Developing Nation Stocks Jump 23% From Low, Exit Bear Market Oct. ...

In today's Weekly Speculator we make the point that there would be nothing
exceptional about the EM complex enjoying a frenetic bear market rally off this
week's climactic low. Our rough target is a 50% advance off the recent low (445
for the MXEF) which would take that index up to around 670. Contrary to this
article this would still keep this asset class firmly within a powerful bear
market - our target is still almost 50% below the November 2007 all time high
and is also the level reached at the end of the mid EM 2006 panic. We would
expect this week's low to be eventually surpassed in the medium term. The rally
is therefore a selling opportunity and (later on) an opportunity to re-load
short positions.
<>

Today's data shows a very large weekly increase in CP outstanding, an
increase of just over $100 bln. (6%) to $1.59 Trillion. This would seem to
indicate that the FRB's gargantuan efforts are having some effects and is
clearly good news if it can be sustained going forward.



(See attached file: D-FCPOTOTS_Index.gif) - D-FCPOTOTS_Index.gif

Copper Stockpiles at the LME rose to 223,875 tonnes today which is a new 4
year high. As the attached charts show stockpiles fell precipitously in the
early years of copper's rally and have stayed very low in recent months
(although they have doubled from their recent lows). We would expect to see
stockpiles grow very significantly in the coming months confirming the
validity of copper's recent plunge. Note that since there can be significant
lags in time between stockpiles and price we would not use this a timing
guide for trades but more as a longer term indication of how supply and demand
are trending.





(See attached file: D-LSCA_Index.gif) - D-LSCA_Index.gif

The market for luxury watches has exploded this cycle with the number of
brands, individual styles and (most of all price) all moving parabolically in
recent months. We would expect this story to end just as badly as luxury Real
Estate and Art so it is interesting to see this sponsorship deal announced
today. Outsized "naming" (think "Enron Field") and sponsorship contracts (AIG
are Manchester United's main shirt sponsor) typically happen right at the end
of an unsustainable bull market.

+------------------------------------------------------------------------------+

(ESP)-NEW UNITED SPONSORSHIP DEAL
2008-10-30 13:05:04.30 GMT

NEW UNITED SPONSORSHIP DEAL
By Simon Stone, PA Sport Chief Football Writer
Manchester United have signed a new multi-million pound sponsorship deal with
Swiss watch manufacturers Hublot.
The three-year contract comes hot on the heels of similar contracts with Saudi
Telecom, Seoul Metropolitan Government and Budweiser.
The deal proves how valuable the United brand has become even during a
worldwide economic slump which has seen West Ham's shirt sponsor XL go into
administration and the Red Devils' sponsors AIG be effectively bought out by
the
US government.
While some critical fans vehemently opposed to the Glazer family ownership will
continue to insist United's finances are precarious, club officials will point
to increased sponsorship as evidence to the contrary.
``We are delighted to welcome such a prestigious partner as Hublot to the
Manchester United family,'' said chief executive David Gill.
``Their reputation for excellence and innovation makes them a fitting and
exciting sponsor for the club.
``Sir Alex (Ferguson) is known as a stickler for timekeeping, both on and off
the pitch, now we have a partner that shares his passion.''
end
-0- Oct/30/2008 13:00 GMT

-0- Oct/30/2008 13:05 GMT

Fed Opens Swaps With South Korea, Brazil, Mexico, Singapore Oct. ...

See last night's note on FRB/New Zealand facility - there is a very clear
concerted effort to calm currency markets at the current time. Hopefully this
extension of swap lines will be more sucessful than the TAF, TSLF and PDLF were
in 2007/8.

The MSCI AC Asia Excluding Japan Index (MXASJ)is a capitalization weighted
index that monitors the performance of stocks from the Asian region excluding
the country of Japan. It is worth noting that during yesterday's session this
index bounced off support at its 2004 low. Our "worst case scenario" for the
overall MXEF index uses the equivalent level (almost exactly 400, compared to
yesterday's low of 445 and close of 488) as a target and the likelihood of this
being reached is greater now one of the important regional sub-indexes has
already made the trip. - sg2008102935541.gif

Following yesterday's massive rally the question remains whether it will
prove to be another "flash in the pan" or the start of a more significant
advance. In order to examine this further we have attached a 60 minute
chart of the SPX index covering October 2008. One thing that can certainly
be said is that as of yesterday's close the index had built a useful buffer
of 100 points above key support at the 2008 low, with initial support being
formed in the 875-900 range. There is also a clear initial upside target of
985, important short term resistance that needs to be violated in order for
this rally to gain critical respect particularly if it is confirmed by a
collapse in the VXO below 55 as we have discussed before. One other
encouraging note is that short term MACD (lower chart) has already reached
the level where the prior October 16th - 20th rally failed, which is an
indication that positive momentum is starting to build (daily and weekly
MACD remain at near record negative levels). The 2 moving averages we are
using on this chart are the 8 (blue) and 40 (green) hour. These approximate
a 1 day and 1 week average and "bullish" and "bearish" crosses therefore
indicate important shifts in the profitability of short term "long" and
"short" index trades. Note that the last leg of this sell off coincided
with a bearish cross, while yesterday's powerful rally completed a
"bullish" cross.

We would expect a move above 985 to lead to substantial follow through and
would look for a test of the October 14th high at 1044. We do note some
rare but distinct signs of strength in individual names and 7 out of the 100
OEX equities closed above their 50 day ma yesterday which is an indicator
that some new funds are being allocated. Nevertheless a failure to break
through 985 would of course have the opposite effect and condemn the index
to another down wave that would seek to test the 2008 lows. A violation of
this support would presumably take the index substantially lower with our
"worst case scenario" being 750.

(See attached file: 30-SPX_INDEX.gif) - 30-SPX_INDEX.gif

One hesitates to suggest that other countries would be tempted to follow the
"loony-lead" of Argentina. However, back in August we all smiled patronisingly
when Pakistan simply made it illegal for its local stock market to fall below
its August 27th low whereas this action turned out to be the first in a series
of ill-considered regulatory attempts to "stabilize" markets that took place
throughout developed and emerging markets.

We therefore note this story and will keep in the back of our mind the
possibility that sometime another country will have the bright idea of forcing
its pension funds to immediately repatriate capital. These remain the most
extraordinary times and there are likely to be some extraordinarily bone-headed
"solutions" launched in the coming months.

+------------------------------------------------------------------------------+

Argentine Funds From Brazil Will Bolster Peso, Cronista Says
2008-10-29 11:51:51.920 GMT


By Drew Benson
Oct. 29 (Bloomberg) -- Argentina will have a resolution in
place by tomorrow that will require private pension funds, known
as AFJPs, to bring back about $600 million invested in Brazil, a
move that will bolster the peso, newspaper Cronista reported.
The resolution is being developed by the AFJP regulator, the
securities regulator and the central bank, Cronista reported in
an interview with the head of the AFJP regulator, Sergio Chodos.
The Argentine peso dropped the most since 2003 yesterday,
sliding 2.1 percent to 3.368 per dollar. It touched 3.3692, its
weakest since December 2002.

For Related News:
Latin America and Caribbean: TOPL <GO>

--Editors: Glenn J. Kalinoski, Greg Storey

To contact the reporter on this story:
Drew Benson in Buenos Aires at +54-11-4321-7736 or
[email protected].

