US bailout fails to unclog credit choke

US bailout fails to unclog credit choke

Dow ends 157 pts down as mood sours after rescue Bill is passed

By Goh Eng Yeow

US stocks retreated on Friday as investors, worried about the economic outlook, failed to be moved by the passing of the US$700 billion financial rescue plan.

FOR many investors, the unfolding drama on Wall Street resembles Hong Kong director Benny Chan’s latest movie Connected in many ways.
Those who stayed up on Friday night to watch the outcome of the US House of Representatives’ vote on a US$700 billion (S$1 trillion) bailout package would find one scene from the action-packed film particularly relevant.

In it, the car driven by the hero (Louis Koo) lurched out of control and went hurtling down a slippery slope. He managed to get out only seconds before the vehicle plunged down a cliff.

On Wall Street last Friday, feverish anticipation that the rescue package for financial institutions would be approved sent the Dow Jones Industrial Average up by as many as 313 points in early trading.

But the mood soured after the Bill was passed. The Dow slipped precipitously and ended 157 points down as selling accelerated in an alarming manner.

So what should investors do? Are financial markets careening out of control like Louis Koo’s car before it crashed?

The US$700 billion rescue package was supposed to inject a massive vote of confidence into financial markets, buy troubled assets off US banks and get them to start lending to each other again.

But the global credits markets have stayed frozen, despite efforts to unclog them.

The squalls unleashed by the death of Lehman Brothers and near-collapse of American International Group last month have transformed into a gale-force wind threatening even the world’s biggest banks.

The Libor rate - the interest rate for US dollars at which banks lend to each other - is almost double the US Federal Reserve’s short-term interest rate of 2 per cent.

There are reports that some banks are charging much higher rates and lending only on an overnight basis, in case their borrowers run into financial difficulties.

Even the world’s largest companies are not immune to the credit crisis.

Last week, rather than try to draw down on its massive credit lines, General Electric sold US$3 billion worth of preference shares to investor Warren Buffett on very generous terms.

The state government of rich and powerful California was forced to approach the US government for emergency funding to pay its bills.

To traders here, all these gloomy reports have a surreal feel. But beneath the sea of calm, there is increasing anxiety. Last week, the benchmark Straits Times Index fell 4.7 per cent to a 26-month low of 2,297.12.

Among the worst hit were biggies such as Keppel Corp and Sembcorp Marine which were considered to be strong defensive plays because they could ride out the financial storm with their fat order books.

But the credit crunch has also severely affected hedge fund managers, as they cope with the big flood of redemption orders from jittery investors. So it is no surprise that rig-builders should come under selling pressure, since these stocks were among their favourite picks last year.

How will it all end?

In Connected, Louis Koo was shown on top of a mountain resembling a Master of the Universe, back in charge of his destiny after his near-death experience.

For the central bankers charged with saving the global financial markets from hubris, a similar miracle will be appreciated.

Source : Straits Times - 06 Oct 2008

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Singapore GIC chief’s warning proves prophetic

Singapore GIC chief’s warning proves prophetic

Despite his July forecast of a recession coming true, Tony Tan still sees opportunities for fund

Dr Tan’s team is shopping for distressed assets in the US to boost long-term returns for the fund. — ST PHOTO: CAROLINE CHIA

WHEN Dr Tony Tan, executive director of Singapore’s biggest sovereign wealth fund, warned in July that the world might plunge into its worst recession in 30 years, many shrugged off his remarks as too gloomy.
Three months later, Dr Tan’s prophecy of doom is becoming a reality as the credit crisis ravages US and European banks and takes a toll on the global economy.

Dr Tan’s Government of Singapore Investment Corp (GIC) is meanwhile sitting with 7 per cent of its estimated US$300 billion (S$435 billion) portfolio in cash and another 26 per cent in G-7 government bonds.

Dr Tan, a 68-year-old former finance minister, professor and banker, and his team are now cautiously sifting through the financial carnage to shop for distressed assets in the United States in an effort to boost long-term returns for the fund.

