OUTLOOK FOR WEEK OCTOBER 9
by Stephen Tetreault
October 9, 2007

The bond market will be closed on Monday and the forex, but it will be a regular trading day for stocks, ETF's etc. The big-mover of the week could be the minutes of the Federal Reserve's policy meeting on 8/18 to be released on Tuesday as we saw at that meeting, the Fed-heads decided to cut interest rates 50-basis points and the thoughts, forecast and insight from the minutes will be the focal point of many investors/traders. They will certainly be dissecting the data for any clues with regard toward further interest rate cuts. Also Monday would be the funds last-easy-manipulative opportunity to send the markets higher, due to the ability to squeeze short on a potentially light-bank-holiday with the bond-market closed!

As I stated last week I was expecting an assault on the old highs and even a possibility of making relative NEW-Highs, which is exactly what we saw happen! I am still expecting that another exhaustion top is/has formed and I am till expecting an abrupt reversal according to my Turn-Time forecast...we as we have entered the enterer the inflection period....and it pointing toward a HUGE-MEGA inflection period ahead, and the window is tightening as we get nearer to the potential turn period @ (10-4 to 10-11 ) and according to my wave analysis we have multiple Tsunami waves converging and a major Inflection & Fibonacci collision possibility hitting the overall markets within this window and since we have been in a bullish-up-trend, this should be the start of a significant corrective wave/period....I am looking for what we call a BULL-TRAP to play out on Monday/Tuesday of this week we could easily giddiness in the markets as we tested and pushed through into NEW-HIGHS as new-monies flowed-into the new-quarter, than before the bulls know it they get trapped in the slaughter-yard, and the markets are pulled out below them! In my opinion the potential for significant profit taking this week is huge possibility. The propensity to take profits should be huge....Funds can always get back in when the clouds darkening the landscape dissipate.

Shakespeare warned, "Neither a borrower nor a lender be," but he probably never met our infamous Helicopter man Bernanke, the lender of last resort, the lender/friend and bail-out-hero of large banks and brokerage firms. This Federal Reserve chairman literally stomped on our American greenback when on 9/18 he with his band of merry misfits aggressively slashed the federal funds by 50-basis points, to 4.75%, in his zeal to bail out his idiotic, reckless and imprudent lenders at all costs. In so he clearly signaled his eagerness to sacrifice his reputation and any credibility he had as an inflation fighter in order to avoid near-term pain for his reckless buddies, and all he did was refuel their lamebrain and excessive risk taking behavior by providing the liquidity and spread which will no doubt encourage more of the same kind of rampant speculation.

Inflation is not an issue�.we are now living in another time, and place�we have entered into the what I refer to as the Federal-Reserve-Federation�(similar to what we saw on Star Trek), as this is the new-world�In the Star Trek "universe", humanity developed faster-than-light travel following a post-apocalyptic period in the mid-21st century; and all needs were eliminated for the most-part (food, transportations, energy etc.).

� We no longer have combustion vehicle using (crude-products)�we just beam-ourselves around or utilize warp-drives�hence no need to worry about the inflationary�exploding crude, and gasoline prices.

� We no longer have needs to heat and cool our homes using (natural-gas, heating-oil or electricity)�we just ask the computer to increase or decrease the environmental conditions to our desired temperature, hence their soaring prices and inflationary affects will have to bearing on our economy.

� We no longer have needs for food, drink or other nourishment, so their soaring costs are not really inflationary as we just us the nearest replication-devise and we have all we desire effortlessly

� We no longer have to pay for higher education, so their rocketing costs are not really inflationary either as all education in this new-world the federal-reserve has developed is free�

� In this new world healthcare is freely distributed with-out cost, so we need not worry about the soaring costs of insurance, prescription drugs or other healthcare needs.

All the staples of life are provided for by the Federal-Reserve-Federation, and we need never worry about this thing called inflation again!

This weekend I could not get that all familiar theme from �Jaws� out of my head as traders/investors who just a few weeks ago were running from stocks like Olympian gold medalists�now just a few-weeks later after the fed-heads delivered their aggressive rate cut all is clear�and all problems are solved and now its is perfectly safe for John/Jane Doe and other fund-managers to venture back into the shark infested water ( hopefully they are not still bleeding) as these sharks can smell blood from miles away! They dove back into the water these past few weeks�their euphoria and the fed-heads massive liquidity injections have helped to drive the DOW and SPX to new-record highs. This is a classic scenario where to much money chasing few-instruments (markets have been trading with significantly less volume of late). In a nutshell the vast array of talking-butt-heads has again been screaming that this is the start of another-bull market! Much of the recent buying is driven by the notion that equities are a significantly safer bet than those riskier debt/credit markets and other investments CDO�s etc. that were the original cause of the recent market contagions/meltdown.

