Cisco Systems’ (NASDAQ:CSCO) CEO John Chambers said he now sees a global economic recovery, fueling a rebound in the company’s sales this quarter.  The Dow average jumped 203 points, or 2%, while the tech-heavy NASDAQ, riding high on Cisco’s forecast, bolted up 50 points or about 2.4%. 

All ten S&P 500 industry groups ended in the green, with banking shares advancing 2.6% as analyst Dick Bove of Rochdale Securities noted the group will double by the end of 2010.  Technology shares advanced 2.2%.  Qualcomm Inc. (NASDAQ:QCOM) jumped 5.4% to $43.85 and Microchip Technology Inc. (NASDAQ:MCHP) gained 3.9% to $25.37 after it was raised to “buy" from “neutral" at FTN Equity Capital Markets.  Research in Motion (NASDAQ:RIMM) jumped on news of its $1.2 billion share buyback plan as well as a Standard & Poor's ratings increase to "buy" from "hold."  A report on the semiconductor industry projected sales growth of 10% in 2010.

On the retail sales front, action was largely mixed.  About half of firms that reported numbers missed expectations as the growth proved selective. Costco (NASDAQ:COST) posted 3% same-store-sales gains excluding gasoline results; Gap (NYSE:GPS) registered a 4% sales growth and raised its third quarter guidance.  Luxury retailers Nordstrom (NYSE:JWN) showed surprising gains with its 6.5% sales increase.

On the political front, President Obama is expected to sign into law today an extension and broadening of the homebuyers' tax credits, to include both first-time buyers' credits of $8,000, and existing homeowners, in residence for over five years, of $6,500.  The measure also includes an extension of unemployment benefits by up to twenty weeks.

Standard & Poor's will consider creating a commodity futures index that excludes commodities listed in the United States, according to a new report in the Financial Times. Michael McGlone, head of the S&P GSCI, says the firm has been flooded with requests from clients concerned about the impact of the expected regulatory crackdown on commodity investors by the Commodity Futures Trading Commission.

The CFTC is widely expected to enact new rules this fall that would severely limit the size of positions that investors can take in the commodity futures market.

Many have predicted that such a crackdown would only serve to move commodity investors overseas, and the announcement by S&P is the latest sign that such a migration may in fact take place.

The S&P GSCI is the world's most popular commodity index. Approximately $60 billion is currently benchmarked against the index.

Read the full story here.

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).

Get the most recent insight from Zacks Equity Research with the free Profit from the Pros newsletter: http://at.zacks.com/?id=5513

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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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=5517

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=5518.

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As previously announced, in order to preserve cash and statutory surplus at Ambac Assurance, it has discontinued the payment of monthly dividends on its outstanding auction market preferred shares.
 
Following second quarter results Standard & Poor's revised its outlook on Ambac Assurance's ratings to negative on Friday, citing deterioration of the firm's insurance portfolio.
 
S&P also cited further losses due to exposure to collateralized debt obligations resulting from distressed debt exchanges. Losses and reserve additions are expected to eat into the company’s capital levels.

Standard & Poor's Upgrades McClatchy's Corporate Rating

On Tuesday June 30, 2009, Standard & Poor's raised its corporate credit rating for newspaper publisher McClatchy (MNI) to "CC" (highly vulnerable) from "SD," (selective default). The rating agency still holds a negative view on the company on account of its possible restructuring.

Last Friday, June 26, both Standard & Poor's and Moody's Investor Services had lowered their corporate ratings on the company following the debt exchange offer announced by McClatchy. Moody's lowered its corporate rating to "Caa2" from "Caa1", whereas Standard & Poor's lowered its credit rating to "SD" from "CC." McClatchy offered to pay $60 million in cash and issue $175 million in new notes, with a 15.75% coupon rate due 2014, to replace $1.15 billion in debt owed to its bondholders.

The reason behind downgrading was the company's dubious ability to repay debt and high default risk. On the announcement of the completion of the debt exchange offer on June 26, only $102.9 million in debt had been tendered, (approximately 9% of $1.15 billion).

The recent marginal amendment to "CC" from "SD," by Standard & Poor's was based on McClatchy's announcement that it exchanged $24.2 million in new senior notes and $3.4 million in cash, for a total of $102.9 million of senior notes.

McClatchy like other newspaper companies - The New York Times Company (NYT), Washington Post Co (WPO), Gannett Co (GCI) and Journal Communications (JRN) is in the midst of a secular and cyclical slowdown in print advertising. McClatchy, in a race for survival, is building its Internet operations, cutting costs, reducing its debt burden and has recently suspended its dividend.

However, postponement of $190 million land sale erodes visibility to any relief. We maintain a Sell rating on the stock with a six-month target price of $0.50.

Chicago, IL - June 19, 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: Wells Fargo (WFC), U.S. Bancorp (USB), BB&T (BBT), Fifth Third Bancorp (FITB) and KeyCorp (KEY).

Get the most recent insight from Zacks Equity Research with the free Profit from the Pros newsletter: http://at.zacks.com/?id=5513

Here are highlights from Thursday's Analyst Blog:

S&P Downgrades 18 Banks

Standard & Poor's Ratings Services has downgraded some of the largest banks in view of the Obama Administration's regulatory revamp plan, which will result in tighter regulation and lower profits for the industry.

Among the banks which were downgraded were Wells Fargo (WFC), U.S. Bancorp (USB), BB&T (BBT), Fifth Third Bancorp (FITB) and KeyCorp (KEY).

Yesterday President Obama unveiled his comprehensive regulatory revamp plan, which proposes to designate the Federal Reserve as the consolidated supervisor of large, systemically important institutions and also to require higher capital standards and greater oversight for all banks.

S&P also downgraded five smaller banks to junk status and still has negative outlooks on many U.S. banks, suggesting ratings could be downgraded further. The rating agency said that loan losses in the overall banking industry could increase beyond current expectations.

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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=5517

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=5518.

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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

Pre-market futures suggest a flat opening as traders look for concrete signs of an economic recovery, amid fears of increased government interventions and a crushed economic rebound.

Commodities and financial shares led the decliners yesterday, but healthcare stocks rose after Democratic leaders began working on a healthcare overhaul that would make it mandatory for all Americans to have health insurance coverage.  Shares traded in a narrow range, swinging between gains and losses.  Among S&P industry groups, financials led the declining issues with a 2.2% fall.  Oil and basic materials both recorded a 1.6% fall.  Stocks of consumer services companies gained 1.1%, with drug retailers rising 2.3%.

Among financial sector issues, Bank of America (NYSE:BAC) fell 3.4%, Citigroup (NYSE:C) plunged 5.2% and Wells Fargo (NYSE:WFC) recording a 5.4% decline.  JP Morgan (NYSE:JPM), Goldman Sachs (NYSE:GS), State Street (NYSE:STT) and Morgan Stanley (NYSE:MS) repaid funds borrowed under the government's TARP program.  The Obama Administration's proposed plan for a major financial system overhaul to counter the "cascade of mistakes and missed opportunities of the past decade," however, could not boost sentiments, even as $68 billion of TARP funds were repaid on Wednesday.  S&P, on its part, cited less favorable conditions industry-wide and greater volatility in financial markets for its decision to lower ratings on banks. Banks mentioned included Regions Financial (NYSE:RF), Wells Fargo (NYSE:WFC), Capitol One Financial (NYSE:COF) and PNC (NYSE:PNC).

Technology stocks, nevertheless, showed some resistance, riding high on a number of analyst upgrades and a better-than-expected forecast from Adobe Systems (NASDAQ:ADBE). Merrill/BoA upended its rating on Texas Instruments (NYSE:TXN) from "underperform" to its US I Focus List with a $27 target, noting its expected margin expansion even as the firm faces only modest cyclical recovery prospects. Qualcomm (NASDAQ:QCOM) rose after Goldman Sachs (NYSE:GS) added the firm to its conviction buy list, citing a raised global handset forecast along with an undervalued royalty business.

Chevron (NYSE:CVX) shares declined 1.5% after weekly crude stockpiles showed a larger-than-expected decline of 3.87 million barrels.

Among corporate releases slated for today are JM Smucker (NYSE:SJM) and Discover Financial Services (NYSE:DFS); Research in Motion (NASDAQ:RIMM) is expected to report results after today's close. Treasury Secretary Geithner is scheduled to testify in a House committee hearing on financial regulation. Jefferies' Healthcare Conference continues for its third and final session.

First, let me begin by stating that I make no claim whatever to be able to predict whether stock prices will go up or down over the near term or when the market bottom might be reached. In part that humility is inspired by a large academic literature demonstrating that it's very hard to predict stock prices with formal statistical models.