GIC released its first performance report last month, after increased scrutiny of sovereign funds by Western lawmakers who want them to be more transparent, and revealed a 4.5 per cent real return in Singapore dollar terms over 20 years.

‘We should not assume that the worst is over and we continue to be watchful and prudent in our assessment of the economic risks and in our investments,’ Dr Tan, who is also the fund’s deputy chairman, told reporters at the launch of the report.

Mr Song Seng Wun, a Singapore-based economist with Malaysia’s CIMB, said Dr Tan’s long stint with the private and public sectors made him experienced enough to guide GIC through the crisis.

‘I don’t think you can compare him to an investor like Warren Buffett,’ he said. ‘But he is an old hand who has seen the ups and downs of the Singapore economy and it is good to have someone like him steering the ship.’

GIC, which manages part of Singapore’s foreign reserves, ploughed US$18 billion into UBS and Citigroup in December and January, though shares of the two banks have since fallen. By contrast, Mr Buffett, regarded as one of the world’s greatest investors, waited until the past two weeks to spend US$8 billion on shares in Goldman Sachs and General Electric.

Dr Tan has said US investments will remain a big part of his portfolio, but GIC has said it may use some of its cash to buy emerging market stocks in Asia.

Dr Tan joined GIC in 2005 after a stint as the chief executive officer of Singapore lender Oversea-Chinese Banking Corp and over a decade in politics, which followed a PhD in applied mathematics.

Dr Tan, who has his hair slicked back and wears vintage dark-rimmed glasses, became finance minister and was tipped by Singapore’s first prime minister Lee Kuan Yew as his successor. The post eventually went to Mr Goh Chok Tong in 1990.

‘He has a quick brain and there is a decisive quality about him. He listens, takes all points of view and decides,’ Mr Lee said of Dr Tan in 1988. Mr Lee is the chairman of GIC but leaves its day-to-day running to Dr Tan.

GIC has limited its losses on UBS and Citi by taking advantage of price reset clauses in its original agreements. Dr Tan has said GIC has room for investing in another bank.

‘We always look at the risk first,’ Dr Tan said in January. ‘Our philosophy is if you look after the downside, the upside will look after itself.’

REUTERS

Source : Straits Times - 06 Oct 2008

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Banks dangle attractive fixed deposit rates

Banks dangle attractive fixed deposit rates

Banks see term deposits as alternative source of funds amid credit crisis

By Gabriel Chen

BANKS that are hungry for cash amid the global credit crunch have unleashed a string of eye-catching promotional rates for fixed deposit accounts.
This spells good news for customers with cash parked in bank deposits.

The interest rates on offer may still be well below the inflation rate, but they are far higher than typical term deposit rates in Singapore.

And amid severe stock market volatility and a cooling property market, cash in the bank is a fairly safe investment.

Take Standard Chartered Bank (Stanchart), for example, which is dangling a rate of 1.688 per cent a year for a 100-day tenor on a deposit of at least $50,000.

If you have more money to put in the bank, you stand to reap a solid 1.958 per cent a year for a minimum deposit amount of $500,000 over two years.

This means after two years, $500,000 placed with Stanchart should return a depositer close to $520,000.

At Citibank, customers enjoy a rate of 1.65 per cent a year on a one-year time deposit of $10,000 and above if they set up a new salary credit account with the bank.

At Maybank, customers who place $25,000 to $500,000 receive a healthy interest rate of 1.9 per cent a year, for a three-year term.

Consumers even get their interest paid upfront, said Ms Helen Neo, Maybank Singapore’s head of consumer banking.

‘The upfront time deposit promotion is to reward our customers so that they can re-invest their interest earned. Customers would also appreciate receiving their interest earlier rather than upon maturity,’ she said.

Some local banks have also got into the fixed deposit promotional rates frenzy.

United Overseas Bank, for instance, is offering customers 2 per cent a year on a three-month fixed deposit, and 1.36 per cent a year on a 15-month fixed deposit when they place a minimum of $25,000 for each deposit. This dual-term fixed deposit promotion is available only for a limited period, the bank said.

