Seven things to remember in bear run

The year 2008 has been unkind to investors so far. Many have suffered huge losses. Who knows, there could be more pain ahead. It’s worth reminding ourselves of basic lessons that every retail investor ought to keep in mind to avoid, or at least minimise, losses in one’s portfolio.

1. High rewards don’t come without taking high risk.

During a bull market, retail investors get taken in by the rise in the stock market. They don’t want to be left out. So, they rush in and buy in an indiscriminate way, without realising that they might be taking on too much risk. Remember, if you chase high returns, high risk will follow you. Let’s take the example of publicly-listed real estate sector in India. The industry has a very favourable long-term future. However, the rapid rise in the sector’s stock prices over the past year made a short-term investment in these stocks a risky bet. As it turns out, the risks have been borne out and this sector has collapsed spectacularly. Understand your own risk profile and how you emotionally deal with volatility in stock prices.

2. Understand what you own — don’t always rely on the latest tip or prediction.

If you knew the secret location to some buried treasure, would you share it with others around you? If someone really has a hot tip on an investment that is going to earn high returns, always ask why they are sharing it with you. In today’s wired world, it is possible even for retail investors to understand, even if in basic ways, what is it that you are about to invest in — what does the company do, who its customers are, is the company profitable and so on. You must form your own view about the company’s prospects. Stay away from fast risers. The more you understand investments that you have made, the more confident you will become.

3. Leverage is a double-edged sword that can destroy you in falling markets.

The recent collapse of various hedge funds and banks has shown that living on borrowed money can be dangerous. During good times, leverage can amplify your returns. But in rough times, it can kill you. Currently, even the world’s best risk managers on Wall Street are having a tough time dealing with their leveraged exposure to markets. Be careful about making investments using leverage. Remember, nobody is going to flash an emergency light announcing the arrival of the next crisis.

4. Keep some of your powder dry — you don’t always need to be fully invested.

This is where the professionals really distinguish themselves from amateur retail investors, because they keep some cash available to take advantage of falling prices. Professionals think of a correction in stock prices as a sale in stocks. But to benefit from these sales, they keep some cash ready. They don’t feel the need to be fully invested all the time. If you use up all your cash to make your investments, you will never be able to take advantage of the cut price sales that will happen in times of severe correction like now. Corrections occur periodically — be prepared to take advantage of these situations.

5. Build portfolio on a strong foundation.

Just like you cannot build a house on a weak foundation, your stock portfolio also needs to be built on the back of strong companies and predictable stability. The more junk you have and poor quality stocks you own, the quicker your portfolio will also collapse during a correction. Weak companies with unfavourable long-term business prospects, weak balance sheets and poor operating performance might look tempting as they promise short-term growth. They may go up faster than the market in a bull phase, but come racing down at the slightest evidence of any stock market trouble.Build your portfolio on the back of stable, blue-chip companies that have long track records of success across economic conditions.

6. Keep a wishlist of companies.

Smart investors keep a wishlist of companies whose shares they want to buy when the opportunity and price are right. Corrections will give you the opportunity to pick through names. But, like we said in point 4 above, you need to have some dry powder to be able to add your wishlist to your portfolio. Warren Buffett has been known to keep his eye on his wishlist companies for decades before he finally finds a good entry point for an investment.

7. Invest for the long-term.

Serious investors put money to work for the long-term. They don’t get distracted by seasonal or cyclical fads, or get caught up in short-term performance. Don’t day trade, and especially not on margin. For every day trader who wins, there is another trader on the other side of the trade who has lost. In this speculative game, its likely that you will on average have as many bad days as good days. If you invest for the long-term, you will be less affected by all the noise in the market that will clutter your thinking and cause you to make impulsive and short-sighted decisions. You will also avoid the tax liability associated with short-term trading that can add more complexity to your finances.

It is never too late for serious investors who want to build long-term wealth to learn and apply the above lessons. With a little bit of discipline, your portfolio too can survive any stock market correction and achieve excellent long-term performance.

'US realty slump to turn attention towards India'

MUMBAI: Cushman & Wakefield, one of the world’s largest property consultancy firms, said the real estate downturn in the US could continue and that India, China and the Middle-East will become even more attractive as these markets offer huge opportunities for investment.

The US-based property consultant also said that more financial institutions in the US and Europe are likely to face financial problems in the coming weeks.

In an interview with ET, John C Cushman III, chairman of the board, Cushman & Wakefield said, “More bad news could come. We are facing new challenges everyday. Though there is a debate on whether this is a recession or not, in the coming months more bad things are waiting to happen.”

