Dollar Financial Corporation (DLLR) said on Wednesday that it intends to offer $250 million aggregate principal amount of senior notes in a private offering through its indirect wholly owned subsidiary National Money Mart Company. 

The senior notes will be guaranteed on an unsecured basis by Dollar Financial and some of its current and future direct and indirect wholly owned U.S. and Canadian subsidiaries. The company intends to use net proceeds from the senior notes offering to finance the acquisition of Military Financial Services, LLC by its wholly owned subsidiary, Dollar Financial Group, Inc. 

The senior notes offering, which the company expects to start and close in Dec 2009, will be available only to qualified institutional buyers and certain offshore investors. 

Concurrent with the senior notes offering, the company said on the same day that it is seeking an amendment and extension of the terms for its revolving credit facilities along with its $286.2 million of Canadian term loans and $83.5 million in British term loans. The amendment would allow the extension of the maturity dates of a portion of Dollar's credit facilities to December 2014. 

Credit Suisse Securities (USA), LLC, a division of Credit Suisse Group (CS) and Wells Fargo Bank, National Association, a division of  Wells Fargo & Company (WFC) will take part in this amendment and extension transaction as Joint Lead Arrangers and Joint Book Runners. 

We think that both the senior notes offering and amendment of revolving credit facilities will increase the company’s financial flexibility. As a result, the company will be able to continue to further expand its global footprint and diversified business model. 

We remain concerned about the risks related to Dollar Financial’s tax strategies, extremely fragmented nature of business and international dependence. However, a solid liquidity position, exposure to a somewhat recession-proof sector and cost containment measures will drive future growth.

Details are in the works for the launch of the first aluminum-backed exchange-traded fund, the Wall Street Journal reported Monday.

Though Glencore International, the world's biggest commodity trader, and Credit Suisse Group are still looking for both an ETF provider and regulatory approval, the new ETF is said to reflect growing interest in physically backed commodity products in the face of looming stricter U.S. regulation in the futures markets.

Abundant supplies of aluminum following a drop in demand associated with the economic downturn is also encouraging the creation of the ETF as a way to help soak up some of that supply and keep prices firm.

Recently, the price of aluminum on the London Metal Exchange has soared, trading some 50 percent higher than the seven-year lows it hit earlier this year, and though some analysts see further growth ahead, the massive inventory overhang could pose a threat to those gains. In fact, LME aluminum stocks are at record-high levels in warehouses across the globe, and that aluminum will eventually need to be absorbed by buyers.

It's not clear where the ETF will be listed, but some sources suggest it might happen on the Swiss and German exchanges.

Metals-backed ETFs have significant influence in their underlying markets, the Globe and Mail said Monday. Glencore is a large holder and trader of aluminum, and it has partnered with Credit Suisse before.

You can read the full Wall Street Journal story here.

You can read the full Globe and Mail story here.

You can read a HardAssetsInvestors.com in-depth feature on the aluminum market here.

Sales at stores open at least a year, a key retail industry performance metric, were only down 3%, ahead of the 7% expected by analysts. Gap noted that sales at its higher-end store Banana Republic were worse than expected, but buoyed by a strong performance from sales at the value oriented Old Navy.

Estimates Continue to Rise

With the company holding its own in a very tough environment, analysts continue to raise their earnings estimate. The current year is up 8 cents in the last month to $1.33 per share. The next-year estimate is up 9 cents in the same time to $1.42, a respectable 7% growth projection.

The Chart

Shares of GPS caught a second wind in early August, building on previous gains from earlier in the year. Take a look at the nice move below.

Last Week's Momentum Zacks Rank Buy Stocks

Credit Suisse Group (CS) has posted huge gains over the last 4 months as the financial sector has recovered from a virtual near-death experience. Read Full Article.

Polo Ralph Lauren Corp. (RL) recently reported solid second-quarter results that were better than expected, pushing the company's share price close to its 52-week high. Read Full Article.

Western Digital Corp. (WDC) is selling more hard drives than it did last year and holding revenue steady, helping the company produce better than expected Q2 earnings and sending estimates higher. Read Full Article.

Autonation, Inc. (AN) has been on a big-time rally for the last 9 months, recently topping off above $21 and moving within striking distance of the all-time high. Read Full Article. Zacks Investment Research

Investors can procure cheap loans for buying newly created consumer loan-backed, new and existing commercial mortgage-backed bonds. The deadline for investors to request loans for buying asset- backed debt for the seventh round of the TALF is Sept. 3.

The deal, called BAAT 2009-2, will be jointly led by Bank of America/Merrill Lynch, Barclays Capital (BARC), Citigroup Inc. (C), Credit Suisse Group (CS) and Royal Bank of Scotland (RBS). Last month, Bank of America sold the first deal eligible under TALF of $4 billion auto-loan backed deal at 135 basis points over a benchmark.

TALF was set up in March to reinvigorate the battered securitization market following the bankruptcy of Lehman Brothers Holdings Inc. Although TALF was originally applicable only to securities backed by consumer loans, it has been expanded to include commercial mortgage loan-backed bonds.

TALF loans against newly issued asset-backed securities and existing commercial mortgage-backed securities will be extended through March 31, 2010. For newly issued CMBS, which takes considerable time to be put together, the extension is until June 30, 2010.

The Fed is relying on the TALF to lower borrowing costs and unlock credit to consumers and small business. The program may provide as much as $200 billion in loans to finance the purchase of highly rated asset-backed securities comprising new consumer and small- business loans.

