Stocks ended the quarter on a positive note. For the week, the Dow gained 1.4% and the S&P500 added 1.1%. The Transports jumped 3.2%, and the Utilities gained 2.7%. The Morgan Stanley Consumer index rose 1.8%, and the Morgan Stanley Cyclical index gained 1.1%. The broader market rallied strongly. The small cap Russell 2000 rose 1.9% and the S&P400 Mid-cap index jumped 2.2%. Technology remains strong. The NASDAQ100 rose 1.9%, and the Morgan Stanley High Tech index increased 2.1%. The Semiconductors jumped 3.2%. The Street.com Internet Index gained 1.8%, and the NASDAQ Telecommunications index added 0.8%. The hot Biotechs gained 2.7%. Once again, the financial stocks were mixed. The Broker/Dealers jumped 3.3%, while the Banks declined 0.6%. With bullion up $6.05, the HUI Gold index gained 3.5%.

Yields are moving decidedly higher. For the week, two-year Treasury yields surged 15 basis points to 4.17%, a four-year high. Five-year government yields jumped 12 basis points to 4.19%. Bellweather 10-year yields gained 8 basis points for the week to 4.33%. Long-bond yields added 5 basis points to 4.60%. The spread between 2 and 10-year government yields narrowed 8 to only 16 bps. Benchmark Fannie Mae MBS yields rose basis points, right in line with 10-year Treasuries. The spread (to 10-year Treasuries) on Fannie's 4 5/8% 2014 note was unchanged at 30, and the spread on Freddie's 5% 2014 note widened one basis point to 30. The 10-year dollar swap spread increased 1.25 to 46.0, the highest close since mid-May. Corporate bond spreads narrowed, with junk bonds outperforming. The implied yield on 3-month December Eurodollars gained 13 basis points to 4.375%, rising above pre-Katrina levels. December '06 Eurodollar yields surged 17.5 basis points to 4.60%.

This week's investment grade corporate issuance was steady at $13.8 billion. Issuers included AIG $1.5 billion, JPMorgan Chase $1.25 billion, Countrywide $500 million, Cytec Industries $500 million, Baxter Finco $500 million, Detroit Edison $250 million, Appalachian Power $250 million, Burlington Northern $245 million, Equitable Resources $150 million, and Hornbeck Offshore $75 million.

Junk bond funds reported outflows jumped to $1.3 billion (from AMG). Issuers included Neiman Marcus $1.2 billion, Whiting Petroleum $250 million, Chart Industries $170 million, Pregis $150 million, US Airways $125 million, G Steel $100 million, and Drivetime Auto $80 million.

September 26 - Bloomberg (Steve Rothwell): "Strong investor demand for issues denominated in euros helped drive offerings of international bonds up 15 percent to $1.94 trillion in year to Sept. 23, from $1.76 trillion a year earlier. If that pace continues, the total for the year could reach a record $2.7 trillion, 15 percent more than 2004's $2.35 trillion, which was also a record. Issuance in euros, which accounts for an increasing share of the market, was also at a record pace. Some 58 percent of international bonds -- or $1.12 trillion -- were denominated in euros this year, up from 56.3 percent last year and 44.6 percent in 2000."

Foreign dollar debt issuers included BNP Paribas $2.25 billion, Islandsbank $1.05 billion, China Development Bank $1.0 billion, Osterreich Bank $1.0 billion, Woori Bank $500 million, Cathay United $500 million, and Russian Standard Bank $500 million.

September 27 - Financial Times (Paul J. Davies): "It is proving a bumper year for lending to Russian companies and everyone wants to be in on the action. A senior German banker complains that if you want to fly with British Airways or Lufthansa from London or Frankfurt to Moscow you now have to book more than three weeks in advance - and that includes economy class. The expected completion of a $12bn loan to Gazprom to fund its purchase of Roman Abramovich's 72 per cent stake in Sibneft will overtake the recent $7.5bn loan to Rosneftegaz, which was already the largest single loan to the country. These huge deals for the state-backed companies, that are effectively consolidating Kremlin control over the country's oil and gas industry, are unique and unlikely to be repeated on such a scale, according to bankers. But they are helping to develop a market that is expected by many to continue growing strongly. Oliver Duff, head of European syndication at Morgan Stanley, says: 'These jumbo loans are very important because they immediately reset market capacity and are likely to increase the amounts banks will be willing to lend in the future.' According to figures from Loan Radar... lending so far this year to Russian companies was already more than $16bn versus $11bn for all of 2004, before the two mega-deals at Gazprom and Rosneftegaz."

