Yuan, Rupee Rise at Record Pace as China, India Fight Inflation

By allowing their currencies to strengthen, Asian countries are attempting to reduce the cost of importing coal, iron ore and wheat, ingredients essential to their booming economies. The risk is that the goods they produce may become too expensive. In China, consumer prices rose 6.5 percent in August, the most since 1997. Singapore consumer prices hit a 12-year high in August, and India's inflation rate this year reached the highest since 2005.

Asian central banks are finding that raising interest rates and selling debt aren't enough to soak up the cash that generates higher wages and fuels inflation. The People's Bank of China increased rates five times this year, while the Reserve Bank of India has boosted its target seven times in two years.

Currencies in Asia are rising so fast that manufacturers in Asia are demanding reassurances from policy makers that their exports will remain competitive. India's export growth slowed to an average 14.4 percent in the first eight months of this year, compared with 22.4 percent in the same period in 2006.

Asian central banks that want faster appreciation in their currencies are getting some help from international investors, who are pumping money back into emerging markets after pulling away in July and August. Stock market indexes in India, China, the Philippines, Indonesia and Singapore rose to records in the last month.

-Subir

The Big Bank Bail Out

In a move reminiscent of the bail out of Long Term Capital Management in the late nineties, a group of large banks led by Citigroup, Bank of America, and JP Morgan have been in discussions to financially back approx. $100 billion in troubled investments tied to subprime mortgages. The concern is that "bank-affiliated funds will be forced to unload billions of dollars in MBS" which would in turn cause auction sales which would further drive down the price of these securities. The bigger fear is that after banks sustain this hit, they will be less inclined to approve loans to homeowners and businesses...further damaging the economy.
Many banks have created structured investment vehicles (SIV), which buy long term higher yielding long term debt, and issue short term debt at low rates because of their high credit rating. However, as the value of subprime has fallen, so has the credit quality of these vehicles. This has made it increasingly difficult for SIVs to roll their debt (issue new debt to redeem maturing debt). The plan ... which is tentatively named "Master-Liquidity Enhancement Conduit" (sounds like a physics experiment) would create a fund backed by the banks to issue short-term debt while also buying assets currently held by the SIVs. This superconduit would be financially backed by the big banks, and thus reassure the risk-averse investors that the SIVs initially attracted.
-JK

Get Ready to Read Between the Fed's Lines

Investors are evenly divided over whether Federal Reserve officials will cut interest rates again later this month or stand pat after September's cut.

By the end of the week, we'll all have a better idea of how Fed officials have been thinking. Minutes from the Fed's September meeting -- when it cut its target federal-funds rate by a half percentage point to 4.75% -- and from its emergency August conference call are due.

Money is flowing more easily through the credit markets and the September employment report makes the situation look much less scary.

If the minutes show the Fed was dwelling on markets and the August jobs report, investors might infer officials are more at ease now.

In the end, investors will have to decide whether they prefer an economy that is so weak the Fed feels compelled to cut rates again, or an economy that's strong enough to make officials feel comfortable standing pat.

-Subir

Banks selling debt for cheap

As the credit markets seized up over the summer, the private equity firms that were in high gear ran into troubled waters. Gone was the buyout shops' access to cheap loans.

Gone, too, even more suddenly, was investor demand for the loans -- and the price for them fell in step. That left Wall Street banks holding some $400 billion in debt they had promised as financing for purchases private-equity firms had in the works globally.

With the economy slowing and profits weakening, the banks could be stuck holding these hundreds of billions of dollars of loans for months to come -- a big risk
After the Fed rate, the banks have been able to sell off a portion of those debts; examples include $26.4 billion for Kohlberg Kravis Roberts & Co.'s buyout of First Data Corp.

The sales haven't come easily -- or profitably. They have offered only the highest-quality portions of the debt for sale, and that at a loss. To accomplish that they agreed to sell the debt at 96 cents per dollar, locking in losses after their fees were figured into the deal.

The banks have also tried to convince investors by promising 60-day protection on price. Yet many hedge funds decided to sit on the sidelines, assuming that on day 61, when the guarantee expired, they could pick up the debt for less money in the secondary market.

-Subir

Why the Dollar Won't Regain Its Past Strength

The US Dollar has been declining like it did in 2005 but experts believe that it probably wouldn’t regain its past strength.

The dollar is declining becase the current account deficit is increasing. Broadly speaking, the deficit measures how much more the U.S. spends on goods and services from abroad than it earns on the goods and services it sells.

Increasing current account deficit, will force the US to borrow money from outside, by writing IOUs. Borrowing money from outside will decline the dollar.

