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Business Headlines For October 1, 2009

Natty Gas Tumbles on Huge Storage

NEW YORK (AP) – Natural gas prices tumbled Thursday after the government reported the U.S. is using so little that it has more in storage now than at any other time on record.

The report was welcome news for homeowners who heat their homes and cook their meals with natural gas. Suppliers already have cut rates in many parts of the country as stockpiles ballooned above the five-year average, and a continued drop in natural gas prices should convince others to cut prices as well.

Natural gas for November delivery fell 34.7 cents, or 7.2 percent, to $4.494 per 1,000 cubic feet on the New York Mercantile Exchange.

The Energy Information Administration reported Thursday that underground aquifers and caverns in the lower 48 states stored 3.589 trillion cubic feet of natural gas last week, topping the previous all-time high of 3.545 trillion cubic feet set on Nov. 2, 2007. Government records go back to 1975.

Analyst Steven Schork said supplies have grown so much that the U.S. is nearing its storage capacity for natural gas. If that happens, producers could dump more of it on the open market, dropping prices even more.

But Peter Beutel at Cameron Hanover said prices have dropped so low this summer that they’ll likely spring back as winter approaches.

“We’ll start drawing down those supplies,” Beutel said “especially if it’s cold and the economy starts to pick back up.”

Elsewhere, oil prices fell because of a stronger dollar, and government and industry reports suggested a swift recovery wasn’t likely for the American economy.

Benchmark crude for November delivery gave up 38 cents at $70.23 on the Nymex. In London, Brent crude lost 50 cents at $68.57 on the ICE Futures exchange.

Reports by the Commerce and Labor departments said that while consumer and construction spending grew in August, the number of people claiming first-time unemployment benefits increased more than expected last week.

Although the Institute for Supply Management’s index of manufacturing activity showed a second straight month of growth in September, the reading was well below what analysts expected.

The mixed economic news helped equities markets start the fourth quarter on a sour note. The Dow Jones industrial average lost about 152 points in morning trading, and the Standard & Poor’s 500 index gave up 20, down about 2 percent.

At the pump, retail gas prices fell by a penny overnight to a new national average of $2.469 a gallon, according to auto club AAA, Wright Express and Oil Price Information Service. A gallon of regular gas is 13.8 cents cheaper than last month and $1.15 cheaper than the same time last year.

In other Nymex trading, gasoline for November delivery fell less than a penny to $1.7472 a gallon, and heating oil lost 1.84 cents at $1.814 a gallon.


30 Year Yield Drops Below 4%

By Cordell Eddings

Oct. 1 (Bloomberg) — Treasury 30-year bond yields fell below 4 percent for the first time since April as reports showed jobless claims increased, manufacturing declined and inflation remains subdued.

Bonds rallied as signs recovery from the worst slump since the Great Depression will be slow prompted traders to reverse bets that yields would increase before tomorrow’s monthly employment report. The Labor Department may say that job losses last month totaled 175,000, according to a Bloomberg survey. The Treasury announced plans to sell $78 billion of notes and bonds over four consecutive days next week.

“We are not in the double dip-camp, but there are still headwinds for the economy,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney. “There is a ton of money on the sidelines. Investors are feeling more comfortable with interest-rate risk and are moving out on the curve.”

The yield on the 30-year bond fell 11 basis points, or 0.11 percentage point, to 3.94 percent at 1:31 p.m. in New York, according to BGCantor Market Data. That’s the lowest level since April 29. The 4.50 percent security due in August 2039 rose 2, or $20 per $1,000 face amount, to 109 23/32.

The 10-year note yield touched 3.18 percent, the lowest level since May 21. The Standard & Poor’s 500 Index fell 2 percent.

Inflation Data-Driven

The Fed’s preferred price measure, which excludes food and fuel, climbed 0.1 percent from the previous month and was up 1.3 percent from a year earlier, the smallest year-over-year gain since September 2001. Spending by U.S. consumers climbed 1.3 percent in August, Commerce Department figures showed in Washington.

“The 30-year falling below 4 percent was driven from the inflation data,” said Carl Lantz, an interest-rate strategist in New York at Credit Suisse Group AG. “There were a number of investors expressing short positions in the long bond, banking that Fed policy would have to be more aggressive, but the inflation data continues to argue that we’ll have no inflation for longer. The 30-year bond’s yield can decline further as the curve flattens.” Investors cover shorts when they buy an asset to cover wrong-way bets it would fall…..


New Bill Introduced For Renewable Energy

U.S. Senators John Kerry (D-MA), Chairman of the Foreign Relations Committee, and Barbara Boxer (D-CA), Chairman of the Committee on Environment and Public Works, today introduced the Kerry-Boxer legislation to create clean energy jobs, reduce pollution, and protect American security by enhancing domestic energy production and combating global climate change.

Called the Clean Energy Jobs and American Power Act, the bill could help the U.S. cut carbon pollution and stimulate the economy by creating millions of jobs in the renewable energy sector.

“This is a security bill that puts Americans back in charge of our energy future and makes it clear that we will combat global climate change with American ingenuity. It is our country’s defense against the harms of pollution and the security risks of global climate change,” Sen. Kerry said.  “Our health, our security, our economy, our environment, all demand we reinvent the way America uses energy.  Our addiction to foreign oil hurts our economy, helps our enemies and risks our security.  By taking decisive action, we can and will stop climate change from becoming a ‘threat multiplier’ that makes an already dangerous world staggeringly more so.”

Some of the renewable energy and energy efficiency sections of the bill are listed below

  • Section 161. Renewable Energy. Directs EPA to establish a program to provide grants and other assistance to renewable energy projects in states with mandatory renewable portfolio standards.
  • Section 162. Advanced Biofuels. Directs EPA to establish a program to provide grants for research and development into advanced biofuels
  • Section 163. Energy Efficiency in Building Codes. Requires the EPA Administrator to set a national goal for improvement in building energy efficiency.
  • Section 164. Retrofit for Energy and Environmental Performance. Establishes the Retrofit for Energy and Environmental Performance Program to provide allowances to States to conduct cost-effective building retrofits.

A major strength of the bill, according to Environment California, is that it preserves and builds on the Clean Air Act’s protections, which will enable America to move to wind, solar, and other clean energy technologies by requiring the nation’s fleet of old and inefficient coal-fired power plants to eventually meet modern air pollution standards.

“This bill is a good beginning,” said Bernadette Del Chiaro, clean energy advocate with Environment California. “It is the first of many steps toward a cleaner, healthier, and safer world.”

In addition, the bill also improves on legislation passed by the House in June by aiming to cut global warming pollution from large polluters 20 percent by 2020. This comes just a week after the release of a sobering United Nations report concluding that the impacts of global warming are arriving faster than the world’s scientists had predicted just two years ago.


CIT Board Scrambles To Forge a Plan

NEW YORK (Reuters) – CIT Group Inc’s (CIT.N) board was meeting Thursday to consider a restructuring plan for the struggling commercial lender, a source familiar with the matter said.

Under the terms of a rescue loan CIT received in July, Thursday is the deadline for the company to come up with a restructuring plan agreeable to lenders.

On Wednesday, sources close to the situation said the company would offer its unsecured debt holders two options — either exchange their debt voluntarily or face a prepackaged bankruptcy.

CIT declined to comment on Thursday. The source who reported the board meeting declined to be identified because talks are not public.

CIT shares were down 6 cents, or 5 percent, at $1.15 in midday trading on the New York Stock Exchange.

Its bonds were mixed. The 7.625 percent bond due 2012 was the most actively traded, rising 1.5 cents to 66 cents on the dollar, according to MarketAxess…..


F Sales Fall 5% For September

CNBC Reports F Sales Down 8.9%

DETROIT (Reuters) – Ford Motor Co (F.N) said on Thursday its U.S. auto sales fell 5 percent in September from a year earlier as demand slumped off in part due to the end of the U.S. government’s “cash for clunkers” incentive program.

For the third quarter, Ford said sales for its core Ford, Lincoln and Mercury brands were up 5 percent, the only quarterly sales gain for a major automaker in the U.S. market.

Ford, the only U.S. automaker to have avoided bankruptcy, is targeting a return to profit by 2011 and has been gaining market share at a time when industry-wide sales remain weak.

The company has said it expects industry-wide sales in September to be near 9 million to 9.5 million units on the annualized and adjusted basis tracked by analysts, near the low point for sales that the U.S. market hit in February….


U.S. Standing in the World Sinks To Pre Cold War Levels

WASHINGTON — The United States’ standing in the world declined in the past decade to below Cold War levels, according to a leading group of political scientists.

Favorable attitudes have risen sharply under President Barack Obama with his commitment to “restore American standing,” but confidence in him appears to be in conflict with unfavorable attitudes about U.S. foreign policy, the American Political Science Association said in a report released Thursday.

“Many American leaders and citizens worry that this decline, despite a recent upturn, may be part of a long-term trend, one that will be hard to reverse,” the report said.

While Obama has raised American esteem, he has not produced more European troops for Afghanistan, secured concessions from North Korea nor made any headway with Iran, the academics said.

Twenty political scientists worked on the report for more than a year. Two of them dissented from the conclusions, saying that “political bias affects perceptions” and that “the academic community, unbalanced as it is between self-identified Republicans and Democrats, is not immune to such bias.”

The dissenters, Stephen D. Krasner of Stanford University and Henry R. Nau of The George Washington University, said U.S. standing is heavily influenced by political bias in the United States and political attitudes in foreign countries. Krasner was director of policy planning at the State Department under President George W. Bush.

The findings are based on analyses of public opinion surveys, votes in the U.N. General Assembly and the expert judgment of specialists in the field of comparative geopolitics, said Peter J. Katzenstein of Cornell University, a former president of the association……


CIT Consequences

By Emily Chasan

NEW YORK (Reuters) – If struggling U.S. commercial lender CIT Group Inc were to collapse it would be a “drastic mistake” as the small businesses that rely on it would have few alternate sources of funding, turnaround experts said at the Reuters Restructuring Summit this week.

“I have a great fear of the collapse of CIT and that people don’t understand the ramifications of what that can be,” Lynn Tilton, chief executive of distressed investment firm Patriarch Partners said, adding she believed any collapse would result in millions of job losses at smaller U.S. companies.

“I think it would be a very, very drastic mistake in this country to allow CIT to go under,” Tilton said.

CIT is planning to offer its unsecured debt holders an option to either exchange their debt voluntarily or face a pre-packaged bankruptcy, sources close to the situation said on Wednesday.

Shares of CIT fell 40 percent on Wednesday on fears that however the company rights itself, be it with a debt exchange or bankruptcy, equity holders will get little. But if those options do not work, there is unlikely to be any company able to fill CIT’s shoes, the experts said.

“Over 80 percent of our workforce lies in small and mid-size companies, and yet there is absolutely no credit available to these companies,” Patriarch’s Tilton said.

“Large banks, who have been able to find their way back from the abyss, are not making these loans, and the regulators on the ground are telling them not to make these kinds of loans. It is not the best use of their capital. They are high risk. They are small. It takes a lot of energy. And our smaller regional and community banks are on the cusp of failure.”

And while CIT’s need to restructure has been telegraphed for months, retailers and other small businesses, which are particularly reliant on their funding, appear to have done little to prepare for a collapse, said Cory Lipoff, an executive vice president at Hilco Merchant Resources who works with distressed retailers.

“Everybody has adopted a wait-and-see attitude,” Lipoff said. “Everybody is uncertain and cautious, but nobody is taking any actions right now,” Lipoff said at the summit.

Part of the issue for retailers and other businesses that rely on CIT for loans, is that it remains unclear how a bankruptcy would affect their contracts, turnaround experts said. If CIT goes through a pre-packaged bankruptcy, or ends up with deals to sell some units, their loan contracts might not change at all. If its bond exchange is successful, there may also be no change.

“My partner went out and talked to retail lenders (about CIT)… and the message that came back is ‘We’re just going to wait and see how this all plays out over the next 60 days,'” Lipoff said.

Few financial companies have survived bankruptcy, but CIT believes its customers will continue to borrow from it even if it is reorganizing in bankruptcy court, the sources said.

