Mr. Pink's Picks: selected event-driven value investments Message Board

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Strategies & Market Trends : Mr. Pink's Picks: selected event-driven value investments

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To: Mr. Pink who wrote (11645)	10/15/1999 1:25:00 AM
From: Lonnie	Read Replies (1) of 18998

A big down day tomorrow? biz.yahoo.com FOCUS-Greenspan raises concerns about stock risks (Updates with more details from speech) By Caren Bohan WASHINGTON, Oct 14 (Reuters) - Federal Reserve Chairman Alan Greenspan on Thursday advised banks to set aside more money as insurance against a big market downturn, a sign he is concerned about a potential bubble in equity prices. While emphasizing he was not predicting a stocks crash, Greenspan told a banking-related conference that sudden losses in investors' confidence ``will inevitably emerge from time to time' and said financial institutions should boost their reserves to account of that possibility. He said diversification among different types of assets -- a common strategy used by portfolio managers to guard against market risks -- may not be sufficient to account for all types of scenarios in which the value of their investments might decline sharply in value. ``At a minimum, risk managers need to stress test the assumptions underlying their models and set aside somewhat higher contingency resources -- reserves or capital -- to cover the losses,' he said. The Fed chairman noted that equity premiums -- the amount of return investors demand to cover the risks associated with investing in stocks -- had declined in recent years but he said it was unclear why. ``The key question is whether the recent decline in equity premiums is permanent or temporary,' he said. If the decline was only temporary then portfolio managers may find they were underestimating the credit risks of individual loans and could be too optimistic about how protected they were by spreading their risk. He said investment professionals who specialize in risk management should take this factor into account and weigh carefully whether investors' were not paying enough heed to the risk associated with holding stocks. ``The decline in recent years in the equity premium ... should prompt careful consideration of the robustness of our portfolio risk-management models in the event this judgment proves wrong,' he said. Greenspan shocked financial markets in December 1996 when he asked whether U.S. equity prices were affected by ``irrational exuberance'. Since then he has repeatedly questioned whether the prices of U.S. were justified by corporate earnings. But the Fed chairman, who was sharply criticized for appearing to second-guess investors with the famous 1996 comment, has in all of his discussions of the stock market since then been careful to be more circumspect. In Thursday's speech, Greenspan noted that economists had failed to anticipate sharp reversals in market confidence. He also repeated his line that the prices of assets were determined by millions of investors, ``many of whom are highly knowledgeable about the prospects for the specific investments.'

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