capital infusion from the Abu Dhabi Investment Authority to shore up its battered balance sheet.

December 2007: UBS writes down a further US$10 billion and, on Dec 10, announces a 13-billion Swiss franc injection of new capital from the Government of Singapore Investment Corporation (GIC) and a strategic investor from the Middle East.

Morgan Stanley becomes the first Wall Street firm to predict the US economy is likely to slip into a mild recession in 2008.

US commercial bank Washington Mutual says it will quit the sub-prime lending business, cutting 3,000 jobs.

French bank Societe Generale announces the US$4.3 billion bailout of an off-balance-sheet investment vehicle. Its move follows similar rescues by HSBC, Standard Chartered and Rabobank since end-November of so-called structured investment vehicles or SIVs to avoid the forced sale of SIV assets as market prices plunge.

On Dec 19, Morgan Stanley sells a US$5 billion stake to China's new sovereign wealth fund, China Investment Corporation, after revealing a Q4 loss of US$3.59 billion due to US$9.4 billion in mortgage-related writedowns.

On Dec 24, Morgan Stanley's Wall Street rival Merrill Lynch announces a US$6.2 billion fund-raising from private investors, including an injection of up to US$5 billion by Singapore's Temasek Holdings.

January 2008: Oil prices start the trading year on Jan 2 by setting a new record, rising above US$100 a barrel for the first time. On Jan 8, US stocks plunge amid speculation that Countrywide Financial, the country's biggest mortgage lender, may be forced into bankruptcy.
Jimmy Cayne, CEO of US investment bank Bear Stearns, says he plans to step down. Three days later, Bank of America says it will buy troubled Countrywide for US$4 billion.

On Jan 15, Merrill Lynch receives a US$6.6 billion capital injection from foreign investors including the Kuwait Investment Authority, Japan's Mizuho Financial Group and the Korean Investment Corporation through the sale of preferred shares.

Citigroup announces a US$12.5 billion injection of new capital to shore up its balance sheet from investors including Singapore's GIC, which pumps in US$6.88 billion. Citi says that it lost US$9.83 billion in Q4 2007 due to writedowns of US$18.1 billion.

Two days later, Merrill Lynch writes off US$11.5 billion of bad debt and reports a Q4 2007 net loss of US$9.8 billion.

On Jan 21, stock indices worldwide tumble as panic grips investors. In Singapore, the Straits Times Index plunges 6 per cent. The US market is closed for a public holiday, but the plunge in equities elsewhere prompts the US Federal Reserve to slash its benchmark interest rate by three quarters of a percentage point to 3.5 per cent in an emergency move one week before a scheduled policy meeting, to relieve pressure before US markets reopen. Eight days later, on Jan 30, the Fed cuts rates again, by half a percentage point to 3 per cent.

On Jan 24, France's Societe Generale shocks financial markets by unveiling a loss of 4.9 billion euros (S$9.85 billion) due to fraud, saying it will have to raise 5.5 billion euros to shore up its capital due to losses related to US sub-prime mortgages. The rogue trader responsible for the losses is later identified as Jerome Kerviel.

February 2008: The UK government formally announces its intention on Feb 17 to nationalise Northern Rock after failing to find a buyer for the troubled mortgage lender.

On Feb 19, Credit Suisse reveals US$2.85 billion of losses on structured credit positions due to mispricing, caused in part by some of its traders inflating the value of investments in mortgage-backed securities. On Feb 28, insurance giant American International Group (AIG) writes down US$11 billion of mortgage securities and reports its worst-ever quarterly loss.

March 2008: The US Federal Reserve leads a group of the world's largest central banks in a coordinated effort to inject at least US$200 billion of fresh liquidity into money markets in North America and Europe on March 11, just four days after the Fed announced a separate US$200 billion intervention.

On March 13, Carlyle Capital, a London-based bond fund affiliated with US private equity firm The Carlyle Group, goes bust after last-minute talks to renegotiate financing terms with its lenders collapse.

The US dollar slides against other major currencies, falling below 100 yen for the first time in more than 12 years. Crude oil hits a record US$111 a barrel and gold exceeds US$1,000 an ounce for the first time.

On March 14, the US Fed extends an emergency loan to investment bank Bear Stearns through its rival JPMorgan, after Bear's access to liquidity suddenly dries up. At this point, Bear, which was not a commercial bank, could not borrow from the Fed directly. Two days later, after a weekend of frenzied talks, JPMorgan says it is buying Bear for US$2 a share in a deal backed by the Fed. The price is a 93 per cent discount to Bear's last traded price of US$30 on March 14 and values the company at a mere US$236 million.

