{http://online.wsj.com/article/SB123413532486761389.html?mod=testMod}

“The problem Saks faced last November is one that haunts the U.S. economy as a whole: Inventories that are far too fat… Pressured by Saks, and hit by the worst holiday season in almost 40 years, rivals including Neiman Marcus Group Inc. and Barneys New York slashed prices, too. They cut much more deeply and aggressively than usual, starting as early as late November — with shopping season barely under way… Retailers are still feeling pain. Last Thursday, Saks said January sales fell nearly 24%. Neiman Marcus expects its first quarterly loss in a holiday shopping period that anyone at the retailer can remember.”

So what to do? Go out and short all things luxury — and there’s no easier way to do that than via stocks!

But which names do we short? Our bull-market friends at Robb Report give us a hand by creating a luxury index {ROB US equity DES <Go>}. Internet users can see the full list here: {http://www.robbreport.com/resources/robb-report-luxury-index/}.

Short the lot of ‘em!

In Korea, the no-brainer shorts continue to be HYUNDAI DEPT (069960 KS) and LOTTE SHOPPING (023530 KS). CLSA is officially negative on both.

>>> WSJ: Saks Upends Luxury Market With Strategy to Slash Prices <<<

FEBRUARY 8, 2009, 9:31 P.M. ET
By VANESSA O’CONNELL and RACHEL DODES

When Saks Fifth Avenue slashed prices by 70% on designer clothes before the holiday season even began, shoppers stampeded. “It was like the running of the bulls,” says Kathryn Finney, who says she was knocked to the floor in New York’s flagship store by someone lunging for a pair of $535 Manolo Blahnik shoes going for $160.

Saks’ deep, mid-November markdowns were the first tug on a thread that’s now unraveling long-established rules of the luxury-goods industry. The changes are bankrupting some firms, toppling longstanding agreements on pricing and distribution, and destroying the very air of exclusivity that designers are trying to sell.

The problem Saks faced last November is one that haunts the U.S. economy as a whole: From car makers to home builders, companies are stuck with inventories that are far too fat. (See related article.)

Saks’s risky price-cut strategy was to be one of the first to discount deeply, rather than one of the last. Managing high-fashion inventory is tricky. Clothing can go out of style in just months, so stores don’t want to keep it around. But cut prices too soon or too deeply, and shoppers start to expect it.

Stephen I. Sadove, Saks’ chief executive, says his action helped his company avoid massive losses, or worse. “These Herculean things,” including slashing inventories, were done to “make sure that the company survives,” Mr. Sadove said in an interview.

Pressured by Saks, and hit by the worst holiday season in almost 40 years, rivals including Neiman Marcus Group Inc. and Barneys New York, a unit of Istithmar World of Dubai, slashed prices, too. They cut much more deeply and aggressively than usual, starting as early as late November — with shopping season barely under way.

That, in turn, clobbered smaller boutiques. “It didn’t seem logical to continue,” says Linda Dresner, owner of a Park Avenue shop that for a quarter-century specialized in procuring unusual items favored by the fashion cognoscenti, like $1,000 dresses by Japanese label Comme des Garcons. She closed her doors in December, unable to keep up with the price-cutting.

Retailers are still feeling pain. Last Thursday, Saks said January sales fell nearly 24%. Neiman Marcus expects its first quarterly loss in a holiday shopping period that anyone at the retailer can remember.

Last year, luxury goods had become especially important to retailers because sales of these so-called “star” brands such as Prada, Gucci and Dolce & Gabbana — which sell in department stores as well as their own boutiques — stayed strong into mid-2008, even though retailing overall was sinking by then.

By mid-November, there were already a few signs of trouble. Five days before Saks slashed its prices, Neiman Marcus had cut its own by 40%. And designers themselves were quietly trying to drum up cash by selling current fashions at fire-sale prices (to 90% off) at private “sample sales,” often tucked away in industrial buildings in New York.

But Saks’ maneuver marked an open abandonment of the longstanding unwritten pact between retailers and designers over when, and to what extent, to cut prices. Those old rules boiled down to this: Leave the goods at full price at least two months, and don’t do markdowns until the very end of the season.

That worked fine in the good times. Demand was high, and so were everyone’s profit margins.

But Saks’ surprise discounting forced companies and brands that have their own retail operations — including Prada SpA, PPR SA’s Bottega Veneta and LVMH Moet Hennessey Louis Vuitton’s Marc Jacobs, which had opened hundreds of their own stores in the past decade — to follow suit or forfeit sales.

Giving designers a heads-up wasn’t an option, Saks says, without risking that rival department stores get wind of its strategy. “We live in a competitive environment,” says Ron Frasch, Saks’ chief merchandising officer. “Also, who do you tell and who don’t you tell?”

Perhaps the biggest consequence is that customers are now questioning the entire premise of luxury goods: Why pay top dollar today if big markdowns could be coming tomorrow?

“Shopping has changed as an experience for me” because of all the discounting, says Roz Silbershatz of New York. Over the holidays she bought, among other things, a $1,000 Badgley Mischka gown for $290.

Previously, the 29-year-old communications executive had paid full price for items including a $2,500 Jimmy Choo handbag. “I am so shocked that I ever did pay full price,” she says. “I could never do that again.”

Designers are starting to fight back. Discounting “is the way of spoiling everything,” says Gianni Castiglioni, president of Milan-based designer label Marni SRL, known for $2,000 dresses made from innovative materials such as polyvinyl chloride (the “PVC” in household pipes) that are favored by the art-gallery set.

Some, including Marc Jacobs and Derek Lam LLC, are thinking about splitting their product lines or withholding some top items from department stores in order to feature them in their own stores. And at this month’s New York Fashion Week, which starts Friday, some designers might offer retailers only their “pre-fall” collection, but not what they actually show on the runways, which would appear only in their own shops, according to one buyer for a Saks rival. This person declined to name the two brands weighing this strategy.

Saks executives aren’t in favor of that. It’s the runway collection that’s “setting the image and setting the tone” for a designer’s look, says Mr. Sadove.

Diane von Furstenberg, the designer and president of the U.S. fashion designers’ trade organization, says another solution might involve producers leasing space in department stores.

The idea appeals to brands because it gives them complete control over display and staffing. Department stores, however, have some issues. It diminishes control over their own department-store brand and can also get confusing for shoppers, if say a “store-wide” sale doesn’t apply to items bought in various leased-out areas of the shop floor.

Leasing is more common Europe and Asia but relatively rare in the U.S. Saks leases a slice of its space to Louis Vuitton and Fendi, among others.

From his corner office overlooking 49th Street, Mr. Sadove, 57 years old, says he’s working on damage control with designers. “If people’s feathers got ruffled, we want to unruffle them.”

Saks has an incentive. “Almost everything we sell is ‘designer’ in one form or another,” Mr. Sadove says.

Still, he and Mr. Frasch, defend their actions, saying they needed to swiftly fix a big problem that no one saw coming.

When Saks started planning its 2008 holiday season a year ago, there were few clues that the six-year boom in luxury goods was about to flop. Although other retailers were starting to suffer, it appeared that Saks’s wealthy clientele — its typical shopper has a $175,000 annual household income — might help the chain buck the trend.

