Sustaining the Unsustainable(part-2)

Since then, economists have vied with each other to overturn this orthodoxy. Indeed, rejecting the conventional wisdom is now conventional, as Jeffrey Frankel, an economist at Harvard University, has pointed out. Three years ago, Michael Dooley, David Folkerts- Landau and Peter Garber, all Japan, Saudi Arabia, America and the EU economists at Deutsche Bank, argued the world economy was enjoying a reprise, the Bretton Woods era. America's large external deficit could be sustained for years as Asian central banks kept their currencies cheap in order to foster export led growth. In '05, Ben Bernanke said global interest rates were oddly low, suggesting a glut of saving abroad, not a shortfall of saving at home, was responsible for the flow of capital to America. Recent papers have picked up similar threads, arguing that imbalances may prove to be more persistent and less perverse than once thought. A study by IMF economists showed poor countries which export capital grew faster than those which rely on importing it from abroad.

One reason may be the feebleness of their financial markets. Ricardo Caballero and Emmanuel Farhi of the Massachusetts Institute of Technology, and Pierre-Olivier Gourinchas of the University of California, Berkeley say emerging economies have been accumulating real assets, but their generation of financial assets has not kept pace. Thanks to weak property rights, fear of expropriation and poor bankruptcy procedures, newly rich countries are unable to create enough trustworthy claims on their future incomes. Lacking vehicles for saving at home, the thrifty buy assets abroad instead, because emerging economies' supply of financial instruments is so unreliable, people may hoard more of them as a precautionary measure.

If global imbalances are the result of such frictions, they are unlikely to unwind quickly. Financial systems do not mature overnight. If Mr. Caballero is right, America is also less vulnerable to a sudden run on its securities. Where will the excess demand for global assets go? So far, the behaviour of financial markets seems to vindicate his point. But it's a mistake to place too much faith in these new studies. If the dollar tumbles, there will be plenty of academics ready to take the old theories off the shelf and eager to say: "We told you so."

Sustaining the Unsustainable(part-1)

“Global investors are worried about many things. Why is America's current-account deficit not one of them?”

Sour subprime mortgages, sluggish retail sales, the spectre of a broader retreat in credit and consumer spending. These are the American shadows that spooked investors across the globe this week, sending share prices tumbling from Manhattan to Mumbai. For years, the longest shadow of all was cast by America's imposing current-account deficit. But in these fretful times, no one seems to be fretting much about the country's reliance on foreign funding. Latest figures show Americans spent some $857 billion more than they produced in '06, the equivalent of 6.5% of GDP, and a new record. China's trade surplus in February was the second highest on record. It has reached almost $40 billion in the first two months of this year.

China's government, one of America's best creditors, has announced it is seeking a better return on a chunk of its forex reserves. It will create a new investment agency, which looks sure to diversify some of the central bank's assets out of the American Treasury bonds that now dominate its portfolio. None of this had much effect on the dollar. Measured on a trade-weighted basis, it has fallen by a mere 0.04% since the recent financial turbulence began on February 27. And as investors yawn at America's deficit, so too do policymakers. A year ago, finance ministers and central bankers from the G7 group of countries promised to take "vigorous action" to resolve the imbalances between the world's savers (particularly China, Japan and oil exporters) and borrowers (especially America). The IMF was hoping to reinvent itself as the overseer of this grand macro economic bargain. A year later the venture has fizzled. The IMF sponsored discussions between China, Japan, Saudi Arabia, America and the EU have yielded little. What explains this non-chalance? By some measures, the world is already rebalancing. The dollar has fallen by 16% from its’02 peak in real terms. Compared with the previous quarter, America’s current account deficit shrank in the last three months of ’06 and was below $200 billion for the first time in more than a year. That decline was a lot to lower oil prices. But even excluding oil, America’s trade balance seems to be stabilizing as exports boom and imports slow. Even so, it is hard to escape the conclusion that both investors and officials have become less worried about global imbalances. A few years ago, most economists argued the spectacle of poor countries bank rolling America's deficits was the perverse and unsustainable consequence of American profligacy. Economic theory suggested capital should flow from rich countries to poor ones; and that America could not increase its foreign borrowing for ever. Empirical studies showed that deficits of more than 5 % of GDP caused trouble.