To contact the editor responsible for this story:
Dave Liedtka at +1-212-617-8988 or
[email protected]

Fed Creates $15 Billion Swap Line With New Zealand

Another key carry-trade being targetted by US and local central bank action.

We continue to see the central role that FX markets are playing accross global
asset markets today with the EUR/JPY cross maintaining its position as the key
indicator of carry-trade pressures. As the attached chart shows the sell off in
gloabl equity markets was presaged by a plunge in the EUR/JPY cross through the
key 150 level which extended to yesterday's low of 113.64. Today's rebound
takes the cross back up to 124.01 and represents the largest ever 1 day gain
recorded since the EUR was invented in 1999 (see yellow line lower chart). No
doubt this represents a very welcome change in direction for all concerned but
as we have mentioned many itime in recent months, record 1 day gains are often
recorded in the early stages of long term bear market. A multi-session respite
may have commenced but we very much doubt that we have seen the low for the EUR
against either the JPY or USD. - sg2008102855900.gif

BM&F CFO Says Extent of Brazil Derivatives Losses

Another interesting article highlighting the exposure of Brazilian financical
and corporate investors to currency derivative trades. Note the comments
concerning future regulation. The market for OTC FX contracts may well be
abolished in the coming weeks.

Emerging Nations to Save Art Market From Slump, Christie's Says ...

It is remarkable how long it takes the penny to drop (or at least for the
promoters to admit that it has finally done so). The quotes attached to this
story could have come straight out of the pages of a Gulf State RE story 90
days ago, or a discussion of the NY RE market 12 months ago but it is worth
being reminded of how stubborn optimism is at the end of a massive bull cycle.
<>

The original chart did not contain the new home sales data (blue line) -
new chart shows this data.

(See attached file: M-NHSLNFS.gif) - M-NHSLNFS.gif

One of the first convert buybacks we have seen announced this cycle. Note that
Punch paid #75 per #100 for the notes reducing its 2010 redemption obligation
by #70 mln. We would expect to see a great deal more of this type of activity
by those companies that have sufficient cash on their balance sheet to purchase
their debt at a deep discount. Readers with long memories may recall a number
of technology companies did the same back in 2002-3 and it was a key
development for a number of issuers that allowed them to come out of the tech
crisis intact.

 

Today's new home sales data showed a stabilizing of home sales around the
450K level (blue line). This is encouraging given that this period covered the
month of September and saw immense turmoil at the GSE's and a number of
other financial institutions. More importantly the inventory of new homes
(black line) continued to fall sharply dropping by 31K (7.29%) to 394K
homes. The 12 month ROC (green line lower chart) is now -25.24%, the
fastest pace of inventory decline ever recorded.

As of September 30th the inventory number is within 50K of the 20 year
average (red line on chart) and should fall below this important milestone
sometime during the 4th quarter. This would represent the first key housing
metric to register a "healthy" reading in this down cycle. We would expect to
see inventory levels continue to fall back for another 6-9 months eventually
bottoming in the 225-275K range. However, it is important to note that the
actual sales of new homes typically starts to pick up quite strongly during the
final stages of an inventory wind-down.

Despite the weakness of home-builder stocks in recent weeks (which hardly
makes them unique in the current market) the data remains on track for a
reasonable recovery in this limited portion of the housing market at the
turn of 2008/9.

(See attached file: M-NHSLNFS.gif) - M-NHSLNFS.gif

Attached is a long term monthly chart of the NKY index (log scale) which
achieved the dubious distinction of being the first major equity market to
surpass its 2002 low and taking the index back to where it was in 1982.

Since during the current wave of liquidation the weakest markets have
tended to lead the stronger markets lower this is clearly a warning that
other developed markets may also break their 2002 support levels, which for
the SPX would be 780. Our current "worst case scenario" based on the 1974
sell-off has a low of around 750 for the SPX and a "probable" range of 780-820.

The -57% annual ROC (lower chart in green) is also a record by some
distance (the index is down over 45% over the last 13 weeks) and is an
accurate reflection of the power of the current wave of liquidation. About
the only bright spot on this chart is the fact that all prior major sell
offs were followed by short term recovery rallies of 30-50%, and the fact
that for non-JPY investors the massive losses were at least partially
covered by currency gains. Japan may therefore be a market worth looking at
whenever this vicious sell off is complete but at the moment discretion is
clearly the better path to follow.



(See attached file: M-NKY_Index.gif) - M-NKY_Index.gif

Attached chart shows Ammonia (black), Sulfur (red) and Urea (blue) prices
weekly since 1998. All 3 have collapsed over the course of the last month
belatedly justifying the collapse of Agri-business stocks which preceded
this shakeout. While we claim no expertise in understanding this particualr
industry it does seem clear that the run up in fertilizer prices was captured by
financial flows in the manner we described in August. This remains a sector
that we would avoid at the current time.


(See attached file: D-FERLAMYU_Index.gif) - D-FERLAMYU_Index.gif

Once more we see the validity of the 85-55 trading range in the VXO. The index
has tested the upper limit without penetrating more than a fraction and has
now pulled back to just over 80, during this time the SPX has shuddered without
actually breaking through key support at 840. It is worth keeping a close
eye on the VXO throughout today's session.



(See attached file: D-VXO_INDEX.gif) - D-VXO_INDEX.gif

Citic Pacific's Yung Heads to Beijing to Get Loans After Losses ...

Yet another disclosure of massive FX losses (with some particularly egregious
behavior). It is becoming increasingly clear that a tremendous amount of
reckless FX speculation took place over the last 18 months (something we warned
of at the time). Note that thus far the bulk of the losses have been disclosed
in EM institutions and corporations. The exposure (both regulatory and
financial) of EM subsidiaries of a number of US and European broker/dealers and
banks may well end up being an unpleasant sting in the tail of this cycle. We
note that a number of EM and "carry trade" currencies have broken down to new
2008 lows this morning, a fair indication that forced unwinds continue to take
place.
<>

It has been an eerily quiet Monday thus far, no doubt a reflection of the
fact that it follows the first weekend for several weeks without a major
bank failure or emergency policy initiative being announced. Although the
equity market has only responded moderately to this short period of quiet
there are sings that a number of important stress metrics are slowly
moderating from their recent extreme readings. We are encouraged that this
improvement has happened in something of a "news vacuum" rather than on a
day in which another plan to "save the system" is being hurriedly
announced.

Looking at our 2 favorite credit and equity indicators we see that the 5
year swap spread is currently right on the key 100 level that marks the
"crisis" boundary. As important as the level of swaps is MACD which
currently indicated that upward momentum is rapidly dissipating, a
potential indication that we may be about to see a meaningful improvement
in this instrument's pricing. Meanwhile the VXO index has fallen back
sharply from Friday's close and is curently testing important support at
the 55 level. Interpreting the VXO is more of an art than a science at the
moment since there is such little historical data available that covers the
index above 50. Our sense is that a drop below 55 would be a good indicator
that the worst of this wave of panic is behind us and should be followed by
a further sharp drop, and a move higher for the equity market. Nevertheless
the VXO would still be flashing a warning until it dropped below the 40
level which even in the best case scenario is several sessions away.


