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Financial Sphere Earnings Watch

The Dow added 0.4%, increasing y-t-d gains to 12.0%, and the S&P500 gained 0.2%, raising 2006 gains to 9.6%. The Transports rose 1.0%, while the Morgan Stanley Cyclical index declined 0.8% (largely due to Caterpillar's disappointment). The Utilities surged 3.2% (up 12.7% y-t-d), and the Morgan Stanley Consumer index gained 1.2% (up 12.2% y-t-d). The small cap Russell 2000 was little changed, while the S&P400 Mid-Cap index dipped 0.6%. The NASDAQ100 fell 1% and the Morgan Stanley High Tech index dropped 1.8%. The Semiconductors were clobbered for 5.1%, and the NASDAQ Telecommunications index lost 1.0%. The Street.com Internet Index gained 0.7%. The Biotechs jumped 3.3%. The Broker/Dealers declined 2.0% (up 16.7% y-t-d), and the Banks fell 1.3% (up 9.0% y-t-d). Although bullion gained $1.20, the HUI gold index dipped 0.5%.

For the week, two-year Treasury yields added one basis point to 4.87%. Five-year yields were unchanged at 4.76%, while bellwether 10-year yields dipped one basis point to 4.79%. Long-bond yields declined 2 bps to 4.91%. The 2yr/10yr spread ended the week inverted 8 bps. The implied yield on 3-month December '07 Eurodollars declined 1.5 bps to 4.995%. Benchmark Fannie Mae MBS yields declined 2 bps to 5.9%, this week slightly underperforming Treasuries. The spread on Fannie's 4 5/8% 2014 note was little changed at 32, and the spread on Freddie's 5% 2014 note narrowed slightly to 31. The 10-year dollar swap spread declined 1.3 to 54.0. Corporate bonds performed well, with junk spreads narrowing sharply for the second straight week.

Investment grade issuers included Wachovia $4.0 billion, Northern Rock $1.5 billion, Lehman Brothers $1.25 billion, Realogy Corp $1.2 billion, Monument Global $200 million, and Potomac Edison $100 million.

Junk bond funds posted weekly inflows of $3.2 million (from AMG). The junk market enjoyed a flurry of issuance. Junk issuers included West Corp $1.1 billion, Energy Transfer Partners $800 million, Cricket Communications $750 million, Southern Union $600 million, Buffets $300 million, Markwest Energy $275 million, Ranhill $220 million, Felcor Lodging $215 million, Berry Petrol $200 million, AGY Holding $175 million and Compucom Systems $175 million.

October 18 - Bloomberg (Marie Beaudette): "Corporate restructuring experts speaking at a recent industry conference said they expect to see a significant increase in Chapter 11 bankruptcy filings starting in 12 to 18 months as liquidity tightens and interest rates rise. But the panel of restructuring experts told attendees at the Turnaround Management Association's annual conference..., the distressed-debt market hasn't reached its breaking point. They said companies with the lowest-rated debt still will be able to obtain financing and avoid bankruptcy for the time being."

Convert issuers included Minefinders Corp $75 million.

International dollar debt issuers included Unicredito $4.2 billion, Turkey $3.25 billion, Uruguay $1.0 billion, Coldelco $500 million, Eksportfinans $1.0 billion, Embraer $400 million, Saneamento Basic $140 million, and Barclays $105 million.

October 18 - Financial Times (David Oakley and David Turner): "MDM Bank yesterday issued Russia's biggest consumer loan securitisation so far as the growing appetite of the middle classes for borrowing to buy cars and other goods increases the supply of debt available to securitise. The country's second-largest privately owned bank raised $430m for a car loan asset backed security after an 18-day roadshow that took in leading US and European cities."

Japanese 10-year "JGB" yields rose 3.5 bps this week to 1.795%. The Nikkei 225 index added 0.7% (y-t-d up 3.4%). German 10-year bund yields rose one basis point to 3.835%. Emerging debt and stock markets held their own. Brazil's benchmark dollar bond yields were unchanged at 6.29%. Brazil's Bovespa equities index slipped 0.5% this week (up 15.5% y-t-d). The Mexican Bolsa jumped 1.7% to another record high, increasing 2006 gains to 30.5%. Mexico's 10-year $ yields declined 2.5 bps to 5.79%. The Russian RTS equities index gained 1.2%, increasing y-t-d gains to 44.9% and 52-week gains to 83.7%. India's Sensex equities index dipped 0.2%, reducing 2006 gains to 35.2%. China's Shanghai Composite index added 0.3%, increasing y-t-d gains to 54.2%.

This week, Freddie Mac posted 30-year fixed mortgage rates dipped one basis point to 6.36%, up 26 bps from one year ago. Fifteen-year fixed mortgage rates were unchanged at 6.06% (up 41 bps y-o-y). One-year adjustable rates added one basis point to 5.57% (up 68bps y-o-y). The Mortgage Bankers Association Purchase Applications Index added 0.4% this week. Purchase Applications were down 14.9% from one year ago, with dollar volume 15.5% lower. Refi applications fell 5.3%. The average new Purchase mortgage increased to $226,400, while the average ARM slipped to $369,700.

