Professional Secret keeping

Today the Bank of England disclosed that it provided more than 60 billion pounds only in emergency loans to RBS and HBOS at the height of the credit crisis last year. The reason why this figure has not been published in the annual report already back in May but just now is because of the Bank of England's fears of its impact on the banking system. Now, with the two banks on a sounder financial footing, there is believed to be no more reason for secrecy. To me this action behind the back of a population that buys newspapers in order know what is going on, is just not fair. This is why I am curious about discovering how different newspapers are approaching this topic today.

Reuters described this situation objectively, however, not clearly. From the language used in this article, the reader cannot draw conclusion on what the author's position this is. The Bank of England deputy governor states in this article that it 'was a dire emergency'. In my opinion this is a weak excuse that does not give me a satisfactory explanation to the large secret they kept. The statement continues with the words that it was a decision made in order to 'prevent a loss of confidence in (...) the financial system as a whole'. At this point I wonder what financial institutions expected the confidence to be after these shocking numbers get confirmed!? Now, when the banks successfully repaid the borrowed amount and the collateral hasn't got touched, Gordon Brown's spokesman proudly says that 'it was a powerful reminder of how close the banking system came to near collapse'.

The article in the Financial Times, which was published 4 hours later, added some more information: both banks were already eligible for a variety of liquidity providing actions when the Bank of England gave financial aid. The extraordinary measures were not enough to sustain the other lenders. This information worries me even more since it means that actions have been undertaking for much more time than so far expected; everything secretly. Even the Northern Rock bailout was kept secret the year before. The bank added that since RBS now signed up for the famous government-run asset protection scheme and Lloyds took over HBOS in highly controversial government-backed rescue merger, there was no longer a need to keep this information from public. I do very much believe that it was not possible anymore to keep it secret, since too many things were involved. It would have been especially interesting to keep it from public now, considering that investors just started to gain confidence in the market after a long time. To discover the exact, horrible numbers of the crisis, which is not really over yet, certainly make me less risk-loving.

The Guardian was as expected not able to hide its centre-left political orientation: already in the title a sarcastic language is used ('billions spent 'propping up' RBS and HBOS). Under a large picture of Mervyn King the biting language continues with statements such as 'figure had been known to only a handful of people until today' or 'how many universities, colleges and jobs you could support with this'. Hyperlinked in the article is also the letter Mervyn King wrote to the Treasury select committee. This article was the longest, with the most information, the most links and the most interviews from all the article read in the Internet today.

However, the differences on the language used in the different articles is impressive. Whilst on Reuters and in the Financial times very objective language allowed the reader to make his own opinion, the Guardian is really pushy and seems to be willing to incite the reader to hate the whole financial system. This is not particularly useful since in my opinion it takes away the thinking, which should always be encouraged among readers. No source of financial media should sound convincing; they all should be as objective as possible. Since in general newspapers with a left political orientation are not very good at being objective, they are only useful to provide the reader with a critical point of view on information gathered from other financial media. I personally believe that an over reliance on left newspapers is manipulating, which in the current environment is fatal. As you will have understood already, the secret keeping was not a good move at all in my opinion. It is a very controversial action that now newspapers have to explain to the public. This is not easy in a period in which the market is in need of calmness and tranquillization in order to see rising confidence among investors. Only this confidence can then potentially lead to a steady growth of global economy. As a reader I am thus now asking for at least some objective information on this matter. Not for a game of hide and seek.

Sources:
http://www.reuters.com/article/companyNews/idUKGEE5AN16S20091124
http://www.ft.com/cms/s/0/b657a26c-d8e8-11de-99ce-00144feabdc0.html
http://www.guardian.co.uk/business/2009/nov/24/bank-england-rbs-hbos-loans
http://img.dailymail.co.uk/i/pix/2007/09_03/009mervynking_468x325.jpg

Is FTSE high equal to increasing investors' confidence?

The FTSE 100 index is up 2.9 percent compared to the beginning of this week. Only yesterday it increased by 19.88 points or 0.4 percent yesterday. The index thus reached the highest close in 14 months, since September 2008. The strong rebound of 53 percent since hitting a six year trough in March means that the FTSE 100 is now approaching the magical 5,300 points benchmark. Despite this fact making headlines in most of the major financial newspapers, I could not be convinced that this fact was enough to define the economic recovery as sustainable. So I started researching in...

