Previous Recessions in US History

* Panic of 1907 (1907 - 1908), begins with a run on Knickerbocker Trust Company stock October 22nd 1907 sets events in motion that will lead to a depression in the United States. Duration: 13 months
* Post-WWI recession - marked by severe hyperinflation in Europe over production in North America. Very sharp, but also brief.
* Great Depression (1929 to late 1930s), stock market crash, banking collapse in the United States sparks a global downturn, including a second but not heavy downturn in the U.S., the Recession of 1937. Durations: 43 and 13 months respectiviely.
* Recession of (1945) Duration: 8 months
* Recession of (1948 - 1949) Duration: 11 months
* Post-Korean War Recession (1953 - 1954) - The Recession of 1953 was a demand-driven recession due to poor government policies and high interest rates. Duration: 10 months
* Recession of (1957 - 1958) Duration: 8 months
* Recession of (1960 - 1961) Duration: 10 months
* Bond Inversion of (1965 - 1967) no recession materialized
* Recession of (1969 - 1970) Duration: 11 months
* 1973 oil crisis (1973 - 1975) - a quadrupling of oil prices by OPEC coupled with high government spending due to the Vietnam War leads to stagflation in the United States. Duration: 16 months
* 1979 energy crisis - 1979 until 1980, the Iranian Revolution sharply increases the price of oil
* (1981 - 1982) Duration: 16 months
* Early 1980s recession - 1982 and 1983, caused by tight monetary policy in the U.S. to control inflation and sharp correction to overproduction of the previous decade which had been masked by inflation
* Great Commodities Depression - 1980 to 2000, general recession in commodity prices
* Early 1990s recession - 1990 to 1992, collapse of junk bonds and a credit crunch in the United States leads to one quarter of US GDP decline, and therefore not an official recession.

Seven Tests of Defensive Stock Selection
Keys to Putting Together a Conservative Portfolio of Common Stocks
By Joshua Kennon, About.com

Each autumn, I read Benjamin Graham's Intelligent Investor. Its principles are timeless, unquestionably accurate, and contain a sound intellectual framework for investing that has been tested by decades of experience. As I considered the content of my weekly article, I decided to focus on the seven tests prescribed by Graham in Chapter 14, Stock Selection for the Defensive Investor. Each of these will serve as a filter to weed out the speculative stocks from a conservative portfolio. Note that these guidelines only apply to passive investors seeking to put together a portfolio of solid companies for long-term appreciation; an investor that is capable of financial statement analysis, interpreting accounting decisions, and valuing an asset based on discounted cash flows may take exception to any of the following as long as he is confident his analysis is both conservative and promises safety of principal.
1. Adequate Size of the Enterprise
In the world of investing, there is some safety attributable to the size of an enterprise. A smaller company is generally subject to wider fluctuations in earnings. Graham recommended [in 1970] that an industrial company should have at least $100 million of annual sales, and a public utility company should have no less than $50 million in total assets. Adjusted for inflation, the numbers would work out to approximately $465 million and $232 million respectively.
2. A Sufficiently Strong Financial Condition
According to Graham, a stock should have a current ratio of at least two. Long-term debt should not exceed working capital. For public utilities the debt should not exceed twice the stock equity at book value. This should act as a strong buffer against the possibility of bankruptcy or default.
3. Earnings Stability
The company should not have reported a loss over the past ten years. Companies that can maintain at least some level of earnings are, on the whole, more stable.
4. Dividend Record
The company should have a history of paying dividends on its common stock for at least the past twenty years. This should provide some assurance that future dividends are likely to be paid. For more information on the dividend policy,
5. Earnings Growth
To help ensure a company's profits keep pace with inflation, net income should have increased by one-third or greater on a per-share basis over course of the past ten years using three-year averages at the beginning and end.
6. Moderate Price to Earnings Ratio
For inclusion into a conservative portfolio, the current price of a stock should not exceed fifteen times its average earnings for the past three years. This acts as a safeguard against overpaying for a security.
7. Moderate Ratio of Price to Assets
Quoting Graham, "Current price should not be more than 1 1/2 times the book value last reported. However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5 (this figure corresponds to 15 times earnings and 1 1/2 times book value. It would admit an issue selling at only 9 times earnings and 2.5 times asset value, etc.)"

