Stock Market Crash Expected In 2008 To Be Worse Than 1929

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Citi loses almost $10 billion 
Largest quarterly deficit in bank's 196-year history

Citigroup Inc. lost almost $10 billion in last year's final three months, the largest quarterly deficit in the bank's 196-year history, and slashed its dividend as it recorded a mammoth write-down for bad bets on the mortgage industry.

The nation's largest bank wrote down the value of its portfolio by $18.1 billion. It also boosted loan-loss reserves by $4.1 billion, signaling further problems in its consumer businesses as deflated home prices, high energy and food costs, and rising unemployment weigh on people's ability to make their loan payments.

To bolster its capital, the bank also said Tuesday it has lined up $12.5 billion in new investments from sovereign wealth funds and existing shareholders.

That includes $6.88 billion from the Government of Singapore Investment Corp. for a 4 percent stake. Other investors were Capital Research Global Investors, Capital World Investors, the Kuwait Investment Authority, the New Jersey Division of Investment, shareholder Prince Alwaleed bin Talal of Saudi Arabia and former chief executive Sanford Weill and his family foundation.

The $12.5 billion in fresh equity adds to the $7.5 billion that Citi got in November from the Abu Dhabi Investment Authority in exchange for a 4.9 percent stake in the company.

Citigroup's shares, which were trading around $55 a year ago, fell 70 cents to $28.36 in premarket trading on Tuesday.

The financial services company made no mention in its earnings report about job cuts beyond the 17,000 announced in the spring, a disappointment to some investors who were looking for a big downsizing. That means Chief Executive Vikram Pandit, who replaced Charles Prince in December, hasn't yet decided whether any of the global bank's core operations need to be cut or sold.

Pandit, calling the fourth-quarter results "clearly unacceptable," said in a statement Tuesday that "in an uncertain environment, these actions put us on our 'front foot,' focused on capturing opportunities that earn attractive returns for our shareholders."

The loss for the quarter totaled $9.83 billion, or $1.99 per share, compared with earnings of $5.13 billion, or $1.03 per share, during the same quarter a year earlier. Citigroup's revenue fell to $7.22 billion, down 70 percent from $23.83 billion in the final quarter of 2006.

Citigroup said the 41 percent cut in its quarterly dividend to 32 cents a share from 54 cents—along with the Asian investments and a stock offering of about $2 billion—will help boost its Tier 1 capital ratio, a measure of its financial strength.

Financial companies have been the highest dividend-paying sector in the stock market, but many—including Washington Mutual Inc., National City Corp. and the government-sponsored lenders Freddie Mac and Fannie Mae—have pared those payouts in recent months.

Citigroup's decision to cut its dividend and seek new cash from outside investors was widely anticipated on Wall Street after months of scrutiny over the bank's deteriorating operations. The biggest was Citigroup's bad bets on mortgage-backed bond instruments called collateralized debt obligations. It also was forced to bring $49 billion in hemorrhaging funds known as structured investment vehicles onto its books.

Over the past several weeks, Asian funds have been buying up the battered stocks of struggling U.S. banks. Early Tuesday, Merrill Lynch said it will receive a total of $6.6 billion from the Korean Investment Corp., Kuwait Investment Authority and Japan's Mizuho Corporate Bank—in addition to the $4.4 billion it has already gotten from Singapore's state-run Temasek Holdings.

Pandit said Citigroup would continue to sell off "non-core" assets. The bank has already sold shares in Redecard, a card business in Latin America, and an ownership interest in a unit of the Japanese brokerage Nikko Cordial it bought last year.

Citigroup's $18.1 billion writedown was significantly wider than the $6 billion writedown it took in the third quarter last year, and bigger than the $8 billion to $11 billion it guessed in October that it would take for the fourth quarter.

Citigroup said as of Dec. 31, it had a total of $37.3 billion in direct subprime mortgage exposure, down from $54.6 billion three months prior.

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Wholesale prices rise 6.3% 
Increase in 2007 was largest in 26 years

Wholesale inflation last year shot up by the largest amount in 26 years while retailers suffered their worst December shopping season in five years as mounting economic woes caused consumers to put away their wallets.

The Labor Department reported that wholesale inflation was up 6.3 percent for all of 2007, reflecting a huge increase for the year in various types of energy costs ranging from gasoline to home heating oil.

Meanwhile, retail sales fell by 0.4 percent in December, the worst showing in six months, the Commerce Department reported. Consumer confidence has plunged, reflecting the worsening housing slump and a lingering credit crisis.

For inflation, the year ended on a more positive note, with wholesale prices falling by 0.1 percent in December. That reflected decreasing costs last month for gasoline and other energy products. It was a significant slowdown after prices had soared by 3.2 percent in November, which had been the biggest one-month increase in 34 years.

The combination of rising inflation pressures and a weak economy represent a dilemma for the Federal Reserve over whether to cut rates to boost economic growth even at the risk of making inflation worse.

Federal Reserve Chairman Ben Bernanke last week sent a strong signal that the Fed is more worried at the moment about weak growth than inflation—given a series of weaker-than-expected data in recent weeks.

The economy skidded to a virtual standstill in the final three months of last year, raising fears the country could fall into a recession, unable to withstand the multiple blows from the prolonged downturn in housing, a severe credit crisis and soaring energy costs.

Already, unemployment is rising. The jobless rate jumped to 5 percent in December, up from 4.7 percent in November. That was the biggest one-month surge in unemployment since October 2001 in the wake of the 2001 terrorist attacks.

The various economic threats have sent consumer confidence plunging and pushed the economy to the top of voters' concerns. Political leaders have responded, with President Bush, Democrats in Congress and presidential candidates from both parties putting forward economic stimulus proposals.

The 6.3 percent increase in the Producer Price Index, which measures cost pressures before they reach the consumer, followed a much more moderate 1.1 percent increase in 2006.

It was the biggest annual price gain since a 6.3 percent rise in 1981, a year when the Federal Reserve was aggressively raising interest rates in a successful effort to combat a decade-long bout of stagflation, rising inflation in conjunction with weak economic growth.

