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Words from the (Investment) Wise for the Week That Was (September 15 - 21, 2008): Part II

Asha Bangalore (Northern Trust): Industrial Production plunges in August
"Industrial production fell 1.1% after a downwardly-revised 0.1% gain in July. The large monthly decline was due to an 11.9% drop in production of motor vehicles. Total factory production fell 1.0% in August, after a 0.1% drop in the prior month. A drop in factory production of a similar magnitude, excluding the Katrina-related decline, was last seen in 2003. Excluding autos, factory production declined 0.3%. Precautionary shutdowns due to Hurricane Gustav led to a drop in production at refineries. Mild weather led to a 3.2% reduction in utilities. Production in the high-tech sector held steady in August after a 1.3% increase in the prior month.

"In sum, industrial production data suggest that the economy is in the midst of a recession."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, September 15, 2008.

Asha Bangalore (Northern Trust): Current account deficit widens in Q2
"The current account deficit of the US economy widened to $183.1 billion in the second quarter from $175.6 billion in the first quarter. The current account as a percentage of GDP was 5.12% versus 4.96% in the first quarter. The trade deficit on goods increased to $216.3 billion during the second quarter versus $211.0 billion in the prior quarter."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, September 17, 2008.

Asha Bangalore (Northern Trust): Home building activity remains weak
"Starts of new homes fell 6.2% to an annual rate of 895,000 in August, putting the peak-to-trough decline at 60.6%. The total starts and permits estimate appears to be still distorted from the building code changes in New York. On a year-to-year basis, single-family starts were down 36.5%, with the largest drop for the current downturn recorded in April (-43.8%), implying a deceleration in the pace of declines in construction of new homes."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, September 17, 2008.

Asha Bangalore (Northern Trust): Consumer Price Index - August 2008
"The Consumer Price Index (CPI) fell 0.1% in August, after a string of three significant monthly gains. On a year-to-year basis, the CPI has moved up 5.4% in August compared with a 4.1% increase in all of 2007. During the three months ended August, the CPI has risen at an annual rate of 7.2% versus a 10.6% gain during the three months ended July. The 3.1% drop in energy prices reflects a 4.2% drop in gasoline prices, lower prices for natural gas and heating oil but higher prices for electricity. The food price index moved up 0.6%, putting the year-to-date gain at 7.5%. In 2007, food prices rose 4.9%, after a 2.1% increase in 2006.

"Excluding food and energy, the core CPI rose 0.3% in August, translating to 2.54% year-to-year gain versus a 2.44% increase in 2007. In August, prices of clothes advanced 0.5%, car prices fell 0.6%, airfares increased 1.6%, while the shelter index moved up only 0.1%, and recreation costs rose 0.5%. The financial market crisis underway and a significantly weak economy point to a noticeable moderation of inflation in the months ahead."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, September 16, 2008.

Bill King (The King Report): Facing the consequences of Easy Al's policies
"Why did regulatory malfeasance and neglect occur? As we have maintained for years, Easy Al with the acquiesce of Congress and the Bush, Clinton and Bush administrations tried to paper over diminishing US living standards cause by the massive transfer or wealth from US consumers to BRIC nations and OPEC.

"Bubbles do not occur by accident; they are the residue of design - a profligate money policy to paper over: diminishing living standards, a nation's unwarranted consumption and ballooning external debt.

"Instead of the financial markets, particularly the stock market, acting as a gauge or beneficiary of economic activity, the financial markets became the most important generator of US economic activity. This was the 'new economy', AKA egregiously levered financial speculation and engineering.

"Long-time readers know that one of our postulations is that 20th Century big government - communism, socialism, fascism, 'the third way' and crony capitalism - are imploding with the weakest going first.

"The bankruptcy of the communist world in the '90s plus Japan's pricking of its bubble created an insatiable global demand for dollars. Easy Al exploited this phenomenon by creating bubbling amounts of credit. Then Easy Al ran interference for Street speculators at Congress. Al brayed that any interference, regulation or scrutiny of the Street's massive levering, unfathomable risk tolerance and rank speculation would impair the US economy because foreign competitors would eagerly adopt The Street's self-immolating schemes and practices. The consequences are now occurring."

