China View    By Yangtze Yan

    BEIJING, Oct. 24 (Xinhuanet) — Leaders of the ASEAN countries and China, Japan, South Korea (ASEAN+3) have reached agreement on an 80 billion U.S. dollar foreign-exchange reserve pool to be used as a countermeasure to defend currencies and backstop Asian economies amid the global financial crisis, a Japanese official said Friday.

    The operation details and the timeline of the crisis fund, however, is still under discussion, Japanese Foreign Ministry press secretary Kazuo Kodama said at a press briefing on the sidelines of the seventh Asia-Europe Meeting (ASEM).  

    The agreement essentially firms up an earlier commitment in May by ASEAN+3 leaders, superseding the Chiang Mai Initiative, which came into being in 2000 in the wake of the 1997/98 East Asian financial crisis to ease mainly bilateral currency swaps, according to Kodama.

    Meanwhile, the crisis fund will defend regional currencies and could see its mandate widened to cover domestic liquidity issues, ASEAN Secretary General Surin Pitsuwan was quoted as saying at the conclusion of the ASEAN+3 leaders meeting Friday. Pitsuwan also denied a specific timeline for the set-up of the fund by next June as revealed by news reports.  

    The East Asian countries began talks in 2006 on transforming the Chiang Mai Initiative into a more powerful and multilateral reserve pooling mechanism.

    In May they reached preliminary agreement to create a foreign exchange reserve pool of 80 billion dollars. The initial agreement called for China, Japan and South Korea to provide 80 percent or 64 billion dollars, with ASEAN members providing the remaining 16 billion.

    ASEAN groups Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

    The ASEAN+3 leaders met prior to the Asia-Europe Meeting (ASEM) summit held in Beijing Friday and Saturday.

China FX www.12buzz.com/fx now has oil Day Trading just as it already offers Gold and Silver Trading. However, unlike these commodities, oil has some peculiarities as it trades predominantly over the exchanges and there is not a liquid continuous spot market.

Trading in OIL

Oil trading at China FX is performed in the same way as Foreign Currencies Trading. It is OTC (Over the Counter) trading, which means that the transaction is performed directly between the two parties, involved - the buyer and the seller. There is no third party involved, like in an exchange market.

The acronym for oil is OIL. It is measured in barrels but as it is cash settled (non-delivery trading) the physical purchase or sale of the commodity is not actually performed.

China FX bases its contract on the US standard for OIL trading, namely the WTI (West Texas Intermediary). Also known as, Texas Light Sweet, WTI is a type of crude oil used as a benchmark in oil pricing and the underlying commodity of the New York Mercantile Exchange’s (NYMEX) oil futures contracts.

What does this mean to the China FX trader? The OIL trader will open, modify, and close deals on the China FX-Easy-Forex platform in the same way they do with a currency day trade.

Quote convention: OIL will be quoted with OIL as the base - Example OIL/USD = 118.00 USD per barrel Expiration date: Oil trading can only be renewed up to the close of business on the fourth US business day prior to the 25th calendar day of the month, proceeding the contract month. If the 25th day is a non-business day, trading shall cease on the fourth business day prior to the business day proceeding the 25th calendar day.

Trading hours: 01.30 London time until 22:30 London time. Outside these hours, no opening or closing of deals will be allowed. Go to trading hours to see the hours of trade for other currencies and commodities.

Availability: Oil trading is not available in USA and some other regions.

To find out more about OIL trading contact your Account Service Manager or Personal Dealer. www.12buzz.com/fx

CONTACT: Sutida Suwunnavid, Buzz Technologies, Inc Tel: +66 76 326 318 123 Tel: +66 76 326 318 129 e-mail: ir@12buzz.com WWW: http://www.12buzz.com

Vice President Noli de Castro assured the public yesterday that the local housing sector is in good shape despite the global financial crisis that was triggered by the foreclosure of mortgaged houses in the United States.

