Chicago, IL – November 10, 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: Freeport-McMoRan (FCX), Barrick Gold Corp. (ABX), Deutsche Telekom (DT), AT&T (T) and Verizon (VZ).

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Here are highlights from Monday’s Analyst Blog:

No Inflation Problem

How, then, does one explain the recent move in the price of gold to over $1,100 an ounce? Historically, gold has been seen as the ultimate inflation hedge. Its rise over the past year to record nominal levels (it would have to roughly double to match its inflation-adjusted high’s set back in 1979) would seem to indicate that the market is afraid of inflation. How do we square this with data from the TIPS market, which indicates the market sees no real problem with inflation?

One reason might be the rise of India, although that would not explain the day-to-day moves. Historically and culturally, Indian’s have a far higher propensity to store their wealth in the form of gold, specifically in jewelry, not bullion, than the rest of the world does. That said, I don’t think that the 200 metric tons recently bought by the Reserve Bank of India is about to be turned into necklaces and earrings anytime soon.

Still, as millions and millions of Indians become more middle class, the demand for gold has gone up. To a lesser extent, this holds true for China as well. Even more Chinese are becoming wealthy or at least middle class than are Indians, although the cultural propensity to hold gold is not quite as strong.

Part of it might just be that we have not found that many new gold mines recently, and the ore grades in places like South Africa have been going down. That, combined with rising demand, is a classic recipe for rising prices -- even if people are not expecting a return of 1970’s-style inflation.

Total world gold production has been falling over the last five years following steady growth in the over 20 years preceding that. That would mean good things for the gold miners who have large reserves of gold in the ground, especially if they are able to increase production when the rest of the world is seeing production decline. Freeport-McMoRan (FCX) and Barrick Gold Corp. (ABX) are good examples of such companies.

DT Tops Estimates on Cost-Cutting

German telecom giant Deutsche Telekom (DT) announced results for third-quarter 2009 with reported earnings per ADS of 31 cents, beating the Zacks Consensus Estimate of 25 cents. Net income of €959 million (US$1.4 billion) reflects a 7.2% increase from €895 million (US$1.3 billion) reported a year ago.

This year-over-year growth was fueled by the company’s ongoing cost-cutting initiatives under the "Save for Service" program. Total savings from this program reached approximately €5.4 billion (US$7.7 billion) at the end of the quarter, exceeding the annual savings target of up to €4.7 billion (US$6.7 billion) originally expected to be achieved in 2010.

Revenue at Mobile Communication USA (T-Mobile USA), the fourth-largest US wireless carrier, grew 3% year over year to €3.8 billion (US$5.4 billion). However, in dollar terms, total revenue for the quarter represents a 2.3% annualized decline. Net income (measured in dollars) also decreased 5.7% year over year to US$417 million.

Blended ARPU for T-Mobile USA was US$47, down from US$52 and US$48 reported in the prior-year quarter and previous quarter, respectively, as growth in data services was offset by lower roaming and customer migration to unlimited plans. Blended churn (customers switching to other products) increased sequentially and year over year to 3.4% as a result of an increase in contract churn due to intense competition.

Higher contract churn affected customer retention at T-Mobile USA in the third quarter, as evidenced by a net loss of 77,000 customers. This is compared to a net gain of 325,000 and 670,000 customers in the previous and year-ago quarters, respectively.

T-Mobile USA remains challenged by the cutting-edge wireless handsets offerings from its larger peers such as AT&T (T) and Verizon (VZ), resulting in increased customer defection. The entity served 33.4 million mobile subscribers at the end of the quarter.

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Investors remained wary of emerging-market debt as evidence mounted that most of the major major economies - the U.S., the UK, Japan and the Eurozone - are sliding into recession. This realisation has triggered a major exit from commodities, which are a significant source of export revenue for a large number of developing nations. In particular bonds extended losses on the perception that the $700 billion U.S. bank bailout would not work miracles and thus many developed economies will be struggling to digest the impact of the credit blow-out for some time to come.


Until credibility is restored, we will not see people investing in the numbers that emerging economies like India and Brazil badly need to see. But at the same time, we might ask ourselves, at theis moment in time if they don't invest in India and Brazil, then where are they going to invest? The problem is that in the present global environment people are not simply not willing to take assume what is perceived as "risky" without being paid a large - and from the emerging economy point of view - damaging premium. Of course, the situation is also confused since people are no longer clear what constitutes "risky" and what doesn't - the German government, for example, yesterday found itself forced to offer a blanket guarantee of all domestic bank deposits to head off any risk of flight from German bank accounts.

One result of all this nervousness is that the cost of protecting developing nations' bonds against default has been steadily rising. Five-year credit-default swaps based on Argentina's debt climbed 44 basis points to 12.55 percentage points last week, the highest since at least June 2005. That means it costs $1.255 million to protect $10 million of the country's debt from default. Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.


Emerging Market Stocks

Emerging-market stocks also fell substantially last week, experiencing their the biggest weekly decline in seven years, led by the banks and energy companies. The MSCI Emerging Markets Index dropped 2.3 percent on Friday to 741.73, following a 3.4 percent decline on Thursday. The index lost 10 percent on theweek, the most since the September 2001 terrorist attacks.


Turkey's benchmark index fell the most in three weeks, losing 4.2 percent to 34,553 in the first trading day since Sept. 29. Russia's Micex Index slumped 5.3 percent, extending its annual loss to 51 percent. India's Sensex index slid 4.1 percent to 12,526.32. Reliance Industries Ltd., India's biggest company by market value, slumped 7.6 percent, to its lowest in a year.

Inflation Falls

But while India's financial system has been taking a beating, Indian inflation, almost un-noticed -slipped back to a 13-week low in late September, giving the central bank some breathing space to keep interest rates unchanged and lossen the liquidity strings when it next meets at the end of this month. Wholesale prices rose 11.99 percent in the week to Sept. 20 from a year earlier after gaining 12.14 percent in the previous week, the commerce ministry said in a statement in New Delhi on Thursday.



