Business Headlines For September 23, 2009

AIA Index Ticks Down

Before you build something, you get an architect. House, school, office building, apartment building, whatever, and that’s why I find the Architectural Billings Index, from the American Institute of Architects, so very interesting. This index measures billings from AIA member-owned firms and reflects the approximate nine to twelve month lag time between billings and construction spending. And it’s monthly.

Today the AIA reported the August ABI rating was 41.7, down slightly from 43.1 in July.

This score indicates a decline in demand for design services (any score above 50 indicates an increase in billings).

But this comes after several months of gains. I called the AIA’s chief economist, Kermit Baker.

“The ABI is back from the real dark spot it was in six months ago,” says Baker, “but our members say people aren’t beating down the doors.” Despite the upturn in the economy, Baker says there has been more tire kicking than investment in new projects. Right now there’s just not a lot of pressure to invest in new plant and equipment structures.

“We’ve been on a frozen rope since the spring. We were hoping it would inch its way back to recovery but it hasn’t made any progress.”…..

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MAR To Write Down $760 mln

By John Gittelsohn

Sept. 23 (Bloomberg) — Marriott International Inc., the largest U.S. hotel chain, plans to take a third-quarter pretax charge of $760 million in its timeshare business as the economic slowdown cuts leisure travel and investing.

The company will cut prices, halt development at some luxury fractional ownership and residential resorts, and sell some undeveloped land, Bethesda, Maryland-based Marriott said today in a statement. It also plans to sell its inventory of rooms as part of a new program with Ritz-Carlton Destination Club.

Hotel owners are struggling to attract customers as the recession deters vacationers. Demand for luxury timeshares “was soft in 2008 and weakened further in 2009,” Marriott said today. Timeshares have become a diminishing part of Marriott’s business, accounting for about 14 percent of revenue in the fiscal year ending in January, compared with 16 percent in the year earlier period.

“Marriott has shifted from development mode to cash- harvest mode in its timeshare business,” said Jake Fuller, an analyst with Soleil Securities Group Inc. in New York. He rates the shares “buy.” “This timeshare business will now produce cash instead of use cash.”

Marriott also said its revenue per available room declined by about 19 percent in the quarter ending Sept. 11 from a year earlier. That’s better than a forecast of a drop of 20 percent to 23 percent announced in July.

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FDIC to Meet on Insurance Companies Shortly

U.S. regulators will meet on Sept. 29 to discuss how to rebuild the bank deposit insurance fund, which has been depleted by a sharp increase in bank failures, the Federal Deposit Insurance Corp said in an agenda notice Wednesday.

The FDIC’s board is expected to propose and put out for public comment a number of options to replenish the fund, including tapping the agency’s $500 billion line of credit with Treasury, levying additional emergency fees on banks, encouraging banks to prepay their regular assessments, and possibly borrowing from healthier banks.

FDIC Chairman Sheila Bair has said all options are on the table and that the agency will seek feedback from the industry before making a final decision.

The board meeting next week will also provide an update of the agency’s expectations for the volume of bank failures that are still looming.

In May, the FDIC projected a loss of $70 billion for the insurance fund over the next five years, up from a prior forecast of $65 billion……

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Mass Layoffs Continue in August

WASHINGTON (Reuters) – The number of mass layoffs by U.S. employers rose by 533 in August from July, with the manufacturing sector the hardest hit, Labor Department data showed on Wednesday.

The number of mass layoff actions — defined as job cuts involving at least 50 people from a single employer — rose to 2,690 last month, affecting 259,307 workers. That brought the total of mass layoffs so far this year to 21,184.

A total of 279 mass layoff events were reported in the manufacturing sector in August, the department said.

While the broader economy appears to be recovering from its deepest and longest recession in 70 years, unemployment continues to rise. There are fears rising joblessness could hamper the recovery.

The U.S. unemployment rate hit a 26-year high of 9.7 percent in August, and many economists expect it to peak above 10 percent early next year.

In the 21 months since the start of the recession, the total number of mass layoff events was 44,669, accounting for over 4.56 million jobs, the department said.

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XLNX Raises Guidance

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Asia Trades Mixed With Major Markets To The Downside

By Shani Raja

Sept. 23 (Bloomberg) — Asian consumer-related shares rose on expectations the Group of 20 Nations will continue policies to support growth. Chinese shipping lines fell on lower commodity cargo rates.

Geely Automobile Holdings Ltd. soared 19 percent in Hong Kong after selling convertible bonds. Billabong International Ltd., Australia’s biggest surfwear maker, rose 3.1 percent. Woodside Petroleum Ltd., Australia’s second-biggest oil and gas producer, jumped 5.1 percent, after crude oil advanced for the first time in four days yesterday. China Cosco Holdings Co., the world’s largest operator of dry-bulk ships, lost 3 percent.

“G-20 leaders are expected to continue to support fiscal policy stimulus and the global banking system, with the removal of stimulus to take place in a globally coordinated manner,” said Stephen Halmarick, Sydney-based head of investment markets research at Colonial First State, which holds about $115 billion. “There are still concerns about the sustainability of the recovery beyond the stimulus.”

The MSCI Asia Pacific excluding Japan Index rose 0.3 percent to 394.49 as of 7:20 p.m. in Tokyo, after touching its highest point in a year. About three stocks on the index fell for every two that gained. The gauge that includes Japan has rallied 69 percent from a five-year low on March 9. Australia’s benchmark S&P/ASX 200 Index advanced 1.5 percent at the close, snapping three straight days of losses. Japanese markets were closed for a holiday.

Broker Upgrades

New Zealand’s NZX 50 Index added 0.2 percent, as a government report today showed the nation emerged from recession. The unexpected growth in gross domestic product drove the U.S. dollar to a 13-month low against New Zealand’s currency.

South Korea’s Kospi Index lost 0.4 percent to 1,711.47 at the close. Hynix Semiconductor Inc. slumped 5.4 percent, leading a gauge of technology stocks on the ex-Japan Asian index lower, after Hyosung Corp. submitted a bid to gain control of the world’s second-biggest computer-memory chipmaker. Korea Express Co., the nation’s largest logistics company, slumped 5 percent to 71,000 won after prosecutors raided its offices. Hong Kong’s Hang Seng Index dropped 0.5 percent at the close.

Futures on the U.S. Standard & Poor’s 500 Index gained 0.1 percent. The gauge climbed 0.7 percent to 1,071.66 yesterday following a spate of brokerage upgrades. JPMorgan Chase & Co. had its earnings estimate raised at Bank of America Corp., while Citigroup Inc. advised buying Macy’s Inc. shares.

Asia Leading Recovery

“A slew of broker and earnings upgrades provided the impetus and now there’s plenty of cash to follow the advice,” said Cameron Peacock, a Melbourne-based analyst at IG Markets. “The demand from cash on the sidelines will make dips shallow and short lived.”

International Monetary Fund Managing Director Dominique Strauss-Kahn called on leaders from the G-20 nations to maintain policies to pull the world economy out of recession and said China will play a larger role in shaping a sustainable recovery. The Washington-based IMF is advising officials around the world not to withdraw economic stimulus programs too soon as they chart a path to lasting growth.

The Federal Reserve has started talks with bond dealers about withdrawing the unprecedented amount of cash injected into the financial system in the last two years, according to people with knowledge of the discussions……

European Markets Trade Fractionally to The Upside

By Adria Cimino

Sept. 23 (Bloomberg) — European and Asian stocks rose for a second day amid speculation the Group of 20 nations will maintain measures to support the economy even as signs grow that a recovery is accelerating.

Alcatel-Lucent SA jumped 4.9 percent after a report that the world’s biggest supplier of fixed-line phone networks may post higher-than-estimated profit. Merck KGaA climbed 2.2 percent after saying its Erbitux treatment helped some colon cancer patients live longer. Mitchells & Butlers Plc led pub owners lower after UBS AG recommended selling the shares.

Europe’s Dow Jones Stoxx 600 Index added 0.3 percent to 245.01 at 11:13 a.m. in London. The regional gauge has soared 55 percent since March 9 as earnings at companies from Goldman Sachs Group Inc. to GlaxoSmithKline Plc surpassed projections and the German and French economies exited recessions.

