Editorial: This Is Not Your Father’s Recession

Prepare for a long road of volatility

Throughout America’s spending binge, which really got going in the 80s, ignoring the mounting deficit has become the standard course of action. We’ve never (and still haven’t) paid a price for running up such a big tab. It’s been all gravy so far.

And as Morgan Stanley analyst Richard Berner notes (via Paul Kedrosky), that’s the problem. The lack of consequences to our spending has hardened us to the belief (however much Obama or anyone else proclaims to “lose sleep” over the matter) that deficit spending can go on forever.

America’s long-awaited fiscal train wreck is now underway.  Depending on policy actions taken now and over the next few years, federal deficits will likely average as much as 6% of GDP through 2019, contributing to a jump in debt held by the public to as high as 82% of GDP by then – a doubling over the next decade.  Worse, barring aggressive policy actions, deficits and debt will rise even more sharply thereafter as entitlement spending accelerates relative to GDP.  Keeping entitlement promises would require unsustainable borrowing, taxes or both, severely testing the credibility of our policies and hurting our long-term ability to finance investment and sustain growth.  And soaring debt will force up real interest rates, reducing capital and productivity and boosting debt service.  Not only will those factors steadily lower our standard of living, but they will imperil economic and financial stability.

Familiar challenges. Sound familiar?  Warning about these challenges has long been a staple for economists.  Five years ago, for example, I summarized my concerns about our coming fiscal problems, along with the interplay among them and unexpected longevity, inadequate thrift and saving infrastructure, mediocre education outcomes, and inadequate energy policy (see America’s Long-Term Challenges, May 21 and May 24, 2004).  I was merely the latest in a long line of alarmists; for example, Pete Peterson famously noted more than 20 years ago that “America has let its infrastructure crumble, its foreign markets decline, its productivity dwindle, its savings evaporate, and its budget and borrowing burgeon.  And now the day of reckoning is at hand” (see “The Morning After,” Atlantic Monthly, October 1987).  The Congressional Budget Office (CBO) has since 1997 – under directors from both sides of the aisle – carefully laid out ever-more depressing fiscal scenarios in its annual Long Term Budget Outlook, the latest of which appeared last week.

The problem, ironically, is that the day of reckoning hasn’t come.  This has seriously undermined doomsayers’ credibility and, more importantly, it has made the electorate and elected officials complacent about the threat from unsustainable fiscal policies.  Some even proclaimed that “deficits don’t matter.”

To be fair to politicians, voters obviously don’t want prudence. We want tax cuts, and if we’re asked what spending we want to see cut, we usually only come up with minor budget line items. Very few (other than the more ideological minded) seem to have much appetite for lower spending on defense, education and supporting the elderly.

What’s particularly wild is that even when the crisis is right in front of us, we can’t do anything. Or at least, they couldn’t do anything in California. Rather than address their fiscal crisis — one in which they were clearly given a drop-dead date — the state chose to convert into a third-world country that issues its own currency, but borrows in dollars.

That’s some political self-destruction for you.

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Ortel:

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Treasury Auction sees Great Demand

By Susanne Walker and Cordell Eddings

July 8 (Bloomberg) — Treasuries rose as investors seeking a refuge amid concern the economic recovery may take longer than anticipated led to higher-than-forecast demand at today’s auction of $19 billion of 10-year notes.

Yields on the securities touched the lowest level since May 22 after the auction drew a yield of 3.365 percent, and attracted the most demand from a group of investors that includes foreign central banks since May 2007. The note sale is the third of four this week totaling $73 billion. Traders speculated that company earnings reports scheduled to start today will show profits fell in the second quarter.

“There’s a real flight to quality going on here,” said Andrew Brenner, co-head of structured products and emerging markets in New York at MF Global Inc., a broker of exchange- traded futures. “Everything points to a hiccup in the economy. There is tremendous demand for U.S. Treasuries.”

The yield on the benchmark 10-year note fell 15 basis points, or 0.15 percentage point, to 3.43 percent at 1:16 p.m. in New York, according to BGCantor Market Data.

The notes sold today were forecast to yield 3.398 percent, according to the average estimate of six bond-trading firms surveyed by Bloomberg News. The offering is the second reopening of the record $22 billion 10-year note sale on May 6, and the securities mature in May 2019. The June sale totaling $19 billion drew a yield of 3.99 percent, which was the highest since August 2008.

Foreign Central Banks

Today’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.28. Investors bid for 2.62 times the amount of debt available at the June sale, versus an average of 2.40 at the previous 10 scheduled auctions.

