Coming Rate Cut?

9/16/07 Coming Rate Cut?

Kopin Tan: "Since 1970, the S&P 500 has risen by an average of 5.5% in the three months after the central bank first cut rates, according to Birinyi Associates. Only twice out of nine instances did stocks falter, including an 18% drop three months after the Fed's 2001 easing. The average gain six months later is an even more encouraging 12.3%...So here's a rough market consensus (gathered, alas, from a wholly impressionistic, happy-hour survey): Cutting a quarter percentage point off benchmark rates of 5.25% will leave a horde of crestfallen traders and trigger short-term selling. A half-percentage-point cut, served up with the promise of further leniency, will help bulls feel that their faith is being rewarded, and that could encourage another round of buying. In either case, and given stocks' anticipatory rally, the potential downside from dashed hopes likely will exceed any potential upside from fulfilled expectations."

Schottenstein, chief executive of M/I Homes, a home builder based in Columbus, Ohio: "This is a time to be careful and a time to be prudent, but we think it's a time of opportunity," Schottenstein said. "Laced between the negative news reports there are still a lot of people buying homes."

According to the FT, banks funding the $26bn takeover of First Data Corporation by KKR, the private equity group, will on Monday begin selling a $5bn chunk of the loan package to investors at a discount. After lengthy and tense negotiations between KKR and the banks, a decision was made to move forward with the sale at 96 cents on the dollar and a coupon of 275 basis points over the London Interbank Offered Rate, according to Reuters Loan Pricing Corporation...The total loan package needed to fund the deal is worth about $15bn, including a $2bn revolving credit facility. The size of the loan was reduced by $1bn to help stimulate demand. As well as the $5bn tranche slated to be sold next week, the other $3bn and $5bn tranches will also have to be sold eventually
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Carl Icahn on Friday called for a sale of BEA Systems. He reported in a regulatory filing that he had raised his stake in the company to 8.53 per cent, and said he may ask the company to hold a shareholder meeting and propose his own directors.

Statoil and the Brazilian oil company Petrobras have signed a long-term strategic collaboration agreement for exploration and production as well as biofuels.

Floyd Norris: "The employment statistics and the bond market are combining to send out a warning that has been heard only rarely in the past two decades: A recession is coming in the United States. Both warned of an economic downturn before the 1990 and 2001 recessions, and they are doing so again.While each has arguably registered false warnings, they have never done so together."

Peter Schiff: "For years America has convinced the emerging market countries that their prosperity is a function of our consumption. It is argued that their export oriented economies would falter if not for the insatiable American willingness to consume (a "virtue" that is assumed to be uniquely American). As the dollar falls into the abyss, this myth will be shattered.My forecast is that over the next two to three years the U.S. Dollar index will fall to 40; half of its current value. As this happens, much of America's economic power will be transferred abroad."

"This blind faith in the Fed's power to hold up the economy and stocks epitomizes the following definition of magic offered by Teller of the illusionist and comedy team of Penn and Teller: a 'theatrical linking of a cause with an effect that has no basis in physical reality, but that - in our hearts - ought to be.'" [September 2007, The Elliott Wave Financial Forecast]

Doug Noland: "Today, recession cannot be avoided and the weak dollar and robust global inflationary backdrop will limit the Fed's flexibility...Today, the banking system is ill-prepared to play the role of lender of last resort for long. Moreover, the scope of required ongoing Credit inflation ensures dollar vulnerability... We have today much greater financial fragilities, disastrous economic imbalances, and a feeble currency - whether the stock market chooses to discount it now or not."

To The Rescue

9/15/07 To The Rescue

According to Reuters, Britain's financial authorities stepped in to rescue mortgage lender Northern Rock on Friday as the group, which has lent aggressively to home buyers, fell victim to the sharp rise in borrowing costs between banks. In Britain's biggest casualty of a global financial crisis sparked by U.S. mortgage defaults, queues stretched out into the streets as customers waited to withdraw savings from Northern Rock branches, with some reports of fighting in its home town of Newcastle. The British central bank's support -- the first time it has acted as lender of last resort in this way since becoming independent on interest rate policy in 1997 -- puts a prop under Northern Rock, which has been hit by banks' reluctance to lend as they hoard cash to cope with the fallout from bad U.S. loans.

Sales at retailers rose a smaller-than-expected 0.3 percent in August and they recorded the biggest decline in almost a year when car sales were stripped out, a government report showed on Friday. Excluding motor vehicles and parts, retail sales fell 0.4 percent last month, the sharpest drop since September 2006, the Commerce Department said. Retail sales excluding cars, parts and gasoline, fell 0.1 percent, the steepest decline since April. If the consumer represents at least 2/3 of the economy, what are the chances of a recession?

The RBC Cash Index showed consumer confidence clocking in at 71.1 in September, a sharp drop from August's reading of 89.3. It marked the worst showing since May 2006. Individuals' feelings about the economy's prospects and their own financial fortunes plunged to 14.4 in September, compared with 43.9 in August. The new reading was the fourth weakest showing on record. Peoples' feelings about current economic conditions sank to 90.5 in September, down from 105.6 in August. A measure looking at peoples' attitudes about investing, including their comfort in making major purchases, fell to 88.3, from 97.9.

Manufacturing output fell 0.3% in August, the first decline since February.

Prices of goods imported into the U.S. declined by 0.3% in August, taking their first drop since January, the Labor Department reported Friday. Imported petroleum prices fell by 1.3% in August. It follows a revised increase of 6.4% in July. Imported natural gas prices fell by 12.9% in August. Excluding all fuels, import prices rose by 0.2% in August.

The Organization of Petroleum Exporting Countries kept its oil demand growth view unchanged in its September report, saying it still sees growth of 1.3 million barrels of oil a day in 2007 and in 2008.

China lifted its benchmark interest rate 0.27-percentage point Friday. The rate change, which will affect both lending and deposit rates, takes effect Saturday. . The rate hike is the fifth this year and comes after data released Friday showed urban fixed-asset investment surged 26.7% in the January to August period from a year earlier.

Through the first 11 months of the current budget year, receipts total a record $2.282 trillion, up 7.5 percent from last year, while outlays totaled a record $2.557 trillion, up 5.3 percent from last year.

Healthy San Francisco is the first effort by a locality to guarantee care to all of its uninsured, and it represents the latest attempt by state and local governments to patch a inadequate federal system. It is financed mostly by the city

Palatin reported a net loss of $6.1 million, or ($0.07) per basic and diluted share, for the quarter ended June 30, 2007, compared to a net loss of $7.9 million, or ($0.11) per basic and diluted share, for the same period in 2006. Total revenues in the quarter ended June 30, 2007 were $2.6 million, compared to $5.0 million for the same period in 2006. As of June 30, 2007, the Company had cash, cash equivalents and investments totaling $33.8 million. At present, there are about 76 million shares. As such, the stock is currently selling for approximately its cash per share.

China's emerged as a net importer of coal in 2007. Alpha Natural Resources Inc., based in Abingdon, Va., stands to benefit most from this trend, said Jeremy Sussman, a coal sector analyst at Natexis Bleichroeder. The company is the largest U.S. exporter of metallurgical coal, and it has plenty of production that isn't locked into contracts at lower prices. "While I do expect Alpha's costs to rise, the benefit of higher coal prices will far outweigh the cost increases," Sussman said. "Strong metallurgical coal pricing is the first catalyst we're going to see before the end of the year."

Rates on jumbo mortgages (loans for $417,000 or more) have spiked to 7.46 percent, and some lenders are charging more than 8 percent.

Facing a U.S. legal assault, China fired back Friday by filing a World Trade Organization complaint against anti-dumping duties that the United States applies on Chinese paper imports. On May 30, Washington imposed penalty tariffs ranging from 23.19 percent to 99.65 percent on imports from China of the glossy paper used in art books, textbooks and high-end magazines. The decision to impose duties on Chinese paper reversed 23 years of U.S. trade policy by treating China -- classified as a non-market economy -- the same way as other U.S. trading partners in disputes involving government subsidies.

It must be Friday as the buyout rumors have surfaced again on Yahoo. The $25 call options are exceptionally active. The September call options expire next Friday, the 21st.

George Friedman: "The war, both in Iraq and against al Qaeda, has worn the United States down over time. The psychology of fear has been replaced by a psychology of cynicism. The psychology of confidence in war has been replaced by a psychology of helplessness. Exhaustion pervades all."

Iran's interior minister said Friday his country has finalized oil and gas projects with China, adding that two-way trade was on target to hit $20 billion (14.4 billion euros) this year.

Merrill Lynch & Co warned on Friday that shaky credit markets forced the world's largest brokerage to adjust the value of securities linked to risky subprime mortgages and other products, a move that could hurt third-quarter profit. Remember that fair value (open to subjective thought) is not necessarily the same as marked to the market. Next week the major brokerage houses report quarterly earnings. Let's see about the transparency as it relates to marking positions to the market. Don't hold your breath.

With two of my good friends seriously ill, my writing may be sparse at best.

The Good News And The Bad News

9/14/07 The Good News And The Bad News

The good news is jail officials will not need to make maternity accommodations for Foxy Brown — her manager says the rapper isn't pregnant, despite her lawyer's courtroom contention that she was. The bad news is maybe her lawyer might have thought he was the would be father.
The good news is her manager and Koch Records announced that Brown would release a new album while serving a one-year jail sentence. The bad news is she will be releasing her first record since 2001.

The bad news is Alcatel-Lucent SA slashed its forecast for full-year revenue growth in its third profit warning since the start of the year. The good news is that it could have been worse as the company expects third-quarter operating profit to be "around break-even." They could have been in the red.

Three powerful earthquakes jolted Indonesia in less than 24 hours, triggering tsunami alerts Thursday.

Friedman Billings Ramsey sees chance of recession at near 60%.

Foreign investment in China rose 12.8 percent to $42 billion in the first eight months of this year, the Commerce Ministry said Thursday. China's industrial output soared 17.5 percent in August over the year-earlier period, the government said Thursday. China plans to boost its strategic oil reserves from the current 2 million to 3 million tons (15.8 million to 23.7 million barrels) to 12 million tons (94.8 million barrels) by 2010, a state-run newspaper said Thursday, citing a senior economic planning official. Raising the amount of crude oil in the recently established reserves will give China the equivalent of a one-month supply, the Shanghai Securities News reported.