That said, we believe that banks in stable emerging economies, such as Chile, Brazil or India, may be more attractive investments -- similar to what we expect for certain regional banks in the US. To be sure, banks in emerging economies will face asset quality issues; however, they are not confronted with other significant problems that many of the larger banks in Europe and the United Kingdom are, such as toxic securities, dilution from capital raising and dividend cuts/omissions. Moreover, these emerging market banks generally tend to be well capitalized, aren't as heavily exposed to the property markets, and have significant and generally growing sources of noninterest income.

In fact, Zacks-covered banks in Latin America and Asia have outperformed both the S&P 500 year to date, as well as Zacks-covered banks in Europe and the United Kingdom, increasing 40.1% and 27.7%, respectively, versus gains of 3.3% for the S&P 500 and 10.6% for banks in Europe and the United Kingdom.

There are several caveats one should consider when investing in these banks. First, investment in non-US ADR bank stocks entails foreign currency risk. Currently, the US$ is appreciating against many foreign currencies, which tends to depress US$ share performance. On the other hand, when this turns and the US$ starts falling against other foreign currencies, this will accelerate gains in US$. More importantly, we expect stock prices to continue volatile, reflecting economic uncertainty in the coming months and headline risk.

OPPORTUNITIES

Specific banks that we like include Itau Unibanco Holding S.A. (ITUB) in Brazil, Banco Santander Santiago (SAN) in Chile and HDFC Bank Limited (HDB) in India.

ITUB is the largest bank in Brazil following the February 2009 merger of Uniao de Bancos Brasileiros S.A. and Banco Itau Holding Financeira S.A., with R$575 billion (US$240 billion) in assets, 4,800 branches, and a 19% share of the Brazilian loan market.

SAN is the largest private bank in Chile (total assets of Ch$21,137 billion or US$33.6 billion at year-end 2008) and is 77% owned by Banco Santander Central Hispano, the largest bank in Spain and one of the largest in Europe.

HDB is now one of the largest banks in India, with Rs183,271 crores, or US $35.1 billion, and a retail network of 1,412 branches and 3,295 ATMs in 528 cities for the fiscal year ending March 31, 2009.

There are currently three stocks in the Zacks covered non-US bank universe with a Zacks ranking of 1 (Strong Buy) -- Credit Suisse Group (CS), HDFC Bank Limited and ICICI Bank Limited (IBN) -- and three stocks that have a Zacks rank of 2 (Buy) -- Itau Unibanco Holding S.A., Banco Bradesco S.A. (BBD) and Deutsche Bank AG (DB).

WEAKNESSES

We would avoid the larger banks in the Great Britain and Ireland, particularly those that that have participated in government recapitalization programs, such as The Royal Bank of Scotland Bank plc (RBS) and Lloyds Banking Group plc (LYG) in Britain and Allied Irish Banks (AIB) and The Governor and Company of the Bank of Ireland (IRE). In return for the government capital and asset quality protection, these banks must submit to other government intervention, including limits on dividend payouts and nomination of board members. This will limit their financial flexibility for awhile and raise issues of complete nationalization, which could continue to hurt share price performance.

Current Sells include Banco Bilbao Vizcaya Argentaria, S.A. (BBV) and Banco Santander Central Hispano, S.A. (STD), both headquartered in Spain. In Spain, the recent collapse in housing and construction, which propelled economic growth for the last decade, is expected to stall for the next few years. Moreover, the International Monetary Fund (IMF) believes that Spain will be harder-hit by the global economic downturn than other European countries. Indeed, Spain's unemployment rate was 17.4% at the end of March, more than double the level a year ago.

There is currently one stock in the Zacks covered non-US bank universe with a Zacks ranking of 5 (Strong Sell) -- Banco Bilbao Vizcaya Argentaria, S.A. -- and one stock that has a Zacks rank of 4 (Sell)-- Mitsubishi UFJ Financial Group, Inc. (MTU).Zacks Investment Research

That said, we believe that banks in stable emerging economies, such as Chile, Brazil or India, may be more attractive investments -- similar to what we expect for certain regional banks in the US. To be sure, banks in emerging economies will face asset quality issues; however, they are not confronted with other significant problems that many of the larger banks in Europe and the United Kingdom are, such as toxic securities, dilution from capital raising and dividend cuts/omissions. Moreover, these emerging market banks generally tend to be well capitalized, aren't as heavily exposed to the property markets, and have significant and generally growing sources of noninterest income.

In fact, Zacks-covered banks in Latin America and Asia have outperformed both the S&P 500 year to date, as well as Zacks-covered banks in Europe and the United Kingdom, increasing 40.1% and 27.7%, respectively, versus gains of 3.3% for the S&P 500 and 10.6% for banks in Europe and the United Kingdom.

There are several caveats one should consider when investing in these banks. First, investment in non-US ADR bank stocks entails foreign currency risk. Currently, the US$ is appreciating against many foreign currencies, which tends to depress US$ share performance. On the other hand, when this turns and the US$ starts falling against other foreign currencies, this will accelerate gains in US$. More importantly, we expect stock prices to continue volatile, reflecting economic uncertainty in the coming months and headline risk.

OPPORTUNITIES

Specific banks that we like include Itau Unibanco Holding S.A. (ITUB) in Brazil, Banco Santander Santiago (SAN) in Chile and HDFC Bank Limited (HDB) in India.