Source: Bill King, The King Report, September 19, 2008.

Infowars: Ron Paul blasts "secret government" running economy
"Congressman Ron Paul has issued a stinging address concerning the financial crisis in which he outlines how the current economic problems, created via malinvestment and shift to a debt based economy, are now being mismanaged by private interests in secret."

Click here for the full article.

Source: Steve Watson, Infowars, September 18, 2008.

Bespoke: 3-Month Treasuries Will Now Get You $89 on $10,000 p.a.
"The move to nearly 0% on the yield of 3-month Treasuries was really the sign that a modern day bank run was occurring. As investors withdrew money from brokerage, money market, savings, and even checking accounts, one of the only other places to go (other than under the mattress) was into short-term Treasuries. As shown in the chart below, the actions by the US government over the last two days have thwarted an extension of this bank run. With the Fed announcing that all money market funds would be insured, investors have gained confidence back in the system, and the yield on short-term Treasuries has spiked higher.

"A $10,000 investment in 3-Month Treasuries will now get you $89 per year. That's much better than the $4 we of earlier in the week."

Source: Bespoke, September 19, 2008.

Bloomberg: Emerging-market bonds tumble as credit crisis deepens
"Bonds from Argentina, Ecuador and Venezuela, the highest-yielding government debt in emerging markets, tumbled as investors shunned all but the safest securities as the credit crisis worsened.

"Emerging-market bond losses deepened on speculation the Federal Reserve's takeover of American International Group will fail to restore confidence.

"'The outlook remains negative,' said David Spegel, head of emerging-market strategy at ING Financial Bank NV in New York. 'Access to funding is going to be severely curtailed.'"

Source: Lester Pimentel, Bloomberg, September 17, 2008.

David Fuller (Fullermoney): Bond yields reflect crunching global recession
"We have seen inflation ... but we have also experienced a perfect storm of disinflationary pressures this year, caused by the west's ongoing credit crisis and banking insolvency problems, to burst housing bubbles and the oil price shock. Global deleveraging continues. We have also seen a flight to government bonds.

"This certainly challenges the lengthy bottoming out hypothesis for government bond yields (topping out for bond prices) that I have advocated. Quite simply, the game has changed and some people think US 10-Year Yields will fall to 2%.

"I doubt this because I do not expect the crunching global recession that it would imply. I think government bond yields will start to rise as the stock market begins to anticipate the next economic recovery."

Source: David Fuller, Fullermoney, September 16, 2008.

Bespoke: Sector performance since July 15th
"While the July 15th S&P 500 lows have been handily broken, there are three sectors which have managed to stay above their closing levels from that day. Interestingly, two of them are not defensive and they are not sectors that have managed to insulate themselves from the housing meltdown. In fact, they are the sectors which got us here in the first place! As shown below, the two sectors that have done best since July 15th are Consumer Discretionary and Financials!"

Source: Bespoke, September 19, 2008.

Bespoke: VIX spikes to 35
"Below we highlight a chart of the VIX index that measures volatility. As shown below, today's spike to 35 would mark the highest closing price since late 2002. People have been waiting for this spike to signal a short-term bottom, but while this is the highest level of the current bear market, it got well into the 40s back in '98 and the early 2000s."

Source: Bespoke, September 18, 2008.

CNBC: Will markets get worse?
CNN's Andrew Stevens talks to Jim Rogers about what's ahead for world stock markets.

Source: CNBC, September 18, 2008.

David Fuller (Fullermoney): The beginning of the end of bear market
"Investor psychology has been dominated primarily by fear during the last fifteen months, and not without good reason, as we have increasingly discovered. The experience has been traumatic and in the west we have seen financial developments that go beyond our personal experience.

