While there have been many doom and gloom merchants on the TV and in the media, forecasting massive falls in stock markets, and a slowing of the worldwide economy, we have yet to see any confirmation, but is it on the way? Or has the financial world rode out the dangers of the credit crunch?

On the surface it seems as though worldwide markets are now over the worst, but is this really the case, or is there a storm brewing for the future? Historically we will not see the worst effects of the recent episode until the announcement of company results, with all eyes on the financial sector.  There is no doubt that holes have been blown open in balance sheets, and there is pressure on profitability, but is it really under control?

The price of gold has been rising steadily over the last few months, and is close to an all time high.  Seen by many as a safe haven in times of trouble, it has often moved in the opposite direction to worldwide stock markets.  Will the gold price fall back, or have markets remained a little too resilient after the recent episode? As we mentioned above, the full impact of recent events will not become apparent until company’s release their half year and full year profits, and more importantly forecasts for the immediate future. 

A prominent economic group have recently forecast that up to 6,500 jobs are at risk in the City of London’s financial district – a hangover from the credit crunch.  In the UK it seems as though the economy is set for a period of great turbulence, which was part of the reason why Gordon Brown even contemplated calling a snap election.  While the skies may be clearing, we are not out of the woods yet!

Recent events in the money markets have shown that once you sign that mortgage / loan deal, do you really know what happens, and where your liability may end up? Unless you have done some major research into the sector, you will probably not be aware about what goes on behind the scenes.  Let us tell you what happens…….

Once you sign that mortgage or loan deal, there is every chance that your agreement could be split up into many pieces and sold to a number of financial companies around the world.  But how is this done?

Simple!

When you sign a financial agreement you will create two separate income streams, interest and capital, which will be stripped and bundled up with a variety of other financial elements.  By bundling many different qualities of income stream into a new financial instrument, it is possible to create a customised vehicle for any requirement.  Risks and the duration of the instrument can be varied simply by taking on different “strips” of any other agreement.

So in effect you take your mortgage out in the UK and within a matter of days your agreement could be scattered to all areas of the world.  This is part of the problem with the ongoing credit crunch in that nobody really knows who is at risk until the pack of cards start to fall, then A cannot pay B who cannot then pay C, and so on.  After a short period of time, liquidity dries up, finical institutions need to retain their funds, and the internal money market is dead.  Step forward Northern Rock for 75% of that last mortgage they agreed, in the form of a commercial loan, but the funding is not there!

While the above description may sound a little simplistic , it really is that simple.  A lack of confidence in the money markets can lead to banks withdrawing their finance from the markets, which results in other companies not being able to function normally, which results in Northern Rock like situations.

Northern rock is a little different than most banks as it borrows a large amount of mortgage funding from the market, rather than being in a position to use its own assets.  The likes of Barclays, Lloyds, etc are total different in that they are more likely to use their own asset to back 75% of a mortgage agreement, and borrow 25% from the money markets. 

The UK credit crunch has now taken hold of its first major UK causality, with Northern Rock forced to call on the Bank of England’s “lender of last resort” system, to bail out their business.  While the situation is only short term, it has caused major upset with the Bank’s customers with over £1 billion of deposits withdrawn over the last couple of days.  So how did Northern Rock get into this mess, and is it terminal?

The problem with the Northern Rock business model is the fact that they lend 75% of all mortgage amounts from the inter bank market – effectively borrowing money from their banking counter-parts.  This has left them more wide open than most to the recent disappearance of commercial lenders, in light of concerns within the US financial markets.  As lenders have disappeared from the market, Northern Rock have been pushed into a corner whereby they have had to call on the Bank of England to allow them to agree future mortgages.  So how much will this cost Northern Rock?

While the loan situation is purely a technical phase, the Bank are being charged an enormous 6.75% by the Bank of England, which will reduce their profit margin on future mortgages.  Last year the group made profits of some £500 million, so you can see from their history that they are not a small bank.  Unfortunately, while the turmoil continues and customers clamour to withdraw their funds from the bank, their reputation is being ruined and when the situation calms down they will almost certainly become part of a larger group, with the  likes of Lloyds TSB being mentioned as a possible suitor.

While many may not have been aware of the internal credit market before the recent downturn, it does demonstrate how events in another part of the world can result in the collapse of confidence, and even businesses, in another area of the world.   The financial markets around the world are so entwined that the knock on effects can last for some time, and have disastrous effects.

Northern Rock may be the first major UK bank to hit trouble, but there are rumours that a whole host of others are finding life tough.  This is not the last of the credit crunch problems in the UK, you can be sure of that!

After the calm, we are set for another storm as the US initiated credit crunch claims its first UK victim, with the fall of Victoria Mortgages, a UK based sub prime mortgage lender.  Despite having a mortgage book of some £500 million the main banks have withdrawn credit lines and the company has been forced to into administration.  Is this the start of a new phase of economic turbulence?