“We’re looking at a recovery,” Mike Lenhoff, who helps oversee about $26 billion as chief strategist at Brewin Dolphin Securities Ltd. in London, said in a Bloomberg Television interview. “Markets are indicating a degree of confidence in prospects of growth that lie ahead. This is the quarter that we’re getting some indication of GDP recovering.”

The MSCI Asia Pacific excluding Japan Index rose 0.3 percent as New Zealand unexpectedly emerged from recession. The country’s economy grew for the first time in six quarters, with gross domestic product increasing 0.1 percent in the three months to June 30, a government report today showed…..

Oil Trades Largely Unch @ $71pb

By ALEX KENNEDY p {margin:12px 0px 0px 0px;}

SINGAPORE (AP) – Oil prices hovered above $71 a barrel Wednesday in Asia as signs of weak crude demand were offset by a slumping U.S. dollar.

Benchmark crude for November delivery was down 6 cents at $71.70 a barrel by late afternoon Singapore time in electronic trading on the New York Mercantile Exchange. The contract added $1.83 a barrel to settle at $71.76 on Tuesday.

Oil prices have traded between $65 and $75 for months as consumer demand in the U.S. has remained tepid despite evidence of an economic recovery.

U.S. oil inventories rose unexpectedly last week, the American Petroleum Institute said late Tuesday. Crude stocks increased 276,000 barrels while analysts had expected a drop of 2.25 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

“The reason oil is trading in this range is this battle between weak supply fundamentals and optimism for economic recovery,” said Victor Shum, an energy analyst with consultancy Purvin & Gertz in Singapore.

“This seems to be a level that both producers and consumers are happy with.”

A weakening U.S. dollar has helped support oil prices. The euro rose Wednesday in Asian trading to $1.4817 from $1.4788 the previous day while the dollar fell to 90.68 yen from 91.15.

In other Nymex trading, gasoline for October delivery was steady at $1.77 a gallon, and heating oil held at $1.81 a gallon. Natural gas was up 3.2 cents to $3.64 per 1,000 cubic feet.

In London, Brent crude fell 13 cents to $70.40 on the ICE Futures exchange.

Dollar Bears Continue Singing

By Anchalee Worrachate and Ron Harui

Sept. 23 (Bloomberg) — The dollar traded within a cent of a one-year low against the euro on speculation the global economic recovery is gathering strength, encouraging investors to buy higher-yielding assets.

The U.S. currency also weakened versus the pound and South Korean won as economists forecast the Federal Reserve will signal today it intends to keep holding down borrowing costs. New Zealand’s dollar was the biggest gainer versus the greenback among major currencies as the nation’s economy unexpectedly grew for the first time in six quarters.

“The dollar is likely to remain weak in the near term,” said Lee Hardman, a currency strategist at Bank of Tokyo- Mitsubishi UFJ Ltd. in London. “What’s driving the dollar lower is the exceptionally loose liquidity conditions, and this encourages its use as a funding currency.”

The dollar traded at $1.4778 per euro at 7:09 a.m. in New York, from $1.4790 yesterday, after earlier declining to $1.4842, the weakest level since Sept. 22, 2008. The U.S. currency rose 0.3 percent to 91.37 yen, from 91.10. The yen weakened 0.2 percent to 135.01 per euro, from 134.76.

The pound advanced 0.5 percent to $1.6434 and 0.6 percent to 89.91 pence per euro as minutes of the Bank of England’s meeting showed Governor Mervyn King agreed this month to follow through with policy makers’ August decision for 175 billion pounds ($286 billion) of asset purchases, suspending his drive to buy more…..

Taiwan’s Exports Fall For The 11th Month

By Janet Ong

Sept. 23 (Bloomberg) — Taiwan’s export orders fell for an 11th month in August, as weaker demand from the U.S. and Europe offset improved sales to China.

Export orders, an indicator of actual shipments over the next one to three months, dropped 11.96 percent from a year earlier, after an 8.77 percent decrease in July, the Ministry of Economic Affairs said in Taipei today. That’s more than the median estimate of a 7.25 percent decline in a Bloomberg News survey of 12 economists.

Taiwan is relying on exports, which account for more than two-thirds of the economy, to drive the island’s recovery. Increased demand from China for electronic products from companies including Taiwan Semiconductor Manufacturing Co. and Asustek Computer Inc. were countered by a larger decline in sales to the U.S. and Europe.

“The weaker-than-expected export orders is no cause for worry,” Cheng Cheng-mount, an economist at Citigroup Inc., said by telephone in Taipei today. “There were fewer working days in August because of the typhoon. In September, we will see a smaller decline in export orders as economy recovers. By October, we can see a growth in export orders.”

Typhoon Morakot dumped record rainfall on Taiwan between Aug. 6 and 9, killing more than 600 people as landslides buried villages and destroyed bridges and roads.

Industrial Production

Industrial production fell 9.62 percent from a year earlier, after declining a revised 7.93 percent in July, according to today’s report……

Singapore’s CPI Falls For The 5th Consecutive Month

By Jennifer Ryan

Sept. 23 (Bloomberg) — Bank of England Governor Mervyn King agreed this month to support policy makers’ August decision for 175 billion pounds ($286 billion) of asset purchases, suspending his drive to buy even more.

King and David Miles switched sides and joined a unanimous vote for no change in the plan, arguing that consensus was better for now even though a higher amount may be warranted. All nine members of the Monetary Policy Committee also opted to keep the interest rate at 0.5 percent, minutes of the Sept. 10 decision released by the central bank today in London showed.

King and Miles had sought as much as 200 billion pounds at the August decision. The Confederation of British Industry today raised its forecast for economic growth in the third quarter and predicted the central bank may cap its program after buying the current allocation with newly printed money.

“We probably have seen the worst of the recession,” said Colin Ellis, an economist at Daiwa Securities SMBC in London and a former Bank of England official. “A further extension of asset purchases could be on the cards, but it’s a difficult balancing act for the bank.”

The pound rose as much as 0.6 percent against the dollar after the report to $1.6438. Against the euro, the U.K. currency climbed by the same amount to trade at 90.03 pence as of 10:01 a.m. in London.

“For those members who had preferred a larger stimulus at the August meeting, a larger asset-purchase program could still be justified,” the minutes said. “But in the absence of significant news about the medium term, the case for adjusting the program now was outweighed by the benefits of following through with the program” announced in August.

Risks to Growth

Policy makers noted that prices of assets including housing and equities had risen, and the short-term risks to economic growth had lessened……

Areva Gets 3 Bids For Less Than $4bln

By Jacqueline Simmons and Anne-Sylvaine Chassany

Sept. 23 (Bloomberg) — Areva SA, the biggest builder of nuclear reactors, received three offers of less than 4 billion euros ($5.9 billion) for its transmission and distribution unit, according to three people familiar with the sale.

General Electric Co. teamed up with CVC Capital Partners Ltd. to make an offer, while Toshiba Corp. submitted a separate bid, said the people, who declined to be identified because the talks are private. France’s Alstom SA and Schneider Electric also submitted a joint offer, the people said.

The bids fell short of the 4.25 billion euros analysts had estimated the unit to be worth. Areva is selling the business to raise money to develop uranium mines and buy Siemens AG’s share of a nuclear-reactor joint venture. The company bought the division from Alstom for 920 million euros in 2004.

Areva spokeswoman Patricia Marie and GE spokesman Dan Nelson declined to comment. Officials at Alstom and Schneider weren’t immediately available to comment. Toshiba spokesman Keisuke Ohmori didn’t answer calls to his mobile phone and officials couldn’t be reached at the company’s Tokyo headquarter on a national holiday.

Buyers are interested in the Areva division because of the growing business of making electrical grids more efficient. Areva, the world’s third-biggest maker of transmission and distribution equipment behind Germany’s Siemens AG and Switzerland’s ABB Ltd., provides circuit breakers, high voltage management systems and substations that distribute electricity generated by power plants across the grid.

General Mills Profits Up 51%

By TESS STYNES

NEW YORK — General Mills Inc.’s fiscal first-quarter earnings soared 51% as the company’s profit margins widened in tandem with moderating commodity prices and as sales rose of household staples like Hamburger Helper, Multigrain Cheerios and Pillsbury cookie dough.