ITUB is the largest bank in Brazil following the February 2009 merger of Uniao de Bancos Brasileiros S.A. and Banco Itau Holding Financeira S.A., with R$575 billion (US$240 billion) in assets, 4,800 branches, and a 19% share of the Brazilian loan market.

SAN is the largest private bank in Chile (total assets of Ch$21,137 billion or US$33.6 billion at year-end 2008) and is 77% owned by Banco Santander Central Hispano, the largest bank in Spain and one of the largest in Europe.

HDB is now one of the largest banks in India, with Rs183,271 crores, or US $35.1 billion, and a retail network of 1,412 branches and 3,295 ATMs in 528 cities for the fiscal year ending March 31, 2009.

There are currently three stocks in the Zacks covered non-US bank universe with a Zacks ranking of 1 (Strong Buy) -- Credit Suisse Group (CS), HDFC Bank Limited and ICICI Bank Limited (IBN) -- and three stocks that have a Zacks rank of 2 (Buy) -- Itau Unibanco Holding S.A., Banco Bradesco S.A. (BBD) and Deutsche Bank AG (DB).

WEAKNESSES

We would avoid the larger banks in the Great Britain and Ireland, particularly those that that have participated in government recapitalization programs, such as The Royal Bank of Scotland Bank plc (RBS) and Lloyds Banking Group plc (LYG) in Britain and Allied Irish Banks (AIB) and The Governor and Company of the Bank of Ireland (IRE). In return for the government capital and asset quality protection, these banks must submit to other government intervention, including limits on dividend payouts and nomination of board members. This will limit their financial flexibility for awhile and raise issues of complete nationalization, which could continue to hurt share price performance.

Current Sells include Banco Bilbao Vizcaya Argentaria, S.A. (BBV) and Banco Santander Central Hispano, S.A. (STD), both headquartered in Spain. In Spain, the recent collapse in housing and construction, which propelled economic growth for the last decade, is expected to stall for the next few years. Moreover, the International Monetary Fund (IMF) believes that Spain will be harder-hit by the global economic downturn than other European countries. Indeed, Spain's unemployment rate was 17.4% at the end of March, more than double the level a year ago.

There is currently one stock in the Zacks covered non-US bank universe with a Zacks ranking of 5 (Strong Sell) -- Banco Bilbao Vizcaya Argentaria, S.A. -- and one stock that has a Zacks rank of 4 (Sell)-- Mitsubishi UFJ Financial Group, Inc. (MTU).Zacks Investment Research

In the third quarter (in line with its pre-announcement), CSG posted a net loss of CHF1.3 billion compared to net earnings of CHF1.3 billion a year ago. This poor performance reflected large trading losses and further writedowns in the leveraged finance and structured products businesses. In other news, Credit Suisse has raised CHF10 billion in Tier 1 capital, with a pro forma Tier 1 ratio of 13.7% at September 30, 2008, which exceeds regulatory requirements for 2013.

We are cutting our estimates to a net loss of $4.60 from EPS of $2.45 for 2008 and to EPS of $1.30 from $5.85 for 2009.

Read the analyst note on CS

Zinc also was sharply higher, just pulling back a bit late to end at $0.5322/lb., up almost 3 cents. Aluminum followed much the same path, busting to its intraday high of $0.9236/lb., up 2¾ cents, while lead had some brisker ups and downs, eventually adding a penny and a quarter, to $0.6869/lb.

Copper led…

Yesterday, the Ukraine received a USD16.5bn loan from the IMF and the IMF at the same time said that it would agree with the Hungarian government on a rescue package in the coming days. Under normally circumstances this would be good news for CEE assets. However, it seems like the markets are totally giving up on CEE. This morning the Hungarian stock markets have dropped more than 10% despite the promise of an IMF package.

......it is worrying that the CEE markets continue to sell-off despite IMF’s clear commitment to support the region’s markets and economies. One might in fact see the lack of positive response to IMF’s rescue packages for Hungary and the Ukraine as an indication that these packages are in fact making the markets even more nervous that something “is seriously wrong in CEE”.
Lars Christensen, Chief Analyst Danske Bank, CEE: Markets fail to respond to IMF packages, 27 October 2008

The Polish government has also announced on Monday that Poland is considering guaranteeing interbank transactions - according to Deputy Prime Minister Waldemar Pawlak speaking on Polish public radio. Pawlak said that the government is examining the possibility of taking bank shares as collateral in exchange for any guarantees offered. According to Pawlak external investors in Polish banks have been applying policies that are "too strict" in the Polish context, since the credit problems encountered elsewhere have not affected Polish banks in the same fashion. This is a classic example of what we economists call "contagion".

According to the draft of the new law which is set to go before the Polish cabinet on Tuesday, Poland's government will be empowered to guarantee commercial banks loans from the central bank and other lenders on the interbank markets. The government will also be able to lend cash and state securities to banks. Poland's central bank has already injected 9.3 billion zlotys ($3.42 billion) of liquidity into the banking sector (last week), in the form of 14-day repos. The latest decision seems to have been taken in order to try to ease strains on the Polish money market, and in particular the availability of forex loans.

