Dow down by 733 points on new disheartening economic data

Dow down by 733 points on new disheartening economic data.

The economy lurched deeper into the doldrums Wednesday and took the stock market down with it, sending the Dow Jones industrials to a staggering 733-point loss and erasing any hopes that the convulsions that have shaken Wall Street for a month were over.

The day long sell-off came as retailers reported the biggest drop in sales in three years and as a Federal Reserve snapshot showed Americans are spending less and manufacturing is slowing around the country.

Piling up losses in a rough final hour of trading, the Dow ended the day down nearly 8 percent -- its steepest drop since one week after Black Monday in 1987. The Dow has wiped out all but about 127 points of its record-shattering 936-point gain on Monday of this week.

Earlier this week, after governments around the world announced plans to use trillions of dollars to prop up banks, including a U.S. plan to buy about $250 billion in bank stocks, the market had appeared to be turning around -- or at least calming down.

Instead, relentless selling gave the Dow its 20th triple-digit swing in the past 23 trading sessions, an unprecedented run of volatility. The Dow has finished higher on only one day this month. The loss of 733 points is the second-worst ever for the average, topped only by a 778-point decline Sept. 29.

The plunge in stocks put the nation's economic anxiety front-and-center as the two major presidential candidates, Sens. Barack Obama and John McCain, prepared for their final debate Wednesday night in Hempstead, N.Y.

In the meantime, the man they each hope to succeed met with his Cabinet. President Bush predicted "in the long run that this economy will come back."

Bush plans to speak on the financial crisis early Friday -- before the markets open -- at the U.S. Chamber of Commerce headquarters across from the White House. Officials said the speech wasn't intended to put forward new policy actions, but president would instead give a more detailed explanation of what the government is doing -- and why -- to combat the crisis.

Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke expressed confidence that the government's radical efforts to stabilize the financial system and induce banks to lend again will eventually help the economy.

But Bernanke warned that even if the financial markets level off, the nation will not snap back to economic health quickly.

"Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away," Bernanke told the Economic Club of New York.

Paulson, making the rounds of network TV morning shows, struck a similar note. "This will take time. There will be challenges," he said on ABC's "Good Morning America."

Some analysts believe the economy jolted into reverse in the recently ended third quarter, while others predict it will shrink later this year or early next. The classic definition of a recession is back-to-back quarters of shrinking economic activity.

Two gloomy economic reports showed that the debate at this point is merely semantic.

The Fed's snapshot of business conditions around the nation, known as the Beige Book, showed economic activity weakening across all of the Fed's 12 regional districts. Consumer spending -- which accounts for more than two-thirds of economic activity -- slumped in most Fed regions. Manufacturing also slowed in most areas.

As shoppers cut back, retail sales dropped sharply in September. The 1.2 percent decline was the biggest in three years. Retail sales have fallen for three months in a row, the first time that's happened since the government began keeping comparable records in 1992.

Analysts had expected only a 0.7 percent decline. And as Americans watch their nest eggs shrink before their eyes on days like Wednesday on Wall Street, there's little reason to expect they will shop with gusto anytime soon.

Leaders of the world's top economic powers, the Group of Eight, said they would meet "in the near future" for a global summit to tackle the financial crisis. The group comprises the United States, Japan, Germany, France, Britain, Italy, Canada and Russia.

British Prime Minister Gordon Brown said the meeting could be held as soon as next month. He said the discussions should include not only the world's richest nations but also major emerging economies such as China and India.

"I believe there is scope for agreement in the next few days that we will have an international meeting to take common action ... for very large and very radical changes," Brown told reporters before a meeting with other European Union leaders for talks in Brussels on the financial crisis.

German Chancellor Angela Merkel and French President Nicolas Sarkozy also called for a G-8 meeting.

Merkel said reform was needed so that "something like this can never happen again," while Sarkozy said the meeting should be held in New York, "where everything started."

The current financial crisis began more than a year ago in the United States when lax lending standards on certain home mortgages came home to roost. Foreclosures skyrocketed, mortgage securities soured and financial companies racked up huge losses.

Credit remained strained Wednesday, and investors' appetite for super-safe investments stayed high. The three-month Treasury bill's yield slipped. Low yields show that investors are willing to earn meager returns as long as their investment is preserved.

Key lending rates between banks in the U.S. and Europe only inched down after major central banks offered the banking sector unlimited amounts of short-term loans in dollars. The move was meant to keep credit markets flowing while lenders regain confidence.

There was a dose of good news Wednesday: Oil prices dipped below $75 a barrel for the first time in nearly 14 months, suggesting gas prices will keep falling. Oil prices have now plunged almost 50 percent since peaking at $147.27 in mid July.

Associated Press Reporters Pan Pylas in London, Madlen Read and Patrick Rizzo in New York and Deb Riechmann, Christopher S. Rugaber and Martin Crutsinger in Washington contributed to this report.

Stock Markets Facing Downward Trend

Markets dive on recession fears

The Dow Jones index fell 733 points to 8,577 points, in its biggest percentage fall since 26 October 1987.

The panic later spread to Asian markets, with Japan's Nikkei average dropping more than 4% in early trading.

Earlier, there were similar plunges in European markets - London fell 7% and Frankfurt and Paris both lost 6%.