The results handily topped expectations and the processed-food giant again raised its fiscal-year earnings view, this time by 20 cents to $4.40 to $4.45 a share.

Lower commodity prices have begun to aid the large food makers, who were hit badly last year as their raw material costs surged. Despite the declines in raw material costs, most of these companies have largely been able to avoid the large scale price rollbacks some investors had feared. That is beginning to help their profit margins. ConAgra, maker of Hunt’s sauces and Healthy Choice meals, this week also raised its fiscal year earnings forecast. Companies like General Mills have also cut costs aggressively.

General Mills also has introduced products to help drive its U.S. retail segment growth, such as Progresso High Fiber soups. Its Betty Crocker brand entered the profitable gluten-free niche with mixes for cookies, brownies and cakes.

For the quarter ended Aug. 30, the company reported a profit of $420.6 million, or $1.25 a share, up from $278.5 million, or 79 cents, a year earlier.

Excluding items, such as hedging gains and losses, earnings were up at $1.28 from 96 cents. The company earlier this month indicated results likely would top its internal projections but didn’t give details.

Revenue edged up 0.6% to $3.52 billion, with currency fluctuations hurting sales results by 2 percentage points. Volume was flat, reflecting the loss of 2 percentage points from divested product lines.

Analysts polled by Thomson Reuters most recently were looking for earnings of $1.03 on revenue of $3.49 billion.

Gross margin jumped to 41.5% from 34.1% amid lower costs for grain and other commodities.

At its U.S. retail business, sales rose 5.8%, with volume up 2%. Profit rose 21%. In its international division, sales dropped 4.1% on the weaker dollar as earnings fell 13%.

The bakery and food-service unit remains under pressure amid restaurant industry weakness, with sales down 16% on divestitures and falling flour prices. However, segment profit more than doubled amid lower commodities prices and cost cuts.

Retailers Expect Fewer Holiday Jobs

From the Oracle:

Given the recent, massive increase in commercial banks’ excess reserves, many commentators are of the view that banks will sooner or later start employing these reserves in lending and thus cause an increase in the inflation rate.

Even former Federal Reserve Chairman Alan Greenspan is alarmed by the massive pumping by the Fed and other central banks. Speaking via satellite to a conference in Mumbai on September 8, 2009, Greenspan said that central banks need to defuse the large increases in their assets.

He stated that failing to shrink central-bank balance sheets could lead to very high price inflation: “I am not talking 3–5 per cent inflation; I am talking double-digit inflation in the US.”

In August 2008, excess reserves stood at $1.9 billion. At the end of August 2009, excess reserves stood at almost $800 billion. By early September 2009, they had reached $823 billion.

Some other commentators hold that banks’ decision to sit on their massive surplus cash rather than lend it out raises the likelihood that the Fed’s loose monetary policy remains ineffective. They argue that if the policy had worked, banks would have used the pumped reserves to make loans by now.

But a view is emerging from academics, Fed economists, and Fed officials that the massive buildup in reserves points to a great success in Fed monetary policy.[1]

These proponents believe that the critics have overlooked an important change since October 2008 regarding the conduct of the Fed’s monetary policy. This change, they claim, has not only saved the US monetary system from a severe calamity, but will also prevent the eruption of the inflationary menace. So what is it all about?

The Old System and Its Limitations

The standard monetary policy tool of the Fed involves setting a target for the federal-funds rate. By varying the target whenever they deem necessary, Fed officials say they can bring the economy onto a path of sustainable economic growth with very little inflation. However, Fed officials like New York Fed President William Dudley, note that various shocks could undermine Fed policy makers’ efforts to do this.

Dudley and other proponents of the Fed’s massive pumping argue that until October last year, Fed policy makers didn’t have adequate means to counter disruptive shocks in a quick and effective way. If the Fed had aggressively pumped money to soften the effect of a given shock, it would have almost instantly pushed the federal-funds rate strongly below the target.

Obviously this would have clashed with the Fed’s objective to navigate the economy towards the growth path of economic stability. This means that the Fed couldn’t change the size of its balance sheet without causing a large deviation from the federal-funds–rate target.

The New Tool and the Aspirations for It

Based on the work of some academic economists, the current US Federal Reserve chairman, Ben Bernanke, concluded that the link between the central bank balance sheet and the policy rate could be broken by paying banks interest on their reserves (set at the level of the federal-funds–rate target).[2] In this setup, banks would have no incentive to lend below the interest rate that they would receive on their reserves. As a result, the Fed could pump as much reserves as it thought necessary without upsetting the target. It could thus expand its balance sheet without any restraint.

After some persuasion by Bernanke, in October 2008, Congress gave the Federal Reserve the authority to pay this interest.

According to Dudley,

Policymakers now had the capacity to expand the size of the Fed’s liquidity facilities and other programs without the threat of compromising the control of monetary policy.

Furthermore, he argues,

This new tool immediately proved enormously helpful. The Fed was able to respond to the deterioration of conditions in the fall of 2008 by sharply increasing the size of its Term Auction Facility program and removing the limits on the size of many of the foreign exchange swap programs. These programs, along with the increased use of the Fed’s standing liquidity facilities and the start-up of the Commercial Paper Funding Facility in late October, led to a sharp growth in the Federal Reserve’s balance sheet beginning in late September.[3]

This means that Fed policy makers, when required, can assist financial markets whilst maintaining the federal-funds rate at the target.

For instance, if a large bank runs into difficulty, it could pose a threat to the supply of credit and in turn undermine the real economy. Prior to October last year, the Fed would have had difficulties quickly preventing severe side effects without upsetting the federal-funds–rate target. Any support, i.e., pumping money, would push the rate strongly to below the target.

According to proponents like Dudley, in the new setup, the Fed can provide immediate support without upsetting the target.

Indeed, commentators are almost unanimous that the new rapid response of the Fed to various shocks has prevented the US economy from plunging into another Great Depression.

Let us look at some key economic data that seem to indicate that the worst is over: In the second quarter (Q2) of 2009, the annual rate of growth of real GDP jumped to minus 1% from minus 6.4% in Q1. The ISM manufacturing index climbed to 52.9 in August from 48.9 in the month before.

But what about the inflationary threat that all this buildup in bank excess reserves could have at some time in the future?

According to Dudley and other proponents, the new tool will enable the Fed, when the time is right, to raise the interest rate. This will make it less attractive for banks to expand lending and thus fuel the rate of inflation.

It would appear that the new setup not only enables the Fed to quickly neutralize any potential financial crisis but also permits it to counter rapidly and effectively any possible inflationary threats.

Criticism of the Fed and its New Tool

Despite the improvement in some key economic data, one important indicator — commercial bank lending — displays a massive decline. Data for August shows that, year-on-year, lending fell by 3.8% after declining by 2.6% in July. (In early September, the rate of growth stood at minus 4.9%).

Consumer credit also had a big fall in July — falling year-on-year by 4.2% after declining by 3.1% in June.

If Bernanke has managed to stabilize credit markets, as the media and most financial experts argue, why is lending by banks displaying large declines? According to Bernanke’s way of thinking (the financial-accelerator model), such big declines in lending pose a threat to the real economy.

Is It True that the Fed Creates Money?

Some commentators, including Dudley himself, have suggested that the Fed is not actually creating money. They argue that the so-called pumping doesn’t amount to the creation of new money but simply to the employment of commercial banks’ existing excess reserves.

This means that the Fed borrows the surplus money from the banks and invests it in Treasury bonds. In an interview with CNBC on August 31, 2009, Dudley said,

The excess reserves are funding the purchases of treasuries and agency debt and agency mortgage backed securities. So right now we’re basically — essentially borrowing the money at 25 basis points, a quarter of a percent, and investing in assets that are yielding … three and half, four, four and a half, five percent.[4]

Now, if the Fed were borrowing money from banks, one would think that this would be registered in the Fed’s balance sheet. So far we haven’t seen anything in this regard.

Also, if the Fed were using the banks’ surplus cash, it would increase demand deposits in the economy and thus increase the money supply. (Excess reserves are not part of the existing money supply.) For instance, let us say that the Fed uses one million dollars from banks’ deposits to buy Treasuries from nonbanks. The Fed writes checks to the sellers of Treasuries. These checks, once deposited, boost the money supply.