Paul L. Kasriel: "So, a good way for the Fed to prevent asset-price bubbles is to limit the amount of credit it creates. By following a rule of increasing the value of its balance sheet at a rate no faster than that of population growth, the Fed would be able to keep the prices of goods and services from rising rapidly and, without having to identify an asset-price bubble a priori, could also prevent the formation of asset-price bubbles. Of course, adopting the gold standard would be superior to my suggestion. But as low as the probabilities are for the Fed to adopt my prescription, the probabilities are even lower that the Fed would opt to go back on the gold standard."

Bill Bonner: "Speculators, investors, and central bankers have figured out that the U.S. government and the Bernanke Fed will not protect the dollar - not when millions of Americans are having trouble making their mortgage payments. The U.S. money supply is increasing - nearly five times faster than GDP growth. And now, fearing a Japan-style deflation, the Fed is likely to cut rates later this month."

Speculators, investors, and central bankers have figured out that the U.S. government and the Bernanke Fed will not protect the dollar - not when millions of Americans are having trouble making their mortgage payments. The U.S. money supply is increasing - nearly five times faster than GDP growth. And now, fearing a Japan-style deflation, the Fed is likely to cut rates later this month.

Reuters reported "Structured investment vehicles (SIVs) that have been rolling their commercial paper at very short maturities may be challenged to fulfill rating agency liquidity requirements.This could trigger downgrades that ultimately send the structures into a death spiral, CreditSights analysts said in a report on Wednesday.SIVs, which use short-term and long-term funding to invest in a mixture of financial and asset-backed debt, have struggled to roll their commercial paper as investors shun paper that is backed by mortgages. This investor reticence has also spread to non-mortgage backed debt."While SIVs have largely been able to roll maturing commercial paper over the last few weeks, they have generally only been able to roll those amortizations into the very short-term commercial paper with one-week or even overnight maturities," CreditSights analysts said."Clearly the ability to roll at any tenor is better than not being able to at all, but we would point out that the roll of maturing debt into one-week or overnight commercial paper is a train wreck in the making," they said.SIVs are required by rating agencies to hold enough assets to cover the worst-case scenario of outflows over a 15-day period. Typically the assets held to ensure their liquidity are bank lines of credit, U.S. Treasury bonds and agency debt, CreditSights said.As SIVs roll over their commercial paper with short maturities, the liquidity they need to meet the 15-day outflow scenario is increased.This would drive down the net asset value of the SIVs. And, as net asset values fall, the structures are subject to further downgrades."This death-cycle dynamic can have the consequence of forcing steep downgrades of SIV commercial paper even if the SIV is still able to roll most of its commercial paper in the overnight or one-week tenors," CreditSights said."But because commercial paper holders are generally extremely sensitive to ratings downgrades, such downgrades are effectively the kiss of death," they said. "They can search for an increase in their backstop bank line of credit, but banks that have been caught napping with already excessive amounts of contingent liabilities to asset-backed commercial paper programs are unlikely to want to increase the sizes of these lines," the analysts said."The other unattractive option is to liquidate assets that are not eligible liquid securities in order to buy U.S. Treasuries and other assets that will count towards the liquidity minimum," they said.As all SIVs face the same risks, however, the structures may be forced to sell securities at the same time, which would send down prices of the assets."

Now for some good news. McDonald's Inc. boosted the annual dividend by 50 percent, to $1.50 per share from the $1.00 McDonald's paid in 2006.
The new payout is payable Dec. 3, to holders of record Nov. 15. McDonald's said it expects to return from $15 billion to $17 billion in cash to shareholders from 2007 through 2009, "subject to business and market conditions."

Home prices fell in most Southern California neighborhoods and the number of sales tumbled to a 15-year low for August. Sales for the month plunged 36% from a year earlier. What's more, 71% of the Southland's ZIP Codes showed price declines, according to figures released Wednesday by DataQuick Information Systems.

Mervyn King, Bank of England Governor: “The provision of large liquidity facilities penalises those financial institutions that sat out the dance, encourages herd behaviour and increases the intensity of future crises,” he added. Central banks should not “sensibly entertain” such cash injections just to maintain the status quo, he added.

The dollar fell to a lifetime low against the euro of $1.3927.

The ECB said last Thursday it would pump three-month money into the system to “support a normalization of the functioning of the euro money market”.

John Howard (better known as Bush's friend) has called an end to his political career after saying he would retire as Australia’s second-longest serving prime minister part way through his next term if he wins an election due to be held by early December. A resurgent opposition Labor party is under Kevin Rudd who said Mr Howard could no longer govern his own party let alone the country. Sounds familiar.

Forsyth Partners, a U.K. fund of funds manager, has gone into administration and trading in the group's funds has been temporarily suspended it announced Thursday.The group has around $1.2 billion in funds under management.

Microsoft raised its quarterly dividend 10 percent to 11 cents a share, the first increase in a year.The dividend will be paid Dec. 13 to shareholders on record on Nov. 15.

Saul Sterman: "Perhaps it would be enough just having Zell as a client for Rubin to make partner at McDermott. But for all three to make partner…give me a break. One $8.4 billion deal is not enough, so I'm wondering what other megabucks deal the three have going. The Cubs need to get sold and a couple of Tribune buildings over the next 12 months; all providing a steady revenue flow, however we are talking about three new partners, not one. t is so obvious that without the income from the Tribune deal this would not be happening that it just doesn't get any better." As I have said over and over again, the Tribune deal will, in my view, get completed.

Target announced late Wednesday it has hired Goldman Sachs to advise in its review of potential ownership alternatives for its credit card receivables valued at approximately $7 billion. Target also said it will re-evaluate its use of debt and pace of share repurchases.

The bad news is Bloomberg reported Goldman Sachs sent clients an unsigned update of August hedge fund performance. Goldman's Global Alpha quantitative fund lost 22.5%, its largest monthly decline ever, and is now down 33% year-to-date and 44% from its March 2006 peak. Investors in Global Alpha notified Goldman in August that they plan to withdraw $1.6 billion or about 20% of the fund's assets as of July 31. The good news is there are still assets remaining in the fund.

The Swiss franc hit a new two-year high on Thursday after the Swiss National Bank hiked its target LIBOR band by a quarter-point to a mid-point of 2.75%.

First-time claims for state unemployment benefits rose by 4,000 to 319,000 for the week ending Sept. 8, the Labor Department reported Thursday. Claims fell by a revised 22,000 in the week ending Sept. 1, to 315,000. It was the most they'd fallen since Feb. 17. The four-week average of new claims fell by 1,000 to 324,000, the lowest since Aug. 18. The number of workers continuing to collect unemployment benefits fell by 6,000 during the week ended Sept. 1 to 2.58 million. This is the lowest level since the week ended Aug. 18. The four-week average of continuing claims rose by 9,000 to 2.58 million, the highest level since Jan. 14, 2006.

According to Bloomberg, Kohlberg Kravis Roberts & Co. may delay the sale of loans to finance the $26 billion takeover of First Data Corp. until next week after failing to agree on terms with bankers, people close to the negotiations said.

The Bank of England relaxed restrictions on the amount of money financial institutions need to hold with the central bank, encouraging them to lend more to each other as it tries to reduce overnight borrowing costs.

You think rates should be cut in the U.S.? Stop complaining. Consider yourself lucky. Venezuela's overnight lending rate climbed to as high as 90% Thursday after the central bank said it has suspended open market operations meant for pumping liquidity into the market.

Mike Shedlock: "In essence the "Savings Glut" is nothing more than an optical illusion that confuses "savings" with "debt" while ignoring U.S. deficit spending, consumer credit binges, and trillions of dollars blown in Iraq, all in the face of Fed policies that discourage saving every step of the way. No matter what Bernanke's model suggests, an unsupportable consumption binge in the U.S. does not mathematically translate to a "glut of savings" elsewhere. And given his inability to distinguish between "savings" and "debt" as well as his reliance on mathematical models and academia instead of real world practicality, Bernanke keeps reinforcing what we already knew: Bernanke is a Complete Fool...His proposed "Savings Glut" is easily exposed as nothing more than a speculative credit binge now going bust. The construct is so simple that even a brilliant Ph.D can't figure it out."

The New York Mercantile Exchange, Inc. today announced margin changes for its gold and COMEX miNYTM gold futures contracts, effective at the close of business tomorrow.
Margins for the gold futures contract will increase to $2,500 from $2,000 for clearing and non-clearing members and to $3,375 from $2,700 for customers.
Margins for the COMEX miNYgold futures contract will increase to $1,250 from $1,000 for clearing and non-clearing members and to $1,688 from $1,350 for customers.

Valero Energy Corp. closed its Port Arthur refinery in Texas because of Hurricane Humberto.

Banks have committed $350 billion for leveraged buyouts in the U.S. and 60 billion euros ($83 billion) in Europe that have yet to syndicate, according to UBS estimates.

Asset-backed commercial paper, primarily short-term loans backed by mortgages, fell by $21.6 billion or 2.2%. Commercial paper levels are down 13.8% to $1.92 trillion in the past six weeks when credit markets began to seize up. The level of outstanding asset-backed paper has fallen 20.1% to $945 billion in the past six weeks.

The company ``recently arranged for $12 billion in additional secured borrowing capacity through new or existing credit facilities,'' Countrywide said in a statement.

Natural-gas inventories rose by 64 billion cubic feet for the week ended Sept. 7, the Energy Department said Thursday. Total stocks now stand at 3.069 trillion cubic feet, at the same level as last year, and 260 billion cubic feet above the five-year average, the government data said.

October crude climbed 18 cents to close at $80.09 a barrel Thursday, marking the first close above $80 for a front-month futures contract on the New York Mercantile Exchange. Natural-gas futures dropped over 6% as a storm threat to energy production in the Gulf of Mexico fizzled. October natural gas fell 40.9 cents, or 6.4%, to end at $6.029 per million British thermal units.

December gold fell $2.80 to close at $717.90 an ounce Thursday. December silver lost 11.3 cents to close at $12.68 an ounce while December copper finished at $3.3965 a pound, up 3.7 cents for the session.

Hovnanian Enterprises Inc. is offering discounts of up to $149,000 on homes. The company will start a three-day sale tomorrow, dubbed the ``Deal of the Century,'' in 18 states including California, New Jersey, New York, Arizona, Ohio and Illinois. Buyers will ``realize unprecedented savings,'' Red Bank, New Jersey-based Hovnanian said.