De Castro, chairman of the Housing and Urban Development Coordinating Council (HUDCC), said the growth of the real property sector in the Philippines is fueled by the favorable policy in the housing sector and the desire of Filipinos to own a house.

He said the housing sector would be able to weather the global financial storm arising from the US financial meltdown.

“The problems in the United States came about because of excessive leveraging on primary mortgages, which worked as long as real estate prices were going up. We do not have that in the Philippines. Our housing financial sector is anchored on strong fundamentals. The upside potential of the real estate industry is still there, because this is a long-term trend that goes beyond the present crisis of confidence in the global financial markets,” De Castro said.

“Among the policy factors in favor of the real estate industry are the substantial allocation of P30 billion by the Pag-ibig Fund in addition to the funds that are available through private banks, the improvements in the regulatory environment as a result of the collaboration between the government and private developer groups, and the guarantee provided by the government to housing loans through the Home Guaranty Corporation,” De Castro said.

Celebrating its 10th Anniversary, the Vacation Ownership Investment Conference held in Orlando, Florida, from October 6th-9th, presented a rather optimistic outlook of the future of the vacation ownership industry.

The beginning of October 2008 will long since be remembered as one of the worst periods of our nation’s economic history. The stock market plummeted to historical lows substantially decreasing the net worth of millions of individuals across the world. The positive effects of the $700-billion bailout plan were skeptical at best and it seemed that each day brought the bankruptcy of some well-known banking institution. Perhaps this was not the best period in which to hold an investment conference, or maybe, it was exactly the type of event needed to stimulate growth and optimism in developers and investors seeking to diversify their hospitality-driven projects.

HVS Shared Ownership Services, which specializes in consulting and valuation, and resort development services for vacation ownership, fractional developments, private residence clubs, and mixed-use developments, has been a patron sponsor of the Vacation Ownership Investment Conference since its inception 10 years ago. This article provides insights into the topics covered during the conference’s 10th anniversary, including an explanation of what the conference entails, an overview of the timeshare and fractional ownership industry, and historical industry performance and future outlooks. Given the variety of vacation ownership developments that are anchored or affiliated with a traditional hotel product, we have also included highlights on the state of the US lodging industry as provided by Smith Travel Research.

Vacation Ownership Investment Conference

As the credit crunch continues to eliminate many hospitality developments from their eventual execution, the necessity to diversify each development by utilizing a mixed-use model of varying products becomes a more viable option as compared to a singularly focused hotel development. The Vacation Ownership Investment Conference (referred to as VOIC), was designed to provide developers and potential investors with the necessary tools and networking opportunities to intelligently and effectively enter into the vacation ownership industry. The event brings together the essential entities for successful timeshare, fractional, and private residence club (PRC) developments including consulting, branding, designing, financing, marketing, sales, management, and an abundance of market research. VOIC also provides an opportunity to learn first-hand from some of the industry’s most prominent executives from companies and firms such as Interval International, Marriott Vacation Club International, PriceWaterhouseCoopers, Baker Hostetler, Smith Travel Research, and HVS; all of which share an association with the American Resort Development Association, the industry’s Washington D.C.-based professional association representing vacation ownership and resort development. Although recent economic news could have set the tone for a rather gloomy outlook on the future of the vacation ownership industry, the overall attitude of speakers and panelists was that of optimism and continued stability.

