DFIN.COM Financial Archives With A Digital Bias
(Synopses of News that Impacts Finance in a Digital World)

The Digital Financier Update (DFIN.COM Update) provides a weekly commentary on important stories with significant financial, and or Internet implications. The purpose is to provide finance professionals and there staff with a timely brief synopses of recent and historic news events that best illustrates the changing digital economy.  The stories will eventually impact all of us.  Many of our stories may have received very little popular press coverage.  The weekly summary is e-mailed at no cost to participating subscribers for distribution to staff and co-workers.

This publication is designed to be a quick read and the archive is a good resource for financial history.

The most common sources for the DFIN.COM Update include UP, AP,  Fast Company, Business Week,The Economist, Forbes, Wired, Federal Reserve Bank Publications. The Wall Street Journal Interactive, MSNBC, L.A. Times, San Jose Mercury News. 

Week of February 28, 1999

A Scottish Bank takes affinity marketing to a new level with Pat Robertson. The NYSE set an all time high this week while the unemployment rate edged higher.  Has the yield curve began its traditional upward shift and  shape change (see graph).  Is this the beginning of a normal term structure of interest rate shift?  Are the "bag ladies" entering the stock market?  More on this next week. The EU has established consumer privacy laws that may negatively impact database marketers in the USA, but increase consumers privacy.  Maybe we should learn from the EU, after all, they have witnessed what a lack of privacy did in Nazi Germany.

Scottish Bank Teams Up with Pat Robertson For U.S. Push, Wednesday, March 3, 1999, By Brett Chase, American Banker - This is a very unique marketing move, but will a partner that polarizes the population be a good long term strategic move?  Why didn't they mention the Internet in their strategy?

"Bank of Scotland is joining forces with televangelist Pat Robertson in an attempt to crack the U.S. retail banking market."

"The Edinburgh-based bank and the fundamentalist minister announced plans Tuesday to charter a national bank that would take deposits through the mail and let customers bank by phone and automated teller machine."

"His Christian Broadcasting Network reaches some 70 million cable television households, which the joint venture views as its potential reach."

"The Robertson bank, which would not have brick-and-mortar branches, would be a subsidiary of Bank of Scotland, with Mr. Robertson holding a "significant minority interest."

M&I Data Services, a subsidiary of Marshall & Ilsley Corp., Milwaukee, would provide all back-office operations and a customer call center for the new bank. M&I said it would add 300 employees to service the bank, which is expected to open this summer.

"There will be a premium paid on all savings accounts because what we have is efficiency without all this overhead," he said. The new bank would operate nationwide and would initially focus on offering savings accounts and certificates of deposit.

EU Privacy Rule Worries U.S. Firms,  Restriction on transmitting personal data could lead to trade skirmishes, March 6, 1999, By GREG MILLER, Times Staff Writer -  Database marketing in the USA is a growth industry and considered vital to many companies.  In general, the USA has had a good history of protecting citizens privacy. However, is too much of our private information available to the highest bidder?  EU Internet privacy laws may unfavorably impact commerce with the USA but there roots go back to Nazi Germany. 

"Adopted in October, the European Union Directive on Data Protection sets strict rules for companies that handle European consumers' personal data, ranging from food choices on airline flights to credit card purchases."

"The directive could affect countless American companies because it bars transmission of personal information to any country without "adequate" safeguards, a vaguely defined standard that deeply worries U.S. firms."

"Those concerns are at the heart of negotiations between Washington and the European Union, which are set to resume March 16, two months before their next summit, and focus on whether U.S. privacy practices will prove adequate under the new rules."

"The looming battles are illustrated by an ongoing case in which Sweden is poised to block the Sabre Group, a giant Fort Worth-based airline reservation system, from transmitting data ranging from passengers' meal preferences to requests for wheelchair assistance."

"The stakes are significant because trade between the United States and Europe tops $550 billion per year. Increasingly, that trade is dependent on, if not embodied by, the free flow of computer data across the Atlantic.  Citigroup Inc., the largest international issuer of credit cards, handles all of its worldwide transactions at a data center in South Dakota. Ford Motor Co. transmits detailed records on European employees. And electronic commerce giants such as Amazon.com field orders around the world on computers in the United States."

"For now, the European Union has agreed not to enforce the privacy directive while negotiations with the United States continue. If Europe were to lift that enforcement ban, U.S. officials have threatened to treat any data stoppage as a trade violation and take the matter to the World Trade Organization. David Aaron, undersecretary of Commerce, has led the efforts to carve out a "safe harbor" arrangement for U.S. companies that volunteer to comply with certain principles. To be shielded from European interference, companies would have to take steps, including providing greater warnings to consumers about how their data will be used."

"The debate underscores deep differences between Europe and the United States on privacy issues. The United States has traditionally relied on a patchwork of self-regulation and narrowly tailored laws. This piecemeal approach helps to explain why the United States is the biggest market in the world for the type of personal data that fuels everything from the catalog industry to investment scams. In European countries, on the other hand, privacy is more typically regarded as a fundamental human right, often guarded by omnibus legislation. The approach can seem heavy-handed by American standards, De Graaf said, but it is shaped by fears of privacy abuses dating back to the Nazi atrocities during World War II."

Free or cheap Net access may change the game, March 4, 1999, Mercury News - The stock market primarily equates value for Internet companies based upon the number of customers.  With this being the case why wouldn't companies subsidize consumers directly in order to capture a large Internet market share rapidly.  NetZero in a few months has 40% of the customers that the IBM ISP took years to build, and a free service in England is the largest ISP in England having surpassed AOL.

" the World Wide Web is still too new to presume that anything is set in stone, and monthly dial-up fees could become another Internet dinosaur if others keep giving away what America Online is trying to sell."

"Last week, Gateway announced that it would throw in a free year of its Internet service with any computer purchase of more than $1,000."

"More than a million British have signed on with a service named Freeserve, which began operating in September, but has already surpassed America Online as Britain's most popular Internet access provider."

"NetZero, brought to the Web by the same venture capitalists who sparked an online stampede by giving away ad-rigged computers at Free-PC.com, has signed up 400,000 customers since it launched a free service in October."