The markets this week will be traversing a proverbial mine-field of economic news/releases along with the usual confessions of firms that already know that they will be-unable to meet expectations! The markets will no doubt be also digesting-calculating and eventually pricing in the current premise for the prospect of another rate cut (on not) late in the month�I believe the idea of another interest rate should be greatly diminished (or at least it should be), however most talking butt-heads and analysts are still not changing their rate cutting tune.

I believe the upcoming reports will point toward a healthier economy **on the data** and greater than expected inflationary pressures than most of the fed-heads want to acknowledge or see and the potential for additional rate cuts should be taken off the table for now, and this scenario is not priced-into-the-markets in my opinion!

All I keep hearing from the talking-butt-heads on bubblevision is historical data suggesting a mega year end-rally as the Dow has rallied during the final quarter of the year for the past nine years straight; while we have seen that the SPX has posted a fourth-quarter rally in 13 of the past 15 years ( a great streak right�one that we should not ignore!)

Strong results, or in-line earnings that have already been massaged lower (under promise�over-deliver), could keep this euphoric rally chugging along. However if the third-quarter earnings results become quite lackluster or worse yet fall under the lowered expectations and firms in their fourth-quarter guidance/forecasts hint or worse yet blatantly suggest that the worst might not be over in the subprime/slime and credit markets, and that consumers are retrenching, than fears of recession would again become the center of attention, and those fund-manager and hedge-funds with nice pent up profits heading into this quarter will be quick to hit the sell buttons to protect those profits!

For the first time since the 2001 corporate profits are expected to post a third-quarter decline, a trend that usually spells only one thing an impending recession. The SPX is now expected to see a 0.4% drop in operating earnings, a figure that doesn't yet reflect the sizeable hits announced during the past several weeks by Citigroup, Merrill Lynch, Washington Mutual.

� Citigroup expects "substantial decline" in Q3 net income, a decline of 60%: They announced that dislocations in the mortgage-backed securities and credit markets, and deterioration in the consumer credit environment are expected to have an adverse impact on Q3 financial results.

� Washington Mutual stated that Q3 net income impacted by market and credit environments: they announced that a weakening housing market and disruptions in the secondary market through the end of the third qtr will result in a decline in net income of approximately 75% from the prior year quarter, subject to the finalization of third-quarter 2007 results.

The markets are rallying on hopes/prayers that the fed-heads continue to cut interest rates and that earnings and guidance will be significantly better than expected when in fact it’s not the third quarter that they should be worried about as it will not be as negatively impacted from the financial write-downs, as will the fourth!

In my opinion, way too many investors, fund-managers and hedge-fund managers are banking weigh to heavily on a solid earnings rebound in the fourth quarter, in large part based on the presumption/assumption that our faltering pro forma economy will continue to grow, albeit at a slower pace. I totally disagree with this premise; as in my opinion a much greater risk in underestimating the negative impact that the subprime housing market implosion will have on consumers-discretionary-spending heading into the critical-retail housing season. This contagion could easily bleed over into the global-economic that rely heavily on demand for their products from America's buyers who have continued to wrack up their credit card debit to record levels. Remember my friends that this is the first time in over 65+/- years where average home prices have declined at the same time that Americans have been borrowing against their houses (lines of credit, and capital extraction), in effect using them as their own personal ATM machines; and as such I sincerely doubt that the real negative impact on the consumer has yet be felt, and when the contagions are unmasked the markets will not act favorability.

SAME OLD CRAP....where are the watch-dogs?

The Office of the Comptroller of the Currency reported Thursday that commercial and retail bank underwriting standards eased again in 2007, and this was the fourth consecutive year (what are these numb-nut banker thinking, the very-practices that led to the subprime mess is getting more lackluster), with standards falling most at large banks.

Large banks eased standards especially for leveraged and large corporate products, the OCC stated, while midsize banks eased standards modestly.

Community banks, meanwhile, tightened standards, the OCC stated.

