Will 2008 be worse?

I hope you all had a peaceful and restful Christmas holiday I am back in the office today Thursday December 27th. One of the things that really irk me around this time of year is the relentless advertising by companies to buy, buy,and buy most of the times things that you really don't want. Christmas has become a huge consumer monster where is it said you must buy enough food and drink to feed the five thousand, OK if you have a large family you can buy in bulk within reason but the constant rantings by Tesco, Morrison, Marks & Spencers to buy more food (that ends up in the bin) is nonsense. Also the sales and mother of all sales and it's not even new year. People are behaving like sheep no need to panic the retailers already have a plan to write down stock from previous sales that did not sell then entice you with "70% OFF" then folk who already are on tight budgets extend themselves even more believing they have scooped a bargain when in reality they have not and curse themselves for spending the rent or mortgage money. I have news don't believe the hype the pain in the banking and housing markets are real we are living beyond our means and have to pay for all that reckless spending. Debt charities are gearing up for the calls around overspending and debt. January is a bleak time with credit card bills, missed mortgage and rent payments simply because people want to enjoy themselves during the festive season and ignore responsibilities. Banks are now rejecting 40-50% of all credit card applications, interest rates have also gone up for credit card debts as people struggle with back busting mortgage payments. The sad thing about all this consumerism is that over half the gifts are not wanted, not planned and will probably end up in the bin or be recycled. Most are impulse buys, so don't be like sheep and don't believe the hype.

More bad news ahead in 2008 for Merrill Lynch, Citigroup and banks in general as the losses keep mounting. However should we feel sorry for the banks? Not really they created this mess and produced "Junk Products" put simply they are stuck with their own products they can't shift them and now have to write them off. This credit crunch will probably linger for a while as Merrill will probably write down a further $4-7bn in Q4 ,and Citi billions more. "It will be a couple of quarters before the current credit crisis is fully digested by the markets," the analyst, William Tanona, wrote on Thursday.

The analyst issued his forecast after banks said they would write off tens of billions of dollars of debt this quarter, as rising mortgage and credit losses led investors to shun debt once thought safe but now deemed risky. Citigroup replaced Chief Executive Charles Prince with Vikram Pandit, while Merrill replaced Chief Executive Stanley O'Neal with John Thain.
Citigroup, Merrill and JPMorgan did not immediately return calls seeking comment.
Tanona, who rates Citigroup "sell," said the largest U.S. bank may have to write off $18.7 billion this quarter for collateralized debt obligations. That's up from his prior $11 billion forecast, and higher than Citigroup's $8 billion to $11 billion forecast. Tanona boosted his forecast for the bank's fourth-quarter loss to $1.33 per share from 52 cents.
The analyst also said Citigroup may in 2008 cut its 54-cents-per-share quarterly dividend, equal to a 7.1 percent yield, to help raise or preserve another $5 billion to $10 billion of capital. In November, Citigroup shored up capital by selling a $7.5 billion stake to Abu Dhabi's government.

Tanona said Merrill, rated "neutral," may write off $11.5 billion for CDOs this quarter, up from his prior $6 billion forecast, as Thain tries to clean up problems now rather than let them fester in 2008. The analyst expects a fourth-quarter loss of $7.00 per share, up from his prior $1.50 forecast.

Brad Hintz, a Sanford C. Bernstein & Co analyst, separately on Thursday predicted a $10 billion fourth-quarter write-off at Merrill, leading to a $5.10 per share quarterly loss.

So my prediction for 2008 is more of the same as in 2007 but worse, whatever is happening cannot be stopped these things have to happen no matter how the Fed or BOE tinker a lot of these happening were foretold. We are after all my friends living in the last days of earth's history. Take sometime out and reflect and look at the problems we are seeing when has it ever been this bad?

As I write we are hearing that Benazir Bhutto has been killed by injuries from a bomb blast, what now Pakistan? Also bear in mind we have a election in America in 2008 that will be very important for the world also the candidates. Will we have a woman president or the first black president of the USA? whatever happens it will centre around the economy, immigration, the war on terror and America's standing in the world that will have a knock on effect for all of us as my grandad use to say "Saddle Up" we are in for a rough ride.

