Friday, November 30, 2007

Moody's Says Citigroup SIV Debt Ratings Under Threat (Update2)

By Shannon D. Harrington

Nov. 30 (Bloomberg) -- Moody's Investors Service said $64.9 billion of debt sold by Citigroup Inc.'s structured investment vehicles was cut or placed on review for a downgrade as part of a review of $130 billion of SIV debt.

The ratings company surveyed 20 SIVs since Nov. 7 and expanded its review after noticing ``significant additional deterioration'' in asset values, according to a statement today. Links Finance Corp., a SIV sponsored by Bank of Montreal with $19.1 billion of debt, may have its ratings cut, Moody's said.

SIVs, which sell short-term debt to buy longer-term, higher- yielding assets, were shut out of the short-term market as losses on subprime mortgage securities prompted investors to retreat from all but the safest of securities. Unable to finance themselves, three SIVs have defaulted and others are being bailed out by their sponsors. The world's 30 SIVs have more than $300 billion of assets.

``In recent weeks, Moody's has observed material declines in market value across most asset classes in SIV portfolios,'' the ratings company said in the statement.

Moody's cut at least $10 billion in debt in all, mostly capital notes that rank below commercial paper and medium-term notes and are usually the first to absorb losses, Henry Tabe, managing director in charge of structured finance, said in a telephone interview. The ratings company placed at least $100 billion of debt on review for a downgrade and confirmed the ratings on $11 billion, Tabe said.

`Continued Deterioration'

SIV assets on average are 38 percent financial institution debt, 16 percent asset-backed securities and 12 percent collateralized debt obligations, Moody's said.

The downgrades are ``a reflection of the continued deterioration in market value of SIV portfolios combined with the sector's inability to refinance maturing liabilities,'' Moody's said.

Citigroup, the largest U.S. bank by assets, provided $7.6 billion of emergency financing to the seven SIVs it runs earlier this month after they were unable to repay maturing debt.

Citigroup, based in New York, created the first SIV in 1988 and is the largest manager.

The SIVs' struggle for survival, and the threat of having their assets dumped on the market, prompted Treasury Secretary Henry Paulson to broker talks with Citigroup, JPMorgan Chase & Co. and Bank of America Corp. to form an $80 billion fund to help bail them out.

HSBC Holdings Plc of London this week said it will take on $45 billion of assets from the two SIVs it manages after they were unable to finance themselves. SIVs set up by Dusseldorf- based lender IKB Deutsche Industriebank AG and London-based Cheyne Capital Management Ltd. defaulted last month after investors stopped buying their asset-backed commercial paper.

Centauri, Beta

Centauri Corp., the largest SIV run by Citigroup with $16.9 billion of debt, had its P1 commercial paper rating placed on review for downgrade as well as its AAA medium-term note program, Moody's said. Centauri's net asset value dropped to 60 percent from 85 percent since Sept. 5, Moody's said.

Beta Finance Corp., the second-largest Citigroup SIV with $16 billion of debt, had its senior debt ratings placed on review for downgrade after its net asset value declined to 60 percent from 87 percent, Moody's said.

Sedna, Dorada

Four other Citigroup SIVs, Sedna Finance Corp., with $10.7 billion of debt, Five Finance Corp., with $10.3 billion, Dorada Corp. with $8.5 billion, and Zela Finance Corp., with $2.5 billion, had their P1 commercial paper rating and AAA medium-term note programs placed on review, Moody's said.

Sedna's net asset value dropped to 56 percent, Five's declined to 63 percent, Dorada dropped to 62 percent and Zela's fell to 61 percent. A seventh Citigroup SIV, Vetra Finance Corp., wasn't part of the review.

Dorada's capital note program was reduced to Caa3 from Baa1.

Orion Finance Corp., a SIV managed by Eiger Capital with $835 million of debt, had its P1 commercial paper ratings downgraded to Not Prime, and its AAA medium-term note program to Baa3. Orion's net asset value dropped to 54 percent from 61 percent since Sept. 5, Moody's said.

Links Finance's net asset value declined to 78 percent from 94 percent since a Sept. 5 review, Moody's said. The SIV's AAA ratings may be cut after a review that will be completed within a week, Moody's said. Links' standard capital notes were cut 11 levels to the fourth-lowest ranking.

Toronto-based Bank of Montreal spokesman Ralph Marranca didn't immediately return a call seeking comment.

Crude Oil Falls Below $90 on Concern Economic Growth Will Slow

By Margot Habiby and Robert Tuttle

Nov. 30 (Bloomberg) -- Crude oil fell below $90 a barrel in the biggest weekly loss in two and a half years on concern slowing economic growth will cut energy demand, and as Saudi Oil Minister Ali al-Naimi said supplies in the market are ``ample.''

Consumer spending in the U.S., the world's biggest oil user, rose less than forecast in October and incomes increased at the slowest pace in six months, the Commerce Department said in Washington today. Al-Naimi, speaking in Doha, said oil prices don't reflect actual production and consumption trends.

``The market is simply becoming more concerned about a possible recession that could reduce petroleum demand,'' said James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois. ``We have been seeing evidence for some time of a weakening economy and weakening oil demand.''

Crude oil for January delivery fell $2.30, or 2.5 percent, to settle at $88.71 a barrel at 2:45 p.m. on the New York Mercantile Exchange. Futures touched $88.45 a barrel, the lowest since Oct. 25. Oil has dropped 9.7 percent this week, the biggest weekly loss since April 2005. Prices climbed to a record $99.29 a barrel on Nov. 21.

Average U.S. consumption of oil products, such as gasoline and diesel, over the four weeks ended last week was 0.5 percent lower than a year ago, according to U.S. Energy Department data.

The U.S. dollar recorded its largest weekly gain against the euro since August, pressuring oil prices which rose earlier in the month on the currency's weakness. The dollar strengthened after Federal Reserve Chairman Ben S. Bernanke yesterday signaled he may lower interest rates to bolster growth. The yen had its biggest weekly drop in almost three years.

Oil surged above $95 a barrel yesterday after an Enbridge Inc. crude oil pipeline in Minnesota exploded on Nov. 28. Enbridge said operations will return to normal within three days.

Lower Prices

The pipeline blast seems to be ``just a near-term support,'' said Eric Wittenauer, an analyst at A.G. Edwards & Sons Inc. in St. Louis. ``As the details and extent of the damage and timeline for recovery came to light, it ended up pushing prices lower.''

The Enbridge pipeline blast killed two workers and cut shipments that average 1.5 million barrels a day. The pipelines transport oil to U.S. refiners, including BP Plc's plant in Whiting, Indiana, and facilities along the Gulf Coast. The U.S. imported 10.3 million barrels a day last week.

Brent crude oil for January settlement fell $1.96, or 2.2 percent, to $88.26 a barrel, the lowest since Oct. 30, on the ICE Futures Europe exchange in London.

Thirteen of 27 analysts surveyed by Bloomberg News, or 48 percent, said oil will drop through Dec. 7. Nine, or 33 percent, said prices will rise and five forecast little change. Last week, 43 percent of respondents said oil would fall.

January Options

Bets that January crude oil will fall below $85 a barrel were the most actively traded options contracts on the Nymex today. The put contracts, which represent the right to sell oil at that price, rose 55 cents to $1.13, or $1,130 per contract, according to data compiled by Bloomberg as of 4 p.m. New York time. One options contract is for 1,000 barrels of oil.

OPEC raised shipments 2 percent to 24.53 million barrels a day in the four weeks to Dec. 15, according to consulting company Oil Movements.

Saudi Arabia, OPEC's biggest producer, is adding 500,000 barrels of spare capacity in December to ensure that consumers are adequately supplied. The country is producing 9 million barrels a day, al-Naimi has said.

``They will probably give us a token production increase and, by that time, it will be well discounted,'' Ritterbusch said.

U.S. Stocks Rise, Led by Banks; Wells Fargo, Countrywide Gain

By Elizabeth Stanton

Nov. 30 (Bloomberg) -- U.S. stocks rose, capping the best weekly gain since March, after Federal Reserve Chairman Ben S. Bernanke signaled he may cut interest rates and the Treasury moved closer to a plan to prevent thousands of Americans from losing their homes.

JPMorgan Chase & Co. and Wells Fargo & Co. led financial shares to their biggest weekly rally in four years. Countrywide Financial Corp., the largest U.S. mortgage company, jumped 16 percent and homebuilders climbed the most in seven years on Treasury Secretary Henry Paulson's plan to avert foreclosures. Today's advance limited the worst monthly losses in five years for the Standard & Poor's 500 Index and Dow Jones Industrial Average.

``They're going to try to do a more concerted approach'' to relieve stress in the financial system, said Peter Sorrentino, who helps manage about $6.5 billion at Huntington Asset Management in Cincinnati. ``That's why we've got Paulson as well as Bernanke at the Fed and the administration behind this.''

The S&P 500 advanced 11.42, or 0.8 percent, to 1,481.14. The Dow average increased 59.99, or 0.5 percent, to 13,371.72. The Nasdaq Composite Index slipped 7.17, or 0.3 percent, to 2,660.96, led by Dell Inc.'s 13 percent tumble following earnings that missed analysts' estimates. About nine stocks gained for every five that fell on the New York Stock Exchange.

Weekly Gains

For the week, the S&P 500 added 2.8 percent and the Dow average gained 3 percent, while the Nasdaq rose 2.5 percent. The indexes climbed in the week's final four days after declines on Nov. 26 left them down 10 percent from their Oct. 9 records, marking the usual definition of a market ``correction.''

Bernanke spurred speculation the Fed will cut its benchmark rate by half a percentage point at its Dec. 11 meeting by saying in a speech after the market closed yesterday that the economic outlook has become more uncertain, requiring the central bank to be ``exceptionally alert and flexible.'' A government report today showed incomes and spending rose less in October than economists had forecast, with incomes posting their smallest increase in six months.

``It is telling you that it's likely to cut pretty aggressively over the next six months,'' said Jason Trennert, chief investment strategist at Strategas Research Partners in New York. The federal funds rate target, lowered to 4.5 percent on Oct. 31, may fall to 3.5 percent in six months, he said.

Paulson's Plan

JPMorgan, the third-largest U.S. bank, rose $1.97, or 4.5 percent, to $45.62 for the top gain in the Dow average. Wells Fargo, the second-biggest U.S. mortgage lender, advanced $1.89 to $32.43. Bank of America, the second-largest U.S. bank, increased $1.50 to $46.13. Citigroup Inc., the top U.S. bank, added $1.01 to $33.30.

Paulson is negotiating an agreement with banks to stem a surge in foreclosures by freezing payments on adjustable rate mortgages, or ARMs, to subprime borrowers, according to people familiar with a meeting he led yesterday. Citigroup, Wells Fargo and Washington Mutual Inc. executives attended, said a person present, who spoke on condition of anonymity.

Mortgage lenders, homebuilders and bond insurers were among the biggest gainers in the S&P 500. Countrywide rose $1.52, or 16 percent, to $10.82. DR Horton Inc. led a gauge of homebuilders to an 8.7 percent jump, the steepest advance since December 2000. Ambac Financial Group Inc., the second-largest bond insurer, rose $3.78, or 16 percent, to $27.19.

