10/19/2006 Financial Sphere Earnings Watch *

The Dow added 0.4%, increasing y-t-d gains to 12.0%, and the S&P500 gained 0.2%, raising 2006 gains to 9.6%. The Transports rose 1.0%, while the Morgan Stanley Cyclical index declined 0.8% (largely due to Caterpillar’s disappointment). The Utilities surged 3.2% (up 12.7% y-t-d), and the Morgan Stanley Consumer index gained 1.2% (up 12.2% y-t-d). The small cap Russell 2000 was little changed, while the S&P400 Mid-Cap index dipped 0.6%. The NASDAQ100 fell 1% and the Morgan Stanley High Tech index dropped 1.8%. The Semiconductors were clobbered for 5.1%, and the NASDAQ Telecommunications index lost 1.0%. The Street.com Internet Index gained 0.7%. The Biotechs jumped 3.3%. The Broker/Dealers declined 2.0% (up 16.7% y-t-d), and the Banks fell 1.3% (up 9.0% y-t-d). Although bullion gained $1.20, the HUI gold index dipped 0.5%. For the week, two-year Treasury yields added one basis point to 4.87%. Five-year yields were unchanged at 4.76%, while bellwether 10-year yields dipped one basis point to 4.79%. Long-bond yields declined 2 bps to 4.91%. The 2yr/10yr spread ended the week inverted 8 bps. The implied yield on 3-month December ’07 Eurodollars declined 1.5 bps to 4.995%. Benchmark Fannie Mae MBS yields declined 2 bps to 5.97%, this week slightly underperforming Treasuries. The spread on Fannie’s 4 5/8% 2014 note was little changed at 32, and the spread on Freddie’s 5% 2014 note narrowed slightly to 31. The 10-year dollar swap spread declined 1.3 to 54.0. Corporate bonds performed well, with junk spreads narrowing sharply for the second straight week.    Investment grade issuers included Wachovia $4.0 billion, Northern Rock $1.5 billion, Lehman Brothers $1.25 billion, Realogy Corp $1.2 billion, Monument Global $200 million, and Potomac Edison $100 million. Junk bond funds posted weekly inflows of $3.2 million (from AMG). The junk market enjoyed a flurry of issuance. Junk issuers included West Corp $1.1 billion, Energy Transfer Partners $800 million, Cricket Communications $750 million, Southern Union $600 million, Buffets $300 million, Markwest Energy $275 million, Ranhill $220 million, Felcor Lodging $215 million, Berry Petrol $200 million, AGY Holding $175 million and Compucom Systems $175 million. October 18 – Bloomberg (Marie Beaudette): “Corporate restructuring experts speaking at a recent industry conference said they expect to see a significant increase in Chapter 11 bankruptcy filings starting in 12 to 18 months as liquidity tightens and interest rates rise.   But the panel of restructuring experts told attendees at the Turnaround Management Association’s annual conference…, the distressed-debt market hasn’t reached its breaking point. They said companies with the lowest-rated debt still will be able to obtain financing and avoid bankruptcy for the time being.” Convert issuers included Minefinders Corp $75 million. International dollar debt issuers included Unicredito $4.2 billion, Turkey $3.25 billion, Uruguay $1.0 billion, Coldelco $500 million, Eksportfinans $1.0 billion, Embraer $400 million, Saneamento Basic $140 million, and Barclays $105 million. October 18 – Financial Times (David Oakley and David Turner): “MDM Bank yesterday issued Russia’s biggest consumer loan securitisation so far as the growing appetite of the middle classes for borrowing to buy cars and other goods increases the supply of debt available to securitise. The country’s second-largest privately owned bank raised $430m for a car loan asset backed security after an 18-day roadshow that took in leading US and European cities.” Japanese 10-year “JGB” yields rose 3.5 bps this week to 1.795%. The Nikkei 225 index added 0.7% (y-t-d up 3.4%). German 10-year bund yields rose one basis point to 3.835%. Emerging debt and stock markets held their own. Brazil’s benchmark dollar bond yields were unchanged at 6.29%. Brazil’s Bovespa equities index slipped 0.5% this week (up 15.5% y-t-d). The Mexican Bolsa jumped 1.7% to another record high, increasing 2006 gains to 30.5%. Mexico’s 10-year $ yields declined 2.5 bps to 5.79%. The Russian RTS equities index gained 1.2%, increasing y-t-d gains to 44.9% and 52-week gains to 83.7%.  India’s Sensex equities index dipped 0.2%, reducing 2006 gains to 35.2%. China’s Shanghai Composite index added 0.3%, increasing y-t-d gains to 54.2%. This week, Freddie Mac posted 30-year fixed mortgage rates dipped one basis point to 6.36%, up 26 bps from one year ago. Fifteen-year fixed mortgage rates were unchanged at 6.06% (up 41 bps y-o-y). One-year adjustable rates added one basis point to 5.57% (up 68bps y-o-y). The Mortgage Bankers Association Purchase Applications Index added 0.4% this week. Purchase Applications were down 14.9% from one year ago, with dollar volume 15.5% lower. Refi applications fell 5.3%. The average new Purchase mortgage increased to $226,400, while the average ARM slipped to $369,700.  Bank Credit rose $10.4 billion last week to a record $8.185 TN, with the Fed apparently revising last week’s data to show an unusual $130 billion increase in Real Estate loans.   Year-to-date, Bank Credit has now expanded $678 billion, or 11.5% annualized. Bank Credit inflated $785 billion, or 10.6%, over 52 weeks. For the week, Securities Credit declined $4.7 billion. Loans & Leases expanded $15.2 billion during the week, with a y-t-d gain of $498 billion y-t-d (11.5% annualized). Commercial & Industrial (C&I) Loans have expanded at a 14.8% rate y-t-d and 13.2% over the past year. For the week, C&I loans dipped $1.0 billion, while Real Estate loans jumped $11.4 billion. Real Estate loans have now expanded at a 16.4% rate y-t-d and were up 15.3% during the past 52 weeks (we’ll have to see if last week’s big change was an adjustment or an error). For the week, Consumer loans dipped $0.6 billion, while Securities loans fell $4.8 billion. Other loans rose $9.1 billion. On the liability side, (previous M3 component) Large Time Deposits gained $4.7 billion (3-wk rise of $45.5bn).     M2 (narrow) “money” supply jumped $30.8 billion to a record $6.934 TN (week of 10/9), posting a 10-week gain of $121 billion. Year-to-date, narrow “money” has expanded $248 billion, or 4.7% annualized. Over 52 weeks, M2 has inflated $322 billion, or 4.9%. For the week, Currency slipped $0.3 billion, while Demand & Checkable Deposits increased $11.1 billion. Savings Deposits gained $8.7 billion, and Small Denominated Deposits increased $4.3 billion. Retail Money Fund assets rose $7.0 billion.    Total Money Market Fund Assets, as reported by the Investment Company Institute, declined $4.0 billion last week to $2.260 Trillion. Money Fund Assets have increased $203 billion y-t-d, or 12.2% annualized, with a one-year gain of $275 billion (13.8%).  Total Commercial Paper dropped $20.1 billion last week to $1.894 Trillion. Total CP is up $253 billion y-t-d, or 19.1% annualized, while having expanded $278 billion over the past 52 weeks (17.2%).  Asset-backed Securities (ABS) issuance rose this week to $10 billion. Year-to-date total ABS issuance of $578 billion (tallied by JPMorgan) is running about 6% below 2005’s record pace, with 2006 Home Equity Loan ABS sales of $392 billion about 2% under comparable 2005. Also reported by JPMorgan, y-t-d US CDO (collateralized debt obligation) Issuance of $253 billion is running 69% ahead of 2005. Fed Foreign Holdings of Treasury, Agency Debt declined $1.7 billion to a record $1.686 Trillion (week of 10/18). “Custody” holdings were up $166 billion y-t-d, or 13.6% annualized, and $217 billion (14.8%) over the past 52 weeks. Federal Reserve Credit added $0.4 billion to $831.5 billion. Fed Credit is up $5.1 billion (0.8% annualized) y-t-d, while having expanded 3.8% ($30.5bn) over the past year.  International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – were up $625 billion y-t-d (19.1% annualized) and $693 billion (17.4%) in the past year to a record $4.6 Trillion. Russian reserves are up 64% y-o-y to $266.5 billion. Currency Watch: The dollar index fell 0.9% to 86.06. On the upside, the New Zealand dollar gained 1.7%, the British pound 1.5%, the Swedish krona 1.4%, and the Hungarian forint 1.4%. On the downside, the South African rand declined 1.0%, the Israeli shekel 0.8%, the Ukraine hryvnia 0.5%, and the South Korean won 0.3%.  Commodities Watch: From Caterpillar’s Q3 earnings release: “Worldwide, metals mining companies increased exploration and development budgets 45 percent in 2006, the fourth consecutive year of double-digit percentage increases.  Despite those increases, mining production capacity continues to struggle to meet demand.  Metals demand is growing rapidly, inventories are nearly depleted and production problems persist.  Mine production in three major producing countries -- Australia, Canada and South Africa -- declined year to date.” October 17 – Bloomberg (Chanyaporn Chanjaroen): “Zinc rose to a record in London, gaining for a third straight trading session, as falling stockpiles exacerbated a global supply shortage. Inventory tracked by the London Metal Exchange dropped…to 127,400 tons… That’s equal to less than five days of global consumption…” Gold added 0.2% to $591.60 and Silver 2.4% to $11.97. Copper gained 1.4%, increasing y-t-d gains to 79%. December crude fell $1.00 to end the week at $59.30. November Unleaded Gasoline was little changed, while November Natural Gas surged 29%. For the week, the CRB index added 0.8% (down 7.9% y-t-d), and The Goldman Sachs Commodities Index (GSCI) added 0.1% (up 0.8% y-t-d).      