On closing those of us who have seen the movie "Minority Report" where a person is arrested before they commit the crime take notice where in the film identification was checked by a series of Iris scans against a database, the FBI have announced they have cameras that can scan one's Iris from 15 feet away also facial recognition, true they are in the process of building the world's largest bio metric database, whatever next?

Morgan Stanley bailed out by Beijing

Morgan Stanley yesterday announced $9.4billion of write downs predominantly from mortgage related exposure. The loss of $9.4bn in the first quarter is the first in the bank’s 73 year old history. The write down took the bank to a $3.5bn dollar fourth quarter loss and was so severe that the bank was forced to agree a $5billion cash injection from the Chinese Government to prop up its capital base.
In exchange for $5bn from China Investment Corp (CIC), China’s sovereign wealth fund, CIC will get, says Tom Stevenson in The Telegraph, "a 9% coupon on convertible shares that will give it a 10% stake in the bank within three years." So in other words, in exchange for $5bn now, Morgan Stanley will pay China $450m a year for the next three years, after which the Chinese government will own one-tenth of the bank. Morgan Stanley’s market cap this morning was around $53bn, even after the shares have fallen more than 25% since the start of this year, So that doesn’t look a bad deal at all for the Chinese.
So as China and the Arab states diversify their Dollar holdings we have seen over the past months Banks in particular receiving huge cash injections as the credit crunch continues more of these institutions will have no other method of attracting this money and at times may be forced to go cap in hand. Who said America was not for sale?

Below are some institutions who have received foreign investment. I have named the banks,investors, amount invested and stake in the bank as a percentage.

Morgan Stanley- China Investment Corp $5bn 9.9% stake
Barclays- China Dev Bank $4.4bn 5.2% stake
Blackstone- China Investment Corp $3bn 9.4% stake
Fortis- Ping An Insurance $2.6bn 4.18%stake
UBS- Singapore Invest Corp $11.2bn 11.5%stake
Citigroup- Abu Dhabi Invest Auth $7.5bn 4.9%stake
Standard Chart -Temasek Holdings $4bn+ 15.3%stake
Carlyle Group- Mubadala (Abu Dhabi) $1.35bn 7.5%stake
Standard Chart- Istithmar (Dubai) $1bn 2.7%stake
HSBC- Dubai International "Substantial stake"

Should we be worried about foreign governments buying our companies?
This does all raise a difficult question though. How important is it that foreign governments are gaining increasing control of key assets across the world?
It’s easy to get sidetracked on this topic - on the one hand, we pride ourselves on our free and open markets. On the other, should we be worried about foreigners controlling our companies and the jobs that result from them?But really, it’s not that difficult. As other commentators have pointed out, we learned through a long and painful process in this country that governments are not great at running anything. It’s something that some people are still learning – most notably anyone who still supports the idea that the government should be allowed to build a national ID database. If we don’t trust our own government to run companies efficiently, then it’s unlikely that your average foreign government is going to run things any better. And more to the point, while we can kick our own government out (eventually), we have no control over the make-up or in general, the actions of a foreign power. This isn’t meant to be scaremongering jingoism. The point is that through our ill-considered economic policy of "spend yourself rich", the US and the UK in particular now find ourselves in no position to negotiate when wealthy foreign governments want to cherry-pick our assets. As thousands of homeowners are about to find out, it’s never a good idea to be a forced seller. You place yourself at the mercy of the buyer, which is never a good position to be in, regardless of how benign the buyer’s motivations are. At best, you’ll get a low-ball offer - at worst you’ll get completely shafted.Let’s hope that China and all the other sovereign wealth funds are feeling benevolent when they start running the slide-rules over the rest of the West’s family silver.

Credit Crunch Still Biting:
Citigroup have failed to secure $10billion in financing for Vladimir Potanin, the Russian oligarch, because of turmoil in the credit markets. Also Liverpool FC have had to cutback on more ambitious plans for their new development in Stanley Park the problems in securing £300million for the new stadium have forced the owners Hicks and Gillette to scale back plans.

Sterling due for correction:
The Bank of England have signalled that they will cut interest rates next month due to better than expected inflation figures. As the economy slows and the Credit crunch bites the already fragile housing and retail sector hope that lower rates will kick start the flagging economy but with forecasts showing 45,000 homes to be repossessed next year home owners are hoping for some sort of relief. Sterling will go lower based on the BOE’s intention for the first time in three months it dipped below $2.00 and was trading at approx 1.9869 expect it to fall lower.

