Today's Tidbits

Chinese Officials Indicate Increased Desire to Limit Exposure to Dollar
From Bloomberg: “The dollar fell the most since September against the currencies of its six biggest trading partners after Chinese officials signaled plans to diversify the nation's $1.43 trillion of foreign exchange reserves… ``We will favor stronger currencies over weaker ones, and will readjust accordingly,'' Cheng Siwei, vice chairman of China's National People's Congress, told a conference in Beijing. The dollar is ``losing its status as the world currency,'' Xu Jian, a central bank vice director, said at the same meeting… Chinese investors have reduced their holdings of U.S. Treasuries by 5 percent to $400 billion in the five months to August.”

Unpaid Credit Card Debts Growing
From AP: “The malaise in the mortgage market is starting to spread to credit card and auto loans in what one analyst has dubbed consumer credit "contagion." It's an ominous warning signal for the economy. Many of the nation's big banks and credit card companies have begun acknowledging that they are seeing a shift in consumer behavior, including more people unable pay off their debts. Things are unraveling faster than expected for some… An added complication was that many Americans used their homes as piggy banks in recent years. When debt was cheap and easy to get, and the value of their homes was surging, they borrowed against them. People used part of that cash to pay off other debts, but mostly to fuel a spending surge on everything from flat-screen TVs to new cars to vacation homes. That party seems to be over… expects more stringent lending standards to put the squeeze on consumers. In recent weeks, many banks and card issuers have boosted what is known as loan-loss reserves. Under accounting rules, they are required to estimate the amount of loans that won't be collected, and should that increase they must set aside more money to cover those loans. Higher loan-loss reserves equal lower earnings.”

Surprise Slowing in Credit Growth Suggests Consumer Consumption May Falter
From USA Today: “Consumers borrowing increased in September at the smallest pace in five months as the growth in credit card debt and car loans slowed. The Federal Reserve reported Wednesday that consumer credit rose at an annual rate of 1.8% in September, the slowest since April's 1.6% mark. The September gain was about half what economists had expected. The sluggish growth reflected lower rates of increase for auto loans and credit card debt. That debt had risen sharply in recent months as consumers started borrowing more heavily on their credit cards once home refinancings slowed… The Fed said revolving credit, which includes credit cards, rose at an annual rate of 4.4% in September. That compares with a rate of 9.3% in August… Non-revolving loans, which includes auto loans, rose at a 0.3% rate, compared with 6.4%. It was the weakest showing for auto loans since they fell at a 2% rate in October 2006. Total consumer debt rose $3.75 billion, a sharp decrease from a gain of $15.41 billion in August. .. Economists are concerned that a slowdown in consumer borrowing will weigh on consumer spending, which accounts for two-thirds of total economic activity. After surging at an annual rate of 3.9% in the July-September quarter, the overall economy is expected to slow to a growth rate of around half that pace in the current quarter and the first three months of next year.”
From JP Morgan: “Excluding a 0.2% decline in nonrevolving credit in October 2006, the September print was the lowest since early 1998. Importantly, this may be a reflection of tighter lending standards for auto loans. According to the Fed’s October loan officer survey, a net 26% of banks were tightening standards on non-credit card consumer loans, a sharp rise from 12% in the July survey, 7.8% in April, and 0% in January; indeed, the October figure is the highest in the history of the series, which goes back to 1996.”

Many Mortgages Have Questionable Fees Added to Foreclosures By Servicers
From The New York Times: “As record numbers of homeowners default on their mortgages, questionable practices among lenders are coming to light in bankruptcy courts, leading some legal specialists to contend that companies instigating foreclosures may be taking advantage of imperiled borrowers. Because there is little oversight of foreclosure practices and the fees that are charged, bankruptcy specialists fear that some consumers may be losing their homes unnecessarily or that mortgage servicers, who collect loan payments, are profiting from foreclosures. Bankruptcy specialists say lenders and loan servicers often do not comply with even the most basic legal requirements, like correctly computing the amount a borrower owes on a foreclosed loan or providing proof of holding the mortgage note in question. “Regulators need to look beyond their current, myopic focus on loan origination and consider how servicers’ calculation and collection practices leave families vulnerable to foreclosure,” said Katherine M. Porter, associate professor of law at the University of Iowa. In an analysis of foreclosures in Chapter 13 bankruptcy, the program intended to help troubled borrowers save their homes, Ms. Porter found that questionable fees had been added to almost half of the loans she examined, and many of the charges were identified only vaguely. Most of the fees were less than $200 each, but collectively they could raise millions of dollars for loan servicers at a time when the other side of the business, mortgage origination, has faltered.”