(See attached file: D-VXO_INDEX.gif)
(See attached file: D-USSP5.gif) - D-VXO_INDEX.gif - D-USSP5.gif

The attached chart shows the CS High Yield Index (bottom chart in black)
with the spread to 5 year T-note (red top chart). It is not a chart that
needs a great deal of explanation. Nominal yields have blown out to 17.27%
this week, just under the record level of 19.10% reached in November 1990
following the collapse of Drexel. Obviously the spread to T-note is
substantially higher at present than it was back in 1990. The impetus for
the current spike is seemingly a flood of liquidating trades by impaired
funds holding this asset class and an understandable shortage of capital
prepared to purchase bonds in a cascading market. No matter how difficult
the incipient delinquency cycle is in terms of default and recovery rates
it seems likely that significant value now exists in the high yield arena
although this process of liquidation may yet see yields rise further in the
short term.


<>< p="">

LIBOR rates remain extremely extended but there are finally some signs that
the peak may have been reached in this particular cycle. US 3 month LIBOR
has now moderated by 40 bp in recent days to fall back to 4.41% (compared
to a "normal" reading of around 1.70%). We view this change in direction as
potentially crucial and would look for further meaningful improvement over
the course of the next 2 weeks. A similar shift has occurred in EURIBOR
which is still some 100 bp above what we would view as "normal" (remember
the ECB base rate is 3.75% compared to the FDTR at 1.50%) while the UK
LIBOR rate is proving to be somewhat less inclined to drop at present.

As we have stated before, the meaning of LIBOR has changed radically in
recent months. It no longer reflects the availability or cost of capital
for large banks since these institutions now exclusively use the Central
Banks for this function. It is though still important as a benchmark for
commercial loans. Perhaps most importantly the prominence given to LIBOR by
the financial media and professional commentators has made it quite
influential over the mood of market participants. We may feel this
influence is unwarranted but it would be foolish for us to deny its
existence. Lower LIBOR rates would therefore be an important source of
stability for a broad range of financial assets.



(See attached file: D-US0003M.gif) - D-US0003M.gif

While the MXEF index is now some 15% below its June 2006 low there are a
couple of large emerging markets that are yet to complete their own
correction back down to this milestone. Attached are charts of India
(SENSEX) and South Africa (JALSH) that show this graphically. Given that
both these markets have re-accelerated to the downside in recent days we do
think it is likely that they will reach their respective targets of 8,800
(SENSEX) and 18,200 (JALSH) before this correction is complete. Both of
these targets are approximately 10% below the current value of the index.
It should also be recognized that the underlying both currencies have been
experiencing significant weakness in recent months (no doubt partly related
to foreign sales of local equities and bonds) making the losses for USD
holders of these equities significantly higher than the local shares.



(See attached file: D-SENSEX_Index.gif)
(See attached file: D-JALSH_Index.gif) - D-SENSEX_Index.gif - D-JALSH_Index.gif

Crude oil continues to show signs of forced liquidation falling sharply in
recent sessions and trading through $70 for the first time in 15 months. We
are currently testing support at the August 2007 low (which is really just an
extension of round number support at $70). Below this level we would simply
use round numbers to indicate support with $65 and $60 being obvious
targets, the latter is particularly significant. Given the severity of the
decline and general wave of liquidation washing across asset markets it
should be understood that the ultimate low of this corrective move could be
significantly lower than the current value. Once a clear bottom has been
defined we can start to talk about the extent of any bear market recovery
rally but as we wrote earlier this week it is too early to talk of such
things at the moment.

(See attached file: D-CL1_COMDTY.gif) - D-CL1_COMDTY.gif

This is clearly a very important development. In a world in which Central Banks
supply infinite lending to the banks they simply have no incentive to moderate
LIBOR rates or to actually lend money to each other. For commercial lenders
this poses a real problem since the cost of their "LIBOR +" loans has become
prohibitive. Unless LIBOR rates drop back sharply in the near term we would
expect to see it marginalized as a benchmark in the weeks ahead.

+------------------------------------------------------------------------------+

Companies May Swap Out of Libor to Gain Cheaper Loans (Update1)
2008-10-16 14:30:38.820 GMT


(Adds Electricite de France in the eighth paragraph.)

By John Glover
Oct. 16 (Bloomberg) -- Companies may be able to cut their
borrowing costs by exercising an option to change the benchmark
that sets the interest rate on their loans, according to analysts
at bond research firm CreditSights Inc.
Loan agreements are typically structured off the London
interbank offered rate, a benchmark for how much banks charge
each other to borrow, plus a premium to compensate for the risk.
To protect lenders against Libor being too low, the contracts
contain an option allowing a shift to a so-called alternate base
rate, usually the higher of the U.S. fed funds rate or the prime
rate, New York-based analyst Chris Taggert wrote in a note today.
Financial-market losses prompted investors to flee all but
the safest government securities and banks to stop lending to one
other on concern their counterparties may default. The turmoil
pushed Libor rates higher and prompted central banks to cut their
benchmark target rates, which last week sent the prime rate to
below the three-month Libor, according to CreditSights.
``There are many problems with this new, unanticipated
dynamic,'' Taggert wrote. ``Bank lenders stand to earn less than
the cost of capital,'' and loan buyers will be hurt because they
typically pay their investors Libor plus a spread.
Three-month Libor last week rose to a high this year of
about 4.82 percent, surpassing a Bloomberg composite of U.S. bank
prime rates, which fell to 4.5 percent. Loan agreements typically
call for the interest rate companies are charged to be set 100
basis points lower than the alternate base rate used, according
to Taggert.

Electricite de France

The problem of borrowers having the option to switch to a
new benchmark is greatest in the U.S., while in Europe loan
agreements more commonly call for new base rates to be set by
lenders' real funding costs, CreditSights said.
``There are said to be several moves afoot to adjust base
rates in Europe,'' Taggert wrote.
Electricite de France SA will use an alternative to Libor on
an 11 billion-pound ($19 billion) loan to finance the takeover of
British Energy Group Plc. Interest will be paid on an average of
funding rates supplied by BNP Paribas SA, Deutsche Bank AG, Royal
Bank of Scotland Group Plc, Banco Santander SA and Societe
Generale SA, according to a banker involved in the deal.
Borrowers thinking of exploiting these agreements to cut
their costs should consider the move carefully, Taggert wrote.
``By capitalizing on the market disruption against an
already challenged lending base, a borrower stands to cause
significant animosity within the lending group,'' he wrote. ``In
the future this could come back to hurt borrowers,'' with lenders
choosing to ``claw back the loss and more at some future point
when the borrower needs an amendment or to roll out maturities.''

For Related News:
Stories on money markets worldwide: NI MMK BN <GO>

--Editors: Romaine Bostick, Alan Goldstein.

To contact the reporter on this story:
John Glover in London at +44-20-7073-3563 or
[email protected]

To contact the editor responsible for this story:
Gavin Serkin at +44-20-7673-2467 or
[email protected]

Beware of unintended consequences. It would appear that the creation of a large
pool of bank debt which is now implicitly guaranteed by the Treasury and
yielding substantially more than GSE paper has led a large number of
participants to swap out of GSE's and into bank debt. The 5 year FNM spread
reached a new 2008 high this morning just over 127 bp, some distance wider than
at the height of the GSE meltdown in early September.