The 2007 survey included the 78 largest U.S banks by asset size and covered the 12-month period ending March 31. The survey indicated that 20 banks reported easing commercial standards in 2007, mostly in the large bank group. Of those 20, 13 reported easing for a third consecutive year. A result of the easing of standards is that commercial credit risk is increasing. Continued easing in overall underwriting standards, combined with commercial real estate concentrations in community and mid-size bank portfolios, underscores examiner�s assessments that commercial credit risk is increasing, the report indicated. The survey said that the change in underwriting and "currently uncertain economic environment" will boost credit risk over the next year for 58% of the sampled banks in products including leveraged lending and commercial real estate lending.

What a week, (especially for the giddy-bulls) The indexes wrapped up their first week of the fourth quarter by touching relative and several all-time record highs, and the potential for earnings to beat reduced expectations as results start coming in this week could keep the rally alive (key-word = could). Currently we continue to see herd-after-herd of analysts, talking-butt-heads and fund managers professing that the third-quarter earnings will easily exceed current expectations. Wes aw that stocks rose for a fourth straight week, sending the SPX and Dow to new all time closing highs and the impetus was not another rate cut�it was a reversal of the catalyst that prompted the last rate cut; and I was mystified at the initial-response as the Friday non-farm payrolls report showed growth as such it eased the looming concerns that mortgage losses will be the catalyst for a recession. The mystical-Government fuzzy-math-revision-pen did it again as it erased the crummy August jobs report and it didn't stop there as it reached into the July report to fluff that up as well (Its so they proclaim the 3-month average is ? ). The dismal employment forecast the main-reason-given for the fed-heads rate cute was almost completely erased with a swipe of a pen.

Alcoa, the world's largest aluminum maker, takes its traditional pole position as the first major Dow component to report earnings after the close on Tuesday. Other companies reporting during the week that will provide acute insight into consumer spending include Costco, Monsanto, PepsiCo and Safeway. The bar has been lowered so low right now; it should not be difficult at all to hurdle it as many paid shills and analysts are forecasting 2.5% to 3.0% earnings increases in the SPX just a few weeks ago they were forecasting on average 6.0-6.5% and they have lowered their expectations dramatically (manipulated-massaging I call it) a few weeks ago, but have come down dramatically amid concerns about a so-called credit crunch and huge losses tied to subprime and Alt-A mortgages.

Brokerages, Banks and other financial firms were in vogue helping push the SPX and the BIX to their biggest rally since March 2003; and do not ignore the homebuilders as they surged dramatically higher as they posted the largest weekly gain since November 2000 after a Citigroup state that their shares are cheap. The banking sector and brokerage-dealer strength Mystified me as Citigroup-warned and their shares rose and Merrill warned and stated the following and their shares also rose on the premise that this is all the bad-news looming; what a stupid premise to hold in my opinion�.

Investment banker Merrill Lynch said Friday that their credit and mortgage woes will lead to them to post a third-quarter loss, as they are going to take a whopping $5 billion in write downs due to the contagions of the recent credit crunch that paralyzed Wall Street and sent them scurrying like rats deserting a sinking ship. The bulk of the losses will come from marking down the value of complex instruments known as collateralized debt obligations and from declines in subprime mortgages loans given to customers with poor credit history; this is in my opinion just the tip of the proverbial iceberg.

Rising delinquencies and defaults on mortgages, especially subprime ones, has led to the near disappearance of investors willing to buy these sucker loans; and without an investor market (better know as bag-holders), the value of the loans decreased, leading to write-downs of various portfolios�.subprime mortgages are often used in CDOs, pushing their value lower as well. About $4.5 billion of the write-downs are related to the declining value of subprime mortgages and CDOs. **(I believe they like many others are holding a huge pile of these instruments that they haven't even begun to adjust�I bet we hear the same warning and write-downs for many quarters to come!)

Merrill Lynch said it took significant steps to reduce its exposure to the subprime market in the third quarter. Merrill Lynch is also writing down another $463 million, net of related fees, on the value of financing commitments for corporate buyouts, regardless of when the deals will close or fund. Many investment banks got stuck this summer with loans they pledged to private-equity firms for major acquisitions.