Indirect bidders, a class of investors that includes foreign central banks, purchased 43.9 percent of the notes. At the June sale, they bought 34.2 percent, higher than the average for the past 10 sales of 27.9 percent.

“There’s a fairly broad degree of interest in the 10-year note from global and domestic investors,” Lawrence Dyer, an interest-rate strategist in New York at HSBC Securities USA Inc., said before the auction. The firm is one of 17 primary dealers that bid on Treasury auctions. “We are getting immune to the ability of supply to shock anymore.”

U.S. stocks fell, sending Standard & Poor’s 500 index to its lowest since April.

“We are seeing money coming out of equities mainly into the belly of the curve, said Paul Horrmann, a strategist in Jersey City, New Jersey, at ICAP Plc, the world’s largest inter- dealer broker. “We are caching a bid here when equities get lower on a small flight to quality trade.”

‘Huge Story’

Demand has been rising at the U.S. auctions, especially from indirect bidders such as foreign central banks. Indirect bidders bought 54 percent of the three-year notes sold yesterday, up from 43.8 percent in June. They purchased 49.7 percent of the Treasury Inflation Protected Securities sold July 6, compared with 26.2 percent at the previous auction in April.

The levels of indirect bidders at recent auctions may have been affected by a rule change last month that eliminated a provision allowing some customer awards to be classified as dealer bids.

After more than doubling note and bond offerings to $963 billion in the first half, President Barack Obama may sell another $1.1 trillion by year-end, according to Barclays Plc, another primary dealer. The second-half sales would be more than the total amount of debt sold in all of 2008.

IMF Forecast…..

FNM Sells $500 mln In Bills Below Par With A MM Rate of 0.175%

NEW YORK, July 8 (Reuters) – Fannie Mae (FNM.N) (FNM.P), the largest U.S. home funding company, said on Wednesday it sold $250 million each of 3-month and 6-month bills, in its smallest weekly benchmark bill auctions.

Fannie Mae sold three-month bills due Oct. 7, 2009 at a stop-out rate of 0.175 percent and six-month bills due Jan. 6, 2010 at a 0.288 percent stop-out rate.

The three-month bills were priced at 99.956 with a money market yield of 0.175 percent and the six-month bills were priced at 99.854 with a money market yield of 0.288 percent.

Settlement is July 8-9.

On July 1, Fannie Mae sold $500 million of three-month bills at a 0.194 percent stop-out rate and $500 million of six-month bills at a rate of 0.342 percent.

IMF Predicts A Better Chance of Recovery in 2010

By Sandrine Rastello and Timothy R. Homan

July 8 (Bloomberg) — The International Monetary Fund said the global economic rebound next year will be stronger than it forecast in April as the financial system stabilizes and the pace of contractions from the U.S. to Japan moderates.

The Washington-based lender said in a revised forecast released today that the world economy will expand 2.5 percent in 2010, compared with its April projection of 1.9 percent growth. A contraction this year will be 1.4 percent, worse than an April forecast for a 1.3 percent drop, the IMF said.

The improved outlook for next year reflects differing stages of recovery across the globe, with emerging economies including China helping drive the world out of the worst recession in six decades, while Europe lags behind the U.S. and Japan. The fund warned that the pickup is likely to be “sluggish” and called repairing the international banking system a priority.

“The global economy is still in a recession but we’re inching towards a recovery,” IMF chief economist Olivier Blanchard said in a statement today. “We have to continue with the fiscal, monetary, financial policies which we have put in place.”

At the same time, the fund also called on policy makers to start crafting plans to exit such support measures in order to tame inflation concerns and take steps toward balancing public finances.

Advanced Economies….

European Markets Fall Into the Funnel

By Sarah Jones

July 8 (Bloomberg) — Stocks in Europe and Asia declined, sending the MSCI World Index lower for a fifth straight day, on concern that second-quarter earnings reports will show the worst global recession since World War II is far from over.

Holcim Ltd. slipped 3.9 percent after the world’s second- biggest cement maker said it expects a “difficult” 2009. Banco Espanol de Credito SA slid 2.8 percent after reporting a drop in profit. Amada Co. fell to a three-month low in Tokyo following an unexpected decrease in Japanese machinery orders.

The MSCI World slid 0.5 percent at 12:22 p.m. in London for the longest stretch of declines since March 3. Alcoa Inc. will kick off the earnings season today as the first company in the Dow Jones Industrial Average to report results. Analysts estimate profits fell an average 34 percent at Standard & Poor’s 500 Index companies in the second quarter, according to data compiled by Bloomberg.