But the lurking possibility of a free-fall bankruptcy could actually be useful to CIT in gaining support for its plans at this stage, another turnaround expert said.

“Clearly CIT is negotiating in the shadow of bankruptcy,” said Corinne Ball, the attorney at Jones Day who led Chrysler through its bankruptcy earlier this year. Ball said the threat of bankruptcy can push the company’s stakeholders to more “productive discussion” about what course to pursue and force bondholders to think about what they would get if the company were to fail.


Bernanke Speaks on the Hill

WASHINGTON (AP) — Federal Reserve Chairman Ben Bernanke told Congress Thursday that the central bank is “well suited” to oversee colossal financial companies whose failure could endanger the entire economy.

But he was silent on the issue of the Fed losing some of its consumer protection duties, after previously criticizing the Obama administration for its plan to strip the central bank of some of those powers.

Testifying before the House Financial Services Committee, the Fed chief said only that protecting consumers from abusive practices involving mortgages, credit cards and other financial products is “vitally important.”

In past appearances on Capitol Hill, Bernanke has laid out a spirited defense that the Fed should keep those powers. The administration wants to create a consumer protection agency for risky financial products.

Rep. Melvin Watt, D-N.C., was stunned by what he thought was Bernanke’s short shrift to the consumer protection issue. “Five sentences on consumer protection when everything else gets substantially more space,” Watt said. “It is just not a good message to send.”

Bernanke did lay out a case for the additional power over so-called “too big to fail” financial companies, which could include insurance companies, hedge funds and others beyond the big banks traditionally overseen by the Fed. In fielding questions, Bernanke said the “focus” in that regard should remain on financial firms, rather than on other types of companies.

As part of a sweeping rewrite of the nation’s financial rule book, the administration has proposed tapping the Fed to regulate those companies, and Bernanke said the central bank has the expertise to best carry out those duties.

For both accountability and effectiveness, that power is “best vested with a single agency,” Bernanke said. “I believe that the expertise we have developed in supervising large, diversified and interconnected banking organizations … makes the Federal Reserve well suited to serve as the consolidated supervisor.”

To police the broader U.S. financial system for risks, Bernanke supported a council of regulators do that job — also in line with Obama’s proposal.

All financial regulators, Bernanke said, should step up day-to-day oversight and have a big-picture approach in this area.

“To further encourage a more comprehensive and holistic approach to financial oversight, all federal financial supervisors and regulators — not just the Federal Reserve — should be directed and empowered to take account of risks to the broader financial system,” he said.

Bernanke said potential risks monitored by the council could include significant increases in leverage at companies and gaps in regulatory coverage that can arise when new financial products are created.

His endorsement of a council to police risk isn’t a shift in his stance, Bernanke said. “There has been some misunderstanding … we support a council … we never objected to a council,” he said.

Both Democrats and Republicans have been loathe to give the Fed additional powers. They argue that the central bank failed to spot problems that led to the financial crisis in the first place.

“We have had debate and will have further debate about exactly what the role of the Federal Reserve will be in the systemic risk regulation. There were some, myself included, who earlier this year thought the Federal Reserve would have a larger role than it looks like it will have,” said committee chairman Barney Frank, D-Mass.


Today’s Upgrades & Downgrades

Stocks slipped after disappointing data blew in from the Windy City via a weaker than expected Chicago PMI report. See also Chicago PMI Freezes the Bulls. Maybe markets simply needed to CIT (CIT)�(-45%) down amid signs a seven month rally is entering the September of its years. More likely investors were unnerved by The Boss gracing an AARP Magazine cover on the day ADP announced monthly private sector payrolls plunged 254,000. Still, the Dow did post its biggest third quarter gain since the outbreak of World War II and October, notwithstanding ’29 and ’87, is invariably less ominous for equities than popularly perceived.

Life on Mars is again being discussed but the death-knell has started for Saturn after Penske Automotive (PAG) pulled the plug on investment. After the close Bank of America (BAC) announced a departure beyond everybody’s Ken while today sees Accenture (ACN) and Constellation Brands (STZ) report results. Brace also for a battery of economic data including weekly jobless claims, August personal income and spending and ISM’s September Manufacturing Index.


Auto Parts Companies: Barclays puts O’Reilly Automotive (ORLY) in the driver’s seat with an Overweight, while AutoZone (AZO) and Advance Auto Parts (AAP) will hope slow and steady wins the race after the broker initiated each with Equal-Weight.

Casinos: Soleil initiates casino companies Las Vegas Sands (LVS) (Buy; $20 target), MGM Mirage (MGM) (Hold; $13) and Wynn Resorts (Hold; $80). For more on these names, see Casino Stocks Are a Bad Bet.

AFLAC (AFL):�The AFLAC duck may have wished for more to crow about after Sandler O’Neill starts with a Hold ($46 target).


Alcoa (AA): The aluminum company, which kicks off earnings season next week, is boosted by Deutsche Bank (Buy from Hold). The broker cites an improving near-term outlook in aluminum allied to ebbing financial risk.

PMC-Sierra (PMCS): J.P. Morgan upgrades PMC-Sierra to Overweight from Neutral and takes its target up $2 to $11.50.

Big Lots (BIG): Closeout retailer Big Lots looks for a big bounce after an upgrade to Overweight at JP Morgan, which notes most of its products are aimed at non-consumable categories.


Microsoft (MSFT): It’s hardly bye-bye for Microsoft but it is cut to Buy from Conviction Buy by Goldman Sachs. See today’s article Why Microsoft’s Downgrade Doesn’t Matter.

Saks (SKS): Another Saks (Inc.) could be more five and dime than Fifth Avenue today after a downgrade (Neutral from Overweight) at JP Morgan.

PMC-Sierra: In contrast to Morgan, Goldman sees PMC-Sierra heading downhill and lowers the stock to Neutral from Buy.

Agilent (A): The stock gets downgraded to Market Weight from Overweight over at Thomas Weisel.

BMC Software (BMC): JP Morgan reduces its BMC Software rating to Underweight from Neutral and establishes a objective of $30.

Nothing contained in this article is intended as a solicitation for business of any kind or for investment in the firm.


TER Gives Upward Guidance

NORTH READING, Mass. (AP) — Teradyne Inc., a chip maker, on Thursday raised its third-quarter guidance due to improving conditions in the industry and said it will end temporary salary reductions in the fourth quarter.

Shares rose 72 cents, or 7.8 percent, to $9.97 during premarket electronic trading.

The company now expects to report a profit of 10 cents to 13 cents per share, excluding one-time items, from a previous range of a loss of 2 cents per share to a profit of 2 cents per share.

Analysts polled by Thomson Reuters, on average, predict a profit of a penny per share. Analyst estimates typically exclude one-time items.

Teradyne now expects revenue of $250 million to $260 million, from a prior range of $190 million to $205 million. Analysts predict revenue of $201.5 million.

The North Reading, Mass.-based company said it will end temporary salary reductions implemented in 2008 and 2009 in the fourth quarter.

The company will release third-quarter results in late October.


Asian Markets Fall as Cap Ex Spending is Expected To Fall

By Shani Raja

Oct. 1 (Bloomberg) — Asian stocks fell for the first time in three days on concern the region’s economic recovery may falter after a Bank of Japan survey showed companies plan to deepen investment cuts.

Fanuc Ltd., Japan’s largest maker of robots, fell 3.1 percent after the central bank’s Tankan report showed companies will cut capital spending 10.8 percent this year. Hyundai Motor Co., South Korea’s largest automaker, slumped 8.1 percent on concern export earnings will be hurt after the won rose against the dollar and Chicago business activity dropped. Advantest Corp. slumped 5.8 percent after Credit Suisse Group AG cut its rating.

“The data is looking a bit more mixed,” said Rob Patterson, who helps manage $3.4 billion at Argo Investments Ltd. in Adelaide. “The rally has been very strong and probably a bit overdone. We need more evidence of an economic recovery and the proof will be in the next earnings results.”

The MSCI Asia Pacific Index declined 1.2 percent to 116.60 as of 7:27 p.m. in Tokyo, following a two-day, 0.6 percent advance. The gauge has surged 65 percent from a five-year low on March 9 as stimulus measures around the world dragged economies out of recession.

Japan’s Nikkei 225 Stock Average sank 1.5 percent, while South Korea’s Kospi Index lost 1.7 percent. Australia’s S&P/ASX 200 Index dropped 0.9 percent. Markets in Hong Kong and China are closed for holidays.

Elpida Memory Inc. sank 8.6 percent in Tokyo after the U.S. vowed to use World Trade Organization sessions to press Japan over subsidies to the chipmaker. In Seoul, shipbuilder Hanjin Heavy Industries & Construction Co. slumped 6.5 percent in Seoul, falling for a second day on concern France’s CMA CGM will cancel new vessels. StarHub Ltd. fell 6.5 percent in Singapore after losing sports-channel broadcast rights.

Business Index

Futures on the Standard & Poor’s 500 Index dropped 0.4 percent. The gauge fell 0.3 percent yesterday after the Institute for Supply Management-Chicago Inc. said its business measure decreased to 46.1 in September, while economists had projected the gauge would rise….

Europe Follows In Asia’s Downside Action

y Andrew Rummer

Oct. 1 (Bloomberg) — European stocks declined after Dow Jones Stoxx 600 Index’s steepest quarterly rally in a decade pushed valuations to the highest level since 2003.

The Stoxx 600 slipped 0.4 percent to 241.47 as of 11:50 a.m. in London, erasing an earlier advance of as much as 0.7 percent.

Oil Trades Down Below $70pb

Oil prices fell below $70 a barrel Thursday after surging overnight on signs U.S. gasoline demand may be improving. Weaker equity markets and gains by the dollar helped push down oil prices.

By midday in Europe, benchmark crude for November delivery was down 78 cents at $69.83 in electronic trading on the New York Mercantile Exchange.

The contract jumped $3.90 to settle at $70.61 on Wednesday after the Energy Information Administration said U.S. gasoline stockpiles unexpectedly dropped 1.6 million barrels last week from the previous week.

Analysts had expected a jump of 1.2 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

The EIA also said demand for gasoline over the four weeks ended Sept. 25 was 5.4 percent higher than last year.

“Gasoline demand continues to improve,” Barclays Capital said in a report. “We see the global market adjustment as remaining on track for a slow and steady soft landing for both prices and quantities.”

Barclays said it expects crude to average $76 a barrel in the fourth quarter and $85 next year.

Other inventory data was less encouraging. Crude supplies grew more than expected last week, according to the government report, and they have now swelled to 11.4 percent above what they were last year.

Analysts said a multitude of U.S. economic data to be released Thursday and Friday – weekly jobless claims, pending home sales, construction spending, auto sales and non-farm payroll data, among others – could push and pull on prices.

“We are not ready to have a conviction in any trends,” said Olivier Jakob of Petromatrix in Switzerland. “Further violent moves can be expected but the recent ranges are likely to remain respected.”

In other Nymex trading, gasoline for November delivery fell 1.97 cents to $1.7319 a gallon, and heating oil lost 2.23 cents to $1.8101 a gallon. Natural gas retreated 7.2 cents to $4.769 per 1,000 cubic feet.

In London, Brent crude fell 77 cents to $68.30 on the ICE Futures exchange.

The Dollar Ticks Slightly Higher Against Most Major Currencies

Thursday during early deals, the US dollar edged up against its European, Swiss and Japanese counterparts ahead of various economic reports, which are due in the upcoming North American session. Elsewhere, the US currency pared its Asian session gains against the pound.

The Bureau of Economic Analysis is due to release its personal income & outlays report for August. Economists estimate the report, which is due out at 8:30 am ET, to show that personal income rose 0.1% and the personal spending increased 1.1% in the month.

At the same time, the Labor Department is due to release its customary weekly jobless claims report for the week ended September 26th. Economists estimate claims to have fallen to 535,000 in the week.

The results of the manufacturing survey of the Institute for Supply Management, are due out at 10 am ET. Economists expect the index to show a reading of 54 for September.

The Commerce Department’s construction spending report to be released at 10 am ET is expected to show a 0.2% decline in spending for August.

Data on Pending Home Sales, is due out at 10 am ET. The index is expected to rise 1% in August.