He said, as a consequence, global attention will be on the real estate market in India and China as these markets are offering huge investment opportunities.

“India, with a GDP growth rate of 8% compared to less than 4% GDP growth in the US, is a more promising market in the world,” he said. “We have three major nodes from where our revenue originates. They are the Greater New York region, Greater Los Angles and Asia. Within Asia, India has had a compounded annual growth rate (CAGR) of 37%,” Mr Cushman, whose family founded the firm, said.

Cushman & Wakefield is majority owned by the Agnelli family, the owners of Fiat. Mr Cushman said the firm was keen to carry out “transformative acquisitions” in India, but declined to provide details.

Mr Cushman said the US crisis could spill over to other European countries and London will be an immediate victim as the city has emerged as the capital of financial services during the past years.

“I feel the US financial turmoil will have an impact on European countries and London will be under enormous pressure as it is the world capital of financial services,” he said. According to him, countries like Poland, Bulgaria, Ukraine, Canada and Czech Republic presented op-portunities. However, political risk in some of the former Soviet Republics were higher.

The global head of the real estate consultancy firm said that India is a very important market for the firm and it would operate in all the real estate segment in the country.

“We want to extend our operations in India through both organic and inorganic routes. We are focused in the hospitality and retail segments, sectors which are offering expo-nential growth, and we want to enter into segments like house mortgage,” Mr Cushman said.

Trust history, the bear sway may be over

With Indian equities in an absolute free fall and virtually everyone, from the Armani-clad expert on TV to the paan-chewing neighborhood broker prophesying an impending apocalypse, things couldn’t have looked bleaker for the small retailer investor. With virtually all doomsayers predicting a four-digit Sensex in the near future, the capitulation is clearly visible.

But considering that the majority has always been proven wrong in financial markets, may be it’s the apt time to load up your portfolio, what with valuations of even the bluest of the blue chips of India Inc at mouth-watering levels. But it is not just some chest-thumping last-ditch attempt at motivating the bleeding bulls but some raw data and technical facts that point towards the possibility that the worse may be over for the Indian equity market.

Less than two years back, in the summer of 2006, the situation was exactly the same. After closing at a then all time high of 3,754 on the May 10, the Nifty went for a bungee jump losing 29% before finally bottoming out at 2,633 on June 14.

This loss of 1,121 points was a 78% retracement of the rally that had started on October 28, 2005 at a level of 2,316 on the Nifty. In technical analysis, the 78.6% retracement is seen as a significant support level and the fact that it was not violated augured well for the Nifty. The result? All doomsayers were thrown out of the window as the Nifty went on to make a new lifetime high within the same calendar year, gaining more than 50% from its lows.

What is significant though is the precise similarity that the current crisis has with the correction of May-June 2006. After hitting a new all time high of 6,357 on January 8, the Nifty is witnessing a savage correction losing 29% by close on March 17, which is exactly the same that it lost before bottoming out during the correction of 2006.

But the point that is of more importance is that this loss of 1854 points is an exact 78.6% retracement of the rally that had started from the lows of August 17, 2007 at a level of 4,002 on the Nifty. And so, if the closing levels of March 17 are not violated, we may be headed for the mother of all bull runs.

So, if you believe in history, this may be once in a lifetime opportunity to buy Indian stocks as the Nifty may just have bottomed out on Monday. Moreover, with things looking slightly brighter in the US, over-exuberant Dalal Street’s bears may soon be in tears.

Margin-hit HNIs unwind long positions

MUMBAI: It is a vicious circle, but could take a while before the market manages to break free of it. As stock prices continue their slide, jittery traders are unwinding their long positions, in turn driving prices further down. Large traders are having trouble meeting their mark-to-market obligations, as the value of their shares pledged as collateral with brokers continues to shrink. With the market yet to show any signs of stabilising, these traders are liquidating their positions rather than holding on by replenishing the margins.

Many high net worth individuals (HNIs) had built fresh positions using the current holdings in their portfolio, as margin. Brokers provide funds to these HNIs against the stocks pledged as collateral. If a client is holding any stock which is part of the eligible securities available for funding, he can use his current holding to take further exposure to new stocks.

