Citis kitchen sink Quarter

Citigroup posted the biggest loss in the U.S. bank's 196-year history as surging defaults on home loans forced it to write down the value of subprime-mortgage investments by $18 billion. The bank also cut its dividend by 41 percent, announced 4,200 job cuts and said it will receive $14.5 billion from outside investors to shore up depleted capital.

The risk of Citigroup defaulting fell after the U.S. bank posted the biggest loss in its history and wrote down the value of subprime-mortgage investments by $18 billion.

Opposition from the Chinese government may stop Citigroup's plan to raise capital by selling a stake worth $2 billion (1.3 billion euros) to a Chinese bank, the Wall Street Journal reported on its Web site Monday.

Merrill Lynch raised $6.6 billion by selling preferred shares to a group including the Kuwaiti Investment Authority and Japan's Mizuho Financial Group Inc.

Municipal borrowers sold $4.2 billion of bonds during the first full week of 2008, after last year's weekly pace of $6.5 billion, according to data compiled by Bloomberg that excludes variable-rate demand notes and auction-rate securities. Municipal issuance is poised to remain below last year's weekly average for a fifth week.

State Street Corp., the world's largest money manager for institutions, said fourth-quarter earnings fell 28 percent after setting aside $618 million to settle legal claims stemming from losses on subprime mortgages.

U.S. Bancorp reported a 21% drop in fourth-quarter net income as the bank-holding company was hit with charges while trying to navigate amid the credit crisis.

M&T Bank said on Monday that profit tumbled 70 percent, hurt by debt write-downs and turmoil in residential real estate markets.

Sovereign Bancorp, the second-largest U.S. savings and loan, said on Monday it expects to take $1.58 billion in fourth-quarter charges, hurt by worsening credit quality and a tough mortgage environment.

Foreclosure has become a top priority for the U.S. Conference of Mayors which is holding its winter meeting in Washington Jan. 23-25. "The federal government response has been anemic," said Mayor John DeStefano of New Haven, Connecticut, where foreclosures rose 80 percent in 2007. "Mayors are talking to each other about this," DeStefano said. "No one else is going to help these homeowners."

Futures contracts on the Chicago Board of Trade showed a 50 percent chance the Fed will reduce its benchmark rate by three- quarters of a percentage point at its Jan. 30 meeting to prevent rising U.S. home foreclosures and bank writedowns from triggering a recession.

U.S. recession poses a bigger threat to the global economy than a slowdown in China, according to Burton Malkiel, the Princeton University economics professor who wrote "A Random Walk Down Wall Street.''

HSBC Holdings Plc, Europe's biggest bank by market value, set up a collateralized debt obligation to repackage so-called surplus notes sold by insurance companies to bolster capital, according to Standard & Poor's.

Senate investigators, stepping up scrutiny of tax-cutting maneuvers, are examining whether Wall Street firms improperly structured transactions that helped hedge funds sidestep dividend taxes, say people familiar with the situation.

Regulators are now conducting a broad review of pre-deal trades by investment banks to determine if they were coincidences, or something else. It isn't clear what deals they're looking at.

Hypo Real Estate Holding, the German commercial-property lender that acquired Depfa Bank, said pretax profit fell in 2007 and that it will cut its dividend. The shares tumbled more than 27 percent, their most ever. "....a 390 million-euro charge taken during the fourth quarter to account for the impairment of U.S. exposure of collateralized debt obligations,''

Centro Properties Group, the Australian owner of 700 U.S. shopping malls, said Chief Executive Officer Andrew Scott resigned and asked lenders to extend a Feb. 15 deadline to refinance A$3.9 billion ($3.5 billion) of debt.

Northern Rock's "principal challenge'' is to repay at least 25 billion pounds ($49 billion) owed to the Bank of England, Chairman Bryan Sanderson said today.

The Bank of Japan cut its evaluation of regional economies for the first time after four of its nine branches said conditions in their areas were worsening.

Williams-Sonoma Inc., the U.S. gourmet-cookware retailer, reduced its fourth-quarter profit forecast as holiday sales declined on the worst housing slump in 27 years. Sales at Williams-Sonoma's stores open more than a year fell 0.4 percent for the nine weeks through Dec. 30, the company said.

Tesco's U.K. Holiday Sales Slow, Missing Estimates. The supermarket company's shares fell to a four-month low after Tesco said sales at U.K. stores open at least a year rose 3.1 percent, excluding gasoline, in the six weeks ended Jan. 5. That was below the third quarter's 4.1 percent growth and the 4 percent.

Northern Foods Plc, the U.K. maker of Fox's cookies, said third-quarter sales strengthened after it raised prices of frozen pizzas and baked goods to reflect higher ingredient costs. sales rose 3.5 percent at continuing businesses in the 13 weeks ended Dec. 29 excluding currency movements. That beat the first half's 2.7 percent gain.

Beiersdorf, the German maker of Nivea skin creams, reported 2007 profit that beat analysts' estimates on growth in emerging markets.

Nokia Oyj, the world's biggest maker of mobile phones, will close a factory in Germany and cut about 2,300 jobs as it shifts production to locations with lower costs.

Chancellor Angela Merkel said Germany may have difficulties this year in repeating its success in balancing the 2007 budget as global risks including inflation pressures and the impact of the subprime mortgage crisis grow.

George Soros's hedge-fund firm named BlackRock Inc. co-founder Keith Anderson as its new chief investment officer, according to a letter sent to shareholders. The $17 billion fund returned 32 percent, outpacing the average hedge- fund gain of 10.4 percent.

Samsung Electronics said Tuesday that its fourth-quarter net profit fell 6.6 percent amid sharp declines in prices for computer memory chips, though sales of mobile phone handsets surged to a record. Results beat expectations and the shares surged in early morning trading.

The media industry is braced for an advertising downturn after news that marketing budgets were revised down for the first time in a year during the last quarter of 2007.

In the latest effort to right EMI Group Ltd., the record company announced Tuesday that it is laying off as much as one-third of its employees, slashing marketing expenditures and dropping artists as part of a radical restructuring.

General Motors top finance executive said Sunday he doesn't see the subprime mortgage mess spreading into auto loans at the company's former credit arm, GMAC financial services. GMAC's auto loan delinquencies rose from 2.4 percent in the third quarter of 2006 to 2.6 percent in the same period of 2007.

Oil prices have disconnected from demand in rich countries, showing how the global oil market has become unmoored from some of the factors that steered it in the past.

Chile, the world's biggest copper producer, said the value of its exports of the metal rose 19 percent in December as mines expanded production. Chile produces 35 percent of the world's mined copper.

The risk of default by retailers including Sears Holdings and Saks rose on concern that a slowdown in consumer spending will make it tougher for the companies to repay debt.