Timeshares

Timeshares (also referred to as vacation ownership), as broadly defined by David Callaghan of Interval International, essentially entails the sale of a vacation accommodation in increments of one week (or a points based equivalent) for the minimum use right of three years. Public perception of the timeshare industry has changed significantly over the last decade due to marketing shifts that placed emphasis on a more genuine sales approach versus the stereotypical experience of being pushed by aggressive sales associates. Lani Kane-Hanan, Vice President of Marriott Vacation Club International, explained that public perception has changed largely because of timeshare developments’ affiliations with internationally renowned hotel brands. These well-known and respected brands have helped gain consumer trust and have provided much needed credibility to the timeshare industry. In financial terms, total timeshare sales equated to $10.6-billion in 2007, an increase of 6.0% over the previous year1. According to Scott Berman of PriceWaterhouseCoopers, the weighted average interval price equated to $19,692 in 2007, which represents an increase of 42.3% over the 2003 weighted average of $13,840 and 6.4% over the previous year’s average of $17,347. Mr. Berman also stated that while total revenue has increased, so also have expenses. In 2007, product costs grew from 26.0% to 26.5%. Sales and marketing costs represent the most substantial expense in the sale of a timeshare interval and increased from 43.8% of total sales to 44.1% in 2007. Due to the vast inventory of timeshare intervals that each development must sell, a tremendous sales and marketing effort is required leading to these substantial, but necessary, costs. General and administrative expenses also increased to 7.4% of total sales revenue as compared to 7.1% in 2006.

Fractionals, Private Residence Clubs (PRC), and Destination Clubs

Fractionals and private residence clubs are sold in blocks of time in excess of two-week intervals and typically function as an alternative to a second home. According to The Shared-Ownership Resort Real Estate Industry in North America: 2008, Ragatz Associates assumes that product selling for less than $1,000 per square foot falls into the fractional interest category, and product selling for more than $1,000 per square foot falls into the private residence club category. The report also states that a destination club typically sells 30-year memberships on a non-equity basis in a wide network of vacation homes in multiple locations; however, some clubs are equity based. Fractional development tends to make sense in markets that experience a high volume of repeat guests and where whole-ownership condominiums are unaffordable. The benefit of purchasing a fractional versus a whole-ownership second home is that buyers only pay for the specific amount of time they intend to use. Furthermore, the maintenance and care of the unit may be executed by the development’s management company and funded by the homeowners’ association; thus, alleviating the stress and burden of ownership. In 2007, fractional sales worldwide totaled approximately $2.1-billion, with fractional interests representing $485.1-million or 21.1%, the greatest portion generated by private residence clubs at $1,202.3-million or 52.3%, and destination clubs constituting the remaining 26.6% or $610.0-million2. Jeff Yamaguchi, Vice President and GM of the Roco Ki Club, noted a few trends in the fractional market including shorter length-of-stay periods; increased demand for beach, ski, and golf resorts that include a fractional component, and the expectation that the quality of the fractional unit will be equal to or greater than the quality of the purchaser’s primary residence.

Historical and Future Outlook

The years 2006 and 2007 were viewed as great years in which tremendous revenue was gained and annual sales increased considerably over prior years. However, the general consensus from the conference is that for 2008 and 2009, the vacation ownership industry will experience just “good” years with sales revenue remaining flat, but not decreasing. Although the economic crisis has influenced many to cancel trips to traditional hotels and resorts, vacation ownership resorts continue to operate at high-demand levels given the prepaid nature of these developments. Marriott Vacation Club International reported an average occupancy of 88% to 90% for its timeshare resorts and stated that they continue to be very profitable even after the timeshare inventory is sold due to the ancillary services utilized by owners such as spa facilities, food and beverage outlets, and recreational amenities. A great deal of the conference focused on several hot markets outside the United States, including Mexico, Latin America, and the Caribbean. Since much of the demand to these destinations is sourced from the United States, many were curious as to how these markets have been affected given the current state of the US economy. Representatives from various Caribbean developments reported a decrease in sales revenue of approximately 20% for year-to-date 2008; however, they did not view this as a reason to panic. As stated previously, recent years have exhibited exceptional sales revenue and volume, but a decrease in sales is natural and expected during economic hardships. Latin American markets such as Mexico, Costa Rica, and Panama are experiencing tremendous development growth. Several developers in these markets reported the necessity of diversifying their projects based on changing market demands by offering products ranging from vacation ownership to whole ownership.