For example, if a client holds Reliance Industries stock worth Rs 50 lakh, his broker would allow him to take fresh positions of up to Rs 25 lakh in another stock. Of course, the client will be charged interest on this money. If the value of the pledged shares fall, the client will have to make up for that difference either by way of pledging more shares or through cash. This arrangement is dependant on the creditworthiness of the client and his relationship with the broker. Market participants aver of late, many brokers have stopped funding clients.

“The fall since January has been unprecedented in the history of the market, and most HNIs have seen a severe erosion in their portfolios,” says India Infoline VP-HNI Desk Ketan Malkan. “As a result, their ability to hold on to positions for a longer duration has been dented,” he added.

There is a perception that many clients who had earlier been waiting for recovery and paying their mark to market margins, have resorted to selling. This is however client specific. “If the client thinks that his positions pose higher risks, he would prefer to sell, rather than meeting daily obligations,” says a broker.

Bajaj Capital CEO and director Anil Chopra says that the impact of this kind of selling by HNIs has a spiralling effect on the markets. “We are witnessing this kind of selling even by institutional players where they had to sell off or reduce their exposure to Indian equity markets due to problems on their home turf. Similarly, in order to meet their obligations, HNIs are also selling if the position requires additional margins. This is largely in case of those HNIs that had earlier leveraged to make a quick buck.”

Mr Chopra is of the view that HNIs with a long-term view should not sell at these levels, if they do not have genuine requirement of funds. The markets have already fallen substantially and at these levels there seems to be more upside than downside.

GM eyes Indian market with global products

David Nick Reilly is no 2 in the largest car company in the world. He is the also the president for the Asia Pacific region from July 2006 and also heads the GM Daewoo Auto and Technology Company (GMDAT). Speaking to Automania Mr Reilly outlines the broad contours of India plans and the aggressive strategy to garner a 10% market share in the domestic market by 2010.

How is GM planning to carve a niche for itself in the rapidly growing Indian market?

We are in the middle of spending $350 million in expanding the Indian operations. A similar amount will also be spend on new product launches and 2-3 new vehicles should be introduced in the next 3 to 4 years.

We are making significant investment to make India our major manufacturing base with an eye on exports, after we gain sufficient sales in the domestic market.

What kind of volumes is GM India expecting from operations in India?

We have set an internal target of 10% market share from India by 2010. We have been making sufficient progress and currently have 3% market share in India and 7% in the Asia Pacific region. New launches and product will reinforce our market position and already we are one of the fastest growing car company in India.

What new brand and products are likely to hit the Indian market?

We plan to launch our off roader, Hummer H3 this year, which will be followed by the debut of its luxury Cadillac CTS sedan next year. The vehicle (Hummer H3) is currently undergoing homologation (technical testing) to meet Indian driving conditions. We are also looking at enhancing the presence in the small car segment by and will launch another compact car to complement its existing range of Chevrolet Spark and UV-A in next two years.

Besides these car, what else is coming from the GMC stable to India?

India will be a major market in our global plans. There are unapproved plans to bring 3-4 new products. Of these, one possibly a small car will be premiered here in India in the next two years with a significantly lower price point than our current cheapest model, Chevrolet Spark, which comes at a price of Rs 2.8 lakh (ex-showroom Delhi).

What are the plans on export from India?

We are planning to make India export hub for small cars. Our locally manufactured smaller and mid-size cars will be exported to other emerging markets. There is a significant potential, but this will happen only after we improve upon our domestic market share from the current 3% to 10% by 2010. We are also looking at developing a reliable supply base to increase localisation to 90% from the current 40% to gain cost competitive advantage in India.

What are the plans on low-cost vehicles?

We are looking at introducing low-cost pick-up trucks and mini vans from its Chinese operations which are manufactured with Wooling Motors. We are conducting a feasibility study to assemble these low-cost vehicles in India. We will assemble them in India only if the right price could be offered to customers here. We are not looking at any Tata Nano type vehicle, but will surely like to tap the low-cost vehicles market in India.

Investors can short-sell from April 21

MUMBAI: All classes of investors, retail as well as institutional players like FIIs and mutual funds, will be allowed to short-sell shares in the spot market from April 21.

Short-selling refers to the practice of selling a stock which the seller does not own at the time of trade with the hope of buying it back at a lower price.

At present, individual traders’ short-sell shares during the day and square off their positions before the closing bell. However, institutions are not allowed to indulge in such intra-day speculations.

Now, SEBI is putting in place a mechanism where the short-seller can borrow the shares to meet the delivery commitment. Just as an investor borrows money to buy shares, it will now be possible to borrow shares to sell. Under this, all categories of investors can now lend the stocks they own and borrow the ones they don’t.

