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QUEST MEANS BUSINESS
China Raises Interest Rates; Protests, Strikes in France
Aired October 19, 2010 - 14:00:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
RICHARD QUEST, HOST, QUEST MEANS BUSINESS: China raises interest rates and that causes stock markets to fall.
In France, those fuel shortages, airport blockades and strikes are causing huge travel delays.
And getting further, faster. Deutsche Bahn's plan for a high-speed rail.
I'm Richard Quest. I mean business.
China today shocked the markets by raising interest rates a 0.25 of a percentage point. The move was flagged by the Chinese authorities as an internal signal to property developers that rampant house price inflation was intolerable and would be controlled by the Beijing government. It was also see a sign of slowing down an economy that could be overheating.
To the markets, which fell sharply on the news, the Dow Jones industrials at the moment, up 183 points at the moment, 182. Down once again, we are under the 11,000 mark for the Dow, a loss of 1.5 percent. There was earnings news which also took its toll on the Dow. But it was primarily this announcement from the Chinese, of a small raise in rates, a rise in rates that caused the worry. Todd Benjamin is with me to help explain the seemingly inexplicable.
A small 0.25 point rise in Chinese rates, in an economy that is already overheating, or in danger of.
TODD BENJAMIN, FINANCIAL ANALYST: Please, Richard, you are much more sophisticated than that, and I know it.
Look, the reason that the markets are falling is because China is a global engine of growth right now. It is the one major economy that is really going on all four cylinders, six cylinders, eight cylinders. And what people are worried about is if China slows down, if the government tries to slow down the economy, then that means that commodity prices will fall, because demand will be less. That means that other products won't be as desirable, from other countries, and so, not surprising to me that the market is selling off. It is the first interest rate rise in nearly three years.
QUEST: All right. But you can see my somewhat sensible point. That a small rise in rates ensures the sustainability of the growth. So what are they afraid of?
BENJAMIN: Look, I think no one doubts that China is going to grow strongly, it is a question of how strongly. And you are right, it is much better to have sustainable growth. I think the government is being extremely responsible in doing this interest rate rise, it is not only because of property prices. It is also because, you know, in real terms they have negative interest rates. So that encourages people to speculate in other areas, in other assets. All right? But the bottom line is, Richard, that markets, they want to see China just go as fast as it can because it means higher commodity prices. The markets aren't rational.
BENJAMIN: Right? You know it.
QUEST: Well, that is a wonderfully-
BENJAMIN: No, they're not.
QUEST: That is a philosophical argument that we could get into. Overtime, markets do-they price to perfection over time.
BENJAMIN: Yes, but when people are in a frenzy and China is the center of the universe right now, any sign that the economy may grow more slowly rattles the markets. Just that simple.
QUEST: Do you-are you in the camp, after the midterms are out of the way, quantitative easing returns to the United States, both with Treasuries and with B.S.?
BENJAMIN: Look, absolutely. I think quantitative easing is back. You know, I think Bernanke has certainly signaled that. I think you'll get it at their next meeting. The big question is, what will it really mean for the U.S. economy? I don't think it is going to do much. I think it is already built into the markets. You know, they've already had, you know, very low interest rates, and a lot of quantitative easing. And the economy is not getting worse-although it is getting slightly worse. You could have a quarter of negative growth next year. The reality is it really hasn't helped that much. So, I'm thinking, yes, it is baked in.
QUEST: OK, all right. I was reading Joseph Stiglitz in this morning's "Financial Times".
BENJAMIN: Yes, the "Times" thing.
QUEST: I'm sure you saw his article. He compares monetary policy with fiscal policy. He says it is too monetarism and fiscal policies were the way forward. On the same week that the Conservative government, the Tory government, the coalition in the U.K. is going to make major cuts.
Quantitative easing is an unknown, isn't it? We're talking about it as if it is tried and tested. It is not.
BENJAMIN: No, it is not tried and tested. And I really don't think it is going to give the dividends that the Fed thinks it is going to get. And that is why I think the markets are starting to doubt really how much further it can go. It certainly has weakened the dollar, which is a big plus, because, you know, about 45 percent of the earnings in the S&P 500 are tied to overseas earnings. But having said that, it is not going to buy a recovery in the United States, it is that simple.
QUEST: All right. I want you to stay where you are, Todd.
QUEST: Because once we have heard the earnings, I need to get your interpretation into a wider spectrum. So, don't go too far, and try not to cause too much trouble.
BENJAMIN: All right.
QUEST: The results are in from some of America's top firms. And going by the reaction on Wall Street, they have certainly, seemingly hit the mark. We will be in New York in just a moment.
First of all, the vital numbers that you need to know. IBM says net income is up 12 percent on last year, to $3.6 billion, reaping the benefits of a weaker dollar and a big jump in sales in emerging markets. Apple hit an all time record for sales in the quarter, selling $20 billion worth of iPod, iPads, iPhones. Net profit was expecting $4 billion. Goldman is losing the touch, some say. A slump in trading income took 40 percent off quarterly earnings. At least it made a profit. Bank of America skidded to a $7 billion loss in the same period. It blames recent financial reform. And Coca-Cola made $2 billion, up 8 percent on last year.