State of the US Lodging Industry

The United States lodging industry (not including vacation ownership resorts); as reported by Jan Freitag, Vice President of Smith Travel Research, experienced an increase in hotel rooms supply by 2.4% for year-to-date August 2008, while demand decreased by 0.3% as compared to the previous year. As a result, the national occupancy rate dropped by 2.6% to 63.2%. The average daily rate (ADR) increased by 3.8% to $107, displaying continued growth in excess of the CPI. However, Mr. Freitag stated that looking forward to next year, demand may continue to be flat, but emphasized that this projection is highly optimistic. He also stated that ADR growth in 2009 will most likely be less than the growth experienced this year and has been projected at 3.5%.

Thoughts from Industry Leaders

Now to the question on everyone’s mind, “What is the general outlook for the vacation ownership industry in the near future?” This question was presented to several industry leaders, including Craig Nash, CEO of Interval Leisure Group; Ken Chupinsky, CFO of Consolidated Resorts; and Steve Rushmore, President of HVS. Mr. Chupinsky explained, “We’ve been so used to being superb (referring to past sales volume in the vacation ownership industry), that we’re not comfortable with just being good.” But good is much better than many industries are currently operating in today’s economy. Mr. Rushmore stated that he feels very positive about the hospitality industry’s future and that economic crises have been experienced in the past and the industry has been able to overcome them, due to its ability to find a balance between supply and demand. He further stated that much of the new supply of hospitality-driven projects will be canceled or postponed and that the industry will eventually come back with a “vengeance.” Mr. Nash provided a bit of optimistic council for those struggling to endure through recent economic changes, “Don’t be overly aggressive; stay conservative and just keep going.” Mr. Nash’s Interval Leisure Group is a leisure and membership-based business with recurring revenues and has a successful track record of strong results through various economic cycles.

HVS Shared Ownership Services would like to invite all those interested in learning more about the vacation ownership industry to attend the 2009 ARDA Convention and Exposition in Orlando, Florida, from March 29th through April 2nd, and the 11th Annual Vacation Ownership Investment Conference, which will be held from the 14th-16th of September 2009 in Orlando, Florida. For a complete listing of the services available by HVS Shared Ownership Services, please visit our webpage at www.hvs.com/services/sharedownershipservices/ or call us directly at (305) 378-0404.

1. ARDA International Foundation
2. The Shared-Ownership Resort Real Estate Industry in North America: 2008 – Ragatz Associates

October 18, 2008

 Redroadmaster Analyst/Commentator/Editor

Dear Reader,

A few weeks ago there was a really big story in the world news that got mini story coverage in the US media, though was major news in the rest of the world.

At the time I mentioned it to a colleague, told him the essence and the importance of the event and filed it for the subject of a Red Roadmaster Special Report. Finally this week I read an article by a financial editor that I read regularly and join the commentary. I trust it will continue and gain some momentum as it is important in the extreme.

Did you know that a few weeks ago Iraq signed its first Crude Oil deal in 35 years with a foreign oil company, and that foreign Crude Oil company was not a US or EU giant.

Bagdad reported that a 22 yr old deal (in suspension) between Iraq and CNPC (China National Petroleum Company) was renegotiated. The original deal included production sharing rights, the new deal pays China for it oil exploration and production services but there is no profit sharing.

The New York Times reported that all payment will be made in cash and that there will be no in kind payments in Crude Oil

The deal on its face looks like a global Crude Oil services contract; it is actually a significant development in the China’s quest for long term energy supplies. China is an expert player in this kind of business.

Some of the facts:

1)     With estimated Crude Oil reserves of 115B bbls, Iraq is tied with Iran for the world’s #2. position, behind Saudi Arabia, which has estimated reserves of 264B bbls,

2)     There is short supply in infrastructure in Iraq, as it has been ravaged by war, and there is a huge electric power plant in the planning mill, the Crude Oil produced from the Ahdab Oil Field is set to help fuel that utility.

3)     China by helping Iraq with this important undertaking can expect to gain a foothold in one of the world’s Crude Oil rich nations in the world, and you thought the war was started to export Democracy…

4)     The deal between Iraq and China highlights something that most folks have not focused on, that being that the winners in this Iraq Crude Oil resources game will not be the giants: Chevron Corp., ExxonMobil Corp., Royal Dutch Shell Oil, PLC, or other Big Sisters.