The US dollar advanced to 1.0435 against the franc and a 2-day high of 1.4552 against the euro during Thursday’s early European deals, with 1.049 and 1.446 seen as the next upside target levels. The dollar-franc pair closed yesterday’s deals at 1.0364 and euro-dollar pair at 1.4642.

On the economic front, the Eurostat said the seasonally adjusted jobless rate for the Eurozone inched up to 9.6% in August from 9.5% in July. That was the highest rate since March 1999. It also matched economists’ expectations. A year ago, the rate of unemployment was 7.6% in August.

There were 15.165 million people out of work in the euro area in August. The jobless rate for EU27 stood at 9.1% in August, up from 9% in July. That was the highest rate since March 2004.

From Switzerland, data released by Credit Suisse said today that the Swiss SVME purchasing managers’ index or PMI rose for the seventh month in September, suggesting growth in the private sector output,.

The PMI climbed to 54.3 in September from 50.2 in August. Economists had forecast a reading of 51. The PMI has remained above the 50-point growth threshold for two successive months. The index last exceeded this level in June 2008, before Switzerland slipped into recession.

The US currency edged up against its Japanese counterpart during Thursday’s early trading. At about 2:50 am ET, the dollar-yen pair hit as high as 90.18, which may be compared to Wednesday’s close of 89.72. The dollar may likely find resistance near the 91.3 level, if it moves up further…..

China’s PMI Rises On Stimulus Spending

By Bloomberg News

Oct. 1 (Bloomberg) — China’s manufacturing expanded at the fastest pace in 17 months in September on stimulus spending and this year’s record growth in new loans.

The Purchasing Managers’ Index rose to a seasonally adjusted 54.3 from 54.0 in August, the Federation of Logistics and Purchasing said today in an e-mailed statement in Beijing. The latest number was lower than the median estimate of 55 in a Bloomberg News survey of 13 economists. A reading above 50 indicates an expansion.

China, which is marking 60 years of Communist Party rule today, has pledged to maintain stimulus policies to create jobs, maintain social stability and strengthen the recovery of the world’s fastest-growing major economy. A manufacturing index released by HSBC Holdings Plc yesterday also showed an expansion in September as a 4 trillion yuan ($586 billion) stimulus package countered a slump in exports.

“Manufacturing is likely to keep climbing steadily as investment, production and retail sales all rebound further and exports bottom out,” said Lu Zhengwei, an economist at Industrial Bank Co. in Shanghai. Lu estimates China’s economy may grow 9 percent this quarter, up from 7.9 percent in the previous three months.

China’s stock markets were closed today for a public holiday…..

China Can Not Satisfy its Voracious Appetite… Is This Dollar Diversification ?

China’s sovereign wealth fund is spending more money on oil, purchasing 11% of a Kazakh oil producer for $939 million, the Wall Street Journal reports.

China’s investment strategy is to purchase real estate and oil companies and invest with hedge funds and money managers.

The nation’s various oil companies have been gobbling up oil like crazy, as we detailed here, spending close to $13 billion in the past year.

With all these purchases comes a backlash. Iraq might not let China participate in the next rounds of bidding on its oil fields because China is owner of an oil field in Northern Iraq’s Kurdistan region. China wants to bid on Nigerian oil, but the government is wary, since it will adversly affect Western companies.

This is why China is only making an 11% investment in the company. If it does too many big blow deals it could scare everyone off.

IMF Raises 2010 Growth Estimates

By Sandrine Rastello and Timothy R. Homan

Oct. 1 (Bloomberg) — The International Monetary Fund raised its forecast for global growth next year as more than $2 trillion in stimulus packages and demand in Asia pull the world economy out of its worst recession since World War II.

The Washington-based IMF said the economy will expand 3.1 percent in 2010, more than a July forecast of 2.5 percent. China’s economy will grow 9 percent and India’s 6.4 percent. That compares with growth of 1.7 percent in Japan, 1.5 percent in the U.S. and 0.3 percent in the euro region.

Days after President Barack Obama and other leaders declared that the Group of 20 is now the main forum for steering the global economy, the forecasts show emerging Asian nations powering the return to growth. The IMF, whose members are gathering in Istanbul for next week’s annual meeting, warned that the recovery would be “weak by historic standards” and said restoring banks to health remains a priority.

“The global economy appears to be expanding again, pulled by the strong performance of Asian economies and stabilization or modest recovery elsewhere,” IMF said in its semi-annual World Economic Outlook. Still, the rebound will be “sluggish, credit constrained and, for quite some time, jobless.”

European stocks gained, with the Dow Jones Stoxx 600 Index adding 0.5 percent to 243.74 at 8:20 a.m. in London.

Crisis ‘Not Over’…..

Brit Bailouts For Lloyds & RBS Flowed To Ireland

By Ian Guider and Andrew MacAskill

Oct. 1 (Bloomberg) — Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, rescued by British taxpayers last year, injected 3.03 billion euros ($4.4 billion) into their Irish units during the past 10 months amid rising real estate losses.

Records in Dublin’s Companies Registration Office show the two banks made a series of six payments, with the first in December and the most recent in August. RBS injected about 1.58 billion euros, while Lloyds sent 1.45 billion euros.

“The scale of that figure is quite shocking,” Brian Lucey, associate professor of finance at Trinity College Dublin, said in an interview. “They weren’t leaders in the Irish market. The figure just shows the level of clean-up needed.”

British banks invested in Irish real-estate developers at the height of the “Celtic Tiger” boom and are now writing down investments amid the worst property slump in western Europe. RBS, 70 percent government-controlled, and Lloyds, 43 percent taxpayer-owned, were bailed out by Chancellor of the Exchequer Alistair Darling with 37 billion pounds ($59 billion) of public money 12 months ago.

The Irish bailout’s sterling cost is 2.8 billion pounds, more than the 2.6 billion pounds spent by British taxpayers on military operations in Afghanistan last year, according to House of Commons Defence Committee figures. This year’s Afghan costs are forecast to be 3.5 billion pounds….

Europe’s Unemployment Rises To 9.6%

By Emma Ross-Thomas

Oct. 1 (Bloomberg) — Europe’s unemployment rate rose to the highest in more than 10 years in August as companies continued to cut jobs even as the region’s largest economies emerged from recession.

Unemployment in the 16-member euro region increased to 9.6 percent from 9.5 percent in July, the European Union statistics office in Luxembourg said today. That’s the highest since March 1999 and matched the median forecast from a Bloomberg survey of 23 economists.

The German and French economies both emerged from the recession in the second quarter and the euro-area economy probably followed in the third, according to the European Commission. Rising unemployment may be an obstacle to the recovery, including in Germany, where the government has been offering temporary subsidies to maintain payrolls.

“With these short term schemes starting to expire, the only thing to expect is for unemployment to continue increase going into next year,” said Martin van Vliet, senior economist at ING Bank. “They are postponing the damage.”

German unemployment remained unchanged at 7.7 percent while Spain’s jobless rate rose to 18.9 percent and Ireland’s increased to 12.5 percent, today’s report showed.

“The risk of unemployment is still hanging in the air so consumers will continue to retrench on spending,” van Vliet said.

The euro declined against the dollar today, and was down 0.4 percent at $1.4582 as of 10:44 a.m. in London….

CSCO Buys Tandberg ASA of Norway

OSLO (AP) – Cisco Systems Inc. says it has agreed to buy Tandberg ASA, a Norwegian company that makes hardware for video conferences, for $3 billion.

Cisco, the world’s largest maker of computer networking equipment, said Thursday it offered 153.50 kroner ($26.50) per share of Tandberg’s stock, an 11 percent premium on Wednesday’s closing share price.

Tandberg said in a statement that the proposal was recommended by a unanimous vote of its board of directors. The acquisition is expected to close in the first half of 2010.

The company’s shares rose 11 percent to 153.80 kroner ($26.50) in morning trading in Oslo.

Tandberg employs 1,500 people globally, with joint headquarters in Oslo and New York.

Comcast Rumored To Buy GE’s NBC Unit

NEW YORK/PARIS (Reuters) – Comcast Corp, the largest U.S. cable service provider, denied a Web report on Wednesday that it had struck a deal to buy media conglomerate NBC Universal for $35 billion.

But Comcast, which normally does not comment on takeover rumors, stopped short of quashing widespread speculation that it was interested in NBC Universal, which is owned by General Electric and Vivendi SA.

A spokesman for Vivendi had no comment on the report and said the French media group had an annual window from Mid-November to early-December to exercise a put option on its stake in NBC Universal.

Vivendi shares were indicated up 1.7 percent in Paris.

When asked if it was looking at NBC Universal, a Comcast spokesperson declined comment.

The Wrap.com reported late Wednesday that Comcast is in talks to buy NBC Universal from GE, and that bankers for both sides met in New York Tuesday to hammer out deal points…..

Small Business Loan Delinquency Rise

By James B. Kelleher

CHICAGO (Reuters) – Delinquencies among small and medium-sized U.S. businesses on the loans, leases and lines of credit they use to finance investment in capital equipment rose in August, PayNet Inc reported on Thursday.

Accounts in moderate delinquency, or those behind by 30 days or more, rose to 4.40 percent in August from 4.36 percent in July, said PayNet, which provides risk-management tools to the commercial lending industry.

Accounts 90 days or more behind in payment, or in severe delinquency, improved modestly, slipping to 1.51 percent in August from 1.52 percent in July. But those that were 180 days behind, or considered to be in default, rose to 0.81 percent in August from 0.78 percent in July.

The report is the latest to suggest the U.S. economy, which slipped into recession in December 2007, is experiencing a patchy rebound.

“The recovery that seems to be under way for large corporations and the stock market and certain parts of the economy doesn’t seem to have arrived yet for these companies,” said Bill Phelan, president and founder of Skokie, Illinois-based PayNet.

Separately, PayNet said its small business lending index, which had risen in June and July, fell at an annual rate of 20 percent in August.

“It’s too early to call it a trend,” Phelan said. “But it’s a little disheartening because this kind of activity is a leading indicator for gross domestic product.”

PayNet collects real-time loan information, such as originations and delinquencies, from more than 225 leading U.S. capital equipment lenders.

The company’s proprietary database encompasses more than 15 million current and historic contracts, worth $645 billion.

More than half the money invested in plants, equipment and software in the United States in any given year is financed with loans, leases and lines of credit.

GM & Penske Talks Breakdown With Saturn Unit Ending Up To Be Shut Down

DETROIT (AP) – For those who expected General Motors’ once-funky Saturn brand to live on with a new owner, there has been a sad twist. Saturn, once billed as a different kind of car company, appears as dead as Pontiac and Oldsmobile.

At the brand’s 350 remaining dealers around the country, there were high hopes that a deal would be announced for GM to sell the brand to former race car driver and auto industry magnate Roger Penske.

Instead, Penske Automotive Group Inc. announced Wednesday it is walking away from the deal, unable to find a manufacturer to make Saturn cars when GM stops producing models sometime after the end of 2011. GM then announced it would stop making Saturns and soon would close down the brand, just like it did with Oldsmobile in 2004 and soon will do with Pontiac.

The day’s events mean an almost certain end to Saturn, a brand that was set up in 1990 to fight growing Japanese imports. Instead of celebrating a rebirth, the announcements sent dealers scrambling for ways to stay open and preserve about 13,000 jobs….

Ken Lewis To Retire By Year End

After fighting to keep his grip on the bank he helped build from a scrappy Southern outsider to the nation’s largest in assets, Bank of America Corp. Chief Executive Kenneth D. Lewis said he will resign by year end.

The 62-year-old Mr. Lewis, who has led the Charlotte, N.C., bank since 2001, notified the board of his decision Wednesday. A person close to him says Mr. Lewis was fed up with the criticism that haunted him following the takeover of Merrill Lynch & Co. The board had told Mr. Lewis it wanted to know how long he planned to stay. He indicated that he would stay through 2010, this person said, but he changed his mind during a vacation to Aspen, Colo., in late August. One sign to company insiders that something was up: Mr. Lewis returned to work after Labor Day in a full beard, which no one at the bank had ever seen before. He shaved it off after one day.

AFP/Getty Images

Ken Lewis testifies on the use of TARP funds before the House Financial Services Committee on Feb. 11, 2009.