The Dow Jones Industrial Average was approaching 13000, and “our customer feels good,” Mr. Sadove said in November 2007, as Saks reported higher profits.

So, in February 2008, Mr. Sadove told his merchants to place orders accordingly when they jetted to Milan and Paris to buy for the fall season.

Then, September struck. Mr. Sadove was in Paris on Sept. 29, attending runway shows — but his eyes were glued to his BlackBerry as he watched the Dow drop nearly 800 points in one day.

Next, he watched big spenders became penny-pinchers. That month, Saks’ same-store sales fell 11%. In October, they declined another 17%, the worst monthly drop since the 2001 terror attacks.

The change happened “over as short a period of time as you can possibly imagine,” Mr. Sadove says.

The result: a huge disconnect between Saks’ inventory and shoppers’ appetite. At Saks’ annual “private sale nights,” early-November events for top customers, the usual 40% discounts got no response.

After lunch on Nov. 10, Messrs. Sadove and Frasch gathered with other executives to strategize. The Thanksgiving kickoff to shopping season was still a few weeks away, and maybe people’s billfolds would loosen up by then. But Mr. Sadove was anxious.

So he floated the idea of deep price cuts.

Some colleagues urged drawing the line at 50%. But Mr. Frasch felt strongly that wouldn’t be enough.

“I felt, the sooner we react, the better,” he recalls. “I said, ‘Let’s not wait till December 26th’” to do something dramatic.

Their decision: A 70%-off sale would be used, but only in a worst-case scenario, if sales kept declining and shoppers remained bored by less eye-popping 40% rollbacks.

Extreme discounting of luxury goods is perilous. Not only does it potentially leave your best customers feeling duped for paying full price, it also erases fat profit margins of 50% or more.

“We are going into a period of total unknown,” Mr. Frasch told the team.

As Thanksgiving approached, things still looked very bad. So the 70%-off signs went up.

On sale day, Tuesday, Nov. 25, a line of hundreds of women snaked out the entrance of Saks’ 8th-floor shoe department in New York to buy, among other things, $800 Christian Louboutin pumps price-chopped to $250.

Nationwide, boutique owners were blindsided. In Los Angeles, less than three miles from Saks’ Beverly Hills store, Tracey Ross, a well-known boutique owner there, decided not to match the cuts right away. So she was stuck trying to sell $2,400 dresses and $1,400 handbags at full price when similar goods were in the bargain bin, relatively speaking, just around the corner.

Ms. Ross says she phoned and pleaded with designers to take their merchandise back. They were “in complete denial,” she says. “They said, ‘You’re Tracey Ross. You’ll sell it.’”

In the end, she says, she had to discount so steeply that she couldn’t pay her designers. “I am like, ‘Do the math. I sold your $800 shoes for $50.’” She closed her store and filed for bankruptcy protection on Christmas Eve.

Some designers also added to the pain by enforcing minimum-order agreements on boutiques. In good times, hot brands had the power to set terms like these.

Some boutique owners were incredulous. “Could you imagine if I told my customer, shopping in my store, ‘Here is your budget’?” says Elyse Walker, who owns five boutiques in Pacific Palisades in Southern California.

Her sales were down 5% for the year — but profits fell 50% due to deep holiday discounting.

Meanwhile, in Milan, Mr. Castiglioni of the designer label Marni was at home in mid-November when he received a call from the manager of his New York store saying customers were suddenly walking in and demanding 50% to 70% off. “They were saying, ‘Why should we pay full price?’” Mr. Castiglioni recalls.

In New York, American designers started contacting Ms. von Furstenberg, the head of their trade group, looking for advice. “I was very upset. Everyone was,” the designer says. That level of price-cutting “cannot happen again,” she says.

Part of the problem is the designers’ own fault. Over the past 15 years, their products have become so ubiquitous — Gucci is sold at airport kiosks, Hermes has mall shops — it’s undermining the image of exclusivity. In a January survey of rich shoppers by the Luxury Institute, a research firm, roughly half of high-net-worth consumers said luxury brands are becoming commoditized; 64% said they were overpriced.

“The luxury industry has to devise a new business model,” says Arnold Aronson, a consultant and former Saks chairman.

Among the designers rolling out separate lines for their own shops is Aeffe SpA, the Milanese parent company of Alberta Ferretti and Moschino. The company had just opened stores in New York and West Hollywood, Calif., in August and September — just in time to come under discounting assault. Aeffe USA’s president, Michelle Stein-Borgna, says shoppers’ expectations have already changed. A few days ago, one of her store managers informed her that “customers are coming in and asking for discounts on spring merchandise right now.”

Her response: “Absolutely not. It’s a vicious cycle,” she says. Aeffe is now thinking about cutting back what it offers to department stores in areas where it has its own shops.

Similarly, New York design house Derek Lam, which is known for cocktail dresses that sell from $1,200 to $3,500, is opening its own New York store next month. To protect itself against other retailers’ discounts, it’s thinking about creating “special editions” of its lines that wouldn’t be sold in Saks and other retailers.

Others are taking the opposite approach. In December, Sergio Rossi, the Italian shoe and handbag designer, closed all three of its U.S. Sergio Rossi stores. Instead, the label, which is owned by the Gucci Group unit of French company PPR S.A., plans to stick with boutiques and department stores.

A spokeswoman for Gucci Group says the store closures were a strategic decision unrelated to discounting.

For emerging designers, the situation is more dire. “The department stores really hurt us,” says Philip Leeming, co-designer for Falls, a dress-designing duo.

Late last year, Saks informed Falls and other designers that they would be expected to cover some of the cost of Saks’s price-cut decisions — without having a say in the decision.

“It was horrendous,” says Leong Ong, Mr. Leeming’s business partner.

Last year, Falls shipped its own lines to 160 different retail customers. Today, it is drastically cutting production and instead focusing on designing for retailers’ private-label lines. “There’s less chance of them asking for returns” on unsold goods, Mr. Ong notes.

In hindsight, Saks executives say they may have cut too much in some areas. “We didn’t need to do what we did in accessories,” Mr. Frasch says. High-end shoes and handbags would probably have sold out, even at higher prices, because shoppers see them as more practical wardrobe updates than another new outfit.

The retailer is still not out of the woods. Saks shares were recently trading at $2.72, down from $22 in December 2007. In mid-January, it laid off 1,100 people, or 9% of its work force, and could close some stores.

This year, Saks is spending about 20% less on merchandise to keep inventories lower, but Mr. Frasch acknowledges the number is only a guess. The luxury-goods business is “absolutely flying blind,” he says.

His boss, Mr. Sadove, agrees. “One of the big questions that people are asking,” he says, is: “Will people ever buy at full price again?”

Write to Vanessa O’Connell at vanessa.o’connell@wsj.com and Rachel Dodes at rachel.dodes@wsj.com

{http://www.ft.com/cms/s/0/4ac8f142-f39f-11dd-9c4b-0000779fd2ac.html?nclick_check=1#U230936160652CY}

But despite the negative spin the FT puts on mining situation, to me it sounds awfully bullish!

