What a tragic and disturbing week. As for stocks, the Dow gained 0.5%, and the S&P500 rose 1.0%. The Transports slipped 0.4%, while the Utilities surged 2.6%. The Morgan Stanley Cyclical index increased 1.0%, while the Morgan Stanley Consumer index added 0.8%. The broader market was quite strong. The small cap Russell 2000 jumped 2.3%, and the S&P400 Mid-cap index gained 1.3%. The NASDAQ100 rose 0.9%. The Morgan Stanley High Tech and Semiconductors indexes gained 0.7%. The Street.com Internet Index increased 1%, and the NASDAQ Telecommunications index added 0.7%. The Biotech index surged 4.6%. The financial stocks rallied. The Broker/Dealer index gained 1.7% and the Banks rose 1.3%. With gold up $6.70 the HUI index rose 4.4%.

Crisis fed the bond market. For the week, two-year Treasury yields sank 31 basis points to 3.75%, and five-year government yields fell 24 basis points to 3.84%. Meanwhile, ten-year Treasury yields sank 15 basis points for the week, to 4.03%. Long-bond yields declined 8 basis points to 4.29%. The spread between 2 and 10-year government yields increased to 28 basis points. Benchmark Fannie Mae MBS yields declined in line with the 10-year Treasury note. The spread (to 10-year Treasuries) on Fannie's 4 5/8% 2014 note was little changed at 31, and the spread on Freddie's 5% 2014 note was unchanged at 31. The 10-year dollar swap spread slipped .25 to 44.0. Corporate bond spreads were little changed, although junk bond spreads widened slightly. The implied yield on 3-month December Eurodollars sank an eye-opening 35 basis points to 3.955%, and December '06 Eurodollar yields fell 35.5 basis points to 4.14%.

This week's light investment grade issuance included MBNA Europe $900 million, Caterpillar $250 million, and United Dominion Realty $100 million.

Junk bond funds reported outflows of $101.5 million (from AMG).

Japanese 10-year JGB yields dropped 9.5 basis points this week to 1.305%. Emerging debt markets rallied strongly. Brazil's benchmark dollar bond yields sank 30 basis points to 7.74%. Mexican govt. yields fell 22 basis points to 5.16%. Russian 10-year dollar Eurobond yields dropped 17 basis points to 6.01%.

Freddie Mac posted 30-year fixed mortgage rates fell 6 basis points to 5.71%, with a three-week decline of 18 basis points (down 6bps from one year ago). Fifteen-year fixed mortgage rates fell 3 basis points to 5.32%. One-year adjustable rates fell 8 basis points to 4.48%, up 51 basis points from the year ago level. The Mortgage Bankers Association Purchase Applications Index declined 3.6%. Purchase applications were 6.8% ahead of the year ago level, with dollar volume up 19%. Refi applications fell 5.4%. The average new Purchase mortgage declined to $240,600, while the average ARM increased to $335,800. The percentage of ARMs slipped to 27.8% of total applications.

Broad money supply (M3) surged $59 billion to a record $9.898 Trillion (week of August 22). Year-to-date, M3 has expanded at a 6.8% rate, with M3-less Money Funds expanding at a 8.3% pace. M3 has expanded $273 billon over the past 14 weeks, or 10.5% annualized. For the week, Currency added $1.4 billion. Demand & Checkable Deposits jumped $25.4 billion. Savings Deposits declined $7.4 billion, while Small Denominated Deposits gained $2.0 billion. Retail Money Fund deposits expanded $1.7 billion, and Institutional Money Fund deposits increased $4.9 billion. Large Denominated Deposits jumped $15.9 billion, with a y-t-d gain of $208.1 billion (29.5% annualized). For the week, Repurchase Agreements jumped $17.6 billion, while Eurodollar deposits declined $3.7 billion.