U.S. banks tapped the Federal Reserve's discount window for $7.2 billion on Wednesday, the Fed said Thursday, the highest total since the terror attacks in 2001 and the first significant borrowing from the Fed since the Fed lowered the discount rate on Aug. 17. The average borrowing for the week was $2.7 billion.

Rising Costs And Rising Inflation

9/13/07 Rising Costs And Rising Inflation

According to the Henry J. Kaiser Family Foundation and the Health Research Trust, since 2001, family health insurance costs have jumped 78%, while wages have increased 19% and inflation 17% (the latter number is ridiculously low). Kaiser says between 1 million and 2 million people join the ranks of the uninsured every year.

The WSJ reports that Home builders are putting up fewer supersize homes and offering smaller floor plans to lure buyers by keeping prices low.

Thousands of homeowners face an "imminent risk" of losing their homes because of clashes between American Home Mortgage Investment Corp. and its former financial backers, according to Freddie Mac, a government-chartered housing financier. Freddie Mac said 4,547 loans valued at nearly $797 million are at stake.

Alcoa Inc. is selling its entire stake in Aluminum Corp of China Ltd for up to US$2 billion, reaping a potential profit on its investment of as much as US$1.9 billion.

The euro hit an all-time high against the U.S. dollar on Wednesday at 1.39.

Brad Setser: "It (China) has put itself in a position where it singled handedly will finance about ½ of the US current account deficit."

The end of easy credit and a further decline in home construction are sending the economy into a "near-recession," with growth hovering at just above 1% through the first three months of 2008, according to the UCLA Anderson Forecast to be released today. The forecast presents a gloomier outlook for jobs and the housing market. The nation's unemployment rate will rise to 5.2% by mid-2008, up from the current 4.6%. And home values will fall 10% to 15% from their peaks, the forecast says, meaning that sliding prices have yet to hit bottom.

The European Central Bank on Wednesday loaned commercial banks €75bn ($104bn) for three months, a sign that institutions in the money market remain wary of lending to each other for periods of more than a week.

Treasury Secretary Paulson said he had been an investment banker at Goldman Sachs during the “Russian default, Asian crisis . . . and Latin American credit crisis” and expected this bout of uncertainty in credit markets was “going to take longer” to resolve.

Lehman Brothers Holdings Inc. Chief Executive Officer Richard Fuld considers the current debt market rout less than half as severe as the turmoil in 1998, according to a report by UBS AG.

Russia has tested the world’s most powerful vacuum bomb, which unleashes a destructive shockwave with the power of a nuclear blast, the military said on Tuesday, dubbing it the ”father of all bombs”.

Japan's current account surplus widened 4.5% in July from a year earlier, marking the seventh straight month of expansion, the government said Wednesday. The current account for July totaled 1.86 trillion yen ($16.25 billion), up from 1.76 trillion yen a year earlier, the Finance Ministry said.

Retail sales in China grew 17.1% in August, up from 16.4% growth in July, and marking the fifth straight month of accelerating gains in the pace of spending growth.

Nationally, the share of people 65 to 74 who were still working jumped from one in five in 2000 to one in four in 2006.

In March, Consumer Reports magazine said a taste test of basic black coffee found McDonald's stronger blend beat brew from Starbucks, Burger King and Dunkin' Donuts. In addition, at a McCafe in a McDonald's restaurant an average latte costs 26 percent less than one at Starbucks.

The EIA said retail heating oil will average $0.30 higher at $2.78 per gallon for the October to March heating season. That equates to a 12% increase over 2006.

August audience figures from comScore show that Yahoo! (YHOO) Finance maintains a lead in unique visitors over rivals AOL (TWX) and MSN (MSFT) Money, but that the large pageview advantage that it once had is almost gone. Yahoo! Finance had almost 13,7 million unique visitors in August, ahead of MSN Money at 11.5 million and AOL Finance at 10.2 million. But, in pageviews, Yahoo! posted 289 million to AOL's 266 million.

H&R Block said it will eliminate 575 jobs at its Option One Mortgage Corp subprime lending unit, on top of 615 job losses announced on May 15.

Wheat prices surpassed $9 a bushel for the first time as a drought in Australia cut production, pushing global stockpiles toward a 26-year low.

Electronic Data Systems Corp., the second-largest computer-services company, plans to offer early retirement to 12,000 workers in the U.S. after new orders plunged last quarter.

In its Quarterly Economic Report, the World Bank forecast China's CPI to rise 4.6% this year, up from its previous forecast of 3.2% and above Beijing's target of less than 3%. It expects the CPI to rise 3.8% next year. The bank also raised its forecast for China's gross domestic product growth this year to 11.3%.

CFOs' optimism about the U.S. economy has taken a nosedive. In fact, it has sunk to the lowest level on record, according to the latest results of the quarterly Duke University/CFO Business Outlook Survey. Nearly two-thirds of CFOs are feeling more pessimistic this quarter than they did three months ago, the survey of 580 U.S. finance executives says. Only 13.6 percent of the survey respondents reported feeling more optimistic than last quarter. Those numbers reflect a six-year nadir, the lowest level since the survey began in June 2001. "With pessimists greatly outnumbering optimists, the prospects for the U.S. economy are very poor, with a recession a distinct possibility," said John Graham, director of the survey and a finance professor at Duke's Fuqua School of Business.

In early Wednesday trading, crude traded over $79 a barrel. Refinery utilization fell to 90.5 % of capacity from 92.1% a week ago.

The American Petroleum Institute reported a fall of 5.2 million barrels in crude supplies for the week ended Sept. 7. The Energy Department had reported a decline of 7.1 million barrels for the latest week. Motor gasoline supplies were up 3.3 million barrels, the API said. The government reported that supplies were down 700,000 barrels. Distillate supplies climbed 5.7 million barrels, the API said. They were up 1.8 million barrels, according to the Energy Department.

Barclays Capital strategists expect the dollar to fall back below 110 yen by the end of the year as Japanese retail investors become more risk-averse.

An 8.2 magnitude earthquake struck near the coast of Indonesia's Bengkulu province on Sumatra island.

Lead, copper, zinc, aluminum, and nickel had strong up days Wednesday. Natural gas rose more than 8%. Crude traded at a record price over $80 a barrel. Corn rose the most in eight months.

October crude climbed $1.68, or 2.2%, to finish at $79.91 a barrel after trading as high as $80.05. October natural gas closed at a more than three-week high of $6.438 per million British thermal units, up 8.5%, or 50.4 cents.

Gold for December delivery finished down $1.03 at $720.70 an ounce. December silver fell by 4 cents to $12.79 an ounce, October platinum rose $2.40 to $1,304.7 an ounce and December palladium rose 65 cents to $339.45 an ounce.
December copper rose 3.4 cents to $3.3594 a pound, following a gain of 4% in the previous session.

Is the Fed concerned with inflation? The S&P Goldman Sachs Commodity Index closed at 527 and the CRB at 321. In sum, inflation is not muted. The dollar is in the soup with the U.S. dollar index at 79.40. Is it intelligent to lower rates at the next Fed meeting?

Bertrand Russell: “The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt"

RGE Monitor: "The Fed estimates $266b of U.S. ABCP (asset backed commercial paper) will come due in the next two weeks and Bank of America estimates that a further $136b of ABCP will be due in Europe by the end of the month."

“European officials, while acknowledging the lack of visibility at the present time, seem confident that, if the US sneezes, they won’t catch pneumonia,” said Marc Chandler, of Brown Brothers Harriman. Maybe the U.S. will do a lot more than simply sneeze.

More Fallout

9/12/07 More Fallout

Wachovia said its investment banking unit may be stuck holding loans intended to fund leveraged buyouts, but which investors will not buy. "Volatility in the fixed-income market is being felt at Wachovia," Chief Executive Ken Thompson said. "We don't know when markets will normalize."

William James : “To study the abnormal is the best way of understanding the normal.”

China's consumer price index rose 6.5% in August from a year ago, the National Bureau of Statistics reported Tuesday, the highest single-month reading since December 1996. The cumulative increase for the eight months through August was 3.9%, the statistics bureau said.

The European Commission trimmed its euro zone growth forecast for this year to 2.5 pct from it previous projection of 2.6 pct due to a weaker-than-expected second quarter. In its latest set of interim economic forecasts, the commission estimated 2007 inflation at 2.0 pct compared with the 1.9 pct it projected in its spring forecasts published on May 7, citing higher commodity prices.

Gross domestic product - the total output of goods and services in the economy - will edge up 2 percent in 2007 and 2.8 percent next year, the National Association for Business Economics predicted in a report presented at the group's annual meeting. This year's growth rate is expected to be significantly below the economy's 2.9 percent expansion in 2006 and the lowest since 2002, when the nation was pulling out of recession.

The European Central Bank said Tuesday it drained $82.7 billion from money markets in a tender operation aimed at absorbing excess liquidity. The ECB has injected hundreds of billions of euros into jittery money markets in five tenders over the past month, amid a credit crunch caused by the crisis over U.S. subprime mortgage loans.

Dan Denning: "If credit as an asset class is in a bear market, how will stocks go up from here? "It was the biggest bubble of all time and the signs that it's been pricked are all around us. Yet you're telling me the whole thing's been factored into stock prices and earnings? "Balderdash!!"

Wal-Mart Stores Inc. reduced its reported second-quarter profit by $153 million due to expenses from selling its German retail operations, the world's largest retailer reported Monday. In a regulatory filing, Wal-Mart said the added cost reduced its earnings per share for the quarter that ended July 31 to 72 cents from the 76 cents it originally reported Aug. 14. That compares with 50 cents per share in the year-ago quarter.

Brent Steenbarger: "Quite simply, our brains function differently under conditions of fear (and greed!) than under cooler emotional conditions. As a result, we can make decisions with our money that later (in our more calm modes) seem puzzling to us."

"It's (the housing downturn) created an environment where people are a little tense and when they get a little tense they hold onto their dollars and hold their cars a little longer," GM's Wagoner said. "So we saw reasonably weaker sales the last several months."

For September, ICSC expects retail sales to increase by 2.5%, on a year-over-year basis.

McDonald's August U.S. same-store sales up 7.4%.