Using banks’ surplus cash would boost price inflation at some time in the future. After all, the price of a good is the amount of money paid for the good. The more money is available, the more money will be spent per unit of a good (all other things being equal).

Dudley reaches a different conclusion because he holds that inflation is driven by only two variables: inflation expectations and the degree of pressure on resources. He mentions nothing about money. Somehow in Dudley’s world, prices are not related to money.

But is it valid to argue that the Fed borrows money to fund its activities?

The US central bank is the only institution permitted by law to print money. Now if any individual had such a license, would he ever consider borrowing money? The Fed pays for the assets it acquires by writing a check on itself — i.e., creating money “out of thin air.”

If the Fed’s pumping is not inflationary, as Dudley and other commentators argue, why is the growth momentum of the money supply exploding? The yearly rate of growth of our monetary measure AMS jumped from 0.8% in August last year to above 14% in August this year. After a time lag, this explosive growth is going to manifest in the prices of goods and services.

Is There a Link Between the Size of Excess Reserves and Bank Lending?

Despite the increase in excess bank reserves, Dudley and other proponents are of the view that there is no need to be alarmed. In fact, they argue that the textbook economics model, wherein the Fed injects reserves into the banking system and banks then amplify the injection through lending, doesn’t apply in reality.

According to Dudley,

If banks want to expand credit and that drives up the demand for reserves, the Fed automatically meets that demand in its conduct of monetary policy. In terms of the ability to expand credit rapidly, it makes no difference whether the banks have lots of excess reserves or not.[5]

Superficially, it does make sense to conclude that central bank policies are of a passive nature: the central bank just aims at keeping the money market in balance. In reality, without the central bank being active, it would be impossible for banks to expand lending, i.e., set in motion the creation of credit out of thin air.

Let us say that banks are experiencing an increase in demand for loans. Also, let us assume that the pool of loanable funds is unchanged. According to Dudley, banks will oblige this increase. The demand-deposit accounts of the new borrowers will then increase. Obviously, the new deposits are likely to be employed in various transactions.

After some time elapses, banks will be required to clear their checks; and this is where problems will occur.

Some banks will find that to clear checks they are forced to either sell assets or borrow the money from other banks (remember that the pool of loanable funds stays unchanged). We suggest that all this will put upward pressure on money-market interest rates, and in turn on the entire interest-rate structure. It might also put at risk the survival of some of the banks.

To prevent the overnight interest rate from rising above the interest-rate target, the central bank will be forced to pump money. However, by doing so it will, so to speak, endorse the expansion of credit.

Surely, this accommodation cannot be labeled as passive; it is very much active. To protect the interest-rate target, the central bank is forced to pump money. So the conceptual outcome as depicted by the textbook model remains intact. The only difference is that banks initiate the lending process, which is then accommodated by the central bank, rather than vice versa.

Without the central bank pumping, banks would have difficulty engaging in an expansion of credit. Any attempt at such an expansion would run the risk of going “belly up.”

Furthermore, if, as Dudley says, it makes no difference for lending activity how much excess reserves banks have, why was the Fed pumping all that cash into the banking system? Clearly the idea was to enable banks to continue expanding credit.

We also suggest that paying interest on bank reserves is not going to stop banks from expanding credit, as argued by Dudley and others. After all, there are always opportunities to lend money at much higher interest rates than the federal-funds rate.

We can thus conclude that the massive increase in banks’ excess reserves is a potential threat for an explosive credit creation some time in the future. Contrary to popular thinking, we suggest that the new setup, which gives the Fed total freedom to pump money, can only destabilize the financial system and the economy. By responding to every shock that in Bernanke’s theory could lead to a potential disaster, the Fed is going to severely damage the pool of real savings.

Since lending is currently in free fall, the pool of real savings may already be in serious trouble. If this is the case, then the Fed’s pumping is unlikely to revive the credit markets anytime soon. Remember that the essence of lending is real savings and not money as such. It is real savings that imposes restrictions on banks’ ability to lend.

In addition to the extremely loose fiscal policy of the Obama administration, any further monetary pumping runs the risk of inflicting more damage on the formation of real savings. Consequently, it can only paralyze the US economy.

Conclusions

Against the background of a massive increase in US banks’ excess reserves, we are of the view that some time in the future, banks will start employing these reserves in lending. Such lending runs the risk of igniting strong increases in the prices of goods and services.

Also, the Fed’s present monetary policy appears to be ineffective. Despite massive pumping by the US central bank, commercial bank lending displays sharp declines.

However, an emerging view in support of the Fed’s recent policy actions holds that critics have overlooked an important tool that the Fed’s policy makers now have: paying interest on banks’ reserves.

The proponents of this new ability say that the Fed can now rapidly counter any possible shocks that threaten to destabilize the economy, without compromising the macro goals of price stability and full employment. They believe that the new setup has prevented the US economy from plunging into another Great Depression. They are also of the view that it not only enables the Fed to counter various shocks, but also permits a rapid counterattack on inflation.

We suggest that what matters for price inflation is money supply; for the time being, that displays a very strong increase. We also suggest that the Fed’s new ability to respond rapidly to any perceived threat is likely to produce very reckless monetary policy, which will destabilize the economy.

Faber:

Ryding:

CAG

OMAHA, Neb.–(BUSINESS WIRE)–ConAgra Foods, Inc., (NYSE: CAG – News) one of North America’s leading packaged food companies, today reported results for the fiscal 2010 first quarter ended Aug. 30, 2009. Diluted EPS from continuing operations was $0.37, including $0.01 per diluted share of net expense from items impacting comparability. Excluding those items, diluted EPS from continuing operations was $0.38. For the same period a year ago, diluted EPS from continuing operations of $0.23 included net $0.04 of expense from items impacting comparability. Items impacting comparability in the current year and prior year are summarized toward the end of this release.

Gary Rodkin, ConAgra Foods’ chief executive officer, commented, “We are off to a strong start in fiscal 2010. The Consumer Foods segment posted significantly improved operating profits, along with good sales trends across the consumer branded portfolio, and we expect the balance of the year to show strong profits for this segment due to manageable inflation, good cost savings, sales growth, and favorable mix. Our Commercial Foods segment is poised for a solid profit performance in line with our expectations, and we are confident we will deliver our raised EPS guidance for this fiscal year.”

Minor Segment Change: During the quarter, the company transferred the Alexia frozen operations from the Consumer Foods segment to the Commercial Foods segment, resulting in slightly changed historical amounts for segment sales and profits. The Q&A document related to this release gives the current presentation of historical segment amounts, reflecting this change……

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KMX

NEW YORK (MarketWatch) — CarMax Inc. /quotes/comstock/13*!kmx/quotes/nls/kmx (KMX 21.00, +1.67, +8.64%) said Tuesday that its second-quarter earnings rose to $103 million, or 46 cents a share, from $14 million, or 6 cents a share, in the year-earlier period. The latest quarter included a benefit of 10 cents a share from favorable adjustments for CarMax Auto Finance. Net sales and operating revenue increased 13% to $2.08 billion from $1.84 billion. Analysts polled by FactSet Research expected, on average, earnings of 16 cents a share and sales of $1.74 billion for the Richmond, Va.-based used-car retailer.

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CCL

MIAMI Sept. 22 /PRNewswire-FirstCall/ — Carnival Corporation & plc (NYSE/LSE: CCL; NYSE: CUK) reported net income of $1.1 billion, or $1.33 diluted EPS, on revenues of $4.1 billion for its third quarter ended August 31, 2009. Net income for the third quarter of 2008 was $1.3 billion, or $1.65 diluted EPS, on revenues of $4.8 billion.

Micky Arison, Carnival Corporation & plc Chairman and CEO, commenting on third quarter results said, “given the global economic environment earning more than $1 billion this quarter was quite an achievement and is a testament to the power of our global brands. Our net income for the quarter exceeded our previous guidance, as a result of better than expected pricing on close-in bookings worldwide during the seasonally strong summer period.”