'Changing the Fundamentals'

``The fact that the government and private banks are looking at freezing ARM readjustments -- clearly that changes the fundamentals,'' said Brett Gallagher, deputy chief investment officer at Julius Baer Investment Management in New York, which oversees $70 billion. He added that it still may not be enough to avert additional reckoning with mortgage losses.

Banks and brokerages also rallied after Credit Suisse raised its recommendation on banks to ``benchmark'' from ``underweight.'' Global economies will avoid a hard landing, strategists including Andrew Garthwaite wrote in note published today.

Financial shares in the S&P 500 climbed 2.9 percent as a group today and 5.6 percent over the past week.

A gauge of 30 retailers in the S&P 500 increased 1.5 percent as crude oil futures dropped 2.6 percent to $88.65 a barrel. Macy's Inc. gained 35 cents to $29.65. Gap added 51 cents to $20.40.

``Fundamentals argue for oil closer to $80, which could be a big and important boost to the equity market,'' said Binky Chadha, chief U.S. equity strategist at Deutsche Bank Securities in New York.

General Motors

General Motors Corp. increased $1.05 to $29.83 on prospects for lower costs after the largest automaker said it plans to boost spending on Chinese-made parts 25 percent a year until 2010.

Yields on three-month Treasury bills rose the most in more than two weeks, increasing 0.20 percentage point to 3.16 percent on reduced demand for the safety of short-term government debt.

Dell, the world's second-largest personal-computer maker, retreated $3.60 to $24.54 for the steepest loss in the S&P 500. Dell, after the market closed yesterday, reported third-quarter profit of 34 cents a share, missing the estimate of 35 cents in a Bloomberg survey of analysts.

Chief Executive Officer Michael Dell said he would boost spending to expand into new countries and retailers. Goldman, Sachs & Co. removed the stock from its ``Americas conviction buy'' list, saying the improvement in the company's performance ``is smaller and more gradual than we had been expecting.''

'Black Cloud'

``You're getting a couple of high-profile tech companies making statements or having company-specific issues, which is putting a black cloud over the sector as a whole,'' said Brian Rauscher, director of portfolio strategy at Brown Brothers Harriman & Co. in New York. The firm oversees $45 billion in client assets.

Research In Motion Ltd. fell $8.26 to $113.82 after a Piper Jaffray & Co. analyst cut his profit estimates for the maker of the BlackBerry e-mail device on concern sales growth may slow.

Bernanke's comments yesterday came after Fed Vice Chairman Donald Kohn acknowledged the threat to spending from reduced access to credit on Nov. 28. The Fed in October said growth and inflation risks were ``roughly'' balanced.

Economy Watch

The 0.2 percent increase in consumer spending was less than the 0.3 percent gain forecast by economists in a Bloomberg News survey. The Commerce Department said incomes also rose 0.2 percent, half the pace forecast by economists and the smallest increase since a decline in April.

A gauge of business activity compiled by the National Association of Purchasing Management-Chicago rose more than forecast in November. The group's business barometer climbed to 52.9 from 49.7 in October. Readings greater than 50 signal growth. The median forecast was for a reading of 50.5.

Concern the U.S. may slip into a recession helped send the Dow average to a 4 percent drop in November, while the S&P 500 lost 4.4 percent and the Nasdaq Composite retreated 6.9 percent.

The Russell 2000 Index, a benchmark for companies with a median market value of $601 million, gained 0.2 percent to 767.77. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, rose 0.7 percent to 14,932.65. Based on its advance, the value of stocks increased by $137 billion.

U.S. Economy: Spending Increases Less Than Forecast (Update1)

By Joe Richter

Nov. 30 (Bloomberg) -- Consumer spending and incomes in the U.S. rose less than forecast in October, reinforcing Federal Reserve Chairman Ben S. Bernanke's warning of ``headwinds'' for the economy in coming months.

The housing slump and climbing fuel bills are wearing down consumers, whose spending has helped sustain the six-year expansion. Bernanke acknowledged late yesterday that market ``turbulence'' tied to the collapse of the subprime mortgage market may have harmed the economy.

``Consumer spending is off to a pretty weak start for the fourth quarter,'' said Peter Kretzmer, a senior economist at Bank of America Corp. in New York. ``This helps confirm what is built into the market by now: that the Fed is likely to move on interest rates next month.''

The 0.2 percent increase in purchases followed a 0.3 percent gain in September, the Commerce Department said today in Washington. Incomes also rose 0.2 percent. Separately, the National Association of Purchasing Management-Chicago reported that its barometer of business activity climbed in November. The group's index rose to 52.9, from 49.7 the previous month.

Stocks advanced on speculation the weakening economy will force Bernanke and his colleagues to reduce borrowing costs on Dec. 11. The Dow Jones Industrial Average rose 0.5 percent to 13,371.72. Stocks were also boosted by talks between the Treasury Department and lenders to fix interest rates on subprime mortgages.

Purchases were little changed after adjusting for inflation, which are the figures used in calculating economic growth, the Commerce figures showed today.

Higher Inflation

The report's price gauge tied to spending patterns and excluding food and energy costs, the Fed's preferred measure, rose 0.2 percent in October for a second month. It was up 1.9 percent from October 2006, matching the September increase which was revised higher.

Economists forecast spending would increase 0.3 percent, according to the median of 75 projections in a Bloomberg News survey. Estimates ranged from no change to 0.5 percent.

Bernanke said in a speech in Charlotte, North Carolina, last night that ``uncertainty surrounding the outlook'' is ``even greater than usual,'' requiring the Fed to be ``exceptionally alert and flexible.''

Federal funds futures show traders see a 100 percent chance of a reduction in the benchmark rate next month, with a 30 percent probability of a half-point move.

Savings Drops

The inflation-adjusted change in spending was the smallest since March. The savings rate fell to 0.5 percent from 0.7 percent in September.

Inflation-adjusted spending on durable goods, such as autos, furniture and other long-lasting items, dropped 0.6 percent, the biggest decline since June. Purchases of non-durable goods fell 0.1 and spending on services, which includes utilities and accounts for almost 60 percent of all outlays, increased 0.1 percent.

There are signs that high energy costs and falling home values are starting to weigh on consumers. Retail sales increased at a slower pace in October, the Commerce department said Nov. 14. A report earlier this month showed sales of cars and light trucks cooled in October.

Hudson, Ohio-based Jo-Ann Stores Inc. this week cut its 2008 earnings forecast because of ``increased uncertainty in consumer spending.'' Retail sales in November and December may rise 4 percent, the slowest gain since 2002, according to the National Retail Federation in Washington.

Spending Forecast

Consumer spending will grow at a 2 percent pace in the final three months of the year after rising 2.7 percent in the third quarter, based on the median estimate in a Bloomberg survey taken from Nov. 1 to Nov. 8. Reports since then suggest that forecast may prove too optimistic, economists said.

The Fed said economic growth slowed in seven of 12 U.S. regions from October through mid-November, with retailers ``slightly pessimistic'' about year-end holiday sales, according to their regional survey issued this week.

Reports on retail spending ``were downbeat in general,'' according to the report known as the Beige Book. Most Fed banks reported that retailers expect sales growth ``to be modest at best in the upcoming holiday season,'' the central bank said.

Thursday, November 29, 2007

Abbott Stent Needs More Safety Study, FDA Panel Says (Update1)

By Lisa Rapaport and Elizabeth Lopatto

Nov. 29 (Bloomberg) -- Abbott Laboratories' experimental heart stent hasn't been studied enough to ensure its safety beyond one year of use, a U.S. advisory panel said.

Outside experts for the Food and Drug Administration at a meeting today urged additional data to show the device, called Xience, doesn't cause potentially fatal blood clots. The panel will vote later today on whether to recommend approval. The FDA generally follows the advice, though it isn't required to do so.

The agency is considering whether to clear Xience to compete with Boston Scientific Corp.'s Taxus and Johnson & Johnson's Cypher, the two drug-coated stents on the U.S. market. Sales of the devices, used to prop open diseased heart arteries, plunged 40 percent to $2 billion in the U.S. last year over concerns they caused fatal blood clots. Abbott said today it plans to follow patients with Xience for five years, including studies that are already under way.

``We cannot say there is adequate assurance of safety in absolute terms,'' FDA panel chairman Clyde Yancy, medical director of Baylor Heart and Vascular Institute in Dallas, said at the meeting today. ``The data submitted does provide adequate assurance up to 12 months. Beyond 12 months, half the panel believes there is insufficient data, but that doesn't mean we think the device is inherently unsafe.''

Florida Halts Withdrawals From Local Investment Fund (Update2)

By David Evans

Nov. 29 (Bloomberg) -- 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 percent.

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 at the meeting in the state capitol in Tallahassee. The fund was the largest of its kind, managing $27 billion before this month's withdrawals.

Local governments including Orange County and Pompano Beach that use the pool like a money-market fund asked for their money back after the State Board of Administration disclosed in a report earlier this month that holdings in the fund were lowered to below investment grade.

The board met today to consider ways to shore up the fund, including obtaining credit protection for $1.5 billion of downgraded and defaulted holdings hurt by the subprime market collapse. In voting for the suspensions, officials sought to stem the increasing flood of money leaving the pool and avoid losses on forced sales of assets.

`No Liquidity'

``We need to protect what is there in the interim,'' said Governor Charlie Crist, a Republican and one of three trustees of the State Board of Administration along with Florida Chief Financial Officer Alex Sink and Attorney General Bill McCollum.

The fund has invested $2 billion in structured investment vehicles and other subprime-tainted debt, state records show. About 20 percent of the pool is in asset-backed commercial paper, Stipanovich said at the meeting today.

``There is no liquidity out there, there are no bids'' for those securities, he said.

Stipanovich raised the possibility of having the state pension fund shoulder the risk of some of the troubled securities with a credit-default swap, through which the retirement fund would guarantee the debt in exchange for an insurance premium.

``It will be a wonderful diversifier,'' Stipanovich said.

Sink immediately rejected the executive director's plan.

``We would, in effect, be bailing out one fund, to which we have no legal obligation, with the star fund of Florida, our pension fund,'' she said. ``I think we have to be very careful about transferring this risk into our pension fund.''

Exemptions Sought

The board also considered adopting a more conservative investment policy and taking steps to qualify for a top credit rating for the pool from Standard & Poor's.

The trustees discussed an exemption to the suspension in withdrawals that would allow cities and schools to take money from the pool to pay employees; it was rejected.

``It's not set up to pay payroll,'' Crist said.

Because the trustees' decision to freeze withdrawals was an oral vote, not based on approving a written document, it is possible exceptions will be made to allow municipalities to meet their payrolls, said State Board of Administration spokesman Mike McCauley.

``We're getting a lot of calls,'' McCauley said.

It wasn't decided how long the suspension would last. The trustees meet again on Dec. 4.

Paychecks Threatened

Hal Wilson, chief financial officer for the school district in Jefferson County, located 30 miles (42 kilometers) east of Tallahassee, said he had decided not to pull the district's $2.7 million from the fund. He said he relied on assurances from the state board that the money would be secure for his 1,559-student school system, with 220 employees.