China's trade surplus expanded 33% to $24.97 billion in August, the second highest monthly surplus on record, according to government data. China's exports rose 22.7% to $111.36 billion, while imports were up 20.1% to $86.38 billion, the General Administration of Customs said Tuesday.

The supply of Iranian natural gas to Turkey has suspended as the gas pipeline between the two countries was partially damaged in a blast, an official statement said on Monday.

Lukoil and China National Petroleum will cooperate on oil and natural gas production abroad and supplying hydrocarbons to China.

The value of U.S. exports of goods and services to the rest of the world increased 2.7% in July, the fastest seasonally adjusted growth in more than three years, the Commerce Department reported Tuesday. With imports growing 1.8%, the deficit between imports and exports narrowed by 0.3% to $59.2 billion in July from an upwardly revised $59.4 billion in June. Both exports and imports were at record levels in July, reflecting strong global demand and higher prices. U.S. producers exported record values of capital goods, consumer goods, autos, and foods. Exports were led by airplanes and autos. U.S. consumers imported record values of foods and feeds. The trade gap with China was the second highest ever at $23.8 billion.

According to the NY Post, Countrywide Financial has hired Goldman Sachs and law firm Wachtell Lipton Rosen & Katz to arrange another multi-billion investment in the company, just weeks after Bank of America made a $2 billion investment in preferred shares in the mortgage company, Meanwhile, Countrywide's stock is about $17 and the January 08 $10 puts are going for $1. That pessimism is no laughing matter.

According to Bloomberg, a Saudi Arabian-backed proposal to temper high oil prices by raising oil production at today's OPEC meeting in Vienna is meeting resistance from Venezuela, Algeria and Libya.

The Federal Reserve reported that consumer credit rose at an annual rate of 3.7 percent in July, down from a 5.9 percent growth rate for consumer debt in June. The slowdown reflected a big drop in borrowing in the category that includes auto loans.

Companies will be unable to meet payments on about 4 percent of bonds and loans with high-risk, high-yield credit ratings as they run out of cash and are unable to refinance existing debt, Moody's said in a report Tuesday. Corporate treasurers need to repay $26 billion of high- risk, or junk bonds by the end of 2008, Moody's said.

The London Interbank Offered Rate (Libor), the key measure of how much money costs on the City's open market, increased again yesterday, with the three-month rate, an important yardstick for business borrowing costs, particularly affected. It widened by almost a full basis point (0.01pc) to 6.89625pc, meaning the three-month Libor is currently the highest it has been above the Bank of England's base rate for 20 years. It coincided with news of the first collapse by a British sub-prime mortgage company as a result of the market meltdown. Victoria Mortgage Funding, a small lender, has been placed in administration after funding lines dried up.

Oliver Wendell Holmes: "If I had a formula for bypassing trouble, I would not pass it round. Trouble creates a capacity to handle it. I don't embrace trouble; that's as bad as treating it as an enemy. But I do say meet it as a friend, for you'll see a lot of it and had better be on speaking terms with it."

Pirate Capital LLC, the hedge-fund manager run by Thomas Hudson, barred withdrawals from its two Jolly Roger Activist funds after the firm's assets declined by almost 80 percent in the past year.

Monsanto will buy Brazilian corn-seed company Agroeste Sementes for slightly more than $100 million in cash. Monsanto said Brazil has the world's third largest corn production area, and estimates the country's hybrid corn seed market is 23 million acres.

The U.S. housing industry is in for a much deeper downturn, the National Association of Realtors said Tuesday as it slashed its forecasts for home sales and construction for this year and next. Tighter credit conditions will likely postpone the recovery even further, said Lawrence Yun, senior economist for the real estate trade group.
Housing starts are now expected to fall 24% this year and an additional 8% next year to 1.26 million, about 10% less than the realtors' forecast from just a month ago. That would be the lowest since 1992.
Starts of single-family homes are projected to fall 26.5% this year and an additional 11% next year to 954,000, about 11% less than last month's forecast. It would be the lowest total since 1991.
New home sales are projected to fall 24% this year and an additional 7.4% next year to 741,000, about 13% less than the forecast a month ago. That would the lowest since 1995.
Existing-home sales are projected to fall 8.6% this year and rise 5.8% next year to 6.28 million, about 2% less than last month's forecast.
The median price for existing-homes is expected to fall 1.7% this year to $218,200 and rise 2.2% next year to $223,000.

Private Chinese oil companies are currently looking to be acquired by foreign oil companies due to the government-sponsored monopoly in place in the country's oil wholesaling industry, a senior official with a large industry association told Interfax Tuesday.

Financial institutions in Shanghai saw rapid growth in individual housing and foreign exchange loans during August, the People's Bank of China (PBOC) Shanghai said in a report yesterday, in which it also warned commercial banks to keep a close watch on the ability of borrowers to service their loans, as well as changes in forex liquidity and currency supplies.

China's Ministry of Finance announced yesterday that it will issue special treasury bonds worth RMB 200 billion ($26.49 billion) that will be made available to the public through the nationwide inter-bank bond market. The new special T-bonds will be the first tranche to be issued on the public market from the RMB 1550 billion ($205.30 billion) in special T-bonds that were approved for issuance by China's top legislature, the National People's Congress, in June this year. According to the MoF, the new special T-bonds will have 10-year-terms, and their interest rate will be decided by bidding carried out within the nationwide inter-bank bond market.

IndyMac's CFO said the company will about 10% of staff over next few months.

Albert Einstein: “Whoever undertakes to set himself up as a judge of Truth and Knowledge is shipwrecked by the laughter of the gods.” The Decider might focus on those words.

The Organization of the Petroleum Exporting Countries agreed to raise its production quota by 500,000 barrels per day, effective Nov. 1, according to Dow Jones Newswires. OPEC's official quota from 10 of its 12 members had been at 25.8 million barrels per day. But in August, the U.S. Energy Department estimated that July OPEC oil production from the 10 members stood at 26.67 million barrels per day.

Imports of copper and copper products gained 43 percent to 1.91 million metric tons in the eight months ended Aug. 31, the Beijing-based customs office said. Before today, the metal, used in pipes and wires, gained 13 percent this year as global demand outpaced supplies.

The U.S. Dollar Index made another 15-year low on Tuesday at 79.50.
October crude climbed 74 cents to close at $78.23 a barrel Tuesday, marking the highest closing level for the front-month contract traded on the New York Mercantile Exchange. December gold climbed $8.90, or 1.3%, to close at $721.10 an ounce Tuesday. December silver gained 1.1% to close at $12.835 an ounce, while December copper climbed 4% to finish at $3.3875 a pound. Yet, the Dow closed up 180 points. You figure.

GMAC LLC, the lender partly owned by General Motors Corp. that lost more than $1 billion on mortgages, will receive as much as $21.4 billion from Citigroup Inc. to fund auto and home loans. The financing replaces a $10 billion arrangement dating from August 2006 with New York-based Citigroup. All I can say is that Citigroup has a big set of cajones. Of course, it's with shareholder funds.

9/11

9/11

A USA TODAY/Gallup poll taken Friday and Saturday revealed a record 60% say the United States should set a timetable to withdraw forces from Iraq "and stick to that timetable regardless of what is going on in Iraq." The Decider has different ideas. In addition, 53% of those surveyed say Petraeus will deliver "a biased report that reflects what the Bush administration wants the public to believe."

According to the WSJ, KKR is willing to make concessions to banks handling the $24 billion financing of the purchase of First Data, specifically agreeing to performance criteria on First Data's debt. It's better to give to get rather than to be stubbornand walk away with little.

The WSJ reported about $120 billion of commercial paper outside the U.S. is due for renewal in the next week, including $56.5 billion of asset-backed paper, which has met the stiffest resistance from investors. Issuers need to find buyers in order to roll over these short-term funding mechanisms or pay off the loans. I do not expect all of this paper to be rolled over. With the lessening of risk on minds of everyone, it would be folly to think it will be successfully rolled over. (According to the FT, while significant, $1,400bn of conduit exposure is not going to cause the banking system to topple over. Banks in Europe and the US that have provided back-up facilities to conduits – and are therefore responsible for the assets if they can no longer issue commercial paper – have enough liquidity and capital to absorb the hit. Fitch calculates that if the worst were to happen and all the assets in conduits were put back to the banks, the impact would knock about 60 basis points off the average bank’s Tier One capital ratio. That is uncomfortable but not life-threatening.) The Fitch report gives me a warm and fuzzy feeling--just like their ratings!

The market for SIVs has ceased to function during this summer's credit crisis(BusinessWeek.com, 7/27/07). SIVs hold a wide range of mortgages, credit-card receivables, and other kinds of asset-backed debt, some of it subprime. If money-market funds and other buyers stay out of the market, commercial banks could be required to lend money to SIVs and carry those loans, says Chip MacDonald, a partner and corporate finance expert with global law firm Jones Day.

The IMF chief, Rodrigo de Rato, says the dramatic repricing of risk in the financial markets should be healthy for the medium-term stability of the global economy. We'll have to see about that stability.

According to the FT, the leading commercial and investment banks have been in private talks about how to account for losses in their leveraged lending and securities businesses due to the credit squeeze. It's long overdue.

Two-thirds of respondents in a Telephia survey recently said they considered mobile ads to be unacceptable.

Bill Bonner: "The price of the metal(gold) was over $700 - if we recall correctly - the day Ronald Reagan was first sworn in as president, 27 years ago. Then, the dollar - against which gold is measured - was fundamentally much more solid than it is today. Back then, derivatives, the carry trade, private equity and diamond-encrusted skulls had scarcely even been invented."

John Hussman: " Why do we really need so badly to believe that a government entity that influences an overnight interest rate on a $41 billion pool of money (this is the entire amount of U.S bank reserves) is actually in tight control of a $13.8 trillion economy?...What the Fed does next week will certainly have an effect on short-term market psychology. The Fed can also have an impact by maintaining liquidity in the banking system in response to short-term demands for withdrawals. But managing the day-to-day demand fluctuations in a $41 billion pool of funds will not cure the much deeper solvency issues in the trillion dollar mortgage and commercial paper markets. To believe otherwise is plain and dangerous superstition."

The Oil Drum: "Saudi Aramco in its Annual Review 2006 said that last year the company's crude oil production declined by 1.7 percent, while exports declined by 3.1 percent, compared with the previous year."

