Tuesday, September 26, 2006

9/26 Global Markets Hope "Mid-Cycle" "Soft Landing" Bet Can Hold thru Year-End Bonuses

September 26 (Econotech FHPN) -- As the third quarter draws to a close, global financial markets seemed more contradictory than usual, which is normal during possible key inflection periods.

Ten-year Treasury yields have plummeted about 60 bps during the quarter, as if the clearly inverted yield curve was discounting a sharply slowing economy and Fed rate cuts, which can’t come soon enough for broker-dealers increasingly dissatisfied with the “negative carry” of funding lower-yielding longer-term securities with higher-yielding short-term ones. Reflecting economic uncertainty in this period, the spread in forecasts for long-term rates between the economists at the five leading U.S. investment banks is now quite dramatic

Yet as I have written a number of times since June 2 link when global financial markets were sharply declining, equity markets still remain in their now 4-year bull market, judged on the most simplistic trend criteria (e.g. MSCI World (ex US) and the NYSE are currently well above their rising 200-day moving averages), indicating the equity markets’ recent diminution of concern over the prospects of a successful "soft landing" (e.g, the IMF recently forecast global economic growth would remain right around 5% for the fourth straight year in 2007, though with a modest shift away from the U.S.).

Within the equity markets themselves, the clear and interrelated leaders over the previous 3-4 years, namely energy and emerging markets, lagged in the third quarter, especially MSCI Asia-Pacific and oil services, while previous laggards, most especially U.S. technology stocks, which had seriously underperformed global equity indexes since Jan 2004, finally caught a bid in early August (see “financial markets” news summaries sections below for details, and my Aug 30 article, “Semiconductor Stocks Recently Lead,” link).

For now equity markets are overlooking that all three sectors, energy, emerging markets, and tech, are cyclical highly dependent on a healthy global economy. As are U.S. retail stocks, which in late Aug also joined the recent tech stock giddiness, with the RTH retail etf in Sep testing its previous highs in Jul 2005 and Mar 2006, as good quarterly results at Best Buy and Fed Ex helped raise hopes of U.S. shoppers buying ever more stuff from Asia this holiday season.

So if energy wasn’t working in the third quarter, trapping late-coming small investors yet once again, this time in energy mutual funds, then the hot money just turned to some old favorites of the late 1990’s TMT equity bubble, such as ORCL and CSCO, sometimes seemingly for almost no other stated reason than just because they can, to go along with a few large caps in telecom, (e.g. T), drug (MRK, PFE), etc., and especially the huge M&A and private equity buyout deals they’ve been playing all year. Now even the beaten-down homebuilder stocks are attracting interest if simply on the basis of price to book value.

It remains to be seen how much a slowdown in the energy sector will impact overall earnings growth, whose estimates have finally but slowly started to come down, and thus U.S. market multiples. In the meantime, the big five i-banks continued to post yet another quarter of very high return on leveraged legal looting (ROLLL), which is far better than their hedge fund clients have been doing.

With so much liquidity still sloshing around the world, global markets are simply being driven by hedge funds and other hyper-speculators chasing whatever they want to move, hoping to be first in and first out (their version of FIFO inventory accounting). For now, markets want to have their cake and eat it too with both bonds and stocks going up on diametrically opposite economic outlooks, and different cyclical sectors of the equity markets going in opposite directions.

Helping the hyper-speculators play their game of musical chairs with the global financial markets, the yen carry trade (borrowing at negligible Japanese interest rates) seems once again in full gear pumping out liquidity. However, the less than enthusiastic foreign buying of U.S. securities in the last monthly report bears watching if it continues.

Of course, the U.S. focuses blame on China, not its allies Japan and Saudi Arabia, and certainly not itself, for global imbalances. China’s currency has been appreciating more rapidly recently, while Japan’s remains weak (most global currency strategists predicted yen strength this year, and dollar weakness last, the exact opposite of what has occurred).

Towards the end of the third quarter, the global central bank tightening cycle manifest itself in the usual problems at weaker hands (e.g., Amaranth hedge fund, street demos in Hungary, coup in Thailand, where as elsewhere recently, the preference of Pres Bush and presumably the financial markets for election results seems conditional on self-interest).

So far, the impact of potential trouble areas seems well-contained in the financial markets, aided by the consensus that the Fed has ended its tightening cycle, coincidentally just in time for the upcoming election. The U.S. equity market has so far defied both its usual September seasonal weakness and the four-year election cycle low.

Hyper-speculators hope that with more good luck they will get through the next month of quarterly earnings reports without a serious negative change, e.g. to their 2007 earnings outlook, to get a fourth-quarter rally going right before and during the usually seasonally strong holiday period. So they keep telling anyone who will listen that Bernanke will soon cut rates, without caring too much about the implications if he actually does so.

Why I Like Charts and Leading Indicators

One reason for incorporating a technical approach to investment analysis is the difficulty in accurately forecasting economic and financial fundamentals, especially in the current business cycle. In a recent 19-page survey of the global economy in its Sep 16 issue, “The Economist” said:

“The high share of profits and low share of wages in national income are not the only numbers that have strayed a long way from their historical average. An alarming number of economic variables are currently way out of line with what conventional economic models would predict. America's current-account deficit is at a record high, yet the dollar has remained relatively strong. Global interest rates are still historically low, despite strong growth and heavy government borrowing. Oil prices have tripled since 2002, yet global growth remains robust and inflation, though rising, is still relatively low. House prices, however, have been soaring in many countries.”

In addition to charts, I also like leading economic indicators as a simple(istic?) way of cutting through a lot of often seemingly contradictory economic data.

“A closely watched gauge of future economic activity slipped for a second straight month, a performance viewed as signaling a slowdown but not an outright recession. The Conference Board reported Thursday that its Index of Leading Economic Indicators fell 0.2 percent in August following a similar decline in July. The index has fallen in four of the past five months.” (AP, Sep 21)

““I think the bigger picture here is that there is now a dawning realization that the U.S. economy is slowing," says Anirvan Banerji, director of research at the Economic Cycle Research Institute. ECRI published its Weekly Leading Index of economic indicators Friday showing a drop of 0.9% for the week ending Sept. 8. This marks the seventh straight decline and points to slower growth in the economy down the road.” (thestreet.com, Sep 15)

Some of My Other Biases

I of course have many other biases, some of which are clearly reflected in the material I have chosen for the news summaries below.