"In exchange for free Web access, these services want free access to your eyeballs -- and a fixed portion of your computer screen -- so they can show you a continuous parade of advertisements."

What online services charge for Internet access
COST

• America Online $21.95 per month

• CompuServe.. $19.95 per month

• Microsoft Network $19.95 per month

• AT&T WorldNet $21.95 per month

• Freeserve (Britain Only) No charges

• Mindspring $19.95 per month ($25 set-up fee)

• EarthLink Sprint $19.95 per month ($25 set-up fee)

• IBM Global Network.... No unlimited access/$19.95 for 100 hours

• NetZero No charges

SUBSCRIBERS (includes plans with monthly time limits)

• America Online 16.0 million

• CompuServe.. 2.0 million

• Microsoft Network 1.8 million

• AT&T WorldNet 1.5 million

• Freeserve (Britain only) 1.1 million

• Mindspring 1.1 million

• EarthLink Sprint 1.1 million

• IBM Global Network.... 1.0 million

• NetZero 400,000

Source: Jupiter Communications, AP research

U.S. unemployment rate ticks up as manufacturing sector loses more jobs, But overall, payrolls jump a strong 275,000 in February, ASSOCIATED PRESS, from MSNBC, WASHINGTON, March 5 - The big news is that productivity continues strong and this bodes well for corporate profitability and low inflation.

"The unemployment rate edged up slightly to 4.4 percent in February as the nation’s manufacturers continued to be battered by the global economic crisis. Manufacturing employment fell by 50,000 last month, the biggest setback since last November, with layoffs especially high at apparel and aircraft factories, the Labor Department reported Friday."

"DESPITE THE WEAKNESS in manufacturing, the overall number of payroll jobs climbed by 275,000 last month, slightly higher than expectations."

"Even with the 0.1 percentage point rise in the overall jobless rate, up from 4.3 percent in January, the nation’s job picture hit manufacturing and farming especially hard."

"But so far, that slowdown has yet to appear. Federal Reserve Chairman Alan Greenspan pointedly warned last week that if economy doesn’t slow on its own accord, the Fed may be forced to start raising interest rates to engineer a slowdown that would keep tight labor markets from increasing inflationary pressures through higher wage demands."

PNC to Chop Expenses by As Much as $200 Million, March 4, 1999, By Karen Talley, American Banker -  The existing banks better watch their backs as start-ups like NetBank and the new Bank of Scotland subsidiary start to take advantage of their structural economies.

"Joining a host of other major banking companies that are trying to slim down, PNC Bank Corp. of Pittsburgh has begun a campaign to shave annual expenses by as much as 5%, or $200 million."

"This week the $50 billion-asset Republic New York announced an annual cost reduction goal of $67 million, saying it would get two-thirds of the way there this year. Its plan included a 10-year outsourcing contract with Computer Sciences Corp."

"PNC's initiative is partly driven by a desire to boost return on equity, which was 20.8% for 1998. Higher-performing banking companies are typically aiming for ROE in the 25% range, Mr. Rothmann said."

Net population to double by 2005, By Bloomberg News, Special to CNET News.com, March 1, 1999, London -   In another forecast that The Digital Financier believes will prove to be underestimated "The number of people using the Internet worldwide will double to 300 million by 2005, with the greatest growth in Asia and South America, according to a new report."

"The online population will rise 61 percent to 95 million in the United States, more than double to 88 million in Europe, and quadruple to 118 million in the rest of the world, U.K. market researcher Datamonitor projects."

"Internet use is expected to grow as the cost of access drops dramatically. Companies such as Gateway and Dixons Group, the United Kingdom's largest electronics retailer, offer free Internet access." Copyright 1999, Bloomberg L.P. All Rights Reserved.

Mortgage Borrowers Scramble as Rates Jump, March 1, 1999, By Heather Timmons, American Banker -  "A lot of people are irritated that they missed the bottom," said Luke Hayden, executive vice president of Chase Manhattan Bank in New York. "The near-term surprise is that rates drifting up have caused a lot of mortgage applicants to jump in."

"Mortgage rates have been rising in tandem with the 30-year Treasury bond, whose yield last week reached its highest point in seven months -- 5.56%. The average mortgage rate climbed 6 basis points in the week, to 6.89%, the fourth straight weekly rise, Freddie Mac reported."

"A report Friday by the Commerce Department showing that the economy was growing at a robust 6.1% was the latest news to fan inflation fears."

Week of February 21, 1999

This was a week in which the USA long bond weakened to a yield of 5.5%! Technology stocks weakened from all time highs and Greenspan talked financial reform.  He also demonstrated a re-focus on Money Supply.   As we have discussed previously, the monetary aggregates are getting a new respect throughout the world and M2 continues its rapid growth in the USA.  MSNBC provided a great review on the demographics of aging and the new book "Grey Dawn". This was also the week in which the NYSE talked about extending hours,   This will happen but when?  The US West Coast employees and traders have already started to complain.

Iceberg ahead? A booming senior population could create a global crisis,By Peter G. Peterson, Feb. 5, MSNBC - Retirement will soon be a thing of the past. Peter Drucker has warned us and now Peter Peterson has written a book on the aging population and its implications to the economy.  Included below are excerpts from his new book as quoted from MSNBC.

" the unprecedented growth in the number of elderly and the unprecedented decline in the number of youth over the next several decades. Lurking beneath the waves, and not yet widely understood, are the wrenching economic and social costs that will accompany this demographic transformation — costs that threaten to bankrupt even the greatest of powers, the United States included"

"This demographic shift cannot be avoided. It is inevitable. The timing and magnitude of the coming transformation is virtually locked in. The elderly of the first half of the next century have already been born and can be counted — and the retirement benefit systems on which they will depend are already in place." 

"Societies in the developed world — by which I mean primarily the countries of North America, Western Europe, Japan, and Australia — are aging for three major reasons:
Medical advances, along with increased affluence and improvement in public health, nutrition, and safety, are raising average life expectancy dramatically.
A huge outsized baby boom generation in the United States and several other countries is now making its way through middle age.
Fertility rates have fallen, and Japan and a number of European countries are now running far beneath the “replacement rate” necessary to replace today’s population. The impact of so few young people entering tomorrow’s tax-paying workforce, while so many are entering benefit-receiving elderhood, is of profound consequence."