The one element of predictability for which I do see some support in the academic literature is the claim that the price/dividend or price/earnings ratios do not wander too far from their long-run historical averages. The implication of that finding is that when prices are high relative to dividends and earnings, you can expect below-average stock returns. The graph below, which I've updated from Robert Shiller's historical data base, conveys some sense of that relation and where we stand at the moment.

Ratio of value of S&P 500 to the average earnings of those companies over the previous 10 years, adapted and updated from Shiller. Blue line: ratio of monthly average S&P 500 index (deflated by current CPI) to 10-year average of most recent monthly earnings (each deflated by CPI for that month). April-June 2008 earnings from straight-line monthly interpolation of 12-month as reported quarterly earnings from Standard & Poor's. November 2008 value for S&P is the November 12 close. Red line: historical average (16.34).

We're currently at a P/E around 14, a bit below the historical long-run average P/E of 16.3, meaning you could expect a slightly above-average return from buying stocks now. Specifically, if companies were to pay their shareholders all the income to which they're entitled in the form of a dividend, that dividend would give you better than a 7% immediate return, and over the long run, the dividend would grow at least at the rate of inflation. That's a return that proved more than sufficient compensation to investors for the extra risk they faced from stocks over the last century and a half, which included plenty of times tougher than those we're going through at the moment. To me, a 7% real yield sounds like an attractive investment, despite the risk, and certainly dominates most other alternatives as a long-run vehicle for saving for retirement.

But isn't it possible that the P/E will decline further, to much below the historical average, before the carnage is finished? Sure it is. But here's another way to look at that. Companies in fact don't turn over 100% of their profits to the shareholders as dividends, but re-invest some of those profits in the hope that future earnings will increase faster than inflation. The typical stock in the S&P 500 today is giving you a 3% dividend, which you could hope will grow 3% faster than inflation over the long run as a consequence of the reinvested profits. That again to me sounds like a very nice investment. You can buy and hold for the long term with the philosophy that it's that stream of growing dividends that you really want and are going to get. Let the market price of the stock go up or down from here wherever the psychology of the market may take it-- you've still received what you paid for, and it's a reasonable deal.

But if stocks really weren't such a good bargain a few years ago, why was the market valuing them as highly as it did? Shiller's view is that investors simply miscalculated, misled by the fact that everybody else seemed to think they were worth that much. According to that philosophy, recessions and market busts are the time you should be buying. Here's how Warren Buffett described how he put that into practice last month:

I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds....

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.

John Cochrane instead attributes the big swings in the historical P/E to changes over time in the compensation that investors require for risk. According to Cochrane's view, people understood that they'd be getting less than a 6% expected real yield on stocks if they bought a few years ago, and that stocks purchased today offer you better than 6%. John summarizes his investment advice this way:

If you're less leveraged, less affected by recessions, and have a longer horizon than the average, it makes sense to buy [now]. If you're more leveraged, more affected by recession or have a shorter horizon, it might be the time to sell, even though you might be cashing out at the bottom.

As for which stocks to hold, one unquestionably sound investing principle is the benefit of diversification. But if you pay a big fee to somebody to manage your portfolio, you're out that fee before you start, and the evidence is to me unpersuasive that high-priced fund managers can systematically outperform the market. So my advice for most people is to use broad funds that mindlessly, mechanically, and cheaply do something simple like try to hold a portfolio mimicking the S&P 500. Broader diversification into smaller companies and internationally is also an extremely good idea. My 403(b) invests 1/4 each in the following funds:

• Fidelity Emerging Markets
• Spartan International Index
• Spartan 500 Index
• Fidelity Mid-Cap Growth

Yes, they've all tanked this year, but here's the bright side-- those monthly payments I'm still putting in are now more likely to get me something for my money!

We've also been saving some money beyond the 403(b) limits, and we've always just had this in T-bills. I felt pretty silly describing this part of my portfolio as a professional economist, but I was fearful of putting any more into stocks, given the graph above. Now I'm feeling pretty proud of myself for being so silly.

But my wife and I also feel that now is the time to move that money out of Treasuries and into the stock market. Outside of a 401(k) or 403(b), one disadvantage of stock index funds is that you're taxed on realized capital gains as they arrive, whereas if you buy and hold individual stocks, you can postpone the capital gains tax. Because of compound interest, this can make a big difference. For example, if you face a 50% tax rate assessed every year on the gains from your 6% return, after tax you're re-investing 3% for a 20-year cumulative return of [(1.03)^20 -1] or an 81% total return. On the other hand, if you can hold that 6% as unrealized capital gains and only pay the 50% tax when you sell, you've got 0.5[(1.06)^20 - 1] = 110% total return.

So we've been buying stocks over the last month, and greeted yesterday's carnage as good news for us in that the downturn allowed us to execute two more of our outstanding limit buy orders. I didn't do nearly enough research on individual stocks, but know the kind of equities I wanted-- a P/E of maybe 11, dividend of at least 3%, long record of strong growth, a solid balance sheet, and a company that I knew at least something about personally. Here's what we've bought (some of which meet those criteria better than others) along with some brief annotations on each:

• 3M COMPANY (MMM). Growth comes from continually developing new products-- a lot more than Scotch tape.
• Apache Corp (APA). Yes, I know spot oil is below $60, but once the world recovers from this downturn, there's room for quite a few more cars in China, and Apache should actually have some oil to sell.
• AT&T (T): I'm a sucker for the 6% dividend.
• Delhaize Group (DEG): Owns a number of grocery store chains; the ones I've used I like.
• Home Depot (HD): They should survive, and when growth resumes, they have a very successful strategy.
• Eli Lilly (LLY): Downside is likely legislation targeting drug company profits. But I like the long record of profitable R&D and 5.5% dividend.
• Walgreen (WAG): Drugstores too will survive.
• Johnson Controls (JCI): Downside: U.S. auto industry will be absolutely hammered. Upside: I don't think Congress will allow domestic manufacturing to be completely eliminated, and JCI will be one of the survivors. Also may benefit from Obama's green investments.

We plan on buying more next month. One thing that's clearly underweighted in the little portfolio above is stocks in the financial sector. But in the brief time I've spent looking at a dozen or so of these, I didn't find one that didn't have some bad smell to it. What I'd really like is a regional bank that's been run with a paleolithic conservatism during the go-go years. Any such entity would be in a good position to profit mightily from the current mess.

I look forward to hearing other suggestions or investment philosophy from our readers in the comment section below.

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With investors fleeing to the security of Treasury bonds, Standard & Poor's indexing services unit has been busy lately expanding its benchmarks focusing on that part of fixed income.

On Monday, S&P launched the S&P/Citigroup International Treasury Bond Index Series. It follows introductions of the S&P U.S. Commercial Paper Index and the S&P/LSTA U.S. Leveraged Loan 100 Index.

The new S&P series could very well prove to add another option for individual investors. Currently, the only way exchange-traded funds investors can access foreign Treasuries is through the SPDR Lehman International Treasury Bond Fund (AMEX: BWX). A pair of ETFs focused on developing countries are also out, the iShares JPMorgan USD Emerg Markets Bond Index (NYSEArca: EMB) and the PowerShares Emerging Markets Debt Portfolio (NYSE: PSY).

The new S&P index series will focus on government issues from developed markets outside of the U.S. It determines which are developed and which aren't using classifications by the Bank for International Settlements, according to S&P.

"Treasury bonds issued by sovereign nations excluding the United States are an asset class that is often overlooked by investors. They have returns with low correlations with U.S. stocks and bonds as well as international stocks," said James Rieger, an S&P vice president, in a statement.

The new series consists of two benchmarks. One is the S&P/Citigroup International Treasury Bond Index Ex-US, which includes bonds with a maturity of greater than one year. The other is the S&P/Citigroup International Treasury Bond Index Ex-US 1-3 Year, which includes bonds with a maturity of between one and three years. Both indexes will be rebalanced at the end of each month. On a backtested basis, the yields of the indexes have generally been between 2% and 4% since April 2001, says S&P's research staff.

They also point out that Treasury bonds issued by sovereign nations outside of the United States continue to grow in importance. S&P says that the market at the end of last year had more than $9.5 trillion in outstanding bonds. Bonds from the developed markets represented the majority of the international Treasury bond market (through September) with the remaining 7% representing emerging market treasury bonds.

The top three sovereign issuers represented in the new international Treasury index series entering October were: Japan (24.95%); Germany (9.28%) and Italy (8.74%).