However, while allowing the long-awaited measure, a circular issued by the capital market regulator SEBI on Wednesday said that “naked short-selling will not be permitted and all investors will be mandatorily required to honour their obligation of delivering the securities at the time of settlement.”

Significantly, this would mean that day traders would no longer be in a position to sell and then buy back during the day. The new guideline will not only force these active investors to change the way they play the market, but also impact liquidity in the short term.

Short-selling transactions will be done through a separate screen, other than the one currently in use for regular transactions.

The new platform, an automated, screen-based and order-matching system similar to current trading terminals, will be provided by the clearing houses of stock exchanges. To begin with, all stocks in the futures and option segments will be eligible for borrowing and lending.

The tenure of borrowing/lending shall be fixed at 7 days. According to a brokerage, investors may have to first borrow them to short-sell and for this, exchanges may allow a one-hour window in the morning. This will allow players to borrow in the morning and sell during the day.

However, market participants say that if an investor is keen to go short on a stock, the F&O route would be cheaper and convenient than borrowing shares. However, the borrowing mechanism could come in handy when there is an arbitrage possibility.

“Such schemes work in markets where there are no single stock futures. However, one of the advantages would be that it could minimise the manipulation of futures price through cash market deals,” said a broker.

Buffett's NetJets flying into India

MUMBAI: Warren Buffett’s NetJets, the world’s largest fractional aircraft ownership company, is setting up shop in India. The company operates close to 730 aircraft, making it the second- largest fleet in the world after American Airlines.

NetJets has tied up with Ashish Chordia, CEO of luxury good company Shreyans, to act as the company’s strategic partner for India. There is no clarity yet on whether foreign charter companies like NetJets can operate within India. The company is, therefore, starting its operations by offering its aircraft for international flights.

Speaking at the launch, NetJets director of sales Graeme Weston said there is a huge potential for private jet travel in India from corporates as well as high networth individuals. About two dozen Indian customers already use NetJets’ planes in the United States and Europe.

The company offers two kinds of products—either a fractional ownership wherein a customer can buy quarter, half, fourth or one-eighth of an aircraft or for those whose usage is limited a card programme where customers can buy blocks of 25 hours of flying time.

“At the entry level for a small plane, the cost of buying a block would be about Rs 1 crore, a sum that is within the reach of a lot of individuals in India,” says Shreyans CEO Ashish Chordia. The programme is more expensive for higher end aircraft like the Gulfstream V, which would cost about $450,000 for the same time period, he said. Mr Chordia, who represents luxury brands like Prosche, Fendi and Van Cleef, has a client base of high-spenders who could use the facility.

Fractional aircraft ownership allows individuals and companies to enjoy all the benefits and more of owning their own jet at a fraction of the cost. A host of companies have been trying over the years to popularise the idea in India, but no one has succeeded so far.

Most corporates have, in fact, chosen to go the other way and invest a much higher amount to make a down payment for corporate aircraft. Ownership of a plane has hassles like finding pilots and crew and maintenance and parking facilities. Despite this, the number of private jets has been growing fast, making India among the fastest-growing markets in the world.

Warren Buffett to CNBC: U.S. Economy in Recession By "Common Sense Definition"

In a series of exclusive live appearances on CNBC's Squawk Box this morning, Warren Buffett told us that by a "common sense definition", the U.S. economy is already in a recession, even if it hasn't met the technical definition of two consecutive quarters of negative growth.
He's been saying for several months that the U.S. could easily fall into a recession.

He restated, however, his view that over the long-run the U.S. economy will do fine and that each generation will live better than the one before it. Buffett also said current conditions are "nothing like" the downturn of 1973 and 1974, although he can't rule out the possibility that things will get worse.
Buffett noted that Federal Reserve Chairman Ben Bernanke has a tough "balancing act" and risks reigniting inflation with a series of rate cuts by the central bank.

Buffett also told CNBC's Becky Quick that while stocks are "not cheap" now, they're not extreme, either. He says he's waiting for when stocks become "very cheap." He does, however, "find more things to look at now than I did six months or a year ago." The best opportunities he sees right now are in bonds rather than stocks.
Buffett says his offer to guarantee $800 billion dollars in municipal bonds now backed by Ambac
and FGIC is "not on the table" any longer. "We tossed our hat into the ring, and they tossed it right back."
The big bond insurers soundly rejected the offer Buffett made first made public last month on Squawk Box, saying their prospects would be severly damaged if Buffett took over the relatively solid muni bond guarantees, while not also backing the other very risky investments that threaten the bond insurers' financial footing. Berkshire created its own bond insurance subsidiary late last year.

