Fixed income has been the fastest-growing corner of the ETF market this year, pulling in $31.5 billion in new capital through September. Those inflows worry me, for a number of reasons.

First, as I’ve written about previously, those inflows have forced some corporate bond ETFs to trade at large premiums to their net asset values. Those premiums are sustainable so long as investors continue to buy. Unfortunately, like all ETF premiums, if fund flows reverse, those premiums can collapse and turn into discounts, and investors will be left holding the bag. (See related story here.)

But there’s an even more fundamental problem with corporate bond ETFs, which stems from the way their indexes are constructed. This is the elephant in the room in corporate bond indexing, and it amazes me that it is rarely discussed.

Ready? Most corporate bond indexes weight holdings based on their total debt outstanding. To put it more bluntly, the more debt a company has, the higher its weight in the index.

On the face of it, this is crazy. The idea that investors want to pile more money into the most indebted companies flies in the face of common sense. Where are the fundamental indexers when you need them?

This isn’t a new insight. Laurence Siegel of the Ford Foundation has been writing about it for years. It’s called the “bums problem”: Bond indexes tend to overweight corporate bums that run up huge levels of debt.

A look at the holdings of corporate bond ETFs like the SPDRs Barclays Capital High Yield ETF (NYSEArca: JNK) confirms these fears. Among the top 10 holdings by weight are gems like AIG, GMAC, Harrah’s and Intelsat.

I realize that the idea of junk bond indexing is to buy into notes that pay high yields, but there’s risk and then there’s RISK. Overweighting companies that issue more and more debt just seems absurd.

I’m not sure how you get around the bums problem. Some have suggested equal-weighting as a preferred methodology, but that “hands-off” approach has never appealed to me. There must be a way that combines liquidity, ability to repay and true credit quality.

As a way of measuring the market, weighting an index by debt outstanding makes sense. But as a way of investing in that market, it makes me nervous.

Credit Quality

Index-weighting methodology isn’t the only obvious problem with bond indexes. The other big fat elephant we dance around is credit ratings.

As far as I know, all the major bond indexes use official bond ratings from S&P, Moody’s and Fitch Ratings to determine which bonds are “investment grade” and which are “high yield.”

Didn’t we learn anything from the financial crisis? Can we really trust the ratings agencies to do their job?

Here I think there is a relatively easy solution. Why not use credit default swap rates to determine credit quality rather than the “official” bond ratings? We could define the split between “investment-grade” and “high-yield” debt based on the cost of insuring against default for the next five years. Let the market make the determination, in real time, rather than the troubled credit ratings agencies operating with a lag.

The specialty chemicals company had earlier projected earnings of $5.47 to $5.77 per share. Excluding charges, its new adjusted earnings per share will be between $6.10 and $6.40, up from its prior view of $5.70 to $6.00 per share. The Zacks Consensus Estimate is pegged at $5.96.

Ratings Affirmed

Recently, Fitch Ratings affirmed its BBB rating on Lubrizol, reflecting a low to moderate credit risk. The rating outlook remains Stable driven by the company’s strong position in the additives market, steady free cash flow generation, reasonable credit metrics and cumulative debt reduction since its acquisition of Noveon International in June 2004.

The company's additives business continues to dominate its overall results. Lubrizol remains the largest single seller of lubricant additives in a market that has few other big players, which results in substantial pricing power and has translated into an ability to pass on costs to downstream customers.

Despite weak volumes, Lubrizol generated healthy operating cash flows in the second half of 2009. This was due to margin expansion, inventory reductions and other favorable working capital changes in the additives business brought about by the sharp drop in energy feedstock costs. Fitch expects Lubrizol to generate strong cash flow in 2009. With a cash balance of $860.8 million at the end of the second quarter of 2009, the company's liquidity is also strong.

About $1.7 billion in debt is affected by this rating action. Fitch anticipates Lubrizol's total debt to drop to around $1.5 billion after it repays the remaining 2009 notes, or even lower if it prepays some or its entire $150 million term loan. However, Fitch remains concerned about the company’s volume and margin weakness in the chemicals business. Subdued performance in the advanced materials segment that continues to pressure working capital is also a cause for unease.

The revision in outlook reflects Darden’s competitive edge and its ability to generate significant cash flow. The company’s same-store sales fell 1.4% in fiscal 2009 compared to the estimated 5.6% decline for the Knapp-Track benchmark of US comps for casual dining chains. Moreover, Darden’s cash flow from operations increased 2.2% to $783.5 million during the year.

Moderating food costs coupled with the company’s cost-control measures and synergies from its RARE Hospitality International acquisition should facilitate cash flow generation. Free cash flow totaled $138 million at the end of fiscal 2009.

Darden’s “Stable" outlook also incorporates prudent capital management and cash returns to shareholders in form of steady dividend and share buybacks in the current credit-constrained market. The company maintains substantial liquidity with $502.6 million available under its $750 million revolving credit facility due Sept. 20, 2012, and $62.9 million in cash.

Despite the challenging sales environment, Darden has fared better than other casual dining chains due to its strong restaurant concepts and guest loyalty. Sales increased 8.9% year over year to $7,217.5 million in fiscal 2009.

Fitch maintained Darden's long-term issuer default rating, bank credit facility and senior unsecured debt ratings at "BBB".

Chicago, IL – September 14, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: FedEx Corp. (FDX), United Parcel Service Inc. (SNDA), UBS AG (UBS), Moody’s Corp. (MCO) and McGraw-Hill (MHP).

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Here are highlights from Friday’s Analyst Blog:

FedEx Preannouncement Beats

Shares of FedEx Corp. (FDX) have jumped more than 5% so far today after the company preannounced fiscal first-quarter earnings, which topped Wall Street expectations.