"By the 2030s, these countries will be much older than they are today. Some of them may exceed a median age of 55, twenty years older than the oldest median age (35) of any country on earth as recently as 1970. Over half of the adult population of today’s developed countries and perhaps two-thirds of their voters will be near or beyond today’s eligibility age for publicly financed retirement. So we have to ask: When that time comes, who will be doing the work, paying the taxes, saving for the future, and raising the next generation? Can even the wealthiest of nations afford to pay for such a vast number of senior citizens living a third or more of their adult lives in what are now commonly thought of as the retirement years? Or will many of those future elderly have to do without the retirement benefits they are now promised? And what happens then? "

"In 1996, I presented my views about the aging of America and the impending crisis in U.S. retirement programs in my book, Will America Grow Up Before It Grows Old? So, one might ask, why write another book on what sounds like the same subject? The answer is, it’s not the same subject. My last book focused on America’s own domestic problem. But while writing that book, I became aware that, imposing as the challenge of an aging society is in the United States, it is even more serious in Japan and much of Europe. In most of the other developed countries, populations are aging faster, birthrates are lower, the influx of younger immigrants from developing countries is smaller, public pension benefits for senior citizens are more generous, and private pension systems are weaker. Most of the other leading economies therefore face far worse fiscal fundamentals than we do. Even some major developing countries — China, for example — face serious aging challenges in the next century."

"Given the instant and sometimes painful interactions within global capital markets and the likelihood of varying national responses to the coming fiscal challenge, I can easily envision that sometime in the next decade or two demographic aging will trigger unprecedented financial pressures, both on fragile regional economic arrangements such as the European Economic and Monetary Union and on the world economy as a whole. The economic and political outcome could make today’s Asian or Russian crisis look like child’s play."

"In 1994 I served on the Kerrey-Danforth Commission on Entitlement and Tax Reform, established by President Clinton. After studying demographic projections and their cost implications, we issued a report that was endorsed unanimously by the Commission’s 20 Democratic and Republican congressional members and by 30 of its 31 total members. (The sole exception was the President of the United Mine Workers.) The report demonstrated beyond question that if we do not reform tax and spending policies, the benefit outlays for just five programs — Social Security, Medicare, Medicaid, and federal civilian and military pensions — will exceed total federal revenues by the year 2030. This would leave zero tax revenue for any other purpose — not even for interest payments, nor for national defense, nor for education, nor for child health, nor for the federal payroll. Not a penny available for anything else."

"America’s political leadership thanked us for the report, shook our hands, and walked away. After that, silence. Soon, after the 1994 congressional elections, the White House and congressional leaders decided that the Commission was politically toxic since its conclusions pointed so inescapably toward Social Security and Medicare reform. In the end the Commission expired without agreeing on a single concrete proposal to reform a system it had in its own report called “unsustainable.”"

"A wise man once said that the real tragedy of life is that everyone has his reasons. Politicians are no exception. All over the world, they fear backing proposals that will cut or change retirement benefits because they think they’ll lose their jobs if they do, as others have. In 1995, Silvio Berlusconi’s Forza Italia government was buffeted by a number of political storms, all of which were arguably survivable — except for the gridlock over pension reform, which shattered his coalition. That same year, the Dutch Parliament was forced to repeal a recently enacted cut in retirement benefits after a strong Pension Party, backed by the elderly, emerged from nowhere to punish the reformers. In 1996, the French government’s modest proposal to trim pensions triggered strikes and even riots. A year later the Socialists overturned the ruling government at the polls."

"Rarely have so many official multilateral bodies — such as the International Monetary Fund (IMF), the World Bank, and the Organization for Economic Cooperation and Development (OECD) — agreed with such unanimity on the dimensions of a problem. Margaret Thatcher told me that she repeatedly tried to raise this issue at G-7 summit meetings. Yet the answer from her fellow leaders was, in effect, “Of course aging is a profound challenge, but it doesn’t hit until early in the next century. That means it won’t hit on my watch.”"   

"The politicians are hardly the only culprits in this denial game. The public is often a willing accomplice. Voters have become habituated to a pay-as-you-go system that banks every generation’s future retirement on the next generation’s resources rather like a giant Ponzi scheme. But try telling people that a system that worked just wonderfully for their parents (who signed up early) won’t do nearly so well for their kids (who are signing up late). You might as well tell an addict to end his dependency because the supply of drugs is running low."

"Over the past fifty years, as this notion of “earned benefits” has expanded, America’s personal savings rate has fallen from near the top to the very bottom among developed nations. From a society that once felt obliged to endow future generations, we have become a society that feels entitled to support from our children. Unless this mindset changes, Americans may one day find that all they really are “entitled to” is a piece of the national debt."

Big Board looks for a way to trade Nasdaq stocks, Responding to competitive pressure, the NYSE is talking to firms like Instinet but may create its own network, By Greg Ip, THE WALL STREET JOURNAL, Aaron Lucchetti and Rebecca Buckman contributed to this article -  Can we all agree that the existing manual, or open call out system, is outdated? Automated trading systems are approved in a test mode in April 1999. Can the NYSE and other exchanges be far behind?

"The gloves are coming off. The New York Stock Exchange, the world’s biggest and most prestigious market for stocks, has watched as the hottest technology stocks — Microsoft, Intel, Dell and Cisco, among others — have led the bull market upward from their perch on the Nasdaq Stock Market. In recent months, the Big Board has looked on from the sidelines as dozens of red-hot Internet start-ups listed their shares with Nasdaq."

"TO ADD INSULT to injury, the rapidly growing community of online brokers has been sending many of its trades of Big Board stocks to Nasdaq dealers or regional stock exchanges."

"The plans are preliminary, and the exchange may ultimately choose to do nothing. But if it proceeds, there are at least three possible routes: Build its own electronic trading network, buy or ally with an existing network such as Reuters Group PLC’s Instinet Corp., or arrive at some sort of joint venture with Nasdaq itself."