“I am a bit concerned about the earnings season,” said Andreas Utermann, chief investment officer at the RCM unit of Allianz Global Investors, which manages $1.34 trillion. “I think the market is going to be disappointed somewhat. I am not certain we are not going to see further softness,” he told Bloomberg Television.

S&P 500 futures added 0.2 percent after the gauge slid to the lowest level since May 1 yesterday. Europe’s Dow Jones Stoxx 600 Index declined 0.3 percent today, while the MSCI Asia Pacific Index sank 1.3 percent, falling for a sixth day.

France’s Correction…..

Factory Output Slips 0.5% In The U.K.

Hopes that the recession had ended in the second quarter were all but dashed yesterday when it emerged that manufacturing had suffered a surprise slump, prompting economists to say that the economy had shrunk for a fifth consecutive quarter between April and June.

Factory output tumbled by 0.5 per cent in May, hitting its lowest level since 1992 and confounding City expectations of a 0.2 per cent rise.

The disappointing figures led the influential National Institute of Economic and Social Research (NIESR) to estimate that GDP across the economy as a whole had tumbled by another 0.4 per cent in the second quarter.

If confirmed by official figures due on July 24, that would shatter rising hopes that the worst recession since the Second World War could have ended already, but it would still mark a big improvement on the 2.4 per cent fall officially reported for the first quarter…..

IBM To Cut 401k For 5k In The U.K.

Robin Pagnamenta

More than 5,000 UK workers at IBM, the computing giant, could lose their rights to a defined benefit pension scheme under plans being considered by the company.

An email to staff from Brendon Riley, IBM’s UK and Ireland general manager, said the pension fund was being re-evaluated because of growing liabilities that were threatening the company’s future performance.

If the closure proceeds, it will affect more than a quarter of IBM’s 20,000 UK staff.

Mr Riley said: “For IBM UK … the rapidly rising costs and liabilities associated with the provision of defined benefit pensions is placing pressure on our long-term ability to invest for future growth and operate in an intensely competitive global market.”…..

Stimulus Is Keeping States Floating In A Sea of Red

WASHINGTON – The Obama administration hoped spending $787 billion in stimulus would jump-start the economy, build new schools and usher in an era of education reform. So far, government auditors say, many states are setting aside such grand plans and simply trying to stay afloat.

The Government Accountability Office, in a report to be released Wednesday, says the stimulus is keeping teachers off the unemployment lines, helping states make greater Medicaid payments and providing a desperately needed cushion to state budgets.

But investigators found repeated examples in which, either out of desperation or convenience, states favored short-term spending over long-term efforts such as education reform.

In Flint, Mich., for example, new schools haven’t been built in 30 years but the school superintendent told auditors that he would use federal money to cope with budget deficits rather than building new schools or paying for early childhood education.

Also, the GAO said about half the money set aside for road and bridge repairs is being used to repave highways, rather than building new infrastructure. And state officials aren’t steering the money toward counties that need jobs the most, auditors found.

President Barack Obama pitched the stimulus as more than just a lifeline to states. Yes, it would save teaching jobs, he said, but it would also lead to lasting education reform. Old schools would be replaced, new science labs would be constructed.

“We can use a crisis and turn it into an opportunity,” Obama said while promoting the stimulus in February. “Because if we use this moment to address some things that we probably should have been doing over the last 10, 15, 20 years, then when we emerge from the crisis, the economy is going to be that much stronger.”

The 400-page stimulus includes provisions for long-term growth, such as high-speed rail and energy efficiency, but their effects will be seen later.

The report was scheduled to be released on Wednesday to the House Committee on Oversight and Government Reform, which has been investigating the effectiveness of the stimulus.

Ed Deseve, the White House budget official in charge of the stimulus, said the GAO report showed that the stimulus “is working to deliver the results promised on the timeline promised.”

He said the White House is already working on improving transparency and meeting other recommendations of the GAO report.

Since Obama signed the stimulus bill in February, the economy has shed more than 2 million jobs. Unemployment now stands at 9.5 percent, the highest in more than a quarter century.

Darling Releases U.K. Banking Regulations

LONDON, July 8 (Reuters) – British finance minister Alistair Darling unveiled plans for a reform of banking supervision on Wednesday. Below are highlights of his statement to parliament and reaction from the opposition Conservative party.

CONSERVATIVE PARTY TREASURY SPOKESMAN GEORGE OSBORNE

“The next Conservative government will abolish the tripartite system and will put the Bank of England in charge of the banks … and other financial institutions because you cannot separate central banking from the financial supervision system.”