``I might not be able to pay our employees tomorrow,'' he said, referring to his $850,000 payroll. ``I am sure that those money managers who withdrew all their funds are feeling really smug right now, thinking they did the right thing. But it left the rest of us holding the bag.''

The investment pool's debt holdings that were downgraded below its minimum standards amount to about 10 percent of the pool.

Default Ratings

The fund's $900 million of asset-backed commercial paper that was downgraded to default amounts to 6 percent of its assets. Another $650 million, or 4 percent, is invested in certificates of deposit at Countrywide Bank FSB, a unit of Countrywide Financial Corp. The bank's rating was cut to Baa1, three levels above junk, by Moody's on Aug. 16.

The pool owns $168 million of debt from KKR Atlantic Funding Trust cut to D, or default, from B by Fitch Ratings on Oct. 8. It also has $356 million issued by KKR Pacific Funding Trust, cut to D from B by Fitch Ratings on Oct. 2. Fitch said the cut to default on the debt reflected non-payment under the original terms. The debt was restructured to extend the maturities to February and March, and interest payments are continuing.

Florida's pool has $180 million of paper from Ottimo Funding, cut to D from C by S&P on Nov. 9. S&P said an auction of Ottimo's collateral ``did not generate cash proceeds'' to repay the asset-backed commercial paper.

The pool also holds $175 million of short-term debt issued by Axon Financial Funding, an SIV. It was cut to D from C by S&P this week. S&P said Axon failed to pay liabilities maturing Nov. 26, causing an ``automatic liquidation event.''

The pool was created in 1982 to provide higher short-term returns for local schools and governments than were available at banks. Today, Crist suggested the pool's time may have passed.

``It's a nice thing for us to be able to do if it's prudent,'' Crist told Stipanovich. ``I'm wondering if it's a good idea today.''

U.S. Economy: Growth Is Faltering After 4.9% Surge (Update3)

By Shobhana Chandra

Nov. 29 (Bloomberg) -- The U.S. economy is faltering after a third-quarter expansion as new-home prices dropped the most since 1970 and jobless claims rose to a nine-month high.

The figures are consistent with a report from the Federal Reserve yesterday that showed a slowing expansion. Traders are certain the central bank will reduce interest rates again next month, which would mark the deepest cut in borrowing costs since 2001.

The odds of recession ``are much too close for comfort,'' said Douglas Porter, deputy chief economist at BMO Capital Markets in Toronto, who correctly forecast that third-quarter growth would be revised to 4.9 percent today. ``We are likely to see growth of less than 1 percent in the fourth quarter.''

The median price of a new house dropped 13 percent to $217,800 in October from a year earlier, the Commerce Department said today in Washington. Homes sold at an annual rate of 728,000 in October, less than the median forecast of 750,000 among economists surveyed by Bloomberg News.

The number of Americans filing first-time claims for unemployment benefits rose to 352,000, the Labor Department reported.

The figures overshadowed the revision in third-quarter economic growth by the Commerce Department. The new rate is a percentage point higher than the 3.9 percent initially reported. The expansion may slow to about 1 percent this quarter, some economists predict.

President's Forecast

President George W. Bush's economic advisers today reduced their outlook for economic growth in 2008 to 2.7 percent from a 3.1 percent rate projected in June. The unemployment rate will rise to 4.9 percent, compared with 4.7 percent previously estimated, according to the Council of Economic Advisers' semi- annual forecast.

New home sales increased 1.7 percent from the previous month because September's purchases were revised lower. In a another report, the Office of Federal Housing Enterprise Oversight said today in Washington that prices for previously owned single- family houses fell 0.4 percent last quarter, the first decline since 1994.

``There is no question there has been another big leg down in housing in recent months,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut, who forecast sales would drop to a 725,000 pace. ``Prices will continue to slip.''

Market Reaction

Treasury notes extended gains after the reports. The yield on the benchmark 10-year Treasury note dropped 12 basis points to 3.91 percent at 2:24 p.m. in New York. A basis point is 0.01 percentage point.

The collapse in subprime lending and turmoil in financial markets are projected to extend the housing recession well into 2008.

September new-home sales were revised down to a 716,000 pace, the lowest in almost 12 years, from the originally reported 770,000 rate.

``The housing sector has continued to decline and to erode at a very, very rapid rate,'' Fed Vice Chairman Donald Kohn said yesterday in response to a question after a speech in New York. ``It would be nice to see some early signs that it was beginning to stabilize, and we haven't seen that yet.''

Bernanke Speech

Investors and traders await a speech from Fed Chairman Ben S. Bernanke on the economic outlook at 6:45 p.m. today in North Carolina. Kohn suggested yesterday he would be open to the possibility of lowering the target interest rate again. Central bankers next meet on Dec. 11.

The number of new homes on the market decreased 2.3 percent to a seasonally adjusted 516,000. The supply of homes at the current sales rate dropped to 8.5 months' worth from 9 months in September.

Sales of new homes were down 24 percent from the same time last year.

Purchases rose in three of four regions. They climbed 14 percent in the Midwest, 6.8 percent in the South and 1.8 percent in the Northeast. Sales dropped 16 percent in the West.

New-home purchases are considered a timelier indicator because they are based on contract signings, while existing home sales are calculated when a contract closes, usually a month or two later. New home sales account for about 15 percent of total home sales and those of existing homes account for the rest.

The worst U.S. housing slump in 16 years will drive down property values by $1.2 trillion next year and slash tax revenue by more than $6.6 billion, according to a report this week by the U.S. Conference of Mayors. The 361 largest U.S. cities will experience a combined loss of $166 billion in economic growth, it said.

Tighter Lending

Banks are tightening lending rules, buyers are waiting for bargains and the number of foreclosed properties is rising. As a result, prospects are poor for a quick recovery, executives at homebuilders D.R. Horton Inc. and Beazer Homes USA Inc. said.

Next year ``is going to be worse than '07 for us and for the industry in general,'' D.R. Horton Chief Executive Officer Donald Tomnitz said at a conference in Las Vegas this week.

Residential construction, which has subtracted from economic growth every quarter since the first three months of 2006, will remain a drag, economists said.

Fed policy makers reduced their growth forecasts when they last met on Oct. 31. They projected the economy would grow between 1.8 percent and 2.5 percent in 2008, ``notably below'' their last forecast issued in July, according to meeting minutes released Nov. 20.

Treasury 3-Month Bill Yields Fall Below 3% on Credit Concern

By Deborah Finestone and Sandra Hernandez

Nov. 29 (Bloomberg) -- Treasuries rose and three-month bill yields fell below 3 percent for the first time since August as concern over banks' willingness to lend drove investors to the relative safety of U.S. government debt.

The interest rate that banks charge each other for borrowing in dollars for one month rose the most in more than a decade as banks sought to cover their commitments through the start of 2008. Yields on notes fell as futures traders increased bets that the Federal Reserve will cut borrowing costs a half- percentage point next month to prevent a recession.

``The credit crunch began in earnest back in July, but what you're seeing now is it's deepening and spreading out,'' said Kathleen Bostjancic, an economist in New York at Merrill Lynch & Co., which expects the Fed's target lending rate to fall to 2 percent by the end of the second quarter of 2009. ``You're seeing a tremendous flight to quality.''

The three-month bill's yield fell 7 basis points, or 0.07 percentage point, to 2.96 percent at 4 p.m. in New York, after touching 2.89 percent earlier. Yields on 10-year notes decreased 11 basis points to 3.95 percent.

In a sign of banks' reluctance to lend to each other, the difference between three-month bill yields and the London interbank offered rate, or Libor, was the widest in three months. The ``TED'' spread increased 12 basis points to 2.16 percentage points, the biggest since Aug. 20, when money-market funds dumped assets linked to a collapsing U.S. mortgage market in favor of the shortest-maturity government debt. The spread has more than doubled this month.

Libor Rises

Investors bought government debt as one-month Libor for dollars jumped 40 basis points to 5.23 percent, the British Bankers' Association said. Today is the first day a cash loan of one month will cover a borrower's needs through the end-of-year holiday period.

The rate rose to 72.5 basis points above the Fed's 4.5 percent target for overnight lending between banks, the highest since Sept. 18, when the central bank cut its benchmark a half- percentage point.

The spread was only higher in 1999 on concern over possible computer glitches associated with the changeover to the new millennium, and in 1998 over the collapse of Long-Term Capital Management LP, according to T.J. Marta, a fixed-income strategist in New York at RBC Capital Markets.

``Not exactly good company to be keeping,'' he said. ``The markets are just so uncertain at this point. There's more than just a year-end liquidity problem.''

December Outlook

Fed funds futures on the Chicago Board of Trade show traders see a 34 percent chance that the central bank will lower its benchmark borrowing cost to 4 percent at its meeting Dec. 11, compared with 6 percent yesterday. That pushed down the odds that the rate will be reduced to 4.25 percent to 66 percent, from 94 percent yesterday.

Price swings in U.S. government debt reached the highest since September 2003 this week. Merrill Lynch's MOVE index, a measure of expectations for Treasury volatility, rose to 133.4 on Nov. 27. The index, based on prices of over-the-counter options on Treasuries maturing in two to 30 years, has risen from a record low of 51.2 on May 15.

``Certainly it feels a lot like the Long-Term Capital Management crisis,'' said Vincent Boberski, senior vice president of portfolio strategies in Chicago at FTN Financial.

Treasuries are set for their best monthly performance since September 2003, returning 2.74 percent, according to Merrill Lynch. U.S. government debt has returned 8.61 percent this year, headed for the best performance since 2002.

Corporate Debt

While short-term lending rates have spiked, borrowers and banks are selling the most corporate bonds in at least seven weeks. Companies plan to issue at least $11.1 billion today after raising $8.8 billion in offerings yesterday.

Those planning to sell debt include PepsiCo Inc., the second-largest U.S. soft-drink maker.

Many of the offerings are from companies that are ``not exactly names that are going to cause portfolio managers to lay awake at night because of the credit situation,'' said Mitchell Stapley, who oversees $22 billion as chief fixed-income officer in Grand Rapids, Michigan, at Fifth Third Asset Management. ``And it's coming cheap, at very attractive levels.''

The average investment-grade corporate bond yields are 194 basis points higher than government debt, more than double the spread in June, according to Merrill Lynch indexes.

The yield on five-year notes dropped 9 basis points to 3.41 percent, remaining lower after the government's auction of $13 billion in new debt drew the weakest demand since July. The Treasury sold the notes at a yield of 3.415 percent, lower than the average forecast of bond traders surveyed by Bloomberg.

Investors bid for 2.26 times the amount of debt being sold. For the past 10 sales, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, averaged 2.48.

Dollar May Extend Gain Versus Euro as Credit Squeeze Spreads

By Bo Nielsen

Nov. 30 (Bloomberg) -- The dollar may extend a rally against the euro and pound on concern the reluctance of banks to lend is spreading to Europe.

The U.S. currency gained yesterday as the cost of borrowing in euros for one month rose by a record amount as banks sought funds to cover their commitments through to the start of next year. A government report today is forecast to show personal spending in the U.S. increased 0.3 percent last month.