The benchmarks don't have a set number of constituents, but are based on how many issues are eligible at each rebalancing. No single country can have a weight of greater than 24.95%, says S&P's indexing services group.

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.

Standard & Poor's has extended its series of dividend-focused indexes, adding benchmarks covering Asia, Australia, Europe, Japan and several emerging markets.

Outside of Europe, S&P has never had a dividend-specific index for the other regions and countries covered in the new index launches.

The timing of the launch is not unrelated to the widespread market problems and equities sell-off, according to a company statement about the new products.

Particularly during times of market unrest and risk aversion, dividends assume greater prominence as a cushion against declining equity prices, S&P's index services group points out.

S&P research also shows that dividend-paying issues have outperformed nonpaying issues more in down markets than in up markets. As an example, the S&P 500 was down 36.66% year-to-date, and 20.26% for the current quarter, based on S&P data through Wednesday.

The S&P 500 Dividend Aristocrats Index was only down 20.26% for the year-to-date period, and 16.8% so far this quarter. The S&P Europe 350 Dividend Aristocrats Index was down 36.80% year-to-date, while the original S&P Europe 350 Index was down 40.36%.

Emerging markets, one focus of the new index series, is a broad equity market where losses have been much greater than in the U.S. and Europe. S&P's BRIC 40 Index was down more than 60% year-to-date.

The Dividend Investor Series is comprised of three dividend families:

• S&P Dividend Aristocrats—focuses on long-term dividend growth
• S&P Dividend Opportunities—focuses on absolute high dividend yield
• S&P Dividend Alternatives—focuses on higher income, or dividend stories with lower correlation to traditional equities.

The newly created indexes are:

• S&P Asia Dividend Aristocrats
• S&P Asia Dividend Opportunities
• S&P Australia Dividend Opportunities         
• S&P Emerging Market Dividend Opportunities
• S&P Europe Dividend Opportunities
• S&P Japan Dividend Opportunities

He says it is essential to guard against today’s downside risks with trailing stops, inverse ETFs, and put options.

And every investor should have a plan to re-engage with the markets when this financial storm passes.

This from Money Morning:

As the worst financial crisis in recorded market history rocks Wall Street, millions of investors on Main Street keep asking a single question.

When will this end?

The market volatility is unprecedented: Where professional traders once ranked a day as “wild”…

This from Money Morning:

The leaders of 20 of the world’s most developed nations, the G20, will convene in Washington D.C. on Nov. 15 for an emergency financial summit considered by many to be the 21st century version of the Bretton Woods initiative of 1944. This will be the first chance for European leaders – many of whom blame the current financial contagion on U.S. free market capitalism…

``We expect Russian corporate and financial sector default rates to increase as
debtors' access to official funds will vary,'' S&P said in the statement.
``Other uncertainties remain regarding what the economic policy response will be
to weakening growth, and whether the ongoing concentration of the financial
system in state hands is permanent or temporary.''

The S&P 500 is set to add another exchange to its blue chip index. After the close of trading on Tuesday, the Nasdaq OMX Group Inc. will replace department store chain Dillard's Inc., which has occupied the blue chip benchmark's last spot.

The shift follows the addition of Comstock Resources Inc., an oil and natural gas producer, to the S&P MidCap 400 index. It replaced Entercom Communications Corp., a radio broadcaster that was listed as the benchmark's 400^th largest company based on market-cap size when the move was made last week.

Also, the S&P SmallCap 600 index has made two changes within the past week. One of those involved replacing wireless tech provider EMS Technologies with Radio One Inc.  At the same time, Integral Systems Inc. was added and Fleetwood Enterprises, which makes recreational vehicles, fell out of the benchmark.

This has been a relatively active few months for the S&P 500. Since June alone, some 23 companies have been deleted, starting with the now defunct Bear Stearns on June 2. Most have been financials hit hard by the global credit crisis, including Lehman Brothers (deleted on Sept. 16) and Washington Mutual on Sept. 29.

Among recent additions is Invesco, the parent of exchange-traded funds giant PowerShares. Another player in the ETF marketplace, Bank of New York Mellon, joined the S&P 500 in May.

The addition of the Nasdaq is the first new exchange in the index since the Chicago Mercantile Exchange became part of the S&P 600 last August. Other exchanges in the S&P 500 are the NYSE and the Intercontinental Exchange. 

The Nasdaq certainly has been on an aggressive expansion path, particularly in ETFs. In the wake of the merger by what has been the industry's largest exchange, the American Stock Exchange, with the New York Stock Exchange, the Nasdaq has had a flurry of new offerings with its own ETF platform.

The Nasdaq has also been remaking itself from a domestic stock-focused exchange into a global provider. According to the company, its net revenues have shot up more than 200% in the past three years. Since going public three years ago, the Nasdaq's market cap has soared from around $700 million to top $6 billion.

Normal 0 false false false EN-US X-NONE X-NONE MicrosoftInternetExplorer4 /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-qformat:yes; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin-top:0in; mso-para-margin-right:0in; mso-para-margin-bottom:10.0pt; mso-para-margin-left:0in; line-height:115%; mso-pagination:widow-orphan; font-size:11.0pt; font-family:"Calibri","sans-serif"; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:"Times New Roman"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin;} Separately on Tuesday, Standard & Poor's lowered its expectations for 2008 dividend payment levels for the S&P 500 from $28.85to $28.05.

The lowered estimate still represents a 1.2% increase in S&P 500 dividend payments from the $27.73 posted in 2007,and translates into a $244.7 billion aggregate payment for the S&P 500 companies for 2008.

"The 1.2% expected increase in S&P 500 dividend payments for 2008 will be the lowest growth rate since 2001 when payments were down 3.3%," said Howard Silverblatt, S&P's senior index analyst, in a statement.

"The growth ratef or dividends was negatively impacted by financials. Year-to-date, there have been 35 dividend cuts by financial issues with an aggregate decrease of $31 billion compared to just 12 cuts over the past five years reducing dividends by $3.1 billion."

The S&P 500 is set to add another exchange to its blue chip index. After the close of trading on Tuesday, the NASDAQ OMX Group Inc. will replace department store chain Dillard's Inc., which has occupied the blue chip benchmark's last spot.

The shift follows the addition of Comstock Resources Inc., an oil and natural gas producer, to the S&P MidCap 400 index. It replaced Entercom Communications Corp., a radio broadcaster that was listed as the benchmark's 400^th largest company based on market-cap size when the move was made last week.

Also, the S&P SmallCap 600 index has made two changes within the past week. One of those involved replacing wireless tech provider EMS Technologies with Radio One Inc.  At the same time, Integral Systems Inc. was added and Fleetwood Enterprises, which makes recreational vehicles, fell out of the benchmark.

This has been a relatively active few months for the S&P 500. Since June alone, some 23 companies have been deleted, starting with the now defunct Bear Stearns on June 2. Most have been financials hit hard by the global credit crisis, including Lehman Brothers (deleted on Sept. 16) and Washington Mutual on Sept. 29.

Among recent additions is Invesco, the parent of exchange-traded funds giant PowerShares. Another player in the ETF marketplace, Bank of New York Mellon, joined the S&P 500 in May.

The addition of the NASDAQ is the first new exchange in the index since the Chicago Mercantile Exchange became part of the S&P 600 last August. Other exchanges in the S&P 500 are the NYSE and the Intercontinental Exchange. 

The NASDAQ certainly has been on an aggressive expansion path, particularly in ETFs. In the wake of the merger by what has been the industry's largest exchange, the American Stock Exchange, with the New York Stock Exchange, the NASDAQ has had a flurry of new offerings with its own ETF platform.

The NASDAQ has also been remaking itself from a domestic stock-focused exchange into a global provider. According to the company, its net revenues have shot up more than 200% in the past three years. Since going public three years ago, the NASDAQ's market cap has soared from around $700 million to top $6 billion.

Separately on Tuesday, Standard & Poor's lowered its expectations for 2008 dividend payment levels for the S&P 500 from $28.85 to $28.05.

The lowered estimate still represents a 1.2% increase in S&P 500 dividend payments from the $27.73 posted in 2007, and translates into a $244.7 billion aggregate payment for the S&P 500 companies for 2008.

"The 1.2% expected increase in S&P 500 dividend payments for 2008 will be the lowest growth rate since 2001 when payments were down 3.3%," said Howard Silverblatt, S&P's senior index analyst, in a statement.

"The growth rate or dividends was negatively impacted by financials. Year-to-date, there have been 35 dividend cuts by financial issues with an aggregate decrease of $31 billion compared to just 12 cuts over the past five years reducing dividends by $3.1 billion."