The big increase last year reflected the fact that energy prices rose by 18.4 percent after having declined by 2 percent in 2006. It was the biggest annual increase in energy costs at the wholesale level since they rose by 23.9 percent in 2005.

However, core inflation, which excludes energy and food, was better behaved, rising by 2 percent last year, the same as in 2006. The Fed is closley watching core prices for any signs that the price pressures being seen in energy and food are starting to spread to other parts of the economy.

For December, the 0.1 percent drop in overall prices reflected a 1.9 percent plunge in energy and a 1.3 percent rise in food costs. Outside of food and energy, core inflation posted a moderate 0.2 percent increase.

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Newest junk bonds:
U.S. Treasuries? 
Medicare, Social Security pose
threat to American debt rating

U.S. Treasuries should be downgraded to junk bond status, not given a "triple-A" government rating, economist John Williams says, supporting a warning issued by Moody's last week that the credit rating of the U.S. government may be plunging in the next decade.

The issue surfaced recently when Reuters published a Moody's warning that in the next 10 years, the credit rating of the United States is at risk of being dropped below triple-A.

"We decided to raise the flag," Tom Lemmon at Moody's told WND, "because the underlying credit rating of the U.S. government faces the risk of downgrading in the next 10 years if solutions are not found to our growing Medicare and Social Security unfunded obligations."

Williams, author of the Internet newsletter ShadowGovernmentStatistics.com, said the credit-rating problem is immediate, not long-term.

"The U.S. Treasury is currently issuing 10-year notes and 30-year bonds," Williams pointed out. "Yes, the U.S. government can always print money, but the question is whether the investors buying these Treasury securities will get paid off when they get their money back."

Williams fears the U.S. is going through a period of "stag-flation," marked by a combination of slower economic growth accompanied by inflation, an economic condition the United States has not faced since the Carter administration and the 1970s.

Additionally, the declining value of the dollar means holders of long-term U.S. Treasury securities are likely to be paid off in dollars of considerably reduced value, compared to the value of the dollar at the time the securities were purchased.

"The total unfunded debt obligations for the federal government, including the net present value of the future Medicare and Social Security unfunded obligations, is now nearly $60 trillion," Williams told WND. "This is more than five times the total Gross Domestic Product of the United States."

"A ratio of 5-to-1 of unfunded debt obligations to GDP is more typical of third-world country than a triple-A rated country, such as the United States is supposed to be," he said.

The credit rating of the United States is critical because the federal government relies on sales of Treasury notes and bonds to finance federal deficits.

U.S. government securities rated as junk bonds will be much more difficult to sell to investors including foreign governments, with the result the bonds will be more expensive for the U.S. to issue, requiring much higher payouts to induce investors and foreign governments to take the added risk of repayment.

"The Bush administration has not succeeded with plans to reform Social Security and has not made serious proposals concerning Medicare, other than to add on a prescription drug benefit," the Moody's Sovereign Credit Analysis for the United States noted last week.

The Democrats taking control of Congress in the November 2006 mid-term elections "ended the prospect of major policy initiatives by the current administration," the Moody's report concluded.

Nor was Moody's confident Democratic presidential candidates had the political will to make the needed reforms to Medicare and Social Security, especially since Hillary Clinton, Barrack Obama and John Edwards have all promised various forms of universal health care which would increase costs by giving government-funded health care to those now uninsured.

Medicare and Social Security had been cited as the largest threats to the long-term financial health of the United States and to the government's triple-A rating, Moody's analyst Steven Hess told Reuters, as Moody's issued the report.

The General Accountability Office has also pushed the same alarm button.

David Walker, Comptroller General of the United States, has warned Congress the federal government's unfunded liabilities in light of growing Medicare and Social Security obligations soon to be due retiring baby boomers was $53 trillion as of Sept. 30, 2007. That was up from $20 trillion as of Sept. 30, 2000, some eight months after George W. Bush took office.

As WND previously reported, the Treasury Department's annual GAAP-accounted 2007 Financial Report of the United States Government suggested the real 2007 federal budget deficit was $4 trillion, not $163 billion previously reported by the Bush administration on a cash accounting basis.

The calculations in the Treasury's 2007 financial report are calculated on a Generally Accepted Accounting Practices basis that includes year-for-year changes in the net present value of unfunded liabilities in social insurance programs such as Social Security and Medicare.

Under cash accounting, the government makes no provisions for the future Social Security and Medicare benefits in the year in which those benefits accrue.

The approximately 76 million U.S. citizens born between 1945 and 1964 represent some 28 percent of the U.S. population. In 2008, baby-boomers born in 1946 will be able to receive their first Social Security payments, if they opt for early retirement at age 62.

"Simply said, holding revenues constant, required Medicare, Medicaid, and Social Security spending and the related deficit financing costs will far exceed the Government's ability to pay," the Citizens' Guide to the 2007 Financial Report of the United States Government concluded.

"The spending for social insurance programs," the Treasury’s Citizen Guide continued, "is projected to grow at an alarming rate under current law."

The concern about the debt rating of the U.S. makes more problematic the future payment of Medicare, Medicaid and Social Security obligations that today are being accrued by about-to-retire baby boomers.

As the 2007 Financial Report of the United States Government pointed out future Medicare, Medicaid and Social Security obligations are dramatically unfunded at current obligation levels.

Moreover, the future obligations due retiring baby boomers will have to be paid by a smaller group of U.S. workers who will have to pay higher yields to sell downgraded, possibly junk-bond rated U.S. Treasury debt to attract potential buyers, the critics said.

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Consumer spending slowdown deepens
'When all is said and done, we have probably entered into a recession'

More evidence of a dramatic slowdown in consumer spending surfaced Monday, as Sears Holdings Corp. warned that a drop in sales would result in a profit shortfall and the world's largest retail trade group issued a downbeat sales forecast for 2008.

Shares dropped among retailers from jewelry chain Zales Inc. to Saks Inc., which operates luxury retailer Saks Fifth Avenue, as the spending malaise appeared to deepen and spread beyond lower and middle-income shoppers to more affluent consumers. The decline in retailers' stocks continued a yearlong downward trend.