``There's a growing concern about a global growth slowdown as the U.S. drags down other economies,'' said Michael Malpede, a senior currency analyst in Chicago at Man Global Research, part of MF Global Ltd., the world's largest broker of exchange- traded futures and options contracts. ``Nobody is quite sure how much damage is being done to the European credit markets, but their markets seem to be in dire straits as well.''

The U.S. currency, which has fallen 11 percent on a trade- weighted basis this year, traded at $1.4744 per euro and 109.94 yen at 7 a.m. in Tokyo. It gained 0.7 percent versus the euro and 1 percent against the pound yesterday. The euro bought 162.08 yen, falling 0.8 percent yesterday.

Malpede forecasts the dollar may strengthen to as much as $1.455 versus the euro in the next two weeks.

Separate data may show the Federal Reserve's preferred gauge of inflation was 1.8 percent in the 12 months through October, according to the median forecast of 29 economists surveyed by Bloomberg. Fed officials, including Chairman Ben S. Bernanke, have said they would be comfortable with the gauge between 1 percent and 2 percent.

Bernanke will speak in Charlotte, North Carolina, on the national and regional economies at 6:45 p.m. local time.

`A Long Way'

Chief Economist Jim O'Neill of Goldman Sachs Group Inc. in New York said the dollar's slide may soon end.

``It's fallen a long, long way,'' O'Neill said at the University of Oxford on Nov. 28. ``I personally think that a year from today the dollar will be quite a bit stronger.''

He also led a group of analysts in a report forecasting ``a gradual relaxation of credit concerns in the financial sector over the coming months.''

The yield on the March Euribor interest-rate futures contract was unchanged yesterday at 4.4 percent. It has declined 33 basis points since reaching 4.73 percent on July 6. The yield on the 90-day sterling interest-rate futures contract for June fell 8 basis points to 5.33 percent. It was 6.4 percent on July 17. A basis point is 0.01 percentage point.

Housing Slump

The dollar has declined against 15 of the 16 major currencies this year amid the worst housing market slump since 1991 and a credit squeeze that sent three-month interbank borrowing costs to the highest since 2001. Policy makers cut the benchmark rate twice to 4.5 percent to keep the economy out of recession.

Borrowing costs in the U.K. are 5.75 percent after five increases since 2006, and 4 percent in the euro region after eight increases since 2005.

``Selling the dollar has been one of the easiest trades this year, but it's not a one-way bet at the moment,'' said Mark Meadows, strategist at currency-trading company Tempus Consulting Inc. in Washington. ``You're starting to see evidence that the subprime crisis is spreading and that other central banks may have to hold, or even cut, interest rates.''

The London interbank offered rate that banks charge each other for euro loans that only come due after the end of 2007 climbed 64 basis points to 4.81 percent yesterday, the British Bankers' Association said. The rate charged for dollars rose 40 basis points to 5.23 percent.

The dollar will gain to $1.44 per euro and 112 against the yen by the end of June, according to the median forecast of 39 analysts and brokerages surveyed by Bloomberg.

Futures contracts on the Chicago Board of Trade showed yesterday traders see a 100 percent chance the Fed will lower its target for overnight loans between banks at least a quarter- percentage point to 4.25 percent on Dec. 11. The chance of a cut to 4 percent is 26 percent.

Monday, November 26, 2007

U.S. Stocks Fall on Credit Concern; Citigroup, Fannie Retreat

By Elizabeth Stanton

Nov. 26 (Bloomberg) -- U.S. stocks fell, pushing the decline from this year's record highs to more than 10 percent, on concern that mounting mortgage losses will lead banks to reduce lending.

Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co., the three biggest U.S. banks, retreated after Goldman Sachs Group Inc. said HSBC Holdings Plc faces $12 billion in additional writedowns. Fannie Mae and Freddie Mac, the largest U.S. mortgage-finance companies, tumbled after UBS AG said higher credit costs will cause earnings growth to slow. Target Corp. and Macy's Inc. led retailers lower on concern consumers will spend less on holiday gifts.

The Standard & Poor's 500 Index dropped 33.48, or 2.3 percent, to 1,407.22, leaving the benchmark down 0.8 percent in 2007. The Dow Jones Industrial Average tumbled 237.44, or 1.8 percent, to 12,743.44, paring its gain for the year to 2.3 percent. The Nasdaq Composite Index lost 55.61, or 2.1 percent, to 2,540.99 and is up 5.2 percent in 2007. Almost six stocks fell for every one that rose on the New York Stock Exchange.

``There's still a lot of fear out there because of the fact that this credit contagion is starting to widen out,'' said Larry Adam, chief investment strategist at Deutsche Bank Alex. Brown in Baltimore, which manages $58 billion. ``You're seeing increasing amounts of write-offs by banks, with some of them saying that they're going to be larger for the fourth quarter than the third.''

The S&P 500 extended its worst monthly drop in five years as all 10 of its main industry groups fell. Financial shares dropped to the lowest since April 2005 after the Federal Reserve said ``heightened pressures in money markets'' prompted it to take steps to increase the cash available to banks for loans.

10 Percent Drop

Treasuries rallied, pushing 10-year yields to the lowest level since March 2004, as investors sought the safety of U.S. government debt.

Both the S&P 500 and Dow average have fallen 10.1 percent from their Oct. 9 records, marking a so-called correction in the U.S. stock market. The S&P 500 last fell at least 10 percent from a high in the period ended March 11, 2003, or 1,721 calendar days ago. Today's decline ended the longest streak without a correction in the S&P 500 since the 2,573-day stretch ended October 27, 1997, according to data compiled by Birinyi Associates Inc. and Bloomberg News.

Bank of America dropped $1.27 to $41.88. JPMorgan fell $1.49 to $40.46. Lehman Brothers Holdings Inc., the largest U.S. underwriter of mortgage bonds, retreated $3.40 to $57.46. Merrill Lynch & Co., the biggest U.S. brokerage, decreased $2.31 to $51.23.

`Rudderless Ship'

Citigroup, whose Chief Executive Officer Charles O. ``Chuck'' Prince stepped down Nov. 4, posted the steepest decline in the 30-member Dow average after CNBC said it may cut as many as 45,000 jobs. The biggest U.S. bank by assets said ``reports on specific numbers are not factual.'' Its shares slipped $1.95, or 6.2 percent, to a five-year low of $29.75.

``Without a CEO it's kind of like a rudderless ship,'' said Peter Kovalski, who helps manage $12 billion at Alpine Woods Capital Investors in Purchase, New York. ``Since they don't have a spokesman who can go out and talk to the investment community, they're defenseless against the rumors that keep swirling around, whether its write-offs or layoffs.''

Banks and brokerages declined after HSBC, Europe's largest bank, said it will bail out two structured investment vehicles by taking on $45 billion of assets to avoid a fire sale of bond holdings. Banks are trying to prevent SIVs, companies that borrow short-term to invest in higher-yielding securities, from collapsing and forcing fund managers to sell their $320 billion of assets.

Bank of America, Citigroup and JPMorgan are trying to persuade competitors to help finance an $80 billion ``SuperSIV'' fund to bail out the companies.

Fannie, Freddie

Fannie Mae and Freddie Mac were cut to ``neutral'' from ``buy'' by analysts at UBS AG, who lowered the price estimate on Fannie Mae to $31 from $88 and Freddie Mac to $28 from $87.

Fannie Mae dropped $3.28 to $28.92. Freddie Mac fell $1.97 to $24.50.

Countrywide Financial Corp. fell $1.01, or 10 percent, to $8.64 after Senator Charles Schumer urged the regulator of the Federal Home Loan Bank system to examine the risks posed by cash advances to the largest U.S. mortgage lender. The system's Atlanta bank had made $51.1 billion in advances to Countrywide as of Sept. 30, representing 37 percent of the bank's total outstanding advances, Schumer wrote to Federal Housing Finance Board Chairman Ronald Rosenfeld, citing U.S. Securities and Exchange Commission filings.

Financial shares in the S&P 500 dropped 4.1 percent as a group and contributed the most to the overall index's decline.

Target, Macy's

Target, the second-largest discount chain, fell $1.95 to $55.22. Macy's lost $1.73 to $28.30.

Circuit City Stores Inc., the second-largest U.S. consumer electronic chain, fell 52 cents to $5.99. Its 19 percent gain on Nov. 23, the first day of holiday shopping season, was the biggest in at least 27 years.

The National Retail Federation said 147 million customers visited stores on the day after Thanksgiving, up 4.8 percent from a year earlier, while shoppers spent 3.5 percent less per person.

``In general it's a pretty pessimistic market,'' said Bartley Barnett, head of listed trading at Memphis-based Morgan Keegan Inc., which has $120 billion in client assets. ``It seems like there are two sides to every story and everyone's leaning to the negative side right now.''

Fed Adds Cash

The Federal Reserve today announced it would add cash reserves to the banking system for long-term periods spanning the end of the year, a step aimed at keeping the overnight lending rate between banks in line with the central bank's 4.5 percent target. The rate exceeded the target seven of the past eight days, a sign banks are reluctant to lend.

The Fed lowered its target for the federal funds rate at its past two meetings, and is forecast by traders of interest-rate futures to reduce it at each of its next three meetings.

The S&P 500 has fallen 9.2 percent in November, its biggest monthly decline since sliding 11 percent in September 2002. Financial companies declined the most in the month, dropping more than 16 percent.

A poll of 50 economists released last week by the National Association for Business Economics found that nine put the odds of a recession in the next 12 months at 50 percent or higher. In September, five of 46 economists held that view.

Slowing Growth

The biggest slump in residential real estate since 1991, resulting turmoil in financial markets and higher energy prices will slow the U.S. economy's growth rate to 1.5 percent during the fourth quarter, the economists said.

A gauge of homebuilders, including Centex Corp. and D.R. Horton Inc., fell 6.4 percent to a four-year low after Citigroup's investment research arm said real-estate prices may continue to fall. Shares of Centex slipped $1.58 to $18.38 while D.R. Horton lost 80 cents to $10.58.

Apple Inc., maker of the iPod, iPhone and Macintosh computers, added $1 to $172.54. Goldman Sachs recommended investors buy shares of the company after a ``strong start'' to the so-called Black Friday weekend. ``Apple will have multiple winners once again this holiday season, with Macs a particular standout,'' wrote analysts David Bailey and Laura Conigliaro.

Cisco Systems Inc., the world's largest maker of networking equipment, fell $1.19 to $27.49 after an analyst said investors overlooked slowing sales in developing countries when it reported earnings. Investors instead focused on a decline in U.S. orders, said John Marchetti, an analyst with Morgan Stanley in New York who recommends buying the shares.

Boeing, Deere

Boeing Co. rose 39 cents to $89.93 for the second-biggest gain in the Dow average after Wachovia Capital Markets LLC advised investors to buy shares of the world's second-largest maker of commercial planes because of rising global demand. Analyst Gary Liebowitz said Boeing has become less reliant on U.S. airlines and will benefit from global economic growth of 4 percent next year and 4.1 percent in 2009, based on Wachovia's forecasts.

