I wrote an article on 27 August 2008 to see what can we get out from Buffett's rejected US$500 million bid for a Chinese stock.
Here is the link.
http://financial-information-updates.blogspot.com/2008/08/buffetts-rejected-us500-million-bid-for.html
I have been reading around and here are more on what I found out.
At times when the stock market is bad, rumors will start to fly. We have seen the how the rumor has spread that says Buffett was interested in buying CITIC Bank of China. But it was later clarified that it was not true.
CITIC Bank's spokesman said that they only saw the news from the internet and have heard nothing of it previously. On 28 August CITIC Bank's Board of Directors representative said that the rumour has been clarified and there is nothing like what the rumour mentioned.
Actually, after Buffett's announcement, the first to think that Buffett was interested in CITIC Bank was an analyst named '潘大'. When the media first reported that Buffett was interested in CITIC Bank, it merely quoted what 潘大 concluded from his analysis on his article published on the internet. But no one really know who 潘大 is or was.
One of the people from an investment agency who previously owns shares of CITIC Bank thinks that with Buffett's 500 million US dollars and CITIC Banks share price before the rumour, the number of shares that can be bought is about 600 million shares and is only about 1.5% of the total holdings. According to Buffett's past investments, he will normally go for majority share holdings (PetroChina was an exception as the total number of shares were too huge). This 1.5% looks too stingy for him.
Another private equity person says that Buffett could have bought CITIC Banks directly fro the Hong Kong share market's H shares as the share price in the Hong Kong market at that time is lower than that in the China stock market. Buffett would not have picked the more expensive price to purchase.
Analyst from a China bank also thinks that it cannot be CITIC Bank. Globally, how the price of a bank was evaluated was using PB and not was normally used in China PE. Banks trade currencies and the risks involved are great so it would be more suitable to use net assets to calculate. CITIC Bank's asset quality is only normal and even if were to buy, the timing is also not then. Buying at the secondary market, banks prices are at about the SSE index 2700 level, it is not cheap, normally Buffett will buy only at a very safe price level. The analyst also mentioned that Buffett could be looking at companies which have market monoploy in consumer products, financial stocks and media related stocks could be what Buffett is looking at.
The guessing has also been spreading. From China Life Insurance (中国人寿) to China Vanke (万科) till the not yet listed CICC. Looks like the answer can only be answered by Buffett himself.
Regarding the guess about China Life Insurance, its management during the result announcement in Hong Kong recently has said that they do not have any contact with Buffett although the rumour has not ended yet.
About Vanke, currently the China macro economic policies are not too good for it. Although Chinese investors do not see it perform, but when people fear it is when Buffett's greed for it starts. This statement has been spreading through investors in China. But there were also analysts to point it out quickly that Buffett does not like companies that gives dividends and equity incentives and so refute the possibility about Vanke.
On 26 August, CITIC Bank's share price opened low but went high during trading hours and stopped trading at about 10:05 am because price has reached the upper trading limit, making the stock trading index turn positive. The stock price performance since the start of the rumour was much better then the stock trading index and trading volume was at a 7 month high. CITIC Bank share performance has been declining since August last year with seldom big price jumps.
To a lot of institutions, this presents a great opportunity to dump their CITIC Bank shares. From trading data on the 26 August, most funds and QFII dump their holdings during that time. From trading data, there were 6 accounts that have the biggest selling transactions. 4 were from funds which sold about a total of 25 million RMB. Another account is a QFII which sold close to 10 million RMB topping the sellers list. Buyers were mostly floating capitals and private equities.
After the rumours were clarified, the short term performance for CITIC Bank stock came to an end. On 28 August, CITIC Bank share price went down.
In fact, in the eyes of China institutions, CITIC Bank is not what they think was the target of Buffett's interest. CICC in its research report gave a neutral rating for CITIC Bank A-shares in China. A China brokerage firm, HaiTong Securities (海通证券) thinks that after 2009, CITIC Bank can grow within 20%. Long term wise it sees potential in faster growth of its scale.
Sunday, August 31, 2008
China - Measures to prevent an economic hard landing
From the news articles by the China official news agency, we can see that the China government policy moves for the rest of the year is to continue to fight inflation and at the same time try to maintain the economic growth in order to prevent a hard landing for the Chinese economy.
So what are the measures that are being taken. The main idea is to encourage internal domestic consumption.
Here are what I found out.
1) Stop collection of management fees
On the 26 August, the various Chinese authorities announced that the management fees for the various industrial and commercial accounts and trading markets are waived.
Currently there are about 27.31 million industrial and commercial accounts. If taking the current fee of 650 RMB per account, the new rule will let the accounts save about 17 billion RMB. Ministry of Finance will also come up with 2 billion RMB to help with the transition.
2) Railway projects
From the authorities in charge of railways, for the rest of the year, the development of railways will speed up. The total investment is about 300 billion RMB(3千亿元). Various projects are going to start development.
The various highlights are the Jing-Jin(京津) route [BeiJing(北京)-TianJin(天津)], the Ha-Ning route(合宁) [HaFei(合肥)-Ning(南京)] and the Ha-Wu(合武) [HaFei(合肥)-WuHan(武汉)] route. It is about 370 kilometers and the investment is about 22 billion RMB.
Also, the Jing-Shi(京石) [BeiJing(北京)-ShiJiaZhuang(石家庄)] route, Shi-Wu(石武) [ShiJiaZhuang(石家庄)-WuHan(武汉)] route, Jin-Qin(津秦) [TianJin(天津)-QinHuangDao(秦皇岛)] route and the other routes totalling 9 routes are to start work soon. The total railway route is about 4,100 kilometers.
It is estimated that by 2010, the total railway route in commercial use will expand from current 78,000 kilometers to above 90,000 kilometers with about 700 coaches in service.
So what are benefits from more railway projects?
More people movements. Since 1 August, the Jing-Jin(京津) route sees about 60,000 people moving between BeiJing and TianJin, and increment of 1.3 times as per comparison.
Help with asset prices appreciation. Properties at the various cities where there are train stops, properties are seeing price appreciation.
3) The rebuilding in SiChuan
A member from the Macroeconomic Research Institute of National Development and Reform Commission says that the rebuild for the earthquake zone is costs about an estimated 1万亿元, to be completed in the coming 3 years.
The amount spent should let the earthquake zone recover back to the normal development route and let the economics and people's living standard return back to the level before the earthquake.
A state department report estimates that to fully recover the quake zone to return to levels before the earthquake, it will require about 6,900亿元 investments. It should incrase a total social output value of about 4万8800亿元 and help with the GDP growth.
4) Economic stimulus policies in ShangHai
Currently ShangHai is working on some economic stilunus package and will be submitted for approval.
From what is gathered by the media, there will be financial policies to help the SMEs, private enterprices, high tech enterprises and export companies. There will also be policies to help raise credits and help lower operation costs.
In 2010 there is the World Expo to be held in ShangHai. But what after that? Analysts believe it can be the 'big aeroplane' development project.
5) Reduction of export tax for textile industry
To help the labour intensive textile industry, on 1 August, the finance department and tax department increased the export tax rebate by 2%.
Dalian(大连) currently have about 1,000 plus textile export enterprises. With the reduction of the export tax, those enterprises can increase their earnings by about 100 million RMB.
FuJian(福建) is also another big textile export province with last year's exported value of about 7.3 billion US dollars. At an estimated growth export rate of about 10%, this year's export value can reach 8 billion US dollars. With the 2% reduction in export tax, the total revenue can increase by about 161 million US dollars.
ZheJiang(浙江) is a large clothing production province. About 100,000 clothing enterprise will benefit from the export tax cut. Not only can the competitiveness be increased, it can also help keep the current export market and at the same time stabalize the employment rate. A lot of the enterprise says that it is good to make use of this chance to upgrade production capabilities and create more value add to the products.
6) Development of the Yangtze River Delta
China's State Council, or the cabinet, on Wednesday (6 August 2008) approved guidelines to boost the development of the Yangtze River Delta.
The Yangtze River Delta Region, which covers affluent ShangHai, as well as JiangSu and ZheJiang provinces, is a major economic engine in China."The region should quicken its industrial restructuring and seek to create an industrial structure with a modern service industry as the pillar," said the guidelines.
12 September 2008
So what are the measures that are being taken. The main idea is to encourage internal domestic consumption.
Here are what I found out.
1) Stop collection of management fees
On the 26 August, the various Chinese authorities announced that the management fees for the various industrial and commercial accounts and trading markets are waived.
Currently there are about 27.31 million industrial and commercial accounts. If taking the current fee of 650 RMB per account, the new rule will let the accounts save about 17 billion RMB. Ministry of Finance will also come up with 2 billion RMB to help with the transition.
2) Railway projects
From the authorities in charge of railways, for the rest of the year, the development of railways will speed up. The total investment is about 300 billion RMB(3千亿元). Various projects are going to start development.
The various highlights are the Jing-Jin(京津) route [BeiJing(北京)-TianJin(天津)], the Ha-Ning route(合宁) [HaFei(合肥)-Ning(南京)] and the Ha-Wu(合武) [HaFei(合肥)-WuHan(武汉)] route. It is about 370 kilometers and the investment is about 22 billion RMB.
Also, the Jing-Shi(京石) [BeiJing(北京)-ShiJiaZhuang(石家庄)] route, Shi-Wu(石武) [ShiJiaZhuang(石家庄)-WuHan(武汉)] route, Jin-Qin(津秦) [TianJin(天津)-QinHuangDao(秦皇岛)] route and the other routes totalling 9 routes are to start work soon. The total railway route is about 4,100 kilometers.
It is estimated that by 2010, the total railway route in commercial use will expand from current 78,000 kilometers to above 90,000 kilometers with about 700 coaches in service.
So what are benefits from more railway projects?