The package-delivery major said that it expects to post earnings of 58 cents per share, which is well above its guidance of 30 cents to 45 cents as well as the Zacks Consensus Estimate of 43 cents per share. The company reported earnings of $1.23 per share in the year-ago quarter.

The Memphis, TN-based company also stated that fiscal second-quarter earnings is expected to range between 65 cents and 95 cents per share, which is in line with the Zacks Consensus Estimate of 71 cents per share derived from 15 covering analysts. The guidance is still well below the year-ago earnings of $1.58 per share.

FedEx attributed the better-than-expected first quarter earnings to improved International Priority (IP) shipping volumes and management’s cost cutting efforts. The IP service generated revenues of nearly $7 billion and contributed about 19.6% towards total revenue during fiscal 2009.

However, the company added that revenue per shipment dipped year over year in each of the transportation segments amid a competitive pricing environment coupled with significant overcapacity in less-than-truckload (LTL) freight market. The company, which competes with United Parcel Service Inc. (SNDA), also said that the second quarter guidance incorporates the current outlook on fuel prices and a modest recovery in global economic conditions.

Moody's Under SEC Axe

Swiss banking giant UBS AG (UBS) was recently ordered to pledge its assets or provide bonds worth $35 million by Judge John Blawie at Connecticut Superior Court. The unfavorable order came as a blow after reports claimed that top credit ratings agencies had committed a securities fraud by providing insider trading information to the bank.

Stanford-based hedge fund Pursuit Partners claimed that UBS had entered a deal to sell its investment-grade collateralized debt obligation (CDO) notes in 2007 with the prior knowledge that the securities were about to be downgraded.

The proceedings revealed that the rating agencies Moody’s Corp. (MCO) and Standard & Poor's provided insider information to UBS regarding their impending decision to downgrade some of the CDOs the bank was selling. The credit crunch led the securities to default only months after they were sold and UBS used the situation to its advantage.

The Court order came at the end of a one-week hearing, where various UBS employees testified and related documents, including internal UBS e-mails, were reviewed. However, UBS pledged innocence saying that the Court’s decision was a routine procedure, requiring defendants to provide security during the case proceedings.

The UBS litigation reflects a negative sentiment that has built up against large credit rating agencies for sharing furtive connections with big investment banks. This would certainly hurt Moody’s goodwill and highlight the fact that rating agencies can be bought. The integrity of the company and its ratings are in question.

Moody’s allegedly hastened the credit crisis earlier in the decade by assigning top ratings to mortgage-backed securities that deteriorated later. Moreover, it is being probed by regulators worldwide, with several ongoing reviews in Europe for rating a European debt product, constant proportion debt obligations (CPDOs), at a higher-than-merited AAA.

The SEC has designed various measures to stop the practice of corporations seeking to buy favorable ratings by negotiating fees with raters. Although Moody’s is not ultimately compensated on the accuracy of its ratings, we believe it will face large penalties similar to investment banks in the wake of the technology bubble earlier in the decade.

The SEC is expected to hold a meeting on Sept. 17 to vote on proposed rules for credit rating agencies and pose restrictions on controversial flash orders. Regulators will also vote on the subject on adopting previously proposed rules to improve credit rating practices. The major credit rating agencies under the scrutiny would be Moody's, McGraw-Hill (MHP), Standard & Poor's and Fitch Ratings.

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This revision in rating outlook reflects TDS’s weak performance in the last quarter across both wireless and wireline segments, which prompted the management to revise the financial guidance for 2009. The company has reported tepid revenue growth in the last quarter, which was accompanied by 21% year over year decline in net profit.

US Cellular was hit by a weak economy and intense competition as it lost 88,000 customers during the second quarter. The company reported decline in ARPU (average revenue per user) as growth in data was offset by the declines in voice and roaming revenue. This declining trend is expected to sustain at least through the second half of 2009.
 
Post-paid churn increased both sequentially and year over year as US Cellular is being challenged by the increasingly competitive domestic wireless market. Competition has increased due to the roll out of exclusive premium wireless handsets by Tier-1 carriers such as AT&T (T), which markets iPhone 3GS. Based on uncertain economic conditions, US Cellular has withdrawn its net subscriber addition target for the year.
 
The combined entity has a sound financial profile with over $800 million in consolidated cash and short-term investments supported by healthy free cash flow ($129 million for the first-half 2009). The current consolidated debt level is approximately $1.6 billion (low leverage of 0.4) with no significant near-term maturities.
 
However, future free cash flow levels are expected to be pressured due to incremental investment in business operations including network expansion and technology upgrades. Moreover, declining roaming revenues and subscriber losses may strain financials moving forward. 
 
Both TDS and US Cellular are pursuing several initiatives to reinvigorate growth. US Cellular continues to expand coverage of its 3G wireless network with a target of achieving 70% penetration of its subscriber population by the end of 2009. On the wireline front, aggressive deployment of “Triple-Play" (bundles voice, high-speed Internet and Dish Network TV) continues to effectively compete with cable TV operators.
 
Although the ongoing business initiatives look promising, it remains unclear if and when TDS will return to sustainable growth track as the company remains challenged by a volatile economic environment, which may continue to impact subscriber retention moving forward.

Lower earnings and cash flow have resulted in a leverage which is above normal levels for maintaining an “A" assigned to the company’s long-term default rating, unsecured bank credit and senior unsecured debt program. Fitch has an "F1" rating on Honeywell’s short-term issuer default and commercial papers.