"However we also know that the world does not end, at least not for manmade financial reasons. Bear markets are temporary because there are limits to deleveraging and asset liquidation. Recent action represents the fifth wave of capitulation selling that we have seen. Cash is an appealing haven in times of crisis, but it is also a wasting asset over the long term.

"With bank shares still reeling, we obviously cannot say that the problems are over. Consequently the risk of additional selling remains. Stock market indices are in downtrends. Financial sector problems inevitably weigh on the broader economy, although the latter will remain in better overall shape.

"The really good news - inflation is now a rapidly waning problem, although it will take longer for official statistics to reflect this. If the appropriate analogy is to think in terms of inflationary fire and deflationary ice, we have gone from ice over fire at the beginning of this decade, to fire over ice as central banks stoked up money supply, to ice over fire once again, in response to higher rates and asset price disinflation.

"Consequently central banks are now in a position to switch their policy emphasis from fighting inflation to stimulating GDP growth. They may remain crisis oriented, but at least we are beginning to see the coordinated intervention that I have been discussing and expecting.

"I will certainly not be selling during what I expect is the beginning of the end of this bear market. However, as conditions improve I am likely to shift some of my 'just in case' cash holding into equities over the next few months. This will almost certainly be in Fullermoney themes, but I will also broaden the portfolio's coverage. Meanwhile, I'm just watching the charts, reading the articles and reports, and commenting."

Source: David Fuller, Fullermoney, September 18, 2008.

The Wall Street Journal: Jeremy Grantham beginning to see value
"Even one of the most notorious bears is starting to concede some shares are reasonably valued. I'm speaking about fund manager Jeremy Grantham, of Grantham Mayo Van Otterloo & Co. I should add the caveat that Mr. Grantham, who has been predicting financial disaster for several years, remains deeply gloomy overall. Nonetheless he now calculates that shares have fallen so far that if you buy a basket of 'high quality' US stocks today and hold them for about seven years, you'll probably end up making about a 50% profit - after inflation.

"Stocks that even Jeremy Grantham likes come pretty well recommended even in a financial crisis. His top 'high quality' picks are Microsoft, Johnson & Johnson, Pfizer, Wal-Mart, Exxon Mobil, Coca-Cola, PepsiCo, Chevron, UnitedHealth Group, Procter & Gamble, QUALCOMM, Oracle, Merck, Home Depot, and Cisco Systems. (It sort of looks like a typical 'Large Cap' fund without the financial stocks.) If you are really nervous, maybe you should just sell your other shares and buy these."

Source: Brett Arends, The Wall Street Journal, September 18, 2008.

Goldman Sachs: Bear market troughs - a history of 10 cycles
"The S&P 500 has declined by 26% since the October 2007 peak, with a third of the decline occurring in the past three weeks. If the current bear market followed historical precedent, the S&P 500 would trough at 1070. Our fundamental analysis suggests the market will bottom in 4Q 2008, but we have less conviction regarding the precise trough level.

"The path to the trough varies in each cycle. It may be a sharp 3-month correction (1957, 1987, & 1990) or a decline lasting over 18 months (1968, 1973, 1980, & 2000). Bear markets over the past 50 years have declined on average 32%, with 10% occurring in the final month. Rebounds are sharp, averaging 15% in the following three months.

"Using returns and valuation in prior bear markets as a template to assess the current situation implies the S&P 500 would bottom at 1070.

"Our profit cycle trilogy suggests the market bottoms 4 months before corporate profits trough, which we anticipate will occur in 1Q 2009. This pattern suggests the S&P 500 will trough in 4Q 2008. Consistent with history, a sharp rally would lift the market towards our 1400 target."

Source: Goldman Sachs, September 18, 2008.

Richard Russell (Dow Theory Letters): Nineteen 90% down-days
"Lowry's ominously reports that since this decline began, there have been a total of nineteen 90% down-days, the most of any period in the 75 year history of the Lowry's studies. I see this as massive distribution of stocks, and the implications of this are not pretty. Why have large sophisticated interests been so anxious to unload stocks, many times on rallies? We'll know the answer to this question in the fullness of time. I can't come up with the exact reason, but the action is hardly comforting."