The longer the UK financial sector appeared to have missed the US credit crunch problems, the more easier a number of investor were breathing.  However, a little after a month after the US market hit problems we are seeing the repercussions on the UK market and Victoria Mortgages will not be the last to suffer. While the company was still viable, the major credit providing banks (Barclays Capital and UBS) withdrew their funding because of concerns about the market overall.  So how will the stock market react?

The stock market reaction as yet has been fairly muted, although it is struggling to make any real headway forward.  Many investors are sitting on the sidelines waiting for the next big sell-off, which many analysts are expecting over the next few weeks.  What will cause this next round of sell offs?

The next round of sell offs could be a mixture of small players being forced into administration (a constant drip feed of negative news to the market) or the collapse (or major deterioration in the health) of one of the majors mortgage lenders.  The next few months are going to be very difficult for worldwide stock markets, and there will be many investors afraid to dip their toe into the water just yet. 

There are difficult times ahead, with mortgage rates set to rise due to the increased cost of inter bank borrowing – all at a time when base rates are high, the economy is slowing and the property market looks on the verge of a possible turning point.  Caution will be the watch word for some time to come.

While we have all heard about the sub-prime crisis in the US and the problems in the credit market, many are asking how and why a problem with the US economy should effect other areas of the world such as the UK.  While it is a very valid point, there are a number of reasons why it actually happens.

In brief, while the US economy is the largest and most powerful of the economies around the world, in effect there is only really one economy – the worldwide economy.  Individual areas such as the US, China, UK, etc have an impact on the worldwide economy to varying degrees, but such is the integration of multi-national companies, the ease with which you can purchase goods and invest overseas,  that basically all economies are connected in some way.

A drop off in the Chinese economy would impact upon demand for US goods and US services, which would then impact on the US economy where companies may have to cut costs, thereby impacting on the property market as more people find it difficult to find full time employment.  These are the types of connections which are now common place.

The financial sector is one of the purest forms of a worldwide market, with for example mortgages secured in the US probably sold on throughout the world as parts of more complicated financial instruments.  This has been one of the reasons why the credit crunch in the US has actually overlapped into areas such as the UK, etc, where many UK institutions have taken on exposure to the US mortgage market – with potentially billions of pounds at stake!

As worldwide economies become more and more entwined, the chance of knock on effects becomes even greater – something which we are seeing more and more of.   

While we are currently experiencing a short term lull in the US credit crunch crisis, it has already had a major impact upon the corporate finance industry, the movers and shakers who put the big takeovers and mergers together. While funding has been relatively cheap for some time, the ongoing credit crisis has seen funding costs literally shoot up over night. So what next?

Business Networking Lancashire

There are a number of implications for the current situation, the lack of corporate funding being perhaps the main one, but stock prices are set to fall further as well. Over the last 2 years we have seen a number of high profile mergers and acquisitions, something which has impacted upon the share price of many companies. For every takeover or acquisiton which has actually happened, there have literally been another 100 rumoured ones yet to materialise. So how does this effect stock prices?

Much of the recent boom in stock markets, especially in the US, has been on the back of takeover speculation which has pushed some share prices to crazy prices – prices which can easily fall sharply if no takeover occurs. As funding for such takeovers has become more expensive, and it will be difficult to raise large sums of money in the short term, we will see much of the “froth” taken off many share prices.

Even when stock markets around the world have calmed down, the froth from the ramped up prices will continue to fade away. The effects are then two fold, in that stock markets will slowly fall back to more realistic levels and investor sentiment may turn negative as they slowly see their investments falling back down to earth.

All in all we are likely to see a lot less corporate activity over the coming months, and this current credit crunch is by no means over – the US Federal Bank would not take such drastic action as seen last week, without knowing there is further bad news to come.

Worldwide stock markets have today received a welcome, although unexpected boost with news that the US Federal Reserve have reduced US base rates by 0.5% to 5.75%.  In a move which was designed to both inject liquidity into the money markets, and give the economy a much need boost, stock markets have rebounded sharply from recent lows.  But is the worst over?

While a move such as that experienced today is not so unusual, in the past it has often precluded more bad news which the Fed were aware of, but which was maybe not yet in the public domain.  Even though the markets have good reason for this show of short term relief, the situation is far from over and there will still be further fallout.

True, there will be more readily available liquidity in the markets which may see many firms over their bad times, but some companies have already suffered beyond reasonable repair.  Many of Wall Street’s larger companies have become embroiled in the situation, and the fact that many are looking to be bailed out by larger banks around the world is a marked change from their front running attitude of the past.

The stock market is a volatile and unpredictable beast at the best of times, and it has a habit of biting back just when you think you have tamed the beast.  Today’s substantial buying pressure has been greatly received, but those who think the situation is now over may soon be disappointed.  The central banks around the world cannot support such man-made situations forever, and there will be some form of accountability at some stage – “pay back time”. 