Although the global recession has hurt the company’s short-term outlook and 2009 results, Honeywell plans to continue its investments to ensure growth when the economy rebounds. It intends to reduce debt to help limit the impact of weaker financial results on leverage in 2009. The company continues to target strong financial metrics to improve its financial flexibility and ability to maintain a solid competitive edge.

Honeywell had cash and cash equivalents of $2.6 billion, long-term debt of $6.2 billion and net worth of $8.6 billion as of June 30. Its long-term debt-equity ratio is 0.72 and net debt stands at $3.6 billion, down by $20 million from the first half of 2009.

A rating downgrade is unlikely if Honeywell's actions and planned debt reduction contribute to a financial improvement by end of 2009.

A change in the level of the US Government’s defense and aerospace funding could adversely impact sales of Aerospace’s defense and space-related product and services. Future growth is also dependent upon the company’s ability to develop pioneering technologies that achieve market acceptance with acceptable margins.

Honeywell is a diversified technology and manufacturing company, serving customers worldwide with aerospace products and services, control, sensing and security technologies for buildings, homes and industry, among other things. United Technologies Corp. (UTX) and Johnson Controls Inc. (JCI) are its major competitors.

We currently have a Neutral Recommendation on Honeywell.

In March, 2009, Fitch Ratings had downgraded MGIC’s long-term issuer and senior debt to 'B' from 'BBB-' and junior subordinated debt rating to 'C' from 'BB' previously.

On Thursday before the opening bell, MGIC reported a loss of $2.74 per share for the second quarter of 2009. Following the results, management announced a reorganization of its core mortgage insurance business by capitalizing MGIC Indemnity Corp with $1 billion. The capitalization will be funded from existing cash and investments.

We doubt management's assertion that it has sufficient resources to settle the claims. Therefore we maintain a sell recommendation for MGIC.

Ever since the end of the housing market boom in 2006, MGIC, the largest private mortgage insurer has been facing difficult business conditions as borne out by its results. Mounting mortgage delinquencies have made matters difficult for the mortgage insurer, which has been reporting losses since the second half of 2007.

Other private mortgage insurers who have suffered rating downgrades since the housing downturn include United Guaranty Residential Insurance (UGRIC), Radian Guaranty (Radian MI), PMI Mortgage Insurance (PMI). Private Mortgage Insurers mostly help banks and other lenders recover their costs in the event of a homeowner defaulting on home loan payments.

Recently the company was downgraded by S&P and Fitch Ratings. Ongoing weakness in the southwestern residential real estate markets, where the company has a significant exposure, continues to hurt the results.

Ahead of 2Q09 results, we have lowered our EPS estimates, based on our concerns for further credit deterioration. We are maintaining our Sell recommendation on the shares.Zacks Investment Research

Yesterday, Petrobras (PBR), the state-run oil giant, sold US$1.25 billion of reopened global 2019 bonds carrying 7.875% coupon, at 6.875% current yield. Although this is lower than the 8.125% yield on US$1.5 billion of the same bonds in February, it is still 332 basis points over U.S. Treasury yield.

Currently, the amount of notes outstanding is worth US$2.75 billion. The company doubled the initial offer of US$500 million on the bond based on its high demand. Petrobras plans to use proceeds from these bonds to repay part of the $6.5 billion loan secured from various commercial banks for two years.

On the opening front, Petrobras has stepped closer to finalizing details of its planned tender for offshore drilling rigs and production platforms, which will increase its operating costs in the short term. However, the activity will encourage growth in the domestic oilfield-service sector. Moreover, efforts to standardize equipment for platforms, rigs and refineries under construction will help cut costs in the long term.

Petrobras has been running periodic auctions of natural gas for short-term delivery since the beginning of the year. It plans to schedule its fourth auction for the deliveries on July 8, which will be offered for delivery in August and September. The company started these auctions in order to sell excess gas in its pipeline system. This requires large investments and Petrobras will have to depend on government spending to finance majority of its investment plans for 2009.

However, Fitch Ratings has maintained the debt rating on Petrobras and its wholly owned subsidiary, PifCo (Petrobras International Finance Co.), based on the fact that investments made in exploration and production are likely to lead to significant increase in production and reserves in the upcoming future. Therefore, we continue to have a positive view on Petrobras.

Read the full analyst report on "PBR"
Zacks Investment Research
]]> http://www.straightstocks.com/stock-watch/petrobras-banks-on-govt-support-analyst-blog/feed/ 0 http://www.straightstocks.com/stock-watch/fifth-third-sells-processing-unit-analyst-blog/ http://www.straightstocks.com/stock-watch/fifth-third-sells-processing-unit-analyst-blog/#comments Wed, 01 Jul 2009 18:10:46 +0000 Zacks Market Commentaries http://www.zacks.com/stock/news/21713/Fifth+Third+Sells+Processing+Unit+-+Analyst+Blog Fifth Third disposes majority stake in processing unit

On June 30, Fifth Third Bancorp (FITB) sold a 51% stake in its processing business to Advent International, the leading global buyout firm. The deal is valued at $2.35 billion, before any valuation adjustments.

The deal was announced in March this year. Fifth Third will retain the remaining 49% stake in the new company and will also keep its credit card issuing business, including retail credit card and commercial multi-card services.

We are encouraged with this transaction, as it will enable Fifth Third to focus more on its core business while boosting its Tier 1 common equity.

Fifth Third will realize a pre-tax gain of around $1.7 billion or $1.0 billion post-tax on the transaction. Approximately $1.2 billion will be contributed from this transaction to the bank's Tier 1 equity. The company has recently raised $1 billion of capital from its stock offering and completed the tender offer for its preferred shares. The company exchanged $696.2 million in its depository shares which represent 62.9% of the aggregate liquidation amount of its depositary shares. The transaction resulted in the issuance of approximately 60,121,124 shares of common stock and the payment of $229.8 million in cash.