Reserve Bank of India Governor Duvvuri Subbarao is under pressure to boost money supply as a local stock sell-off triggered by the global credit crunch has drained funds from the banking system, increasing borrowing costs. Subbarao will undoubtedly seek to steer a middle course, since, given that inflation is still double the central bank's target he will not want to seem to be "soft", while on the other hand he will want to be prudent and will try to head off an excessively rapid credit tightening on the back of the global crunch. In addition, the peak of global inflation has now undoubtedly past, and we are now likely to see growing deflationary (rather than inflationary) headwinds as capacity levels exceed demand across the whole global economy and commodity prices tumble, as Claus Vistesen explains in this excellent and timely post.

The Indian central bank had been busy tightening, and had raised the cash reserve ratio, or the proportion of deposits that lenders maintain with it as reserves, by 400 basis points to 9 percent during the period between December 2006 and July 2008 in an ongoing battle to contain inflation. The bank will make the outcome of its next meeting in Mumbai known on Oct. 24, but we can be pretty sure that the "bias" will now have shifted towards loosening liquidity conditions rather than tightening them, as the priorities have changed, and the big priority now is to avoid any systemic bank problems, to keep the cost of borrowing for Indian companies down, and to prevent consumer credit slowing too dramatically.

The Indian banking system has been under increasing strain in recent days, and one symptom of this is that the rate at which Indian banks lend to each other reached an 18-month high of 17.5 percent on Oct. 1. Indian banks borrowed an average 413 billion rupees a day from the central bank in September, almost twice the amount in August, further indicating a shortage of funds in the banking system.


Commodities Down

Commodities, as measured by the Reuters/Jefferies CRB Index of 19 raw materials, tumbled 9.9 percent last week, the most since at least 1956.

Crude oil has lost 12 percent during the week, the most since 2004. The contract for November delivery traded at $94.47 a barrel, up 0.5 percent, as of 12:11 p.m. London time. Copper fell as much as 3.1 percent to $5,670 a ton on the London Metal Exchange, the lowest since February 2007 and was down 12% on the week.

Such downward movement in commodity prices has a double-edged impact on emerging economies. On the one hand inflation, which has in large part been driven up by rising commodity prices, will reduce significantly, but on the other hand many emerging economies are dependent on revenue from commodity sales to finance growth and development. Really this is a situation which will sort the "men" from the "boys", since those emerging economies which are really going to emerge will be in a position to switch the driving force of growth from commodity and agricultural dependence to industrialisation and domestic investment and consumer demand. It is my firm belief that India is now decidedly inside the group which is in the process of making this transition.


Stocks Down

Indian stocks fell during the week, with the benchmark Sensex stock index declining to its lowest in 18 months. The Bombay Stock Exchange's Sensitive Index, dropped 529.35, or 4.1 percent, to 12,526.32, its lowest since April 2, 2007. The index posted its second weekly decline, falling 4.4 percent. The S&P CNX Nifty Index on the National Stock Exchange fell 3.4 percent to 3,818.30. The BSE 200 Index declined 3.8 percent to 1,515.29. Nifty futures for October delivery fell 2.9 percent to 3,853.


Overseas investors bought a net 845 billion rupees ($18 million) of Indian stocks on Sept. 30, trimming their net outflow this year from equities to $9.1 billion, the nation's stock market regulator said.


Forex Reserves

India's foreign exchange reserves fell marginally by USD 153 million to USD 291.819billion for the week ended September 26 from USD 291.972 billion in the previous week. Reserves had jumped by USD 2.511 billion in the previous week. Foreign currency assets (FCA), during the week, dropped to USD 282.652 billion from USD 282.811 billion a week ago, according to data issued by the RBI on Friday.

Rupee

India's rupee slumped to the lowest since 2003, adding to speculation investors will take continue taking money out of the currency. The currency completed its eighth weekly loss, the longest drop since December 2005. The rupee was down 1 percent on the day to 47.085 per dollar, the lowest since June 2003, as of the 5 p.m. close in Mumbai on Friday. The currency lost 1.15 percent this week.

September Global Manufacturing PMI Shows Sharp Contraction

September seems to have been the ultimate "mensis horribilis" for industrial output internationally - and thus it is only natural to assume that Indian industry was also adversly affected - with global manufacturing activity contracting for the fourth consecutive month, and output falling to its weakest level in over seven years according to the JP Morgan Global Manufacturing PMI, which at 44.2 hit its strongest rate of contraction since November 2001, down from 48.6 in August (Please see the end of this post for some information about countries included and the JP Morgan methodology).


According to the JP Morgan report the retrenchment of the manufacturing sector mainly reflected marked deteriorations in the trends for production, new orders and employment. The declines in output and new work received were the second most severe in the survey history, while staffing levels fell at the fastest pace for over six-and-a-half years. The Global Manufacturing Output Index registered 42.7 in September, well below the 48.5 posted for August.

The sharpest decline in production was recorded for Spain, followed by the US, Japan and then the UK. Although the Eurozone Output Index sank to its second-lowest reading in the survey history, it was above the global average for the first time in four months. Within the euro area, France and Spain saw output fall at survey record rates, while in Italy and Ireland the contractions were the second and third most marked in their respective series. Germany, which until recently was the main growth engine of the Eurozone, saw production fall for the second month running and to the greatest extent for six years. Manufacturing activity in Japan fell to the lowest in over 6- years with the Nomura/JMMA Japan Purchasing Managers Index declining to a seasonally adjusted 44.3 in September from 46.9 in August.

At 40.8 in September, the Global Manufacturing New Orders Index posted a reading well below the neutral 50.0 mark. JP Morgan noted that the trends in new work received were especially weak in Spain, the UK, France and the US, with the all bar the latter seeing new orders fall at a series record pace (for the US it was the strongest drop since January 2001). The downturn of the sector led to further job losses in September, with the rate of reduction in employment the fastest since February 2002. Conditions in the Spanish, the UK and the US manufacturing labour markets were especially weak.

Russian manufacturing shrank for a second month in September, and in so doing registered its first back-to-back contraction since November 1998, as companies cut jobs and growth in new orders slowed, according to the latest VTB Bank Europe Purchasing Managers Report. The PMI came in at a seasonally adjusted 49.8, compared with 49.4 in August. The August reading was the lowest figure in three and a half years, according to the bank statement. On such indexes a figure above 50 indicates growth while one below 50 indicates a contraction.

