, specifically October 19, 1987. Themorning started with stock selling and lots of it and ended with aday of historic losses. Twenty five years later,although the recent financial crisis was more severe and long-lasting, the crash of 1987 remains the single-most dramatic day of trading that most people have everexperienced on Wall Street.
That day came to be known as "Black Monday" because the Dow Jones Industrial Average plummeted 508 points, losing 22.6percent of its total value in a single session. It was the greatest percentage loss Wall Street had ever suffered on a single trading session. Despite the agonizing days of the financial crisis of 2008, those downside moves barely crack the top ten worst days for the Dow Jones Industrial Average - the 7.8 percent loss on October 15, 2008 is number nine.
What caused the crashof 1987? According toa 2006 Federal Reserve paper, a combination of circumstances made the crash possible. In the five years preceding the crash, stocks were supported by new entrants into the market (pension and 401(k) plans), which drove up prices.The Dow bottomed out at 776 in August 1982 and marched upto a high of 2,722 in August 1987.
Equities were also boosted by favorable tax treatments given to the financing of corporate buyouts, which "increased the number of companies that were potential takeover targets and pushed up their stock prices." These buyouts benefitted from lower interest rates. However,in the months leading up to the crash, interest rates were rising globally and concerns about inflation caused fears of further interest rate increases in the U.S. as well.
Two fuses were lit in the days before the crash. On Wednesday October 14, there were reports that legislation had been proposed in Congress to eliminate tax benefits associated with financing mergers, and separately, the U.S. trade deficit was revealed to be worse than expected, which caused the value of the dollar to dive and raised expectations that the Fed would increase interest rates.
Once these fuses were lit, other conditions added fuel to the fire. The increase in computer "program trading" strategies added to the magnitude of the losses, as did the impact of margin callsand the inability for investors to gather information in the chaotic environment. The combination of all these factors led to that historic and frightening day of trading. Sound familiar?
Could it happen again? Of course it could! It is almost ironic to go back readaccounts published onthe twentieth anniversary of the crash in October 2007, like this one in the Wall Street Journal:
"Some of the root causes of the 1987 crash appear to be missing today...Stocks don't look as overpriced today as they did in 1987...the Fed already has stepped in, lowering target short-term interest rates and pumping money into the banking system...Despite the continuing housing crisis and difficulties that many borrowers still face raising money, many investors believe the worst of the year's troubles are over."
Oops! So what have we learned in the 25 years since "Black Monday" and the subsequent financial crisis that started four years ago?
Cash is King : For those investors near or already in retirement, a cash cushion of 1-2 years of living expenses can reduce the urge to panic and sell at the bottom.
Planning is Queen : A thorough financial plan that contemplates both good and bad marketscan help you navigatea crash and its aftermath.
Diversification and rebalancing complete the Royal Family : Understanding your risk tolerance to build your asset allocation on a diversified basis, followed periodic rebalancing really canwork! The numbers back up the royal family and prove that using different types of assets (stocks, bonds,commodities and cash), based on your particular risk tolerance and rebalancing the allocation on a regularbasis (quarterly, semi-annually or evenannually) can help protect your money when the next crash occurs.
Sunday, 21 October 2012
BP Board Approves Rosneft Deal (Moscow)
BP's boardhas approved an offer from the Russian state oil company, Rosneft, to buy most of BP's business in Russia for cash and shares in Rosneft, further consolidating Russia's control of its oil industry, an executive with knowledge of thedecision said.
Under the terms of thedeal, BP would remainin Russia but - initially at least - only as a minority investor in anoil company controlled by the government of President Vladimir V. Putin. Later, BP is hoping to use this newstrategic tie with the Kremlin to drum up other business.
BP had been telegraphing its willingness to make a deal for some time, and Rosneft formally submitted an offer on Thursday to buy out BP's 50 percent of a joint venture here called TNK-BP.The board's authorization allowed BP's chief executive, Robert W. Dudley, to negotiate the final terms for BP's sale of its Russian holdings within a range of acceptable combinations of cash and shares,
Under the terms of thedeal, BP would remainin Russia but - initially at least - only as a minority investor in anoil company controlled by the government of President Vladimir V. Putin. Later, BP is hoping to use this newstrategic tie with the Kremlin to drum up other business.