5)     This Iraq/China deal suggests Iraq will treat its natural Crude Oil reserves as a national treasure and that the real winners in Iraq will be Arabic or Chinese, and not the US or it major multi-nationals.

Anybody that has ever worked in China knows that they are shrewd and long term players, and this is not exception.

One analyst that I follow tells it this way, “understand now is that Crude Oil ownership is an illusion. It does not guarantee price, or profit. What really matters in the end is having secure supply lines and sources from the Middle East.”

CNPC has contracted with Iraq to provide technical advisors, oil workers and equipment to help develop the Ahdab Oil Field southeast of Baghdad. And while China will not participate in the profits from the Crude Oil it helps pump, it has focused on the long-term benefits.

“There are some political profits for China,” Ibrahim Bahr al-Ulum, a former Iraqi oil minister, told The Times. “They need access to Iraq, and when they need Crude Oil, at least the Iraqi people will feel that China has done something for them.” You should know that this is China’s natural resource development world wide. It is different from the West’s in that China is not colonizing the resource rich countries of Africa and South America; it is developing the infrastructure and working to make life better for the people so that they will have deep friendly relations and not enemies in those places.

Before 2003, Iraq had Crude Oil agreements with China, Russia, Indonesia, India and Vietnam, three included production sharing agreements, but with the big spike in Crude Oil prices, plus other changes prompted the new Iraq government to reconsider the terms of all of those deals.

It is believed that Iraq continues to negotiate other service contracts with ExxonMobil, Royal Dutch Shell PLC, Chevron, and some smaller Crude Oil companies. The word is that the deals have been reduced from two years to one year after Iraq gov took heat for not putting the contracts out to competitive bidding.

It is interesting to note that the China contract was the first major one to be completed and the announced reason was its wide experience in the Crude Oil services field, plus many foreign Crude Oil companies were not willing to come to Iraq because of the continuing hostilities there.

China is a savvy international player in the Crude Oil game.

Ironically, it was the United States’ folly that crystallized this situation. When the US invaded Iraq we dealt China’s central planning commission a setback by wiping out China’s Crude Oil interests in Iraq.

China believes that there will not be enough Crude Oil to go around in the very near future and that a U.S. dominated supply chain could choke China’s growth.

So China has done what the US and other great powers have done, and gone on a buying spree in Africa and South America, this activity is causing a lot of concern in the West.

The West’s leaders do not understand that China is not intimidated of the West and it is equally not afraid to do business with the so called rogue nations like Iran, Sudan and Myanmar, it has developed very good relations with Venezuela and Russia, this is causing lots of teeth gnashing in the Bush administration, it is a situation that has put our Secretary of State is in Irons.

It seems clear that China will maintain this policy now and in he future as it knows that it cannot depend on the status quo worldwide, because what matters to China is this, anyone who provides Crude Oil to them will get their brand of aid, no matter what the rest of the world thinks. China’s interest is China period.

The Iraq/China deal is telling the world’s leaders that China will go to extraordinary lengths to obtain the Crude Oil it requires to grow its economy.

China now has a lot of Crude Oil suppliers, why, because China will pay more money, endure limitless criticism for ignoring human-rights issues and endure harsher business conditions than the Western companies can or will undertake.

While Western firms must worry about sanctions, bad publicity or simply security, China worries only about access to Crude Oil. They learned this lesson from the US, and refined it, as we got fat, lame and lazy.

Stay tuned…Red

www.bangkokpost.com

Brought to you by Khao Khad Villa’s Phuket www.khaokhad.com

Thailand’s property market is well insulated from the global financial crisis as it is far less dependent on debt than most property markets, said real estate firm CB Richard Ellis Thailand.

Chairman David Simister, as a longstanding player in Thai real estate and resort property, said Thai politics had been troubled for over three years so real estate investors have been cautious.