Manufacturing in China contracted for a second month in August, underscoring the risk of a slump in the world's fourth-biggest economy. The Purchasing Managers' Index was a seasonally adjusted 48.4, unchanged from July, the China Federation of Logistics and Purchasing said today in an e-mailed statement.




Brazil's industrial output fell a seasonally-adjusted 1.3 percent in August, the largest monthly drop this year, bolstering expectations the central bank will ease monetary tightening in response to slowing economic growth. On an annual basis, output rose 2 percent, the slowest pace since March, according to data from the national statistics agency in Rio de Janeiro.

And the situation seems to have deteriorated further in August, since the headline seasonally adjusted Banco Real Purchasing Managers’ Index (PMI) registered a 25-month low of 50.4, down from 51.1 in August.

So basically this is where we get to learn what a global credit crunch means in terms of output and economic growth.

India's Industrial Output Weakens Too

India's industrial output growth bounced back again in July (the last month for which we have official data), reaching a five-month year on year expansion rate high of 7.1%. This follows a noted slowdown where output only rose by 5.4 percent gain in June, and 4.1% in May, according to data from the Central Statistical Organisation.


But if we come to look at the manufacturing PMI we will see that India's manufacturing output has also slowed somewhat, and expanded at its slowest pace in 14 months in September according to the ABN AMRO Bank purchasing managers' index. The PMI reading - which is based on a survey of 500 companies operating in India - fell to a seasonally adjusted 57.3 in September from 57.9 in August. This reading was the lowest since July 2007. Still 57.3 still suggests Indian industry continues to grow quite vigoursly, although the report did highlight the fact that the drop in the index was mainly the result of a decline in growth of new orders, and implied a deterioration in demand conditions, both locally as well as in export markets.


Current Account and Trade Deficit

The Rupee has also been dropping in reaction to India's deteriorating current account situation. The current account deficit rocketed to $10.7 billion in the three months from April to June, up from a $1.04 billion gap in the previous quarter,according to data from the Reserve Bank of India last week.

India's trade deficit almost doubled to a record in August as a surge in crude oil prices increased the import bill and overseas sales of goods slowed. The trade deficit widened to $13.9 billion from $7.2 billion a year earlier, according to data from the Ministry of Commerce and Industry. Imports grew 51 percent, the fastest gain in seven months, to $29.9 billion, while exports expanded 27 percent to $16 billion.

A near doubling of oil prices has boosted import costs, since India relies on overseas purchases for three-quarters of its energy needs. India paid an average $8 billion a month this year for oil imports, up from $5.5 billion in 2007, as crude oil costs surged to a record $147 a barrel on July 11. In India's case the 35 percent drop in oil prices we have seen since July has been partially offset by the decline in the rupee to a five-year low.

India's oil imports in August rose 77 percent to $10.9 billion as refiners paid more for crude oil purchased overseas. Non-oil imports gained 40 percent to $18.9 billion. Imports in the five months ended August 31 rose 38 percent to $130.3 billion from $94.6 billion a year ago. That took the trade deficit to $49.2 billion, compared with $34.5 billion in the same period a year earlier. Overseas sales of Indian goods in the five months to August 31 grew 35 percent to $81.2 billion, compared with $60.1 billion, the statement said.

India and Brazil Critical Weathervanes

What I have been arguing in this post is not that everything about India's economy is perfect - far from it, but neither is it the "perfect storm" disaster which current knee jerk reactions among international investors would seem to suggest. The problems which are hitting the Indian economy at the moment, from the rapid rise in inflation to the sudden withdrawal of sentiment have a common origin: the dynamics of the global economy, and it is to these we must now look if we are to be able to sort the wood from the trees about what happens next. Basically, when the dust settles, I think it will be apparent that there are few economies left sufficiently well standing (not Russia certainly, and probably not China, given the export dependence on the developed economies) and with sufficient energy to bounce back. Many may be sceptical that Brazil and India are going to lead the coming charge (this recession cannot, after all, last forever), but I ask you, if it isn't Brazil and India, who is it going to be?

JP Morgan Global Manufacturing PMI Methodology


The Global Report on Manufacturing is compiled by Markit Economics based on the results of surveys covering over 7,500 purchasing executives in 26 countries. Together these countries account for an estimated 83% of global manufacturing output. Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease.

The countries included are listed below by size of global GDP share, and the figures in brackets are the % og global GDP in each case (World Bank Data).

United States (30.5), Eurozone (18.7), Japan (13.9), Germany (5.6), China (4.9),United Kingdom (4.5), France (4.0), Italy (3.2), Spain(1.9), Brazil (1.9),India (1.7), Australia (1.3), Netherlands (1.1), Russia (0.9), Switzerland (0.7), Turkey (0.7), Austria (0.6), Poland (0.5), Denmark (0.5), South Africa (0.4), Greece (0.4), Israel (0.3), Ireland (0.3), Singapore (0.3), Czech Republic (0.2), New Zealand (0.2), Hungary 0.2.

Investors distanced themselves from emerging-market debt as the evidence mounted that major economies - the U.S., the UK, Japan and the Eurozone - are sliding into recession and this triggered a major exit from commodities, which is a significant source of export revenue for a large number of developing nations. In particular bonds extended losses on the perception that the $700 billion U.S. bank bailout would not work miracles and thus many developed economies will be struggling to digest the impact of the credit blow-out for some time to come.


Until credibility is restored, we will not see people investing in the numbers that emerging economies like India and Brazil badly need to see. In the present environment people are not simply not willing to take assume what is perceived as "risky" without being paid a large - and from the emerging economy point of view - damaging premium. As a result the cost of protecting developing nations' bonds against default has been steadily rising. Five-year credit-default swaps based on Argentina's debt climbed 44 basis points to 12.55 percentage points last week, the highest since at least June 2005. That means it costs $1.255 million to protect $10 million of the country's debt from default. Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.


