The Dow gained 1.6%, increasing y-t-d gains to 7.0%. The S&P500 rose 1.2%, with economically sensitive issues outperforming. The Transports gained 1.7%, and the Morgan Stanley Cyclical index jumped 2.8%. The Utilities added 1.1%, increasing 2006 gains to 9.2%. The Morgan Stanley Consumer index rose 2.3% (up 9.3% y-t-d). The broader market rallied strongly. The small cap Russell 2000 surged 3.2% (up 7.2% y-t-d), and the S&P400 Mid-cap index gained 2.5%. Technology stocks were strong. The NASDAQ100 rose 2%, and the Morgan Stanley High Tech index jumped 2.9%. The Semiconductors advanced 2.5%, The Street.com Internet Index 2.5%, and the NASDAQ Telecommunications index 3.5%. The Biotechs rose 2.1%. The Broker/Dealers added 1.1%, and the Banks increased 0.2%. With bullion up $1.95, the HUI Gold index gained 2.4%.

Yields declining at home and abroad... For the week, two-year Treasury yields sank 9 bps to 4.76% (low since March 27). Five-year yields dropped 7 bps to 4.68%, and bellwether 10-year yields declined 5 bps to 4.73%. Long-bond yields fell 5 bps to 4.87%. The 2yr/10yr spread ended the week inverted 3 bps. The implied yield on 3-month December '06 Eurodollars fell 7.5 bps to 5.335%. Benchmark Fannie Mae MBS yields dipped 3 bps to 5.94%, this week underperforming Treasuries. The spread on Fannie's 4 5/8% 2014 note was unchanged at 34, and the spread on Freddie's 5% 2014 note was little changed at 33. The 10-year dollar swap spread was about unchanged at 55.5. Corporate bonds continue to lag, with junk spreads widening noticeably this week.

August 30 - Financial Times (Saskia Scholtes): "US corporations issued $63bn of new investment-grade bonds this month in the busiest August on record for corporate debt issuance. Supply volumes were up from $58bn last year and well above the average $34bn for the month since 1998... Analysts say that strong investor appetite for new deals this month augurs well for a heavy supply calendar in September. High-grade issuance is expected to be in the $70bn-80bn range next month, up from $62bn last year and just short of a record $82bn in September 2004."

August 29 Bloomberg (Mark Pittman): "Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. are among the biggest losers in the bond market, where the largest U.S. banks' relative borrowing costs are the highest in three years. A slowing economy has prompted investors to demand an additional 11 basis points of interest, or $1.1 million for each $1 billion face amount, on bank bonds since February..."

Wall Street's debt security issuance assembly line was pretty much shut down this week for the holidays. Junk bond funds saw outflows of $153 million during the week (from AMG).

International dollar debt issuers included Transocean Inc. $1.0 billion.

Japanese 10-year "JGB" yields dropped another 6 bps this week to a lowly 1.64%. The Nikkei 225 index gained 1.2%, moving slightly into the positive column for the year. German 10-year bund yields declined 5 bps to 3.74%. Emerging debt and equity markets were again impressive. Brazil's benchmark dollar bond yields sank 17 bps to 6.32%, approaching low yields from March. Brazil's Bovespa equity index jumped 3.8%, increasing 2006 gains to 11.6%. The Mexican Bolsa added 1.0% this week, increasing y-t-d gains to 19.0%. Mexico's 10-year $ yields fell 10 bps to 5.79%, also approaching low yields from back in March. Russian 10-year dollar Eurobond yields dipped 3 bps to 6.76%. The Russian RTS equities index dipped 1.4%, reducing 2006 gains to 44% and 52-week gains to 81%. India's Sensex equities index added 1.8% (up 25.3% y-t-d).

Freddie Mac posted 30-year fixed mortgage rates declined 4 bps to a 20-week low 6.44%, a decline of 36 bps in six weeks - but up 73 basis points from one year ago. Fifteen-year fixed mortgage rates fell 4 bps to 6.14%, 82 bps higher than a year earlier. One-year adjustable rates dipped one basis point to 5.59%, an increase of 111 bps y-o-y. The Mortgage Bankers Association Purchase Applications Index declined 1.6% this week. Purchase Applications were down 19% from one year ago, with dollar volume down 20%. Refi applications were unchanged last week. The average new Purchase mortgage rose slightly to $225,800, and the average ARM increased to $358,500.