Poland's deputy prime minister also issued a warning that local bank capital was at risk of capital being transferred to financially-strapped foreign banks who own the local banks and urged the country's financial watchdog to stay vigilant in the face of this. Here we see the reverse side of the coin of having non-national banks in such a dominant position. Previously this was thought to be a great advantage, since the parent banks were thought to be ready willing and able to fund domestic lending almost ad-infinitum. Now we see that this is not at all the case, and that their behaviour moves in a pro-cyclical direction, exaggerating the boom in the good times, and sharpening the downturn in the bad ones.

"There is a risk that the capital will be transferred from Polish institutions to their parents," Waldemar Pawlak, who is also the economy minister and heads the governing coalition's junior party, was quoted as saying by PAP newswire.

As a consequence of this governmental concern the Financial Oversight Commission (KNF) has asked banks domiciled in Poland to report all transactions with their foreign owners on a daily basis. KNF head, Stanislaw Kluza, said in a newspaper interview last week that the he considered the risk of capital transfers to be very low, however, because the European banks Polish outlets, with only $284 billion in total assets, were much too small to rescue large players in Europe and the United States. This is evidently true, but some of these bank are now under great pressure to avoid additional exposure in the East, and withdrawal of funds can equally correspond to this kind of damage limitation strategy.

Foreign financial groups, among them Italy's UniCredit, the Dutch ING Groep, and KBC Group NV, Belgium's biggest bank and insurer by market value (all of whom are struggling with major problems at the present time), control two-thirds of the Polish banking sector after buying stakes in local lenders during the banking sector privatisation of the 1990s.


Polish lenders have been especially hurt in recent weeks by concerns over their ability to obtain foreign currency through interbank markets and worries about the fate of their foreign parents. Executives at some Polish banks have urged the government to consider introducing guarantees after the central bank's moves to boost liquidity on the interbank market, including foreign exchange swaps, failed to boost confidence between lenders. The financial watchdog KNF said on Saturday that Poland should think about measures to boost the Swiss franc positions of Polish banks, along with guarantees of interbank transactions or an eventual "institutionalisation" of the interbank market. But the regulator, the government and central bank insist Polish banks remain solvent and enjoy "over-liquidity."

Many of Poland's banks, like other lenders in the region, have been forced to introduce severe curbs on mortgages in Swiss francs due to pressure on their own liquidity and balance sheets. Such lending had become popular in Poland in recent months due to lower interest rates available from Switzerland and what was once favourable exchange rate.

Millennium BIGW.WA and PKO BP PKOB.WA, two of Poland's top home loan lenders, have gone so far as to announce that they were going to tighten rules for new mortgages due to the rising cost of money and fears that global financial nervousness may lead to much slower economic growth in Poland. Millennium Chief Executive Boguslaw Kott said last week that the group - which is Poland's third-biggest mortgage lender would ask for a 35 percent downpayment for popular Swiss francs-denominated home loans, a move which is likely to put a sharp brake on the growth of its mortgage portfolio.

PKO, Poland's largest mortgage lender, also confirmed it would ask new clients to put up 20 percent of the value of property when borrowing in francs. Millennium, which is controlled by Portugal's Millennium bcp, will now also require customers to cover 20 percent of investment when borrowing in Polish zlotys. Both banks had previously been offering mortgages equal to the entire value of the new home (100 LtV). Basically, what the hell these people thought they were doing by continuing to lend at 100% LtV after we have seen all that has happened in the US, and that is now happening in the UK and Spain is totally beyond "my ken", it really is.

Chief Executive Boguslaw Kott described the move as a precautionary one, and said it did not reflect any liquidity problems, adding that it was now more difficult to get Swiss francs on the interbank market. Marek Juras, head of research at BZ WBK brokerage is quoted as saying: "At times like these it is more important for banks to take care of their liquidity than drive their sales even higher." He estimated that for some lenders this would translate into a drop in new mortgages by between one-third and one-half.

The two market leaders join other smaller lenders, which in recent days moved to raise the bar for mortgage lending in foreign currencies as banks become more conservative and try to lure more cash on deposits by offering even higher yields. Mortgage adviser Expander said Getin's DomBank and Santander and GE Money had tightened their lending requirements. Many banks have also boosted margins on their mortgages in the past two weeks.

The Polish mortgage market has expanded rapidly since 2003, driven by economic growth and soaring wages, with annual growth exceeding 40 percent in the first half of this year. Large numbers of central and Eastern European housebuyers hold loans in foreign currencies, especially Swiss francs.

Most major Austrian banks, including UniCredit's Bank Austria, Erste Group Bank and cooperative Raiffeisen have now completely stopped lending to Polish domestic retail customers in foreign currencies.


After a meeting with economic advisers President Kaczynski advised Poles to keep faith in the zloty as the currency suffered further setbacks on the markets on Friday. Kaczynski recommended that loans should be taken in zlotys, not foreign currencies in order to avoid losing money on currency exchange.

"The depreciation of the zloty, which has its good sides for exports, boosts
mortgage loan installments for those who took them especially in the Swiss
franc. This may, however, be a lesson to us all to take loans in the Polish
currency. Considering low inflation, this gives the best results," Polish
President Lech Kaczynski told a press conference last Friday.

Seventy percent of the Polish banking sector is owned by foreign banks leading to concern that the impact of the general crisis in the banking sector will be felt in Poland. On Tuesday, Polish business Daily, Gazeta Prawna wrote, "The global financial crisis may cause large shifts in the Polish banking sector, AIG Bank Polska will soon be sold and there has been speculation that Fortis, Dominet, Citi Handlowy and even Bank Pekao may change hands."

