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US Treasury Secretary Geithner will unveil the very much-
anticipated financial-rescue plan (which is
expected to include the setting up of a Bad Bank,
Treasury back-stopping etc) on Monday Feb 9th.

This news alone helped reverse early weakness on
Wall Street yesterday as benchmark indices like
Dow and S&P500 ended 1.3-1.6% higher after losses
of >1% in early trading.

If the reversal reflects short covering, the risk
of Buy-on-expectation-&-Sell-on-News
cannot be ignored.

The key point is, in the past few weeks, experts like
Bill Gross, George Soros, Martin Feldstein, Joseph
Stiglitz have all expressed their views on the financial
rescue plan, proposing this, embracing this idea or
rejecting that.

Gross, who runs the world’s
largest bond fund, said yesterday the US
government would need to spend trillions, and
not billions, to spur growth in order to avert
a mini-depression. Obama’s stimulus package,
now going through the Senate after being passed
by the House, is to cost up to US$900 bln..

Other latest and newsworthy developments
yesterday include:
- Bank of England (BOE) cut its rate by 50 basis
points to 1%, yet another new 315-year low;
and consistent with the Federal Reserve’s zero
rate policy.
- European Central Bank (EC on the other
hand, kept its rate unchanged at 2%, as ECB is
not a central bank like BOE and Fed as they
need to keep rates low while embarking on
massive debt issuance.
- Bank of America rebounded off a 24-year
low of US$3,77 after CEO Ken Lewis bought
more (200,000) shares for his own account.

US employers slashed 598,000 jobs in January, the deepest cut in payrolls in 34 years and the jobless rate shot up to 7.6 per cent, according to a Labor Department report yesterday that underlined a deepening recession.

January's job losses were worse than the 525,000 that had been forecast by Wall Street economists, who also had expected the unemployment rate to come in lower at 7.5 per cent. The bleak data is certain to be cited by the Obama administration as a fresh reason for Congress to speed up debate over economic stimulus proposals that could cost US$800 billion or more.

Last month's job reductions were the largest since 602,000 in December 1974, while the jobless rate reached its highest level in more than 16 years.

'The economy is just falling into oblivion and it will get worse,' said Greg Salvaggio, vice- president for trading at Tempus Consulting in Washington, shortly after the jobs report was issued. Others agreed, saying that it intensifies pressure for the government to try something to prop up the economy.

TO MOST casual observers, the fact that the Dow Jones Industrial Average (DJIA) has bounced back every time it dipped below 8,000 points over the past few months - even when there is bad news - suggests that the 8,000 mark is where the 'support' or the magical 'market bottom' lies. This means that as soon as the index nears 8,000 on the downside, chartists and traders will start calling a 'buy' on the market.

Closer examination, however, reveals that the bounces around the 8,000 mark are simply a function of the way the index is constructed. Because the Dow is price-weighted, it is also inherently flawed.

In Thoughts from the Frontline weekly newsletter dated Jan 23, writer John Mauldin correctly points out that the divisor for the DJIA is 7.964782, which means that for every dollar an index stock falls, the DJIA falls 7.964782 points, regardless of the stock's capitalisation.

As a result, if the stock of Microsoft, with a price of US$17 and a market cap of US$156 billion, was to crash to zero, the DJIA would only lose 135 points (17x7.964782). But if the same was to happen to IBM, with a smaller market cap of US$124 billion but a higher share price of US$92, it would cost the index to lose a whopping 700 points.

Now consider the four financial stocks currently in the DJIA - Citigroup (US$3.90), Bank of America (US$6.78) Amex (US$16.70) and JPMorgan (US$25.43) - using last Thursday's prices.

If all four stocks were to crash to zero, the DJIA would only lose 300 plus points, not that huge a loss in the context of the market, yet imagine the repercussions on the US and global economies if these four institutions collapsed totally.

Most of the news on Wall Street these days centres on the crippled financial and auto sectors. But because the share prices of these companies are now so low, these stocks do not affect the DJIA by much (General Motors' shares, for example, are now just above US$3).

In other words, because the index stocks most affected by bad news are already battered to rock-bottom levels, the DJIA doesn't seem to fall much when bad news is released, thus giving the mistaken impression of resilience to adverse news and of strong support around 8,000 points.

By right, these financial and auto stocks should have been removed from the index, given that it has been past practice to replace stocks whose prices drop below US$10.

For some reason, the DJIA's guardians have been reluctant to do the same now, possibly because of the political fallout that might ensue - imagine the repercussions of removing pillars like Citigroup or General Motors.