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

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

Record Oil Revenue Boom

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




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




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



Not Just Energy - Vast Resource Potential

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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


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


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

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

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

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

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

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"Many central and eastern European countries simply don't have either the financial strength or the technical expertise to bail out banks,'' said Lars Christensen, a senior emerging-markets analyst at Danske Bank A/S in Copenhagen. "It's like an Iceland look-a-like contest and there are a number of candidates looking very fragile at the moment.''

Chaos rules among institutional investors, as well, at least the majority of the investment fund managers polled by Portfolio.hu on Wednesday admitted, speaking on condition of anonymity, that they have absolutely no idea about the possible outcome of the current financial crisis. A number of them noted they are at a loss as to what to do with their portfolios in the current situation. Interestingly enough, the only parallel the respondents were able to draw between the present predicaments and the 1998 Russian economic crisis was the mass unwinding of leveraged positions.

As one fund manager interviewed said “From this perspective, the current situation is the same as in 1998 only to the second power. Margin calls are being received, you gotta put in the deposits but as there's no money you have to execute brutal sales irrespective of the price of assets.....Frankly, I haven't got a clue as to when and how this would end, I'm just staring into empty space."

Holiday home new construction has shifted in the opposite direction from building permits. Building permits were up by 26% , while newly built holiday houses were down by 30% over the same period last year. In the first half of 2008, 650 holiday units got building permits and only 200 units were built, with the average size of 66sqm.

Industrial output fell for the first time in three and a half years in June as the looming recession in the eurozone stifled demand for products assembled in Hungary such as Audi cars and Nokia phones. This slowdown already threatened to bring Hungarian GDP growth close to recession in Q3, and the recent financial turmoil now makes it almost certain that any (possible) Q3 contraction will be followed by a further one in Q4 with worse to come as we enter 2009.

The volume of industrial exports plunged by 7.2% yr/yr vs. an increase of 0.3% in July. If we look as the seasonally adjusted industrial output index, we will see that the level of output more or less peaked in December 2007 - February 2008, with the high point being in February, and with the level of output steadily slowing since.

If we look at the most recent purchasing managers index (PMI) reading we find that the rate of expansion in Hungary's manufacturing sector expansion slowed again in September (after August's mini boost) and remained close to stagnation as new orders growth dropped sharply while the rise in output also eased, according to the monthly report from the Hungarian association of logistics, purchasing and inventory management (MLBKT). The September PMI fell to a seasonally adjusted 50.3 from 51.9 in August. The figure is the lowest for any September in the past three years. In Sept 2007 the index stood at 55.1 (a reading of 50 marks the frontier between expansion and contraction, and 50.3 is this a very, very fractional expansion, if it be confirmed by the final data from the KSH).




One clear indication of problems to come can be found in the fact that European car sales fell 8.2 percent in September, extending a decline that began in May, as higher fuel prices and financial-market turmoil reduced demand. Registrations in September dropped to 1.3 million vehicles from 1.42 million a year earlier, the Brussels-based European Automobile Manufacturers' Association said in a statement earlier this week. Sales for the first nine months fell 4.4 percent to 11.7 million vehicles, compared with a 3.9 percent contraction through August.

Industrywide sales in western Europe, including the 15 countries that were members of the EU before May 2004 plus Iceland, Norway and Switzerland, slid 9.3 percent to 1.21 million vehicles. Deliveries in the 10 eastern European countries that have joined the EU since 2004 increased 7.8 percent to 93,275. The association's figures don't include deliveries in Russia.

New car sales inside Hungary are also well down, and dropped by 4.6% year on year in the January-September period, according to data published today by the Association of Hungarian Vehicle Importers (MGE) . The lions share of this drop must have come during the July to September period, since MGE only reported a 1.4% drop in the first six months of the year.


Inflation Eases Back In September, But Will We Now Head For Deflation?

Hungary's inflation saw stationary month on month in September with consumer prices remaining unchanged over August. On an annual basis prices rose by 5.7% over September 2007, greatly undershooting analysts expectations (the median forecast in the Portfolio.hu analysts poll had been 6.1% , for example)

Seasonally adjusted core inflation decelerated to an annual 5.0% from 5.8% in Aug, according to Central Statistics Office (KSH) data. In monthly terms, core CPI also remained unchanged as comparesd with the 0.3 % rise registered in August. This deceleration is pretty swift, and were in not for the sharp fall in the forint, we would now be expecting strong disinflatioary pressures to make themselves felt in the coming months.



The big surprise seemed to be in the processed food components, where a much slower disinflation (following the drop in fresh food prices resulting from this years excellent harvest)had been foreseen. Bread prices were for instance down, despite the fact that local bakers had been threatening further increases. Processed foods were flat month on month taking the year on year index down to 13.2% from 16.0% a month earlier.

In what could be interpreted as an early warning signal of what may be in store further down the road, however, durable and non-durable industrial goods prices continued to rise as the weaker forint fed rapidly through rather quickly to prices.

Producer prices were up in Hungary by only 3.2% year on year in August, down from July's 3.7% rise, and way down from April's 6.5% peak. The breakdown of these price increases is also interesting, since domestic sales prices were up 12.9% over August 2007, while export sales prices (measured in HUF) actually decreased by 3.9% year on year.

Employment Remains (more or less) Stagnant As Hungary's Population Falls

One thing the Hungarian economy is NOT doing to any great extent these days is creating employment. The number of employees in companies employing at least 5 people and in the public sector (combined) dropped by 0.5% year on year in July to hit 2.755 million. This decline follows a 0.9% annual drop in June. Actually this process is only natural (and more or less to be expected) as the Hungarian population declines, but of course it does mean that the only real way the Hungarian economy can grow is by increasing productivity, and that in June something like the first 1% of productivity any productivity improvement Hungary was getting was eaten up by diminished employment. Clearly the answer to this is to increase labour force participation rates, but while this sounds fine in theory (and is generally what is recommened by think tanks grom the World Bank to the OECD, see for eg the World Bank report from Red to Grey), but we are a long way from seeing it happen in practice in Hungary.

The distribution of the labour force is changing, however, since the number of employees in the private sector rose by 0.3% year on year in July while employment in the public sector decreased by 3.5%. On the other hand, and to put all of this in some perspective, there are now over 100,000 fewer employees in the private sector than there were in June 2003.

Hungary's present population is something like 10.03 million, and this is down from 10.22 million in 2000. The rate of decline is small, but the attrition is constant.



But as well as falling, Hungary's population is also ageing, and we know from basic life cycle theory (Modigliani) that saving and spending patterns change across the life cycle, with the propensity to borrow against future income to buy now declining significantly after 50, and since it is increasing consumer credit that drives retail sales growth in the dyamic internal consumption economies, then it is highly likely that ageing will now act as a drag on sales growth generally in Hungary. As we can see in the chart below, Hungary's median population age has been rising steadily, but the rate of ageing is now about to accelerate quite sharply, with the only real substantial unknown between now and 2020 being life expectancy, which may accelerate more than anticipated (in which case the population ageing will be even more rapid).




It's All About Exports Now

Apart from retail sales, another indicator of domestic demand which is worth thinking about is housing construction. Let's look at the chart.



As we can see the number of new buildings peaked in 2004. Since that point the sector has struggled. Obviously the absence of new households can be offset to some extent by holiday homes, but this has limits, and in the present credit crunch environment is unlikely to be as important as many anticipated. Despite the general economic slowdown there was a rebound in housing activity in 2007, but in the wake of the US financial turmoil of August 2007 this now seems to have faded. It will be many a long year (if ever) before we see construction on the 2004 scale in Hungary again, since housing is, above all, about demographics.

So what does all this mean for Hungary? Should people simply pack their bags and leave. No, not at all. What it means is that it is all about exports now, as far as the Hungarian economy goes, and the sooner Hungarian civil society (together with the civic institutions - parliament, central bank etc) faces up to this, the better.

Given the rapid ageing that Hungary is now faced with, and the need to maintain a health and pension system with some kind of minimum guarantees, then economic growth is essential, and the only way to get this economic growth is through the export sector, and this is now a hard fact of life. Indeed it is precisely because the structural commitments to current expenditure are so large in the Hungarian case, that the downturn in public sector construction has been so strong following the austerity package. The sooner everyone faces up to all of this the better.

And if we look at the short term outlook for Hungary's export sector, then it doesn't look too bright, since Hungary posted a trade deficit of EUR 103.7 million in August, according to first estimate figures released by the Central Statistics Office. This compares with a deficit of EUR 365.1 m in July and EUR -176.5 m in Aug 2007. Exports - at EUR 5,378.3 m - were down 0.7% year on year, which compares with a growth of 8.2% in July. The August drop is significant, since the last time the 12 month export index was in the negative territory was in June 2003 (-1.3%).