Sell off speculation has surrounded the Italian owned Pekao bank over the last two weeks. It was subject to a 20 percent share price decrease in October prompting concerns that owner UniCredit may have been considering selling of all its Central and Eastern European assets. This has since failed to materialize but shows the current lack of faith surrounding the Polish banking sector.

Slawomir Skrzypek, president of The National Bank of Poland stated it had no intention of stepping in to help the zloty as it continues to weaken on the foreign currency market in a statement to reporters on Friday.


The sale of apartments in Poland has dropped by 70 percent in comparison to the same time last year, showing that the credit crunch is beginning to bite in Poland. The tightening of lending policies by banks has caused demand to fall and though prices are decreasing by 10 to 20 percent in some areas, buyers are looking for smaller flats, or withdrawing from the transaction altogether. The financial crisis has also influenced the situation of those clients who wanted to buy apartments without needing to get a mortgage, the number of which is declining due to losses on the stock market, says Gazeta Prawna.

Polish banks are to crack down on credit lending for housing loans after Poland’s financial regulator asked them to get tougher on lending practices. Millennium bank is one of the first high street banks to react and will now expect customers to cover 35% of the loan if they borrow in a foreign currency or 20% if borrowing in Polish zloty. The move is thought to be a precautionary one and not an indication of any liquidity problems, according to CEO Boguslaw Kott who told a news conference on Tuesday, “The decision practically blocks an increase of our mortgage portfolio.” He also told reporters that Swiss francs are harder to come by on the interbank market. Millennium Bank has been a dominant force in the Polish housing lending market with 80% of its mortgages being in Swiss Francs. This reflects a trend across Central and Eastern Europe where many house buyers have loans in either Swiss or other foreign currencies.

PKO BP, another major Polish mortgage lender, has joined Millennium in giving credits up to 80% of the value of the real estate. Fears that the Polish housing market could suffer similar repercussions to that of some western banks are as yet premature although the move does indicate a degree of uncertainty on behalf of the lending sector’s big hitters.

"We are extending between 35 and 60 million zlotys worth of mortgages each day, the vast majority of those in Swiss francs." Mariusz Grendowicz Head of BRE Bank BREP.WA "To fund our growth in mortgages, we were the only bank to the best of my knowledge that was using not swaps, which were the cheapest alternative, but actually taking a three- to four-year loan in Swiss francs to fund the book,"

The role of forex lending is clearly more important in housing loans than in general lending (see chart below).

One of the reasons for the recent uptick in Swiss Franc lending has been the monetary tightening cycle initiated by the central bank (see chart below), which made the cheaper interest rates available in CHF more attractive even though there was an evident currency risk involved.



If we look at the next chart the year on year rate of increase in the forex loans (the Polish central bank don't distinguish in their data between CHF and Euro, but all the anecdotal evidence cited above points to a significant role for the CHF, and especially given the role of Austrian banks were this type of lending has been commonplace.




The big problem is really that the CHF is a "carry trade" currency, and carry currencies have a strong tendency to shoot up in value as risk sentiment retreats, quite simply because people all try to liquidate their positions at the same time. Hence carry currencies have a kind of "pro-cyclical" role, adding to the boom during the good times, and making the bad times even worse. Which would be one very good reason why if you really do want an fx mortgage, using a currency other than a carry one would be a good idea. Obviously those who have euro denominated mortgages - while not being immune from the present problems (see the Baltics) - are less exposed, since the movements in the relative value of the euro tend to be in the opposite direction to those of the CHF and the Japanese yen.




Where Does All This Leave Us?


Well obviously Polish GDP growth is now set to slow quite dramatically. At this point just how dramatically is hard to see. Credit Suisse Group recently cut its forecast for Polish economic growth next year, predicting that the global financial crisis will hurt consumption and investment.




Credit Suisse said Poland's gross domestic product will rise by less than 4 percent in 2009, compared with the 4.4 percent rate it had previously forecast, according to a note to clients last week. The revision, amid rising aversion to risk in emerging markets, pushed the zloty to a two-year low against the euro. I think, basically, even Credit Suisse are being over optimistic at this point, although I think we need to see some real economy data before putting numbers on just how over-optimistic they may be.

Poland's `` private consumption and investment should fall further than we had anticipated due to our expectations of an increasingly restrictive credit environment in 2009,'' Jacqueline Madu, an emerging-markets research analyst at Credit Suisse in London, wrote in the note.

If we actually look at the level of the seasonally adjusted index, then the steep increases in the levels of construction output become apparent. We should also notice how since about April the level has stopped rising, and this seems to suggest that the expansion in the industry had been slowing even before the latest credit shock. Be ready for this to be followed by a sharp slowdown in the months to come.

If we look at the chart for year on year industrial activity, then it is clear that the expansion in output has been fading for months now - not a good sign, not good at all, since it means that there is little underlying stability to resist the knock. The thing is running out of energy.

This becomes even clearer when we look at the seasonally adjusted index, since it is pretty evident that industrial output went into decline at the end of last year, killed-off in part by the high zloty, and in part by excess internal wage and cost push inflation.

"The Kazakh government is ready to step in,'' Kazakhstan's Prime Minister Karim Masimov said this morning in a telephone interview with Bloomberg "The Kazakh banking system with the support of the government and central bank will fulfill all obligations to international investors.....We have our own specific plan to survive without any external support....I don't think we need support from the International Monetary Fund or overseas.''