Bank Credit rose $10.4 billion last week to a record $8.185 TN, with the Fed apparently revising last week's data to show an unusual $130 billion increase in Real Estate loans. Year-to-date, Bank Credit has now expanded $678 billion, or 11.5% annualized. Bank Credit inflated $785 billion, or 10.6%, over 52 weeks. For the week, Securities Credit declined $4.7 billion. Loans & Leases expanded $15.2 billion during the week, with a y-t-d gain of $498 billion y-t-d (11.5% annualized). Commercial & Industrial (C&I) Loans have expanded at a 14.8% rate y-t-d and 13.2% over the past year. For the week, C&I loans dipped $1.0 billion, while Real Estate loans jumped $11.4 billion. Real Estate loans have now expanded at a 16.4% rate y-t-d and were up 15.3% during the past 52 weeks (we'll have to see if last week's big change was an adjustment or an error). For the week, Consumer loans dipped $0.6 billion, while Securities loans fell $4.8 billion. Other loans rose $9.1 billion. On the liability side, (previous M3 component) Large Time Deposits gained $4.7 billion (3-wk rise of $45.5bn).

M2 (narrow) "money" supply jumped $30.8 billion to a record $6.934 TN (week of 10/9), posting a 10-week gain of $121 billion. Year-to-date, narrow "money" has expanded $248 billion, or 4.7% annualized. Over 52 weeks, M2 has inflated $322 billion, or 4.9%. For the week, Currency slipped $0.3 billion, while Demand & Checkable Deposits increased $11.1 billion. Savings Deposits gained $8.7 billion, and Small Denominated Deposits increased $4.3 billion. Retail Money Fund assets rose $7.0 billion.

Total Money Market Fund Assets, as reported by the Investment Company Institute, declined $4.0 billion last week to $2.260 Trillion. Money Fund Assets have increased $203 billion y-t-d, or 12.2% annualized, with a one-year gain of $275 billion (13.8%).

Total Commercial Paper dropped $20.1 billion last week to $1.894 Trillion. Total CP is up $253 billion y-t-d, or 19.1% annualized, while having expanded $278 billion over the past 52 weeks (17.2%).

Asset-backed Securities (ABS) issuance rose this week to $10 billion. Year-to-date total ABS issuance of $578 billion (tallied by JPMorgan) is running about 6% below 2005's record pace, with 2006 Home Equity Loan ABS sales of $392 billion about 2% under comparable 2005. Also reported by JPMorgan, y-t-d US CDO (collateralized debt obligation) Issuance of $253 billion is running 69% ahead of 2005.

Fed Foreign Holdings of Treasury, Agency Debt declined $1.7 billion to a record $1.686 Trillion (week of 10/18). "Custody" holdings were up $166 billion y-t-d, or 13.6% annualized, and $217 billion (14.8%) over the past 52 weeks. Federal Reserve Credit added $0.4 billion to $831.5 billion. Fed Credit is up $5.1 billion (0.8% annualized) y-t-d, while having expanded 3.8% ($30.5bn) over the past year.

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $625 billion y-t-d (19.1% annualized) and $693 billion (17.4%) in the past year to a record $4.6 Trillion. Russian reserves are up 64% y-o-y to $266.5 billion.

Currency Watch:

The dollar index fell 0.9% to 86.06. On the upside, the New Zealand dollar gained 1.7%, the British pound 1.5%, the Swedish krona 1.4%, and the Hungarian forint 1.4%. On the downside, the South African rand declined 1.0%, the Israeli shekel 0.8%, the Ukraine hryvnia 0.5%, and the South Korean won 0.3%.

Commodities Watch:

From Caterpillar's Q3 earnings release: "Worldwide, metals mining companies increased exploration and development budgets 45 percent in 2006, the fourth consecutive year of double-digit percentage increases. Despite those increases, mining production capacity continues to struggle to meet demand. Metals demand is growing rapidly, inventories are nearly depleted and production problems persist. Mine production in three major producing countries -- Australia, Canada and South Africa -- declined year to date."

October 17 - Bloomberg (Chanyaporn Chanjaroen): "Zinc rose to a record in London, gaining for a third straight trading session, as falling stockpiles exacerbated a global supply shortage. Inventory tracked by the London Metal Exchange dropped...to 127,400 tons... That's equal to less than five days of global consumption..."

Gold added 0.2% to $591.60 and Silver 2.4% to $11.97. Copper gained 1.4%, increasing y-t-d gains to 79%. December crude fell $1.00 to end the week at $59.30. November Unleaded Gasoline was little changed, while November Natural Gas surged 29%. For the week, the CRB index added 0.8% (down 7.9% y-t-d), and The Goldman Sachs Commodities Index (GSCI) 0.1% (up 0.8% y-t-d).