Sales at U.S. retailers unexpectedly fell in December, capping the weakest year since 2002. Sales dropped 0.4 percent, the first decline since June, following a revised 1 percent gain in November, the Commerce Department said today in Washington. Purchases excluding automobiles also decreased 0.4 percent.

German Investor Confidence Dropped to 15-Year Low. The ZEW Center for European Economic Research said its index of investor and analyst expectations fell to minus 41.6 from minus 37.2 last month, the eighth straight decline.

U.K. Inflation Holds Above Bank of England Target. Consumer prices rose 2.1 percent from a year earlier, the same as in November, the Office for National Statistics said in London today.

A U.S. court crackdown on punitive damages resulted in the second consecutive year of declines and reversals of earlier verdicts, a trend working in favor of companies like Ford Motor Co.

Money-market rates fell before a series of central bank auctions aimed at defusing the logjam in short-term credit markets. The three-month euro interbank offered rate, or Euribor, dropped 2 basis points to 4.54 percent, the European Banking Federation said today, the lowest since Aug. 15. It was at a seven-year high of 4.95 percent on Dec. 12, when policy makers announced a plan to counter a global squeeze on lending. Dollar and pound rates also dropped.

The Nikkei 225 Stock Average declined 138.16, or 1 percent, to close at 13,972.63, dropping below 14,000 for the first time since Nov. 10, 2005. The Topix index slid 27.38, or 2 percent, to 1,350.20, the lowest close since Sept. 16, 2005. More than 11 stocks fell for each that gained. Japan's markets were closed yesterday for a public holiday. In Hong kong the Hang Seng index closed down 630 pts or 2.38 percent. The Shanghai Composite index closed down 54 pts or 1 percent.
European stocks declined, led by retailers and financial companies, after Tesco Plc reported holiday sales that trailed analysts' estimates and Hypo Real Estate Holding AG's profit dropped. National benchmarks slid in all of the 18 western European markets. France's CAC 40 sank 1.3 percent, and the U.K.'s FTSE 100 fell 1.6 percent. Germany's DAX slipped 0.9 percent.

U.S. overnight and premarket:

US interrest rates ready to drop?

The dollar fell to a seven-week low against the euro on speculation U.S. interest rates will drop below those of the 15 nations that share the euro for the first time in three years. "We cannot live with a euro at this level with three other currencies which are weak,'' France's European Affairs Minister Jean-Pierre Jouyet said in a Jan. 12 interview in Malta.

Longer-run inflation expectations are "well-anchored," in Fed Governor Mishkin's view, so "the easing of the stance of monetary policy in response to deteriorating financial conditions seems unlikely to have an adverse impact on the outlook for inflation."

The sub-prime mortgage lending crisis has seen 112 companies report write-downs of more than $170bn (£87bn) but this is only the tip of the iceberg, research consultancy Advisen has warned.

Embattled bond insurer MBIA Inc. likely will have to serve up a pricey 14 percent yield to close its planned $1 billion note offering, dealers said Friday.

The European Central Bank's independence isn't at risk and won't be questioned by a summit of European Union leaders planned by French Prime Minister Francois Fillon, the German government said.

The odds have grown that the economy will slip into a recession. At the beginning of last year, many economists put that chance at less than 1-in-3; now an increasing number says it has climbed to around 50-50. Goldman Sachs, the biggest investment bank on Wall Street even thinks a recession is inevitable this year.

Just days after warning the US had gone into recession, Merrill Lynch's Gary Dugan, chief investment officer of Merrill's global wealth management arm, is priming its richest clients to swoop on undervalued assets. Top of Merrill's list of recommended assets are natural gas futures, pharmaceutical shares and the Japanese stock market.

UBS AG may split its investment banking and money management operations into two separately traded companies, SonntagsZeitung reported, without saying where it got the information. The bank, based in Zurich, may also take another $5 billion to $8 billion in writedowns.

UBS AG, Europe's biggest bank by assets, faces soaring interest costs when it sells bonds in euros today. UBS is offering investors a yield premium of about 70 basis points more than the benchmark midswap rate.

Credit Agricole SA is selling its 2.07 percent stake in French utility Suez SA, valued at about 1.25 billion euros ($1.86 billion). Credit Agricole Dec. 20 announced writedowns and provisions that will cut 2007 earnings by 1.6 billion euros, on top of writedowns of 850 million euros it reported in the first three quarters of 2007.

Sumitomo Mitsui Financial Group Inc., Japan's second-largest bank by market value, will follow rivals Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc. in selling securities to boost capital.

U.S. chain stores, reeling from the slowest holiday shopping season in five years, got some more bad news on Sunday: 2008 will not be any better and could see changes that may shift the retail playing field forever.

U.S. retailers will close stores and reduce square-footage growth plans this year to offset slowing sales, slumping stock prices, a saturated market and a penny conscious shopper, analysts said on Sunday.

Full-year 2007 US auto sales dropped almost 3 percent to 16.14 million vehicles, the lowest since 1998. Wagoner said he expects the market in 2008 to be about as tough as the year just ended, estimating total U.S. industry sales to come in at 16.3 million to 16.5 million units.

General Motors Corp. is close to an agreement with the United Auto Workers on another round of buyout and early retirement offers to cut the number of workers in jobs banks and clear openings for workers hired at lower-tier wages, a top company official said Sunday.

GM is scheduled to announce a partnership with Coskata, a year-and-a-half-old company with technology for turning wood chips, grasses, or municipal waste into ethanol. The auto giant has committed to doubling its flex-fuel vehicle output to 80,000 cars by 2010, and to making half of its new cars flex-fuel-capable by 2012.

Debenhams Plc, the second-largest U.K. department store company, climbed the most ever in London trading after the Sunday Times reported that the retailer's sales over the holiday period beat analysts' estimates.

JJB Sports Plc, the U.K.'s second- largest sporting-goods retailer, forecast a drop in earnings after cutting prices to clear leftover inventory.

Experts who follow the much-anticipated UK annual property index from consultants IPD are confidently predicting that it will show a slump of 15pc in the capital value of UK property from June, when values peaked, including a 4pc to 5pc fall in December alone, revealing that the second half of 2007 was one of the worst in recent memory.

Soybeans rose to a record in Chicago as global production declines and demand increases for animal feed, vegetable oil and fuel made from crops. Corn futures rose to an 11-year high.

Copper prices rose in Asia after imports of the metal by China, the world's largest user, reached an eight-month high. Copper and copper-product imports rose 8.6 percent more than a year earlier in Dec.

Eni SpA and partners in the Kashagan oil field agreed to cede a greater stake in the world's biggest crude discovery in 30 years to Kazakhstan.