RETURNING BANKS TO PRIVATE SECTOR

“We intend to return our stakes in the banks to the private sector, in a way that brings best value to the taxpayer, promotes competition, and maintains stability – and using the proceeds to cut government debt.”

ON NEW COUNCIL FOR FINANCIAL STABILITY

“So we will legislate to set up a new Council for Financial Stability – which will bring together the Bank of England, the FSA and the Treasury. This will not just to deal with immediate issues, but also monitor system-wide financial stability and respond to long-term risks as they emerge. This needs to be done on a formal statutory basis.

“The Council will draw on the expertise of the FSA and the Bank, who are and will remain independent of Government, by looking at their regular reports – the Financial Stability Report and Financial Risk Outlook – and formally responding to their recommendations.

“That way when risks or threats to stability are identified they will be addressed. It will do this in way that is transparent and accountable – so people can see how and why decisions are made – with regular publication of minutes.

“And the Council’s responsibilities will be set out in law, with published terms of reference.”

“And, in discussion with the Treasury Select Committee and the House, we will consider how to increase accountability through greater Parliamentary scrutiny.”

FSA TO HELP IMPROVE FUNCTIONING OF KEY MARKETS

“By introducing higher standards and transparency, the FSA can also improve the functioning of key markets, such as the derivatives market – so that problems in one institution are less likely to spread through the entire system….

U.S. Mortgage Applications Rose 10.9% From 7 Month Lows

NEW YORK (Reuters) – Demand for U.S. mortgages to buy homes and refinance loans bounced from seven-month lows last week, with average 30-year borrowing rates unchanged, the Mortgage Bankers Association said on Wednesday.

The industry group’s total loan applications index rose a seasonally adjusted 10.9 percent to 493.1 in the week ended July 3, after slumping the prior week to the lowest level since November.

Last week’s report was adjusted to account for the Independence Day holiday on Friday.

A sudden spike in home loan rates from record lows in the spring had derailed a race by homeowners to cut monthly costs by refinancing.

The group’s seasonally adjusted refinancing index rose 15.2 percent last week to 1,707.7, after a 30 percent plunge in the prior week.

Purchase applications, which lagged refinancing demand all through the spring home sales season, rose 6.7 percent last week to 285.6.

The average 30-year mortgage rate stayed at 5.34 percent last week. That was up from the record low 4.61 percent in late March, based on MBA data, but sharply below 7.04 percent in the same week a year ago.

On a four-week moving average, which smooths out volatility, the purchase index rose 1.4 percent and the refinance index fell 10.9 percent.

GOOG To Enter Operating Systems Muscling In On MSFT

By Brian Womack

July 8 (Bloomberg) — Google Inc., owner of the most- visited Internet search engine, plans to release a computer operating system to challenge the dominance of Microsoft Corp.’s Windows.

The software will be based on the Chrome Web browser, Mountain View, California-based Google said in a blog post. It will be designed at first for low-cost laptops called netbooks. The company is in talks with partners on the project and computers running the software will be available in the second half of 2010, it said.

Google’s new operating system aims to take on Microsoft’s flagship Windows product, which runs about 90 percent of the world’s personal computers. The plan escalates the two companies’ rivalry, which extends to Web browsers, Internet search and business applications such as word-processing and spreadsheet programs.

“There is a possibility that the new OS can break the paradigm Microsoft and Intel created over the past 20 years,” said Yukihiko Shimada, a computer analyst at Mitsubishi UFJ Securities Co. in Tokyo. “There is plenty of business opportunity for Google in this market.”

Google said it’s working with computer makers to introduce a number of netbooks next year, without identifying any of the companies. The Chrome OS will be open-source, meaning the program code will be open to developers, Google said. The software will work on top of the Linux operating system.

Netbook Competition…

AA Earnings Preview

By ROBERT GUY MATTHEWS

Alcoa Inc., which is expected to report a quarterly loss Wednesday amid a slump in global aluminum demand, is positioning itself for an eventual economic rebound by investing in markets it thinks are ripest for recovery.

The U.S. aluminum giant just completed a $750 million expansion of a construction-products factory in Russia that will allow it to produce beverage cans for the European market. In Morocco, the company recently bought a small fasteners business that supplies aerospace customers in Europe.

Klaus Kleinfeld, Alcoa’s chief executive, said Tuesday that he is seeing signs of recovery or of a bottoming out in some sectors, including the aluminum market. Speaking to reporters in Moscow, where he was traveling with U.S. President Barack Obama, Mr. Kleinfeld said the North American automotive market is re-awakening.