Now, to help you make sense of the earnings, we are bringing back our exclusive Q25 Index. Each quarter we pick 25 global firms that represent a wide variety of businesses. And we decide whether the results merit a green balloon or a red balloon. The earnings season we have raised the bar a bit. We have made it tougher to give companies the passing grade, as earning trends have improved. It is the tough love of the Q25.
So, to get a green balloon, you have to basically have four out of the five. Revenue growth of 5 percent or more; profit growth, 5 percent profit rise compared to previous quarter; positive comments about future; and any words on hiring, R&D, and expansion plans.
Those are the criteria. If you get three, well, we have a debate. Three greens, two or three, either way, on the red and the green means that we will have somewhat of a debate about it. Maggie Lake is in New York, and joins me.
Now, our first-Maggie, this is new territory for me. You know, like the old saying about having to walk and chew gum at the same time. I've got to get the balloons, and I have to deal with you, and I've got to keep Todd in one place, over there.
Goldman Sachs, on the strict criteria, Goldman got one out of the five. Therefore it is an automatic red. But I wasn't yet convinced.
MAGGIE LAKE, CNN FINANCIAL CORRESPONDENT: Yes, you weren't. I'm in the red camp, Richard. You and I don't agree on this at all. You know, I think, listen, are things going to get better for Goldman? Yes, they have a cash stockpiled, their building, they are being very much on the down low. They don't want a lot of publicity. So no surprise, they are not saying great things about the future.
But bottom line is, these are the best traders on Wall Street, the best in breed. And they didn't measure up. Investment banking was a bit better but trading was weak. So, I get a red. I don't know what you were so positive about? Why do you think they don't deserve a red?
QUEST: I'm positive, because in a bad market they did beat expectations. They weren't as bad as bad as it-
LAKE: Beat whose expectations? Beat whose expectations?
QUEST: But the sector, Maggie, the sector.
LAKE: Just because you did bad, and everyone else did bad, doesn't get you a green, I think. I see your point. I don't think it was train wreck everyone expected, but
QUEST: Anyway, anyway, it doesn't really matter because under the new tough love Q25 it gets its automatic red balloon.
IBM, I'm going to quickly do IBM. It got three out of the five, which means we had a debate and we decided it was a definite green for IBM. I don't think you want to say anything on that. But Apple Computers-I mean, the numbers were good. There is nothing, really, that indicates a red for Apple, is there?
LAKE: There isn't. And you know, we should point out the stock is trading down. People were disappointed. The expectations were so high. But this is one of those cases where I think you can't really take those expectations into account. This was a fantastic record breaker quarter for Apple. They get a green.
QUEST: Oh, hang on. Todd, yes, Todd?
BENJAMIN: Yes, let me just jump in here. It was a fabulous quarter for them, Maggie, spot on as always. You know, $20 billion in revenue. And, normally, Steve Jobs doesn't come in on the call with analysts, but he came in on this one, just to remind people this is their first $20 billion quarter.
I think where the market was disappointed, Maggie, you can correct me if I'm wrong, is that they didn't sell as many iPads-
BENJAMIN: -as some thought. And that is what is dragging the stock down.
QUEST: They were expecting something like 4 million, and they got 3.2. But hang on, he really stuck it to the critics, didn't he? I mean, some say it was a rant, Maggie, some say it was a rant the way he went on about, we don't want 7-inch iPad, digital thing-pads.
BENJAMIN: The Android.
LAKE: He took a real shot at Google, yeah. Took a real shot. Because listen, if Steve Jobs once again, he is a one of a kind. In this politically correct, you don't hear CEOs go off script. Not only did he come out and tell the analysts they were wrong, but he took a slam at the competition, too. That is why we watch him.
QUEST: All right. Bank of America, there was no debate on Bank of America. Because on the new test, one out of five, it gets its automatic red.
But Maggie, it was a pathetic performance by BOA.
LAKE: Yes, listen, they are struggling. They have exposure to the U.S. housing market, the mortgage market, a new mess there. Somebody did point out that it is a mess, it is still a manageable mess. But watch this space. Tough sledding, still, for Bank of America.
QUEST: Finally, Coca-Cola, tell you, all these balloons, one of them is going to go astray before we're finished.
Coca-Cola was a two, three-er, so we had to have a debate about it. I like what I saw in Coca-Cola. I don't care what the tough love said, I said it was a green.
LAKE: Yes, no, I'm with you on this, too, Richard. It is hard in the tough love edition, but the thing is, Coke missed on a couple of them, like for instance, profit growth of 10 percent or more, but it cam awfully close, it was at 8.4 percent. And you know, the volumes were good. Even in North America, the weakest spot they saw volume growth. So, I'm with you. I think all things considered, there is a positive story here, for Coca-Cola.
QUEST: Maggie Lake is in New York. We have four versus three; this is going to be an exciting, if not somewhat dangerous Q25 for us.