With this week's data confirming an increasingly entrenched recovery, Japanese 10-year JGB yields jumped 11 basis points this week to 1.47%. Emerging debt and equity markets were somewhat mixed, but nonetheless impressive in the face of rising Treasury yields. Brazil's benchmark dollar bond yields sank 12 basis points to 7.28%. Brazil's Bovespa equity index added 1% to another new high (up 20.6% ytd). The Mexican Bolsa jumped 3% to another record high, increasing y-t-d gains to 24.8%. Mexican govt. yields rose 8 basis points to 5.42%. Russian 10-year dollar Eurobond yields jumped 9 basis points to 6.10%. The Russian RTS equity index rose 4.4% to another record (up 64% y-t-d).

Freddie Mac posted 30-year fixed mortgage rates jumped 11 basis points to 5.91%, the high since mid-April and up 19 basis points from one year ago. Fifteen-year fixed mortgage rates also rose 11 basis points, to 5.48%. One-year adjustable rates surged 20 basis points to 4.68%, the highest rate since June 2002. One-year ARM rates are up 71 basis points from the year ago level. The Mortgage Bankers Association Purchase Applications Index declined 3.4%. Purchase Applications were up 3% from one year ago, with dollar volume up almost 11%. Refi applications dropped 10.5% to a 19-week low. The average new Purchase mortgage declined to $240,900, while the average ARM increased to $367,900. The percentage of ARMs slipped to 28.8% of total applications.

Broad money supply (M3) jumped $21.3 billion to a record $9.964 Trillion (week of September 19), with a noteworthy 18-week gain of $339 billion, or 10.2% annualized. Year-to-date, M3 has expanded at a 7.0% rate, with M3-less Money Funds expanding at an 7.8% pace. For the week, Currency added $0.1 billion. Demand & Checkable Deposits rose $18.6 billion. Savings Deposits gained $11.4 billion, with a three-week rise of $56 billion. Small Denominated Deposits gained $2.7 billion. Retail Money Fund deposits added $2.4 billion (fifth straight gain), and Institutional Money Fund deposits jumped $7.7 billion (notable 5wk gain of $41.2bn). Large Denominated Deposits fell $10.3 billion. Year-to-date, however, Large Deposits are up $215.8 billion, or 27.4% annualized. For the week, Repurchase Agreements dropped $7.9 billion, and Eurodollar deposits dipped $3.4 billion.

Bank Credit expanded $7.3 billion last week. Year-to-date, Bank Credit has inflated $626.3 billion, or 12.7% annualized (up 10.1% from a year earlier). Securities Credit gained $9.5 billion during the week, with a year-to-date gain of $165.4 billion (11.8% ann.). Loans & Leases have expanded at a 13.4% pace so far during 2005, with Commercial & Industrial (C&I) Loans up an annualized 17.1%. For the week, C&I loans added $3.5 billion, while Real Estate loans declined $2.0 billion. Real Estate loans have expanded at a 14.8% rate during the first 38 weeks of 2005 to $2.816 Trillion. Real Estate loans were up $354 billion, or 14.4%, over the past 52 weeks. For the week, Consumer loans dipped $1.0 billion, while Securities loans fell $10.3 billion. Other loans gained $5.6 billion.

Total Commercial Paper declined $5.7 billion last week to $1.612 Trillion. Total CP has expanded $197.9 billion y-t-d, a rate of 18.7% (up 21.2% over the past 52 weeks). Financial CP dipped $0.1 billion last week to $1.469 Trillion, with a y-t-d gain of $184.4 billion, or 19.1% annualize (up 21.5% from a year earlier). Non-financial CP fell $5.7 billion to $143.0 billion (up 13.9% ann. y-t-d and 17.6% over 52 wks).

ABS issuance slowed to $13 billion (from JPMorgan), although total September issuance ($78bn) was second only to June's record ($86bn). Year-to-date issuance of $570.6 billion is 18% ahead of comparable 2004. Home Equity Loan ABS issuance of $375.5 billion is 22% above comparable 2004.

Fed Foreign Holdings of Treasury, Agency Debt jumped $7.6 billion to $1.464 Trillion for the week ended September 28. "Custody" holdings are up $128.2 billion y-t-d, or 12.8% annualized (up $172.4bn, or 13.3%, over 52 weeks). Federal Reserve Credit rose $0.2 billion to $800.6 billion. Fed Credit has expanded 1.7% annualized y-t-d (up $34.7bn, or 4.5%, over 52 weeks).