E.g., I remain somewhat skeptical of the idea that peace is going to break out in the Middle East anytime soon (see the global geopolitics news summaries below). Withholding judgment, Cheney and Israel want the termination of what they strongly allege to be Iran’s nuclear weapons program, yet Iran agreeing with them still seems unlikely to me. See the comment in the geopolitics section below of neocon-oriented well-connected Washington columnist Charles Krauthammer for what might eventually result.

For months energy fundamental analysts have been saying that oil was over-priced. Then Rice extended negotiating deadlines with Iran, and voila!, the geopolitical premium in oil’s price disappeared in just a few days in September as hedge funds driving oil up in the futures markets suddenly dashed for the exits.

Perhaps coincidentally just in time for Bernanke to become more dovish, and to help the mid-term election prospects of Pres Bush’s party. Granted, other matters were also at work influencing Pres Bush extending Iran negotiations, including the ongoing quagmire in Iraq, and the supply/demand outlook also influenced the oil price decline.

If this seems too cynical, at least it’s consistent with what I noted in my July 19 article, “Bernanke’s More Difficult Dilemma,” link:

“Global speculators hope that as Bernanke feels he is able to bring “core” inflation back under control, as the Fed currently forecasts, mainly due to slowing economic growth, the continuation of non-existent real wage growth, and a flattening of energy price increases (presumably helped by other factors, including geopolitical), then he will stop tightening.”

Some things have changed since I wrote that, especially financial speculators’ concern about inflation in the average wage/benefit, which they would consider bad, though of course not their own sky-rocketing “compensation” (see the private equity and hedge fund section below).

A second bias and a recurring focus of my web site, perhaps a little distinct from others, is how private equity and hedge funds are greatly negatively distorting the global allocation of capital solely for their benefit (e.g. see the section on private equity in my Aug 14 article, “After Fed’s Pause,” link).

If you read only one thing more in this article, then I suggest the news summary section on these funds below, where I think there is a lot of good stuff, including the quotes by Steven Cohen of SAC, one of the most successful and well-known hedge funds, from the WSJ, and from the blistering anti-management buyout op-ed by Ben Stein in the NYT. The vast majority of economic/financial commentators, bloggers, etc. just don't focus enough on this critical area, while politically oriented commentators blame the world's woes on Bush (and before that Clinton).

A third of my biases is the great historical importance of what is happening in the developing nations, most especially China, hence the need to understand this as much as possible (see the news summaries sections on China and the global economy).

In a quick glance through the IMF’s recent semi-annual reports, “World Economic Outlook” and “Global Financial Stability Review,” perhaps the following is the most important point for the long-term, though not noted in mass media reports that focused on next year’s growth forecasts:

“during 1970–2005, Asia enjoyed both faster physical capital accumulation and faster TFP growth than other developing economies; in contrast, Asia’s catch-up with advanced economies largely reflected capital accumulation.”

TFP stands for total factor productivity, and its growth is what ultimately determines rising living standards. Economists have obscure debates over this issue, but it is very important.

A fourth bias, though I try as much as possible to distinguish between positive and normative views taught in econ 101, is that both U.S. mainstream political parties seem rather hopeless in addressing critical issues.

E.g., Pres Bush’s electioneering notwithstanding, getting U.S. relations with China right will be at least as important as the “war on terror” to peace and prosperity in the 21st century.

My bias is that, if anything, this administration’s nearly monomaniacal five-year focus on the latter, without commenting on its success or lack thereof, may eventually undermine the former, if simply by taking America’s focus away from its own critical problems. Simply put, the rest of the world does not wake up every morning obsessed with terror, presumably what terrorists would like, as important as that issue is.

To balance things out, in a leader in its current Sep 23 issue, “The Economist” takes the left and Democrats to task for not coming up with viable reforms for the obvious inequities that are intrinsic to globalization (I would say the current hyper-speculative version):

“If Democrats are serious about fighting inequality, their top priority ought to be tax reform … it is a tangled mess, increasingly reliant on regressive taxes, such as the payroll tax, and full of subsidies that benefit rich people while reducing economic efficiency. The mortgage-interest deduction costs some $80 billion a year, does little to help poor people buy their own homes and does a lot to encourage rich people to buy McMansions. Over half the subsidy goes to the richest tenth of Americans … the tax code is larded with more than $700 billion-worth of inefficient subsidies. Scaling them back would improve the economy's efficiency and would free up a huge amount of money. And the best way to shift those resources is again through the tax code, by expanding the Earned Income Tax Credit (EITC).”

Btw, this quote touches on another pet peeve of mine, namely that free market types staunchly defend real estate speculation as if it were an American birthright when that market is anything but free, heavily dependent not only on tax subsidies ("The Economist" failed to mention the huge home capital gains tax breaks enacted in the late 1990s), but also deliberately distorted negative real interest rates, zoning laws, government-sponsored entities buying trillions in mortgages, etc. This willful blindness is par for the course.

The Critical Link Between Economics and Morality

A fifth bias is that the critical reforms necessary are to the speculative financial/monetary system, yet that remains off the radar screen, for both parties and the mass media. As to why, most know Bush/Cheney's financial support, see the news summary in U.S. politics below on Hillary Clinton being a major beneficiary of political donations from Wall Street investment banks and hedge funds.

Many of the most prominent international economists repeatedly in recent years plainly have spoken out against the economic and moral problems of the developing nations financing the U.S. massive twin deficits. Here's just a recent example:

"[Lawrence Summers] said: ``I don't see evidence that there are strong correcting forces. I think the greatest area of risk is yet to come.'' … says it's irresponsible for the U.S. to demand that China tackle its imbalances without addressing its own. Summers also wonders about the precariousness of a rich country like the U.S. being supported by money from developing nations." (William Pesek, Bloomberg, Sep 22)

Reforming the monetary/financial system to make the U.S. earn its way once again, as it had proudly done for two centuries, would profoundly change everything, including the low image of the U.S. in the world and the social/political mass culture of this nation.