Imports - at EUR 5,482 m - were down 1.9% year on year, while in July they were up by12.4%.





Tightening credit standards and the cut-back in credit lines to producers and wholesalers suggest there will be a further dramatic fall in new orders, which is likely to weigh on export performance. The question is how long and how far credit standards will continue to tighten, but the chances of a prolonged deterioration in financial conditions have increased, pointing towards sustained weakness in the real economy for some time to come.



Construction Drops Back Again In July

Construction output is falling steadily in Hungary, and output fell more strongly in July - down by 11.8% year on year, than it did in June, when there was an 8.1% drop. Taking the number of working days into account, the decline was 12.8% in July, and 9.0% in June.



Adjusted seasonally and for working days, output contracted by 2.8% month-on-month from June, following a 5.5% month on month contraction in June. July was the third consecutive month when construction industry output dropped. Output in January-July was down 10.9% over the same period of 2007.



While the index will probably settle down a bit in the autumn, given the base effects due to the strong plunge in output last autumn, we are unlikely to see any short term improvement in construction output, and given the ongoing turmoil in the sector globally the position will more than likely continue to deteriorate for some time to come. Maybe someone will one day wake up to the fact that with an ever smaller and older population in the longer term you need fewer and fewer houses. As can be seen from the chart below, the level of construction activity peaked in Hungary in 2005 (along with domestic private consumption growth), and given the population situation, and that civil engineering will be continuously constrained by government budget commitments to health and pension programmes in an ageing society, it is very unlikely that we will ever again reach that level. Remember here, we are talking about the RATE of output, and not the STOCK of buildings, bridges, motorways etc. I simply can't see why none of this can enter the mindset of those who are sitting stoically, arms folded, waiting for the "inevitable" upturn in Hungarian domestic consumption. Less retail sales, less building, less people working, this is, I think, what you should expect with a declining and ageing population. And, of course, we are about to see this phenomenon repeated in one society after another as the process spreads. Hungary is simply unfortunate enough to be among the first.





Falling Retail Sales

Hungarian retail sales were down by 0.1% month on month in July, following a 0.3% drop in June, according to the most recent calendar and seasonally adjusted data from the Hungarian Central Statistics Office (KSH). Using calendar-effect adjusted data, there was a fall of 1.8% year on year in July, following a 1.9% decline in June.

Retail sales declined in 2007 by 2.9%, which compares with an increase of 4.4% in 2006 and 5.6% in 2005. As can be seen from the monthly seasonally adjusted sales index (below), Hungarian retail sales peaked in early summer 2006, from which time they have been steadily falling. As far as I can see, with an ageing and falling population, and domestic demand stagnating, is quite possible that Hungarian retail sales will never reach this historic peak again.



A Long And Deep Recession Looms Over The Horizon

Despite the slight acceleration in Hungary's annual economic growth seen in the second consecutive quarter in Q2 - which was largely as a result of a surge in agricultural output - underlying trend growth in the Hungarian economy is now extremely low - I would say between 0 and 1% per annum. So the charts are deceptive at this point, since agriculture was up 33.8% year on year, meaning that it contributed about 50% of the quarter on quarter growth despite being a very small segment of the economy. Such significant movements in GDP due to volatility in one small raw materials sector is a characteristic wich is much more typical of a developing than of a developed economy, and therefore what is so striking about Hungary's current situation is just how little it has been able to move away from this role model over the last seven or eight years, despite all the financial wizardy to which it has been subjected.

Gross domestic product was up by an annual 2 percent in Q2 2008, and this was the fastest rate since the first quarter of last year. The figure compares with the 1.7 percent growth achieved in the first three months of 2008. Over the previous quarter GDP was up by 0.6%, equalling the performance in Q1 over Q4 2007.




Agricultural production rose an "extraordinary'' 33.8 percent compared with Q2 2007, largely due to a bumper wheat harvest which was up 40 percent this year (to 5.6 million metric tons) following a very poor harvest in 2007 after frost and drought damaged the crop.

Industrial production was up only up 4.2 percent year on year, due to the slowing pace of export increase. IP had risen by 6.9 percent in the first quarter. Private Household consumption also showed some signs of life and rose 1.4 percent. This was the biggest leap in private household consumption since Q3 2006.



Indeed, quarter on quarter, household consumption was up 0.5%, which was the fastest quarterly rise since Q4 2005. Since this is really quite a surprising result it will be interesting now to see what happens as we move forward. On the other hand there is evidence that the stronger forint has been having an effect on exports. Indeed the annual growth in imports (at 11.2%) just exceeded the annual growth in exports (11.1%), hence the net impact of trade on GDP growth was marginally negative. The services and real estate sectors also slowed in Q2, with finance and real estate contracting by 0.3% quarter on quarter. Given that the rate of increase in new mortgage lending has now been slowing for some months, and new building permits are way down year on year, can we start to detect the first initial effects of the extending global credit crunch in Hungary at this point?

Investments as we have seen in a previous post were down year on year by 2.2%, while construction was down year on year by 6%. Given that the external environment in the Eurozone is now deteriorating, the industrial output (as we are also seeing for July today) is losing steam on the back of the high forint, I think we are more than likely going to see a steady reduction in the annual rate of growth as we move forward again, especially since one off factors like agriculture will not be so important, and can't be guaranteed to always show up just when you want them.

It is hard to put a precise number on future GDP growth at this point, given the dramatic events which are unfolding around us. We first need to see the actual GDP data for Q3 2008, but if we look at the industrial output, retail sales, construction and exports data presented above, it is hard not to come to the conclusion that the economy may well have contracted quarter on quarter in Q3 (even despite the good agricultural performance, which will, after all, enjoy a strong base effect from Q2), and if this is the case then with Q4 almost certain to see quite a strong contraction, it isn't unreasonable at this point to think that Hungary entered recession on 1 July 2008.

Central Bank Caught In A Double Bind

Hungary's Magyar Nemzeti Bank left its benchmark interest rate unchanged at the three-year high of 8.5 percent at its last meeting on 29 September as the global financial crisis and upside risks to inflation forced prevented the bank from initiating a rate cut cycle. Hungary's rate is currently the second-highest in the European Union after Romania, whose current base rate is 10.25 percent.

Basically I think this is the point, when the HUF rally runs out of steam
the NBH is going to be in a very difficult situation indeed, and it will run out
of steam when Hungarian housholds let up on their frenzy to borrow money in
Swiss Franc denominated loans, a decision which may be made easier for them now
that the band has been removed and the currency risk is evident to all. A
difficult decision, but then maintaining the band was only encouraging people to
keep going on contracting the loans.

• Standard & Poor’s yesterday (Monday) reduced the credit rating of Royal Bank of Scotland PLC (ADR: RBS), lowering the rating of both the Edinburgh-based bank’s long-term and short-term debt. “The rating actions reflect Standard & Poor’s expectation that RBS’s financial profile may continue to weaken,” the analysts said, citing a “combination of mixed earnings prospects, deteriorating credit risk in its key geographies, and difficult market conditions” in which to shore up its capital, Bloomberg News reported. RBS stock sank over 20% on the downgrade.

• Shares of biotech firm Dendreon Corp. (DNDN) soared 33% yesterday (Monday) on news of a good drug trial. Provenge, Dendreon’s experimental prostate cancer drug, reduced the risk of death in 20% of trial participants, Reuters reported. Dendreon shares gained $1.73 to close at $6.93.

• Eli Lilly & Co. (LLY) announced yesterday (Monday) that it plans to buy ImClone Systems Inc. (IMCL) for $6.5 billion in a deal that values the biotech firm at about $70 share. This latest offer from Eli Lilly beat out Bristol Myers Squibb Co.’s (BMY) competing bid of $62 per share. However, Bristol Meyer’s will receive approximately $1 billion in cash for its 17% stake in ImClone, The New York Times reported.

• AgFeed Industries Inc. (FEED) announced yesterday (Monday) a $10 million share repurchase program to commence immediately. AgFeed, which does most of its feed and hog production business in China, will fund the share buyback with current cash reserves, Trading Markets reported.

• Bank of America Corp. (BAC) yesterday (Monday) reported third-quarter results earlier than planned, and revealed a 68% drop in profit, as well as plans to boost capital by selling stock and halving its dividend. Profit fell to $1.18 billion, or 15 cents per share, for the July-to-September period from $3.7 billion, or 82 cents per share, in the same period last year.