Bank Credit rose $28.2 billion last week. Year-to-date, Bank Credit has expanded $579.5 billion, or 13.1% annualized (up 10.7% in one year). Securities Credit added $5.8 billion during the week, with a year-to-date gain of $148 billion (11.8% ann.). Loans & Leases have expanded at a 14.0% pace so far during 2005, with Commercial & Industrial (C&I) Loans up an annualized 18.4%. For the week, C&I loans gained $2.3 billion, while Real Estate loans increased $3.6 billion. Real Estate loans have expanded at a 15.6% rate during the first 34 weeks of 2005 to $2.801 Trillion. Real Estate loans were up $372 billion, or 15.3%, over the past 52 weeks. For the week, Consumer loans rose $1.8 billion, while Securities loans gained $6.3 billion. Other loans jumped $8.7 billion.

August 31 - Bloomberg (Harris Rubinroit): "Federated Department Stores Inc., the owner of Macy's and Bloomingdale's, obtained $7 billion in credit lines to help fund the acquisition of May Department Stores Co.... Federated received a $5 billion, 364-day bridge loan... The interest rate payable is 29 basis points, or 0.29 percentage points, more than the London interbank offered rate."

Total Commercial Paper jumped $15.3 billion last week to $1.602 Trillion. Total CP has expanded $187.9 billion y-t-d, a rate of 19.7% (up 17.6% over the past 52 weeks). Financial CP gained $15.1 billion last week to $1.460 Trillion, with a y-t-d gain of $176.1 billion (20.4% ann.). Non-financial CP added $0.2 billion to $141.4 billion (up 13.7% ann. y-t-d and 10.1% over 52 wks).

ABS issuance this week was a late-summer $4 billion (from JPMorgan). Year-to-date issuance of $493 billion is 21% ahead of comparable 2004. Home Equity Loan ABS issuance of $319 billion is 24% above comparable 2004.

Fed Foreign Holdings of Treasury, Agency Debt gained $2.3 billion to $1.468 Trillion for the week ended August 31. "Custody" holdings are up $132.4 billion y-t-d, or 14.7% annualized (up $186bn, or 14.5%, over 52 weeks). Federal Reserve Credit jumped $6.4 billion to $798 billion. Fed Credit has expanded 1.4% annualized y-t-d (up $33.7bn, or 4.4%, over 52 weeks).

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $611 billion, or 18.4%, over the past 12 months to $3.925 Trillion. South Korean reserves surged 26.1% to $206.38 billion over the past 12 months.

Currency Watch:

The dollar index sank 2% this week. On the upside, the Polish zloty jumped 5.2%, the Czech Koruna 4.2%, the Indonesian rupia 4.2%, the Norwegian krona 4.0%, South African rand 3.7%, and Iceland krona 3.4%. On the downside, the Jamaica dollar slipped 0.5%, the Peruvian sol 0.5%, and Taiwan dollar 0.1%.

Commodities Watch:

October crude oil gained $1.44 to $67.57. October Unleaded gasoline surged 18% to a new record high. For the week, the CRB index gained 4.5%, increasing y-t-d gains to 16.7%. The Goldman Sachs Commodities index surged 6.1%, with 2005 gains rising to 49.2%.

China Watch:

August 29 - Bloomberg (Bradley Cook): "China and Russia may stop using the dollar to service bilateral trade, RIA Novosti said, citing Garegin Torsunyan, head of the Association of Russian Banks. The two countries started moving in this direction by letting their banks open corresponding accounts with each other"

Asia Boom Watch:

August 31 - Bloomberg (Kathleen Chu): "Japanese housing starts rose in July 8.3 percent from a year earlier to the most in about eight years, the Ministry of Land, Infrastructure and Transport said in Tokyo. Housing starts rose in the month to an annualized 1.335 million units..."

September 1 - Bloomberg (William Sim): "South Korean exports rose in August at the fastest pace in nine months as consumers spent more in China and the U.S., the nation's biggest overseas markets. Overseas sales rose 18.8 percent from a year earlier to $23.5 billion after gaining 10.9 percent in July..."