More people movements. Since 1 August, the Jing-Jin(京津) route sees about 60,000 people moving between BeiJing and TianJin, and increment of 1.3 times as per comparison.
Help with asset prices appreciation. Properties at the various cities where there are train stops, properties are seeing price appreciation.
3) The rebuilding in SiChuan
A member from the Macroeconomic Research Institute of National Development and Reform Commission says that the rebuild for the earthquake zone is costs about an estimated 1万亿元, to be completed in the coming 3 years.
The amount spent should let the earthquake zone recover back to the normal development route and let the economics and people's living standard return back to the level before the earthquake.
A state department report estimates that to fully recover the quake zone to return to levels before the earthquake, it will require about 6,900亿元 investments. It should incrase a total social output value of about 4万8800亿元 and help with the GDP growth.
4) Economic stimulus policies in ShangHai
Currently ShangHai is working on some economic stilunus package and will be submitted for approval.
From what is gathered by the media, there will be financial policies to help the SMEs, private enterprices, high tech enterprises and export companies. There will also be policies to help raise credits and help lower operation costs.
In 2010 there is the World Expo to be held in ShangHai. But what after that? Analysts believe it can be the 'big aeroplane' development project.
5) Reduction of export tax for textile industry
To help the labour intensive textile industry, on 1 August, the finance department and tax department increased the export tax rebate by 2%.
Dalian(大连) currently have about 1,000 plus textile export enterprises. With the reduction of the export tax, those enterprises can increase their earnings by about 100 million RMB.
FuJian(福建) is also another big textile export province with last year's exported value of about 7.3 billion US dollars. At an estimated growth export rate of about 10%, this year's export value can reach 8 billion US dollars. With the 2% reduction in export tax, the total revenue can increase by about 161 million US dollars.
ZheJiang(浙江) is a large clothing production province. About 100,000 clothing enterprise will benefit from the export tax cut. Not only can the competitiveness be increased, it can also help keep the current export market and at the same time stabalize the employment rate. A lot of the enterprise says that it is good to make use of this chance to upgrade production capabilities and create more value add to the products.
6) Development of the Yangtze River Delta
China's State Council, or the cabinet, on Wednesday (6 August 2008) approved guidelines to boost the development of the Yangtze River Delta.
The Yangtze River Delta Region, which covers affluent ShangHai, as well as JiangSu and ZheJiang provinces, is a major economic engine in China."The region should quicken its industrial restructuring and seek to create an industrial structure with a modern service industry as the pillar," said the guidelines.
The eastern economic hub should step up efforts for industrial upgrading and turning itself into an advanced global manufacturing base, according to the executive meeting presided over by Premier Wen Jiabao.
The region should improve its overall capacity and ability to innovate while aiming for sustainable development, the guidelines said. The delta region should also coordinate the development of rural and urban areas.
Improving the delta's international competitiveness plays a significant role in the country's reform and opening up, said the meeting. This year is the 30th anniversary of China's reform and opening up policy.
The meeting also urged the delta to modernize its agricultural sector, conserve energy and land, protect the environment and perfect its employment and social security systems.
The State Council also called on the region to set up a unified open market system and help lead the way toward a sound market economy system nationwide.
China's central bank to seek policy balance between fighting inflation, boosting economy
2008-08-15 22:44:59
BEIJING, Aug. 15 (Xinhua) -- The People's Bank of China (PBOC),the central bank, said on Friday that it would seek a balance between fighting inflation and boosting economic growth in the rest of the year to ensure a steady and fast economic development.
PBOC expected the country's economic growth to remain steady and fast in the second half despite challenges from home and abroad, boosted by increasing domestic demands, industrial structure upgrading and fast industrialization and urbanization, it said in the monetary policy implementation report for the second quarter.
The central bank said it would make small changes to its monetary policies at a proper time in the second half, responding to the domestic challenges and uncertainties on the global economy.
The government had focused on using tightening policies to fight inflation and to prevent the economy from overheating. But economists were calling for minor changes to the macro-economic policy to avert the risk of sharp economic slowdown.
The country's consumer price index (CPI), a main gauge of inflation, eased to 6.3 percent in July from 7.1 percent in June, 7.7 percent in May and a peak of 8.7 percent in February.
According to the PBOC report, the central bank would encourage financial institutions to increase credit supply to key industries and weak links, especially to small enterprises, post-quake reconstructions and those concerning agriculture, farmers and rural areas.
The report also urged tightened supervision on the foreign exchange flows to prevent the risk of large amount of outflows.
The State Administration of Foreign Exchange (SAFE) created a new system last month that enabled real-time monitoring of the foreign exchange flows. The system is mainly an Internet-based data exchange mechanism among SAFE, banks, enterprises and accounting firms.
The system should be well managed, the PBOC said. On Thursday, the central bank announced that it would establish a department to deal with foreign exchange issues.
Editor: Pliny Han
Chinese official: curbing inflation a priority after GamesLatest Updates
2008-08-27 22:04:50
BEIJING, Aug. 27 (Xinhua) -- The Chinese government will stick to an economic policy that focuses on curbing inflation for the rest of the year, a senior official on Wednesday told China's top legislature, as slowing output and rising prices loom over the post-Games economy.
Economic planners would exert themselves to increase supplies of necessities, closely track key prices and make price controls more effective, National Development and Reform Commission deputy chief Zhu Zhixin told the fourth session of the Standing Committee of the 11th National People's Congress.
"A lot of factors can drive prices up," said Zhu. "There is a strong demand for primary products, with prices hovering high on international markets, while more expensive land and labor at home will add to costs."
His statements came after China's main inflation indicator showed a deceleration in July and as the world wondered where the already slowing economy would head after the glitz of the Games.
The consumer price index was up 6.3 percent last month over July last year, lower than the 7.1 percent in June and 7.7 percent in May, as tighter monetary policies adopted last year seemed to bite.
Meanwhile, the country's economic output in the first half was 10.4 percent higher, compared with 10.6 percent in the first quarter and 12.2 percent in the first half last year.
Zhu said the output slowdown was "a moderate correction from a high level".
"The national economy is heading in the direction expected by the macro-control policy."
Zhu cited the pressures on some industries and enterprises as one of the major conflicts in the economy, saying it would take time for the latest supportive policies to show an effect and for companies to adjust.
He told the top legislature the government would continue to seek a balance between fighting inflation and maintaining growth.
Tasks for the rest of the year included improving the contribution of domestic consumption to economic growth, boosting agricultural output and increasing aid to small enterprises, he said.
The government had been focusing on preventing the economy from overheating before changing the goal to "keeping steady, rapid growth" in July.
Many analysts foresaw a loosening of the tight monetary policy to provide liquidity for enterprises, especially exporters, that were squeezed by weakening demand, credit controls and rising costs.
Earlier this month, administrators raised the export tax rebate rates for some textiles and garments, while the central bank allowed more credit to small and medium-sized enterprises.
"The fiscal and monetary policies are likely to be eased, if the current trend is a guide," said CITIC Securities analyst Zhu Jianfang. "The central bank is not expected to come up with any big tightening moves after the Olympics."
Editor: Wang Hongjiang
12 September 2008
- SMEs to get benefit package soon
BEIJING, Sept. 12 (China Daily) -- The Ministry of Finance will "soon" draft special rules requiring local governments to buy more products from small and medium-sized enterprises (SMEs).
Funding to SMEs will be increased significantly to help them cope with the tightened credit situation and falling global demands, the ministry said yesterday.
The ministry will earmark 3.51 billion yuan (512 million U.S. dollars) worth of special funds to help the growth of SMEs, which will enjoy preferential tax policies, too. It, however, did not say when exactly the new government procurement rules would be announced.
Analysts said the new rules would change the prevailing situation in which governments shun SMEs to buy goods from big companies.
The country has about 40 million SMEs, including those run by individuals. They have become the national economy's most dynamic factor, accounting for about three-fourths of the urban labor force.
But because of last year's tightening monetary policy, aimed to rein in the runaway economy, it has become difficult for vulnerable SMEs to get bank loans.
Moreover, the demand for their products have fallen, thanks to the slowing of economic growth from 11.9 percent last year to 10.1 percent in the second half of this year.
And the drop in exports of their products, as a result of this year's gloomy global economy, has made things even worse.
The central treasury, too, has given financial help to enterprises facing multiple problems.
Of the 3.51-billion-yuan support package, 500 million yuan (73 million dollars) will go into making SMEs acquire state-of-the-art technologies. This year's amount is 25 percent more than last year's.
A total of 200 million yuan (29.2 million dollars) of the technology development fund will be used to subsidize institutions that guarantee the SMEs would get bank loans, the ministry said.
The SMEs' technological innovation fund will get 1.4 billion yuan (204.4 million dollars), up 27.3 percent than last year.
The ministry will use 1.2 billion yuan (175.2 million dollars), up 20 percent, to help the SMEs tap the international market by providing them information and helping them go through the often complicated global certification process.
The ministry imposes a 20 percent tax on SMEs with low profit levels, and has cut the tax rate for high-tech SMEs to 15 percent, according to the newly promulgated corporate tax law.
The government passed a unified corporate tax law for domestic and overseas companies in March, imposing a flat tax rate of 25 percent on them. Before that, domestic enterprises had to pay a 33 percent tax.
The law stipulates that high-tech firms and small enterprises with marginal profits will enjoy preferential tax rates.
- China's railway investment hits $19.6 bln in first 7 months
BEIJING, Sept. 8 (Xinhua) -- China's railway investment soared 37.5 percent from January to July. The numbers are attributed to a building boom of high-speed lines and the country's desire to link together poor regions.
The investment reached 133.78 billion yuan (19.6 billion U.S. dollars), the Ministry of Railways (MOR) said on Monday.
More people than ever are using railways. In the first 7 months of the year trains carried 855.3 million passengers, up 12.6 percent from the same period last year. Cargo volume was 1.94 billion tons, up 6.8 percent from a 2007.