Bank Credit expanded $17 billion last week to $8.038TN (6-wk gain of $93bn). Year-to-date, Bank Credit has expanded $531 billion, or 10.8% annualized. Bank Credit inflated $676 billion, or 9.2%, over 52 weeks. For the week, Securities Credit increased $13.7 billion. Loans & Leases added $3.3 billion during the week and were up $356 billion y-t-d (10.0% annualized). Commercial & Industrial (C&I) Loans have expanded at a 16.7% rate y-t-d and 14.2% over the past year. For the week, C&I loans declined $4.0 billion, while Real Estate loans added $3.5 billion. Real Estate loans have expanded at an 11.1% rate y-t-d and were up 10.8% during the past 52 weeks. For the week, Consumer loans increased $2.2 billion, and Securities loans added $1.6 billion. Other loans were unchanged. On the liability side, (previous M3 component) Large Time Deposits dropped $13.6 billion.

M2 (narrow) "money" supply jumped $36.5 billion to $6.884 TN (week of August 21st). Year-to-date, narrow "money" has expanded $198 billion, or 4.5% annualized. Over 52 weeks, M2 has inflated $308 billion, or 4.7%. For the week, Currency added $1.0 billion, and Demand & Checkable Deposits surged $21.5 billion. Savings Deposits gained $7.0 billion, and Small Denominated Deposits increased $5.8 billion. Retail Money Fund assets added $1.0 billion.

Total Money Market Fund Assets, as reported by the Investment Company Institute, declined $12.2 billion last week to $2.201 Trillion. Money Fund Assets have increased $162 billion y-t-d, or 11.3% annualized, with a one-year gain of $260 billion (13.4%).

Commercial Paper rose $7.7 billion last week to a record $1.844 Trillion. CP is up $203 billion y-t-d, or 18.4% annualized, while having expanded $255 billion over the past 52 weeks (16.1%). It is worth noting that CP has increased more than M2 both y-t-d and y-o-y.

Asset-backed Securities (ABS) issuance this week slowed to $9 billion. Year-to-date total ABS issuance of $472 billion (tallied by JPMorgan) is running about 5% below 2005's record pace, with y-t-d Home Equity Loan ABS sales of $332 billion 2% above last year.

Fed Foreign Holdings of Treasury, Agency Debt jumped $8.5 billion to a record $1.679 Trillion for the week ended August 30th. "Custody" holdings were up $160 billion y-t-d, or 15.6% annualized, and $211 billion (14.4%) over the past 52 weeks. Federal Reserve Credit rose $3.8 billion to $828.9 billion. Fed Credit has increased $2.5 billion y-t-d, or 0.4% annualized. Fed Credit is up 3.9% ($31.1bn) over the past year.

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $525 billion y-t-d (19% annualized) and $647 billion (17%) in the past year to $4.572 Trillion.

September 1 - Bloomberg (Rogerio Jelmayer): "Brazil's foreign-currency reserves rose $4.6 billion in August, prompted by the central bank's continued purchase of U.S. dollars on the spot market... Brazilian foreign reserves reached $71.4 billion... In the first eight months of 2006, Brazil's foreign reserves rose more than $17.6 billion. The volume of reserves reached in August was the highest since July 1998."

Currency Watch:

The dollar index lost 0.5% to 84.89. On the upside, the New Zealand dollar gained 2.9%, the Turkish lira 1.8%, Iceland krona 1.5%, and Australia dollar 1.3%. On the downside, the South African rand declined 0.7%, the Paraguay guarani 0.5%, the Norwegian krone 0.4%, and the Swedish krona 0.4%.

Commodities Watch:

August 31 - Bloomberg (Thomas Kutty Abraham): "Imports of wheat to India, the

World's second-largest consumer of the grain, could rise to as much as 8 million tons this year... The country, which has resumed wheat imports after a six-year gap, may also buy shipments of the commodity in 2007 to replenish depleted stockpiles, Mark Samson, vice president for South Asia at the U.S. growers' lobby group said."

September 1 - Bloomberg (Grant Smith): "The cost of shipping commodities such as iron ore and coal rose to the highest in fifteen months amid booming Chinese steel production. Steel output in China, the biggest producer, rose 23 percent in July from a year ago..."

Gold added 0.2% to $624.10, and Silver jumped 5.8% to $13.085. Copper added 0.9%, increasing y-t-d gains to 79%. Energy prices were on the decline. October crude dropped $3.37 to end the week at $69.14. October Unleaded Gasoline dropped 7.8%, and September Natural Gas sank 19.3%. For the week, the CRB index fell 3.2% (down 1.9% y-t-d). The Goldman Sachs Commodities Index (GSCI) dropped 4.5%, reducing 2006 gains to 6.5%.