...the Wall Street Journal, which in the article includes not only the general information about the FTSE needed to satisfy the reader that had been attracted by the headline, but also examples of some companies. An overview of some European markets, including the recovery of major brands in the jewellery and clothing industry is given. Mentioned are also the major events in the French CAC and the Nikkei index in Tokyo. This is all interesting information but not what I need in order to find out if the FTSE 14-month high means anything to the world's currently major concern: the economic recovery. From a rather long article with the words 'FTSE' and '14-month high' in the title I expected more information than just the numbers I can read off a normal chart in no time. Furthermore the fact that no primary research is referred to in the text makes the article rather dry and boring.

From a very short article on FinanceRoll I was able to get more specific information about the 'whys' of the good results: British Airways improved not only the stock but also partly the index since the merger with Iberia and BT Group raised its cash-flow forecast. However, these two facts told me that the FTSE 100 high was mainly influenced by one large merger and by a lousy forecast of one of the world's biggest companies. An increase in indexes is generally speaking a good news, but in this case certainly not something that convinces me that everything is fine already.

The article I read in Reuters afterwards increased my disappointment for the newly discovered source of FinanceRoll: it was not mentioned that it was the increase of heavyweight bank HSBC that added the most points to the FTSE index. Only this week HSBC's stock increased by an incredible 8.5 percent. Along with results of other banks also the stated stock changes of large energy firms helped me to create a picture of what the main drivers for the FTSE index were. From an interview (!) with a strategist at IG index I learned that also the good US retail figures and the recent UK inflation data could be considered as evidences of economic recovery. This article was the most complete, which is probably why it has been published on many other websites including Yahoo Finance, Euroinvestor and Forbes.

On the whole it can be said that some more of investors' confidence can be found in the market. However, uncareful readers can be misled once again by the optimistic titles in this weeks' financial media. The fact that some other large banks like Barclays or LLoyds actually experienced falling stock prices shows that a common phase of reinvesting in the market has not started yet. However, the increasing hunger for investment opportunities not directly related to the market, for example in real estate, lets profits and forecasts of many big players and companies depending on these big ones, increase. I believe that this is likely to lead to more homogeneous results throughout the stock market and means that financial media can look at the economy as a whole again when making positive headlines. Not just at FTSE 100.

Sources:
http://online.wsj.com/article/SB10001424052748703811604574533830637220564.html
http://www.reuters.com/article/londonMktRpt/idUSLD5164620091113
http://www.financeroll.com/en/headline-news/news-stock-market/149995-ftse-index-end-higher-at-14-month-high.html

http://uk.finance.yahoo.com/news/ftse-hits-14-month-closing-high-hsbc-advances-targetukfocus-c5fc9fbc6e63.html
http://www.euroinvestor.co.uk/print/printnewsstory.aspx?storyid=10734753
http://www.forbes.com/feeds/afx/2009/11/13/afx7121007.html

US unemployment weighs on European market

One of this week's main headlines is the reaction of European stocks to the release of US job data. An unemployment rate 10.2 % is the highest in more than 26 years and clearly exceeded the expectations of 9.9%. In jobs getting cut this means 190.000 instead of 175.000. And this is the 22th month in a row that jobs get cut and unemployment has been increasing steadily. These incredible numbers gathered only from headlines and subheadings definitely attracted my attention and I kept on reading several articles about this topic.

Different financial media including articles from the NY Times, BBC News, The Guardian and Reuters as well as videos online about the released unemployment figures all give rather detailed data. Numbers and figures as well as forecasts are all very similar and increase the credibility and reliability of the news. However, none of them gives such a general picture of the current situation and the consequences as the article in the Wall Street Journal which is why I choose to have my blog's main focus on the analysis of that article.

The first paragraphs of the Wall Street Journal were able to persuade me to continue reading. A simple language and a different approach to present the fact to the reader were enough for me to classify this article as more interesting than the average. Unlike articles in the Financial Times or on Bloomberg.com, the Wall Street journal is not just throwing numbers in the reader's face with a 'this is the news - now you think about it' attitude, but is describing immediately the 'whats and whys and hows' I am looking for when collecting information. The article does not give the reader the feeling of being reading about numbers that motivated some changes now but it's not actually important since in an hour something else will be influencing the market. It instead describes the news as something bigger and more important by including more general information. For example it describes the event as a reminder for investors that an economy that had been confirmed to have emerged from recession several times over the last weeks, is only recovering very slowly. I personally appreciate when an article gives me more a general idea and overview instead of tons of precise facts and figures which are not really in a context. Only one sentence with detailed percentage changes in the European stock market as a consequence of the job cuts can be found in this article.

For these reasons I felt addressed by this article and felt like one of many readers who are interested in finance without being a professional depending on exact and reliable data. I felt like a person that simply wants to know what is going on in the world without having his family's net worth fluctuating with the market, simply like a person that makes part of the target audience this article is written for.