“”" ”Most of the operations are mature and their life-of-mine is limited without developing resources below 4,000 metres,” according to one analyst. The costs of starting such a mine from scratch ”would be prohibitive unless the gold price was, say, $2,000 [an ounce]”. Most analysts’ long-term forecasts are closer to $900. “”"

This is where things get bullish. CLSA strategist Chris Wood remains of the view that we see gold reach $3000/oz by 2010-end… a 3-bagger in less than two years! Once that level is breached, then profitability for gold miners should theoretically rise multi-fold.

S.Africa probably has the most to gain from gold’s rise, and thus, it may be worth investigating going long the the Johannesburg Stock Exchange, especially as and FDI increases with more projects turning viable (on that note, anyone who believes in the dollar-debasement trade should think about going long Rand).

To make it easy, the iShares give you the quickest exposure (EZA US). African miners listed in the US include GFI, HMY, and AU. Those looking for an uptick in oil should watch SSL, while TKG is a proxy on S.Africa’s infra outlook.

A more direct play on gold miners would be GDX, which is 77% concentrated in Canada and South Africa.

>>> FT: South Africa’s gold miners face deepening gloom <<<

By Tom Burgis
Published: 18:14 | Last updated: 18:14

The ammonia still hangs heavy in the air from the last blast. Drenched in sweat, the faces of the miners on the morning shift betray nothing but concentration. Yet when the previous night’s explosion took them a few metres further into the South African rock this week, their gold mine, Mponeng, became the world’s deepest.

The pride of the managers at Anglogold Ashanti’s flagship operation is not enough, however, to reverse the terminal decline of an industry that at its peak in the 1970s produced two-thirds of the world’s gold.

Today, South Africa’s mines account for less than 10 per cent of supply. Last year, output fell by 14 per cent to an estimated 232 tonnes, pushing the country into third place behind China and the US, according to GFMS, the consultancy.

The last time output fell so precipitously, in 1901, the Boer war was raging and bubonic plague was rife in Cape Town.

That Mponeng has surpassed its neighbour to reach a depth of 3,778m is a reminder that South Africa’s mines are deep and difficult: 123 years after the stupendous riches of the Witwatersrand basin lured its first prospectors to a settlement they called Johannesburg, they could hardly be otherwise.

”We’ve gone through all the sweet spots,” says Graham Briggs, chief executive of Harmony, the world’s ninth biggest producer whose entire production currently comes from South Africa. ”The grade [quality] year on year is downwards.”

South Africa’s woes spread well beyond its domestic miners into the global gold market, helping to hold down the world’s mine gold supply last year to 2,385 tonnes, down 3.6 per cent from 2007. That drop, just as investors are hoarding gold amid the global financial crisis, has helped to push gold prices above $900 an ounce. The only reason prices are not higher is because jewellery demand for gold, particularly in India and the Middle East, has collapsed.

Banks such as UBS and Goldman Sachs this week have forecast that gold prices will rise above $1,000 an ounce in the near term, probably hitting an all-time high.

John Reade, a precious metal strategist at UBS in London, says fear is helping to drive up prices. “Purchases of physical gold have jumped over the past six months as investors’ fears about the current financial crisis … have intensified.”

Yet while investors may see gold as an island of security in a financial tempest, there is nothing easy about digging out the precious metal at a depth equivalent to 10 Empire State buildings. The temperature on the lower levels of Mponeng hovers around 35 degrees centigrade despite the 180 tonnes of ice pumped into the mine every hour. Every month or so, the shafts’ steel girders are tested by a ”seismic event”.

Such dangers, coupled with the backlash of years of rising fatalities, have propelled safety to the forefront of South African gold mining agendas. Already, fewer miners are dying. But there are further difficulties: aids kills about 600 South Africans a day; apartheid has been dismantled but the skills shortage created by decades of systematically under-educating the black majority remains.

”Most of the operations are mature and their life-of-mine is limited without developing resources below 4,000 metres,” says David Davis, senior gold analyst at Credit Suisse Standard Securities. The costs of starting such a mine from scratch ”would be prohibitive unless the gold price was, say, $2,000 [an ounce]”. Most analysts’ long-term forecasts are closer to $900.

All the same, executives predict static or increased output over last year’s level, which should help keep prices high if investors continue to demand large amounts of bullion.

As South Africa’s old mines yield less and less, companies such as Harmony, which is constructing a potentially lucrative mine in Papua New Guinea, and the other two South African gold giants – Anglogold and Gold Fields, respectively the world’s third and fourth largest producers – are increasingly turning their attention abroad.

These days Anglogold, formerly the gold arm of Anglo American, considers itself a global company, with an array of international listings. While Mark Cutifani, chief executive, says he is ”committed to South Africa”, the country will soon yield only 40 per cent of Anglogold’s output. The difficulties at operating so far underground will cap production.

Nick Holland, Gold Fields’ chief executive, told the Financial Times that he is scouting for more assets in West Africa, Asia, Australia and Andean South America. Despite the rehabilitation of South Deep, one of the Witwatersrand’s great mines, he predicts the company that is a descendant of Cecil Rhodes’ gold venture will see the South African share of its production fall to about 50 per cent.

But like his counterparts, Mr Holland refuses to give up on South Africa. In the short term at least, the financial markets have created what he calls a ”perfect storm”. Frazzled investors are deserting emerging market currencies such as the rand in order to plough cash into gold, the ultimate store of value.

But South Africa is not running out of gold. It is there in abundance – only at fantastic depths. While smaller companies are picking through the scraps of previously abandoned mines, the consensus is that no one in their right mind would embark on a new mega-project – least of all foreign miners unfamiliar with the geological complexities.

One bellwether will come when Anglogold’s board decides in July whether or not to spend ”two-figure billions” on pushing into the huge reef that extends even deeper than Mponeng.

The push deeper than the current record of 3,778m down into the earth will depend a lot on whether investor appetite for the precious metal pushes it beyond another all-time high: the $1,030.80 a troy ounce price it reached last March. Yesterday in London, the record appeared a bit closer, with spot gold trading at $918.55 an ounce, less than 15 per cent below its peak.

Additional reporting by Javier Blas in London

Copyright The Financial Times Limited 2009

{http://money.cnn.com/2009/02/04/news/economy/city_troubles/index.htm?postversion=2009020418}

The cities’ proposed solution?

“The mayors have put together a “Ready to Go” report that details 18,750 local infrastructure projects in 779 cities that can be started as soon as funding is received. The projects, which represent an investment of $150 billion, would create 1.6 million jobs in 2009 and 2010 and range from creating bridge guardrails to renovating elementary schools.”

But the requested $150bn is much higher than the $43bn that Obama’s plan is commiting.

The answer to underfunding infrastructure? Private stimulus.

“In a report due out Wednesday, a group including Morgan Stanley, Credit Suisse and the Carlyle Group says $180 billion of private capital is available for investment in highways, airports and other transportation infrastructure. The report says this money could help create millions of jobs, boost economic growth, reduce travel congestion and free up government dollars for other priorities.” {http://online.wsj.com/article/SB123249627623600271.html}

Will Obama allow the privatization of toll roads and other transportation assets? That’s remains to be seen.