What's different now is that the U.S. economy is looking weaker than many of its counterparts abroad. US productivity is declining as compared to the emerging markets. So now investing in the US (i.e. lend US money) is not that attractive

Hence dollar will become cheaper, and US interest rates will go up; reducing the delta of interest rates with the emerging markets

-Subir

October 8, 2007 - AMR's Long-Trm Solution Needs to Gain Some Altitude

Investors should be cautious about AMR (American Airlines) stock despite its recent list in price. The world's largest airline by traffic is setting a slower recovery pace than its competitors. The CEO is adhering to long-term strategy that often eschews short-term, investor pleasing fixes. Now, investments to improve operations for the long haul, including better customer service and new aircraft interiors, are adding to the carrier's high costs. Most airline stocks have been hurt in recent months by soaring energy prices, but shares of MAR have been battered more than others.

Hedge Funds Playing With Valuation?

New research shows that many hedge funds may be "cherry-picking" certain securities in their client portfolios and valuing them at overly favorable prices to improve the performance of their funds. This is especially significant given the number of hedge funds in the marketplace and volatility in the market as of late. Investment managers are blowing up as of late. For example, Ellington Capital suspended withdrawals at the end of September on two of their funds due to the credit market crunch. Two funds at Bear Stearns Asset Management had to suspend activities in late July due to large losses on CDOs. This has caused a domino effect on the market (especially on structured finance products) as the assets from these funds are liquidated in open market auctions. Because of the mark-to-market accounting principle of trading securities, banks and brokers had to mark down their securities to the auction levels...causing huge losses in the broader market. However, hedge funds do not operate under the same scrutiny. Many are offshore entities and not registered with the SEC. However, the idea of hedge funds playing with valuation may be of no surprise. According to a couple academic researchers, "distorting returns is more feasible when the opportunity for exerting managerial discretion is higher". Yea. Duh.
-JK

October 4, 2007 - 'Decoupling' Is a Popular Bet; That's the Rub

It's increasing clear that the U.S. isn't any longer the sole engine of global growth- that other economies have, in effect, decoupled from it. For U.S. investors looking to cut exposure to a weaker U.S. economy, the key is to find companies that benefit from global growth and avoid those that are domestically focused or have big exposures to the housing market. Strong global demand makes energy and basic-materials companies obvious between, particularly since oil and raw materials are good hedges against a weakening dollar. Industrial companies with big overseas sales, such as Boeing and Deere, also make sense, as do most technology firms. On the other side of the ledger, department stores, media companies, restaurants and other so-called consumer-discretionary companies could get hurt by a slowdown in the consumer spending at the same time that they see some of their costs driven higher by the global boom. Many regional banks and other financial companies are getting hit by mortgage troubles. Firms with exposure to housing are in the worst straits. There's a big hidden risk here. When so many investors place bets on the same idea - no matter how good it is - even the slightest bit of unexpected bad news can inflict widespread pain as everyone tires to unwind those trades.

October 1, 2007 - Stocks Rise, Through It All

Although the stock market ended with respectable gains, there was turbulence along the way, including a dive in August when credit woes drove major indexes more than 9% off records set in July. Oil prices hit an exchange record high and the dollar hit a low against the euro. The Dow Jones Industrial Average recovered to end the quarter up 487.01 points, or 3.6%, at 13895.63, ahead 11.5% this year. The Fed Res helped in Sept. with half percentage point cut in its target short-term interest rate, sending the Dow to its best month since May and the best Sept since 1997. There could be more bad news from the credit crunch. The economy is in transition, moving from slow expansion to what investors hope will be more robust output aided by further interest-rate cuts from the Fed. It could move from slow expansion to shrinkage as well.

October 1, 2007 - Why eBay, Amazon Shares Are Up

Wall Street is re-evaluating how to measure growth at eBay Inc. and Amazon.com - and the change is helping to send the stocks of both companies higher. For years, analysts and investors routinely looked to numbers such as total auction listings and new users to gauge whether eBay and Amazon were growth companies. But some on Wall Street now have begun emphasizing other measures such as revenue generated per Internet user, operating margins and overall revenue growth. That means some analysts now are comparing eBay and Amazon with brick-and-mortar retailers rather than high-technology concerns.

October 1, 2007 - Dollar Lists Exporters

If the dollar falls too far and too fast, it could spur a run-up in interest rates and shake the stock market - which would be bad for the economy. A rapidly falling dollar would raise the price of imports, stocking inflation and in an extreme case could prompt foreign investors to dump U.S. bonds, pushing their yields higher. But as long as the dollar declines at a gradual pace, most economist see it as a modest positive. Multi nationals have built factories all over the world to insulate themselves from changes in currency. The dollar, however, has drifted so low, that some companies are considering moving their production back into the US.

MONDAY OCTOBER 1ST 2007 - STOCKS STRENGTH VERSUS ECONOMIC REALITY

The stock market is usually a leading indicator of economic growth. With the market once again trending upward, there seems to be a disconnect with the economy. Reports on employment, sales, production and homes have been weaker then expected. Chances of a recession are not quite 50/50, but it is somewhere in the neighborhood. Housing is a small portion of GDP. It's effect on the economy, however, is critical. Residential investment damped GDP growth prior to 8 of the last 10 recessions. Investors seem to be banking on overseas economic strength. Exports account for more then 1/10th of GDP.