If the rules of the monetary/financial system were changed so that the U.S. would once again fairly pay its way, then wouldn't U.S. corporate innovation become focused on what the rest of the world really needs, not on MySpace, YouTube, etc? And wouldn't Americans be proud in doing so? Wouldn't that be a more positive image and vision for the world?

In the final news summary section below, Social - U.S., there are two quotes about widespread MBA cheating and lack of honesty. Though very disturbing, this can hardly be too surprising to anyone who has ever seen the tv shows on PBS of filled lecture halls of MBA students at leading schools just lapping up with a big "we're so special" grin what CEOs on the stage are telling them about how they boosted their companies' stock prices, and hence implicitly their ill-gotten stock options, by making the "touch but necessary" choices, the standard euphemism for laying off workers and reneging on contractual benefits and pension plans. It's really a sorry spectacle, I'm sad to say, but not surprising, under the distorted incentives prevalent in the current hyper-speculative version of globalization.

Again, unless the monetary/financial system is significantly changed such that the U.S. dollar "free lunch" is ended and the U.S. once again resumes its proud heritage of paying its way through selling leading products and services that the rest of the world needs and wants, none of these disturbing cultural manifestations of dishonesty can and will change. Changing the rules will lead to rebuilding American moral character, and then real national pride will replace false patriotism.

As individuals, Americans are very honest, good, well-meaning, hard-working people. Yet despite the very best of individual intentions, it is not possible to have widespread public economic morality under a fundamentally dishonest monetary/financial system. This critical link is missed by virtually all cultural critics of American character and public morality, with only one or two exceptions that I'm aware of. That's because the underlying monetary/financial system appears to most of them like the proverbial water in the goldfish bowl, i.e. an unquestioned, unnoticed, seemingly immutable part of the fixed environment.

It doesn't have to be so. Humans are not goldfish, we do not have to swim around in circles.

While the rest of the world rapidly develops in one of the most significant and uplifting transformations in global history, is the 24/7 obsessive narcissistic gossip of MySpace, YouTube, etc (see quote in Social - U.S. news summary below) the results of the distorted incentives, via IPOs, CEO stock options, M&A, LBOs, etc, of the hyper-speculators on U.S. corporate innovation, and Silicon Valley, which for decades created new products and services that were the pride of the nation and the envy of the world?

Below are some recent news summaries from the mainstream media. My intent in posting these is to highlight some things I consider to be important that might get overlooked. A few op-eds are indicated by the author’s name. Again, I do NOT necessarily agree with their views nor those of the news articles. For what it's worth, (Econotech FHPN) at the very front of my articles stands for "Fair, Honest, Principled News," you please be the judge of that.

This article is well over 8,000 words even with leaving much out, which is far too long for very time-constrained readers. My apology, I am considering ways to shorten the length in the future and will inform you of any changes I may make.

Financial Markets – U.S.

[S&P] 500 has risen 3.5 percent since the beginning of July … third-quarter gain will be the biggest in nine years as long as [it] stays above 1310.16 … S&P 500 technology index jumped 9.3 percent since Aug. 15 … biggest among 10 industry groups. For the quarter, [tech] climbed 6.1 percent for the third- largest advance. The stocks were the worst performers during the first half of 2006 … food, drug and household-products as the best performers since July began. Health-care climbed 8.9 percent, the second-biggest … Energy, the biggest winners in 2006's first half, had the quarter's biggest losses … tumbled 6.2 percent … Raw-material fell 2.7 percent. (Bloomberg, Sep 25)

Earnings at S&P 500 companies may climb 13.8 percent this quarter and 12.9 percent in the final three months of 2006 … Profits rose 16.3 percent in the second quarter. Third-quarter forecasts have been cut for eight of the benchmark index's 10 industry groups over the past month, while fourth-quarter estimates for seven groups have also been trimmed … profits at energy companies may not make up for shortfalls at other groups this quarter. (Bloomberg, Sep 23)

the two-year note's yield is … the furthest below the Fed's key policy rate it has been since April 2001, when the Fed had already started cutting rates aggressively … "Dealers and other leveraged players loathe negative carry. They don't like to hold Treasurys yielding less than the fed-funds rate; it results in daily losses," "Players won't be comfortable unless they feel their borrowing costs will head downward… this is only the 4th time in 16 years that the 10-year has been below funds. All other occasions saw a rate cut within 6 months." (WSJ, Sep 21)

Treasuries returned 3.4 percent since June 30, rivaling the 3.6 percent gain in the second quarter of last year … The last time returns were higher was in the July-to September period of 2002. (Bloomberg, Sep 22)

Goldman says two-year note yields may fall from the current 4.67 percent to 4.20 percent. Merrill says they may drop to 3.60 percent … Bear Stearns, Lehman Brothers and Morgan Stanley forecast two-year yields will rise as high as 5.80 percent … The difference between the high and low forecasts hasn't been this big since 2004. (Bloomberg, Sep 25)

Analysts now predict the big five [i-banks] will earn $28 billion next year, up 7 percent from the record anticipated this year … [third-quarter] seasonal drop this year was the second worst since at least 1999 [for] Goldman, Lehman and Bear Stearns. (Bloomberg, Sep 18)

Since oil's peak July 14, energy funds are down 8.2 percent, while [S&P] 500 has gained 6.4 percent … About $67.4 billion is invested in 525 energy and commodity hedge funds, more than double the $30 billion at the start of the year … Goldman Sachs Energy Index peaked Sept. 1, 2005, is down 37 percent. (Bloomberg, Sep 25)

Financial Markets -- Global

Asian stocks lagged for the second straight quarter … [MSCI] Asia Pacific fell 0.1 percent in the third quarter … [S&P] 500 advanced 3.5 percent, while Europe's [DJ] Stoxx 600 added 4.7 percent in dollar terms … MSCI Asia Pacific Materials slid 5.5 percent, the steepest drop of 10 industry groups … energy producers fell 3.1 percent … Shanghai Composite rose 3.2 percent after jumping 44 percent during the first half. (Bloomberg, Sep 25)