Once the current euphoria calms, many will still wake up to the fact that the US property market is still in big trouble, personal debt has never been higher, and much of the recent stock market rise was pinned on the back of takover and merger rumours.  It is highly unlikely that we will see an immediate move back to wild takeover speculation, something which may bring many more share price valuations back into line with reality.

It is essential that investor tread cautiously in what is still a difficult period for world markets.

Commonly referred to as the “suckers rally”, worldwide stock markets have returned to their recent down trend after a recent rally which tempted some back into the market.  After a few days of rest bite, we are now seeing the first cautious statements from some of worlds largest companies, with many forecasting that the situation will get worse before its gets better.

We have seen statements from retailers, manufacturers and investment companies, all of whom have taken a similar line in their reading of the situations.  The next step will be some official reductions in the expected growth of both local and worldwide economies, which could well lead to further profit downgrades and even sell recommendations.  When you also consider that a vast number of recent takeovers rumours will soon disappear, as funding becomes more and more expensive, the premium in many share prices will soon evaporate.

Attempts by central banks around the world to shore up the money markets, by injecting much need liquidity, have had a short term impact but they cannot continue bailing out the markets for much longer.  Sooner or later the market will find its natural level, a level which will be a reflection of the concerns of the moment.

All in all the next few months are going to be vital for both local and the world economy, although the probable slow down in economies may well reduce the likelihood of further base rate rises both in the UK and across the Atlantic.  However, for many investors, both directly and indirectly exposed to the stock market, this will be little compensation with stock prices likely to be under pressure for some time to come.

While the US sub prime lending crisis continues to unfold, the effects are now being seen on the European markets with above average demands for cash from those banks who have seen their balance sheets effected over the last few weeks.  Even the European Central Bank (ECB) are playing their part, injecting some $130 million into the system.  So what really is happening?

The concerns about sub prime lending in the US, and the deterioration in worldwide stock markets, have been the main catalyst for the recent money market problems.  While on the surface the problems appears to be confined to the US for the moment, today’s financial markets are very different from years gone by.  Complicated financial instruments are now common place, with many mortgages, loans and other financial investments chopped, split and repackaged for sale to other financial institutions.  As a consequence, many of the worlds largest banks will have substantial exposure to the US market, and many will be suffering at the moment.

The strength of the ECB support has spooked many in the market, as the reaction has been even above and beyond the support for 9/11.  Do the ECB know something which is not public knowledge or are they just trying to calm markets? Until the know sub prime lending situations unravels there will be those sceptical about the level of support, and the fact that the ECB have commented that more funding will be available, as and when required.

In the meantime the short term lull in the fall of worldwide stock markets is over, with both the US and European markets taking a hit over the last few days.  The worst situation for any stock market is one of uncertainty, and until the picture becomes clearer we can expect many more days of wild fluctuations.

Stocks are spiraling downward, surprisingly since it was only a few days ago that they were improving. The biggest part of the problem is that the issue over defaulted mortgage loans is still fresh and now investors are looking at bonds rather than stocks.

Recently many homes have been foreclosed upon because the free lending methods of the past backfired and all those bad credit home loans banks thought they would cash in on went belly up causing a big stir in the financial world. When things seemed to be settling down somewhat the problem arose again when American Home Mortgage Investment disclosed that it had hired advisors to help guide them. The end result may be that they must sell some of their assets, although this will not happen if the mortgage company is able to access its credit.

Towards the end of last week the Dow Jones tumbled hundreds of points and really scared investors. However, when the new week began it looked as if things might be working out in the world of stocks as the Dow gained almost 100 points. However, Tuesday rolls around and sees a loss of more than 100 points. This left investors a little anxious because it was difficult to tell exactly where the market was going.

Other aspects that are not helping the Dow Jones any include that oil prices reached a price of $78 for the first time ever. Gold had a higher price as well. With the market jumping up and down investors should be prepared for more of the same. Of course, better than expected earnings for any of the big businesses could turn things around for the Dow Jones but while the market is worried over lending and whether or not companies will be able to receive loans the market will be finicky.

It seems strange that the Dow Jones reached a record of 14,000.41 in July and then just a few days later managed to fall an astonishing 5%. Believe it or not but some investors believe the worst has yet to be seen and that it is possible for another 5% drop. That remains to be seen but investors should prepare themselves for a volatile market that may be high one day and tumbling the next.

Of course, long-term investors likely have little to be concerned over because they may sit tight and wait for the storm to pass. It is hard to do however when it appears the market is going straight for the toilet. Nevertheless, long term predictions for the Dow Jones look good so investors may prefer to ride out the bad wave and then be in position when the Dow starts rising again.

This is especially true now that many lending institutions are changing their standards for home loans and subprime lenders are more than likely going to be required to have higher credit to be approved than the borrowers that have recently defaulted on so many loans.