It is also explained that this is the longest period jobs have been continuously cut in 70 years and talks about how important the US labor market is for the global economy since it accounts for two thirds of the US economic activity which again accounts 20% of the world economy. More interesting news follow in an interview with Paul Ashworth, economist at Capital Economics: he says that even though the recovery in output began already, the U.S. economy would still not be expanding rapidly enough to generate net gains in employment. This is an interesting point of view and explains the current position of the US nicely. This article gives the reader the news, the detailed figures for those interested and a good and objective picture of where the US economy is as a whole now. In my opinion this is financial media at its best.

In my opinion there is a fact related to this current situation that does not get as much attention in financial media as it should get. The average working hours in the US where lower in good times and increased since the beginning of 2008. This means that banks are exploiting the gratefulness of employees who still have a job and make them work even harder which means that less people are needed and costs are saved. It is worrying that tendency is still increasing because this means that the better the results get the less jobs there are. Are we willing to pay for pay for good results with jobs? As long as its my neighbour's job - yes!

Sources:

http://news.bbc.co.uk/1/hi/business/8346936.stm

http://www.reuters.com/article/eurMktRpt/idUSL650179820091106

http://online.wsj.com/article/SB125749164584233339.html

http://www.guardian.co.uk/business/2009/oct/02/us-unemployment-figures-job-losses

http://www.nytimes.com/2009/11/07/business/economy/07jobs.html

The fun of covered bets

It is the period in which quarterly results of all kind are published. We have seen everything from enormous losses to amazing profits. In this moment of wealth redistribution I am having a strange feeling about too large profits. Why are people investing that much these days, why keep trading volumes going up every day if there is so much confusion in the market? Partly responsible is financial media who is not trying to make investors be more cautious. But by reading how Morgan Stanley made its profits I understood that they are risking a lot with the money the manage, so if it goes, either well or bad, it goes big time. However, this is not exactly what newspapers are writing about...

Reuters for example writes, as many newspapers, about the bank's involvement in risky trading operations, but does not bother to explain what pushes Morgan Stanley to do so. Instead a large part of the article is focusing on comparison with its 'chief rival' Goldman Sachs. The way this article is putting the news makes it look like these two investment banks are racing for the largest bonus pools and value-at-risk ratios (which for both are really high at 95%). This article gives the reader a lot of information, interviews with analysts and even the CFO, tons of certainly accurate numbers and also a good picture where and how Morgan Stanley positioned itself in the market and among its rivals. But it does not give the background I am looking for.

So I continued reading in on Bloomberg. They are obviously starting off with some numbers and ratios that support the title saying that the bank is beating the estimates. Typically for Bloomberg also surveys made among analysts about the estimates are included. This kind of information based on quantitative research is something that in my opinion looks really good in a financial article, especially nowadays. However, after interviews with the CEO, the CFO, analysts, portfolio managers and the comparison with major rivals Goldman Sachs and JP Morgan Chase as well as paragraphs about book value and fixed income, there was no more space for interesting background. My curiosity to find an answer about the WHY? of all this led me to....

....the Wall Street Journal. This article is much more focused on Morgan Stanley itself and gives a detailed overview of the development of the bank's shares trading at the New York stock exchange. It also includes comparison with the results form previous quarters this year which provide the reader with a good understanding of what happened. However, not with a why!! After useless reading through more articles in The Financial Times, The New York Times, BBC and the Guardian I decided to think about it and find an answer myself:

In the race for the highest profits and ROIs banks are looking for the riskiest trades they can get out there and do not really worry about a thing. Probably this is because in the back of there heads they know that if anything goes wrong, the FED will back all their losses and give their trading desks some more billions until they are healthy again. Isn't it beautiful to be too big to fail?

Sources:
http://www.reuters.com/article/BROKER/idUSN2143290720091021?sp=true
http://bloomberg.com/apps/news?pid=20601087&sid=adpXZLj_1P.U
http://online.wsj.com/article/SB125612022489198637.html#articleTabs%3Darticle

Highest EURO / $ ratio since 2008

Today the dollar fell through $ 1.50 against the euro for the first time in 14 months. Since over the last few years this round number has developed to a sort of benchmark, today’s relationship between these currencies was a big event in financial media and formed dramatic headlines in many newspapers. After rather neutral reports on third quarter results from last week, almost all newspapers are now using a language full of temper and aggression again.