[Editor: Friday was a 90% up-day.]

Source: Richard Russell, Dow Theory Letters, September 18, 2008.

Richard Russell (Dow Theory Letters): Bearish trends feed on themselves
"The great tragedy unfolds phase by phase. This is the way I see it. The first phase was the giant edifice of inflated home prices topping out and rolling over. The second phase was the collapse of the great Wall Street houses, the third phase was the stock market sinking day after day. The path of the stock market directly affects public sentiment. And I'm very much afraid that the next phase is going to be a pull back in spending, particularly discretionary spending, by the US public. Jobs will be difficult to find, the word will spread, if you've lost your job, you're not going to find another one at the same level of pay (if you find one at all). This will have an impact on retail sales, and US imports (which will have international implications for the exports of foreign companies, remember, the US is buyer to the world).

"In this atmosphere, the big money, as I see it, will be made by wealthy speculators who will buy up foreclosed housings at bargain prices, often below the cost of replacement. Everything now depends on people being able to finance what they own, and this takes income and cash. The two rarest items around will be just that - cash and income.

"The great danger as I look ahead is that the bearish trends will feed on themselves. Frightened people dump their stocks for cash, the result is a sinking stock market. A sinking stock market further frightens people and pushes them to sell ('get me out at any cost'). When I tell people that the correct posture now should be cash and gold coins, they look at me as though I was crazy. That reaction makes me worry."

Source: Richard Russell, Dow Theory Letters, September 16, 2008.

Reuters: Earnings Outlook - Q3 forecast for S&P 500 drops on financials
"Downgrades to profits forecasts for financial stocks are driving the decline in earnings outlook for the S&P 500 stocks for the third quarter.

"At this time, the estimated growth rate for the third quarter of 2008 stands at -1.6%. On July 1, the estimated growth rate was 12.6%.

"If the final growth rate for the third quarter is -1.6%, it will mark the first time the S&P 500 has recorded five consecutive quarters of negative earnings growth since the first quarter 2001 to second quarter 2002.

"Next week, twelve S&P 500 companies are expected to announce. For the second quarter of 2008, S&P 500 earnings growth rate was -22.1%.

"The decline in the third quarter growth rate during the past week can be attributed to downward estimate revisions to a number of companies in the Financials sector including Lehman Brothers."

Source: John Butters, Reuters, September 12, 2008.

MarketWatch: China to purchase stocks, "backstop" market
"The government said a unit of its sovereign wealth fund will purchase shares in three of its largest banks, according to the state-run Xinhua News. State-owned enterprises will also be encouraged to buy back their own shares, and the current levy on stock purchases will be eliminated.

"Central Huijin Investment Co, a unit of the $200 billion China Investment Corp. sovereign wealth fund, will purchase additional shares in the three lenders: Industrial & Commercial Bank of China, China Construction Bank and Bank of China, Xinhua reported.

"Authorities did not indicate how much they planned to spend on the purchases, but said operations had begun Thursday.

"The report said the purpose was 'to shore up their share prices amid stock market slumps'.

"Analysts said the move appears specifically designed to backstop further declines in the Shanghai benchmark, which has slumped 64% so far this year.

"'This announcement represents a significant policy initiative aimed at supporting China's leading financial institutions against the backdrop of turmoil in global markets,' J.P. Morgan's China equities chief Jing Ulrich said in a research note."

Source: Chris Oliver, MarketWatch, September 18, 2008.

David Fuller (Fullermoney): Chinese rate cuts positive for stock market
"China used the mid-Autumn festival holiday, when the market was closed, to make its rate cut announcement, so it will be interesting to see how it is greeted in tomorrow's trading. This should be a net positive for the stock market, as it is a clear indication that the central bank has turned from targeting inflation to growth. The Chinese have been successful in pricking housing and stock market bubbles without conceded too much in terms of economic growth. In turning their attention to supporting the economy and considering the myriad tools and reserves available to them, they have a good chance of preserving their economic expansion albeit at a somewhat slower pace."

