Page 3 of
5 Tight
'money' Commentary and weekly
review by Doug Noland
across the
U.S. has already battered some of our largest
financial institutions, created ghost towns of
once vibrant neighborhoods -- and it’s not over
yet.’"
November 28 – Bloomberg (David
Evans): "Florida local governments and school
districts pulled $8 billion out of a state-run
investment pool, or 30% of its assets, after
learning that the money-market fund contained more
than $700 million of defaulted debt. Orange
County…removed its entire $370 million from the
pool
on Nov. 16, two days after the head of the agency
that manages the state’s short-term investments
disclosed the defaulted debt in a report delivered
to Governor Charlie Crist. ‘Our primary goal is to
protect our funds,’ said Jim Moye, Orange County’s
chief deputy comptroller… ‘Knowing other people
were pulling out, and that word was spreading, we
looked at the potential for a run on the pool,’
said Orange County’s Moye… Should the withdrawals
continue, Florida’s pool may have to consider
filing for bankruptcy protection, says John
Coffee, a securities law professor at Columbia Law
School... Coffee predicts the pool will likely
file lawsuits to recover losses. ‘I’d expect the
pool is going to sue the people who sold them the
commercial paper, saying the risks were hidden,’
he said… The Florida pool, which was the largest
of its kind in the U.S. at $27 billion before the
recent spate of withdrawals, has invested $2
billion in SIVs and other subprime-tainted debt…"
November 29 – Bloomberg (David Evans):
"Florida officials voted to suspend withdrawals
from an investment fund for schools and local
governments after redemptions sparked by
downgrades of debt held in the portfolio reduced
assets by 44%. The Local Government Investment
Pool had $3.5 billion of withdrawals today alone,
putting assets at $15 billion, said Coleman
Stipanovich, executive director of the State Board
of Administration, which manages the fund along
with other short-term investments and the state’s
$137 billion pension fund. ‘If we don’t do
something quickly, we’re not going to have an
investment pool,’ Stipanovich said… The fund was
the largest of its kind, managing $27 billion
before this month's withdrawals… ‘We need to
protect what is there in the interim,’ said
Governor Charlie Crist… The fund has invested $2
billion in structured investment vehicles and
other subprime-tainted debt... About 20% of the
pool is in asset-backed commercial paper,
Stipanovich said… ‘There is no liquidity out
there, there are no bids’ for those securities, he
said."
November 30 – Bloomberg (David
Evans): "School districts, counties and cities
across Florida sought to raise cash after being
denied access to their deposits in a $15 billion
state-run investment fund. The Jefferson County
school district was forced to take out a
short-term loan to cover payroll for the 220
teachers and other employees in the system after
$2.7 million it held in the pool was frozen
yesterday. At least five other districts also
obtained last-minute loans… ‘The unthinkable and
the unimaginable have just happened here in
Florida,’ said Hal Wilson, chief financial officer
of the Jefferson County school district…"
November 29 – Financial Times (Michael
Mackenzie): "The baton of tension in the money
market will pass to one-month paper today as the
countdown to year-end funding pressures enters its
final four weeks… In the present situation,
traders report a distinct reluctance among banks
to lend beyond a one-week period and say
conditions are approaching the levels of stress
seen back in September when the credit squeeze
initially flared. ‘People are waiting for the day
of reckoning,’ said George Goncalves, analyst at
Morgan Stanley… Money markets are already enduring
a protracted period of stress, thanks to the
credit squeeze. This is being exacerbated by the
traditional pressures associated with the closing
of the fiscal year for many financial
institutions. This is when banks garner cash in
order to meet dividend, tax and interest payments
and provide for bonuses. ‘Year end is usually a
nervous time and this is being magnified by the
present strains and stress in the system,’ said
John Wraith, head of UK rates strategy at RBS."
November 26 – Financial Times (Jennifer
Hughes): "Auditors will apply tough standards to
banks’ assessments of their holdings, according to
a draft paper being put together by the biggest
auditing firms that aims to bring about a common
approach to valuation. The paper, seen by the
Financial Times, is also designed to allay fears
that the ongoing market turmoil will lead banks
and their auditors to different conclusions about
how they value holdings and what is a fair price.
The issue is increasingly urgent with financial
year-ends approaching since only full-year
financial statements are fully audited…. The paper
is being drawn up by the ‘Big Four’ - PwC, KPMG,
Deloitte and Ernst & Young - together with BDO
International and Grant Thornton… In a sign of the
seriousness of the situation, this is the first
time the six have sat down and formally compared
their internal practices in such a way."
November 28 – Financial Times (Ben White):
"Sixteen years ago, the largest bank in the US was
on the ropes, its balance sheet crippled by bad
debts, especially on commercial real estate and
Latin American loans. Citicorp, as it was then
known, turned to a top client in the Middle East
for help, securing a $600m investment from Prince
Alwaleed bin Talal of Saudi Arabia for convertible
shares paying a cumulative annual dividend of 11%.
Now Citigroup, its balance sheet threatened by bad
residential real estate loans and related
securities, has once again turned to a top client
in the Middle East. This time it is receiving a
$7.5bn cash infusion from the investment arm of
the Abu Dhabi government for convertible stock
yielding 11%."