Todd Benjamin, the earning season is underway, and Even Stevens.
BENJAMIN: Even Stevens, China is the big story, though.
QUEST: China is the big story. We'll talk to you more about that (UNINTELLIGIBLE). Many thanks, Benjamin.
BENJAMIN: Great seeing you.
QUEST: As pension strikes bring France to a virtual standstill, how much public support do the strikers have? And exactly what are they striking over?
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In a moment.
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QUEST: France is in uproar with more than 1 million people on the streets in anger, rolling strikes keeping planes on the ground. Petrol pumps are starting to run dry. Schools have been closed. And with the government due to vote on divisive pension reform, the situation is likely to intensify. Our correspondent is Jim Bittermann, and he is in Paris.
Jim, I need to understand. How widespread are these strikes, and how much are ordinary people affected?
JIM BITTERMANN, CNN CORRESPONDENT: Well, those are two very distinctly different questions. I mean, I think that as far as the strikes are concerned, we have actually seen a lessening in strike activity in some sectors today, over last week, for example. In some of the transport sectors, the postal workers, what not, there are a fewer people on strike today than last week.
Having said that, we still have strikes at the fuel depots and some of the other places in France that are tying things up, especially fuel supplies. And from that standpoint what affects the average man on the streets seems to be a growing problem. In that we have seen 4,000, according to the transport minister, 4,000 of the nation's service stations, that is about a third of the nation's service stations are in need of resupply.
And the government is scrambling and scrambled this afternoon within a crisis meeting, to figure out how to get gasoline and diesel oil to the various service stations around the country. So it is a mixed bag. The strikers are affecting some things. Sometimes less than what they did last week, but on the other hand, the average guy on the street, they are probably feeling the impact, more today than they did last week, Richard.
QUEST: Jim, how much of all of this, is cultural, over what they are striking? When you look at what I-the pension reforms, being asked to work an extra two years, say 60 to 62. A lot of it might at first blush, seem moderate, or at least not exceptional, bearing in mind the circumstances. So is there something cultural going on here?
BITTERMANN: Definitely, I think that there is-first there is a sort of resistance to reform in this country, and there always has been resistance to reform, and when it comes to bear, as this has. It could be very unpopular.
The other thing, of course, is that President Sarkozy is very unpopular. His popularity ratings have been plummeting. I expect we're going to hear in the next 24 hours or so, that they have reached their lowest point, ever, we have a survey that is going to come out. I think it is going to show that. And as a consequence a lot of this is anti-Sarkozy.
You have a lot of people joining the movement, we had a poll come out, yesterday, for instance, that indicated 71 percent of the French either are sympathetic or support the strikers. Well, that is an incredibly large percentage given the fact that a lot of people are also facing hardships. And I think it is because people are along with the strikers because they feel it is a away to express their anger at the government, which they feel has been sort of ramming down their throats various reforms along the line, including this one, Richard.
QUEST: In France, there has always and often been an assumption, hasn't there? You work hard and you pay your taxes early on in your life, but later on is when you can reap the benefits and rewards of an old age, where the state will help and look after you. Does it seem that this is under threat as a result of this? Is this seen as a fundamental threat on a core value?
BITTERMANN: Well, that is exactly what a lot of this is about. For instance, the French say this is al a duate key (ph), which is to say an acquired right. And the idea is, that once you would acquire a right-and President Mitterrand sort of was the first person to say this. That once you acquire one of these rights, no one will ever take it away. Well, Mitterrand gave workers the right to retire at 60, back in the early `80s, when they were living to age 74. Now, they are living to age 81, and the government says, "Wait a second, we have got to do something about that. We have to raise the retirement age."
What you hear in the streets, though, is don't raise the retirement age, just tax the rich more, Richard.
QUEST: Well, that is one way of doing it. Jim Bittermann, in Paris, many thanks, indeed.
Now today's crossing of the channel tunnel by Deutsche Bahn, to pave the way for even greater competition. A boon in high-speed rail networks, right across the Continent. Coming up in just a moment.
QUEST: The high-speed train run by the German rail firm, Deutsche Bahn, made its own little bit of history today. The first passenger train not run by Eurostar, to cross between Britain and France via the channel tunnel. Ayesha Durgahee, now explains to us, Deutsche Bahn is showing it is capable of running safely through the tunnel, on a route which is now being opening up to competition.
AYESHA DURGAHEE, CNN CORRESPONDENT (voice over): London's (UNINTELLIGIBLE) has a visitor from Germany, a Deutsche Bahn train to carry out crucial tests in the channel tunnel, to get the green light to start operating services between Germany and the U.K..
STEFFAN GEERS, PROJECT DIRECTOR, DEUTSCHE BAHN: I'm really delighted to have achieved such an event today and having the train here in St. Pancris, it is really a great day for Deutsche Bahn, and for my project, and for my team. It adds to the connectivity from London to mainland Europe. We are adding new destinations, four new destinations. It is Cologne, Frankfurt, Rotterdam and Amsterdam.
So there is a lot more choice for the British people, for London.