Emerging Market Stocks

Emerging-market stocks had the biggest weekly decline in seven years last weeks, led by banks and energy companies. The MSCI Emerging Markets Index dropped 2.3 percent on Friday to 741.73, following a 3.4 percent decline on Thursday. The index lost 10 percent on theweek, the most since the September 2001 terrorist attacks.


Turkey's benchmark index fell the most in three weeks, losing 4.2 percent to 34,553 in the first trading day since Sept. 29. Russia's Micex Index slumped 5.3 percent, extending its annual loss to 51 percent. India's Sensex index slid 4.1 percent to 12,526.32. Reliance Industries Ltd., India's biggest company by market value, slumped 7.6 percent, to its lowest in a year.

Inflation Falls

But while India's financial system has been taking a beating, Indian inflation, almost un-noticed -slipped back to a 13-week low in late September, giving the central bank some breathing space to keep interest rates unchanged and lossen the liquidity strings when it next meets at the end of this month. Wholesale prices rose 11.99 percent in the week to Sept. 20 from a year earlier after gaining 12.14 percent in the previous week, the commerce ministry said in a statement in New Delhi on Thursday.



Reserve Bank of India Governor Duvvuri Subbarao is under pressure to boost money supply as a local stock sell-off triggered by the global credit crunch has drained funds from the banking system, increasing borrowing costs. Subbarao will undoubtedly seek to steer a middle course, since given that inflation is still double the central bank's target he will not want to seem to be "soft", while on the other hand he will want to be prudent and will try to head off an excessively rapid credit tightening on the backs of the global crunch. In addition, the peak of global inflation has now undoubtedly past, and we are now likely to see growing deflationary headwinds as capacity levels exceed demand across the whole global economy, as Claus Vistesen explains in this excellent and timely post.

The central bank has raised the cash reserve ratio, or the proportion of deposits that lenders maintain with it as reserves, by 400 basis points to 9 percent since December 2006 to contain inflation. The bank will make the outcome of its next meeting in Mumbai known on Oct. 24.

The rate at which Indian banks lend to each other climbed to an 18-month high of 17.5 percent on Oct. 1 as investors hoarded cash. Indian banks borrowed an average 413 billion rupees a day from the central bank in September, almost twice the amount in August, further indicating a shortage of funds in the banking system.

Essentially the wholesale price index fell because of a decline in the prices of farm products such as cereals, fruits and vegetables. The index of primary articles, that includes food items, dropped 0.2 percent, while the indices of manufactured and fuel were unchanged in the week to Sept. 20, today's report said.

Commodities Down

Commodities, as measured by the Reuters/Jefferies CRB Index of 19 raw materials, tumbled 9.9 percent last week, the most since at least 1956.

Crude oil has lost 12 percent during the week, the most since 2004. The contract for November delivery traded at $94.47 a barrel, up 0.5 percent, as of 12:11 p.m. London time. Copper fell as much as 3.1 percent to $5,670 a ton on the London Metal Exchange, the lowest since February 2007 and was down 12% on the week.

Such downward movement in commodity prices have a double edged impact on emerging economies. On the one hand inflation, which has in large part been driven up by rising commodity prices, will reduce significantly, but on the other hand many emerging economies are dependent on revenue from commodity sales to finance growth and development.


Stocks Down

Indian stocks fell during the week, with the benchmark Sensex stock index declining to its lowest in 18 months. The Bombay Stock Exchange's Sensitive Index, dropped 529.35, or 4.1 percent, to 12,526.32, its lowest since April 2, 2007. The index posted its second weekly decline, falling 4.4 percent. The S&P CNX Nifty Index on the National Stock Exchange fell 3.4 percent to 3,818.30. The BSE 200 Index declined 3.8 percent to 1,515.29. Nifty futures for October delivery fell 2.9 percent to 3,853.


Overseas investors bought a net 845 billion rupees ($18 million) of Indian stocks on Sept. 30, trimming their net outflow this year from equities to $9.1 billion, the nation's stock market regulator said.


Forex Reserves

India's foreign exchange reserves fell marginally by USD 153 million to USD 291.819billion for the week ended September 26 from USD 291.972 billion in the previous week. Reserves had jumped by USD 2.511 billion in the previous week. Foreign currency assets (FCA), during the week, dropped to USD 282.652 billion from USD 282.811 billion a week ago, according to data issued by the RBI on Friday.

Rupee

India's rupee slumped to the lowest since 2003, adding to speculation investors will take continue taking money out of the currency. The currency completed its eighth weekly loss, the longest drop since December 2005. The rupee was down 1 percent on the day to 47.085 per dollar, the lowest since June 2003, as of the 5 p.m. close in Mumbai on Friday. The currency lost 1.15 percent this week.

September Global Manufacturing PMI Shows Sharp Contraction

September seems to have been the ultimate "mensis horribilis" for industrial output internationally, with global manufacturing activity contracting for the fourth consecutive month, and output falling to its weakest level in over seven years according to the JP Morgan Global Manufacturing PMI, which at 44.2 hit its strongest rate of contraction since November 2001, down from 48.6 in August (Please see the end of this post for some information about countries included and the JP Morgan methodology).


According to the JP Morgan report the retrenchment of the manufacturing sector mainly reflected marked deteriorations in the trends for production, new orders and employment. The declines in output and new work received were the second most severe in the survey history, while staffing levels fell at the fastest pace for over six-and-a-half years. The Global Manufacturing Output Index registered 42.7 in September, well below the 48.5 posted for August.

The sharpest decline in production was recorded for Spain, followed by the US, Japan and then the UK. Although the Eurozone Output Index sank to its second-lowest reading in the survey history, it was above the global average for the first time in four months. Within the euro area, France and Spain saw output fall at survey record rates, while in Italy and Ireland the contractions were the second and third most marked in their respective series. Germany, which until recently was the main growth engine of the Eurozone, saw production fall for the second month running and to the greatest extent for six years. Manufacturing activity in Japan fell to the lowest in over 6- years with the Nomura/JMMA Japan Purchasing Managers Index declining to a seasonally adjusted 44.3 in September from 46.9 in August.