China Watch: October 20 – Financial Times (Tom Mitchell and Geoff Dyer): “Industrial and Commercial Bank of China has priced its shares at the top end of its indicative range, according to a person familiar with the matter, as China’s biggest bank prepares to launch the world’s largest ever initial public offering… ICBC will sell H shares in Hong Kong at HK$3.07 each and Shanghai-listed A shares at Rmb3.11 each. At these prices, the bank will raise $16bn and $5.9bn in Hong Kong and Shanghai, respectively…” October 19 – Bloomberg (Nipa Piboontanasawat): “China’s retail sales rose at a faster pace in September. Retail sales rose 13.9 percent last month to 655.4 billion yuan ($82.9 billion) from a year earlier after climbing 13.8 percent in August...” October 19 – Bloomberg (Nipa Piboontanasawat): “China’s industrial production growth accelerated in September. Output rose 16.1 percent last month from a year earlier to 775.4 billion yuan ($98 billion) after gaining 15.7 percent in August…” October 19 – Bloomberg (Wing-Gar Cheng): “China’s spending on crude oil, gas and coal production jumped in the first nine months… Spending on petroleum and gas extraction rose 19.3 percent from a year earlier while investment in coal mines soared 36.4 percent, the National Bureau of Statistics said… Coal output rose 11.7 percent.” October 20 – Bloomberg (Samuel Shen): “China’s 1.3 billion people may spend more than 1 trillion yuan ($126 billion) dining out this year, 13 percent more than a year ago, the country’s Ministry of Commerce said.” October 16 – Bloomberg (Samuel Shen): “China’s wealthiest lavished 500 million yuan ($63 million) on Hennessy X.O spirits, Porsche sedans, South African diamonds and other luxury goods during a show in Shanghai, double the value of transactions a year ago. Top Marques, a four-day show that has its origin in Monaco, attracted 12,000 visitors last week with exhibits of 70 luxury brands, including $300,000 De Bethune watches and $426,983 Lamborghini sedans. ‘China has embraced every aspect of luxury pursuits, whether it’s hunting, gambling, jets or yachting,’ said Peter Thompson, a partner of yacht broker Cavendish White, whose clients include U.S. tycoon Donald Trump. ‘There’re a lot of rich people and they have a desire to explore new ways of life.’ The nation’s luxury-goods market is growing as much as 60 percent a year…” October 18 – Bloomberg (Matthew R. Miller): “Hong Kong hedge fund assets almost quadrupled by the end of March from two years earlier, according to a Securities and Futures Commission survey. Assets under management by the city’s licensed funds rose 268 percent to $33.5 billion from $9.1 billion on March 31, 2004… Between 30 and 40 percent of buying and selling in Hong Kong's financial markets can be attributed to global hedge funds…” October 17 – Bloomberg (Nipa Piboontanasawat): “Hong Kong’s jobless rate fell to the lowest level in more than five years, signaling higher demand for workers may push wages up, supporting consumer spending. The seasonally adjusted unemployment rate for the three months ended September dropped to 4.7 percent…” India Watch: October 18 – Bloomberg (Kartik Goyal and Cherian Thomas): “Indian Prime Minister Manmohan Singh said the government will aim to accelerate the nation’s annual pace of economic growth to 10 percent by 2012 as it improves the quality of roads, ports and other infrastructure. ‘This is the first time since the planning process began that we will be aiming for a growth rate of 10 percent,’ Singh told the New Delhi-based Planning Commission, which sets five-year investment targets.” October 17 – Bloomberg (Manash Goswami and Archana Chaudhary): “Power Grid Corp., India’s main transmission company, said a $17 billion program to more than double the nation’s network to 77,690 miles, long enough to circle the earth three times, will help end blackouts. ‘Power is like the mother for all development,’ Power Grid Chairman R.P. Singh said…‘Nothing is going to happen of all the development work we are planning to do without power.’” October 18 – Bloomberg (Kartik Goyal and Paul Gordon): “HSBC…, Europe’s biggest bank by market value, expects its Indian unit to post annual profit growth of as much as 50 percent as it increases lending to consumers and taps small and medium-sized companies.” Asia Boom Watch: October 18 – MarketNewsInternational: “The [South Korean] jobless rate improved to 3.2% in September from 3.6% the year before, supported by an increase in employment in both the private and public service sectors, telecom, finance and construction industries, the National Statistical Office said.” October 20 – Bloomberg (Anuchit Nguyen): “Thailand posted a record trade surplus in September as falling crude oil prices reduced import bills and exports climbed to the highest ever, the commerce ministry said. Southeast Asian’s second-biggest economy’s second straight monthly surplus rose to $1.51 billion… Shipments abroad last month increased 15.3 percent to $12.05 billion from a year earlier. Imports rose 9 percent to $10.5 billion…” Unbalanced Global Economy Watch: October 16 – Bloomberg (Alexandre Deslongchamps): “Canadian existing-home sales fell 1.6 percent in September and new listings rose, the nation’s realtor association said… New listings climbed 3.5 percent, to 48,945 units, and the average price jumped 9 percent from a year ago to C$295,830 ($260,000).” October 19 – Bloomberg (Craig Stirling): “Growth in M4, the broadest measure of U.K. money supply, accelerated to a 16-year high in September, suggesting inflation is building in Europe’s second-biggest economy… M4 increased 14.5 percent from a year earlier…” October 20 – Bloomberg (Craig Stirling): “The U.K. economy, Europe’s second-biggest, grew faster than expected in the third quarter, stoking speculation that the Bank of England needs to raise interest rates more than once to quell inflation. Growth accelerated to an annual 2.8 percent, the quickest pace in two years…” October 16 – Bloomberg (Brian Swint): “U.K. house-price inflation accelerated to the fastest pace in almost two years in October as buyers chased a shrinking number of properties, Rightmove said. An index of average asking prices rose 11.5 percent in the four weeks ending Oct. 7 from a year earlier to a record 218,954 ($408,000)…” October 20 – Bloomberg (Joao Lima): “Spanish house-price growth slowed to 9.7 percent in the 12 months through September as homes in Madrid and the northern region of Navarra restrained gains.” October 16 – Bloomberg (Evalinde Eelens): “Exports from Belgium, the sixth-largest economy among the 12 nations using the euro, increased 14.6 percent to 17.3 billion euros ($21.7 billion) in August.  Imports rose to 17.6 billion euros, up 12.3 percent…” October 17 – Bloomberg (Tasneem Brogger): “Danish house-price inflation slowed in the third quarter from a 20-year record in the three months through June after the central bank raised interest rates. House prices rose at an annual pace of 24.2 percent, compared with 25.9 percent previous quarter…” October 19 – Bloomberg (Jonas Bergman): “Sweden’s unemployment rate fell to 4.9 percent in September as accelerating growth increased demand for workers and the government raised spending on job training programs. The rate fell from 5.7 percent in August…” October 16 – Bloomberg (Sebastian Alison): “Foreign investment in Russia grew to $27 billion in the first nine months of this year, with foreign direct investment up 43.6 percent while portfolio investment nearly tripled, Prime Minister Mikhail Fradkov said.” October 19 – Bloomberg (Lucian Kim): “Russian President Vladimir Putin said the country’s power shortage threatens his plan to double gross domestic product within 10 years. The lack of a ‘clear and well-defined’ energy plan is curbing economic growth, Putin told a special government meeting…” October 17 – Bloomberg (Steve Bryant): “Turkey’s government plans to raise spending by 18 percent next year, widening the budget deficit, the Finance Ministry said.” Latin American Boom Watch: October 18 – Bloomberg (Eliana Raszewski): “Argentina’s industrial output last month grew at the fastest pace in since June…  Industrial production rose…1.1 percent last month from August and 7.7 percent from the same month a year earlier…” October 18 – Bloomberg (Guillermo Parra-Bernal): “Growth in Venezuela’s bank lending accelerated in September as pledges by President Hugo Chavez to make more funds available for loans to farmers and companies spurred demand for credit. Growth in lending by Venezuela’s 50 state and non-state banks and financial institutions rose 7.1 percent in September… The country’s loan portfolio rose 74 percent over the past 12 months through September…” October 16 – Bloomberg (Matthew Craze): “Peru’s economy grew 9.2 percent in August from a year earlier on a surge in agricultural output, the National Statistics Institute said…”    Bubble Economy Watch: October 17 – Dow Jones (Janet Morrissey): “Despite a slight slowdown in the third and fourth quarters, the lodging sector is poised to post its biggest increase in room rate and occupancy growth in more than 25 years when 2006 wraps up, according to a new PricewaterhouseCoopers study…  The report predicts revenue-per-available room, or revpar, will be up 8.7% in 2006 - its highest level since 1980. Revpar is a key lodging metric used to measure occupancy and room rate growth.” October 18 – Bloomberg (Vincent Del Giudice): “Retired U.S. workers receiving Social Security benefits will earn about $33 more each month beginning in January, a smaller increase than they received this year. The estimated monthly payment to some 53 million Americans receiving benefits will rise 3.3 percent in 2007. That compares with a 4.1 percent increase this year, the biggest since 1990.” Real Estate Bubble Watch: October 18 – Dow Jones (Damian Paletta): “Competitive pressures have forced loan underwriting standards to soften for the third straight year, according to a survey of national bank examiners [OCC]… This easing of loan requirements has made it easier for everyone from large corporations to low-income home owners to secure loans, but regulators are watching closely as such easing can pose major risks for both borrowers and financial institutions down the road.” October 17 – Bloomberg (Jeff Bennett): “Julie Taylor fights to hold back the tears when she talks about the day in March that she lost her home. ‘There was just no other choice,’ the 39-year-old Detroit woman said. ‘My husband, Ken, lost his auto job, we couldn’t keep up with the house payments, and before we knew it, we were forced to let the bank foreclose.’ That sequence of events is becoming increasingly common in Detroit… As slumping carmakers and their suppliers slash tens of thousands of jobs, foreclosures in the area are at an all-time high. Families like the Taylors can’t tap their home equity to keep afloat because the workforce cuts are also dragging down property values.” October 19 – Los Angeles Times (Annette Haddad): “Playing catch-up with the recent run-up in home prices, rents in large apartment complexes posted strong gains across California in the third quarter… Rents rose an average of 6% in most of the state’s biggest markets…research firm RealFacts said. Southern California remained the West’s most expensive place to rent, and the San Francisco Bay Area saw the highest rent increases, RealFacts said… average rent in Los Angeles and Orange counties rose 7.4% to $1,546 during the third quarter… In Silicon Valley, the average rent jumped 10.4%...” October 19 – Los Angeles Times (David Streitfeld and Martin Zimmerman): “The number of Californians who are significantly behind on their mortgage payments and at risk of losing their homes to foreclosure more than doubled in the three months ended Sept. 30, providing the latest evidence of trouble in the housing market, figures released Wednesday show. Lenders sent out 26,705 default notices — the first step toward a foreclosure — during the July-to-September period, up from 12,606 during the same quarter in 2005, according to DataQuick… Defaults are still well below their peak level of 59,897, which came in the first three months of 1996, as the state’s last housing slowdown was ending…  ‘We were putting buyers in homes with loans they could not afford to sustain over the long haul,’ said Bob Casagrand,a San Diego real estate agent. ‘If you’re a marginal buyer with an adjustable mortgage, you’re rolling the dice on the future.’” October 16 – Bloomberg (Alison Vekshin): “The U.S. federal government may back away from restrictions on banks that hold large amounts of commercial real-estate loans, as long as those banks can show they have adequate protection against failure, the top regulator of national banks said. Banks won’t automatically be required to increase their cash reserves when they hold high concentrations of real-estate loans if they can show bank examiners they can weather an economic decline, U.S. Comptroller of the Currency John C. Dugan said.”    Energy Boom and Crude Liquidity Watch: October 16 – Bloomberg (Tina Seeley): “U.S. electricity demand will increase three times faster than supplies during the next decade, threatening reliable operation of the nation’s power grid, according to an industry report. Demand for power will increase 19 percent, or 141,000 megawatts, while supplies are only expected to increase 6 percent, or 57,000 megawatts, leaving a shortfall of 84,000 megawatts, the North American Electric Reliability Council said.” October 18 – Bloomberg (Greg Chang): “Google Inc…said it plans to install the largest U.S. corporate solar power system, joining rivals such as Microsoft Corp. in adopting alternative energy. Google’s solar system at its headquarters in Mountain View, California, will generate 30 percent of the facility’s electricity and will be put into service in the first half of next year… The solar system is more than three times the size of the one Microsoft installed in April at its offices less than 2 miles away. Companies are installing solar panels to buff their environmental image, save money on electricity and take advantage of government incentives designed to encourage alternative energy.” October 19 – Financial Times (Joanna Chung and Rebecca Bream): “Russia’s Unified Energy System, the world’s biggest electricity generating company, is planning to raise about $10bn in the international capital markets over the next two years as part of a broad strategy to fund urgent domestic energy needs.” October 19 – Financial Times (Roula Khalaf): “A few years ago, only a few Arab investors could grab the headlines with big deals at home or abroad. Investment banking was still an emerging industry in the Middle East and private equity was virtually unheard of. But the sea of cash flooding the Gulf these days has produced an explosion of investment companies. New names - investment banks, private equity or venture capital funds and Islamic groups - spring up almost every week. Arab companies’ acquisitions abroad, in western and Asian markets, are announced with as much frequency. ‘In 2003 people hardly understood what private equity and alternative in-vestments really were; now every other day we get wind of another fund,’ says David Jackson, chief executive officer of Dubai-based Istithmar, an up-and-coming government investment arm.” Climate Watch: October 20 – Associated Press (Seth Borenstein): “The world - especially the Western United States, the Mediterranean region and Brazil - will likely suffer more extended droughts, heavy rainfalls and longer heat waves over the next century because of global warming, a new study forecasts… In a preview of a major international multiyear report on climate change that comes out next year, a study out of the National Center for Atmospheric Research details what nine of the world’s top computer models predict for the lurching of climate at its most extreme. ‘It’s going to be a wild ride, especially for specific regions,’ said study lead author Claudia Tebaldi, a scientist at the federally funded academic research center. Tebaldi pointed to the Western U.S., Mediterranean nations and Brazil as ‘hot spots’ that will get extremes at their worst, according to the computer models.” Fiscal Watch: October 20 – Dow Jones (Rebecca Christie): “Old planes, high fuel costs and a possible $12 billion medical bill are pushing the Air Force to redouble its focus on budget politics, according to senior leaders and budget plans. The service submitted a $690 billion plan for the next six years, including $108 billion for fiscal year 2008. In addition, the Air Force sees a looming $20 billion annual gap between its proposed budget and ‘things we know we need to do that we don’t have the money to do.’ For example, the service faces a daunting challenge with its suite of new space programs. ‘Every single thing we have on orbit has to be recapitalized or replaced over the next decade,’ said Gen. Michael Moseley, the Air Force’s chief of staff.” Speculator Watch: October 20 – Bloomberg (Katherine Burton and Jenny Strasburg): “John Snow and Lawrence Summers, two former U.S. Treasury secretaries, were hired by New York-based hedge fund companies as scrutiny of the industry increases. Snow…was named chairman of Cerberus Capital Management LP, which manages $16.5 billion in hedge funds and private equity. Summers…will join D.E. Shaw & Co. as a part-time managing director. D.E. Shaw oversees $25 billion for clients… Paul O’Neill, the Treasury Secretary before Snow, now is an adviser to Blackstone Group LP, a New York-based buyout firm, which also manages hedge funds. Former regulators including Eugene Ludwig, who served as Comptroller of the Currency when Clinton was president, and Richard Breeden, who was chairman of the U.S. Securities and Exchange Commission from 1989 to 1993, have started their own funds.” October 19 – Bloomberg (Katherine Burton and Jenny Strasburg): “Hedge funds attracted $44.5 billion from wealthy investors and institutions in the past three months, the most in one quarter since at least 2003… Net deposits beat the previous record of $42.1 billion in April through June, according to data released today by Hedge Fund Research Inc… Hedge funds have garnered $110.6 billion this year, compared with $46.9 billion in all of 2005. The previous annual record was $99.4 billion in 2002.” October 19 – Financial Times (Peter Smith): “Carlyle will shortly begin marketing a $15bn fund dedicated to US buy-outs, joining a list that includes rivals such as Blackstone, Kohlberg Kravis Roberts, Permira and Texas Pacific that have recently raised so-called mega funds of $12bn-$16bn. Carlyle, which is also raising a European buy-out fund of $3.8bn-$5bn, declined to comment… Industry commentators believe 2006 will set a high water mark in the current private equity fundraising cycle. Private Equity Intelligence estimates that groups that have completed their fundraising this year have attracted capital of $311bn but forecasts that figure will rise to a record $400bn by the year end, eclipsing the previous record set last year of $293bn. ‘It would be remarkable for next year to be as good as 2006 but $300bn would not be a surprise,’ said Mark O’Hare, managing director of PEI.”  Financial Sphere Earnings Watch: Highlights from Citigroup’s third quarter: “Repurchased $2.0B of common stock, $10.4B in last twelve months.” Income from Continuing Operations up 6% from Q3 2005 to $5.3 billion. “Total revenues were approximately even with the third quarter of 2005, as international revenue growth was offset by a decline in U.S. revenues, reflecting lower revenues in capital markets driven businesses… Average Consumer Loans were up 12% y-o-y to $422 billion. International Average Consumer Loans were up 9% to $116 billion. “Global wealth management revenues increased 14%, and net income was up 30%... asset under fee-based management increased 25% to $322 billion…” Assets under custody were up 14% y-o-y to $9.6 Trillion (with a “T”). “Fixed income markets revenues declined 16% to $2.3 billion, primarily driven by lower results in commodities, interest-rate products, and foreign exchange.” Total Assets surged $119.9 billion during the quarter, or 29.5% annualized, to $1.747 Trillion. Investments expanded $56.8 billion, “Fed Funds and Repos” $28.2 billion, and Trading Account Assets $23.3 billion. Total Loans increased $18.3 billion during the quarter. Total Assets were up $274 billion, or 18.6%, y-o-y. Over the past year, total Loans expanded 15.7%, with Corporate loans up 32%. The Asset “Federal Funds Sold and Securities Borrowed or Purchased under agreements to Resell” was up 21% y-o-y to $263 billion.” On the Liability side, Total Deposits were up 13% y-o-y to $669 billion. “Fed Funds and Repos” were up 32% to $320 billion, Brokerage Payables 37% to $97 billion, and Trading Account Liabilities 15% to $139 billion. The Liability “Fed Funds & Repos” jumped $55.6 billion during the quarter, compared to Deposit growth of $23.5 billion. The company repurchased 41 million shares during the quarter, increasing 12-month buybacks to 218 million shares. JPMorganChase reported third quarter Net Income of $3.30 billion, up 30% from Q3 2005. Highlights included: “Record Investment Banking fees of $1.4 billion up 44% y-o-y, driven by record debt underwriting and strong advisory fees.” “Ranked #1 in Global Syndicated Loans; #2 in Global Long-Term Debt…” “Commercial Banking loans up 11% y-o-y, driven by solid growth across all businesses…” From Asset & Wealth Management, “assets under management up 13% y-o-y” to $935 billion. “Credit card charge volume up 15% y-o-y to $87.5 billion.” From Treasury & Security Services, “assets under custody were up 23% y-o-y” to $12.9 Trillion. “Assets Under Management were $935 billion, up 13%...from the prior year.” Card Services Net Income was up 31% y-o-y to $711 million. Mortgage loan originations down 28% to $28.4 billion. Average Home Equity loans were up 10% y-o-y. Total Assets expanded 3.0% annualized during the quarter to $1.338 Trillion and were up 11.2% y-o-y. Wholesale Loans were up 18% from Q3 2005 to $179.4 billion, while Consumer Loans were up 6% to $284.1 billion. The company repurchased 20 million shares ($900 million) during the quarter, increasing 12-month buybacks to 95.8 million shares.   