The MOR had planned to invest 1.25 trillion yuan (182.6 billion U.S. dollars) in railway building and renovation through 2010 extending the train network by 17,000 kilometers.
China started construction on the 1,318-km-long Beijing-Shanghai high-speed railway on April 18. The train is designed to run 350km per hour. The total project cost 220.9 billion yuan (32.3 billion U.S. dollars).
- Tibet plans huge industrial investment
LHASA, Sept. 5 (Xinhua) -- China's southwestern Tibet Autonomous Region plans to invest heavily in 22 industrial projects to stimulate comprehensive economic development, according to the local authority.
The government will pool 21.17 billion yuan (about 3 billion U.S. dollars) for 10 mining projects, four construction and building material enterprises, three medicine and food plants, and five industrial development zones in five years, Li Xia, the autonomous regional economic commission director, told Xinhua in an exclusive interview.
Among the selected projects, the mining sector will absorb 15.9 billion yuan and the industrial zones will take 3.45 billion yuan, according to Li, citing a government decision released at a local economic meeting held here late last month.
The projects are expected to earn 18.28 billion yuan with an estimated profit of 5.11 billion yuan after they start operation before 2013. They will bring job opportunities for nearly 15,600 people.
According to the schedule, investment in the projects will reach 5.9 billion this year.
Industrial development in Tibet had remained inactive for a long time and the sector only accounted for 7.5 percent of the region's overall gross domestic product last year, official statistics showed.
The 22 projects are expected to speed up development of other industrial fields and the comprehensive economic growth, according to Li.
The launch of the Qinghai-Tibet railway in 2006, the first raillink between Tibet and the rest of China, has been a big step to greatly facilitating transport and communication in the landlocked region.
- Full steam ahead for rail plan
BEIJING, Sept. 2 -- The development of China's railway network will include the construction of 548 railway stations within the 11th Five-Year Plan period (2006-10), a senior official from the Ministry of Railways, said yesterday.
"Twenty-eight new stations have already been completed, 58 are under construction and 210 are in the design stage," Zheng Jian, the ministry's deputy chief engineer, told China Daily.
Last month, Beijing South - the largest in the country - and Tianjin railway stations opened for business at the two ends of a new high-speed intercity service, he said.
In the coming years, as more high-speed routes are added, the ministry plans to develop six passenger transport hubs - Beijing, Shanghai, Wuhan, Guangzhou, Xi'an and Chengdu - and 10 regional hubs, with local railway stations upgraded to deal with the increased numbers of travelers, he said.
But it is not only the hubs that are looking to upgrade their facilities, Zheng said.
In Hangzhou, capital of Zhejiang province, for example, plans have been drawn up to build a station with 30 platforms, more than at Beijing South, he said.
Local governments have realized that their existing railway stations are too small to satisfy the demands brought about by rapid economic development, he said.
"Cities like Hangzhou and Nanjing know that being linked to the high-speed rail network will have a hugely positive impact on their economies, and that is why they want to build big stations, Zheng said.
"However, we will continue to stress that while the construction of large railway stations is fine, they must adhere to the basic principles of economy and not be overly lavish in their decoration," he said.
One Beijing woman said he was pleased to see all the new railway stations being built in the capital.
"Railway stations are no longer shabby or overcrowded like they used to be," commuter Zhang Tao said yesterday.
"They are more like airports," she said.
Under the Ministry of Railways' mid- to long-term plan, the nationwide, high-speed rail network will be extended to 12,000 km by 2020.
- China's central bank to make credit easier
BEIJING - China's central bank said on Monday that it would increase the flexibility of its credit control policy to ensure steady economic growth.
'(We) have to take into account... rising international uncertainties in particular and improve the flexibility (of credit controls) to deal with various potential impacts,' the central bank said in a statement.
The country's credit policy has to 'strike a balance between maintaining fast and steady economic growth and curbing inflation', it said.
The central bank will expand loan access for the agriculture sector and small companies countrywide, as well as reconstruction projects in areas devastated by the May 12 earthquake, it said.
State media reported last month that the central bank had raised this year's quota of new yuan loans by 5 per cent, although this has not been confirmed.
The previous cap was widely understood to be no more than the 3.63 trillion yuan (US$532 billion) lent in 2007.
The world's fourth biggest economy grew 10.4 per cent in the first half and 10.1 per cent in the second quarter, down from 11.9 per cent for all of 2007.
The slowdown has led to the government making a subtle policy shift from preventing economic overheating to ensuring steady growth. - AFP
Saturday, August 30, 2008
Buffett reduced stock purchase by 52% in first half of this year
"God of Stocks" Warren Buffett mentioned that US economy, at least in the coming months, will still be in decline. However, from an investing point of view, current US difficult economy actually created a window of opportunity for investment. US stocks are 'more attractive' as compared to a year ago. But during the first half of this year, Buffett stock purchase has reduced by quite a lot as compared to the same time period last year. Looks like he is waiting for a better opportunity.
Waiting For A Better Investment Opportunity
Buffett recently in his interview with CNBC says that although he believes that the US economy can perform better in the next 5 years, but in the coming 5 months the economic situation may get worse. The sub-prime crisis repercussions will continue to bring difficulty to the financial industry and the economy. His housing development businesses are also facing problems getting credits and the progress is slow.
Talking about sub-prime crisis, Buffett believes that Fannie and Freddy will not go broke easily, but this does not mean that its shareholders can escape. He predicts that if the problems get bigger for Fannie and Freddy, the government will eventually has to step in and help.
Also, Buffett thinks that more banks will go broke, especially those which have a lot of involvement in the housing market. But the FDIC will provide the necessary deposit insurance to prevent the bank from facing mass cash withdrawal.
When talking about investing, Buffett says that from another angle, current bad economic situation in the US economy presents investing opportunities. Stock prices are 'more attractive' compared to a year ago.
Reduction In Stock Purchase
Berkshire's recently announced second quarter financial report shows that currently the company have in cash and assets worth 35.456 billion US dollars, about 315 million less compared to December 2007.
From data provided by Bloomberg, in the first of this year, Buffett sold of 1.76 billion US dollars worth of stocks and bought in 5.51 billion US dollars worth of stocks. In the same time last year, Buffett bought in 11.5 billion US dollars worth of stocks and sold 20.9 billion worth of stocks.
The amount bought by Buffett this year has reduced by about 52%, which may hint that Buffett expects there is possibility of further decline in the US stock market.
On 14 August Buffett showed his latest portfolio. Ending 30 June, Berkshire has about 3.2 million shares of NRG Energy Inc. At the same time, Buffett reduced his stake in Anheuser- Busch Cos. from 35.6 million share in March to 13.8 million shares in June, slashed by 61% before the brewer agreed to be purchased by InBev NV.
On the day the news of Buffett increasing his stake in NRG Energy Inc is released, the share price went up by 4%. Frank Betz, a partner at Warren, New Jersey-based Carret Zane Capital Management, which oversees $800 million, including Berkshire shares says that NRG Energy Inc is US Texas state second largest electrical enterprise. Energy price has risen 24% comparing to same time last year. Demand for electricity is still high. To Buffett, increasing stakes in electrical stocks or public utilities stocks is quite reasonable and NRG Energy Inc quite matches his investing principles.
Buffett, also added to stakes in refrigeration-equipment maker Ingersoll-Rand Co. and Sanofi-Aventis SA, France's largest drugmaker.
On 21 August Buffett says that in the second quarter this year, he finally spent $3.98 billion on equities. The purchases disclosed may have cost Buffett about $260 million all told if he bought the shares at their highest second quarter prices. Berkshire also increased its holding of American depositary receipts in Sanofi-Aventis by 8.8 percent to 3.9 million. So what did he buy with the rest of the 3.6 billion US dollars?
Said Gerald Martin, a finance professor at American University in Washington that considering in May where Buffett made a trip to Europe (Germany, Switzerland, Spain and Italy) to source potential buyouts, he could have invested outside of US.
No Interest In Alberta, Yet
Buffett also clarified that last week he and Bill Gates trip on 18 August into northeastern Canada Alberta on Monday to take a look at the oilsands does not mean that he or Berkshire is interested.
The trip aroused a lot of guessing by investors. The Horizon oilsands development project visited was owned by Canadian Natural. Amount invested was about $9.3 billion Canadian dollars. The project is expected to go into commercial operation before the end of the year.
Analysts says that the Canadian oilsands offers a secure supply of oil for the United States. A source said that Buffett and Gates recently have been understanding about the Canadian oilsands situation. The visit is to satisfy "their own curiosity" but also "with investment in mind."
Because of the high cost involved in the development of oilsands, it still cannot compare to the mainstream crude oil supply. But with the recent rise of the crude oil price, it makes the development of oilsands economically viable. Analyst estimate that to extract oil from oilsands in Canada, each barrel would be about 35 to 45 US dollars. Comparing to current crude oil price, extracting oil from oilsands can be profitable. Some big oil companies have already started to work on the oilsands in Canada. This makes Canada becoming one of the few countries who can increase oil supply at times of tight oil supply situation.
Analysts estimates that Alberta's oilsand contains about 1.8 trillion barrels of oil. And the Horizon project contains about 175 billion barrels of oil. Canada's northern region will add about 100 billion Canadian dollars in investment to work on the oilsands development planning in 2015 to produce about 2.8 million barrels of oil per day.
Another energy analyst says that although the rise in oil price has caused people to drive less, but in the stock market, it has no impact to the oil related stocks superb performance.
Reseachers have said that if investors were to follow Buffett's portfolio, especially those companies that he is interested in, in the past 30 years, the yearly returns can be around 25% which is two times the rise in S&P 500 index.
Waiting For A Better Investment Opportunity
Buffett recently in his interview with CNBC says that although he believes that the US economy can perform better in the next 5 years, but in the coming 5 months the economic situation may get worse. The sub-prime crisis repercussions will continue to bring difficulty to the financial industry and the economy. His housing development businesses are also facing problems getting credits and the progress is slow.