Source: David Fuller, Fullermoney, September 15, 2008.

Financial Times: Russian stocks rally as bourses reopen
"Russia's Micex stock market index opened 12.5% higher on Friday as trading resumed after a two day suspension.

"The index of the less liquid RTS exchange opened 2.6% higher, with traders and analysts predicting a major recovery on Friday from more than 20% in losses seen earlier in the week.

"Russia's state controlled oil company Rosneft jumped 25% with state gas export monopoly Gazprom rising 17% and VTB , one of Russias largest banks, soaring 40%.

"President Dmitry Medvedev of Russia pledged $20 billion on Thursday to shore up the nation's stock markets after the worst declines since the August 1998 crash.

"Mr Medvedev's pledge came as the finance ministry rolled out a crisis plan aimed at boosting liquidity in the banking system, which would double the amount of budget funds placed in short-term deposits at the three main state-controlled banks to a total of $59.1 billion."

Source: Catherine Belton and Charles Clover, Financial Times, September 17, 2008.

Richard Russell (Dow Theory Letters): Doubts about stability of dollar?
"Suddenly, everyone wants dollars. This is in sharp contrast to a year ago, when we were told that above all, we must get out of dollars and into any other currency. ... it's interesting that over the last few days investors are swapping their treasured dollars for gold. What's the meaning of this - their doubts about the stability of the dollar? Currently, dollars are flooding the world, and this suggests that there are just too many of these Federal Reserve Notes being produced. When the dollar's seriously in trouble, I think we'll see it in an important decline in the Treasury bonds. Sophisticated bond holders are not going to hold billions in US bonds which are denominated in suspicious currency. Keep your eye on the Treasuries. Foreign central banks are holding a huge hoard of US Treasuries, and if suspicion grows about the sustainability of the dollar, they'll be selling their dollars."

Source: Richard Russell, Dow Theory Letters, September 19, 2008.

Casey's Charts: Foreigners pull plug on dollar recycling program
"Foreign buyers exited the market for US dollar-denominated debt and securities when the credit crisis surfaced in August of 2007. And their return since is proving to be somewhat tentative, as revealed in the latest US Treasury report on capital flows. In July 2008, foreigners once again fled the scene, and were net sellers in US capital markets to the tune of $25.6 billion.

"The stability of US credit markets relies on foreigners recycling their trade surpluses back into the US economy by purchasing dollar-denominated IOUs. As large financial institutions continue to tumble, and the Fed turns on the printing press in an attempt to limit the damage, the flight to safety will mean a flight from the dollar and further trouble for US markets."

Source: Casey's Charts, September 17, 2008.

Richard Russell (Dow Theory Letters): Bernstein - hold some gold
"'The next step in this crisis is hard to predict,' Peter Bernstein says, because the crisis is so unusual. 'Nothing like this has ever happened before,' he continues, 'There have been credit crunches and housing crises and dollar crises, but having all the chickens coming home to roost at the same time and interacting with one another is unique. We have historical perspective on the parts, but not the whole, and that makes things both interesting and scary.'

"Bernstein also recommends holding some gold as a hedge against a collapse in the value of the dollar if China or other nations decide that they no longer want to invest as much in US Treasuries. 'In a total disaster, where there is a run from paper currency, you'll get your biggest bang for your buck in gold,' he says. You don't have to buy much gold to have an effective hedge, he adds, noting that 'if everything hits the fan, gold should be worth several thousands dollars an ounce.' 'Above all, don't let your defensive attitude waver, Bernstein counsels.'"

Source: Richard Russell, Dow Theory Letters, September 15, 2008.

MoneyWeb: Jeffrey Christian, CPM Group, on gold price jump
: Well, it's across to Vancouver now, where we link up with Jeff Christian, managing director of the CPM group. Jeff, earlier today your time, or North American time, the gold price jumped $50 in a period of 10 minutes. It's holding that level above $830/oz - do you have any insight into what's going on?