DURGAHEE: Deutsche Bahn has spend 500,000 million euros on at least a dozen new trains. Half will be used to connect Frankfurt and London, via, Cologne, Brussels, and Lilles.
(On camera): With a new player in town, this will be the first time two European railways, Deutsche Bahn and Eurostar, will compete on a cross- border route.
(Voice over): -which could mean competitive prices. Breaking the monopoly Eurostar has enjoyed for more than 15 years. Interlining the web sights, though, will take time.
AARON GOWELL, CEO, SILVERRAIL TECHNOLOGIES: If you look at a company like Expedia, that is largest agency in the world now. And they sell no rail, anywhere in the world, in spite of the fact that you know, you have these huge billion-dollar outfits running into St. Pancris and there is now way to buy them.
DURGAHEE: Once you do get a ticket, trains from Cologne to London will take less than four hours. And Frankfurt to London will take around five. The hope is to make traveling by rail more attractive than by air.
JACQUES GOUNON, CEO, EUROTUNNEL GROUP: The competition, now, in Western Europe, is not between two different trails (UNINTELLIGIBLE). The competition is between rival (UNINTELLIGIBLE) and alliance. And I must confess that in the years to come, due to environmental constraints, railways, high-speed railways will defeat short airline travels.
DURGAHEE: As high speed, one, in Europe tunnel, opens it tracks to other operators. From 2013, we could see a true European railroad, Renaissance. Ayesha Durgahee, CNN, St. Pancris, London.
QUEST: Now Eurostar has lost no time in retaliating. Eurostar currently runs the trains. This is this evening's newspaper from Britain. It is "The London Standard" and even before Deutsche Bahn is up and running they are advertising Cologne, Eurostar and a whole route map, as you can see of where you can get to on the Eurostar currently, with times. Although, I have to say, London to Amsterdam, 5 hours, 32 minutes, seems a little extreme perhaps. But anyway, Eurostar versus Deutsche Bahn.
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The European stock markets-this is how they closed their day. They were very much taken aback by the Chinese raising interest rates. Just a small game for the Zurich SMI, barely worth talking about.
And on the New York market, where the Chinese rise in interest rates has seriously take its toll. The Dow Jones industrials, currently off nearly 200 points. Those losses are slightly extending, under 11,000. And that is largely because of fears of Chinese economic growth.
In a moment Twitter has created a global following and may actually be a way we can predict market sentiment. QUEST MEANS BUSINESS, we're back in a moment.
QUEST: Hello, I'm Richard Quest, QUEST MEANS BUSINESS. This is CNN and on this network, well, you always know the news comes first.
QUEST: Chicago corn futures are down for a fifth straight session. They have been dragged lower by the higher dollar. Prices remain stubbornly close to a two-year high following the prediction that this year's harvest will be less than last. In many parts of the U.S. are affected by a drought.
Poppy Harlow has been to meet one particular farmer who is facing huge losses because of the weather.
UNIDENTIFIED MALE: You love the land. You love growing things. You plant the seed, watch it grow, harvest and hopefully have a profitable harvest and it is just a love of your job, what you do. I've been a farmer since 1965, when I was 14.
See, this is a part of the problem with the yield this year. And this is one, this has got a fungus.
We are a 2,000-acre corn and soybean farm. Mostly rented ground, we control about 300 acres of ground that we own.
In June we had like 7/10ths of an inch of rain, as opposed to normal of almost 4.
POPPY HARLOW, CORRESPONDENT, CNNMONEY.COM (On camera): How much of your crop was negatively affected, do you think?
UNIDENTIFIED MALE: Probably 90 percent, 10 percent we can irrigate. That corn is OK. But the balance of it, anywhere-like half a crop.
HARLOW: Will you be profitable this year?
UNIDENTIFIED MALE: No.
HARLOW: You'll lose money?
UNIDENTIFIED MALE: Yes, we'll lose probably in the neighborhood of $200,000 or more.
HARLOW: From one, bad crop?
UNIDENTIFIED MALE: Yes. For -- for lack of rain.
HARLOW: You supply Perdue, a major food company, with feed. You also lock in prices...
UNIDENTIFIED MALE: Yes.
HARLOW: -- with some of your buyers. Tell me about that process.
UNIDENTIFIED MALE: Around the first of the year we'll sit down and figure out how much we want to sell a head, what prices are. If we see a profit, then we're lock in some.
HARLOW: How did it go locking in this year?
UNIDENTIFIED MALE: From a profit, if we had a -- a normal crop, it would have worked well.
UNIDENTIFIED MALE: But since we don't, we could benefit now because the price is definitely higher than by anywhere from 80 cents to a dollar a bushel more than some of the prices that we locked in.
HARLOW: How much do you rely on Perdue to keep your business afloat?
UNIDENTIFIED MALE: They're critical to us. New Jersey has started an export business in -- out of the Port of Newark, loading containers for China. So that's some competition to Perdue. But before that, Perdue was the only game in town.
We've been exporting all -- whatever China will buy from us. There are big South American buyers, too.