September 1 - Bloomberg (Anuchit Nguyen): " Thailand's inflation rate accelerated in August to the highest in almost seven years as rising fuel costs increased bus fares and other product prices. The consumer price index rose 5.6 percent from a year earlier after climbing 5.3 percent in July..."

September 1 - Bloomberg (Aloysius Unditu and Arijit Ghosh): "Indonesia's inflation rate accelerated in August, adding to pressure for a further increase in interest rates on top of the three-quarter percentage point rise announced by the central bank this week. Consumer prices rose 8.3 percent from a year ago after increasing 7.8 percent in July..."

Unbalanced Global Economy Watch:

August 31 - Bloomberg (Theophilos Argitis): "Canada's economy grew at a faster-than-expected 3.2 percent annual pace last quarter as consumers and companies reduced purchases of goods made overseas. Growth exceeded the 2.7 percent median estimate..."

September 2 - Bloomberg (Sam Fleming): "A measure of U.K. construction activity rose to its highest in sixteen months in August, suggesting the slowdown in consumer spending during the first half of the year hasn't spread to other parts of the economy."

August 31 - Bloomberg (Simone Meier): "French joblessness recorded its biggest drop in more than four years in July, sending the unemployment rate to a two-year low, fueled by subsidized jobs. The number of unemployed fell by 30,000 to 2.42 million..."

August 31 - Bloomberg (Ben Sills): "Domestic demand in Spain was the biggest contributor to economic growth in the second quarter, helping Europe's fifth-largest economy expand at almost three times the rate of the euro zone... Spain's economy grew 0.9 percent in the second quarter from the previous three months and 3.4 percent from a year earlier..."

August 31 - Bloomberg (Trygve Meyer): "The pace of borrowing by Norwegian households and businesses in July advanced to the highest in more than four years, raising pressure on the country's central bank to raise interest rates for a second time this year. Credit growth for households, companies and municipalities accelerated for a sixth month to an annual 11.2 percent..."

August 29 - Bloomberg (Trygve Meyer): "Norwegian retail sales rose more than expected in July as the Nordic country's consumers boosted spending on clothing, shoes and building materials for refurbishing their homes. The seasonally adjusted index rose 1 percent from June and 7.3 percent from a year earlier..."

August 31 - Bloomberg (Jonas Bergman): "Swedish consumer optimism surged to a four-and-a-half year high in August after the central bank cut interest rates to a record low in June to revive the largest Nordic economy."

August 29 - Bloomberg (Tasneem Brogger): "Swedish, Norwegian and Finnish consumers grew more optimistic in August as they benefited from higher employment, an accelerating economy, lower taxes and cheap mortgages, surveys of economists showed."

September 1 - Bloomberg (Victoria Batchelor): "Australian business investment rose at twice the pace expected by economists in the second quarter, helping spur growth in the Asia-Pacific's fifth-biggest economy as consumer spending slows. Capital spending on equipment, buildings and plant rose 7.3 percent in the three months ended June 30..."

August 31 - Bloomberg (James Cordahi and Andy Critchlow): "Dubai's economy is booming, thanks to record oil prices and surging real estate values. The Dubai Financial Market has more than tripled in value in 12 months. Each week brings more news of record profits for companies and announcements of yet another gigantic construction project. The $1 billion Burj Dubai, for example, is planned to be the world's tallest building at more than 800 meters (2,625 feet) when it's completed in 2009."

September 1 - Bloomberg (Marc Wolfensberger): "Iranian consumer prices rose 15.7 percent over the past 12 months, Iran Daily reported, citing data provided by the Central Bank of Iran."