Deutsche Bank AG raised its forecast for crude oil prices this year because of global political tensions and a "tight'' balance between demand and supply. West Texas Intermediate and Brent crude oil will average $85 a barrel this year, 6.3 percent more than a previous forecast of $80 a barrel.

While few, if any, investors are making money buying U.S. stocks this year, the market for puts and calls is providing a bonanza on Wall Street where options trading has never been so brisk.

China is starting to gain control of its turbocharged economy, just as a U.S. slowdown raises the risks of doing so. Last month's trade surplus shrank to $22.7 billion from $26.2 billion in November, and the broadest measure of money supply rose by the least in seven months.

Sears Holdings Corp., the retailer run by investor Edward Lampert, fell as much as 12 percent in early U.S. trading after saying profit will trail analysts' estimates following a drop in holiday sales.

International Business Machines Corp., the world's biggest computer-services company, posted earnings and sales that topped analysts' projections as orders from Asia and Europe bolstered results.

HeidelbergCement AG, Germany's biggest cement maker, said full-year profit rose 38 percent, after it spent a record $15.4 billion to buy U.K. based sand and gravel producer Hanson Plc.

U.K. Producer Prices Rise at Fastest Pace Since 1991. Manufacturing output prices rose 5 percent from a year earlier after a 4.7 percent gain in November.

The TD Securities-Melbourne Institute monthly inflation gauge rose by 0.6 per cent in December, following consecutive 0.3 per cent rises in October and November. The inflation gauge rose by 3.7 per cent in the 12 months to December.

Asian markets were bumpy Monday, with the Taiwanese Taiex index posting a 1.79% advance following the landslide electoral victory of pro-China opposition party Kuomintang. Japan was closed for a holiday. The Hang Seng ascended to 27142.88 before declining 1.48% to 26468.13. The Shanghai Composite gave up early gains to slide 0.5%, pulled down by U.S.-listed stocks
European stocks rose for the first time in four days, led by technology companies, after sales and earnings for International Business Machines Corp. topped analysts' estimates. National benchmarks rose in 13 of the 18 western European markets. The U.K.'s FTSE 100 gained 0.7 percent. France's CAC 40 climbed 0.9 percent and Germany's DAX advanced 0.4 percent.

U.S. overnight and premarket:

Infaltion expectations well anchored!?

According to FED governor Mishkin infaltion expectations appear to have remained "reasonably well anchored". There is nothing in the way of monetary policy to be "decisive and timely" in responding to a financial market disruption. If he is wrong the central bank should be prepared to hold steady or even raise the policy rate. Let's hope he is not wrong!!

....How can a central bank keep inflation expectations solidly anchored so it can respond preemptively to financial disruptions? The central bank has to have earned credibility with financial markets and the public through a record of previous actions to maintain low and stable inflation. Furthermore, the central bank needs to clearly indicate the rationale for its policy actions. Policymakers also need to monitor information about underlying inflation and longer-run inflation expectations, and if the evidence indicates that these inflation expectations have begun rising significantly, the central bank should be prepared to hold steady or even raise the policy rate.

...Of course, in making its decisions, the Federal Reserve also gives careful consideration to the outlook and risks associated with the second aspect of our dual mandate, namely, price stability. Because longer-run inflation expectations appear to have remained reasonably well anchored, in my view, the easing of the stance of policy in response to deteriorating financial conditions seems unlikely to have an adverse impact on the outlook for inflation.

BofA buys Countrywide Financial!

Bank of America Corp., the biggest U.S. bank by market value, agreed to buy Countrywide Financial Corp. for about $4 billion.

Merrill Lynch is expected to suffer $15 billion in losses stemming from soured mortgage investments, almost double its original estimate, prompting the firm to raise additional capital from an outside investor.

Credit card company American Express said on Thursday that a slowdown in cardholder spending and rising delinquencies would lead to a pre-tax charge of around $440 million for the fourth quarter. The stock plunges 5pc ah.

Given the outlook, the Fed will have to be "exceptionally alert and flexible" and be ready "to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks,"Bernanke said in a speech yesterday.

Northern Rock agreed to sell mortgages valued at 2.2 billion pounds ($4.3 billion) to JPMorgan Chase & Co. to help repay loans from the central bank.

UBS AG said 2008 will probably be another ``difficult'' year for the financial services industry. After the latest writedowns, UBS said it held about $16 billion in residential mortgage-backed securities as of Nov. 30 and about $13 billion in so-called super senior securities.

Buyout firms paid $5.4 billion to securities firms in the U.S. and Europe in the second half of 2007, 38 percent less than the first six months. The drop was steepest in Europe where fees fell 54 percent.

Using a method that extracts the forward implied dividend from options prices, Credit Suisse says that several large financials, including Citi, Countrwyide, Bear Stearns, and Merrill Lynch, as well as REITs like Equity Residential, General Growth, and Vornado, are likely to cut their dividends substantially.

The $112.7 billion Pimco Total Return Fund had 13 percent of assets in corporate debt in December, up from 12 percent the previous month. The fund's cash position dropped to 36 percent, the lowest since August 2006, from 44 percent in November.

Clients of James Simons's Renaissance Technologies Corp. withdrew $4 billion from the firm's largest hedge fund in the past four months after returns trailed peers.

Commercial paper backed by mortgages, credit-card loans and other assets rose $4.8 billion to a seasonally adjusted $778.6 billion for the week ended Jan. 9, the Federal Reserve in Washington said today. The 0.6 percent increase followed a rise of 3.5 percent in the prior period, which was the biggest gain in at least seven years. The broader commercial paper market rose $14.5 billion in the most recent week to $1.81 trillion.

The US economy will grow at a much slower pace in 2008 but certainly will not slip into a recession as the overseas operations of US companies will offset a domestic slowdown, said Markus Schomer, managing director of the global economic strategist team at AIG Investments.

The probability of the U.S. economy sliding into a recession is now over 50 percent, but it is not a sure thing, National Bureau of Economic Research President Martin Feldstein said on Thursday.

The International Monetary Fund sees the US economy avoiding recession, despite financial sector turmoil and a housing sector slump, a spokesman said yesterday.

The economy will keep slowing "for the time being" as the country's cycle of profits feeding into wages and consumer spending weakens temporarily, Bank of Japan Deputy Gov. Toshiro Muto said Thursday. Goldman Sachs Group cut its Japan economic growth estimate and said the world's second-largest economy faces a 50 percent chance of a recession.

The Baltic Dry Index, a measure of shipping costs for commodities, fell the most since 1989 in London as traders speculated about a possible recession and after a reduction in the amount of iron-ore cargoes. The index, which tracks transport costs on international trade routes, dropped 384 points, or 4.6 percent, to 7,949 points today.

Wheat futures in Chicago declined for a second day yesterday as a survey showed U.S. farmers planted more wheat to capitalize on higher prices. Corn and soybeans were little changed after falling from multiyear highs.