Last week, Fitch Ratings downgraded the long-term issuer default rating of Fifth Third Bancorp and its subsidiary to "A-" from "A" with a negative outlook. Prior to that, Standard & Poor's lowered ratings of 18 banks, including Fifth Third, Wells Fargo & Co (WFC), Huntington Bancshares (HBAN), U.S. Bancorp (USB), KeyCorp (KEY) and Citizens Republic Bancorp (CRBC). Standard & Poor's reduced the bank's counterparty credit rating to "BBB" from "A-" with a negative outlook.

However, we are encouraged with the capital bolstering initiatives of Fifth Third and continue to view its shares a Hold, as we think that asset quality deterioration and the impact of a recessionary economy will restrict earnings in the coming quarters.
Read the full analyst report on "FITB"
Read the full analyst report on "WFC"
Read the full analyst report on "HBAN"
Read the full analyst report on "USB"
Read the full analyst report on "KEY"
Read the full analyst report on "CRBC"
Zacks Investment Research
]]> http://www.straightstocks.com/stock-watch/fifth-third-sells-processing-unit-analyst-blog/feed/ 0 http://www.straightstocks.com/commodities/words-from-the-investment-wise-for-the-week-that-was-june-22-%e2%80%93-28-2009/ http://www.straightstocks.com/commodities/words-from-the-investment-wise-for-the-week-that-was-june-22-%e2%80%93-28-2009/#comments Sun, 28 Jun 2009 08:37:06 +0000 Prieur du Plessis http://www.investmentpostcards.com/?p=7850 http://www.straightstocks.com/commodities/words-from-the-investment-wise-for-the-week-that-was-june-22-%e2%80%93-28-2009/feed/ 0 http://www.straightstocks.com/stock-watch/obama-plan-spares-rating-agencies-analyst-blog/ http://www.straightstocks.com/stock-watch/obama-plan-spares-rating-agencies-analyst-blog/#comments Mon, 22 Jun 2009 14:25:59 +0000 Zacks Market Commentaries http://www.zacks.com/stock/news/21307/Obama+Plan+Spares+Rating+Agencies+-+Analyst+Blog President Obama's regulatory reform plan appears to be a good beginning for restoring the confidence in the financial system, but there are many areas where it does not go far enough, like the revamp of the rating agencies. Despite their significant  role in the credit crisis, the impact of the proposed changes in the plan on rating agencies is minimal.

The rating agencies play a crucial role in the capital markets by rating everything from simple corporate bonds to complex structured investments like mortgage backed securities. Institutional investors rely heavily on credit ratings while deciding their purchases. Banks are also required by law to take ratings into account when investing in bonds.

Top rating agencies like Moody's (MCO), McGraw-Hill's (MHP) S&P Rating Services and Fitch Ratings are paid by issuers whose securities they rate, thus creating an incentive to assign high ratings in order to win more business. This system creates a conflict of interest and at times companies are even threatened with lower ratings if they don't pay particular ratings agencies.

The plan does nothing to address this key shortcoming of the system -- the "issuer pay" model.

Many of the mortgages and other securities which were awarded high ratings by the rating agencies later proved worthless, fueling the financial crisis.

The plan does make many comments and suggestions to improve oversight of the ratings process and to better manage conflicts of interest. However, the proposals are similar to the changes that were already being considered by the SEC, or even the rating agencies themselves.

The proposal also calls for regulators to reduce their reliance on agency ratings in regulations and supervisory practices wherever possible, but does not offer an alternative to the current system.

The plan proposes that the SEC continue its efforts to strengthen the regulation of credit rating agencies, and it would also require the agencies to differentiate between credit ratings assigned to complex mortgage-related investments and more traditional bonds.

The rating agencies have also escaped any liability for their ratings which later proved to be worthless under First Amendment protection, and the proposal does not change that, which may result in continuation of their irresponsible behavior in the future.
Read the full analyst report on "MCO"
Read the full analyst report on "MHP"
Zacks Investment Research
]]> http://www.straightstocks.com/stock-watch/obama-plan-spares-rating-agencies-analyst-blog/feed/ 0 http://www.straightstocks.com/financial/does-aig-still-have-a-pulse/ http://www.straightstocks.com/financial/does-aig-still-have-a-pulse/#comments Tue, 02 Jun 2009 11:00:58 +0000 Bullish Bankers http://www.bullishbankers.com/?p=13677 http://www.straightstocks.com/financial/does-aig-still-have-a-pulse/feed/ 0 http://www.straightstocks.com/stock-watch/tenet-healthcare-gains-7-zacks-tale-of-the-tape/ http://www.straightstocks.com/stock-watch/tenet-healthcare-gains-7-zacks-tale-of-the-tape/#comments Mon, 01 Jun 2009 19:36:22 +0000 Zacks Market Commentaries http://www.zacks.com/stock/news/20639/Tenet+Healthcare+Gains+7%25%2B+-+Zacks+Tale+of+the+Tape Shares of Tenet Healthcare Corp. (THC) are up more than 7% today. The hospital operator just announced an offering of $450 million in senior notes to boost its financial flexibility.

The company plans to offer $450 million in senior secured notes maturing in 2019 through the private placement route. The proceeds will be used to purchase up to $1.0 billion of its outstanding senior notes maturing in 2014.

Fitch has assigned a rating of 'BB-/RR1' to the offer, considering Tenet's recent improvement in operating and financial position. The rating agency also said that the company's "liquidity position has benefited from the extension of its maturity schedule as well as the execution of several cash-generating initiatives."