BankAmerica third quarter Net Income was up 41% from the year earlier quarter that excluded the acquisition of MBNA.  Proforma (excluding MBNA impact) revenue increased 10% to $18.65 billion. While Credit card loans surged to $96.0 billion with the acquisition, “home equity production increased 16% to $20.68 billion…and home equity portfolio balances grew 22% to $82.16 billion.” “In the third quarter, average business loans to small businesses with less than $2.5 million in annual sales grew 73% [y-o-y] to nearly $13 billion…Total average loans and leases grew 14% in Global Corporate and Investment Banking to more than $246 billion… Total assets under management in Global Wealth and Investment Management grew 13% to $517 billion…” Total Average Loans during the quarter expanded at a 23.8% annualized rate to $673.5 billion, with total commercial loans increasing at a 10% rate (to $236bn) and total consumer loans at a 32% rate (to $437bn).   Choosing to reduce securities positions, Total Assets expanded only 1.1% annualized during the quarter to $1.449 Trillion (assets up 16% y-o-y). On the Liability Side, Deposits were up 6.3% y-o-y to $666 billion, and Fed Funds & “Repo” were up 18.9% to $258 billion. BofA repurchased 59.5 million shares ($2bn) during the quarter, increasing 12-month buybacks to 263.4 million shares. Highlights from Wells Fargo’s third quarter (CEO: “The stagecoach was running on the full horsepower of our diversified business model…”: “Record Net Income of $2.19 billion, up 11% from the prior year’s $1.98 billion, up 10% (annualized) from the second quarter… Average commercial and commercial real estate loans up 10% from prior year, up 8% (annualized) from second quarter… Average consumer loans (excluding real estate 1-4 family first mortgages) up 16% from prior year, up 19% (annualized) from second quarter 2006.” “Mortgage originations of $104 billion, compared with $116 billion in prior quarter and $103 billion in third quarter 2005.” Single-Family second mortgages expanded at a 15.2% rate during the quarter. “Loans to small business…grew 18% from prior year.” “Brokerage assets under administration of $91 billion, up 16% from prior year.” Total Assets expanded at a 6% rate during the quarter to $500 billion, with a 12-month gain of 15%.  Merrill Lynch posted third quarter Net Earnings of $3.045 billion (including positive $1.1 billion impact from the BlackRock merger), up 121% from Q3 2005. Net Revenues for the quarter were up 48% from comparable 2005 to $9.90 billion. Global Markets and Investment Banking (GMI) “generated its highest revenues ever for a fiscal third quarter despite challenging market conditions during much of the period… Fixed Income, Currencies and Commodities net revenues increased 26% [to $2.1bn] and were a quarterly record… Equities Markets net revenues increased 26% [to $1.50bn]... Investment Banking net revenues, at $783 million, were just above the strong prior-year quarter… GMI’s year-to-date net revenues of $13.5 billion increased 30% from the first nine months of 2005…” Merrill Lynch Investment Managers third quarter Net Revenues were up 54% from Q3 2005 to $700 million [total client asset of $1.5TN), “driven principally by higher long-term asset values, robust net inflows and consolidated investments.” Merrill Lynch’s nine-month Net Revenues were up 35% from comparable 2005 to $26.0 billion. Nine-month Compensation expense surged 44% to $13.7 billion. The company repurchased 18.3 million shares ($1.3 billion) during the quarter. (Balance Sheet data not yet available)  I continue to read analysis postulating that the Fed overshot; that rates were hiked above some so-called “neutral rate.” In this Age of Unlimited, Asset-Market-Centric Global Finance there is no such animal as a single U.S. interest rate to stabilize our Credit and Economic Bubbles into some equilibrium state. And while we can attempt to discern the state of Financial Conditions from analyzing day-to-day marketplace nuances, quarterly financial sector earnings reports do provide the clearest view of system Credit Availability and the General Liquidity Backdrop. Despite some unsettled market conditions during the third quarter, there is no evidence of tight Financial Conditions in the reports from our largest and most powerful financial institutions. In short, the mindset remains very much “full steam ahead!”  Intense competition and margin pressure continue to drive lending volumes and capital market activities. The sharp slowdown in home sales activity is offset by more aggressive home equity, credit card, and small business lending. Almost across the board, commercial lending volumes are strong. Industry executives certainly exuded confidence during their respective conference calls.  While delinquencies and Credit losses ticked up a bit, they don’t yet appear to be a source of worry. “There’s nothing in any of the information that we see to lead you to think the consumer has any significant level of weakness,” commented BofA’s CFO Alvaro Molina, as his company pursues even more aggressive consumer loan growth. And the scope of share repurchases remains astounding. Citigroup, BofA, and JPMorgan combined for buybacks of 120.5 million shares during the quarter, putting y-t-d repurchases at an incredible 427.6 million. Citigroup’s Total Assets surged $119 billion during the quarter. Bank of America posted exceptional Average Loan growth in their mortgage, consumer and commercial units. BofA’s Average Home Equity loan balances were up 21% from Q3 2005, with Average Total Commercial loans up 18%. Investment banking fees at JPMorganChase were up 44% from Q3 2005 to a record $1.44 billion. JPMorgan’s Home Equity Loans were up 10% y-o-y, and loans at its Commercial Banking unit were up 11%. Commercial and (non-single family first mortgage) consumer loans were up double digits y-o-y at Wells Fargo. Merrill Lynch Net Revenues were up 48% from Q3 2005 to $9.90 billion. Merrill’s Fixed Income, Currencies and Commodities Revenues were a record $2.12 billion, up 26% from Q3 2005. And virtually all institutions noted strong inflows into their investment management businesses.  It is also worth noting earnings disappointments from the likes of mortgage players Washington Mutual, MGIC, Radian Group, and Accredited Home Lenders. Mortgage industry profits are petering out, although I’m still in no hurry to call for the imminent demise of the Mortgage Finance Bubble. At this point, industry earnings troubles are more a reflection of massive overcapacity and a sharp reduction in originations – rather than rapidly escalating Credit losses and lender/investor/speculator revulsion. Accordingly, Credit Availability remains generally loose. Some regional housing Bubbles are bursting, which has set in motion quite problematic dynamics for those individual markets. Conversely, other markets have hardly missed a beat. With respect to the national economy, Credit Bubble Dynamics will for now continue to counterbalance what would in normal circumstances be the devastating consequences of a major housing downturn. It is important to repeatedly remind ourselves that these are anything but normal times. In true Credit Bubble Blow-Off Fashion, the push into commercial lending and capital markets activities (spurred by waning mortgage profits) has evolved into a key facet of resilient employment and income growth trends. Those analysts most intensely fixated on faltering housing markets tend to avoid giving general Credit and Liquidity Trends (Financial Conditions) deserved consideration. I still get stomach aches from all the humble pie I’ve consumed from my predictions of an imminent bursting of the mighty bond market Bubble. Everything I thought I understood about market Bubbles, financial history, and the unprecedented degree of leveraged speculation that had come to permeate the U.S. Credit system left me cocksure that the bond bear would be one elongated and ferocious grizzly.  Well, wrong and more wrong (at least so far). Contemplating my analytical errors, I now appreciate that I failed to adequately take into account the global Credit and Liquidity backdrop. U.S. and Global Financial Conditions were extraordinarily loose, which (so clearly in hindsight) ensured that abundant liquidity flowed continuously into U.S. Treasury, agency, and debt markets (recycling massive U.S. Current Account Deficits, as well as enormous “carry trade” flows from Japan, Switzerland and elsewhere). The global liquidity backdrop has proved itself overpowering. Clearly, housing Bubbles demonstrate different dynamics than a bond market Bubble. For one, there are prominent local characteristics creating varying degrees of housing vulnerability. One can today examine Florida and California, for instance, and see markets acutely susceptible to bursting Bubble dynamics. These local factors (expanding inventories and inflated prices, along with mounting post-Bubble speculator revulsion) will now – even in the face of a resilient National Mortgage Finance Bubble – play a more pronounced role in dictating market dynamics than declines in mortgage rates.   At the same time, as analysts, we should not dismiss the possibility that the generally loose U.S. and global backdrops will continue to present a countervailing force supporting home prices around the country, similar to how they’ve cushioned the bond market Bubble. It sure doesn’t hurt that lenders are “printing money” outside the mortgage business, while the enterprising leveraged speculator community is finding myriad creative ways to profit from this incredible late-stage Credit boom. With Global Credit conditions underpinning employment and income - while stoking systemwide liquidity over-abundance – I’ll continue to approach the unfolding housing bust with analytical caution. The housing grizzly goes on a rampage with the breakdown of the Mortgage Finance and Credit Bubbles. In the meantime, I am willing to predict escalating Monetary Disorder and resulting wild marketplace instability and divergences in housing, securities, and commodities prices – a backdrop poised to confound the Fed and limit their flexibility for responding to deepening housing troubles.