Latin America Watch:

August 31 - Bloomberg (Guillermo Parra-Bernal): "Brazil's economy expanded more than expected in the second quarter as a surge in exports of products such as iron, sugar and trucks more than offset a slump in domestic demand. Stocks, bonds and the currency gained. Gross domestic product grew 3.9 percent from a year earlier, faster than the 2.8 percent growth in the first quarter..."

September 2 - Bloomberg (Carlos Caminada): "Brazilian imports surged to a record in August as a strengthening currency made purchases of machinery and other goods abroad cheaper. Imports rose 27 percent from July, the fastest pace in 17 months, to $7.68 billion..."

August 29 - Bloomberg (Alex Kennedy): "Venezuela boosted government spending by 21 percent in June as higher revenue from record oil prices funded increased outlays for social programs such as job training and literacy classes."

Bubble Economy Watch:

September 1 - Dow Jones: " U.S. home prices surged an average 13.4% during the 12 months ended June 30, reflecting the largest yearly jump in 25 years, new federal statistics show. The Office of Federal Housing Enterprise Oversight, which regulates Fannie Mae and Freddie Mac, said Thursday that U.S. house price growth doesn't look like it will slow anytime soon. 'On the contrary, house price inflation continues to accelerate as some areas that have experienced relatively slow appreciation are picking up steam,' OFHEA Chief Economist Patrick Lawler said... 'There is no evidence here of prices topping out.'"

July Personal Income was up 0.3%, with a y-o-y increase of 6.3%. Personal Spending was up 1% for the month and 6.9% over the past year.

September 1 - MarketNews: "The following is the text released...by Monster.com for its monthly index of employment for August: U.S. Online Job Demand Surges in August, Lifting Monster Employment Index to Highest Level Ever. Sharp Rise in Online Recruitment Activity Nationwide Indicates Continued Labor Market Strength as Fall Hiring Season Approaches... Index jumps 8 points to a record-high level of 142; up dramatically from July and 30 points higher compared to a year ago..."

California Bubble Watch:

August 31 - PRNewswire: "Luxury home prices posted double-digit gains and rose to all-time highs in Los Angeles, San Diego and San Francisco in the second quarter of 2005 compared to a year ago, according to the First Republic Prestige Home Index... Los Angeles values jumped 2.6% from the first quarter of 2005...and rose 21.9% from the second quarter a year ago. The average luxury home in Los Angeles is now a record $2.09 million, up $376,000 from a year ago... San Diego values increased 2.2% from the first quarter...and were up 16.5% from the second quarter a year ago. The average luxury home in San Diego topped $2 million for the first time... San Francisco Bay Area values rose 3.9% from the first quarter of 2005...and gained 10.4% from a year ago. San Francisco luxury home values remain the highest in the state at a record $2.8 million..."

Mortgage Finance Bubble Watch:

August 29 - Mortgage Bankers Association: "Commercial and multifamily mortgage bankers' loan originations set a new record during the second quarter of 2005... The $44.4 billion in loan originations reported for the second quarter was 25% higher than the second quarter of 2004 and 41% higher than the first quarter of 2005. Second quarter originations were also 4% higher than the fourth quarter of 2004, which had previously been the largest single quarter for originations volume... MBA also reported that year-to-date loan originations were 31% higher than they were last year at this time. 'Capital continues to flow into the commercial and multifamily real estate markets on both the debt and equity sides,' noted Douglas Duncan, MBA chief economist...'And so far, no significant obstacles to that flow have appeared, whether in the form of higher interest rates, declining loan performance or declining property performance.'"

I will not address the markets, economy, "money," or Credit during the week of our nation's most tragic natural disaster. Like everyone, I am deeply saddened and my heart goes out to so many that are suffering so much. And, like many, I am appalled by our federal government's response to a disaster that was anything but unpredictable. It is hurricane season, for heaven's sake, and a major storm season has been predicted by the experts. New Orleans' dangerous vulnerabilities were also well-known. Especially considering the amount of money and resources devoted to national defense and homeland security, this week was a national disgrace.