Key metrics for the third quarter of 2009 compared to the prior year were as follows:

• On a constant dollar basis net revenue yields (net revenue per available lower berth day) decreased 12.3 percent for Q3 2009 which was better than our June guidance of down 14 to 16 percent. Net revenue yields in current dollars decreased 16.5 percent due to unfavorable currency exchange rates. Gross revenue yields in current dollars decreased 17.6 percent.
• Excluding fuel, net cruise costs per available lower berth day (“ALBD”) for Q3 2009 were 0.7 percent lower on a constant dollar basis. Excluding the impact of the $26 million insurance settlement received during the same period last year, net cruise costs per ALBD excluding fuel were 2.4 percent lower on a constant dollar basis.
• Including fuel, net cruise costs per ALBD decreased 11.4 percent on a constant dollar basis (decreased 14.8 percent in current dollars). Gross cruise costs per ALBD decreased 17.1 percent in current dollars.
• Fuel price decreased 39 percent to $405 per metric ton for Q3 2009 from $666 per metric ton in Q3 2008 and was in line with the June guidance of $406 per metric ton.

Outlook

Since June, booking volumes for the remainder of 2009 and the first half of 2010 are running 19 percent ahead of the prior year. Although occupancy levels are catching up with last year they are still slightly behind, with ticket prices for these bookings also at lower levels……

Samsung Boosts Chip Output

TAIPEI (MarketWatch) — Global demand for semiconductors is better than Samsung Electronics Co.’s previous expectations, and the company is increasing chip production to meet the demand, the president of the company’s chip division said Tuesday.

Oh-Hyun Kwon attributed the improved demand to companies replenishing chip inventories and stronger sales supported by government stimulus packages.

Demand for double-data-rate-three dynamic random access memory chips used in personal computers is very strong, Kwon said at a news conference in Taipei, where the South Korean electronics giant is holding a forum on the mobile phone industry.

DDR3 chips are faster and more energy efficient than their predecessor DDR2 chips.

Samsung is now boosting production of DDR3 chips and expects to help end a shortage of the chips, he said.

Contract prices of DRAM chips have been increasing sharply since April. The average contract price of the mainstream 1-gigabit DDR2 chip that runs at 667 megahertz hit US$1.66 for the latter part of September, the highest level in a year, according to data from Taipei-based online chip clearinghouse DRAMeXchange.

DRAM prices are returning to “reasonable” levels now after previous sharp falls due to aggressive capacity expansion by manufacturers, Kwon said.

But he declined to give the company’s pricing plans. Samsung’s smaller rival Hynix Semiconductor Inc. said Tuesday the recent upward trend in DRAM prices is likely to continue due to robust PC sales and tight supply.

But Kwon also sounded a cautious note and said the sustainability of demand will depend on how sales during the Thanksgiving holiday season in late November turns out…….

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FED Actions May Be Hurt By Slow Velocity of $

By Scott Lanman

Sept. 22 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke’s efforts to stoke a U.S. economic recovery may be undermined by the central bank’s other goal of restoring the banking system to health.

The Federal Open Market Committee, at the conclusion tomorrow of a two-day meeting, will probably maintain its assessment that “tight” bank credit is impeding growth. Lending contracted for five straight weeks through Sept. 9, a drop that in part reflects Fed orders to banks to raise more capital and toughen lending standards, analysts say.

A failure to restore the flow of bank credit carries the risk that the economic recovery will be slower than the Fed anticipates, or even that the U.S. lapses into another recession, economists say. That would make it more likely the Fed will keep its main interest rate close to zero for a longer period.

“They would be absolutely delighted if banks went out and raised a lot more private capital and then began to lend more,” said former Fed Governor Lyle Gramley, now senior economic adviser with New York-based Soleil Securities Corp. “Until that happens, the Fed has to continue to try to encourage economic growth through easy money.”

The FOMC, composed of Bernanke, Fed governors and regional Fed-bank presidents, is expected to release a statement at about 2:15 p.m. New York time. Economists surveyed by Bloomberg News unanimously forecast the Fed will leave its benchmark interest rate unchanged.

The central bank may also decide to extend the end date of its $1.45 trillion program to buy housing debt, now set to expire at the end of the year, and to gradually reduce the size of the purchases.

Lending Contracts

Banks have become more careful about lending. A Fed report released last week shows banks had $6.85 trillion of loans and leases outstanding to businesses and households as of Sept. 9, down for a fifth straight week and below the record $7.32 trillion in October 2008. Real estate loans, the biggest portion, stood at $3.79 trillion, up $7.5 billion from the prior week while down from a peak of $3.9 trillion……

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Asian Markets Rise on Brokerage Upgrades of Various Companies

By Shani Raja

Sept. 22 (Bloomberg) — Asian stocks rose for the first time in three days as brokerage upgrades fueled speculation that regional equities can extend a six-month rally.

Samsung Electronics Co. gained 3.4 percent in Seoul after Citigroup Inc. raised its price estimate and chip prices climbed to their highest level in more than a year. LG Chem Ltd. and Samsung SDI Co. jumped at least 6.4 percent after being lifted to “overweight” at Morgan Stanley. China Mobile Ltd. advanced 2.4 percent in Hong Kong after it added customers at a faster rate in August than the previous month.

The MSCI Asia Pacific excluding Japan Index rose 1 percent to 393.28 as of 6:39 p.m. in Hong Kong. Markets in Japan, Malaysia, Indonesia and Pakistan were shut for holidays. The gauge that includes Japan has rallied 68 percent from a five- year low on March 9, lifting the average price of its stocks to 1.6 times book value from 1.03 at this year’s trough.

“Valuations at this juncture are not cheap,” said Tim Schroeders, who helps manage about $1 billion at Pengana Capital Ltd. in Melbourne. “However, if underlying levels of economic activity can continue to improve and profitability continues to grow, that should be sufficient to sustain current market levels.”

South Korea’s Kospi index advanced 1.4 percent to 1,718.88, its highest close since June 20, 2008. STX Pan Ocean Co., the country’s biggest commodity-shipping line, rose 8 percent in Singapore after securing its largest contract. Hong Kong’s Hang Seng Index added 1.1 percent at the close.

Valuation Concerns

The Shanghai Composite Index fell 2.3 percent to 2,897.55, its lowest close since Sept. 7. Australia’s benchmark S&P/ASX 200 Index lost 0.3 percent at the close. Macquarie Airports Ltd. climbed 3 percent in Sydney after saying it may be compensated if debt costs rise.

Futures on the U.S. Standard & Poor’s 500 Index gained 0.7 percent. The gauge fell 0.3 percent to 1,064.66 yesterday on speculation a six-month rally has outpaced prospects for profit growth, even as an index of U.S. leading economic indicators rose for the fifth-straight month.

European Stocks Rise Off The Back of Asia & On Government Stimulus

By Adria Cimino

Sept. 22 (Bloomberg) — European and Asian stocks rose, resuming a six-month rally for the MSCI World Index, amid signs government stimulus measures are helping the global economy to recover. U.S. futures advanced.

Samsung Electronics Co. and STMicroelectronics NV surged more than 3 percent as chip prices climbed to the highest level in more than a year. Carnival Corp. gained 2.7 percent in London after Bank of America Corp. recommended shares of the world’s biggest cruise-line operator. BHP Billiton Ltd. led mining companies higher as commodities advanced.

The MSCI World added 0.9 percent at 11:09 a.m. in London. The index has advanced 66 percent since March 9 as results at companies from HSBC Holdings Plc to GlaxoSmithKline Plc surpassed projections and the German and French economies unexpectedly exited recessions. The gauge is valued at more than 27 times the reported earnings of its companies, the highest level since 2003, weekly data compiled by Bloomberg show.

The rally “can run a bit further,” Georgina Taylor, an equity strategist at Legal & General Group Plc in London, which oversees $456 billion worldwide, said in a Bloomberg Television interview. “We’re positive on equities. There’s evidence of real economic activity starting to increase.”

The Dow Jones Stoxx 600 Index of European equities gained 0.9 percent today as all 19 industry groups advanced. Standard & Poor’s 500 Index futures added 0.7 percent and the MSCI Asia Pacific excluding Japan Index increased 0.9 percent. Markets in Japan, Malaysia, Indonesia and Pakistan are shut for holidays.