This clearly was not what the Treasury anticipated when rushing through its
plan to inject captial into the banks. What will be interesting to observe is
whether these spreads eventually collapse by GSE yields falling back to
Treasury levels or whether Treasury holders start to dump holdings in favor of
GSE paper (a 5 year agency note now yields 40% mor over the course of its life
than a corresponding Treasury). If the latter occurs Treasury yields at the
mid-long end of the curve could move substantially higher, with obvious
implications for all debt priced off these instruments. - sg2008101533484.gif

During last week's chaotic markets one of the points we tried to get across
was that we were not too focussed on the exact low point reached in the
climactic sell-off. We argued at the time that the lower the final
destination the more powerful the recovery rally was likely to be with the
two countervailing moves largely cancelling each other out. In the event
the SPX bottomed at 839.80 close to our 780-820 "worst case range" and is
currently almost 140 points or 16% above that low point justifying our
stance. As we described at the time Friday's action certainly had the
terminal feel of forced liquidation from both redemptions and margin calls
and today's reversal also strikes us as typical of the beginning a
multi-session recovery. What can certainly be said is that the market now
has a useful buffer between its current price and the 2008 low while
momentum seems to have decisively shifted in its favor. Even so we are yet
to fully repair even the damage done during Thursday's session so there is
still plenty of work for the market to complete in the days ahead.

The VXO also shows conformation of this reversal by falling 40 points from
Friday's peak at 103.41. We would like to see the VXO fall below 60 and you
could not really consider this unpleasant episode to be "in the books"
until this index fell below 40. That is clearly several sessions away even
in the best of circumstances. We also lack confirmation from an improvement
in credit markets since these are closed due to today's Columbus Day
holiday. We will be watching swap rates in particular over the next 48
hours to see how they respond.


(See attached file: D-SPX_INDEX.gif) - D-SPX_INDEX.gif

We may seem a little unfair in picking on Goldman Sach's energy team (we
suggested in July that they had a word with Abby Joseph Cohen about the dangers
of not recognizing the early stage collapse of an extinct bull market) but they
were very much the cheerleaders for Crude's fundamentally unwarranted ascent up
to its 2008 peak of $147.27. Friday's low point of $77.09 represents a drop of
over 50% of this peak valuation and the Goldman team has belatedly capitulated
to a significantly lower price target. For our part we are satisfied that Crude
met and exceeded our target of $85 for the initial wave of its (anticipated)
multi-year
decline.
We would not
be surprised to see a decent recovery rally temporarily interurpt crude's long
decline in the 4th quarter. Bear market rallies can be powerful, with gains of
up to 50% from the intermediate low being recorded. If Friday's low of $77 did
prove to be the starting point for such a rally a 50% move would take crude
back to around $115. A smaller 30% rally would take crude almost exactly to
$100 but it is still too early to make any such predictions.

+------------------------------------------------------------------------------+

Goldman's Murti Cuts Oil Price Forecasts on Financial Crisis
2008-10-13 10:16:05.630 GMT


By Nesa Subrahmaniyan
Oct. 13 (Bloomberg) -- Arjun Murti, the Goldman Sachs Group
Inc. analyst who predicted a ``super spike'' in oil prices in
March 2005, has lowered forecasts for crude as the global
financial crisis threatens to stall economic growth.
New York-based Murti's Goldman equities research team cut
its estimate for U.S. benchmark West Texas Intermediate crude for
the fourth quarter to $85 a barrel from $120 and reduced its 2009
average to $75 a barrel from $110, according to a research note
issued by the bank yesterday.
``The rationale for the changes is largely demand-driven as
increasing concerns towards oil demand growth in light of the
global economic turmoil have taken center stage,'' Goldman
analysts Daniel Boyd and Charles Minervino said in the report,
citing Murti's latest forecasts.
Global oil demand has declined as a financial crisis in the
U.S., the world's biggest energy consumer, spreads and banks
pinched by the credit squeeze tighten lending, tipping the world
economy close to a recession.
Murti, a managing director at Goldman and head of Americas
equity energy research, said in May that oil prices may rise to
between $150 and $200 a barrel within two years as growth in
supply fails to keep pace with demand.
Last month, he slashed his 2009 WTI crude oil forecast to
$110 from $140.
The ``global credit crisis and high-profile problems at
major financial institutions have exacerbated the downtrend in
oil markets due to forced liquidation of oil market positions,''
Boyd and Minervino said.

Crisis Underestimated

The commodity research team at Goldman Sachs lowered its
crude oil price forecasts today for the second time this year.
The bank reduced its estimate for the fourth quarter to $75
a barrel from $110 and cut its year-end target to $70 a barrel
from $115, Goldman's commodity research analysts, led by London-
based Jeffrey Currie and Giovanni Serio, said in a report today.
``We clearly underestimated the depth and duration of the
global financial crisis and its implications on economic growth
and commodity demand,'' the analysts wrote. ``Should the
financial and evolving economic crisis cut deeper into demand,
the market could fall as low as $50 a barrel'' in December.
Currie and Serio lowered their average forecast for 2009 to
$86 a barrel from $123. The bank's end-2009 target was cut to
$107 a barrel from $125. The forecast is Goldman commodity team's
second downward revision this year, after a cut on Sept. 16.

July Record

``It's a drastic reduction,'' said Victor Shum, senior
principal at energy consultant Purvin & Gertz Inc. in Singapore.
``Maybe they are foreseeing even worse to come and there's more
downside risks than upside risks to oil right now.''
New York crude oil has fallen 45 percent from a record
$147.27 a barrel in New York on July 11 as demand deteriorated
and the weaker outlook in Europe and Asia lifted the dollar,
reducing the appeal of commodities priced in the U.S. currency.
``The worst is likely already upon us, but the key will be
the duration of credit issues,'' Currie and Serio said. The
``point of maximum weakness for oil demand is likely occurring
right now while the credit markets are locked.''
U.S. oil demand was down more than 10 percent last week from
a year ago ``due to rampant de-stocking and credit-induced
disruptions in the supply chain,'' the analysts said.
The International Energy Agency, an adviser to 28 nations,
cut its forecast for global oil demand next year by 0.5 percent
as the worst financial crisis since the 1930s threatens a global
recession.

IEA's Forecast

The 2009 projection was lowered by 440,000 barrels a day to
87.2 million barrels a day, the Paris-based agency said Oct. 10
in its monthly report, citing a weaker economic outlook from the
International Monetary Fund.
The global credit crisis has damaged the outlook for oil
demand as it has become clear it will have a deep and lasting
impact on ``forward economic activity'' as the bank's economists
reduced global economic growth forecast to 3 percent from 3.7
percent, the Goldman commodity research analysts said.
The credit market turmoil has made it difficult to predict
the direction of oil prices, the analysts said.
West African crude shipments to Western markets have fallen
35 percent in October from September, the analysts wrote in the
report, citing 95 percent of shipping fixtures.
In 2009, the bank expects long-dated oil prices to remain
around $95 a barrel and lower prices may allow demand to return
after being restrained by high prices in 2008. That has prompted
the bank to forecast demand to fall by 400,000 barrels a day
instead of 600,000 barrels a day based on its economic growth
prediction of 3 percent.
The Organization of Petroleum Exporting Countries may need
to cut output by 700,000 barrels a day in January 2009 to
maintain a balance between supply and demand, the analysts said.