Deere & Co. added $1.82 to $158.46 after Banc of America raised its recommendation on the world's largest maker of tractors and harvesters to ``buy'' from ``neutral,'' increasing its price estimate 43 percent to $186 per share. ``Global agriculture fundamentals -- rising farm income, relatively high crop prices, low crop inventories, and bio-fuel-related demand -- all suggest another strong year of farm equipment sales in 2008,'' analysts including Seth Weber in New York wrote in a note published today.

The Russell 2000 Index, a benchmark for companies with a median market value of $573.5 million, fell 2.6 percent to 735.07. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, lost 2.1 percent to 14,208.95. Based on its drop, the value of stocks decreased by $386.6 billion.

Treasury 10-Year Yield Is Lowest Since March 2004 on Subprime

By Deborah Finestone and Sandra Hernandez

Nov. 26 (Bloomberg) -- Treasuries rose, pushing 10-year note yields to the lowest since March 2004, as concern that subprime mortgage losses will continue to spread led investors to sell stocks for the relative safety of government debt.

The yield on the 30-year bond fell the most in three years after Goldman Sachs Group Inc. analysts said HSBC Holdings Plc may have to set aside a further $12 billion for bad debts. The Federal Reserve sought to ease concern that banks will be short of cash next month by planning its first long-term injection of year-end funds in two years.

``With equity prices weaker, more people are allocating assets into the fixed-income arena, even with yields as low as they are,'' said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading in New York at Deutsche Bank AG's private wealth management unit.

The 10-year note's yield decreased 16 basis points, or 0.16 percentage point, to 3.84 percent at 4:45 p.m. in New York, according to bond broker Cantor Fitzgerald LP. It touched 3.79 percent, the lowest since March 2004. The price of the 4 1/4 percent coupon due in November 2017 rose 1 11/32, or $13.44 per $1,000 face amount, to 103 13/32.

The yield on the 30-year bond fell 14 basis points to 4.29 percent after touching 4.23 percent, the lowest since July 2005. It was the biggest drop since June 15, 2004, when then Fed chairman Alan Greenspan said inflation wasn't ``a serious concern.''

``The longer end is one of the few places you can still get'' more than 4 percent in yields, said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors.

HSBC Bailout

HSBC, Europe's largest bank, said it will bail out two structured investment vehicles, taking on $45 billion of assets to avoid a fire sale of bond holdings. The rescue is the biggest for SIVs, companies that borrow short term to invest in higher- yielding securities.

Citigroup Inc., which has announced at least $8 billion of fourth-quarter writedowns on mortgage investments, is reviewing ways to ``be more efficient and cost effective'' as it seeks a new chief executive officer, said Christina Pretto, a spokeswoman for the bank.

The Standard & Poor's 500 Index dropped 2.3 percent, and the Dow Jones Industrial Average fell 1.8 percent.

Banks and other financial firms have reported more than $50 billion of mortgage-related losses and writedowns, increasing the appeal of fixed-income assets. Treasuries of all maturities have returned 2.76 percent through Nov. 23, according to Merrill Lynch & Co. bond indexes. That's the best performance since gaining 2.98 percent in September 2003.

Two-Year Notes

Yields on two-year notes fell 19 basis points to 2.88 percent and earlier touched 2.87 percent, the lowest since December 2004. They yielded 96 basis points less than 10-year notes, 5 basis points from the widest spread since January 2005, which was reached last week. The narrowing gap suggests reduced demand for shorter-term securities.

People are investing in two-year debt ``for defensive purposes and not for investment-return purposes because the yield is just too low there in normal times,'' said Andrew Harding, who helps manage $16 billion as chief investment officer for fixed income in Cleveland at Allegiant Asset Management.

Fed Rate Outlook

Futures on the Chicago Board of Trade show traders began betting that the Fed will lower its target rate for overnight lending between banks by a half-percentage point on Dec. 11. Traders see an 82 percent chance rates will be cut to 4.25 percent at the meeting, and 18 percent odds of a cut to 4 percent. The Fed has reduced the rate by three quarters of a percentage point this year to 4.5 percent.

Yields on two-year notes are at ``extreme levels, indicating the bond market's perspective that the Fed needs to go to an easing cycle,'' said T.J. Marta, a fixed-income strategist in New York at RBC Capital Markets, the investment- banking arm of Canada's biggest lender. ``It's no longer asking politely. It's back to demanding.''

Losses have made banks reluctant to lend to each other, keeping the average overnight fed funds rate above the central bank's target almost every day since Nov. 9.

The New York Fed said today it will arrange $8 billion of long-term repurchase agreements, or repos, to extend financing into the new year ``in response to heightened pressures in money markets for funding through the year-end.''

First Since 2005

The repos, the first such operation since 2005, will be arranged Nov. 28 and mature Jan. 10, the central bank said in a statement. The Fed said it also plans to ``provide sufficient reserves to resist upward pressures'' on the funds rate around year-end.

The cost of borrowing dollars for three months rose as banks hoarded cash to cover their commitments through the end of the year. The London interbank offered rate, or Libor, for dollars rose 1 basis point to 5.05 percent, for a four-week high and the ninth straight day of gains, the British Bankers' Association said today.

That pushed the ``TED'' spread, or the difference between three-month Treasury bill yields and Libor, to 1.95 percentage points, the widest since Aug. 20, when it reached 2.4 percentage points. The yield on the three-month bill fell 11 basis points to 3.10 percent.

The Treasury Department said today it will sell $20 billion in two-year notes on Nov. 28 and $13 billion in five-year debt the following day, in line with expectations from Wrightson ICAP in Jersey City, New Jersey.

Trading in Treasuries through ICAP Plc, the world's largest broker of trades between banks, has risen 34 percent since the Fed cut the discount rate by a half-percentage point on Aug. 17 Trading volume from that day through today has averaged $322.6 billion, compared with $242.1 billion for the same period in 2006.

Fed Plans to Ease Funding Pressures by Adding Cash (Update4)

By Ye Xie and Craig Torres

Nov. 26 (Bloomberg) -- The Federal Reserve will provide funds for banks to borrow in an attempt to forestall any cash shortages at the end of the year, its first such operation since December 2005.

The Fed's New York branch said in a statement that it plans a series of repurchase agreements, starting with an $8 billion injection on Nov. 28, extending into next year. The move follows the European Central Bank's commitment last week to make extra cash available to ``counter the re-emerging risk of volatility'' in money markets.

``The Fed is pulling out all stops to try to alleviate funding pressures in the money and financing markets as the markets lurch into year-end,'' said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

Fed officials acted after the average U.S. overnight lending rate between banks exceeded their target seven of the past eight days, suggesting a reluctance to lend amid mounting subprime mortgage losses. In most years, banks face year-end pressures as they adjust their books to show ample liquidity and at the same time meet a jump in demand for cash from consumers.

The New York Fed said it planned the steps ``in response to heightened pressures in money markets for funding through the year-end.'' Officials will ``provide sufficient reserves to resist upward pressures'' on the benchmark federal funds rate around year-end. The Nov. 28 repo will mature on Jan. 10.

`Still Fragile'

Policy makers judged that financial markets were ``still fragile'' when they met to set interest rates Oct. 30-31, according to minutes of the session released last week. ``Unusual pressures in funding markets persisted,'' the Fed said.

The cost of borrowing dollars for three months rose for a ninth day to 5.05 percent in London today, the British Bankers' Association said. That's 55 basis points more than the Fed's benchmark rate, the widest gap since the Fed cut its benchmark rate for the first time in 4 1/2 years on Sept. 18.

Fed Chairman Ben S. Bernanke will have an opportunity to comment on market developments when he speaks Nov. 29. The central bank today expanded the scope of his remarks to include the national economic outlook. Previously, he was scheduled to give acceptance remarks for the Charlotte Chamber's Citizen of the Carolinas Award and speak about the regional economy.

August Collapse

Fed officials in Washington, who confer daily with the New York Fed's System Open Market Operations desk, have been attuned to funding shortages since the credit-market collapse in August.

On Aug. 10, the central bank pledged to supply additional reserves as needed to address funding constraints. The Fed also reduced the discount rate, the charge for direct loans to banks, to a half-point spread over the federal funds rate on Aug. 17. The gap is usually 1 percentage point.

Policy makers also lowered the main rate by 75 basis points in their past two meetings, to 4.5 percent, in an effort to cushion the economy from the credit crunch and housing recession. The discount rate is 5 percent. A basis point is 0.01 percentage point.

Central bankers next meet to set rates Dec. 11. While Fed Governor Randall Kroszner and other officials have expressed skepticism on the need for additional rate cuts, traders are betting on them.

Fed funds futures contracts show an 84 percent probability of a quarter-point reduction next month, with a 77 percent chance of a further rate cut in January.

`Magic Bullet'

``Given the heightened state of credit aversion going on it looks like the only magic bullet that they have to help the markets is a rate cut,'' Rupkey said.

Fed officials may be drawing on the playbook developed for the 1999-2000 millennium year change. At that time, regulators feared that obsolescent computers would wreak havoc with the banking system. They developed the Special Liquidity Facility in mid-1999, which included longer-term repurchase agreements and the sale of options on repos.

The Fed arranged $5 billion in 28-day repos on Dec. 7, 2005, and $4 billion through 52-day repos on Nov. 15, 2004. The Fed didn't arrange such repos in 2006.

``What the Fed's trying to do here is let the market know that they will provide liquidity around year-end, which is of particular concern in financial markets right now,'' said Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc. ``So anything they can do around that should help alleviate concerns.''

Repo Agreements

In repos, the Fed buys U.S. Treasury, mortgage-backed and so-called agency debt from its 21 primary dealers for a set period, temporarily raising the amount of money available in the banking system. At maturity, the securities are returned to the dealers and the cash to the Fed. The Fed conducts short term repos, ranging from overnight to two weeks, almost every day to keep the Fed fund close to its target.

Louis Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, said the Fed often does long-term repos spanning year-end in November and December, and they usually won't issue a statement to announce the move.

``Formalizing the procedure by announcing it, they intend to boost confidence in the repo markets,'' said Crandall.

In a separate statement, the New York Fed said it will raise the limits on the amount of Treasuries that dealers can borrow from its System Open Market Account. Through the account, dealers can borrow Treasury notes and bills that are scarce in the repo market.

Higher Limit

Primary dealers will be able to borrow 25 percent of the amount available, with a maximum of $750 million per Treasury security, up from the previous limit of 20 percent with a maximum of $500 million per issue, according to the Fed's statement.

The Fed said it has also increased the amount available for borrowing each day to 90 percent of an issue from 65 percent. Dealers can also borrow securities maturing in six days or longer. The Fed had previously limited the borrowing only to issues maturing in at least 13 days.

Demand for government bonds have increased as losses tied to delinquent mortgages spread through the credit markets. The yield on the benchmark 10-year Treasury note has declined 0.59 percentage point in the past month and touched 3.79 percent today, the lowest since March 2004.

`Crucial' Market

Raising borrowing limits will help ``alleviate shortage of securities that have developed recently,'' Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York, wrote in a research note. ``The action will in turn help maintain functionality in the $4 trillion market for repurchase agreements, a market crucial toward the financing of Wall Street's fixed-income inventory.''