10/12/2006 Financial Conditions *

For the week, the Dow gained 0.9% (up 11.6% y-t-d) and the S&P500 rose 1.2% (up 9.4% y-t-d). Economically sensitive stocks were strong. The Transports gained 1.9% (up 11.0% y-t-d) and the Morgan Stanley Cyclical index jumped 2.1% (up 8.9% y-t-d). The Morgan Stanley Retail index surged 3.0% (up 17.0% y-t-d), and the S&P Supercomposite Restaurants Index gained 2.9% (up 20.3% y-t-d). The Utilities increased 1.1% (up 9.2% y-t-d), and the Morgan Stanley Consumer index added 0.4% (up 10.8% y-t-d). The broader market was quite strong. The small cap Russell 2000 jumped 3.1%, increasing 2006 gains to 13.3%. The S&P Mid-Cap index jumped 2.7%. The NASDAQ100 rose 2.5% and the Morgan Stanley High Tech index 3.2%. The Semiconductors surged 4.4%. The Street.com Internet Index gained 2.15% (up 10.6% y-t-d), and the NASDAQ Telecommunications index surged 3.5% (up 20% y-t-d). The Biotechs increased 1.2%.  The Broker/Dealers slipped 0.9% (up 19.1% y-t-d), while the Banks added 0.5% (up 10.5% y-t-d). With bullion gaining $16.30, the HUI rallied almost 4%.
                                                                                                                             
For the week, two-year Treasury yields jumped 12.5 bps to 4.86%. Five-year yields rose 12 bps to 4.76%, and bellwether 10-year yields gained 10 bps to 4.80%. Long-bond yields increased 10 bps to 4.80%. The 2yr/10yr spread ended the week inverted 6 bps. The implied yield on 3-month December ’07 Eurodollars jumped 15.5 bps to 5.005%. Benchmark Fannie Mae MBS yields rose 8 bps to 5.99%, this week outperforming Treasuries. The spread on Fannie’s 4 5/8% 2014 note widened one to 32, and the spread on Freddie’s 5% 2014 note widened one to 32. The 10-year dollar swap spread increased 0.75 to 55.5. Corporate bonds outperformed, with junk spreads narrowing significantly.   

Investment grade issuers included Conocophilips $1.875 billion, AIG $1.75 billion, Morgan Stanley $1.25 billion, Lehman Brothers $975 million, Baltimore Gas & Electric $700 million, SLM Corp $600 million, Principal Financial $500 million, John Deere $400 million, and MBIA $100 million.

October 12 – Financial Times (David Oakley and Gillian Tett): “Top-rated corporate debt has shrunk to an historically low proportion of the overall market, highlighting the growing willingness of investors and issuers to embrace more risk. Triple-A corporate issues account for 8 per cent of outstanding global debt against 15 per cent in the mid-90s, according to research by Merrill Lynch. The shift reflects the fact that many mainstream companies have been cash-rich in recent years and have seen less need to issue bonds.  But it also reflects a flood of issues from companies with low credit ratings as it has become easier to sell risky assets to investors.”

Junk bond funds saw outflows of $62 million during the week (from AMG). Junk issuers included Soar Eagle Mining $400 million.

October 9 – Dow Jones (Cynthia Koons): “The default rate for global high-yield bonds hit a credit cycle low of 1.5% during the third quarter, Moody’s…reported… The trailing 12-month default rate had been range-bound between 1.6% and 2.1% prior to September’s results.”

October 11 – Financial Times (Paul J Davies and Saskia Scholtes ): “The cost of insuring corporate debt against default in Europe and the US has hit new lows as investors reassess their previously gloomy outlook for credit markets in the third quarter. The European non-investment grade index saw one of its biggest morning moves of the past few days as the rally of recent sessions gathered steam.”

Convert issuers included Five Star Quality Care $110 million and Finisar $100 million.

International dollar debt issuers included KFW $3.0 billion and Majapahit Holdings $1.0 billion.

October 11 – Financial Times (Michael Mackenzie): “US equity investors have shifted a record proportion of their funds into foreign share markets this year as investors chase returns from overseas and emerging markets which have been outstripping those on Wall Street. Of the $4,800bn in equities held by US mutual fund investors, $811bn, or 17 per cent, sit in funds containing foreign companies, according to AMG Data Services, which monitors mutual fund flows. ‘This is the highest percentage of international securities holdings by domestic mutual funds on record,’ Robert Adler, AMG’s president, said… It also represents a doubling of this share since August 2000. AMG data also show that of the $124bn invested so far this year into US equity mutual funds…fully $110bn, or 89 per cent, has gone into funds investing in overseas companies.”

Japanese 10-year “JGB” yields gained 6 bps this week to 1.76%. The Nikkei 225 index added 0.5% (y-t-d up 2.6%). German 10-year bund yields rose 8 bps to 3.83%. Emerging stock markets remain incredibly strong and debt markets notably resilient. Brazil’s benchmark dollar bond yields dipped 2 bps to 6.30%. The Bovespa equity index jumped 2.3% this week (up 16.1% y-t-d). The Mexican Bolsa rose 2.2% to another record high, increasing 2006 gains to 28.3%. Mexico’s 10-year $ yields rose 8 bps to 5.84%. The Russian RTS equities index jumped 3.6%, increasing y-t-d gains to 43% and 52-week gains to 72%.  India’s Sensex equities index gained 2.9%, increasing 2006 gains to 35.5%. China’s Shanghai Composite index rose 1.8% this week, increasing y-t-d gains to 53.7%.

This week, Freddie Mac posted 30-year fixed mortgage rates increased 7 bps to 6.37%, up 34 bps from one year ago. Fifteen-year fixed mortgage rates were 8 bps higher to 6.06% (up 44 bps y-o-y). One-year adjustable rates jumped 10 bps to 5.56% (up 71bps y-o-y). The Mortgage Bankers Association Purchase Applications Index declined 5.3% this week. Purchase Applications were down 18% from one year ago, with dollar volume 19% lower. Refi applications dropped 5.8%. The average new Purchase mortgage declined to $225,800, and the average ARM dropped to $371,000.

Bank Credit jumped $31.0 billion last week (2wk gain of $62bn) to a record $8.065 TN.  Year-to-date, Bank Credit has expanded $559 billion, or 9.7% annualized. Bank Credit inflated $668 billion, or 9.0%, over 52 weeks. For the week, Securities Credit surged $44.1 billion. Loans & Leases declined $13.1 billion during the week, with a y-t-d gain of $373 billion y-t-d (8.9% annualized). Commercial & Industrial (C&I) Loans have expanded at a 15.4% rate y-t-d and 13.8% over the past year. For the week, C&I loans gained $8.6 billion, and Real Estate loans surged $21.8 billion (3-wk gain of $54.1bn). Real Estate loans have expanded at an 11.4% rate y-t-d and were up 11.6% during the past 52 weeks. For the week, Consumer loans added $1.7 billion, and Securities loans rose $11.5 billion. Other loans posted an unusually large $56.8 billion decline. On the liability side, (previous M3 component) Large Time Deposits expanded $16.9 billion.    

M2 (narrow) “money” supply jumped $14.4 billion to a record $6.904 TN (week of 10/2). Year-to-date, narrow “money” has expanded $217 billion, or 4.2% annualized. Over 52 weeks, M2 has inflated $293 billion, or 4.4%. For the week, Currency added $0.6 billion, and Demand & Checkable Deposits rose $7.4 billion. Savings Deposits increased $0.9 billion, while Small Denominated Deposits gained $5.3 billion. Retail Money Fund assets added $0.3 billion.   

Total Money Market Fund Assets, as reported by the Investment Company Institute, jumped $18.5 billion last week to a record $2.264 Trillion (10-wk gain of $93bn!). Money Fund Assets have increased $207 billion y-t-d, or 12.8% annualized, with a one-year gain of $291 billion (14.7%). 

Total Commercial Paper gained $5.7 billion last week (10-wk gain of $124bn, or 36% annualized) to a record $1.914 Trillion. Total CP is up $273 billion y-t-d, or 21% annualized, while having expanded $313 billion over the past 52 weeks (19.6%). 

Asset-backed Securities (ABS) issuance slowed this week to $6.0 billion. Year-to-date total ABS issuance of $565 billion (tallied by JPMorgan) is running about 5% below 2005’s record pace, with 2006 Home Equity Loan ABS sales of $383 billion about 1% under comparable 2005. Also reported by JPMorgan, y-t-d US CDO (collateralized debt obligation) Issuance of $243 billion is running 74% ahead of 2005.

Fed Foreign Holdings of Treasury, Agency Debt jumped $12.5 billion to a record $1.687 Trillion (week of 10/11). “Custody” holdings were up $168 billion y-t-d, or 14.0% annualized, and $220 billion (15.0%) over the past 52 weeks. Federal Reserve Credit added $1.4 billion to $831.1 billion. Fed Credit is up $4.7 billion (0.7% annualized) y-t-d, while having expanded 3.7% ($29.7bn) over the past year. 