• U.S. Treasury Secretary Henry M. Paulson selected Neel Kashkari, a former Goldman Sachs Group Inc. (GS) executive and current assistant secretary to be the interim head of Treasury’s new Office of Financial Stability, The Associated Press reported. Kashkari will be in charge of the office created by the emergency legislation enacted Friday to fund the largest government bailout. Paulson was the head of Goldman before joining the Bush administration in 2006.

Source: Global Investing Roundups Tuesday, October 7th, 2008

Russia's economic growth is obviously slowing quite quickly - and evidently far more rapidly than the government anticipated - largely due to the impact of the global credit crunch, the downward movement in oil prices and investor reaction to Russia's "go it alone" attitude in international disputes.

In the present environment inflation is likely to slow quite rapidly, and in September this easing in infaltion was noted in the prices that manufacturers pay and charge, as highlighted in the VTB report: "The rate of increase in prices charged by Russian manufacturers eased for the fifth straight month to its weakest' since at least January 2003".



Oil Output Down


And just to cap it all, Russia's oil production also fell in September as companies struggled with costs and maturing fields, effectively bringing the world's second-largest crude exporter closer to its first annual drop in output since 1998. Production fell to 9.83 million barrels of crude a day (40.2 million metric tons a month), 0.4 percent less than a year earlier, according to figures released by the Energy Ministry's CDU-TEK unit.

So What Can We Expect?

Well, in broad outline I don't think the outlook has changed that much from when I wrote my last analysis two weeks ago.

As I said at that point, Russia is hardly the Baltics, so we should not expect the economy to go into a complete nosedive. A lot depends on the view you take about the future of energy prices. While the global economy is now evidently set to slow considerably - in addition to the reduction in growth rates already seen so far this year -and especially in the aftermath of the most recent bout of financial turmoil. Cleary oil prices are set to drop even further - and this will only keep pushing Russian growth down - but at some point the market will find a floor, possibly in the region of $80 a barrel. More importantly when it comes to the future of oil prices, I would not be banking on some kind of long and deep global recession. Many of those developed economies who are significantly affected by the bursting of their construction booms (and the banking issues which have gone with it) will probably have weak domestic consumer demand for some time to come, but a solid core of emerging economies may well take off again quite rapidly as we move into 2009 -and especially if energy prices drop back, and the current near panic in the financial markets settles down (people do, after all, have to put their money somewhere). So the emergent (and numerous in population terms) emerging economies should give another strong shove to what may have become a rather listless global economy. As a knock on effect this should also serve to put some life back into export dependent economies like Germany and Japan (who by and large are not reeling under the impact of the construction bust, although their banks may have been lending to people who are).

So the bottom line here, I think, is be ready for a sharp slowdown in headline Russian GDP, but don't expect to see any imminent meltdown in the Russian financial system, one way or another they have the wherewithall at this point to keep limping forward. Of course, in the longer term, well, you know......

Russia's economic growth is obviously slowing quite quickly - and evidently far more rapidly than the government anticipated - largely due to the impact of the global credit crunch, the downward movement in oil prices and investor reaction to Russia's "go it alone" attitude in international disputes.

In the present environment inflation is likely to slow quite rapidly, and in September this easing in infaltion was noted in the prices that manufacturers pay and charge, as highlighted in the VTB report: "The rate of increase in prices charged by Russian manufacturers eased for the fifth straight month to its weakest' since at least January 2003".



Oil Output Down


And just to cap it all, Russia's oil production also fell in September as companies struggled with costs and maturing fields, effectively bringing the world's second-largest crude exporter closer to its first annual drop in output since 1998. Production fell to 9.83 million barrels of crude a day (40.2 million metric tons a month), 0.4 percent less than a year earlier, according to figures released by the Energy Ministry's CDU-TEK unit.

So What Can We Expect?

Well, in broad outline I don't think the outlook has changed that much from when I wrote my last analysis two weeks ago.

As I said at that point, Russia is hardly the Baltics, so we should not expect the economy to go into a complete nosedive. A lot depends on the view you take about the future of energy prices. While the global economy is now evidently set to slow considerably - in addition to the reduction in growth rates already seen so far this year -and especially in the aftermath of the most recent bout of financial turmoil. Cleary oil prices are set to drop even further - and this will only keep pushing Russian growth down - but at some point the market will find a floor, possibly in the region of $80 a barrel. More importantly when it comes to the future of oil prices, I would not be banking on some kind of long and deep global recession. Many of those developed economies who are significantly affected by the bursting of their construction booms (and the banking issues which have gone with it) will probably have weak domestic consumer demand for some time to come, but a solid core of emerging economies may well take off again quite rapidly as we move into 2009 -and especially if energy prices drop back, and the current near panic in the financial markets settles down (people do, after all, have to put their money somewhere). So the emergent (and numerous in population terms) emerging economies should give another strong shove to what may have become a rather listless global economy. As a knock on effect this should also serve to put some life back into export dependent economies like Germany and Japan (who by and large are not reeling under the impact of the construction bust, although their banks may have been lending to people who are).

So the bottom line here, I think, is be ready for a sharp slowdown in headline Russian GDP, but don't expect to see any imminent meltdown in the Russian financial system, one way or another they have the wherewithall at this point to keep limping forward. Of course, in the longer term, well, you know......

The big bailout is still Topic #1, as speculation is “rife that the Senate will pass the plan … and that House Republican opposition to the plan will succumb to pressure, with the House passing the plan on Thursday,” wrote Matthew Strauss, senior currency strategist at RBC Capital Markets.

Among the day’s hard numbers, Standard & Poor’s released the latest Case-Shiller home price index, which reported that house prices in 20 major U.S. cities fell 0.9% in July, up from June’s 0.5% drop. Prices are now down a record 16.3% year over year, and off 19.5% from the July 2006 peak.

On the positive side, the Conference Board reported that consumer confidence rose for the third straight month in September. The index rose to 59.8 from a revised August reading of 58.5, vs. economists’ expectations that it would remain unchanged.

However, “These results did not capture all of the tumultuous events in the financial sector this month, and until the dust settles a bit more, we will not know the full impact on consumers' expectations,” said Conference Board economist Lynn Franco.

Source: Dollar on a tear -  Gains on euro weakness, bailout hopes

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Citigroup's (C) share price rebounded this morning, a day after plummeting in response to its deal to buy Wachovia's (WB) banking operations and bad debt. The acquisition, devised by the federal government, is generally seen as a positive for Citigroup, as it will substantially increase the New York- based company's retail banking franchise.

While the deal improves Citigroup's long-term funding risk, analysts are concerned about integration risks in a volatile market. Ratings agencies Fitch and Standard & Poor's put the biggest U.S. bank by assets on watch for a possible downgrade, citing asset quality problems. Investor morale, however, received a boost on speculation of a bailout plan for financial markets being revived by Congress. Citi shares were trading up nearly 17%, ahead of the broader markets, at $20.72 in the afternoon session.

The index adds to S&P's existing set of Asian equity indexes targeting some of the biggest names and biggest markets. S&P offers an index on the 50 largest stocks on the National Stock Exchange of India, the S&P NCX Nifty; the S&P HKex LargeCap, which targets the 25 largest Hong Kong-traded stocks; and indexes for Chinese stocks based outside mainland China through its S&P/CITIC China 30 and S&P/CITIC China 50 indexes.

Vietnam has previously only been covered by S&P in broad-based Asia indexes. FTSE already offers two indexes covering stocks that trade on the Ho Chi Minh Stock Exchange; the FTSE Vietnam All-Share Index, covering 90% of the stock universe; and the more narrow FTSE Vietnam Index.

The top five holdings in the S&P Vietnam 10 Index are FPT Corp., Petroleum Technical Services Corporation, PetroVietnam Drilling & Well, PetroVietnam Fertilizer and Chemicals, and PetroVietnam Insurance JSC. Sectors covered include Consumer Discretionary, Energy, Financials, Industrials, Information Technology, Materials and Utilities.

Companies to be included in the index must have a float-adjusted market capitalization above $50 million and a three-month average daily trading value above $250,000, and must trade on local Vietnam exchanges. Weights are liquidity-based, with no single stock having a weight of more than 15% in the index at reconstitution. The index will be rebalanced quarterly.

S&P has launched similar 10-stock indexes covering China and India's markets as well.

Vietnam is currently classified as a frontier market by the major index providers, and it has garnered a lot of attention from investors seeking to diversify their portfolios and take advantage of the outsized returns the country's market has achieved in recent years - although it is down sharply year-to-date. However, many believe that Vietnam represents a compelling long-term story.