Purchases have been made for use or investment rather than short-term speculation, he said. Also, outside Phuket and Koh Samui, the bedrock of commercial success has been sales to Thai nationals.

“In my opinion, Thai market caution has resulted in the following: muted demand; a low level of speculation, despite rising prices; low borrowings to value; and possibly as low as 50% debt to current valuations, with buyers acting well within their financial capacity,” he said.

Unlike in most western markets, Thai property is not propelled by the availability of debt finance. Nor are maximum mortgages the norm. Thai banks also have a strict approval policy, he said.

He added that the Thai banking industry learned a very hard lesson in 1997 and - both in project financing and domestic mortgages - prudence has since been the order of the day.

Unlike many foreign counterparts, Thai banks have stayed away from structured finance and concentrated on unadventurous domestic business, with property loans rarely reaching 70% of the banks’ own valuations, he said.

Mr Simister added that foreign buying has been 100% in cash, as purchasing a condominium under the foreign quota requires buyers to show they have brought in funds from abroad covering the full purchase price.

“Thai real estate developed in the last five years has been a cash-driven market,” he said.

Though optimistic, Mr Simister said his company had seen fewer launches and a lack of products for sale in some areas of Bangkok and Phuket.

“We expect this situation to continue for another 18 months,” he said. “More importantly, with the bulk of products under construction having sold well, we see no chance of a market crash.”

He said committed buyers continue to make serious property searches at its Phuket and Koh Samui offices but are finding almost no new high-end products.

“Given the lack of good oceanfront sites, we are bullish on the limited volume of developments that are proceeding,” said Mr Simister. “Thai property has proved to be resilient to numerous external problems and I am convinced that it will prove to be, for tomorrow’s buyers, an excellent medium-term investment.”

HONG KONG: Regulators in two of the biggest Asian financial centers stepped up their efforts Tuesday to ensure liquidity and insulate their respective banking systems from the turmoil in global credit markets.

The Hong Kong Monetary Authority said it would provide government backing for all of the $773 billion in Hong Kong bank deposits through 2010 as government assistance for banks in Europe and the United States put pressure on Asian regulators to follow suit even though Asian banks tended to be better capitalized. The authority also said that it was prepared to provide capital to the 23 locally incorporated banks if they needed it, following the examples of the United States and Britain.

The Bank of Japan, meanwhile, said it would increase the size and frequency of its commercial paper repurchase operations and take other steps to improve money market operations in the wake of the recent global financial market turmoil, Reuters reported.

The bank also said it would broaden the range of asset-backed commercial paper eligible for its market operations as a temporary measure until the end of April 2009, Reuters said. After an extraordinary policy-setting meeting, the central bank said it would keep the overnight call rate target, its benchmark interest rate, unchanged at 0.5 percent.

The Japanese central bank also said it would offer unlimited short-term dollar credits to banks in an effort to relieve stress on the global financial system. The Bank of Japan had previously offered up to $120 billion in credit.

Hong Kong banks are already among the most heavily capitalized in the world, and Joseph Yam, the chief executive of the monetary authority, said at a news conference that he did not think either of the new measures would be needed. The average capital as a share of assets for banks incorporated in Hong Kong is 14 percent, well above the international minimum of 8 percent.

“Our banking system is healthy and robust - however, we must make preparations for a rainy day,” said John Tsang, the financial secretary of Hong Kong.

Hong Kong was the scene of a bank run on Sept. 24 and 25, when depositors lined up to pull money out of Bank of East Asia, one of the largest banks in the city. The bank had enough cash to meet the withdrawals and survived the bank run after regulators assured the public that the bank had ample capital and after Li Ka-shing, the wealthy Hong Kong businessman, made it known that he was buying shares in the bank.

The authorities are investigating the source of mobile phone text messages that set off the bank run. Under previous rules, Hong Kong insured up to 100,000 Hong Kong dollars, or $12,900, in a bank account.