This year in July, I thought -- you know, I'm almost 60 and I thought, boy, I ought to just quit. But I'll go on another year. Farmers just -- we're a different breed. We just, you know, love the land and -- and love doing what we do.
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QUEST: Poppy Harlow reporting.
Twitter has changed the way we communicate in 140 characters or less - - @richardquest is certainly the way you know to contact me on that.
Could it change the way we look at the stock market?
Our next guest believes so. And we'll be talking about that after the break.
QUEST: QUEST MEANS BUSINESS on a Tuesday.
Guillermo Arduino is at the World Weather Center for us this evening.
We know that there is this extremely unpleasant...
GUILLERMO ARDUINO, CNN METEOROLOGIST: Yes.
QUEST: -- system that -- that is in Asia.
ARDUINO: What do you think is going to happen at Hong Kong Airport if we have the cyclone right there, three days from now?
Saturday, it's going to be complicated, Richard, because we have it. It's humongous. It's leaving the Philippines. We are seeing some bad weather still in the Philippines, but it's getting better.
The good thing is that Vietnam appears to be getting a break, because they're already flooded, so it would be a disaster. And in this case, you know, Hong Kong, that area is better prepared to face a cyclone like this. It's going to be a category four, 213 kilometers per hour, in two days. And then the outer feeder bands are going to start going into Southern China.
It may change a little bit. It may go farther to the east or to Hong Kong proper. So we will continue to monitor it. You must stay with CNN for the updates -- Richard, I found out you were in Curitiba, in the south of Brazil. I was wondering where you were. I thought you were in Rio, but father south. And the weather was pretty nice. You know, I see it's high pressure, so some clouds, perhaps. Not that hot.
QUEST: Well, I -- I'll tell you, I -- I -- I tell you, Guillermo, I was filming in Curitiba and I looked at the forecast before I went. And it was threatening thunderstorms. I was convinced we weren't going to get one picture out of there over the whole time.
QUEST: But the rains held off.
ARDUINO: Yes. Good. And that high pressure keeps expanding now, so it's nice. And into Rio and Sao Paolo, you see it's not that -- that hot. It's 21 degrees. It's pretty nice; 27 in Buenos Aires right now. And it's 3:35 p.m.. And it's going to warm up a little bit.
Curitiba, though, here in the south, a little bit cooler -- barely touching the 20 degrees.
While in Europe, the cold is here to stay. And we have it all over. Scotland is going to feel it. It is feeling it right now in the -- the North Sea. So it's cold. We see some snow into Scandinavia. We are going to see also winds into Germany. Cool, cool, cold conditions, below average. Look at these numbers, now all the way to eight degrees below normal.
And this is going to gather a large area of Europe, as you see, all the way down into the Balkan Peninsula. And Northern Italy is going to be, also, cold.
Look, single digits all over -- eight in Paris; seven in London. That's the high. So tonight, it's going to be very cold, two degrees or so, I think, in London. It's going to remain a little bit cold.
And you know what?
I -- I have a friend in Melbourne, Australia, Jillian Thomas (ph). And she e-mailed me and she said, "What's up with the cold weather?"
Yes, we knew it was going to happen. Now it's getting a little bit better in the southern parts of Australia. The high is moving away all those clouds. You know, it's supposed to be nice. It is four in Melbourne only, but it is in the dead of night right now. Cambria at nine degrees.
Let's see what's going to happen later on, especially, remember, this is a nice time of the year to go to Australia. New South Wales at 22, so pretty nice. Melbourne at 20.
I think, Richard, that the cold is over in Southeast Australia -- back to you.
QUEST: Many thanks, Guillermo, at the World Weather Center.
ARDUINO: Thank you.
QUEST: And well, then, now I know what -- the viewers will know they can just e-mail you for their holiday weather at any point and I'll make sure you send a reply.
ARDUINO: Oh, of course.
QUEST: That should keep him busy for a while -- Guillermo, listen, I'll tell you, there's no point in having an entire meteorological department if they can't tell you where it's going to be nice on your weather.
Japanese companies in China are looking to beef up their security. That's because of growing protests over Japan's claim to the Senkaku Islands. Toyota is urging 14 Japanese workers in Guangzhou to take precautions. Nissan insists its 40 Japanese in -- employees in Zhengzhou are safe. Japan says the protests in China will not derail plans for the two country's foreign ministers to meet next week.
For the view from Japanese, Kyung Lah is in Tokyo.
KYUNG LAH, CNN CORRESPONDENT: The politicians say relations are beginning to thaw between Japan and China. But days of protest on the street suggest that the people don't feel the same.
LAH: This is video captured by an American living in China who says he witnessed all of this in Chengdu. You can see protesters burning the Chinese characters that read, "Japan."
Now this protest happened over the weekend. Size reports vary, but some media outlets are reporting that thousands took part.
Now, at another protest in nearby Guiyang, they tipped over a Toyota vehicle.