The Fed cuts its discount rate by a quarter of a percentage point to 3.25 per cent, two days ahead of a scheduled policy meeting on March 18, to prevent a run on major banks when markets reopen on March 17. Still, stock markets in Asia and Europe plummet on March 17 on fears that the sale of Bear Stearns at a massive discount could mean that other financial firms are also in serious trouble. The cost of insuring against default on corporate bonds soars, while the US dollar sinks to new lows against other major currencies.

Gold rises to a record US$1,030.80 an ounce, while US crude oil rises to a new high of US$111.80 a barrel. US stocks plunge at the start of trading as worries spread about the health of other financial firms such as Lehman Brothers, but recover by the end the day.

The next day, the Fed cuts its benchmark interest rate by three quarters of a percentage point to 2.25 per cent, the lowest level since December 2004. Although traders had expected a full percentage-point cut, the reduction sparks a surge in US stocks. The rise is helped by stronger-than-expected earnings reports from investment banks Goldman Sachs and Lehman Brothers.
On March 24, JPMorgan raises its offer for Bear Stearns to US$10 a share from US$2 and agrees to finance the first US$1 billion of any losses associated with the target bank. The new offer values Bear at some US$2 billion.

A week later, on March 31, US Treasury Secretary Henry Paulson announces a broad overhaul of Wall Street regulations, creating a set of federal regulators with authority over all players in the financial system. Lehman Brothers says it will raise at least US$3 billion of new capital to shore up its balance sheet.

News spreads that Swiss bank UBS is expected to reveal further writedowns of up to US$18 billion and seek a capital increase of about 13 billion Swiss francs later in the week. Citigroup unveils a sweeping restructure of its global business, separating them into four regions and breaking out its credit card business from its broader consumer banking segment.

April 2008: UBS chairman Marcel Ospel says on April 1 that he will not seek re-election at the Swiss bank's annual shareholders' meeting on April 23. The bank warns that it expects to lose a net 12 billion Swiss francs in the first quarter due to further write-downs of US$19 billion on its US investment holdings. It also says it will make a 15 billion franc rights issue to boost its capital.
On April 8, the International Monetary Fund warns that total losses and write-downs in the financial sector from the credit crisis could reach US$945 billion. The next day, oil futures reach a record US$112.21 a barrel in intraday trading and end at a record closing price of US$110.87, after a surprise drop in US oil inventories.

On April 10, the Chinese yuan rises to a record 6.99 against the US dollar, crossing the seven yuan per US dollar mark for the first time.

The Monetary Authority of Singapore effectively gives a one-time boost to the Singapore dollar to fight rising inflation by re-centring its undisclosed policy band for the trade-weighted Sing dollar or S$NEER at the prevailing level - widely believed to be near the top of the previous tolerated range. The Sing dollar rises 1.8 per cent to a record 1.3567 against the US dollar. Since MAS's previous statement on Oct 10, 2007, the Sing dollar has gained 7.4 per cent against the US dollar.

Rice prices exceed US$1,000 a tonne for the first time on April 17 as panicking importers scramble to secure supplies, worsening disruption already caused by export restrictions in Vietnam, India, Egypt, China and Cambodia.

Citigroup's chief executive Vikram Pandit says the financial group will slash its cost base by up to 20 per cent. Merrill Lynch says it will cut 4,000 jobs after suffering a US$2 billion Q1 2008 loss, bringing to almost 40,000 the number of jobs lost at financial companies since the onset of the credit crunch.

The next day, Citigroup says it suffered net loss of US$5.1 billion in Q1, its second consecutive quarterly loss, after writing down almost US$16 billion of soured investments. Citigroup also says it will cut 9,000 jobs in the next 12 months.

Oil futures close at a record high of US$116.69 a barrel as news about pipeline sabotage in Nigeria pushes up prices. On April 22, the UK's Royal Bank of Scotland unveils emergency plans to raise £16 billion (S$33.3 billion) through a £12 billion rights issue and asset sales. The rights issue is Europe's biggest to date.

Oil prices reach a record US$118.47 a barrel amid strong demand from China, attacks on oil facilities in Nigeria and concerns about the outlook for supplies from Saudi Arabia.