Asian stocks fell for a third week, the longest losing stretch in four months … declines by exporters after U.S. reports suggested growth in the world's biggest economy was slowing. (Bloomberg, Sep 23)

Thailand's baht rebounded from its biggest loss in three years as investors bet this week's coup will break a political deadlock that has stalled public works spending. Stocks pared early declines. (Bloomberg, Sep 21)

stock markets in countries such as Russia, South Africa and Canada, which until now have performed better than the commodities that underpin their economies … Energy and raw materials producers make up 29 percent of [MSCI] Emerging Markets Index … 15 percent of the World Index of developed markets. (Bloomberg, Sep 25)

In spite of central bank rate rises that should have begun to sap liquidity worldwide, there are few signs that investors are short of money even for aggressive deals. And defaults typically follow waves of low-quality financing only after three or four years. (Lex, FT, Sep 18)

Corporate bond sales worldwide rose 16 percent to $533 billion in the second quarter from a year earlier because of acquisitions and the sale of receivables to investors, the [BIS] said. Bond sales by financial companies made up the bulk of the total, rising 7.3 percent to $480 billion. (Bloomberg, Sep 11)

Derivatives traded on exchanges rose 13 percent in the second quarter, the [BIS] aid. Global trading in futures and options contracts on lending rates, currencies and stock indexes increased to $484 trillion from $429 trillion in the first quarter, the Basel, Switzerland- based BIS said in a quarterly review. (Bloomberg, Sep 11)

Acquirers paid $13.5 billion for fund managers in the first half of the year, almost as much as in all of 2005 … At that pace, 2006 would be the second only to 2000, when fund-manager transactions were $32 billion. (Bloomberg, Sep 21)

An average of just $6.6 million worth of Vietnamese shares traded daily in the past three months, compared with $314 million in Thailand. The Vietnam Stock Index has surged 66 percent this year in dollar terms, the most of 413 Asian indexes. (Bloomberg, Sep 22)

Private Equity and Hedge Funds

[Steven] Cohen of [SAC Capital] … "It's hard to find ideas that aren't picked over, and harder to get real returns and differentiate yourself," he says. "We're entering a new environment. The days of big returns are gone." … SAC is among the most widely watched investment firms in the world … [Though not this year] "There will be a real decline that may devastate hedge funds that have crowded into the same stocks," he predicts … SAC has generated an average annual return to investors of 43.5% [after fees] … A year ago, SAC told investors the fund was aiming to return between 10% and 15% a year [according to sources]. (WSJ, Sep 16)

Merrill Lynch's hedge-fund index is up about 4% through Aug. 28, compared with a 7.2% gain for the DJ World Index, a rise of 4.3% for [S&P] 500-stock index, and a gain of 2% for the Lehman Brothers bond index. (WSJ, Sep 18)

In many conventional arbitrage strategies, hedge fund returns over the past year have been lacklustre. The field has simply become too crowded. 1,893 new hedge funds were registered in the Cayman Islands in the previous 12 months. (FT, Sep 18)

Private-equity firms have notched seven of the 10 largest leveraged buyouts of all time this year … [CEOs] are both buying and selling the company … fraught with potential conflicts of interest. "Every private-equity firm markets itself to its potential investors on the basis of its access to deals, preferably exclusive access to deals" without competitive bidding, says a merger-and-acquisition lawyer … little that is more important to a private-equity firm than courting the management. offer management … as much as a 10% stake … when the company is recapitalized or goes public, the executives often get windfalls valued at hundreds of millions of dollars. (WSJ, Sep 8)

[management buyouts] should simply not be allowed at all as a matter of law … they buy the assets on the cheap and sell them off for their own management benefit, or they manage the company differently for the benefit of themselves and their buyout partners … breaching that fiduciary duty … management is seeking to pay the least it can get away with for the assets of the public holders, while the public holders want the most they can get. irreconcilable conflict of interest … lack of full disclosure … [buyout] memos are not disclosed to the stockholders or to the market generally … insider trading. what is a management buyout other than trading on inside knowledge? (Ben Stein, NYT, Sep 3)

Financial regulators need to pay more attention to whether margin requirements placed on investors such as hedge funds are adequate, said New York Federal Reserve Bank President Timothy Geithner. ``and limits around the counterparty risk-management process'' …``The changes that have reduced the vulnerability of the system to smaller shocks may have increased the severity of the large ones,'' he said. (Bloomberg, Sep 15)

based on the TASS database, hedge funds appear to have clocked an eye-popping 16.5% a year between year-end 1994 and April 2006 … What happens if you eliminate survivorship and backfill bias? Messrs. Ibbotson and Chen calculate that hedge funds returned just 9% a year, less than the S&P 500's 11.6%. (WSJ, Sep 20)

[hedge fund] Amaranth's assets, which peaked at $9.5 billion last month, plunged 65 percent through Sept. 19 because of wrong-way bets on natural-gas prices, Maounis said in the letter, a copy of which was obtained by Bloomberg News. (Bloomberg, Sep 21)

Some consumer advocates, utilities and federal officials say speculation in the energy markets accentuates the volatility of this staple fuel … Many utilities made gas purchases over the past year that proved to be poorly timed … many traders' paychecks have soared. Amaranth’s [32-year-old] Mr. Hunter is estimated to have taken home $75 million to $100 million last year. (WSJ, Sep 19)

Venture-capital returns have been tepid lately … [But] pay for venture capitalists is up 35% this year … the average employee at firms specializing in buyouts … is expected to earn $1.2 million, up 61.5% from last year … "much of the [vc profit] increase may have been due to a few very profitable exits". (WSJ, Sep 14)

“We were surprised by a great deal of what we learned … venture capital investors tended to be less helpful than might otherwise be expected. This comment was repeated in a majority of the interviews we conducted. A large number of CEOs said their venture capital investors rarely offered useful guidance.” (pg 20, 2005 book “Startups That Work,” Joel Kurtzman, was a Global Lead Partner at PWC, former editor of the HBR).

