FUTURES TANKING!
WOW - Greenspan speech will present fantastic opportunity tomorrow!
Thu, 14 Oct 1999, 8:04pm EDT
Greenspan Says High Stock Prices Are a Risk, Lenders Should Boost Reserves
By Bill Arthur
Greenspan Says High Stock Prices Put Lenders, Investors at Risk
Washington, Oct. 14 (Bloomberg) -- Federal Reserve Chairman
Alan Greenspan said surging stock prices have increased risks of
loan losses for lenders, and financial institutions should boost
their reserves to weather market panics.
Losses will ''inevitably emerge from time to time when
investors suffer a loss of confidence,'' as they did a year ago
after Russia defaulted on its bank debt, Greenspan said in the
text of a speech to a conference sponsored by the Office of the
Comptroller of the Currency.
While Greenspan didn't directly address the level of U.S.
stocks, he said ''the key question'' is whether the recent
decline in so-called equity premiums -- a measure of how much
investors are willing to pay for common stocks as compared to
holding risk-free assets like Treasury securities -- is permanent
or temporary.
''If it proves temporary, portfolio risk managers could find
that they are underestimating the credit risk of individual loans
based on the market value of assets and overestimating the
benefits of portfolio diversification,'' he said.
As a consequence, Greenspan said banks and other financial
institutions must ''set aside somewhat higher contingency
resources -- reserves or capital -- to cover the losses'' during
market panics, he said.
Maintaining such funds may seem like a less than optimal use
of money, but ''so do fire insurance premiums,'' Greenspan said.
The price-earnings ratio of the Standard & Poor's 500 index
is 30 today. While that's down from this decade's high of 35 in
April of this year, it's well above the average of 21.6 for all
of the 1990s. The index today is 263 percent higher than it was
on the last trading day of the 1980s.
Greenspan suggested there are logical reasons why investors
are willing to pay so much for stocks. For one thing, the growing
wealth of information and the speed in which information is
gathered and distributed have ''reduced uncertainties'' and risk
of relying on equities.
''That equity premiums have generally declined during the
past decade is not in dispute,'' Greenspan said. ''What is at
issue is how much of the decline reflects new, irreversible
technologies, and what part is a consequence of a prolonged
business expansion without a significant period of adjustment.''
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This is why futures are down
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