China Watch:

October 20 - Financial Times (Tom Mitchell and Geoff Dyer): "Industrial and Commercial Bank of China has priced its shares at the top end of its indicative range, according to a person familiar with the matter, as China's biggest bank prepares to launch the world's largest ever initial public offering... ICBC will sell H shares in Hong Kong at HK$3.07 each and Shanghai-listed A shares at Rmb3.11 each. At these prices, the bank will raise $16bn and $5.9bn in Hong Kong and Shanghai, respectively..."

October 19 - Bloomberg (Nipa Piboontanasawat): "China's retail sales rose at a faster pace in September. Retail sales rose 13.9 percent last month to 655.4 billion yuan ($82.9 billion) from a year earlier after climbing 13.8 percent in August..."

October 19 - Bloomberg (Nipa Piboontanasawat): "China's industrial production growth accelerated in September. Output rose 16.1 percent last month from a year earlier to 775.4 billion yuan ($98 billion) after gaining 15.7 percent in August..."

October 19 - Bloomberg (Wing-Gar Cheng): "China's spending on crude oil, gas and coal production jumped in the first nine months... Spending on petroleum and gas extraction rose 19.3 percent from a year earlier while investment in coal mines soared 36.4 percent, the National Bureau of Statistics said... Coal output rose 11.7 percent."

October 20 - Bloomberg (Samuel Shen): "China's 1.3 billion people may spend more than 1 trillion yuan ($126 billion) dining out this year, 13 percent more than a year ago, the country's Ministry of Commerce said."

October 16 - Bloomberg (Samuel Shen): "China's wealthiest lavished 500 million yuan ($63 million) on Hennessy X.O spirits, Porsche sedans, South African diamonds and other luxury goods during a show in Shanghai, double the value of transactions a year ago. Top Marques, a four-day show that has its origin in Monaco, attracted 12,000 visitors last week with exhibits of 70 luxury brands, including $300,000 De Bethune watches and $426,983 Lamborghini sedans. 'China has embraced every aspect of luxury pursuits, whether it's hunting, gambling, jets or yachting,' said Peter Thompson, a partner of yacht broker Cavendish White, whose clients include U.S. tycoon Donald Trump. 'There're a lot of rich people and they have a desire to explore new ways of life.' The nation's luxury-goods market is growing as much as 60 percent a year..."

October 18 - Bloomberg (Matthew R. Miller): "Hong Kong hedge fund assets almost quadrupled by the end of March from two years earlier, according to a Securities and Futures Commission survey. Assets under management by the city's licensed funds rose 268 percent to $33.5 billion from $9.1 billion on March 31, 2004... Between 30 and 40 percent of buying and selling in Hong Kong's financial markets can be attributed to global hedge funds..."

October 17 - Bloomberg (Nipa Piboontanasawat): "Hong Kong's jobless rate fell to the lowest level in more than five years, signaling higher demand for workers may push wages up, supporting consumer spending. The seasonally adjusted unemployment rate for the three months ended September dropped to 4.7 percent..."

India Watch:

October 18 - Bloomberg (Kartik Goyal and Cherian Thomas): "Indian Prime Minister Manmohan Singh said the government will aim to accelerate the nation's annual pace of economic growth to 10 percent by 2012 as it improves the quality of roads, ports and other infrastructure. 'This is the first time since the planning process began that we will be aiming for a growth rate of 10 percent,' Singh told the New Delhi-based Planning Commission, which sets five-year investment targets."

October 17 - Bloomberg (Manash Goswami and Archana Chaudhary): "Power Grid Corp., India's main transmission company, said a $17 billion program to more than double the nation's network to 77,690 miles, long enough to circle the earth three times, will help end blackouts. 'Power is like the mother for all development,' Power Grid Chairman R.P. Singh said...'Nothing is going to happen of all the development work we are planning to do without power.'"

October 18 - Bloomberg (Kartik Goyal and Paul Gordon): "HSBC..., Europe's biggest bank by market value, expects its Indian unit to post annual profit growth of as much as 50 percent as it increases lending to consumers and taps small and medium-sized companies."

Asia Boom Watch:

October 18 - MarketNewsInternational: "The [South Korean] jobless rate improved to 3.2% in September from 3.6% the year before, supported by an increase in employment in both the private and public service sectors, telecom, finance and construction industries, the National Statistical Office said."

October 20 - Bloomberg (Anuchit Nguyen): "Thailand posted a record trade surplus in September as falling crude oil prices reduced import bills and exports climbed to the highest ever, the commerce ministry said. Southeast Asian's second-biggest economy's second straight monthly surplus rose to $1.51 billion... Shipments abroad last month increased 15.3 percent to $12.05 billion from a year earlier. Imports rose 9 percent to $10.5 billion..."