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $615 billion, or 18.3%, over the past 12 months to $3.96 Trillion.

September 30 - Bloomberg (Yanping Li): "China's foreign-exchange reserves, the world's biggest after Japan's, reached $753 billion in August, the China Business News reported... The reserves totaled $732 billion at the end of July..."

Currency Watch:

The dollar index posted a small gain for the week. On the upside, the Iceland krona jumped 2.0%, the Brazilian real 1.7%, Chilean peso 1.5%, Mexican peso 0.8%, Australian dollar 0.7%, and the Canadian dollar 0.7%. On the downside, the Czech koruna fell 1.4%, the Polish zloty 1.2%, and the Norwegian krone 0.9%%.>

Commodities Watch:

November crude oil rose $2.05 to $66.24. November unleaded gasoline surged 5.1% this week, with November Natural Gas up almost 10% to yet another new all-time high. Copper traded to a new high yesterday before slipping slightly today. For the week, the CRB gained 3.1%, increasing y-t-d gains to 17.3%. The Goldman Sachs Commodities index jumped 4.2%, with 2005 gains surging to 51.2%.

China Watch:

September 28 - Financial Times (Andrew Yeh): "Severe and widespread corruption in China is becoming a source of social discontent and poses a threat to the legitimacy of the country's leaders, according to the Organisation for Economic Co-operation and Development... The assessment highlights the far-reaching effects of corruption throughout China, which has become one of the most daunting challenges for its leaders. 'The economy is growing, so incidences [of corruption] are growing too,' said Janos Bertok, one of the OECD researchers in charge of evaluating corruption in China... 'The social dimension is equally as important as the economic dimension.' Mr Bertok said corruption had already become a 'danger to legitimacy' for Beijing because there was much popular dissatisfaction with corrupt officials."

September 27 - Bloomberg (Philip Lagerkranser): "Hong Kong's export growth unexpectedly picked up last month as the city's ports handled more goods en route to mainland China and Europe. Overseas sales rose 12.7 percent from a year earlier to a record HK$205.9 billion ($26.5 billion) after climbing 8.1 percent in July..."

Asia Boom Watch:

September 30 - Bloomberg (Kathleen Chu): "Japanese housing starts rose for a fifth month in August, up 7 percent from a year earlier, to an annualized 1.3 million units, the Ministry of Land, Infrastructure and Transport said..."

September 30 - Bloomberg (Cherian Thomas): "India's economy expanded at the fastest pace in more than a year... Gross domestic product in Asia's fourth-largest economy expanded 8.1 percent in the three months ended June 30 from a year earlier... The expansion, led by an 11.3 percent gain in manufacturing..."

September 26 - Bloomberg (James Peng): "Taiwan's money supply grew in August at the fastest pace this year, the central bank said. M2, the broadest measure of the island's money supply, rose 6.52 percent from a year earlier..."

September 30 - Bloomberg (William Sim): "South Korea's transportation companies, insurers and other service industries saw output rise as the fastest pace in more than 2 1/2 years in August, adding to evidence of a recovery in Asia's third-largest economy. Output gained 5.6 percent from a year earlier..."

September 27 - Bloomberg (Harumi Ichikura): "Toyota Motor Corp., Japan's biggest automaker, said global production of its cars and light trucks rose 9.8 percent in August from a year earlier. The...company produced 530,687 autos worldwide last month..."

September 27 - Bloomberg (Harumi Ichikura): "Honda Motor Co., Japan's third-largest automaker, said global production of its cars and light trucks rose 12.4 percent in August compared with the same month last year."

Unbalanced Global Economy Watch:

September 26 - Financial Times (Ivar Simensen): "Global lending volumes have surged more than 20 per cent in the year to date, driven by rising takeover activity and refinancing of old loans, as fierce competition between cash-rich banks has pushed down borrowing costs. Syndicated lending increased by 20.4 per cent to $2,234bn in the year to date, according to data from Thomson Financial. 'There is unparalleled liquidity and a shortage of borrowers in the market,' said Simon Collins, chief executive of corporate finance at KPMG... The global growth has been driven by European lending, which was up 46.3 per cent to $838bn as of September 23, compared with the first nine months of last year. Syndicated lending in Europe in the whole of last year was $857bn. US loan volumes increased 6 per cent to $1,031bn."