Real Estate Markets

[NAR] said existing homes … down 0.5% from July and 12.6% from a year earlier … The median sales price of an existing home was $225,000 in August, down 1.7% from a year earlier. first year-to-year price decline since 1995 and the second sharpest in the nearly 40 years … inventory of unsold homes rose 1.5% last month, a 7.5-month supply, and the biggest supply since April 1993. The increase was smaller than in July, when inventories rose 3.2%. (WSJ, Sep 26)

Compared to a year earlier, August housing starts were down 19.8 percent. Permits for future groundbreaking fell to the lowest in four years. (Reuters, Sep 19)

Confidence among U.S. homebuilders dropped to a 15-year low this month. It was the eighth consecutive monthly drop in the index. (Bloomberg, Sep 18)

NAR now expects sales of existing homes to fall 7.6% this year. new-home sales are projected to plunge 16% … Within months, prices are likely to cave in to the forces of supply and demand, the NAR says. A record 3.86 million homes are for sale — a 7.3-month supply. (USAToday, Sep 7)

More than half [polled] expect house prices in their neighborhoods to remain about the same six months from now. (Bloomberg, Sep 22)

About 12.2% of [sub-prime ARMs] borrowers were late paying their loans in April through June, the highest level since the end of 2003. About 25% of all mortgages carry adjustable rates, and more than half of those loans are to subprime borrowers … In 18 states, more than 15% of homeowners with subprime ARMs were behind in their payments in the second quarter. (USAToday, Sep 14)

[August foreclosures] were 24 percent above the level in July and 53 percent higher than a year earlier … "Usually, foreclosures are a lagging [market] indicator" "But we've never had a situation like this with adjustable-rate mortgages amounting to $400 billion to $500 billion coming up for adjustment over the rest of the year." (CNNMoney, Sep 15)

The bill is coming due. Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules -- often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can't count on rising equity to bail them out. What's more, steep penalties prevent them from refinancing. (Nightmare Mortgages, BW cover story, Sep 11)

When related purchases such as furniture and appliances are included, housing accounted for 23 percent of 2005's [gdp], according to the Joint Center for Housing Studies at Harvard. (Bloomberg, Sep 18)

Dealogic says sponsors have this year also acquired nearly $14bn worth of listed US real estate investment trusts - a 15-fold increase on 2004. US Reits look expensive relative to equities' earnings yields and bond yields but cheap relative to private real estate. (Lex, FT, Sep 18)

Economy and Business – U.S.

Fed funds futures traded on the Chicago Mercantile Exchange reflect about a 40 percent chance the central bank will lower its target rate to 5 percent by the end of January … U.S. growth will slow to 2.7 percent, according to the median estimate in the Bloomberg survey, compared with the average of 3 percent over the past two years. (Bloomberg, Sep 26)

U.S. consumer confidence rebounded solidly in September although it failed to regain all of the ground lost in August, as consumers responded favorably to the decline in gasoline prices … “even though consumers' concerns have eased, there is little to suggest a significant change in economic activity as we enter the final quarter of 2006." (WSJ, Sep 26)

The U.S. current-account gap widened by $5.21 billion to $218.41 billion in the second quarter. The wider deficit was due in large measure to soaring global oil prices. The deficit remained 6.6% of the U.S. economy. (WSJ, Sep 19)

U.S. economic growth is likely to slow this year to 3%, a pace slightly below its long-run average of 3.1%, according to a survey of chief executives. An index on the economic outlook for the next six months has dropped to 82.4 from 98.6, reaching the lowest point in three years. The latest reading remains far above the threshold of 50 below which a contraction is expected. (WSJ, Sep 18)

Unless the shape of the Treasury yield curve normalizes in the next few months, going from its current negative to a more normal positive slope, the U.S. could be headed for a recession late next year. That's the implication of a new paper by economists Arturo Estrella and Mary R. Trubin of the Federal Reserve Bank of New York. (Caroline Baum, Bloomberg, Sep 5)

``We read the Bernanke Fed as being more sensitive to small undershoots of growth than to small overshoots of inflation,'' wrote Soss, who was an assistant to former Fed chief Paul Volcker (Bloomberg, Sep 18)

``A lot of the monetary stimulus the last time worked through asset prices,'' says Philip Swagel, "It's hard to imagine housing prices are going to take off again even if the Fed cut rates" (Bloomberg, Sep 11)

In a trend the Fed said reflects increased merger-and-acquisition activity, the volume of syndicated credits reached $1.9 trillion in the second quarter, up nearly $250 billion, or 15.2%, from a year earlier. The share of problem credits rose to 5.1% from 4.8% … [nonblank] institutions accounted for 14% of all loan commitments, up from 2% 10 years ago. The share of problem credits among nonbank institutions stood at 11.8% as of the second quarter. (WSJ, Sep 26)

Twenty-two of 52 economists said recession is the greatest threat to the economy over the next 12 months … The economists raised their forecasts for the likelihood of recession for a third straight time. put the probability at 26%, compared with 15% just last spring (WSJ, Sep 8)

The U.S. gasoline pump price fell 24 cents in the past two weeks to $2.42 a gallon, the biggest decline in almost a year, as supplies stayed ahead of demand … Pump prices have tumbled 60.5 cents from a record average $3.025 a gallon reached in mid-August. (Bloomberg, Sep 25)

national average had fallen to $2.47 a gallon as of Sept. 20, representing the second-largest uninterrupted decline … dating back to 1990. (WSJ, Sep 20)

National Retail Federation forecasts holiday sales for the November-December shopping period to increase 5 percent over last year. In comparison, holiday sales in 2005 rose 6.1 percent. (CNNMoney.com, Sep 23)

FedEx Corp. said demand for Asian exports remains strong despite the slowing U.S. economy … GDP would post a 3.1% improvement. (WSJ, Sep 21)

For the first time, more flat-panel televisions [from Asia] are forecast to sell this year than traditional tube TVs … Prices will drop as much as 30 percent this year, turning flat-panels into commodities. (Bloomberg, Sep 21)

Ford Motor Co. and DaimlerChrysler AG are unlikely to stem losses in North America by firing workers and cutting output, according to traders betting on the creditworthiness of companies in the credit-default swap market. (Bloomberg, Sep 20)