There is a Vietnam index-based ETF trading overseas, offered by Deutsche Bank's x-trackers family, the DB FTSE Vietnam ETF (LSE: XFVT) tracking an index provided by FTSE. In the U.S. EFT market, the Market Vectors family recently filed for a Vietnam fund.

For example, erratic deliveries of steel have caused an acquaintance of mine to put his employees on flexible work schedules. According to him, steel mills are not sticking to regular production schedules of the type of metal used for the packaging products that his company manufactures.

Not surprisingly, his customers are unhappy. But, because they lack a cost-effective alternative, they have no choice but to accept the higher prices and irregular production schedules.

Then there is fertilizer. Employees of fertilizer company Potash (POT) are on strike at a time when there continues to be a shortage of potash - a key ingredient for fertilizer. The company told Standard & Poor's that the strike should only affect non-agricultural customers. That may not sound like a big deal, until one considers that there is no room for supply disruptions across the entire industry.

Still, shares of CF Industries (CF) and other fertilizer stocks are getting knocked around because of the overall weakness in commodity stocks. For demand destruction to occur, one would have to assume that people are going to stop eating, ethanol is no longer going to be subsidized or a replacement for fertilizer has been found. I just don't see this happening.

Another example is natural gas. Natural gas prices have plunged by nearly 50% since early July. Yet, worldwide energy usage is growing. Plus, the Farmer's Almanac is predicting a "numbing" winter.

Perhaps traders think that the NOAA's forecast for above normal temperatures will be the correct one. My best guess is that those of us living in the northern states will be bundling up and complaining about our heating bills.

Of course, it is important to realize that even with the pullback, just about all commodities are still expensive. Here in the Chicago area, gas stations charge around $4 for a gallon of unleaded. Lake County, where I live, is coping with a dramatic increase in the price of road salt. Local officials say that this problem affecting many municipalities across the country.

Given the slowing economies of the Western World, some weakness in the commodity prices is logical, but we are a long way from the perceived demand destruction that seems be influencing some traders. This is why I am looking for the opportunity to add more commodity stocks to the Focus List.

The Financial Crisis

On Wednesday, I discussed the ongoing financial crisis in my Industry Rank column. In the second half of a podcast published on Thursday, I further discussed the banking industry's problems with Chuck Jaffe of Marketwatch.

In summary, I believe the financial crisis, and the housing slump, will continue into next year. Here are some reasons why:

• The FDIC's insurance fund's reserve ratio dropped so low, 1.01%, that it is being forced to develop a plan for replenishing the safety net for depositors.
• Banks will likely have to pay higher fees to the FDIC, at the same time they are coping with tighter net interest margins.
• Nearly 1 million petitions for bankruptcy have been filed during the past 12 months; personal bankruptcies are up 28%.
• Net charge-off rates for Capital One (COF), and probably many other credit issuers, have been rising for several quarters.

Staying on the subject of banks, I want to mention the creativity shown by National City (NCC).

NCC is offering customers $200 to close their home-equity lines of credit. The bank is also waiving the $350 early termination fee. It is an interesting attempt to avoid further charge-offs, but my guess is that it won't have any positive impact. Those who have the cash to pay off their home equity loans are not likely to default. And those who are at a risk of default probably don't have the cash to pay off their loans.

The more likely scenario is that NCC is trying to engage in a game of hot potato, by which its borrowers move their home equity lines to another lender. For someone who is cash strapped, $200 helps, but not enough to keep them from falling behind on their payments.

The Markets

Volume picked up this week, as was expected.

Rather than focusing on weakening inflationary pressures, traders instead viewed the falling commodity prices as another sign that the economy is having problems.

The Fed's observation that "economic activity has been slow" didn't help matters. Selling intensified on Thursday in response to lousy retail sales numbers and fears about Friday's employment numbers.

Last week, I called for choppy markets and this is what we are seeing.

My expectation is that the economic news won't be very good, on balance, for a while. But, also I think we are closer to a recovery than many other developed nations. It's a good market for long-term investors.

Remember, those who try to time the markets are often the ones who take large losses and miss out on the big gains. Conversely, the most successful investors never stop researching stocks.

Focus List Updates

We removed Central European Distributors (CEDC) from the portfolio. The fundamentals continue to look fantastic, but the selling pressure on the stock has been relentless.

The stock has been adversely affected by the Russian invasion of Georgia. Although CEDC is based in Pennsylvania and does a large amount of its business in Poland, it's still being adversely affected by the rotation away from Russian stocks.

Charles Rotblut, CFA, is the Senior Market Analyst for Zacks.com. He can be reached at crotblut@zacks.com.
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One notable recent development has been the decision by ratings agency Standard & Poor’s to award Brazil investment grade, with the foreign currency debt rating being raised to BBB- from BB+. This decision has produced considerable debate as many long term Brazil watchers believe that the upgrade comes at a time when Brazil has all the cyclical winds blowing in her favour, and ask the not unreasonable question what happens when the weather shifts? It is clear however that Brazil has made tremendous improvements over the past decade in terms of central bank independence, reigning in inflation and setting public debt on a sound footing, so whatever the fine print details, Standard and Poor’s decision can surely not be considered an imprudent one.

As regards its external balance Brazil is rather different from many other large emerging economies since while the central bank (which has a high level of independence from government) does intervene in the spot market to try to keep a lid on the Real’s rise and to built up a “war chest” of international reserves the bank has allowed the currency to rise substantially against the US dollar (as of July the Real had appreciated by some 13% against the dollar in 2008) and Brazil has also recently opened a small but quite manageable deficit on its current account, which means that Brazil as it develops is becoming a net consumer of excess capacity in the global economy. A break-down of the current account position reveals that Brazil continues to retain a surplus on the goods balance due to the importance of commodities and food but that services and in particular a negative income account are now gradually pulling the overall balance into negative territory. This is really what one could reasonably expect in the context of an emerging economy at Brazil's stage of development.



On the monetary policy front the central bank is rapidly earning a reputation for itself as Latin America’s new Bundesbank, and governor Henrique Meirelles delivered a decisively hawkish message during the last monetary council meeting to accompany the decision to hoist rates by 75 basis points to the current 13% level. Brazil's interest rate is now the the second-highest inflation-adjusted one in the world after Turkey's. Brazil's real interest rate, or the benchmark 13 percent rate minus annual inflation of 6.06 percent, is 6.94 percent. Turkey currently has the world's highest so-called real interest rate at 7.55 percent.

This decision is the continuation of a hiking campaign set in motion in order to establish strong credentials for the central bank as an inflation fighter, and to prevent generalised inflation expectations from taking a hold among the population. The central bank is attempting to keep inflation within the the official target of 4.5% and with inflation forecast to be somewhat above that figure in 2009 the central bank is simply acting accordingly.



Such aggressive tightening is, however, not without its problems, and policy makers now face a serious dilemma. Predictably, given the state of the current global environment, the central bank's larger than expected interest hike was rapidly translated into an appreciation of the Real – pushing it to its strongest level since 1999. So far, the 13% rise against the USD this year puts the real in the pole position amongst emerging market currencies versus the USD. This position is reasonably comprehensible taking into account the recent decision to award Brazil investment grade status; this coupled with a nominal yield on 10 year government notes at about 15% and a benchmark stock index – the Bovespa – which is up approximately 10% from its January level, implying a 20% gain in US dollar term, basically mean that international investors are finding it hard not to put money into Brazil at this point in time.

Consequently, with a global credit crisis far from over, a hawkish central bank, and a hard currency making exports more difficult one could only reasonably expect the economy to slow in line with weaking global momentum. The key point with respect to the Real would be that a continuing rise will push the external balance further into negative territory. Moreover, in a likely scenario where global commodity prices somewhat pare-back their recent impressive upward movement Brazil’s external bookkeeping will further come under pressure.

Outlook on Key indicators

• 
  Following the most recent rate hike market expectations have now solidified towards further interest rate increases in the pipeline. The driving orce here will, as ever, be inflation running above the central bank's nominal target. Here at Emerginvest we see the Central Bank of Brazil aiming for a nominal rate of 15% which should be reached over the course of the next three meetings.
• 
  The Real is likely to continue to be supported by a hawkish central bank but as the external balance moves steadily into negative territory macro-fundamentals may take over, and as the economy slows and inflation comes into the target zone the central bank will once more move into loosening mode pushing the Real down in the process. A violent correction however is not expected.
• 
  GDP growth is expected to moderate in 2008 compared to the levels seen in 2007 but at this point growth projections remain solid, and we certainly see Brazil’s mid term sustainable growth rate as being above the consensus 3%-5% rate once inflation is firmly under control.