September 27 - Bloomberg (Simone Meier): "Money supply growth in the 12 nations sharing the euro accelerated last month to the fastest pace since August 2003, reducing the European Central Bank's leeway to keep interest rates at a six-decade low to bolster the economy. M3, the ECB's preferred measure of money supply, rose 8.1 percent from a year earlier, after 7.9 percent in July..."

September 29- Bloomberg (Laura Humble): "The number of home loans approved by U.K. mortgage lenders reached the highest in 14 months in August, suggesting the $6 trillion housing market may be stirring from a yearlong slowdown after the Bank of England cut interest rates."

September 28 - Bloomberg (Laura Humble): "The U.K. economy expanded at the slowest annual pace in more than 12 years in the second quarter, reinforcing expectations Chancellor of the Exchequer Gordon Brown will have to scale back plans to increase spending."

September 29- Bloomberg (Ben Sills): "The inflation rate in Spain, Europe's fifth-largest economy, rose in September to the highest in 2 1/2 years because of a tax increase on alcohol and tobacco and higher prices for energy products. Consumer prices advanced 3.7 percent from a year earlier, compared with a 3.3 percent rate in August..."

September 30 - Bloomberg (Trygve Meyer): "The increase in borrowing by Norwegian households and businesses advanced to the highest in more than four years in August, adding pressure on the country's central bank to raise interest rates.... Credit growth for households, companies and municipalities accelerated for a sixth month to an annual 11.3 percent..."

September 29- Bloomberg (Bradley Cook): "Russia, the world's second-biggest oil supplier, will increase spending for the second time this year as crude trades at twice the price the government expected when it passed the 2005 federal budget a year ago. The government is asking parliament to approve a supplemental spending bill totaling 125 billion rubles ($4.4 billion)... Part of that money will be used to pay January pensions early, build roads, and fund bank buyouts by state-owned lender Vneshtorgbank..."

September 28 - Bloomberg (Garfield Reynolds): "Russia's economy will receive more than $100 billion in investment this year from foreign and local companies, Interfax reported, citing Finance Minister Alexei Kudrin."

September 30 - Bloomberg (Gemma Daley): "Australia's retail sales rose twice as
much as expected in August, signaling record gasoline prices won't slow growth in Asia's fifth-largest economy. Retail sales increased 0.6 percent..."

September 29- Bloomberg (Tracy Withers): "New Zealand's economy expanded more than expected in the second quarter, fueling expectations the central bank will increase interest rates next month to curb spending and inflation... The NZ$97 billion ($67 billion) economy grew 1.1 percent from the first quarter when it expanded 0.7 percent..."

September 30 - Bloomberg (Nasreen Seria): "South African credit growth remained close to a record in August, rising 23 percent from a year ago, as interest rates at a 24-year low boosted consumer spending on houses, cars and household appliances."

Latin America Watch:

September 29 - Bloomberg (Daniel Helft): "Argentine exports rose at their fastest pace in eight years in August, led by shipments of cars and soybeans. Exports jumped 29 percent from the year-earlier period to a record high of $3.8 billion..."

September 29 - Bloomberg (Alex Kennedy): "Venezuelan imports surged to their highest level in at least 11 years in July as an economic expansion bolstered consumer demand for foreign-made goods. Imports of products such as cars, chemicals and electronic goods soared 44 percent to $2 billion in the month from the year-earlier period..."

Bubble Economy Watch:

August Existing Home Sales were reported at a stronger-than-expected - and second-highest - 7.29 million annualized rate. Total August sales were up 7.8% from a year earlier, with Condo/Coop sales up 14.3%. The median price was up 15.8% from August 2004 to a record $220,000. The average price was up 11.2% to a record $268,000. New Home Sales were a weaker-than-expected 1.273 million rate, down sharply from July's record 1.373 million. The Inventory of unsold new homes jumped to 479,000 (4.7 months), up 33,000 in four months and 73,000 from one year ago. Median prices were up 1% y-o-y to $220,300, with average prices up 4.1% to $283,400.

September 28 - Dow Jones: "The number of people in the U.S. past due on their credit-card bills rose to a record high in the second quarter of this year, the American Bankers Association said... 'The last two quarters have not been pretty,' said James Chessen, ABA's chief economist. 'Gas prices are taking huge chunks out of wallets, leaving some individuals with little left to meet their financial obligations. With gas prices still rising, the third quarter is not likely to be any better' Chessen said. A record 4.81% of credit-card accounts were past due in the second quarter, up from 4.76% in the first quarter."