"Nasdaq’s dealer system is under strain from eroding profitability, extreme volatility in new stocks and regulatory change. The Big Board itself faces incipient threats from online brokers that don’t do business on the New York exchange and from ECNs its own member firms are setting up. The pace and scope of change have reached the point where bold moves may be the only ones that will make any difference."

"The ECNs take about 20% of Nasdaq’s volume, even as Nasdaq itself is adopting new systems, including one called OptiMark, that would enable individual and institutional customers to trade directly and anonymously with each other outside the Nasdaq dealer system. (Dow Jones & Co., publisher of The Wall Street Journal and Interactive Journal, owns 8% of OptiMark’s developer, OptiMark Technologies Inc.)"
       
"But setting up its own screen-based network to trade Nasdaq stocks would carry risks for the New York exchange. It would in effect be conceding that there is a viable alternative to its centuries-old floor-based system."

Economy outgrowing statistical yardsticks, Valley firms rely on federal gauges in decision-making , BY JONATHAN RABINOVITZ, February 25, 99Mercury News Staff Writer -  Can the federal reserve and BLS keep up with the Internet?

"A U.S. economy that operates increasingly on Internet time is outgrowing a national statistical system that was intended to measure factories and farms, even as federal agencies strive to overhaul their methods to keep pace with the rapid changes."

"The current statistical methods, economists say, are not well-suited to gauge a dynamic global economy that depends more and more on software development and new medical procedures than on the output of steel manufacturers and size of wheat crops."

"We cannot afford to use rusty, iron-age statistics to measure the new millennium American economy,'' said Steven Landefeld, director of the Bureau of Economic Analysis, one of the federal agencies most responsible for economic statistics. Unless substantial changes are made, he added, ``the chickens would come home to roost.''"

"The Bureau of Labor Statistics, which conducts the monthly employment survey, has acknowledged the problem: that it needs to improve its measurement of start-ups. It was supposed to have a new system in place by June, but is running a year behind schedule."

"The Census Bureau acknowledged last year that it understates U.S. exports by as much as 10 percent."

• " The Bureau of Economic Analysis' most important statistic, Gross Domestic Product, which measures total national output, has fallen short of Gross Domestic Income. These two figures should be equal. In recent years, the agency says, this discrepancy has become ``alarmingly large.''

•  Corporate spending on software is not counted as an investment by the bookkeepers who maintain the national accounts. Bureau of Economic Analysis director Landefeld estimates that this practice has lowered the annual growth in the GDP by a few tenths of a percentage point.

•  The Bureau of Labor Statistics collects wage and salary data in its monthly employment survey for production and non-supervisory workers but does not gather earnings information for a host of others, such as those in sales, marketing and management, positions that account for almost half of U.S. compensation."

"And even with these criticisms, many economists still consider U.S. statistics to be among the world's best."

"The government is adopting a new way of categorizing industries, the North American Industry Classification System, to replace the SIC or Standard Industrial Classification System. This will provide separate categories for software and cell phone service, which previously were classed in a large grab-bag category of ``other services.''"

"This month the Bureau of Labor Statistics unveiled a new way of calculating the Consumer Price Index that better appraises the value of high-tech items."

"And the Bureau of Economic Analysis earlier this month asked Congress for an additional $4.5 million in money to develop new yardsticks to measure the ``new millennium economy,'' particularly the ``exploding volume of investment in computer software.'' "

"The Bureau of Labor Statistics conducts a monthly survey of about 400,000 establishments, with about one out of 10 in California. From that survey, the agency estimates the total workforce and breaks it down by the industry codes. It then provides these numbers to the states so they can release statewide figures and break them out by county. "

Tech firms slow to use direct Web sales, BY MONUA JANAH, Mercury News Staff Writer February 23 - Are tech firms the first to experience the difficulty in transitioning to new distribution channels?  This is a big issue for financial service companies.  What will a large insurance company do with the sales staff?

"Many of Silicon Valley's companies that are at the heart of the Internet -- ones that provide the equipment that makes buying and selling on the Web so easy -- do little, if any, online selling of their own."

"As a result, analysts say, companies such as Sun Microsystems Inc., Hewlett-Packard Co., Compaq Computer Corp. and 3Com present a strange spectacle: While they are touting products and services to help their customers build e-commerce systems, they're leery of doing e-commerce themselves."

"But this is beginning to change. Technology companies are ramping up their Web-selling efforts, while at the same time taking care not to ruffle the feathers of their longstanding resellers -- national and regional distributors, systems integrators and retailers."

"Among major manufacturers, Cisco Systems Inc. and Dell Computer Corp. lead the pack in online selling, having started well ahead of their competitors. Cisco, which makes networking hardware, sold $2.1 billion of goods online in its latest fiscal quarter. Dell generates $14 million a day from consumer and business purchases on its Web site."

"But market-research firms are predicting spectacular growth in sales of computer equipment and peripherals via the Web. Forrester Research Inc., of Cambridge, Mass., sees sales of computing and electronic equipment growing from $19.7 billion in 1998 (less than half of all online sales, of $43.1 billion) to $50 billion this year and $230 billion in 2001. But the real question is how this growing pie will be divided up among the industry's giants.

"Palo Alto-based HP, meanwhile, has operated two online stores -- the HP Shopping Village, where direct purchases can be made, and the Commerce Center for business customers -- since November 1997. The Commerce Center isn't an online store per se -- it simply gives business customers an easy, point-and-click way to order from an HP reseller. ``Currently what we offer is an elaborate and sophisticated referral service'' on the Web, says Rebecca Green, HP's North America e-commerce manager."

"Interestingly, Cisco's routers are among the most complex and expensive computing equipment around. But the company's online configurator provides buyers with easy-to-follow steps to specify settings for the routers, which are used to direct traffic on computer networks. The tool assists potential buyers pre-configure their purchases, and it is user friendly enough that it can point out errors."