Comments from Today’s Fed Speakers
From RBSGC: “Fed speakers had a variety of comments, most balanced to slightly cautious about the near-term economic outlook. Mishkin notes investors are 'continuing' to reassess risks and its 'far too early' to know extent of market turmoil, and Lacker noted that while he supported the rate cut there were "good arguments on each side." In addition, Warsh noted info/data "materially" altering the Fed's expectations would be needed for another move, and Lockhart said a 'moderate slowdown' was most likely, but the outlook has a 'high level of uncertainty."”
From Deutsche Bank: “Fed's Mishkin says recent turmoil has not seriously hurt small business access to credit. Fed's Warsh says inflation expectations look contained, says many mkt segments recovering. Fed's Lacker says `very comfortable' with current mkt functioning, says supported Oct cut but good arguments on both sides. Fed's Lockhart says recent econ data strong overall, but says some anecdotes worse than data, says supported Oct rate cut as insurance against downside risks. Fed's Poole says excessive rate cuts would run risk of increasing inflation, Fed needs to do what is necessary but not more. Fed's Plosser says expects Q4 growth to be as low as 1-1.5%, would need weaker to justify further rate cuts.”
From Merrill Lynch: “Fed Governor Mishkin …noted that while "small business access to credit has been robust" that the recent events in financial markets create "unusually high" uncertainty about the future. Indeed, in a speech yesterday, Mishkin noted that the uncertainty of whether the events in the credit markets will spill over into the broader economy led him to believe a rate cut was prudent at the October 31st meeting. Later in Q&A, Mishkin reiterated the recent Fed musing on inflation, saying that it is "extremely important" to keep inflation contained. He also mirrored recent comments on housing, stating that the housing market is "not out of the woods yet" and that the Fed should be "concerned" about more foreclosures. So clearly, Mishkin is leaving the door open to further Fed rate cuts, especially if the financial and housing markets deteriorate more than expected…Richmond Fed President Lacker (non-voter) gave a speech to credit portfolio managers on the role of the central bank in credit markets. He believes that the markets coped pretty well with the credit turmoil back in August, and continues to be "very comfortable" with how the markets are currently functioning. When addressing the Fed's latest rate cut, he noted his support for the measure ("slightly lower rate was warranted"), and said that there were "good arguments on each side". He is also the latest Fed speaker to pound the table on inflation, saying it's not in the best interest to see inflation increase…Fed Governor Warsh struck a very data-dependent tone this afternoon, saying "that should incoming data materially change our forecast, or risks to our forecast, for growth and inflation, so too would our view on the appropriate stance of monetary policy". He continued to note that while there has been some recovery in financial markets that "stresses" remain - which is inline with the recent rhetoric from other Fed speakers this week. On the inflation front, his comments were also pretty much in line with other Fed speakers, as he noted the risks to inflation from higher commodity and crude prices. However, he differed in that he mentioned the weak dollar as a source of concern about inflation - Governor Mishkin had said earlier this morning that the dollar's impact on inflation was "limited".”