The Chicago Tribune reports retailers that had largely dismissed Chinese suppliers' complaints about the soaring cost of wages, energy and raw materials are preparing to pay manufacturers more to ensure better quality. By doing so, they hope to prevent recalls that hurt their bottom lines and reputations. But those added costs -- on a host of items that include toys and frozen fish -- mean either lower profits for retailers or higher prices for consumers.
"For American consumers, this big China sale over the last 20 years is over," said Andy Xie, former Asia economist for Morgan Stanley, who works independently in Shanghai. "China's cost is going up. They need to get used to it."

Higher food prices were likely behind accelerating inflationary pressures among Chinese manufacturers in August, analysts said. China's producer price index climbed 2.6% in August from a year earlier, up from a 2.4% rise in July, marking its first rise in three months, the National Bureau of Statistics said Monday.

Palatin Technologies Inc. said King Pharmaceuticals Inc ended its collaborative development agreement on bremelanotide used in the treatment of male erectile dysfunction and female sexual dysfunction. Palatin said King Pharma exercised its right to terminate the deal after U.S. health regulators raised safety concerns about the efficacy of the results of the drug in early- and mid-stage trials.
Palatin added "Regarding the FSD program with bremelanotide, we have completed an exploratory at-home Phase 2 clinical trial in pre- and postmenopausal women and are in the final stages of compiling the data. We anticipate releasing the results later this month," stated Carl Spana, Ph.D., President and Chief Executive Officer of Palatin.
Palatin will also continue to focus its efforts on the Company's pipeline of preclinical therapeutics, including its compounds for obesity partnered with AstraZeneca and a lead clinical candidate for the treatment of congestive heart failure.

The Wall Street Journal writes that Yahoo! has considered outsourcing its search functions to Google.

Aquarian Investments Ltd's Joseph Lewis paid $890.4 million to acquire a 7 percent stake in Bear Stearns Cos.

Mexico's Pemex reports 6 pipeline blasts and suspects sabotage. Two of the blasts damaged a 48-inch natural-gas pipeline, with a third happening on a separate line, Petroleos Mexicanos, the country's state-run oil company said. Two other explosions disrupted a 30-inch line and a sixth hit a pipeline junction, all in the eastern state of Veracruz.

Intel raised it revenue range for the third quarter.

On Sunday, Apple Inc.sold its one millionth iPhone.

Weyerhaeuser Co. said Monday that it might offset eroding demand for its wood products through closures, curtailments and restricted operations.

The 4,000 jobs lost in August should be viewed in the context of "recently positive reports in retail sales," Atlanta Federal Reserve President Dennis Lockhart said Monday.

About 2.5 million people have been made homeless in Assam (India) after a second wave of flooding caused by heavy rains over the past three days, an official said on Monday.

Laura Bush "underwent a successful posterior cervical foraminotomy to relieve the pressure on the pinched nerves in her neck."

Kerry Killinger, Washington Mutual's CEO, said the Seattle-based thrift will set aside as much as $2.2 billion this year to cover potential loan losses -- $500 million more than WaMu predicted as recently as July.

Noble Energy said in a meeting with RBC Capital Markets that prices have been falling to the $185 million to $215 million range for jackup rigs, down from $225 million to $250 million.

An increase in credit card debt pushed up outstanding U.S. consumer debt in July, at a 3.7% annual rate, or by $7.5 billion, the Federal Reserve reported Monday. Consumer credit outstanding rose to $2.46 trillion in July, up from a revised $2.45 trillion in June.

October crude climbed 79 cents to close at $77.49 a barrel Monday. October natural gas closed 7.1% higher at $5.891 million British thermal units.

December gold climbed $2.50 to close at $712.20 an ounce Monday. December silver fell 6 cents to finish at $12.70 an ounce, but December copper closed at $3.256 an ounce, up 0.45 cent.

Courtesy of Bloomberg:

Following are 10-year bond yields for each of the five largest Wall Street firms:

Goldman Sachs 5.625% due in 1/2017: 5.818%

Morgan Stanley 5.45% due in 1/2017: 5.926%

Merrill Lynch 5.7% due in 5/2017: 6.110%

Lehman Bros 5.75% due in 1/2017: 6.297%

Bear Stearns 5.55% due in 1/2017: 6.448%

“In Russian roulette, five out of six times your gun won’t go off,”
McCulley of Pimco said. “It’s the same with a recession. We actually have
one in six chances of having a recession — but it’s that one that’s
really nasty.”

George Ure:"The value of the dollar is going to be set by what we offer in exchange for it. Junk paper/liar's paper is beginning to be seriously discounted,
and as I've said for a long time, the only real growth industry in America
for the past several years (since 2000 when DotComs blew up) has been
financial instruments. That's not a sound "national industry."
Countries need something a little more tangible than debt. Paper with
declining assets seems destine to become less fungible/interchangeable with
food, machine equipment, and electronics."

The Pentagon is preparing to build a military base near the Iraq-Iran
border to try to curtail the flow of advanced Iranian weaponry to
Shiite militants across Iraq, the Wall Street Journal reported.

Avery Dennison Corp. cut its 2007 earnings outlook, citing weak market conditions for the roll materials business in the U.S. and Western Europe combined
with more aggressive competitive activity and a soft retail environment impacting sales for the office products and retail information services
segments. The New York-based maker of labeling materials now expects 2007 earnings before restructuring charges and integration costs to
come in as much as 15 cents below the low end of its previous forecast of $3.90 to $4.10 a share. "Customer sentiment and external indicators
have us feeling cautious about near-term demand," said Chief Financial Officer Daniel O'Bryant in a statement. "We are taking actions to
reduce costs in light of the weaker sales environment, but we will not be able to fully offset the sales shortfall."

Market turmoil created by problems in subprime mortgages have increased the risks to the broader economy, San Francisco Fed President Janet Yellen said Monday. Speaking in San Francisco, Yellen said she saw "significant downward pressure"
on aggregate demand. She noted that conditions in financial markets can change quickly, but warned that illiquid credit markets threaten to
make the housing downturn worse, which in turn could hurt consumer spending.

The U.S. military reported the deaths of nine soldiers Monday —
including seven killed in a vehicle accident — and Iraq's prime
minister said the nation's armed forces were not ready to fight without
American help. U.S. troop deaths have risen to at least 3,771 in the 4 1/2-year war.

Untested Waters

9/10/07 Untested Waters

Creditors for Beazer Homes have served notice that they intend to call in $1.3 billion of debt, the company announced Friday. Fearing this creditors' move, Beazer filed a request in U.S. District Court in Atlanta on Aug. 21 asking the court to bar the collection efforts of U.S. Bank National Association, the trustee of the loans at issue. Beazer contends it has not violated the terms of the loan agreements. In its August court filing, the company notes that it has never missed a debt payment. Six days after Beazer's filing, U.S. District Court Judge Julie E. Carnes entered an order that Beazer should file a formal request for an injunction before she could rule. To date, no request has been filed.

"We're in untested waters right now in terms of the complexity of the financial instruments in play," says Stephen Mihm, author of the just-published "A Nation of Counterfeiters: Capitalists, Con Men, and the Making of the United States." "I'm not so concerned about what happens tomorrow, but, eventually, there's a day of reckoning," adds Mihm, who teaches American history at the University of Georgia.

Allan Sloan: "Even though you're not risking your capital when you stash your dough in a Treasury money fund, you're risking something: your income. Yields on short-term Treasury securities have plunged because investors seeking a safe haven have poured so much money into that market. The average Treasury fund yielded 4.20 percent on Aug. 14, according to iMoneyNet. The most recent yield: a mere 3.62 percent. That's a 15 percent drop in a bit over three weeks. During that same period, the average yield on "prime" money funds has actually risen, iMoneyNet says, and is up to 4.64 percent from 4.56. In other words, the spread between Treasury funds and other funds has almost tripled - to 1.02 points from 0.36 of a point - almost overnight." My questions are simple. The dollar made a 15-year low on Friday as seen in the U.S. Dollar Index. Are you willing to buy a Treasury bill and see your purchasing power tank? Does a printing press make a Treasury bill risk free?

The WSJ reports that growing uncertainty about the U.S. economy -- prompted by the recent liquidity crisis in credit markets caused by subprime mortgage loan risk -- "in part" may translate into some uncertainty within the Federal Reserve's current inflation outlook, Philadelphia Federal Reserve President Charles Plosser said Saturday. But he added that the reserve system seems to be dealing effectively with such uncertainty by providing more liquidity in the form of repurchase agreements and by having lowered the discount rate and increased temporarily the term during which funds borrowed can be held. ``Disruptions in financial markets can be addressed using the tools available to the Federal Reserve without necessarily having to make a shift in the overall direction of monetary policy,'' Plosser said yesterday. One might note liquidity does not equate to credit worthiness. Preach liquidity to the Beazer creditors.

According to the FDA, Boston Scientific committed "serious violations" of federal regulations by failing to report two deaths in a clinical trial. That's comical. What's is the definition of a non-serious violation? Heartburn?

Listening to Bush, you get the thought that just maybe he has begun drinking again. He referred to Australia as Austria and to APEC as OPEC. The next thing he might state is that, since we invaded Iraq, 37 of our Finest have been killed rather than 3700+.

According to the SF Chronicle, Fair Isaac has devised new formulas for the three major U.S. credit bureaus - Experian, Equifax and TransUnion - that will no longer factor authorized user accounts into credit scores. While the move will put an end to piggybacking, Fair Isaac says as many as 3.3 million people in the United States will effectively lose their credit score because their credit history was established only through authorized user accounts. The company also said about one-third of about 165 million people who qualify for a Fair Isaac score have at least one authorized user on one of their credit accounts, usually a spouse, child or other family member. John Ulzheimer, president of educational services for Credit.com in San Francisco, which provides credit and personal finance services, said consumers without established credit scores will have a difficult time obtaining loans or applying for credit online or through an automated system - and they probably won't realize why. The majority of those affected by the formula change are women, he added. "When people get married, one of the spouses changes the way they use credit, and in more cases than not it's the woman," Ulzheimer said. "The problem is that 50 percent of people in this country who get married also get divorced. If these people have nothing but authorized-user history, they'll be starting with a new credit score."