Copper headed for the biggest weekly gain since September as China, the world's largest user of the metal, said its imports in December rose to an eight-month high.

Commodities will be "well supported'' by rising demand and curbs on supply even as the U.S. economy slows, Goldman Sachs said.

U.S. retailers' holiday sales gained 2.2 percent, the slowest pace in five years, the International Council of Shopping Centers said today, based on results from 45 chains.

Best Buy Co., the largest U.S. consumer-electronics chain, said sales in December rose 11 percent as it gained market share from Circuit City Stores Inc. during the holidays.

Tiffany & Co., the world's second- largest luxury-jewelry retailer, said holiday sales growth shrank to 8 percent and lowered its annual profit forecast as its U.S. customers reined in spending.

J.Front Retailing Co Ltd, Japan's top department store operator, fell 10.7 percent to 833 yen after it slashed its full-year outlook on weak clothing sales.

Premier Foods Plc, the maker of Hovis bread, fell to a record in London trading on concern that the company will struggle to repay its debt if food costs continue to increase and may have to raise money by selling new shares.

Paragon Group Cos., the U.K. mortgage lender that gets all its financing from capital markets, plans to raise 287 million pounds ($560 million) in a share sale to help cover a funding shortfall.

Japan’s Eco Watchers survey fell to a nearly five year low of 36.6 in December, as sentiment on the economy becomes increasingly pessimistic, helping to raise speculation that the Bank of Japan will be forced to cut rates this year.

German wholesale prices surprisingly fell in December by 0.5 percent, which may help alleviate some of the ECB’s inflation concerns.

UK industrial production was weaker than expected at -0.1 percent, amidst weak manufacturing, mining, and oil/gas output. The manufacturing sector has already showed some cracks, as PMI pulled back throughout the fourth quarter to 52.9 in December.

The Canadian economy unexpectedly lost 18,700 job in December, marking the first time the net employment change fell negative in 8 months.

Brazilien consumer prices, as measured by the IPCA index, jumped 0.74 percent in December, the biggest increase since October 2005. The gain, fueled by food prices, was almost twice the 0.38 percent increase in November and pushed the annual rate to 4.46 percent.

The U.S. trade deficit widened more than forecast in November as Americans spent a record amount on imported oil, overshadowing gains in exports. Exports climbed 0.4 percent to $142.3 billion in November, setting a record for a ninth consecutive month.

China’s trade surplus rose by nearly 50 per cent in 2007 to a new record of $262bn, but the three straight months of the final quarter in which import growth outpaced exports suggests the contentious imbalance may finally be nearing a peak. Europe also replaced the US as China’s largest export market. Europe also replaced the US as China’s largest export market. Sales to an expanded European Union grew by 29.2 per cent in 2007, compared to just 14 per cent to the US.

The three-month euro interbank offered rate, or Euribor, dropped 1 basis point to 4.58 percent, the European Banking Federation said today. The equivalent dollar rate declined 12 basis points to 4.26 percent, the British Bankers' Association said today.

The Nikkei .N225 was down 0.8 percent at midsession after a morning of seesaw trade, falling 115.73 points to 14,272.38. The index fell 277.32, or 1.9 percent, to close at 14,110.79, the lowest since Nov. 15, 2005. The benchmark has dropped 4 percent this week. The broader Topix index lost 23.78, or 1.7 percent, to 1,377.58, taking its weekly decline to 2.4 percent. In Hong Kong the Hang Seng index closed down 360 or 1.34 percent. On the mainland the Shanghai Composite finished higher 28 or 0.52 percent.
European stocks headed for the fifth week of losses, led by L'Oreal SA, Unilever and Nestle SA, on concern profit growth will slow with consumer spending. National benchmarks retreated in 13 of the 18 western European markets. France's CAC 40 dropped 0.3 percent, and the U.K.'s FTSE 100 slid 0.1 percent. Germany's DAX rose 0.1 percent.

Infaltion expectation outside comfort zone

According to CB Consumer Confidence and and UMi Consumer Sentiment index inflation expectations increased in twelve month time. The Conference Board index increased from 4.7 to 5.7, the Consumer Confidence index moved higher from 3.0 to 3.4. While inflation expectations might not be "unmoored" yet the development is worrisome. Together with other inflation signals flaring red hot (gold close to $900, oil hit $100) Bernanke will have a hard time convincing his fellow board members to ease monetary policy further. The FEDs preferred measure for core inflation is between 1 and 2 percent and for headline inflation probably between 2 and 3 percent. Expectations are currently outside these comfort zones.

Bernanke: Between a rock and a hard place?

In his most recent speech Ben Bernanke reiterates his concern with the economy and the outlook for monetary policy. The picture he paints is not pretty: With a weakening economy job growth is slowing and the financial market conditions remain uncertain he indicates that further "substantial" rate cuts are coming. Ben is also an inflation fighter. He is concerned with high oil prices and delivers a stern warning any tendency of inflation expectations to become "unmoored" reduce the central bank’s policy flexibility to "counter shortfalls in growth in the future."
Some might say the chief at the FED is already between a rock and a hard place.

on Housing, the Subprime Mortgage Market, and the Financial Turmoil
....However, on balance, these developments have prompted banks to become protective of their liquidity and balance sheet capacity and thus to become less willing to provide funding to other market participants, including other banks. As a result, both overnight and term interbank funding markets have periodically come under considerable pressure, with spreads on interbank lending rates over various benchmark rates rising notably. We also see considerable evidence that banks have become more restrictive in their lending to firms and households. More-expensive and less-available credit seems likely to impose a measure of financial restraint on economic growth.

on the health of financial institutions
Fortunately, after a number of years of strong earnings, most financial institutions entered the current episode in good financial condition. Thus, notwithstanding the effects of multi-billion dollar write-downs on the earnings and share prices of some large institutions, the banking system remains sound.

on the US economy
Although economic growth slowed in the fourth quarter of last year from the third quarter’s rapid clip, it seems nonetheless, as best we can tell, to have continued at a moderate pace. Recently, however, incoming information has suggested that the baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become more pronounced. ...

Even as the outlook for real activity has weakened, there have been some important developments on the inflation front. Most notably, the same increase in oil prices that may be a negative influence on growth is also lifting overall consumer prices and probably putting some upward pressure on core inflation measures as well. Last year, food prices also increased exceptionally rapidly by recent standards, further boosting overall consumer price inflation. Thus far, inflation expectations appear to have remained reasonably well anchored, and pressures on resource utilization have diminished a bit. However, any tendency of inflation expectations to become unmoored or for the Fed’s inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and reduce the central bank’s policy flexibility to counter shortfalls in growth in the future. Accordingly, in the months ahead we will be closely monitoring the inflation situation, particularly as regards inflation expectations.