But it’s looking increasingly likely that the govt will need private-sector assistance in carrying out its lofty goals. If that’s the case, then an opportunity could be opening up again for infrastructure plays which have been hammered over the last year.

IF the govt allows this to happen, then it may be worth taking a look at US-listed infrastructure names like MACQUARIE INFRA (MIC), FLUOR (FLR), ABB (ABB), SHAW (SGR). Going down the market-cap list, names like AQUA AMERICA (WTR) and AMERICAN SUPERCONDUCTOR (AMSC) also stand out.

For more US infrastructure plays, see: {http://www.smartmoney.com/investing/mutual-funds/stimulus-plan-may-lift-infrastructure-plays/}. 

>>> CNN: 84% of cities in money trouble <<<

Some 84% of cities say they are facing financial difficulty, according to new survey. Things won’t improve this year.

By Tami Luhby, CNNMoney.com senior writer
February 4, 2009: 6:23 PM ET

NEW YORK (CNNMoney.com) — More than eight in ten cities are in financial trouble, up from 64% six months ago, according to a survey released Wednesday.

The recession is straining cities’ ability to meet their financial needs, according to the National League of Cities. Some 84% of cities reported facing fiscal difficulties, the highest percentage since the group starting doing surveys in 1985.

The nation’s cities are counting on billions of dollars from the economic stimulus package now being debated in the Senate. Mayors gathered in Washington, D.C., to meet with White House advisers and House Speaker Nancy Pelosi, D-Calif., on Wednesday to urge Congress to pass the recovery bill.

The mayors are eager to get funding for transportation and infrastructure projects that will put their residents to work. While most of those meeting Wednesday have budget deficits, they are not looking for federal money to close those gaps.

“If we’re going to invest to stimulate our economy, we need to invest in our cities,” said Miami Mayor Manny Diaz. “Cities are ready to go. This money comes in and goes right back out to create jobs.”

The mayors have put together a “Ready to Go” report that details 18,750 local infrastructure projects in 779 cities that can be started as soon as funding is received. The projects, which represent an investment of $150 billion, would create 1.6 million jobs in 2009 and 2010 and range from creating bridge guardrails in Bessemer, Ala., to renovating elementary schools in Norfolk, Va.

The economic stimulus package sets aside billions of dollars for highway construction, transit improvements, school modernization and community development block grants.

2009 not looking better

Things will remain tough in 2009. Some 92% of the cities surveyed expected to have trouble meeting their city needs during this year. To cope, they are implementing hiring freezes and layoffs, delaying capital expenditures and instituting service cuts.

Some 69% have instituted hiring freezes or layoffs, while 42% are delaying or canceling infrastructure projects. Another 22% have instituted across the board cuts.

Cities are seeing their tax revenues decline as property values drop, shopping slows and unemployment rises. On top of that, nearly one in two city finance officers report difficulties in access to credit and/or bond financing.

To bring in more revenue, they are adding to raising fees. Nearly half are increasing charges for services, while 28% are increasing the number of fees. Fewer are raising taxes. Some 14% have increased property taxes, while 6% have hiked sales taxes.

“Cities are responding as best they can,” said Donald Borut, the league’s executive director. “Their citizens have increasing needs for services just at the same time that revenues are declining.”

City finances tend to lag the overall economy by 12 to 24 months, the league said. The weakening economic conditions will be felt by cities through 2009 and likely through most of 2010, the league said.

First Published: February 4, 2009: 12:11 PM ET

{http://www.cnbc.com/id/28977233}

“”" Though only 2% of the overall housing market, high-end home volume sales have seen a dramatic drop. Homes valued at $750,000 or more plunged a whopping 47% in the year ended in November, [while] homes valued at $400,000 or less fell by only 3% during the same period. “”"

Last summer my Greenwich-based Cyrano de Bergerac told me about a home speculator sweating bullets because he couldn’t flip out of his development punt. This is a guy that top-ticked the Greenwich housing market by buying a $1.5m and trying to flip it the next month for $1.7m.

Given that the speculator probably put down only 10% (or $150k) to buy the house, his target return was c.133%. The problem, though, was that he couldn’t sell it. So on the $1.35m loan he took out, he’s looking at interest payments of $67.5k/yr (or $5600/mth). That’s an awful lot going towards a house that he doesn’t live in.

So assuming CNBC is correct, and the value of this guy’s house is -47%, then that implies a new market value of $800k vs. his purchase price of $1.5m last yr. That’s a $700k loss on his $150k investment… Ouch.

That house is still on the market.

Greenwich is frozen, and we’re finally starting to hear that even the resilient Hamptons (which was supposedly even MORE resilient than Greenwich) is also starting to crumble.

STAY LONG {SRS US equity DES <Go>}.

>>> CNBC: High-End Housing Market Ravaged by Stock Selloff <<<

By: Mark Koba, Senior Editor | 03 Feb 2009 | 09:33 AM ET

For wealthier Americans, the free-fall in stocks is not only ravaging their portfolios—it’s taking a huge bite out of the value of their homes.

“The high-end market relies on equities,” says Walter Molony, spokesman for the National Association of Realtors. “If stocks are doing well, so too does high-end housing.”

Though only 2 percent of the overall housing market, high-end home volume sales have seen a dramatic drop, according to Molony. Homes valued at $750,000 or more plunged a whopping 47 percent in the year ended in November. By comparison, sales of homes valued at $400,000 or less fell by only 3 percent during the same period.

A look at the markets during the same time period shows the Dow Jones fell 33.1 percent, while the S&P shows a 37.5 percent drop in value.

Real estate professionals agree that sliding markets and a ravaged economy are hurting prospective high-end buyers and sellers. And that means prices will likely decline even more before there is any recovery.

“Unless they are forced to move, they are staying put,” says Mary Cassidy, a licensed real estate broker in Bronxville, New York, a wealthy suburb of New York City that is home to many Wall Streeters. “People are not buying and people are not selling. When everyone’s uncertain as to whether they have a job, why go out and buy something?”

Jumbo Loans

While equities and the economy are reasons for slower sales, the rise in jumbo loan rates is another, says Greg McBride, Senior Financial Analyst at Bankrate.com. “More money down is the big reason people aren’t taking them out,” McBride says. “It takes good credit but you need 30 percent down or more and even those people are paying an interest rate of more than 7 percent.” 

Bob Walters, Chief Economist at Quicken Loans also sees fewer jumbo loans being made. “Down payments have to be higher, credit scores have to be higher,” says Walters. People are getting hit hard from all sides and there’s less demand for more expensive homes.”

By nature, jumbo loans, or non-conforming loans are used for financing high end homes. They are a mortgage with a loan amount above the industry-standard definition of conventional conforming loan. A loan in excess of $417,000 to $625,000 is currently considered a jumbo in most states. And jumbos have interest rates a little higher than a conforming loan.

But those interest rates have gotten even higher over the past few months, which is a direct result from the lack of a secondary market to purchase jumbo loans says Gary Meglino, a corporate executive at Residential Home Funding in White Plains, New York.