BP had been telegraphing its willingness to make a deal for some time, and Rosneft formally submitted an offer on Thursday to buy out BP's 50 percent of a joint venture here called TNK-BP.The board's authorization allowed BP's chief executive, Robert W. Dudley, to negotiate the final terms for BP's sale of its Russian holdings within a range of acceptable combinations of cash and shares,
Interest rate (IR)
Interest rate(s)
The price(s) of obtaining the temporary use of money that one borrows from someoneelse who actually ownsit, normally expressed as a percentage of the amount borrowed per year. Since loans and loan repayment extendover considerable periods of time and entail more complex security arrangements than a simple cash-on-the-barrelhead exchange, interest ratesto be paid are normallyspelled out as part of a relatively complex written contract between borrower and lender.
The price(s) of obtaining the temporary use of money that one borrows from someoneelse who actually ownsit, normally expressed as a percentage of the amount borrowed per year. Since loans and loan repayment extendover considerable periods of time and entail more complex security arrangements than a simple cash-on-the-barrelhead exchange, interest ratesto be paid are normallyspelled out as part of a relatively complex written contract between borrower and lender.
Interest rate (IR)
Interest rate(s)
The price(s) of obtaining the temporary use of money that one borrows from someoneelse who actually ownsit, normally expressed as a percentage of the amount borrowed per year. Since loans and loan repayment extendover considerable periods of time and entail more complex security arrangements than a simple cash-on-the-barrelhead exchange, interest ratesto be paid are normallyspelled out as part of a relatively complex written contract between borrower and lender.
The price(s) of obtaining the temporary use of money that one borrows from someoneelse who actually ownsit, normally expressed as a percentage of the amount borrowed per year. Since loans and loan repayment extendover considerable periods of time and entail more complex security arrangements than a simple cash-on-the-barrelhead exchange, interest ratesto be paid are normallyspelled out as part of a relatively complex written contract between borrower and lender.
Law of diminishing returns (LoDR)
Sometimes also referred to as the law ofvariable proportions , this "law" is really a generalization economists make about the nature of technology when it is possible to combine the same factors of production in a number of different proportions to make the same product. The law states:
When increasing amounts of one factor of production are employed in production along with a fixed amount of some other production factor, after some point, the resulting increases in output of product become smaller and smaller.
(That is, first the marginal returns to successive small increases in the variable factor of production turn down, and then eventually the overall average returns per unit of the variable input start decreasing.) Since the law assumes that the available quantity of atleast one factor of production is fixed at agiven level and that technological knowledge does not change during the relevant period, the lawof diminishing returns normally translates intoa statement about the short-run choice of production possibilities facing a firm (since in the longer run it is virtually always possiblefor the firm to acquire more of the temporarily "fixed" factor -- building an additional factory building, buying additional land, installing additional machines of the same kind, installing newer and more advanced machinery, and so on.
When increasing amounts of one factor of production are employed in production along with a fixed amount of some other production factor, after some point, the resulting increases in output of product become smaller and smaller.
(That is, first the marginal returns to successive small increases in the variable factor of production turn down, and then eventually the overall average returns per unit of the variable input start decreasing.) Since the law assumes that the available quantity of atleast one factor of production is fixed at agiven level and that technological knowledge does not change during the relevant period, the lawof diminishing returns normally translates intoa statement about the short-run choice of production possibilities facing a firm (since in the longer run it is virtually always possiblefor the firm to acquire more of the temporarily "fixed" factor -- building an additional factory building, buying additional land, installing additional machines of the same kind, installing newer and more advanced machinery, and so on.
Monetary policy (MP)
Monetary policy
That part of the government's economic policy whichtries to control the size of the total stock of money (and other highly liquid financial assets that are close substitutes for money) available in the national economy in order to achieve policyobjectives that are often partly contradictory: controlling the rate of increase in the general price level ( inflation ), speeding up or slowingthe overall rate of economic growth (mainly by affecting the interest rates that constitute such a large share of suppliers' costs for new investment butpartly by influencing consumer demand through the availabilityof consumer credit andmortgage money), managing the level of unemployment (stimulating or retarding total demandfor goods and services by manipulating the amount of money in the hands of consumersand investors), or influencing the exchange rates at which the national currency trades for other foreign currencies (mainly by pushing domestic interest rates above or below foreign interest rates in order to attract or discourage foreign savings from entering or leaving domestic financial markets).
That part of the government's economic policy whichtries to control the size of the total stock of money (and other highly liquid financial assets that are close substitutes for money) available in the national economy in order to achieve policyobjectives that are often partly contradictory: controlling the rate of increase in the general price level ( inflation ), speeding up or slowingthe overall rate of economic growth (mainly by affecting the interest rates that constitute such a large share of suppliers' costs for new investment butpartly by influencing consumer demand through the availabilityof consumer credit andmortgage money), managing the level of unemployment (stimulating or retarding total demandfor goods and services by manipulating the amount of money in the hands of consumersand investors), or influencing the exchange rates at which the national currency trades for other foreign currencies (mainly by pushing domestic interest rates above or below foreign interest rates in order to attract or discourage foreign savings from entering or leaving domestic financial markets).