Japan Watch:

August 29 Bloomberg (Jason Clenfield): "Japan's unemployment rate fell and job vacancies climbed to the highest in 14 years, laying the groundwork for a recovery in consumer spending in the world's second-largest economy. The jobless rate dropped to 4.1 percent in July from 4.2 percent a month earlier..."

August 30 Bloomberg (Jason Clenfield): "Sales at Japan's shops and supermarkets fell more than economists expected in July as a long rainy season kept consumers at home. Retail sales, which reflect receipts at brick-and-mortar businesses, slid a seasonally adjusted 1.7 percent from June..."

China Watch:

August 30 Bloomberg (Jianguo Jiang): "China raised its estimate for 2005 gross domestic product growth to 10.2 percent from 9.9 percent, the National Bureau of Statistics said... The revision means the economy expanded at the fastest pace since 1995, when it grew 10.9 percent. It was the third straight year of at least 10 percent expansion for the world's fourth-largest economy."

September 1 - Bloomberg (Nipa Piboontanasawat): "Hong Kong's retail sales grew at a faster pace in July as rising wages buoyed consumer spending, a government report showed. Retail sales rose 7.1 percent from a year earlier..."

Asia Boom Watch:

August 31 - Bloomberg (Cherian Thomas): "India's economy grew faster than 7 percent in the three months ended June 30, Finance Minister P. Chidambaram said..."

August 31 - Bloomberg (Theresa Tang): "Taiwan's new car sales may drop to a 50-year low in 2006 on rising bad debt levels and oil prices, the Economic Daily News said, citing unidentified industry officials... The island's lenders are cutting personal credit limits amid growing credit card debit..."

September 1 - MarketNewsInternational: "South Korean exports rose 18.7% year-on-year to $27.71 bln in August, rising in the double digits for a seventh month, on strong overseas sales of petroleum products, semiconductors, and machinery..."

August 28 Bloomberg (Shamim Adam): "Singapore's manufacturing grew faster than expected in July as a pick-up in demand for computer chips and drugs boosted production...which accounts for a quarter of Singapore's $118 billion economy, increased 19.6 percent from a year earlier..."

August 30 Bloomberg (Stephanie Phang): "Malaysia's economy expanded at the fastest pace in more than a year as exports of electronics increased and companies spent more on factories. Southeast Asia's third-largest economy grew 5.9 percent in the second quarter from a year earlier after a revised 5.5 percent gain in the previous three months..."

August 28 - Bloomberg (Luzi Ann Javier): "The Philippines economy expanded by as much as 5.8 percent in the second quarter as agricultural and export growth accelerated and remittances from abroad increased, Economic Planning Director Dennis Arroyo said."

August 31 - Bloomberg (Joshua Fellman): "Macau casinos' gross revenue from gambling rose 13 percent in the first half to 25.01 billion patacas ($3.12 billion), more than they collected in all of 2002..."

Unbalanced Global Economy Watch:

August 28 - MarketNewsInternational: "Eurozone M3 money supply growth decelerated sharply in July to the slowest pace since January's 7.7%, but growth in loans to the private sector accelerated, according...the European Central Bank... Loans to non-financial corporations shot up to an non-adjusted 11.8% in July from 11.4% in June in apparent contradiction of the deteriorating business confidence measured recently. However, reflecting higher mortgage rates, growth in lending for house purchases slowed to 11.4% from June's 11.8%."

August 31 - Bloomberg (Brian Swint): "The cost of renting property in the U.K. rose the most in at least eight years in the three months through July, driven in part by immigration from Eastern Europe, the Royal Institution of Chartered Surveyors said..."

August 29 - Bloomberg (Simone Meier): "German consumer confidence rose to the highest in almost five years as the prospect of a sales tax increase in 2007 boosted households' willingness to spend..."

August 31 - Bloomberg (Tasneem Brogger): "Denmark's quarterly economic growth accelerated to 1.9 percent in the three months through June, the fastest pace in eight years, as exports surged and companies stepped up investments to offset a labor shortage."

August 31 - Bloomberg (Bunny Nooryani): "Norway's jobless rate unexpectedly fell in August as high oil prices encouraged investment in the petroleum industry and credit growth stayed at the fastest pace in more than 18 years in July... The unemployment rate slid to 2.7 percent from 2.8% in July... Domestic credit growth was an annual 14.4 percent in July..."

August 30 Bloomberg (Jonas Bergman): "Swedish economic growth will accelerate to 4.1 percent this year, the fastest since 2000, as consumer and government spending rises, the National Institute of Economic Research said... Growth is accelerating amid record exports, rising consumer spending as the labor market improves after a three year lull and on increased government spending before next month's election."