Consumer spending, which accounts for two-thirds of the nation's economic activity, had been showing resilience even as gas prices rose and the housing market fell. But recent data point to a sharper pullback, a trend that may tip the economy into recession.

American Express Co., whose customers are generally affluent, said Thursday it expects slower spending and more missed payments on credit card bills to hurt its profit throughout 2008. Upscale jewelry retailer Tiffany Co. cut its 2007 profit outlook on Friday as it reported a 2 percent decline in same-store sales, or sales at stores opened at least a year, during the holiday period.

On Monday, Sears Holdings, which owns Sears and Kmart stores, blamed growing competition, the housing market slump and consumers' credit fears for sales figures that were expected to slash fourth-quarter profit by as much as 57 percent from the year-ago period. Meanwhile, the National Retail Federation predicted retail sales in 2008 will grow at the weakest pace in six years.

The reports come on the heels of sales reports Thursday by major retailers that showed the weakest holiday period since 2002.

"When all is said and done, we have probably entered into a recession. The weakness in the holiday season was the tipping point," said Carl Steidtmann, chief economist at Deloitte Research, who forecasts a decline in consumer spending that takes inflation into account in coming months. It would be the first since 1991, when the savings and loans crisis precipitated a recession.

Steidtmann noted that rising employment and incomes had helped offset surging gasoline prices and mortgage payments, but with the job market showing signs of faltering, shoppers are losing their nerve. On Jan. 4, the Labor Department said hiring practically stalled in December, driving the nation's unemployment rate to a two-year high of 5 percent. For all of 2007, wages increased 3.7 percent, less than the 4.3 percent gain in 2006.

"Consumers are feeling very pinched," Steidtmann added. He said signs the "aspirational luxury" customer is retrenching are disconcerting, though the super wealthy are still spending. Any retrenchment of the affluent has negative consequences not only for stores, but for the boating industry and other luxury sectors, he said.

Some economists, including Rosalind Wells, are not predicting a recession but acknowledge a slowdown.

"The consumer is full of anxiety," said Wells, chief economist at the National Retail Federation, which said total retail sales are slated to grow 3.5 percent in 2008. That's below last year's estimated 4 percent pace and marks the weakest growth since 2002, when retail sales climbed 3 percent. The retail sales figure excludes automobiles, gas stations and restaurants. The final 2007 figure will not be known until Tuesday, when the Commerce Department is slated to report December's total retail sales figures.

Wells believes that further interest-rate cuts, along with a stimulus package from the government, could improve spending in the second half. Still, the worry is that such moves may help the economy, but they could be too late to make shoppers spend again.

Clearly, the holiday season showed shoppers are so financially squeezed, they are not only trading down to cheaper stores such as wholesale clubs but to cheaper brands within stores. Drug store chain Walgreen Co. reported early this month that shoppers are gravitating toward store label brands as they look for value. Grocery chain Supervalu Inc. reduced its full-year profit outlook last week, saying shoppers are focusing on its cheaper brands.

"I don't care whether the economy is in a recession, the consumer is in a recession," said Patricia Edwards, a retail analyst with Wentworth, Hauser and Violich. "When you are not buying name-brand cough syrup, something is going on."

Investors are becoming pessimistic, pushing down stocks among a wide variety of retailers Monday. While Saks' shares rose less than a penny, to $15.94 in trading Monday, Sears' stock plunged 5 percent, or $4.79, to $91.38. Zales' shares fell almost 5 percent, or 64 cents, to $13.08 in Monday trading. The Dow Jones index that tracks retailers' stocks fell about 9 percent in the past month and has fallen 9 percent in the past year.

Edwards and other analysts believe that stores' woes will translate to closings and reduced expansions. She expects mall-based apparel chains such as Gap Inc. and Chico's FAS Inc. to close some stores, while big department chains—including J.C. Penney Co. and Kohl's Inc.—will probably pare their growth.

As for Sears, Edwards noted its future looked more uncertain.

"It's not a fierce enough competitor to make it big" in this economic climate, she added.

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Dollar near record low
To within 1 cent of its all-time bottom versus euro

The dollar fell to within a cent of its all-time low versus the euro on speculation U.S. interest rates will drop below those of the 15 nations that share the single European currency for the first time in three years.

The U.S. currency extended three weeks of declines as Federal Reserve officials including Chairman Ben S. Bernanke signaled last week they favor greater ``insurance'' against an economic slowdown amid the slump in the housing market. European Central Bank council member Klaus Liebscher said today he sees ``significant'' upside risks to inflation.

``Interest rates in the U.S. are falling below those in Europe,'' said David Watt, a senior currency strategist at RBC Capital Markets Inc. in Toronto, a unit of Canada's biggest bank by assets. ``There are few reasons to buy the dollar.''

The dollar fell to as low as $1.4915 against the euro, the weakest since declining to a record low of $1.4967 on Nov. 23, and traded at $1.4870 as of 4:02 p.m. in New York, from $1.4776 on Jan. 11. It depreciated to the lowest since Nov. 27 against the yen, trading as low as 107.37 yen, before rebounding to 108.19. Watt said the dollar could weaken to $1.50 per euro this week.

The euro was little changed against the yen at 160.89, from 160.79 on Jan. 11.

Dollar's Decline

The U.S. Dollar Index traded on ICE Futures in New York, which tracks the dollar against six major currencies, touched 75.361, the lowest since Nov. 29. The index fell to 74.484 on Nov. 23, the weakest since the gauge started trading in 1973.

The U.S. currency may fall to $1.55 per euro by the end of the first quarter, London-based Bilal Hafeez, global head of currency strategy at Deutsche Bank AG, the world's largest foreign-currency trader, said in an interview. That compares with a median forecast of $1.47, compiled by Bloomberg from reports by 47 strategists and economists.

The Fed has lowered benchmark borrowing costs by 1 percentage point to 4.25 percent since September while the ECB has increased rates eight times to 4 percent since November 2005. The ECB kept rates unchanged on Jan 10. The euro has risen 15 percent in the past 12 months against the dollar.

Fed funds futures contracts on the Chicago Board of Trade show 52 percent odds the Fed will cut its target rate for overnight bank loans to 3.75 percent at its Jan. 30 meeting. The odds have risen from no chance a month ago. The odds of a decrease to 3.5 percent are 48 percent, compared with zero a week ago.