New Accounting Rule Will Force More Financial Firms to Recognize MTM Losses
From Bloomberg: “U.S. banks and brokers face as much as $100 billion of writedowns because of Level 3 accounting rules, in addition to the losses caused by the subprime credit slump, according to Royal Bank of Scotland Group Plc. The Financial Accounting Standards Board's rule 157 will make it harder for companies to avoid putting market prices on securities considered hardest to value, known as Level 3 assets…The new rule is effective Nov. 15…Morgan Stanley has the equivalent of 251 percent of its equity in Level 3 assets… Goldman Sachs Group Inc. has 185 percent, Lehman Brothers Holdings Inc. has 159 percent and Citigroup Inc. has 105 percent… Merrill Lynch & Co., which wrote down $8.4 billion of subprime mortgage debt and related securities, has Level 3 assets equal to 38 percent of its equity ``and may well come out of all of this in the best health,'' …Under FASB terminology, Level 1 means mark-to-market, where an asset's worth is based on a real price. Level 2 is mark-to-model, an estimate based on observable inputs and used when there aren't any quoted prices available. Level 3 values are based on ``unobservable'' inputs reflecting companies' ``own assumptions'' about the way assets would be priced. ABX indexes, which investors use to track the subprime-bond market, are showing ``observable levels'' that would eat up institutions' capital if the benchmark's prices were used to value their Level 3 assets, according to...[The Royal Bank of Scotland analyst]”

Rising Unemployment in California Implies Increasing Recession Risk
From Goldman: “California seems to be sliding into recession. The three-month moving average of the state unemployment rate—by far the most reliable state-level economic indicator—has risen 0.7 percentage point since late 2006. In the past, moves of this magnitude have invariably been associated with recession, at both a national and (it appears) statewide level. Other labor market indicators such as nonfarm payrolls and jobless claims are deteriorating as well. Moreover, worsening news on the economy and state tax receipts has led Governor Schwarz! enegger to consider steep budget cuts. Together with the regional recessions already visible in Florida and Nevada, a California recession would mean that the housing bust has pushed an area responsible for 20% of US GDP into an outright downturn. While it is primarily national developments that matter for Fed policy, we suspect that a California recession would form one additional argument for additional monetary easing…we know from our work on the national economy that the unemployment rate is an excellent indicator of recession. Since the late 1940s, every increase in the three-month moving average of the [national] unemployment rate of more than 0.3 percentage point has resulted in recession. [Note US unemployment rate has risen from 4.4% in March to 4.7% now]”

Rising Inflation Expectations Steepen Yield Curve and Support TIPS Price Gains
From Bloomberg: “… as a tumbling dollar and surging oil sparked concern inflation will accelerate. Two-year yields fell to the lowest since July 2005 as traders favored shorter-maturity notes, which are less vulnerable to quicker inflation. The gap between two-and 10-year yields reached 0.72 percentage point, the most since April 2005…The difference between two- and 10 year notes has also grown as investors bet bank losses on subprime mortgage-related assets may slow the economy and prompt the Federal Reserve to cut interest rates. Yields on the notes were even in June…Inflation expectations increased, as measured by the yield difference of regular bonds over Treasury Inflation Protected Securities, or TIPS. Ten-year notes yielded 2.45 percentage points more than similar-maturity TIPS, the most since June. The difference reflects investors' expectations for inflation over the next decade.”

WaMu Accused of Abetting Fraudulent Mortgage Appraisals (FNMA #3 customer)
From Bloomberg: “Washington Mutual Inc., the largest U.S. savings and loan, fell the most in 20 years after New York Attorney General Andrew Cuomo said he found a ``pattern of collusion'' on mortgage appraisals linked to the company. Cuomo subpoenaed Fannie Mae and Freddie Mac, the two biggest U.S. providers of home-loan financing, seeking information on loans they bought from Seattle-based Washington Mutual and other banks. ``Fannie Mae and Freddie Mac must ensure that Washington Mutual's mortgages have not been corrupted by inflated appraisals,'' Cuomo said in a statement today on his office's Web site. ``Our belief is the appraisal in many cases was fraudulent, that there was pressure on the appraisers.'' Cuomo last week sued the real-estate appraisal unit of First American Corp., the biggest U.S. title insurer, accusing it of inflating home values under pressure from Washington Mutual. The thrift is the third-largest provider of loans to Fannie Mae, selling $24.7 billion in 2007. It ranks 14th with Freddie Mac, selling $7.8 billion of loans this year.”