Now, the protests have been scattered across several cities in Central China, where there are many Japanese factories. Targeted -- Japanese companies, like this Sony store that had its sign apparently ripped off. Japanese companies report they're beefing up security at stores in China. You can see extra workers outside grocery store Ito-Yokado in Chengdu.
The protests have this in common -- anti-Japanese slogans and calling for a boycott of Japanese products.
So where does all this anger come from?
It all stems from the collision between Chinese fishermen and the Japanese Coast Guard last September near some disputed islands in the East China Sea. Both countries, for decades, have claimed the islands are rightfully theirs. Japan arrested the Chinese captain of the fishing boat and eventually released him. But this incident brought diplomatic ties to recent lows. China and Japan's leaders say relations are now on the mend. Japan's prime minister called for calm: "We've asked China to prevent any further damage to Japanese shops and companies. It's important for both of our governments to deal with this situation calmly."
The promises added that despite these reports of protests happening in China, that bilateral relations between China and Japan remain intact.
Now, there have been some protests here in Japan that have been anti- Chinese. But so far, no reports of violence at those protests.
Kyung Lah, CNN, Tokyo.
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QUEST: The game is on -- U.K. football teams are set to battle over Man U's Wayne Rooney after the team's boss confirms he's off -- Rooney, that is, not Erlich (ph).
QUEST: A new report says Twitter can predict movements in the stock market. A study from Indiana University claims the emotions of Twitterverse can forecast market behavior two to six days in advance. Researchers tracked almost 10 million Tweets from the social networking service and they monitored the daily ups and downs of the Dow Industrial average.
Six Twitter moot -- Twitter moods -- happiness, kindness, alertness, sureness, vitality and calmness. Researchers used two Twitter mood tracking tools, Profile of Mood States.
So we now have, perhaps, a reliable barometer.
Let's get the source of this.
Johan Bollen is one of the academics behind the analysis, associate professor of infometrics and computing at Indiana.
Johan, this is a fascinating piece of research.
How reliable was it?
What was the number?
JOHAN BOLLEN, INDIANA UNIVERSITY: Well, the number was 87.6 percent in the up and down direction to the Dow Jones Industrial Average three days out. So that means that our mood curves could predict whether the Dow Jones Industrial Average was going to go up and down correctly in 87.6 percent of cases.
QUEST: This is phenomenal in the sense that if you are right -- and I -- and I'm not -- well, if you're right, you might just have -- have -- have done -- have done the three card trick.
BOLLEN: Well, I mean, of course, this is all with the usual caveats. This is -- this is done for the fall of 2008, so that was a very turbulent episode in the markets, in the world financial markets, and also in the -- in the public's mood states.
It's -- we haven't actually tested this in real time, so we haven't put any money where our mouth -- where our mouths are. But there's -- the results are statistically highly significant.
BOLLEN: So that means that it would have been very difficult to obtain them by chance alone. And, you know...
QUEST: How do you actually...
BOLLEN: -- we still can...
QUEST: Let me just interrupt you.
How do you actually -- I mean the -- the millions of Tweets, how can you collate all those millions of Tweets, because you're obviously -- you haven't -- you're not following all those millions of people.
So how do you actually get the data, the raw statistical data?
BOLLEN: Well, Twitter is actually very kind to researchers. They actually make a lot of their raw data available to research projects and they have done that in our case, as well. So they -- it's actually relatively easy to go -- go online and use their -- their online tools to - - to download this kind of information, which is what we did. And then -- then we analyzed it and we -- we performed our research that led to the conclusions that you're discussing.
QUEST: OK. Now, so give me an example of this. I mean if somebody has Tweeted "beautiful day in London, I'm off for a coffee," that is obviously a positive one versus somebody who Tweets, "car has broken down, cat's dropped dead and the low -- the washing machine has leaked."
BOLLEN: That would be a negative one, I agree. Now, what we're -- we're tracking so that this is based on a psychological instrument, the Profile of Mood States. It's been around for about 30 or 40 years. And that mea -- that measures public mood states along six dimensions that you mentioned just now.
And what we do is we look at these Tweets and we look for markers that are very -- highly indicative of sort of elevated or depressed levels of -- of those particular mood states. If someone says, "I'm very sad," well, the (INAUDIBLE) sadness...
BOLLEN: -- in a sense and that -- that amplifies the signals.
QUEST: But hang on...
QUEST: Have you -- have you -- have you managed to understand why should the correlation of Tweets or people's moods relate to the stock market as such?
BOLLEN: That's a really interesting question. I think a lot of people have claimed that the -- the markets are driven by -- by fear and greed. And in our case, we are, perhaps, measuring fear. But the -- the causal mechanisms we have no information about. It's really difficult to actually do that. But that -- that will be for future research.
Now, I can speculate, though, that a lot of people nowadays are invested in the market and their particular mood state may influence investment strategies. Also, among investors, that -- that may be attuned to the zeitgeist and to -- to how people in general are feeling. And that may have an effect on the market.
QUEST: OK. Final question, if you had $1,000 in front of you, would you put it on your own prognostications as a result of your research?
QUEST: Right. There we are.