Unbalanced Global Economy Watch:

October 16 - Bloomberg (Alexandre Deslongchamps): "Canadian existing-home sales fell 1.6 percent in September and new listings rose, the nation's realtor association said... New listings climbed 3.5 percent, to 48,945 units, and the average price jumped 9 percent from a year ago to C$295,830 ($260,000)."

October 19 - Bloomberg (Craig Stirling): "Growth in M4, the broadest measure of U.K. money supply, accelerated to a 16-year high in September, suggesting inflation is building in Europe's second-biggest economy... M4 increased 14.5 percent from a year earlier..."

October 20 - Bloomberg (Craig Stirling): "The U.K. economy, Europe's second-biggest, grew faster than expected in the third quarter, stoking speculation that the Bank of England needs to raise interest rates more than once to quell inflation. Growth accelerated to an annual 2.8 percent, the quickest pace in two years..."

October 16 - Bloomberg (Brian Swint): "U.K. house-price inflation accelerated to the fastest pace in almost two years in October as buyers chased a shrinking number of properties, Rightmove said. An index of average asking prices rose 11.5 percent in the four weeks ending Oct. 7 from a year earlier to a record 218,954 ($408,000)..."

October 20 - Bloomberg (Joao Lima): "Spanish house-price growth slowed to 9.7 percent in the 12 months through September as homes in Madrid and the northern region of Navarra restrained gains."

October 16 - Bloomberg (Evalinde Eelens): "Exports from Belgium, the sixth-largest economy among the 12 nations using the euro, increased 14.6 percent to 17.3 billion euros ($21.7 billion) in August. Imports rose to 17.6 billion euros, up 12.3 percent..."

October 17 - Bloomberg (Tasneem Brogger): "Danish house-price inflation slowed in the third quarter from a 20-year record in the three months through June after the central bank raised interest rates. House prices rose at an annual pace of 24.2 percent, compared with 25.9 percent previous quarter..."

October 19 - Bloomberg (Jonas Bergman): "Sweden's unemployment rate fell to 4.9 percent in September as accelerating growth increased demand for workers and the government raised spending on job training programs. The rate fell from 5.7 percent in August..."

October 16 - Bloomberg (Sebastian Alison): "Foreign investment in Russia grew to $27 billion in the first nine months of this year, with foreign direct investment up 43.6 percent while portfolio investment nearly tripled, Prime Minister Mikhail Fradkov said."

October 19 - Bloomberg (Lucian Kim): "Russian President Vladimir Putin said the country's power shortage threatens his plan to double gross domestic product within 10 years. The lack of a 'clear and well-defined' energy plan is curbing economic growth, Putin told a special government meeting..."

October 17 - Bloomberg (Steve Bryant): "Turkey's government plans to raise spending by 18 percent next year, widening the budget deficit, the Finance Ministry said."

Latin American Boom Watch:

October 18 - Bloomberg (Eliana Raszewski): "Argentina's industrial output last month grew at the fastest pace in since June... Industrial production rose...1.1 percent last month from August and 7.7 percent from the same month a year earlier..."

October 18 - Bloomberg (Guillermo Parra-Bernal): "Growth in Venezuela's bank lending accelerated in September as pledges by President Hugo Chavez to make more funds available for loans to farmers and companies spurred demand for credit. Growth in lending by Venezuela's 50 state and non-state banks and financial institutions rose 7.1 percent in September... The country's loan portfolio rose 74 percent over the past 12 months through September..."

October 16 - Bloomberg (Matthew Craze): "Peru's economy grew 9.2 percent in August from a year earlier on a surge in agricultural output, the National Statistics Institute said..."

Bubble Economy Watch:

October 17 - Dow Jones (Janet Morrissey): "Despite a slight slowdown in the third and fourth quarters, the lodging sector is poised to post its biggest increase in room rate and occupancy growth in more than 25 years when 2006 wraps up, according to a new PricewaterhouseCoopers study... The report predicts revenue-per-available room, or revpar, will be up 8.7% in 2006 - its highest level since 1980. Revpar is a key lodging metric used to measure occupancy and room rate growth."

October 18 - Bloomberg (Vincent Del Giudice): "Retired U.S. workers receiving Social Security benefits will earn about $33 more each month beginning in January, a smaller increase than they received this year. The estimated monthly payment to some 53 million Americans receiving benefits will rise 3.3 percent in 2007. That compares with a 4.1 percent increase this year, the biggest since 1990."

Real Estate Bubble Watch:

October 18 - Dow Jones (Damian Paletta): "Competitive pressures have forced loan underwriting standards to soften for the third straight year, according to a survey of national bank examiners [OCC]... This easing of loan requirements has made it easier for everyone from large corporations to low-income home owners to secure loans, but regulators are watching closely as such easing can pose major risks for both borrowers and financial institutions down the road."