Yield Spread

The yield spread between German two-year notes and same- maturity Treasuries was 1.13 percentage points, near the widest since November 2002. The ECB is under pressure to keep interest rates unchanged even as inflation of 3.1 percent last month was above its 2 percent ceiling.

Investment banks including UBS AG, the world's second- biggest currency trader, and New York-based Goldman Sachs Group Inc. cut their dollar forecasts last week.

The euro strengthened after reaching a record against the currencies of the region's 24 biggest trading partners. It advanced against all but six of the 16 most-active currencies today. The single currency also climbed to a record 76.08 British pence and was recently at 76 pence, from 75.52 pence on Jan. 11.

The pound declined against 15 of the 16 major currencies even as a report showed U.K. factories increased prices at the fastest annual pace since 1991 in December.

Bank of England

Traders bet the Bank of England will cut interest rates from 5.5 percent to 4.75 percent by September, according to the September 90-day sterling interest-rate futures traded in London. The contract yielded 4.74 percent today, down from 5 percent on Dec. 31.

The common European currency extended gains against the dollar after rising beyond $1.4825 and $1.4850, where orders to buy the euro were placed, said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon in New York, the world's largest custodial bank with over $20 trillion in assets under administration. Traders sometimes use automatic instructions to limit losses in case bets go the wrong way.

``Some suggested that it was an Asian trade based on the rumor that the Fed will do an inter-meeting cut today,'' Woolfolk said. ``The expectations of the Fed's interest-rate cuts are undermining the dollar.''

The dollar fell against all 16 most-active currencies before a Commerce Department report economists in a Bloomberg News survey say will show retail sales were unchanged in December. The data will be released tomorrow.

Swiss Franc

The Swiss franc rose to a record against the dollar and the strongest in five months versus the euro as the risk of European companies defaulting on their debt rose, prompting investors to unwind carry trades. The franc gained to as high as 1.0886 per dollar.

``Traders are expecting this week's data to be pretty weak, supporting much more aggressive actions from the Fed,'' said Kathy Lien, chief currency strategist at DailyFX.com in New York.

The Fed is ``ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks,'' Bernanke told the Women in Housing and Finance and Exchequer Club in Washington on Jan. 10.

The dollar also fell against the yen as one-month implied volatility for yen options against the dollar rose to 13.45 percent from 12.13 percent on Jan. 11. Higher volatility may deter so-called carry trades funded in yen as it exposes the bets to greater exchange-rate fluctuation risks.

In carry trades, investors borrow in countries with lower interest rates and invest in those with higher rates, earning the spread between the two. The risk is that currency moves erase those profits. Japan's 0.5 percent interest rate is the lowest among industrialized nations.

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Asian stock markets plunge

Asian markets plunged Wednesday on growing speculation the U.S. economy- a vital export market- is sliding into a recession that could lead to a global slowdown.

Investors dumped stocks after an overnight sell-off on Wall Street and on news that Citigroup Inc. had lost nearly US$10 billion in the fourth quarter as it wrote down mountains of bad mortgage assets _ the latest fallout from the credit crisis. Weak U.S. retail sales figures also added to the gloom.

"American financial mismanagement has brought us to this economic meltdown," said Francis Lun, a general manager at Fulbright Securities in Hong Kong. "Asian stock markets are all suffering; nobody has escaped."

In Hong Kong, the benchmark Hang Seng index sank 5.4 percent to 24,450.85, while Tokyo's Nikkei 225 index fell 3.4 percent to close at 13,504.51 points, its lowest in more than two years.

Markets in Australia, China, India, South Korea, New Zealand and the Philippines also dropped sharply on worries about slower growth in the U.S. and uncertainty about the extent of the subprime mortgage crisis.

Concerns about the U.S. financial system were also felt in the currency market, which sent the U.S. dollar below 106 yen, its lowest since May 2005.

Investors saw more damage from the credit crisis when Citigroup said Tuesday it had written down $18.1 billion in bad assets. That help send the Dow Jones industrial average down 277 points, or 2.2 percent, to 12,501.11.

"The fallout from the Citigroup result is significant, with many saying ... there is more bad news to come," said Trent Muller, an ABN Amro Morgan analyst in Sydney. "We will see a bit of panic selling with a lot of investors taking cash off the table today."

There is also growing fear that the Federal Reserve hasn't done enough to keep the U.S. economy going. The central bank has lowered its key interest rate by a full percentage point to 4.25 percent since early August.

Now many investors and analysts believe the Fed will cut rates by a half-point at its Jan. 29-30 meeting.

But some believed the concerns about the U.S. economy were overblown.

However, Ernie Hon, a strategist with ICEA Securities in Hong Kong, said he expected any U.S. economic slowdown would be temporary and have limited impact on Asia. Strong demand from within Asia and the Middle East would offset slowing demand from the U.S., he said, blaming the market drop on investor jitters.

"The recession will only last for one to two quarters because the U.S. will continue to cut rates and inject money into its banking system," he said.

Still, in Tokyo, the region's biggest market, worries about the yen's appreciation contributed to big declines in major Japanese exporters Honda Motor Co., which shed 4.9, and Sony Corp., which plunged 6.8.

In China, the benchmark Shanghai Composite Index fell 2.8 percent to 5,290.60. The index has gained 0.6 percent since the beginning of the year, compared with losses in most other Asian markets.

"The U.S. market certainly influenced mainland Chinese markets due to its impact on Hong Kong shares. That's the main reason for today's decline," said Peng Yunliang, a senior analyst at Shanghai Securities.

But the impact is mainly limited to major bank and insurance companies whose shares are listed in both Shanghai and Hong Kong. Overall, China's share prices have strong support from domestic demand, she said.

"Other stocks like pharmaceuticals, energy, resources and tourism are all continuing to gain thanks to strong demand," Peng said.

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Dow drops more than 300 points

Wall Street extended its 2008 plunge Thursday, tumbling after a regional Federal Reserve report showed a sharp decline in manufacturing activity and as investors grew concerned that downgrades of key bond insurers could trigger further trouble with souring debt.

