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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: macavity who wrote (6924)	1/28/2003 1:18:28 AM
From: Jon Koplik	Read Replies (1) \| Respond to of 33421

WSJ -- Fed policy / "credit default swaps" January 28, 2003 Will Drop in Stocks Weigh On Fed's Decision on Rates? By GREG IP Staff Reporter of THE WALL STREET JOURNAL WASHINGTON -- Though the recent selloff in stocks gives Federal Reserve officials more reason to worry that the economy remains stuck in a soft spot, they are taking some comfort in the corporate bond and derivatives markets. Those markets, which Fed policy makers monitor just as closely as stocks, show no great sign of stress yet. The central bank's policy-making committee meets Tuesday and Wednesday and will issue its interest-rate decision Wednesday afternoon. The improvement since the fall in what the Fed calls "financial conditions" could be a leading factor in favor of leaving interest rates alone. But if the latest drop in stocks begins rippling more noticeably into other markets, that could begin tilting sentiment inside the Fed toward cutting rates again. This week, Fed policy makers are likely to keep rates unchanged. They are also apt to say risks are still balanced between economic weakness and inflation, though that might be a closer call. After the weak jobs, trade and industrial production data, if Tuesday's report on December durable-goods orders shows further declines in capital-equipment spending, some officials could be pushed in favor of saying risks are tilted toward weakness. Still, officials generally think the latest data point to flat growth in the fourth quarter, which has long been the Fed staff's forecast, not to renewed recession. While there are few signs an upswing has begun, officials think the pieces are in place. "The conditions for continued recovery are fairly good," Federal Reserve Bank of Dallas Robert McTeer said last week. One factor supporting continued recovery was the improvement in financial conditions. Stocks had been holding well above their October lows until intensified concerns about a war with Iraq and lackluster corporate earnings reports triggered a 10% slide in the past two weeks. With a 141-point drop Monday, the Dow Jones Industrial Average stands 9% lower than on Nov. 6 when the Fed cut its overnight interest rate target to 1.25%, a 41-year low, from 1.75%. But Fed officials look at much more than just the Dow industrials. They also monitor stock options volatility, corporate-bond yields and a fast-growing market for derivatives that reflects expectations of corporate default. These markets, the theory is, reflect the uncertainty of investors and lenders, and, indirectly, businesses, whose investment plans are influenced by the ease of raising capital. Last summer and fall, investors behaved like the economy was sliding into a deflationary abyss. The widespread fear was best captured in "credit default swaps." These rapidly growing financial derivatives enable a bondholder or bank to buy insurance against a company defaulting, or a speculator to bet on such a default. They are a favorite indicator of Fed Chairman Alan Greenspan. A basket of such swaps traded by Morgan Stanley doubled from 1.3 percentage points in June -- before WorldCom Inc. disclosed a massive accounting fraud -- to 2.8 percentage points on Oct. 10, meaning the cost of insuring $100 of a typical blue-chip borrower's debt against default for one year shot up to $2.80 from $1.30. Traders were treating the likes of Ford Motor Co. as if they were a few steps from bankruptcy. "You had the corporate-governance issue, the geopolitical risks, the risk of deflation, coming together at one point in time," said Lisa Watkinson, head of credit derivatives research at Morgan Stanley. The Fed's November rate cut and sweeping moves by corporations to strengthen balance sheets have significantly eased those fears. Morgan Stanley's swaps index dropped to 1.3 percentage points two weeks ago. It has since risen to 1.6 percentage points, though it hasn't risen "nearly as much as you'd expect given the [drop] in the stock market," said Ms. Watkinson. In a speech in December, Mr. Greenspan noted the improvement in stocks, corporate-bond yields and credit-default swaps with approval. "The overall cost of business capital has clearly declined," he said. Write to Greg Ip at gregory.ip@wsj.com Updated January 28, 2003 Copyright © 2003 Dow Jones & Company, Inc. All Rights Reserved.

To: macavity who wrote (6924)	2/3/2003 1:11:45 AM
From: macavity	Read Replies (1) \| Respond to of 33421

UK Pensions Crisis (More). ....."We are presently heavy in equities. We remain convinced that equity markets still offer attractive prospects for long-term, real returns." We could well be heading for a bloodbath this year. These guys are going to have to puke their position, or else The Market will make them. Note how they flex the rules. Just like moving stops, it does not pay in the long run. telegraph.co.uk © Copyright of Telegraph Group Limited 2003. Standard Life, Europe's biggest mutual insurer, is expected to announce another cut in its bonus rates today, compounding the bleak outlook for savers, particularly those approaching retirement. The news is a serious blow to its 2.3 million with-profits policyholders, many of whom saw the Scottish company as the final haven in turbulent times. Standard Life could cut bonuses by up to 50 per cent, adding the insurer to a growing list of companies penalising savers for the fall in the stock market. A spokesman said: "Over the past year we have consistently signalled the fact that the likely future direction is down. It is something that we have been preparing people for for quite a while." The cut in bonuses, the third in the past 12 months, will damage Gordon Brown's attempts to reassure investors in a speech today. The Chancellor will say: "Britain is better placed than we have been in the past to deal with economic shocks and the ongoing risks to the global recovery. "I am confident that, tested in adversity, our system will demonstrate its credibility and resilience." But Michael Howard, the shadow chancellor, accused Mr Brown yesterday of failing to take responsibility for the crisis in the markets. He said: "The Brown bear market represents investors' judgment on his performance. People are suffering badly as a result of his mismanagement of the economy." Last week it emerged that the City regulator, the Financial Services Authority, had written to life insurance firms to make clear that it would not necessarily clamp down on those that breached their solvency ratios. The letter said: "There is no doubt that falling equity prices have had, and will continue to have, a significant impact on the financial position of life insurance companies." The shares of Britannic, one of the worst hit companies, fell by 69 per cent in the first four weeks of this year. It even issued a statement insisting that it could survive the market conditions. Like all companies, Standard Life has been badly hurt by the stock market decline. Only six months ago it said: "We are presently heavy in equities. We remain convinced that equity markets still offer attractive prospects for long-term, real returns." The company, and now its policyholders, are likely to pay heavily for this optimism telegraph.co.uk © Copyright of Telegraph Group Limited 2003. Hey Steve, having fun on the FTSE - it looks in appaling shape. -macavity