International oil markets have enough oil, but a lack of capacity to refine it was contributing to high prices, OPEC's president told reporters on Sunday. "Current supplies to the petroleum market are sufficient," OPEC President and United Arab Emirates Oil Minister Mohammed al-Hamli said. OPEC's output was just over 30 million bpd, he said. OPEC produced 30.37 million bpd in August, over a third of the world's 85 million bpd supply, according to a Reuters survey.

Satyajit Das: "There is no difference between a run on a bank and shutdown of access to funding from the capital markets. US mortgage lenders faced old-fashioned runs. Central banks pumped money into the system. The Fed cut the discount rate. Four major US banks used the discount window: “to encourage its use by other financial institutions”. They did not need cash. It was a sign of strength. In the words of financial historian, Charles Geisst, it was : “like someone from the Upper East Side being seen in .. Wal-Mart”. The problem was credit risk not liquidity. Lack of information and diffusion of risk meant that no one was certain who had exposure to what or to whom. EBC governor Jean-Claude Trichet pleaded for everybody “to keep their composure”. It was reminiscent of Emperor Hirohito’s response to the bombing of Hiroshima: “the War situation has developed not necessarily to Japan’s advantage.”...The new liquidity factories were based on the new age idea of “risk transfer”. The shell game requires three shells and a small, soft round ball, about the size of a pea. The pea is placed under one of the shells, then quickly the shells are shuffled around. Bets are taken from the audience on the location of the pea. It is a confidence trick used to perpetrate fraud. Through sleight of hand, the operator easily hides the pea, undetected by the victims. Risk transfer is the shell game of the credit markets; a short con, quick and easy to pull off. Central banks believe that if banks sell off their risk then it is distributed widely reducing the chance of a crash. Banks frequently don’t sell off their real risks. For regulatory capital reasons, they sell off less risky loans. In a CDO, the bank typically takes all or a portion of the equity tranche. This is “hurt money” or the “skin in the game” to reassure other investors. Banks must hold the loans until they can be sold. If there is a market disruption and the bank is unable to sell then the risk remains with the bank. The risk may also return to the bank via the back door. Where it acts as a prime broker –executing trades, settling transactions and financing hedge funds – the bank lends to investors using the CDO securities created as collateral. If the value of the securities falls and the hedge fund is unable to post additional margin to cover the loss then the bank is exposed to the risk of the securities. The bank assumes that it can sell the securities it is holding to pay itself back. There are few prime brokers - three dominate the business - concentrating the risk...As the 2007 credit crisis unfolded, there was no liquidity for structured securities. There was only one marketmaker - the person who sold it to you in the first place. In a dealing room during a crisis, the first rule is do not answer phone calls from clients. The second rule is say “wrong number” if you accidentally pick up the phone. Inability to price or trade means that fund managers cannot establish current portfolio values or allow withdrawals of investor money. This forced funds to suspend withdrawals. Prime brokers could not establish the value of collateral. Where investors failed to make “top up” margin calls, the prime brokers could not sell the collateral securing their loans. They couldn’t get back their money and were at risk of further falls in the value of securities..In Western societies, there is an increasing obesity problem, in part caused by poor diets that include fast food. A diet of cheap and excessive debt has created a bloated financial system. Crash diets rarely work. The solution requires will power, a sensible but reduced food intake and exercise. In financial markets, the resolution requires regulatory will and an imposition of market disciplines on errant investors and banks. It also requires a sharp reduction in debt levels and addressing the problems of risk transfer, model risk and market transparency.I am not hopeful that the required reassessment will occur. The current credit crunch will be the new wonder diet snack for financial markets. It will have some short term effects but leave the root cause untreated."

Mike Burk: "The 3rd year of the Presidential Cycle is the strongest of the 4 and, since 1939, the first 9 months of the 3rd year of the Presidential cycle have never been down. Although up, this year ranks as the worst since 1947...The DJIA reached its all time high on July 19 and a recent low less than a month later on August 16 when the NYSE recorded the 3rd highest number of new lows ever at 1132. The extreme number of new lows at the mid August low along with the continued underperformance of the secondaries suggest this decline has further to go...Seasonally, the strongest part of September is over and most indications are we are in the down part of the cycle. I expect the major indices to be lower on Friday September 14 than they were on Friday September 7."

China's consumer price index leapt from 4.4 per cent in June to 5.6 per cent in July - a 10-year high, and up from only 3.3 per cent in March. "China has exported deflation in the past, but that's now changing," says Gerard Lyons, chief economist at Standard Chartered. "And as inflation becomes more of a concern around the world, the inflationary impact of China is becoming much more important." "China is only in the early stages of a rapid industrialisation - so its commodity demand will become even more inflationary over time," says Gabriel Stein, a senior economist at Lombard Street Research. "And now the deflationary benefits of cheap Chinese labor are receding as well, as the country tries to move up the value chain."
China's currency, the yuan, has risen almost 10 per cent against the dollar since 2005, pushing up export prices even more.

Audre Lorde: “If I didn't define myself for myself, I would be crunched into other people's fantasies for me and eaten alive.”

Libor

9/9/07 Libor

Randall Forsyth: "Why the divergent action between Libor and the two-year Treasury, both of which typically track the funds rate? It's a matter of trust, says Robert Kessler, who heads the eponymously named Kessler Investment Advisors, a Denver-based manager of Treasury securities for institutions and wealthy individuals. Unlike interbank lending, Treasuries are free of credit risk. And even though Libor is based on rates from the world's largest banks, confidence is so fragile that the market demands a premium to lend past overnight. Moreover, "tiering" has returned to the money market, with Barclays and Credit Suisse posting three-month rates of 5.80%, eight basis points above Libor, as calculated by the British Bankers' Association. All of which would be largely academic except that Libor will determine the rate on billions of dollars' worth of American adjustable-rate mortgages. ARM resets are set to climb sharply, to over $50 billion per month starting last month through year end, reaching a crescendo over $100 billion by next March. Cumulatively, some $1.3 trillion of ARMs will reset over the two years through December 2008. Most of those ARMs will be reset at a spread of several points over Libor, meaning some of those borrowers may face mortgage rates of close to 10%. The recent rise in Libor will exacerbate this squeeze. Indeed, a 25-basis-point cut in the funds rate would merely offset the rise in Libor, leaving actual borrowing costs unchanged for much of the economy."

July job growth was revised down to 68,000 from 92,000. June gains were revised to 69,000 from 126,000. This is why I stopped wasting my time predicting employment. Revisions make the effort meaningless.

Yves Smith: "Those who have been following the job creation story weren't surprised at the weak BLS employment (the so-called "non-farm payroll") report today, or by the fact that it revised the results for the last three months downward by 81,000. Various commentators (see here, here, and here) have observed that the rises reported in recent months have been due almost entirely to a "voodoo calculation, the "birth/death model" a plug to allow for business creation and failure (one we've commented on before). Note this feature was added in 2001.And where had these jobs supposedly been created? In construction. Need we say more?"

Wells Fargo & Co. will help borrowers struggling to make payments and, in some cases, will change loan terms rather than foreclose on properties, the company's chief executive said Friday.

The Daily Reckoning: "The problem is that even though the feds are making money available, lenders are becoming reluctant to lend and borrowers are becoming reluctant to borrow. That's why we see the London Inter-Bank Lending Rate - LIBOR - so far above the central banks' base rates. The government, through central bank intervention, can set one rate. But the banks have one of their own. And right now, banks are wary about lending a lot of money to each other - because they can't figure out what each other's real financial situation is."

Nouriel Roubini: "The utterly ugly employment figures for August (a fall in jobs for the first time in four years, downward revisions to previous months’ data, a fall in the labor participation rate, and an even weaker employment picture based on the household survey compared to the establishments survey) confirm what few of us have been predicting since the beginning of 2007: the U.S. is headed towards a hard landing."

Brett Steenbarger: "Fri. decline left us with 28% of SPX stocks above their 50 day MA, down from 50% earlier this week. Broad loss of momentum."

Seattle-based Nordstrom opened its first store Friday in Massachusetts. The store in the Boston suburb of Natick is 144,000 square feet, typical for a new Nordstrom, and features a men's grooming studio — another first for the retailer — eyebrow bar and sunglass boutique. Nordstrom now has 99 full-line department stores in 28 states. If I should ever get lost and visit an eyebrow bar, please kick me where it hurts.

A US federal judge declared in a ruling on Friday that Iran must pay $2.65 billion to nearly 1000 family members and a few survivors of the 1983 bombing of the US Marine barracks in Lebanon that killed 241 soldiers. I know the courts are backed up, but 24 years.

Sen. Dick Durbin (D-Ill.), the No. 2 leader in the Senate, said Friday that he will not vote for more supplemental war funding bills unless a strategy for withdrawal is attached, signaling a new level of conflict between the White House and Congress over the war. I wonder if gutless Pelosi and gutless Reid will choose the same Durbin strategy.

The 2-year Treasury yields 4.10%. The 3-month Libor rate is 5.72%. What does it matter if the Fed lowers fed funds to 5% on Sept.18? At least $329 billion, or 40% of all U.S. corporate bonds sold in 2007 used Libor as a benchmark.

Between The Hedges: "Moreover, the 10-week moving average of the percentage of bears is currently at 39.3%, a high level. The 10-week moving average of the percentage of bears peaked at 43.0% at the major bear-market low during 2002. The 50-week moving average of the percentage of bears is currently 37.1%, an elevated level seen during only two other periods since tracking began in the 1980s. Those periods were October 1990-July 1991 and March 2003-May 2003, both of which were near major stock market bottoms. The extreme readings in the 50-week moving average of the percentage of bears during those periods peaked at 41.6% on Jan. 31, 1991, and 38.1% on April 10, 2003. We are currently very close to eclipsing the peak in bearish sentiment during the 2000-2003 market meltdown, which I still find astonishing, notwithstanding the recent correction. The S&P 500 is still 101.3% higher from October 2002 lows and is only 5.9% lower from its recent record set in July. "

Mike Shedlock: "The unemployment rates is based on the Household Survey. Notice how 340,000 civilian jobs were lost and total employment fell by 316,000 jobs, but magically unemployment fell by 24,000. Raise your hand if that makes sense to you."

India's Sensex equities index gained 1.8% (up 13.1% y-t-d). China's Shanghai Composite index added 1.1% to close at yet another record high (up 97% y-t-d and 218% over the past year).