Financial shares in the SPX rose 4.5%; Fannie Mae, the largest provider of money for U.S. home loans, rose 11% to $67.30. Morgan Stanley rose 9.4%; Goldman Sachs rose 5.4% on week. The SPX Homebuilding Index gained 12%, the most in almost seven years; after analyst Stephen Kim said at the start of the week that the shares of builders such as Lennar Corp. are undervalued. ( Lennar rose 10%.... D.R. Horton gained 14% Pulte Homes gained 13% while Centex Corp. gained 8.2%).

Rumors can still drive stocks as Sears Holdings had the biggest weekly advance since 3/2005 after activist investor William Ackman bought 5 million shares of this lackluster department-store. It was strange as he was the same character that thwarted the company's attempt last year to purchase its Sears Canada Inc. unit. Sears Holdings shares surged a whopping 17% on the week

Not all was great as Walgreen dropped over 17%, the largest percentage drop since August 1980; they reported their first profit drop in almost a decade as expenses rose and earnings from generic drugs fell.

To CUT or NOT to cut that is the $64,000 question!

Perhaps the Fed isn't going to cut rates in October after all. I suggested a while back that the Fed might be contemplating and only able to deliver a "one and we are done" scenario. The 50-basis point rate cut seemed oversized given the lack of any real evidence that a real recession was developing (only speculation, and the cries of wall-street promoted such a situation). I believe that many a fed-head now, even may be thinking they shouldn't have moved so aggressively is such a blatant move to bail out their banking and brokerage friends.

We have seen that the equity and commodity markets on a global basis have rallied significantly, and in some sectors have shown renewed-speculative euphoria frenzy. CNBC surprised me by running a piece this past week on soaring condo prices in NY city due in part to the massive anticipated Wall Street bonus checks to be cut this year. Not to mention that M&A speculation and LBO deal activity is starting to pick up again.

I sincerely pray that this was not the desired affect of their aggressive rate cut without supporting-data, I sincerely hope that this is not what the fed-heads envisioned or wanted when the delivered their drug addict friends (banks, and ponzi-scheme-of-primary-dealers) with another massive dose of easy-money; when they delivered that last rate cut or was it. Was it their chief intention to once again jumpstart and promote this bubble-like activity again.

If a rate cut isn't forthcoming, all that would do is take away some of the huge excesses that have been priced into the markets due to hedge-funds, funds and other money-managers running stocks/instruments into their respective bonus windows; the real critical factor for the stock markets are whether economic growth continues, not whether rates are cut another 25/50 basis points in the long-haul.

Just 4 weeks ago, the payroll report was bantered about as a dismal-development then we saw that on Friday, the government accountants were dead-wrong last month (hell can we ever-believe their crap reporting) nevertheless the September non-farm payroll report showed a gain of 110,000 and it came with an wild-118,000 upward revision to the past two months worth of data. In sum, the report and the prior months' revisions left a 228K overall gain; which more than eclipsed the originally reported loss of 4,000 in August payrolls�it was this so-called decline which sealed the deal for the mid-September Fed-head policy aggressive 50-basis point cut�and now we see that it was revised upward to a 89,000 gain�.now we saw that most of the upward revisions were for government workers (which mysteriously appeared) still leaving private payrolls with just a 53,000 average gain over the past two months; the massive fears of outright declines was totally misrepresented as was the irresponsible rate cut in my opinion by the fed-heads�where were the massive negative implications and their effect on American incomes and spending and what data points since then (other than housing) have demonstrated such a cooling of the economy to panic the FOMC at their last meeting.

The stronger revisions and stronger than September jobs report and guarded/ cautious comments from several of the Fed-heads should have left the markets quite skittish over the feasibility and need for further interest-rate cuts; and that they are not necessarily baked in the proverbial cake. After the very-aggressive surprise half-a-percentage point rate cut announced 9/18, which took the federal funds rate down to 4.75%, most market participants, talking butt-heads and so called economists have expected at a minimum a 25-basis point rate cut at the FOMC's next meeting 10/30-31 and many expect another 50-basis points.

However since the last cut, the pro forma economic indicators have not been as unambiguously weak as many had been hoping-for and pricing-in, as the odds of a cut in the FOMC's overnight target rate by the end of October fell to 44% from 74% earlier this week. The market's are now pricing in one further rate cut by the end of the year (just 25-basis points) and a 37% chance of a second cut; significantly down from earlier estimates.

The September job report showed job growth was stronger than expected over the past three months; and we have seen a plethora of in-line or better than expected economic reports and as each report that contradicts the slow-growth scenario, I think we will have to diminish the likelihood that a credit-market turmoil is going to translate to some sort of consumer or business panic slow-down or outright panic.