Consumers point out that these rates are attractive, given that average three-month fixed deposit rates and savings rates from banks in Singapore can be as low as 0.425 per cent and around 0.25 per cent respectively.

‘I might move about $50,000 or more into one of these promotional offerings, because deposit rates are so low and inflation is eating away at my money,’ said 26-year old business owner Justin Kho.

Mr Kho, who currently has a one-month fixed deposit with DBS Bank yielding around 0.325 per cent, said he would review his options with the bank, in the light of these better returns.

Analysts say it is understandable why some of these banks are dishing out these tantalising returns.

‘The global credit crunch and interbank liquidity squeeze may have contributed to banks turning to fixed deposits as an alternative source of near-term funding,’ said OCBC Bank economist Selena Ling.

Basically, with the tighter credit conditions, banks are unwilling to lend money to each other, and this has the effect of making money harder to borrow.

This scarcity of short-term liquidity has seen the three-month Singapore Interbank Offered Rate (Sibor) jump by one percentage point in just a month to more than 2 per cent.

With banks needing fresh capital for their operational needs or to shore up their balance sheets, money roped in from fixed deposits would certainly come in handy.

‘If you’re a foreign bank, you either borrow from the interbank market or tap your own deposit base for capital, but unlike local banks, foreign banks may not have such a large deposit base,’ said Mr Joseph Chong, chief executive of financial advisory firm New Independent.

Phillip Securities Research analyst Brandon Ng suggested that DBS, for instance, has a huge retail deposit base. This could be one reason why the bank has not been launching promotional fixed deposit rates, unlike foreign banks.

Not surprisingly, DBS said it has not seen a rise in fixed deposits.

Stanchart consumer banking head Ajay Kanwal said that in the last month, the bank has seen a quick rise in deposit interest rates, mainly on account of the rise in three-month Sibor.

That, he said, is in turn influenced by two key factors: United States interest rates and domestic loans demand.

Source : Straits Times - 06 Oct 2008

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Thailand police arrest key anti-govt leader

Thailand police arrest key anti-govt leader

PAD leader Chamlong nabbed as he arrives to vote in Bangkok election

By Nirmal Ghosh, Thailand Correspondent

PAD strategist Chamlong Srimuang cast his vote in Bangkok’s gubernatorial polls yesterday, before the police took him away. His arrest may have derailed planned talks with the government, which had seemed last week on the verge of a truce with the alliance. — PHOTO: ASSOCIATED PRESS

BANGKOK: Police yesterday arrested a key anti-government figure as he turned up to vote in Bangkok’s gubernatorial election, in a move that could heighten the country’s political tension.

Polls opened across the capital at 8am, and there was immediate drama at a polling station in the historic Dusit district when former general Chamlong Srimuang arrived to cast his vote and was informed by police that he was under arrest.

Mr Chamlong, a former Bangkok governor, was among nine leading figures of the People’s Alliance for Democracy (PAD) who had arrest warrants issued against them in late August. PAD had invaded a government TV station and three airports before overrunning Government House, where the coalition and thousands of its supporters remain encamped.

The nine were accused of inciting unrest and trying to overthrow the government, charges that amount to treason and can carry the death penalty. However, police were unable to execute the warrants since they refused to leave the Government House compound.

Mr Chamlong, 73, was taken away in a police car after casting his vote. Police are expected to apply to a court today for permission to hold him for another 12 days.

Mr Abhisit Vejjajiva, leader of the Democrat Party, which has been overtly sympathising with the PAD, said he was concerned that the arrest would worsen the political crisis. Former prime minister Anand Panyarachun also said the arrest would heighten the political tension.

The PAD has accused the government of Premier Somchai Wongsawat of acting as a proxy for his brother-in-law, ousted former premier Thaksin Shinawatra.

Newly-appointed Deputy Premier Chavalit Yongchaiyudh was reported to be on the verge of reaching a truce with the PAD. Last week, Mr Chamlong even welcomed overtures from Mr Chavalit.

But yesterday’s arrest might have derailed the efforts. Mr Chamlong said following his arrest that PAD will cancel any planned talk with the government, The Nation reported.