DaimlerChrysler AG is in talks to sell cars made by Chery Automobile Co. in the U.S. and Europe … [Daimler] estimating pay for Chinese workers was one-18th those of U.S. workers. (Bloomberg, Sep 25)

More tax credits and faster issuance of ``green card'' work permits to foreigners will help the U.S. become more competitive in high-technology manufacturing, officials from [SIA] said. U.S. production capacity of high-end chips will drop to 11 percent of global capacity this year from 35 percent in 2001. (Bloomberg, Sep 19)

CEOs were paid wildly during the housing boom, which now shows signs of turning into a bust. So will pay-for-performance work in reverse? ... The easy part of pay-for-performance is high pay for high performance. The hard part is low pay for low performance. There are few CEOs in the U.S. who have mastered that art. (Graef Crystal, Bloomberg, Sep 6)

“The FBI is conducting probes of 52 companies that may have illegally backdated stock options and more cases are on the way, its new criminal investigative chief said. The number of criminal cases has increased 16 percent in less than two months” (Bloomberg, Sep 26)

Economy and Business – Global

Crude oil had its biggest fall in four months after U.S. President George W. Bush said he will give European diplomacy a chance to end the dispute with Iran, the world's fourth-biggest oil producer. (Bloomberg, Sep 20)

Crude oil dipped below $60 a barrel to its lowest in six months after Iran's President Mahmoud Ahmadinejad said his country may consider discussions on its nuclear program, easing concerns that supply will be disrupted. (Bloomberg, Sep 25)

The dollar headed for the biggest weekly loss against the euro in three months as traders began to bet on the Federal Reserve cutting interest rates by year-end. (Bloomberg, Sep 22)

Fitch Ratings yesterday cut the outlook on Hungary's credit ratings to negative from stable, citing the possibility that the protests and street violence may force the government to soften its austerity package. (Bloomberg, Sep 21)

Hungary's economic woes, which economists say threaten a financial collapse that could spread to other Eastern European members of the European Union, several of which are heavily borrowing abroad to finance outsize deficits. In recent weeks, Hungary and the Czech Republic abandoned target dates for adopting the euro. (WSJ, Sep 19)

India is a ``laggard'' in keeping its fiscal deficit under control, said David Beers, managing director and head of sovereign and international ratings at Standard & Poor's. (Bloomberg, Sep 19)

India's inflation ``is not at a comfortable level'', [its] Finance Minister said, adding that three interest rate increases this year haven't done enough to tame loans growth. (Bloomberg, Sep 20)

India will set up 100,000 computer kiosks in the country's villages at a cost of 57.4 billion rupees ($1.3 billion) to accelerate rural growth over the next 18 months. (Bloomberg, Sep 22)

Assets held by the rich in Brazil, Russia, India and China are set to rise by $2 trillion, or 71 percent, to $4.8 trillion by 2010 … Millionaires' wealth in the four countries is growing 11 percent a year on average, compared with 5.6 percent elsewhere … The amount overseen by wealthy people in China and India will double by 2010 … there were 7.2 million millionaires in the world, up about 10 percent from a year earlier, with $25 trillion of assets. The U.S. had 3 million, Europe about 2 million, and China about 250,000. The number of millionaires increased 5 percent last year in the U.S. and 20 percent in Asia. (Bloomberg, Sep 19)

South Korean consumers became the most pessimistic in almost two years, signaling spending may slow further and crimp growth in Asia's third-largest economy. (Bloomberg, Sep 22)

The [IBM global] survey found that Europe attracted 39 per cent of all new [FDI] plants and projects in 2005, with Asia-Pacific receiving 31 per cent and North America 18 per cent … China received one in every eight dollars invested by companies abroad. [in] India investments by multinationals created more than 180,000 jobs. (FT, Sep 17)

slowdown in the US and China will reduce eurozone growth from 2.3 per cent this year to 1.8 per cent in 2007 (forecast from Consensus Economics). The expectations measure of the ZEW survey of German economic sentiment has fallen for seven months in succession but there was surprise at the extent of its fall in August.. (FT, Sep 18)

Manufacturing jobs are haemorrhaging across large areas of western Europe with many of the jobs being transferred to lower-cost new eastern European EU states, according to a report published today. (FT, Sep 18)

According to Meps, the average price of steel over a range of products has strengthened this year from $555 a tonne in January to $671 a tonne now. foresees this price falling to $626 a tonne by next summer. (FT, Sep 18)

The share of global exports purchased by U.S. consumers and businesses fell to 17.9 percent in 2005 from 21.8 percent in 2000. Exporting nations in Europe and Asia are poised to grab a larger share of world markets with trade agreements that don't include the U.S. (Bloomberg, Sep 25)

Monday's IMF decision means that China, South Korea, Mexico and Turkey -- the countries considered to be most severely shortchanged on the IMF board -- will quickly receive token increases in their voting power. (WSJ, Sep 19)

The International Monetary Fund's decision to give China and South Korea more clout may not be enough to reverse a loss of influence in Asia. (Bloomberg, Sep 19)


The Chinese currency has gained 0.15 percent per week this month, compared with a 0.05 percent weekly appreciation last month and 0.02 percent per week in the 27 weeks after the July 2005 revaluation. (Bloomberg, Sep 25)

China's Communist Party has fired Shanghai party chief Chen Liangyu as a result of an investigation into misuse and embezzlement of pension funds, the most senior victim of the city's biggest corruption scandal in decades. (Bloomberg, Sep 25)

Profit at Chinese industrial companies grew 29.1 percent in the first eight months from a year earlier, the government said. (Bloomberg, Sep 22)

China's central bank will likely raise interest rates for a third time since April by the end of 2006 to cool factory spending and keep inflation from quickening … bring the official one-year lending rate to 6.39 percent. (Bloomberg, Sep 21)

Standard Chartered Plc raised its estimate for China's economic growth this year to 10.8 percent, saying government efforts to cool an investment boom aren't working. The new 2006 projection represents the fastest expansion since 1995 … banks still have an incentive to lend because the returns they earn on central bank bills are less than what they have to pay on deposits. (Bloomberg, Sep 26)