"Compaq, too is stepping up its Web efforts. Compaq chief Eckhard Pfeiffer declared last month that the company intends to assume leadership of the Internet, and analysts expect that Compaq will use its AltaVista company to build up a major Internet portal that will, among other things, drive sales of Compaq gear. Compaq this week confirmed reports that it has suspended agreements with 10 online retailers that sell its computers, citing the need to review its approach to Web sales. Though online sales are small compared to Dell's, they are growing: Compaq says its online sales now amount to $2 million a day."

"Unlike Cisco, Bay has gained most of its revenue from third parties like systems integrators and resellers. So in creating an online-sales site, the company had to tread carefully. Says Phyllis Brock, vice president of the Web business organization, ``We absolutely wanted to keep our relationships with our partners.'' In addition to the direct-ordering operation, the company also provides information about resellers. It also offers various customized online services for buyers, such as purchasing histories."

"No matter how much the companies soft-shoe around the issue, however, eventually, more online sales will take a chunk out of the business of traditional intermediaries."

"Another Sun reseller has taken another tack. ``We've moved to being a manufacturer,'' says David Van Beveren, president of EIS Computers Inc. of Moorpark. ``We buy components from Sun and we build our own systems under our own brand.'' EIS has also focused on a particular market segment -- selling to Internet service providers, a technically savvy group. Analysts predict that this market will thrive in the next few years."

Week of February 14, 1999

This was a week where we continue to see the USA pull ahead of of the countries of the world as deflation becomes the watch word. Japanese rates are moving toward negative, or if nothing else, maybe they are experiencing the proverbial liquidity trap. IBM joins HP and includes the Linux operating system on PC server computers.  Between Linux and Java, Microsoft better watch their back.  Linux is an open source code software (modified by users and often shared) and support is available if you purchase the Free software from Red Hat Software.  What a world! the software is free but if you want a manual you must pay.  Adam Smith has to love it.   My computer friends couldn't say enough good about Linux.  One friend said that he has a Linux server that has run for 24 hours per day for 2 years without a crash.   If any readers match this with NT, Please let me know.  On the court front. . . be certain that your company has a e-mail retention policy, or maybe we should call it an e-mail burn policy.

Countrywide Blazes Trail With, Mortgage Deal in U.K., By Marc Hochstein, American Banker, February 18, 1999 - Will Countrywide Mortgage use the Internet to expand rapidly in Europe?   We think so and we applaud their effort.

"Countrywide Home Loans is forming a joint venture that would make it the first major U.S. mortgage lender to tap the European market."

"The California-based giant said Wednesday that it will form an alliance with Woolich PLC, a British bank, to provide mortgage services in the United Kingdom, France, and Italy."

"The European market will more than double the company's geographic territory, Mr. Kurland said."

"Another potential challenge for U.S. mortgage lenders in Europe is the relative difficulty of foreclosing on properties, Ms. Erb said. "In certain countries the courts don't tend to favor lenders. It can be a lengthy process, or you don't get consistent treatment.""  Is this much different than New York?

Merrill Lynch enters Net brokerage race,  By Sandeep Junnarkar,
Staff Writer, CNET News.com , February 19, 1999 -  They can run from the discount brokers but they can't hide.  If Merrill Lynch refuses to acknowledge the success of the discount brokers will success follow, or will they loose most of their customers?

"In a move to have a stronger presence on the Internet, Merrill Lynch, one of the world's largest brokerage firms, today announced it is acquiring the Web brokerage technology unit of securities firm D.E. Shaw."

""Merrill, along with a few other big traditional brokerage firms, has been slow to move into the booming online trading market. The firm's Net efforts have been held back partly by fears that discount trading would eat into its brokers' commissions.""

"Meanwhile, Charles Schwab and Donaldson Lufkin & Jenrette have created separate units to handle online trading, and other major brick-and-mortar brokerages are looking for ways to integrate Net trading into their existing businesses."

"The pure Internet trading firms include E*Trade, Ameritrade, and Datek."

DFIN.COM provides a growing list of online brokers. Click Here 

Canada wants to be most `wired' nation, February 16, 1999, Mercury News, OTTAWA (Reuters) -   Will this help their economy? The Canadian government is increasing efforts to make Canada the most wired nation.  The effort includes the Indians and Eskimos.  The Canadian government appears to realize that the Internet can be inclusionary and beneficial to all.   "Finance Minister Paul Martin said on Tuesday he was expanding efforts to make Canada the most wired nation on earth with hundreds of millions of dollars in new technology spending, including establishing experimental ''smart'' communities among Natives and in the Arctic."

"He said the spending was part of a plan to make Canada the most connected country in the world and to ensure that all Canadians get a chance to learn and profit from the Internet."

"Canada will be spending C$200 million over the next three years to expand its Internet-based Community Access Program and SchoolNet, which aims to wire the nation's schools to one other and the world."

The new danger, The Economist - We have included this entire article because it is so well written and reflects our views.  Our hats off to Mr. Greenspan and his work with the monetary aggregates.  Didn't the other countries of the world learn from the experience of the Great Depression?

"FOR several decades the bogeyman for most rich economies has been inflation. Policymakers began to fight it seriously 20 years ago, when Paul Volcker, chairman of America’s Federal Reserve, dramatically tightened monetary policy. Countries from Britain to Brazil then joined the fray. With great success: the average inflation rate in the G7 economies is now a mere 1%, the lowest for half a century. But even as the old enemy seems quiescent, a new and possibly more dangerous one may be rising up: deflation."

"This is not a claim that The Economist makes lightly. We have long urged central banks on in their determination to resist inflation. And isn’t the sign of a good central bank its willingness to turn a deaf ear to calls for monetary expansion, whatever the circumstances? Actually, no. The right target is broadly stable prices, which requires that a central bank should be ready to attack deflation as fiercely as it does inflation. Not only that, but a good central bank also keeps in mind that deflation can be more damaging than inflation, if it creates a downward spiral in which the expectation of falling prices reduces demand and pushes prices lower still, as happened in the Great Depression."