Ben Bernanke, the chairman of the Federal Reserve, warned that the US economy now faced a "significant threat" from the credit crisis.

Treasury Secretary Henry Paulson has hinted he does not expect to return to the post in the new US presidential administration which will follow the November election.

In an interview on CNBC, he said he meant to ensure a "first-rate transition", "whoever the new treasury secretary is".

Some on Wall Street have expressed concern about Mr Paulson leaving in the midst of the credit crisis, Reuters news agency reports.

Slowing economy

Many investors are now convinced that the US economy, if not already in a recession, is moving towards one.

Meanwhile the leaders of the G8 major industrialised nations have agreed to hold a summit with other countries to discuss global financial reform.

The move follows a call by UK Prime Minister Gordon Brown to rebuild the IMF to help regulate the world's financial systems.

Mr Brown told that the meeting would take place in "the next few weeks".

In the US, the economic impact of the credit crisis was highlighted in two reports published on Wednesday.

September retail sales recorded their biggest monthly decline in more than three years, while a Federal Reserve report showed economic activity had weakened across the country.

In a speech in New York, Mr Bernanke said the US had avoided making the mistakes that helped plunge the country into the 1930s Great Depression.

He pledged that the Fed would continue to fight the credit crisis. But he warned it would take time for the country's economic health to mend.

"The turmoil in financial markets and the funding pressures on financial firms pose a significant threat to economic growth," he said.

"The last decade has shown that bursting bubbles can be an extraordinarily dangerous and costly phenomenon for the US economy."

Asian markets tumble; Nikkei falls 10 percent:

Asian stocks plummeted Thursday, with Tokyo's market plunging more than 10 percent, after another dive on Wall Street as worse-than-expected data about the U.S. economy heightened fears of a global recession.
Japan's benchmark Nikkei 225 stock average slid 911 points, or 9.6 percent, to 8,635.56, after earlier falling as much as 10.3 percent. Hong Kong's key index lost 963.65 points, or 6 percent, to 15,034.65.

South Korea's Kospi was down 7.2 percent, Australia's benchmark was off 6.3 percent and Singapore's index lost about 6 percent.

Investors were unnerved by U.S. data showing the country's retail sales fell 1.2 percent in September, almost double the 0.7 percent decline analysts expected. Other readings, released by the U.S. Federal Reserve, indicated the economy continued to slow in the early fall as financial and credit market problems took a turn for the worse.

The figures were ominous signs that the world's largest economy -- a critical export market for Asia -- was sliding into recession.

"Sentiment is deteriorating very fast. People are losing what little confidence they have on a day-by-day basis," said Jacky Choi, a Hong Kong-based fund manager at Value Partners Ltd., which manages about US$5 billion in Asia. "Everyone is very worried about the economy in the U.S and around the world."

In New York Wednesday, the Dow Industrial average ended down 733.08, or 7.87 percent, at 8,577.91 -- the biggest percentage drop since the 8 percent drop on Oct. 26, 1987, which followed Black Monday, the Oct. 19 crash that sent the blue chips down 22.6 percent in a single session.

The massive selling accelerated as the U.S. Federal Reserve Chairman Ben Bernanke warned in a speech Wednesday that patching up the credit markets won't provide an instantaneous jolt to the economy.

Oil prices continued to fall. Light, sweet crude for November delivery slid US$1.48 to US$73.06 in Asian trade on the New York Mercantile Exchange.

European markets sank Wednesday, with Britain's FTSE 100 index dropping 7.2 percent to 4,079.59, while Germany's DAX ended down 6.5 percent at 4,861.63

In Latin America, too, stocks plunged. Brazil's Ibovespa stock index sank 11.4 percent to 36,833. The sell-off triggered an automatic 30-minute suspension of mid-afternoon trading. Argentina's Merval index plunged 12.2 percent.

Fears about the outlook for the world economy have overtaken the relief the markets breathed at the start of the week on the unveiling of a series of bank rescue packages from governments around the world.

On Tuesday, the U.S. government followed Europe's lead and announced it will pump some $250 billion into shares of its leading banks, including JP Morgan Chase & Co., Bank of America Corp., Goldman Sachs Inc. and Citigroup Inc.

New York 'faces 165,000 job cuts'

New York City could lose as many as 165,000 jobs as a result of the crisis in the financial sector, the city's chief financial officer has warned.

Comptroller William Thompson estimates the positions will go over the next two years, including 35,000 directly employed in the financial sector.

The 165,000 figure is more than double the earlier prediction Mr Thompson made in July of 80,000 job losses.

Since then the health of the US financial sector has worsened sharply.

As the country's financial industry is centred on New York, the city is bearing the brunt of the downturn that has seen Lehman Brothers seek bankruptcy protection, and fellow investment bank Merrill Lynch bought by Bank of America.

'General recession'

Mr Thompson said the increase in his job cut estimate reflected "the spreading of the economic troubles to other industry sectors as the nation slips into a general recession".

His fears are shared by New York City Mayor Michael Bloomberg.

Mr Bloomberg has already ordered a cut in New York City's budget as the losses among Wall Street firms mean they may not have to pay most taxes to the city for a number of years - or at least until profits return.

Last month he told all city agencies to cut their spending by 2.5% this financial year, and by 5% for the next.