October 17 - Bloomberg (Jeff Bennett): "Julie Taylor fights to hold back the tears when she talks about the day in March that she lost her home. 'There was just no other choice,' the 39-year-old Detroit woman said. 'My husband, Ken, lost his auto job, we couldn't keep up with the house payments, and before we knew it, we were forced to let the bank foreclose.' That sequence of events is becoming increasingly common in Detroit... As slumping carmakers and their suppliers slash tens of thousands of jobs, foreclosures in the area are at an all-time high. Families like the Taylors can't tap their home equity to keep afloat because the workforce cuts are also dragging down property values."

October 19 - Los Angeles Times (Annette Haddad): "Playing catch-up with the recent run-up in home prices, rents in large apartment complexes posted strong gains across California in the third quarter... Rents rose an average of 6% in most of the state's biggest markets...research firm RealFacts said. Southern California remained the West's most expensive place to rent, and the San Francisco Bay Area saw the highest rent increases, RealFacts said... average rent in Los Angeles and Orange counties rose 7.4% to $1,546 during the third quarter... In Silicon Valley, the average rent jumped 10.4%..."

October 19 - Los Angeles Times (David Streitfeld and Martin Zimmerman): "The number of Californians who are significantly behind on their mortgage payments and at risk of losing their homes to foreclosure more than doubled in the three months ended Sept. 30, providing the latest evidence of trouble in the housing market, figures released Wednesday show. Lenders sent out 26,705 default notices -- the first step toward a foreclosure -- during the July-to-September period, up from 12,606 during the same quarter in 2005, according to DataQuick... Defaults are still well below their peak level of 59,897, which came in the first three months of 1996, as the state's last housing slowdown was ending... 'We were putting buyers in homes with loans they could not afford to sustain over the long haul,' said Bob Casagrand, a San Diego real estate agent. 'If you're a marginal buyer with an adjustable mortgage, you're rolling the dice on the future.'"

October 16 - Bloomberg (Alison Vekshin): "The U.S. federal government may back away from restrictions on banks that hold large amounts of commercial real-estate loans, as long as those banks can show they have adequate protection against failure, the top regulator of national banks said. Banks won't automatically be required to increase their cash reserves when they hold high concentrations of real-estate loans if they can show bank examiners they can weather an economic decline, U.S. Comptroller of the Currency John C. Dugan said."

Energy Boom and Crude Liquidity Watch:

October 16 - Bloomberg (Tina Seeley): "U.S. electricity demand will increase three times faster than supplies during the next decade, threatening reliable operation of the nation's power grid, according to an industry report. Demand for power will increase 19 percent, or 141,000 megawatts, while supplies are only expected to increase 6 percent, or 57,000 megawatts, leaving a shortfall of 84,000 megawatts, the North American Electric Reliability Council said."

October 18 - Bloomberg (Greg Chang): "Google Inc...said it plans to install the largest U.S. corporate solar power system, joining rivals such as Microsoft Corp. in adopting alternative energy. Google's solar system at its headquarters in Mountain View, California, will generate 30 percent of the facility's electricity and will be put into service in the first half of next year... The solar system is more than three times the size of the one Microsoft installed in April at its offices less than 2 miles away. Companies are installing solar panels to buff their environmental image, save money on electricity and take advantage of government incentives designed to encourage alternative energy."

October 19 - Financial Times (Joanna Chung and Rebecca Bream): "Russia's Unified Energy System, the world's biggest electricity generating company, is planning to raise about $10bn in the international capital markets over the next two years as part of a broad strategy to fund urgent domestic energy needs."

October 19 - Financial Times (Roula Khalaf): "A few years ago, only a few Arab investors could grab the headlines with big deals at home or abroad. Investment banking was still an emerging industry in the Middle East and private equity was virtually unheard of. But the sea of cash flooding the Gulf these days has produced an explosion of investment companies. New names - investment banks, private equity or venture capital funds and Islamic groups - spring up almost every week. Arab companies' acquisitions abroad, in western and Asian markets, are announced with as much frequency. 'In 2003 people hardly understood what private equity and alternative in-vestments really were; now every other day we get wind of another fund,' says David Jackson, chief executive officer of Dubai-based Istithmar, an up-and-coming government investment arm."

Climate Watch:

October 20 - Associated Press (Seth Borenstein): "The world - especially the Western United States, the Mediterranean region and Brazil - will likely suffer more extended droughts, heavy rainfalls and longer heat waves over the next century because of global warming, a new study forecasts... In a preview of a major international multiyear report on climate change that comes out next year, a study out of the National Center for Atmospheric Research details what nine of the world's top computer models predict for the lurching of climate at its most extreme. 'It's going to be a wild ride, especially for specific regions,' said study lead author Claudia Tebaldi, a scientist at the federally funded academic research center. Tebaldi pointed to the Western U.S., Mediterranean nations and Brazil as 'hot spots' that will get extremes at their worst, according to the computer models."