Raymond Li, the chief executive of the Hong Kong Deposit Protection Board, said at the news conference that he did not have figures available on the proportion of deposits in Hong Kong that belonged to individuals and companies from elsewhere.

Li Kui-wai, director of the Asian economic policy center at the City University of Hong Kong, said the city’s history of attracting deposits from all over the world meant that the policy initiatives could prove costly.

“If the one million richest people in the world put their money in a Hong Kong bank,” he said, “and the bank goes broke, can we - the Hong Kong government, the Hong Kong taxpayer - afford to bail out” that bank?

Hong Kong’s action could put pressure on other international financial centers with very large deposits and limited populations that have not yet issued blanket guarantees of bank deposits, like Switzerland, which has roughly the same population as Hong Kong, about seven million people.

Hong Kong will back up its deposit guarantee with its $161 billion foreign exchange reserves. In Asia, the governments of Australia and New Zealand on Sunday guaranteed all bank deposits. Taiwan did so on Oct. 7.

Britain returned Hong Kong to Chinese rule in 1997, but Hong Kong retains a largely free-market economy and a completely separate banking system and currency from mainland China. The Chinese government still owns all or most of the shares of big mainland banks, and has seen little effect on these institutions from global financial troubles because the mainland Chinese financial system is still shielded from international markets by many barriers.

By contrast, Hong Kong’s system is very open, including full convertibility into other currencies for the Hong Kong dollar, which has its value closely pegged to the U.S. dollar.

Central banks in Asia do not have a tradition of cooperating on policy initiatives as closely as the European Central Bank cooperates with the Bank of England and the U.S. Federal Reserve. Yam said that he had discussed the initiatives with the People’s Bank of China before announcing them and said without elaborating that there was ample communication among Asian central banks.

But he noted that without a common currency comparable to the euro, Asian countries would inherently face greater challenges to cooperation than European countries.

October 14, 2008

Paul A. Ebeling, Jr. Analyst/Commentator/Editor

Dear Reader,

Today the DJIA had the biggest pointgainer in 112 yrs and the fifth largest percentage gainer in its storied history after several weeks of forced and panic selling.

Many of you have e mailed me letting me know that you are tracking the DJIA as never before, and have asked to give a brief overview of the Dow Jones Industrial Average, what it is made of, what it indicates, etc. It is clear that many folks do not know the basics, so here you go, as follows;

The DJIA index is made of 30 of the biggest U.S. companies and is set up as a calculated measure of stock market performance. Today it is the world’s most famous and watched stock market index.

The Dow, as it has come to be known (there is also Dow Transports, Dow Utilities and Dow Theory), is the oldest continuing U.S. market index; it measures the combined stock values of 30 Big U.S. companies known as the “Blue Chips.” 

We do not find any Transports or Utilities in the Dow Industrials, but it is interesting to note that in 1999 the industrial’s only tradition was broken when Intel (INTC) and Microsoft (MSFT) were added. This marked the first time that a NASDAQ (non-NYSE) traded stock became a member of the DJIA.

Started on May 26, 1896 by financial reporter Charles Dow, at its inception It started with 12 companies, including now-defunct companies like U.S. Leather Co. and Tennessee Coal, Iron and Railroad Co and and was priced at $40.94  It is interesting to note that the only original component still around is General Electric Company (GE).

Today the Dow Industrials has expanded to 30 components and reflects the U.S. economy’s move from big industrial companies to  include big financial companies like Citigroup Inc., technology bellwether IBM Corp. and drug manufacturer Pfizer Inc. (Financials, Technology and Drugs: healthcare).

The Dow Industrial index today is made up of these big US companies: 3M, Alcoa, American Express, AT&T, Bank of America, Boeing, Caterpillar, Chevron, Citigroup, Coca-Cola, DuPont, ExxonMobil, General Electric, General Motors, Hewlett-Packard, Home Depot, Intel, IBM, Johnson & Johnson, JPMorgan Chase, Kraft Foods, McDonald’s, Merck, Microsoft, Pfizer, Procter & Gamble, United Technologies, Verizon Communications, Wal-Mart and Walt Disney.