September 28 - Bloomberg (Bill Murray): "A New York Mercantile Exchange membership has sold for a record $2.85 million as energy prices rise, oil and gas trading surges and the exchange considers turning itself into a publicly traded company."

September 28 - Bloomberg (Matthew Keenan): "U.S. retirement accounts increased an average of 15 percent in 2004, the second straight year of gains, as 401(k) plan participants benefited from rising stocks. The average nest egg of Americans who've participated in 401(k) plans since 1999 grew to $91,042 last year from $78,893 in 2003..."

September 28 - Bloomberg (Jesse Westbrook): "American International Group Inc. Chief Executive Officer Martin Sullivan said insurers, battered by Hurricane Katrina's devastation in the Gulf of Mexico last month, are raising commercial property rates around the world. 'We are already seeing rate increases being proposed in the property, energy -- on and offshore -- and the marine areas,' Sullivan said..."

September 28 - MarketNews (Gary Rosenberger): "U.S. manufacturers of commercial aircraft, suppliers and other industry officials are reporting 2005 as 'a banner year' for aircraft orders, with year-to-date figures pointing to perhaps the best order rates in as many as 15 years. Jet fuel prices appear to be no barrier to aircraft sales and some are suggesting a likelihood of accelerated orders for new aircraft with fuel-efficient engines. Nor have the spate of U.S. airline bankruptcies stood in the way of the strong orders rebound. The brunt of order activity has been outside the U.S. ..."

Speculator Watch:

September 28 - Bloomberg (John Dooley and Hamish Risk): "The global credit-derivatives market increased by 48 percent to $12.43 trillion in the first half of this year, the International Swaps and Derivatives Association said... The surge comes amid warnings from U.S. and European regulators that banks and brokers aren't coping with the amount of transactions so far..."

California Bubble Watch:

September 26 - California Association Realtors (CAR): "The median price of an existing home in California in August increased 20.1 percent and sales increased 7 percent compared with the same period a year ago... 'California hit a new record median of $568,890 in August,' said C.A.R. President Jim Hamilton. 'This was the second strongest August sales figure on record dating back to 1979, surpassed only by August 2003. 'While fixed mortgage interest rates have not increased, adjustable rates have risen in reaction to the Federal Reserve and a more general increase in short-term rates. Since more buyers are relying on adjustable-rate mortgages to finance the purchase of their homes, buyers may be moving more quickly to make the home purchase decision in anticipation of future rate increases. This is adding more pressure to the price of a home... Los Angeles County is on track to break the previous sales record set in 2003... CARs Unsold Inventory Index...was 2.9 months, compared with 3.6 months for the same period a year ago."

Mortgage Finance Bubble Watch:

September 28 - Financial Times (Dan Roberts): "Viewed from the air, the outer limits of North America's fastest-growing metropolis are lost in a shimmering desert haze. The Valley of the Sun, a contiguous sprawl linking Phoenix, Scottsdale and some 20 other Arizona communities, is filling up with 150,000 new residents a year, doubling its population since 1990 to nearly 4m. Nate Nathan, a land broker whose aerial reconnaissance provides some of the only reliable maps, measures today's greater Phoenix at 108 miles across by 102 miles deep (173km by 163km). House builders have identified sufficient development sites to bring its population to 8m by 2020 - overtaking London. On a hot day it already uses more electricity than New York... But this is also the centre of a national housing boom that exposes some of the more worrying features of the US economy. Local house prices rose 47 per cent last year, raising fears of unsustainable speculation. And many of the new jobs supposedly fuelling demand for new houses are in property-related fields such as real estate broking and construction. So far, the perpetual-motion machine seems to be holding up."

September 27 - Associated Press: "Everything about Frank Fazio's new two-bedroom apartment on Manhattan's Upper West Side is decidedly average, including its price: a hair under $1 million. With five rooms and about 1,050 square feet of space, the place is a nice size, by New York standards, but it is no mansion... 'There is nothing that would make you say, 'Wow this place must have cost a million bucks,' said Fazio... Yet pay a million he did, something more Americans are doing these days. For the first time, there are more than 1 million owner-occupied homes in the United States worth $1 million or more, according to a Census Bureau survey... Once a symbol of unusual wealth, million-dollar dwellings now seem like a dime a dozen in some places. San Francisco alone has more than 20,000 of them. There are another 46,000, or so, in Orange County, Calif.

In Manhattan, even someone with a million dollars in their pocket can't buy luxury. The average price for an apartment in all but Harlem and the borough's northern tip climbed above $1.2 million in the second quarter of 2005..."