JEFFREY CHRISTIAN: Well, there's a mistake that people regularly make about gold when you see a financial crisis like we are seeing this week. People are always expecting gold to skyrocket immediately. And usually if you look at it - you know, October 1987, August 2007, this week - typically what often happens is that gold prices fall initially and then they rise. And the reason for that is one of the functions gold serves for investors is it's a source of liquidity in a time of crisis. That's why people want gold, because if things get really nasty in the financial markets: 'I've got gold, I can sell to raise cash.' We saw on Monday and Tuesday some of that liquidity rush, in the rush to cash, the rush to convert you money into US dollars, and buy US Treasury-guaranteed investments with it. And that pushed gold and silver down. I think what you're seeing now is that that liquidity rush is over. Meanwhile you have this tremendous demand for gold and silver in physical form around the world. People are paying record high premiums for gold and silver; in India there are reports of tightness in an investment for silver and gold by North America and Europe. So I think what you are seeing - the paper market can swamp the physical market for a time, but the physical market ultimately trumps the paper market - and that's what you are seeing.

ALEC HOGG: Jeff, is gold then acting like a canary in a financial services coal mine?

JEFFREY CHRISTIAN: I don't know if that's the right metaphor. Gold is more acting like the fire extinguisher in a burning building. It's what you grab when you really want to make it to the door. A canary in a gold mine dies in an emergency. Gold thrives in an emergency.

ALEC HOGG: And how much of an emergency is this? We've seen the Federal Reserve in the United States bailing out AIG, the biggest insurance company in the world. Next on the chopping block seems to be Washington Mutual, and big questions marks about who might come thereafter. This seems to be an ideal environment for gold to flourish?

JEFFREY CHRISTIAN: I think I said it when I was in your studio in August - we are having troubles at CPM Group coming up with scenarios in which the gold price falls in the next several quarters significantly, and in which the gold bull market ends. This is in fact probably the ideal time - financial market conditions are more unruly than ever - at least since World War II, and maybe the Great Depression and the panic of 1907. This is a worse financial market than we had in '79/'80. Things are very bad, we are not out of the woods. I think that we are - Churchill's famous statement - at the end of the beginning of the financial market unrest, and I think there's a lot more to come, and a lot more will come that is going to keep gold in the hearts and minds of investors for at least another six or eight months.

ALEC HOGG: Perhaps we could close off with Mike Myers' statement again: "I love go-o-o-old!" It was a great movie, Goldmember.

Source: Alec Hogg, MoneyWeb, September 17, 2008.

Charleston Voice: Gold - the greatest government lie ever told
"I have now concluded our country's treasury no longer has any gold reserves. The gold our ancestors entrusted to government for safeguarding is gone. Congress has been rebuffed on numerous occasions when requesting a physical audit. The Treasury balance sheet lists something like 261 million ounces. Oh yeah? Show us. Let others accept the 'trust me' argument, but as for me that's a worn out response.

"Even worse, this gold has been jettisoned off by lease, swaps, or loaned. In all of the instances our gold will never be returned. It's gone, and the American people are the poorer, and must rebuild their lives and their country from scratch.

"The bankers have moved on to more fertile ground for they are international bankers with allegiance to no sovereign.

"For a patriotic, moral, and gracious people I can think of no greater lie ever being told."

Source: Charleston Voice, September 18, 2008.

BCA Research: Crude oil prices melt!
"Crude oil prices broke decisively below $100/bbl on a worsening global macro backdrop and a rapid unwinding of decoupling bets. The growth slump has spread across the developed world and is threatening many emerging markets, causing investors to scale back expectation for energy demand and allowing prices to plunge lower. Implied option volatility has been high and rising for many commodities, which is typical capitulation selling. While these phases do not typically last long, we advise against buying into weakness at this time.

"At a time when the global economy is in desperate need of liquidity, hesitant central banks and a broadening in the financial sector crisis continue to undermine growth expectations. Lower energy and food prices will help to bring down inflation in the coming months, eventually opening the door to policy easing that will sow the seeds of the next economic upturn. Still, until then, crude prices are likely to face downside risks."