"Seen it all before

In much of the world outside America, the risk of falling consumer prices (ie, deflation) is at its greatest since the 1930s (see article) . Japan is already in the grip of deflation. Prices are falling in China and some other parts of East Asia. Continental Europe’s inflation rate, if correctly measured, is close to zero. Prices are coming down partly thanks to the beneficial effects of new technology and deregulation, and partly thanks to cheaper oil and other commodities. Such deflation is generally benign. But alongside it are signs of a more malign deflation, caused by excess capacity and weak demand. On current forecasts, the global “output gap” between actual and potential production will, by the end of 1999, be at its widest since the 1930s. If the economies of America or Europe were now to take a sudden lurch downwards, the world might easily experience outright depression, with prices and output falling together, just as they did 70 years ago.

Given such a risk, monetary policy in the rich world, taken as a whole, looks dangerously tight. Real interest rates are only slightly below their long-term average, which hardly seems appropriate when growth is so far below trend. Nominal GDP in the G7 economies is forecast to grow this year by only 2¹/₂%, virtually the slowest since the war and well below what is required to sustain healthy growth with stable prices."

"True, monetary policy has been eased since last summer, but the easing has often come in the wrong places. The biggest drop in real interest rates has been in America, where growth of almost 6% in the fourth quarter of 1998 hardly points to imminent deflation. In a less gloomy world the Fed might be raising rates to cool the economy. In contrast, monetary easing has been more cautious in Japan and Europe, where the danger of deflation is much more immediate."

"Japan seems to be stuck in a classic liquidity trap: it needs lower real interest rates to boost demand, but because of deflation they are stuck painfully high. At the same time, government debt has exploded to a size that makes fiscal policy less potent. Yet there is still another instrument in the Bank of Japan’s tool-kit: it can increase the quantity of money by buying government bonds—ie, by printing money. This solution is not without its drawbacks (see article), and banks weighed down by bad debts may still prove reluctant to lend more. But such a monetary boost would push down the yen, and so both lift exports and push prices up. Moreover, unless it is backed by monetary easing, Tokyo’s latest policy twist (trying to talk down the yen) will simply not work."

"The European Central Bank (ECB) also needs to relax more. In response to pressure to cut rates from European politicians, notably Oskar Lafontaine, Germany’s finance minister, the ECB has argued that its rates are already at a historical low and that European unemployment is structural, making it in the long run impervious to monetary policy. But real rates are not in fact that low. And not all European unemployment is structural—some is caused by economies operating below full potential. Forecasts last year suggested that the euro-11 economies would, on average, enjoy growth of almost 3% this year. But now most economists reckon it will be no bigger than 2%, meaning that the euro area’s output gap will widen. Given a risk that deflation is looming, that seems to make it safe and prudent to cut interest rates further. If Mr Lafontaine really wants this, however, he might be wise to shut up: his demands are encouraging the ECB to delay any cut, to avoid seeming to bow to political pressure."

"Indeed, the Bank of Japan and the ECB are resisting an easing of monetary policy partly for similar reasons. They fear that their independence and credibility might be damaged. But to seek to keep inflation above zero is hardly to risk hyperinflation. And central banks’ credibility would suffer far more if they allowed deflation to take root."

"The world economy is precariously lop-sided. Even as America’s economy continues to surge, much of the rest of the globe is drifting towards deflation. It is scary that America’s boom, fuelled by an unsustainable stockmarket, is now the main prop for global demand. For how much longer? Global deflationary pressures are already choking American profits, making its share prices look ever more overvalued. This could yet topple the stockmarket. No wonder American policymakers are urging Japan and Europe to reflate."

"Most economists believe that a repeat of the 1930s is unlikely, if only because people ought to have learned from their mistakes. Yet central banks failed to foresee either the 1930s depression or the great inflation of the 1970s. A big concern for the world economy may now be that central bankers, having successfully scotched that inflation, will prove too slow to come to grips with the prospect of deflation."

One Currency, Many Bond Markets (int'l edition) Some countries still pay a risk premium on their debt , By Kerry Capell in London, March 1, 1999 issue -  There may be a unique opportunity to benefit in the European bond market until the Euro becomes fully integrated.

"Europe may have achieved monetary union, but bond investors are still treating the Continent like a group of distinct countries. Many economists expected the 11 member nations to pay nearly the same rate for government borrowing after the euro's January launch and the European Central Bank's official opening. Instead, a familiar gap remains between countries that must pay a premium to issue sovereign bonds and those that can raise money more cheaply."

"But in the euro's early days, figuring out a fair price for sovereign debt feels like ''running an experiment without a control,'' says Charlie Berman, head of European debt markets at Salomon Smith Barney."

"Spreads between European bonds have narrowed considerably over the past five years during the runup to the euro's launch. For example, on Feb. 24, the benchmark German 10-year bond, known as the Bund, yielded 3.90%, while Italy's 10-year bond paid 4.11%. That 21-basis-point spread is a far cry from 1995, when the gap between Italian and German sovereign debt was more than 600 basis points."

"Indeed, the international debt-rating agencies assign Germany the top AAA rating, while Italy merits a mere AA3. In fact, says Cesar Molinas, senior Europe strategist at Merrill Lynch & Co. in London, Italy and other high-debt nations such as Belgium could be piggybacking on Germany's creditworthiness now that they're all in the euro club--even though Germany wouldn't be obligated to bail them out of a crisis."

"Between credit risk and liquidity risk, it makes more sense that the euro zone's $2.5 trillion government bond market isn't a monolith. ''There's a natural inclination to assume that now that Europe has one currency, its government bond market will develop along the same lines as the U.S. Treasury market,'' says Merrill Lynch's Molinas. A more accurate comparison, he says, would be the U.S. municipal bond market, where spreads between states and localities vary widely, depending on everything from tax rates to pollution to budgets."

Housing construction at 12-year high,Industrial output unchanged, MSNBC NEWS SERVICES,  The Associated Press and Reuters contributed to this report WASHINGTON, Feb. 17 -  Before the advent of computer databases and ubiquitous computers, we would watch housing starts and auto sales as a gauge for the economy. Not surprisingly, with interest rates at record lows and full employment housing starts are at a 12 year high.  However,  "demand for U.S.-made exports has fallen amid a global slump in emerging markets, particularly in Asia and parts of Latin America" and "capacity utilization was running at 1.5 percentage points below its average of the past 31 years".  Can the USA keep the world economy going?