Talking about sub-prime crisis, Buffett believes that Fannie and Freddy will not go broke easily, but this does not mean that its shareholders can escape. He predicts that if the problems get bigger for Fannie and Freddy, the government will eventually has to step in and help.
Also, Buffett thinks that more banks will go broke, especially those which have a lot of involvement in the housing market. But the FDIC will provide the necessary deposit insurance to prevent the bank from facing mass cash withdrawal.
When talking about investing, Buffett says that from another angle, current bad economic situation in the US economy presents investing opportunities. Stock prices are 'more attractive' compared to a year ago.
Reduction In Stock Purchase
Berkshire's recently announced second quarter financial report shows that currently the company have in cash and assets worth 35.456 billion US dollars, about 315 million less compared to December 2007.
From data provided by Bloomberg, in the first of this year, Buffett sold of 1.76 billion US dollars worth of stocks and bought in 5.51 billion US dollars worth of stocks. In the same time last year, Buffett bought in 11.5 billion US dollars worth of stocks and sold 20.9 billion worth of stocks.
The amount bought by Buffett this year has reduced by about 52%, which may hint that Buffett expects there is possibility of further decline in the US stock market.
On 14 August Buffett showed his latest portfolio. Ending 30 June, Berkshire has about 3.2 million shares of NRG Energy Inc. At the same time, Buffett reduced his stake in Anheuser- Busch Cos. from 35.6 million share in March to 13.8 million shares in June, slashed by 61% before the brewer agreed to be purchased by InBev NV.
On the day the news of Buffett increasing his stake in NRG Energy Inc is released, the share price went up by 4%. Frank Betz, a partner at Warren, New Jersey-based Carret Zane Capital Management, which oversees $800 million, including Berkshire shares says that NRG Energy Inc is US Texas state second largest electrical enterprise. Energy price has risen 24% comparing to same time last year. Demand for electricity is still high. To Buffett, increasing stakes in electrical stocks or public utilities stocks is quite reasonable and NRG Energy Inc quite matches his investing principles.
Buffett, also added to stakes in refrigeration-equipment maker Ingersoll-Rand Co. and Sanofi-Aventis SA, France's largest drugmaker.
On 21 August Buffett says that in the second quarter this year, he finally spent $3.98 billion on equities. The purchases disclosed may have cost Buffett about $260 million all told if he bought the shares at their highest second quarter prices. Berkshire also increased its holding of American depositary receipts in Sanofi-Aventis by 8.8 percent to 3.9 million. So what did he buy with the rest of the 3.6 billion US dollars?
Said Gerald Martin, a finance professor at American University in Washington that considering in May where Buffett made a trip to Europe (Germany, Switzerland, Spain and Italy) to source potential buyouts, he could have invested outside of US.
No Interest In Alberta, Yet
Buffett also clarified that last week he and Bill Gates trip on 18 August into northeastern Canada Alberta on Monday to take a look at the oilsands does not mean that he or Berkshire is interested.
The trip aroused a lot of guessing by investors. The Horizon oilsands development project visited was owned by Canadian Natural. Amount invested was about $9.3 billion Canadian dollars. The project is expected to go into commercial operation before the end of the year.
Analysts says that the Canadian oilsands offers a secure supply of oil for the United States. A source said that Buffett and Gates recently have been understanding about the Canadian oilsands situation. The visit is to satisfy "their own curiosity" but also "with investment in mind."
Because of the high cost involved in the development of oilsands, it still cannot compare to the mainstream crude oil supply. But with the recent rise of the crude oil price, it makes the development of oilsands economically viable. Analyst estimate that to extract oil from oilsands in Canada, each barrel would be about 35 to 45 US dollars. Comparing to current crude oil price, extracting oil from oilsands can be profitable. Some big oil companies have already started to work on the oilsands in Canada. This makes Canada becoming one of the few countries who can increase oil supply at times of tight oil supply situation.
Analysts estimates that Alberta's oilsand contains about 1.8 trillion barrels of oil. And the Horizon project contains about 175 billion barrels of oil. Canada's northern region will add about 100 billion Canadian dollars in investment to work on the oilsands development planning in 2015 to produce about 2.8 million barrels of oil per day.
Another energy analyst says that although the rise in oil price has caused people to drive less, but in the stock market, it has no impact to the oil related stocks superb performance.
Reseachers have said that if investors were to follow Buffett's portfolio, especially those companies that he is interested in, in the past 30 years, the yearly returns can be around 25% which is two times the rise in S&P 500 index.
Friday, August 29, 2008
China tightens credit control on property projects
Those who are invested or interested to invest in China property stocks please take note.
It seems like China in this round of macro economic control has chosen to sacrifice the property developers. We can then see that the China government does not see any harm to the economy if the property prices were to fall further from current levels. Before this, there is an investigation by the CBRC and the Development and Reform Commission which shows that there will not be any harm to the banking system if housing prices should fall further.
We can also see that the China government is 'listening' to the peoples voices for a strong need to further drop the property prices as the general income growth cannot keep up with the tremendous increase in property prices in the past few years. As the China economy is slowing down, any further upwards movements to the housing prices may cause civil unrest.
We will also see a re-shuffling of property developers in China. Survival of the fittest. Actually, there are voices in the internet saying that now is a good time to consolidate and get rid of the incompetent property developers.
Another angle to view is that the move is to help lower inflation. Which is one of the main targets of the China government this year.
The end of 'super profits' for property developers is here. And like the Chinese media says, its a very cold and probably long winter for the property developers in China.
It seems like China in this round of macro economic control has chosen to sacrifice the property developers. We can then see that the China government does not see any harm to the economy if the property prices were to fall further from current levels. Before this, there is an investigation by the CBRC and the Development and Reform Commission which shows that there will not be any harm to the banking system if housing prices should fall further.
We can also see that the China government is 'listening' to the peoples voices for a strong need to further drop the property prices as the general income growth cannot keep up with the tremendous increase in property prices in the past few years. As the China economy is slowing down, any further upwards movements to the housing prices may cause civil unrest.
We will also see a re-shuffling of property developers in China. Survival of the fittest. Actually, there are voices in the internet saying that now is a good time to consolidate and get rid of the incompetent property developers.
Another angle to view is that the move is to help lower inflation. Which is one of the main targets of the China government this year.
The end of 'super profits' for property developers is here. And like the Chinese media says, its a very cold and probably long winter for the property developers in China.
China tightens credit control on property projects
2008-08-28 15:39:34
BEIJING, Aug. 28 (Xinhua) -- The People's Bank of China (PBOC) and the China Banking Regulatory Commission (CBRC) are urging rigorous credit management on commercial property projects to curb possible risks that could threaten the banking sector.
Analysts said the policy aimed at improving the property credit market with the central bank's resolution and devotion to implement the tight economic policy and the banking regulator's prevention against possible financial risk.
The policy would have significant impact on property developers as financing would be more difficult.
According to the joint-circular issued late on Wednesday evening, no loan would be given to developers to cover land transfer costs. Loans for land reserve acquisition would be secured by property developers through the use of a mortgage and require a legal land use certificate. The amount of the loan should be less than 70 percent of the estimated value of the project. The credit period would be confined to two years.
Provision of credit would be more cautious to government-approved construction projects that hadn't started within a year after a land concession contract was signed.
This would also apply to projects where its developed land area was less than one-third of the total, or where the investment was less than a quarter of the total within a year after starting construction.
No credit of any kind would be offered to projects where land had been idle for two years or more, the statement said.
Analysts said the policy would keep lenders away from risks caused by the possible reform of the country's property sector due to the global economic downturn and China's possible post-Olympics economic slowdown.
In the first half, nationwide credit for commercial real estate amounted to 5.2 trillion yuan (761.5 billion U.S. dollars), up 22.5 percent year on year, accounting for 15 to 20 percent of the total assets of the banking industry.
Analysts said the rate of non-performing loans was increasing. Stagnation in property sales and capital chain rupture would leave banks subject to high risk, which would in turn put the country's economy in danger.
As of Aug. 23, cash outflow outnumbered cash inflow among 55 developers by 25.5 billion yuan in the first half, up 477.2 percent from a year-earlier level, according to Wind Info, a Chinese financial data provider.
The developers posted their operating income at 58.3 billion yuan, up 37.96 percent year on year. Operating profit was 13.02 billion yuan, up 44.46 percent, while net profit stood at 9.94 billion yuan, up 49.4 percent. The figures were far from the more than 80 percent year-on-year growth rate posted last year.
Due to the credit crunch, property developers had sought to broaden channels of financing. Typically, they shifted some of their attention to trusts, funds and bonds.
The PBOC and the CBRC also called for financial support for indemnificatory housing construction. Strict credit management on rural collective land for construction should be enhanced. Loans would not go to projects in such areas for commercial properties or to rural residents' land purchase for home construction.
Editor: Yao
US dollar up - oil down?
Crude oil price since the beginning of July has dropped from USD$145 per barrel to below USD$120, dropping about 20%. At the same time, US dollar has been making new highs.
A report from Morgan Stanley thinks that although it cannot be proven from figures, but there is a certain 'inverse relationship' between the US dollar and crude oil price. Although before this the US government has been saying that the high crude oil price is because OPEC refuses to increase production capacity, but Morgan Stanley's report says that the high crude oil price rise has relationship to the poor performance of the US dollar.
At the same time, Morgan Stanley also pointed out that the recent drop in crude oil price and the strong US dollar is good for the global economy, stating that the drop in crude oil price has given the various countries central banks more flexibility to tackle the inflation problem.
See-Saw Action Between US Dollar and Oil Price
Because the US dollar is the main currency used for global crude oil trading, under the condition that supply does not change, strong or weak US dollar movements have a negative correlation with oil price fluctuations. However, a Chinese analyst says that the main reason for the drop in crude oil price was that the economic outlook for US, Europe and Japan is not good and the expected demand will thus decrease.