Tenet also reiterated its adjusted full-year earnings before interest, taxes, depreciation and amortization (EBITDA) guidance of between $760 million and $825 million, indicating a "growing level of confidence toward the higher end of that range."

For this year, analysts are calling for a loss of 5 cents per share, which has narrowed by 7 cents over the past month as 11 out of 15 covering analysts raised expectations.

THC, a Zacks #2 Rank ("Buy") stock, is trading on higher-than-usual volume of approximately 17.1 million, compared to average daily volume of about 12.8 million.

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Here are highlights from Friday's Analyst Blog:

On Bankruptcy & Banking

With the bankruptcy of Chrysler, and the potential bankruptcy of General Motors Corp. (GM) the bankruptcy code is very much in the news. Imagine for a minute, though, what would happen if the biggest single liability for these firms -- say, their legacy Pension and Health Care liabilities -- were by law not allowed to be touched by the courts. How much good could it really do?

Well that is the way it should be according to every single Republican and twelve Democrats in the U.S. Senate. No, not for big firms like GM, but for individuals.

The same day that Chrysler went "Tango Uniform," the U.S. Senate bowed to the pressure of the bankers' lobbyists and refused to allow mortgage cram-downs is bankruptcy courts. As Sen. Richard Durbin (D- IL) put it, referring to the bank lobbyists, "They own this place."

Evergreen Solar's Wider Loss

Evergreen Solar, Inc. (ESLR) announced financial results for its 1st quarter ended April 4, 2009.

Revenue for the reported 1st quarter of 2009 was $55.8 million, up 26% from $44.2 million in the sequential 4th quarter of 2008, and up 144% from $22.9 million in the year-ago 1st quarter of 2008.

AMAG Drug Nears Approval

AMAG Pharmaceuticals, Inc. (AMAG) reported first quarter 2009 financial resorts and recent accomplishments Thursday after market close.

Apparently, investors are not interested in its financial results; instead, they are more focused on the approval status of the company's lead anti-anemia drug Feraheme. In the news release and the conference call, the company disclosed that all outstanding issues pertaining to the manufacturing of Feraheme have been settled to the satisfaction of the FDA, and that a re-inspection of its manufacturing facility will not be required as a condition to approval of Feraheme.

Boeing Suffers Rating Cut

Fitch Ratings lowered to negative its long-term credit ratings outlook on The Boeing Company (BA) and its financial unit, Boeing Capital Corp.

Fitch said the long-term issuer default rating of A+ on Boeing and Boeing Capital Corp., along with other ratings, were supported by financial flexibility, large order backlog, and the company's balanced portfolio approximately equally split between defense and commercial.

Micros Beats on Lower Revenues

Micros Inc. (MCRS, Hold) released its fiscal Q3 results yesterday. Revenues were sharply lower at $205.7 million, versus our and consensus expectation of $227 million and $222 million, respectively. Non-GAAP EPS was impressively higher at $0.32, compared to our estimate of $0.27 (consensus was at $0.28).

EPS upside was largely a result of cost-cutting measures, while the revenue shortfall was attributed to weak restaurant business. The stock is up around 10% in trading today.

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About Zacks Equity Research

Zacks Equity Research provides the best of quantitative and qualitative analysis to help investors know what stocks to buy and which to sell for the long-term.

Continuous coverage is provided for a universe of 1,150 publicly traded stocks. Our analysts are organized by industry which gives them keen insights to developments that affect company profits and stock performance. Recommendations and target prices are six-month time horizons.

Zacks "Profit from the Pros" e-mail newsletter provides highlights of the latest analysis from Zacks Equity Research. Subscribe to this free newsletter today: http://at.zacks.com/?id=2677

About Zacks

Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros at http://at.zacks.com/?id=4580.

Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.

Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security.

Contact:
Mark Vickery
Web Content Editor
312-265-9380
Visit: www.zacks.com

Cigna incurred huge losses from its runoff reinsurance businesses in 2008, which weakened its financial position.

A month earlier, Standard & Poor's Ratings Services had reduced its rating for similar reasons.

However, the agency raised Cigna's outlook to "Stable" from "Negative" and expects good earnings from the company this year.

Analysts are positive on the long-term prospects of the company as they have raised their 2010 earnings estimate in last week by 3 cents to $4.20 per share.

Cigna is a Zacks #3 Rank ("Hold") company.

Well, it is not yet a done deal but to show what it means to be stuck between a rock and a hard place it would serve us well to have look at Hungary which, even among its CEE comrades, look comparatively battered and bruised. To make matters worse, Hungary received another blow to the kidneys as Prime Minister Ferenc Gyurcsany announced on Saturday that he was resigning his position. On the face of it, it is difficult to blame the guy since with Hungary being the first economy in Eastern Europe to secure a loan from the IMF to the tune of 20 million euros the corresponding budgetary cuts demanded look almost cartoonishly unrealistic relative to the economic situation.

Even as he presided over a reduction of the budget deficit from 9.2 percent of GDP in 2006 to about 3.3 percent last year, Gyurcsany was criticized in February by some opposition parties and the central bank for his proposed 900 billion forint ($4.1 billion) tax shuffle to boost growth. Critics said more spending cuts were needed to stabilize the economy in the short run and boost growth in the long run.

“The government no longer had any room to maneuver,” Gyorgy Barcza, chief economist at KBC NV’s Hungarian unit, said yesterday. “Without new measures, the budget deficit would be more than the target.”Failure to continue austerity measures could result in a downgrade of the country’s credit rating, David Heslam, Director of Fitch Ratings’ sovereign team, said in a statement today. The agency rates Hungary’s debt BBB, the second-lowest investment grade, with a negative outlook.

