Monthly Archives: October 2008

Two Sides of A Coin

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Posted by pakdi on October 31, 2008 – 11:02 am
Filed under Economy & Finance


While global markets struggle to pick up the pieces from what has been dubbed “the worst economic crisis in decades”, the Islamic finance industry was dealt a blow when Standard & Poor’s revealed that more than US$5.6 trillion had been wiped off the value of Shariah compliant equities worldwide during the third quarter of 2008.

However, it added that Shariah investors had benefited from their lack of exposure to financials, which have been the focus of the market selloff. Its Index services vice president Alka Banerjee said: “While equity markets around the world have experienced a tumultuous quarter, Shariah investors continue to be shielded to some extent by the exclusion from their portfolios of financial stocks and other highly leveraged companies, which do not satisfy the strict compliance criteria associated with Islamic law.”

Standard & Poor’s Ratings Services had also revised its outlook on six banks in Gulf Cooperation Council (GCC) countries to stable from positive, which included Islamic banking giant Kuwait Finance House, citing the less supportive environment in which they operated from as a factor.

The financial turmoil has boosted perception of Islamic finance, which is now being considered by many Western countries including the US and even Australia. It was reported that the US government was studying the salient features of Islamic banking to ascertain how far it could be useful in fighting the ongoing world economic crisis.

Prominent Egyptian-born, Qatar-based cleric Sheikh Yussef al-Qaradawi told participants of a recent conference to take advantage of the financial crisis to create a Shariah compliant economic system.

“We have all the wealth… the Islamic nation has all or nearly all the oil and we have an economic philosophy that no one else has,” he said, alluding to the fact that Saudi Arabia holds a substantial portion of the world’s proven crude oil reserves.

The head of theological studies at Doha University shares Sheikh Yussef’s view, saying the global economic meltdown shows the need for a radical and structural reform of the global financial system. He says the system based on the principles of Islam offers an alternative that can reduce risks.

On the flip side, others say that although interest, derivatives and short selling are forbidden under Shariah law, which means that Islamic financial institutions were not burdened any subprime loans, hedge funds or credit default swaps, investing in halal finance would not be a shield against a global financial or even economic crisis.

Our country reports focus on Japan, where the private sector has shown its full commitment to the growth of the Islamic finance industry. The government has now realized the potential of attracting petrodollars from Middle Eastern investors and government officials and industry practitioners are diligently studying Islamic finance.

The first of two market reports paint a dreary picture for Islamic investors saying they were not immune from stock market crashes while Monem Salam, in the other, urges the industry to avoid similar disasters by analyzing the failings of conventional finance instead of displaying a false sense of pride.

“Do not boast. Do not be negative. Show your strength with value-added products,” he advocates.

(Taken from islamicfinancenews.com)

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Buy American, I Am

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Posted by pakdi on October 22, 2008 – 3:15 pm
Filed under Economy & Finance, Investing, Stocks


By: Warren Buffet

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So … I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

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Investors and Consumers: Don’t Panic

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Posted by pakdi on October 13, 2008 – 10:35 am
Filed under Economy & Finance, Stocks

The question now is: Will the panic move from Wall Street to main street — and if it does, will it make a bad economic situation worse? “The reality is that your relationship with a financial institution is based on trust,” says Gallup Chief Economist Dennis Jacobe. “A lot of people trusted that these big Wall Street investment firms couldn’t go broke. As trust erodes, it creates problems.”

One of those problems is that average people might take their cues from Wall Street, and right now, the Street is a terrible role model. With trillions of dollars lost in the past year and an estimated loss of at least 110,000 jobs in the financial sector since January 2008, market movers are scared.

“Wall Street is really comprised of greed and fear: greed to get as much as they can and fear that they may lose everything,” says Jacobe. “And right now, fear is by far a more dominant feeling. There’s a lack of transparency on the Street because no one knows what assets people have, what losses they’re going to take, and who’s going to be next.”

Good article from Gallup Management Journal.

Bull market happens when greed is everywhere and bear market happens when fear is everywhere.

Full text of the article can be read here.

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Buffett on $5B Goldman Investment

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Posted by pakdi on October 12, 2008 – 6:53 pm
Filed under Economy & Finance, Investing, Stocks

CARL: A lot of people who are watching us Warren, and even people who have just started watching us over the past week or two, look at the stock market every day and are confused. They want to use it as a metric for how we’re doing, or at least the progress we’re making on big issues. I’m guessing you don’t think it’s reflective of anything that’s based in reality right now?

BUFFETT: Well, the stock market in the short — my old boss Ben Graham said that in the short-run the stock market is a voting machine, in the long-run it’s a weighing machine. As a voting machine, it responds to people’s emotions. There’s no literacy test for voting. You vote according to how much money you have, not according to how smart you (are.) So the stock market does some very silly things in the short-run. Over the long-run, it behaves quite rationally. And, you know, five years from now, ten years from now, we’ll look back on this period and we’ll see that you could have made some extraordinary buys. That doesn’t mean it won’t get more extraordinary a week or a month from now. I have no idea what the stock market is going to do next month or six months from now. I do know that the American economy, over a period of time, will do very well, and people who own a piece of it will do well. But they shouldn’t own it on leverage. That’s what people have learned in this period, that you’ve got to be able to play out your hand and it’s a big mistake to let somebody else be in a position where they can sell you out.

Click here if you want to read full transcript of Warren Buffett’s interview with CNBC regarding $5B Goldman Investment

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Fed statement on rate cut

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Posted by pakdi on October 8, 2008 – 8:57 pm
Filed under Economy & Finance

Here is the text of the Federal Reserve’s statement on the coordinated rate cut from its Web site:

Joint Statement by Central Banks

Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets.

Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.

Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions.

Federal Reserve Actions

The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1.5%. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.

Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation.

The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1.75%. In taking this action, the Board approved the request submitted by the Board of Directors of the Federal Reserve Bank of Boston.

(Source: CNNMoney.com)

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