The New York Fed cut the minimum fee dealers pay to borrow Treasuries from the central bank to a record low of 0.5 percent on Aug. 21, from 1 percent.

In its daily open-market operation, the Fed added $10.25 billion through overnight repos today, when $6.3 billion in repos was due to mature. Wrightson had expected the Fed to add as much as $15 billion.

Repos help maintain enough money in the system to keep overnight interest rates close to the central bank's target.

The overnight rate traded at 4.625 percent today, above the Fed's 4.5 percent target rate.

Asian Stocks May Drop on Concern U.S. Subprime Loss Will Spread

By Patrick Rial

Nov. 27 (Bloomberg) -- Asian stocks may fall on concern losses from U.S. subprime mortgage-related securities at financial institutions will increase. Mitsubishi UFJ Financial Group Inc., Japan's second-largest bank, may lead declines.

HSBC Holdings Plc, Europe's biggest bank by market value, may have to write down an additional $12 billion for non- performing subprime assets, Goldman, Sachs & Co. said. CNBC reported Citigroup Inc. may shed 45,000 jobs, citing unidentified people within the company. In the U.S., the Standard & Poor's 500 Index fell 2.3 percent, the biggest drop in more than two weeks.

``With the U.S. performing so poorly, it can only mean bad news for the market here,'' said Terunobu Kinoshita, who helps manage $785 million at Fund Creation Co. in Tokyo.

Japanese exporters such as Sony Corp. may drop after the yen strengthened to the highest since June 2005 against the dollar, reducing the value of their overseas sales.

Australia's S&P/ASX 200 Index fell 1.6 percent to 6,370.70 as of 10:41 a.m. in Sydney. New Zealand's NZX 50 Index, Asia's first benchmark to begin trading, lost 0.4 percent to 4,061.38 in Wellington.

U.S.-traded receipts of Mitsubishi UFJ slid 4.1 percent from the closing share price in Tokyo yesterday. Those of Sony declined 2.3 percent. Receipts of Kookmin Bank, South Korea's largest lender, dropped 4.1 percent.

HSBC may have to set aside additional funds for bad debts because of customer defaults at its U.S. subprime lender Household International Inc., Goldman said. The brokerage lowered its rating on the stock to ``sell'' from ``neutral.''

Stronger Yen

The London-based bank said yesterday it will also bail out its two structured investment vehicles by taking on $45 billion of their assets to avoid a fire sale.

Citigroup, which earlier this month announced at least $8 billion of fourth-quarter writedowns on mortgage investments, said it is reviewing ways to cut costs. The bank declined to comment on specifics. Citigroup may cut as many as 45,000 jobs in the next two months, CNBC reported yesterday, citing unidentified people within the company.

The yen's gain against the dollar may also push shares lower as it reduces the value of overseas sales when converted into local currency. The yen strengthened to as high as 107.23 to the dollar in New York, the highest since June 2005.

Japanese paper companies such as Japan Pulp & Paper Co. may rise after the Nikkei newspaper said the producers are expanding their operations in China to take advantage of growing demand.

Nikkei 225 Stock Average futures expiring in December recently fell 2.3 percent to 14,835 in Singapore, down from 15,210 in Osaka, Japan, and 15,200 in Singapore yesterday. The Bank of New York Asia ADR Index, which tracks the region's American depositary receipts, slipped 0.8 percent.

Sunday, November 25, 2007

Japan Stocks Rise on U.S. Retail Sales, Capital Spending Report

By Pavel Alpeyev and Darren Boey

Nov. 26 (Bloomberg) -- Japanese exporter stocks gained after a U.S. report said retail sales increased the day after Thanksgiving as consumers proved willing to spend despite rising oil prices and other economic pressures.

Electronics makers such as Canon Inc. paced the advance as U.S. retailers offer discounts to lure back consumers amid worsening economic conditions. U.S. stocks rose on Nov. 23 with the Standard & Poor's 500 Index gaining 1.7 percent.

``The numbers are looking very good heading into the Christmas shopping season,'' said Norihiro Fujito, a senior strategist at Mitsubishi UFJ Securities Co. in Tokyo. ``Gains in the U.S. market may push the Nikkei benchmark to 15,000.''

Industrial machinery makers such as Mitsubishi Electric Corp. also advanced after the Nikkei newspaper forecast Japanese companies' capital spending will rise 11 percent in fiscal 2007, citing its own survey.

The Nikkei 225 Stock Average added 11.89, or 0.7 percent, to 14,999.66 at 9:16 a.m. in Tokyo. The broader Topix index gained 10.87, or 0.8 percent to 1,448.25. More than two stocks rose for every one that fell on the first section of the Tokyo Stock Exchange.

Canon, the world's largest maker of digital cameras, gained 80 yen, or 1.5 percent to 5,520. Sony Corp., the world's largest maker of video-game consoles, rose 120 yen, or 1.9 percent, to 5,380.

Mitsubishi Electric, a Tokyo-based maker of factory machinery, elevators and railway systems, added 10 yen, or 0.8 percent, to 1,205.

Nikkei futures expiring in December climbed 1.5 percent to 14,990 in Osaka and added 1.4 percent to 14,980 in Singapore.

In other Asian markets open for trading, South Korea's Kospi index jumped 1.7 percent and Australia's S&P/ASX 200 Index gained 1.7 percent.

U.S. Consumers Spent Average of 3.5% Less on Shopping (Update4)

By Cotten Timberlake and Tiffany Kary

Nov. 25 (Bloomberg) -- U.S. consumers spent an average of 3.5 percent less during the post-Thanksgiving Day holiday weekend than a year earlier as retailers slashed prices to lure customers grappling with higher food and energy costs.

Shoppers spent $347.44 on purchases from Nov. 22 through today, choosing to buy less-expensive digital-photo frames and cashmere sweaters, the National Retail Federation said today in a statement. Store visits increased 4.8 percent.

Customers have cut back on spending in the face of increased costs for milk and gasoline and the worst housing slump in 16 years. Wal-Mart Stores Inc. responded by offering holiday discounts more than two weeks earlier than last year while Macy's Inc. and J.C. Penney Co. reduced clothing prices by as much as 60 percent.

``The sense we have this year is that shoppers are very mission-focused,'' said Fred Crawford, managing director for consulting and advisory firm AlixPartners LLP. ``They know who is carrying what, and at what price point.''

More than 147 million consumers visited stores over the weekend, the NRF said, based on a poll it commissioned from BIGresearch. The average spending amount last year was helped by increased sales of high-definition televisions, NRF spokesman Scott Krugman said.

``It's the saturation of HD-TVs into the market, and also retailers recognizing that consumers will be more conservative this year and focusing on lower-priced merchandise,'' he said.

November, December

Sales in November and December represent 20 percent of retailers' annual revenue, according to the NRF. The fourth quarter accounts for almost a third of retailers' annual profit, according to the International Council of Shopping Centers.

Sales on Nov. 23, called Black Friday because it was the day that retailers traditionally turn a profit for the year, rose 8.3 percent from a year earlier to $10.3 billion, Chicago- based research firm ShopperTrak RCT Corp. said.

Combined sales for both Black Friday and yesterday rose 7.2 percent to $16.4 billion, the firm said today.

ShopperTrak measures foot traffic in shopping centers and malls using more than 50,000 video devices. BIGresearch, based in Worthington, Ohio, polled 2,395 consumers on Nov. 22-24.

Krugman, who didn't provide an aggregate spending estimate for the weekend, said overall sales were lifted by the higher number of shoppers, even as they spent less individually.

Shares Rise

Wal-Mart, the world's biggest retailer, rose 87 cents, or 1.9 percent, to $45.73 in New York Stock Exchange composite trading on Nov. 23. Macy's gained $1.53, or 5.4 percent, to $30.03 in New York trading and Target Corp. advanced $3.07, or 5.7 percent, to $57.17.

Online retail spending on ``Cyber Monday'' may surpass $700 million, a single-day record, as customers head to Inc. and to find bargains on flat-panel televisions and toys, research firm ComScore Inc. said today.

Consumer purchases over the Internet rose 29 percent on Thanksgiving Day and 22 percent the day after, Reston, Virginia-based ComScore said. Spending tomorrow probably will exceed either of those days as people return to work from the holiday weekend, it said.

Online visits on Black Friday increased 10 percent from a year earlier, according to data released today by research firm Nielsen Online.

Web sites run by IAC/InterActiveCorp, owner of the HSN shopping channel and ticket broker Ticketmaster, were the most visited by U.S. shoppers from their homes, followed by, and Target Corp., New York-based Nielsen said.

The NRF in September predicted a 4 percent gain in total retail sales for November and December, the smallest gain since a 1.3 percent rise in 2002. The group reiterated its projection today.

The margin of error of the BIGresearch poll was plus or minus 1.5 percentage points.

As Bonds Point to U.S. Recession, Bad News Is Not Anytime Soon

By Daniel Kruger and Sandra Hernandez

Nov. 26 (Bloomberg) -- The good news for Treasury investors is that the U.S. economy is slowing. The bad news is that it may avoid falling into recession.

Even bulls say that the biggest rally in government debt since 2002 has pushed yields on 10-year notes so low that they can only decline if the economy shrinks. None of the 68 economists surveyed by Bloomberg News from Nov. 1 to Nov. 8 expect the economy to contract before the end of 2008.

``The market's priced to an extreme outcome,'' said Peter Kretzmer, senior economist in New York at Bank of America Corp. ``You have this dichotomy that seems to be going on between financial market behavior and the economy.''

After falling below 4 percent last week for the first time since 2005, 10-year yields will rise to 4.325 percent by year- end, according to the median forecast of the 21 primary dealers that trade directly with the Federal Reserve. The increase would mean a capital loss of 2.21 percent, Bloomberg data show. Ten- year notes returned 12 percent since yields rose as high as 5.3 percent in June, Merrill Lynch & Co. indexes show.

The Fed said Nov. 20 that it expects the economy to expand 1.8 percent to 2.5 percent in 2008. The median estimate in the Bloomberg survey is for 2.1 percent growth this year and 2.4 percent in 2008.

What concerns bond investors is that the slowing economy may lead the central bank to lower interest rates even though the dollar's 12 percent decline on a trade-weighted basis this year and the 61 percent increase in crude oil prices are causing inflation to accelerate. The consumer price index increased 3.5 percent in October from a year earlier, the fastest pace since August 2006, the government said Nov. 15.

Stagflation Danger

The last time the economy suffered through slowing growth and rising inflation, or stagflation, was in the 1970s. The 10- year note's yield rose to 10.3 percent by 1980 from 5.89 percent at the end of 1971.

``I think we have some version'' of stagflation now, said Paul McCulley, a money manager at Newport Beach, California- based Pacific Investment Management Co., which runs the world's biggest bond fund. ``We're importing a degree of inflation with the weaker dollar and oil prices, which the Fed can't do anything about. The economy is weaker.''

The Fed probably will reduce its interest rate target for overnight loans between banks to less than 3 percent from 4.5 percent now, choking off the rally, McCulley said.

Breakeven Rate

Investors are ratcheting up expectations for inflation. The gap between yields on inflation-protected 10-year Treasuries and the benchmark 10-year note has increased to 2.4 percentage points from a low of 2.2 percentage points on Sept. 5. The difference represents the average annual rate of inflation traders expect over the life of the securities.