Source: BCA Research, September 16, 2008.

Victoria Marklew (Northern Trust): UK - increasingly gloomy outlook increases odds of a Q4 rate cut
"The past two days have presented us with a clear picture both of the stresses facing the British economy and the thinking of the Bank of England's Monetary Policy Committee (MPC). Today saw the release of the minutes of the September 3-4 MPC meeting. Eight of the members opted to keep the repo rate at 5.0%, one argued for a 50bp cut, and no-one made the case for a rate hike. The members concluded that there had been both upside and downside developments over the previous month. Interestingly, the members also emphasized that the Council would continue to make its judgment each month on the basis of changing evidence.

"In sum, while the MPC is minded to keep rates on hold for now, the members, and the Governor, have been at pains to emphasize that they will 'examine the latest developments, including those in financial markets, to assess how the balance of risks is evolving at its next and subsequent meetings'. With unemployment rising sharply, export orders sliding, and the ongoing woes in the financial sector (particularly worrisome for the UK given London's prominence in the global financial system), our best guess is that the odds now favor a rate cut in Q4 2008 - but those odds could change again by tomorrow."

Source: Victoria Marklew, Northern Trust - Daily Global Commentary, September 17, 2008.

Bloomberg: China may cut rates again, boost spending for growth
"China may cut interest rates again, ease limits on bank lending and boost spending to spur economic growth after lowering borrowing costs for the first time in six years.

"'Policy makers will consider further interest-rate cuts in the coming month, in conjunction with a more proactive fiscal policy,' said Jing Ulrich, chairwoman of China equities at JPMorgan Chase & Co. in Hong Kong. The central bank yesterday reduced the one-year lending rate and lowered the proportion of deposits that the nation's smaller banks must set aside.

"The slowest inflation in 14 months gave China room to lower borrowing costs and protect jobs as the outlook for exports dims and the credit crisis deepens.

"'A gradual easing cycle has probably begun,' said Alec Young, an international equity strategist at Standard & Poor's in New York. 'The focus is no longer on inflation and is more on China's growth. The rest of the world is flirting with a recession and China's growth is slowing too.'

"The People's Bank of China reduced the one-year lending rate to 7.20% from 7.47%, effective today. It lowered the reserve-requirement ratio for smaller banks to 16.5% from 17.5%."

Source: Li Yanping and Kevin Hamlin, Bloomberg, September 16, 2008.

Financial Times: Zimbabwe rivals agree on power-sharing
"Zimbabwe's rival politicians pledged to work together for a 'better Zimbabwe' on Monday after signing a historic power-sharing agreement in Harare.

"Completing a nine-year march to office that has seen him routinely harassed and occasionally beaten by state forces, Morgan Tsvangirai, leader of the Movement for Democratic Change, called on Zimbabweans to consign divisions to the past.

"'This agreement sees the return of hope to all our lives. It is this hope that provides the foundation of this agreement that we sign today, that will provide us with the belief that we can achieve a new Zimbabwe,' said Mr Tsvangirai, who becomes prime minister in the new administration.

"International reaction to the deal remained cautious. Power and ministerial positions will now be divided up roughly evenly between President Robert Mugabe and his opposition rival, with a small breakaway faction of the MDC holding the balance with three positions in the cabinet. However, if all goes to plan, Mr Tsvangirai will lead day-to-day running of government and gain control of the budget.

"The agreement recognises that there will be nothing to spend, however, unless western countries put an end to Zimbabwe's economic isolation and allow it access to credit from international financial institutions.

"European Union foreign ministers meeting in Brussels issued a statement saying: "The EU stands ready to adopt a set of economic support measures and measures to support a transitional government ..."

"Mr Tsvangirai promised 'a new way of governing where we serve the needs of the people'.

"He pledged also to 'restore the value of the currency', battered by inflation that some estimate has now reached 40 million per cent."

Source: Tony Hawkins, Financial Times, September 14, 2008.

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