Over to the bulls? US Fed cuts rate by 75 bps

MUMBAI: Wednesday will be a big day. Late Tuesday evening (Indian Time) the US Fed cut the key Federal Funds rate by 75 basis points to 2.25%. While aggressive, this is less than 100 basis points cut which over-optimistic bulls had been waiting for. On Tuesday, for a while, it appeared as if the bulls had finally got their act together on the battered Indian markets and a recovery was under way. But that was not to be. Foreign institutional investors remained sceptical even as better-than-expected earnings from global investment banks Goldman Sachs and Lehman Brothers sparked off an upswing in world markets.

With FIIs dumping over Rs 1,000 crore worth of stock at the net level on Tuesday, market operators had no choice but to beat a hasty retreat. That took the wind out of equity benchmarks, which ended the day with meagre gains after having risen more than 2% at one stage. Early Wednesday morning, after the Federal Reserve rate cut, US markets shed part of earlier gains, since the rate cut did not match up to expectations. The Dow Jones Industrial Average was trading at 12,163 points, up 190.75 points or 1.59% at midnight. Before the rate cut, the rally had been led by financial sector stocks, after investment banks Goldman Sachs and Lehman Brothers posted better-than expected results. There was some good news on the local front, in the form of robust advance tax payments by leading corporates like Reliance Industries, HDFC Bank and Larsen & Toubro. Even that failed to cheer as local traders were reluctant to take up heavy positions in view of the extended weekend. The 30-share Sensex closed at 14,833.46, up 23.97 points, after touching a high of 15,169.61 during the session. The 50-share Nifty closed at 4,533, up 29.90 points. Investors, already on edge, were further rattled by a statement from minister of state for finance PK Bansal that the Securities and Exchange Board of India was investigating alleged insider trading activities in Reliance Petroleum shares.

Later in the day, Reliance Industries issued a release saying they have “complied with all rules and regulations and will co-operate and provide all the necessary information to the authorities concerned”.

The only talking point in the market was, how deep would be the rate cut by Fed. Most analysts said even the best possible outcome could only provide a temporary reprieve for the battered stocks. There is a growing feeling that more financial services companies around the world are expected to announce further write-offs in the months ahead, they warned. “Market may have already discounted any possible Fed move,” said Sonal Kumar Shrivastav, head of research, private client group at MF Global Sify Securities. “We expect the indices to trade in a fixed zone with a negative bias.” While the debate rages as to whether markets have entered a bear phase, none of the leading brokerages have made an outright call. “It may be premature to pronounce the ongoing correction as the start of a bear market even as technical metrics are suggesting that we may already be in one,” read a recent note by Morgan Stanley. “If we get a bear market, a 50% decline from the top is in the offing.” Real estate shares rebounded as investors looked for bargains after a month-long slide in prices. The BSE Realty index was the best performer, gaining around 2%. But there was no respite for metal shares, with the BSE Metal index shedding another 2%.

Visa Raises $17.9 Billion in Biggest U.S. IPO, Prices Shares at $44 Each

March 18 (Bloomberg) -- Visa Inc., the largest payment-card network, set a record for U.S. initial public offerings today by raising $17.9 billion, more than expected.
Underwriters sold 406 million shares of San Francisco-based Visa for $44 each, above the expected range of $37 to $42 each, according to Bloomberg data. That values the entire company at $42.5 billion, compared with $27.6 billion at rival MasterCard Inc., the industry's second-largest company. The stock begins New York Stock Exchange trading tomorrow under the ticker ``V.''
Chief Executive Officer Joseph Saunders pressed ahead with the sale amid the worst market for IPOs since 2001. Demand for new shares has waned this year, with 133 companies raising $16 billion as of yesterday, 47 percent less than in the same period last year, according to data compiled by Bloomberg.
Visa's IPO ``is in a league of its own,'' said Francis Gaskins, president of Gaskins IPO Desktop, in an interview with Bloomberg Television. ``It's a one of a kind and it shows that the IPO market is not dead.''
The IPO eclipses AT&T Wireless Group's $10.6 billion stock offering in 2000 and ranks second in the world after the $22 billion debut in 2006 of Industrial & Commercial Bank of China Ltd.
Visa and MasterCard have benefited as consumers pay for more purchases with credit and debit cards instead of cash. Cards will be used for 55 percent of all U.S. transactions by 2011, rising from 40 percent in 2005, according to the Nilson Report, an industry newsletter based in Carpinteria, California.
Visa's profit doubled to $424 million in the quarter ended Dec. 31. Revenue surged 76 percent to $1.49 billion.
Visa and MasterCard, which is based in Purchase, New York, are insulated from rising defaults and late payments because, unlike American Express Co. and Discover Financial Services, they don't extend credit to cardholders. Banks that issue the cards take the credit risk.
The Visa share sale was managed by JPMorgan Chase & Co. and Goldman Sachs Group Inc. with assistance from 13 firms including Bank of America Corp. and Citigroup Inc.