September 27 - "Illinois home sales bustle in August to wrap-up the summer home-selling season. According to the Illinois Association of Realtors, there were 19,957 total home sales, which include single-family homes and condominiums, in August 2005, up 8.6 percent from 18,384 sales in August 2004. The Illinois median home price in August was $215,000, up 11.1 percent from $193,500 a year earlier."

September 29- Dow Jones (Danielle Reed): "The Federal Reserve has been stepping up its warnings about so-called 'exotic' mortgages and the risks they may pose to borrowers stretching to get into a house that would otherwise be beyond their means. But lenders, who have seen increasing demand for interest-only loans and option ARMs in the past two years, don't appear to be paying much attention, judging by data available on mortgage loan securitizations and anecdotal evidence on loan originations."

September 29 - The Wall Street Journal (Ruth Simon and James R. Hagerty): "After years of easy money, some mortgage lenders are beginning to tighten their standards. Lenders have rolled out a raft of new mortgage products in recent years that have made housing purchases more affordable and allowed many people to extract cash from their homes' equity without boosting their monthly payments. Now, in what could be the first signs of a reversal, some lenders are starting to raise the bar on making these products available to new borrowers... Last week, Washington Mutual...told mortgage brokers that it will make it more difficult for borrowers to qualify for its option ARMs, which carry an introductory rate of as low as 1.25%... New Century Financial... last week said it was aiming to reduce the amount of interest-only loans it grants to less than 25% of total loan production from 33% in the year's first half... This month, Option One Mortgage, a unit of H&R Block Inc., boosted the rates on all of its mortgage products by 0.40 percentage point... The moves come as bank regulators are sounding the alarm bells about rising risks in the mortgage market."

September 27 - Mortgage Bankers Association: "The level of commercial/multifamily mortgage debt outstanding surpassed $2.4 trillion in the second quarter, growing at a pace that rivals previous records... At the end of the second quarter 2005, $2.4 trillion in commercial/multifamily mortgage debt outstanding was recorded by the Federal Reserve, an increase of $72.5 billion or 3.1% from the first quarter. The record for a quarterly increase is the $72.9 billion added in the fourth quarter of 2004... 'Commercial banks and the commercial mortgage-backed securities (CMBS) markets have been leading the charge in channeling capital into commercial and multifamily mortgages' said Doug Duncan, MBA's chief economist..."

Global Liquidity Glut:

September 30 - MarketNews (Steven K. Beckner): "The predominant topic at Friday's Group of Seven finance ministers and central bankers meeting was the high and volatile cost of energy, but a senior U.S. Treasury official said there was also a lively discussion of 'low' interest rates and 'narrow' rate spreads -- and the risks they pose... And the official said the G7 is 'monitoring' rates and spreads to make sure they 'appropriately' reflect the level of risk..."

And last week from Reuters (Krista Hughes): "...on the agenda for IMF representatives would be the question of why long-term interest rates remain low at a time when many central banks, including the United States Federal Reserve, are raising official interest rates, the source said. Federal Reserve chairman Alan Greenspan has called the development a conundrum. The source said central bankers' job was not only to pose questions, but also to answer them. 'Maybe we can solve Greenspan's puzzle,' he said. 'Liquidity in the U.S. and globally has increased by degrees, that has already led to some exaggerations on bond markets, maybe that's the puzzle,' the source said."

If there have been "some exaggerations on bond markets," there have been lots on global equities. Japan's Topix index surged 20% during the quarter to the highest level since May 2001 (up 23% y-t-d). The Nikkei was up 17% for the quarter (up 18% y-t-d). The South Korean Composite index gained 21%, increasing y-t-d gains to 36%. Hong Kong's Hang Seng was up 9% (8% y-t-d), China's Shanghai A 9.5% (down 9% y-t-d), Shanghai B 6% (down 10.6% y-t-d) and India's Mumbai 20% (up 31% y-t-d). Australia's SPX 200 jumped 9% (up 14.6% y-t-d) and New Zealand's NZX 50 rose 6.7% (up 12.7% y-t-d). The major index in Singapore was up 4.3%, Thailand 7%, Malaysia 3.8%, Philippines 2.5%, Vietnam 17.4% and Sri Lanka 28% - for the quarter!