The US government is currently implementing a $700bn bail-out package for the financial sector, and, as part of the package, on Tuesday unveiled a $250bn plan to purchase stakes in a wide variety of banks to help restore confidence in the sector.

Japan's prime minister says US bank bailout is 'insufficient' and leading markets lower

Japanese Prime Minister Taro Aso said Thursday the U.S. bank bailout is "insufficient" and is contributing to the renewed plunge in global stock markets.

"Since it was insufficient, the market is again falling sharply," Aso told lawmakers at the upper house budget committee in parliament. The committee was wrapping up talks on a supplementary budget aimed to help struggling small- and mid-sized firms amid an economic downturn.

Aso made his comments as Japan's key stock index plummeted 10 percent in early Thursday following another dive on Wall Street amid growing fears of a global recession.

The U.S. Congress earlier this month approved a plan to use $700 billion of public money to buy bad mortgage-related securities and other assets from troubled financial institutions. Some $250 billion of that will be used to buy shares in leading U.S. banks.

Aso said that the continued market volitility suggests that more action is needed. He did not elaborate.

Japan has said that it is willing to offer funding to help prop up crumbling financial companies around the world.

Japan is sitting on more than $950 billion in foreign exchange reserves, second only to China's $1.9 trillion. Together, they control a major pool of funds that could come to the rescue of the West's severely strained financial industry. Options range from helping to provide credit to strapped financial institutions to cash infusions in return for ownership stakes in them.

Finance Minister Shoichi Nakagawa said Tuesday that Japan would be willing to contribute to a rescue led by the International Monetary Fund. He said that at a Group of Seven meeting in Washington last weekend that brought together finance ministers from Japan, the United States and five other major economies.

'Credit Crisis' Hits Everyone

Recent 'Credit Crisis' Hits Everyone: Companies and individuals are suffering. For individuals, the credit markets matter on several levels. Many investors, especially those close to retirement or in retirement, hold credit investments, usually in the form of Treasuries, corporate bonds or bond mutual funds. Treasuries are considered extremely safe, while corporate bonds range from pretty safe to frighteningly risky. Many corporate takeovers during the past several years were funded with borrowed money in the form of "junk" bonds. These corporate bonds sport a high yield but also a high risk of default.

Beyond investments, credit markets are essential to the economy. For instance, banks use credit markets to fund their day-to-day activities. The rates banks charge one another to borrow money for short-term needs have risen sharply, an indication that banks don't trust one another.

That translates into less money available for banks to lend to individuals or businesses, putting a squeeze on economic activity.

The most widely used bank-to-bank lending rate, the London interbank offered rate (Libor), which has risen sharply, is also used to calculate interest rates on credit cards and many adjustable-rate mortgages. That's more bad news that consumers and homeowners don't need.

Commercial-Paper Crunch

In another nook of the credit markets, banks and businesses actively use "commercial paper" to fund day-to-day business activities. Commercial paper represents short-term loans, sometimes as short as a day, and money-market mutual funds invest in this paper. But the credit crunch has even forced this usually routine market into crisis.

Some blue-chip companies report difficulty selling commercial paper, which means finding more expensive alternatives to fund business operations. Also, money-market funds, which historically are very safe, have gotten caught up in the commercial-paper crunch, with at least one fund seeing its price fall below the $1-a-share money funds almost always maintain. The government recently introduced an insurance program to backstop money funds.

A big part of the government bailout effort is aimed at restoring confidence in the credit markets by creating a "buyer of last resort," especially for the toxic credit derivatives that have heavily damaged the financial sector. Until the credit markets rebound, pressure on the economy will mount.

Yen gains against euro, dollar

The yen surged on Wednesday to a three-year high against the euro and a six-month pinnacle against the dollar amid a fierce sell-off on stock markets across the world.

In morning London trade, the European single currency slid as low as 134.17 yen -- a level not seen since September 2005. Elsewhere, the euro rose to 1.3618 dollars from 1.3599 dollars on Tuesday.

The US currency sank to 98.61 yen -- the lowest point since late March. It later stood at 99.49 yen, down sharply from 101.38 yen in New York on Tuesday.

In commodity markets, the price of gold jumped above 900 dollars per ounce, winning support from its status as a haven amid economic uncertainty.

Oil prices sank close to one-year lows near 80 dollars a barrel as plunging stocks generated fresh fears of slowing energy demand, traders said.

"The crisis has a lot further to run and, for the currency markets, this seems to mean a much stronger yen," Steve Barrow, senior currency strategist with Standard Bank in London, told Dow Jones Newswires.

Speculators have for years been taking advantage of Japan's cheap credit to borrow the low-yielding yen and then use it to fund higher-yield investments in other currencies -- a market bet known as a "carry trade."

But amid the current turmoil, investors have been getting rid of these riskier holdings, strengthening the Japanese currency, which had been previously used as essentially a source of cheap cash to invest elsewhere.

There has been a "mass exodus" from risky assets funded in yen, RBS Securities analysts said in a note. It said developments were taking place "with intensities not seen since the Asian crisis" 10 years ago.

"Yen buying is likely to continue for now as there are surely no factors to support the dollar," said Hironobu Hagi, deputy general manager at the capital markets division of Shinsei Bank.