“The secondary market lost interest in acquiring the loans about May or June of 2008,” says Meglino. “The only institutions that are offering jumbo loans have to service them, and that has made them very expensive.”

Bigger Problem Behind Jumbo Loans

In February of 2008, then-President Bush signed an economic stimulus package that increased the conforming loan limit to $729,750. But that only lasted until the end of 2008 and caused a bigger problem for jumbo loan applicants says Bankrate’s McBride.

“Conforming loan limits declined beginning in 2009,” McBride says. “What that means is that in high cost housing markets, you have a lot more borrowers that are considered jumbo and can’t get rates for a lower loan. The conforming loan limit should go back to the 2008 level, when it was higher. In New York it was the $729 thousand figure. It’s now at the high end of $625,500. That could increase foreclosures.”

Foreclosures For High End Homes?

In the past, foreclosure rates have been much lower on jumbo loans in comparison to conforming loans. But jumbo’s are a higher risk for lenders, because if the jumbo loan defaults, it’s harder to sell a home, especially a luxury home. for its full price. And that could be a problem if there are more foreclosures ahead.

“I think the best thing is to re-invigorate the banking system, and let it work itself on its own,” says Quicken’s Walters. “It’s not a good policy for the government to buy million dollar homes,” when asked about what’s the best solution if jumbo loan foreclosures mount in the wake of higher unemployment.

Future Of High End Market

As the markets continue to decline and home values erode at record lows, the future for high end sales looks fairly bleak at least for now, says Bronxville, NY’s Cassidy.

“Lower prices are not moving people to buy,” Cassidy says. People say, ‘I have what I need, why do I need more.’ We’re not seeing may sales with jumbo loans. People are scared about the economy. The high end here is more than $2 million. There’s no market for them. It’s a lot of hand holding for sellers. Our work is even tougher.”

But Residential Home’s Meglino does see some hope for home buyers with enough cash. “Jumbo’s are harder and more expensive,” he says, “but for people who need a mortgage, there’s always someone there with a price.”

{http://money.cnn.com/2009/02/02/news/economy/california_budget_crisis/index.htm?postversion=2009020216}

California’s largest deficit is expected to reach a record $15bn in FY2009 and $25bn in FY2010. But California is not alone. Some 46 states face budget shortfalls, forcing them to slash funding for many services. Combined state deficits over the next 2.5 years is likely to be $350bn to $370bn, according to Center on Budget & Policy Priorities {http://www.cbpp.org/9-8-08sfp.htm}. Whoa.

And once again, this huge deficit at the state level is precisely why I think Obama’s magical $819bn fiscal solution will not work. Not mention the fact that the majority of his plan is going to the wrong places — only $30bn is going to infrastructure, for example — but that’s another story.

Make sure you p.a. incudes a healthy chunk of {SKF US equity DES <Go>} & GOLD.

>>> CNN: California delays $3.5B in payments <<<

Gov. Schwarzenegger’s Golden State is in a world of pain. Now it can’t meet its obligations to taxpayers, vendors and others until a budget deal is reached.

By Tami Luhby, CNNMoney.com senior writer
Last Updated: February 2, 2009: 4:49 PM ET

NEW YORK (CNNMoney.com) — Running short of cash, California has started delaying $3.5 billion in payments to taxpayers, contractors, counties and social service agencies.

With the governor and state lawmakers locking horns on resolving California’s budget crunch, the controller Monday halted checks covering these obligations so the state could continue funding its school system and making its debt payments.

The delay will inflict more pain on the already sorry condition of the Golden State, which is facing a $40 billion budget gap. People won’t have tax refund money to spend, businesses won’t get paid for their services and agencies won’t have funds to help the needy until the budget situation is addressed.

Nearly $2 billion in personal state income tax refunds are being held up, according to state estimates. Last year, some two million Californians received refunds in February.

“People are going to be hurt starting today,” said Garin Casaleggio, a spokesman for Controller John Chiang.

Also on hold are $515 million in payments to the state’s vendors and $280 million to help people with developmental disabilities. Other public assistance agencies will be left waiting for hundreds of millions of dollars.

Gov. Arnold Schwarzenegger and legislative leaders are behind closed doors trying to hammer out a solution to the state’s budget crisis, which also includes a $15 billion budget deficit for 2008-2009 and a projected $25 billion gap for 2009-2010. The governor has proposed draconian spending cuts in virtually every department, as well as hefty tax increases, to close the widest deficit in its history.

California not alone in feeling pain

California, the world’s eighth largest economy, is not alone in its budget troubles. Some 46 states face budget shortfalls, forcing them to slash funding for many services.

But California, the largest state in the union by population, faces a deficit that totals more than 35% of its general fund.

Some 257,400 jobs in the Golden State evaporated in 2008, pushing the unemployment rate up to 9.3% in December, the fourth highest nationwide. Its median home price plunged nearly 50% since the spring of 2007.

Meanwhile, the demand for assistance has risen. The number of Californians receiving food stamp benefits increased by 13.8% for the year ending September 2008, while the number of families receiving cash assistance from the CalWORKs welfare program rose by 5.9%, according to the California Budget Project.

The state’s fiscal troubles largely stem from its heavy reliance on personal income taxes. This revenue stream dries up when recessions hit and unemployment soars. California also never fully recovered from the dot-com bust. So the state didn’t have large reserves to fall back on when the bottom fell out of the economy.

“We went into this downturn in a very weak position,” said Jean Ross, the California Budget Project’s executive director.

On top of its economic troubles, the state is also coping with a near shutdown of the nation’s government bond markets, which had allowed it to borrow to cover its short-term debts. This fall, the state was only able to borrow half of what it needed to see it through the fiscal year.

The lack of access to the bond markets prompted the state in December to suspend funding for more than 2,000 infrastructure projects, leaving many people and businesses without much-needed work.

And because of California’s financial woes, credit rating agencies are taking a dim view of the state. Moody’s warned in mid-January it might downgrade California’s general obligation bond rating because of its budget and liquidity problems. If this happens, it will become even costlier for California to borrow.

Deep cuts and steep tax increases

To shore up California’s budget, the governor wants to slash spending by $17.4 billion, according to the California Budget Project. Included are cutting $7.7 billion from public education, eliminating dental and other benefits for adults on Medicaid and requiring state workers to take two unpaid days off per month.

Schwarzenegger is also looking to boost revenue by $14.3 billion and borrow $10 billion more. He wants to raise the state sales tax by 1.5 points – to 8.75% – through the end of 2011 and hike alcoholic beverage taxes by a nickel a drink.

“The truth is that California is in a state of emergency,” Schwarzenegger said in his State of the State address on Jan. 15. “The $42 billion deficit is a rock upon our chest and we cannot breathe until we get it off.”

Even after state officials hammer out a deal, payments may not start flowing right away, Casaleggio said. It hinges on the details of the agreement, as well as on how much tax revenue the state collects in January.

“It all depends on the money that’s in the Treasury,” Casaleggio said.

Some relief may be coming California’s way. The state stands to receive billions from the $819 billion stimulus package that just passed the U.S. House of Representatives.