Oil hits $100 barrel

Oil has broken through the landmark $100 a barrel, driven by a slumping dollar, geopolitical instability and worries over a winter fuel supply crunch.

See how the price of oil has risen - and fallen - since 1970 against a background of key world events.


1973 ARAB-ISRAELI WAR

Fighting between Arab and Israeli forces sent jitters through the Middle East.

Alarmed by Israeli successes, the Organisation of Petroleum Exporting Countries (Opec) orchestrated the Arab oil embargo, sending prices soaring by 400% in six months.

It was the first time oil had been used as a political weapon, putting pressure on the US which, in turn, persuaded Israel to accept UN mediation on the crisis.


1979 IRANIAN REVOLUTION


Months of turmoil in Iran led to the exile of the Shah and the declaration of an Islamic republic.

It also led to a reduction in oil production and, at one point, the flow of crude oil from Iran was almost halted. Nervousness about the stability of Iran brought together the other major Arab oil-producing states to ensure supply and increase prices.


1980 IRAN-IRAQ WAR

Iran weakened by the revolution was invaded by Iraq in September 1980. By November, the combined oil production of the two countries was only one million barrels a day, 6.5m fewer barrels than the year before.

It meant a worldwide reduction in crude oil production of 10%. The combination of the Iranian revolution and the Iran-Iraq war caused crude oil prices to more than double from $14 in 1978 to $35 in 1981.



1986 OIL PRICE CRASH

Higher oil prices led to a reduction in demand as consumers and industry looked at ways of becoming more energy-efficient.

The price rise also led to increased exploration for new sources of oil outside the traditional oil-producing regions.

Saudi Arabia suffered from the reduction in revenue, made worse by new Opec quotas which meant it had also been forced to reduce production.

It responded by increasing production in early 1986.

Crude oil prices plummeted below $10 per barrel - but the Saudi revenue remained about the same.

1990 GULF WAR

The Iraqi invasion of Kuwait, partly prompted by the low price of oil, led to uncertainty about production and prices spiked.

Iraq wanted to gain control of the world's third largest oil producer to give it more control over the world market.

Following the Gulf war to liberate Kuwait, crude oil prices entered a period of steady decline, reaching their lowest level in 1994 for 21 years.


1997 ASIAN FINANCIAL CRISIS

The rapid growth in Asian economies came to a halt leading to lower consumption of oil - just at a time when Opec had begun increasing production.

The combination sent prices plummeting, through to December 1998.


2001 9/11


Oil prices suffered a downturn as Russian oil production increased, and the US economy went into decline.

Opec tried to stem the reduction by cutting production - but the terror attacks on 11 September sent oil prices plummeting again.

Prices were down by about 35% by the middle of November. Opec delayed cutting production again until early 2002, when prices began to move upwards once more.



2003 IRAQ WAR

The American-led invasion of Iraq led to the loss of oil production in the Gulf state. In mid- 2002, there were over six million barrels per day of excess production capacity and by mid 2003, this had dropped to below two million.

It dropped still further in 2004-5. A million barrels per day is not enough spare capacity to cover for any sudden drop in production and it led to an increase in prices.


2006 LEBANON CONFLICT

After Israel launched attacks on Lebanon, oil prices reached a new high of $78 per barrel.

Although neither Israel nor Lebanon are oil producers, the conflict increased tension in the Middle East sending prices soaring.


2008 $100 BARREL

Geopolitical tension in Kenya, Algeria and Pakistan, as well as the threat of US sanctions against Iran have played their part.

At the same time, there are fears of a cold winter in the US and Europe, and increased demand from China and India as well as the US.

The falling US dollar has also driven up oil prices as they have to gain to compensate for a slide in the currency.


Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/7083015.stm

Published: 2008/01/02 18:39:19 GMT

© BBC MMVIII

March 19, 2008

Big Payday for Wall St. In Visa’s Public Offering

By ERIC DASH

In a boon for big banks and Wall Street, Visa, the credit card giant, went public Tuesday in the largest initial public offering in American history.

The company’s shares, priced at $44 each, will begin trading on Wednesday on the New York Stock Exchange under the ticker symbol V.

The $18 billion public offering was greeted with fanfare in the financial industry but was unlikely to unleash a new wave of initial stock sales given the turbulence in the markets.

Even so, the offering will generate a windfall for Visa’s thousands of member banks, which own the company. JPMorgan Chase is expected to reap about $1.25 billion, while Bank of America, National City, Citigroup, U.S. Bancorp and Wells Fargo are likely to receive several hundred million dollars each.

Wall Street firms, in the meantime, stand to collect upward of $500 million in underwriting fees from the sale.

“That is a good infusion of capital,” said John E. Fitzgibbon Jr., the founder of IPOScoop.com, a Web site that tracks the industry. “And it’s no secret that Wall Street is capital starved right now.”

Shares of Visa were priced above the expected range of $37 to $42. More than 406 million shares are being offered, with an option to add 40.6 million if there is demand. That means the size of sale could reach as much as $19.7 billion.

In going public, Visa is following in the footsteps of its smaller rival MasterCard, whose shares have risen more than 439 percent since its public offering in May 2006.

Many other companies, however, are struggling to sell stock given turmoil in the markets.

“There are just not the buyers out there in this environment,” said Scott Sweet, a partner at IPOBoutique, an industry research firm. “They are scared by the market volatility.” Just 10 companies went public during the first two months of 2008, according to Dealogic, a financial services research firm. That compares with 50 public offerings in the first three months of 2007.

Analysts say that the market has essentially been closed to companies outside the energy, natural resources and health care industries. Excluding Visa, roughly 190 deals, valued at a combined $37.7 billion, are still in the pipeline, according to IPO Scoop.com data.

Several high-profile initial public offerings have been scrapped or delayed in the last few months, including one for Kohlberg Kravis Roberts & Company, the big buyout firm. In all, about 77 percent of all public offerings have been withdrawn or postponed, according to bankers, including one this week by Pogo Jet, a jet charter service.

Many companies that have moved forward with sales have scaled back their offerings. CardioNet, a health care technology start-up which Citigroup is taking public on Wednesday, cut the number of shares it allocated in half and lowered the price after several big shareholders backed out of the offering.

Visa, however, is the biggest player in its industry and has a brand known to nearly everyone with a credit card. Wall Street also understands the company’s business.

Visa and MasterCard have prospered as Americans increasingly swipe their cards rather than use cash nearly everywhere. The companies have not been hurt by the credit squeeze, because they do not actually make credit card loans; they merely process transactions for banks that do.

Visa, whose offering is being led by JPMorgan and Goldman Sachs with 17 other banks contributing, has been contemplating such a move for more than two years. In that time, it has bolstered its management team and revamped the company.

Industry observers say investors are complaining that they are being given only a fraction of the shares they requested. “I hear that allocations are being given out with eyedroppers,” Mr. Fitzgibbon said.

Would you like a mortgage that lends you more than the value of your house?

Would you like it structured so that your first payments are extra low?

If the mortgage weren't structured that way, would you be unable to afford the payments?

Are you convinced that real estate prices will continue to rise?

Do you have a poor credit history?

Congratulations if you answered "Yes" to most or all of those questions! You're an ideal target for a subprime mortgage lender.

Of course, there is a downside amid all the fine print, as hundreds of thousands of American consumers are now finding out. Mortgage delinquencies and foreclosures are way up. Dozens of companies that lent money to anyone with a pulse have gone belly up. And suddenly, some economists are starting to worry that the whole mess could send the U.S. economy into recession.

How did this happen?

What makes a mortgage "subprime"?

The term "subprime" isn't well known in Canada because most of our mortgage lending is "prime," or conventional. In the U.S., however, rapidly rising house prices and a poorly regulated industry combined to create a mortgage monster that is now busy running amok.