For Related News:
News on oil markets: NI OILMARKET <GO>
Top oil stories: OTOP <GO>
News on oil inventories: TNI OIL INV <GO>

--Editors: John Chacko, Jane Lee.

To contact the reporter on this story:
Nesa Subrahmaniyan in Singapore at +65-6212-1509 or
[email protected].

To contact the editor responsible for this story:
Clyde Russell at +65-6311-2423 or [email protected].

A 1km tower would be approximately 2 times of the height of the still to be
commenced Freedom Tower, or almost 3 times the height of the Empire State
building
(381m).
While the
the coincidence of the completion of extremely tall buildings with peaks in
economic cycles is well understood, the planning of even taller buildings and
grandiose projects that are never commenced or completed is perhaps an even
better indicator. For instance back in 1907 plans were drawn up to double the
width of 5th Avenue (at the expense of Central Park) and create a massive
European style boulevard and in 1929 the HQ of Met Life on Madison Avenue (now
occupied by CS) was originally intended to be built as the world's tallest
building prior to it being radically truncated into its present stub nosed
reality.

+------------------------------------------------------------------------------+

Alwaleed Plans One Kilometer-Tall Tower on Saudi Red Sea Coast
2008-10-13 05:48:00.780 GMT


By Glen Carey
Oct. 13 (Bloomberg) -- Kingdom Holding Co., the investment
company controlled by Saudi billionaire Prince Alwaleed bin
Talal, plans to build a 1 kilometer-tall building in the Red
Sea city of Jeddah.
Kingdom Tower is part of a 100 billion ($26.7 billion)
real-estate project in Jeddah known as Kingdom City, the
Riyadh-based company said in a statement posted late yesterday
on its Web site.
Saudi Arabia, the world's largest oil exporter, seeks to
diversify its economy away from energy revenue and develop its
infrastructure with new industrial cities such as the $120
billion King Abdullah Economic City. Dar Al Arkan Real Estate
Development Co. started work Oct. 11 on the 50 billion-riyal
residential and commercial buildings in Jeddah's Khuzam Palace.
Kingdom City is 20 kilometers from the old city of Jeddah
near King Abdul-Aziz International Airport and will have
commercial, residential, institutional, educational,
entertainment, retail and hotel facilities. Kingdom City is
expected to have 80,000 residents and accommodate 250,000
visitors.
Kingdom Holding is down 55 percent this year, with its
shares closing yesterday at 5.6 riyals.

For Related News:
For Saudi property stories: TNI SAUDI REL <GO>
For Top Gulf stories: TOP GULF <GO>

--Editor: Sean Evers.

To contact the reporter on this story:
Glen Carey in Dubai at +971-4-364-1029 or
[email protected].

To contact the editor responsible for this story:
David Merritt at +44-20-7673-2639 or [email protected]

we are clearly close to a full meltdown in the one remaining supposedly
bouyant international RE development market.

+------------------------------------------------------------------------------+

Dubai May Need Help From Abu Dhabi to Repay Debts (Update1)
2008-10-13 08:54:09.400 GMT


(Adds Moody's comments in 10th, final paragraphs.)

By Matthew Brown
Oct. 13 (Bloomberg) -- Dubai may depend on support from
neighboring Abu Dhabi and the federal government of the United
Arab Emirates to help pay for a surge in borrowing, Moody's
Investors Service Inc. said.
Government-controlled companies owe at least $47 billion in
total, more than Dubai's gross domestic product, according to
Moody's data based on economic statistics from 2006.
``We believe that leverage raised primarily through state-
owned corporations will continue to grow faster than GDP for at
least the next five years, during which time the Emirate's
susceptibility toward execution, financing and geopolitical
risks will be at its most pronounced,'' Philip Lotter, Dubai-
based senior vice president at Moody's, said in a report today.
Dubai has borrowed to fund real estate projects including
Burj Dubai, the world's tallest tower, and to buy stakes in
Deutsche Bank AG, European Aeronautic Defence and Space Co. and
Standard Chartered Plc, as it seeks to reduce dependence on its
dwindling oil reserves.
Abu Dhabi, by contrast, owns more than 90 percent of the
U.A.E.'s oil reserves and nearly 8 percent of the world's total.
The Abu Dhabi Investment Authority, its sovereign wealth fund,
has assets of between $250 billion and $875 billion, according
to the International Monetary Fund.
Dubai controls its economy through state-owned companies
that dominate each major industry. Dubai Holding LLC, which
groups assets belonging to Dubai Ruler Sheikh Mohammed bin
Rashid al-Maktoum, owns hotel chain Jumeirah Group and Dubai
International Capital, which unsuccessfully bid for Liverpool
Football Club earlier this year.

Default Swaps

The cost of insuring Dubai Holding's bonds has increased
nearly four-fold since May, according to traders of credit
default swaps. Contracts protecting Dubai Holding Commercial
Operations medium-term notes for four years traded at 679.3
basis points on Oct. 10, up from 172.99 at the beginning of May,
CMA Datavision prices show.
Dubai World, a state-owned holding company, acquired almost
10 percent of Kirk Kerkorian's MGM Mirage last year for about
$5.1 billion. MGM shares have since tumbled to $16.80 from $84
when the deal was agreed.
Deutsche Bank shares have fallen nearly 70 percent since
Dubai government-owned DIFC Investments bought a 2.2 percent
stake for about $1.8 billion in May 2007.
``In most countries there are identifiable delineations
between the public and private sectors,'' Tristan Cooper,
Moody's Middle East sovereign analyst, said in the statement.
``In Dubai, however, the state corporatist model plus the fact
that the ruler and his closest relatives form the core of the
government, make it difficult to draw such distinctions.''

`Implicit' Support

Abu Dhabi and Dubai are the two-largest emirates in the
seven-member U.A.E.
While Dubai's economic model ``has proved successful to
date, cumulative liabilities are currently rising faster than
investments are able to generate returns, which increases
Dubai's medium term susceptibility to execution risks and
necessitates a clear understanding of wider implicit federal
support when rating key government-backed corporations,'' Lotter
said.

For Related News:
U.A.E. economy stories: TNI ECO UAE BN <GO>

--Editors: Sean Evers, Gavin Serkin

To contact the reporter on this story:
Matthew Brown in Dubai at +971-4-364-1022 or
[email protected]

To contact the editors responsible for this story:
Chris Kirkham at +44-20-7673-2464 or [email protected]

This package represents 8.5% of current GDP. As we have been patiently
explaining for months while the US may have the largest aggregate nominal
exposure to busted mortage collateral (and we would stress "may") it is likely
to be a far lower proportion of GDP than for many other countries, and let's
not even talk about Iceland. Bizarre as it may seem the USD will increasingly
be viewed as a "safe haven" in the months ahead.

+------------------------------------------------------------------------------+

Norway to Spend $55.4 Billion to Boost Liquidity (Update1)
2008-10-12 15:55:59.990 GMT


(Adds fixed-rate loan measure in fifth paragraph.)