‘He said there was no need to negotiate with the government now. He said the talks are no longer necessary and all protesters must remain within Government House,’ Mr Suriyasai Katasila, another PAD co-leader, was quoted as saying.

In a pre-written note read out on the PAD’s television channel, Mr Chamlong also urged his supporters not to quit. ‘We are gathering to repay the country and to make merit for Thailand,’ he said.

On Friday, another PAD co-leader Chaiwat Sinsuwong was arrested after he was spotted at a toll booth in the capital.

One source said police had been waiting to evaluate the PAD’s reaction to Mr Chaiwat’s arrest. While the PAD denounced the arrest and alleged a conspiracy to derail embryonic negotiations with the government, there was no greater mobilisation among supporters.

Later yesterday morning, another PAD co-leader, Mr Sondhi Limthongkul, vowed that demonstrations would continue until the government falls. ‘I am warning you, the government and police, that you are putting fuel on the fire. Once you arrest me, thousands of people will tear you apart,’ he told his supporters.

The developments could further destabilise Thai politics. But taken together with other recent events, they could equally signal a scripted behind-the- scenes manoeuvre to find a way out of the political impasse.

PM Somchai met for 45 minutes last week with Privy Council president Prem Tinsulanonda, believed to be one of the key people pulling strings from behind the scenes - and tacitly supporting the PAD.

Separately Mr Somchai proposed a new Constitutional Drafting Assembly to consider changes to the Constitution to promote political reform.

Meanwhile in the gubernatorial election, incumbent Apirak Kosayothin, yesterday looked on course to comfortably winning a second term. Exit polls showed Mr Apirak - a marketing specialist and poster boy for the Democrat Party - set to win over 40 per cent of the vote.

The polls showed Mr Prapas Chongsa-nguan of the ruling People’s Power Party (PPP) a distant second place, followed by independents Chuwit Kamolvisit - a former sex massage tycoon - and Kriengsak Chareonwongsak, a former Democrat Party MP.

Source : Straits Times - 06 Oct 2008

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Five times more rental Singapore flats recovered

Five times more rental Singapore flats recovered

147 units seized from tenants who made profit from illegal sub-letting

By Jessica Cheam

MORE rental flat cheats are being exposed, with the number of flats seized by the Government for illegal subletting increasing five-fold this year.
New figures obtained by The Straits Times show that 147 rental flats have been recovered by the Housing Board as at end August, compared to just 28 flats recovered last year. Less than 20 flats were seized in 2005 and 2006 each.

This year’s number is set to go up further as the HDB steps up its efforts to weed out errant tenants who abuse their rental flats to make profits.

Rental flats rates currently range from $26 to $205 for a one-roomer and $44 to $275 for a two-roomer, depending on household income and other factors.

There is a long waiting list of more than 4,000 applicants for these flats, which the Government reserves for needy, low-income families that cannot afford to buy a home or pay market rental rates.

What rental cheats do is sublet these rental flats at market rates instead of staying in them. Many flats are being sub-let for about $1,000 a month, netting their original tenants handsome profits.

The Straits Times had reported in May a surge in the number of such tenants illegally sub-letting rental flats to cash in on the demand for low-priced housing.

Demand has spiked on the back of last year’s property boom, which has upped rentals islandwide, and an influx of foreign workers looking for cheap accommodation.

Anecdotal evidence, based on interviews with residents, shows that in some estates, as many as one in five rental flats were illegally rented out, often to foreign workers or students from Malaysia, China and India.

‘It’s great that HDB is discovering more of such cases,’ said MP for Pasir Ris-Punggol GRC, Mr Teo Ser Luck.

‘These units shouldn’t be used for profit and denied to a citizen who is really in need,’ he said.

The HDB has stepped up its enforcement blitzes, extending its net to more areas across the country. This was partly in response to a call-for-action by MPs, residents of rental blocks and genuinely needy Singaporeans who have been left waiting in the queue.

‘I fully support HDB’s enforcement actions. Rental flats shouldn’t be used as a money-making machine,’ said North West District Mayor Dr Teo Ho Pin, who is also MP for Bukit Panjang.

