Is The Worst Over?

Source : The Straits Times, Oct 3, 2007

Investors and analysts clash over whether the global sub-prime mortgage crisis has turned the corner

Yes, say investors

POSITIVE OUTLOOK

Banking giants disclose sub-prime related losses on Monday but investors take the disclosures as a sign that the worst may be over.

DOW'S RECORD CLOSE

Investors push US stocks to its highest-ever close on optimism that the sub-prime crisis is nearing its end.

Key index ends Monday up 1.4 per cent at 14,087.55.

Stocks recover all of the nearly US$2 trillion (S$2.98 trillion) lost in July-August rout.

CITIGROUP AND UBS DISCLOSURES BRING RELIEF

Bad news from two banking giants but investors choose to focus on the positives.

Citigroup to write off US$5.9 billion (S$8.8 billion) in third quarter. Profit to drop 60 per cent. Citi chief executive Charles Prince says profits will return to normal in fourth quarter. Investors choose to focus on this healthy forecast.

UBS to write off US$3.4 billion and suffer a loss in the same quarter. But it indicated that the current period might see a return to normal earnings levels.

GREENSPAN UPBEAT

'Is this August-September credit crisis about to be over? Possibly,' says former US Federal Reserve chairman Alan Greenspan. He cites signs that lenders are seeking to buy longer-term assets of lower quality.

ANOTHER RATE CUT

Investors still expect another rate cut from the Fed to boost the US economy.


Maybe not, say analysts

NOT ENOUGH ASSURANCE

Conditions in the credit market are still fragile. Many problems remain for the United States economy, especially in the housing sector.

'The question really is, 'Is this the end of it or not?'' Mr Axel Merk, portfolio manager of the Merk Hard Currency Fund told the Washington Post. 'For whatever reason, the market wants to see the glass as half full. I just think we need to see more,' he said.

MORE PAIN FOR BANKS

Banks cleaning up their balance sheets only solves half the problem. Going ahead, they are likely to generate less income as the buyout boom slows.

Banks must find ways to replace the income from sub-prime mortgages, a market that could take years to recover.

HOUSING RECESSION NOT OVER

The US consumer spending is being hit by falling home prices, higher mortgage rates and foreclosures. Thus lower spending will adversely affect the economy in the long run.

Most US adjustable-rate home loans will reset over the next several years at higher rates. This could lead to more foreclosures and a fall in home prices.

FALSE RALLY?

Analysts caution: Do not read too much into the Dow's rally.

This is because the rally was achieved on low trading volumes.

Shares of large companies recovered because of investments in strong economies overseas and a weak US dollar.

Many mortgage companies, banks and home builders are still trading far below their highs.