By Tasneem Brogger
Oct. 12 (Bloomberg) -- Norway will offer commercial lenders
as much as $55.4 billion in government bonds in exchange for
mortgage debt to try to boost confidence in the country's
financial system and ease liquidity constraints.
Banks will be able to use the government notes as collateral
to borrow funds, according to an e-mailed statement from the
government today. Norway will issue as much as 350 billion kroner
($55.4 billion) in bonds in the program and collateral
requirements will be eased.
The central bank last week brought forward an interest rate
meeting to Oct. 15 after the U.S. Federal Reserve, the European
Central Bank and four other banks coordinated rate cuts to
support the global economy. Norway has kept its benchmark rate at
a five-and-a-half year high of 5.75 percent since June to limit
inflation amid a labor shortage.
``The Norwegian authorities are prepared to do what is
necessary to ensure confidence in the Norwegian bank system,''
the government said in the statement.
The central bank will also issue a fixed-rate loan with a
two-year maturity in an effort to help smaller banks, according
to the statement.

--Editor: Bruce Rule, Phil Serafino

To contact the reporters on this story:
Tasneem Brogger in Copenhagen at +45-3345-7123 or
[email protected];

To contact the editor responsible for this story:
Chris Kirkham at +44-207-673-2464 or
[email protected]

See earlier chart on gold. It is an extremely negative sign when retail demand
spikes in this manner and prices fail to respond accordingly.

+------------------------------------------------------------------------------+

Londoners Queue on Sidewalk to Buy Gold in Rush for Money Haven
2008-10-10 14:38:34.890 GMT


By Jonathan Browning and Thomas Biesheuvel
Oct. 10 (Bloomberg) -- Londoners stood in line outside the
largest gold coin and bar retailer in the city's West End
shopping district, clogging the lobby and trading among
themselves as they sought a safe haven for their money.
``People want something tangible, something they can hold
on to, something the banks can't give them,'' said Chris
Burrow, the owner of ATS Bullion, the gold dealer in the Strand
that traces its roots back to the 17th century. ``There's no
time to breathe. We're rushed off our feet. Staff are
exhausted.''
As U.K. stocks tumbled to a five-year low, paced by
financial-services companies, gold advanced. Since Lehman
Brothers Holdings Inc.'s Sept. 15 filing for bankruptcy
protection, exacerbating the worldwide credit crisis, gold for
immediate delivery has jumped 19 percent.
``Investors are rushing to safe havens and physical gold
seems to be the favorite one,'' said Frederic Panizzutti, a
senior vice president at MKS Finance, one of Switzerland's four
bullion refiners.
British government action to prop up the banking industry
has failed to reassure investors. The U.K. on Oct. 8 promised
50 billion pounds ($86 billion) of capital to banks, the same
day the Bank of England cut its benchmark interest rate by half
a percentage point. Last month, the government brokered a
takeover of HBOS Plc, Britain's largest mortgage lender, and
seized control of Bradford & Bingley's mortgage division.

`Jumping in the Sea'

``I'm uncertain about the banks and I don't want too much
of my cash with them,'' said Mark Thomas, 33, who was waiting
to buy 2,000 pounds worth of gold from ATS today. ``It's about
protection.'' He said he owns about 5 kilograms (11 pounds) of
bullion.
Some were buying the metal for the first time.
``It's like jumping in the sea,'' said Ann Ferguson, 70, a
retired librarian. ``I've never done it before.''
London bullion merchant Baird & Co., which began offering
gold bars in London's financial district in May 2007, said
``all sales of gold coins'' were on hold as of Oct. 7,
according to a statement on its Web site.
``The financial sector has been distorted beyond
recognition and investors have lost faith,'' said James Moore,
an analyst at U.K. metals information Web site
TheBullionDesk.com.
In the lobby of ATS, Neil Lovegrove, a 24-year-old
engineer, sold a Krugerrand to a buyer who couldn't wait to get
into the sales area. ``The queues were too long,'' he said.

`Something Is Wrong'

Gold futures for December delivery jumped $29.30, or 3.3
percent, to $915.80 an ounce at 9:01 a.m. on the Comex division
of the New York Mercantile Exchange. A close at that price
would be the biggest weekly gain since Sept. 19.
Waiting to buy coins or bars at ATS, Brijesh Patel said
he'd take whatever was available.
``I've never seen anything like it. I'll just get
anything, whatever they have left,'' said Patel, a 25-year-old
salesman. ``Gold is an indicator of confidence. When it's
disappearing, it shows something is wrong.''
As the Reuters/Jefferies CRB Index of 19 raw materials
fell for the second day, gold headed for its biggest weekly
gain in almost a month.
``Demand for gold will continue,'' ATS's Burrow said.

For Related News:
Global mining NI MNG BN <GO>
Metal markets: NI METMARKET BN <GO>

--With reporting by Claudia Carpenter in London. Editor:
Malcolm Fried, David Merritt

To contact the reporter on this story:
Jonathan Browning in London +44-20-7330-7500 or
[email protected].

To contact the editor responsible for this story:
Malcolm Fried in London at +44-20-7073-3387 or
[email protected].

Whatever the problem is gold does not appear to be the answer. Despite
massive retail buying of the metal on a global basis (last night the Perth
Mint announced it was doubling the production of gold bars) gold has been
unable to break out of its trading range. Today's $70 drop in spot prices
takes the metal down below the key $850 level which marks our "benefit of
the doubt" level. We continue to believe that in the short to medium term
gold is more liekly to be heading for a trip back down to suppport in the
mid $650s than the $1,000+ level that many are calling for.



(See attached file: D-GOLDS_COMDTY.gif) - D-GOLDS_COMDTY.gif

As the week enters its final afternoon session stress measures remain at
extremes in both fixed income and equity markets. The VXO index peaked this
morning just below 3 digit territory at 99.65 and has since retreated to
94.71, still a remarkably high reading that has only been bettered on a
closing basis 3 times (all of which occurred in October 1987). It seems
likely that volatility will remain very high going into the weekend given
the high degree of uncertainty surrounding a number of global financial
institutions and the likelihood of another "Sunday Surprise" and the
earliest we can expect any sort of an unwind would be Monday's sessions.

Credit markets also remain extremely stressed but unlike their equity
counterparts with the exception of the somewhat artificial LIBOR numbers
they remain under the peak readings recorded in September. 5 year swaps for
instance are currently priced at 121.1 bp versus a peak of 128.88. This is
important in our opinion. One other point to note is that we finally have the
sort of volume in equity markets that typifies capitulation by investors. It
may yet take another weekend for investor sentiment to finally bottom but we
sense that this point is getting near.


(See attached file: D-USSP5.gif) - D-USSP5.gif

AAA Junior and Senior blew out to new records this week. A grade stayed
very elevated. Clearly no relief in sight for commercial mortgage market
and significant additional mark-to-market losses for holders of AAA paper.



(See attached file: W-CMBSA_Index.gif) - W-CMBSA_Index.gif

We could all do with a little cheering news and as the US heating season gears
up this is being supplied by sharply falling heating oil prices. Attached is a
5 year seasonal chart of Heating Oil with the heating season indicated by the
yellow box. The red dotted line shows the current price of heating oil which
has fallen from a high of $4.16 on July 11th to the current price of $2.26.
This current price is below the entire range of prices experienced in the
2007/8 heating season (white line) although it still remains 10-20% above
prices paid in 2006/7 and 2005/6. Nevertheless the marginal cost of heating oil
is now down on a year-over-year basis (with obvious implications for consumer
and industrial balance sheets) although the total cost of heating season will
still depend much on the actual temperatures recorded. - sg2008101038627.gif

On Wednesday morning we sent out a long term chart of the SPX showing that
it had breached its 200 month ma and pointing out that this was the first
time this had happened since 1974. We also explained that back in 1974 the
SPX overshot this measure by 25% which would indicate a target for the SPX
of around 750 in a "worst case scenario".