Ken Lewis, CEO of Bank of America, testifies on the use of Troubled Asset Relief Program (TARP) funds before the House Financial Services Committee at the US Capitol in Washington, DC, February 11, 2009. AFP PHOTO / Saul LOEB (Photo credit should read SAUL LOEB/AFP/Getty Images)

Ken Lewis, CEO of Bank of America, testifies on the use of Troubled Asset Relief Program (TARP) funds before the House Financial Services Committee at the US Capitol in Washington, DC, February 11, 2009. AFP PHOTO / Saul LOEB (Photo credit should read SAUL LOEB/AFP/Getty Images)

Mr. Lewis was initially hailed as a hero for swooping in to buy Merrill on the same weekend last September when Lehman Brothers Holdings Inc. collapsed. He soon may face civil securities charges from New York Attorney General Andrew Cuomo over disclosures of Merrill’s bonus payments and ballooning losses shortly before the takeover was completed in January.

“I will simply say that this was my decision, and mine alone,” Mr. Lewis wrote in a farewell memo to employees.

Bank of America said its board plans to name a successor for Mr. Lewis by the time he leaves, but no one has been chosen yet. The directors likely will seriously consider outside candidates for the CEO spot, though they might be able to fill Mr. Lewis’s void internally…..

Wall St Wizadry Allows Them To Hold Less Capital on The Books For The Same Assets

A new wave of financial alchemy is emerging on Wall Street as banks and insurers seek to make soured securities look better. Regulators are pushing back, saying the transactions don’t have enough substance and stand to benefit bankers and ratings firms.

The deals come as Wall Street firms, buoyed by surging markets, are seeking to profit from the unwinding of the complicated securities that helped fuel the credit crisis. Regulators, meanwhile, are struggling to prevent a recurrence of the crisis.

The popular deals are known as “re-remic,” which stands for resecuritization of real-estate mortgage investment conduits. The way it works is that insurers and banks that hold battered securities on their books have Wall Street firms separate the good from the bad. The good mortgages are bundled together and create a security designed to get a higher rating. The weaker securities get low ratings.


The net result is financial firms’ books look better and they need to hold less capital against those assets, even though they are the same assets they held before the transaction.

Some state insurance regulators worry that current ratings are flawed — perhaps even too harsh — for determining the capital that should back up residential-mortgage securities. But they are chafing at the re-remic strategy. That’s partly because of the fees and partly because re-remics rely on ratings firms — faulted for failing early on to identify problems with mortgage-backed bonds — to rate the new securities.

At hearings Wednesday on Capitol Hill focused on the ratings firms, U.S. Rep. Dennis Kucinich (D-Ohio) raised concerns about the mounting number of re-remics, saying, “The credit-rating agencies could be setting us up for problems all over again.”

New York and some other key regulators are considering an alternative to re-remics that doesn’t entail insurers paying millions in fees to investment banks and the ratings firms; they also have debated possibly unfavorable accounting treatment for the re-remic deals.

Regulators would like “a lot fewer dollars” paid to Wall Street, as well as “less reliance on the ratings agencies,” said Kermitt Brooks, first deputy insurance superintendent in New York. The state is an important voice on financial matters at the National Association of Insurance Commissioners, or NAIC.

The alternative solution, proposed by trade group American Council of Life Insurers, calls for hiring an analytical firm with expertise in residential mortgage-backed securities to help regulators determine the value of deteriorated holdings on insurers’ books, bypassing the ratings providers. This firm would help size up potential losses and how much capital the insurers need to hold.

The re-remic accounting treatment, meanwhile, is expected to be taken up at a meeting of NAIC regulators in December.

It is unclear how big a concern this is for banking regulators. Alabama Deputy Banking Superintendent Trabo Reed said he has seen only a few examples of re-remics. His concern is that banks engaging in this practice account for it correctly…..

More Write Downs Are Coming This is Just One Angle

Banks and loan investors are starting to bite the bullet and lower the principal due on home mortgages for some struggling borrowers, a new report from bank regulators shows.

That’s good news for some homeowners, but may portend more write-offs over the next few years for banks and other lenders now wading through hundreds of thousands of applications for loan modifications. The tradeoff for banks is that by taking the hit now they can boost their chances of being repaid.

Banks and loan servicers modify loans primarily by reducing interest rates or extending the term of the mortgage. These methods can temporarily help borrowers struggling to make payments without requiring lenders to lower the principal owed. Now, in a small but growing number of cases, banks are going further and writing off some of the loan altogether.

Part of this is due to prodding from the Obama administration, which has made saving homeowners from foreclosure a cornerstone of its economic-rescue strategy. The administration in March announced plans aimed at helping as many as nine million households struggling with mortgage debt through loan modifications or refinancings. The plans include financial incentives for mortgage-servicing firms that modify loans.

At the same time, banks now have more flexibility to modify loans because of their success in stabilizing their balance sheets and, in some cases, raising fresh capital. Banks can afford “to take the pain up front,” said Kevin Fitzsimmons an analyst at Sandler O’Neill & Partners LP in New York. “If they want a legitimate chance of salvaging something out of the loans, they are better off taking the loss now.”…… Full OCC Report

BAE Faces Corruption Charges

LONDON — U.K. authorities, having failed to negotiate a settlement with BAE Systems PLC, are pursuing corruption charges against Europe’s largest defense contractor.

The U.K. Serious Fraud Office, which investigates complex crimes, said Thursday it plans to press charges against the British firm. The SFO still needs to obtain consent from Attorney General Patricia Scotland to pursue the criminal charges.

The SFO has been investigating potential bribes paid by BAE to win contracts in various countries, including Czech Republic, Romania, South Africa and Tanzania.

A BAE spokesperson wasn’t immediately available for comment.

The development marks a renewed push by British authorities to reach a conclusion to a highly controversial case that has dragged on for five years and cost millions of pounds to investigate.

In 2004, the SFO launched an investigation into whether bribes had been paid by BAE to Saudi officials to secure a massive fighter-jet deal, known as the Al Yamamah contract, with the government of Saudi Arabia. The British government halted the Saudi investigation in late 2006 citing national-security concerns, which sparked outrage in Britain and rebukes from other Western countries, including the U.S.

The U.S. Department of Justice is conducting its own investigation into the Saudi deal.

Do You Really Know what is On Your Banks Balance Sheet ?

That the FDIC had to raise its estimate for coming losses to $100 billion makes it plenty clear that the state of American banking is far from healthy. But what’s scary is not the eye-popping number, it’s the lack of insight anyone has into bank balance sheets.

Jonathan Weil at Bloomberg hits the nail on the head:

There was a stunning omission from the government’s latest list of “problem” banks, which ran to 416 lenders, a 15-year high, as of June 30. One outfit not on the list was Georgian Bank, the second-largest Atlanta-based bank, which supposedly had plenty of capital.

It failed last week.

Georgian’s clean-up will be unusually costly. The book value of Georgian’s assets was $2 billion as of July 24, about the same as the bank’s deposit liabilities, according to a Federal Deposit Insurance Corp. press release. The FDIC estimates the collapse will cost its insurance fund $892 million, or 45 percent of the bank’s assets. That percentage was almost double the average for this year’s 95 U.S. bank failures, and it was the highest among the 10 largest ones.

The obvious worry is that there are a lot more Georgian Banks out there than anyone realizes. Granted, if the FDIC can raise 3-years worth of fees by borrowing forward from its member banks, we can handle a lot of Georgian Banks. And in the end, handling smallish, regional banks isn’t going to prove to be a major systemic problem, even if there are several of them.

What’s scary is that this level of opacity likely extends upwards to the ranks of the too-big-to-fail institutions that can’t be rescued merely by making depositors whole. As the story about JPMorgan’s (JPM) Jamie Dimon — sitting in his office, examining the bank’s CRE exposure by zipcode suggests — even most of the banks have no idea what they’re holding. How oculd regulators?

JPM’s Economic Indicator Points to More Good Times to Come

One of JP Morgan’s preferred equity market indicators is their Economic Activity Surprise Index (EASI).  It uses trailing data from the previous 6 weeks to gauge whether analysts are currently too optimistic or too pessimistic.  As you can see in the latter half of 2008 analysts became overly bearish which resulted in the current environment that can only be characterized as “better than expected” run amok.  The pendulum has swung to the other side now as analysts are now beginning to catch-up.  We’ve seen it in recent housing data and in yesterday’s Chicago PMI data.  It’s likely that this morning’s ISM will also reflect the overly optimistic trend.

JP Morgan continues to view the EASI as a bullish indicator, but we are beginning to view it more as a contrarian indicator.  Such indicators are better trend following indicators rather than leading indicators.   Currently, it looks like that trend is beginning to run into some resistance as the economic data begins to come up short of expectations.  As for earnings my preliminary research says we likely have at least one more quarter of “better than expected” earnings before the analyst community gives the “all clear” and begins to get far too optimistic about future expectations.


Source: JP Morgan

* All information on this website is provided for general purposes and should not be misconstrued as financial advice. Always consult your financial advisor before acting on any of the information herein. You should always assume that the author(s) could have a vested interest in topics described and may or may not own securities and instruments discussed.

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Editorial: Are We in a Liquidity Trap ?

From The Oracle

The latest data for lending in the eurozone, the United Kingdom, and the United States display a visible weakening. In the eurozone, the yearly rate of growth of bank lending to the private sector fell to 0.6% this July from 9.3% in July last year. In the United Kingdom, the yearly rate of growth of lending to the private sector fell to 2.2% in July 2009 from 10.1% in July 2008. In the United States, the rate of growth of lending plunged to minus 3.8% in August 2009 from a positive figure of 8.6% in August 2008.

A weakening in the growth momentum of lending has taken place despite central banks’ massive monetary pumping. Commercial banks in major economies are finding it more attractive to sit on the newly injected money rather than lend it out.

At the end of July this year, US banks were sitting on $729 billion of cash against $1.9 billion in July last year.

In the United Kingdom, bank cash reserves jumped from £28.6 billion in July last year to £161.3 billion at the end of July this year.

In the eurozone, bank reserves climbed to €505 billion in June this year from €227 billion in June last year before settling at €394 billion in July this year.

Some commentators are of the view that banks’ preference to sit on a growing pile of cash rather than lend it out points to an emerging liquidity trap, which can pose a serious threat to economic growth.

The Origin of the Liquidity-Trap Concept

In the popular framework of thinking, which originates in the writings of John Maynard Keynes, economic activity is presented in terms of a circular flow of money. Spending by one individual becomes part of the earnings of another individual, and spending by another individual becomes part of the first individual’s earnings.

Recessions, according to Keynes, are a response to the fact that consumers — for some psychological reasons — have decided to cut down on their expenditures and raise their savings.

For instance, if for some reason people have become less confident about the future, they will cut back on their outlays and hoard more money. So, once an individual spends less, this worsens the situation of some other individual, who in turn also cuts his spending.

Consequently, a vicious circle sets in: the decline in people’s confidence causes them to spend less and to hoard more money, and this lowers economic activity further, thereby causing people to hoard more.

Following this logic, in order to prevent a recession from getting out of hand, the central bank must lift the money supply and aggressively lower interest rates. Once consumers have more money in their pockets, their confidence will increase, and they will start spending again, thereby reestablishing the circular flow of money, so it is held.

However, Keynes suggested that a situation could emerge when an aggressive lowering of interest rates by the central bank would bring rates to a level from which they could not fall further.

This, according to Keynes, could occur because people might adopt the view that interest rates have bottomed out and that rates will subsequently rise, leading to capital losses on bond holdings. As a result, peoples’ demand for money would become extremely high, implying that they would hoard money and refuse to spend it no matter how much the central bank tried to expand the money supply.

Keynes wrote,

There is the possibility, for the reasons discussed above, that, after the rate of interest has fallen to a certain level, liquidity-preference may become virtually absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest. In this event the monetary authority would have lost effective control over the rate of interest.[1]

Keynes suggested that, once a low-interest-rate policy becomes ineffective, authorities should step in and spend. The spending could be on all sorts of projects — what matters here is that a lot of money must be pumped in order to boost consumers’ confidence. With a higher level of confidence, consumers would lower their savings and raise their expenditures, thereby reestablishing the circular flow of money.