Well, once you've actually done that, come back and tell me how it went and we can...
BOLLEN: OK. I will do that.
QUEST: -- and I -- I won't -- I'll take -- I'll share the profit and we'll talk about the losses on another occasion.
Many thanks, indeed.
BOLLEN: That was very good.
I found that particularly fascinating, absolutely, God-smackingly interesting, because 23 years ago today, the world witnessed the worst stock market crash, percentage wise, in history.
Now, for some of us, me -- yes, I'm old enough -- Black Monday doesn't seem that long ago. It was the irrational exuberance of the 1990s and the naughties that followed that make it seem like a distant memory.
But come into the library and we will have a discussion as to what caused this crash back in 1987. It was called Black Monday. It was the cause of computer trading, so-called stop-go options and puts between the Chicago pits and the New York cash market. And it was the first time that computer trading, options and puts, had really taken control of the market.
The -- there was a -- well, there were external factors, as well. The U.S. had retaliated against Iranian attacks and there were all sorts of reasons why. But the actual precipice was computer trading as, indeed, the report which followed made clear.
The panic set in. It started in Asia. It moved across the globe. Hong Kong was down. Australia and other markets suffered well. In London, the FTSE was down 20 percent -- 10 percent, the worst day in its history.
The -- that was on October the 19th, the Black Monday.
So the mood was bad and it never got any better. The Dow's second worst drop, 22.5 percent. Now, in percentage terms, it's actually the worst drop by far. No -- there's never been another one that badly. But that was Black Monday. It's a day that those of us who witnessed will not forget in a hurry -- 508 points.
As Felicia Taylor now explains, the way in which it all happened and exactly how it all happened and the long lasting effects -- Felicia, how much of it do you remember?
FELICIA TAYLOR, CNN CORRESPONDENT: You're trying to get my age out of me, aren't you?
I was around in 1987. I had just recently graduated from college. And I do remember it quite well, because I had just started to work in financial business news.
But more importantly are the men that -- and the women that were on the floor of the New York Stock Exchange and experienced it firsthand.
Take a listen.
TAYLOR (voice-over): On October 19th, 1987, the Dow sank more than 500 points in a single session. The S&P dropped more than 20 percent, marking the worst single day percentage loss Wall Street had ever suffered. A trillion dollars in value was erased from the market. A five year bull market came to an end, as fears of an impending recession began and the New York financial industry lost as estimated 15,000 jobs.
Recently, we met with four veteran traders at the legendary Harry's Bar, just blocks from the New York Stock Exchange, about their recollections of Black Monday and how it compares with the flash crash in May, when the Dow lost almost 1000 points in just 20 minutes, before partially recovering.
THEODORE WEISBERG, SEAPORT SECURITIES: First of all, back to '87, for most of us that were there, it was the worst day we've ever experienced, the closest the institution ever came to a panic.
KENNETH POLCARI, ICAP EQUITIES: The bell rang at 4:00 and we were still there at 6:30, 7:00 at night just picking up the paper and trying to figure it all out. And I remember going home and looking at my wife, saying, "It's over. We just -- like we're going to lose everything."
ART CASHIN, UBS FINANCIAL SERVICES: It was the most dangerous day of all was the Tuesday after.
UNIDENTIFIED MALE: Right.
CASHIN: The day after. Because the market had opened up 200 points and suddenly it rolled over and it went back into negative territory. And you could hear an audible gasp on the floor.
TAYLOR: Fast forward now to May, when we had the flash crash then.
Is there more uncertainty now, with the advent of -- of electronic trading?
WEISBERG: That is the result of a brand new market system which nobody really understands. I mean I know all the fingers point at the -- at the institution that sent the order. But the reality is, for me, that it's the mechanisms that basically allowed that to happen. And the scary thing is, I think it will happen again and again and again.
POLCARI: The next day, you didn't know if the trade was good or if it was bad, if they were going to cancel the trade, was there someone on the other side?
You just didn't know.
CASHIN: When you see rushes and sell orders that don't seem natural, you turn to one another quickly and say, this looks unusual. You want to make sure that you minimize the damage and that, I think, was part of what was missing on May the 6th.
DOREEN MOGAVERO, MOGAVERO LEE & COMPANY: I think people agree that you need to have a combination of both and that speed is obviously not the best thing all the time.
(END VIDEO TAPE)
TAYLOR: So one of the things about the flash crash that we learned, obviously, is that there were different rules in place at the different exchanges. And, obviously, speed is more efficient. Electronic trading has brought that to the forefront of the exchanges. But they had to put in new rules. And those new rules have now been put into place. And they're in sort of a testing pattern right now.
So, indeed, we've learned a lot of lessons from both 1987 and May 6th, how to make the efficiency of trading that much better for the marketplace.
QUEST: I don't agree...
QUEST: I don't agree with you, Felicia, on -- on that.
QUEST: Well, I'll tell you why. I think that we've learned that these things keep happening again and again no matter what we do. We are destined, once a generation, to have some sort of massive tumble like this.
