On the 9th of March this year the Dow closed at 6547,its lowest close in more than twelve years.It has come a long way since then,closing at 8185 yesterday,a gain of over 25% in about seven weeks.Although it needs to put on another 75% from current levels to be anywhere near the peak of 14164 that it touched on October 9th 2007,the present rally is nothing short of spectacular and somewhat inexplicable considering that things have not really improved much.
In a recent report the I.M.F. has estimated that global losses due to the present crisis may touch $4 trillion.It had originally estimated that total losses would be only about $1 trillion,a figure which has already been exceeded.The U.S. Fed acknowledges that the U.S. economy continues to contract,although the speed of the fall has slowed somewhat.
At the bottom of the mess are the toxic assets,primarily mortgage backed securities that the financial system is saddled with.Not only have they lost value but they are also extremely illiquid.Almost all financial institutions have been compelled to undertake distress sales of blue chip assets to cover the losses caused by these securities.The Fed has now announced that it will buy up to $1.25 trillion worth of such securities.This is welcome news to the holders of these securities as it will not only improve liquidity but may also serve to set benchmarks for valuing these otherwise hard to value assets.This in turn may also lead to a revival of sorts in the market for these assets.
So where does the Dow go from here?This is a trillion dollar question.Certain things have to be kept in mind before taking a call on its future direction.According to Roubini the financial system will have to writedown another$2.4 trillion in losses.The I.M.F. puts the figure closer to $2 trillion!Considering that U.S. companies have only written down about $1 trillion so far it would appear that we are not even halfway through the process.The financial sector accounted for almost 8% of G.D.P. and almost 35% of corporate profits.What cannot be ignored is that the weightage of the top financial companies like G.E.,A.I.G.,BoA,Citigoup etc.along with G.M.,put together, was about 25% before the crisis started.These companies are now worth a fraction of their earlier value and are in fact battling for survival. Even if they do survive, thanks to intervention by the government it is going to take them several years to regain their financial health.In this scenario it may not be long before the Dow starts its downward journey once again.
Thursday, April 30, 2009
Wednesday, April 29, 2009
U.S. Economy Slides 6.1% In Obama's 1st 100 Days.
Figures released early Wednesday showed the U.S. economy shrank at an annualized rate of 6.1% during the first hundred days of Obama's Presidency.These figures were worse than expected. Experts had predicted a decline of about 5%.
To be fair to Obama he has not been able to set any economic agenda.He inherited an economic meltdown and has been simply trying to get the economy back on track.So far, all he can be credited with is the passage of a $787 billion stimulus plan.The stimulus plan has also not led to any significant increase in government spending so far.Government spending has actually declined by almost 4% in this period. Both home prices and home sales continue to fall, and unemployment continues to rise.
Many see the first glimmers of hope . Consumer sentiment has shown a marginal improvement and consumer spending is showing signs of stabilising.The benefits of increased government spending and tax cuts are also expected to kick in from the month of May, and Wall Street is back to where it was when Obama took office.Nevertheless the fact is that the economy continues to be as bad as it was in the last quarter of last year when it contracted at an annual rate of 6.3%.
Many experts caution against being overly optimistic about the near future.They say that the current optimism stems from the fact that companies have announced quarterly results that are not as bad as expected.But this does not take away from the fact that both sales and profits continue to fall, it is just that the rate of fall is slightly slower.They emphasise that the jobless rate is at 8.5% and will in all likelihood hit 10% by the end of the year.U.S. exports have fallen 30% and are unlikely to revive any time soon. Spending on home building as well as fresh business investment are all down sharply.A 2.2% increase in consumer spending can best be described as a blip.This is because increasing unemployment, declining wealth and tougher lending conditions will continue to exert a downward pressure on consumer spending and thereby on manufacturing.High unemployment will also raise default levels on both consumer and corporate loans which will further affect the health of the financial system
Clearly the economic crisis is still to find its trough. There is more pain to come.Recovery is bound to be a slow and lengthy process.
To be fair to Obama he has not been able to set any economic agenda.He inherited an economic meltdown and has been simply trying to get the economy back on track.So far, all he can be credited with is the passage of a $787 billion stimulus plan.The stimulus plan has also not led to any significant increase in government spending so far.Government spending has actually declined by almost 4% in this period. Both home prices and home sales continue to fall, and unemployment continues to rise.
Many see the first glimmers of hope . Consumer sentiment has shown a marginal improvement and consumer spending is showing signs of stabilising.The benefits of increased government spending and tax cuts are also expected to kick in from the month of May, and Wall Street is back to where it was when Obama took office.Nevertheless the fact is that the economy continues to be as bad as it was in the last quarter of last year when it contracted at an annual rate of 6.3%.