Just recently Chrysler Group LLC announced that it was re-opening some idled plants. While steel is used more than aluminum in auto-making, the auto industry’s consumption of aluminum has been expanding over the past three years.

Mr. Kleinfeld also said China is “out of the woods” and growing, particularly in its automobile and commercial-building and construction markets.

Alcoa also sees growth potential in the oil and gas market. It announced in June that it was acquiring intellectual property rights on welded-aluminum products from Switzerland’s Noble Corp., an offshore drilling contractor, for an undisclosed price.

The company said it would announce other oil- and gas-related forays in the near future.

“Times are still tough,” said an Alcoa spokesman. “But this is not to say that everything is cutting, and we are using the downturn to strengthen our business.”

To be sure, cutting costs is still a prime objective for Alcoa, which is under pressure from weak global markets for transportation and aerospace goods and home appliances.

The price of aluminum has climbed in the past few months, but it is still about 45% below last year’s record.

Alcoa is expected to post a second-quarter loss of 38 cents a share, according to analysts surveyed by Thomson First Call, on the back of still-anemic demand for aluminum and alumina, the primary ingredient in aluminum production. In the year-earlier quarter, the Pittsburgh company had net income of $546 million, or 66 cents a share, on revenue of $7.62 billion.

In 4 p.m. New York Stock Exchange composite trading, Alcoa shares were up 1.6% at $9.41.

Global aluminum inventories remain high, but have been trending lower since August, when they were close to historic highs, according to the International Aluminum Institute, an industry trade group. In May, the latest month for which data is available, they totaled 2.5 million metric tons, up 71% from a year earlier.

Since last year, Alcoa and other aluminum producers have slashed production to better match supply to demand. So far, production hasn’t fallen fast enough. Global aluminum output was about 63.6 million metric tons a day in May, about 10% less than in the year-earlier period.

To ride out the weak markets, Alcoa is attempting to acquire market share in product lines it hopes will be among the first to come out of the recession. But analysts aren’t so sure that the company has found the right combination of cost-cutting and investment yet, given the slack demand for aluminum.

FBR Capital Markets analyst Luther Lu downgraded Alcoa’s stock in late June, citing excess aluminum inventory world-wide. He said in a research note that until the oversupply was addressed, Alcoa isn’t expected to benefit greatly from “upticks in the aluminum market.”

BA To Buy Dreamliner Plant

By PETER SANDERS

Boeing Co. agreed to acquire manufacturing operations from one of its key suppliers on the delayed 787 Dreamliner aircraft at a cost of $1 billion.

The purchase of a plant in North Charleston, S.C., from Vought Aircraft Industries would mark the second time Boeing has taken over a key part of the Dreamliner’s supply chain.

Boeing is paying $580 million in cash and will forgive $422 million in cash advances paid to privately held Vought for work on the 787…..

SNE Jumps Into Notebooks in August

Sony Corp. said Tuesday it will launch a tiny new laptop starting in August, the company’s belated entry into the growing but cutthroat “netbook” PC market.

The new addition to its Vaio line of computers will cost about $500 in the U.S. and 60,000 yen ($630) in Japan when it goes on sale next month. It will be about the size of a hardback book and run on lower grade hardware than other Sony models.

Netbooks — small, cheap laptops with stripped-down components — have been a lone bright spot in the PC market, expanding even as consumers cut back on more expensive purchases. But the tiny computers have low profit margins and can put well-known brands in direct competition with budget manufacturers.

“The netbook market is expanding, and Sony is following this trend,” said a company spokesman….

CTFC Considers Trading Curbs on Commodities

By Russell Blinch

WASHINGTON (Reuters) – The top regulator of U.S. futures markets is considering a clampdown on excessive speculation in energy and commodity trading by restricting holdings of big players, part of a broader move by the Obama administration to stabilize the financial markets.

Commodity Futures Trading Commission Chairman Gary Gensler said in a statement on Tuesday that the agency will hold hearings in the next few weeks to seek comments from consumers and market players on whether to set position limits on all commodity futures contracts.

“Our first hearing will focus on whether federal speculative limits should be set by the CFTC to all commodities of finite supply, in particular energy commodities such as crude oil, heating oil, natural gas, gasoline and other energy products,” said Gensler, who took office on May 26.

CME Group Inc slumped more than 5 percent to $282.06 on Gensler’s statements, while IntercontinentalExchange dropped more than 12 percent to $98.03 a share.