....However, in light of recent changes in the outlook for and the risks to growth, additional policy easing may well be necessary. The Committee will, of course, be carefully evaluating incoming information bearing on the economic outlook. Based on that evaluation, and consistent with our dual mandate, we stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.

Mr. Market focused on this last passage of Bernanke's speech.

Rates and Consumer in focus

European Central Bank President Jean- Claude Trichet said the bank is ready to act "pre-emptively'' to quell inflation even after signs of slowing economic growth prevented the bank from raising interest rates. The ECB kept its benchmark interest rate at 4 percent.

German Finance Minister Peer Steinbrueck Wednesday expressed understanding for the 8% pay rise the ver.di trade union has demanded on behalf of the 1.3 million public sector workers it represents.

Euro-zone GDP growth is expected to slow to 0.5 pct in the fourth quarter of last year and to 0.4 pct in the first and second quarters of 2008, according to the main economic institutes of Germany, France and Italy.

Switzerland is likely to see another year of strong growth, Swiss economy minister Doris Leuthard said at a media briefing in Bern. She also reiterated the government's 2008 growth forecast of 1.9 pct.

The Bank of England kept its benchmark interest rate unchanged today as policy makers assessed the effects of last month's reduction on the economy.

Bernanke will give fresh clues to the Fed's thinking today in a speech in Washington. Goldman Sachs Group Inc., JPMorgan Chase & Co. and Barclays Capital Inc. are all predicting a reduction in the main rate to 3.75 percent.

The recession risks in the US economy stem mostly from the financial markets' problems, St. Louis Federal Reserve Bank President William Poole said yesterday, but those problems do not yet justify predicting a recession. He said in response to a question from a reporter that "if the evidence suggests a substantial policy easing -- the term you used -- is appropriate, I don't think we will face a risk from adverse inflation expectations consequences.''

The chief executive of UPS Inc. said Wednesday that the country is at increased risk of falling into a recession and it's not clear when the economy will rebound. "....overall economic growth is lethargic."

Inflation in Mexico reached one of its lowest levels in history in 2007, the Bank of Mexico announced Wednesday. The National Consumer Price Index rose 0.41 percent in December, bringing inflation for the year to 3.76 percent, from 4.05 percent in 2006, the bank said.

Wal-Mart Stores Inc., the world's largest retailer, said December sales climbed 2.4 percent, higher than analysts' estimates. Target’s unadjusted same-store sales fell 5 per cent. JC Penney’s comparable department store sales fell 7.5 per cent, Macy’s posted a 7.9 per cent fall, while Gap’s same-store sales were down 6 per cent

Holiday sales in the U.S. climbed 4.5 percent, ahead of ShopperTrak RCT Corp.'s forecast, as retailers lured customers with discounts on clothing and electronics. The gain exceeded the projection of a 3.6 percent increase.

J Sainsbury Plc, Britain's third- biggest supermarket chain, reported sales growth that exceeded analysts' estimates after offering Christmas discounts on televisions and DVDs.

Metro AG, Germany's largest retailer, said 2007 sales increased 10 percent, beating analysts' estimates and fueling the stock's biggest gain since 2003. Domestic sales, which account for about 42 percent of total revenue, rose 5.5 percent in the year. Fourth-quarter sales rose 8.3 percent to 19.9 billion euros, compared with an average analyst estimate of 19.7 billion euros.

Figures from the Australian Bureau of Statistics show retail sales grew by a stronger than expected 0.8 per cent in November, giving the fastest annual growth rate since 2004, of 8.1 per cent.

David Nadler, vice-chairman at insurers Marsh & McLennan, said: "Systemic financial risk is the most immediate and, from the point of view of economic cost, most severe risk facing the global economy. A potential recession in the US and the knock-on effects of a collapse in asset prices, such as housing and shares, could throw the world economy into chaos, says a study from the World Economic Forum.

Countrywide said the foreclosure rate doubled to 1.44 percent from 0.70 percent a year earlier, and rose from November's 1.28 percent. The delinquency rate rose to 7.20 percent of unpaid balances from 4.60 percent a year earlier.

Warren Buffett’s Berkshire Hathaway went ahead with plans to set up a new bond insurance company last month, just weeks after receiving an unusual call from New York state’s insurance regulator urging it to enter the multi-billion dollar market. "....we can’t afford to have this industry go into a tailspin’.”

So much for the theory that the credit crunch would declaw Carl Icahn and Nelson Peltz. New data compiled by FactSet Shark Watch, which tracks shareholder activism, show that these investors are, well, as active as ever.

Bear Stearns(BSC) won’t take more wirtedowns because the firm is “adequately marked” to market on its investments, CEO Alan Schwartz said in an interview. Schwartz said the company is “comfortable” with its positions and isn’t looking to raise capital.

Citigroup, Merrill Seek More Foreign Capital. Merrill is expected to get $3 billion to $4 billion, much of it from a Middle Eastern government investment fund. Citi could get as much as $10 billion, likely all from foreign governments.

Freddie Mac may be downgraded by Moody's Investors Service because the damage from loan defaults could be worse than the ratings company expected.

Capital One Financial reduced its full- year profit forecast by about 20 percent because of swelling loan losses in a weakening U.S. economy. The decline was caused by $1.9 billion of loan-loss provisions and $80 million in legal reserves in the fourth quarter.

Chancellor of the Exchequer Alistair Darling said it might not be possible for companies to finance a rescue of Northern Rock and that shareholders of the bank should have realized that their investment may be worth nothing.

The CEOs of Total and ConocoPhillips question mainstream forecasts for supply, suggesting the era of "plateau oil" is nearer than many in the business have admitted.

Developing economies in the Asia-Pacific region will face a slight slowdown in 2008 as exports are likely to fall due to a wobbly United States economy, a UN report said Wednesday. India's economy is expected to grow 9.0 percent in 2008 while China's growth is forecast at 10.8 percent.

Bank Hapoalim Ltd., Israel's second- biggest lender by assets, wrote down $380 million on its structured investment vehicles and mortgage-backed bonds.

Aluminum producer Alcoa Inc. said Wednesday its fourth-quarter earnings soared 76 percent, buoyed by the pending sale of its packaging and consumer businesses. Quarterly revenue fell to $7.39 billion from $7.84 billion last year, due to lower metal prices and the exclusion of results from a soft alloy extrusion business that is now part of a joint venture.