Fed Reduces Benchmark Rate to 2.25%, Detects Further Weakening of Economy

March 18 (Bloomberg) -- The Federal Reserve cut its main lending rate by three-quarters of a percentage point to 2.25 percent as officials try to prop up the faltering economy and restore faith in the U.S. financial system.
Chairman Ben S. Bernanke is struggling to cushion consumers and companies from the worst of the credit freeze that's made some of the world's biggest banks reluctant to lend to each other. Officials also showed renewed concern about inflation, making a smaller reduction than traders anticipated. Two policy makers dissented in favor of ``less aggressive action.''
``Recent information indicates that the outlook for economic activity has weakened further,'' the Federal Open Market Committee said in a statement today after meeting in Washington. At the same time, ``inflation has been elevated, and some indicators of inflation expectations have risen.''
Stocks extended their rally, pushing the Standard and Poor's 500 Index 4.2 percent higher to 1,330.74. The dollar rose the most in almost four years against the yen.
``The Fed made a very clear statement: We are on the side of the economy and the markets, and if we have to do more, we will,'' said Steven Einhorn, a partner at hedge fund Omega Advisors Inc. in New York.
The Fed Board of Governors also voted to lower the discount rate, the cost of direct loans from the central bank, to 2.5 percent.
``Today's policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity,'' the FOMC said.
Fisher, Plosser Dissent
Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser voted against today's decision.
``Relative to where inflation is running is where you begin to get the real tension between addressing the liquidity problems in the banks and the capital markets, and trying to encourage inflation to be under control for the long run,'' former Fed governor Susan Bies said in an interview with Bloomberg Television. `They are running very close, in this very high-inflation environment, to how much they can deal with.''
The Fed has cut the benchmark lending rate by 2 percentage points this year, the most aggressive easing since the federal funds rate became an explicit target of policy in the late 1980s.
The decision follows a week of emergency actions by the U.S. central bank, which has pushed its $900 billion balance sheet into the front lines of market turmoil to quell a collapse of brokerage firms and market making in mortgage-backed securities.
Subprime Spillover
The Fed has lowered its benchmark overnight rate six times and the discount rate eight times since the middle of August, when the collapse of U.S. subprime mortgages started to infect markets around the world. The world's biggest financial companies have posted at least $195 billion in writedowns and credit losses tied to American mortgage markets as of March 14.
``It could be they went to 75 rather than 100, trying to buy off some dissenters,'' Lee Hoskins, former president of the Cleveland Fed, said in an interview with Bloomberg Television. ``I'm disappointed in the statement. They give a nod to inflation, but make no serious effort to target it.''
Expanding Role
Last week, the Fed said it would swap out some of its Treasury holdings for mortgage-linked bonds issued by government-sponsored enterprises such as Fannie Mae and by private companies. On March 14, the Fed extended an undisclosed amount of credit to Bear Stearns Cos. to stave off a collapse, invoking a little-used rule that allows the central bank to loan to non-bank corporations.
Two days later, the Fed expanded on that rule and set up a lending window for dealers in government bonds, similar to the lender-of-last-resort function it has traditionally reserved for banks.
The moves helped relieve some stress in credit markets. Yield differences on a Bloomberg index for Fannie Mae's current- coupon, 30-year fixed-rate mortgage bonds and 10-year U.S. government notes narrowed about 22 basis points to 176 basis points, or 61 basis points less than the 22-year high reached two weeks ago.
Still, mortgage lending will tumble to an eight-year low this year and house prices will continue to decline, according to the Mortgage Bankers Association.
Mounting foreclosures are adding to the glut of unsold homes, and that is driving down property values. Home prices in 20 U.S. metropolitan areas fell in December by the most on record. The S&P Case-Shiller home-price index dropped 9.1 percent from December 2006.