On Friday we saw that the unemployment rate rose to 4.7% in September from a previous reading of 4.6%, but job growth was stronger than expected over the past three months, according to the pro forma reporting Labor Department. Nonfarm payrolls increased by 110,000 in September, including 73,000 in the private sector, and as such these numbers came in very close to the expectation of 113,000. Payroll growth in July and August was revised higher by 118,000 (attributed to the mysterious birth-death-model). The unemployment rate ticked up to 4.7%, the highest in a year. The labor force expanded by 573,000, and employment as measured by the household survey rose by 463,000, the most in more than two years. The details of the report paint a picture of a stronger job market than expected and if they were smart should lead markets to lower their expectations for another interest-rate cut by the Fed-heads at the end of the month.

Against this backdrop, a number of fed-heads are now rethinking and recanting that their easing by 50-basis points a little more than two weeks ago may have been in error; and the markets has failed either intentionally or they are drunken with giddiness as they are still surging ahead expecting rate cuts and continued huge liquidity infusions. Those who want, need and demand to see continued rate-cuts are likely to find they are fighting an uphill battle.

Donald Kohn, the Fed's vice chairman, said earlier Friday that the half-point cut may be enough of a sufficient tonic to keep the U.S. economy on the right track�."Pending further evidence, a 50-basis-point easing was not an unreasonable first approximation of what might be required to keep the economy on a sustainable growth path," he said in a speech to the Greater Philadelphia Chamber of Commerce. With inflation low (out-side on my vantage point), the FOMC could reverse the rate cut if it turned out to be larger than needed, he said.

Don't expect any more rate cuts from the FOMC unless the economic news gets really awful. Kohn, the vice chairman of the Fed board, gave a remarkably transparent speech (it was not widely reported), wherein he detailed exactly why the FOMC cut their fed-funds rate by 50-vbasis points. In his view, the aggressive/bold cut was a surgical strike aimed at unblocking the credit crunch in financial markets, not an attempt to rescue the economy as a whole, which he sees returning to moderate growth. He went on to say that it was not designed to bail out investors. "Our policy easing was aimed at helping to offset the effects of those tighter credit conditions and thereby to encourage moderate economic growth over time," he said. "It was not intended to, nor should it, short circuit a more realistic pricing of risk and the gains and losses that the re-pricing will entail for market participants. We have seen some signs of improvement in some markets that were severely disrupted," he said. Credit remains tight for some borrowers, he acknowledged, but there's little more the Fed can do in the short term to restore confidence in loans that should never have been made in the first place. Kohn wrapped up his speech with a strong statement against letting inflation creep higher. If needed to maintain price stability, the Fed is ready to take back some or all of the September rate cuts, he said.

Charles Plosser, said this past week that only if significantly weaker economic data were to surface would he be inclined to support further rate cuts (looks like at this point he would not be able to entertain such an action). "Weaker numbers will not lead me to revise my outlook or my view of the appropriate funds rate target, unless they are much weaker than already anticipated and accumulate sufficiently to generate another downward revision in my outlook," Plosser said.

Richard Fisher, this past Thursday sounded a warning about inflation (I though it vanished according to those on bubblevision), saying that the recent spike in food prices might linger.

Hence how could the FOMC feel comfortable with cutting rates especially if the PPI report due out this coming week and the CPI report the week after show increasing inflationary pressures? The recent spike, maintenance at those higher levels for crude $78-82 a barrel, will no doubt push up the headline numbers all by itself.

What is extremely alarming to me is that to support our huge spending habits; the ballooning twin-deficits (federal deficit and enormous trade deficit) we are now borrowing roughly 73% of the entire world's savings�.this pace is extremely unsustainable and it holds us hostage to others especially those who hate us. The question remains how much longer, will they continue loaning us money to support out spending habits; without looking for a better return especially as our greenback heads into the cesspool. We continue to see our society and way of life crumble (just my opinion) as we export our quality and benefited jobs to China/India and abroad while they loan us hordes of cheap money, and we consume their cheap exports at a break neck pace. It has been these loans�their buying of our debt which has resulted in keeping long-term interest rates artificially low.