Ranked as the ninth largest country in the world by size, it is also the world's largest landlocked country, with a territory of some 2,727,300 km² (which is greater than the whole of Western Europe). It is bordered by Russia, Kyrgyzstan, Turkmenistan, Uzbekistan and China. On the other hand, and despite its enormous size, Kazakhstan has a comparatively small population. No one actually has an exact idea of the actual size of the Kazakhstan population (not to mention the thorny issue of just how many foreign migrants live and work there), but the US Census Bureau International Database list the current population of Kazakhstan as 16.763 million, while sources drawing their data from the United Nations (like the IMF which I have relied on for the chart below) give a 2008 estimate of 15.135 million. In any event the current population level, after falling in the early 1990s as ethnic Russians left, has now stabilised, and is virtually stationary. This virtually stagnant population constitutes, as we will see, a significant problem for a country with such a massive resource base, and such enormous economic and development potential as Kazakhstan would seem to have.

Record Oil Revenue Boom

Kazakhstan is the biggest energy producer in Central Asia and the country's $100 billion economy has in fact grown at an average of 10 percent a year rate since 2000 (see chart below), in particular as the price of oil has surged. This rapid GDP growth produced a rapid increase in per capita income as well as national creditworthiness, and these in turn sparked in their wake a substantial construction boom. Indeed it has precisely been the bursting of this boom in the autumn of 2007 - on the back of the seize-up in global wholesale money markets which followed August's financial turmoil in the USA - which lies at the heart of Kazakhstan's current growth slowdown. Kazakhstan's economy expanded at a 'mere' 5.3 percent rate in the first quarter of 2008, half the pace achieved in the same period a year earlier, following a dramatic curtailment in bank lending, and if Kazakhstan is still able, despite all the problems we will see below, to maintain some sort of growth momentum at this point it is undoubtedly the result of the oil and other commodity resources which the country has at its disposal, and indeed as part of its initial response to the present crisis the country increased crude production by an annual 6.3 percent in the first four months of the year, according to official government data.




Now one of the most curious details about the present slowdown in Kazakhstan, has been the fact that at the very same time as the economy started to lose velocity the central bank found itself busy struggling to curb an inflation rate which was steadily shooting onwards and upwards towards the outer stratosphere, as revenue from record oil prices pushed up domestic demand, and the resulting construction and consumption boom drove up wages far beyond normal "productivity-gain" rates of increase (remember, there are not THAT many people in the country, and much of the population is rural and unskilled in relation to the needs of a modern technological and services economy). In fact inflation hit year-on-year rates of increase approaching 20% in the autumn of last year (see chart below), although it had dropped by to an annual 18.2% by September.




So, as well as containing the property bust, the Kazakh authorities have also had to conduct an inflation fight (more details below). So far from lowering rates like the US Federal Reserve has been able to do, Karakhstan's central bank was forced to raise the key interest rate to 11 percent in December 2007, at a time when annual inflation was riding at almost 19 percent, the highest for the country in over eight years. The refinancing rate was then maintained at the 11% level until it was finally lowered to 10.5% at the last central bank meeting in July.



Not Just Energy - Vast Resource Potential

The fact that Kazakhstan's industrial output growth has lost a lot of momentum in 2008 as the slowdown in the building industry provoked a slump in cement and other materials production should not take our minds too far away from the fact that the underlying potential in Kazakhstan is enormous. In fact while industrial output growth was reduced to an annual 3.8 percent growth rate in the January-June period, it was at least still growing.

The low point seems to have been hit back in January, when cement production which, not surprisingly, was among the hardest hit sectors, was down 26 percent year on year, the sharpest January fall in five years, as growth in the construction industry stalled, brought to a halt by the fact that the Kazakh banks, who had been struggling to borrow from abroad following the collapse of the U.S. subprime mortgage market, virtually stopped lending to homebuyers and builders.

Copper and rolled-iron output also declined an annual 13 percent in January while output from oil refineries and manufacturing industry decreased an annual 2.9 percent as the problems rolled in. Thus there is evidence of a very sharp shock initially hitting the local economy. On the other hand, since the country is resource rich and the given that first half of 2008 saw a very significant global commodities boom, there were other economic sectors to fall back on, and mining production was up 6 percent from a year earlier in the first quarter, bolstered by an increase in natural gas and coal output, which climbed 15 percent and 11 percent respectively. At the same time crude oil production went up by an annual 5.4 percent.

Apart from oil and gas Kazakhstan has a huge array of potential resource reserves just waiting to be tapped. Among these there is copper. London-listed Kazakhmys accounts for the bulk of Kazakh copper output - and this was down 17.5 percent year-on-year in January-April. Industrial output in Karaganda region, home to Kazakhmys and Arcelor Mittal mines and smelters, declined 5.5 percent year-on-year in January-April.

Kazakhmys reported that their first-quarter output fell 9.9 percent on "severe winter weather'' and repairs at its Balkhash smelter. Production of finished copper plates, or cathodes, from the company's ore fell to 75,500 metric tons, from 83,800 tons a year earlier. These drops in output are, of course not entirely associated with the credit crunch, but they do give an idea of the challenging and volatile environment in which the mining and extraction industries work in Kazakhstan. Realistically speaking it seems quite likely that output in these sectors will return to more normal levels during the second-half of 2008, having alreadt rebounding significantly from the low point reached in the first-quarter.

