Page 3 of 5 CREDIT BUBBLE BULLETIN The 'arb' game is over
Commentary and weekly watch by Doug Noland
October 16 - Bloomberg (Josh Fineman and Bradley Keoun): "Merrill Lynch ...
reported a fifth straight quarterly loss as the credit crisis saddled the firm
with at least $13.5 billion of writedowns. The third-quarter net loss of $5.15
billion was more than double the year-earlier deficit of $2.24 billion ...
Merrill, hobbled by $52.2 billion in losses and writedowns from
subprime-contaminated securities before today, has plunged about 80%... from a
peak ... last year."
October 16 - Bloomberg (Christine Richard): "Ambac Financial Group Inc. and
other bond insurers are working on a plan to send to the US Treasury that would
enable them to sell troubled assets
to the government ... The companies also may present a proposal next week that
would allow the insurers to guarantee some assets with government backing ...
The Treasury's $700 billion program to buy troubled assets may allow the two
guarantors to dispose of bonds backing collateralized debt obligations that
they guaranteed ... "
October 14 - Dow Jones (Paul Ziobro): "Domino's Pizza Inc. may look to raise
additional funding after the bankruptcy of Lehman Brothers ... reduced the
amount of capital available under its credit revolver. A Domino's spokeswoman
... identified Lehman as the primary lender of the pizza chain's revolving
credit facility. Lehman provided $90 million of a $150 million revolving credit
line, but the total available would fall to $60 million if Domino's is unable
to raise additional funding."
October 15 - Bloomberg (Tom Cahill): "Lehman Brothers ... hedge-fund clients
may have to pay more collateral on $65 billion of assets frozen when the
investment bank went bankrupt a month ago. Lehman's London-based prime
brokerage has about 3,500 active clients including hedge funds that own about
$45 billion in securities, Steven Pearson, the partner at
PricewaterhouseCoopers responsible for unraveling the unit, said ... They hold
an additional $20 billion in short positions, or bets that prices will fall.
While investors are largely unable to access their Lehman accounts, the value
of the securities continues to fluctuate along with the markets. The clients
may be required to put up more collateral if the value of those securities
drops, a process known as a margin call ... 'Who is the holder of the risk of
the securities? The hedge funds. If the value of the securities fell, they have
to meet margin calls.' Lehman's bankruptcy, the world's biggest, has rocked
hedge funds that relied on the firm to provide loans, clear trades and handle
administrative tasks."
October 13 - Bloomberg (Nadja Brandt): "German financial regulator BaFin said
the costs from Lehman Brothers Holdings Inc.'s bankruptcy totaled about $300
billion outside the US , Reuters reported, citing the regulator's president
Jochen Sanio."
October 13 - Bloomberg (Peter Woodifield): "London's office market is suffering
the most in Europe as the global credit crisis curbs demand for space in the
U.K. capital's main financial district and Canary Wharf, Moody's ... said.
Rising vacancies, slumping demand and a glut of space make the City of London,
as the main district is called, the worst in Europe, while Canary Wharf
deteriorated faster than any other market in the first half, Moody's analysts
wrote ... "
October 16 - Bloomberg (Rebecca Keenan and Brian Lysaght): "Lend Lease Corp.,
the Australian developer building London's Olympic Village, is facing delays in
talks to fund the 1 billion-pound ($1.7bn) project after credit markets froze
worldwide. The U.K. government has paid 95 million pounds so far for
construction at the site ... The government is paying because Lend Lease can't
find a lender to finance the project."
October 14 - Dow Jones (Rogerio Jelmayer): "After four high-profile Brazilian
companies reported significant losses in the foreign exchange derivatives
market, investors are beginning to wonder who's next. 'We will certainly have
more companies reporting these kinds of losses,' said Jose Augusto de Castro,
vice president of the Brazilian Exporters Association. The companies reporting
such losses tend to be exporters because their US dollar revenues make them
natural foreign exchange hedgers. 'But they are not financial market
specialists,' said De Castro. 'They were convinced by their bankers to take
risky positions, but when the currency reversed, they were caught off guard.'"
October 15 - Bloomberg (Rebecca Keenan and Jesse Riseborough): "Rio Tinto Group
may delay the planned sale this year of $10 billion of assets and Sterlite
Industries (India) Ltd. shelved its $2.6 billion purchase of Asarco LLC because
of the global financial crisis. Rio, battling an $86 billion takeover bid from
BHP Billiton Ltd., said today it's also reviewing its spending timetable and
project costs ... . 'Acquirers will find it harder to source funds and even if
they can source funds, they'll have to pay more,' said Steve Robinson, a senior
investment manager with Alleron Investment Management in Sydney ... "
October 15 - Bloomberg (Alexander Ragir and Fabiola Moura): "Brazilian
companies may report as much as $28 billion of write-offs because of currency
bets gone awry as they prepare to release third-quarter results. Potential
losses of 60 billion reais ($28 billion) threaten the solvency of several
businesses after the real's unexpected 30% drop against the dollar since Aug.
1, said Paulo Vieira da Cunha, a hedge fund manager and former Brazilian
central bank deputy governor."
October 13 - Wall Street Journal Asia (Reem Shamseddine and Andrew Critchlow):
"The United Arab Emirates said it would guarantee domestic bank deposits and,
with Saudi Arabia, promised fresh financial support Sunday to domestic banks.