Strong Inventory Growth Likely to Raise 3rd Qtr GDP and Reduce 4th Qtr GDP
From Merrill Lynch: “We are currently tracking 4.6% QoQ SAAR GDP growth for 3Q, which would be a substantial upward revision from the 3.9% pace reported in the Advance GDP release. However, 85% of this is coming from a major inventory build. To be sure, there could be some offsets from Friday's trade report… The main source of concern at this point is how this inventory build will unwind in the fourth quarter. An $18 billion of extra inventory investment in 3Q, all else equal, implies an equal amount of drag on 4Q. With our 4Q GDP tracking already at a very thin 0.7% QoQ this extra drag from inventories could send the tracking to flat or even negative.”

Oil Prices Expected to Continue Rising as Demand Increases Over Next Decade
From Bloomberg: “Chinese and Indian crude oil imports will almost quadruple by 2030, creating a supply ``crunch'' as soon as 2015, the International Energy Agency said. China will replace the U.S. as the world's largest energy user early next decade and its oil demand will more than double to 16.5 million barrels a day by 2030, led by a sevenfold increase in Chinese car ownership, the IEA said. China and India together account for almost half of a projected 55 percent increase in world energy demand, the IEA said in its World Energy Outlook. Oil investments of $5.3 trillion will be needed as new sources pace slowing output from old wells, the IEA said. If investments aren't made, this year's 61 percent surge in crude prices to more than $98 a barrel may be the start. ``From 2012, oil supply will be tight, this is not good news for anybody who wants to see an ease in prices,'' IEA Chief Economist Fatih Birol told reporters in London. ``The message to our governments is to slow down the demand increases and to producers to invest more if we want to avoid a supply crunch.'' China and India's combined imports will surge to 19.1 million barrels of oil a day by 2030 from 5.4 million barrels of oil a day in 2006, the report said in its so-called ``reference scenario.'' That's more than today's combined oil imports to Japan and the U.S., the largest energy user. The IEA maintained projections for oil production reaching as much as 116 million barrels of oil a day by 2030, up from about 85 million barrels a day now. Demand would reach 120 million barrels a day and crude prices as high as $159 a barrel in a ``high growth scenario,'' Birol said. ``We have to look at this because we have all been wrong so far'' about Chinese and Indian economic growth, said Birol. ``The most important question is what is the pace of growth in China and India in years to come.'' Birol, who began leading the team writing the World Energy Outlook in 2002, said high growth forecasts have more closely tracked actual results than the reference scenario for the past five years. Some in the industry doubt world production can meet IEA projections. Reaching 100 million barrels a day may be ``optimistic,'' Total SA Chief Executive Officer Christophe de Margerie and the chairman of Libya's state oil company, Shokri Ghanem, said last week. ``We are saying what needed to be done, not what will be done,'' said Birol, …An average field decline of 3.7 percent a year means 12.5 million barrels of new production -- more than the current output of Saudi Arabia -- needs to be added between 2012 and 2015 to counter the drop and meet new demand…Even a slight increase in the rate of decline would ``eat up most of the world's current spare oil production capacity,'' the group said. ``Any shortfall in net capacity growth could result in a sharp escalation of prices.'' For every $4 invested in oil infrastructure, $3 will be needed to slow declining rates in existing fields, while $1 will go to new production…Russia and the Organization of Petroleum Exporting Countries, home to as much as 82 percent of oil reserves according to statistics from BP Plc, should account for a larger share of production though they may withhold investment because they realize higher prices will result, the IEA said. ``The alternatives to OPEC are getting weaker and weaker,'' Nobuo Tanaka, the IEA's executive director, said at the conference in London. ``They may well go for the higher prices. One of the reasons we may see higher prices is investments won't be made.'' OPEC's share of world oil production will rise to 52 percent by 2030 from the current 42 percent, the IEA said. So-called non- conventional oil sources, such as extra heavy oils, tar sands and natural gas-to-liquids sources, will quadruple to 8.5 million barrels of oil a day from 1.8 million barrels of oil a day in 2006, the IEA said. The IEA's report this year focuses on how China and India, the world's fastest growing energy users, are reshaping the industry.”