August 30 Bloomberg (Dorota Bartyzel): "Poland's $320 billion economy expanded in the second quarter at the fastest annual pace in two years as corporate investments soared and individuals boosted spending on record-low interest rates. Gross domestic product grew an annual 5.5 percent in second quarter..."

August 29 Bloomberg (Milda Seputyte): "Lithuania's economy, the biggest of the three Baltic states, expanded an annual 8.4 percent in the second quarter, led by constructions, revised data showed."

September 1 - Bloomberg (Svenja O'Donnell): "Russia's manufacturing industries grew at the fastest pace in almost six years in August, expanding for a fifth consecutive month as output and new orders increased, a gauge of industrial production showed."

August 31 - XFN: "Total credit provided to the private sector by financial intermediaries rose by 1.2% in July from June, following a rise of 1.1% in June, the Reserve Bank of Australia said. It said in the year to July, total credit rose by 14.8%."

August 30 Bloomberg (Nasreen Seria): "South African credit growth unexpectedly accelerated to a record 24.7 percent in July from a year earlier, increasing the likelihood the central bank will raise borrowing costs for a third time this year in October. Growth in borrowing by households and companies, also known as private sector credit extension, accelerated from 23.9 percent in June..."

Latin American Boom Watch:

September 1 - Bloomberg (Valerie Rota): "Mexico will swap $500 million of foreign-currency bonds into domestic securities, the first of four exchanges that President Vicente Fox has planned to leave his successor with the lowest level of foreign debt in almost five decades... The swaps are part of Fox's plan to reduce Mexico's foreign debt to 6 percent of gross domestic product, the lowest since 1960..."

September 1 - Bloomberg (Katia Cortes): "Brazil's trade surplus narrowed in August on record imports as a strengthening in the currency prompted manufacturers to substitute local capital goods for imported ones. The surplus narrowed to $4.52 billion from $5.64 billion in July... Imports rose 14 percent to $9.13 billion while exports rose to $13.64 billion from $13.62 billion in July and $11.3 billion in August 2005."

Central Bank Watch:

September 1 - Bloomberg (John Fraher): "Detlef Wetzel has a message for German steelmakers -- and for European Central Bank President Jean-Claude Trichet. 'It's high time we got a decent share now that times are good,' said Wetzel, the chief negotiator for IG Metall, Europe's largest manufacturing union, in this year's round of wage talks. 'It's only right.' The last time German steelworkers sought a pay increase as big as the one they're seeking now, 14 years ago, inflation surged and Germany's central bank raised interest rates to the highest in more than a decade. Now, rising wage demands from the steelworkers, and other unions to come, are adding to Trichet's concerns as he attempts to curb inflation that is forecast to exceed the ECB's 2 percent target for an eighth straight year in 2007."

August 29 Bloomberg (Simon Thiel): "The European Central Bank raised its forecasts for economic growth and inflation in the dozen euro nations, Financial Times Deutschland said, without saying where it got the information. The ECB expects the economy to grow faster than it had previously forecast this year and inflation to exceed its earlier projections in 2006 and 2007..."

August 28 - Bloomberg (Andreas Britt): "The Swiss central bank may need to raise interest rates further amid an economic expansion that's leading to full employment in Europe's eighth-largest economy. 'In the view of the moderate development in credit and monetary aggregates as well as the favorable inflation outlook our policy of normalizing interest rates is bearing fruit,' Swiss National Bank President Jean-Pierre Roth said..."

August 30 Bloomberg (Jonas Bergman): "Sweden's central bank raised its benchmark interest rate by a quarter-point for the fourth time this year and damped speculation it will pick up the pace of increases as the economy expands at the fastest speed since 2000. The repurchase rate was raised to 2.5 percent..."

Bubble Economy Watch:

July Personal Income was up 7.1% from one year ago, with Compensation up 7.7% ("Wages & Salary" up 7.9% y-o-y). Disposable Income was up 6.0%, and Personal Spending increased 5.9% from July 2005. July Construction Spending was up 5.1% from a year ago. Residential spending declined 2.8%, while Non-Residential surged 15.8% y-o-y. July's 128,000 jobs created was right at the six-month average.

Real Estate Bubble Watch:

September 1 - Bloomberg (Bob Willis): "Contracts to buy previously owned homes in the U.S. plunged in July by the most since the terror attacks of September 2001, an industry report showed. An index of signed purchase agreements fell 7 percent..."