The three-month euro interbank offered rate, or Euribor, dropped 1 basis point to 4.59 percent. It was at a seven-year high of 4.95 percent on Dec.12. The comparable pound rate fell 5 basis points to 5.6 percent, the lowest since April 2007. The cost of borrowing dollars for one month dropped 5 basis points to 4.32 percent. The so- called TED spread, was 114 basis points, from 221 basis points on Dec. 11, and up from 42 basis points in July, 2007. The one-month Libor OIS spread, viewed as an indirect measure of the availability of funds in the money market, has narrowed to 30 basis points, from 110 basis points on Dec. 4, and up from 8 basis points on July 31, 2007.

Asia: Nikkei down 1.45% to 14388.11, Hang Seng down 1.30% to 27255.73. Refiners and utilities fell in Shanghai and Hong Kong following China's announcement of a freeze in fuel and power prices to curb inflation. China Petroleum & Chemical Corp., or Sinopec (SNP), fell 5.7% in Hong Kong and 3% in Shanghai; Huaneng Power (HNP) fell 4.5% and 3.2%.
European stocks declined for the sixth time in seven days, led by chemical makers, metal producers and engineering companies, on speculation inflation may keep central banks from cutting interest rates to stoke economic growth. National benchmarks declined in 15 of the 18 western European markets. The U.K.'s FTSE 100 sank 0.9 percent, while Germany's DAX and France's CAC 40 lost 0.5 percent. The Stoxx 50 fell 0.7 percent and the Euro Stoxx 50, a measure for the euro region, dropped 0.4 percent.

More recession talk and another dividend cut

Goldman Sachs Group Inc. said the U.S. economy is probably slipping into recession and forecast the Federal Reserve to respond by slashing interest rates. Goldman predicts the Fed to cut its benchmark rate to 2.5 percent by the third quarter.

Former U.S. Treasury Secretary Lawrence Summers said in Stockholm today there's a 60 percent or greater chance that the U.S. economy will go into recession this year because of declining home prices and a loss of consumer confidence.

The U.S. will skirt recession as consumer spending slows without collapsing, a survey of economists showed.

The federal funds rate, the Fed's key policy tool, will likely be cut to 3 percent by mid-year, said Gross, chief investment officer of Pacific Investment Management Company.

The risk of European companies defaulting rose to the highest in more than five months after Marks & Spencer Plc, the U.K.'s biggest clothing retailer, said sales unexpectedly declined. U.S. credit-default swaps soared to a record on concern the worst housing slump in 27 years may cause a recession.

MBIA Inc., the world's largest bond insurer, sliced its dividend and said it will raise $1 billion in the sale of notes to help shore up capital and stave off a credit-rating downgrade. The company said it had $2.1 billion of mark-to-market losses on derivative contracts it insures.

Sales of fixed-income securities in the U.S. are expected to decline 15 percent this year, as markets continue to lick their wounds from last year's subprime mortgage turmoil, the Securities Industry and Financial Markets Association, the largest trade group for the fixed-income markets, said Tuesday.

Merrill Lynch & Co., the world's biggest brokerage, fired at least eight bankers in London from a group that sold asset-backed debt and invested the firm's money, people with direct knowledge of the situation said.

There is “no evidence” the US housing market is bottoming out, Hank Paulson, Treasury secretary, said on Tuesday, offering a sober view of US economic prospects.

European Union Monetary Affairs Commissioner Joaquin Almunia said the fallout from the collapse of the U.S. subprime market has created "more difficult conditions'' for Europe's economy, broadcaster EuroNews reported today, citing an interview.

KB Home posted a quarterly loss of nearly $773 million on Tuesday with abandonment and impairment charges as the U.S. housing market continued to decline, and said it expects another tough year for the industry in 2008. New home deliveries fell 22 percent to 8,132 in the quarter from a year earlier and the average selling price fell 11.5 percent to $247,800.

Countrywide Financial Corp., the biggest U.S. mortgage lender, said home loans in December were a better-than-forecast $24 billion. The lender rose 9.7 percent to $6 in early trading.

NYC Office Rents Tick Up in 4Q. Overall rents edged up 3.4 percent to $65.08 per square foot from $62.91 in the previous quarter. The first, second and third quarters averaged a 7.6 percent increase over the prior quarters. Slightly more than 5 million square feet of office space was leased in the fourth quarter, less than each of the year's previous quarters.

Luxury-home prices in London climbed in December at the fastest pace in three months as overseas buyers entered the market. The average price of houses and apartments costing at least 2.5 million pounds ($4.9 million) rose 1 percent last month from November.

The bond market is telling Li Ka-shing, Asia's richest man, he's sitting on a Chinese property bubble that's bigger than the one deflating in the U.S. Bonds of China's Agile Property Holdings Ltd. yield 7.17 percentage points more than U.S. Treasuries, double the premium in July.

DuPont Co., the third-biggest U.S. chemical maker, said 2007 profit rose 11 percent and raised its forecast for this year on higher-than-expected fourth-quarter sales.

E*Trade Financial Corp., the worst performer in the Standard & Poor's 500 Index last year, said it sold an additional $3 billion in mortgage-backed securities and bonds to bolster its finances after losses.

Corporate insiders are more bullish today than they were three months ago. For the eight weeks ending last Friday, in contrast, the Vickers Weekly Insider Report ratio was more bullish 1.47.

European earnings will drop this year for the first time since 2002 and are likely to fall into a "recession,'' according to Morgan Stanley, the region's top- ranked strategists.

German Car Demand Hits New Low as Fuel Costs Rise. New-car registrations dropped 9.2% to just over 3.148 million in 2007, after a plunge of 20% in December, according to data released by KBA, the German motor-vehicles agency.

German Reports Suggest Economic Growth Is Slowing. Production fell 0.9 percent in November from October. Sales abroad, adjusted for working days and seasonal swings, slid 0.5 percent from October and retail sales dropped 1.3 percent.

UK consumer confidence fell to a ten month low as oil prices reach record highs and the housing market continues to slump. The Nationwide survey printed at 85, down a point from the previous month.

Marks & Spencer Group Plc, the U.K.'s biggest clothing retailer, fell the most in at least 19 years in London trading after an unexpected decline in holiday sales. revenue fell 2.2 percent at stores open at least a year in the fiscal third quarter ended Dec. 29, the first same- store sales drop in 2 1/2 years.

Soybean futures in Chicago climbed close to a 34-year peak and corn rose to an 11-year high on speculation higher energy costs and the dollar's weakness will help boost demand for commodities as a hedge against inflation.

TUI AG plans to raise 450 million euros ($663 million) by selling bonds exchangeable for part of its stake in TUI Travel Plc as lower-rated companies turn to the equity-linked market for funds.