Central Banks act on meltdown fear

Mid October 2007 when the central bank and governors and finance minsisters from the G7 countries met in Washington they thought the worse of the global credit crunch might be over, far from it we are now in mid December and the central banks have been forced to act. Yesterday around 2pm GMT The Bank of England, Federal Reserve, The European central bank, Bank of Canada and the Swiss central bank announced they were combining forces to release into respective economies $100bn. This release of money via auctions is to prevent the worsening credit crunch derailing the world economy. Put simply commercial banks are not lending to each other due to the losses from the sub-prime fall out, confidence has been sapped as banks are hoarding cash mainly to balance their books for the end of year. Libor and Interbank interest rates are at 17 year highs as continual losses are announced by banks. Just this week UBS announced a further $11bn writedown on loans and with others due to report Q4 results who knows what lurks around the corner.

Whilst the injection of cash from the Central banks are seen as a good thing we can't simply think this alone will fix the credit crunch. The following needs to happen:

Libor-The London Interbank Offered Rate needs to come down this is the rate that banks lend to each other and for the past three months it has been very high.

The billion-pound write downs by banks and their holdings of complex trading instruments coming to a halt. This will mean that the value of collateralised debt obligations (CDO's) which contain many of the sub prime mortgages in the US will have stabilised.

Debt markets starting to open up, with companies again able to turn to the financial markets to raise fresh money in the form of long-term debt and short term commercial paper.

Securitisations of the type which got Northern Rock into trouble once again emerging.

Just how the markets react over the coming days and weeks are crucial to this ploy by the Central banks working. Just late tonight the Libor rate has not reacted to the announcement by the Central banks but these are early days the Bank Of England's first auction is the 18th of December.

Normal services will only resume when these multi-billion losses diminish.

The threat of higher inflation is a concern but the Central banks really have to hope the credit crunch does not take hold as this will be a global problem with slower growth and recession.

As discussed in previous blogs the Federal Reserve cut interest rates by 0.25% basis points both the Funds rate and Discount rate were cut, however the markets expected more and we had a huge fall on share prices as clearly markets were disappointed. Many had expected a 0.50% cut but Bernanke and the Fed are worried about the problems of inflation so rates will remain at 4.25% for the time being. The main worry however is the economic slowdown, and the falling dollar as 2008 will probably herald what we have all been speculating a Recession. American investors hoped the rate cut would have eased fears around the housing slump and the worsening credit squeeze as banks are still reluctant to lend to each other many are sitting on huge reserves but with the discount rate above the fund rate for interbank lending some banks are seeking alternative sources of liquidity. The fact to remember is the Fed does not have the cure to the markets ills, they can only do so much "Monetary Policy" is the key role of the Fed and whilst the markets had priced in a rate cut Bernanke must get the balance right.

The fall out continues from the Sub-prime crisis as UBS this week announced another write down of $10bn taking the total lost by the bank to $13.5bn. This after UBS telling us in Q3 they did not see anymore significant losses. So what doe this mean? Well many banks will now be reviewing and looking at the book value of these CDO's and SIV's they have on their books. Sad to say we have not even scratched the surface of sub-prime losses expect more revelations over the coming weeks and months. Banks will look to source other cash revenues just as Citigroup went cap in had to Abu Dhabi, UBS have received a cash injection of $9.7bn with the bulk of the money coming from the Singapore Government and the Oman Government pumping in $1.75bn. It's further evidence of the transfer of financial power from the western economies to the great cash generating economies of Asia, Russia and the Middle East - which are able to dictate the terms on which they prop up important institutions,"

This coming on the worries by CIBC banking analyst (Meredith Whitney) that Citigroup is in worse shape than thought. Whitney believes that Citigroup needs to raise $30 billion of capital, and may have to do things like sell assets, issue new stock or cut its dividend, which pays out $2.7 billion of cash each quarter. My major worries is that Citigroup will announce huge losses, probably they should under new boss Vikram Pandit and then concentrate on getting the bank back to profit. Pandit is a ex-Morgan Stanley who left the bank to set up "Old Lane Partners" a hedge fund that he later sold to Citigroup for $800m. Note that Pandit's management team at Citigroup will consist of four ex-bankers from Morgan Stanley. We all await Q4 losses from Citigroup with abated breath who says another $11bn?