Euro Reaching For New Highs

By Ron Harui

Sept. 22 (Bloomberg) — The euro may extend its rally to a five-week high of 137.50 yen, Citigroup Inc. said, citing trading patterns.

Europe’s currency is likely to gain versus the yen after rising above the “neckline” of a “double-bottom” pattern, Citigroup analysts Tom Fitzpatrick in New York and Shyam Devani in London wrote in a research note yesterday

“The daily chart shows the rally through the double bottom neckline at 134.41,” Fitzpatrick, chief technical analyst at Citigroup, and Devani said in the note. “A test of 137.50 is expected.”

The euro traded at 135.01 yen as of 12:50 p.m. in Tokyo from 134.96 yen in New York yesterday, when it rose to 135.48 yen, the highest level since Aug. 25. The 137.50 level would be the strongest since Aug. 13. The currency has risen 1.1 percent in September, heading for its first monthly gain since June.

A double bottom occurs when a currency makes two consecutive troughs of about the same depth, and indicates it may rebound. The neckline passes through the highest point of the double bottom.

In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index.

Oil Rises Slightly $ 70 & Change pb

VIENNA (AP) – Oil prices hung near $70 a barrel Tuesday after falling steeply overnight amid news that China’s crude consumption fell in August.

Chinese oil demand slid 5.4 percent in August from July, the first month-to-month drop since March, according to Platts, the energy information arm of McGraw-Hill Cos., as the world’s second-largest oil consumer reined in oil imports and crude throughput rates at its domestic refineries.

Benchmark crude for October delivery was up 88 cents at $70.59 a barrel in noon European electronic trading on the New York Mercantile Exchange. The contract fell $2.33 to settle at $69.71 on Monday.

Energy consumption in North America and Europe has been crimped by recession, leaving China as one of the few countries that continue to consume oil, gasoline and diesel in growing quantities. That pace, at least during late summer, appeared to slow, according to a report released Monday.

“Crude oil is not moving higher, but the only problem is, it is not moving lower either,” noted trader and analyst Stephen Schork, in his Schork Report. “In other words, the market is mired inside a well defined consolidation pattern – in between the mid $70s and high $60s.”

But some analysts expect a second-half recovery in demand from Europe and the U.S. combined with still decent energy appetite from Asia to boost oil prices.

“I think we’re going to see a pretty significant recovery in the second half in the U.S. and Europe, and demand from China has been holding up,” said Christoffer Moltke-Leth, head of sales trading for Saxo Capital Markets in Singapore. “I see more upside than downside for oil prices right now.”

Moltke-Leth said crude could rise above $75 during the next month. “If we can break through that, prices will likely jump to $80.”

In other Nymex trading, gasoline and oil for October delivery both rose by more than 2 cents to $1.77 a gallon. Natural gas, after tumbling more than 5 percent, was up more than 11 cents to $3.69 per 1,000 cubic feet.

In London, Brent crude rose 85 cents to $69.54 on the ICE Futures exchange.

Kiwi Currency Rises To Its Highest Levels

By Candice Zachariahs

Sept. 22 (Bloomberg) — The New Zealand dollar rose to the highest in more than a year after the nation’s current account deficit shrank to the least since 2004 as a proportion of the economy. Australia’s currency advanced.

The so-called kiwi climbed the most in two months after Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, raised its milk price forecast for the coming year by 12 percent. Both currencies were also bolstered after the Asian Development Bank said Asian economies will expand at a faster- than-expected pace next year and China said its coal imports from Australia in the first eight months of 2009 surged.

“That’s the best number since September 2004 in GDP terms — a significant improvement in the current account,” said Imre Speizer, a market strategist at Westpac Banking Corp. in Wellington. “The kiwi will be supported.”…..

Rio Tinto Sells Its Alcan Unit to Schweiter

By Rebecca Keenan

Sept. 22 (Bloomberg) — Rio Tinto Group, the world’s third- largest mining company, agreed to sell its Alcan Composites unit to Schweiter Technologies AG for $349 million to help cut debt.

The sale should be completed by the end of the year, London-based Rio said today in a statement to the Australian stock exchange.

Rio has sold $7 billion of assets since March 2008 to help repay debt from the purchase of Canadian aluminum producer Alcan Inc. for $38.1 billion. Last week it took the first step in divesting the Alcan Engineered Products unit by agreeing to sell 56 percent of the cable division to Platinum Equity LLC.

Schweiter is the world’s biggest maker of equipment to test light-emitting diodes. Alcan Composites had sales of $649 million in the past year to August and earnings before interest taxation depreciation and amortization of $54 million, Rio said.

Singapore Cuts its Stake In C

By Netty Ismail and Joyce Koh

Sept. 22 (Bloomberg) — The Singapore government pared its stake in Citigroup Inc. to less than 5 percent, realizing a $1.6 billion profit as the city-state’s investment companies reduce holdings in European and U.S. banks.

Government of Singapore Investment Corp. sold the stock after converting preferred shares in the New York-based bank into a more than 9 percent common-equity stake, it said in a statement. The company, manager of more than $100 billion of foreign- exchange reserves, also has a $1.6 billion paper profit on its remaining holding.

Citigroup shares have surged more than fourfold since falling below $1 on March 5, as the U.S. economy began to show signs of emerging from its deepest postwar recession. GIC’s Citigroup bet fared better than those of Temasek Holdings Pte, Singapore’s smaller investment company, which sold its stakes in Bank of America Corp. and Barclays Plc at a loss.

“There is clear evidence that the financial stimulus by central banks are bearing fruit,” said Singapore-based Roger Groebli, head of financial market analysis at LGT Capital Management, which oversees about $75 billion in assets.

Citigroup shares traded in Frankfurt gained 2.3 percent to 3.07 euros as of 12:08 p.m. local time…….

China’s Sovereign Wealth Fund Buys A Stake in Noble

By Kyunghee Park

Sept. 22 (Bloomberg) — China Investment Corp., the nation’s sovereign wealth fund, bought a 15 percent stake in Noble Group Ltd. as the Hong Kong-based commodity supplier benefits from China’s demand for coal, iron ore and soybeans.

Noble will sell $850 million worth of new and existing shares to CIC at 8.1 percent less than the last traded price. The sale includes 135 million shares owned by Chief Executive Officer Richard Elman and 438 million new shares, the Hong Kong- based company said in a statement.

CIC is increasing investments in commodities after losing money on financial firms including Blackstone Group LP and Morgan Stanley. Noble’s second-quarter profit doubled as China boosted raw material imports to fuel $586 billion of stimulus spending needs.

“CIC started accelerating its overseas investment pace in the most recent three to six months, they are showing a clear direction, that is from paper assets to commodities,” said Zhang Zhiming, director of asset allocation research at HSBC Holdings Plc in Hong Kong. “If they hold long-term positions in commodity assets, they need a trading house.”

Noble has more than doubled, making it the fourth-best performer on the Straits Times Index. The company’s shares traded at S$2.30 before they were suspended on Sept. 15 when it said it was in talks with an unspecified investor. The shares will remain suspended until Sept. 23……

China Appeals WTO Decision

By Jennifer M. Freedman

Sept. 22 (Bloomberg) — China appealed a World Trade Organization ruling that found its curbs on the sale of books, films and music from the U.S. are unfair.

WTO judges concluded on Aug. 12 that China was violating its free-trade commitments by requiring importers to channel foreign publications and audiovisual products through state-run companies. The panel also urged China to allow foreign companies to sell music over the Internet, which would be a boon for Apple Inc., with its iTunes software.

“China has appealed to the WTO over the publication ruling,” said a spokesman for the Ministry of Commerce in Beijing.

U.S.-Chinese trade relations have soured amid allegations about market-access restrictions, trade protectionism, copyright infringement, currency manipulation and claims that Chinese exporters are undercutting higher-cost American manufacturers. The U.S. has lodged eight complaints against China at the Geneva-based WTO — more than any other government — while four of China’s five trade complaints are against the U.S……

Emerging markets in Asia Get a Boost From ADB

Developing Asia is poised to lead the recovery from the global slowdown and economies in the region are proving to be more resilient to the downturn than initially estimated, the Asian Development Bank said Tuesday.