The state could get as much as $63.4 billion, some 12.3% of which could be used to balance the budget, according to the Center for American Progress. Some $3.6 billion could go for highway construction and transit improvements, restarting some of the projects currently idling. California will also receive billions to pay for education, Medicaid and other benefits.

{http://www.creditwritedowns.com/2009/01/gdp-imports-inflation-and-local-government-are-the-story.html}

Harrison’s focus on deflation, consumption, capex cuts, trade, and state & local govt give us a good picture of the US economy as it really is: Screwed.

In particular, Harrison’s comments on state & local govt support my suspicions on Obama’s $819bn fiscal package:

“This is an eye-opener. Government spending is down from Q3 to Q4 because municipalities are having to cut back more than the feds have increased. Basically, your local county or city government doesn’t have a printing press to cover deficit spending with. That means that when tax revenue decreases, so too must spending. And this is exactly what’s happening at the state and local level. In fact, the annualized drop in state and local government spending was 7.8% in Q4. That’s huge. Economic stimulus at the federal level will be offset by contraction in local government spending unless local governments receive funds soon. Translation: Obama’s stimulus package is not going to do the trick.”

I still say that “HOPE” is not a strategy. STAY LONG (or at least hedge with) {SKF US equity DES <Go>} & {SRS US equity DES <Go>}.

>>> GDP: imports, inflation and local government are the story <<<

By Edward Harrison (Credit Writedowns)
January 30th, 2009

I have just now had a chance to look at the data and wanted to share my thoughts with you, unfiltered by the media reports. I would sum it up by calling it a story about the three I’s of imports, inflation and investment. But, I will also have a few words to say about state and local government spending as well.

We all expected a bad number. Therefore, in the scheme of things, -3.8% was not so bad, despite being billed as the worst economic performance in 27 years. There were no big surprises, so I want to focus on the deltas — that is on the things that changed the most from Q3 to Q4. This may give us a clue as to what to expect going forward.

Now, I am going to be discussing the non-inflation-adjusted numbers because I do not want the GDP deflator – which is used to go from these numbers to the ones you hear in the media – to skew the analysis.

Here are the deltas I see:

Inflation
The first number to note is the GDP deflator itself. Now in case you don’t know what the hell a GP deflator is – it is the number the government statisticians use by which they ‘deflate’ the Nominal GDP number in order to calculate the Real GDP number reported in the press. (For more on this, see my post “The GDP deflator.”)

This number often seems bogus as it does not include an adjustment for imported goods and services like oil. So it’s like measuring domestically-derived inflation only. It gives a good read on prices generated in the domestic economy. The annualized quarterly number for Q4 2008 was -0.07%, the first negative number since Q3 1954, which was 54 years earlier. Translation: deflation has arrived. We are not talking about oil prices here. We are looking at deflation of prices for domestically generated goods and services.

Durable Goods
Now, if you recall from Econ 101, GDP equals C + I + G + (Ex – IM) — Consumption + Investment + Government Spending + Net Exports. When people talk about over-consumption, they mean that the C has been growing faster than everything else. For instance, in 1984, 25 years ago, Consumption was 63% of nominal GDP. Just before GDP growth turned negative last year, it was 71%. That’s overconsumption!

But, this has come to an end. And it is durable gods – cars, refrigerators, and the like – that have seen the lion’s share of the fall, an annualized 12.8% last quarter alone. People are obviously deferring purchases of big-ticket items due to economic uncertainty. Expect this trend to last for all of 2009 at a minimum. This is one reason the automakers’ problems are not temporary. I anticipate they will come looking for more money from the government sometime soon.

Fixed Investment
Then there’s the Investment side of things. Fixed Investment as fallen for 8 quarters now, since the beginning of 2007. However, the drop of 7.4% last quarter indicates that the falloff is increasing. But, as capital spending is a lagging indicator, this doesn’t really say much about where things are headed except with regard to the employment market where it signifies an increase in job cuts. (See my post “The Economy’s Four Horsemen” for more on this).

State and Local Government
This is an eye-opener. Government spending is down from Q3 to Q4 because municipalities are having to cut back more than the feds have increased. Basically, your local county or city government doesn’t have a printing press to cover deficit spending with. That means that when tax revenue decreases, so too must spending. And this is exactly what s happening at the state and local level. In fact, the annualized drop in state and local government spending was 7.8% in Q4. That’s huge. Economic stimulus at the federal level will be offset by contraction in local government spending unless local governments receive funds soon. Translation: Obama’s stimulus package is not going to do the trick.

Trade
Finally, we come to net exports. Exports were down an annualized 36% in Q4. But, imports declined even more: an annualized 46%. So net, net we saw a better trade balance in Q4. What this means is that the recession is reducing American reliance on foreign goods and services. I see this as a necessary re-balancing which will be useful once the U.S. leaves recession.

On the whole, my takeaways from this are the following:

1 … Overconsumption in the U.S. is at an end. Consumers are spending less.

2 … Durable goods are going to take the biggest beating here. Position your investments accordingly.

3 … Losses in tax revenue by local and state governments mean reduction in spending, which will partially offset the Obama stimulus package. This makes it likely that the stimulus will fail.

4 … The absolute value of trade is plummeting. This will cause exporters to lobby for export subsidies, increasing trade friction and protectionism.

{http://specials.ft.com/vtf_pdf/300109_BACK1_EUR.pdf}

After a slew of capex cuts announced across the industry, Royal Dutch Shell has made a commitment to continue investing while others are not. Contrarian investing at its best? Credit Writeown author Edward Harrison thinks so.

On top of the Lex column below, take a look at Harrison’s blog from Jan 16 talking about ConocoPhilips’ capex cuts {http://www.creditwritedowns.com/2009/01/conoco-phillips-34-billion-writedown-makes-me-bullish.html}.

Harrison’s conclusion:

“”" [ConocoPhilips will implement] huge cuts in capex that are bound to be a constraint when the economy turns. Far from viewing this as a negative, I see a temporary supply glut that is likely to swing massively in the other direction when reflation takes hold. Oil prices in the 30s is as extreme a low as oil prices at $140 were an extreme bubble high. The consensus is that low prices are here to stay because most oil stocks are trading at ridiculously low multiples. However, in my view, low prices have invited cuts in oil sector investments, which means higher prices down the line. “”"

Anyone with a long-term view (if their are any of you left!) may want to look at buying companies continuing to spend in cyclical industries facing massive capex cuts this year.

On that note, take a look at the attached strategy piece for our top long-term BUYs in Korea. No.5 on the list is POSCO (005490 KS). An industry leader flush with cash, Posco is one of the only steel makers globally to be keeping capex FLAT YoY while the rest of the industry aggressively cuts. If/when prices begin rising again, then POSCO is the MUST OWN inflation hedge in Korea.

>>> FT: LEX – Gimme shelter <<<

It took four years for crude oil to get from $35 a barrel to $147, then just four months to get back again. How are the oil majors responding? Royal Dutch Shell, first out of the traps with fourth-quarter figures yesterday, has set an encouraging marker.