At 40.8 in September, the Global Manufacturing New Orders Index posted a reading well below the neutral 50.0 mark. JP Morgan noted that the trends in new work received were especially weak in Spain, the UK, France and the US, with the all bar the latter seeing new orders fall at a series record pace (for the US it was the strongest drop since January 2001). The downturn of the sector led to further job losses in September, with the rate of reduction in employment the fastest since February 2002. Conditions in the Spanish, the UK and the US manufacturing labour markets were especially weak.

Russian manufacturing shrank for a second month in September, and in so doing registered its first back-to-back contraction since November 1998, as companies cut jobs and growth in new orders slowed, according to the latest VTB Bank Europe Purchasing Managers Report. The PMI came in at a seasonally adjusted 49.8, compared with 49.4 in August. The August reading was the lowest figure in three and a half years, according to the bank statement. On such indexes a figure above 50 indicates growth while one below 50 indicates a contraction.

Manufacturing in China contracted for a second month in August, underscoring the risk of a slump in the world's fourth-biggest economy. The Purchasing Managers' Index was a seasonally adjusted 48.4, unchanged from July, the China Federation of Logistics and Purchasing said today in an e-mailed statement.




Brazil's industrial output fell a seasonally-adjusted 1.3 percent in August, the largest monthly drop this year, bolstering expectations the central bank will ease monetary tightening in response to slowing economic growth. On an annual basis, output rose 2 percent, the slowest pace since March, according to data from the national statistics agency in Rio de Janeiro.




So basically this is where we get to learn what a global credit crunch means in terms of output and economic growth.




Current Account and Trade Deficit

The Rupee has also been dropping in reaction to India's deteriorating current account situation. The current account deficit increased to $10.7 billion in the second quarter of 2008 from a $1.04 billion gap in the previous quarter,according to data from the Reserve Bank of India last week.

India's trade deficit almost doubled to a record in August as a surge in crude oil prices increased the import bill and overseas sales of goods slowed. The trade deficit widened to $13.9 billion from $7.2 billion a year earlier, according to data from the Ministry of Commerce and Industry. Imports grew 51 percent, the fastest gain in seven months, to $29.9 billion, while exports expanded 27 percent to $16 billion.

A near doubling of oil prices has boosted import costs, since India relies on overseas purchases for three-quarters of its energy needs. India paid an average $8 billion a month this year for oil imports, up from $5.5 billion in 2007, as crude oil costs surged to a record $147 a barrel on July 11. In India, the 35 percent drop in oil prices since July has been partially offset by the decline in the rupee to a five-year low. India's oil imports in August rose 77 percent to $10.9 billion as refiners paid more for crude oil purchased overseas. Non-oil imports gained 40 percent to $18.9 billion. Imports in the five months ended August 31 rose 38 percent to $130.3 billion from $94.6 billion a year ago. That took the trade deficit to $49.2 billion, compared with $34.5 billion in the same period a year earlier.

Overseas sales of Indian goods in the five months to August 31 grew 35 percent to $81.2 billion, compared with $60.1 billion, the statement said.


Overseas sales of Indian goods in the five months to August 31 grew 35 percent to $81.2 billion, compared with $60.1 billion, the statement said.

India's current account deficit widened to a record in the three months to June as a surge in crude oil prices increased the nation's import bill. The shortfall, the amount by which imports exceed exports, remittances and other income from abroad, increased to $10.72 billion from a $1.04 billion gap in the previous quarter, the Reserve Bank of India said in a statement in Mumbai. Analysts expected a deficit of $11.52 billion.

India's financial system is evidently showing signs of strain as the impact of both local policy tightening and the global credit crunch steadily take hold. The rate at which Indian banks lend to each other climbed to an 18-month high of 15.125 percent on Sept. 19, following the failure of Lehman Brothers Holdings and the U.S. government takeover of American International Group. As a result the Indian finance ministry responded by allowing companies building roads, ports, utilities and other infrastructure projects to borrow more overseas - thus giving them access to cheaper funds - while the central bank announced measures to boost cash in India's financial system.

Indian banks have borrowed an average 642.8 billion rupees from the central bank in the last two weeks, more than five times the average 113 billion rupees in the previous fortnight, further indicating a shortage of funds in the banking system.

Foreign Exchange Reserves Rise Slightly

India’s foreign-exchange reserves rose by the most in five months in the week ended September 19, according to the latest data from the Reserve Bank of India. The rise has surprised many observers, but it should be borne in mind that it coincided with the rise in the dollar against a number of other currencies (and in particular the euro, which the RBI also holds in reserves) on the back of the euphoria about the possible bailout of the US financial system.

Total foreign-exchange reserves rose by $2.51 billion to $292 billion in the week ended Sept 19, while foreign-currency assets - which form the lions share of the reserves -climbed $2.5 billion to $282.8 billion during the week. As we can see from the chart (below) the value of foreign exchange reserves has stabilised since mid-August, so the rot, it would seem, has definitely stopped. I think it is significant that we saw a positive initial response across the key emerging markets to the proposed US bailout, and while we are now seeing considerable volatility as people become nervous about whether it will, finally, arrive.I think when the package is introduced the key emerging market economies will be the principal beneficiaries, as the so called "risk appetite" will bounce back, especially given that the aftermath of the package will be a lower growth period in the OECD economies as the cost of the bailout has to be assimilated.




Even given the recent decline, it is important to bear in mind that India's foreign-exchange reserves, including overseas currencies, gold and special drawing rights with the International Monetary Fund, have increased $56.1 billion in the past year.

Money Supply Continues To Grow

Meanwhile, money supply in India grew year on year by 21 % in the two weeks ended Sept. 12, same rate as in the previous fortnight, according to data from the RBI. M3 - which largely consists of currency in public circulation, bank deposits and money invested in other saving plans, stood at Rs 42,26,143 crore as on September 12.

M3 has been rising at an average rate of 21% since the current fiscal year began on April 1, and has been consistently above the central bank’s target of 16.5% to 17% for the fiscal year ending March. At the same time, total bank loans rose by Rs 32,914 crore in the two weeks ended Sept 12, the biggest fortnightly increase since March. Outstanding bank credit was up by 26.1% year on year and reached Rs 24, 91,248 crore. Food credit was up by Rs 847 crore to Rs 45,190 crore, while non-food credit increased by Rs 32,067 crore to Rs24,46,058 crore. Total bank deposits rose by 22.5%, or Rs 6, 25,282 crore, in the same period to Rs reach 34, 05,377 crore.