Fiscal Watch:

October 20 - Dow Jones (Rebecca Christie): "Old planes, high fuel costs and a possible $12 billion medical bill are pushing the Air Force to redouble its focus on budget politics, according to senior leaders and budget plans. The service submitted a $690 billion plan for the next six years, including $108 billion for fiscal year 2008. In addition, the Air Force sees a looming $20 billion annual gap between its proposed budget and 'things we know we need to do that we don't have the money to do.' For example, the service faces a daunting challenge with its suite of new space programs. 'Every single thing we have on orbit has to be recapitalized or replaced over the next decade,' said Gen. Michael Moseley, the Air Force's chief of staff."

Speculator Watch:

October 20 - Bloomberg (Katherine Burton and Jenny Strasburg): "John Snow and Lawrence Summers, two former U.S. Treasury secretaries, were hired by New York-based hedge fund companies as scrutiny of the industry increases. Snow...was named chairman of Cerberus Capital Management LP, which manages $16.5 billion in hedge funds and private equity. Summers...will join D.E. Shaw & Co. as a part-time managing director. D.E. Shaw oversees $25 billion for clients... Paul O'Neill, the Treasury Secretary before Snow, now is an adviser to Blackstone Group LP, a New York-based buyout firm, which also manages hedge funds. Former regulators including Eugene Ludwig, who served as Comptroller of the Currency when Clinton was president, and Richard Breeden, who was chairman of the U.S. Securities and Exchange Commission from 1989 to 1993, have started their own funds."

October 19 - Bloomberg (Katherine Burton and Jenny Strasburg): "Hedge funds attracted $44.5 billion from wealthy investors and institutions in the past three months, the most in one quarter since at least 2003... Net deposits beat the previous record of $42.1 billion in April through June, according to data released today by Hedge Fund Research Inc... Hedge funds have garnered $110.6 billion this year, compared with $46.9 billion in all of 2005. The previous annual record was $99.4 billion in 2002."

October 19 - Financial Times (Peter Smith): "Carlyle will shortly begin marketing a $15bn fund dedicated to US buy-outs, joining a list that includes rivals such as Blackstone, Kohlberg Kravis Roberts, Permira and Texas Pacific that have recently raised so-called mega funds of $12bn-$16bn. Carlyle, which is also raising a European buy-out fund of $3.8bn-$5bn, declined to comment... Industry commentators believe 2006 will set a high water mark in the current private equity fundraising cycle. Private Equity Intelligence estimates that groups that have completed their fundraising this year have attracted capital of $311bn but forecasts that figure will rise to a record $400bn by the year end, eclipsing the previous record set last year of $293bn. 'It would be remarkable for next year to be as good as 2006 but $300bn would not be a surprise,' said Mark O'Hare, managing director of PEI."

Financial Sphere Earnings Watch:

Highlights from Citigroup's third quarter: "Repurchased $2.0B of common stock, $10.4B in last twelve months." Income from Continuing Operations up 6% from Q3 2005 to $5.3 billion. "Total revenues were approximately even with the third quarter of 2005, as international revenue growth was offset by a decline in U.S. revenues, reflecting lower revenues in capital markets driven businesses... Average Consumer Loans were up 12% y-o-y to $422 billion. International Average Consumer Loans were up 9% to $116 billion. "Global wealth management revenues increased 14%, and net income was up 30%... asset under fee-based management increased 25% to $322 billion..." Assets under custody were up 14% y-o-y to $9.6 Trillion (with a "T"). "Fixed income markets revenues declined 16% to $2.3 billion, primarily driven by lower results in commodities, interest-rate products, and foreign exchange." Total Assets surged $119.9 billion during the quarter, or 29.5% annualized, to $1.747 Trillion. Investments expanded $56.8 billion, "Fed Funds and Repos" $28.2 billion, and Trading Account Assets $23.3 billion. Total Loans increased $18.3 billion during the quarter. Total Assets were up $274 billion, or 18.6%, y-o-y. Over the past year, total Loans expanded 15.7%, with Corporate loans up 32%. The Asset "Federal Funds Sold and Securities Borrowed or Purchased under agreements to Resell" was up 21% y-o-y to $263 billion." On the Liability side, Total Deposits were up 13% y-o-y to $669 billion. "Fed Funds and Repos" were up 32% to $320 billion, Brokerage Payables 37% to $97 billion, and Trading Account Liabilities 15% to $139 billion. The Liability "Fed Funds & Repos" jumped $55.6 billion during the quarter, compared to Deposit growth of $23.5 billion. The company repurchased 41 million shares during the quarter, increasing 12-month buybacks to 218 million shares.