"Despite icy weather in the Northeast and Midwest, construction of new homes jumped 3.8 percent in January to a 12-year high, extending the building boom of 1998 into the new year. Builders started construction of houses and apartments at a seasonally adjusted annual rate of 1.80 million, the most since December 1986, the Commerce Department said Wednesday. Separately, the Federal Reserve reported Thursday that U.S. industrial production was unchanged in January despite a slight increase in factory output."

"Regionally, the South more than accounted for the national gain.
Starts there jumped 22.3 percent to a rate of 890,000, the most in 13 years. They rose 3.7 percent in the West to a rate of 446,000. However, they plunged 25.3 percent — the sharpest decline in five years — to a rate of 316,000 in the Midwest and slipped 3.2 percent to a rate of 152,000 in the Northeast.      Meanwhile, housing permits — a barometer of construction plans — rose 2.8 percent to a seasonally adjusted annual rate of 1.78 million, the most since July 1986."
       
"Separately, the Federal Reserve reported Thursday that U.S. industrial production was unchanged in January despite a slight increase in factory output. U.S. mines, factories and utilities operated at 80.5 percent of maximum capacity — the weakest rate since 80.4 percent in September 1992 — after running at 80.8 in December. Overall output was steady following a 0.2 percent gain in December, the Fed said."

"Capacity utilization was running at 1.5 percentage points below its average of the past 31 years, the Fed reported. Output was up 1.7 percent from a year ago, it added."

Japanese Short-Term Rates Near Zero, By BILL SPINDLE and JATHON SAPSFORD, February 17, 1999, Asia Wall Street Journal, Dow Jones Newswires, Tokyo - Can you say, Japanese Liquidity Trap?  and how about the liquidation of Japanese USA assets for reinvestment in Japan?  "The Bank of Japan drove short-term interest rates to almost zero, the most recent indication that it has begun a shift from conventional interest-rate policy to focus on expanding money supply."

"The yield on Japan's benchmark long-term bond slid to 1.925% Wednesday, from 1.985% a day earlier and 2.135% before Tuesday's policy offensive. The yen also weakened on the rate-cut news, to more than 118 yen to the dollar in Tokyo trading, compared with about 117 yen a day earlier and 114 at the start of Tuesday trading."

"The central bank's decision to push the interest rate it most directly controls to 0.08% -- and Gov. Masaru Hayami's telling reporters this week that even a rate of zero would be acceptable -- may be one of the first steps in a policy shift toward aggressively printing money to break a deflationary spiral, according to analysts and financial-industry officials."

"The move Wednesday bolstered perceptions in the financial industry that the government has exhausted conventional means of boosting the economy and is now headed into waters virtually uncharted for a half-century. In just two weeks, the idea of Japan revving up the yen printing presses has moved from the realm of arcane academic discussion to the center of public-policy debate. But the risks of such a policy, which some business leaders and many analysts view as likely sometime this year, are huge."

"Some economists say that if Japan aggressively expands its money supply, the yen will depreciate significantly, perhaps even to 200 yen to the dollar. That could put pressure on other currencies in Asia, potentially sparking another round of global financial turmoil."

"Interest rates of 2% may seem low by global standards, but with wholesale prices falling, some economists worry that the real cost of borrowing has become high enough to threaten an economic recovery. Higher Japanese rates have also rattled the U.S. bond market, sparking fears that Japan will lure capital away from the U.S."

"With rates approaching zero, some members of the bank's top policy board began debating more-radical approaches. One is expanding money supply rapidly with the aim of creating inflation. That might not only break the deflationary trend but also ease the burden of indebted banks, construction companies and the government -- all of which could pay back what they owe in cheaper yen, economists say."

"An academic paper by Massachusetts Institute of Technology Prof. Paul Krugman plugging this approach -- heresy to central bankers long schooled to prevent inflation -- was translated, circulated among bank staff last May and discussed at key meetings. "It was mind-boggling for us," said a member of the bank's bureaucratic rank and file."

Week of February 7, 1999

This was a relatively quiet week, the President of the USA was acquitted on Saturday and the Thursday/Friday NASD roller coaster was another sign of our irrational stock market.  On Thursday, the NASD has its greatest 1 day point gain in history and the composite index was up 4.2% to 2406. On Friday the NASD was down 2.5% or about half of the prior days increase. This was also the week that William Hambrecht began to issue his first Dutch Auction IPO.  We have confidence that his new firm will be a huge success and will shape markets of the future.

Hambrecht Serves Little Guy, Tweaks the Big Guy, Online, By LISA BRANSTEN and NICK WINGFIELD,  THE WALL STREET JOURNAL INTERACTIVE EDITION, February 8, 1999, San F4rancisco -  Was William Hambrecht subconsciously signaling the market that the Internet will change the delivery systems of all financial institutions when his firm ( Hambrecht & Quist ) was sold only to be reborn as a Dutch Auction IPO firm?  "For 30 years, William Hambrecht doled out hot initial public offerings to powerful institutions and favored clients. Now he's catering to the little guy -- and tweaking the clubby world of investment banking."

"a Dutch auction process both to set the offering price and allocate stock to individual investors. High bidders, not preferred investors, get the shares."

"Moreover, he expects to charge companies fees of 3% to 5% of the amount of money raised in the IPO, as opposed to the traditional 6% to 7% collected by investment banks. And, theoretically, companies could raise more money by selling their shares closer to the price at which they begin trading on the market; the first trade of some hot IPO's can be sharply above their offering price, enabling the investors to pocket a quick bundle that might otherwise have gone to the company."

"Mr. Hambrecht's new firm, W.R. Hambrecht (www.wrhambrecht.com), will begin taking offers on its first deal, an IPO for Ravenswood Winery Inc. of Sonoma, Calif. Mr. Hambrecht, 63 years old, who has been developing his IPO idea for a year, takes aim at his former peers with a series of distinctive cards mailed to potential clients."

"Under Mr. Hambrecht's plan, dubbed Open-IPO, would-be investors submit bids for the number of shares they would take and at what price; to participate, bidders will need to have a brokerage account through W.R. Hambrecht or one of the five small brokerages that have agreed to participate in the process."