Asian Stocks Fall For the Third Straight Week

ASIAN stocks fell posting their third weekly loss.

Mitsubishi UFJ Financial Group and Toyota Motor led Japanese stocks lower on concern the level of pay rises will damp growth in the region's largest economy. "With wage increases so weak, there's not much hope for a recovery in spending," said Tomokatsu Mori, of Fukoku Capital Management in Tokyo.

TDK gained after saying it's in talks to buy a unit of Alps Electric, boosting speculation there will be further consolidation in the electronics industry.

Japan's Nikkei 225 Stock Average declined 0.7% while the broader Topix index slid 1 %. China's Shanghai and Shenzhen 300 Index lost 1.6%. Gauges fell in Australia, Hong Kong, New Zealand, Singapore, Thailand and India. Mitsubishi UFJ, Japan's biggest bank slipped 3%, its biggest loss since October 12. Toyota, the nation's biggest automaker, lost 0.7%. Suimitomo Mitsui Financial Group, Japan's No. 3 lender, declined 2.8%.

The world's second-largest economy grew 5.5 percent in the three months ended Dee. 31, the fastest pace in three years, the government said this week. Business investment rose 3.1 percent in the quarter, up from the 2.2 percent preliminary estimate. In contrast consumer spending rose 1 percent in the quarter, down from the preliminary 1.1 percent expansion. Stagnant wages may keep consumers from spending more on goods and services, denting economic growth and making bank stocks, which derive most of their earnings from the domestic economy, less attractive.

Global Markets Sneeze(part-2)

Adding to the housing worries, tile US Mortgage Bankers Association said delinquencies for all home loans rose to a three-year high of 4.95% in the fourth quarter, and to 13.33% in the risky 'subprime' market.

The Dow Jones Industrial Average fell more than 240 points overnight for its second-biggest drop in almost four years on Tuesday, with a tepid 0.1 % rise in the US retail sales in February providing little cheer for investors.

But barring a really severe economic downturn in the US, the Asian economies should continue to enjoy solid growth, said Tim Rocks, Asian equities strategist at Macquarie Securities in Hong Kong.

"We see the outlook as fundamentally very, very strong. Domestic conditions in Asia are very, very healthy. We don't see the Asian markets as particularly expensive overall," he said.

"We think it's a danger to become too defensive in this environment. Obviously we're .not going to know the full extent of this slowdown in the US for some time now so there's some reason for caution, "he added.

Across the region, stock price screens were awash with red.

Sydney lost 2.1 %, Shanghai slid 1.97%, Manila fell 3.38%, Seoul declined 2.0%, Kuala Lumpur was down 2.7% in late deals and Singapore shed 3.06%. Indian share prices were not spared from the rout, with Mumbai down over 3% in early deals. Dealers said the disquiet about the US economy had unnerved investors who are still jittery after last month's big sell-off sparked by heavy losses in Shanghai.

"The latest bout of share market turmoil has its origins in the US even though a 9% one-day fall in Chinese shares (on February 27) may have provided an initial psychological trigger," AMP Capital Investors head of investment strategy Shane Oliver said in Sydney.

"We remain of the view that while recent weakness and volatility in share markets may have further to run, it is just another correction in a still rising trend, " he said.

Global Markets Sneeze(part-1)

“Jitters over Chinese markets resurfaced after data on inflation, loans and trade boosted speculation.
US Mortgage Bankers Association said delinquencies for all home loans rose to a 3-year high of 4.95010 in Q4”

Global stock markets sell off spread to Asia on Wednesday following steep losses in the US and Europe as signs of trouble in the US housing sector spooked investors.

The falls reversed much of the markets' recent recovery from the worldwide rout that began late last month with a 'slump in Shanghai.

Jitters over the Chinese markets resurfaced after recent data on inflation, loans and trade boosted speculation that the authorities there may be forced to take further steps to cool the booming economy, dealers said.