Bloomberg reported that "IndyMac Bancorp Inc., the second-biggest U.S. mortgage company, plans to cut 10 percent of its workforce and lower the dividend as housing sales falter and home-loan defaults climb. It may post a loss for the first time in at least eight years."

Robin Bhar, of UBS in London, added that gold physical demand was accelerating in India, the world’s largest gold consumer, China and the Middle East. “Gold underlying fundamentals are improving,” Mr Bhar said.

Abraham Lincoln: “These capitalists generally act harmoniously and in concert, to fleece the people”

Insolvency

9/7/07 Insolvency

Bill Bonner: "The problem is not illiquidity, it’s insolvency – caused by too much credit, not too little. People, businesses, nations – debtors owe more than they can repay. Borrowing more may postpone the crisis...maybe even disguise it; it cannot solve it.

Chesapeake Energy will cut 6% of its natural gas output due to low prices.

Wal-Mart's August sales at stores open at least one year rose 3.1%. Including the impact of fuel sales same-store sales rose 3%. The company expects same-store sales of its U.S. operations for the September period to be between 1% and 3%. With the stock at $42+, one might consider buying the stock and selling a $45 call against the purchase. That seems like a low risk strategy to me.

The European Central Bank, on a day in which it injected $57 billion (42 billion euros) into the banking system, held interest rates steady Thursday. The European Central Bank said that 526 million euros ($715 million) was borrowed at its marginal lending facility, which is akin to the Federal Reserve's discount window, at 5%. The ECB separately conducted a one-day tender.

Nordstrom Inc.'s August same-store sales rose 6.6%.

China lifted the reserve requirement ratio by 0.5-percentage points Thursday, forcing domestic banks to increase the amount of funds they must set aside as reserves in relation to loans for the seventh time this year. Starting Sept. 25, banks must set aside 12.5% of deposits as reserves, the People's Bank of China said on its Website Thursday. The central bank statement said the policy change was targeted at "strengthening liquidity management in the banking system and checking excessive money and credit growth".

The Bank of England said it's too soon to tell how the disruption in financial markets will impair the availability of credit to companies and households, as it kept its key interest rate on hold at 5.75%.

Nippon Steel, the world's second-largest maker of the alloy, lifted its sales forecast for the fiscal year ending March 30 to 4.8 trillion yen, an increase of 0.8% from 4.76 trillion yen forecast earlier, the company said in a statement posted on its Website. The steel maker intends to pay an interim dividend of 5 yen per share, up from 4 yen a year earlier. Nippon Steel also said it would lift its first-half net profit forecast to 170 billion yen from 160 billion yen.

Monster Worldwide Inc.'s online-recruitment index showed its lowest-ever annual growth rate in August, "a further indication of softening employer demand for labor," the online recruiter said. The index rose 3 points in August from July, to 186, reflecting "a slight rebound" in the availability of jobs online across a majority of industries, occupations and regions. The index sat at 173 in August 2006. The index rise was smaller than usual for August and reduced the index's annual growth pace to roughly 7.5%, the lowest on record.

Anglo-Australian miner BHP Billiton and Brazilian miner Companhia Vale do Rio Doce, or CVRD, may team up to launch a takeover bid for mining rival Rio Tinto, according to reports citing market rumors.

Jeremy Grantham: "Even if the credit crunch passes without a major catastrophe, the prices of stocks, bonds and real estate have a long way to fall."

Thomas P. Au: "When Bill Gross of Pimco shocked the investment world by estimating the value of the Dow at 5000 in 2002, he was probably referring to its bond value. My own estimate of this metric, updated to 2007, is something like 6700. In a 1930s scenario, blue chip stocks won’t go to zero, but they will fall to the point where they (collectively) yield more on dividends than Treasury bonds will yield in interest. Then stocks will be trading like bonds, having lost all of the option premiums that characterized their valuations during the period of general belief in the new economy. And in worst case situations like 1932 and 1974, the Dow went to about half of its bond value, a valuation that would put it between 3000 and 3500."

The Energy Insider: "Solar costs about 25 cents a kilowatt hour. That's compared to about 9 cents a kilowatt hour for natural gas and 5 cents a kilowatt hour for modern coal-burning plants, as well as 6 cents a kilowatt hour for wind energy if tax considerations are included. The good news is that the cost of solar power is falling all the time. It once stood at $1 a kilowatt hour and advocates say that it could soon cost 12-16 cents a kilowatt hour."

Investment banks need to restore investor confidence by making a concerted effort to reveal the full extent of any losses arising from the credit market turmoil, Josef Ackermann, chief executive of Deutsche Bank, has urged. Mr Ackermann said investors lacked confidence in the financial markets and in the banking sector because they were uncertain of the size and location of the losses. He said investment banks should provide clarity by valuing their credit exposure to current market levels.

According to the FT, Kazakhstan on Thursday demanded greater control over the giant Kashagan oilfield in the Caspian Sea on Thursday, complaining that inadequate management of the project by a foreign consortium led by Italy’s Eni had damaged the Central Asian republic’s economy and reputation as a reliable global energy supplier. Karim Massimov, Kazakh prime minister, said that KazMunaigas, the state oil company, should be appointed as co-operator at Kashagan where Eni had proved “incapable of fulfilling some of its obligations. KazMunaigas currently holds an 8.33 per cent interest in Kashagan alongside partners Eni, Shell, ExxonMobil, Total, ConocoPhillips and Inpex of Japan.

Biogen Idec sees FY non-GAAP EPS $2.60 to $2.70.

The Reserve Bank of Australia has widened the range of securities it’s willing to buy in so-called repurchase agreements in order to boost the amount of money available in the nation’s banking system.

Countrywide Financial is laying off another 900 employees as a result of decreased lending and increased defaults resulting from the worst U.S. housing slump in two decades.

India's Ranbaxy Laboratories has submitted a preliminary bid for U.S.-based Bradley Pharmaceuticals, the Economic Times reported on Thursday, citing a source close to the development. Indian media had earlier reported Hyderabad-based Dr Reddy's Laboratories was in the race for Bradley.

Target Corp. expects September sales at stores open at least one year to rise in a range of 4% to 6%. Its August same-store sales rose 6.1%

Unit labor costs increased at a 1.4% annual rate, down from the earlier estimate of 2.1%. Over the past four quarters, the output per hour of American businesses has increased 0.9%, up from the initial estimate of a 0.6% rise. Unit labor costs was up 4.9% over the past year, the fastest pace since the third quarter of 2000.

The number of initial claims in the week ending September 1 fell 19,000 to 318,000. It's the lowest level since the week ended Aug. 4.

Credit derivatives awarded the top ratings by Moody's Investors Service and Standard & Poor's may be as vulnerable to default as high-risk, high-yield bonds, according to independent research firm CreditSights Inc.

According to the Morgage Bankers Association's quarterly delinquency survey, a seasonally adjusted 0.65% of loans on one- to four-unit residential properties entered the foreclosure process during the period, the highest level in the survey's 55-year history. In the first quarter, when the previous record was set, 0.58% of loans entered the process; a year ago, 0.43% entered the process.

The ISM non-manufacturing index was unchanged at 55.8% in August.

U.S. natural gas supply up 36 bln cubic feet: Energy Dept.

The American Petroleum Institute reported a fall of 4.8 million barrels in crude supplies for the week ended August 31. The Energy Department had reported a decline of 3.9 million barrels for the latest week. Motor gasoline supplies were up 1.6 million barrels, the API said. The government reported that supplies were down 1.5 million barrels. Distillate supplies climbed 3.3 million barrels, the API said. They were up 2.3 million barrels, according to the Energy Department.

The outstanding volume of commercial paper fell by $54.1 billion to $1.93 trillion, or 2.7%, last week, the Fed reported Thursday. Outstanding paper dropped by a record $259 billion, or 11.9%, in August.

Syria has said its air defenses opened fire on Israeli warplanes after they violated its airspace in the north of the country.

Dallas Fed President Richard Fisher said recent economic data has been "rather positive," and pointed specifically to the August ISM services index, which was unchanged at 55.8%. Fisher said anecdotal reports from throughout his district and across the country point to "a labor shortage." "People are having trouble finding everything from day workers to bank tellers," Fisher said. "The good news is the financial turmoil that we have recently seen came against a background of a very strong economy. I don't see the dynamics of that growth changing overnight," he said.

October crude climbed 57 cents to close at $76.30 a barrel Thursday. December natural gas retreated from a high near $6 to close at $5.65 per million British thermal units, down 2.7%.

December gold climbed $13.90, or 2%, Thursday to close at $704.60 an ounce. December silver gained 17.8 cents, or 1.4%, to finish at $12.533 an ounce and December copper tacked on 1.2% to close at $3.3025 a pound.

Atlanta Fed President Dennis Lockhart: "So far, I have not seen hard or soft data that provide conclusive signs that housing problems are spilling over into the broad economy."

Baker Hughes Inc. filed to sell up to $2 Billion in a mixed securities. The "Use of Proceeds": acquisitions; working capital; capital expenditures; repayment of debt; and repurchases and redemptions of securities. I continue to believe that an acquisition of BJ Services makes a lot of sense to me.

Conduits

9/6/07 Conduits

The London interbank offered rate, or Libor, increased to 5.72 percent, the highest since January 2001, from 5.70 percent yesterday and 5.36 percent at the end of July, the British Bankers' Association said. Other short-term rates also rose, including the three-month rate for the euro, which climbed to 4.76 percent from 4.75 percent, its highest since 2001.

Boeing's first Dreamliner 787 flight might be pushed back until November. There are continue delays in building the plane. The fact is the company does not have the necessary fasteners.

The WSJ reports that the housing slump strains budgets for states and cities. It has cut into fees, taxes, and other related income.

Yahoo agreed to buy online advertising company BlueLithium for about $300 million. BlueLithium is the fifth largest ad network in the US and second largest in the UK with 145 million unique visitors each month.

"Higher Libor rates affect the whole economy by tightening the budgets of borrowers large and said small," said Lou Crandall, chief economist with Wrightson ICAP in NY.

BlackRock's Larry Fink: "I don't believe the Federal Reserve should ease. It's a foolish, foolish statement for people to make with the economy performing in line with the Fed's current forecast. It's a good thing for regulators to see risk premiums become more appropriate."

Forbes: "As lenders tighten their standards more Americans chose to rent, not own. That's good news for landlords."

