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

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 1

Financial crisis – a review 2

The Bear - WSJ March 3, 2009 3

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%) 4

Dow 30 Component Stocks 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% 5 Dow Jones Industrial Average 11,421.99 10,917.51 -504.48 -4.42%

Three months – Merrill Lynch -- freefall for financial stocks 6

3 months -- AIG 7

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) 8

Sub-Prime Mortgage Crisis • Excess liquidity on the loan market led to housing bubble • Subprime mortgage crisis caused difficulty among mortgage banks • Credit contraction 9

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 10

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. 11

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 12

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. 13

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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. 15

Looking for Bargains: (Wall Street Journal November 1, 2008) 16

The market has been in a long bull run (S&P 500) (about 34% - second greatest since World War II) 17

Dow 30 18

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 19

May see increasing volatilities 20

History of declines 21

Mid-term election- ”Uncertainty” (source: CFRA) 22

Recession? 23

EPS 24

P/E ratio of S&P 500 index 25

Time to invest in international market? 26

About forecast • John Kenneth Galbraith once said: “the only function of economic forecasting is to make astrology look respectable ” 27