Each of the major indexes fell at least 2 percent, including the Dow Jones industrial average, which lost more than 300 points.

Stocks opened higher but quickly gave up their gains after the Philadelphia Federal Reserve said its survey of regional manufacturing activity registered a negative 20.9 from a revised reading of negative 1.6 in December. The reading came in well short of what Wall Street had been expecting and underscored the seriousness of the economic concerns that have gripped both Wall Street and Washington in recent weeks.

Credit concerns also dogged Wall Street after rating agency Moody's Investors Service placed bond insurer Ambac Assurance Corp. on review for a possible downgrade. That possibility alarmed Wall Street because it would place all bonds insured by Ambac on review as well. Ratings agencies are concerned that bond insurers would be unable to absorb a spike in claims.

According to preliminary calculations, the Dow, which had been up more than 50 points early in the session, closed down 306.95, or 2.46 percent, at 12,159.21.

The Dow is now off 8.34 percent for the year.

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Bush calls for $145 billion stimulus package 
President sees tax rebates as priority

President Bush on Friday called for about $145 billion worth of tax relief and other incentives to stimulate a sagging economy and fend off a possible recession. He said a growth package must include tax incentives for business investment and “direct and rapid” tax relief for individuals.

Bush said that to be effective, an economic stimulus package would need to roughly represent 1 percent of the gross domestic product — the value of all U.S. goods and services and the best measure of the country’s economic standing. White House advisers say that, in current terms, 1 percent would amount to around $145 billion, which is along the lines of what private economists say should be sufficient to help give the economy a short-term boost.

“Letting Americans keep more of their money should increase consumer spending,” he said.
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Bush said that Congress should work as soon as possible to send him legislation to “keep our economy growing and creating jobs.”

The president and Congress are scrambling to take action as fears mount that a severe housing slump and painful credit crisis could cause people to close their wallets and businesses to put a lid on hiring, throwing the nation into its first recession since 2001.

“This growth package must be big enough to make a difference in an economy as large and dynamic as ours, which means it should be about 1 percent of GDP,” Bush said. He said the package should be built on “broad-based tax relief” that will directly affect economic growth.

Federal Reserve Chairman Ben Bernanke entered the stimulus debate Thursday, endorsing the idea of putting money into the hands of those who would spend it quickly and boost the flagging economy.

The scramble to take action came as fears mounted that a severe housing slump and a painful credit crisis could cause people to clamp down on their spending and businesses to put a lid on hiring, throwing the country into its first recession since 2001.

The president did not push for a permanent extension of his 2001 and 2003 tax cuts, many of which are due to expire in 2010, officials said. That would eliminate a potential stumbling block to swift action by Congress, since most Democrats oppose making the tax cuts permanent.

White House counselor Ed Gillespie said Friday on CNN the White House would still like to see the tax cuts made permanent, but the president believes a stimulus plan needs to be put into place within the next few weeks.

Bernanke voiced his support for a stimulus package in an appearance before the House Budget Committee. He stressed that it must be temporary and must be implemented quickly — so that its economic effects could be felt as much as possible within the next 12 months.

“Putting money into the hands of households and firms that would spend it in the near term” is a priority, he said.

Especially important is making sure a plan can put cash into the hands of poor people and the middle class, who are most likely to spend it right away, he said, though he added that research shows affluent people also spend some of their rebates.

Bernanke declined to endorse any particular approach, but he did say he preferred one that would not have a long-term adverse impact on the government’s budget deficit.

Senior aides to House Democrats and Republicans said in addition to included tax rebates for individuals, the emerging measure would contain tax breaks for businesses investing in new equipment, increases in food stamps, and higher unemployment benefits. They spoke on condition of anonymity, since the talks are ongoing and lawmakers have promised not to reveal details.

House Speaker Nancy Pelosi said she wanted legislation enacted within a month and said the government must “spend the money, invest the resources, give the tax relief in a way that again injects demand into the economy, puts it in the hands of those who need it most and into the middle class ... so that we can create jobs.”

For now, Bernanke was hopeful the country could skirt a dangerous downturn.

“We’re not forecasting recession but, rather, at this point, slow growth,” he told lawmakers. Still, the toll of the housing and credit debacles will be felt into early next year, he added.

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US recession fears sink global markets

Asian and European stock markets plunged Monday following declines on Wall Street last week amid investor pessimism over the U.S. government's stimulus plan to prevent a recession.

India's benchmark stock index tumbled 7.4 percent, while Hong Kong's blue-chip Hang Seng index plummeted 5.5 percent to 23,818.86, its biggest percentage drop since the Sept. 11, 2001, terror attacks.

Investors dumped shares because they were skeptical that an economic stimulus plan President Bush announced Friday would shore up the economy, which has been battered by housing and credit problems. The plan, which requires approval by Congress, calls for about $145 billion worth of tax relief to encourage consumer spending.

Concerns about the outlook for the U.S. economy, a major export market for Asian companies, has sent the region's markets sliding in 2008. Just last Wednesday, the Hang Seng index sank 5.4 percent.

"It's another horrible day," said Francis Lun, a general manager at Fulbright Securities in Hong Kong. "Today it's because of disappointment that the U.S. stimulus (package) is too little, too late and investors feel it won't help the economy recover."

Japan's benchmark Nikkei 225 index slid 3.9 percent to 13,325.94 points, its lowest close in more than 2 years. China's Shanghai Composite index plunged 5.1 percent.

The sell-off continued in Europe. Germany's DAX was down 4.2 percent in morning trading, France's CAC 40 slid 4.7 percent, while Britain's FTSE 100 dropped 3.6 percent.

"People are certainly nervous about a potential recession in the U.S. spilling over to the rest of the world," said David Cohen, Director of Asian Economic Forecasting at Action Economics in Singapore.

"Maybe there's still some wariness about politicians are able to come up with a compromise and act sufficiently quickly" on a stimulus package, Cohen said. "I think the impact would be marginal anyway."

Investors took cues from the negative reaction to the president's plan on Wall Street on Friday, when the Dow Jones industrial average slid 0.5 percent to 12,099.30, bringing its loss for the year so far to nearly 9 percent.