May 2008: America's AIG says on May 9 that it suffered a record net loss of almost US$8 billion in Q1 2008 due to massive writedowns on credit derivatives and losses on its investment portfolio. The insurer says it plans to raise US$12.5 billion in new capital. Standard & Poor's and Fitch both downgrade their ratings of the company.

Crude oil futures close at a record US$125.96 after climbing as high as US$126.25 a barrel during the day. On May 22, oil futures reach a new high of US$135.09 a barrel in intraday trading after repeatedly breaking previous records earlier in the month.

Swiss bank UBS, one of the worst affected by the credit crunch, launches a 15.97-billion franc rights issue to cover its losses on assets linked to US mortgage debt.

June 2008: UK bank Barclays announces a plan on June 25 to raise £4.5 billion from foreign investors including Qatar Investment Authority to bolster its balance sheet.

July 2008: Oil prices reach an all-time high of just over US$147 a barrel on July 11. In an emergency move on July 13, after a weekend of desperate negotiations, the US Treasury and other government agencies say they will provide liquidity and capital support to US mortgage finance giants Fannie Mae and Freddie Mac, which account for almost half of the outstanding mortgages in the US. The share prices of both firms had plunged the previous week as investors feared that falling US house prices and rising defaults on mortgages would drag them into bankruptcy. The same day, US mortgage lender IndyMac Bank collapses, the second-biggest bank failure in US history.

On July 15, stocks in Asia slump as news emerges that some of the region's biggest banks had billions of dollars invested in debt securities issued by Fannie Mae and Freddie Mac.

August 2008: In a settlement with US regulators over the latest scandal to engulf Wall Street, Citigroup and Merrill Lynch announce on Aug 7 that they will buy back a total of up to US$20 billion in bonds known as auction-rate securities from investors, after some claimed that they were misled by the banks' advisers.

A day later, UBS agrees to buy back US$18.6 billion of auction-rate securities to settle charges of misleading investors over the securities.

Other banks including JPMorgan Chase, Morgan Stanley, Goldman Sachs, Deutsche Bank and Wachovia Corp soon follow with their own settlements. Shares in American International Group (AIG) plummet on Aug 7 after the insurer reports a loss of more than US$5 billion on mortgage-related exposures.

Shares in Fannie Mae and Freddie Mac plunge further after both report multibillion-dollar quarterly losses. Fears grow over the fate of both firms, as well as that of Lehman Brothers, which is trying desperately to raise cash from investors in China and South Korea. Oil falls to US$115 a barrel.

On Aug 12, UBS announces plans to separate its wealth management, investment banking and asset management business units, after reporting a fourth straight quarterly loss and massive withdrawals of funds by clients. UK chancellor Alistair Darling warns on Aug 30 that the country faces its worst economic downturn in 60 years.

September 2008: The US government takes over Fannie Mae and Freddie Mac on Sept 7 in one of the biggest bailouts in US history after a weekend of frantic talks, reminiscent of the dramatic attempt to save Bear Stearns in March. Investors' fears turn to the four remaining independent Wall Street investment banks - Lehman Brothers, Merrill Lynch, Morgan Stanley and Goldman Sachs - as well as insurer AIG.

After days of searching frantically for a buyer, Lehman files for bankruptcy protection on Sept 15, while Merrill agrees to be taken over by Bank of America for US$50 billion, capping Wall Street's worst-ever weekend.

On Sept 16, financial markets worldwide plunge into chaos. The US government announces an US$85 billion emergency loan for AIG to save the insurer from bankruptcy, in exchange for a 79.9 per cent stake in the company.

As news of Lehman's collapse and the extraordinary takeover of Merrill spreads, markets in everything from stocks and currencies to credit derivatives strain to cope with the fallout.
Stunned investors flee equities for government bonds and gold, while interbank lending rates jump to record levels as banks jealously hoard cash, causing credit markets to seize up.
A day later, HBOS, the UK's biggest mortgage lender, is taken over by Lloyds TSB in a £12 billion deal after a run on HBOS shares. Stocks worldwide continue to gyrate wildly. In Russia, trading is halted indefinitely by regulators.

On Sept 18, central banks worldwide inject US$180 billion of US-dollar liquidity into money markets in a desperate bid to lower interbank borrowing costs and calm financial markets.
The next day, regulators in the US and UK ban the short-selling of shares in financial companies, blaming it for recent declines in financial stocks. News emerges that the US government is preparing a plan for a mass rescue of the financial sector.