International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – were up $626 billion y-t-d (19.6% annualized) and $695 billion (17.5%) in the past year to a record $4.672 Trillion. 

October 13 – Bloomberg (Nerys Avery and Nipa Piboontanasawat): “China’s foreign-currency reserves surged to almost $1 trillion, the most ever held by a single country, driven by a record trade surplus… China had reserves of $988 billion at the end of September… That’s 28.5 percent higher than a year earlier.”

Currency Watch:

The dollar index rose 0.8% to 86.87. On the upside, the South African rand gained 4.8%, the Mexican peso 2.2%, Hungarian forint 2.0%, and Turkish lira 1.6%. On the downside, the Canadian dollar declined 1.3%, the Czech koruna 1.0%, Norwegian krone 0.9%, and Swiss franc 0.9%. 

Commodities Watch:

October 11 – Financial Times (Kevin Morrison and Lucy Warwick-Ching): “US wheat prices struck a 10-year high yesterday on fears of a further decline in global production at a time when world stockpiles are near 20-year lows. The latest rise is expected to lead to higher food prices, hitting bread, breakfast cereals, pizzas and pasta. Wheat harvests from Australia to Argentina, Europe and North America have been affected by drought, heatwaves and, in the case of Ukraine, infestation from the Eurygaster beetle. Global wheat supplies have fallen about 5 per cent - or 30m tonnes - from last year.”

October 11 – Bloomberg (Feiwen Rong and Jae Hur): “Wheat production in Australia may slump 58 percent this year as drought spreads, exacerbating a global shortage that drove prices to a 10-year high this week.”

October 9 – Bloomberg (Chia-Peck Wong): “Nickel prices rose to their highest in at least 19 years on the London Metal Exchange amid concern supply won’t meet demand after inventories dropped to a more than two-month low.”

October 12 – Bloomberg (Chanyaporn Chanjaroen): “Lead prices in London jumped to a record after a slide in inventories of the metal used in car batteries extended to 60 percent since late June.”

Commodities bear market? Wheat surged 13%, posting its biggest weekly gain in 10 years. Corn gained 16%, its strongest week since 1988. Orange juice rose almost 16%. Nickel this week traded to a 19-year high, tin a 17-year high and lead a record high. Gold gained 2.8% to $590.4 and Silver 4.5% to $11.68. Copper added 0.7%, increasing y-t-d gains to 77%. November crude declined $1.19 to end the week at $58.57. November Unleaded Gasoline fell 2.4%, and November Natural Gas sank 11.9%. For the week, the CRB index rallied 1.1% (down 8.6% y-t-d), and The Goldman Sachs Commodities Index (GSCI) gained 2.8% (up 0.7% y-t-d). 

Japan Watch:

October 13 – Bloomberg (Mayumi Otsuma): “Japan’s producer prices rose the most in more than 25 years in September, increasing pressure on companies to pass on costs to consumers to protect profits. An index of prices that companies pay for energy and raw materials such as iron ore increased 3.6 percent in September from a year earlier…”

October 12 – Bloomberg (Lily Nonomiya): “Japan’s bank lending rose for an eighth month, extending its longest expansion in a decade, helping companies fund increases in capital spending. Loans climbed 1.6 percent in September from the same month a year earlier…”

China Watch:

October 12 – Bloomberg (Nipa Piboontanasawat and Irene Shen): “China had its second-largest trade surplus on record in September, adding funding to an investment boom the government is trying to cool. The gap narrowed to $15.3 billion from a record $18.8 billion in August…”

October 13 – Bloomberg (Nipa Piboontanasawat): “China’s money supply grew in September at the slowest pace in more than a year after the central bank stepped up efforts to drain funds from the financial system. M2…rose 16.8 percent last month after gaining 17.9 percent in August… Outstanding yuan loans rose 15.2 percent at the end of last month from a year earlier to 22.1 trillion yuan ($2.8 trillion)…”

October 12 – Associated Press (Elaine Kurtenbach): “China’s oil imports surged to a record 3.3 million barrels a day in September…as the country recently began filling its newly built strategic oil reserves.  Preliminary data from the General Administration of Customs showed crude oil imports jumped 24 percent over the same month a year earlier to 13.5 million metric tons…  That would be an all-time high for any month… China recently completed construction of a storage facility…the first of four planned strategic oil reserves. Filling of those tanks began in August with a shipment of Russian crude…”

October 12 – Bloomberg (Wing-Gar Cheng): “China imported 16 percent more crude oil in the first nine months than a year earlier to meet rising energy demand in the world's fastest-growing major economy.”

October 11 – Bloomberg (Josephine Lau and Patricia Cheng): “China Life Insurance Co. and the nation’s other insurers may triple their assets to 5 trillion yuan ($632 billion) by 2010, according to the China Insurance Regulatory Commission.”

October 11 – Bloomberg (Lee Spears): “China imported vehicles worth $4.84 billion in the first eight months of the year, 72 percent more than a year earlier, the official Xinhua News Agency said…”

October 9 – Bloomberg (Nipa Piboontanasawat): “An index measuring the performance of Chinese companies climbed the highest in almost eight years in the third quarter.”

Asia Boom Watch:

October 9 – Bloomberg (Cherian Thomas and Anand Krishnamoorthy): “Indian Prime Minister Manmohan Singh may struggle to convince investors to help fund $320 billion of infrastructure spending by 2010 because he can’t persuade his government to draw up investment rules.”

October 12 – Bloomberg (Cherian Thomas): “India’s industrial production rose less than expected in August as monsoon rains hampered construction and forced factories to close. Production at factories, utilities and mines rose 9.7 percent from a year earlier from a revised 12.7 percent in July…”

October 11 – Bloomberg (Theresa Tang): “Taiwan’s exports unexpectedly accelerated in September as companies such as Chi Mei Optoelectronics Corp. benefited from rising global electronics demand. Overseas shipments increased 18.1 percent from a year earlier to a record $20.1 billion after climbing 16.6 percent in August…”

October 10 – Bloomberg (Shamim Adam): “Singapore’s economy expanded faster than expected last quarter as companies such as Chartered Semiconductor Manufacturing Ltd. exported more electronics. Gross domestic product grew an annualized 6 percent last quarter…”

October 13 – Bloomberg (Jason Folkmanis): “Vietnamese exports to the U.S. jumped by a third in the eight months ended August, as U.S. refiners used more crude oil from the Southeast Asian nation and garment sales accelerated.”

Unbalanced Global Economy Watch:

October 12 – Bloomberg (Brian Swint): “An index of U.K. house prices rose to the highest level in four years in September as more buyers chased fewer properties, the Royal Institute of Chartered Surveyors reported.”

October 11 – Bloomberg (Greg Quinn): “Canadian new home prices rose at the fastest since 1989 in August, led by the western province of Alberta, where an energy boom has led to a housing shortage. New home prices jumped 12.1 percent in August from a year earlier, and advanced 1.5 percent from the previous month…”

October 9 – Bloomberg (Matthew Brockett): “Industrial production in Germany rose the most in almost three years in August as Europe’s largest economy heads for its fastest expansion since 2000. Production jumped 1.9 percent from July… From a year earlier, production rose 7.2 percent.”

October 10 – Bloomberg (Nadja Brandt): “German tax revenue in September climbed 7.9 percent from the previous month, Financial Times Deutschland said…     Total tax revenue from January though September 2006 advanced by about 8.7 percent…”

October 10 – Bloomberg (Jonas Bergman): “Swedish unemployment declined for a second month in September as faster economic growth fueled demand for workers and the government boosted jobs training. The non-seasonally adjusted jobless rate fell to 4.2 percent from 4.6 percent in August…”

October 13 – Bloomberg (Tasneem Brogger): “Danish house prices may have risen an annual 20 percent last quarter, indicating the economy is at risk of overheating as low long-term interest rates sustain consumer spending, said economists at Denmark’s six biggest lenders.”

October 11 – Bloomberg (Tasneem Brogger): “Denmark’s economy expanded 3.5 percent in the first half, faster than previously estimated, as consumer spending, exports and investments all exceeded earlier calculations, the statistics office said.”

October 9 – Bloomberg (Svenja O’Donnell): “Russia’s trade surplus widened for a second consecutive month to $13.7 billion in August, from $12 billion a month earlier, the central bank said.”

October 12 – Bloomberg (Hans van Leeuwen and Fergus Maguire): “Australian employers hired six times as many workers as expected in September and the jobless rate held at a 30-year low…Employment increased 31,400 after gaining a revised 23,100 in August. The jobless rate was 4.8 percent…”

Latin American Boom Watch:

October 9 – Bloomberg (Valerie Rota): “Mexico’s monthly inflation soared to its highest level in almost six years in September after hurricanes that pummeled the country’s Pacific coast drove up the price of tomatoes and corn.”

October 12 – Bloomberg (Andrea Jaramillo): “Colombia’s imports rose 20 percent in August from a year earlier, boosted by purchases of vehicles and auto parts.”

Central Banker Watch:

October 13 – Bloomberg (Vivien Lou Chen and Steve Matthews): “Federal Reserve Bank of Chicago President Michael Moskow said central bankers may need more rate increases to curb inflation, bringing to five the number of Fed officials since Oct. 4 who have played down a possible rate cut. ‘Some additional firming of policy may yet be necessary to bring inflation back to a range consistent with price stability in a reasonable period of time,’ Moskow said…”

October 10 – Bloomberg (Craig Stirling): “Bank of England Governor Mervyn King said policy makers will need to watch prices and pay in the U.K. as inflation may pick up again after an expected dip last month… ‘We will need to keep our eye on the ball and monitor closely the evolution of wage and cost pressures,’ King said. ‘It is still not clear that earnings have been sufficiently restrained to accommodate the past rises in energy prices.’”