Many experts caution against being overly optimistic about the near future.They say that the current optimism stems from the fact that companies have announced quarterly results that are not as bad as expected.But this does not take away from the fact that both sales and profits continue to fall, it is just that the rate of fall is slightly slower.They emphasise that the jobless rate is at 8.5% and will in all likelihood hit 10% by the end of the year.U.S. exports have fallen 30% and are unlikely to revive any time soon. Spending on home building as well as fresh business investment are all down sharply.A 2.2% increase in consumer spending can best be described as a blip.This is because increasing unemployment, declining wealth and tougher lending conditions will continue to exert a downward pressure on consumer spending and thereby on manufacturing.High unemployment will also raise default levels on both consumer and corporate loans which will further affect the health of the financial system
Clearly the economic crisis is still to find its trough. There is more pain to come.Recovery is bound to be a slow and lengthy process.
Tuesday, April 28, 2009
Is The U.S. Turning 'Pink'?
Beleaguered U.S. auto giants G.M. and Chrysler inched towards agreements Monday, that would help them avoid bankruptcy.
Chrysler union leaders voted Monday to approve concessions that would help the auto maker ward off bankruptcy.The settlement will see the UAW union ending up with 55% of a restructured Chrysler LLC. Fiat Group SpA will own 35% and the remaining 10% will be divided between the U.S. government and several lenders.
A restructuring plan for G.M., unveiled Monday calls for cutting 21,000 U.S. factory jobs by next year and bidding goodbye to the Pontiac brand. About $27 billion of bond debt will be converted into G.M. stock. It will also offer stock to the UAW towards part of its liabilities to a union managed trust that will take care of retiree health care expenses.If this scheme goes through, the U.S. government along with the UAW union will own 89% of G.M. stock, with the government holding more than 50%. The present stockholders will be left with about 1% only.
These two companies will be the latest additions to a long list of failed business giants like AIG, Lehman Brothers, Fannie and Freddie to name a few.To get a proper idea of the scale of economic destruction over the last eighteen months, one would need to add the long list of smaller banks and companies which have simply disappeared.
The companies which have been bailed out are those which are just too large to be allowed to go under.Their annual revenues run into into hundreds of billions of dollars, larger than the GDP of virtually every nation on this earth, leaving aside about the top twenty countries or so.In economic terms the U.S. has lost more, than perhaps Russia did after the break up of the Soviet Union.
The way out of this mess is expected to be led by a massive injection of funds by the U.S. Fed into these companies with scant regard to their ability to repay the money.The money is to be given at virtually zero percent interest, while the U.S. government itself will have to borrow on interest in order to finance its almost 1.4 trillion dollar deficit in 2010. Banks have been given to understand that they have access to government funds under the preferred swap scheme whereby government loans will get converted into equity.
Although it is premature to conclude that the U.S. government has plans to nationalise important parts of the economy, particularly the banking and insurance industries, it is true that the U.S., regarded as the most capitalistic of nations, may be turning 'pink' after all.
Chrysler union leaders voted Monday to approve concessions that would help the auto maker ward off bankruptcy.The settlement will see the UAW union ending up with 55% of a restructured Chrysler LLC. Fiat Group SpA will own 35% and the remaining 10% will be divided between the U.S. government and several lenders.
A restructuring plan for G.M., unveiled Monday calls for cutting 21,000 U.S. factory jobs by next year and bidding goodbye to the Pontiac brand. About $27 billion of bond debt will be converted into G.M. stock. It will also offer stock to the UAW towards part of its liabilities to a union managed trust that will take care of retiree health care expenses.If this scheme goes through, the U.S. government along with the UAW union will own 89% of G.M. stock, with the government holding more than 50%. The present stockholders will be left with about 1% only.
These two companies will be the latest additions to a long list of failed business giants like AIG, Lehman Brothers, Fannie and Freddie to name a few.To get a proper idea of the scale of economic destruction over the last eighteen months, one would need to add the long list of smaller banks and companies which have simply disappeared.
The companies which have been bailed out are those which are just too large to be allowed to go under.Their annual revenues run into into hundreds of billions of dollars, larger than the GDP of virtually every nation on this earth, leaving aside about the top twenty countries or so.In economic terms the U.S. has lost more, than perhaps Russia did after the break up of the Soviet Union.
The way out of this mess is expected to be led by a massive injection of funds by the U.S. Fed into these companies with scant regard to their ability to repay the money.The money is to be given at virtually zero percent interest, while the U.S. government itself will have to borrow on interest in order to finance its almost 1.4 trillion dollar deficit in 2010. Banks have been given to understand that they have access to government funds under the preferred swap scheme whereby government loans will get converted into equity.
Although it is premature to conclude that the U.S. government has plans to nationalise important parts of the economy, particularly the banking and insurance industries, it is true that the U.S., regarded as the most capitalistic of nations, may be turning 'pink' after all.
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