Observe that Keynesian ideas have been promptly implemented by the governments and central banks of the major economies. Yet despite all the stimulus packages and the massive money pumping, lending remains depressed.

Bank lending is an important factor in making the central bank’s pumping “effective.” Popular thinking holds that lending enables the reestablishment of the circular flow of money and eliminates the liquidity trap.

To push major economies away from this trap, some experts suggest that major central banks should consider the recent policy move of the central bank of Sweden.

In July this year, the Swedish Riksbank became the world’s first central bank to introduce negative interest rates on bank deposits held with the central bank, lowering the deposit rate to minus 0.25% from 0% in June. Note that in July last year, the rate stood at 3.75%.

The idea of negative interest rates is to make it costly for banks to sit on cash reserves. It is held that banks will be forced to expand their lending, thus helping to reestablish the circular flow of money.

Do Individuals Save Money?

In the Keynesian framework, the key to prosperity is the ever-expanding monetary flow. Monetary expenditure drives economic growth.

When people spend more of their money, they save less. Conversely, when people reduce their monetary spending in the Keynesian framework, they save more.

Observe that in the popular, i.e., Keynesian, way of thinking, savings is bad news for the economy. The more people save, the worse things become: the liquidity trap comes on account of too much saving and the lack of spending.

Now, contrary to popular thinking, individuals don’t save money as such. The chief role of money is that of the medium of exchange. Also, note that people don’t pay with money but with goods and services they have produced.

For instance, a baker pays for shoes by means of the bread he produced, while the shoemaker pays for the bread by means of the shoes he made. When the baker exchanges his money for shoes, he has already paid for the shoes, so to speak, with the bread that he produced prior to this exchange. Again, money is just employed to exchange goods and services.

To suggest then that people could have an unlimited demand for money, which leads to a liquidity trap, implies that no one would be exchanging goods. Obviously, this is not a realistic proposition, given that people require goods to support their lives and well-beings. (Note that people demand money not to hold it as such but to employ it in exchange.)

Being the medium of exchange, money can only assist in exchanging the goods of one producer for the goods of another producer. The state of the demand for money cannot alter the amount of goods produced, i.e., it cannot alter real economic growth. Likewise, a change in the supply of money doesn’t have any power to grow the real economy.

Contrary to popular thinking, we suggest that a liquidity trap doesn’t emerge in response to consumers’ massive increase in the demand for money but comes as a result of very loose monetary policies that inflict severe damage on the pool of real savings.

The Liquidity Trap and the Shrinking Pool of Real Savings

The essence of lending is real savings and not money as such. It is real savings that imposes restrictions on banks’ ability to lend. Money is just the medium of exchange, which facilitates real savings.

As long as the rate of growth of the pool of real savings stays positive, this can continue to sustain productive and nonproductive activities. Trouble erupts, however, when, on account of loose monetary and fiscal policies, a structure of production emerges that ties up much more consumer goods than it releases. The excessive consumption relative to the production of consumer goods leads to a decline in the pool of real savings.

This in turn weakens the support for economic activities, resulting in the economy plunging into a slump. (The shrinking pool of real savings exposes the commonly accepted fallacy that the loose monetary policy of the central bank can grow the economy.)

Needless to say, once the economy falls into a recession on account of a falling pool of real savings, any government or central bank attempts to revive the economy must fail. Not only will these attempts fail to revive the economy, but they will deplete the pool of real savings, thereby prolonging the economic slump.

Likewise, any policy that will force banks to expand lending out of “thin air” will further damage the pool and further reduce banks’ ability to lend. Note that without an expanding pool of real savings, any expansion of bank lending is going to lift banks’ nonperforming assets.

The fact that banks are not currently ready to expand lending indicates that they are still in the process of trying to fix their balance sheets. Also, banks cannot find many viable borrowers, i.e., wealth generators, which could be another indication that the pool of real savings is in trouble.

Meanwhile, the Federal Deposit Insurance Corporation (FDIC) data show that US commercial banks’ and savings institutions’ assets remain under pressure. The value of assets fell by $241 billion in the second quarter (Q2) after declining by $301 billion in the previous quarter (Q1). The growth momentum of assets also displayed a visible fall. The yearly rate of growth fell to nil in Q2 from 1.3% in Q1 and 11.6% in Q1, 2008.

In Q2, commercial banks and savings institutions have reported renewed pressure on their net income. The banking industry recorded a loss of $3.7 billion after having a profit of $5.5 billion in Q1. Provisions for bad loans have bounced to $66.9 billion in Q2 from $61.4 billion in Q1.

We can thus conclude that, contrary to popular thinking, the threat to major world economies is not the so-called liquidity trap, but the government and central bank stimulus policies claimed to counter it. These policies only further weaken the pool of real savings, thereby undermining prospects for a durable economic recovery and perpetuating the liquidity trap.


So far, massive monetary pumping by central banks has failed to revive the pace of credit expansion in major world economies. Some commentators have raised the possibility that this points to an emerging “liquidity trap,” which is seen as a major threat to economic growth.

To push economies away from this trap, some experts suggest that major central banks should consider the recent policy move of the central bank of Sweden. The Swedish central bank has introduced negative interest rates on bank deposits held with the central bank. It is believed that negative interest rates will force banks to start expanding lending. This, it is held, is going to revive economic activity in a sustained way.

We suggest that negative interest rates are unlikely to move major economies away from a liquidity trap if the pool of real savings is in trouble. Contrary to popular thinking, the threat posed to the major economies is not the liquidity trap, but the government and central bank stimulus policies aimed at countering it.

Frank Shostak is an adjunct scholar of the Mises Institute and a frequent contributor to Mises.org. He is chief economist of M.F. Global. Send him mail. See Frank Shostak’s article archives. Comment on the blog.

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Business Headlines For September 30, 2009

Asian Markets Trade Higher on Recovery Expectations

By Shani Raja

Sept. 30 (Bloomberg) — Asian stocks rose, lifting the MSCI Asia Pacific Index to its seventh monthly advance, after China’s central bank said it will retain a “moderately loose” monetary policy and NGK Insulators Ltd. increased its profit forecast.

Poly Real Estate Group Co. rose 3.3 percent after the People’s Bank of China said stimulus measures to boost domestic demand will continue. NGK Insulators surged 8.8 percent in Tokyo after citing growing demand for products related to cars and electronics for its higher forecast. Billabong International Ltd., Australia’s biggest surfwear maker, climbed 4 percent on a better-than-estimated retail sales report.

The MSCI Asia Pacific Index added 1.1 percent to 118.03 as of 7:20 p.m. in Tokyo. The gauge is set for its second-straight quarterly advance, having climbed 14 percent in the past three months as economies around the world emerged from recession.

“The recovery is moving from being supported by governments and central banks to being a bit more self- sustained,” said Nader Naeimi, a Sydney-based strategist at AMP Capital Investors, which manages about $75 billion. “Across Asia we’re seeing strong private demand as well as a strong pick-up in actual measures of economic activity.”

The Shanghai Composite Index climbed 0.9 percent in China, where markets are closed from tomorrow for a week-long holiday. The country’s central bank said it will maintain its moderately loose monetary policy to sustain an economic recovery.

Taiwan’s Taiex Index rose 1.1 percent, while Japan’s Topix Index added 0.7 percent. The Bank of Japan may decide as soon as next month to let its emergency corporate-debt buying programs expire as businesses regain access to private funding, people with knowledge of the discussions said….

European Stocks Move Higher

By Sarah Jones

Sept. 30 (Bloomberg) — European stocks rose for a third day, extending the Dow Jones Stoxx 600 Index’s biggest quarterly rally this decade, as Chinese manufacturing expanded and the International Monetary Fund reduced its estimate for bank writedowns. U.S. index futures and Asian shares gained.

Man Group Plc, the largest publicly traded hedge-fund manager, soared 6.2 percent after assets under management increased. Adidas AG added 2.4 percent as rival Nike Inc. posted earnings that beat analysts’ projections. Infineon Technologies AG, Europe’s second-largest maker of semiconductors, climbed 6.7 percent after Exane BNP Paribas recommended the shares.

The Stoxx 600 rose 0.6 percent to 245.08 as of 10:57 a.m. in London. The benchmark gauge for European equities has surged 19 percent since the end of June, the steepest quarterly increase since 1999, as the European Central Bank kept interest rates at a record low and the French and German economies unexpectedly exited recessions.

“The market seems to be resisting skepticism about the economic recovery,” said Mark Bon, a London-based fund manager who helps oversee about $750 million at Canada Life Ltd. “There is increasing evidence that the recovery is coming through. You have to be in the market rather than standing on the sidelines.”

U.S. Futures

Futures on the Standard & Poor’s 500 Index added 0.5 percent before data on gross domestic product, employment and business activity that may show the worst U.S. recession since the Great Depression eased and the economy is probably now in the early stages of recovery. The measure is heading for the biggest quarterly increase since 1998……

Oil Trades Up A Stick Above $67pb

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SINGAPORE (AP) – Oil prices rose above $67 a barrel Wednesday in Asia despite an increase in U.S. crude inventories for a third week, which suggests consumer demand remains weak.

Benchmark crude for November delivery was up 42 cents at $67.13 by late afternoon in Singapore in electronic trading on the New York Mercantile Exchange. The contract fell 13 cents to settle at $66.71 on Tuesday.

U.S. oil inventories rose last week, the American Petroleum Institute said late Tuesday. Crude stocks increased 2.8 million barrels while analysts had expected a jump of 2.1 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

“There’s no doubt that we still have very high levels of inventories, and that’s probably going to prevent oil from breaking above $75,” said Christoffer Moltke-Leth, head of sales trading at Saxo Capital Markets in Singapore.

Oil has traded between $65 and $75 for months as investors mull the strength of a global recovery from recession. Crude bounced off the $65 level earlier this week.

“The support we saw at $65 was quite significant,” Moltke-Leth said. “The hope for recovery is still pretty strong, and that’s what’s holding prices up.”

In other Nymex trading, heating oil rose 0.94 cent to $1.71 a gallon. Gasoline for October delivery gained 2.59 cents to $1.65 a gallon.

In London, Brent crude rose 39 cents to $65.88 the ICE Futures exchange.

The Dollar trades Lower Against Major Currencies

–  The US dollar declined against its major counterparts during Wednesday’s early trading as investor’s risk appetite dampened demand for the safe-haven greenback. The dollar dropped to a 6-day low against the pound and a 2-day low against the yen.

In the New York session, the U.S., ADP National Employment report, which sheds light on non-farm private employment, is scheduled to be released at 8:15 am ET. The private sector is expected to have lost 200,000 jobs for September.

The Bureau of Economic Analysis is due to release its final second quarter GDP report at 8:30 am ET. The report is likely to show that the U.S. economy contracted at a 1.2% rate in the quarter.

The results of the Institute of Supply Management-Chicago’s business survey for September are scheduled to be released at 9:45 am ET. Economists expect the business barometer index based on the survey to come in at 52.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET. At the same time, the Atlanta Federal Reserve Bank President Dennis Lockhart is scheduled to speak on the U.S. economic outlook on the University of South Alabama in Mobile.

The greenback tumbled to 1.4646 against the euro during early deals on Wednesday. This may be compared to Tuesday’s New York session closing value of 1.4589. On the downside, the next likely target for the greenback is seen around the 1.472 level.

Eurozone consumer prices were down 0.3% on a yearly basis in September, a flash estimate issued by the Eurostat said today. In August, prices had declined 0.2%. Economists were expecting the consumer price index to drop at the same pace of 0.2% in September.

The Eurostat is slated to release the final data on October 15. The European Central Bank, which aims to keep inflation rates below, but close to 2% over the medium term, raised its inflation outlook in September. The central bank now expects consumer prices to rise 0.4% in 2009.

Another report from the euro-area showed that the seasonally adjusted number of unemployed in Germany fell 12,000 in September, more than the revised decline of 5000 in August. The fall was surprising as economists were expecting an increase of 20,000 in the number of people out of work in September.