2007 Data

GDP (2007) - 5.4%
Inflation (2007) - 3.6%
Current Account Deficit -0.27% of GDP
Fiscal Deficit - 2.27% GDP
Debt to GDP ratio - 42.8%


Debt Ratings (local currency, long term)

Fitch - BBB-
S&P - BBB+
Moody- Ba1


2008 Central Bank Inflation Target - 4.5% (+ or – 2pp)

Population Median Age -29 years
Total Fertility Rate (2007) -1.88 child per women
Male Life Expectancy - 68.57 years

Development Indicators Rank (131 economies in total)

Global Competitiveness (World Economic Forum)
72/131 (2007-08)
Business Competitiveness (World Economic Forum)
59/131 (2007-08)


Selected Sub-components

Institutions - 104/131
Infrastructure - 78/131
Macroeconomic Stability - 126/131
Health and Primary Education -84/131

Short Term Data

Retail Sales Growth (May, y-o-y, volume index) - 10.5%
Industrial Output (May, y-o-y) - 2.4%
Inflation (July 2008) - 6.3%
Central Bank Interest Rate (SELIC Rate) - 13.0%

One notable recent development has been the decision by ratings agency Standard & Poor’s to award Brazil investment grade, with the foreign currency debt rating being raised to BBB- from BB+. This decision has produced considerable debate as many long term Brazil watchers believe that the upgrade comes at a time when Brazil has all the cyclical winds blowing in her favour, and ask the not unreasonable question what happens when the weather shifts? It is clear however that Brazil has made tremendous improvements over the past decade in terms of central bank independence, reigning in inflation and setting public debt on a sound footing, so whatever the fine print details, Standard and Poor’s decision can surely not be considered an imprudent one.

As regards its external balance Brazil is rather different from many other large emerging economies since while the central bank (which has a high level of independence from government) does intervene in the spot market to try to keep a lid on the Real’s rise and to built up a “war chest” of international reserves the bank has allowed the currency to rise substantially against the US dollar (as of July the Real had appreciated by some 13% against the dollar in 2008) and Brazil has also recently opened a small but quite manageable deficit on its current account, which means that Brazil as it develops is becoming a net consumer of excess capacity in the global economy. A break-down of the current account position reveals that Brazil continues to retain a surplus on the goods balance due to the importance of commodities and food but that services and in particular a negative income account are now gradually pulling the overall balance into negative territory. This is really what one could reasonably expect in the context of an emerging economy at Brazil's stage of development.



On the monetary policy front the central bank is rapidly earning a reputation for itself as Latin America’s new Bundesbank, and governor Henrique Meirelles delivered a decisively hawkish message during the last monetary council meeting to accompany the decision to hoist rates by 75 basis points to the current 13% level. Brazil's interest rate is now the the second-highest inflation-adjusted one in the world after Turkey's. Brazil's real interest rate, or the benchmark 13 percent rate minus annual inflation of 6.06 percent, is 6.94 percent. Turkey currently has the world's highest so-called real interest rate at 7.55 percent.

This decision is the continuation of a hiking campaign set in motion in order to establish strong credentials for the central bank as an inflation fighter, and to prevent generalised inflation expectations from taking a hold among the population. The central bank is attempting to keep inflation within the the official target of 4.5% and with inflation forecast to be somewhat above that figure in 2009 the central bank is simply acting accordingly.



Such aggressive tightening is, however, not without its problems, and policy makers now face a serious dilemma. Predictably, given the state of the current global environment, the central bank's larger than expected interest hike was rapidly translated into an appreciation of the Real – pushing it to its strongest level since 1999. So far, the 13% rise against the USD this year puts the real in the pole position amongst emerging market currencies versus the USD. This position is reasonably comprehensible taking into account the recent decision to award Brazil investment grade status; this coupled with a nominal yield on 10 year government notes at about 15% and a benchmark stock index – the Bovespa – which is up approximately 10% from its January level, implying a 20% gain in US dollar term, basically mean that international investors are finding it hard not to put money into Brazil at this point in time.

Consequently, with a global credit crisis far from over, a hawkish central bank, and a hard currency making exports more difficult one could only reasonably expect the economy to slow in line with weaking global momentum. The key point with respect to the Real would be that a continuing rise will push the external balance further into negative territory. Moreover, in a likely scenario where global commodity prices somewhat pare-back their recent impressive upward movement Brazil’s external bookkeeping will further come under pressure.

Outlook on Key indicators

• 
  Following the most recent rate hike market expectations have now solidified towards further interest rate increases in the pipeline. The driving orce here will, as ever, be inflation running above the central bank's nominal target. Here at Emerginvest we see the Central Bank of Brazil aiming for a nominal rate of 15% which should be reached over the course of the next three meetings.
• 
  The Real is likely to continue to be supported by a hawkish central bank but as the external balance moves steadily into negative territory macro-fundamentals may take over, and as the economy slows and inflation comes into the target zone the central bank will once more move into loosening mode pushing the Real down in the process. A violent correction however is not expected.
• 
  GDP growth is expected to moderate in 2008 compared to the levels seen in 2007 but at this point growth projections remain solid, and we certainly see Brazil’s mid term sustainable growth rate as being above the consensus 3%-5% rate once inflation is firmly under control.

2007 Data

GDP (2007) - 5.4%
Inflation (2007) - 3.6%
Current Account Deficit -0.27% of GDP
Fiscal Deficit - 2.27% GDP
Debt to GDP ratio - 42.8%


Debt Ratings (local currency, long term)

Fitch - BBB-
S&P - BBB+
Moody- Ba1


2008 Central Bank Inflation Target - 4.5% (+ or – 2pp)

Population Median Age -29 years
Total Fertility Rate (2007) -1.88 child per women
Male Life Expectancy - 68.57 years

Development Indicators Rank (131 economies in total)

Global Competitiveness (World Economic Forum)
72/131 (2007-08)
Business Competitiveness (World Economic Forum)
59/131 (2007-08)


Selected Sub-components

Institutions - 104/131
Infrastructure - 78/131
Macroeconomic Stability - 126/131
Health and Primary Education -84/131

Short Term Data

Retail Sales Growth (May, y-o-y, volume index) - 10.5%
Industrial Output (May, y-o-y) - 2.4%
Inflation (July 2008) - 6.3%
Central Bank Interest Rate (SELIC Rate) - 13.0%

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.''

Brazil, Latin America's largest economy, has broken a cycle of boom and bust because of rising commodity exports and will enjoy sustainable annual growth of 4 percent to 5 percent, Setubal said in an interview this week in Sao Paulo. An investment-grade rating granted by Standard & Poor's last month will make Brazil a magnet for foreign investors.

Setubal is expanding abroad and at home, capitalizing on the 31 percent rise in Brazil's real against the dollar since May 2006, the collapse of inflation from almost 5,000 percent in 1994 to 5 percent now, and losses at global competitors. He's opening offices in the Middle East and Asia, hiring bankers from Deutsche Bank AG and Merrill Lynch & Co. and looking to buy Brazilian assets that may get dumped by foreign firms at discount prices.

``I don't see Brazil going back,'' the 53-year-old chief executive officer said at his office in Sao Paulo. ``The strong currency and investment grade are here to stay.''

``This is a big change in Brazil,''Setubal said. ``Politicians used to believe spending was very popular and nowadays they learned that stable prices is much more popular.''

Petrobras, as Brazil's state-controlled oil producer is known, climbed 3.8 percent to 50 reais, pushing its capitalization to 487.9 billion reais ($295.6 billion), according to data compiled by Bloomberg. Microsoft, which yesterday revived the possibility of purchasing Yahoo! Inc., fell 1.8 percent to $29.46, lowering its overall value to $274 billion. ICBC's A shares listed in Shanghai rose 0.2 percent to 6.22 yuan. The market value of the world's largest bank is 2.02 trillion yuan ($289.3 billion).

Exxon’s overall oil and gas production fell 5.6 per cent from the year-earlier quarter. Production in Africa, a key new area of investment, fell 20 per cent as high oil prices and contract stipulations forced it to hand over more of its production to host country governments. Venezuela’s nationalisation of its oil fields also hurt the group’s volumes, as did declines at Canadian gas fields. Unlike Royal Dutch Shell, which is stressing its research in second generation biofuels, and is a leader in making natural gas into transport fuels, Exxon has long argued that traditional alternatives, such as wind power, have proved uneconomic. But it says it is researching future fuels that it is less ready to talk about publicly. The figures are likely to increase pressure from investors for Exxon to raise dividends. It devoted $8bn to buying back its own shares and $1.9bn to dividends while adding another $6.9bn to its now $40.9bn cash pile.