Among several articles I read about this topic, by far the best one was in the Economist. A clear title followed by a short overview about what happened during the last year and statements about current situation a’ la ‘not necessarily a cause for concern’ show the reader immediately that this article is more about information and objectivity than about drama and exaggerations. The Economist defines the steadily decreasing dollar over the last year as a consequence of risk aversion which is not accompanied by a sharp rise in bond yields since the FED has been buying a lot of the year’s debt issuance. And in the outlook at the end of the reader can find more interesting information: ‘A country heavily in debt to foreigners (..) is creating vast amounts of additional currency. Yet it is allowed to get away with very low interest rates. Eventually such an arrangement must surely break down.’ In my opinion an excellent article and more like a report, the only thing missing are interviews.

As already expected after reading the title, the article in the Wall Street Journal is trying to attract readers by dramatising the given facts. Formulations like ‘impact on nascent recovery’and ‘markets have largely ignored the rhetoric’ are not what I am looking for in a newspaper. From my point of view this in language that can be used in blogs or commercials but is certainly not adequate in a source of information. However, the dollar’s influence on stock prices as well as the interrelation between British pound, euro and dollar is well explained. There can be found interviews with different people ranging from analysts to CEOs.

Definitely the most exaggerated article was in today’s Financial Times. When writing about the current exchange rates they say that it would hit ‘the recovery in the euro zone at its most fragile juncture’ and that ‘the pain (!) will get stronger’. They even talk about a ‘disaster in European industry’ and an increasing unease among politicians. The article does give the least information and is the most dramatic one too read. A little bit of panic is certainly the natural reaction for many readers.

….which is something I do not really understand. Actually this was predictable after the Fed lowered interest rates to practically nothing and threw loads and loads of cash into the economy. The reason is because these actions expand the credit market but at the same time it causes adverse effects to the dollar. A basic knowledge of economics is enough to understand that it is not possible to have a credit expansion and a strong dollar. You can either get one or the other. The main reason for this year’s weak dollar is that people began pulling their assets from the US when markets started going crazy. These days it would be better for the average reader to look at a standard ECO 101 book instead of newspapers.

Sources:

http://www.economist.com/businessfinance/displaystory.cfm?story_id=14686307

http://online.wsj.com/article/SB10001424052748704597704574486631968841004.html#articleTabs_comments%26articleTabs%3Darticle
http://www.ft.com/cms/s/0/c5d3d652-be49-11de-9195-00144feab49a.html
http://www.japanfocus.org/data/US_Dollar.jpg

The one billion dollar surprise

Everything just seemed so nice during recent weeks: after a beautiful trend of rehiring people in large companies and banks, the stock market was constantly increasing and precious metal prices skyrocketed. Now however, the third quarter results of several financial institutions where published. On top of the list is the Bank of America with the tremendous loss of 1 billion dollars. Share prices dropped by 4.25% in the first 10 minutes after the announcement - just as if nobody could have predicted it. Well, how could you have when looking at the headlines during the last weeks? Selling immediately was today's reaction of numerous, unprofessional investors. They were waiting for yet another boost of profits while sitting on a big pile of shares but instead experienced a bad surprise.

To blame is in part financial media that spread the believe that everything was going well and a kind of 'the-earlier-you-buy-the-more-you-take-home'-philosophy. So people were buying, possibly before the results got published, especially after the announcement of an over 3 billion dollar profit made by Goldman Sachs two days ago. However investment banks are not the same as commercial banks. Some people understood how financial markets work and knew that in this financial and economic environment no commercial bank could have possibly made a profit. They thus wisely sold yesterday already. The days or week before the announcement of Bank of America's results a lot of trading was going on, and a lot of controversies about what will happen. This can been seen when looking at the stock charts in the Morning star: an almost unchanged share price but much larger trading volumes compared to other days.

Now several different articles from newspapers like the Wall Street Journal, Reuters and the Financial Times can all be put in the same box. What I believe to be important when analysing this week's financial media is to note that they all give the same numbers, facts, statements by Bank of America's CEO - Kenneth Lewis - and don't use any particularly subjective or critical language. There is nothing that really differentiates these rather neutral and objective articles. The one published by Reuters however was a little more detailed then the others, included 'credit worries' subheading with a forecast and is thus considered to be the most useful for an interested reader.

As predicted already in my last week's analysis, people have to be informed well in order to be calm and thus able to make reasonable decisions. In calm times investors tend to do the same things and thus stabilize the market. The speculation in different directions combined with the large trading volumes during the last days as well as the degree of difference among financial news ranging from billions of profit to billions of loss are very likely to generate volatility. In this period of uncertainty in the market with nobody (!), not even the big players, being really sure about anything, it is better for investors to be cautious. Newspapers should have this kind of readers' reaction as a goal in order to avoid further disasters. It is now important to tell people that there might be more losses for banks to come: commercial real estate going down and thus affecting the banks' assets, cash withdrawals from its accounts that have been made for future loan losses tied to credit cards and nobody caring about the bank's reserves instead etc; these are all facts forming the perfect storm to hit banks hard. They should also not forget to mention record deficits of companies and businesses, record borrowing and the plunging dollar. These are only suggestions that are based on my personal opinion and that I am hoping to see in financial media. But for now: the recession remains over.