Of course, other then the slow down of the economy causing a slide in demand, oil's price decline has other reasons.
Credit Suisse in its report says that the recent big drop in oil price is due to 4 reasons. 1) Drop in demand. 2) Weakening of the Euro. 3) Increase in supply. 4) Decreased speculation activity.
Credit Suisse oil and gas analyst Prashant Gokhale says that the non-OPEC countries increase in oil output cannot be ignored. According to his estimates, non-OPEC countries oil supply amount will continue to increase between September this year to August 2009. Especially so will be in 1Q 2009, the non-OPEC countries daily oil output is expected to increase about 1 million barrels.
That expectation has strong support from IEA's figures. IEA's related department also estimated that beginning 4Q this year, non-OPEC countries daily out output volume is expected to increase and will continue to 3Q 2009. In between Januuary and March 2009, daily output volume is expected to be over 1.5 million barrels.
Less Speculation of Crude Oil Futures
The backing off of speculators from the crude oil futures trading is also one of the reasons for the decline in crude oil prices.
Prashant Gokhale, quoting figures from NYMEX, believes that non-commercial related speculation has greatly reduced from that in 2007.
In addition, Morgan Stanley's report believes that there is a 'reverse relationship' between the US dollar and oil price from 6 points. 1) Preference for US dollars of countries producing crude oil and denominated by US dollar drops. 2) Various countries central banks reactions for the high crude oil price crisis are different. 3) High oil price damages the various US projects. 4) US dollar based countries increases its export competiveness because of the drop in US dollar. 5) Big investments in bulk commodities. 6) Although the US dollar weakens but the demand for oil does not.
Credit Suisse report shows that in the first 7 months this year, the correlation between global oil price and the exchange rate between Euro and US dollar reached 77%. The most surprising coincidence is that in mid of July this year, when the exchange rate between Euro and US dollar was at the lowest, crude oil price have also fallen to the lowest at the same time.
Low Oil Price Benefit Fight Against Inflation
Another Chinese analyst says that the coming down of oil price is good in easing of China's domestic inflationary pressure. Imported inflation will decline following the drop in oil price. Production costs will also decrease and is good for the country's economic development. Also, if oil price were to maintain at current relatively lower price range level, it will provide more room for manoeuvre for China's macro economic controls.
According to his analysis, there is a break in relationship between oil price in China and outside of China. But if global oil price were to be cheaper, oil related inustries in China losses will also decrease and will resolve the oil and power shortage problem in China. Although China's oil price control has made oil price effect towards the CPI to be relatively small, but considering the changes in supply and demand, the possibility of adjustment to the oil price in China in the later half of the year will be greater.
If the oil price in China maintans unchanged, he predicts that CPI for 3Q in China to be about 6%, CPI for 4Q in China to be about 5%. So adequate adjustments to the oil price in China is feasible.
If bulk commodities prices, with crude oil as the main representative, can stabalize down, China's economic growth pressure could be lessen next year.
A report by BOC International Securities estimates that with the decline in price of agricultural products, CPI for August will go down to about 5.4%. And PPI will see a peak in the coming 2 months.
Latest Updates
5 September 2008
A report from Morgan Stanley thinks that although it cannot be proven from figures, but there is a certain 'inverse relationship' between the US dollar and crude oil price. Although before this the US government has been saying that the high crude oil price is because OPEC refuses to increase production capacity, but Morgan Stanley's report says that the high crude oil price rise has relationship to the poor performance of the US dollar.
At the same time, Morgan Stanley also pointed out that the recent drop in crude oil price and the strong US dollar is good for the global economy, stating that the drop in crude oil price has given the various countries central banks more flexibility to tackle the inflation problem.
See-Saw Action Between US Dollar and Oil Price
Because the US dollar is the main currency used for global crude oil trading, under the condition that supply does not change, strong or weak US dollar movements have a negative correlation with oil price fluctuations. However, a Chinese analyst says that the main reason for the drop in crude oil price was that the economic outlook for US, Europe and Japan is not good and the expected demand will thus decrease.
Of course, other then the slow down of the economy causing a slide in demand, oil's price decline has other reasons.
Credit Suisse in its report says that the recent big drop in oil price is due to 4 reasons. 1) Drop in demand. 2) Weakening of the Euro. 3) Increase in supply. 4) Decreased speculation activity.
Credit Suisse oil and gas analyst Prashant Gokhale says that the non-OPEC countries increase in oil output cannot be ignored. According to his estimates, non-OPEC countries oil supply amount will continue to increase between September this year to August 2009. Especially so will be in 1Q 2009, the non-OPEC countries daily oil output is expected to increase about 1 million barrels.
That expectation has strong support from IEA's figures. IEA's related department also estimated that beginning 4Q this year, non-OPEC countries daily out output volume is expected to increase and will continue to 3Q 2009. In between Januuary and March 2009, daily output volume is expected to be over 1.5 million barrels.
Less Speculation of Crude Oil Futures
The backing off of speculators from the crude oil futures trading is also one of the reasons for the decline in crude oil prices.
Prashant Gokhale, quoting figures from NYMEX, believes that non-commercial related speculation has greatly reduced from that in 2007.
In addition, Morgan Stanley's report believes that there is a 'reverse relationship' between the US dollar and oil price from 6 points. 1) Preference for US dollars of countries producing crude oil and denominated by US dollar drops. 2) Various countries central banks reactions for the high crude oil price crisis are different. 3) High oil price damages the various US projects. 4) US dollar based countries increases its export competiveness because of the drop in US dollar. 5) Big investments in bulk commodities. 6) Although the US dollar weakens but the demand for oil does not.
Credit Suisse report shows that in the first 7 months this year, the correlation between global oil price and the exchange rate between Euro and US dollar reached 77%. The most surprising coincidence is that in mid of July this year, when the exchange rate between Euro and US dollar was at the lowest, crude oil price have also fallen to the lowest at the same time.
Low Oil Price Benefit Fight Against Inflation
Another Chinese analyst says that the coming down of oil price is good in easing of China's domestic inflationary pressure. Imported inflation will decline following the drop in oil price. Production costs will also decrease and is good for the country's economic development. Also, if oil price were to maintain at current relatively lower price range level, it will provide more room for manoeuvre for China's macro economic controls.
According to his analysis, there is a break in relationship between oil price in China and outside of China. But if global oil price were to be cheaper, oil related inustries in China losses will also decrease and will resolve the oil and power shortage problem in China. Although China's oil price control has made oil price effect towards the CPI to be relatively small, but considering the changes in supply and demand, the possibility of adjustment to the oil price in China in the later half of the year will be greater.
If the oil price in China maintans unchanged, he predicts that CPI for 3Q in China to be about 6%, CPI for 4Q in China to be about 5%. So adequate adjustments to the oil price in China is feasible.
If bulk commodities prices, with crude oil as the main representative, can stabalize down, China's economic growth pressure could be lessen next year.
A report by BOC International Securities estimates that with the decline in price of agricultural products, CPI for August will go down to about 5.4%. And PPI will see a peak in the coming 2 months.
Latest Updates
5 September 2008
- Oil prices fall as dollar surges
NEW YORK - OIL prices fell on Thursday as the dollar strengthened against the euro on eurozone economic woes and the market shrugged off a larger-than-expected decline in US energy stockpiles.New York's main contract, light sweet crude for delivery in October, slid US$1.46 (S$2.10) to close at US$107.89 a barrel.
In London, Brent North Sea crude for October dropped US$1.76 dollars to settle at US$106.30.
New York crude oil prices rose early in the session but lost momentum as the euro sank against the dollar after the European Central Bank cut its eurozone growth forecasts for 2008 and 2009.
The European single currency fell briefly to its lowest level against the dollar since December 21, 2007 at US$1.4326 dollars.
The dollar also found support in an Institute for Supply Management survey showing US service sector activity rebounded unexpectedly in August.
A stronger dollar makes dollar-priced commodities more expensive for buyers using weaker currencies.
Many analysts expect crude oil prices to continue to fall due to declining demand in the slowing global economy.
Crude oil, which had hit a record-high US$147.27 on July 11 in New York, has lost nearly US$40 in less than two months.
In this context, the market dismissed an unexpected decline in US oil stockpiles last week.
The US Department of Energy (DoE) said crude stockpiles had dropped by 1.9 million barrels in the week ended August 29 instead of the consensus forecast of 300,000 barrels.
Distillates, which include heating fuel, fell by 400,000 barrels last week, less than the expected drop of 600,000.
Distillates are being watched closely by the market ahead of the northern hemisphere winter.
The latest DoE weekly report on energy stockpiles was published a day later than normal because of Monday's Labour Day holiday.
The oil market was looking ahead to Tuesday's meeting of the Organisation of the Petroleum Exporting Countries (Opec) amid speculation the cartel could cut output if prices hit US$100 or below.
'The rapidity of the price slide should provoke an aggressive reaction from Opec. Actually, there now appears to be a consensus building within the group for a production cut. The debate at next week's meeting in Vienna will be the size of a cutback,' said Mr John Kilduff at Alaron Trading.
Opec member Nigeria said on Thursday that it was keeping its options open on output quotas in the wake of falling oil prices.
'I'm keeping an open mind,' the junior minister for petroleum Odein Ajumogobia told sources ahead of Tuesday's gathering in Vienna, where Opec headquarters are located.
'We haven't seen the end of the volatility and I think we should wait and see how things settle down ... before we take a step to intervene.'
The Opec cartel of 13 countries produces 40 per cent of the world's oil. -- AFP
Thursday, August 28, 2008
Light at the end of the tunnel for US?