The US dollar slumped to a 6-day low against the UK currency and hit as low as 1.6099 by 4:50 am ET Wednesday. At Tuesday’s close, the pair was quoted at 1.5964. If the dollar slides further, 1.638 is seen as the next likely target level……

Australian Dollar, Retail Sales, & Home Lending Rise

By Jacob Greber

Sept. 30 (Bloomberg) — Australian retail sales, approvals to build private homes and bank mortgage lending jumped in August, stoking speculation the central bank will raise borrowing costs from a half-century low in coming weeks.

Sales climbed 0.9 percent from July and approvals to build private houses increased 3.1 percent, the eighth consecutive month of gains, the Bureau of Statistics said in Sydney today. Bank lending rose 0.1 percent and loans to consumers buying houses jumped 0.6 percent, a central bank report showed.

The nation’s currency jumped to the highest level in 13 months as investors bet rising demand for credit and sales at department stores such as David Jones Ltd. will add to pressure on central bank Governor Glenn Stevens to raise the benchmark interest rate from 3 percent. House prices have jumped 7.9 percent this year, according to a separate report today.

“It makes sense for the Reserve Bank to start withdrawing policy support at the earliest opportunity,” said Sydney-based JPMorgan Chase & Co strategist Stephen Walters, the only economist among 17 surveyed by Bloomberg News who expects Stevens to raise the overnight cash rate target next week. The rest expect an increase in November.

“The Reserve Bank took the cash rate down to ‘emergency’ and ‘unusually low’ settings earlier this year because there was an emergency,” Walters added. “Today’s evidence indicates the emergency has passed.”

Dollar Rises….

Bank of Japan Said To End Debt Purchases Soon

By Masahiro Hidaka and Mayumi Otsuma

Sept. 30 (Bloomberg) — The Bank of Japan may decide as soon as next month to let its emergency corporate-debt buying programs expire as businesses regain access to private funding, people with direct knowledge of the discussions said.

Officials are concerned that maintaining their purchases of corporate bonds and commercial paper beyond the scheduled end in December would distort capital markets, according to the people, who spoke on condition of anonymity because the deliberations are private.

The decision would echo steps by central banks around the world to pare back unprecedented measures to unfreeze credit as the financial industry stabilizes. At the same time, because Japan’s economic recovery is threatened by rising unemployment and deflation, policy makers are likely to keep the benchmark interest rate target near zero into next year, analysts said.

“There is no doubt that the central bank is heading toward unwinding the credit-easing steps,” said Eiji Hirano, who worked at the central bank for 33 years until 2006 and served as an executive director. “BOJ policy makers are now signaling their intention to end them and they seem to be having a sort of dialogue with markets to test their reaction,” said Hirano, who is now a Tokyo-based director at Toyota Financial Services Corp.

Fed, ECB

The Federal Reserve this month said it would shrink programs that auction loans to banks and Treasuries to bond dealers, citing “continued improvements” in markets. The European Central Bank said Sept. 24 it will stop its longer- dated dollar liquidity operations because of limited demand.

Bank of Japan Deputy Governor Hirohide Yamaguchi said on Sept. 18 that the central bank needs to “be mindful that keeping the temporary measures for a long time may hurt an autonomous recovery of market functions and invite the distortion of the allocation of resources.” Earlier in the month, Miyako Suda, a Bank of Japan board member, said the need for the measures is “diminishing.”

The yen rose to 89.76 per dollar at 3:18 p.m. in Tokyo from 90.09 late yesterday in New York. The yield on benchmark 10-year government bonds rose one basis point to 1.29 percent after a Trade Ministry report showed industrial production climbed for a sixth month in August.

Waning Usage

Japan’s central bank found no lenders offering to sell it commercial paper on Sept. 18; as of the end of August, it had 100 billion yen ($1.1 billion) of the securities on its balance sheet, about 3 percent of the 3 trillion yen the bank allowed itself to hold. The Bank of Japan held 200 billion yen of corporate bonds, only one-fifth of the limit set by officials….

Japans Industrial Output Rises 1.8%

By Jason Clenfield and Tatsuo Ito

Sept. 30 (Bloomberg) — Japanese manufacturers increased production for a sixth month in August, capping the longest stretch of gains in 12 years, as emergency spending by governments worldwide rekindled global trade.

Factory output rose 1.8 percent last month after climbing 2.1 percent in July, the Trade Ministry said today in Tokyo, matching the median forecast of economists surveyed by Bloomberg.

Companies said they plan to increase output by 1.1 percent this month and 2.2 percent in October, today’s report showed. Manufacturers including Fuji Heavy Industries Ltd. are hiring workers to meet higher demand as production rebounds from a record collapse in the first quarter this year.

“We’re not going to fall back into recession, but these production increases don’t bring us back to where we started,” said Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo. “You’ve still got a lot of excess capacity.”….

China’s Manufacturing Expands For a Sixth Month

By Bloomberg News

Sept. 30 (Bloomberg) — Chinese manufacturing expanded for a sixth month in September on government stimulus spending and record bank lending in the first half of the year, a purchasing managers’ index released by HSBC Holdings Plc showed.

The index dropped to a seasonally adjusted 55 from August’s 16-month high of 55.1, HSBC said in an e-mailed statement today. A reading above 50 indicates an expansion.

Premier Wen Jiabao said Sept. 10 that it’s too early to withdraw stimulus measures that are countering a slump in exports. China’s State Council announced yesterday bans on building aluminum smelters for three years and the expansion of the steel industry for an unspecified period to prevent overcapacity problems undermining the recovery of the world’s third-largest economy.

“China’s economic activities will continue to accelerate and further cement the nation’s recovery,” said Xing Ziqiang, an economist at China International Capital Corp. in Beijing. “Exports may soon start to rebound as the U.S. and Europe emerge from recession.”

The yuan traded at 6.8268 against the dollar as of 2:36 p.m. in Shanghai, from 6.8275 before the data were released.

An output index fell to 57.6 from 58.4 in August, a measure of new orders declined to 58 from 59.3, and an export-order index dropped to 54.4 from 54.9. The employment index rose to 53, the highest level in 25 months, on climbing sales, HSBC said.

Cement, Coke

The government has this year highlighted overcapacity as one of the nation’s biggest problems. The detailed measures announced yesterday also include a temporary halt to new cement projects and a ban on expanding coke projects for three years.

The State Council’s warning that overcapacity has the potential to undermine the nation’s recovery contrasted with the positive signs from the PMI…..

ECB Lends $110bln Which Was Less Than Expected

By Gabi Thesing

Sept. 30 (Bloomberg) — The European Central Bank will lend banks less money than economists forecast in its second 12-month auction of unlimited funds, indicating banks’ need for cash has eased for now.

Banks bid for 75.2 billion euros ($110 billion) at the current benchmark interest rate of 1 percent, the Frankfurt- based ECB said today. It loaned a record 442 billion euros at the first auction in June and economists had forecast demand for 137.5 billion euros this month, according to the median of 16 estimates in a Bloomberg News survey.

“That it came that low is a bit of a surprise,” said Jan Misch, a money-market trader at Landesbank Baden-Wuerttemberg in Stuttgart. “However, even expectations for anything beyond 100 billion were exaggerated in the first place. There isn’t just any major need for liquidity.”

The ECB, which will offer banks 12-month loans for a third time on Dec. 15, is flooding the system with money in the hope it will be lent on to companies and households. Money-market rates have dropped as the economy shows signs of emerging from recession and banks become less wary of lending to each other.

The euro extended its advance against the dollar after the announcement and was up 0.6 percent to 1.4667 as of 11:03 a.m. in London.


“Weaker demand for ECB loans probably reflects the fact that banks feel more able to borrow from each other, which is encouraging,” said Jennifer McKeown, an economist at Capital Economists Ltd. in London. Still with banks “still concerned about further losses to come, there is a good chance that they will hoard the funds rather than lending them to firms and consumers.”…..

German Unemployment Rises

By Rainer Buergin and Christian Vits

Sept. 30 (Bloomberg) — German unemployment rose in September, posing a challenge for Chancellor Angela Merkel’s incoming coalition even as signs mount that the worst of the economic crisis is over.

The number of people out of work rose 10,000 on a seasonally adjusted basis, before statistical changes are taken into account, the Nuremberg-based Federal Labor Agency said today. Including the changes, unemployment declined by 12,000 to 3.46 million. The agency said there is “no turnaround” in the labor market and the economic crisis continues to affect joblessness.

Merkel, whose government introduced stimulus measures including subsidies to sustain employment, plans to form a coalition of her Christian Democrats and Free Democratic Party after the Sept. 27 elections. While consumer and business confidence is rising as Germany climbs out of its deepest recession since World War II, job-cutting by companies from Jenoptik AG to BASF SE is marring the economic outlook……

IMF Expects More Losses For Global Economies

ISTANBUL — Rising global securities prices reduced the International Monetary Fund’s estimate of bank losses, but banks around the world — especially in Europe — still are likely to face additional write-downs of $1.5 trillion by the end of next year, the IMF said.

Overall, the IMF calculates that the global financial crisis will produce $3.4 trillion in losses for financial institutions, between 2007 and 2010, a chunk of which already has been recognized. That estimate is $600 billion less than the IMF forecast in April, largely reflecting an increase in the prices of securities held by financial institutions since then.

[IMF] AFP/Getty Images

The IMF projected total losses in the banking sector specifically will reach $2.8 trillion. That is the same as in April, but the figures aren’t directly comparable because the IMF reworked its methodology, in part to track potential losses in European banks. Of that amount, the IMF said, banks globally have written down $1.3 trillion and have additional potential losses of $1.5 trillion facing them.

As in past estimates, the IMF said that banks in the U.S. are further ahead in dealing with potential losses than those in Europe. Banks in the U.S. have recognized about 60% of anticipated write-downs, the IMF calculated. Banks in the Britain and continental Europe have recognized only about 40% of their potential losses.

The IMF said that U.S. banks’ portfolios rely more on securities, and thus have benefited from the recent gains in stock markets. Banks in Europe, however, are more dependent on loans to Eastern Europe and other beleaguered markets, whose economies remain vulnerable.

“Financial markets have rebounded, emerging-market risks have eased, banks have raised capital and wholesale funding markets have reopened,” the IMF said. “Even so, credit channels are still impaired and the economic recovery is likely to be slow.”

The IMF urged governments to continue pressing financial institutions to dispose of toxic assets and build capital cushions.

The fund estimated that bank losses in the U.S. and Europe over the coming year or so were likely to outpace the banks’ retained earnings over that time, reducing their equity. By several measures of capital, banks in the U.S. and the U.K. were in better shape than their counterparts in continental Europe, the IMF found.

Private-sector demand for credit is likely to remain “anemic,” the IMF said. But vastly increased public borrowing could put upward pressure on interest rates and undermine what is likely to be a tepid recovery.

Historical evidence suggests that a 1 percentage point increase in the fiscal deficit, if long lasting, helps produce an increase in long-term interest rates of between 0.1 and 0.6 percentage point. Picking the middle of that range, the IMF said increase in the budget deficits by sums equal to between 5 and 6 percentage points of gross domestic product — well within the range of possibility in the U.S. and Europe — could boost long-term interest rates by 1.5 to 2.0 percentage points. That, the IMF warned, would have “very adverse growth consequences.”…..

Boston Scientific To Settle With J & J

Boston Scientific Corp. agreed to pay $716 million to Johnson & Johnson to settle 14 lawsuits over conlficting patent claims, including one that had resulted in a verdict in favor of J&J that Boston Scientific had appealed.

The settlement, announced Tuesday, resolves most of Boston Scientific’s legal liability to J&J after 12 years of lawsuits over stents, popular medical devices that prop open clogged arteries to relieve chest pains. At least three suits between the two companies remain unresolved.

In one, J&J won a court victory without a monetary judgment, but Boston Scientific has estimated the decision will cost it at least $237 million.

Also still alive is a case in which Boston Scientific won a patent verdict against J&J. That case also hasn’t had a sum attached to it…..

FDIC Paints A Deadly Picture For Bank Health

Via ZeroHedge, comes a smoking gun release today from the FDIC. I mentioned last week that the FDIC, which is essentially broke (and by the FDIC, I mean, of course, the DIF – the Deposit Insurance Fund which insures customer deposits up to $250,000), was discussing a plan to re-fund itself by borrowing from its member banks. Today’s FDIC press release confirms just that. “But wait, Kid Dynamite,” you might say, “the release says that the FDIC will have banks prepay 3 years worth of fees.” Yes – that’s the same as borrowing from the banks.