Industrial & Commercial Bank of China Ltd. said it may sell 65 billion yuan ($8.2 billion) of subordinated bonds as it prepares for a fourth-quarter initial public offering. (Bloomberg, Sep 25)

[ICBC] may sell about 18 percent of the stock in its $19 billion initial public offering to about a dozen Hong Kong corporate investors … undertaking the first simultaneous stock sale in Hong Kong and Shanghai … may value at $130 billion and rank it the world's sixth-biggest bank by market value. (Bloomberg, Sep 22)

Shares of China Merchants Bank Co. surged on their Hong Kong debut after investors ordered 53 times the stock offered in its $2.4 billion share sale. Merchants Bank gained as much 30 percent … on course for the biggest first-day rise of the four Chinese banks that have sold shares on Hong Kong's exchange. (Bloomberg, Sep 22)

Overseas lenders have invested a combined $17.9 billion in 18 Chinese banks as at the end of June … the country's central bank had given its approval to 71 overseas lenders to open 214 branches in the country as of June 30 … Three fund management firms and eight brokerages have started ventures in China while 42 investors were approved to buy China's dollar-denominated stocks under QFII. (Bloomberg, Sep 21)

China Telecom Corp said it is in talks with five potential strategic investors that may buy stakes after the company receives government approval to enter the mobile-phone business … China added 17.5 million fixed-line users in the first eight months of the year, compared with 44.1 million mobile subscribers … 437.5 million cellular customers and 367.9 million fixed-line subscribers. (Bloomberg, Sep 25)

local governments are defying Beijing … The sale of land now accounts for 40% to 60% of all local government revenue … The compensation they pay to farmers for the land is far less than its value to developers. When the city flips the land, the revenue isn't part of regular budgets that can be audited by Beijing (WSJ, Sep 15)

China will spend $8.3 billion to build a 1,400-kilometer (868 miles) railway [in Nigeria] … follows China's announcement last month to spend $10 billion to help Venezuela build a 1,000-kilometer (622-mile) railroad. (Bloomberg, Sep 26)

in Southeast Asia, China is making big loans for big projects … Beyond its no-strings approach, China is often appreciated as a lender by poor countries because it is willing to take on complicated projects in distant areas that others are not. (NYT, Sep 18)

the Australian government's commodity forecaster said … Prices of [iron ore] could gain 10 percent to another record in the year from April … China's steel consumption may rise to 452 million tons in 2007, up from 407 million tons in 2006, the bureau said. (Bloomberg, Sep 25)

Nearly a quarter of Beijing's university students suffer from clinical depression, a Chinese newspaper reported on Wednesday, reflecting financial pressures, fierce academic competition and a tight job market for graduates.


Abe, 52, inherits an economy headed for its longest expansion in 60 years. He will need to reduce the world's biggest public debt and mend deteriorating ties with China and South Korea. He has pledged to cut government spending, double foreign investment into the country and revise the pacifist constitution to end the debate over the nation's military. (Bloomberg, Sep 26)

Measured against currencies of Japan's largest trading partners, the yen is approaching its lowest value since 1985 … Japanese investors last month bought more overseas bonds than ever before … U.S. and European money managers also are putting pressure on the yen by borrowing the currency at low rates and then investing in countries with higher yields [yen carry trade] (Bloomberg, Sep 25)

Japan's manufacturers became more optimistic and increased spending plans this quarter, signaling they'll fuel growth in the world's second-largest economy. (Bloomberg, Sep 22)

Japan's trade surplus surged in August as automobile shipments to the U.S. rose at the fastest pace in almost a decade, spurring export growth. (Bloomberg, Sep 21)

Land prices in Japan's three biggest cities rose for the first time in 16 years … rose an average 0.9 percent, with residential land prices in three central wards of Tokyo surging 18 percent, while commercial areas gained 14 percent in the year ended July 1 … Total assets held by REITs surged 65 percent. (Bloomberg, Sep 19)

A Japanese railroad will invest $3.1 billion to develop high-speed magnetic trains over the next decade … Germany and Japan jostle to win new customers for the high speed trains. (AP, Sep 25)

a recent surge in recalls of defective products has set off national hand-wringing and soul-searching here … bruised pride and fears that Japan may be losing its edge at a time when South Korea and China are breathing down its neck. (NYT, Sep 20)

Politics – Geopolitical

Iraq's parliament took tentative steps on Tuesday to resolve a deadlock over autonomous regions, an issue that has split its politicians on sectarian lines … Many majority Shi'ites want to create an autonomous region in their oil-rich southern heartland. Minority Sunnis fear this would siphon oil wealth from Baghdad and could tear the country apart, and want to amend the constitution to strengthen the powers of the central government. Kurds already have autonomy in the north and want their region to include the disputed oil city of Kirkuk. (Reuters, Sep 26)

Iraq's economy is weaker than at any point since the US invasion. Some estimate joblessness at 60 percent (the CIA shows a 30 percent rate for 2005), and prices for foodstuffs and basic goods have doubled - and in some cases tripled - since 2003 … the consumer price index (CPI) increased by nearly 70 percent in July compared with 12 months earlier … the average monthly wage is less than $200. (CSM, Sep 15)

The United Nations and Sudan are discussing the deployment of U.N. military advisers to reinforce the African Union peacekeeping mission in Darfur, hoping to avert a standoff that could deepen the crisis in the war-torn region, officials from both sides said Tuesday. The proposal appeared to be gaining momentum amid fears violence could escalate. (AP, Sep 26)

Violence in Afghanistan in recent months poses the gravest threat to achieving peace since the Taliban regime was ousted in 2001, United Nations Secretary General Kofi Annan said. (Bloomberg, Sep 22)

[U.S] and five partners have decided to set yet another deadline in hopes that Iran will finally agree to terms paving the way for substantive talks on its nuclear program … Iran will have until early October to agree to suspend its nuclear activities as the negotiations take place, diplomats said … The new deadline is the fourth in four months. (WP, Sep 21)

The U.S. and France agreed to give Iran more time to yield to United Nations demands to curtail its nuclear program as Iran's president assailed the U.S. and questioned the world body's authority. (Bloomberg, Sep 20)