The stronger yen was also a major factor driving down stock prices as it makes Japanese exports -- a key driver of the faltering economy -- less competitive overseas and eats into repatriated earnings.

Stock markets across Asia and Europe plunged on Wednesday. Japan's Nikkei index dropped 9.38 percent, its biggest one-day lost since the market crash of 1987.

Elsewhere, sterling climbed against the dollar as the British currency was boosted by the 50-billion-pound part-nationalisation of the country's main banks as part of a massive emergency bailout package.

Markets were also looking ahead to a Group of Seven meeting on Friday gathering central bank chiefs and other financial authorities, trying to see if they would draft further action to stem the crisis.

In morning trading in London on Wednesday, the euro changed hands at 1.3618 dollars against 1.3599 late Tuesday, at 135.55 yen (137.92), 0.7767 pounds (0.7783) and 1.5480 Swiss francs (1.5492).

The dollar stood at 99.49 yen (101.38) and 1.1379 Swiss francs (1.1389).

The pound was at 1.7514 dollars (1.7466).

On the London Bullion Market, the price of gold jumped to 913.90 dollars an ounce from 876.75 dollars late Tuesday.

Date: 10/8/2008

Savings: Is My Bank or Brokerage Going to Disappear

Savings: Are There Any Safe Havens Left?

It sure doesn't feel like it. Even conservative investments - like ultrashort- term bond funds and a single money market fund - have lost value recently. But rest assured, your cash accounts are still extremely safe. To shore up confidence in money-market mutual funds after a prominent portfolio "broke the buck," the Treasury Department launched an insurance plan to guarantee their value.

What's more, bank money-market accounts and CDs are as protected as ever. While it's certainly hard to tell which banks will eventually survive this financial meltdown, your accounts are FDIC-insured.

Finally, if you're looking for a safe option within your 401(k), consider a stable value fund. These portfolios often invest in a diversified mix of short- to intermediate- term bonds that are backed by different insurers. Plus, they've been yielding around 4% lately.

Is My Bank or Brokerage Going to Disappear?

Even with the government stepping in to buy up the crummy mortgage-backed securities that are endangering the health of so many banks and brokers, this relief won't be immediate. It may take weeks for the Treasury Department to put together a team to evaluate these bonds. In the meantime, more banks and brokers could go under or be forced to sell out to healthier firms.

Still, the tally of failed banks is unlikely to come close to the number we saw in the savings and loan crisis. Between 1986 and 1995, 1,043 thrifts went under (though many of them were tiny). So far this year, only 13 banks and savings and loans have failed, according to the Federal Deposit Insurance Corporation. That includes Washington Mutual, the nation's largest S&L, which was shut down before its deposits were sold to J.P. Morgan Chase.

Regardless of what the final tally is, it's important to keep in mind that your bank deposits are for the most part safe. Deposits up to $250,000 per person per institution and $500,000 for joint accounts will be protected by the FDIC (The FDIC temporarily raised the limits from $100,000 and $200,000 respectively through December 30, 2009.). Some retirement accounts are covered up to $250,000.

Investment banks and brokerages have also come under pressure. Here too you are mostly protected. Unlike commercial banks, which use your deposits to lend to other customers, brokerages are supposed to segregate your assets from theirs. So if you own 1,000 shares of General Electric and your brokerage collapses, your 1,000 shares of GE should still be there and will most likely be transferred to another broker on your behalf.

If for any reason your failed broker can't locate your securities, up to $500,000 of your assets per account is covered by the Securities Investor Protection Corporation, a nonprofit funded by member firms. With a few exceptions, SIPC limits its safety net to SEC-registered investments. So while your stocks, bonds and mutual funds will be covered, foreign currency, precious metals and commodity futures contracts won't be.

What Would Happen If My Insurer Went Under?

You may have wondered that very thing before the federal government stepped in with an $85 billion loan guarantee to save American International Group from bankruptcy. Since then no other large insurance company appears to be in similar peril. That's because few insure mortgage bonds, the business that contributed to AIG's problems.

In the event that your insurer goes belly up, you have protections. If you have an outstanding claim when your insurer fails, a state guaranty fund will cover it. The rules vary, but funds typically pay up to $300,000 in claims on most policies.

In nearly all states, disability payouts have no caps. With a variable annuity, you are completely protected because you're investing in mutual-fund-like separate accounts held in your name, and insurance companies can't touch those assets when they liquidate.

If you have yet to collect on your insurance policy, will you face any coverage gaps? With life insurance, you shouldn't lose coverage: In past failures, regulators have moved policies of failed insurers to healthy ones. For most other types of insurance, you'll have 30 days to find another insurer. And if you have paid in advance for, say, a year's worth of homeowners insurance, you can apply for a refund from your state insurance fund.

How Tough Is It Really to Get a Loan Today?

For months you've likely been hearing about (or even experiencing) tight credit: frozen home-equity lines of credit, lower credit-card limits, tougher loan standards. That could be just the beginning. One reason regulators have been so anxious to step in during this crisis is the fear that consumer and business borrowing will be shut off altogether.

For now, though, many people are still able to get loans. "If you have good credit, job stability and low debt, there is a good likelihood that you will get a mortgage," says Marc Savitt, president of the National Association of Mortgage Brokers.