"After a few weeks of taking bids, the offering price will be set at the lowest price at which all shares can be sold. Those bidding above the offering price will get all the shares they asked for at the offering price; those bidding at the offering price will get some portion of their bid; and those bidding less than the offer price won't get any shares. No more than 10% of the shares sold can go to a single bidder, and Hambrecht reserves the right to limit the purchases of anyone seeking to buy more than 1%."

"Before opening the bidding, W.R. Hambrecht will set an expected price range for a deal to give investors a sense of its potential value. For example, it has indicated a price of $10.50 to $13.50 a share for the one million shares that Ravenswood Winery is offering. W.R. Hambrecht will assume the financial risk of a typical underwriter, buying the shares from the company after they are priced and reselling them to investors."

Of course the establishment is not happy with this new concept. Consider what the IPO market has been like recently, and who is making all of the money as you read the following quote. "Mr. Readmond of Wit Capital argues that pricing is best left to investment bankers who know a company and are willing to put their reputation on the line when determining the value of an IPO prospect. Others say traditional analysts are needed to support a company's stock after it is public. Analysts are important because they can "influence a large group of people," says George Zachary, a general partner at the Menlo Park venture-capital firm Mohr Davidow Ventures."

U.S. productivity nears 3-year high, REUTERS, MSNBC, WASHINGTON, Feb. 9 - Productivity may be the important thread between inflation and growth. In the 1970's high interest rate environment productivity was at low levels dropping.  In our current economy, we have low inflation and "The productivity of U.S. workers surged at the fastest rate in nearly three years in the final quarter of last year, the government said Tuesday, in the latest sign of the economy’s exceptional performance. Productivity, a measure of output per worker hour, climbed 3.7 percent for workers outside the farm sector, the biggest gain since a 4.2 percent increase in the first quarter of 1996, the Labor Department said."

Japan's Central Bank Lowers Key Interest Rate to 0.15%, Dow Jones Newswires, February 12, 1999, TOKYO -    In an effort to expand the money supply and end the recession in an unexpected move similar to England last week, the Bank of Japan lowed some key short term interest rates.

"The Japanese central bank's policy board voted to lower the target overnight-call money rate, or the rate charged by banks for overnight lending without collateral, to 0.15% from 0.25%. It also slashed its temporary lending rate for companies to 0.25% from 0.5%."

"Political pressure had been building for the Bank of Japan to buy government bonds to help lower interest rates. The central bank had refused, saying such a measure would spark inflation and trigger a sharp rise in interest rates in the long term."

"A recent surge in the yields on Japan's long-term government bonds has sparked selling in the stock market and buying of the yen."

"Late Friday, the yield on the benchmark 10-year Japanese government bond rose to 2.07% from Wednesday's finish of 1.995%."

"The central bank said it is easing monetary policy to encourage an expansion in the money supply as the risk of deflationary pressure has been rising and the prospects for economic recovery are still unclear."

Citigroup cuts ties with Visa, The financial giant turns to MasterCard, By Steve Frank, THE WALL STREET JOURNAL, taken from MSNBC, Feb. 9 - Citigroup has resigned from Visa’s board of directors in a dispute about how the banking giant’s credit cards are branded. The move means most Citigroup Visa cards will soon become MasterCard's.  

Women's online ranks rise, BY ELIZABETH CORCORAN, The Washington Post, reviewed from the Mercury News Online - "This year for the first time, the number of women using online services is likely to match the number of men online" "The number of women online ``has really surged in the past year alone,'' said Frank Gens, a senior vice president at International Data Group, a market research firm in Framingham, Mass."

"Just four years ago, ``it was pretty much a male Internet,'' Gens said. But by late 1997, about 43 percent of the people online were women, according to Gens' research. That number jumped to 48 percent by the end of last year and will probably exceed 50 percent in 1999, she has concluded."

"Already, more than half of America Online's members are women. ``Our membership is 51 percent women, 49 percent male, mirroring the population,'' said Pam McGraw, a spokeswoman for AOL."

"According to Gens, women spend less time per week online than do men: about 7.5 hours a week, compared with nine hours for their male counterparts."

"There are also subtle differences between what men and women like to do online. Almost everyone uses the Internet to send electronic mail, but women even more so than men. According to Nick Donatiello, president of Odyssey, a market research firm in San Francisco, 91 percent of women online use e-mail, compared with 83 percent of men."

Greenspan Rejects Overtures From Treasury on Reform Bill, By Dean Anason, Friday, February 12, 1999, WASHINGTON - The battle lines are being drawn - again - on banking reform. "Federal Reserve Board Chairman Alan Greenspan rejected a compromise on financial reform Thursday."  His concern is the unfair cost of capital advantage provided to financial institutions because of insurance of accounts.

"After other regulators had endorsed the deal Wednesday, Mr. Greenspan dashed hopes for a breakthrough by blasting Rep. John J. LaFalce's plan to limit new activities conducted in bank subsidiaries to securities underwriting and merchant banking."

"The consequence of doing that is so thoroughly negative . . . that [it] is much too high a price to pay for an issue, which, in our judgment, probably could be resolved by different means," Mr. Greenspan told the House Banking Committee."

"He added that the deal would give banks an unfair competitive advantage over insurance and securities companies."

""You can give us all the authority of everything with respect to operating subs, and we would oppose putting the powers in there," Mr. Greenspan told House Banking's ranking Democrat. "It's not a turf question. It's an issue of structure.""

"Nothing is lost, in my judgment, by making this a two-stage process," he said. "The Asian crisis last year highlighted some of the risks that can arise if relationships between banks and commercial firms are too close."

Senate Banking Committee Chairman Phil Gramm's reform bill will not be released until Feb. 16. Hearings are scheduled for Feb. 23-25, with a committee vote in early March.

"On Thursday, Senate Banking unanimously passed the Financial Regulatory Relief and Economic Efficiency Act, which contains 37 provisions designed to make life easier for banks." "Banks could pay interest on corporate checking accounts and earn interest on reserves held at the Fed. Another provision would eliminate a requirement that thrifts keep 4% to 6% of total demand deposits in liquid assets."