Figures shows that July existing home sales has increased 3.1% from that in June, the first time since February to go above 5 million units. This shows improvement from the steep decline from 2006 to 2007. New home sales was up 2.4% comparatively. Inventory of unsold homes declined for the second month in a row.
The bigger decrease in new home inventory is the first stage of recovery which shows that the US housing market has shown some light at the end of the tunnel.
But, it is still believed that the US housing market will stagger at the current situation for quite some time and will not see a quick re-bounce mainly due to 4 reasons. First, there is still the large second hand home inventory. Second, homes taken over due to foreclosure added more weight on the supply side. Third, credit environment continues to tighten and high mortgage rate gives a hit to demand. Fourth, employment continues to weaken, personal income and expenditure slowing down.
Further drop in interest rate by the FED will not have much effect on the US housing market but will only aid inflation. At the same time, FOMC meeting at the beginning have already shown signs that the FED may increase interest rates. However with falling crude oil price and the strengthening of the US dollar, the possibility of the FED increasing interest rate this year is greatly reduced.
At the beginning of last year when the sub-prime started to show problems in the US, it has worsen into a credit crisis towards the second half of the year. The credit crisis has also spread further into the various economy segments which caused a financial turmoil and becomes a major concern for the US economy. Economic growth was pulled down by the housing market problems and 4Q of 2007 shown negative growth.
To help stimulate the economy, the FED has already decreased the interest rate from 5.25% to 2%. But mortgage rates continues to rise above before the FED start to cut interest rate. The high mortgage rate has caused the number of applicants for mortgages to decrease.
A bottom is expected by around the mid of 2009 for the US housing market.
Latest Updates
3 September 2008
The bigger decrease in new home inventory is the first stage of recovery which shows that the US housing market has shown some light at the end of the tunnel.
But, it is still believed that the US housing market will stagger at the current situation for quite some time and will not see a quick re-bounce mainly due to 4 reasons. First, there is still the large second hand home inventory. Second, homes taken over due to foreclosure added more weight on the supply side. Third, credit environment continues to tighten and high mortgage rate gives a hit to demand. Fourth, employment continues to weaken, personal income and expenditure slowing down.
Further drop in interest rate by the FED will not have much effect on the US housing market but will only aid inflation. At the same time, FOMC meeting at the beginning have already shown signs that the FED may increase interest rates. However with falling crude oil price and the strengthening of the US dollar, the possibility of the FED increasing interest rate this year is greatly reduced.
At the beginning of last year when the sub-prime started to show problems in the US, it has worsen into a credit crisis towards the second half of the year. The credit crisis has also spread further into the various economy segments which caused a financial turmoil and becomes a major concern for the US economy. Economic growth was pulled down by the housing market problems and 4Q of 2007 shown negative growth.
To help stimulate the economy, the FED has already decreased the interest rate from 5.25% to 2%. But mortgage rates continues to rise above before the FED start to cut interest rate. The high mortgage rate has caused the number of applicants for mortgages to decrease.
A bottom is expected by around the mid of 2009 for the US housing market.
Latest Updates
3 September 2008
- Orders to U.S. factories rose by a larger-than-expected amount in July as demand for commercial aircraft, heavy machinery and iron and steel all posted solid gains.
The Commerce Department reported Wednesday that new orders increased by 1.3 percent in July, much stronger than the 0.8 percent increase economists had been expecting. The July advance follows an even bigger 2.1 percent increase in June and represents the fifth straight rise in orders.
- The U.S. dollar rallied against a currency basket Friday, on track for its best monthly gain in nearly 16 years, boosted by a batch of data showing a far more stable growth path for the United States than the rest of the world.
U.S. consumer spending slowed in July, but this was more than offset by a report showing business activity in the U.S. Midwest expanded at a more robust rate than expected, fueling a round of dollar buying. - U.S. consumer confidence rose to its highest in five months in August, posting an unexpectedly large recovery from depressed levels with the help of moderating energy prices, a survey released Friday showed.
The Reuters/University of Michigan Surveys of Consumers said its final index of confidence for August rose to 63.0 -- its highest since 69.5 in March. It was up from 61.2 in July and mid-August's preliminary reading of 61.7.
Economists had expected a reading of 62.0, according to the median of their forecasts in a Reuters poll. The 64 forecasts in the survey ranged from 60.5 to 64.0.
- US GDP increased at a 3.3 percent annual rate in the April-June quarter, much better than the government's initial estimate of a 1.9 percent pace and exceeded economists' expectations for a 2.7 percent growth rate.
- Initial claims for state unemployment insurance benefits declined to a seasonally adjusted 425,000 in the week ended Aug 23 from a revised 435,000 the prior week, the Labor Department said. It was the lowest reading since the week of July 19.
- New orders for long-lasting U.S. manufactured goods jumped a surprising 1.3 percent in July as businesses ramped up spending plans and demand for a wide array of items rose.
- Seasonally adjusted index of mortgage applications which includes both purchase and refinance loans, for the week ended Aug. 22 increased 0.5 percent to 421.6.
- Freddie Mac grew its portfolio to record last quarter, nearly doubling net interest income to $1.5 billion as its spread between funding costs and mortgage assets widened.
- Freddie Mac easily sold $2 billion of debt on Monday, reassuring investors that it and rival Fannie Mae can fund operations without a government takeover.
Controversy in US bio-fuel policy
With the rising crude oil price, US bio-fuel development entered the hyper-growth 'golden period'. However this energy replacement policy has been drawing controversy with the Texas state government who showed strong unhappiness recently.
According to Bush administration government's plan, bio-fuel usage this year must reach 34 billion liters and should increase yearly. But Texas state government strongly points out that the strong push for bio-fuel development is a big mistake because one third of America's bio-fuel comes from the transformation of cereal products. Vigorous development of bio-fuel will led to a big increment in grain prices directly impacting the Texas state livestock and poultry industry. US largest chicken meat producer Pilgrim's Pride says that poultry feed expenditure has increased by 900 million US dollars this year.
In response to the Texas government statement, United States Environmental Protection Agency says that developing bio-fuel will not cause economic harm to other industries manufacturing, the US government energy plan will not change. But Texas state governor Rick Perry says that the argument is not acceptable and some of the Texas state livestock and poultry industry people will continue with their petition with the congress and the next government to urge the correction of the irresponsible policy.
According to Bush administration government's plan, bio-fuel usage this year must reach 34 billion liters and should increase yearly. But Texas state government strongly points out that the strong push for bio-fuel development is a big mistake because one third of America's bio-fuel comes from the transformation of cereal products. Vigorous development of bio-fuel will led to a big increment in grain prices directly impacting the Texas state livestock and poultry industry. US largest chicken meat producer Pilgrim's Pride says that poultry feed expenditure has increased by 900 million US dollars this year.
In response to the Texas government statement, United States Environmental Protection Agency says that developing bio-fuel will not cause economic harm to other industries manufacturing, the US government energy plan will not change. But Texas state governor Rick Perry says that the argument is not acceptable and some of the Texas state livestock and poultry industry people will continue with their petition with the congress and the next government to urge the correction of the irresponsible policy.
Where will the US dollar go from here?
Since mid of July, the US dollar has been showing signs of appreciation. The US dollar index went from 72 points to 77 points, increased by about 7%. But after mid of August, it went through a short period of correction. Last Friday trading day saw it went up to 76.11 and then goes up from there with a new high on 26 August.The recent rise of the US dollar does not seem to be caused by any related good news to the US dollar. It is because the non US dollar based region's economy have not beeng doing well. From figures, Euro region 2Q economy has shown a drop of 0.2% in growth and at the same time import and foreign investments have decreased. Euro's June account deficit has grown to about 8.2 billion Euros. From the figures, we can see that Euro's economic situation is worsening. There is a drop in economic growth. Japan's June export and consumer index are also showing big declines. Japan's 2Q economic growth is -2.4%.
Short term (coming 1 to 3 months) trend for the US dollar should be in stagnant. There up and down trend is limited.
From the US economic situation, currently it still has not come out from the bottom. Although after various interest rate cuts, US housing still have not shown signs of recovery. June's existing home sales fell 2.6 percent in June. Housing permits shows a 17.7 per cent drop from June. The bad housing situation in US makes it difficult for US to get out of the bad economic situation and it may further worsen the US credit crisis.
The US credit crisis started from the 2007 sub-prime related debts, where their gradings have been constantly downgraded since then. The worry is that it may propagate to the prime related area in the coming months. When unemployment starts to get worse, credit card spending are still high. As unemployment gets more worse, the bad debts from credit card spending will increase. Prime housing loans are also showing signs of late payments. This will cause smaller banks to face worsening financial situation.
From US monetary policy stance, since the 90s, the US monetary policy main aim is to counter inflation. However, from 1991 to 1993, US inflation was on the up trend but US did not trigger any interest rate increment. In 1992 September there was even an inerest rate cut. After 'observing' for about 1 and half year or so, in 1994 February then there was the trigger of interest rate increment. The situation from 2000 to 2004 is also the same. In 2002 2H US inflation starts to rise, most economist were expecting then that the FED will start to increase interest rate. But in 2003 June the FED continues to cut interest rate by 50 basis points, beating market expectations. Until 2004 June where inflation continues to rise that the trigger for interest rate increment was started.
From the looks of things currently, with the stabalising of crude oil and commodities, inflation should be coming down and the FED may further cut interest rates to help save the ailing housing market and the falling economic situation. The moves will limit any further up trend for the US dollar.
But becuase of the falling economic situations of the other non US dollar based countries, the down trend of the US dollar is also limited. Tightening measures to control inflation and drop in external demands have caused the economies of the other non US dollar based countries to drop quite a lot. As inflation is still high for those countries at the moment, tightening measures or policies will continue. The economic situation of the other non US dollar based countries will continue to worsen thus providing support for the US dollar.
Mid term (coming 1 to 2 years) should see the US dollar on the up trend.