Since Wednesday the SPX has continued to fall, overwhelming important
support at the September 2001 low (945). We have therefore gone back to
1974 and done some more work on this particular time in the US equity
market. As the attached chart shows the SPX fell 73% from its January 1973
high to its ultimate low in July 1974, and fell 37.8% in its final plunge
from March - July 1974. Note that this plunge took almost three times as
long as the current drop from the September high. Using these figures as a
template both give a potential target or around 820 for the SPX. Today's low
point at 839.80 is certainly within acceptable tolerance of this figure.
Interestingly the 2002 low comes in at 780 which is the mid-point of the
750-820 range given by the 2 differnt methodologies and this is therefore our
preferred ROUGH target for the current move - but we would use the entire range
as indicative.

As important as the scale of the 1974 rout is also the scale of the
subsequent recovery. By July 1975 the SPX was 53% higher at 95.61 and by
September 1976 had recovered 73.5%. If we used 780 as the ultimate low this
would give you recovery targets in the SPX of 1190 (short-medium term) and
1350 (medium-long term) respectively. Note that the 1974 crash put paid to
a thematic style of investing around the "Nifty Fifty". The 2008 crash will
almost certain do the same to commodities and emerging markets, together
with strategies that employ leverage and short volatility to boost returns.


(See attached file: D-SPX_INDEX.gif) - D-SPX_INDEX.gif

Following today's Treasury auctions 5 Year swaps (top chart) have fallen below
100 bp. This is a very significant positive development in our opinion (see
earlier comment).


(See attached file: D-USSP5.gif) - D-USSP5.gif

There is something of a disconnect between stress levels in the fixed
income and equity arena this morning. Looking at the equity market the SPX
remains down slightly on the day and is still threatening to test the
September 2001 low at 944.75. The VXO index has tracked higher reaching a
new 21 year high of 69.44 this morning, just above Tuesday's peak. Clearly
this is a delicate stage in which the market will either stabilize and rally,
in which case volatility will contract powerfully or we'll be looking at a full
test of the 2002 low and 3 digit VXO.

There is therefore some encouragement offered by the credit markets which
show a greater degree of stability at present. Credit markets remains very
stressed but have managed to moderately improve in recent days. For instance
The 5 Year swap to Treasury spread is currently 107.8 bp, well below the
September peak of 128.88. The key level to watch is 100 bp, a fall below that
level would signal a marked improvement in credit stress. Clearly it is possible
for the equity market to ignore such an improvement but we do believe that
it has been the chaos in credit markets that have taken us to this point
and therefore the best chance of emerging to somewhere better would be an
improvement in credit stress levels.


(See attached file: D-SPX_INDEX.gif)
(See attached file: D-USSP5.gif) - D-SPX_INDEX.gif - D-USSP5.gif

One question that comes to mind regarding the devastating recent drop in the
SPX is how far has it fallen in historical terms? The attached chart shows a
very long term logarithmic chart of the SPX going back to 1940 with a 200 month
ma in green. As the chart demonstrates we closed yesterday right on this
measure (992), the first time this has occurred since 1978. The only time this
indicator has been meaningfully breached in the last 60 years was in the crash
of 1974 when the SPX cratered to 62.28 at a time when the 200 month ma was at
81, an overshoot of approximately 25%. One could therefore view this as a
"worst case scenario" target for the current decline and this would translate
into a fall in the SPX to approximately 750, or more probably support that
would be found around the 2002 low at 780. The much better news is that the
1974 low was followed by an extremely powerful rally of over 80% and the
stronger the decline the more powerful will be the response.

We would stress that the above is a "worst case scenario" and much less likely
than a bottom being formed in the near term within a few percent of yesterday's
close, but these are highly unusual times and it pays to consider the
possibilities before you are confronted by the reality. - sg2008100831740.gif

While most global equity markets have responded positively to the
coordinated rate cuts the RTSI$ index remains down 11.25% today at 761.63.
This takes the index down to our bear market target area (higher pink line)
which was meant to serve as a longer term target. At the current level the
index has lost over 70% of this summer's peak market capitalization (to put
this in perspective the first wave of the 1929-1932 crash took the Dow down
48%). If the index fails to stabilize here we would be looking for a fall
down to the 500 level (lower pink band) which marks an area of support back
in 2004. Obviously a decline of this magnitude will have already wrought
devastation on the nation's savings and there may well be a price to pay in
terms of political instability in the months ahead.


(See attached file: W-RTSI$_Index.gif) - W-RTSI_Index.gif

The VXO index is back above the 50 level for a rare-retest of this exalted
area. Monday's high registered 55.10 and it is possible that this mark
could yet be exceeded by few points. With the SPX now just over 2% above
Monday's low (1106.39) a breakout in the VXO would probably coincide with a
full retest of this level.

In terms of historical context the highest reading for the last 21 years
remains 60.63 which was recorded on October 8th 1998. During that
particular episode the VXO exceeded 50 on 6 separate sessions between
August 31st and October 9th before falling back very rapidly to the low
20's.

(See attached file: D-VXO_INDEX.gif) - D-VXO_INDEX.gif

This is a test for a news story

+------------------------------------------------------------------------------+

Bank of America Falls, Dividend Slashed as `Recession' Deepens
2008-10-07 12:46:44.780 GMT


By David Mildenberg and Andrew Frye
Oct. 7 (Bloomberg) -- Bank of America Corp. fell
8.3 percent in early trading after chopping its dividend in half
and offering $10 billion of new stock to brace itself for an
extended recession.
Bank of America slid to $29.55 in New York after the
Charlotte, North Carolina-based company said late yesterday that
third-quarter profit dropped 68 percent. The results were worse
than analysts expected, and the bank reduced its quarterly
payout to 32 cents a share.
Chief Executive Officer Kenneth Lewis, who told investors
in July that the bank didn't need to cut its dividend or raise
capital, said the U.S. economy slowed in the past 45 days with
little prospect for immediate improvement. Troubled assets rose
37 percent in three months, according to Deutsche Bank AG
analyst Michael Mayo.
``The recession is going to be a little deeper than we
thought,'' Lewis said on a conference call. ``It's going to take
some more time and some more pain.''
Profit dropped to $1.18 billion, or 15 cents a share, in
the quarter ended Sept. 30, from $3.7 billion, or 82 cents, a
year earlier. Bank of America announced results two weeks early.
``We don't look real smart today, given what's happened,''
Lewis said. ``But all in all, we just thought it was prudent to
get out there sooner rather than later.

Credit Markets

U.S. Federal Reserve and Treasury officials are considering
new ways of helping credit markets, as banks hoard cash and
interest rates soar on corporate short-term borrowing. Stocks
fell around the world yesterday on the first full day of trading
after the U.S. enacted a $700 billion bank-bailout plan on Oct.
3. The Standard & Poor's 500 Index retreated almost 4 percent.
``The economy weakened materially from the second quarter
as evidenced by rising unemployment, bankruptcies and continuing
home-price declines,'' Lewis said.
The Bank of America share offering has already started,
according to a statement, with the company and Merrill Lynch &
Co. managing the sale. Bank of America may realize ``a few
billion dollars'' more than $10 billion, depending on investor
demand, Lewis said.
Lewis has been taking advantage of the financial industry's
disarray to expand. In July he bought Countrywide Financial
Corp., the largest U.S. home lender, for about $2.5 billion.
Last month he agreed to buy Merrill Lynch, the world's largest
securities brokerage, for $50 billion.