This then leads to the inevitable conclusions: the DJIA is not comparable over time; the only reason the DJIA appears well-supported around 8,000 is because the collapsed financial and auto components have not been replaced as they should have been; and that movements in large-price stocks are magnified because the index is heavily skewed in favour of these counters.

If the index was to be correctly re-balanced by removing the battered financials and autos and replacing them with stocks with prices above US$10, you'd have to wonder whether the 8,000 mark would hold as well as it has.

You'd also have to dismiss arguments that it is safe to buy since the index is at its lowest level in many years because historical comparisons are invalid - unless, of course, the same re-balancings that were done in the past are performed now.

The International Monetary Fund will sharply cut growth forecasts this month and the world will not return to strong growth for two or three years, IMF Managing-Director Dominique Strauss-Kahn said on Wednesday.

'Things are not improving,' Mr Strauss-Kahn said in an interview with the BBC's 'Hard Talk' programme.

The International Monetary Fund's last forecast was 'not that good' and a new forecast, to be released in a few days, will be 'even worse', he said.

Asked about the fund's forecasts for the world, U.S. and European economies, Mr Strauss-Kahn said he did not know exactly how much these would be cut, but added: 'I'm afraid that at least half a point or one percentage point down.'

In its November forecast, the IMF projected world output would grow by 2.2 per cent in 2009 while the United States would shrink by 0.7 per cent and the euro area would shrink by 0.5 per cent but the credit crunch has tightened its grip since then.

Asked if the downwards revision meant the IMF expected a contraction in US and European economies of between one and two percent this year, Mr Strauss-Kahn said: 'There is going to be this kind of contraction in the US, in Europe, including the UK.'

Emerging countries, while still growing, would also do worse than expected, he said. 'China, India, Brazil, other emerging countries are going to experience very slow growth.'

'Altogether, this first half of 2009 will be bad, the second half may show some improvement, but recovery can begin only at the beginning of 2010,' he said.

'We are not going to go back to a high rate of growth before two or three years,' he added.

Mr Strauss-Kahn said the IMF may need more funds in six months to finance bailouts of countries that fall victim to the financial crisis.

'The IMF has enough money today to deal with the countries coming today. If the crisis goes on, which is the most probable way, then down the road, in six months from now, we will need more money,' he said.

'That's why we need to organise now the way to have more money in six months, because it won't be done overnight.' -- REUTERS

US home foreclosures, the epicentre of the global financial crisis, spiked 81 per cent in 2008 despite efforts to slow the 'tsunami,' a data tracking firm said on Thursday.

National foreclosure filings - default notices, auction sale notices and bank repossessions - totaled 3.16 million and were reported on 2.33 million properties last year, said RealtyTrac, an Irvine, California-based company.

One in 54 housing units, or 1.84 per cent of all US housing units, received at least one foreclosure filing during the year, up from 1.03 per cent in 2007, the firm said.

In December alone, foreclosure filings spiked 17 per cent from the previous month to 303,410 properties. That was nearly 41 per cent higher than in December 2007.

On a quarterly basis, foreclosure activity in the fourth quarter fell nearly four per cent from the third quarter but was still nearly 40 per cent higher than a year ago.

'State legislation that slowed down the onset of new foreclosure activity clearly had an effect on fourth quarter numbers overall, but that effect appears to have worn off by December,' said James Saccacio, chief executive of RealtyTrac.

Mr Saccacio said the big jump in December foreclosure activity was 'somewhat surprising' given the moratoria on foreclosures by both Freddie Mac and Fannie Mae and programmes from some of the major lenders and loan servicers aimed at delaying foreclosure actions against distressed homeowners.

'Clearly the foreclosure prevention programs implemented to date have not had any real success in slowing down this foreclosure tsunami,' he said.

Highest foreclosure rates
Nevada, Florida, Arizona had the highest state foreclosure rates in 2008.

Nevada topped the list with more than seven per cent of Nevada housing units - one in 14 - receiving at least one foreclosure notice.

A total of 77,693 Nevada properties received a foreclosure filing during the year, an increase of nearly 126 per cent from 2007.

Florida was number two, with 4.52 per cent of its housing units, followed by Arizona, with 4.49 per cent.

Rounding out the top 10 state foreclosure rates were California, Colorado, Michigan, Ohio, Georgia, Illinois and New Jersey.

The 2008 total foreclosure filings were a whopping 225 per cent higher than in 2006, when the housing bubble began to collapse mid-year.

Falling home values and tight credit pushed borrowers with subprime, or high-risk, home mortgages to default, sparking the financial crunch that turned into a global crisis in August 2007. -- AFP