JPMorganChase reported third quarter Net Income of $3.30 billion, up 30% from Q3 2005. Highlights included: "Record Investment Banking fees of $1.4 billion up 44% y-o-y, driven by record debt underwriting and strong advisory fees." "Ranked #1 in Global Syndicated Loans; #2 in Global Long-Term Debt..." "Commercial Banking loans up 11% y-o-y, driven by solid growth across all businesses..." From Asset & Wealth Management, "assets under management up 13% y-o-y" to $935 billion. "Credit card charge volume up 15% y-o-y to $87.5 billion." From Treasury & Security Services, "assets under custody were up 23% y-o-y" to $12.9 Trillion. "Assets Under Management were $935 billion, up 13%...from the prior year." Card Services Net Income was up 31% y-o-y to $711 million. Mortgage loan originations down 28% to $28.4 billion. Average Home Equity loans were up 10% y-o-y. Total Assets expanded 3.0% annualized during the quarter to $1.338 Trillion and were up 11.2% y-o-y. Wholesale Loans were up 18% from Q3 2005 to $179.4 billion, while Consumer Loans were up 6% to $284.1 billion. The company repurchased 20 million shares ($900 million) during the quarter, increasing 12-month buybacks to 95.8 million shares.

BankAmerica third quarter Net Income was up 41% from the year earlier quarter that excluded the acquisition of MBNA. Proforma (excluding MBNA impact) revenue increased 10% to $18.65 billion. While Credit card loans surged to $96.0 billion with the acquisition, "home equity production increased 16% to $20.68 billion...and home equity portfolio balances grew 22% to $82.16 billion." "In the third quarter, average business loans to small businesses with less than $2.5 million in annual sales grew 73% [y-o-y] to nearly $13 billion...Total average loans and leases grew 14% in Global Corporate and Investment Banking to more than $246 billion... Total assets under management in Global Wealth and Investment Management grew 13% to $517 billion..." Total Average Loans during the quarter expanded at a 23.8% annualized rate to $673.5 billion, with total commercial loans increasing at a 10% rate (to $236bn) and total consumer loans at a 32% rate (to $437bn). Choosing to reduce securities positions, Total Assets expanded only 1.1% annualized during the quarter to $1.449 Trillion (assets up 16% y-o-y). On the Liability Side, Deposits were up 6.3% y-o-y to $666 billion, and Fed Funds & "Repo" were up 18.9% to $258 billion. BofA repurchased 59.5 million shares ($2bn) during the quarter, increasing 12-month buybacks to 263.4 million shares.

Highlights from Wells Fargo's third quarter (CEO: "The stagecoach was running on the full horsepower of our diversified business model...": "Record Net Income of $2.19 billion, up 11% from the prior year's $1.98 billion, up 10% (annualized) from the second quarter... Average commercial and commercial real estate loans up 10% from prior year, up 8% (annualized) from second quarter... Average consumer loans (excluding real estate 1-4 family first mortgages) up 16% from prior year, up 19% (annualized) from second quarter 2006." "Mortgage originations of $104 billion, compared with $116 billion in prior quarter and $103 billion in third quarter 2005." Single-Family second mortgages expanded at a 15.2% rate during the quarter. "Loans to small business...grew 18% from prior year." "Brokerage assets under administration of $91 billion, up 16% from prior year." Total Assets expanded at a 6% rate during the quarter to $500 billion, with a 12-month gain of 15%.

Merrill Lynch posted third quarter Net Earnings of $3.045 billion (including positive $1.1 billion impact from the BlackRock merger), up 121% from Q3 2005. Net Revenues for the quarter were up 48% from comparable 2005 to $9.90 billion. Global Markets and Investment Banking (GMI) "generated its highest revenues ever for a fiscal third quarter despite challenging market conditions during much of the period... Fixed Income, Currencies and Commodities net revenues increased 26% [to $2.1bn] and were a quarterly record... Equities Markets net revenues increased 26% [to $1.50bn]... Investment Banking net revenues, at $783 million, were just above the strong prior-year quarter... GMI's year-to-date net revenues of $13.5 billion increased 30% from the first nine months of 2005..." Merrill Lynch Investment Managers third quarter Net Revenues were up 54% from Q3 2005 to $700 million [total client asset of $1.5TN), "driven principally by higher long-term asset values, robust net inflows and consolidated investments." Merrill Lynch's nine-month Net Revenues were up 35% from comparable 2005 to $26.0 billion. Nine-month Compensation expense surged 44% to $13.7 billion. The company repurchased 18.3 million shares ($1.3 billion) during the quarter. (Balance Sheet data not yet available)

I continue to read analysis postulating that the Fed overshot; that rates were hiked above some so-called "neutral rate." In this Age of Unlimited, Asset-Market-Centric Global Finance there is no such animal as a single U.S. interest rate to stabilize our Credit and Economic Bubbles into some equilibrium state. And while we can attempt to discern the state of Financial Conditions from analyzing day-to-day marketplace nuances, quarterly financial sector earnings reports do provide the clearest view of system Credit Availability and the General Liquidity Backdrop. Despite some unsettled market conditions during the third quarter, there is no evidence of tight Financial Conditions in the reports from our largest and most powerful financial institutions. In short, the mindset remains very much "full steam ahead!"