Sadly, the FDIC wants to go this route, instead of using a special assessment on the banks, because, in their own words:

“Furthermore, any additional special assessment or immediate, large increase in assessment rates would impose a burden on an industry that is struggling to maintain positive earnings overall.”

In plain English, that’s like saying “everyone wants to pretend that the banks are solvent, but if we make them actually pay us extra money, it will make it harder to cover up the fact that the banks are insolvent.” Thus, we wave a magic wand, and even though the FDIC is asking the banks for 3 years worth of money today, the banks will be able to recognize the cost over 3 years. Since when do we treat insurance as a depreciating asset? It’s not like when you buy an airplane and recognize the cost over 20 years! There is a simple, unarguable fact: if Citibank pays the FDIC $1B TODAY (I’m making this number up) in fees for the next 3 years, Citibank has $1B less in cash today. Not $333MM less in cash – $1B less in cash.

The FDIC’s release today is a must read – it contains some serious and scary truths about our national financial situation, despite what the press and the administration have been telling us over the past six months.

Take, for example, this gem:

“Staff’s current projection of $100 billion in failure costs from 2009 through 2013 is higher than staff’s projection in May of $70 billion over the same period. Projected failures have increased due to further deterioration in the condition of insured institutions, as reflected in the increasing number of problem institutions. Asset quality problems among insured institutions are not expected to abate in the near-term.”

In plain speak: While you read headlines every day about the end of the recession, improvement among all metrics, green shoots, and how great it is to have 9.7% unemployment and over 500k in new jobless claims weekly, the fact of the matter is that in the last 4 months, the estimate for losses from bank failures over the next 4 years has increased by 43%! And guess what – asset quality problems are not expected to abate!

The FDIC also reminds us of their previous time frame for restoring the Deposit Insurance Fund:

“In October 2008, the Board adopted a Restoration Plan to return the Deposit Insurance Fund (DIF or the Fund) to its statutorily mandated minimum reserve ratio of 1.15 percent within five years. In February 2009, given the extraordinary circumstances facing the banking industry, the Board amended its Restoration Plan to allow the Fund seven years to return to 1.15 percent. In May 2009, Congress amended the statute governing establishment and implementation of the Restoration Plan to allow the FDIC up to eight years to return the DIF reserve ratio back to 1.15 percent, absent extraordinary circumstances.”

So, last year, the FDIC hoped to replenish the DIF within 5 years. As reality hit, they adjusted this estimate to a 7 year time frame in February. Then, in May, despite an epidemic spread of green shoots in the media, the FDIC again extended the estimate of time needed until the DIF was replenished to 8 years.

There is another terrifying tidbit in the FDIC’s release that’s easy to gloss over:

“At the beginning of this crisis, in June 2008, total assets held by the DIF were approximately $55 billion, and consisted almost entirely of cash and marketable securities (i.e., liquid assets). As the crisis has unfolded, the liquid assets of the DIF have been used to protect depositors of failed institutions and have been exchanged for less liquid claims against the assets in failed institutions. As of June 30, 2009, while total assets of the DIF had increased to almost $65 billion, cash and marketable securities had fallen to about $22 billion. The pace of resolutions continues to put downward pressure on cash balances. While the less liquid assets in the DIF have value that will eventually be converted to cash when sold, the FDIC’s immediate need is for more liquid assets to fund near-term failures.”

This is the doozy – the FDIC has been exchanging cash for trash – as banks fail, the FDIC takes assets (as they’ve admitted above: illiquid, presumably low quality paper – perhaps MBS that will turn out worthless?) and gives the failed banks cash to protect depositors. The last sentence of the quote above presumes that in the end, if they wait long enough, these illiquid assets will have value. The problem is, the FDIC needs cash now, and these assets simply cannot be sold for what we’re pretending they are worth right now. If you’ve been following the crisis, you should realize that this is no different from what the banks the FDIC has NOT yet seized have been hoping – that their trash assets will eventually recover. Everyone is sitting around extending and pretending, delaying and praying, refusing to mark to market, and keeping their fingers crossed that in the end, these assets will be worth what we pretend they are worth. What happens if they’re wrong?

Obviously, I’m adamantly against continued attempts to hide the health of the banking industry. The FDIC doesn’t want to impose special fees on the banks because it’s a tough time for the banks, so they concoct a plan to cook the books -they admit this! They acknowledge that the “prepayment” plan doesn’t really change the balance of the fund!

“Although the FDIC’s immediate liquidity needs would be resolved by the inflow of approximately $45 billion in cash from the prepaid assessments, it would not initially affect the DIF balance. The DIF would initially account for the amount collected as both an asset (cash) and an offsetting liability (deferred revenue).”

When you pull forward revenue, you’re not improving the long term health of the insurance fund- you’re taking money now, and giving up money later.

We need to have another round of special assessments on the banks to shore up the DIF, write trash assets down to realistic levels, seize the bad banks, take the pain, and then we’ll be able to move on unencumbered by a never ending pile of bad debt. As we stand now, failed banks have passed their problems on to the other banks, since the FDIC has inherited fantasy assets which are clogging up the balance sheet of its fund.

A Look @ The Housing Market & Bubble Dynamics

The housing market is quickly becoming the focal point of the market tug-of-war.   Many pundits and analysts are arguing that the housing market has bottomed, but recent data points to potential potholes in this idea.  As regular readers know, I believe the strength in housing has been mostly due to seasonal factors and the first time home buyers tax credit.  I still believe housing is in a long-term secular bear market and that future performance is likely to be very similar to past bubbles.  I.e., flat:


In an effort to reflect both sides of the coin David Rosenberg brings us these excellent points from both the bulls and the bears:

But the bulls will point to the fact that:

  • Sales are up five months in a row;
  • Sales have reached an 11-month high;
  • Sales are up 30% from the January trough;
  • Inventories have collapsed to their lowest level since Nov/92;
  • The unsold inventory backlog is down to 7.3 months’ supply from 7.6 in July and the 12.4 MS peak at the turn of the year.

The bears will point to:

  • Sales were all in the West as builders rapidly unwind inventories — up 12.2% in one region; the rest of the country posted a 3.0% decline. So, hardly a broad-based pickup.
  • Sales were driven by massive deflation — median new prices collapsed 9.5% MoM to $195,200 — the lowest since October 2003.
  • A growing share of homes are being priced below $150k — a 29% share of all sales; barely over 2% of sales are now comprised of homes priced over $750k. Thank you first-time buyers, but what happens when the tax credits expire?
  • It took the builders of median of 12.9 months to find a buyer for their completed homes … a record: a year ago it took them 9 months to unload the property.
  • While home sales have now managed to stabilize on a year-over-year basis, all of the growth is on plan or “spec” — sales of finished product are down more than 20%

Perhaps most overlooked in the housing story is the shadow inventory.  As with all bubbles, we have the early buyers (in this case the first time home buyers) who come out to nibble when they believe prices have stabilized.  Unfortunately, the laws of supply and demand always reassert themselves and take prices sideways or lower for years to come.  The shadow inventory will be the primary culprit on the supply side of the equation over the coming years.  Rosenberg elaborates:

The Shadow Inventory Is Still Huge:

The bulls had a field day with the “improved” housing inventory data in the August reports, but what they can’t explain is why it is that prices continued to deflate. That can only mean that at the last price point, there were still more sellers (supply) than buyers (demand). Indeed, the “shadow’” inventory that does not show up in the official data is closer to 7 million housing units (equivalent to two years of supply!) when you add up all the current foreclosures, the homes entering into the foreclosure process and the number of mortgage borrowers who have not made a payment in the past year.

Let’s examine the data:

  • As of July, there were 1.2 million loans that had just entered the foreclosure process.
  • There are an additional 1.5 million existing units making their way through the foreclosure process.
  • And, a further 217,000 homes in which the borrower has not made a mortgage payment in the past year, but the lender has yet to file notice. In other words, 17% of the homes that are a year past due or more are not yet in foreclosure, up from 8% a year ago.

This inventory has yet to hit the market, but it will. So pundits that get excited about two or three months of Case-Shiller data are spending too much time looking out the back window. More deflation is coming in residential real estate — this bear market in housing ain’t over yet. Remember, homes that are foreclosed typically go on to the market at discounts ranging between 10% and 50%.

Perhaps my favorite piece of classic bubble data is this ad from Hovnanian.  They are not only calling the bottom but predicting a “bounce”.   If this doesn’t stink of a suckers bet then I don’t know what does.  Classic bubble mentality….


* All information on this website is provided for general purposes and should not be misconstrued as financial advice. Always consult your financial advisor before acting on any of the information herein. You should always assume that the author(s) could have a vested interest in topics described and may or may not own securities and instruments discussed.

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Editorial: The Greenback Carry Trade

From the Oracle

A powerful hidden engine existed for close to 20 years called the Yen Carry Trade. The engine produced tainted trillion$ for its priviliged participants, whose access to cheap money was assured and whose control of government policy was tight. The engine served two important purposes. It kept the Japanese Yen currency exchange rate low, sufficient for maintaining the export juggernaut that sent products around global supply routes with names like Toyota, Honda, Komatsu, Mitsubishi, Nikon, Toshiba, and Fuji for a string of years. It also supplied a torrent of funds to feed both the Japanese and Western (think US, UK, Europe) financial markets its most important channel in existence.

The Yen Carry Trade was that important. The Bank of Japan and a host of Tokyo-based financial firms relied upon this carry trade for basically free money. This important money making machine required Japanese interest rates and currency to remain low, and USTreasury Bond yields and US$ currency to remain high. Those halcyon days are largely done, since the Yen is on a rising uptrend and the US$ is on the falling downtrend, even as US long-term rates are stuck below a defended steel bar. Nowadays, the insider firms are struggling to avoid a wrestling match with the Grim Reaper. They are falling like flies.

In the last two to three years, a significant portion of this carry trade has been unwound. In fact, when the US stock market went from Dow 14000 to Dow 7000, it was widely believed that the unwind of the Yen Carry Trade coincided with the decline, thus ending an era. Not to be denied, foreigners tapped into the easy money game during the longstanding era. Wall Street, London, and several European finance centers exploited the opportunity also. When the US$ exchange rate topped in year 2001, and when the US stock market topped in year 2007, the exits became crowded with Japanese and Westerners alike, as they dismantled their leveraged machinery designed to capture the easiest money in modern history. If these firms entered the mortgage bond torture chambers, they had to contend with floors that vanished, as well as swinging axes. Survival is a grand challenge when removing leveraged machinery.


The Yen Carry Trade worked like this in rough terms. The large financial firms borrowed Japanese money at the near 0% rate, a lot of money, and managed a Yen currency risk. They could either borrow cash from Japanese banks or integrate short Yen positions into contracts with equivalent risk exposure. They had liberty to invest in whatever instrument they wished, but the favorite in the last two decades had been the USTreasury long bond. They earned 4% to 5% vig on the difference, but required a rising USDollar and falling Japanese Yen.

The ruinous bursted bubble from Japan around 1990 and the seemingly endless years of 0% Japanese money enabled the Yen Carry Trade against a backdrop of a chronic insolvent Japanese bank system. A critical characteristic of that carry trade was that is applied leveraged enormous pressure in a way so as to maintain the low Yen currency and the high US$ currency. The typical leverage acted like a crowbar (jimmybar) to apply 10x to 20x more force, deploying futures contracts. The leveraged gains were thus between 50% and 100% per year, dotted with some currency risk. Be sure to know that other objects of this leveraged game involved the purchase of US stocks, like in an S&P bundle, and UKGilt Bonds and even German Bunds. Speaking of German, the entire Yen Carry Trade concept was totally unknown to the venerable Kurt Richebächer, admitted in our conversations in August 2003. May he rest in peace.