Officials from both nations have said their banking systems are adequately
capitalized and relatively unexposed to plummeting foreign assets that have
dragged down firms in the US and Europe. But they and other Persian Gulf
leaders have struggled to shore up investor confidence amid the global
financial crisis."
October 13 - Bloomberg (Farhan Sharif): "Police surrounded Pakistan's biggest
stock exchange to thwart violence by investors demanding a halt in trading as
price curbs imposed after the biggest slump in a decade locked up their funds.
'There are no longer any small investors left in the stock market, they have
all been destroyed,' said Kausar Qaimkhani, chairman of the Small Investors
Association"
Currency Watch October 14 - Bloomberg (William Sim): "South
Korea's National Pension Service plans to sell about $7 billion of $20 billion
it holds in US Treasuries to the Bank of Korea this month, MoneyToday reported,
citing an unidentified official at the fund. The state fund may sell more of
its US government debt holdings if necessary to help increase the central
bank's foreign-exchange reserves ... "
The dollar index dipped 0.7% to 82.41. For the week on the upside, the
Brazilian real increased 9.2%, the Australian dollar 7.1%, the New Zealand
dollar 2.9%, the Mexican peso 1.7%, the British pound 1.4%, the Singapore
dollar 0.2%, and the Swiss franc 0.2%. On the downside, the South African rand
declined 5.4%, the Norwegian krone 4.1%, the Swedish krona 2.8%, the South
Korean won 1.2%, the Japanese yen 1.0%, and the Canadian dollar 0.7%. In the
emerging currencies, the Iceland krona dropped 13.2%, the Turkish lira 4.4%,
and the Hungarian forint 3.0%.
Commodities Watch
October 13 - Bloomberg (Winnie Zhu and Wang Ying): "China, the world's
second-largest energy user, increased crude-oil imports to a record last month,
taking advantage of falling prices, as domestic refining capacity climbed.
Crude imports surged 46% to 20 million metric tons or 4.87 million barrels a
day in September from a year earlier ... August purchases were 15.65 million
tons."
October 14 - Bloomberg (Yi Tian): "Paul Reinhart Inc., one of the biggest US
cotton merchants, told farmers last month it faced a 'severe liquidity crisis'
after suffering 'significant losses' when futures prices jumped to a 12-year
high in March. An 'unexpected, historic run-up' in cotton led to margin calls
on futures contracts, stripping the company of 'virtually all available cash,'
R. Dale Grounds, president of ... Reinhart, said ... In the six days ended
March 5, cotton jumped 15%... Reinhart, which began as a Swiss cotton importer
in 1788, was considering selling its assets to competitor Allenberg Cotton Co."
Gold sank 7.8% to $783, and silver dropped 11.8% to $9.345. November Crude fell
$5.79 to $71.91. November Gasoline declined 5.5% (down 33% y-t-d), while
November Natural Gas rose 4.4% (down 8.8% y-t-d). December Copper gained 0.5%.
December Wheat rallied 0.5%, while Corn slipped 1.3%. The CRB index declined
2.7% (down 21.3% y-t-d). The Goldman Sachs Commodities Index (GSCI) dropped
5.5% (down 22.2% y-t-d), having now declined 47% from highs posted only 15
weeks ago.
China Watch
October 14 - Bloomberg (Kevin Hamlin and Li Yanping): "China's foreign-exchange
reserves rose to a world record $1.906 trillion, helping to strengthen the
nation's finances as the credit crisis threatens to trigger a global economic
slump. Currency holdings rose 32.9% at the end of September from a year earlier
... 'Close to $2 trillion in foreign reserves provides China with a strong
foundation and more room to adjust policies to enable it to maintain relatively
fast growth,' said Isaac Meng, senior economist at BNP Paribas SA in Beijing."
October 13 - Bloomberg (Nipa Piboontanasawat and Li Yanping): "China's trade
surplus widened to a record in September as exports withstood the global
economic slowdown and falling commodity prices reduced the import bill. Exports
rose 21.5% from a year earlier to $136.4 billion after gaining 21.1% in August
... The trade surplus climbed to $29.3 billion ... "
October 13 - Bloomberg (Dune Lawrence): "China's Communist Party aims to double
rural incomes in a bid to boost domestic consumption amid global financial
turmoil that threatens to slow economic growth. The government aims to achieve
those goals and eliminate 'absolute' poverty in rural areas by 2020, the
party's ruling Central Committee said in a statement distributed late yesterday
by the official Xinhua News Agency."
October 17 - Bloomberg (Zhao Yidi and Zhang Dingmin): "China's securities
regulator said the government will unveil measures to stabilize the country's
markets, while exhorting banks to avoid 'excessive' financial innovation. The
US credit crisis 'poses grave challenges to China yet the country's economy is
functioning well, Shang Fulin, chairman of the China Securities Regulatory
Commission, said ... 'We must pay attention to the risks involved when we
pursue financial innovations,' Shang said."
October 14 - Bloomberg (Li Yanping): "The global financial crisis will have a
limited and 'controllable' effect on China's economy, Premier Wen Jiabao said.
China will adopt 'flexible and prudent' policies to 'maintain stability in the
economy, in the financial system and in the capital markets,' Wen told British
Prime Minister Gordon Brown ... "
October 14 - Bloomberg (Kevin Hamlin and Li Yanping): "China's
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
