Page 3 of
5 CREDIT BUBBLE
BULLETIN Reflation
contemplation By Doug
Noland
types of businesses,' new Chief
Executive Officer John Thain said ... The market
for CDOs, which repackage assets into new
securities with varying degrees of risk, has been
frozen since last July when two Bear Stearns Cos
funds that invested in them collapsed."
January 30 - Bloomberg (Christine
Richard): "Financial Guaranty Insurance Co, the
world's fourth-largest bond insurer, lost its AAA
credit rating at Fitch Ratings after missing a
deadline to raise capital ... The loss of the AAA
stamp jeopardizes ratings on bonds Financial
Guaranty insured and limits the company's ability
to
generate new business."
January 28 -
Bloomberg (John Glover): "A default by bond
insurers such as ACA Capital Holdings Inc. may
trigger a 'disaster' in the credit-default swaps
market, according to Bank of America ... ACA
Capital, which guarantees more than $75 billion of
debt, may face delinquency proceedings from
Maryland Insurance Administration because it can't
pay $60 billion of credit-default swaps. The
contracts, based on bonds and loans, are used to
speculate on a company's ability to repay debt and
the buyergets face value in exchange for the
underlying securities or the cash equivalent
should a borrower default. 'We see huge potential
problems for settling CDS contracts'," ... analyst
Glen Taksler wrote.
January 30 - Bloomberg
(Adam Haigh and Eric Martin): "Citigroup Inc,
Merrill Lynch Co, UBS AG and other banks may be
forced to post up to $70 billion in writedowns
should bond insurers lose their top credit
ratings, according to Oppenheimer & Co analyst
Meredith Whitney ... 'The fate of the monoline
insurers is of paramount importance to financial
stocks', said New York-based Whitney. 'When it
becomes clear, as we expect it will, that more
charges are on the horizon, we believe the market
will take another turn for the worse'."
January 30 - Bloomberg (Warren Giles):
"UBS AG, Europe's largest bank by assets, reported
a record loss after about $14 billion of
writedowns on assets infected by subprime
mortgages in the US."
January 30 -
Bloomberg (Neil Unmack): "Morgan Stanley, the
second-biggest US securities firm, wrote down $169
million after helping its money funds by taking on
bonds issued by structured investment vehicles.
Morgan Stanley bought $1.06 billion of SIV bonds
... Banks and money managers bailed out money
funds that bought debt from SIVs after losses
caused by the collapse of the US subprime mortgage
market threatened to push their value below 100
cents on the dollar, known as 'breaking the
buck'."
January 29 - Bloomberg (Mark
Pittman): "A collateralized debt obligation backed
by subprime mortgages collapsed after a forced
sale of assets didn't yield enough to pay back
$282 million in notes. Standard & Poor's
lowered the rating of Visage CDO II Ltd. notes to
D, its lowest rating and signifying a default. Two
of the issues totaling $160 million were given an
AAA rating a year ago." Currency
Watch February 1 - Financial Times (Richard
McGregor): "As China's foreign exchange reserves
have swelled to unforeseen and uncomfortable
levels in recent years, Beijing’s policymakers
have taken comfort in the thought that they are at
least making a paper profit on managing the money.
To keep the renminbi stable, the People's Bank of
China buys nearly all the incoming foreign
currency, invests it, and then tries to
'sterilise' the monetary impact in China by
issuing local currency bills to take the funds out
of circulation. High interest rates in the US, and
lower rates at home, meant that the dollars
invested by Beijing in the US earned the central
bank more than it was paying out in local currency
bills. But the monetary policy cycles have now
abruptly reversed. Rates are falling in the US but
rising in China, where the government is
tightening credit to fight inflation and cool some
sectors of the economy. As a result, China's
central bank will be paying about 250 bps more on
the bills it issues at home than it gets on US
Treasuries ... Simple mathematics suggests that
Beijing is losing billions of dollars as a result,
an amount amplified if the impact of China's
appreciating currency is taken into account."
January 31 - Bloomberg (Gavin Finch): "The
Swiss franc rose to a record high against the
dollar as widening financial sector losses and a
decline in stocks prompted investors to sell
higher-yielding assets ... 'We are probably
undergoing a drawn-out process of risk reduction
and de-leveraging in global markets, and as such
the prognosis for carry trades remains poor', said
Ashley Davies, a currency strategist ... at UBS
AG, the world's second-largest foreign-exchange
trader. 'The carry trade will not return in a big
way' in 2008."
January 30 - Bloomberg (Bo
Nielsen): "UBS AG, the world's second-largest
currency trading firm, says investors should stop
selling yen to buy higher-yielding assets overseas
because rising volatility and financial-market
turmoil favor other strategies. Carry trades will
be unreliable this year as banks cut financing in
the wake of credit market losses and changes to
Japanese investment laws ..."