William Blair and Co said in a research note that the stock sank on fears of CFTC imposing restrictions on futures trading, noting that energy futures comprised up to a quarter of revenue for each of the exchanges.

The CFTC will also seek comment on who should qualify for exemptions from position limits….

Nobody Wants CA.’s IOUs

By RYAN KNUTSON

A group of the biggest U.S. banks said they would stop accepting California’s IOUs on Friday, adding pressure on the state to close its $26.3 billion annual budget gap.

The development is the latest twist in California’s struggle to deal with the effects of the recession. After state leaders failed to agree on budget solutions last week, California began issuing IOUs — or “individual registered warrants” — to hundreds of thousands of creditors. State Controller John Chiang said that without IOUs, California would run out of cash by July’s end.

But now, if California continues to issue the IOUs, creditors will be forced to hold on to them until they mature on Oct. 2, or find other banks to honor them. When the IOUs mature, holders will be paid back directly by the state at an annual 3.75% interest rate. Some banks might also work with creditors to come up with an interim solution, such as extending them a line of credit, said Beth Mills, a California Bankers Association spokeswoman.

Meanwhile, on Monday morning, a budget meeting between Gov. Arnold Schwarzenegger and legislative leaders failed to produce a result. Amid the budget deadlock, Fitch Ratings on Monday dropped California’s bond rating to BBB, down from A minus, the latest in a series of ratings downgrades for the state.

The group of banks included Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and J.P. Morgan Chase & Co., among others. The banks had previously committed to accepting state IOUs as payment. California plans to issue more than $3 billion of IOUs in July….

HaHA… Pope Calls For Ethics

Pope Benedict XVI on Tuesday condemned the “grave deviations and failures” of capitalism exposed by the financial crisis and issued a strong call for a “true world political authority” to oversee a return to ethics in the global economy.

The pontiff’s call for stronger government regulation was made in his third and eagerly awaited encyclical, Charity in Truth, which the Vatican chose to issue on the eve of the G8 summit of rich nations being held in Italy…..

Private Equity Objecting To FDIC Call For More Capital Injections

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Private equity investors have objected to a new rule proposed by regulators that would require them to inject nearly four times the minimum capital normally required into troubled banks in which they invest.

The objections were raised during a marathon meeting this week between Sheila Bair, chairman of the Federal Deposit Insurance Corp, and private equity and other potential investors in troubled banks. It came a week after the regulator proposed new policies governing private capital investment in failed banks.

The requirement that new investors post 15 per cent of tier one capital for at least three years upsets plans by some private equity firms to use new banks as platforms to acquire other banks, thus pushing along badly needed consolidation in the banking industry…..

October Crash ?

Global stock markets could crash in October, as by then it will be clear that the economic recovery many people pinned their hopes on will not materialize, the stimulus option will no longer be a viable one, and proprietary trading desks will decide to go short, economist and investor Enzio von Pfeil, CEO of EconomicClock.com, told CNBC.

“The economic time has to worsen and so these green shoots will morph into black shoots very badly, culminating probably in an October crash,” Pfeil said.

“People will finally accept that the unemployment rates will have to keep rising, that productivity will have to keep falling,” he added. That in turn will make earnings expectations “fall through the floor.”

But another analyst rejected his claims, saying predictions of a crash are exaggerated. Anko Beldsnijder, senior portfolio manager at MainFirst Bank, disagreed with the October crash theory.

“A crash – I think that is, in the short term, quite difficult to see because the main problem is a lot of investors are still not in the market, are still very defensively positioned,” Beldsnijder told “Worldwide Exchange” in the same segment.

“The key problem is: who should sell for a crash, where should the main disappointment be,” he added.

With a backdrop of rising unemployment and an excess supply of goods, Pfeil cited three other key reasons for expecting stocks to tank this winter.

Firstly, he thinks the much hoped-for economic recovery will not materialize and governments will be unable to keep showering the global economy with stimulus packages.

“What will become very apparent by then (October) is the so-called global recovery just is not going to happen. The governments have run out of ammunition, they cannot go on stimulating the economies,” Pfeil said. “On top of which, you will find that China itself will be running out of ammunition.”

The big proprietary trading desks have been making money on a bull run, but “the only thing that is going to be out there is to have major, major short positions,” he added.

A third reason to expect declines in October is simply the seasonal factor, according to Pfeil.

“Stupid as it sounds, this is normally when crashes occur, in October. I cannot tell you why,” he said.

The declines are set to start in the U.S. and affect Western markets more than Asia, according to Pfeil.