Sources:
http://quote.morningstar.com/Stock/s.aspx?t=BAC
http://online.wsj.com/article/SB125568868735889619.html?mod=article-outset-box#articleTabs%3Darticle
http://www.reuters.com/article/newsOne/idUSTRE59F1TJ20091016?pageNumber=1&virtualBrandChannel=11618
http://www.ft.com/cms/s/0/263220e0-ba43-11de-9dd7-00144feab49a.html

Gold price records vs. weak dollar - what is the real news?

Dear Reader, please try to think about the impact the currently weak US dollar can have on the country's imports and thus on its trade balance. It is already horrendous and shows a constantly increasing US national debt of almost 12.000 bn US dollars. Instead of showing in an open and honest way what is going on in the market, the newspapers keep on cheering: cheering over better-than-expected corporate earnings due to layoffs; Cheering housing and car sales due to more government debt etc. This causes the vast majority of bad news to actually look like good ones, because the bad part is made unimportant and put in the background if mentioned at all. But how can a weak currency be transformed into a good headline? Just start with the consequence of beautifully rising gold prices and the readers are happy! Let's look at some examples taken from different newspapers:

On Friday CNBC published a price forecast by JP Morgan for gold and said that 'new record highs for gold (...) were likely in 2010'. This article defines gold as the 'overwhelming beneficiary of investment allocations to commodities all year'. The bank already describes the next year as a year of consolidation in the base of metals, stating only in the second last paragraph that investors may be paying too high prices for gold as an inflation hedge. This immediately tells the attentive reader, who knows that in times of uncertainty in the market gold is a secure investment, that there is, as he expected, not everything going well, but without specifying where the exact problem is. This newspaper obviously decided to focus on the good part of the whole story.

The Economist uses a slightly different approach to present the news. It, typical for this magazine, starts off with a short headline that should attract the reader's attention since it contains strong words and does not immediatly make clear what the news is about. This article explains, why factors other than the weak dollar were not the reason for the current boost of the gold prices. According to the Economist, it has been seen already that risk-averse investors tend to buy gold when the dollar falls. At the end of the article there is even a forecast to be found, saying that prices are likely to increase further. However, also this article begins with the fascination of gold from an investors' point of view followed by detailed information about the new record prices. This article gives the best overview combined with background information and I would thus recommend this article to other interested readers.

Even though the article analyzed in the Financial Times refers to different sources including brokerage MF Global and large metal producers, it is still focusing too much on the actual record price of gold, generated profitability and successes acchieved at the London Metal Exchange. This waive of great numbers, statistics and forecasts does not allow a detailed insight in the less brilliant consequences for the world's trade and economy. It is the only article that talkes about the copper, platinum, silver etc. market. With comments like 'unexpected profits' and a paragraph about the fact that materials priced in the US currency are cheap for countries holding alternative currencies, this article sounds quite pushy to me; it almost seems that the FT would get commission for new investors introduced to the commodity market, which from my point of view does not look very adequate.

When trying to not only read through random articles, but thinking about their content and way of putting information, it became apparent to me, that financial media is trying to calm everybody who has a direct or even inderect interest in finance. In good times everything has to be made worse, sometimes even by exagerating, in order to become a great headline. Now, in times of financial crisis (yes, it is not over yet), good news is what people are interested in. For the sake of clarity, I am not saying that attempts to calm down the whole situation are a bad idea, but it depends on how it is done; a good headline will only be good until the bad parts attached to it become obvious to everybody. Then, as soon as there are too many contradictions and different opinions about a topic, disturbance and incertitude are created which lead to wrong behaviour, misinterpretation and bad investments. For this reason I believe that the process of tranquilizing is only sustainable if objectiveness, honesty and straightforwardness are offered in financial media. In the end it is the readers' responsibility to judge the news, decide what to believe in and make decisions as a consequence. But bear in mind: all that glitters is not gold!

Sources:

http://www.usdebtclock.org/

http://www.cnbc.com/id/33239364

http://www.economist.com/businessfinance/displaystory.cfm?story_id=14587601

http://www.ft.com/cms/s/0/88d2fe0e-b3f9-11de-98ec-00144feab49a.html