The ``relatively good economy'' means bonds are likely to fall, said Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc., a primary dealer. ``Fundamentally rates should be much higher.''

Barclays expects 10-year yields to rise to 4.6 percent and two-year yields to increase to 4 percent, from 3.08 percent last week. The firm is one of 13 primary dealers that predict the Fed will keep its target rate at 4.5 percent next month.

Bank of America's Kretzmer forecasts 10-year yields will rise to 4.35 percent and two-year notes will reach 3.55 percent because the economy won't lapse into recession.

Ten-year notes rallied as much as $15.94 per $1,000 face amount last week on growing concern that the Fed is failing to contain the fallout from the collapse of subprime mortgages.

Beating Stocks

While the Standard & Poor's 500 Index fell 1.24 percent, yields on 10-year notes dropped 17 basis points to 4 percent as the price of the 4.25 percent note due November 2017 gained about 1 3/8, or $13.75, to 102 1/32. The two-year note yield tumbled 26 basis points, or 0.26 percentage point.

Primary dealers predicted the biggest bull market for Treasuries since 2002 at the start of this year. In a Bloomberg survey in January, the firms forecast gains of 5.4 percent in 10-year notes and 5.1 percent for two-year securities.

Treasuries are poised to post higher returns than corporate debt and the S&P 500 for the first time since 2002. Treasuries of all maturities have gained 8.6 percent this year, compared with 3.9 percent for company debt, according to Merrill Indexes. The S&P 500 paid 3.3 percent, including dividends, Bloomberg data show.

The rally has driven 10-year yields 50 basis points below the target federal funds rate. The gap was 93 basis points on Sept. 10, before the Fed lowered borrowing costs half a percentage point on Sept. 18 and by a quarter point Oct. 31.

`Financial Spasm'

The central bank cut rates each of the three times since 1989 when the 10-year yield dropped below its target. Recessions followed within a year in 1989 and 2000. The Fed kept the economy from shrinking when it reduced rates in 1998 after Russia defaulted and Greenwich, Connecticut-based Long-Term Capital Management LP collapsed, requiring a $3.5 billion bailout from the world's biggest securities firms and banks.

Merrill's David Rosenberg, the most bullish economist among the primary dealers when it comes to bonds, said the Fed will slash rates to 2 percent by June 2009 because of the worst housing market in 16 years and credit-market losses.

``You either believe this is a just a temporary financial spasm and a soft patch or you believe this is going to be something a lot deeper,'' Rosenberg said.

Any evidence of growth will be enough to end the Treasury rally, said Joseph Balestrino, a senior portfolio manager in Pittsburgh at Federated Investors Inc., which oversees about $21 billion in bonds.

The government is forecast to say this week that the economy accelerated at a 4.9 percent annual pace last quarter, faster than its initial estimate of 3.9 percent on Oct. 31, according to the median estimate of 60 analysts surveyed by Bloomberg.

``Historically speaking, most of the yield decline has already occurred,'' Balestrino said. ``It's hard to be wildly bullish at this point unless you're calling for a recession. Yields will have to back higher.''

Following are the results of Bloomberg's survey of primary dealers, conducted from Nov. 16 to Nov. 23:

Firm Fed 2s 10s
BNP Paribas 4.25 3.4 4.20
Banc of America 4.5 3.55 4.35
Barclays Capital 4.5 4 4.6
Bear Stearns 4.5 3.6 4.5
Cantor Fitzgerald 4.25 3.5 4.3
Citigroup NA NA NA
Countrywide* 4.25 4.4
Credit Suisse* 4.5 3.8 4.45
Daiwa Securities* 4.5 4 4.55
Deutsche Bank 4.5 3.6 4.5
Dresdner Kleinwort 4.25 3.55 4.15
Goldman Sachs* 4.25 3.8 4.2
Greenwich Capital 4.5 3.4 4.2
HSBC Securities 4.5 3.5 4.2
J.P. Morgan 4.25 3.25 4.1
Lehman Brothers* 4.5 3.8 4.4
Merrill Lynch* 4.25 3.6 4.2
Mizuho 4.5 3.4 4.05
Morgan Stanley* 4.5 3.75 4.4
Nomura Securities 4.5 3.4 4.35
UBS 4.25 3.3 4.2
Median 4.5 3.60 4.325

-- With reporting by Kathleen Hays, Deirdre Bolton, Lydia Thew, Ye Xie and Deborah Finestone in New York. Editor: Liedtka (jmp)

Dollar Displaces Yen, Franc as Favorite for Funding Carry Trade

By Bo Nielsen

Nov. 26 (Bloomberg) -- Using the dollar to pay for purchases of currencies with higher yields is proving to be the most profitable trade in the foreign-exchange market.

A basket of currencies including the British pound, Brazilian real and Hungarian forint financed with dollars returned 17 percent this year, compared with 9 percent when funded in yen and 7 percent in Swiss francs, according to data compiled by Bloomberg. Falling U.S. interest rates and increasing volatility in the yen and franc are making the trade even more appealing.

``With the dollar giving the appearance of being in free fall, it increases the attractiveness of using the currency to fund investments,'' said Avinash Persaud, chairman of London- based Intelligence Capital Ltd., which advises hedge funds that manage more than $89 billion. ``That process will only add more fuel to the decline.''

The last time the U.S. currency was used for so-called carry trades was in 2004, when the Federal Reserve's target rate for overnight loans between banks was 1 percent, said Niels From, a strategist at Dresdner Kleinwort in Frankfurt. Since then, it has weakened 18 percent on a trade-weighted basis, according to a Fed index. The International Monetary Fund says the dollar made up 64.8 percent of central banks' currency reserves in the second quarter, down from 71 percent in 1999.

Investors are borrowing dollars and using the money to buy assets in countries with higher interest rates even though U.S. borrowing costs are 4 percentage points more than the Bank of Japan's and 1.75 percentage points above the Swiss National Bank benchmark. In carry trades, speculators get funds in a country with low borrowing costs and invest in one with higher returns, earning the spread between the two.

Housing Slump

Speculation against the dollar increased as the worst housing slump since 1991 forced policy makers to cut the benchmark rate twice to keep the economy out of recession. The currency depreciated in five of the past six years leading central bankers from the Arabian Peninsula to China to diversify their reserves and increase holdings of non-U.S. assets.

The dollar dropped 1.2 percent last week against the euro to $1.4837, and has weakened 12 percent so far in 2007. The U.S. currency has depreciated 10 percent versus the yen this year, including 2.5 percent last week to 108.35 yen. It fell to a record 1.089 Swiss francs on Nov. 23.

Investors may switch more than $100 billion of borrowing from yen or francs into dollars in the next two years for carry trades said Jens Nordvig, a strategist with New York-based Goldman Sachs Group Inc., the biggest U.S. securities firm by market value.

Real, Won, Pesos

The value of futures contracts held this month by hedge funds and traders betting against the dollar was a record $33.9 billion more than contracts that profit from a gain, according to New York-based Morgan Stanley, the second-biggest U.S. securities firm.

Pacific Investment Management Co., which oversees the world's biggest managed bond fund, is selling dollars against the Brazil real, Mexican peso, Korean won and Singapore dollar.

``When we think about currencies on a three- to five-year basis we're very bullish on emerging markets versus the U.S. dollar,'' said Andrew Balls, who helps manage $80 billion for Newport, California-based Pimco. ``That view is only reinforced when you look at interest-rate differentials.''

The real rose 18.5 percent this year and Singapore's currency strengthened 6.4 percent, while the won was little changed. The Mexican peso fell 1.4 percent, the only one of the 16 most-traded currencies to do worse in the foreign exchange market.

Interest Rates

Pimco, a unit of Munich-based insurer Allianz SE, expects the Fed to lower borrowing costs to around 3 percent, from 4.5 percent. Policy makers have reduced the rate by 0.75 percentage point since Sept. 18.

Interest-rate futures on the Chicago Board of Trade show investors see a 58 percent probability that the U.S. benchmark will drop to 3.75 percent by March 31. Switzerland's key rate is 2.75 percent and Japan's is 0.5 percent.

The dollar produced a positive carry, the combined gain from the difference between interest rates and changes in foreign exchange, against 20 of the 24 most actively traded emerging market currencies this year, Bloomberg data show. The franc was positive against 12 and the yen versus 14.

Using a currency to finance bets can drive down its value. Former Japanese vice finance minister Hiroshi Watanabe said in May that one reason the yen had fallen to a record low against the euro was because it was funding about $500 billion of carry trades.

Attracting Speculators

The dollar attracted speculators when the Fed cut the target rate from 6.5 percent in 2001 to 1 percent in June 2003 and kept it there for a year, said Dresdner Kleinwort's From. When the Fed started to raise borrowing costs, traders fled. The U.S. rate surpassed the European Central Bank's benchmark in December 2004, helping the dollar gain almost 13 percent versus the euro the following year.

Strategists say the U.S. currency will recover because the economy is adding jobs and producing faster inflation, limiting the Fed from reducing borrowing costs. The dollar will rebound to $1.42 per euro and to 113 yen by the end of June, according to the median forecast of 41 analysts surveyed by Bloomberg.

The Fed will probably cut its target a quarter-point to 4.25 percent in the next three months and leave it there through 2008, according to a separate survey from Nov. 1 to Nov. 8. The U.S. economy will accelerate to a 2 percent annual growth rate next quarter, from the current 1.5 percent, the survey showed.

``We're actually bullish the U.S. dollar,'' said Jack McIntyre, who helps manage $25 billion at Brandywine Global Investment Management LLC in Philadelphia. ``As long as the world doesn't fall off a cliff, we will see people continue to play the carry trades and the yen will be the premier funding currency.''

`Safer Source'

The dollar is becoming more attractive for speculators concerned that higher volatility will reduce profits from bets funded in yen. An increase in price swings dents returns by raising the risk that gains from the spread between interest rates will be erased by foreign-exchange losses.

The yen appreciated 8.7 percent against the dollar since Oct. 15 as implied volatility on one-month dollar-yen options climbed to 14.97 percent from 7.47 percent. Dealers quote implied volatility, a gauge of expectations for currency moves.

``The dollar becomes a safer source of funding'' as volatility rises, said Maxime Tessier, head of foreign exchange in Montreal at Caisse de Depot et Placement, which manages $151 billion.

U.K. House Prices Fall for a Second Month, Hometrack Says

By Brian Swint

Nov. 26 (Bloomberg) -- U.K. house prices fell for a second month in November as a jump in credit costs sapped confidence among buyers and sellers, a survey by Hometrack Ltd. showed.

The average cost of a home in England and Wales fell 0.2 percent from October to 175,700 pounds ($361,000) following a 0.1 percent drop the previous month, the London-based research group said today. From a year earlier, prices increased 3.6 percent, the least since July 2006.

Analysts predict the weakest housing market in a decade next year, with borrowing costs at a six-year high and a slowdown in economic growth after contagion from the U.S. subprime mortgage market. The central bank signaled this month the economy may need at least one interest-rate cut in 2008.