Asia: The Nikkei edged up 0.5% to close at 14,599.16 as bargain-hunters reentered the market following a two-day, 800-point plummet. The Hang Seng rose 1.8% to 27,601.36. Singapore's Straits Times Index was up 0.4% at 3,350.78 and India's Sensitive Index -- which hit a record intraday -- advanced 0.7% to close at 21,021.81.
European stocks dropped, sending the Dow Jones Stoxx 600 Index to the lowest in more than a year, after sales at Marks & Spencer Group Plc missed analysts' estimates and Merrill Lynch & Co. cut its profit outlook for BP Plc. National benchmarks dropped in all 18 western European markets. The U.K.'s FTSE 100 sank 1.7 percent, while Germany's DAX fell 0.8 percent. France's CAC 40 lost 1.2 percent.

Hank Paulson: honest speech

Hank Paulson recent speech has drawn interest not only from Wall Street but also from outspoken representatives of the recession camp. Finance blogger Felix Salmon argues that Paulson "effectively is in the 2008 recession camp." Economist Nouriel Roubini writes: "Is US Treasury Secretary Hank Paulson becoming as bearish – in his recent speech assessing the financial excesses and the risks to the economy – as yours truly, Nouriel Roubini?"

I disagree and do not think that his speech is "dark and pessimistic". Paulson speaks of challenges, reasons and solutions. "However, let me be clear: there is no single or simple solution that will undo the excesses of the last few years." he concedes.

He speaks of Foreclosure prevention efforts:
After years of unsustainable price appreciation and lax lending practices, a housing correction was inevitable and necessary. That correction is underway. Over the next two years, we also face an unprecedented wave of 1.8 million subprime mortgage resets, raising the potential of a market failure. Because the industry does not have the capacity to manage this volume, without action, unnecessary foreclosures would result. To meet this challenge, this Administration – without committing any taxpayer money – helped foster an industry-wide effort to prevent this market failure....
...We are monitoring results on all aspects of the plan, to ensure participants are fulfilling their commitments and that homeowners are being contacted and, when possible, helped.

mortgage credit market update:
Unsustainable home price appreciation in the past few years caused a large supply response, and it will take time for demand to catch-up. Housing starts have fallen by nearly half since their peak in early 2006, and new home sales are down just as sharply. House prices are falling in many parts of the country, and elevated housing inventories suggest that the price adjustment is not yet complete.
....Fortunately, creditworthy borrowers looking for a conforming mortgage will find that Fannie Mae and Freddie Mac have remained active, and traditional conforming mortgage products are readily available.
....In the third quarter alone, the twelve Federal Home Loan Banks provided an additional $184 billion to borrowers within the system, funding that enables banks and thrifts to continue to lend.

capital markets update:
Our capital markets remain resilient and continue to show progress towards stability. Equity markets are functioning well and finished up for the year, across a broad range of indices. The Treasury market is operating well with elevated volumes at much lower yields than the first half of 2007. Our high grade debt market is performing satisfactorily and issuance has been solid with spreads in line with the last five years' historical averages. Our high yield market is impaired but operational. High yield issuance volume is down significantly and spreads are wider, but still within levels experienced just four years ago.

on the US economy:
Looking across the entire economic landscape, the housing downturn and credit disruption will, as I have said for some time, weigh on our economy and impose a penalty on our economic growth.....While growth looks to have slowed considerably in the last part of 2007, our economy remains resilient and I expect it to continue to grow.

Overall a rather honest assessment of the current macro environment. This goes to show it is important to go to the source of information rather than relying on somebody else's opinion.

Cayne steps down

BSCs Cayne, 73, has begun notifying members of his board that he will step down as CEO and remain chairman of the New York-based company.

Citigroup Inc., the biggest U.S. bank, may be forced to write down $16 billion in the fourth quarter and post a larger loss than previously estimated, Merrill Lynch & Co. analyst Guy Moszkowski said.

Victoria Finance, a $6 billion structured investment vehicle managed by New York-based Ceres Capital Partners LLC, had its investment-grade ratings cut 13 levels to junk after the value of its assets slumped.

The global default rate on high- yield, high-risk bonds, which finished 2007 at a 26-year low of 0.9 percent, will jump more than fivefold by the end of 2008, according to Moody's Investors Service.

Federal Reserve Bank of Philadelphia President Charles Plosser said further interest-rate cuts may be needed should the outlook for U.S. economic growth become ``substantially weaker'' than already projected.

S&P 500 firms' fourth-quarter profits probably fell 9.8% from a year earlier after dropping 4.5% in the third, according to analysts polled by Thomson Financial. It's also a sea change from Oct. 1, when analysts forecast an 11.9% gain. Excluding financials, S&P 500 profits should rise 12%.

For the first time in four years, the national vacancy rate for office buildings rose in the fourth quarter, as an unusually large amount of new space came on the market and tenants shied way from signing new leases.

Treasury Secretary Henry Paulson said on Monday the Bush administration was considering how to give the economy a boost as it weathers a housing correction, but does not want to rush....no decision had been made on how or whether to use fiscal policy to stimulate growth.

Lenders in the UK will take a greater role in preventing mortgage defaults by contacting customers who show signs of falling into arrears, under new guidelines to be introduced in March.

Merrill, itself one of Wall Street's biggest casualties of the sub-prime crisis, is the first major bank to declare that a recession in the world's biggest economy is now underway. David Rosenberg, the bank's chief North American economist, argues that a weakening employment picture and declining retail sales signal the economy has tipped into its first month of recession.

A top French bank has warned that mounting strains within the eurozone will set off a sharp jump in spreads on Italian, Spanish, Greek, and Portuguese sovereign bonds this year, forcing major changes in government policy across the region. "This is going to create friction within the eurozone. Euro weakness will be the inevitable result."

Electronics retailer Circuit City Stores said on Monday December sales at stores open at least 12 months fell 11.4 percent as changes at U.S. stores disrupted business, and added it still expects to post a fourth-quarter loss.

Supervalu Inc., the second-largest U.S. supermarket chain, said third-quarter profit rose and lowered its forecast for full-year earnings. Sales growth at stores open at least a year, excluding fuel, was unchanged at 0.5 percent from the second quarter and fell from the 1.2 percent pace in first quarter.

Marty Whitman and Al Zucaro, stock pickers with a knack for buying low, may be dripping in sweat after they snapped up U.S. mortgage insurers that shed more than 40 percent of their value in the past three months.

Paul Singer, the founder of hedge fund firm Elliott Associates urged investors to shun subprime investments and buy credit-default swaps on mortgage-backed securities. New York-based Elliott Associates, with $9.8 billion in assets, gained more than 30 percent after fees in 2007 -- its best performance ever -- on bets that the housing boom would falter and die.

Medicare spending jumped 19 percent in 2006, the fastest rate of growth in 25 years, after a prescription drug benefit was added to the U.S. health-care program for the elderly and disabled.

Wheat prices in South Africa, the third-biggest producer in Africa, fell by their maximum daily limit on expectations that major producers of the grain will reap bigger harvests.