August 31 - MarketNewsInternational: "The following is the statement released

Wednesday by the Mortgage Bankers Association on second-quarter 2006 commercial and multifamily mortgage loan originations: 'During the second quarter of 2006 commercial and multifamily mortgage bankers' loan originations increased 17.3% compared to the same quarter last year, according to the Mortgage Bankers Association (MBA). The year over year increase during the second quarter was led by solid gains among all property types while commercial banks led the increases among investor types. Second quarter loan originations were up 23.3% compared to the first quarter of 2006 while year to date originations for 2006 are 24.3% higher than at the same time last year."

August 31 - EconoPlay.com (Gary Rosenberger): "Spending on commercial, institutional and public construction continues to ride at peaks, unimpeded by volatile building materials costs, the housing slowdown or other recent economic hiccups, industry officials say. Rising building materials costs have forced some redesign work and reevaluation of budgets but, so far, no wholesale cancellations - other than for high-rise condo developers whose building costs are the least of their worries. Bad as things are in the residential market, builders are still rushing to complete large-scale housing projects where ground was already broken. But that pipeline is clearly thinning and cancellations on proposed projects are rampant. And as residential flattens, commercial work is on the rise - with the industry reporting firm backlogs well into 2007 and a rebound in architecture billings, both harbingers of future activity."

Financial Sphere Bubble Watch:

August 30 - BusinessWeek (Steve Rosenbush): "If the deal market maintains its current hot pace, the tidal wave of leveraged buyouts (LBOs) is on track to hit a record $98.8 billion in 2006. That would eclipse the record of $94.5 billion established in 1988... As the volume of LBOs moves into '80s-era territory (see BusinessWeek.com, 5/2/06, 'The LBO Meets Main Street'), another characteristic of that period is making a comeback. Lenders are allowing private buyout firms that fund transactions with debt, or leverage, to borrow more and more money. It's difficult to know just how much debt LBOs are taking on, because privately held companies aren't required to file financial reports with the [SEC]... But Loan Pricing Corp. keeps a handle on the market by monitoring loan covenants that cap the debt ratios lenders allow borrowers to take on. While it can't track the actual debt level in a given LBO, it knows what the caps and collars are. And it's clear that borrowers are on a longer leash. The debt ratio of the average LBO, measured as a debt multiple of cash flow, is 6.62 for the year to date. That's high by recent historic standards. Debt levels have increased every year since 2001, when they were 4.49. They are up from 6.4 last year, although they exceeded 10 in the late '80s."

Energy Boom and Crude Liquidity Watch:

August 30 Bloomberg (Vineeta Anand): "Rising prices and profits translated into pay packages for oil company chief executive officers that are nearly three times the size of similarly sized businesses, a new study from two watchdog groups said. In 2005, the CEOs of the largest 15 oil companies averaged $32.7 million in compensation, compared with $11.6 million for all large U.S. firms, according to the study...by the Institute for Policy Studies and United for a Fair Economy."

August 29 Bloomberg (Maria Ermakova): "Russian stocks are approaching $1 trillion in value, an emerging-market record, mostly because of the country's burgeoning oil industry."

August 29 Bloomberg (Andy Critchlow): "Bank credit in the United Arab Emirates, the second-largest Arab economy, grew by 43 percent last year as personal borrowing soared, Gulf News reported, citing figures from the country's central bank."

Climate Watch:

August 28 - New York Times (Monica Davey): "With parts of South Dakota at its epicenter, a severe drought has slowly sizzled a large swath of the Plains States, leaving farmers and ranchers with conditions that they compare to those of the Dust Bowl of the 1930's. The drought has led to rare and desperate measures. Shrunken sunflower plants, normally valuable for seeds and oil, are being used as a makeshift feed for livestock. Despite soaring fuel costs, some cattle owners are hauling herds hundreds of miles to healthier feedlots. And many ranchers are pouring water into "dugouts" -- natural watering holes -- because so many of them (up to 90 percent in South Dakota, by one reliable estimate) have gone dry... "It's a grim situation," said Herman Schumacher, the owner of a livestock market in Herreid, S.D..."There's absolutely no grass in the pastures, and the water holes are all dried up. So a lot of people have no choice but to sell off their herds and get out of the business."

August 30 - Reuters (Sambit Mohanty): "From Australia to Argentina, erratic weather is slashing wheat crops of the major producers, which is threatening to push up prices to multi-year highs and making it difficult for countries to replenish stocks. While the world's carryover stocks could cushion the blow, the crop woes coincide with rising demand from Europe and India, which is grappling a with a huge shortfall. Appetite for feed wheat for livestock is also likely to grow as mills cut the usage of corn because its price has soared on strong demand from ethanol makers. 'It is going to be a year of tight supplies,' said Mark Samson, vice president for South Asia of the U.S Wheat Associates."