On Sept 21, Goldman Sachs and Morgan Stanley, the last surviving independent investment banks on Wall Street, receive emergency approval to become commercial banks, to avoid the fate of Lehman and Bear Stearns. Australia, Taiwan and the Netherlands join the US and UK in announcing restrictions on short-selling to prevent investors from betting that stocks will decline.

On Sept 24, Hong Kong's Bank of East Asia faces a run by depositors after rumours spread that the bank has liquidity problems. Its shares plunge. The Hong Kong Monetary Authority says it will provide full liquidity support to the bank, if necessary.

In the US, the Fed increases its swap lines with other central banks, adding Australia, Norway, Sweden and Norway to a list that includes the European Central, the Bank of England and the Bank of Japan.

The next day, Washington Mutual is seized by regulators and sold to JPMorgan Chase for US$1.9 billion, making it by far the biggest bank failure in US history to date. A bailout plan for the financial sector is mired in doubt as US lawmakers argue over details including safeguards over the use of taxpayers' money.

On Sept 28, US policy-makers announce a tentative deal that will allow the US Treasury to buy up to US$700 billion in troubled assets from ailing banks.

In Europe, banking and insurance group Fortis is bailed out by the Belgium, Dutch and Luxembourg governments. The next day, US lawmakers reject the bailout plan by a narrow margin, throwing financial markets into disarray. The Dow Jones index plunges a record 778 points or 7 per cent, while the S&P 500 index falls 8.8 per cent.

Wachovia agrees to be bought by Citigroup in a deal backed by US regulators. UK banking group Bradford & Bingley is bailed out, as is Iceland's third-largest bank Glitnir, while the German government announces plans to rescue Hypo Real Estate, one of the country's biggest banks.
On Sept 30, Ireland's government guarantees deposits and debts at six financial institutions after Irish banks suffered the biggest one-day fall in their share price for two decades on Sept 29.

Central banks worldwide again flood interbank markets with money. The overnight US-dollar London interbank offered rate or Libor, the rate that banks charge one another to borrow US dollars, jumps to 6.9 per cent from 2.6 per cent a day earlier, the biggest-ever one-day increase.
European bank Dexia is bailed out by the Belgian, French and Luxembourg governments.
October 2008: US lawmakers approve the sweeping rescue plan aimed at saving the financial sector. Stocks in the US fall after the vote is announced on Oct 3, ending the week with their worst performance since markets reopened after the Sept 11, 2001 terrorist attacks.

Economic data shows the US labour market lost 159,000 jobs in September, the biggest decline since March 2003.

Central banks pump more money into the banking system, lowering overnight Libor. But three-month Libor rates for interbank loans in pounds, US dollars and euros continue to rise. The spread between three-month dollar Libor and three-month US Treasury bills reaches record levels as investors seek the safety of US debt and shun lending in the money market.
US bank Wells Fargo makes a surprise offer for Wachovia, trumping Citigroup's earlier deal to buy the bank. Two days later, on Oct 5, the German government guarantees savings in all German bank accounts to avert panic after a rescue plan for Hypo Real Estate collapses.
The next day, the Danish government guarantees all bank deposits in Denmark.

On Oct24, The Straits Times Index suffers its biggest one-day fall in almost two decades, ending one of its worst weeks in recent memory. The stock benchmark plunges 8.3 per cent - its biggest percentage drop since Oct16, 1989 - to finish the week with a staggering loss of 14.8 per cent.

On Oct 7-8, Iceland's government formally seizes its three biggest banks - Kaupthing, Landsbanki and Glitnir - as the entire country teeters on the brink of economic collapse. On Oct 8, central banks in the US, Canada, UK, eurozone, Sweden and Switzerland cut rates simultaneously in an unprecedented joint effort to stabilise financial markets and to lower borrowing costs. China also lowers interest rates.

The UK government announces plans to pump up to £250 billion into the country's largest banks, including the Royal Bank of Scotland, Lloyds TSB and HBOS, to boost their capital, and provides a further £250 billion in guarantees for new debt issued by UK banks.

Days later, on Oct 14, the US government decides to use the first US$250 billion of US$700 billion in bailout money - originally intended for buying troubled assets from banks - on a similar plan to buy direct stakes in banks in an attempt to restore confidence to the financial sector.
On Oct 15, the Dow Jones index fell 7.9 per cent - its biggest percentage fall since Oct 26, 1987 - as new data shows the US economy slipping into recession. The next day, the Straits Times Index slumps 5.3 per cent, extending its two-day decline to 8.3 per cent.