In the beginning the DJIA was simple: Charles Dow, when he complied the index back in 1896, originally took the price of one share of each company’s stock, added the numbers up and divided by the number of companies.

Thus the average when the index launched was $40.94: these pale compared to today’s 1000 pt surge to close at 9,387.61, or its record closing high of 14,165.43 on Oct. 9, 2007 just a year ago.

The way the DJIA is calculated today by the Dow Jones & Co. is by a mathematical formula to adjust for things like stock splits, i.e., when a company doubles the number of stocks its shareholders have, splitting the price of each in half, or new companies being added or removed.

The formula is a way to keep the index consistent over time and to make sure today’s value can be compared in a meaningful way to what it was in years past.

This is done mathematically by changing the “divisor”, a number that is divided into the total of the 30 stock prices. That divisor today is 0.122820114.

Next, the index utilized what is termed a “price-weighted average,” meaning expensive stocks have more weight (influence) over the number than lower-priced issues. This is done because the index is based purely on the US Dollar value of the stocks in the index, i.e., a high-priced share goes up/down (move) 20% is a larger dollar increase than a cheaper share’s 20% move.

For example: when we note the drop in the price of General Motors last week, we also know that it did not have a huge effect on the Dow because the automaker’s stock is already low. The stock fell $2.15, or 31 percent, on Thursday but only lowered the Dow by 17.1 points. Therefore, GM’s drag was small on day when the index plunged 679 points.

Some of you have asked me if the DJIA is a good measure of how the US companies are doing in the market, overall.

The answer is that some folks on Wall Street downplay the importance of the average because it is not as broad a measure as the Standard & Poor’s 500 index, which measures the performance of 500 NYSE companies stocks.

But once again, the Dow is the patriarch of all U.S. market indexes, and it presents an simplified snapshot of how the market is performing up or down.

Most analysts that I know believe it is a very good tool when combined with the other market indicators, including the S&P 500 and the NAS composite, an index of shares on the tech-heavy NASDAQ stock market. You will often see these indexes go up and down together percentage wise as you saw today.

UK banks reportedly may unveil capital raising plans Monday

SAN FRANCISCO (MarketWatch) — Some of the largest U.K. banks hope to unveil plans to raise billions of pounds in new capital on Monday as part of government efforts to stabilize the country’s financial system, the Wall Street Journal reported on Saturday. Royal Bank of Scotland Group (RBS: RBS 1.45, -0.04, -2.7%) , Barclays PLC (UK:BARC: UK:BARC 207.50, -34.25, -14.2%) , HBOS PLC (UK:HBOS: UK:HBOS 124.20, -29.30, -19.1%) , and Lloyds TSB Group PLC (UK:LLOY: UK:LLOY 189.40, -22.35, -10.5%) began working faster on these plans after Britain’s stock market plunged further on Friday. At least some of those banks have set Monday for announcing how the capital will be raised, although that deadline could change, the newspaper said. The U.K. government is requiring the banks to raise a total of roughly 25 billion pounds in new capital. The companies can get the money from the government or from private investors, such as shareholders or sovereign wealth funds, the WSJ explained

 Last: 1.45-0.04-2.68%
4:02pm 10/10/2008
Delayed quote data

Add to portfolio
Analyst
Create alert

Insider
Discuss
Financials

 Last: 207.50-34.25-14.17%
4:35pm 10/10/2008
Delayed quote data

Add to portfolio
Analyst
Create alert

Insider
Discuss
Financials

 Last: 124.20-29.30-19.09%
4:35pm 10/10/2008
Delayed quote data

Add to portfolio
Analyst
Create alert

Insider
Discuss
Financials

 Last: 189.40-22.35-10.55%
4:35pm 10/10/2008
Delayed quote data

Add to portfolio
Analyst
Create alert

Insider
Discuss
Financials