Losses announced by banks thus far look like this: (As of 11th December 2007- Freddie Mac announced further losses of $10-12bn)

UBS: $13.5bn
Citigroup: $11bn
Merrill Lynch: $8bn
Morgan Stanley $3.7bn
HSBC: $3.4bn
Bear Stearns: $3.2bn
Deutsche Bank: $3.2bn
Bank of America: $3bn
Barclays: $2.6bn
Royal Bank of Scotland: $2.6bn
Freddie Mac: $2bn
Credit Suisse: $1bn
Wachovia: $1.1bn
IKB: $1bn
Source: Company reports

As the housing market in the UK starts to splutter under the credit crunch it will become harder for those looking to enter the housing market also those who wish to re-mortgage. 1.4 million UK house owners who have fixed rate mortgages that re-set in 2008 will see payments rise on average £200, forecasts next year for repossessions are for 45,000 homes.

So what stocks and funds can you invest in during this crisis, I will look at giving some tips next time.

Can Bernanke cut rates again?

December 11th 2007 the FOMC (Federal Reserve) meet for the last time this year and will decide if they can cut interest rates again to stimlate the ailing American economy. We must bear in mind that these rate cuts take time to affect the economy in some cases 12-18 months we call this "lag" So why are the Americans considering cutting rates and the UK watching the situation before taking action? Well Ben Bernanke and the Fed are more concerned on economic growth and will do anything within reason to stave of recession. The Bank Of England however are more concerned about inflation, remember target 2.0 from my previous post? The UK inflation rate is currently 2.1% with Merv King's guidelines, however with rising oil prices and food prices the threat of inflation going higher is a reality the Bank of England are worried about, so although the UK economy is slowing in particular the housing market many expect The BOE to cut rates if at all in early 2008. Now this could all change should we really have a sluggish run up to Christmas spending, however last weekend's spending spree in and around Oxford street saw reported sales of £100 million quid not bad this had high street retailers smiling with all the gloom of tighter credit, a very wet english summer and some retailers stuck with very high stock levels this just might be what they need. But I hate to be the party pooper bear in mind the mortgage debt levels, credit card debt, housing loan applications at a real low will people really be spending? I think so then the real pain comes in January 2008 when the excess needs to be paid off. I am giving the gift of cash this year for I believe the real bargains will be early to late January, many stores will slash prices for December 26th so my advice wait and grab yourself a real bargain don't be like sheep timing is everything.

Back to Bernanke and the rate cut my concern will be the fall of the dollar already at all time lows it will take a battering and probably hasten massive sell offs as investors already fed up with poor returns look else where. The other fall out from those holding dollar assests and curencies pegged to the dollar is inflation and recession, America can and will export recession no ifs or buts. You ask most economists some say recession has arrived, others state it is a real possibility and Bernanke knows he is in a very very tight spot.

Do yourself a favour and buy this book "The Dollar Crisis causes, consequences and cures" written by Richard Duncan a very informative book and worth every penny, you see why we are all in this mess dealing with the "Gold Standard" Bretton Woods and the Dollar as the reserve currency of the world.

How many of us have heard about Sultan Ahmed Bin Sulayem? He is from Dubai and runs a Dubai fund that have bought The QE2 complete with Tilbury and Southampton docks where the cruise liner berths. Barneys the upmarket department store in New York, two buildings on Park Avenue, and the nearby W Hotel in Manhatta: a share of London based Standard Chartered Bank;beaches across Africa from Zanzibar to Cape Town and half of the Las Vegas Strip. Such is the spending power of Arab and Chinese funds they can buy whatever they want. Only this week Sheihk Ahmed bin Zayed managing director of Abu Dhabi's sovereign wealth fund dipped into his top draw and injected $7.5bn dollars of much needed funds to Citigroup the world's largest bank. His investment will earn around 10% annually, 4.9% of Citigroup convertible stock and the bank stumps up 11% interest rate costs this shows just how desperate the bank is to get its hands on new capital. Markets in turmoil yes but Citigroup were in trouble some time ago. Expect these funds to take equity posistions in banks that need capital and already squeezed by the credit crunch. Morgan Stanley estimates that the worlds funds hold some $2.5 trillion dollars in assets and are adding $500 billion every year. The days of America as a financial superpower are over.