HDB said the increased awareness of such abuse this year has helped in its enforcement, with more residents calling its hotline. Of the 147 units recovered, 31 units - or 21 per cent - could be traced to feedback from residents.

The increase in such cases comes at a time when local demand for rental flats have escalated - a ‘worrying trend’ singled out by Prime Minister Lee Hsien Loong in his National Day Rally speech.

The number of people seeking such flats has ‘tripled’ in just a year, he said. There are about 4,387 in the waiting list as at June, with a waiting time of nine to 18 months. In 2006, the wait was just two to six months.

HDB has since said it will ramp up its current stock of rental flats from 42,800 to 49,860 by end-2011. Tenants illegally renting out their home can lose the flat and face a five-year ban from renting or buying HDB property.

Source : Straits Times - 06 Oct 2008

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Help with electricity hikes on the way

Help with electricity hikes on the way

MEASURES to help ease the impact of the ‘rather large’ hike in electricity tariffs could be introduced in next year’s Budget.

Finance Minister Tharman Shanmugaratnam hinted at it yesterday during a dialogue with residents of Toa Payoh East.

He said: ‘We know the large increase this quarter has unsettled many people. We will take that into consideration in next year’s Budget when we decide on the U-Save (Utilities-Save) rebates and the total package solution for the economy.’

Electricity tariffs shot up 21 per cent last Wednesday - the biggest one-time increase in seven years.

Grassroots leader Rashid Hussein, 67, questioned the timing of the hike, given that oil prices had just gone down.

Mr Tharman acknowledged that it was ’sudden and surprising for most people’. But he placed it in context, saying that in the course of this year, the price of electricity had risen ‘much less’ than oil prices.

‘If you take the year as a whole, you take the electricity tariffs this year compared to last year’s, the increase is going to be 26 per cent,’ he said.

In contrast, oil prices from January to September had gone up by 45 per cent, he noted. ‘So the electricity increase has been reasonable, compared to the oil price increase.’

He reiterated the Government’s stance on not subsidising oil prices, noting that the practice had proved problematic for countries in the region and for developed countries.

‘When they try to subsidise, it either leads to shortage because the suppliers don’t want to supply, or it leads to the government having a bigger and bigger bill on its budget and eventually taxpayers have to pay,’ he said.

Instead, Singapore’s approach is to set a realistic price based on the global market price, but help the poor through measures such as the U-Save rebates.

For instance, families in one or two-room HDB flats would have received rebates amounting to four to five months of their utilities bills, he said. ‘People say the Government gives with one hand and takes with another,’ he said to smiles. ‘But the hand giving is much much bigger than the hand taking back.’

Mr Tharman also held out hope that electricity tariffs would go down, on the heels of lower oil prices. ‘Many people have forgotten that last year, for six months, the tariffs went down, so it is not always going up.’

Source : Straits Times - 06 Oct 2008

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US bailout plan fails to dispel investors’ fears

US bailout plan fails to dispel investors’ fears

Plan may spark bank lending again, but damage to economy seen as enormous

By ANDREW MARKS

NEW YORK CORRESPONDENT

INVESTORS had been waiting hopefully and impatiently over a week for the US Congress to approve the government’s plan to buy up to US$700 billion worth of the illiquid assets that have been weighing down banks’ balance sheets and operations. And when the approval came, their reactions were rather subdued.

‘Stock market valuations are attractive right now by many measures, making them potentially compelling investments, but given the extremely negative sentiment weighing on stocks right now, a sustained rebound looks increasingly unlikely given the market turmoil.’

- Tobias Levkovich,
Citigroup’s chief equity strategist

But if last Friday’s reaction to the passage of the financial bailout plan was any indication of what the stock market faces over the next several weeks, the hard times on Wall Street could be just getting started.

‘Getting the bailout plan in place is obviously vital to keeping the financial system, both here in the US and abroad, from an outright collapse, but no one is under the illusion that the government rescue means we’re okay again. We have a long period of struggle ahead of us,’ said Hugh Johnson, the chief investment strategist at Johnson Illington Advisors, who may request his clients’ permission to reduce their equity allocations below the minimum 35 per cent level to which he has already lowered their portfolios.