In general you'll need a 660 credit score and a 10% down payment to qualify for a loan. Another important criterion is how much of your monthly income goes to repaying all your debts. Today lenders want you to cap that at 41% of your income.

Getting a small business loan is similarly tough. But if you can borrow and have the itch to strike out on your own, small business experts say economic downturns can be a good time to start a venture. In bad times, you may find better deals on, say, advertising and office space. And some of the land mines are more apparent.

"When existing companies are stumbling, it's more obvious what mistakes are to be avoided," says Bob Chalfin, a Metuchen, N.J. small business adviser and a lecturer at the Wharton business school. "When there is change, there is opportunity.

The Real Estate Market

Is There Any Hope for Home Prices?

The burst real estate bubble that kicked off this crisis is unlikely to reinflate quickly. "I don't see the slump in housing prices ending anytime soon," says Dean Baker, co-director of the Center for Economic Policy and Research. The government takeover of Fannie Mae and Freddie Mac lowered mortgage rates briefly (which helps buyers afford your home).

But the bankruptcy of Lehman Brothers, the failure of Washington Mutual and the sale of Wachovia, as well as the stock market sell-off, have made investors nervous about everything, mortgage bonds included. And that has pushed home-loan rates right back up.

The proposed government bailout could help home prices if the banks that get relief turn around and make new loans, but it's not clear that they will. More important, housing prices are not just a factor of mortgage rates. Foreclosures and slow sales have left 4-million-plus homes on the market, nearly half a million more than two years ago. That could get worse before it gets better if rising unemployment translates to fewer buyers to work off that fat inventory.

"In the long run none of what we're doing now is going to matter that much to real estate," says Wellesley economics professor Karl Case. "Home prices have to do with the scarcity of land and perception of that scarcity."

Until homes for sale are again scarce, it will continue to be better to be a buyer than a seller. Most economists expect another 10% drop in housing prices nationally over the next year. Some, like Nouriel Roubini of New York University, say a 15% to 20% drop is more likely.

The Stock Market: When Will Stocks Bounce Back?

The Stock Market

When Will Stocks Bounce Back?

Don't expect an immediate rebound. "Investors shouldn't get overly enthusiastic," says Jean-Marie Eveillard, portfolio manager for the First Eagle Funds. Why? Even if Washington gets its act together, the economy will remain a drag. "In a time of slow growth, profits will not be that great," Eveillard says.

Remember too that a massive government rescue plan could have unintended consequences. If the budget deficit were to balloon - as many economists assume it would - that could further weaken the dollar, which would lead to another bout of inflation fears.

Rising inflation and a falling dollar, in turn, would likely boost market interest rates, since it will take a big carrot to entice foreign investors to buy U.S. bonds. When rates are on the rise, investors typically aren't willing to pay up for stocks in the form of higher price/earnings ratios.

Economists are predicting that a recession could last through next spring or even the fall. Does this mean stocks will languish that entire time? No. Equities have a knack for rallying in anticipation of an eventual recovery. So a stock market rebound could take place sometime in the first half of 2009. Until then, don't hold your breath.

If the Outlook Is So Bad, Why Not Dump Stocks?

Selling stocks after they've sunk to a three-year low in hopes of buying them back after they're trading at higher prices is a surefire recipe for losing your shirt.

While it's understandable to want to flee, Bohemia, N.Y. financial planner Ronald Rogé suggests taking a cue from Warren Buffett. "Here's the smartest guy on the block, and his firm, Berkshire Hathaway, is down like most other stocks this year." But instead of looking to sell, Buffett is buying. Recently he agreed to plow $5 billion into Goldman Sachs.

Still have the urge to purge your portfolio? Consider this: So far this year, fund investors have yanked more money out of their stock funds than they've put in, marking only the third time in recent memory this has happened. The other two times? In 2002, just before a five-year bull market, and 1988, the start of a 12-year bull.

"If you leave the market now entirely, you probably won't make it back in time to enjoy the recovery," says Torrance, Calif. financial planner Phillip Cook. According to Standard & Poor's, equities typically recoup a third of what they lost in a bear market in the first 40 days of a new bull.

Are Stocks Still Best for the Long Run?

If you've been a stock investor over the past decade, you probably feel like the mythical Sisyphus: You've been trying to roll your portfolio up the hill, only to see the market keep batting it back down. Stocks are trading lower than they were at the start of 2000. Even boring bonds have beaten equities during this time.

But disappointing performance doesn't erase the case for stocks. Over the long term (meaning more than a decade), equities give you something fixed-income investments can't: a share of growth. The benefit of owning a stake in a company - as the Treasury Department, no doubt, understands with the majority position it is taking in exchange for helping AIG - is that you get to share in the earnings of the firm. And because stock prices, over time, reflect corporate profit growth, you're likely to far outpace the long-term rate of inflation.

If your faith in stocks is still wavering, consider the last time they performed so poorly: the 1930s. "What if you concluded then that stocks weren't the best place to be?" says Alan Skrainka, chief market strategist for Edward Jones. "You'd have missed out on decades of bull markets."

The long run can turn out to be extraordinarily long, far longer than an investor's investment horizon.