Pending Confessional Season & Earnings Season (3rd quarter)

Lets face it year/year and quarter/quarter and year/year, comparisons will be extremely difficult to meet/beat in my estimation despite the current path of massaging and lowering of the proverbial-earnings bar! When coupled with the current flow of economic data which is also suggesting that corporations are having a hard time passing increased costs associated with business expenses (especially commodity costs) is not an positive moving forward for corporate earnings heading into Q4/2007. I almost forgot to mention that I believe we have seen a massive pull-forward in demand and inventories that were created by tax incentives and various incentive corporate programs that are about to sunset...also the crumbling dollar has resulted in overseas firms locking in the huge currency-conversion benefits by puling forward supply. Hence I believe we will soon start to see companies (especially domestic) lining up at the confessional podium and the results will not be pretty for their underlying stocks (many of which are already quite bloated) and the indexes/sectors wherein they sit. If this was not enough to be concerned about�please do not forget about the following contagions as well.

� WE have seen that the markets have not factored in any geopolitical concerns at all right now, and that most of the uncertainty �fear� premium has been stripped away, and this type of complacency is very dangerous.

o Our president the supreme-ruler remains steadfast and unshakeable in his determination to continue the course in Iraq, whatever the consequences. This has been reflected in a nationwide televised speeches when Bush continues to state that he is the decider and that he has decided to remain on his present path despite what the people think as he knows best.

o Bush also has his sights also firmly set on a defiant Iran as he strongly desires to be the great-middle-east democracy hope; and that he is again stating all over the airwaves "trust me as we have compelling evidence (we can not share) that Iran they will very soon have nuclear-weapons...so trust me" that IRAN is pressing ahead with its uranium enrichment activities. Will he get us into another quagmire it sure seems to be his goal!

� We have seen a reversal in fed-funds interest-rates from an environment, that had taken us from 1% to 5.25% and despite our ballooning �Twin-Deficits� and American debt/credit growing like the bean-stock in the fable Jack & the Bean Stock...its growing as far as the eyes can see, the fed-heads cut rates by 50-basis points to drop the short-term rates to 4.75% as the economic data is mush weaker than it presents (trust us the fed-heads have stated we are not just bailing out our wall-street friends and supporters....( also please American citizens trust us "the Fed-heads " when we say that inflations is quite low ....just do not reflect on the soaring prices of energy, food, commodities, insurance, healthcare, tuition, etC . as these items really do not count towards inflationary-pressures despite what you all think....).

The Dollar is still on a crash-path mode�.but we are getting close to a near term bottom due to excessive-over-sold-conditions in my opinion and at any point the dollar could enter crash mode very quickly.

According to Bill Gross falling home prices will dominate the Fed-head policy decisions for the next several years, despite "false hopes" of a bottom in housing market and "faux economic strength" or worries about the crumbling greenback. He believes that the Fed will cut the federal funds rate from 4.75% to 3.75% within the next 6 to 12 months; as he wrote in his monthly outlook; as policymakers will have to adapt to a "brazen new world" dominated increasingly by supercharged private money (fuzzy speak for that are subservient to large banks and brokerage firms) that is unresponsive to public policy. He went on to state that the Chief Fed-Head Helicopter Bernanke and the proverbial fox-in-charge of the treasury hen house Paulson will need to throw out the textbooks that describe a lost world in which banks/brokerage firms are the main force in the financial world.

He stated that the modern financial complex has morphed into something unrecognizable to many market veterans and academics, referring to the "shadow banking system" of derivatives and the alphabet soup of CDOs, CLOs, ABCPs, CPDOs and SIVs (I have been saying this for many years now!) he went on state that Wall Street, despite its increasing influence in America's finance-based economy, is not Main Street; and stock prices do not dominate the spending habits and confidence of consumers in the same degree as do home prices.

He stated "They know they are in a pickle, and a sour one at that," explaining that if interest rates don't fall enough, Bernanke "risks exacerbating a housing crisis."

The downward path of home prices, however, will dominate Fed policy over the next several years as will the lingering unwind of related financial structures and derivatives that have yet to be discovered by the public, and marked to market by their holders, and this is just the tip of this contagionous iceberg, and it could easily sink the Titanic economy.

Credit Contagions are still looming

I read a report this week that summarized that European banks don't expect to see any improvement in overall access to wholesale funding over the next 3-4 months and they may be forced to further tighten their lending standards according to a European Central Bank survey published Friday. The quarterly survey, which was pulled forward by a month due to the recent credit market disruptions, which indicated that "wholesale funding market access is not expected to become easier over the next three months, although there are some differences according to funding sources," the ECB report stated.