Intense competition and margin pressure continue to drive lending volumes and capital market activities. The sharp slowdown in home sales activity is offset by more aggressive home equity, credit card, and small business lending. Almost across the board, commercial lending volumes are strong. Industry executives certainly exuded confidence during their respective conference calls. While delinquencies and Credit losses ticked up a bit, they don't yet appear to be a source of worry. "There's nothing in any of the information that we see to lead you to think the consumer has any significant level of weakness," commented BofA's CFO Alvaro Molina, as his company pursues even more aggressive consumer loan growth. And the scope of share repurchases remains astounding. Citigroup, BofA, and JPMorgan combined for buybacks of 120.5 million shares during the quarter, putting y-t-d repurchases at an incredible 427.6 million.

Citigroup's Total Assets surged $119 billion during the quarter. Bank of America posted exceptional Average Loan growth in their mortgage, consumer and commercial units. BofA's Average Home Equity loan balances were up 21% from Q3 2005, with Average Total Commercial loans up 18%. Investment banking fees at JPMorganChase were up 44% from Q3 2005 to a record $1.44 billion. JPMorgan's Home Equity Loans were up 10% y-o-y, and loans at its Commercial Banking unit were up 11%. Commercial and (non-single family first mortgage) consumer loans were up double digits y-o-y at Wells Fargo. Merrill Lynch Net Revenues were up 48% from Q3 2005 to $9.90 billion. Merrill's Fixed Income, Currencies and Commodities Revenues were a record $2.12 billion, up 26% from Q3 2005. And virtually all institutions noted strong inflows into their investment management businesses.

It is also worth noting earnings disappointments from the likes of mortgage players Washington Mutual, MGIC, Radian Group, and Accredited Home Lenders. Mortgage industry profits are petering out, although I'm still in no hurry to call for the imminent demise of the Mortgage Finance Bubble. At this point, industry earnings troubles are more a reflection of massive overcapacity and a sharp reduction in originations - rather than rapidly escalating Credit losses and lender/investor/speculator revulsion. Accordingly, Credit Availability remains generally loose.

Some regional housing Bubbles are bursting, which has set in motion quite problematic dynamics for those individual markets. Conversely, other markets have hardly missed a beat. With respect to the national economy, Credit Bubble Dynamics will for now continue to counterbalance what would in normal circumstances be the devastating consequences of a major housing downturn. It is important to repeatedly remind ourselves that these are anything but normal times. In true Credit Bubble Blow-Off Fashion, the push into commercial lending and capital markets activities (spurred by waning mortgage profits) has evolved into a key facet of resilient employment and income growth trends. Those analysts most intensely fixated on faltering housing markets tend to avoid giving general Credit and Liquidity Trends (Financial Conditions) deserved consideration.

I still get stomach aches from all the humble pie I've consumed from my predictions of an imminent bursting of the mighty bond market Bubble. Everything I thought I understood about market Bubbles, financial history, and the unprecedented degree of leveraged speculation that had come to permeate the U.S. Credit system left me cocksure that the bond bear would be one elongated and ferocious grizzly. Well, wrong and more wrong (at least so far). Contemplating my analytical errors, I now appreciate that I failed to adequately take into account the global Credit and Liquidity backdrop. U.S. and Global Financial Conditions were extraordinarily loose, which (so clearly in hindsight) ensured that abundant liquidity flowed continuously into U.S. Treasury, agency, and debt markets (recycling massive U.S. Current Account Deficits, as well as enormous "carry trade" flows from Japan, Switzerland and elsewhere). The global liquidity backdrop has proved itself overpowering.

Clearly, housing Bubbles demonstrate different dynamics than a bond market Bubble. For one, there are prominent local characteristics creating varying degrees of housing vulnerability. One can today examine Florida and California, for instance, and see markets acutely susceptible to bursting Bubble dynamics. These local factors (expanding inventories and inflated prices, along with mounting post-Bubble speculator revulsion) will now - even in the face of a resilient National Mortgage Finance Bubble - play a more pronounced role in dictating market dynamics than declines in mortgage rates.

At the same time, as analysts, we should not dismiss the possibility that the generally loose U.S. and global backdrops will continue to present a countervailing force supporting home prices around the country, similar to how they've cushioned the bond market Bubble. It sure doesn't hurt that lenders are "printing money" outside the mortgage business, while the enterprising leveraged speculator community is finding myriad creative ways to profit from this incredible late-stage Credit boom. With Global Credit conditions underpinning employment and income - while stoking systemwide liquidity over-abundance - I'll continue to approach the unfolding housing bust with analytical caution. The housing grizzly goes on a rampage with the breakdown of the Mortgage Finance and Credit Bubbles. In the meantime, I am willing to predict escalating Monetary Disorder and resulting wild marketplace instability and divergences in housing, securities, and commodities prices - a backdrop poised to confound the Fed and limit their flexibility for responding to deepening housing troubles.


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