The Socialist Party is less than half as popular as its biggest rival. Backing for the government started slipping when it introduced austerity measures to close a budget gap in 2006. The resulting economic decline was worsened by the global crisis, forcing the country to seek international aid. The party had 23 percent support last month, the lowest in 10 years, compared with 62 percent for the largest opposition party, Fidesz, pollster Median said on its Web site on March 18. Gyurcsany’s popularity fell to 18 percent, making him the most unpopular premier since communism. The poll of 1,200 people has a margin of error of 2 to 6 percentage points.

As Edward put it recently, it is difficult not to note a irrevocable pattern in the (unfortunate) countries subject to IMF intervention whereby they collapse under the yoke of the measures demanded in trade for the loan. Of course, we should not only shoot at the IMF since in the context of e.g. the EU one wonders the extent to which western Europe can just idly watch a country such as Hungary spiral into the abyss without extending some kind of bilateral help. Note in passing here that Gyurcsany's resignation marks the second case of government jitters in an IMF supported economy. The second would be Latvia where the government resigned recently.

As it could have been expected the market was none to happy about the PM's resignation which brings us to question of raising those rates. Consider consequently that the Forint which have already been pounded relative to the Euro completed a 2.6 percent drop to 308.62 against the euro (click on image for better viewing).

Consequently and following the Prime Minister's resignation the central bank was forced to move with comments that all tools would be deployed to avoid the Forint depreciation to spiral out of control. Now, I would not want to contradict myself here and let me very clear then; I think that a weak Forint is a fundamental part of whatever future Hungary may have but in the near term and with the rating agencies thoroughly marking the outlook for Hungary with the negative label it is a tightrope walk for policy makers not least because we still have the unresolved issue of translation risk whereby liabilities are denominated in foreign currency (mostly swiss francs though) and assets in Forints. Conclusively, it is difficult to see why, given the economic reality, the central bank would want to raise rates, but it is also difficult not to concur that they need to do something with respect to ensuring some kind of order vis-à-vis Hungary's stakeholders not to mention investors. Perhaps this duality more than anything shows us the almost impossible situation Hungary now finds itself in.

Raising the Stakes?

Meanwhile and moving across the pond for a minute it appears that US authorities have just raised the stakes in the dramatic jeux d'horrible that is the unfolding economic crisis. Thus and following the Fed's shock and awe treatment of the markets last week as Bernanke rolled out measures to buy treasuries (presumably) in the primary market we got the long awaited details in Timothy Geithner's plan on how to deal with those toxic assets and consequently how to restore confidence in markets so that we just might go back to normal whatever that is these days.

Quite naturally, the plan (see also here and here) which includes most notably a public-private partnership scheme designed to take care of about 1 trillion USD worth of toxic asset has been parsed by many of the most astute economic pundits. From the horses own mouth this is how it is described;

The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.

The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.

Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.

The new Public-Private Investment Program will initially provide financing for $500 billion with the potential to expand up to $1 trillion over time, which is a substantial share of real-estate related assets originated before the recession that are now clogging our financial system. Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets. The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury.

This program to address legacy loans and securities is part of an overall strategy to resolve the crisis as quickly and effectively as possible at least cost to the taxpayer. The Public-Private Investment Program is better for the taxpayer than having the government alone directly purchase the assets from banks that are still operating and assume a larger share of the losses. Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets. Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.

Macro Man offers nothing but a sigh, Paul Krugman is in despair, Calculated Risk also seems skeptical that this is the right approach and finally Yves Smith also chimes in with a "thumbs down". I tend to agree with the skeptics and even though I have not really studied the proposal in detail the principal problem for me is that the government is putting up money for assets of which some are surely worthless and others may be work significantly less than current book value. In this way, it does nothing to solve the underlying issue and the risk for the taxpayer seems substantial. What I do like though about the plan is that it explicitly seeks to create a market when there obviously is none and this may be an important first step towards restoring some kind certainty as to where this is going.

Ah well, perhaps I and the rest of the gang above are just party poopers. What is certain is that the markets liked it and in fact Macro Man may have hit the proverbial nail on the head when he recently, and once again, evoked March Madness (click on image for better viewing).

Of course, if there ever was something resembling a sucker rally it is this but so far things look as they are working. Also we cannot rule out that this initiative may just be what it takes to allow these assets to be marked to (a credible) market which would mean that we had taken one important step in moving forward. One thing which I do like by the activism in the US is that it is just that; activist which flies in the face of ostrich attitude prevailing on this side of the pond.

Rates and Stakes

So, what do Hungary and the US have in common here? Except being in the midst of their worst economic crisis of, arguably, all time not a whole lot I guess. However, they are both being forced to move into uncharted waters when it comes to fighting off the current mess in the global economy and her financial system. It will be very interesting to see whether raising rates as well as the stakes will bring forth the intended effects.

Tight credit, shrinking consumer buying and the falling real estate prices have commodity investors wondering, when will it turn around?

To find an answer to that question, we look at another indicator to help determine the future of commodity prices. It’s not one most investors think of in trying to predict which way commodities will go.

But if you look at its current moves, you’ll probably draw the same conclusion that we did: commodities will be ugly for a while.

The indicator I’m referring to is Fitch Ratings - the company that provides so-called credit opinions on companies, markets.

Over the past week or so, Fitch Ratings…

Retail Sales Fall An Annual 8%

Retail sales, excluding cars and fuel, fell by an annual 8 percent in August, the largest such decline registered since at least 2001. This follows a 6 percent in August. The year on year chart (see below) couldn't be clearer.