Traders also have shrugged assurances from Federal Reserve Chairman Ben Bernanke that the U.S. central bank is ready to act aggressively- which means a likely big interest rate cut later this month- to help the sagging economy.

Some analysts predict that Asia won't suffer dramatically from a possible U.S. recession because increased trade and investment within Asia has made the region less reliant on the United States than in the past. Excluding Japan, 43 percent of Asia's exports go to other nations in the region, Lehman Brothers calculates, up from 37 percent in 1995.

But on Monday, uncertainty and pessimism reigned.

In Tokyo trading, exporters got hit hard, partly because of the yen's recent strength against the dollar. Toyota Motor Corp. lost 3.3 percent and Honda Motor Co. sank 3.4 percent.

In Hong Kong, Bank of China dropped 6.39 percent and China Construction Bank slid 7.83 percent.

In Mumbai, India, the benchmark Sensex index fell 1,353 points, or 7.4 percent- its second-biggest percentage drop ever- to 17,605.35. At one point, it was down nearly 11 percent.

The decline hit companies across the board, with power utility Reliance Energy Ltd. falling 16.4 percent. Major software company Tata Consultancy Services Ltd. slid 7.6 percent

"A gloomy U.S. climate has affected the global markets. Even if those markets recover, it will take sometime for the recovery to reach India because today's fall has been so drastic," said Jayant Pai, of the Mumbai investment company IL&FS Ltd.

Still, Pai and others suggested that the declines could lead to a buying opportunity.

"The sell-off today takes us close to the bottom," she said.

Since the start of the year, Japan's Nikkei index has declined 13 percent, while Hong Kong's blue-chip index is down more than 14 percent. Even China's Shanghai index- which nearly doubled last year- has fallen 6.6 percent since the beginning of the year and nearly 20 percent from its all-time closing high on Oct. 16.

[Soldier4Christ]

Holiday saves
U.S. markets 
Black Monday meltdown in Asia,
Europe spells worsening $ crisis

European, Asian markets suffer worst losses since 9/11
Investors skeptical of efforts by Bush, Fed to bolster U.S. economy

European and Asian stock markets followed Wall Street's declines with major losses, including Hong Kong's biggest drop since the 9/11 attacks.

Hong Kong's Hang Seng index lost 5.5 percent to 23,818.86; the UK'S FTSE-100 dropped 3.9 percent to 5,673.1; France's CAC-40 Index declined 4.5 percent to 4,861.2, while Germany's lost 5.35 percent to 6,922.7.

India's stock index plummeted 7.4 percent.

U.S. exchanges are closed today for the Martin Luther King Jr. holiday.

(Story continues below)

Investors reacted with pessimism to President Bush's economic stimulus plan, which calls for $145 billion worth of tax relief to encourage consumer spending and bolster an economy plagued by housing and credit market problems.

Assurances by Federal Reserve Chairman Ben Bernanke that the U.S. central bank likely will respond with a big interest rate cut also did not impress investors.

The Hang Seng index lost 5.4 percent last week amid concerns about the U.S. economy.

"It's another horrible day," said Francis Lun, a general manager at Fulbright Securities in Hong Kong, according to the Associated Press. "Today it's because of disappointment that the U.S. stimulus (package) is too little, too late and investors feel it won't help the economy recover."

Japan's Nikkei 225 index closed at its lowest mark in more than two years, losing 3.9 percent to drop to 13,325.94 points.

"People are certainly nervous about a potential recession in the U.S. spilling over to the rest of the world," said David Cohen, Director of Asian Economic Forecasting at Action Economics in Singapore.

The Dow Jones industrial average lost 0.5 percent Friday, ending at 12,099.30.

The Dow has dropped nearly 9 percent so far this year.

[Soldier4Christ]

Experts warn of stock market hysteria 
Advise against panic, recommend picking up cheap stocks

Markets crashed all across Europe Monday, with Germany's DAX losing 7 percent of its value. But analysts advise against panic -- in fact, they say, now might be a good time to pick up some cheap stocks.

Five percent, 6 percent, 7 percent: For the German DAX stock market index, Monday was a day of steep falls. A €1 billion loss at the bank WestLB, combined with the fears of a global recession (more...), helped push the DAX beneath the psychologically important 7,000-point mark.

It wasn't just the DAX which was hard hit. London's FTSE 100 index also fell 4.5 percent, while in Paris the Cac-40 dropped 4.6 percent. Elsewhere the Tokyo Nikkei 225 index fell by 3.9 percent. US markets were closed for a public holiday, however.

Is the DAX now set to keep falling? No, say experts. "It looks dramatic at the moment, but it is not as bad as it seems," Matthias Jörss, head of equity strategy at the leading private bank Sal. Oppenheim, told SPIEGEL ONLINE. "We have gotten used to rising prices over the years -- especially in Germany. Now we are simply seeing a correction."

There had been signs that a crisis was looming. Every investor knew that the US mortgage crisis was bound to have consequences -- the only question was when. "At the beginning of the year, the market hid all the risks," says Jörss. "It was clear that things were first going to get worse before they got better."

One should not assign too much significance to the current dip, Jörss advises. Stock prices, he points out, are not entirely rational. "If you go onto the trading floor and spread a rumor about a share price, then everyone will believe you," Jörss says. He believes that a further decline in the DAX to 6,600 points is realistic. "If there is bad news, then it can of course go even lower," he says. "But actually we are considering writing reports which are more positive than negative. We are slowly finding many attractive stocks." In other words, prices are so low that it could be worth investing at the moment.

'We Are Seeing an Avalanche'

The trigger for the market crash was the news from WestLB on Monday morning. Over the weekend, the bank had to admit to a billion-euro capital requirement because of misguided investments on the US mortgage market. "At first they gave the impression that they had nothing to do with the cheap loans in the US -- and then suddenly €2 billion were missing (more...)," chides Jürgen Kurz of DSW, a German association which represents private investors. "That unsettles the market tremendously. The result is panic selling like today." Other banking stocks fell into the downward spiral. "What we are seeing is an avalanche," says Kurz.