Last time the oil price slumped, in 1998, the majors reacted by slashing spending, sucking capital out of non-core businesses and driving out costs. Such actions improved returns on invested capital – Shell’s ROIC almost tripled by 2001 – but stored up problems: if you don’t spend the money, about six years later, you start to see the consequences. Shell, still scarred by its reserves downgrade in 2004, felt that more than most. For the past five years it has aggressively recycled surplus cash flow into big, difficult long-life projects, trying to recapture a lost reputation for engineering excellence. This makes a lot of sense: in an era of resource nationalism, only the smartest foreigners are let in.

That is why Shell’s spending cuts are now modest. Capital expenditure for 2009 will be flat, or 10 per cent lower than most forecasts, at about $32bn. Peter Voser, rising to chief executive from head of finance in July, is skimming spending opportunistically. The expensive Canadian oil sands, for example, will
move from expansion to a focus on eliminating bottlenecks, while projects in combustible regions such as Nigeria will be slowed.

The dividend, meanwhile, is sacrosanct, as it has been since the second world war. Mr Voser would never announce his arrival as chief executive by cutting it, or retracting the promise of a rise. Given that meaningful growth is beyond the oil majors – year-on-year oil output at Shell was flat yet again – these are fundamentally income stocks, rising and falling on their prospective yields. Shell, now yielding 7 per cent, is allowing gearing to rise to help support spending and payouts; its net debt to equity, 23 per cent at present, could comfortably rise to 30. In a market stuffed with dividend cuts and rights issues, and denuded of high-yielding banks, it is a distinction worth preserving.

{http://online.wsj.com/article/SB123310490507922365.html}

“”" The immediate danger facing Pfizer is the 2011 expiration of the patent rights for the cholesterol medicine Lipitor, which accounted for a quarter of the company’s 2007 revenues of $48 billion and remains the world’s best-selling drug. Generic drug companies will stage a run on at least 14 Pfizer patents — and 70% of its sales — over the next five years; Merck, Eli Lilly and Bristol Myers Squibb are staring down the barrel of similar expirations. “”"

Pipelines are thin across the board, and bets are increasingly being placed on “bio-medicines” which often target rare diseases and unmet needs like cancer and Alzheimer’s.

There are two ways to invest on these trends: (1) look for industry leaders with diverse revenues streams and equally diverse (and deep) product pipelines, and (2) look for companies that focus on generics as a slew of major patents expire in the coming years.

On the former, take a look at DONG-A PHARM (000640 KS) which fits the criteria perfectly. See Figure 12 of attached for a look at its diverse and promising pipeline. Consensus has the stock on P/E 15x 2009 and 13x 2010. CLSA rates this stock a BUY for 24% upside.

On the latter, take a look at HANMI PHARM (008930 KS) which is a leader in the generic and super-generic fields. Consensus has the stock on P/E 18x 2009 and 15x 2010. CLSA does not cover the stock. Valuations may look rich, but prospects are obviously very bright with major patents coming due in the mid term.

>>> WSJ: The Pfizer Drug Warning <<<

The Wyeth deal and the decline of innovation.

JANUARY 28, 2009

Emergency is too strong a word for Pfizer’s $68 billion agreement to buy Wyeth, but not by much. The deal shows the afflictions that beset the larger American pharmaceutical industry, which ought to concern anyone who cares about U.S. medical innovation.

After weathering a period of listless growth for some top drugs and a dearth of promising new ones, the pharma game these days is “diversification.” That seems to be the strategy behind the Pfizer-Wyeth merger. Pfizer says the new business model will combine the resources of a global corporation with the agility of a small biotech firm, and it expects no drug in the combined portfolio to count for more than 10% of revenue within four years.

The immediate danger facing Pfizer is the 2011 expiration of the patent rights for the cholesterol medicine Lipitor, which accounted for a quarter of the company’s 2007 revenues of $48 billion and remains the world’s best-selling drug. Generic drug companies will stage a run on at least 14 Pfizer patents — and 70% of its sales — over the next five years; Merck, Eli Lilly and Bristol Myers Squibb are staring down the barrel of similar expirations.

New innovation is funded by previous innovation, but the money sunk over the last decade into the search for the next big lifestyle blockbuster a la Lipitor also doesn’t have much to show for it. The industry is thus turning away from such “small molecule” drugs and toward advanced biotechnology. Biomedicines are made by splicing genetic material into living cell cultures, and they often target rare diseases and unmet needs like cancer and Alzheimer’s.

A decade ago Wyeth was in disarray after a series of business blunders and the fen-phen diet drug bomb, but it has since reinvented itself as an industry leader in vaccines and biologics. Pfizer figures this slate of investigational drugs can help refill its pipeline, especially the promising Prevnar-13, an advanced vaccine for pneumococcal meningitis.

For years, analysts have been predicting major industry consolidations like Pfizer-Wyeth because of the patent cliff, but the risk is that the cost savings and bureaucratic mayhem from combining labs and streamlining R&D end up stifling research productivity. Pfizer CEO Jeffrey Kindler is a lawyer who came to the drug giant from McDonald’s in 2006 and has been laying off scientific staff all over the place.

Just as the industry is pinning its hopes on bioresearch, political developments have made it harder to win approval for new medicines. Once admired as an engine of American innovation, drug companies are now treated like Big Tobacco on Capitol Hill. The phantom drug safety crisis conjured by the Vioxx and antidepressant controversies has made the industry a piñata for Democrats like Henry Waxman and Bart Stupak.

The Food and Drug Administration is deeply influenced by this political criticism and has tilted its approval process toward reducing risks rather than speeding the benefits of new drugs to market. On average, a drug stands only an 11% chance of making it through FDA clinical trials and reaching patients, by that point usually costing $1 billion or more. The FDA also forces advanced biologics to conform to conventional testing standards, and any chances for a Congressional fix are nil. Meanwhile, Democrats are planning an FDA pathway for generic imitations of biotech medicines, despite scientific uncertainty and, ironically, safety risks.

The stated political goal is to reduce the cost of health care so the government can afford to pay for benefits for more people, which inevitably means controlling access to new drugs. Blueprints are being drawn up for Medicare to “negotiate” drug prices by leveraging its quasi-monopolistic power or simply by fixing the prices through reimbursement. The influence of such policies will only be magnified if Democrats create a Medicare-like program open to the under-65 set.

This political ferment can’t help but distort the investment decisions of companies like Pfizer, which need to balance projected profits against the cost of clinical development. Biotech medicines hold the promise of significant health benefits but come at a price, reflecting the difficulty of developing them. But if starved of R&D money — whether through politics or industry gambles that don’t pay off — innovation will wither.

Maybe these circles can be squared through more mega-mergers like Pfizer-Wyeth. But they’re symptoms of business weakness, and one more sign of Washington’s growing dominance in the U.S. economy.

Please add your comments to the Opinion Journal forum.