If an investor entered the market last century when the Dow was one-standard deviation above its long-term trend line, an exuberant bull market top, how long did they have to wait? Leuthold (InvestmentNews, 5/21/2001) notes that an investor at the peak in 1929 took until August, 1998, almost 69 years, to reach a nominal return of 10% on their money, including dividends. This is an after inflation yearly return of about 7%. Thus, it took 69 years for an investor to reach the long-term average return for stocks, and had an investor in 1929 relied upon long-term stock returns data to calculate their future net worth or retirement income, they would have been sorely disappointed.

In addition, from its peak in 1929, our long-term investor had to endure an 86% decline in the value of his portfolio to its low in July, 1932. The Dow Industrials holds some of America's largest and financially soundest companies, and cannot be considered an aggressive or speculative part of the stock market. Yet, investors choosing this relatively conservative sector of the stock market would have had to have extraordinary nerves, and an abundance of decades to see a long-term average return on their investment. This is far more than can be realistically expected.

How Bad Could the Economy Get?

Back in January, when it first became clear the economy and the markets were in for a rough patch, the consensus forecast was that we'd have seen the worst of it by now.

Perhaps you put a bit more cash in the bank, trimmed the fat from your budget and tweaked your 401(k) allocations, but otherwise you were confident you could stay the course.

Then came the extraordinary events of September: the government's seizure of Fannie Mae and Freddie Mac and rescue of American International Group; the bankruptcy of Lehman Brothers and pending sale of Merrill Lynch; the first money market fund loss in more than a decade; a series of bank fire sales; and a politically charged federal bailout plan that could carry a $700 billion price tag. You can't help but wonder what all this means to you.

Here are some key questions, from when stocks could bounce back to what's ahead for the economy and home prices. Choose a topic to get some answers.

The Economy

How Did We Get Here?

By now you likely know that the crisis in the financial markets is the culmination of years of reckless mortgage lending and Wall Street dealmaking. It's the final gasp of the burst housing bubble. But how exactly did this happen?

To find the root cause of Wall Street's woes, you have to go back to the collapse of a different bubble - tech. In 2001, after the dotcom craze ended and the bear market began, the Federal Reserve started aggressively slashing short-term interest rates to stave off recession. By eventually reducing rates to a historically low 1%, the Fed reinflated the economy. But this cheap money sparked a new wave of risk taking.

Homeowners, armed with easy credit, snapped up properties as if they were playing Monopoly. As prices soared, buyers were able to afford ever-larger properties only by taking out risky mortgages that lenders were happily approving with little documentation or money down.

At the same time, Wall Street investment banks got a brilliant idea: bundle the riskiest of these mortgages, then slice and dice these portfolios into trade-able bonds to be sold to other banks and investors. Amazingly, bond-rating agencies slapped their highest ratings on the "best" of this debt.

This house of cards came down when sub prime borrowers began defaulting on their mortgages. That sent housing prices tumbling, unleashing a domino effect on mortgage-backed securities. Banks and brokerages that had borrowed money to boost the impact of those investments had to race to raise capital.

Some, like Merrill Lynch, were forced to sell. Others, like Lehman Brothers, weren't so lucky. "What we always tell investors is beware of too much leverage in a company," says Brian Rogers, chairman and portfolio manager for T. Rowe Price. "Leverage is the enemy of the investor."

Sure, everyone from former Fed chairman Alan Greenspan to your friends and neighbors played a role in stoking this casino culture. But troubled banks and brokerages can't pass the blame. "These firms closed their eyes and made very bad bets on risky securities that they didn't truly understand," says Jeremy Siegel, finance professor at the University of Pennsylvania's Wharton business school. "Investments that they did not have to make led to their demise."

How Bad Could the Economy Get?

Before the meltdown, economists fell into two camps: those who thought the economy had already slipped into recession and those who thought a recession could still be avoided.

While forecasters still differ on the timing and severity of a downturn, "the consensus view is that we're headed for recession and will be in one until next year," says Mark Zandi, chief economist for Moody's Economy.com.

Corporate profits are already on the verge of falling for a fifth straight quarter, according to Thomson Financial. The next shoe to drop will be consumer spending. "Two years ago, people were using their homes as ATMs, pumping out cash," says Robert Arnott, chairman of the investment consulting firm Research Affiliates in Pasadena. "As banks continue to tighten their lending, that spending is disappearing."

But softer profits and slower spending haven't translated into widespread layoffs yet. "This is the strongest recessionary job market in 40 years," says James Paulsen, chief investment strategist of Wells Capital Management. A jump in unemployment could still be coming, especially given bank and brokerage failures and mergers. But outside of finance and housing, much of the rest of the economy is strong, he says.

The weak dollar is boosting demand for our goods abroad, and lower gas prices are making Americans feel more flush. Add in the cash that the Fed has been hosing into the banking system and we are bound to see growth in 2009. "If all this stimulus has no effect on the economy, that would be a rarity indeed," says Paulsen.

Standard & Poor's chief economist David Wyss expects a mild recession that ends next spring. "Gradually we will regain confidence in the market. Lower oil prices and a falling trade deficit will help," he says. "This is a financial panic, not an economic one."

Of course, that could change if the financial panic doesn't abate soon. If banks remain too scared or broke to lend, would-be home buyers will be frozen out of the market. If that happens, home values could fall even more, crimping confidence and putting the brakes on the economy's greatest engine: the consumer.

Does All This Mean I'll Pay Higher Taxes?