Sales were also down month on month (ie with respect to August), this time by a non seasonally adjusted 7%. In fact, on a seasonally adjusted basis retail sales peaked in February 2008, and have been trending down since. We still don't have the seasonally corrected data from Eurostat for September, but looking at the uncorrected data we do have from the Estonian statistics office, it does seem that retail sales were down again in Q3 over Q2.




Thus retail sales turned negative in March and the trend simply continues. The decrease in the retail sales of goods was most influenced by the stores selling manufactured goods where sales decreased by 12% compared to September 2007. Sales in non-specialized stores selling manufactured products and shops selling household goods and appliances, hardware and building materials were the worst hit.

Sales in grocery stores have, as might be expected, been rather more stable, with sales only down 3% . As had been the case in previous months, the decrease in food sales was largely influenced by the rise in food prices and the resulting decline in consumption.



Industrial Output Down 3.8%

Output adjusted for working days decreased an annual 3.8 percent, compared with a revised fall of 3.7 percent in August.

If we look at the seasonally and working day adjusted output index, then we can see that the level of output is now meandering downwards, and we now are way off the highs reached during last October and November. With this in mind we should expect the year-on-year percentage drops to start to decline after December, but it will then become much more interesting to follow the evolution of the absolute levels indicated by the general output index.

The main reason for the decline in output is evidently the lack of demand. The fall in manufacturing output was greatest in food, wood and building materials production. Food output was especially hit by the decrease in consumption resulting from this years large price increases. Although the rate of price increase has decelerated in recent months, food product prices are still up by 12% compared to September 2007.

The other area with big output drops is the manufacturing of wood and wood products, where the drop in sales in both domestic and external markets continues. The Estonian market is influenced by the construction slump, while in the external market Estonian manufactures are having a hard time due to the competitive environment and their own weaknesses in price competitiveness. Compared to September 2007, 22% less sawn timber and 9% less glue-laminated timber were produced. The largest drop (32%) was in the production of building materials which is directly connected with the decline in the construction market.

Some export-oriented industries have been continuing to expand - even in this difficult environment - especially enterprises involved in the manufacture of metal products, chemical products, and electrical machinery. Output was also up in the manufacture of machinery, radio and communication equipment, precision instruments and motor vehicles, since again a lot of the output is for export. The export share is 97% in the manufacture of radio and communication equipment and 91% in the manufacture of precision instruments.

Both Wages and Unemployment Still On The Rise


Wages continued to rise rapidly in the second quarter, up by 15.2%, even if this was the slowest pace of increse in more than two years, while the unemployment rate rose - to 3.1 percent in September - the highest level in more than three years.

Estonia's jobless rate, based on the number of unemployed registered with labor offices, rose to 3.1 percent, the highest since July 2005, from 2.9 percent in August, according to data from the Estonian Labor Market Board. The number of people signed on as seeking a job rose 6.6 percent from the previous month to 20,015. This number is of course, incredibly low by any comparable international standard, and is hard to square with a country in the midst of a very deep rcession (even after all the ritual genuflections towards the labour marekt being a lagged indicator). In order to understand how this situation is possible it is important to take into consideration Estonia's special demography and migration history.



However, it is also true to say that unemployment does normally follow changes in economic output with a time lag, se we should expected it to rise considerably in the coming months and quarters. Indeed the unemployment rate as measured by the Estonian statistics office in quarterly labor surveys is nearer to 4 percent in the second quarter (and the EU harmonised rate which is based on the survey shows 4.2% for September in the Eurostat database), and may rise as high as 10% according to recent estimates from Erkki Raasuke, head of Baltic research for Swedbank AB (not that they have been getting too much right of late, but still).


Despite the fact that unemployment will undoubtedly rise further as the recession deepens, it is the very tighness of the labour market (which is, as I say, in part a product of Estonia's demography) which prevents wage increases slowing down more rapidly, and thus the entire Estonian price system adapting to the slowdown (this phenomenon is often called "sticky wages and prices", and as we can see, the degree of viscosity here is almost treacle like). So Estonia's low earlier fertility fuelled the initial wage craze which along with the credit boom got us to the present point, and now the same lack of strength in depth in the labour market blocks the downward adjustment. In both cases the net by-product is massive pressure on the Kroon-Euro peg as Estonia struggles to find export competitiveness.


Consumer Confidence Falls Again


Unsurprisingly Estonian consumer confidence fell again in October, hitting its lowest level in more than 9 years, a sure sign the that the economy is about to shrink again, as domestic demand continues to search for a bottom. The Tallinn-based Konjunktuuriinstituut consumer confidence index declined to minus 27, its lowest reading since June 1999, and down from minus 22 in September. The institute cited worsening expectations for personal and state finances as the key drivers behind the drop.

“We expect the EU and the IMF to announce additional rescue packages for other Central and Eastern European economies in the coming days and weeks. Top of the list are the most imbalanced countries in the region - the Baltic States, Romania and Bulgaria."
Lars Christensen, Danske Bank, Copenhagen

Both Standard & Poor's and Fitch Ratings have responded over the last month to mounting risks from the global credit crunch by downgrading or revising credit rating outlooks to negative for a number of CEE economies including the Baltic states, the Balkans, Hungary and Ukraine. Moody's Investors Service has also revised its outlook to negative for Latvia and downgraded Ukraine.