EU and Japan still needs time to get out of the current declining economic situation. Coming 1 to 2 years will not see them getting out of the declining economic situation. These 2 big economic bodies ability to tackle inflation is less then US as currently they cannot use an expanding monetary poilcy or fiscal policy to stop the declining economic situation. If there are no good measures to stop the worsening economic situation, it will only increase the economic decline time frame and the degree of it. The short term US dollar back flow is good for the recovery of the US economy. When US economy shows signs of recovery and the other non US dollar based economic bodies are still worsening, there will be more back flow of the US dollar, which will aid the recovery of some US industries causing the US dollar to strengthen.
Long term (2 years from now) trend for the US dollar is unclear. With the recovery of the US economy, the rest of the other countries should start to recover. If the US dollar were to continue the up trend, there needs to be some bright spots in economic growth.
Current US deficit is 1.9% of GDP. In future room for using tax cut to stimulate economic growth is still quite big. If the next economic growth still relies on high spending, then the US dollar will head back down as more spending in US will cause the deficit to increase also causing the export of Euro and Japan to increase helping them with the economic recovery causing the US dollar to weaken.
If like the 90s US have some major technological advancement which can lead the economic growth, the next economic growth for US will continue to support a strong US dollar. However, currently there is no such technology or industry which shows the potential to do so.
Latest Updates
30 August 2008
- US dollar rises to 26-month high against British pound
Wednesday, August 27, 2008
The China PolySilicon balance sheet
CEO of LDK Solar (赛维 LDK) in China says that if it is possible to lower the cost of polysilicon purchase, it will be possible to resolve the high cost of using solar panel to generate electricity. It should be possible to reduce the dollar per watt from 4 to below 1 dollar.
Polysilicon takes up to about 70% of the cost to manufacture a solar panel. In order to keep up with the profit margin, the leading solar panel manufacturers in China are moving upstream into polysilicon material related projects. A lot of other solar panel manufacturers outside of China are also rushing into the same area in order to have a piece of the cake in the most lucrative part in the solar panel industry.
According to data, currently there are about 33 projects in China in building on the solar panel related projects with total investments of about 100 billion yuan. Local governments are most happy to bring in such projects and then get it listed as quick as possible on stock markets outside of China.
Some industry experts are already sounding the alarm bell that polysilicon may face the danger of excess production capacity in the near future. If the 33 polysilicon projects that are currently building are able to fulfill full production capacity , they can manufacture up to 140,000 tonnes. In 2010, the estimated global demand for polysilicon is about 80,000 tonnes.
The Ecomomic Figures
Polysilicon manufacturing costs at more high tech plants outside of China is about 30 US dollar per kilogram. Because of technology barrier, capital limitations and the quick development of the end of the manufacturing chain, there is severe shortage of polysilicon in recent years. In China, ready stocks can sell for about 500 US dollars and about 95% is imported.
Such high profits are being eyed after by the China manufacturers.
As Asia's largest polysilicon manufacturing enterprise, LDK Solar's 70%-80% polysilicon material mostly came from the recycling of polysilicon from semi-conductor plants outside of China, waste materials from semi-conductor plants and also other silicon based side materials. The waste materials are much cheaper compared to the direct material purchase price. Those quantity that cannot be met by recycling are purchased from polysilicon manufacturing plants outside of China. But now, even waste materials from semi-conductor plant are getting scarce.
August 2007, LDK Solar invested 13 billion yuan to kick start the upstream manufacturing project of polysilicon with yearly manufacturing capacity of 16,000 tonnes. It is estimated that by the end of 2008, production capacity is to reach 6,000 tonnes and by 2009 will see the full completion of the project.
About 2 months ago, LDK Solar completed its IPO listing in US, the largest new energy IPO in China. Currently, the 16,000 tonnes silicon project has become the largest polysilicon plant globally.
The reason for the 13 billion yuan big investment was that LDK Solar believes that a more economical way of manufacturing polysilicon is to have large scale manufacturing capacity. During the manufacturing of poly-silicon, there is a side product namely Silicon Tetrachloride, a poisonous gas. If this gas cannot be re-cycled, it can harm and pollute the environment. If the polysilicon manufacturing plant can build an enclosed re-cycling system to convert the Silicon Tetrachloride to Trichlorosilane, not only can it can re-cycle the gas for re-usage, stop environmental pollution and lower production consumption, it can help create economical value and lower costs.
Investment in this area is pretty high and there is a high re-cycling technology barrier. Those small plants with capacity of about a few hundred tonnes and with investment amount of only about 100 to 200 million yuan are unable to get into it.
LDS Solar's will take the industrial grade silicon and do extraction/purification. This step needs high technology support, consumes the most energy and have high pollution and re-cycling index. This step also greatly impacts the profit margin. Currently, China plants costs are at about 100 US dollars.
In the past 20 years, the market value of polysilicon per kilogram is about 60 US dollars. Analysts in the industry think that the 400 to 500 US dollars per kilogram is too lucrative and costly. Once when the price goes back to the norm, it will be the time when the industry faces re-shuffling.
LDK Solar's CEO says that in order to reach a viable ecnonomic model, the manufacturing capacity of polysilicon projects should reach 10,000 tonnes. LDK Solar hopes to maintain the cost per kilogram at 20 to 25 US dollars. With the lowering in price of raw materials, then the profit margin at the next steps for silicon wafer production can be increased.
After reaching 16,000 tonnes production capacity, it will all be used fully for LDK Solar's internal silicon wafer production. Currently a lot of the industry players are facing shortage of materials and thus cutting their manufacturing lines and so the production capacity is not fully utilized.
According to LDK Solar's 2008 2Q results, gross margin is about 112.3 million US dollars, gross profit margin is about 25.4%. If LDK Solar were to meet expected production capacity next year, it can reach about 40%-50%.
Capacity Risks
In 2006, when polysilicon was in high demand, a lot of the PV enterprise players chosed to sign long term supply contracts with the global big silicon suppliers. The secured long term contracts may resolve the supply situation but will also face risks when price drops.
In the same year, Suntech (尚德) in WuXi China signed a 5 to 6 billion US dollar polysilicon 10 year contract with the big global suppier MEMC and also signed a 678 million US dollar contract with HoKu in US.
To lower the production cost of a solar panel, other then the raw silicon wafer cost, the other ways are to increase the efficiency of the electricity conversion process and decrease the silicon wafer thickness. But now, the more established industry players are looking upstream to the manufacturing of the raw silicon material.
Industrial leaders are moving upstream in order to open up the industrial chain. Other then LDK Solar's 16,000 tonnes polysilicon project, Suntech invested Asia Silicon (亚洲硅业) have a 6,000 tonnes polysilicon project in oder to have a more secured supply. TianWei BaoBian (天威保变) invested XinGuang Silicon Technology (新光硅业) is also preparing to built two 3,000 tonnes polysilicon projects in ChengDu (成都) XinJin (新津) and LeShan (乐山) in order to link up with the downstream solar panel manufacturing chain.
The high lucrative has attracted a lot of other industrial players in order to have a piece of the sweet cake in the PV industry. Glass industry leader China Southern Glass (南玻集团) has invested a few billions to build a 5,000 tonnes polysilicon project. A subsidiary of DAQO Group (大全集团), originally named Jiangsu Changjiang electronic group, which is in the electrical industry, has plan for a 10,000 tonnes polysilicon project. From the garment industry there is JiangSu Sunshine (江苏阳光) investing in a 4,500 tonnes polysilicon project and so on.
In the past 3 months, Intel, IBM, HP, GE, Bosch, BP, Samsung, Hyundai, LG and UMC are all going into or expanding their investment in the solar energy industry.
Industry experts see that although there are a lot of polysilicon projects ongoing on or starting up, in the short term, the production capacity cannot be fully realized. In 2007, China's polysilicon yearly production capacity was only about 1,100 tonnes and the demand at the same year was about 12,000 tonnes. In 2008, polysilicon supply shortfall situation still exists. Industry players who have the supply chain advantage will be able to avert the market risk.
Chinese Renewable Energy Society secretary-general says that the support for PV industry development comes from various countries government's energy related policies. Germany, US and Japan's are the most effective. Legislations, energy purchase rebates, rate cuts and investment subsidies have helped with the development of the PV industry. Currently in China there are no such policies yet. China's PV industry have to find its own survival space in this unbalanced demand-supply situation outside of China, which is quite reactive.
LDK CEO thinks that after 5 years time, the industry can supply about 100 GW, 3 times demand. Thus till 2012, supply for polysilicon will go way beyond demand.
However, LDK Solar believes that if the problems of funding, technology and market share are resolved, it is still worth a try because large scale of manufacturing can help lower costs. Only if the upstream polysilicon costs can be lowered to the same level as those manufacturers outside of China, then China PV products can be more competitive.
Buffett's rejected US$500 million bid for a Chinese stock
Buffett's recent announcement of a rejected US$500 million bid for a Chinese stock is like a rock thrown into the murky pool of the China stock market.
Chinese investors after hearing the news have been scuffling around to find out which Chinese company is that while the China stock market continues to decline.
The situation is very interesting. Its like a lot of people surrounding a big pool of water trying very hard to find out where the rock has dropped into the pool but ignoring the fact that the rock has dropped into the pool and created waves.
Unless Buffett he himself says it out, there is no way to know which company out of the 1000 plus listed company in China that Buffett is interested to buy. But we can do some analysis and determine some basic facts. Like for example from Buffett's speech, we can say that the deal is not successful because the bidding price may be too low. On this argument, we can further say that Buffett is interested in a China share listed on the China stock market and not in the Hong Kong stock market. It is a strategic investment and not an institutional investment.
If the stock Buffett is interested in is listed in Hong Kong, he could have just bought it openly like what he has done with PetroChina and will not be rejected, unless of course it is a substantial purchase amount. There is also one thing to add. Buffett says that it is a good deal and when the environment is suitable, you will see him doing big investments in China. It is believed that the environment that Buffett is referring to is the policy that restricts foreign investments in China.