Not surprisingly, the hardest source of fund-raising has been through the securitization of home loans, where over 80% of banks who responded said their activity has been hampered. Roughly the same number expected continued difficulties in the fourth quarter.

In contrast, over 70% of banks said their attempts to raise money in the very short-term money market were basically unaffected�hence a mixed picture. Difficulties in accessing wholesale markets will also reduce the amount those banks are willing to lend or the margin they will lend at. Almost 90% of banks that utilize what is referred to as securitization as a funding source will cut the amount they lend, the survey indicated.

This survey came after the ECB kept interest rates on hold at 4% on Thursday; when announcing that decision, the bank said it needs to gather more data on the subprime crisis' impact on the wider economy. The survey, found loans and credit lines to enterprises have been tightened more than those to households. "Banks expect for the next three months more tightening of credit standards, not only for M&A and corporate restructuring related loans, but also for loans financing fixed investment." the ECB survey indicated.

Just under 50% of banks reported they had tightened their standards on approving loans for acquisitions and restructuring in the last three months. But more than 60% said they expect to tighten those standards over the next three months.

Our Federal-Reserve stated this week that banks took only a minimal advantage of their discount-window lending facility in the week ending on Wednesday (I guess the slashing of the discount rate by 100-basis points was fully warranted then huh?). Total outstanding loans of primary credit (also known as the discount window) came in at $26 million on Wednesday; loans averaged $27 million a day for the week, down from $88 million the prior week. Other than some well-publicized loans from five major banks in late August, the only significant borrowing from the Fed came in the week ending Sept. 12^th in mid-August, when the Fed-heads lowered their discount rate and encouraged banks to borrow from the Fed to help ease the credit crunch.

In a separate report the fed-heads stated that the level of outstanding commercial paper what is considered to be top-rated short-term debts issued by corporations increased for the first time in over eight weeks in the week ending this past Wednesday. They reported that outstanding issuances increased $4.5 billion, or 0.2%, to $1.86 trillion; while outstanding issuances are down $364 billion, or 16%, from the peak in early August. Outstanding asset-backed paper, mostly backed by mortgages, declined by $6.1 billion, or 0.7%, to $906 billion. It's the smallest decline in asset-backed paper since the credit crunch hit in early August. However it is still important to note that asset-backed paper is down 23% from the peak. The latest data indicate that the market has for the most part purged itself of unwanted securities.

Energy Inflation is just a myth right?

I read a report this week which stated that crude prices of at least $100 a barrel are expected to become the norm as early as next year, as supplies continue to decline and consumption in the developing world rises. CIBC chief economist Jeff Rubin said "We're in a world of triple-digit oil prices for the foreseeable future. Whether it's $100 or $140 a barrel; is up to debate, but the bottom line is we're in the bottom of the ninth inning of the hydrocarbon age." Rubin said higher oil prices will spur technological innovations, as well as growth in nuclear power and bio-fuel arenas.

Despite Wall Street's obsession with oil consumption by China and India, oil use in Russia, Mexico and the OPEC nations outpaced the world's most populous country this past year believe it or not. In Venezuela and Saudi Arabia, for example, the retail cost of gasoline ranges around $0.25 a gallon cheap enough to consume in ever-larger quantities to fuel growth�and conversation is not a looming issue now is it. At the same time, oil-rich countries such as Kuwait and Mexico are starting to see drop-offs in major oil field supplies. The report went of to infer that by 2012, Canadian oil sands could become the single largest source of new oil supply for the U.S. as Mexico's supplies become depleted. Now who will benefit you ask; recent oil sands acquisitions by Royal Dutch Shell ( RDSA) and Marathon Oil ( MRO) could be the next-big-investment energy vehicles. Six of the largest oil suppliers to the U.S. are poised to cut their global exports by nearly 2 million barrels a day by 2012, Rubin�s report indicated! The projected cut amounts to 7% by Mexico, Saudi Arabia, Venezuela, Nigeria, Algeria and Russia. Canada's oil sands production is expected to increase to 2.3 million barrels a day by 2015, up from about 1.1 million barrels a day in 2005, according to the U.S. Energy Information Administration.

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© 2007 Stephen Tetreault
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Stephen Tetreault
T-Waves
Southern Maine, USA
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