Indeed, while most Wall Street analysts and economists agree that the Troubled Asset Relief Program, or TARP, passed by Congress on Friday should ease constraints in the nearly frozen credit markets, encouraging banks to begin lending to one another again and to businesses and consumers as well, enormous damage has already been done to the US economy over the past month.

‘Considering how much of a fragile condition the economy was in prior to the devastation we’ve seen the past few weeks, the economic fundamentals are in pretty bad shape now,’ said Joel Naroff, president of Naroff Economic Advisors. ‘The September jobs report offered ample proof that the credit crisis has moved into the mainstream of the economy. We’ve got the potential for a steep and long recession and are likely to see more months of job losses before conditions turn around,’ he noted.

That gloomy assessment seemed to be the majority opinion on Wall Street last Friday, and with a third quarter earnings season that is expected to be a brutal one getting it’s unofficial kick-off tomorrow, when Alcoa reports its quarterly profits, investors should brace themselves for a continuation of the stock market’s downward spiral.

‘Stock market valuations are attractive right now by many measures, making them potentially compelling investments, but given the extremely negative sentiment weighing on stocks right now, a sustained rebound looks increasingly unlikely given the market turmoil,’ said Tobias Levkovich, Citigroup’s chief equity strategist, who added that he doubts the market will reach his price targets of 1,475 in the S&P 500, and 13,250 in the Dow, which he’d already lowered by 5 per cent each on August 15.

There could be a bargain hunting rally or two this week, as investors venture into the healthier companies in the heavily battered and, some say, oversold financial services sector. But investors will be doing themselves a disservice if they expect stocks to recover even the heavy losses sustained over the past two weeks as Wall Street awaited the outcome of the bailout plan negotiations.

‘The recovery from a bear market typically takes about twice as long as the fall,’ said Mr Johnson.

If Friday’s trading marked the bottom of the bear market, investors did their best to dig the hole as deep as possible. After rising as much as two hundred points earlier in the day, the Dow Jones began a midday swoon that only worsened after passage of the bailout bill, ending with a loss of 157.47 points, or 1.5 per cent, to close at 10,325.38. The S&P 500 lost 15.05 points, or 1.35 per cent, to 1,099.23, while the Nasdaq lost 29.33 points, or 1.48 per cent, to end the week at 1,947,39.

For the week, the Dow lost 7.3 per cent, its biggest weekly drop since July 2002, and is now down 22.16 per cent for the year. The S&P 500 slumped 9.4 per cent, its lowest close in four years, and is down more than 25 per cent year-to-date. The Nasdaq, which lost 11 per cent last week, is down 26.58 per cent for the year.

The stock market could get a quick boost if investors see that banks are willing to lend to each other, so Wall Street will be paying close attention to the London Interbank Offered Rate, known as Libor, which now stands at 3.93 per cent, an extraordinary 144 basis points higher than its 2.49 per cent rate just a month ago.

The fading economy will draw investors to several key pieces of economic data scheduled for release this week, starting tomorrow with the minutes from the Federal Reserve’s most recent meeting, which along with a Wednesday speech by Fed chairman Ben Bernanke could provide insight into whether the Fed will lower rates at its next meeting at end-October.

Consumer credit is also to be reported tomorrow. Pending home sales are released on Wednesday, and weekly jobless claims and wholesale trade are due to be reported on Thursday. Friday brings international trade and import prices.

It’s a light week for the beginning of third-quarter earnings reporting season, with only Alcoa and General Electric scheduled to release profit reports tomorrow and Friday respectively, representing the Dow Jones Industrials, and only six other S&P 500 companies reporting.

But that will be enough to get investors focusing on the estimated third-quarter profit contraction of 4.8 per cent. Most of the negative growth, of course, can be laid on the doorstep of the financial sector which is expected to post a drop of 68 per cent in profits, or a US$27 billion plunge, from the third quarter in 2007.

Source : Business Times - 06 Oct 2008

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