Currency Watch The
dollar index rallied 1.5% to 76.18. For the week
on the upside, the Brazilian real increased 2.9%,
the South African rand 2.6%, the New Zealand
dollar 1.8%, the Australian dollar 1.6%, and the
Mexican peso 0.9%. On the downside, the Japanese
yen declined 3.4%, the Swiss franc 3.1%, the
Swedish krona 2.5%, the Norwegian krone 2.4%, the
Danish krone 1.6%, and the Euro 1.6%.
Commodities Watch November 29 –
Financial Times (Javier Blas): "Policymakers
already concerned about the relentless rise in
global food inflation are facing more bad news in
the shape of soaring soyabean prices. Soyabean
prices have risen to their highest level in 34
years, boosted by strong Chinese demand and fears
that current prices are not high enough to swing
acreage from corn to soyabeans in the US… The
price-jump threatens to resonate through the
supply chain, boosting meat and poultry prices
because soyabean is used largely for animal feed,
analysts warned. The surge in soyabean costs -
coupled with price increases in other feedstock,
such as wheat and corn - could prompt some farmers
to abandon production of pork, beef and lamb amid
mounting losses, paving the way for higher meat
prices in the future. Food inflation is already a
big concern for policymakers in developed and
developing countries… Soyabeans are, together with
corn, rice and wheat one of the world’s key crops.
About 80% of the harvest is processed into
soyameal and cakes for livestock feeding, while
the other 20% is converted into oil for human
consumption (and more recently also to feed the
biodiesel industry)." For the week, Gold fell 4.9%
to $784, and Silver sank 5.1% to $14.17. March
Copper rallied 5.1%. January Crude sank $9.47 to
$88.71. January Gasoline dropped 9.5%, and January
Natural Gas fell 8.9%. December Wheat jumped 4.9%.
For the week, the CRB index dropped 4.1% (up 10.6%
y-t-d). The Goldman Sachs Commodities Index (GSCI)
sank 6.4%, reducing 2007 gains to 33.2%.
Japan Watch November 30 –
Bloomberg (Lily Nonomiya): "Japan's housing starts
fell for a fourth month in October as stricter
rules for obtaining building permits remain a
burden on economic growth. Starts tumbled 35% from
a year earlier…"
China
Watch November 30 – Bloomberg (Zhang
Shidong and Chua Kong Ho): "Chinese stocks fell,
sending a key index to its steepest monthly slump
in at least 12 years… PetroChina Co., the world’s
biggest company, and China Shenhua Energy Co., the
nation’s largest coal producer, led the decline.
PetroChina tumbled 35% from a Nov. 5 high and
Shenhua sank 32% from its Oct. 15 record close."
November 29 – Financial Times: "The tide
has turned on overseas Chinese initial public
offerings, one of the last outposts of irrational
euphoria open to foreigners. In the past week, two
IPOs have tanked on their debut on the Hong Kong
stock exchange: the latest, Sinotruk, slid 16% on
Wednesday, the worst first-day performance seen in
the territory this year. Coming at the end of a
year marked by excesses - until November 20, such
IPOs were returning an average one-day pop of 30%,
according to Dealogic - the latest arrivals herald
a marked shift in sentiment."
November 27–
Bloomberg (Winnie Zhu): "China Three Gorges
Project Corp. had invested 115.3 billion yuan
($15.6 billion) in the world’s biggest
hydroelectric venture by September… The project
has 19 hydropower units in operation, with
generation capacity of 13,300 megawatts, Wang
Xiaofeng, director of the Three Gorges Dam
office…said… The dam is scheduled to have 26 units
in place by the end of next year."
India
Watch November 30 – Bloomberg
(Cherian Thomas): "India’s economy grew at the
slowest pace since the final quarter of 2006,
signaling the central bank may soon end three
years of interest-rate increases. Asia’s
third-largest economy expanded 8.9% in the three
months to Sept. 30 from a year earlier, after a
9.3% increase in the previous quarter…"
Unbalanced Global Economy
Watch November 28 – Bloomberg (Gabi
Thesing): "Money-supply growth in the euro region
accelerated more than economists forecast in
October, to the fastest pace in more than 28
years, adding to the European Central Bank’s
inflation concerns. M3 money supply… grew 12.3%
from a year earlier, after gaining 11.3% in
September… That’s the highest rate since July
1979."
November 28 – Market News
International: "Growth of eurozone M3 money supply
soared to a record high in November and, along
with a renewed climb of growth in loans to the
private sector, will cause some discomfort at the
ECB, which is already concerned about mounting
risks to price stability. But while the outcome --
which saw the key 3-month moving average of M3
growth rise to a new high of 11.7% -- was
unexpectedly high, the ECB has also acknowledged
that the monetary data may be distorted by the
financial market strains related to the U.S.
subprime mortgage woes."
November 28 –
Bloomberg (Gabi Thesing): "Inflation in the euro
area may accelerate to a six-year high of 3% this
month, increasing pressure on the European Central
Bank to raise
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