January 31 -
Financial Times (Simeon Kerr): "Qatar is reviewing
its currency policy and could revalue or drop the
dollar peg as the booming Gulf state struggles to
tame inflation while the US reduces interest rates
to kick-start its slowing economy. Officials
yesterday confirmed the gas-rich emir-ate is
considering revaluing its currency or linking it
to a trade-weighted basket of currencies as well
as other policy proposals aimed at taming rampant
inflation of up to 15%."
The dollar index
declined 0.7% this week to 75.46. For the week on
the upside, the New Zealand dollar increased 2.2%,
the Brazilian real 2.2%, the Australian dollar
1.7%, the Canadian dollar 0.9%, and the Taiwanese
dollar 0.9%. On the downside, the South African
rand declined 2.2% and the British pound 1.0%.
Commodities Watch January 31 -
Financial Times (Jonathan Birchall): "Kellogg and
Kraft Foods, two of the world's largest food
companies, yesterday said the increase in global
food commodity prices had hit their quarterly
profits. As a result, Kraft said it was planning
to pass on ‘significant’ price increases to
consumers ... Kellogg, the world's largest
breakfast cereal maker, cited 'significantly
higher commodity, fuel, energy and benefit cost
inflation' ... Irene Rosenfeld, chief executive of
Kraft, said the company was facing an
'unprecedented input cost environment' ... 'We are
expecting to see continued record high input
costs', she said. Kraft said a year-on-year
increase in dairy costs of more than 40% had
halved operating income from the cheese business
... Kraft said overall input costs for 2007 had
increased by $1.3bn compared with 2006, with costs
for wheat, soyabean oil and cocoa now at
'significantly higher levels than the 2007 costs'
... David Mackay, chief executive of Kellogg, said
his company had increased the impact of input cost
on its forecast ... 'There's really nothing that's
gone down: wheat, edible oils, corn, packaging,
the price of oil and diesel - everything is up
anywhere between 19 percent and 30 percent. I
think it's impacting almost everyone within the
fast moving consumer goods segment', he said."
January 31 - Bloomberg (Pham-Duy Nguyen):
"Gold rose, capping the biggest monthly gain since
April 2006, after lower US borrowing costs
weakened the dollar, boosting the appeal of the
metal as an alternative investment. Silver jumped
to the highest since 1980."
January 30 -
Financial Times (Javier Blas): "Prices for
top-quality US wheat jumped to a record high
yesterday, extending their gains over the past two
months to 40% as demand from emerging countries
was boosted by weakness in the US dollar and sharp
declines in freight costs."
February 1 -
Bloomberg (Jason Folkmanis): "World rice prices
will probably rise further until at least next
month, stoked by a lack of new supply, the United
Nations forecasts, exacerbating inflation in
leading producers of the grain ... Prices for 13
grades of rice, ranging from Thai parboiled to
California medium-grain, rose by an average of 28%
in January from the same time a year earlier ..."
January 28 - Bloomberg (Josh Fineman):
"Hershey Co., the largest US chocolate maker,
raised prices on one-third of its US candy
products as raw material and fuel costs increased.
The average 13% price boost on candy bars is
effectively immediately ..."
For the week,
Gold dipped 0.9% to $905, while Silver gained 2.0%
to $16.83. March Copper jumped 2.8%. March Crude
declined $1.73 to $88.98. March Gasoline fell
3.0%, and March Natural Gas lost 2.9%. March Wheat
added 1.1%. The CRB index gained 0.7%, boosting
five-week gains to 1.6%. The Goldman Sachs
Commodities Index (GSCI) declined 0.7%, with a
five-week decline of 2.4% (52-week gain 39%).
China Watch January 28 -
Financial Times (Richard McGregor and Tom
Mitchell): "An acute coal shortage left China
suffering its worst power crisis in years as
unseasonably large snowfalls saw hundreds of
thousands stranded when they tried to travel to
their families for the lunar new year holiday.
About half of China's 31 provinces and regions
have been hit by 'brownouts', or voltage
reductions, caused by Beijing's attempt to
reimpose and tighten price controls on commodities
including coal and oil. Beijing is using
old-fashioned price controls in an effort to stop
food inflation, which has pushed the consumer
price index to an 11-year high, from spreading to
the rest of the economy. Power companies insist
the brownouts are the result solely of coal
shortages."
January 30 - Associated Press:
"China's economy was suffering a double blow
Tuesday as coal shortages forced power plants to
shut down, while prices of meat and vegetables
rose as heavy snow hampered deliveries by truck
and train, news reports and companies said. The
dual crises highlighted the strain on China’s
power supplies, railways and other infrastructure
following five years of 10%-plus annual economic
growth. The snows have aggravated power shortages
that have been reported since mid-January and that
analysts blame on a four-month-old government
freeze on electricity prices. The step was meant
to curb inflation, but analysts say it also
prompted utilities to cut power generation to curb
losses as coal prices rose to record levels."
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