Yes. "Taxes will rise regardless of who wins the Presidency," predicts Greg Valliere, chief political strategist for Stanford Group Co.

It's impossible to say what the final bill for rescuing Wall Street will be. Even before the bill to buy $700 billion of unwanted mortgage-backed debt, the government had already signed on for nearly $365 billion in loan guarantees and other costs.

The eventual price tag will depend in part on the housing market. If it recovers by 2010, the value of mortgage-backed securities could rise, minimizing the tab for taxpayers, says Brian Bethune, chief U.S. financial economist for Global Insight.

"On the other hand," Bethune adds, "if the economy continues to tank into a deeper recession, dragging the housing market along with it, then the costs to the taxpayers easily could escalate to several hundred billions of dollars."

Under Treasury Secretary Henry Paulson's original debt-buyback proposal, some economists predicted the federal deficit could soar to $900 billion in 2009. Even without a bailout, the federal budget was expected to hit $482 billion next year. If government aid pads that figure by $200 billion, the deficit will be back to where it stood in the 1980s - around 5% of GDP. At the very least, that will make it hard for a future President to keep tax-cut promises.

by Stephen Gandel and Paul J. Lim
Friday, October 10, 2008

Best Buy Stocks : Highest-Yielding S&P 500 Stocks

Highest-Yielding S&P 500 Stocks Symbol Company Name Previous Day's Closing Price Prev Day's Mkt Capitalization Industry Name S&P Index Membership Current Dividend Yield ACAS American Capital Ltd 14.90 3.084 Bil ClFundDebt S&P 500 27.82 MBI MBIA Inc 7.95 2.173 Bil Titleinsur S&P 500 15.46 DDR Developers Diversified Realty REIT 21.21 2.551 Bil REITRetail S&P 500 12.40 Q Qwest Communications International Inc 2.43 4.194 Bil TelecomDom S&P 500 12.17 GCI Gannett Co Inc 14.61 3.333 Bil PublshNews S&P 500 11.03 BAC Bank of America Corp 22.10 100.8 Bil MonCentBnk S&P 500 10.77 WIN Windstream Corp 9.19 4.04 Bil TelecomDom S&P 500 10.42 FTR Frontier Communications Corp 9.18 2.9 Bil TelecomDom S&P 500 10.17 AIV Apartment Investment & Management Class A REIT 23.49 2.011 Bil REITResid S&P 500 9.41 CBS CBS Corp 11.42 7.765 Bil BrdcastTV S&P 500 9.11 C Citigroup Inc 14.40 78.41 Bil MonCentBnk S&P 500 8.45 HST Host Hotels & Resorts REIT 9.76 5.07 Bil REITHotel S&P 500 8.17 GNW Genworth Financial Inc 4.70 2.035 Bil LifeInsure S&P 500 7.97 CTL CenturyTel Inc 35.03 3.585 Bil TelecomDom S&P 500 7.89 MER Merrill Lynch & Co Inc 17.98 27.49 Bil invbroknat S&P 500 7.78 RAI Reynolds American Inc 43.30 12.69 Bil Cigarettes S&P 500 7.62 AEE Ameren Corp 33.12 6.962 Bil DiversUt S&P 500 7.52 EQ Embarq Corp 35.44 5.05 Bil DiversComm S&P 500 7.49 PLD ProLogis REIT 26.74 7.019 Bil REITIndust S&P 500 7.48 HIG Hartford Financial Services Group Inc 24.86 7.49 Bil PropInsure S&P 500 7.41 CEG Constellation Energy Group Inc 25.49 4.546 Bil ElectricUt S&P 500 7.35 PFE Pfizer Inc 17.13 115.5 Bil MjrDrgManu S&P 500 7.25 KEY KeyCorp 9.00 4.452 Bil MonCentBnk S&P 500 7.07 NI NiSource Inc 13.09 3.59 Bil DiversUt S&P 500 6.94 CINF Cincinnati Financial Corp 22.30 3.621 Bil PropInsure S&P 500 6.92 MO ALTRIA GROUP 18.10 37.28 Bil Cigarettes S&P 500 6.91 MI Marshall & Ilsley Corp 17.45 4.527 Bil MidwestBnk S&P 500 6.90 NYT New York Times Co 13.26 1.907 Bil PublshNews S&P 500 6.87 STI SunTrust Banks Inc 41.75 14.77 Bil MonCentBnk S&P 500 6.71 BMY Bristol-Myers Squibb Co 18.94 37.49 Bil MjrDrgManu S&P 500 6.58 PNW Pinnacle West Capital Corp 32.54 3.278 Bil ElectricUt S&P 500 6.47 VZ Verizon Communications Inc 27.73 78.97 Bil TelecomDom S&P 500 6.37 KIM Kimco REIT 27.61 7.014 Bil REITRetail S&P 500 6.36 XL XL Capital Ltd 8.68 2.709 Bil PropInsure S&P 500 6.33 CNP CenterPoint Energy Inc 11.41 3.9 Bil DiversUt S&P 500 6.22 T AT&T Inc 24.73 145.7 Bil TelecomDom S&P 500 6.22 KBH KB Home 16.35 1.465 Bil ResConstru S&P 500 6.15 LEN Lennar Corp 10.47 1.682 Bil ResConstru S&P 500 6.13 MS Morgan Stanley 16.80 18.63 Bil invdivers S&P 500 6.12 GE GENERAL ELECTRIC 20.65 216.7 Bil Congloma S&P 500 6.11 DOW DOW CHEMICAL 27.83 25.74 Bil ChemDivers S&P 500 5.95 NWL Newell Rubbermaid Inc 14.01 3.882 Bil Housewares S&P 500 5.92 LO Lorillard Inc 63.73 11.08 Bil Cigarettes S&P 500 5.91 MAS Masco Corp 15.09 5.432 Bil LumberWood S&P 500 5.89 TEG Integrys Energy Group Inc 45.83 3.502 Bil DiversUt S&P 500 5.88 DTE DTE Energy Co 35.11 5.726 Bil ElectricUt S&P 500 5.86 HCP HCP REIT 30.30 7.566 Bil REITHlthca S&P 500 5.77 TE TECO Energy Inc 13.73 2.921 Bil ElectricUt S&P 500 5.77 CIT CIT Group Inc 6.47 1.846 Bil CreditServ S&P 500 5.71 PGN Progress Energy Inc 41.46 10.86 Bil ElectricUt S&P 500 5.71 Stocks of companies in the Standard & Poor's 500 Index that have the highest dividend yields. These are often considered the index's most undervalued stocks because their prices are low relative to their dividends.