The crucial question for investors is: What comes next? Kurz sums up investors' concerns: "Have all the banks revealed all their losses -- or is there still something lurking?"

Nevertheless, Kurz himself appears optimistic. "The situation in the real economy is OK. In addition, there is enough liquidity available, including from, among other sources, sovereign wealth funds." This money is looking for places to invest -- and almost automatically flows into the stock market because of low interest rates.

The DSW therefore advises calm. Private investors could even take advantage of the current stock market trough to slowly start buying shares again. "If you're looking at a time horizon of five to six years, you can't go too far wrong with a solid company," says Kurz. "Weak phases are perfectly suited for investing." Only investors who are absolute pessimists should hold off. "But then you basically shouldn't be buying shares," Kurz says.

Kurz considers banks in particular to be "solid companies" whose share prices will rise again. "Banks will still be around in 30 or 40 years. The existing system cannot get by without them." Of course, banks have a tendency to take high risks, he says. "But the business model in itself works. As soon as the risks are out, the institutions will once again make high profits."

Nevertheless, there are certain lessons which should be learned from the current crisis, says the DSW. "We need more transparency and greater responsibility from boards," says Kurz. In addition, he says, risk management must be improved. "It's not acceptable that a bank can take enormous off-balance-sheet risks within the framework of some kind of special purpose entity. These kinds of bodies should not be allowed to exist." The financial authorities should now introduce a strict regulatory framework, he says.

[Soldier4Christ]

Emergency rate cut prevents market meltdown 
U.S. stocks ease from sharp opening drop after global sell-off


In an emergency move, the Federal Reserve lowered its target rate for federal funds by 75 basis points before the New York Stock Exchange opened this morning, hoping to ease investor fears of recession and prevent yesterday's global stock sell-off from spreading to the U.S.

In the first moments after opening, the Dow Jones Industrial Average plunged more than 460 points, dropping sharply to under 12,000. By mid-morning, however, it was trading down just 57 points.

Overnight, stocks closed sharply down in Asia for the second day in a row.

The Nikkei 225 in Japan closed down 5.7 percent, hitting its lowest level since September 2005.

In Hong Kong, the blue-chip Hang Seng index lost 8.65 percent, to close at 21,757.63.

The Bombay Stock Market in India suspended trading for an hour after investors lost some $160 billion in equity value within moments of opening.

European markets are trading higher following the Fed's rate reduction. Britain's FTSE 100 was up 159 points and Germany's DAX index 71 points.

Central bankers are concerned that the worldwide stock sell-off could trigger a panic. On Wall Street, traders worry the Fed's emergency cut today may have limited its options when the Federal Open Market Committee holds its next scheduled meeting Jan. 31.

Lowering rates will pump more liquidity into the market and may take some pressure off homeowners who could face foreclosure as a result of increases in adjustable mortgage rates.

Still, major banks, such as Citibank, and brokerage firms – including Merrill Lynch, Bear Stearns and Morgan Stanley – have sought foreign capital investors, suggesting the crisis is an asset crisis, not a liquidity crisis.

Mortgage foreclosures have caused Collateralized Loan Obligations, or CLOs, held in bank asset portfolios to experience losses that have negatively impacted bank reserves.

Some analysts believe the global problem may not be too little money available to lend at relatively cheap rates. Instead, it could stem largely from the fraudulent and otherwise under-performing securitized loan obligations that Wall Street created and sold to financial institutions for their asset portfolios when former Federal Reserve Chairman Alan Greenspan held rates at historically low levels following 9/11.

Beginning in January 2001, the Fed under Greenspan cut rates 13 times, taking the discount rate, the overnight bank lending rate, from 6.5 percent to 1 percent in June 2003, a 46-year low.

Greenspan held the discount rate at 1 percent for one year, until June 2004, which many believe was behind the housing bubble that now has burst.

Returning to a 1 percent discount rate environment is now virtually unimaginable, especially after the U.S. Labor Department announced consumer prices rose by 4.1 percent in 2007, the fastest pace in 17 years, with increases spurred by higher gasoline and food prices.

As the Fed eases rates, it's likely the dollar will continue its downward spiral. This morning, the euro was up slightly at $1.4624, gaining fractionally against the dollar.

[Soldier4Christ]

Bush won't rule out bigger stimulus package 
White House may agree to go above $150 billion in economic aid

President Bush won’t rule out the possibility of a larger economic stimulus package than the $150 billion program already outlined to reinvigorate the ailing economy, the White House said Tuesday.

Bush last week offered the outline of a short-term economic boost, but the slumping of the global economic market since then has raised the question of whether he’s willing to broaden the package. Word of the administration’s thinking came on the same day that the Federal Reserve announced a three-quarter percentage point cut in a key interest rate to steady the economy.

Discussing the White House’s options, press secretary Dana Perino told reporters: “I’m not going to close the door, but I’m not suggesting that anyone believes it has to be bigger” than the roughly $150 billion figure already discussed. Later, Perino said that at this point the White House has not “seen higher numbers floated by members of Congress” and that Bush believes the growth package he has outlined is “the right amount.”
Story continues below ↓advertisement

The president last Friday put forward the broad outlines of a stimulus plan that would include tax cuts for individuals and businesses. Bush said any plan, to be effective, would need to represent roughly 1 percent of the gross domestic product, or about $140 billion to $150 billion.

On Wall Street, stocks plunged at the opening of trading, propelling the Dow Jones industrials down about 400 points after the Fed’s announcement of its rate cut failed to assuage investors fearing a recession. U.S. markets joined stock exchanges around the globe that have fallen precipitously in recent days amid concerns that a downturn might spread around the world.

U.S. Treasury Secretary Henry Paulson also welcomed the Fed's hefty interest rate cut.

“This is very constructive and I think it shows this country and the rest of the world that our central bank is nimble and can move quickly in response to market conditions,” Paulson said after the Fed cut the benchmark short-term interest rates by three-quarters of a percentage point.

Bush was meeting with congressional leaders at the White House later Tuesday to discuss details of the economic package, which both sides hope to on quickly.