{http://www.ft.com/cms/s/0/6fab9488-ecbf-11dd-a534-0000779fd2ac.html}

“”" The Institute for International Finance forecasts net private sector capital flows to emerging markets will be no more than $165bn (€125bn, £116bn) this year, less than half the $466bn inflow in 2008 and only one fifth of the amount sent in the peak year of 2007. “”"

But this is the most startling quote:

“”" The IIF estimates emerging market institutions will need to refinance about $20bn a month in the first half of 2009, but that the current supply of credit covers only half that. “”"

This is as good a dovetail as any to re-highlight a fantastic regional report by Amar Gill on refinancing needs in Asia. SEE ATTACHED FOR “SOLVENCY IN ASIA”. As the article indicates, financing problems will remain an issue throughout 2009. Make sure you know which of your names may be at risk!

For Korea, be wary of the following debtors: DOOSAN (000150 KS), KUMHO IND (002990 KS), HITE HLDGS (000140), SK HOLDINGS (003600 KS), DONGKUK STEEL (001230 KS), DAEWOO ENG (047040 KS), and KOREAN AIR (003490 KS).

>>> FT: Capital flows to developing world at risk <<<

By Peter Thal Larsen in Zurich
Published: January 27 2009 22:22 | Last updated: January 27 2009 23:06

Capital flows to emerging markets are in danger of collapsing this year as the financial crisis in advanced economies risks choking off the supply of credit to the developing world, an association of large banks warned on Tuesday.

The Institute for International Finance forecasts net private sector capital flows to emerging markets will be no more than $165bn (€125bn, £116bn) this year, less than half the $466bn inflow in 2008 and only one fifth of the amount sent in the peak year of 2007.

The figures underscore the impact the banking crisis and risk-averse investors are having on emerging market economies, one of the central issues at this year’s World Economic Forum in Davos, which starts on Wednesday.

Bill Rhodes, a senior Citigroup executive who is vice-chairman of the IIF, urged leading economies to co-operate with each other and the private sector to address the problem. “This is a worldwide recession the like of which we have not seen since World War II,” he said. “There is no one country or group of countries that can do this on its own. The only way to solve it is co-ordination across the board.”

Mr Rhodes also called on the International Monetary Fund to intensify its efforts to supply liquidity to emerging markets by extending the duration of the current facility from three months to more than a year. “The IMF’s resources need to be expanded and its approaches modified to provide financing to emerging markets that have been caught in a crisis not of their making.”

The shortage of capital is particularly acute for companies that soon need to refinance debt.

The IIF estimates emerging market institutions will need to refinance about $20bn a month in the first half of 2009, but that the current supply of credit covers only half that. The IIF’s forecast is a sharp reduction from only four months ago, when it forecasted net capital flows to emerging markets for 2009 of $562bn. The institute also scaled back its figure for 2008 to $466bn from $619bn, illustrating the extent of the global market turmoil last year.

The sharpest contraction in the supply of capital is likely to be from commercial banks, which are forecast to make a net withdrawal of $61bn in 2009.

IIF officials said the fall in capital flows was consistent with a worldwide reduction in the leverage maintained by financial institutions and investors, and reduced appetite for the risk often associated with such investments.

The figures also underscore the link between emerging markets and rich economies. The projected decline in capital flows is equivalent to about 6 per cent of the combined gross domestic product of these countries.

During the Asian financial crisis of the late 1990s, the decline was approximately 3.5 per cent of combined GDP, while during the Latin American debt crisis it was only 1.5 per cent.

Copyright The Financial Times Limited 2009

{http://www.ft.com/cms/s/0/54030466-e8a3-11dd-a4d0-0000779fd2ac.html}

What’s interesting is the choice of words. Although the US has always thought China has artifically kept its weak, “the Bush administration always stopped short of formally declaring China a currency manipulator.”

So now it looks like the Obama team will pull out all the stops to discontinue China’s tight grip on the RMB, and allow it to strengthen from the current RMB6.8/USD. That’s the political viewpoint.

From an economic viewpoint, there are several bears who believe that China will engage in a currency-weakening exercise to help out their ailing exporters. One of those bears includes Dr. Jim Walker of ASIANOMICS:

“”" In our view the renminbi is likely to be moving towards Rmb8/US$1 over the course of the next 12 months. This will not be helpful in a geopolitical sense as the US Congress attempts to come to grips with a double-digit unemployment rate. Over the last few years China has shown no stomach for taking the pain of slowdown; hence its decision to loosen monetary policy in mid-2005 and its painfully slow renminbi appreciation since. To believe that it will maintain the renminbi’s upward trajectory – or even hold it stable as it has done in the last few months – is to believe that China will set aside its high-growth strategy. We are not ready yet to draw that conclusion. “”" (p.42, ASIANOMICS) 
 
Round 1 is over. Now we wait to see how China jabs back…

>>> FT: US says China ‘manipulating’ the renminbi <<<

By Alan Beattie in Washington and Geoff Dyer in Beijing
Published: January 22 2009 16:41 | Last updated: January 22 2009 21:28

Tim Geithner, President Barack Obama’s choice for Treasury secretary, on Thursday accused China of “manipulating” its currency and pledged “aggressive” diplomatic action to drive Beijing into action.

The comment – a politically loaded term likely to raise tensions with Beijing – marked the Obama administration’s first public intervention in what will be one of its most critical international economic relationships.

The US has long felt that China has artificially depressed the value of its currency to boost exports – to the detriment of US business – but the Bush administration always stopped short of formally declaring China a currency manipulator.

In a written response to questions from senators, Mr Geithner, whose nomination was supported on Thursday by a clear majority of the Senate’s finance committee, said: “President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency.” Mr Obama would “use aggressively all the diplomatic avenues open to him to seek change in China’s currency practices”, he said.

The price of long-term US Treasury bonds fell after Mr Geithner’s remarks, with some traders concerned that Beijing might ease up its purchase of US assets. China is the largest foreign holder of US Treasuries after Japan, and more than half of the $5,500bn Treasury market is held by foreign investors.

Mr Geithner stopped short of pledging that the US Treasury would formally name China as an exchange rate manipulator in its annual currency report, due in the spring. “The question is how and when to broach the subject in order to do more good than harm,” he said.

Hank Paulson, Mr Geithner’s predecessor, repeatedly criticised Beijing for holding down its currency but resisted pressure from Congress formally to name China as a manipulator. US legislation requires only that the administration starts negotiations with any country it so designates.

China abandoned a fixed currency peg with the US dollar in 2005 for a managed float and since then the renminbi has appreciated by about 20 per cent against the dollar.

In November the Chinese authorities let the currency depreciate modestly, prompting speculation about a shift in policy. Since then, the renminbi has traded in a narrow band against the dollar, leading some economists to argue that a de facto peg has been restored.

In spite of the gradual appreciation in the renminbi, China has continued to record large current account surpluses, which are likely to become politically controversial in a global recession.

Mr Geithner’s statement will spark controversy in China. In an article published in the Chinese media last week, Zhang Jianhua, head of the central bank’s research bureau, said that “wrong economic policies and improper market monitoring [in the US] are the primary reasons for the current financial crisis”. He added: “Any attempts to shift the responsibility to other countries reflect an inability to develop the right attitude for seeking solutions.”

Mr Geithner’s nomination hearing was dominated by concerns about his failure to pay some $34,000 in US taxes while employed by the International Monetary Fund several years ago.

Additional reporting by Michael Mackenzie in New York

Copyright The Financial Times Limited 2009