• Data providers
• Copyright © 2008 Reuters

Most Undervalued Stocks - Buy Now

Wise Decision to Buy Stocks
As prices fall, stocks become cheaper relative to our fair value estimates. As of market open on Monday, October 6, we had a 1-star rating on only 35 companies. In contrast, 511 companies carried our 5-star rating. Value investors should be jumping for joy.

With discount rates and risk premiums rising across the board, now could be a good time for the strongest-stomached investors to increase their risk exposure--the market is terrified of risk, so taking on risk should be increasingly well-compensated over the long run. However, market turmoil can also be a great time to pick up core holdings at a discount. The market can be indiscriminate in marking down stock prices, throwing the good out with the bad.

Some of the best investments can be made by buying best-of-breed companies during periods of general market turmoil and holding them until the market comes to its senses. Below, we highlight five companies that passed the following screen:

1. Morningstar Rating of 5 stars

2. Trading at less than half our fair value estimate

3. Morningstar economic moat rating of at least narrow

4. Stock down 20% or more year to date

5. Fair value uncertainty of low or medium

6. Debt-to-total-capitalization of less than 50%

We like these companies for the long-haul, and now looks like a great time to buy. Not surprisingly, Warren Buffett's Berkshire Hathaway (brk.b.B) agrees with us on the first three, as they were recently in Berkshire's portfolio.

USG CorporationPrice/Fair Value = 0.42
From the Analyst Report: Even with the strength of USG's (NYSE:USG - News) brands and distribution, the business remains highly cyclical, with revenue closely tied to booms and busts in commercial, industrial, or residential construction. USG is able to obtain price premiums on its wallboard during hot periods, and it scales back prices at a lower rate than its competitors when building slows. At the peak of the building cycle, USG's price for wallboard was 7% higher than that for a similar product from Eagle Materials, and that premium has now increased to 10%. Although this price volatility leads to choppiness in short-term results, return on invested capital over the long run has averaged 15%--well in excess of the company's cost of capital.

UnitedHealth GroupPrice/Fair Value = 0.45
From the Analyst Report: UnitedHealth (NYSE:UNH - News) connects its 70 million U.S. customers to a network of health-care providers that includes 560,000 physicians and 4,800 hospitals nationwide. The firm reaps the benefits of the positive feedback loop that results when customers seek out UnitedHealth for access to so many care providers and when providers join the UnitedHealth network for access to all those customers. UnitedHealth has one of the strongest bargaining positions in the industry.

ConocoPhillips
Price/Fair Value = 0.48
From the Analyst Report: Conoco's (NYSE:COP - News) production and exploration business benefits from OPEC's ability to influence global supply and stabilize pricing. Ownership of an extensive natural-gas pipeline, gathering systems, and facilities to unlock stranded natural-gas resources also contributes to the company's economic moat.

News Corporation
Price/Fair Value = 0.49
From the Analyst Report: News Corp.'s (NYSE:NWS - News) largest business segment, Fox Entertainment Group, owns a vast library of motion pictures and television shows including The Sound of Music, Star Wars, Titanic, The X-Files, and The Simpsons. Besides the proven ability to create great content, News Corp. can also distribute its content around the world through its theatrical film-distribution capabilities, television networks, and satellite television providers. News Corp. also owns one of the premier online distribution channels via its purchase of MySpace in 2005.

Expedia
Price/Fair Value = 0.41
From the Analyst Report: Expedia (NasdaqGS:EXPE - News) has separated itself from the pack, however. It is almost twice as big as its closest competitor, with nearly 35% of the U.S. online travel agency, or OTA, market. The company uses its size to negotiate lower wholesale prices from suppliers, and, because Expedia is the largest OTA, more suppliers are likely to distribute through the firm. The lower costs lead to higher margins than competitors, and the diverse inventory attracts even more customers to Expedia's sites, leading to favorable network economics and an uphill battle for competing OTAs.

This article has been originally posted at the following link.

The Market's Most Undervalued Stocks