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Japan’s Machine Orders Fall For a Third Month of Falling Exports

By Jason Clenfield and Keiko Ujikane

July 8 (Bloomberg) — Japanese machine orders unexpectedly fell for a third month and the current-account surplus narrowed because of plunging exports, stoking concern that the economy will struggle to emerge from its worst postwar recession.

Orders, an indicator of spending by companies in the next three to six months, declined 3 percent in May from April, the Cabinet Office said today in Tokyo. The current-account excess shrank 34.3 percent from a year ago, the Finance Ministry said.

Stocks slumped for a sixth day on speculation that corporate earnings are unlikely to improve amid a dearth of demand at home and abroad. Mounting evidence that Japan’s revival will falter may prompt the central bank to extend its unprecedented credit programs as soon as next week.

“It’s still difficult to have any confidence that the economy’s rebound will continue through this year,” said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. “Given the economy’s weakness, the Bank of Japan will probably decide to extend all of its emergency measures beyond their expiration at the end of September.”

The Nikkei 225 Stock Average slid 1.8 percent at the lunch break in Tokyo. Bonds rose, sending the yield on the benchmark 10-year bond 1.5 basis points lower to 1.29 percent. The yen strengthened to a five-week high of 94.50 against the dollar as investors sought the relative safety of the currency on concern the worldwide slump will be prolonged.

The median estimate of 25 economists surveyed by Bloomberg was for machinery orders to increase 2 percent. The decline, which was bigger than the predictions of all but two of those analysts, took the value of bookings to 668.2 billion yen, the lowest since comparable data became available in April 1987.

Exports Worsen…

BoJ Hints @ More Lending To Ease The Liquidity Crunch

By Masahiro Hidaka and Mayumi Otsuma

July 8 (Bloomberg) — The Bank of Japan may extend its emergency-credit programs as soon as next week as policy makers await evidence that banks are increasing lending to companies.

Officials may want to decide on the matter months before the programs expire at the end of September to quell any speculation they’re ready to scale back their efforts, said Masaaki Kanno, who worked at Japan’s central bank from 1974 to 1999 and served as a senior adviser on research and statistics. The Bank of Japan’s board next meets July 14-15 in Tokyo.

The debate reflects concern that the world’s second-biggest economy will struggle to emerge from its deepest postwar slump, and is a contrast from the U.S., where the Federal Reserve has already taken steps toward ending emergency-credit measures. BOJ Governor Masaaki Shirakawa this week said many companies are still struggling to borrow, after the bank’s quarterly Tankan survey last week showed access to credit remains constrained.

“Policy makers may conclude the bank had better decide on the extension this month if they need to do so anyway,” said Kanno, who is now chief economist in Tokyo at JPMorgan Chase & Co. “Making such an announcement in July can work as an anchor to prevent premature speculation about an exit policy.”

The Bank of Japan started purchasing commercial paper and corporate bonds this year, after lowering the overnight lending rate to 0.1 percent in December. Policy makers also offered unlimited loans to commercial banks at 0.1 percent in exchange for approved collateral. The three programs are scheduled to expire on Sept. 30.

Tankan Report…

Asian Stocks Decline Led By Finance & Commodities

By Patrick Rial and Kotaro Tsunetomi

July 8 (Bloomberg) — Asian stocks fell for a sixth day, led by finance and mining companies, as an unexpected drop in Japanese machinery orders fanned concern a global economic recovery will falter.

Mitsubishi UFJ Financial Group Inc., Japan’s biggest lender by value, sank 2.9 percent after the nation’s bank lending slowed. BHP Billiton Ltd., the world’s largest mining company, lost 2.3 percent in Sydney on lower oil and copper prices. Honda Motor Co., which gets 45 percent of its sales in North America, slumped 4 percent in Tokyo as a stronger yen threatened the value of overseas revenue.

“The economic rebound won’t be rapid,” said Masaru Hamasaki, a Tokyo-based senior strategist at Toyota Asset Management Co., which oversees $14 billion. “It will take time, and share prices are beginning to reflect that.”

The MSCI Asia Pacific Index dropped 1.2 percent to 100.59 at 10:50 a.m. in Tokyo, taking its six-day decline to 2.5 percent. The index has fallen 4.4 percent since climbing to an eight-month high on June 12 as disappointing economic data damped demand for equities. The measure has gained 42 percent from a more than five-year low on March 9.

Japan’s Nikkei 225 Stock Average fell 1.8 percent. Australia’s S&P/ASX 200 Index declined 1.1 percent, erasing this year’s gains. Indonesia’s stock market is closed today for presidential elections.