Chinese investors while searching around to find out which company Buffett is interested in has neglected the fact that Buffett is once again interested in the China stock market. Chinese investors only see on the surface which stock Buffett is interested in and did not think deeper on the background of his recent decision to buy a China stock. Things like why Buffett is interested only recently and not when SSE was at 6000 or 5000 or 4000 points. This should be the key point to note.
Currently the SSE PE ratio is lower than S&P. Although there are a lot of factors like high inflation causing low confidence in the stock market, but maybe with this recent move by Buffett, it may be time to sit down and re-think and analyse the environment again and look at those companies which you think are worth to start investing in again.
Chinese investors after hearing the news have been scuffling around to find out which Chinese company is that while the China stock market continues to decline.
The situation is very interesting. Its like a lot of people surrounding a big pool of water trying very hard to find out where the rock has dropped into the pool but ignoring the fact that the rock has dropped into the pool and created waves.
Unless Buffett he himself says it out, there is no way to know which company out of the 1000 plus listed company in China that Buffett is interested to buy. But we can do some analysis and determine some basic facts. Like for example from Buffett's speech, we can say that the deal is not successful because the bidding price may be too low. On this argument, we can further say that Buffett is interested in a China share listed on the China stock market and not in the Hong Kong stock market. It is a strategic investment and not an institutional investment.
If the stock Buffett is interested in is listed in Hong Kong, he could have just bought it openly like what he has done with PetroChina and will not be rejected, unless of course it is a substantial purchase amount. There is also one thing to add. Buffett says that it is a good deal and when the environment is suitable, you will see him doing big investments in China. It is believed that the environment that Buffett is referring to is the policy that restricts foreign investments in China.
Chinese investors while searching around to find out which company Buffett is interested in has neglected the fact that Buffett is once again interested in the China stock market. Chinese investors only see on the surface which stock Buffett is interested in and did not think deeper on the background of his recent decision to buy a China stock. Things like why Buffett is interested only recently and not when SSE was at 6000 or 5000 or 4000 points. This should be the key point to note.
Currently the SSE PE ratio is lower than S&P. Although there are a lot of factors like high inflation causing low confidence in the stock market, but maybe with this recent move by Buffett, it may be time to sit down and re-think and analyse the environment again and look at those companies which you think are worth to start investing in again.
9th bank to close in US because of sub-prime
Since the beginning of the year, 'problematic' banks begins to surface.
US FDIC (Federal Deposit Insurance Corp.) announced last week that because of the large amount of bad debts related to housing loans, The Columbian Bank and Trust Company was ordered to close down. This is the 9th US local bank to close this year. Analyst points out that the sub-prime crisis impact to the American banking industry is still far from over. More banks are expected to end up with the same fate.
Sub-Prime Crisis Impact May Be Around For A Long Time
According to the FDIC statements, The Columbian Bank and Trust Company, located in Topeka Kansas, had $752 million of assets and $622 million of deposits as of June 30.
The insured deposits of the failed bank, which had nine branches, were sold to Citizens Bank and Trust. Also, Citizens Bank and Trust agreed to buy $85.5 million of Columbian Bank and Trust's assets.
The FDIC said Citizens Bank and Trust did not purchase about $268 million of brokered deposits at the failed bank. The failed bank had approximately $46 million in uninsured deposits held in approximately 610 accounts that potentially exceed the insurance limits. This amount is an estimate that is likely to change once the FDIC obtains additional information from these customers, regulators said.
The nine branches of The Columbian Bank and Trust Company will reopen on Monday, 25 August as branches of Citizens Bank and Trust, the FDIC said. Depositors of the failed bank will automatically become depositors of Citizens Bank and Trust. Deposits will continue to be insured by the FDIC.
Once that news is announced, the US market plunged with the DJIA giving up 241.81 points, a more than 2% decline.
Prior to the failing of The Columbian Bank and Trust Company, Douglass National Bank and 8 other US banks went under. Analysts says that it is due to the fact that those banks are in the center of the sub-prime crisis and a direct impact from the high default rate in mortgage loans which causes the above mentioned banks to go under.
Figures are also showing that more American banks may be closing down. In the 9 cases this year, 5 happened within a month around 11 July. Analysts warn that the sub-prime crisis could carry on for about 8 to 12 months. The impact to the American banking industry has not reach the worst yet. So, it is predicted that later this year, we may see some larger investment or commercial banks go under.
Facing such a possible situation, the 2 big US banking supervisory body, the FED and OCC (Office of the Comptroller of the Currency, Administrator of National Banks) has strengthen preventive measures to force those banks with such problems to take measures to 'smoothen' out the situation to prevent foreclosure. Such memorandums issued are more than that issued in 2007. The FED has issued 32 for the state and holdings banks dated 17 June. Last year was 31. OOC and FDIC separately issued 9 and 118 memorandums dated 15 August. Last year's respective figures were 6 and 175.
Large Financial Institutions Under Pressure
Because of economic slow down and housing prices still on the decline, financial institutions are facing survival difficulties. Rumors of big US financial institutions going under or being bought over have been flying around recently.
Recently, Korea Development Bank has expressed interest in acquiring Wall Street's 4th largest investment bank Lehman Brothers. But the deal was warned by the Korea government due to Lehman Brothers very low solvency. Lehman Brothers prior plans for the sale of its assets thus ended fruitless. If the Korea Development Bank deal does not go through, analysts believes that Lehman Brothers may end up as predicted being Bear Stearns part 2.
Other than Lehman Brothers, other big US financial institutions are also facing tremendous pressure. Citi and Merrill Lynch have been on a loosing streak for 4 consecutive quarters. JP Morgan Chase is also not in a very good situation as its investments in Freddie and Fannie has shrunk due to the drop in stock prices of Freddie and Fannie. Also, the buying back of the auction-rate securities has also added a big burden to the above banks financials. Wall Street investment banks currently need to buy back about up to 40 billion.
Latest Updates
29 August 2008
US FDIC (Federal Deposit Insurance Corp.) announced last week that because of the large amount of bad debts related to housing loans, The Columbian Bank and Trust Company was ordered to close down. This is the 9th US local bank to close this year. Analyst points out that the sub-prime crisis impact to the American banking industry is still far from over. More banks are expected to end up with the same fate.
Sub-Prime Crisis Impact May Be Around For A Long Time
According to the FDIC statements, The Columbian Bank and Trust Company, located in Topeka Kansas, had $752 million of assets and $622 million of deposits as of June 30.
The insured deposits of the failed bank, which had nine branches, were sold to Citizens Bank and Trust. Also, Citizens Bank and Trust agreed to buy $85.5 million of Columbian Bank and Trust's assets.
The FDIC said Citizens Bank and Trust did not purchase about $268 million of brokered deposits at the failed bank. The failed bank had approximately $46 million in uninsured deposits held in approximately 610 accounts that potentially exceed the insurance limits. This amount is an estimate that is likely to change once the FDIC obtains additional information from these customers, regulators said.
The nine branches of The Columbian Bank and Trust Company will reopen on Monday, 25 August as branches of Citizens Bank and Trust, the FDIC said. Depositors of the failed bank will automatically become depositors of Citizens Bank and Trust. Deposits will continue to be insured by the FDIC.
Once that news is announced, the US market plunged with the DJIA giving up 241.81 points, a more than 2% decline.
Prior to the failing of The Columbian Bank and Trust Company, Douglass National Bank and 8 other US banks went under. Analysts says that it is due to the fact that those banks are in the center of the sub-prime crisis and a direct impact from the high default rate in mortgage loans which causes the above mentioned banks to go under.
Figures are also showing that more American banks may be closing down. In the 9 cases this year, 5 happened within a month around 11 July. Analysts warn that the sub-prime crisis could carry on for about 8 to 12 months. The impact to the American banking industry has not reach the worst yet. So, it is predicted that later this year, we may see some larger investment or commercial banks go under.
Facing such a possible situation, the 2 big US banking supervisory body, the FED and OCC (Office of the Comptroller of the Currency, Administrator of National Banks) has strengthen preventive measures to force those banks with such problems to take measures to 'smoothen' out the situation to prevent foreclosure. Such memorandums issued are more than that issued in 2007. The FED has issued 32 for the state and holdings banks dated 17 June. Last year was 31. OOC and FDIC separately issued 9 and 118 memorandums dated 15 August. Last year's respective figures were 6 and 175.
Large Financial Institutions Under Pressure
Because of economic slow down and housing prices still on the decline, financial institutions are facing survival difficulties. Rumors of big US financial institutions going under or being bought over have been flying around recently.
Recently, Korea Development Bank has expressed interest in acquiring Wall Street's 4th largest investment bank Lehman Brothers. But the deal was warned by the Korea government due to Lehman Brothers very low solvency. Lehman Brothers prior plans for the sale of its assets thus ended fruitless. If the Korea Development Bank deal does not go through, analysts believes that Lehman Brothers may end up as predicted being Bear Stearns part 2.
Other than Lehman Brothers, other big US financial institutions are also facing tremendous pressure. Citi and Merrill Lynch have been on a loosing streak for 4 consecutive quarters. JP Morgan Chase is also not in a very good situation as its investments in Freddie and Fannie has shrunk due to the drop in stock prices of Freddie and Fannie. Also, the buying back of the auction-rate securities has also added a big burden to the above banks financials. Wall Street investment banks currently need to buy back about up to 40 billion.
Latest Updates
29 August 2008
- Integrity Bank of Alpharetta, Ga., on Friday became the 10th U.S. bank to fail so far this year, done in by the very business it was built on -- real estate lending.
Regions Bank of Birmingham, Ala., is assuming all of Integrity Bank's $974 million in insured and uninsured deposits in 23,000 accounts, and about $34.4 million of the bank's $1.1 billion in assets.
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