"Subprime" refers to the risk associated with a borrower, not to the interest rate being charged on the mortgage. Typically subprime mortgages are offered at interest rates above prime, to customers with below-average credit ratings. Subprime mortgage lenders in the U.S. tend to target lower-income Americans, the elderly, new immigrants, people with a proven record of not paying their debts on time — just about anyone who would have trouble getting a mortgage from a conventional lender such as a major bank.

Their pitch is irresistible and it unfolds along lines like this: "You want to buy your first house? We'll make it happen! And don't worry about a down payment. In fact, we'll even lend you more than the house is worth. We'll even charge you a super low rate [the "teaser"] during the first year or two to keep your payments low. Sure, the loan will eventually reset at prevailing rates, but since housing prices are rising by 20 per cent a year, all you have to do is refinance your house to keep your payments low!"

Needless to say, the subprime bubble soon burst. After enjoying a short period at low fixed rates, people with subprime "bargains" suddenly found their loans were being reset at rates that were in the double-digits. U.S. housing prices, which had been soaring, started falling. People with subprime mortgages found they could no longer count on the increasing value of their homes to refinance their way out of the mess.

By late 2006, one subprime loan in eight was in default across the U.S. Foreclosures were soaring. More than 20 subprime lenders were bankrupt. And the National Community Reinvestment Coalition estimated that as many as 1.5 million Americans could lose their homes by the time all the damage is done.

Could it happen in Canada?

Subprime mortgages are available in Canada. But it's a different story up here. For one thing, the subprime market share is much smaller in Canada. About 20 per cent of all U.S. mortgages are of the subprime variety in 2007. That compares to just five per cent in Canada, according to industry figures.

All high-ratio mortgages in Canada — those with less than 20 per cent down — must be secured by mortgage insurance, through, for example, the Canada Mortgage and Housing Corporation. In addition, Canadian financial institutions do not finance more than 100 per cent of a home's purchase price, and that value must be verified with a separate appraisal.

Canadian mortgage lenders have been scrambling to assure the population that there are major differences between the subprime markets in the two countries. "We have not seen the aggressive lending practices common south of the border," said Paul Grewal, chair of the Canadian Association of Accredited Mortgage Professionals. The association says Canadian underwriting practices are "more prudent."

Outside analysis backs up that assertion. Benjamin Tal, an economist with CIBC World Markets, noted recently that "only 22 per cent of subprime borrowers in Canada use variable rate mortgages — half the rate seen in the U.S." Tal also says there is no evidence linking the use of subprime lending in Canada with the increase in house prices. In the U.S., there is a "very high correlation," he says.

"Our view is that the price appreciation in the U.S. housing market over the past two years was, in many ways, artificial — boosted by aggressive lending and irresponsible borrowing."

Overall mortgage arrears in Canada are at just 0.5 per cent, the industry says, near record lows.

That doesn't mean there's nothing to worry about in Canada. A drop in Canadian housing prices and increases in interest rates would pose problems for borrowers. But with Canadian real estate showing fewer of the warning signs, with fewer subprime mortgages in this country, tighter borrowing restrictions and fewer mortgages at floating interest rates, the risks do seem to be considerably lower.

But the U.S. subprime meltdown has recently shown signs of spreading to the wider U.S. economy and into Canada. General Motors cancelled a shift at a truck plant in Oshawa, throwing 1,200 out of work, because sales of pickup trucks have plunged in the U.S. Most of Oshawa's production goes south of the border.

Stock markets in Canada and the U.S. began moving lower in the summer of 2007 as investors reacted to signs that lenders were beginning to tighten credit, boosting fears of a slowdown. Many Canadian companies reported having millions in cash tied up in normally safe short-term debt products that suddenly became illiquid as no one wanted to buy investments perceived as being risky.

Central banks on both sides of the border are watching closely for further signs of subprime fallout in the months ahead, as interest rates in many more U.S. subprime mortgages reset at higher levels.