At the same time, the US housing worries drove the dollar down towards new three month lows against the yen in a setback to Japanese exporters, contributing to a 2.92% slump in Tokyo.

The falls mirrored heavy losses across Asia after the Dow Jones Industrial average dropped 1.97% on Tuesday when data showing rising mortgage delinquencies stoked unease about the slowing Housing sector.

The main European markets opened sharply lower on Wednesday, extending Tuesday's losses.
Dealers said the US housing figures had fanned concerns about a possible credit crunch that could put the brakes on consumer spending in the world's largest economy.

"The sell-off in the local market was due to the correction in overseas markets amid the mortgage loan concerns," said Celestial Asia Securities director Kitty Chan in Hong Kong where shares closed 2.57% lower.

"Bad debts and all these issues could take the market lower still if more (bad) news is uncovered in the near term," she said.

Collateral Damage Continues for US Stocks(part-2)

PROFIT FORECASTS

Shares o. both companies rose to records this year. The retreat from those highs stemmed from concern that the market for collateralized debt obligations, backed by derivatives and bonds in addition to loans, will dry up.

When Moody's reported fourth-quarter earnings on February 7, the New York based company said it anticipated lower revenue this year from rating securities backed by home mortgages.
Even so, the company projected "low double-digit percent revenue growth" for all of 2007. The average forecast of eight analysts surveyed by Bloomberg calls for a 14% increase.

McGraw-Hill also based in New York, reaffirmed last week revenue and earnings will increase more than 10% at S&P this year. Sales rose 14% last year at the financial services unit, the fastest growth among the company's three main businesses. Operating profit climbed 18 % and fell at the other two segments, media and education.

FAVOURABLE RENTS

Maguire, whose shares have lost 16% since February 8, rents space in two Irvine office buildings to New Century. The lender also signed a lease on a third, set to open in September.

A year of lost payments on the current space would total $6.5 million, or 12 cents a share, the Los Angeles-based REIT said in a statement on Tuesday.

Other tenants pay much higher rents than New Century does, according to the statement 45-52% more for the current space and25 % more for the new building. The numbers make the stock's decline look exaggerated, and the same may be true for Moody's and McGraw- Hill.

Goldman Sachs Group Inc's fiscal first quarter earnings have become the most extreme example of a pattern among Wall Street firms: making more money than analysts expect.

By earning $6.67 a share in the three months ended February 23, Goldman surpassed the average forecast in a Bloomberg survey by 34%. The out performance was anything but unusual.

The world's biggest securities firm by market value, based in New York, has beaten analysts' first -quarter estimates by an average of41 % since fiscal 2003.

Collateral Damage Continues for US Stocks(part-1)

“Cos Anticipated Subprime Defaults Will Discourage Them from Selling Loan-Backed Bonds”

(Maguire Properties Inc, the biggest office landlord in downtown Los Angeles, is taking a hit as well)

(David Wilson)

THERE'S no shortage of collateral damage in the US stock market from the collapse of subprime mortgage lenders. Shares of Moody's Corp and McGraw- Hill companies, the parent of Standard & Poor's, are falling in anticipation that subprime defaults will discourage companies from selling loan-backed bonds. Any slowdown would mean less demand for the debt ratings that Moody's and S& P provide.

Maguire properties Inc, the biggest office landlord in downtown Los Angeles, is taking a hit as well. The real estate investment trust's tenants include New Century Financial Corp, the second-largest lender to home buyers with relatively low credit ratings.

New Century, based in the Los Angeles suburb of Irvine, California, lost its New York Stock Exchange listing on Tuesday after failing to meet creditors' demands for funds. Accredited Home Lenders Holding Co, a competitor, said on Tuesday it would seek more financing after bankers made a similar request.

The fallout from the industry's travails has moved far beyond the brokerage firms and banks that are active in the subprime business - maybe too far.

Moody's has dropped 20% and McGraw-Hill has declined 11 % since February 8. Subprime lenders began sinking the day after New Century said it would report a loss and HSBC Holdings plc said it would set aside more for loan losses than analysts anticipated to compensate for defaults.