``The fallout from the credit squeeze, along with relatively high interest rates, is resulting in widespread caution among homeowners,'' said Richard Donnell, director of research at Hometrack. ``It is hard to see the catalyst for any short-term turnaround in market confidence other than interest- rate-cuts early in the new year.''

Property prices fell the most in the East Midlands, where they dropped 0.3 percent, followed by Greater London's 0.2 percent decline. In central London, home values fell 0.5 percent, Hometrack said today.

Advice to Sellers

Rightmove Plc, HBOS Plc and the Royal Institution of Chartered Surveyors have also said house prices fell this month. Sellers shouldn't hesitate to lower the asking price because a more protracted slowdown is on the way, Rightmove, the U.K.'s most-used property Web site, said Nov. 19.

Prices may fall next year as a ``toxic mix'' of higher interest rates, overvaluation and record debt deters property investors, Citigroup Inc. predicted Nov. 9.

A housing shortage may limit a decline in values. Construction of new homes stagnated at 148,000 units a year on average between 1989 and 2005, down from a peak of 425,000 in 1968. The economy is also on course to grow at the fastest pace in three years in 2007, buoying demand for property.

``Values are being supported by a continued tightening in supply,'' said Donnell. ``But the underlying market conditions remain weak with new buyer registrations down by 26 percent over the last five months.''

Bonus Cuts

As U.S. subprime-mortgage losses spread to Europe, London banks and investment companies may cut jobs and bonuses, which helped to fuel house prices over the past decade. Workers in the City, London's financial district, will invest only 2 billion pounds in homes next year, compared with 5.5 billion pounds in 2007, real estate agents Savills Plc said Nov. 5.

Britons are shouldering the highest interest rates since 2001 and have amassed record debt of 1.4 trillion pounds. The U.S. subprime mortgage slump has also prompted banks to lift mortgage rates, hurting affordability.

Home loans with a fixed rate for two years, the most popular type in the U.K., cost an average 6.37 percent in interest last month, compared with 5.41 percent a year ago, central bank data showed on Nov. 9.

Bank of England Deputy Governor Rachel Lomax said last week that there are signs that the slowdown in the housing market ``is gathering pace.''

Economists predict the central bank will cut the benchmark rate in the first quarter, according to the median of 15 estimates in a Bloomberg News survey from Nov. 22.

Saturday, November 24, 2007

China Foreign-Exchange Reform Smooth, PBOC's Su Says (Update1)

By Belinda Cao

Nov. 24 (Bloomberg) -- China is progressing with foreign- exchange reform smoothly and the mechanism plays an important role in `adjusting' the nation's trade balance, central bank Deputy Governor Su Ning said.

The rate of the yuan also plays an important role in sustaining the nation's economic growth, Su said today at a financial conference in Beijing.

``The foreign-exchange mechanism will help improve the economic structure and lead to industry upgrading,'' he said.

European and U.S. officials have been urging China to allow it currency to appreciate faster to reduce global imbalances in trade they say are threatening manufacturing jobs. They claim the Asian nation keeps the yuan undervalued to support exports.

China will consider widening the yuan's 0.5 percent daily trading limit ``if necessary'' and gradually allow the currency to move more freely, central bank Governor Zhou Xiaochuan said in Cape Town, South Africa, on Nov. 18.

``The currency's gain will lead exporters to be less reliant on price competition and will force companies to be more competitive and use their resources more efficiently,'' said Li Huiyong, a currency analyst at Shenyin Wanguo Research and Consulting Co. in Shanghai.

Li said the central bank is likely to allow the yuan to strengthen at a faster pace, though its advance is likely to remain at less than 10 percent a year.

The yuan rose 0.11 percent to 7.4060 per dollar in Shanghai yesterday, according to the China Foreign Exchange Trade System. The currency rose as high as 7.3912, the strongest since its peg to the dollar was scrapped in July 2005.

U.S. Stocks Advance; Circuit City, Target, Boeing Lead Gains

By Eric Martin

Nov. 23 (Bloomberg) -- U.S. stocks rose the most in seven days, paring the week's loss, as shoppers packed stores on the first day of the holiday shopping season and investors speculated a weak dollar will make exports more competitive.

Circuit City Stores Inc., Target Corp. and Macy's Inc. led a gauge of retailers to its biggest Black Friday rally since at least 1989. Boeing Co., the world's second-largest commercial airplane maker, led an advance by exporters as the dollar traded near a record low against the euro. Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. rose for the first time this week after financial shares fell to a two-year low on Nov. 21.

The Standard & Poor's 500 Index added 23.93, or 1.7 percent, to 1,440.7, reducing the week's loss to 1.2 percent. The Dow Jones Industrial Average increased 181.84, or 1.4 percent, to 12,980.88, down 1.5 percent for the week. The Nasdaq Composite Index rose 34.45, or 1.3 percent, to 2,596.6, cutting its weekly drop to 1.5 percent. About seven stocks gained for every one that fell on the New York Stock Exchange. Some 670 million shares changed hands on the Big Board by the 1 p.m. close, the busiest day after Thanksgiving since 1999.

``The fact that Black Friday is not a disaster and is off to a modest but healthy start is just a relief,'' said Mark Bronzo, who helps manage $500 million at Nationwide Separate Accounts in Irvington, New York. ``The scenario we've all been operating under for the last several months is that the retail world is coming to an end. That's not the case.''

Yearly Gain

Today's rally pushed the S&P 500 to a 1.6 percent advance for the year after a drop on Nov. 21 wiped out the benchmark's 2007 gain. Retailers in the index have fallen 17 percent as a group this year on concern that rising energy prices and slumping home values will depress spending.

Retail shares in the S&P 500 advanced 2.7 percent today with 28 of 30 companies gaining. The day after Thanksgiving is known as Black Friday because it is considered the start of the holiday shopping season, when retailers earn most of their profits.

Circuit City, the second-biggest U.S. consumer electronics chain, rallied $1.06, or 19 percent, to $6.51. Macy's Inc., the owner of its namesake chain and Bloomingdale's, climbed $1.53 to $30.03. Target, the second-biggest U.S. discounter, added $3.07 to $57.17. Sears Holdings Corp., the largest U.S. department- store chain, rose $2.26 to $112.58. J.C. Penney Co., the third biggest, increased $1.23 to $41.30.

``It seems like there's a lot of traffic in the stores, so that's a positive,'' said Michael Nasto, senior trader at U.S. Global Investors Inc., which manages $5 billion in San Antonio. ``People might be thinking the sell-off we had the last few days was overdone.''

Exporters, Banks Gain

Boeing, whose top rival is Europe's Airbus SAS, gained $2.13 to $89.54. General Electric Co. added 50 cents to $37.67. Europe accounted for about one quarter of the company's net sales last year. International Business Machines Corp. rose $1.83 to $104.05. The world's second-biggest software maker generated more than half of its revenue outside of the Americas in 2006.

Citigroup, the biggest U.S. bank, added 97 cents, or 3.2 percent, to $31.70. Citigroup, Bank of America Corp. and JPMorgan Chase & Co. are ready to move forward with a plan to revive credit markets with a so-called superfund to buy assets from structured investment vehicles, the Wall Street Journal reported. The three biggest U.S. banks are likely to start asking others to sign up to specific financial terms next week, the Journal reported, citing people familiar with the matter.

Bank of America, the second-largest U.S. bank, gained $1.01 to $43.15. JPMorgan, the third-biggest, climbed $1.27 to $41.95. Wells Fargo & Co., the second-largest U.S. mortgage lender, added 92 cents to $30.84.

Super SIV

The plan is to create a fund amounting to $75 billion to $100 billion as a potential buyer of assets from structured investment vehicles, off-balance-sheet entities that have gotten into difficulties because of lack of liquidity in credit markets. So far, other banks have expressed informal interest, the newspaper said.

The S&P 500 Financials Index, which dropped to the lowest since 2005 on Nov. 21, rose for the first time in seven days today, adding 3.1 percent.

``The banks are coming around,'' said Andrew Seibert, who helps manage $400 million at Nextier Wealth Management in Pittsburgh. ``People that are buying them are saying `There's value here and these stocks are reasonably priced at this range. I'm going to dip my foot in the water.'''

Apple, E*Trade,

E*Trade Financial Corp. gained $1.07, or 25 percent, to $5.33. The second-worst-performing stock in the S&P 500 this year rose on a CNBC report the online brokerage is in talks to sell itself or part of its business. Pam Erickson, an E*Trade spokeswoman, declined to comment.

MBIA Inc. and Ambac Financial Group Inc., the world's two biggest bond insurers, jumped after the bailout of rival CIFG Guaranty signaled the industry may get the financing it needs to avoid credit-rating downgrades. MBIA gained $1.96 to $34.14. Ambac rose $1.41 to $25.55.

Apple Inc. gained $3.08 to $171.54. The maker of the iPod music player agreed to pay $10 million to settle a patent- infringement lawsuit by Inc. over technology that stores audio and video files. The settlement, which isn't yet final, provides Apple with a license to's patents, plus a pledge that Burst won't sue Apple again over future patents, Burst said.

GM, Ford Rise

Carmakers advanced on a report that Congress may adopt separate fuel-efficiency standards for cars and sport-utility vehicles in order to help pass an energy bill this year.

General Motors Corp., the largest U.S. automaker, rose 77 cents to $27.16. Ford Motor Co., the second biggest, climbed 24 cents to $7.19.

Democratic leaders have intensified talks with Republicans in an effort to find compromise legislation and a senior administration official said the odds that a law will be adopted have improved significantly, the Wall Street Journal reported. Rising oil prices have increased pressure on lawmakers to speed up energy-saving legislation, the Journal reported.

Freeport-McMoRan Copper & Gold Inc., the world's second- largest producer of copper, advanced $3.10 to $93.16.

Copper rose the most in a week after inventories plunged in China, the world's biggest user of the metal.

Slumping Dollar

The dollar dropped as low as $1.4967 per euro, the weakest since the single European currency's debut in 1999, on speculation deepening U.S. credit-market losses will prompt the Federal Reserve to cut interest rates.

Former Federal Reserve Chairman Alan Greenspan said policy makers may need to address the weakness of the dollar if it threatens to stoke inflation.

The decline in the subprime mortgage market ``is over'' because the market ``went to zero and cannot go any further,'' Greenspan said at a conference in Oslo, Norway, today. He added that the ``conventional'' mortgage market is ``doing reasonably well.''

The Russell 2000 Index, a benchmark for companies with a median market value of $592 million, added 2 percent to 755.03. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, gained 1.6 percent to 14,518.19. Based on its advance, the value of stocks increased by $287 billion.

Apple Inc. (AAPL US)
Bank of America Corp. (BAC US)
Circuit City Stores Inc. (CC US)
Citigroup Inc. (C US)
E*Trade Financial Corp. (ETFC US)
Ford Motor Co. (F US)
Freeport-McMoRan Copper & Gold Inc. (FCX US)
General Electric Co. (GE US)
General Motors Corp. (GM US)
J.C. Penney Co. (JCP US)
JPMorgan Chase & Co. (JPM US)
Target Corp. (TGT US)
Wal-Mart Stores Inc. (WMT US)
Wells Fargo & Co. (WFC US)