The latest update to the bank’s Asian Development Outlook 2009 forecasts developing Asia, which excludes Japan, to expand 3.9% this year, more than the 3.4% estimated in March. Likewise, the growth forecast for next year was upwardly revised to 6.4% from 6%.

Firm measures adopted by many governments and central banks, healthy financial systems before the global crisis and rapid turnaround in the larger and less export-dependent nations underpinned the growth prospects of the region, the Manila-based bank said. Tax cuts, greater public spending, targeted assistance, and easy monetary policies boosted consumption and investment.

The ADB said any slippage in the major industrial economies’ recovery would delay the region’s return to its long-term growth path. The regional economy is now poised to achieve a V-shaped rebound, according to the lender.

The report said notable divergences exist in the outlook across sub-regions and across economies. Economic growth in East Asia for 2009 was upgraded to 4.4% from 3.6%……

FDIC May Lean on Healthy Banks For Support on The Financial Crisis

(Reuters) – The Federal Deposit Insurance Corp may ask healthy U.S. banks to lend billions of dollars to restore the health of the depleted fund that safeguards bank deposits, the New York Times reported, citing senior regulators.

The paper said the initiative, which has gathered strong support across the board, is seen as a more attractive alternative to tapping the $500 billion line of credit with the U.S. Treasury, or yet another emergency assessment.

According to the paper, the FDIC was reluctant to approach the Treasury department for additional funds, since any new borrowing could be seen as a bailout, and have a strong political reaction.

The FDIC, whose board members were yet to reach a consensus on the issue, is expected to issue a proposed plan next week, to replenish the dwindling fund, the paper said.

The FDIC could not be immediately reached for comment.

IMF Asks Countries To Stay Cautious Until Recovery is Fully Realized

By Lesley Wroughton and Michael Winfrey – Analysis

WASHINGTON/PRAGUE (Reuters) – The International Monetary Fund will wait for a clear global rebound before it demands more austerity from bailed-out countries, and when it does it will focus on medium-term plans rather than quick cuts.

Rather than demand too much and fuel public outrage as in the Asian crisis, the Fund is staying more moderate, and economists said markets will do part of the persuading as they punish competing countries that neglect structural reforms.

The Fund emerged last year after a decade of diminishing relevance to snatch east European countries from the brink of disaster, pumping billions of euros into Latvia, Hungary, Romania, Serbia, Ukraine and other states.

Although it has pushed for eye-watering cuts in a few cases where it sees no alternative, it has learned from the public backlash it encountered in last decade’s Asia crisis and aims to nurture growth rather than just demand harsh belt-tightening.

Analysts say the strategy carries risks due to political wrangling ahead of a string of elections that could slow reforms the emerging states need to catch up with the richer West.

But with growth expected to plummet this year by at least 6 percent in most bailout recipients — and as much as 18 percent in Latvia — the IMF is waiting for clear signs of recovery.

“We are very cautious about trumpeting ‘this is the end of the slump, now the recovery is coming,'” Marek Belka, director of the IMF’s European department, told Reuters last week.

“Don’t expect us to announce: ‘Now is the time to turn around’. The decision is made by individual countries and conditions are so different.”

Market watchers say the approach will continue to support markets across emerging Europe but investors will punish governments that do not show willingness to rein in deficits.

SPIRALLING DEFICITS

Belka said the Fund was keeping a close eye on the recovery in western Europe and also saw potential for Eastern Europe to recover at a faster rate once the crisis ends…..

Fed is in No Hurry To Raise Rates

By Kristina Cooke

NEW YORK (Reuters) – The Federal Reserve meets this week against an improving economic backdrop, but with inflation not an imminent threat, the U.S. central bank is seen as in no hurry to raise interest rates.

Economists expect the policy-setting Federal Open Market Committee to hold the target range for overnight interest rates steady at zero to 0.25 percent until at least 2010.

A statement outlining the Fed’s policy decision is expected at around 2:15 p.m. EDT on Wednesday, at the end of a two-day meeting.

Fed Chairman Ben Bernanke said earlier this month that the worst U.S. recession since the Great Depression was “very likely” over, but that the recovery would be slow and would take time to create new jobs.

Below is some recent data the Fed will consider:

ECONOMY

There have been signs of economic recovery in data released since the Fed’s last policy meeting on August 11-12.

– An index measuring the U.S. economy’s prospects rose for a fifth straight month in August to a 1-1/2 year high as stock prices surged, data from private research group The Conference Board showed on Wednesday.

– Retail sales climbed 2.7 percent in July, the biggest monthly advance since January 2006, the Commerce Department said.

– The preliminary September Reuters/University of Michigan Surveys of Consumers sentiment index rose to 70.2, the highest since June.

– The New York Federal Reserve Bank’s “Empire State” business conditions index, which gauges manufacturing activity in New York State, rose to 18.88 in September, the highest level since November 2007. The survey is one of the earliest monthly guideposts to U.S. factory conditions.

But the positive news was by no means across-the-board: the U.S. unemployment rate hit a 26-year high of 9.7 percent last month.

Housing data has been mixed, suggesting some stability in the hard-hit sector but no firm revival.

In August, U.S. housing starts and permits for future building hit their highest level since November. The data reflected a rebound in multifamily homebuilding activity, though groundbreaking for single-family homes fell 3 percent.

While economists generally agree an economic recovery is underway, many continue to question its sustainability given its current reliance on monetary and fiscal stimulus measures.  Continued…

High Bonds Getting Eaten Up By Investors

From The Oracle:

Many smart people say the markets are headed for another big leg down soon. And maybe they’re right. But traders and investors should always examine opposing views. Today, I want to make the case for stocks going MUCH higher from here. That doesn’t mean I’m bullish on the broad economy — far from it. But stocks could rally — perhaps as much as another 50 PERCENT — riding on a rising flood of government money.

And it could go on for quite some time … into next year and maybe beyond.

The government knows what it is doing — reinflating the financial bubble. And it’s doing it for the simple reason that the shadowy power players in Washington and on Wall Street think they have no choice.

Their power is all that matters to them, and they’ll do anything to preserve it — even reinflate a bubble that could be twice as dangerous to America’s economic system next time around.

As the saying goes, “sow the thunder, reap the lightning.” This game could end very badly. When it does, I think you’ll want to own physical gold and silver.

But while the reinflation game is going on, you’ll want to own stocks, bonds — anything that can ride the government bubble.

The good news is there are investments that can rise in both the short-term and the long-term. I’ll have more on that in a bit.

Also importantly, while stocks could rise another 50 percent, the rally could also end today, if we get a big enough external event that rattles the markets hard enough. That’s another good reason to consider “safety” investments.

First, let’s look at some charts and facts …

Here’s a chart I picked up from ZeroHedge.com. I’ve altered it for clarity.

The chart shows how the stock market has climbed at the same time that the Federal Reserve has monetized the debt by purchasing U.S. Treasuries and government-backed debt securities.

The fact that both stocks and Fed debt monetization are going up at the same time is no coincidence. As I explained in my video on Tuesday, just in the United States alone, the Fed has purchased $1.24 TRILLION in Treasury and Agency securities. The Fed plans to buy at least another $507 million in debt over the next couple months.

At the same time, the Fed is holding its key interest rate at essentially zero. Result: Banks are getting to trade nearly worthless securities for cash while at the same time they are able to borrow money at very low rates.

Of course they invest that money in stocks and bonds … and hard assets, like gold and oil and silver and copper.

The government says that it will stop monetizing the debt … and maybe it will. On the other hand, consider that we’re heading into an election year. I think the government has a strong incentive to keep pushing liquidity into the market, if not through debt monetization then through some other scheme, and the government will probably keep doing it at least through the 2010 election.

Why shouldn’t they? They aren’t thinking about consequences. If they were, they wouldn’t be doing what they’re doing now. It’s not like voters are holding them accountable.

Meanwhile, there is $3.5 trillion sitting in U.S. money market funds, according to recent data from the Investment Company Institute. That’s down from a March peak of $3.9 trillion, but it is still HUGE.

Fund managers and individual investors are sitting on that cash, nervously watching stocks go higher. Will they buy in? Of course they will!

As that money gets put to work, stocks, bonds and precious metals will probably go even higher.

