The US (& world's) Financial System at Risk

The House of Representatives this afternoon(SA time)rejected the Bush administration's proposed $700 billion rescue package for the financial sector, triggering a massive sell off in stocks and a rush into safe-haven government bonds.

The voting was 225 against vs 208 for.

The result was a sliding Dow Jones and all other US indices which in turn affected all other equity markets which were open for trade.

The Fed seems to not have the ability in its balance sheet to help its banking system on its own, but congress was worried that this emergency rescue package would hold long term consequences for the US economy if passed in its current form.

Will we see a reworked plan in the next few days? Until a solution is found, markets will continue to reflect the high level of uncertainty which it dislikes so strongly.

Trevor Manuel Willing to serve under new President

Trevor Manuel said on Tuesday that he was willing to serve in a Kaglema Mothlante cabinet if asked to do so. This seemed to immediately have a somewhat calming effect on markets.

The rather one-sided interim Presidential election was held on Thursday. The ANC Deputy President, Kaglema Mothlante won 269 of the 360 possible votes against the only other candidate, the DA's chairman, Joe Seremane, who received 50 votes.

He seems to be very popular amongst his fellow MP's, but it remains to be seen what sort of direction he will give to the cabinet which is yet to be selected. It will also be interesting to see which ministers who served in the Mbeki cabinet will be asked to stay on as this will surely have a big effect on the efficiency with which the country is governed up until the 2009 Presidential election.

Trevor Manuel and Nine other Cabinet Ministers Resign

Today, Tuesday the 23rd of September, the following statement on the resignation of members of Cabinet and Deputy Ministers was made by the office of the president:

President Thabo Mbeki has, to date, received letters of resignation from the following members of Cabinet which, regretfully, he has had to accept:
1. Deputy President
2. Minister of Defence
3. Minister of Finance
4. Minister in the Presidency, Dr. Essop Pahad
5. Minister of Intelligence
6. Minister of Correctional Services
7. Minister of Public Enterprises
8. Minister of Science and Technology
9. Minister of Public Works
10. Minister of Provincial and Local Government
11. Minister of Public Service and Administration

The following Deputy Ministers have also tendered their resignations:
1. Deputy Minister of Foreign Affairs, Mr. Aziz Pahad
2. Deputy Minister of Finance and
3. Deputy Minister of Correctional Services

The resignations will be effective from the day that the President's resignation takes effect (Thursday the 25th of September). All the Ministers have expressed their availability to assist the incoming administration in the hand-over process and any other assistance that might be sought from them. President Mbeki thanked the Deputy President, the Ministers and the Deputy Ministers for their dedicated service to the nation and wished them well in their future endeavours.

Thabo Mbeki Resigns & two Cabinet Ministers follow suit

The South African president announced his resignation on Sunday night. This happened after an ANC NEC meeting last week voted overwhelmingly to ask him to vacate his office as President of South Africa.

His staunchest ally and long time student colleague & friend, current minister in the Presidency, Essop Pahad, has announced that he will step down the day Mbeki leaves office.

Interestingly, the only non-ANC cabinet minister, Mosibudi Mangena has also announced his intention to resign.

The Deputy President, Phumsile Mlambo Ngcuka, has decided to stay on after being asked by President Mbeki to do so. A number of other Cabinet Ministers are also believed to have been convinced to stay on after an appeal to them was made by President Mbeki.

These are interesting times in South African politics. The next encumbent, whoever that may be, will only be an interim President, and will be faced with an economic crisis as well as a political crisis. Cometh the time, cometh the man/woman.
Who will be the next President? Motlanthe/ Mbete, another ANC MP?

Short Selling Ban did the job for now

The UK's SFA and the US's SEC announced rules to restrict the short selling of stocks last Wednesday, global stockmarkets rallied tremendously on Thursday and Friday. It led to the biggest rally in the last 38 years, this amid one of the worst week's in financial memory.