South Korea’s Kospi lost 0.7 percent. Samsung Electronics Co., Asia’s largest maker of computer-memory chips, fell 0.9 percent in Seoul as researcher Gartner Inc. predicted spending on information technology will drop. Tokyo Electron Ltd., the world’s second-largest maker of semiconductor equipment, sank 5 percent on a Credit Suisse Group AG downgrade.

U.S. Earnings…

Crude Tumbles in Asia After New York Trade

By Christian Schmollinger and Ben Sharples

July 8 (Bloomberg) — Crude oil fell, poised for the longest losing streak since December, as equities slumped and an industry report showed an increase in U.S. fuel inventories.

Oil declined for a sixth day after the American Petroleum Institute said gasoline supplies rose 767,000 barrels to 212.4 million last week. U.S. stocks fell on concern technology spending will slow and second-quarter earnings will fail to justify a four-month rally in equities.

“The drop in equities is showing that people were over- optimistic on the economy,” said Clarence Chu, a trader with options dealers Hudson Energy Capital in Singapore. “Usually for this time of year we should be getting a draw in gasoline so if it’s building that’s a bad sign.”

Crude oil for August delivery fell as much as 94 cents, or 1.5 percent, to $61.99 a barrel on the New York Mercantile Exchange, the lowest intraday price since May 26. Oil was at $62.23 a barrel at 10:26 a.m. Singapore time.

Oil in New York has declined 15 percent from an eight-month intraday high of $73.38 reached June 30 as higher U.S. unemployment raised concern that the economy of the world’s biggest energy-consuming country will be slow to recover….

Technical Analysis Say’s FXP is a Buy

By Shiyin Chen

July 8 (Bloomberg) — Chinese stocks may be headed for a “sizeable correction” after a so-called momentum indicator for the Shanghai Composite Index advanced to the highest in at least five months.

The 14-day relative strength index, or RSI, for the Shanghai Composite climbed to 83 this week, above the 70 threshold that signals to technical analysts an asset or market is poised to fall. Its RSI, which compares the magnitude of recent gains to losses, last breached the 80 level in February. The stock gauge sank as much as 13 percent in the next two weeks.

“The RSI shows that the market is in a pretty overbought situation,” said Barole Shiu, a Hong Kong-based technical analyst at UOB-Kay Hian Ltd. “If history repeats itself, there’s a very strong chance we’ll see a sizeable correction.”

The Shanghai Composite has rallied 70 percent this year, the world’s best performing major market, as improving loans, investment and manufacturing data suggest that the government’s 4 trillion yuan ($585 billion) stimulus package is reviving the world’s third-largest economy.

At the stock measure’s peak in October 2007, its RSI reached 79.6, a level not seen again until this year. The Shanghai Composite plunged 72 percent in the following 12 months before rebounding, according to data tracked by Bloomberg.

Shiu said the Shanghai A Share Index, the Chinese stock gauge he tracks, may fall at least 200 points, or 6 percent, before finding a support at around 3,000. The measure, which tracks only yuan-denominated shares traded on the larger of China’s two stock exchanges, yesterday closed at 3,243.29. Its RSI climbed to 83.1 on July 6.

“The Shanghai Composite moves in more or less a similar pattern to the Shanghai A Share Index,” he said.

Copper Imports To China Expected To Drop by 64%

By Bloomberg News

July 7 (Bloomberg) — Copper imports by China may plunge 64 percent in the second half after record shipments this year led to excess stocks, UBS AG said.

China, the world’s largest consumer of the metal, may cut refined copper imports to around 100,000 metric tons a month in July to December, from an average of 280,000 tons in the first five months, UBS analysts led by Peter Hickson said in an e- mailed report dated July 6.

There are “clear indications that China is now overstocked” as the Strategic Reserve Bureau is offering up to 100,000 tons of copper to the market and traders are preparing for exports of the metal, the UBS report said.

Chinese imports “couldn’t decrease so sharply in the second half,” Yang Gang, a trader at LG International Corp., said from Shanghai today. Many long-term contracts have been booked and importing copper as a way to obtain finance is very active too, he said, referring to the credit terms traders can obtain from banks.

Copper, used in construction and power grids, has dropped 9 percent from the year’s high of $5,388 a ton on the London Metal Exchange on concern that China may slow purchases. The country’s record shipments lifted prices 60 percent this year, closing the gap between London and Shanghai rates and making it unprofitable to import the metal into China.

Stockpile Estimates…

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Interest Rates To Double

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