The Rupee Weakens Again


The rupee has declined almost 17 percent so far this year and is the second-worst performer among the ten most-active Asian currencies excluding the yen. This week it declined for the seventh consecutive week, the longest run in more than 2 1/2 years. The rupee was down 5.6 percent in September, and is thus headed for its worst month since the Asian financial crisis in 1997.

Foreign investors were net sellers of Indian stocks for a fifth straight month in September, and have offloaded $9 billion so far this year, according to data from the Securities & Exchange Board of India. They bought a record $17.2 billion in stocks last year. Indian stocks fell, with the benchmark posting its biggest weekly drop in six months, after talks on a U.S. credit market rescue plan stalled and Washington Mutual Inc. became the biggest bank failure in American history.



The Bombay Stock Exchange's Sensitive Index, or Sensex, fell 445, or 3.3 percent, to 13,102.18. The index had its biggest weekly drop since the week ended March 7. The S&P CNX Nifty Index on the National Stock Exchange slid 125.30, or 3.1 percent, to 3,985.25. The BSE 200 Index declined 3.2 percent to 1,590.58. Nifty futures for October delivery fell 3.9 percent to 3,995.

Standard & Poor's 500 Index futures slid 1.7 percent when negotiations on a $700 billion bailout plan for U.S. credit markets were thrown into doubt by a group of House Republicans who said the plan drawn up by Treasury Secretary Henry Paulson wouldn't work.

The decline in Indian stocks is more a reflection of global sentiment towards emerging market stocks and bonds than it is an indicator of any specific local issue. The MSCI Emerging Markets Index of stocks has been falling since last May - as can be seen in the chart below - and dropped 1.74% percent on Friday to 823.694, its lowest level since Sept. 15. The index is now down 13.6% so far this month, and 33.87% so far this year. But if you look carefully you can see that it peaked up again after 20th September, as speculation increased that there would be a major bailout of the US banking and insurance sector. This bounce back unwound towards the end of last week, as uncertainty grew about the arrival of the package.


A similar picture can be seen of the JPMorgan EMBI+ emerging bonds index (see below), which has been down significantly since the end of August. Since the US package seems now about to be approved for the US congress, as a result we should see sentiment improve significantly, and India may well be one of the principal beneficiaries of this change in sentiment. The coming weeks should clear all this up quite quickly.

To what extent do you feel the U.S. economic slowdown has affected foreign banks in Europe at this time?

The US economic slowdown has hurt European banks immensely, for a couple of reasons. First, many European banks conduct a significant portion of their business in the US. Second, the slowdown in the US is spreading to Europe and the UK, and these countries are experiencing the same types of problems as in the US.

For example, Britain, Ireland, and Spain are witnessing a substantial contraction in their housing markets, which has pushed both sales and pricing into negative territory. This is particularly problematic for Spain and Ireland, where residential investment accounts for 9% and 12% of their economies, respectively, compared to 5% in Britain and 4% in the United States. This is now spreading to other parts of the economy, with the result that GDP is expected to slow.

The European Commission (EC) recently announced that Germany, Spain, and the UK economies would fall into recession this year. The German economy, the largest in euro zone, contracted 0.5% in the second quarter and the EC forecast negative growth of 0.2% for the third quarter. Spain is forecast to record negative growths of 0.1% and 0.3% in the third and fourth quarters, respectively. The UK economy is also expected to experience contractions of 0.2% each in the third and fourth quarters of 2008.

From a broader perspective, the EC forecast gross domestic product growth of 1.3% for this year in the Euro Zone, down from 1.7% previously when the EC saw no risk of recession in Europe. The EC forecast growth of 1.4% for the broader EU, which includes Britain, Sweden, Denmark and several countries in the formerly communist eastern Europe, down from 2.0% before.

This has been reflected in stock prices. For non-US banks in the Zacks universe, the median price decline year to date is 26.7% compared to a 14.9% decrease for the S&P 500. For European and UK banks only in the Zacks universe, the price drop is even worse at 38.0%.

Asia of course is boasting continually strong economic growth. Of the Asian banks under your coverage, which are benefiting most from this?

While it is true that certain Asian economies continue to grow at a reasonable pace, they are still experiencing slowdowns relative to recent growth in their economies. Others are not growing at all. For example, the Reserve Bank of India, expects GDP growth in India to fall to around 8% in fiscal 2009 (ending March) from 9% in fiscal 2008.

In Japan, the economy contracted 0.7% in the 2008 April-June quarter, translating into an annualized drop of 3.0%. This decline reflected sluggish exports and slowing corporate capital spending.

As to stock performance, Asian banks in the Zacks universe experienced a median year-to-date 26.5% decrease, with banks in India down 42.0% year to date and the banks in Japan down 16.3%.

Another strong growth area is Latin America. Do you see banks strengthening following Brazil’s upgrade to investment-level status?

Ironically, since Brazil was upgraded to investment grade by Standard & Poor’s on April 30, 2008 (followed by Fitch on May 30, 2008), the stock market has tanked. The BOVESPA index in Brazil has slumped 24.5% since April 30, while the S&P 500 is down only 9.9% over the same period. This reflects declining commodity prices, risk aversion to emerging markets in general, and global economic slowing.

For Latin American banks in the Zacks universe, the median stock price decline year to date is 21.4%, compared to 14.9% for the S&P 500.

In time, we believe that the upgrade to investment grade will be helpful to Brazil and Brazilian banks. However, this is currently being overshadowed by events on the global stage.

Overall, which are your top Buys/Sells these days?

I have two Buys: Banco Santander Central Hispano, S.A. (STD) and Unibanco - Uniao de Bancos Brasileiros S.A. (UBB).