MISC

From LEHC: “… in a recent survey of homebuilders by Zelman Associates, land prices in many previously “bubblish” areas are now back down to 2002 levels – if, that is, one needs to sell the land (there are very few transactions being done, but ZA notes that recent “distressed” transactions on finished lots in parts of Southern California, Phoenix, and Southeast Florida are down “as much as 70-80%” from their peaks. As ZA notes, capital-constrained builders who bought land in these areas during the 2003-2006 bubble “will most likely have to hand the land back to the banks.””

From Lehman: “Venezuela borrows $4 billion from China to develop energy projects”

From CITI: “Russian inflation rose by more than expected in Oct, up 1.6%mom, taking the yoy rate up to 10.5% from 9.5%.”

From FTN: “GM is about to report it’s biggest ever loss on a write down of tax credits it would have used if it were profitable. Ford is also expected to swing back into the red on weak sales.”

From Barclays: “US crude oil inventories fall further relative their five-year …Gasoline demand continues to show modest Y/Y growth in spite of the sharp Y/Y rise in retail prices.”

From Forbes: “Risk management consultants say the models that banks use to predict the risks of their exposures don't work in these so-called "fat-tail" events, shocks that move otherwise predictable swings outside the parameters of clever computer programs and their keepers.”

From Dow Jones: “U.S. Securities and Exchange Commission Chairman Christopher Cox said that the SEC is analyzing recent financial disclosure at U.S. banks. Cox told reporters at a news conference here that the SEC “is concerned with disclosure” by U.S. banks in light of recent concerns over exactly how much they are exposed to subprime mortgage lending.”
From RBSGC: “Of the 51 public speaking engagements between the beginning of Bernanke’s term and Oct '07, the average 10-year yield move is just -0.6 bps -- and for speeches with Q&A -0.6 bps. For official testimony with Q&A, - 0.4 bps on average.”

From Dow Jones: “Japan’s foreign currency reserves rose for the fifth consecutive month, marking another record high due to gains in U.S. Treasuries and euro-denominated bonds, the Finance Ministry said. The nation’s reserves, which include convertible foreign currencies, gold and International Monetary Fund special drawing rights, rose $8.88 billion to $954.48 billion…”

End-of-Day Market Update

From RBSGC: “The market was well bid today -- as the equity market continued to decline, Fedspeak was mixed, and the data provided little direction. Treasuries continue to find the bulk of their trading direction from stocks -- as the S&P500 dipped to levels not seen since mid-September. Rumors and speculation of ongoing credit-related issues remain high on the market's priority list -- with plenty of write-down speculation making the rounds.”

From SunTrust: “Bills have been on fire again today. The 3 month is now the official security of choice for those looking for safety. It is lower by 24 bp in yield on the day. The yield curve has steepened furiously. 2/10's are spread at +74 bp after starting the week spread at +66.”

From UBS: “Swaps …front end spreads were significantly wider on the day…agencies lagged swaps by 1-3bps. Mortgages saw $1B in origination … going 5 ticks wider to Treasuries and 1 wider to swaps.”

Three month T-Bill yield fell 29bp to 3.45%.
Two year T-Note yield fell 15bp to 3.56%
Ten year T-Note yield fell 5bp to 4.32%
Dow fell 361 to 13,300
S&P 500 fell 45 to 1476
Dollar index fell .50 to 75.54 to new record closing low
Yen Strengthened by 1.95 yen to 112.8 per dollar
Euro rose .008 to 1.464, a new record high close
Gold rallied $6 to $831 to another new 27 year high
Oil fell .82 to $95.88 after hitting a new record overnight of $98.62
*All prices as of 4:50pm

****Reminder - Bernanke gives testimony to JEC tomorrow****