Perino said the White House is not proposing an even bigger economic package at this point, but she declined to rule one out, either. The sharp decline of markets in the United States and around the globe is tied in part to the perception that Bush’s outlined stimulus package would not do enough to avert a recession.

Perino said the White House does not comment on daily fluctuations in the market. But she did say that people should have confidence in the underlying strength and long-term prospects of the U.S. economy.

“We are not forecasting a recession,” Perino said. “Clearly there is a slowdown.”

Earlier Tuesday, Paulson told the U.S. Chamber of Commerce that Congress and the administration need to agree quickly on a package of tax cuts. “Time is of the essence and the president stands ready to work on a bipartisan basis to enact economic growth legislation as soon as possible,” he said.

The Fed’s decision to slash the federal funds rate — the interest that banks charge each other on overnight loans — was the biggest single cut of its kind in recent memory. The Fed cut the rate to 3.5 percent from 4.25 percent — a move that represented the most dramatic signal it could can send of its concern about a recession. It said “appreciable downside risks to growth remain” and held out the prospect of further rate cuts.

Any compromise stimulus package likely would involve tax rebates, business tax cuts and funding for a Democratic-led call for additional food stamp and employment aid. Paulson said he was optimistic the administration and Congress could “get this done long before winter turns to spring.”

The administration’s initial efforts also failed to reassure global stock markets, which plunged Monday on rising fears that trouble in the U.S. economy could translate into weaker economic activity worldwide. U.S. markets were closed Monday for the Martin Luther King holiday.

Both the White House and leading lawmakers already have displayed flexibility not witnessed last year in battles over spending, taxes and children’s health insurance. Lawmakers appearing on weekend televisions talk shows promised bipartisanship.

Bush has advocated a growth package of about $145 billion, centered on tax cuts for business and rebates for individual taxpayers. He did not announce details, but administration officials are focusing on rebates of $800 to $1,600 for individuals and couples and so-called bonus depreciation to allow companies to deduct 50 percent of business investments made this year. He also supports help for small businesses with more generous write-offs on equipment purchases.

On Capitol Hill, talks between Pelosi and House Minority Leader John Boehner, R-Ohio, have focused on smaller tax rebates of perhaps $500 for individuals, bonus depreciation and small business expensing, as well as Democrats’ call for boosts in unemployment benefits, food stamp payments and the Medicaid health care program for the poor and disabled.

The rush to produce an economic stimulus bill comes as recent data on the economy is increasingly negative and as the issue has become a top priority with voters.

[Soldier4Christ]

Volatile Dow Jones
ends under 12,000
Emergency Fed rate cut
fails to stop panic selling

The Dow Jones Industrial Average closed sharply down 128.11 points yesterday, closing at 11,971.19, the first time the market has closed under 12,000 since Nov. 3, 2006.

In an emergency move before the New York Stock Exchange opened, the Federal Reserve acted to prevent a market meltdown by lowering its target rate for federal funds by 0.75 percentage points.

The Fed hoped its surprise announcement would ease investor fears of recession and prevent Monday's global stock sell-off from spreading to the United States, as stock markets opened Tuesday for the first time this week following the Martin Luther King holiday.

In the first moments after opening yesterday, the Dow Jones Industrial Average plummeted more than 460 points, recovering to narrow losses midday in a volatile session that ended with yet another triple-digit loss.

(Story continues below)

In the worst year's opening in history, the Dow is now down 15.5 percent from the historic market peak recorded less than four months ago, on Oct. 9, 2007, when it closed at an all-time high of 14,164.53.

Investors on Wall Street ended the day nervous, resolved to follow overnight markets in Asia and Europe to see if panic selling has subsided.

Yesterday, the Dow futures ended down 155 points, suggesting that stock markets most likely would open down once again today.

Wall Street traders at the close of the market were already jawboning for another .25 percentage point rate cut on Jan. 31, when the Federal Open Market Committee holds its next scheduled meeting.

Still, a series of rate cuts since the mortgage and credit crisis began late last year have not worked to revive stock markets globally, suggesting the crisis is truly an asset crisis, not a liquidity crisis.

Lowering rates will pump more liquidity into the market and lowering rates may take some pressure off certain homeowners who may be more likely to face foreclosures as a result of increases in adjustable mortgages monthly payments should interest rates remain high.

Still, major banks such as Citibank and brokerage firms including Merrill Lynch, Bear Stearns and Morgan Stanley have sought foreign capital investors, suggesting the crisis is an asset crisis, not a liquidity crisis.

In other words, mortgage foreclosures have caused Collateralized Loan Obligations, or CLOs, held in bank asset portfolios to experience losses that have negatively impacted bank reserves.

The global problem may not be a problem of too little money available to lend at relatively cheap rates.

Instead, the current problem more likely results from the fraudulent and otherwise underperforming securitized loan obligations that Wall Street created and sold to financial institutions for their asset portfolios when former Federal Reserve Chairman Alan Greenspan held rates at historically low levels following 9/11.

Beginning in January 2001, the Fed under Greenspan cut rates 13 times, taking the discount rate, the overnight bank lending rate, from 6.5 percent to 1 percent in June 2003, a 46-year low.

Greenspan held the discount rate at 1 percent for one year, until June 2004, a phenomenon many have credited with creating the housing bubble that has now burst, resulting in the CLO asset crisis we have been experiencing with interest rate increases in the first months of current Fed chairman Ben Bernanke's term.

Returning to a 1 percent discount rate environment is now virtually unimaginable, especially after the U.S. Labor Department announced consumer prices rose by 4.1 percent in 2007, the fastest pace in 17 years, with increases spurred by higher gasoline and food prices.

As the Fed eases rates, the likelihood is that the dollar will continue its downward spiral.

The dollar ended lower yesterday against most major currencies, reflecting the concern of world currency markets that lower U.S. rates would make dollar holdings less attractive across the globe.

[Soldier4Christ]

The Feds still are not recognizing a recession is place. Food prices are at a 25 year high. One source has just food alone as a 45% increase not to mention gas inflation prices or other consumer products.

Many economic experts disagree with the Feds on recession (not unusual considering the method Feds use to determine a recession) and say that we have been in a recession for some time now. These same experts are the ones warning against an imminent depression.