Banco Santander Central Hispano, S.A. is the largest bank in the euro zone and the fifth largest in the world, based upon profit. Santander had total assets of €913 billion (US$1.3 trillion) in assets as of December 31, 2007, and is among the highest-rated banks in the world following recent credit rating upgrades. Banco Santander’s long-term credit ratings are AA by S&P and Fitch and Aa1 by Moody’s. We believe that Santander’s valuation is lower than it should be given its strong growth prospects relative to global peers.

Unibanco - Uniao de Bancos Brasileiros S.A. is Brazil’s fourth largest private bank, with total assets of R$150 billion (US$84 billion) at December 31, 2007. The bank offers a diverse array of products and services. Unibanco’s long-term credit ratings are Baa3 by Moody’s, BBB- by Standard & Poor’s, and BBB- by Fitch. UBB represents a good value relative to its strong growth prospects and also vis-à-vis Brazilian peers, Banco Itau (ITU) and Banco Bradesco (BBD).

Ann Heffron, CFA is a senior analyst covering foreign financial institutions for Zacks Equity Research.
"UBB" Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research

While Chidambaram is evidently right here in big picture terms, it is important not to underplay the seriousness of the problem which is being posed by inflation at the present time, nor should he try to deny the significance of the deteriorating fiscal outlook in India, since, as he is indicating, India is far from being in recession, or even in danger of a serious slowdown, so it is important that these twin problems of fiscal deficit and spiralling inflation be gotten under control now.

The decision by Fitch to revise India's local currency outlook to negative from stable is based on a perception by the ratings agency of a worsening fiscal position and rising inflation. The assignment of a negative outlook suggests an increase in the sovereign default rate may follow if the problem is not corrected, and this would affect the flow of funds - and hence investment - into India. The new revised local currency rating will be 'BBB-' with negative outlook as against the earlier 'BBB-' with stable outlook.

James McCormack - Head of Asia Sovereign Ratings for Fitch - is quoted as saying the "the revision to the local currency outlook is based on a considerable deterioration in the central government's fiscal position in 2008-09, combined with a notable increase in government debt issuance to finance subsidies not captured in the budget." The rating agency has revised its economic growth forecast for 2008-09 from just under 9% to 7.7%, and this seems to be not unreasonable.

Fitch did, however, continue to affirm India's long term foreign currency Issuer Default Rating (IDR) at 'BBB-' with stable outlook, its short-term foreign currency IDR at F3 and the country ceiling at 'BBB-'. The assignment of a local currency negative outlook thus means that agency has effectively put India on watch with the implication that is the underlying causes (inflation and the underlying dynamics of the fiscal deficit) are not addressed over the next 12 to 18 months, the rating could be subject to downgrade. Obviously this is a warning shot as much as anything else, and an attempt to put pressure on the Indian government.

India's total central government deficit - including the subsidies to oil companies - may surpass 6.5% of GDP in the current financial. Even the budgeted deficit could rise to 4.5% of GDP from the projected 2.8% of GDP due to higher on-budget subsidies, together with rising interest payments and public sector wages. In addition to this, Fitch argue that bonds issued to oil and fertilizer companies may well reach 2% of GDP in 2008-09.

Higher oil prices have raised India's oil import bill dramatically in last three years, and the goods trade deficit was equivalent to 7.7% of GDP in 2007-08. The current account deficit, however, was much smaller at around 1.5% of GDP, due to high services exports and the strong remittances inflow (estimated by the World Bank at 2.8% of GDP in 2006).




Fitch forecast that the trade deficit will widen further in 2008-09 to 8.2% of GDP, although they suggest the current account deficit may remain broadly unchanged at 1.5%. The IMF do not seem to be so sanguine on this as Fitch, however, (although please note they are using calender and not financial year data) since the April World Economic Outlook forecast was for a CA deficit 2008 of 3% of GDP (they are also forecasting 7.9% GDP growth WY 2008). As can be seen in the chart (below), whichever way you look at it India's external position is certainly deteriorating.




So their is a slight disconnect here, with a deteriorating fiscal side and a comparatively strong external position, which is what is being reflected in the credit rating differential between local and foreign currency.

In the past four years, the three rating agencies have raised India to investment grade on the back of its positive external financial ratios, improving budget deficit and robust GDP growth. The external position remains strong, but analysts are worried that domestic problems and a flight of capital could combine to bring down the country's credit standing.

Earlier this month, Standard and Poor's said the rising cost of subsidies, debt write-offs and public sector wage rises had increased the risk of a downgrade of the BBB-minus domestic debt rating - the lowest investment-grade rating - they assign to India.

While Standard and Poor's, like Fitch, rates both India's foreign and domestic debt at BBB-minus, Moody's rates its domestic debt two notches lower than its foreign rating. Foreign funds have already cut their investments in Indian debt and stock markets by $6.3 billion this year to $31.2 billion. Any further downgrade will only serve to speed this outflow.

While Chidambaram is evidently right here in big picture terms, it is important not to underplay the seriousness of the problem which is being posed by inflation at the present time, nor should he try to deny the significance of the deteriorating fiscal outlook in India, since, as he is indicating, India is far from being in recession, or even in danger of a serious slowdown, so it is important that these twin problems of fiscal deficit and spiralling inflation be gotten under control now.

The decision by Fitch to revise India's local currency outlook to negative from stable is based on a perception by the ratings agency of a worsening fiscal position and rising inflation. The assignment of a negative outlook suggests an increase in the sovereign default rate may follow if the problem is not corrected, and this would affect the flow of funds - and hence investment - into India. The new revised local currency rating will be 'BBB-' with negative outlook as against the earlier 'BBB-' with stable outlook.

James McCormack - Head of Asia Sovereign Ratings for Fitch - is quoted as saying the "the revision to the local currency outlook is based on a considerable deterioration in the central government's fiscal position in 2008-09, combined with a notable increase in government debt issuance to finance subsidies not captured in the budget." The rating agency has revised its economic growth forecast for 2008-09 from just under 9% to 7.7%, and this seems to be not unreasonable.

Fitch did, however, continue to affirm India's long term foreign currency Issuer Default Rating (IDR) at 'BBB-' with stable outlook, its short-term foreign currency IDR at F3 and the country ceiling at 'BBB-'. The assignment of a local currency negative outlook thus means that agency has effectively put India on watch with the implication that is the underlying causes (inflation and the underlying dynamics of the fiscal deficit) are not addressed over the next 12 to 18 months, the rating could be subject to downgrade. Obviously this is a warning shot as much as anything else, and an attempt to put pressure on the Indian government.