The shorting of stocks is when pessimists to buy put options giving them the right to sell those stocks at a perdetermined price at some time in the future. This tends to add impetus to stock market negativity.

The move to restrict shorting was a brave one. It showed how concerned financial regulators were that markets could continue to go down because of the prevailing negative sentiment.

Lets hope this has assisted bulls in their quest to buy stocks at bargain basement prices without further delay. This will then gradually change sentiment as traders see more and more chance of making gains in the near term.

AIG, the world's biggest insurer rescued by US govt

AIG, which sponsors Manchester United, was on the brink of collapse when govt officials agreed to provide an emergency loan this week. The rescue package provided by the US govt was £47.2 billion.


The US Federal Reserve said a "disorderly failure" of AIG could undermine already fragile financial markets. The US government will receive an 79.9% equity stake in the company in return.

The group - massively exposed to the plunging US housing market - was granted an £11.2 billion initial lifeline to shore up its finances on Monday night.
But AIG was then downgraded by three major ratings agencies, making it more expensive for the firm to raise funds.

AIG, which made a net loss of £7.4 billion in the first half of this year, saw its shares tumble more than 30 per cent in early Wall Street trading.

The company employs more than 116,000 employees, and many full- and part-time agents, worldwide.

It operates in 130 countries and jurisdictions, including Brazil, China, India and Taiwan, as well as the United States and United Kingdom

AIG the US's largest insurer is rescued by the Fed

The Federal Reserve Board announced last night that it is to lend around US$85 billion to rescue the crumbling insurer American International Group (AIG).

The Fed authorized the Federal Reserve Bank of New York to lend AIG, a Fortune the funds. In return, the federal government will receive a 79.9% stake in the company.

The company was about to file for bankruptcy. With around US$1.1 trillion in assets and 74 million clients in 130 countries, this would have been catastrophic.

An eventual liquidation of the company is most likely, but with the government loan the company won't have to go through a tumultuous fire sale.

Nedbank has a strategic alliance with AIG, using it as the underwriter of its clients travel insurance.

Lehman Brothers Folds and Merrill Lynch taken over

The credit crunch takes a double toll.

Lehman Brothers, the New York headquartered global financial services group founded in 1850, has collapsed. The firm filed a petition under Chapter 11 of the US Bankrupcy Code to protect its assets from creditors, yesterday. See www.lehman.com for more information.

The US icon owes in the region of US$157bn to its 10 largest creditors alone.

The second victim announced yesterday was the giant Merrill Lynch, the Delaware firm founded by Charles E Merrill and Edmund C Lynch in 1915.

Merrill Lynch has been forced to right down more than US$40bn over the last year due to the credit crunch caused by the collapse of the sub-prime homeloan market in the US. Bank of America, arguably America's oldest banking group with a related history going right back to 1784, yesterday announced its acquisition of Merrill Lynch for around US$50bn. See www.ml.com and www.bankofamerica.com for more information.

This is how the major indices ended on Monday the 15th after this news:

DJIA -4.4%, closing at 10917.51
NASDAQ Comp -3.6%, closing at 2179.91
S&P500 -4.7%, closing at 1192.70
Russell 3000 - 4.7%, closing at 696.31
FTSE -3.92%, closing at 5204.20
DAX -2.74%, closing at 6064.16
CAC 40 -3.78%, closing at 4168.97
NIKKEI 225 -4.95%, closing at 11609.72
Shanghai Comp -4.18%, closing at 1992.76
JSE Alsi -2%, closing at 25,642

Mark Mobius on investing in China & India

According to Dr Mark Mobius, director at Templeton Asset Management Ltd, Stocks in China and India offer ``good bargains`` after benchmark indexes in the nations declined more than any other major market this year.

``We`ve been rearranging the portfolio based on valuations, which have come down pretty dramatically in places like India and China,`` Mobius, who oversees about $47 billion of emerging- market equities as executive chairman of Templeton, said late last month.

