- Looking Back to Look Forward Wei (Victor) Huang Shidler College - - PowerPoint PPT Presentation

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Stock Market Turmoil

• Looking Back to Look Forward

Wei (Victor) Huang Shidler College of Business University of Hawaii at Manoa AmCham Vietnam Ho Chi Minh City April 2018

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Financial crisis – a review

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The Bear - WSJ March 3, 2009

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The Most Chaotic Week in Wall Street History 9/12/2008 -9/19/2008

• Treasury Secretary Henry Paulson, Fed Chairman

Ben Bernanke, and NY Fed chairman Timothy Geithner met and decided not to rescue Lehman Brothers Holdings Inc.

• On September 15, 2008, Lehman Brothers

Holdings Inc. filed for Chapter 11 bankruptcy protection

• Worst losses in Wall Street since 9-11
• Dow Jones dropped by 504.48 (↓ 4.42%),
• S&P 500 down by 59.00 (↓ 4.71%)

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Stock Industry

• Sept. 12
• Sept. 15

Change %Change

Boeing Aerospace/Defense 63.3 62.25

• 1.05
• 1.66%

United Technologies Corporation Aerospace/Defense - Equipment 64.46 63.12

• 1.34
• 2.08%

Microsoft Applications Software 27.62 26.82

• 0.8
• 2.90%

General Motors Auto - Cars/Light Trucks 13.01 11.41

• 1.6 -12.30%

Coca-Cola Beverages - Non-Alcoholic 54.5 54.75 0.25 0.46% DuPont Chemicals - Diversified 46.39 44.74

• 1.65
• 3.56%

Hewlett-Packard Computers 46.97 45.33

• 1.64
• 3.49%

IBM Computers 118.97 115.19

• 3.78
• 3.18%

Procter & Gamble Cosmetics & Toiletries 73.15 72.14

• 1.01
• 1.38%

3M Diversified Industrials 70.15 68.88

• 1.27
• 1.81%

General Electric Diversified Industrials 26.75 24.6

• 2.15
• 8.04%

Intel Electronic - Semiconductors 20.16 19.36

• 0.8
• 3.97%

American Express Finance - Credit Card 38.95 35.48

• 3.47
• 8.91%

Citigroup Finance - Investment Banking/Ba 17.96 15.24

• 2.72 -15.14%

JPMorgan Chase Finance - Investment Banking/Ba 41.17 37

• 4.17 -10.13%

Caterpillar Machinery - Construction & Minin 65.46 63.21

• 2.25
• 3.44%

Merck Medical - Drugs 33.82 32.72

• 1.1
• 3.25%

Pfizer Medical - Drugs 18.62 18.05

• 0.57
• 3.06%

Johnson & Johnson Medical Products 70.59 69.61

• 0.98
• 1.39%

Alcoa Metal - Aluminum 28.67 26.93

• 1.74
• 6.07%

American International Group Multi-Line Insurance 12.14 4.76

• 7.38 -60.79%

Walt Disney Multimedia 33.26 32.36

• 0.9
• 2.71%

Chevron Corporation Oil - Integrated 84.24 80.09

• 4.15
• 4.93%

ExxonMobil Oil - Integrated 77.5 73.25

• 4.25
• 5.48%

Home Depot Retail - Building Products 28.8 28.5

• 0.3
• 1.04%

Walmart Retail - Discount 62.41 61.63

• 0.78
• 1.25%

McDonald's Retail - Restaurants 64.06 63.72

• 0.34
• 0.53%

Bank of America Super-Regional Banks - US 33.74 26.55

• 7.19 -21.31%

AT&T Telephone - Integrated 31.54 29.96

• 1.58
• 5.01%

Verizon Communications Telephone - Integrated 34.49 33.24

• 1.25
• 3.62%

Dow Jones Industrial Average 11,421.99 10,917.51

• 504.48
• 4.42%

Dow 30 Component Stocks

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Three months – Merrill Lynch -- freefall for financial stocks

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3 months -- AIG

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The Starting Point of the Crisis

• Fannie Mae Founded by the government in 1938

– Became private in 1968

• Freddie Mac

– Founded 1970 – Created to compete with Fannie Mae

• Total mortgage related assets holdings: $740

billion in 1990, 5.3 trillion in 2006. Increased by 6 times, one-fifth is subprime mortgage. (Time Magazine)

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Sub-Prime Mortgage Crisis

• Excess liquidity on the loan market led to

housing bubble

• Subprime mortgage crisis caused difficulty

among mortgage banks

• Credit contraction

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Housing Bubble

• Real estate price increased 85% from

1996 to 2006

• Low interest rates
• Easy access to mortgages
• Banks were almost worry-free: make

money from foreclosure in case of default.

• No regulation on loan broker: Mortgage

brokers – the Case of Florida

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The Trigger

• In 2006, the rating companies downgraded

banks that issued bonds linked to subprime mortgages.

• Investors avoid these banks’ stocks and bonds.

These banks started to face liquidity crunch and were forced to reduce credit and raise interest rates.

• Borrowers of subprime mortgages start having

difficulty in making payments. (especially for adjustable interest rates)

• Housing supply increased, price hike stopped.

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The Trigger

• Foreclosure increased, mortgage became

greater than housing value, default shot up.

• Banks’ bad assets increased quickly.
• Several waves: 1) mortgage banks, 2)

investment banks that sells mortgage- related derivatives 3) Insurer such as AIG

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Bank Loss

• In its survey, the American Bankers Association

reported that 27% of the nation's 8500 banks held preferred shares in Fannie and Freddie in their investment portfolios. The shares are expected to be worthless.

• The survey found that 85% of the affected

institutions were community banks -- those with less than $1 billion in assets.

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789 billion Stimulus plan

• part of the breakdown of the spending part of the

New Stimulus.

• Health & Human Services, Labor & Education $91.3 Billion.
• Medicaid Provisions $89.7 Billion.
• State Fiscal Stabilization Fund $79 Billion.
• Transportation and Housing Development $62.3 Billion.
• Assistance for Unemployed Workers $45.7 Billion.
• Health Insurance for Unemployed $40.8 Billion.
• Agriculture, Nutrition, Rural Development $26.9 Billion.
• Health Information Technology $20 Billion.
• The stimulus also will provide government grants

in clean energy, Education, and other programs.

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Looking for Bargains: (Wall Street

Journal November 1, 2008)

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The market has been in a long bull run (S&P 500) (about 34% -

second greatest since World War II)

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Dow 30

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Looking Forward

• Worries:

– Inflation – interest rates – trade war – over-correction – Escalated regional conflict

• Offsets:

– No recession likely – EPS growth expectations for 2018 approach 20% (source: CFRA) – Net-negative real-rate environment – Tax cuts and infrastructure spending

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May see increasing volatilities

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History of declines

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Mid-term election-”Uncertainty” (source: CFRA)

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Recession?

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EPS

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P/E ratio of S&P 500 index

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Time to invest in international market?

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About forecast

• John Kenneth Galbraith once said:

“the only function of economic forecasting is to make astrology look respectable”