Turkey equities posted a quarterly gain of 23.7% (up 33.5% y-t-d), Greece 10.5% (21.4%), Pakistan 10.2%, Cyprus 14% (34.2%), and South Africa 19.5% (34.7%). The Middle East was on fire. The major index in Egypt surged 15.3% during the quarter (101.6%), Kuwait 14% (50.0%), Saudi Arabia 11.7% (83.2%), Qatar 19.3% (92.7%), Israel 17.8% (21.8%) and The United Arab Emirates 3.5% (116%).

It is said that every $10 gain in the price of crude increases oil exporter revenues by $300 billion. Well, crude jumped $10 for the quarter and is up $25 so far this year. This Wall of Liquidity is finding a home in, among other places, European equities. London's FTSE index jumped 7.1% during the quarter (up 13.8% y-t-d), the French CAC40 8.8% (20.4%), Germany's DAX 10.0% (18.5%), Spain's IBEX 7.5 (19%), Italy's MIB 8.1% (12.5%), the Swiss Market Index 10.3% (21.1%), Denmark's KFX 7.7% (29.3%), Belgium's BEL20 6.9% (13.5%) and Luxembourg 8.3% (15.4%). Iceland equities gained 12% during the third quarter (up 37.8% y-t-d), Finland 8.7% (26.4%), Sweden 10.3% (20.8%) and Norway 15.2% (34.1%). Poland surged 19.3% (26.9%), Czech Republic 20.1% (40.9%), Latvia 18.5% (39.3%), Lithuania 25.1% (51.9%), Hungary 22.5% (55.7%), Romania 28.8% (43.2%), Bulgaria 22.6%, and Ukraine 17.4 (34.2%)%

And while oil "money" flowed into the Middle East and Europe, the liquidity-flush Chinese and Asians took a keener interest in Latin America. Brazil's Bovespa surged 26.1% during the quarter (up 20.6%), Mexico's Bolsa 19.5% (24.8%), Argentina 23.9% (23.2%), Chile 4.7% (19.8%), Peru 25.6% (36.7%), and Colombia 24.4% (59.2%).

Closer to home, Canada's TSX Composite index jumped 11.2% during the quarter, increasing 2005 gains to 19.1%. The Dow Industrials gained 2.9%, the S&P500 3.2%, and the NASDAQ Composite 4.6%. Notable group gains included the Dow Jones Utilities up 11.8% for the quarter, NYSE Energy index 17.6%, NASDAQ100 7.2%, NASDAQ Biotech 13.7%, AMEX Composite 12.5% and the HUI Gold Bugs index 21.6%. For the quarter, the small cap Russell 2000 rose 4.4%, the Morgan Stanley High Tech index 7.3%, the Philadelphia Semiconductor index 13.4% and The Street.com Internet Index 6.9%.

The Global Liquidity Gut saw the price of US natural gas double to a new record, while crude gained 17% to a new high. Unleaded gasoline surged 40% to a new record. The CRB index jumped 16.7% to a near record high, and the Goldman Sachs Commodities index rose 23.6% to an all-time record high. Gold jumped 8% during the quarter to an 18-year high, and copper surged 22% to a record high. New and Existing US home sales moved to record highs during the quarter, along with average existing home prices. The median sales price in California jumped to almost $569,000. It is also quite likely that mortgage debt growth expanded at a record pace during the quarter.

Bank Credit expanded at a 10.4% rate during the quarter (first 12 weeks), with broad money supply expanding at an almost 10% rate. Bank Real Estate and C&I loans both expanded at a better than 14% rate during the quarter. From the Financial Times (Jennifer Hughes and Richard Beales) we know that new issuance of ABS is "on course to top $1,000bn in the US for the first time this year... Last year, total ABS issuance...reached $896.6bn, up 53.2 per cent on 2003..." (Bond Market Association data). Yet rapid Credit and money growth is no longer only a US phenomenon. Eurozone M3 continues to accelerate, expanding at an 8.1% rate during August, the strongest expansion since August 2003. For perspective, there have been only 7 months of stronger y-o-y Eurozone money growth over the past 10 years.

This week from the Financial Times (Ivar Simensen): "Global lending volumes have surged more than 20 per cent in the year to date, driven by rising takeover activity and refinancing of old loans, as fierce competition between cash-rich banks has pushed down borrowing costs. Syndicated lending increased by 20.4 per cent to $2,234bn in the year to date, according to...Thomson Financial. 'There is unparalleled liquidity and a shortage of borrowers in the market,' said Simon Collins, chief executive of corporate finance at KPMG... The global growth has been driven by European lending, which was up 46.3 per cent to $838bn as of September 23, compared with the first nine months of last year."