National debt (NB)
National debt
As usually defined, this denotes the total sum of the outstanding debtobligations of a country's central government. (But occasionally writers may use the term somewhat more broadly to refer to the total indebtedness of all levels of government, including regional and local governments, and sometimes also the indebtedness of government owned business entities such aslocal transit and communications systems or nationalized industries as well.) The national debt represents the accumulated total of all the government budget deficits of past years, less the accumulated total of all the government budget surpluses of past years.
As usually defined, this denotes the total sum of the outstanding debtobligations of a country's central government. (But occasionally writers may use the term somewhat more broadly to refer to the total indebtedness of all levels of government, including regional and local governments, and sometimes also the indebtedness of government owned business entities such aslocal transit and communications systems or nationalized industries as well.) The national debt represents the accumulated total of all the government budget deficits of past years, less the accumulated total of all the government budget surpluses of past years.
Phillips curve (PC)
Phillips curve
In the late 1950s, the British economist A.W. Phillips demonstrated an inverse statistical association between annual changes in average wage rates andthe rate of unemployment . When the annual wage growth rates and unemployment rates for Great Britain for each of the years from 1861 to 1957 were plotted as points on a two-dimensional graph,they rather neatly approximated a shallow hyperbola-shaped curve convex to the origin of the graph. That is, in years when unemployment rates were low, averagemoney wages tended to grow rapidly; but in years when unemployment rates were high, average money wages tended to grow little or even to decline. Other economists soon repeated Phillips's procedures with similardata from a number ofother industrialized countries and mostly found similar statistical relationships.
At the time, many Keynesian economists reasoned from this finding as follows: Because unemployment rates and wage increase rates are inversely related, the traditional government goals of maintaining both low inflation and low unemployment would seem to be inconsistent. Because wages are such a large share of the costs of production, rapid increases in average wages are bound to push up the general price level.
In the late 1950s, the British economist A.W. Phillips demonstrated an inverse statistical association between annual changes in average wage rates andthe rate of unemployment . When the annual wage growth rates and unemployment rates for Great Britain for each of the years from 1861 to 1957 were plotted as points on a two-dimensional graph,they rather neatly approximated a shallow hyperbola-shaped curve convex to the origin of the graph. That is, in years when unemployment rates were low, averagemoney wages tended to grow rapidly; but in years when unemployment rates were high, average money wages tended to grow little or even to decline. Other economists soon repeated Phillips's procedures with similardata from a number ofother industrialized countries and mostly found similar statistical relationships.
At the time, many Keynesian economists reasoned from this finding as follows: Because unemployment rates and wage increase rates are inversely related, the traditional government goals of maintaining both low inflation and low unemployment would seem to be inconsistent. Because wages are such a large share of the costs of production, rapid increases in average wages are bound to push up the general price level.
Fiscal policy (FP)
Fiscal policy
That part of government policy which is concerned with raising revenue through taxation and with deciding on the amounts and purposes of government spending. Keynesian economic theorists believe that government can, and should, regulate the overall pace of activity in the national economy through fiscal policy, principallyby deliberately having government borrow to spend more than it takes in (running a budget deficit ) to increase total demand for goods and services in times of high unemployment and economic slowdown (the deficit being created either by cutting taxes or by increasing spending or both). Similarly, Keynesian theorists would advocate havinggovernment spend less than it takes in (running a budget surplus ) to cool down the national economy when too great an expansion of total demand has pushed production to its physical limits and threatens to bring on excessive inflation .
That part of government policy which is concerned with raising revenue through taxation and with deciding on the amounts and purposes of government spending. Keynesian economic theorists believe that government can, and should, regulate the overall pace of activity in the national economy through fiscal policy, principallyby deliberately having government borrow to spend more than it takes in (running a budget deficit ) to increase total demand for goods and services in times of high unemployment and economic slowdown (the deficit being created either by cutting taxes or by increasing spending or both). Similarly, Keynesian theorists would advocate havinggovernment spend less than it takes in (running a budget surplus ) to cool down the national economy when too great an expansion of total demand has pushed production to its physical limits and threatens to bring on excessive inflation .
GDP; Gross Domestic Product
Gross Domestic Product (GDP)
An estimate of the total money value of all the final goods and servicesproduced in a given one-year period using the factors of production located within a particular country's borders
An estimate of the total money value of all the final goods and servicesproduced in a given one-year period using the factors of production located within a particular country's borders
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