Mobius joins investor Jim Rogers (previously co-manager of the Quantum Fund together with George Soros & author of the book "Investment Biker")in favoring Chinese stocks after they plunged 46 percent this year. China and India, the two most populous nations, are the worst performers among the world`s 20 largest stock markets as soaring raw material prices and slowing economic growth weigh on profits. Last year, China`s main index surged 162 percent and India`s advanced 47 percent.

China`s CSI 300 Index is valued at 21 times reported earnings, near the lowest in more than two years, and down from a peak of 53 times in October 2007. In India, the Sensitive Index is trading at 14 times reported earnings, down from a high of 31 earlier this year. That compares to a multiple of about 22 times for the Standard & Poor`s 500 Index in the U.S.

Rogers, who said he hasn`t sold any of the Chinese equities he started buying 1999, told investors on June 28 not to ``give up`` on the nation`s stock markets.

Marc Faber, publisher of the Gloom, Boom & Doom Report, disagrees. The investor who advocated bailing out of U.S. stocks before 1987`s so-called Black Monday crash and correctly predicted last August the U.S. would enter a bear market, said on July 4 that investors betting on a rebound in China`s tumbling stocks are setting themselves up for more losses. Since then, the CSI 300 has gained 6.2 percent.

Is the time right for South Africans to invest offshore?

Guy Monson, investment head at Sarasin & Partners in London (who manage the Nedgroup Investments' Global Balanced Fund), says that the current fiscal stance is good for markets. He expects that the share prices of big companies should deliver solid returns following the credit crisis going forward.

Monson says the value of shares in the US is now the lowest the past 13 years and in the UK the weakest the past 38 years.

In the UK, he says that a recovery in the share market will however depend on what the central bank does. If interest rates are lowered - and judged by the state of the property market, there is little choice - share prices will rally.

Corporate profits are still increasingly (robust), dividend payments are being hiked and cash flows are strong.

On top of that he says that portfolio managers are sitting on big heaps of cash and are ready to move at any sign of a recovery. Monson reckons the managers now have the same levels of cash as in 2003, just before the rally on the share markets started.

He is also positive about emerging markets and say that these markets offer outstanding opportunities. He plans to increase his exposure to these markets by mid-2009. What do you think? Is he onto something or is he using a banned substance?

Remember that it is often the best time to buy share when all hope of an upturn finally seems to have been dashed.

The Cost of Using Bonds to House Your Offshore Funds

The argument as to whether to use an offshore bond to house your funds or not is a very relevant one for South African (and other) investors with overseas portfolios.

Some jurisdictions have tax regimes which have become complex and also rather draconian. This has led to life assurers based in those countries putting much time, effort and money into designing suitable, tax efficient offshore bond products for the use of their clients with offshore money.

Investment advisors who wish to grow their clients' funds with the least amount of erosion from admin charges will tend to prefer the direct route of investment. That is, they will not recommend using bonds to house the various offshore funds but will rather go directly to the fund management houses to select the funds. This immediately cuts out a layer of cost which they may deem unnecessary.

This does create a bit more of an admin burden on the advisor, but he/she does need to do something to earn his/her trail fee now doesn't he? Going the direct route also allows him/her more freedom in the selection of the funds which he deems suitable to his client's risk profile as many offshore bonds have a finite list of "acceptable" funds which the advisor may use.

The "bond supporters" will say that there are many good reasons for using offshore bonds, such as delaying tax, putting sums in trust and you do not have to account annually for the income and capital gains accumulated. This means that you do not have annual accountant costs eating into the investment like you might with a directly held portfolio. Some of these are valid points.

A directly held portfolio of offshore funds needs to be structured in such a way that it does not require regular fiddling and switching to achive the investor's objectives. If it is not structured in this way and the investor wishes to make some pretty major changes, he/she could be in for some pretty nasty capital gains taxes.

This decision depends therefore on your jurisdiction, your investment style as well as the type (tax status)of the funds you have invested in. It also depends on whether the investor fears tax more than he/she does losing out on extra performance.