Bubble Economy Watch:

The August Trade deficit was up 19% y-o-y to a record $69.9 billion. Goods Imports were up 16% from August 2005 to a record $163.5 billion. Good Exports were up 15% y-o-y to $88.0 billion.

October 12 – Dow Jones (Michael S. Derby): “Confidence levels among the nation’s corporate leaders turned negative during the third quarter, marking the first retreat since the attacks of Sept. 11, a report…said.   The Conference Board, a private research group, said that its chief executives confidence index fell to 44 from 50 during the second quarter and 57 in the first three months of the year. Readings below 50 represent a drop in confidence. This is the first time chief executives have been negative on the outlook since the final quarter of 2001.”

October 11 – Bloomberg (Cotten Timberlake): “E. Kelly Sanford, a sociology professor at Tennessee State University in Nashville, no longer has to go hundreds of miles to pull out his credit card at Tiffany’s and Louis Vuitton. Two months ago, the luxury retailers opened their first Nashville stores… ‘They have discovered the very latent factor of the wealth we have in the Nashville area that is more hidden than in large cities like New York,’ said Sanford, 48. ‘They could’ve been here earlier and done just as well as now.’ Watch out, Fifth Avenue. Luxury retailing, once dependent on exclusive big-city locales, is forging into ever smaller U.S. markets, gambling that demand for $995 Gucci boots and $2,495 Burberry coats will broaden and withstand a slowdown in consumer spending and declining home prices.”

October 12 – Dow Jones (John Connor): “A survey of city finance officers by the National League of Cities found 65% of respondents saying their cities are better able to meet their fiscal needs this year than they were last year. The survey found 76% of finance officers in the South and 75% in the West reporting improved conditions, compared to 52% in the Midwest and 36% in the Northeast.   ‘City finance officers’ assessment of their cities’ fiscal conditions in 2006 improved dramatically since 2003, the low point after the fiscal recession, when only 19% of city finance officers said their cities were better able to meet financial needs than in the previous year,’ the NLC said…”

October 9 – Bloomberg (Duncan Moore): “The average cost of health care per employee will rise 7.7 percent for major companies in 2007, the lowest increase in eight years, said Hewitt Associates, a benefits consultant.”

October 13 – New York Times (Louise Story): “Some companies trying to attract M.B.A. students have been playing a version of beat the clock: offering bonuses that decline in value or disappear unless the student accepts the job by a certain date… The bonuses offered to the most promising summer interns, as much as $45,000 in some cases, will be cut in half or will be withdrawn if the students do not accept the job offers by an early deadline, typically the middle of October.”

Real Estate Bubble Watch:

October 13 – EconoPlay.com - (Congrats to Gary Rosenberger’s exceptional service this week celebrating their one-year anniversary!): “The nation’s housing market showed no sign of recovering in September, scant evidence that the worst of the slump is over, and plenty to suggest more rough patches to cross as the slow season approaches, residential builders say.  A smattering of recent announcements from Wall Street – most prominently from former Fed Chairman Alan Greenspan – that the “worst is over” for housing baffles even the most optimistic of builders, who see things quite differently in the trenches… The nation’s largest builders continue to grapple with high cancellations, mounting inventories, and what to do about landholdings that were once a source of bragging rights but now appear overbought and overpriced.  One credible industry source told EconoPlay that the inventory problem will persist for as long as the largest production builders continue to surreptitiously build speculative homes despite their public proclamations to the contrary.”

October 12 – Bloomberg (Daniel Taub): “Home prices in Southern California… rose 1.9 percent last month, the smallest year-over-increase in almost a decade. The median price for a home in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties was $484,000 in September, compared with $475,000 a year earlier…[from DataQuick]”

October 11 – EconoPlay.com (Gary Rosenberger): “The nation’s office market remained on a certain recovery path in the third quarter with vacancy rates dropping, rents rising – spiking in select markets – and building sales prices setting records, say property management firms… Strong corporate profits, ample investment capital, and a highly constrained supply of office space appear to have outweighed the stumbling blocks of a housing bust and $60 crude oil – and point favorably toward burgeoning construction activity for office high rises… Preliminary data point to average rents rising by about 5% annualized in the third quarter, about the same as the second quarter, with downtown Manhattan, Los Angeles and elsewhere galloping in double digit territory. Vacancy rates are seen dropping 30 to 40 basis points sequentially.”

October 12 – Bloomberg (Sharon L. Crenson and Brian Louis): “Homebuilder Toll Brothers Inc. opened sales of its first condominium building in Manhattan, the most expensive urban market in the U.S., as waning demand for its suburban luxury homes crimped earnings… ‘There’s no doubt that real estate is down but certain markets are doing well,’ said Chief Executive Officer Robert Toll… ‘New York has not gone down as the rest of the market has.’ The Toll building, a 21-story blue-green glass building at 110 Third Ave., is just south of Union Square Park in Greenwich Village. Toll, based in Horsham, Pennsylvania, began selling the condos to insiders on Sept. 28. Prices for the 77 units range from $887,990 for a one-bedroom apartment to $2.04 million for a three-bedroom unit with floor-to-ceiling windows…”

Financial Sphere Bubble Watch:

October 9 – Dow Jones (Rimin Dutt): “U.S. leveraged buyout activity in the first nine months of the year has set the stage for 2006 to top last year’s record… About 371 LBOs worth about $124.6 billion closed in the first nine months, up from 291 deals worth $83.1 billion that closed in the year-ago period, according to…Dealogic. That puts LBOs on track to easily best 2005’s record volume, when 356 deals worth $131.5 billion closed. In the third quarter, LBO deal volume was $44.6 billion across 113 deals, up from $34.1 billion in 100 deals in the year-ago period.”

October 12 – Bloomberg (Caroline Salas): “High-yield, high-risk companies this year are increasingly turning to the loan market to borrow money, with bank lending now outpacing bond issues by more than a 3-1 ratio, according to Moody’s… Below investment-grade companies issued 61 bonds amounting to $22.5 billion in the third quarter, compared with receiving 146 new loans totaling as much as $87.8 billion, Moody’s Chief Economist John Lonski said… ‘The rapid growth of bank lending to high-yield companies has been facilitated by the record low delinquency rate of bank commercial and industrial loans and by the strong demand for collateralized debt obligations that consist of bank business loans,’ Lonski…said… In the first nine months of the year, new high-yield loans totaled $293.1 billion, about 322 percent of the $91.1 billion of junk bonds issued… That ratio has increased from 84 percent in 2003, 153 percent in 2004 and 228 percent in 2005, according to [Lonski]…”

Energy Boom and Crude Liquidity Watch:

October 12 – Financial Times (Ed Crooks):  “Europe faces the growing threat of electricity shortages because growth in demand has outstripped investment in new power stations, a leading consultancy has warned. Capgemini, the consultancy, said operating at such low margin levels raised the risk of power shortages, including interruption of supply to large industrial users, “brownouts” – reductions in supply voltage – and blackouts. Colette Lewiner of Cap¬gemini said the study should be a “wake-up call” for the energy industry, governments and regulators.  “We are in a dangerous zone now,” she said. “We could have power cuts.”’
October 12 – Bloomberg (Wing-Gar Cheng): “China, the world’s second-biggest
energy user, and neighboring Russia may spend as much as $10 billion over the next five years to build power plants along the countries’ border. The power plants will supply electricity to China…”

October 12 – Bloomberg (Manash Goswami and Archana Chaudhary): “India will spend $12 billion to increase the nation’s power generation 13 percent by starting to build 16,000 megawatts of capacity this year to boost economic growth in Asia’s fourth-largest economy.”

October 9 – Bloomberg (Alex Kennedy): “Venezuela plans to invest $100 billion over the next six years in 120 infrastructure projects such as roads, ports and bridges as record oil income swells government coffers, Planning Minister Jorge Giordani said.”

October 12 – Bloomberg (Ian McKinnon): “EnCana Corp., Canada’s largest natural-gas producer, may spend as much as C$1 billion ($881 million) to build a new headquarters in Calgary, the financial hub of Canada’ biggest oil-producing province. The company plans to begin construction next year and occupy the 59-story building by 2011… The building, which would be Canada’s tallest west of Toronto, puts EnCana at the forefront of an office space boom in Calgary, where more than 12 million square feet are under development…”

Climate Watch:

October 13 – Financial Times (Kevin Morrison): “The world’s stockpiles of wheat are at their lowest level in more than a quarter century, according to the US Department of Agriculture, which on Thursday slashed its forecasts for global wheat and corn production. The lower forecasts were largely attributable to the severe drought in Australia, where the forecast for this year’s wheat crop was cut by 8.5m tons to 11m. That is less than half of the 24m produced last year, of which about 17m went to exports.”

Fiscal Watch:

The U.S. Treasury this week released preliminary 2006 budget data. For the fiscal year, the federal deficit shrank to $247.7 billion from 2005’s $423.2 billion. Total Receipts (on- and off-budget) were up 11.8% from 2005 to $2.407 Trillion. Individual Income Tax receipts jumped 12.6% to $1.044 Trillion, Corporate Tax receipts 27.2% to $353.9 billion and Social Insurance & Retirement receipts 5.7% to $790 billion. Total Outlays (on- and off-budget) were 7.4% above fiscal 2005 to $2.654 Trillion.