On the other hand industrial output in capital Astana and commercial hub Almaty, where most construction activities are based, was down 13.2 percent and 8.6 percent, respectively, in January-April, and this activity may well take much longer to recover.

Kazakhstan has also had to cut its 2008 oil production forecast to 67.6 million tonnes (1.35 million barrels per day) from a previous estimate of 70 million tonnes citing maintenance works and transport bottlenecks. The country is able to produce a lot of oil, but it does have a large problem getting that oil to the places where people want it. Three major pipeline routes - the Atyrau-Samara and Caspian Pipeline Consortium (CPC) links to Russia, and the Atasu-Alashankou pipeline to China - carry Kazakh crude off towards its end destinations, but none of these are proving sufficient to the demands on them.

"It is impossible to transport crude out of Kazakhstan without some difficulties," Senior Associate Klara Nurgaziyeva from law firm Dewey & LeBoeuf told an oil and gas conference last week in the Kazakh financial capital Almaty.

In a smoke-filled bar in the Kazakh financial capital Almaty, the laughter of Scottish ex-pats is loud and boisterous. More than three thousand miles (5,491 km) separate the Scottish Highlands and the Central Asian steppe, but a mutual interest in oil and gas has created a surprising alliance. Residents estimate that around 400 Scots live in ex-Soviet Kazakhstan, a resource-rich country roughly the size of western Europe.

Most come from Aberdeen, Britain's northeastern oil hub, and they bring with them their technical expertise."We're going to try attract Kazakhs to Aberdeen over the next few years and look at initiatives, and create further investment in Scotland from Kazakhstan," Lord Provost Peter Stephen of the Aberdeen City Council told an energy conference last week in Almaty. He said over 100 companies from in and around Aberdeen are active in Kazakhstan, and the Scottish oil town even has a Kazakh consulate to serve the hundreds of Kazakhs who go to Scotland to train up for the oil business. The Kazakh-British technical university, set up by a group of Scottish universities seven years ago, occupies a grandiose columned building in the centre of leafy Almaty, which housed parliament before the capital was moved to Astana.

Prices for residential property soared 30.2 percent in 2007, reaching a record average mid-year high of 161,300 tenge ($1,338) per square meter, up from 123,900 tenge in 2006, according to the Astana-based state statistics agency. In the financial capital, Almaty, the average price was 345,200 tenge.

The drop in prices from these peaks and the sudden drying up of credit has caused numerous problems for would.be buyers, and Bank TuranAlem, Kazakhstan's second-biggest bank by assets, received $81.2 million last December from the state emergency investment program simply to finance the completion of unfinished construction projects.

The most recent government bailout of the construction sector was announced during the summer - just two weeks before the celebrations of Nazarbayev's 68th birthday and the 10th anniversary of the founding of the new capital Astana on July 6 - following the announcement by a group representing people who had purchased apartments in the unfinished buildings that they were planning a protest march to be held in Astana bang in the middle of the official festivities.

The Industry and Trade Ministry have said that there were 939 residential buildings, with 45,130 apartments pre-paid by homebuyers, under construction as of last January. Minister Edil Mamytbekov said in July that the cases of 4,558 homebuyers in 18 buildings "remain problematic'' because of conduct for which the builders in question had been "charged with crimes.'' The Kazakh Prosecutor General's Office said 123 construction companies that received 104 billion tenge ($865 million) in pre-payments from homebuyers were behind schedule or haven't even begun work on new apartment buildings.

Assets of "careless construction companies,'' including buildings and vehicles, have been seized to compensate lost investments of homebuyers and the government, according to the Prosecutor General's Office. Criminal investigations have been opened into eight companies. A total of 285 companies are building 407 residential projects in Kazakhstan and have received 231 billion tenge in pre-payments from more than 50,000 individuals and companies, prosecutors said. Of 200 ``problem'' projects delayed by at least six months, 110 are located in the capital Astana and 42 in Almaty.

The July rumpus was provoked by the fact that at the start of the summer the Kazakh government had spent only 51 billion tenge to complete stalled residential projects, a fraction of the bailouts promised by Prime Minister Karim Masimov in the autumn of 2007, according to data made public by the Ministry of Industry and Trade on June 23. The government had said on Nov. 14 2007 that it would spend $1 billion by the end of 2007 and another $3 billion in 2008 to "provide economic stability and growth'' by supporting the real estate market and small and medium-sized businesses. Following publication of this data, and some international press coverage, Masimov said that his original emergency investment program was in the process of being expanded, and his government announced plans to spend 17.2 billion tenge to complete residential projects in Astana.

President Nursultan Nazarbayev instructed the state to step in and finish projects, ``which have no source of financing,'' to ``help to reduce social tension,'' according to Edil Mamytbekov, a deputy minister of industry and trade, on June 20. President Nursultan Nazarbayev also said it was necessary to take ``tough measures against careless builders". As a result the Almaty mayors office announced on July 26 that another 46.4 billion tenge had been allocated to support residential projects in Almaty. The state had already invested 22.4 billion tenge and was going to spend the remaining 24 billion tenge by year's end, according to the announcement.

In April, however, the government had announced that the state development holding Kazyna would distribute 59 billion tenge to commercial banks during 2007 to finish 131 buildings in Almaty. Sergei Kuyanov, spokesman for Almaty Mayor Akhmetzhan Yesimov, declined to comment on the discrepancy between the numbers when question by journalists in July.