The objective asset had to meet requirements. They required only strong currencies and hefty bond yields, an easy task to identify object assets to invest in. Since 2001 when the Gold price hit bottom, another object for investment had been the Gold asset. The Gold price has risen in part from the Yen Carry Trade. In fact, the unwind of the Yen Carry Trade might be a key factor to explain the Gold price consolidation since January 2008, nearly a two-year period. My belief is that the long consolidation has created a very strong foundation for a rise to $2000, not a ceiling to limit the Gold price as the clownish pundits claim who litter the compromised landscape. Since year 2003, when the USFed hit the floor with low interest rates, funds to power Gold investment have largely been drawn from the USDollar fountain. Since mid-2007 when the USFed took the official rate even lower, matching the 0% from Japan, against all promises to do so, the Gold investment has been powered clearly by funds in US$ denomination. That movement will surely accelerate.

The Yen Carry Trade decline and wind-down has been reported for the last few years. It has been attributed to the US stock downdrafts. It would be impossible to wind it down in a year or two, even three years. It was that big. Its size is estimated to be perhaps $2 trillion in magnitude. The unwind has a nasty blowback effect to be felt by Japan. The Yen currency rebounded in the last couple years, thus creating a foundation for a strong recovery. In the process, the Japanese export trade is threatened by a rising Yen, rendering its exported products more expensive. Japan must therefore manage a transition to a new major trade partner in China, which has actually eclipsed the US in recent months. During this transition process, Japan will gradually loosen high level corporate ties and important political ties with the Untied States. If the Yen rises faster than the Chinese Yuan, then the transition can be managed to mutual benefits between Japan and China. The only problem is that Japan might find itself becoming a Chinese Lackey in much the same way it was an American Lackey for 50 years. The new Japanese prime minister elect Hatoyama has publicly stated his intention to strive for more balance.


Welcome a new carry trade to town! Before introducing it, let it be known that the carry trade concept was not a foreign tool to Robert Rubin, former Goldman Sachs currency superstar and former Treasury Secy in the Clinton Admin. He was the initial Wall Street fox invited to serve in the Dept Treasury henhouse, the beginning of the financial structure ruin for the nation. He served as Treasury Secretary in the same sense that a armored truck heist serves a bank.

Rubin designed the Gold Carry Trade in the 1990 decade that took down the Gold price. He arranged for the USTreasury gold lease rate to be in the neighborhood of 1%, made available to Wall Street firms, but NOT YOU! They leased the gold bullion from Fort Knox, the national treasury, and sold it into the market. With proceeds they bought USTreasury Bonds, and ushered in a decade of prosperity, as they like to call it, more like a Stolen Decade of Prosperity in Jackass parlance. They set up this Decade of Despair. The end result was the depletion of the USGovt gold treasure by Wall Street for their private gain, but NOT YOURS! To think Wall Street exists in order to facilitate capital formation for the USEconomy is a gross error of judgment, that misses the entire criminal syndicate function they serve, best described as a vast parasite. The public has finally seen it with the climax death of Lehman Brothers, the nationalizations of the Black Holes in AIG and Fannie Mae, the extortion for the TARP funds, the secrecy upheld for its slush fund distribution, and the defiant posture from the USFed when confronted with audits. The syndicate is showing itself more clearly.

The Gold Carry Trade served its purpose, enriching Goldman Sachs beyond its wildest dreams. They even orchestrated an IPO stock event in order to cash in but retain control from their own deep bounty. Gold descended from $400-450 per ounce down below $300, hitting the depth a year after Rubin’s yeoman service. The USDollar peaked at the same time that gold bottomed. Now with insolvency of the US banks and US households, comes insolvency of the USGovt and the absence of its gold collateral for the USDollar itself, the consequence of Wall Street plunder and pillage.

Be sure to know that the natural order has unfolded the beginning of a quiet murder skein behind the scenes. It has been launched by the death of an ABN Amro banker in the Netherlands and the death of the Freddie Mac Chief Financial Officer, both last spring. Other deaths occurred just last week, four convenient ends for men who might have struck a plea bargain agreements with damning evidence, who might have been targeted by angry elite investment victims, and who might just have known too much about fraudulent money trails. Anyone who buys the suicide stories is dopey at best, a moron at worst. Recall that the businessman Al Capone attended church and gave money to ophanages.


Welcome a new carry trade to town! Here in the present, the new carry trade has begun to take root with the USDollar as its basis. Its requirements are simply stated. It needs a crippled bank system that offers a reliable 0% interest rate, a crippled currency that offers little risk of a rise in exchange rate, and plenty of targeted opportunities to invest in rising asset groups in competition. The gold asset is one such object asset.

One is hard pressed to identify a sovereign bond security pitched by a government with any credibility. Their deficits, boatloads of bond issuance, and public statements in desire of weaker currencies tend to rule them out. So Govt Bonds are not a viable object. They are too busy ruining their currencies in the midst of the Competing Currency War. Why just two weeks ago, the Swiss Govt announced their frustration at a rising currency, despite all efforts to undermine their Franc currency. They will be forced to redouble their destructive efforts. The Europeans did NOT want to reduce interest rates a year ago, but they did, a correct Jackass forecast that went directly against some banker contacts. That shows the power of the Competing Currency War, since the Euro currency had risen to 160, sufficient to render considerable harm to the European Union Economy in its export trade. With numerous currencies ‘frozen’ from programmed destruction, the time is ripe for the USDollar Carry Trade to be launched. It has been launched. THIS CARRY TRADE WILL PUNISH THE USDOLLAR BADLY AS IT WEARS A BADGE OF SHAME!

The ruinous bursted bubble from Japan around 1990 and the seemingly endless years of 0% Japanese money enabled the Yen Carry Trade against a backdrop of a chronically insolvent Japanese bank system. A critical characteristic of that carry trade was that heavy leverage applied enormous pressure in a way so as to maintain the low Yen currency and the high US$ currency. In the summer 2008 when the USFed took the official interest down to 0.25% and stuck it there, the USDollar Carry Trade was assured of a vigorous run through the financial factories. Here is what is so important about its upcoming entrenchment. The US$ exchange rates will be heavily subdued, with any rebounds totally smothered, resulting in a relentless Gold rise with gusto. The shorting of the US$ is key for the supply of funds. It comes as borrowed US$ funds used outside the US Sphere, thus net bearish. It comes as leveraged instruments designed to capitalize on a continued US$ decline integrated into securities like with short DX contracts.

The coordinated and systematic ruin of major currencies, through monetizations, through vast federal deficits, through sustained near 0% official rates, and through chronically insolvent national bank systems, will assure that the Gold asset will be a favorite for the USDollar Carry Trade for at least a couple years, maybe more. Furthermore, installation of the USDollar Carry Trade will assure that No Exit Strategy will be available to the USFed also. Wall Street firms will participate in this free lunch carry trade, just like all others. Wall Street will not permit a USFed rate hike to firm the US$ exchange rate. Talk about a strong  perverse factor behind the USDollar. This is every bit as powerful as the ‘Beijing Gold Put’ analyzed in the Hat Trick Letter issued in September.

Continued forces will be at work in a variety of ways to continue the thrust and duration of this new USDollar Carry Trade, sure to keep it badly subdued. The risk is so great that a USTreasury Bond default could even become the last stop on its pathogenesis pathway. Just today, the compromised erudite spokesman Lawrence Meyers actually said the USFed will probably remain on hold for its near 0% interest rate until the end of 2011. That is NOT a misprint!!! The USFed will justify its decision not to hike rates, not to halt money creation, all the while discussing theoretically an Exit Strategy.

Try not to laugh too hard! Also, the US$ Swap Facilities are scheduled to end in October 2009. Their extension should be very harmful for the USDollar, from the bad publicity and the understood urgent implicit desperate need. The next wave of US bank losses will arrive to coincide with the falling of the leaves in autumn, an apt parallel. The inability of the USFed to conduct and execute any Exit Strategy at all is powerful impetus behind the development of the USDollar Carry Trade, and the powerful lift it gives the Gold price. They cannot raise interest rates. The Stimulus Bill has run its measly course. The monetary stimulus must remain in place. The Uncle Sam patient is imprisoned in the Intensive Care Ward.


The Japanese Yen bottom occurred in summer 2007, just about the time of the US stock peak. That is not a coincidence, since Yen Carry Trade funds propelled the US financial markets in a general sense. The continued breakout in the Yen beyond the January 112 highs will amplify the USDollar bear market, and push the US$ DX index to multi-decade lows. A panic comes, coordinated with a rise in the Euro, Yen, and other currencies.

The USDollar DX index will probably head below the critical support at 70 sometime early next year, or late this year. Its movements are increasingly volatile, in a bad way. A global revolt against the US$ is underway with full speed. The only US$ support comes from monetization and deception, as the Printing Pre$$ is active. The nation is insolvent in most every respect. No return to normalcy will come, despite the hopes and dreams of US leaders, unfortunately trapped inside the USDome, where perceptions are flawed. The US financial structure is permanently broken. In reaction to today’s FOMC decision to leave interest rates alone, the USDollar has resumed its decline. It will soon amplify its downward direction. While they spoke with optimistic words, the truth is that they are stuck without an Exit Strategy, which will become painfully clear over the passage of time.

Two weeks ago, a rather comprehensive list of reasons was provided for the Gold price breakout. Many factors were given to explain how and why the Gold price would march toward the $2000 level. THE ARRIVAL OF THE USDOLLAR CARRY TRADE IS A PRIMARY REASON FOR THE MARCH TO $2000 GOLD. Prepare for it, as the pundits will be made to squirm and eat crow! Almost all pronouncements, propaganda, and prattle must be ignored that come from the Pagan Paper Palaces that have wrought the current destruction and wreckage. The only factor they comprehend is the excessive printing of money and largesse from government budgets to aid the rescue and stimulate the moribund as well as to nationalize both the dead financial firms and their grotesque fraud laced with counterfeit.


The phenomenon will be much like a flesh eating bacteria. What is eaten during unbridled USFed money creation and USGovt debt issuance is the USEconomic capital, both industial capital and household capital. The most misunderstood aspect of the profound accommodation with near 0% rate of interest (ZIRP) and enormous mountains of printed money (QE) is the destruction of USEconomic capital. Not only is new capital formation NOT possible, but capital is liquidated and banks are hesitant to lend even to good customers. Zero Interest Rate Policy and Quantitative Easing serve as the most severe and formidable Weapons of Mass Destruction to capital that the modern world has ever seen. See small business sector, see the car industry & supply lines, see construction sector, and much more. Both the ZIRP and QE are fuel and lubricant both to power gold to the $2000 level, serving as vivid battle cries!

The tragedy of modern day central banking, a franchise in total failure, has been the hidden destruction of capital with their full blessing. The central bankers cheered the dispatch of US factories to China so as to exploit cheaper labor, labeling ‘Low Cost Solutions’ as the myth chapter. Debt replaced income. They cheered the raid of equity from US homes after urging a housing bubble creation. Foreclosures resulted. They justified the absurd legitimacy of a USEconomy structured atop a housing bubble, calling home equity wealth, labeling ‘Asset Economy’ as the myth chapter. Bank system insolvency resulted.  They justified the horrendous US trade gaps and current account deficits, recycled back to the US from Asian and OPEC finance of the USTreasurys, labeling ‘Macro Economy’ as the myth chapter. Credit dependence and now monetization dependence resulted. They cheered the ultra-low rates to stimulate an economic rebound that has not occurred, to their frustration. They endorsed the US bank stock rally, aided and abetted by fraudulent bank balance sheet accounting. Lofty stock valuations (amidst a 97% profit decline) and heavy executive insider selling resulted. They cheered the stupid Clunker Car program that used $9 of USGovt funds for every $1 in fuel costs. A Detroit basket case resulted.

The latest shameful disgraces for the USFed are three. 1) The USFed monetizes USTreasurys during auctions by using the primary dealers as temporary holders before permanent open market operations, and by using foreign central bank sales of USAgency Mortgage Bonds in addition to the USDollar Swap Facility. 2) The USFed just admitted publicly that it had consistently been hiding its Gold Swap Agreements, thus rendering Greenspan a perjury perpetrator and the institution in violation of its contract. 3) New York Fed president Jan Hatzius (another GSax plant) expects the USFed balance sheet to expand by over $1 trillion more. The transgressions of the USFed ensure gold will hit $2000.

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