Minyanville: "Remember, the dollar is not backed by real money, but by debt. When that debt is destroyed, the dollar becomes worth much less.
This is when gold will rise precipitously against the dollar and other currencies as well. Those currencies backed by real savings will do relatively better."

WSJ: "Though few investors realize it, banks such as Citigroup Inc. could find themselves burdened by affiliated investment vehicles that issue tens of billions of dollars in short-term debt known as commercial paper. The investment vehicles, known as "conduits" and SIVs, are designed to operate separately from the banks and off their balance sheets. Citigroup, for example, owns about 25% of the market for SIVs, representing nearly $100 billion of assets under management. The largest Citigroup SIV is Centauri Corp., which had $21 billion in outstanding debt as of February 2007, according to a Citigroup research report. There is no mention of Centauri in its 2006 annual filing with the Securities and Exchange Commission."

Citigroup Inc. will close its $2.4 billion Tribeca hedge fund and return money to clients five months after it agreed to buy investment manager Old Lane LP, which uses a similar strategy.

Greg IP: "Federal and state banking regulators urged lenders and investors to restructure the loans of millions of borrowers at risk of losing their homes as their adjustable-rate mortgages reset to a higher rate. Lenders should "review to determine the full extent of their authority to identify borrowers at risk of default" and find a way to keep the borrower in a home, the regulatory bodies said in a joint statement."

According to the FT, market turmoil and the woes in the US subprime mortgage market will crimp world economic growth this year, the Organisation of Economic Co-Operation and Development said on Wednesday, as it called for better regulation to address the “serious imperfections” in US housing markets and credit markets worldwide.

Costco Wholesale Corp. said Wednesday its August same-store sales rose 2 percent primarily on strong international sales. For the month, international same-store sales increased 8 percent while U.S. same-store sales edged up 1 percent.

U.K. consumer confidence fell to a four-month low in August as Britons became less willing to spend after interest rates rose, Nationwide Building Society said.

Canadian Pacific Railway Ltd has agreed to buy the Dakota, Minnesota & Eastern Railroad Corp for at least $1.5 billion cash to expand its network and increase access to U.S. Midwest markets. Canada's number two railway will expand by about 2,500 miles of track by acquiring DM&E, the largest U.S. regional railroad, from London-based Electra Private Equity , which originally invested in the company more than 20 years ago.

Cognos Inc.said Wednesday it'll pay $17.87 a share in cash to buy Applix Inc. in a deal valued at about $306 million net of Applix cash on hand.

The Bank of England said it's upped its aggregate reserves target by 6%, which it says should help to "relieve some pressure on interest rates for overnight borrowing which have, at times during the maintenance period over the past month, been unusually high relative to the bank rate."

Japanese bank minister Yoshimi Watanabe: "There is a risk that players who had invested by borrowing Japan's low interest rate currency would unwind such yen carry trades," he said, adding that he'll be watching Japanese banks on their exposure to U.S. subprime losses.

Announced lay-offs surged 85 percent to 79,459 in August from 42,897 in July, according to Challenger, Gray & Christmas Inc, an employment consulting firm. August's job cuts were the highest since February, when they totaled 84,014. "Nearly half of the August cuts came from the financial sector, as dozens of mortgage and subprime lenders caved under the pressure of a sinking housing market," Challenger, Gray & Christmas said in a statement. Financial job cuts totaled 35,752 in August, the highest monthly total for the industry since Challenger, Gray & Christmas began tracking in 1993, the firm said.

Mortgage insurer MGIC Investment Corp. won't proceed with its acquisition of credit risk management provider Radian Group Inc. because of the challenging conditions in the mortgage markets, the companies said Wednesday.

Prices of U.S. commercial real estate could fall up to 15% in what would be the worst decline since the 2001 recession, Bloomberg reported Wednesday. "People aren't willing to do deals right now," said Howard Michaels, chairman of Carlton Advisory Services. "The expectation is that prices will come down." In July, investors bought the fewest commercial properties in almost a year and apartment building purchases were down 50% from June. Last month, the Archstone-Smith Trust postponed its $13.5 billion sale to a group led by Tishman Speyer Properties until October. Mission West, which owns commercial properties in Silicon Valley, said two weeks ago that its $1.8 billion sale might collapse because a bank has withdrawn funding. "There are so many deals falling apart," said David Lichtenstein, CEO of commercial property owner Lightstone Group. "People who can get out are getting out." Morgan Stanley industry analyst Matthew Ostrower forecast that average prices for commercial properties could fall 5-15% in the next two years.

GM says it will sell a million cars in China this year. According to Reuters, the Chinese market will buy 8.5 million new cars this year, putting GM's share at 12%.

Since June, the amount of distressed bonds has risen more than fivefold to $24.8 billion, according to an index Merrill Lynch & Co. began compiling in 1997.

Wilfred Hahn: "Central banks are really not well equipped to fix liquidity (much less solvency) problems in the non-bank financial world. That's exactly where the major crises are hitting...Unfortunately, the wrong indicator is being observed. The crash was in credit markets, not equities. Assuredly, the effects of this crunch are now working their way into the real economy. As in a tsunami, the after waves must be anticipated. Usually, the second and third waves are the largest. Equity markets at present are therefore falsely comforted during this quiet period in between, even as the backwash has already carried out its first victims. Important to realize is that the financial market topography is very different from that which present-generation analysts are accustomed. To assume that just because stock markets may not have crashed as perhaps in October 1987, that therefore significant damage has not occurred to financial markets and future economic prospects is likely to be wrong...Much of North America's financial system now lies outside of the official monetary system...Therefore, the powers of the "lender of last resort" -- a central bank -- during a period of liquidity crisis are greatly diminished. Today, the member commercial banks of the 12 reserve districts of the US central monetary system represent only a small portion of total credit assets (now well less than a third.) Most credit, therefore, is manufactured outside of the banking system and is not subject to fractional reserve constraints. It is only banks that have access to the credit window of the Federal Reserve System...At the present time, virtually all indicators continue to confirm not only a continuing deleveraging process but also a broad-based consumer retrenchment. Coincident with the broader impact upon securitized credit structures, is a compression of the household sector balance sheet in the US. It is highly unlikely that this latter development is anywhere near ending in the foreseeable future. This is not a third-world debt situation. For now, at its very epicenter are the deteriorating balance sheets of the richest households in the world, who happen to live mostly in the largest economy in the world. We also conclude that complacency and confidence are still far too high. Given the nature of the forces at play and the extent of the damage to credit markets over the past month or so, it would be a serious error to gloss over realities with simple and optimistic "happy talk."

Employee confidence plunged in August, falling to the lowest level since Hurricane Katrina hit, according to the Hudson employment index released Wednesday. The Hudson index fell by 6.6 points (the most ever) to 99.2. "August's business news took a heavy toll on workers' perceptions of their finances," Hudson said. The percentage of workers who said their finances were improving fell from 43% to 37%. Employees were also slightly more concerned about layoffs at their company and about losing their own job. "With news of dramatic declines in stock averages and continued downturns in the housing and mortgage markets, August proved to be an incredibly tough month on workers' psyches," said Robert Morgan, president of Talent Solutions at Hudson, a recruiting company.

Employment in the U.S. private sector grew by 38,000 in August, the weakest in four years, according to the ADP employment report released Wednesday. Adding in some 27,000 government jobs typically added but not covered by the ADP report, it suggests nonfarm payrolls grew by about 65,000. The goods-producing sector fell by 49,000 jobs in August, including 33,000 in manufacturing. The services sector added 87,000 jobs in August.

Demand from India, South Korea, Egypt, Taiwan and Japan is sapping global supplies of wheat. Australia said it may produce 29 percent less of the grain than expected.

No one was in favor of cutting the Federal Reserve's discount lending rate during a key Fed meeting on Aug. 6, just 11 days before it did cut the rate in an emergency move, according to a meeting summary released Tuesday.

Tyson foods now expects full-year 2007 EPS of $0.72-0.80, down from its previous guidance of $0.82-0.90.

Contract signings on existing homes fell by 12.2% in July -- the largest drop since the pending homes sales index started in 2001, the National Association of Realtors reported Wednesday. The index hit its lowest level since September 2001. Pending sales are 16.1% below July 2006.

Wal-Mart traded at a new 52-week low on Wednesday.

Home Depot Inc.'s Chief Executive Frank Blake characterized the rest of 2007 as "tough," and said much of 2008 will "face headwinds."

Petraeus, in an interview with ABC News, signaled he was looking at March for reducing troop levels.

John Dugan, Comptroller of the Currency: "The worst problems we have seen in the markets ... have occurred outside the commercial banking sector."

A B-52 bomber mistakenly loaded with five nuclear warheads flew from Minot Air Force Base, N.D, to Barksdale Air Force Base, La., on Aug. 30, resulting in an Air Force-wide investigation, according to three officers who asked not to be identified because they were not authorized to discuss the incident.

Dick Cheney has ordered top Neo-Con media outlets, including Fox News and the Wall Street Journal, to unleash a PR blitz to sell a war with Iran from today, according to Barnett Rubin, the highly respected Afghanistan expert at New York University. The New Yorker magazine reports that Rubin had a conversation with a member of a top neoconservative institution in Washington, who told him that "instructions" had been passed on from the Office of the Vice-President to roll out a campaign for war with Iran in the week after Labor Day.

Starbucks Corp. expects dairy prices to be a "negative" in 2008. Peter Bocian, Starbucks' executive vice president and chief financial officer backed the company's fiscal 2007 profit forecast in the range of 87 cents to 89 cents a share and net revenue growth of about 20%. He said hitting the high end of the range will be "challenging." For fiscal 2008, the company also said it expects revenue growth of about 18%.

October crude climbed 65 cents to close at $75.73 a barrel Wednesday. October natural gas gained 3.1%, or 17.6 cents to finish at $5.805 per million British thermal units.

December gold fell 80 cents to close at $690.70 an ounce Wednesday. December silver fell 9.3 cents to close at $12.355 an ounce. December copper was the biggest loser, down 4.3 cents, or 1.3%, to close at $3.263 a pound.

"Outside of real estate, reports that the turmoil in financial markets had affected economic activity during the survey period were limited," the Fed said in the survey, which concluded before Aug. 27. "Economic activity has continued to expand nationwide", the Fed said.

On Wednesday there were few bright spots in the equity market. In particular, the financial sectors weakness stood out.