How High Can Stocks Go? Pretty Damned High!

Take a look at this chart I made on Stockcharts.com. It’s a monthly chart of the S&P 500, showing how that leading index rallied and rallied hard each time its 5-month moving average crossed above its 15-month moving average. I’ve marked each cross of these moving averages with blue circles.

• In 1995, the 5-15 moving average cross led to a 211 percent rally over the next five years! That was the beginning of the dot-com bubble.

• In 2003, the 5-15 moving average cross led to a 56 percent rally over five years. And you remember 2003, don’t you? That’s when Alan Greenspan kept interest rates lower than low for a long time. All that easy money had to go somewhere, and it went into the market.

• Now, here we are in 2009. Just like in 2003, there’s plenty of easy money around for banks and big investors. And see what’s happening with the moving averages again? The 5-month is about to cross over the 15-month MA. We could be in for a big move … and it could last for a while.

To be sure, there are important differences. But some differences actually make this rally scenario more likely.

The Dollar as the New Carry Trade

The “carry trade” was a period of about five years, from 2003 to 2007, when investors borrowed low-yielding yen (Japanese interest rates never went above 0.5 percent during that time frame) and used the money to buy just about any other currency with a higher yield as well as higher-yielding bonds, commodities, crude oil and even stocks.

By 2007, it was estimated that $1 trillion was wrapped up in the carry trade.

Why did Japan keep interest rates low for so long? Indeed, their low-interest rate policy started in 1995. Japan’s leaders did that because they were trying to prop up zombie banks.

The banks were kneecapped by the collapse of a credit bubble, which led to the cratering of both Japan’s stock market and its housing market.

Gee, do zombie banks, a stock market collapse and housing bubble sound familiar? But apart from a broad economic slump called the “Lost Decade,” some parts of this story didn’t turn out badly for Japan. Take a peek at how the Japanese stock market did between 2003 and 2007 …

Again, there are important differences between Japan then and the United States now. But I’m hearing reports that more big institutions are borrowing money in U.S. dollars and buying other, higher-yielding currencies.

And that’s because, during the past three weeks, borrowing costs in dollars fell below those of yen and Swiss francs for an extended period for the first time since 1994.

Here are a couple of questions for you:

1. When you fund in one currency to buy a borrowed currency, what happens to the funding currency — in this case, the dollar?
2. Since hard assets (and U.S. stocks) are priced in dollars, what should happen to the price of those assets?

If your answers are “the currency usually goes down in value” and “the assets should go up in price,” go to the head of the class.

But if you think that this ISN’T being planned by our leaders, then it’s the dunce cap for you. Of course this is all according to plan! The Wizards of Wall Street are making your money cheaper on purpose.

The enormous debts run up under Bush and being extended by Obama have to be paid off with something. It’s a lot easier to pay them off if those debts get cheaper along with the value of the dollar. And I’m sure the folks in Washington are thinking, “hey, maybe a cheaper dollar will pump up American exports and jumpstart much-needed job creation!”

So, those furrowed brow-types in Washington and on Wall Street have found a way to reboot the stock market and create more jobs! We should be giving them a round of applause, right?

Well, hold your applause just a minute …

Here’s How Things Can Go Seriously, Terribly, Horribly Wrong

Stocks are rallying even though the broad economy, especially employment, is lagging badly. Unless and until the real economy improves, you can have a market that is stretched far above its fair-market value. That means it will probably be prone to corrections sharp enough to make your head spin.

But that’s not the big problem.

The big problem comes if America careens into a currency crisis. And I think that potential is out there for the U.S. dollar unless something really fundamental changes.

That’s because the insane clown posse in Washington is adding to the debt burden of every American at a frightening pace. You can see this apocalypse in motion for yourself at the U.S. National Debt clock: http://www.usdebtclock.org/.

The U.S. deficit for this year alone is $1.8 trillion. All that debt has to be paid back eventually, and paid back with dollars. When you create more of something, you cheapen its value. In a nutshell, that’s one reason why the U.S. dollar is breaking support and heading lower.

A currency crisis could be mild or severe. In a mild currency crisis, we could see the U.S. dollar lose about 25 percent of its value.

As the value of a currency goes down, inflation picks up, because it takes more dollars to buy something. And if inflation gets really bad, Americans of all stripes will feel the pinch.

But some of our biggest trading partners — China, Russia, India, and various “friends” in the Middle East — are already making louder noises about dumping the dollar as the international reserve currency.

And they aren’t just making noises. They’re already taking action, buying gold and other hard assets, and slashing their purchases of long-term U.S. securities.

Take a look at this chart …

You can see how foreign purchases of long-term U.S. securities are plunging. This is a vote of “no confidence” in the dollar by central banks around the world. This won’t go in a straight line, either. But the trend is clear. This is one reason why the Fed has to buy U.S. Treasuries.

The Ponzi scheme of the U.S. government buying its own debt can’t go on forever. Eventually, the U.S. dollar will crumble, and probably U.S.-dollar-denominated debt along with it.

A move away from the dollar by foreign governments won’t be quick. There are trillions of dollars worth of investments that have to be reallocated. But once started, this juggernaut is hard to stop.

The real problem is that if the greenback loses its status as global reserve currency, then the world won’t need the trillions of dollars stashed in foreign central banks. Those can come back on to the market … sending the dollar lower, and potentially causing a currency crash.

And that brings us to a “severe” currency crisis. In a worst-case scenario, you have the Zimbabwe experience. Interestingly, Zimbabwe shows that a rapidly shrinking currency is actually good for stocks, in a manner of speaking. For example, in one three-month period in 2007, Zimbabwe experienced 1,000 percent inflation. At the same time, its stock market went up 600 percent.

I don’t think we’re headed for Zimbabwe-type hyperinflation. But I don’t know how bad the currency devaluation will be, either. So investing can actually cushion the blow of a shrinking currency — something to keep in mind as the boys in Washington run experiments on the dollar that would make Frankenstein shudder.

Investments for the Long and Short Term

Fundamentals don’t matter in the kind of market I’m talking about. If we really are on the cusp of a big bull run, you’ll want momentum stocks and funds.

Also, if the U.S. dollar is grinding lower, you’ll also probably do well with stocks that deal in hard assets, for the simple reason that the value of their reserves will increase as the value of the dollar goes down.

But even the SPY, which tracks the S&P 500, should do well in a weakening dollar scenario. You might want to wait for a pullback, and there will probably be plenty of them.

A better bet would be an index that tracks gold miners (GDX), agriculture stocks (MOO) or materials (XLB). And ETFs that hold physical gold (GLD) and silver (SLV) should also do well.

My Red-Hot Commodity ETFs subscribers are riding this wave, recently banking one round of double-digit percentage gains on the SLV, and another round of hefty gains on the DGP, a fund which aims to track twice the performance of gold. After banking those gains, my subscribers are holding half the original positions for potentially more. Sweet!

Just remember, a market floating on easy money could quickly capsize. It could tumble very quickly and with very little warning — I highly recommend you use protective stops.

Longer-Term Investments

Longer-term, I think we’re headed for a currency crisis, and you’re going to want to own physical gold and silver — American gold and silver eagle gold coins are a great place to start, as well as silver “rounds,” or one-ounce silver coins produced by various mints.

I also think that even in a currency crunch, stocks of miners that are leveraged to the price of gold and silver should still do well, especially foreign-based miners. And other hard assets should also do well longer-term if the dollar sinks.

The power players in Washington and on Wall Street are sowing the thunder. A storm is coming. Sitting still just makes you a target. Get busy, and you can protect yourself and potentially profit handsomely.

Yours for trading profits,

Sean

P.S. Join Me in Toronto …

I’ll be attending and addressing the Toronto Resource Investment Conference in Toronto, Canada on September 26 & 27. It should be a great show — the other speakers include Frank Holmes, Doug Casey, Paul van Eeden, Jon Nadler, Eric Coffin, James Turk and lots more. I hope you attend, and if you do, please stop by my seminars on Saturday and Sunday and say “hello.” I enjoy meeting subscribers and getting your feedback.

To find out more about this conference, point your web browser to: http://tinyurl.com/lbnmag. For free admission, enter promo code SBT9.

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