Stock Sale

The share sale was widely expected, said Nancy Bush, an
independent bank analyst in Annandale, New Jersey.
``With Merrill and Countrywide on the plate, and whatever
else is coming down the highway, I'm surprised they aren't
raising more capital,'' she said.
Retail deposits advanced $56 billion to $586 billion in the
quarter, boosted by $35 billion from Countrywide. Much of the
increase occurred in September from the ``flight to quality,''
in which depositors seek out banks seen as safe places to store
cash as other institutions fail, Chief Financial Officer Joe
Price said.
Bank of America earned more than $5 billion for five
consecutive quarters in 2006 and 2007 and expects to achieve
higher profit once the economy rebounds and benefits from
Countrywide and Merrill Lynch kick in, Lewis said on the call.
The global credit crunch has led to more than $580 billion
of losses at the world's biggest financial companies, which have
responded by raising at least $432 billion in capital.
``You could talk about a miss on estimates, but estimates
don't seem to mean as much as they used to,'' Lewis said. ``We
thought that having a level of profitability over a billion
dollars might distinguish us among our competitors.''

--With reporting by Rebecca Christie and John
Brinsley in New York. Editors: Dan Reichl, Rick Green.

To contact the reporters on this story:
David Mildenberg in Charlotte at +1-704-331-6587 or
[email protected];
Andrew Frye in New York at +1-212-617-1869 or
[email protected].

To contact the editor responsible for this story:
Rick Green at +1-212-617-5804 or [email protected]

Congress and the Treasury department spent the last 2 weeks bickering over
the TARP proposal hogging participants attention when they could take their
eyes off gyrating markets. It is therefore understandable that the dramatic
growth of the FRB balance sheet has gone largely unnoticed but this does
not make this momentous activity any less important.

Attached is a chart showing Total Assets of the FRB with a 52 week ROC on
the bottom in green. As the chart shows FRB assets have grown by $500 bln.
over the last 3 weeks, an increase of over 50% from their early September
level. Very simply nothing like this has ever been seen before. We note on
the chart the 2 prior rapid increases in the FRB balance sheet which were
the build up to Y2K (when the Greenspan FRB was somewhat bizarrely
concerned that ATM's may run out of cash) and the response the 9-11
Terrorist attacks. The former has been credited with creating the final
blow-off top in the NASDAQ bubble, the latter with stabilizing a shaken
financial system, but both are mere pimples compared to the massive spike
we are currently witnessing.

Since we are firmly in uncharted territory it is impossible to be sure of
the exact effect of this process but we suspect that we will son be dealing
with a situation in which liquidity is theoretically available in abundance
and spreads dropping back considerably. This is still some ways short of a
"healthy" environment. Credit is likely to be strictly rationed with those
borrowers least in need able to obtain financing at reasonable rates but
ore marginal portions of the economy still heavily restricted in their
access. A flight to quality which sees record spreads between "quality" and
"junk" (used generically) seems likely to be a fairly long term phenomenon
but this also means that the longer term value of the latter may actually
prove to be abnormally high for those capable of tucking it away in a
portfolio.


(See attached file: W-FARBAST_Index.gif) - W-FARBAST_Index.gif

With only 75 minutes on the books today's session already seems destined to
earn a place in the history books with both the SPX and VXO indexes
recording extraordinary moves. As of present the SPX is at 1031, a level
unseen since late 2003 when people were still arguing about whether the
2000-2003 bear market had actually ended. Obviously at the current level
the market is fundamentally cheap, but this is likely to remain irrelevant
in the short term. Support comes in most clearly at the 1,000 round number
and below this there is a shelf formed by the August 2003 low around the
980 level. Note that for the latter to be reached today we would almost
certainly trigger a trading halt since the current circuit breaker level is
a 1,100 point fall in the Dow Jones Industrial Average.

The VXO shows the full extent of the current panic and has risen as high as
66.07, a level unseen outside of the October 1987 crash (when it reached
172). As we have said before such conditions do not last long but rather
like a hurricane that blows through a neighborhood they can wreak
tremendous damage while they stick around.



(See attached file: W-SPX_INDEX.gif) - W-SPX_INDEX.gif

This is potentially a real turning point in the valuation of financial franchises under pressure. We have noted for several weeks that the BKX index has been holding up far better than would be expected and WFC stepping up and outbidding C certainly suggests that there is probably more value in this sector than the market realizes. To put this new deal into context, it values WB at around $7 per share. On the eve of the original C/FDIC transaction, WB closed at 10.00 and as recently as May traded at $30 so this still represents a deeply distressed valuation, but it is a long way away from the WM/LEH type of worst case scenario. It will be very interesting to watch how the market digests this news. This is clearly not the end of the problem but it does suggest rather more of a "two-way street" when trying to place a value on troubled franchises.

The chart below shows the Spread of the CS High Yield Index to the 5-Year T-Note (top chart in black) together with the Nominal Yield of the index (bottom chart in red). Given the extreme turmoil currently roiling markets, it comes as little surprise to see that High Yields have risen sharply but is perhaps less expected to see that they have already reached the peaks of the 2000-2002 recession and in fact the collapse of Drexel at the end of 1990. Nominal yields still lag the peaks reached in 2000 and 2001 but this is partly a reflection of a much lower Treasury yield environment at the current time. It should also be noted that we are yet to experience a true wave of high yield defaults this cycle (although the market is no doubt correct in anticipating that this will occur in the months ahead). As with many of the other prices we see on our screens, the driving force seems to be a complete lack of bids rather than an actual destruction of capital, although on a mark-to-market basis this amounts to the same thing. Once more, the probability that prices are being driven by forced liquidation seems to be quite high.

Prior visits to the 1100+ spread level have not lasted more than a short number of weeks and have been followed by strong recoveries and at current yields, surviving credits are clearly paying rich rewards. Nevertheless as the 2000-2002 cycle demonstrates, it is possible to undergo something of a roller-coaster ride as a credit cycle unfolds. We will be paying attention to this index quite closely in the weeks ahead.

The VXO index is back above the 50 level for a rare-retest of this exalted area. Monday's high registered 55.10 and it is possible that this mark could yet be exceeded by a few points. With the SPX now just over 2% above Monday's low (1106.39), a breakout in the VXO would probably coincide with a full retest of this level.

In terms of historical context, the highest reading for the last 21 years remains 60.63 which was recorded on October 8th 1998. During that particular episode, the VXO exceeded 50 on 6 separate sessions between August 31st and October 9th before falling back very rapidly to the low 20's.

Sell-side coverage of the Ag-Tech cycle has been a textbook example of how these things play out (although we would point out that the buy-side has been just as guilty at allowing this over-enthusiasm to take hold). Finally a more realistic viewpoint over this industry's prospects and valuations seems to be taking hold, with the predictable consequences for share prices which are now 40-50% below their peak 2008 levels. Note that a bear market rally is now overdue and those carrying short positions may wish to consider lightening these during the response to this downgrade.