TAYLOR: Well, as Teddy Weisberg said, I mean he really is genuinely afraid that it's going to keep happening again and again. And the likelihood is the more that we move into this period of electronic trading, it will happen. It was just the cause of one high frequency trader.
TAYLOR: And that's the point. I mean you can't control that, necessarily, just by putting in regulations or rules in the exchanges that might match one another. We probably will see it again. It's just a question of what's going to trip it the next time. And nobody can answer that.
QUEST: Now, that's the point.
All right, Felicia, I won't push you any further.
I actually covered the stock market crash of...
TAYLOR: Whoo, you're letting your age out, too, huh?
TAYLOR: I said you're letting your age out, too, huh?
QUEST: Forty-eight and proud of it.
All right, many thanks.
Felicia Taylor in New York.
I'll guaran -- I'll -- I'm -- I'm not a betting man today, but I'm guaranteeing that Alison Kosik doesn't remember the crash of '87 and certainly didn't cover it -- but, Alison?
ALISON KOSIK, CNN CORRESPONDENT: Well, you know what, I'm going to surprise you, Richard. I do remember it. I am older than I look, I have to say. But a girl doesn't tell her age -- at least this girl is not telling.
QUEST: And hey, hey...
QUEST: And I...
KOSIK: -- the markets today.
QUEST: I'm far too delicate to even ask any further questions other than why is the market down nearly 2 percent?
KOSIK: Well, there are -- well, there are a number of reasons. Yes, the market, right now, down quite a bit, the Dow Industrials down 179 points. You know, first of all, you know, we heard from China. You know, surprising investors, Richard, with an interest rate hike. Investors not happy -- happy about that. Obviously, what's causing the U.S. dollar to rise, putting a lot of pressure on equities. And it's really worrying investors at this point, that the global economic growth, even the little bit that we're having right now, is going to slow down even more with China choosing to cool inflation with this interest rate hike.
And this came as a really big surprise for Wall Street. And, you know this, Richard, Wall Street doesn't like surprises. So the market got kind of spooked by that.
We're also keeping an eye on companies that have been reporting earnings, as -- as you've said, reporting these earnings are coming in not so great, as you know. You know, at this point, investors want to see something better. They know that the recession is over and these companies are not posting stellar earnings. And that is what investors were hoping for -- Richard.
QUEST: Many thanks.
And hopefully, we won't see any forms of clashes near or far in the future.
Alison Kosik is in New York.
Manchester United manager Sir Alex Ferguson has confirmed the speculation that the team's most valuable asset wants to leave the club. This means kick-off for Wayne Rooney poaching season. Chelsea and Manchester City are expected to begin a multi-million dollar battle for the 24-year-old player, who is first to the four.
Patrick Snell is at -- joins me now from Atlanta -- Patrick, briefly, how much is he worth and who's going to get him?
PATRICK SNELL, CNN SPORTS CORRESPONDENT: Great questions. I can't answer either of them, to be honest, Richard.
You know, look no further than the usual suspects, Chelsea and Manchester City, who seemingly have a bottomless pit of cash. Real Madrid, of course, in Spain, they, too, inevitably, are being linked with this player. I mean he was bought, the total package, Richard, back in 2004, around 27 million pounds. He is worth substantially more than that. There's no question about that. This is a player just days short of his 25th birthday.
So in a sense, he could be poised to make the most lucrative deal of his career, assuming he does, indeed, go on elsewhere and get that kind of mega deal players like to sort of tie up in their mid-20s.
But, you know, this one isn't quite yet a done deal. Manchester United, I suspect, behind the scenes, with their white-haired coach, Alex Ferguson, have confirmed that they haven't given up the battle of trying to convince him to stay.
And certainly, if you go by what the club's CEO, David Gill, has been saying by his recent activities, United have made him a very lucrative offer, a very tempting offer, said Alex Ferguson, to stay put.
So it's just a question of watch this space. Wayne really, though, apparently, even before this year's World Cup in South Africa, through his agent, telling Ferguson, United, his employers, that he would not be renewing his new contract when it expires in 2012 -- Richard.
QUEST: All right, Patrick, many thanks, indeed.
Patrick Snell in Atlanta.
We'll have some more thoughts on the Profitable Moment and the flash crash of '87, after the break.
QUEST: Tonight's Profitable Moment.
I'll never forget that moment 23 years ago when the New York stock market fell 23 percent -- a crash as a result of computer trading. I was a new financial journalist. It was frightening.
As the years went by, there have been other large, worrying falls, but none that hit me as hard as seeing the Dow drop on Black Monday. Except, perhaps, the flash crash earlier this year, also caused by computer trading.
In both cases, the market was in true freefall, seemingly out of control. I've always believed markets are like human organisms -- you can feel them move in full flood. I know one thing as a result of 23 years ago and what we've seen this year -- I hope I never see a market fall like I did all those years ago.
And that is QUEST MEANS BUSINESS for tonight.
I'm Richard Quest in London.
Whatever you're up to in the hours ahead, I do hope it's profitable.
"WORLD ONE" now.