From Reuters London (Jane Merriman): "A spike in takeovers and mergers in Europe is feeding a hiring spree in investment banking on a scale not seen since the 2000 technology merger boom... If European M&A powers on, deal volume could reach close to $900 billion this year, according to JP Morgan." According to Dealogic, this year's global M&A deals already total $1.97 Trillion, 41% above comparable 2004. For the third quarter, Europe led the U.S. in deal volume $281 billion to $191 billion.

From Reuters London (Emma Davis): "Corporate fundraising through debt and loans grew 16 percent in the first nine months of 2005 over the same period a year ago, as activity in Europe, the Middle East and Africa (EMEA) matched the Americas for the first time... (data from Dealogic) Corporations globally raised $3.5 trillion in the nine months...with companies in EMEA raising a record $1.5 trillion, or 44 percent of the total... Globally structured finance thrived in the first nine months of 2005, reaching $1.7 trillion - an increase of 15 percent over same period of 2004... In the asset-backed securities market, volumes recorded the highest first nine months on record, increasing 23 percent to $844.4 billion, while mortgage-backed securities saw volumes increase 18 percent to $904.4 billion."

From Reuters Hong Kong: "Asian merger and acquisition activity is up 20 percent in the first nine months of the year, and investment bankers are also selling more stock offering as the region's economies outpace those in Europe and the U.S. Asia Pacific M&A, excluding Japan, was $188.3 billion through September..."

According to Bloomberg, third-quarter U.S. corporate debt issuance of $176.8 billion was the strongest since Q1 2004. And, according to Dow Jones, total third-quarter "US debt, equity and equity related underwriting" totaled $924.6 billion, up 10% from last year's third quarter. MBS issuance totaled $235.9 billion during the quarter, led by Bear Stearns' $31.0 billion. ABS totaled $263.5 billion, led by Citigroup's $22.5 billion.

The third quarter saw Brazil issue its first global bond issue ($1.5 billion) denominated in its own local currency (reals). From the Financial Times (Joanna Chung and Jonathan Wheatley): "Raising the local currency element is part of a developing trend in the region. Though such offers were once shunned by investors because of the local currency risk, investors have been flocking to the region, hungry for higher yield and drawn to the marked improvement in credit fundamentals of many Latin American countries. Brazil has already raised all its international financing needs for this year, and is now pre-financing for the next two." Mexico is preparing its first-ever 30-year bond. Throughout Latin America, corporations enjoy access to global debt markets like never before. According to JP Morgan, corporate issuance in the region has already reached $63 billion, easily surpassing last year's $50 billion.

A very strong case can be made that global "financial conditions" have never been as loose. Perhaps global policymakers are scratching their heads. How is it possible that the Fed raises rates 11 times and global liquidity abundance becomes only more pronounced? Well, the problem is that "Tightening Lite" is not tightening at all. Unrelenting U.S. excesses have been accommodated by the Fed, assuring that U.S.-style leveraging, speculation and asset-based Credit excess take hold across the globe. And instead of tighter U.S. monetary policy working to reduce massive Current Account Deficits and the resulting Asian liquidity Bubble, continued accommodation has fostered a second massive Liquidity Bubble throughout the oil producing economies.

The Global Liquidity Glut will require true global tightening. The Japanese and Europeans join the Fed "behind the curve." And the longer global rates remain too low and liquidity overly abundant, the more problematic the unavoidable adjustment in global asset markets. The U.S. Mortgage Finance Bubble is well entrenched. The Global Energy Boom is now well entrenched. The Emerging Market Bubble is also now well entrenched. And the problem with well-entrenched Credit Bubbles is that a period of excess engenders self-reinforcing "virtuous" cycles. Over time, fundamentals look increasingly alluring - and excess begets only greater excess. Latin America, for example, has enjoyed a bonanza of financial flows, which have stoked local currencies and market values. With liquidity flowing and prices rising, positive fundamentals are absolutely irresistible.

None of this is good news for U.S. markets. The Global Liquidity Glut will only make the Fed's job more difficult. Furthermore, heightened global inflationary pressures ensure that the Fed will not be so quick to cut rates at the first sign of systemic stress, a favored assumption that has played a key role in keeping a lid on long-term U.S. rates. And while U.S. stocks did benefit during the quarter from the Global Liquidity Glut, their relative dismal performance portends a struggle ahead. The acutely imbalanced U.S. Bubble economy simply could not be more poorly prepared for higher rates and the unfolding global energy crunch.