Whatever the complications of the present situation and the ins-and-outs of putting the construction and banking problems straight, we should not lose sight of the fact that Kazakhstan has, large financial resources which will surely help it weather the current situation. Official foreign currency assets totaled $46 billion in early June, comprising NBK reserves of $21 billion and oil fund (NFRK) assets of $25 billion. Commercial banks also have foreign assets of which about $3.5 billion are thought to be liquid. Total foreign assets broadly match foreign liabilities when the intracompany debt of the oil sector is excluded, while liquid foreign currency assets comfortably cover potential short-term foreign currency drains.


Favourable Demographics But Migrants Needed, And With Them Modern Citizenship Rights


The chart you will find below is known as a “heat chart”. It depicts the ongoing changes in Kazakhstan's age structure. Each dot represents the number of people in any given age group at any given point in time. A dark red dot represents the largest concentration of people, by age, in a particular year while deep blue dots show the lowest concentrations. A single dark red dot is the equivalent of almost 406,000 people while each deep blue dot represents nearly 23,000 people.


In the upper left-hand corner of the chart the bright reds and yellow areas depicts the population boom that started in the mid 1970s and lasted until the late 1990s. The remnants of that boom extend downward from left to right across the chart. The band also narrows as this population segment ages. This is simply a reflection of the reduction in the total numbers in the population bulge cohorts as out-migration has taken its toll.

Many ethnic Germans and Russians, for example, left Kazakhstan during the years following the end of the Cold War. In the lower left-hand side of the chart there is a preponderance of dark blue dots, indicating a relatively small number of people over the age of 60 years. Over time these dark blue dots are replaced by light blues and greens, a pattern reflecting a gradual but steady increase in the number of elderly people.

The strong budget position in Kazakhstan has provided scope for the government to use fiscal policy to support the economy as growth has slowed. We believe that the increase in spending in the recent supplementary budget is appropriate, and that the automatic fiscal stabilizers should be allowed to work, with any revenue shortfalls due to a weakening economy being accommodated in the near future rather than offset with expenditure cuts to meet budget targets. Going forward, the government's recently announced three-year budget plan maps out a transparent path for fiscal policy over the medium-term. We believe, however, that it is important that the government not commit to further large increases in public sector wages and pensions in future years given uncertainties about budget revenues—particularly from the oil sector—and the stage of the macroeconomic cycle in two or three years time.

Kazakhstan has large financial resources to help it weather the current situation, and medium-term economic prospects remain favorable. Official foreign currency assets, comprising central bank (NBK) reserves and oil fund (NFRK) assets, reached $48 billion at end-September, well above the mid-2007 level. The current account balance has strengthened significantly this year, and oil production is set to increase substantially in the years ahead.

As at the time of the Article IV consultation discussions in April, we believe that in the short-term policies should remain focused on managing risks to the outlook and setting the stage for the resumption of strong and sustained growth. Since our last visit, the authorities have continued to skillfully handle the difficulties the economy has faced, and we welcome the policy steps that are being taken in the monetary, fiscal, and supervisory areas to strengthen the resilience of the Kazakhstani economy. Nevertheless, considerable challenges remain, and these have been heightened by the renewed bout of global financial market volatility.

Here is a recent post from our associated PrimeBrokerageGuide.com site:

When visitors arrive at Singapore's Changi Airport, they get both an immigration card and an application form for opening a hedge fund.

This was one of the jokes making the rounds in 2007. The fact is that hedge funds in Singapore were growing fast since 2006. According to an article dated Feb 2007 from eFinancialCareers, "prime brokers are in hiring mode" - Barclays Capital, Citigroup, Lehman Brothers, Morgan Stanley and UBS all hired for their Singapore prime brokerage operations in 2006.

By Nov 2007, Singapore serves as prime broking regional headquarters for Credit Suisse Group, Citigroup Inc and Barclays Capital plc, according to HedgeFund Intelligence. Citigroup and Morgan Stanley also opened Singapore prime brokerage offices in 2007, to service the fast-growing number of hedge funds in that market. Morgan Stanley, the top Singaporean prime broker by assets under management according to Eurekahedge, had previously been servicing its Singapore clients from Hong Kong.

As the growth of hedge funds slowed down due to the credit crisis, an article (download pdf) dated Feb 2008 pointed out that "their (referring to the prime brokers in Singapore) enthusiasm for growth is now waning". As reported on Oct 4^th, 2008, Morgan Stanley is looking at scaling back its prime-brokerage operation (detail). However others believe that "Asian hedge funds may be cold, but the Asian prime brokerage industry remains sizzling"(FINalternatives), indicated by Citi's move to add eight professionals to four Asia offices in Aug 2008, including transferring Danielle Vint to handle the prime brokerage's fixed-income desk in Singapore.

It is said that Citi has fired "the latest salvo in the prime brokerage talent wars in Asia". In Feb 2008, Merrill Lynch hired Aussie hedge fund CEO Jeffrey Levy for Asia prime brokerage, to join the firm's Singapore office. Levy's hire fills the hole left by Harvey Twomey, who left Merrill Lynch to join Deutsche Bank as head of global prime finance sales in Asia. Another source reports that in Sep 2008, Deutsche Bank has moved Chris Pagan (LinkedIn) from Hong Kong to Singapore in order to head prime brokerage for Southeast Asia.

by Yifei Huang

Interested in learning more about the hedge fund industry in Singapore? Please see our geographical guide on this region: Singapore Hedge Fund Guide.

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