For September, total federal Receipts were up 12.6% y-o-y to $283.3 billion, with Individual Income Tax receipts up 14.2% to $111.0 billion and Corporate Tax receipts up 21.8% to $85.9 billion. Total federal spending (on-budget) was up 5.2% from September 2005 to $227.3 billion.


Financial Conditions:

It is astounding to observe such wild swings in marketplace sentiment and perceptions. There is now at least some recognition that a weakened housing sector is not soon to implode U.S. and global (Bubble) economies. And there was more evidence this week of some unusually conflicting views at the Federal Reserve, as well as confirmation that key Fed officials remain leery of the bond market’s vision of faltering economic momentum, waning price pressures, and the imminent implementation of the next easing cycle. June ’07 eurodollar yields (indicative of prospective 3-month short-term interest-rates) jumped 32.5 basis points in seven sessions to 5.205%. 

A record $70 billion (ok, $69.9bn) August Trade Deficit – a full year after housing's peak – and the strongest Consumer Confidence (Univ. of Michigan) reading in 15 months add to evidence that this is not your old granddad’s economy. U.S. shoppers looked $3 a gallon gas in the eye and refused to flinch. Today, scanning news of bursting housing Bubbles, consumers adopt that famously American attitude that things will surely work out just fine.  No reason to alter one's habits and lifestyles. In the context of such a protracted, historic and rewarding financial and economic boom -- one that emerged out of the early 90’s financial and economic doldrum -- today’s disregard of risk and resiliency of “spirit” are denotative of late-cycle exaltation.     

On so many levels, this cycle continues to rewrite the rules of finance, economics, and policymaking. Until only recently, it would have been totally unreasonable to ponder $70 billion monthly Trade Deficits; if the economy would have somehow had the capacity to create them, never would the markets ever have tolerated – or central bankers allowed - them. Certainly, conventional doctrine would have curtly dismissed any notion that a responsible central bank would ever contemplate lowering rates in the midst of such a gross imbalance. Today, however, buoyant financial markets dictate so many things, including the tenor of central bank decision-making. The bond market signals that 3.5% to 4.0% consumer price inflation is acceptable, and perhaps only the more determined Fed “hawks” have much of a beef. 

As long as the financial markets acquiesce, there is apparently no imbalance worthy of tough policy action. Above all, don’t make foolish mistakes as the Fed did in ’29 and the BOJ did in ’89 – never pop Bubbles. And, to listen to some, the Fed has 525 basis points that virtually guarantee consumers, borrowers, lenders, speculators, investors, entrepreneurs, businessmen, executives, bankers, Wall Street and Congress needn’t brood over how a recession might affect their respective best-laid plans. 

The dilemma is, at this late-stage of the Credit cycle, optimism and excess remain in abundant supply, assuring that it is too easy to match the booming demand for to ballooning supply of Credit/liquidity/purchasing power. At this “terminal phase” of boom-time excess, the continued availability of cheap finance will innately attract boundless ideas for how to procure it and create wealth from it. Earlier this decade, when stocks were no longer the ticket, the boom just shifted to houses, commodities and emerging markets. If houses no longer cut it, well, then why not office buildings, energy, or even telecom – again! It doesn’t really matter; the Financial Sphere profits in any case. 

One lesson that will be learned from this experience:  if the Fed persists in ignoring Credit and disregarding Bubbles, it will eventually have to accept that only quite tough/punishing policy action or bursting Bubbles will suffice when it comes to changing behavior (including interrupting boom-time Monetary Processes). And while the rationale for watching and waiting almost seems convincing, the exercise of anticipating a Bubble burning itself out is fraught with overwhelming risk.  A case in point:  the view today that U.S. housing market fragility might actually be working to bolster U.S. and Global Credit Bubble excesses should not be so contentious. A proper “risk management” policy approach dictates that Bubbles be addressed as early as possible.  The contemporary fallout from “falling behind the curve” is runaway asset speculation, inflation and (Credit, asset, and speculative) Bubbles – that will inevitably burst.

As we’re witnessing, the profligate U.S. financial sector is no mood to back down. Of course not, they’re making too damn much “money.” As demand for home mortgage borrowing has waned, lenders have simply responded with more aggressive commercial real estate and C&I lending. Losses on energy trades have only impelled the leveraged speculating community to press bets in the bond and Credit markets. The upshot is that the housing slowdown has to this point proven a catalyst for only greater Credit Availability and Liquidity throughout corporate and global finance. Little wonder, then, that U.S. employment has held up so well, while Income Growth has accelerated at home and abroad. Ultra-loose Financial Conditions are spurring the hedge fund, proprietary trading, M&A, LBO, derivatives and stock repurchase booms that play a critical role in handing the asset inflation baton effortlessly from U.S. housing to global debt and equities markets.

Contemporary finance is certainly rewriting the book on “inflation.” No longer are consumer prices – especially “core” price indices – an even remotely accurate indicator of “monetary conditions.” Indeed, “Financial Conditions” is supplanting “monetary conditions” as the more suitable moniker for describing general Credit and Liquidity conditions. “Financial Conditions” are today largely dictated by the ballooning U.S. Financial Sphere (including foreign holders of U.S. financial claims), a process chiefly governed by the unconstrained multiplication and leveraging of U.S. marketable securities and non-traditional Credit instruments.   

Contemporary Credit and Liquidity Dynamics have very little in common with those of the past. Traditionally, the Fed dictated “monetary conditions” by overt methods and mechanisms whereby (banking system) “money” was regulated by reserve requirements and open-market operations. The determined management of system reserves and bank deposit growth would under normal conditions hold sway over loan growth and Credit conditions generally.  

Today, the Fed employs little authority over the expansion of bank, Wall Street, or securities Credit outside of small (non-threatening) adjustments to the cost of short-term funds. The Fed, instead, attempts to manage the general financial environment through the manipulation of interest-rates and financial profits. These days, however, the Financial and Economic Spheres have bloated to the precarious point that the Fed presumes it dare not turn parental and remove the punchbowl. Such a circumstance does not go unnoticed by the rambunctious and is exploited with increasing daring as late-stage excesses snowball. And as long as financial players perceive it is to their advantage - as they clearly do today - to expand (loans, securities, leverage, derivatives, etc.), the Financial Sphere Inflation will continue in earnest.

Some analysts describe Fed policy as “tight,” while forecasting that pricing pressures (generally “core” consumer price indices) will soon wane. And it is ridiculous that seasoned economists and market professionals continue to cite tepid growth in M2 as evidence of system “tightness” and Fed restraint.  Why ignore that outstanding commercial paper has been expanding 21% annualized, Bank Credit 9.7%, and Money Market Funds 12.8% (as issuance booms for a variety of Credit instruments such as ABS, CDOs, corporates and Treasuries)? Truth be told, general Credit and liquidity (“Financial”) Conditions remain loose as ever, with indications of serious price distortions, not unexpectedly, as prominent as ever.

With monthly Trade Deficits having reached $70 billion, $1 Trillion annual Current Account Deficits are on the horizon. It is worth noting that monthly Trade Deficits averaged about $30 billion during the peak of King Dollar supremacy back in early 2002. Since then, already enormous Current Account Deficits doubled, notwithstanding a nearly 30% decline in the dollar index. Predictably, the efficacy of dollar devaluation as initiator and promoter of global imbalance rectification (or even stabilization) was a complete dud in the face of extremely loose Financial Conditions. Instead of dollar weakness in any way impinging demand for U.S. securities, the unprecedented U.S. Credit boom was “monetized” by the ballooning holdings of foreign central banks.  The U.S. imported incredible amounts of goods and exported its Credit Bubble to the world.  Who would have thought back in 2002 that Chinese reserve holdings would expand $776 billion, or 366%, to approach $1 Trillion by October 2006? Not me.   

The dilemma today is that the Chinese, Japanese, Asians, oil exporters, and global finance generally -- having accommodated U.S. excesses for years -- will at some point face a most arduous task of weaning our consumers and their manufacturers – and all financial systems - off of Ultra-Easty Global Credit and Liquidity ("Financial") Conditions. Are the Chinese willing to take reserves to $2 Trillion and then to $3 and $4 Trillion. How about the Japanese and Koreans? Russia and the oil exporters? 

The Chinese are certainly facing their own runaway boom. Attempts to cool lending and other excess have been repeatedly thwarted by an unrelenting torrent of hot “money” and investment finance inflows. Interestingly, their efforts to cool real estate speculation may finally be having some effect, although speculative impulses have now infected Chinese equities markets. Across the entire globe, loose Financial Conditions are fueling synchronized stock market Bubbles rarely experienced in history. Ultra-loose Financial Conditions in the U.S. and its Inflationary Manifestations (including Current Account Deficits) have unleashed Credit systems around the world.

And while consumers and securities markets are enjoying a respite from surging energy prices, I wouldn’t extrapolate today’s prices too far into the future. One only has to look at this week’s moves in wheat, corn, nickel, tin, lead, and orange juice for evidence of the Acute Inflationary Bias that continues to envelop the commodities market. Sure, there will be instances when perceived supply constraints fail to materialize and the speculators will be summarily beaten to a bloody pulp. But, as we saw again this week, supply shortages will incite spectacular price surges. In a world of basically unlimited finance and liquidity, how much is too much to pay for food, energy or important raw materials when there is not enough to go around? And I seriously doubt energy supply issues will not resurface, especially if the global economic boom surprises on the upside. Loose Global Financial Conditions seemingly guarantee as much. And I’ve run out of time this evening.