Bush's speech to the U.N. showed how much that diplomatic calculation has changed in Bush's second term … even backtracking on what had been firm positions. (WP, Sep 20)

The signal is unmistakable. An aerial attack on Iran's nuclear facilities lies just beyond the horizon of diplomacy … during which the world economy will be in a deep spiral … Iran will activate its proxies in Iraq, most notably, Moqtada al-Sadr's Mahdi Army … The decision is no more than a year away. (Charles Krauthammer, WP, Sep 15)

The ongoing evolution of Sadr from populist cleric to guerrilla leader to political kingmaker is emerging as a core challenge to U.S. visions of stability in Iraq … Senior U.S. military officials are starting to share this view … Sadr is increasingly seen as a man who has the power to either implode Iraq or keep it together. (WP, Sep 11)

The conflict has deepened ties between Lebanese guerrillas and Palestinian militants each with ties to Syria and Iran. The result, Israeli analysts and military officials say, may be the further entrenchment of Hizbullah within the Palestinian territories and among militants. (CSM, Sep 22)

Efforts to form a Palestinian government acceptable to the West have gone "back to zero," Palestinian President Mahmoud Abbas said Saturday, a day after Hamas said a coalition government that recognizes Israel is unacceptable. (AP, Sep 23)

Hezbollah leader Sheik Hassan Nasrallah told supporters Friday that his guerrillas will not surrender their weapons until a stronger Lebanese government is in place — including 20,000 rockets his group claims to still have after its 34-day war with Israel. (AP, Sep 22)

An agreement to sell nuclear technology to India, one of President George W. Bush's key foreign-policy initiatives, may not get congressional approval this year. (Bloomberg, Sep 22)

The study, conducted for the German Marshall Fund of the United States, found European disapproval of President George W. Bush's conduct of foreign policy has risen to 76 percent, the highest in five years, while only 18 percent support it. (Reuters, Sep 6)

Politics – U.S.

California's governor, Arnold Schwarzenegger, agreed with state legislators on plans to take the state's greenhouse emissions back to 1990 levels by 2020, a cut of about 25 percent over today's levels. The scheme, to be implemented from 2012, would make California the first US state to impose a cap on carbon dioxide (CO2) and other emissions and to offer market incentives for achieving them (AP, Aug 31)

Plummeting gasoline prices and a buoyant stock market may be weakening the power of the economy as an issue for Democrats … 54 percent say the U.S. economy is doing well. That's up 4 percentage points from the beginning of August. (Bloomberg, Sep 22)

Saddam Hussein regarded al-Qaida as a threat rather than a possible ally, a Senate report says, contradicting assertions President Bush has used to build support for the war in Iraq. (AP, Sep 8)

``It's working [Rove’s “war on terror” election push] because we haven't given an effective answer,'' [Bill] Clinton said. ``It's scandalous.'' Clinton added that he doesn't blame Rove for using a tactic that works. (Bloomberg, Sep 22)

executive director of the Republican Senate committee says he's confident Republicans will maintain their majority in the Senate … ``Our incumbents that they have targeted start off with $24 million more in their campaigns than do their challengers'' (Bloomberg, Sep 25)

Wall Street is putting most of its money behind Democratic candidates … Democrats last posted a significant fund-raising lead among investment banks in 2001 … Hillary Clinton is the biggest beneficiary of Wall Street's largesse … a similar trend among hedge-fund managers and private-equity executives. financial-services industry has given about 50 percent of its donations for the 2006 elections to Democrats. (Bloomberg, Sep 14)

Earmarking, where lawmakers insert funds for special projects in broader legislation without public debate … Congress allocated a record $71.77 billion in 2006 to 15,832 special projects, more than double the $29.11 billion spent on 4,155 pork-barrel projects in 1994, when Democrats last controlled Congress (Bloomberg, Sep 19)

Social – Global

South Asian nations must double their pace of economic growth to cut poverty in a decade in the region, home to almost half the world's poor … Antiquated power grids, roads and ports and old transportation links are discouraging companies from investing … India spends a seventh of China's $150 billion investment in public works each year. (Bloomberg, Sep 16)

About 10.5 million children die each year from preventable diseases, and governments and donors must increase spending by about $7 billion annually to meet goals to cut the rate by two-thirds by 2015, the Lancet said today. The 60 countries that account for most child deaths got $1.36 billion in donations last year -- equivalent to $3.10 a child … Diarrhea and pneumonia are the leading killers of children. (Bloomberg, Sep 18)

As many as 40 percent of Manila's estimated 6 million slum dwellers are resorting to charcoal because they only have enough money to buy fuel day by day … About 3 million of the country's 36 million workers don't have a job and 8 million are under-employed. (Bloomberg, Sep 21)

More than 400,000 migrants from eight eastern European countries registered to work in the first two years they had access to the U.K. … [The government] had expected 26,000 to come … created a political backlash against Labour Party. (Bloomberg, Sep 25)

Europe has 7 million to 8 million undocumented immigrants. European justice and interior ministers met to consider appeals from Italy, Spain and other Mediterranean members for aid to stem the flow. (Bloomberg, Sep 22)

An obesity pandemic threatens to overwhelm health systems around the globe with illnesses such as diabetes and heart disease, experts at an international conference warned Sunday (AP, Sep 3)


The study found 56 percent of MBA students acknowledged cheating, compared with 54 percent in engineering, 48 percent in education and 45 percent in law school … “kids are, if anything, underreporting their cheating activity.' (Bloomberg, Sep 25)

M.B.A. programs … are least effective on these traits: honesty and trustworthiness, motivating and inspiring others, and caring about others … Harris Interactive conducted the online survey of 4,125 recruiters. (WSJ, Sep 20)

If there is a single quality that separates those in their late teens and early 20’s from previous generations of young people, it is a willingness bordering on compulsion to broadcast the details of their private lives to the general public. Through MySpace, personal blogs, YouTube and the like ... Details that those of less enlightened generations might have viewed as embarrassing are instead signature elements of one’s personal brand. To reveal, it has seemed, is to be. (NYT, Sep 10)