S&P and Fitch both downgraded long-term sovereign ratings to Latvia and Lithuania on Oct. 27, citing recession risks and the growing need for external financing, while Estonia, had its rating cut by Fitch and outlook revised to negative by S&P. Basically, the crunch is biting in terms of both the cost and the availability of credit. This tightening in credit conditions is not, of course, new in Estonia, and in many ways we could say that the credit conditions should never have been allowed to get so "loose" in the first place. As can be seen from the chart below, the year on year rate of increase in peaked at the end of 2006, and since then the slowdown in Estonian domestic demand has been driven by the slowdown in the availability of credit (strictness off the terms, documentational requirements etc). Evidently, if such criteria had been applied much earlier, and the rate of annual increase never approached 80% all this may well have been a much less dramatic process.







The Estonian central bank said last week revised it's forecast for the economy, which has already made the turn around from being the second-fastest growing one in the EU in 2006, to being one of the most rapidly contracting ones in 2008. According to the bank the Estonian economy may shrink 1.8 percent in whole-year 2008 and 2.2 percent in 2009. As we have noted above the economy sank by 0.8% q-o-q in Q2 and by 1% year on year.



The decrease in GDP in Q2 was mainly a result of weak domestic demand, but the drop in both imports and the rate of increase in the export of goods and services meant that the contribution from external trade was negative. About the only item which maintained some momentum was government spending - buoyed by the tax income from an earier and better epoch. Compared to Q2 2007, total domestic demand was down by 2.8% , largely as a result of adecrease in private consumption and capital investments ( down by 2.0% and 2.5%, respectively).



Private consumption decreased mainly due to the decrease in expenditures on transport and clothing and footwear. The growth of expenditures on food and non-alcoholic beverages decelerated. Capital investments decreased in both the financial and the household sector. Investments in manufacturing industry were almost stationary year on year. At the same time public sector construction investments accelerated.



The decrease in exports and imports since the second half of 2007 which had been noted in Q1 went even further in the 2nd quarter. Compared to the 2nd quarter of the previous year, exports of goods and services decreased by 4.9% and imports by 8.2% (at constant chain-linked prices).




Goods exports were down by 3.2% primarily due to the decrease in exports of refined petroleum products. At the same time, exports of basic metals and electrical machinery (electrical motors and appliances), which significantly influence export movements, increased. Exports of services decreased by 8.9% primarily due to the decrease in exports of services for railway cargo, airway passengers and cargo transport and trade related exports services. The decrease in imports of goods was influenced mainly by the decrease in imports of refined petroleum products and motor vehicles. While imports decreased faster than exports, the deficit of net exports in GDP has increased since the second half of 2007 and amounted to -4.6% of GDP in the 2nd quarter. In the 1st quarter the impact of net exports was -7.1% (so the negative impact slowed vis a vis Q1).

Fiscal Crunch Coming

Basically, as the economy slows, and government income increases even while counter cyclical spending policies add to expenses, the government is moving into tricky fiscal deficit territory. Mindful of this the Estonian government approved on September 25 a draft 2009 budget which attempted to balances overall finances, including local government and the social insurance funds. The budget, which is still to be finally approved by the Estonian parliament, will fall into a deficit and need to be covered from government reserves, according to former Prime Minister Vaehi in a recent interview with the Maaleht newspaper Maaleht.

A deficit of 10 billion krooni would equal 3.5 percent of the expected gross domestic product of 283 billion krooni forecast by finance ministry in August. SEB have forecast a deficit of 1 percent of GDP in Estonia's overall finances next year.

Falling tax revenue has forced the Estonian governemnt of Prime Minister Andrus Ansip to cut spending and seek out new financing in an attempt to maintain a balanced budget, formerly a linchpin of the country's fiscal policies. The Finance Ministry have already forecast the budget will fall into a deficit of 3.1 billion krooni, or 1.2 percent of gross domestic product this year, after running surpluses in each of the last 6 years.



Two Questions In Conclusion

Basically then, it is hard to call the exact impact of trade on Q3 data without having the September trade data in front of us, since although the July and August export numbers are well below the April and May ones, we also need to take into account the accompanying drop in imports (which helps net trade, and thus is GDP positive). On the other hand the general impression you should get from all the data is that we are in for another shocker in Q3. Which leaves us with two questions:

1/ Where do we go from here?
2/ Just how long will it be before we hit generalised price deflation?

Let's take the second one first. Possibly for many people the question will appear to be a ridiculous one, but it isn't. If you look at the CPI index itself (this now becomes much more important than the year on year inflation rates, since what we need to watch for are the price movements from month to month. Now in the rate of increase from one month to another has been slowing, and in September the index was barely up over August (less than 0.5%, following a virtually stationary reading in August over July) so we should not be surprised to see the index hit a ceiling at some point, and then start to come down. Basic economic theory leads us to expect this (on the back of falling commodity and food prices and in a situation where internal capacity is way above the sum of internal and external demand available to the Estonian economy at current prices). Thus there is only one way for prices and wages to go: down. Although people may struggle with all this yet awhile before they accept the inevitable.



So what about the future of the economy in general? Well, let's take two quotes from the most recent Eesti Pank growth forecast. First, a recognition that they got it wrong in the past:

According to the base scenario of Eesti Pank's 2008 autumn forecast, Estonia's gross domestic product will decline by 1.8% in 2008 and by 2.1% in 2009. So far the economic correction has been more abrupt than expected primarily due to decreasing domestic demand. In addition to the cessation of the rapid real estate market expansion, also private consumption dropped in spring more than forecasted.

According to Eesti Pank's estimate, the economy should pick up again either at the end of 2009 or at the beginning of 2010. The average economic growth rate of 2010 will be 3%. Private consumption growth should recover in 2010 along with the revival of household confidence, whereas 2009 will be characterised by slowing wage growth and increasing unemployment.

"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.