India's total central government deficit - including the subsidies to oil companies - may surpass 6.5% of GDP in the current financial. Even the budgeted deficit could rise to 4.5% of GDP from the projected 2.8% of GDP due to higher on-budget subsidies, together with rising interest payments and public sector wages. In addition to this, Fitch argue that bonds issued to oil and fertilizer companies may well reach 2% of GDP in 2008-09.

Higher oil prices have raised India's oil import bill dramatically in last three years, and the goods trade deficit was equivalent to 7.7% of GDP in 2007-08. The current account deficit, however, was much smaller at around 1.5% of GDP, due to high services exports and the strong remittances inflow (estimated by the World Bank at 2.8% of GDP in 2006).




Fitch forecast that the trade deficit will widen further in 2008-09 to 8.2% of GDP, although they suggest the current account deficit may remain broadly unchanged at 1.5%. The IMF do not seem to be so sanguine on this as Fitch, however, (although please note they are using calender and not financial year data) since the April World Economic Outlook forecast was for a CA deficit 2008 of 3% of GDP (they are also forecasting 7.9% GDP growth WY 2008). As can be seen in the chart (below), whichever way you look at it India's external position is certainly deteriorating.




So their is a slight disconnect here, with a deteriorating fiscal side and a comparatively strong external position, which is what is being reflected in the credit rating differential between local and foreign currency.

In the past four years, the three rating agencies have raised India to investment grade on the back of its positive external financial ratios, improving budget deficit and robust GDP growth. The external position remains strong, but analysts are worried that domestic problems and a flight of capital could combine to bring down the country's credit standing.

Earlier this month, Standard and Poor's said the rising cost of subsidies, debt write-offs and public sector wage rises had increased the risk of a downgrade of the BBB-minus domestic debt rating - the lowest investment-grade rating - they assign to India.

While Standard and Poor's, like Fitch, rates both India's foreign and domestic debt at BBB-minus, Moody's rates its domestic debt two notches lower than its foreign rating. Foreign funds have already cut their investments in Indian debt and stock markets by $6.3 billion this year to $31.2 billion. Any further downgrade will only serve to speed this outflow.

India's central bank next meets to review monetary policy on July 29. Last month the bank raised its benchmark interest rate twice to a six-year high of 8.5 percent and lifted its cash reserve ratio to 8.75 percent, in an attempt to slow the rate of increase in the money supply.

In a sign that the tightening may in fact be working liquidity seems to have been under pressure all week in the Indian banking system as banks had to make additional deposits with the Reserve Bank of India (RBI) to meet stricter cash reserve requirements from Saturday. Some Indian comentaters were jokingly saying that money seemed to have disappeared down black holes in the inter-bank market. From a position of surplus funds last week, several banks have run out of headroom this weel to borrow from the Reserve Bank of India (RBI) after collectively raising Rs 30,000 crore from the central bank.

As a result, interest rates for overnight money have breached the higher end of borrowing and lending rates targeted by the RBI and are running at over 9 per cent. Bankers attribute the cash shortage to three factors. One, banks have been asked to maintain higher cash balances with RBI. Second, the central bank has been selling dollars which results in a dip in rupee funds. And third, the government is sitting on funds worth over Rs 16,613 crore raised by way of taxes.

Industrial Output

India's industrial production grew at its slowest pace in more than six years in May as spiraling prices and tightening credit prompted consumers to cut back on purchases of cars, fridges and other manufactured goods. Production at factories, utilities and mines was up 3.8 percent from a year earlier after gaining a revised 6.2 percent in April, accodring to the statistics office in New Delhi today. Manufacturing, which accounts for about 80 percent of India's industrial production, was up 3.9 percent in May. Electricity output rose 2 percent, mining grew 5.5 percent. Consumer-goods production increased 7.2 percent.



Credit Downgrade Looming?

India's credit rating may be cut to ``speculative grade'' if faster inflation and higher government spending ahead of next year's election lead to further deterioration in the budget deficit, Standard & Poor's said today.

India's long-term local currency debt is rated BBB- by S&P, the lowest investment grade. A one-notch drop in its ranking would place India on par with Indonesia, El Salvador and Guatemala. According to the S&P statement:

``Political compulsions may make it difficult for the government to take timely measures to staunch fiscal or monetary slippages...Failure to respond adequately to negative developments could point to a sustained deterioration in macroeconomic stability and increase the probability that the government's ratings could be lowered to speculative grade.''

Reserve Bank of India governor Yaga Venugopal Reddy said yesterday that prospects of more food output this year and curbs on farm exports will boost supplies and help tame inflation, playing down chances of higher interest rates. Still, India's benchmark 10-year bond yield was unchanged at 8.23 percent, the highest in a year, after the inflation data. Inflation was mainly driven by higher costs of fuel, power and light, basic metals including steel and food grains.


India, which imports 70 percent of its oil, increased prices for gasoline by 11 percent, diesel by 9 percent and cooking gas by 17 percent after oil reached a record $135.09 a barrel in New York on May 22. India previously raised fuel prices in February, the first time since June 2006.

The changes in fuel prices announced on June 4 will be reflected in the inflation data due for release on June 20.

India's food grain production may increase to a record 227.3 million tons in the year ending June, helped by bumper rice, wheat and lentils output, the agriculture ministry said in April. It may receive an additional boost as rainfall in the four-month monsoon season that started last week is forecast to be adequate.


Foreign Exchange Reserves

India’s foreign-exchange reserves fell during the week ended May 30 by $1.6 billion to $314.6 billion, according to the Reserve Bank of India yesterday. This was the fifth week this year that this has happened, which is partly an indication that the pace of capital flows has slowed, and partly a reflection of the falling value of the rupee. Foreign-currency assets fell $1.3 billion to $304.9 billion. Gold reserves fell $225 million to $9.2 billion while its reserves with the International Monetary Fund dropped $4 million to $526 million.