After trading ends on Oct 16, the Singapore and Malaysian governments say they will guarantee all bank deposits, following similar moves by governments elsewhere, including Hong Kong, Indonesia, Australia and New Zealand.

Switzerland's government announces a sweeping rescue of its entire banking sector, including emergency cash infusions from the public purse for UBS and a toxic-asset dump for removing troubled assets from banks' balance sheets.

Despite the unprecedented efforts to calm financial markets, stocks worldwide continue to fluctuate violently as the damage from the credit crisis spreads to the broader economy.
Analysts grow increasingly worried that the three biggest us carmakers - General Motors, Ford and Chrysler, which have suffered from plunging sales amid a weakening economy - could collapse, causing hundreds of thousands of job losses and triggering further chaos in financial markets.

On Oct 24, The Straits Times Index suffers its biggest one-day fall in almost two decades, ending one of its worst weeks in recent memory. The stock benchmark plunges 8.3 per cent - its biggest percentage drop since Oct 16, 1989 - to finish the week with a staggering loss of 14.8 per cent.

On Oct 29, the US Fed extends temporary swap lines to Singapore, Korea, Brazil and Mexico to ensure sufficient US-dollar liquidity in the respective banking systems.

A day later, the Fed cuts its key interest rate to one per cent from 1.5 per cent.

November 2008: On Nov 5, Barack Obama wins the US presidential election. The next day, the International Monetary Fund (IMF) warns of a global recession in 2009 as the outlook for the world's biggest economies deteriorates further.

The IMF extends a US$16.4 billion emergency loan to Ukraine on Nov 6 to shore up its economy. Later in the month, the IMF approves emergency loans to Iceland on Nov 20 and Pakistan on Nov 25 to stabilise their economies.

On Nov 7, DBS Group says it will slash 6 per cent of its work force or some 900 jobs by the end of the month, as it reports its worst quarterly performance since the end of 2005. Two days later, China announces a four-trillion yuan (S$840 billion) stimulus plan to spur economic growth. On Nov 17, Citigroup announces plans to slash some 50,000 jobs worldwide, aiming to reduce its headcount to 300,000 'in the near term' from 352,000 at the end of September.
On Nov 23, the US government announces a US$20 billion rescue plan for Citigroup after its shares plunge more than 60 per cent in a week.

On Nov 25, the US Federal Reserve says it will inject another US$800 billion into the economy. A day later, the European Commission unveils a 200 billion euro plan to spur economic growth.
December 2008: The US National Bureau of Economic Research confirms on Dec 1 that the US economy is in a recession that started in December 2007.

On Dec 4, Credit Suisse says it will slash 5,300 jobs or 11 per cent of its global work force by the middle of 2009, as it warns of massive losses from its investment banking business. A week later, Bank of America says it will cut up to 35,000 jobs after its takeover of Merrill Lynch.
On Dec 9, the yield on three-month US Treasury bills fall below zero for the first time in history. Yields on other US government securities also reach all-time lows as investors, desperate for safe havens ahead of the year, become effectively willing to pay the US government a fee to safeguard their money for later.

The World Bank warns that international trade volume is likely to contract in 2009, for the first time since 1982.

On Dec 11, Bernard Madoff, a US money manager based in New York, is arrested after confessing to running a US$50 billion Ponzi scheme. The news sends shockwaves through the global financial community as investors ranging from hedge funds to wealthy individuals scramble to estimate their losses from the biggest fraud in history. On Dec 16, the Fed slashes its benchmark interest rate from one per cent to a range of zero to 0.25 per cent, the lowest since records began.

Three days later, Japan's central bank cuts rates to 0.1 per cent from 0.3 per cent, as the government warns that the economy will stagnate in 2009.

In the US, the government agrees to lend up to US$17.4 billion to its biggest carmakers - General Motors, Ford and Chrysler - to keep them afloat until early 2009.

On Dec 22, DBS Group warns that its net profit is expected to slide further in Q4, as it announces plans to raise some S$4 billion in new capital through a rights offer.

On Dec 30, the US Treasury injects US$5 billion into GMAC, the financing arm of General Motors, and lends another US$1 billion to GM to be re-invested in GMAC. The government bailout extends the ability of cash-strapped GMAC to lend to car buyers, which it hopes will boost sales of ailing US carmakers.

Source: Various news reports, bank statements
Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.