Australia’s Home Building approvals unexpectedly rose 8.9% in November rebounding from the previous month’s decline, fueled by its robust labor market and wage growth. The increased construction will add to inflationary pressures and increase pressure on the RBA to raise rates.

UK Housing prices as measured by the HBOS rose for the first time in four months with an average house price of 197,039 pounds. Prices rose 1.3% contradicting expert predictions of a decline of 0.5%. However, home values fell 0.8 percent in the fourth quarter, the first drop since 2000.

Euro Zone retail sales unexpectedly fell by 0.5% on a monthly basis and 1.4% yearly. Economist were expecting an increase of 0.5% monthly and 0.3% yearly but the number was weighed down by lower sales of food, drinks and tobacco.

Manufacturing orders in Germany unexpectedly surged for a second month in November as domestic companies increased spending on goods such as factory machinery.

Money-Market Rates Fall a 7th Day, Banks Ease Tension. The three-month euro interbank offered rate, or Euribor, dropped 2 basis points to 4.60 percent, the lowest since Nov. 16. The difference between what the U.S. government and banks pay for three-month money was little changed today. The so-called TED spread was at 125 basis points. The spread was 35 basis points at the start of 2007.

Asia on Tuesday: Nikkei up 0.19%, Hang Seng down 0.25%. Cathay Pacific was up and Air China down sharply after China Eastern Airlines' (CEA) minority shareholders rejected its proposed stake sale to Singapore Airlines and Temasek Holdings.
Europe this morning: FTSE up 0.61%, DAX up 0.56%, CAC up 0.79%.

Headed for a fall?

Harvard University economist Martin Feldstein, head of the group that dates U.S. economic cycles, said the odds of a recession have risen to more than 50 percent after a report showing unemployment jumped in December.

In another sign of a weakening job market, employers are cutting hours for more workers to below the 35-hour-per-week threshold for full-time work because of slowing demand, or "slack work," according to government data.

The current mortgage crisis will probably enter the U.S. record book as the second-worst in the past 100 years. The crux of the crisis is a loss of confidence by the investors who purchase mortgage-backed securities and their retreat to the sidelines. When investors stop buying, the secondary market system grinds to a halt.

Jefferies Group projected a surprise fourth-quarter loss, hurt by trading losses, weak results in its high-yield and asset management businesses, and higher compensation costs.

Credit Suisse fell 2.2 percent to 64.25 Swiss francs. Switzerland's second-biggest bank expects additional writedowns of 2.5 billion Swiss francs ($2.3 billion) for the fourth quarter of 2007, Sonntag reported, without saying where it got the information.

Deutsche Bank, Germany's largest bank, slid 1 percent to 86.38 euros after Credit Suisse downgraded the stock to "underperform'' from "outperform,'' saying it remains "cautious'' on European banks in 2008.

Banks may be required to set aside more capital to offset the risk of losses on new collateralized debt obligations and other complex securities, according to Moody's Investors Service.

Gordon Brown on Sunday warned Britain’s economy faces a “dangerous” year ahead as he battled against rising energy prices and higher pay awards that he fears could undermine his pledge to “break the back of inflation”. Mr Brown told the Observer, the British Sunday newspaper: “This is a difficult and dangerous situation for the world economy.”

J Sainsbury Plc, Britain's third- biggest supermarket chain, dropped the most in two months in London trading after a report that the company may have missed internal sales and profit goals over Christmas.

Appraisal values fell at a record rate in November and commercial real estate derivatives contracts indicate owners of British offices, shopping malls and warehouses may suffer their biggest annual losses in more than a quarter century. Building owners may record losses of at least 11 percent in 2008.

European Aeronautic, Defence & Space Co., parent of Airbus SAS, dropped the most in four months after Deutsche Bank AG recommended selling the stock, saying airliner orders may decline this year.

SAP AG fell the most in almost a year in Frankfurt trading after analysts at UBS AG and Societe Generale lowered their price estimates, citing risks related to the acquisition of Business Objects SA.

Nokia Siemens Networks, the world's second-biggest maker of wireless networks, won a contract in Saudi Arabia valued at $935 million, among its biggest deals since the venture started in April.

Gordon Brown's plane will have barely departed New Delhi's Indira Gandhi International Airport this month before Nicolas Sarkozy's arrives with another contingent of executives seeking opportunities in India's rapidly opening markets.

Last Year's Losers Levkovich, Cohen See 14% Advance for S&P 500. Cohen, 55, the New York-based chief investment strategist at Goldman, agrees that the benchmark for U.S. equities will rise 14 percent from its 2007 close. She says stocks will rally because profits will rebound as the economy keeps growing. The S&P 500 fell short of the average 9.3 percent gain expected by forecasters last year after financial companies plunged the most since 1990.

"There's not much return there,'' said Bill Gross in an interview with Bloomberg Television. Newport Beach, California-based Pimco is buying "anything but Treasuries,'' and prefers mortgage-related securities backed by Fannie Mae and Freddie Mac, he said.

European Central Bank President Jean-Claude Trichet said central bankers are "very satisfied'' with their efforts to calm money markets and they remain in close contact regarding further action. Companies' costs to borrow in the short term have fallen to a 22-month low, and issuance of commercial paper backed by collateral increased last week for the first time since August.

The three-month euro interbank offered rate, or Euribor, dropped 2 basis points to 4.61 percent, the lowest since Nov. 16, the European Banking Federation said today. It was 4.95 percent on Dec. 17, the day before the European Central Bank injected a record $500 billion into the banking system. The equivalent dollar rate fell 8 basis points to 4.54 percent, the British Bankers' Association said today.

Options to buy oil for $200 on the New York Mercantile Exchange rose 10-fold in the past two months to 5,533 contracts, a record increase for any similar period. World consumption will rise to 87.8 million barrels a day this year, 2.1 million more than in 2007 according to the Paris-based IEA. Demand from China alone will increase 5.7 percent to 8 million barrels a day.

State oil giant Saudi Aramco is on track to hit its oil production capacity target of 12 million barrels per day (bpd) in 2009, an Aramco official said on Sunday. Aramco aims to increase the recovery rate of oil from its fields to 70 percent from 50 percent through the use of advanced technology. That would help add around another 80 billion barrels to recoverable reserves in the next 20 years.

Copper extended last week's gain in London on speculation that China, the world's largest user of the metal, is replenishing domestic stockpiles. Nickel rose and tin declined. Copper inventory tracked by the Shanghai Futures Exchange fell to an 11-month low of 24,148 metric tons.

PPI in the Euro-zone rose more than expected during the month of November at a rate of 0.8 percent, pushing the annual rate up to an 11-month high of 4.1 percent. The ECB is widely expected to leave rates steady on Thursday but Trichet is unlikely to let up his staunchly hawkish bias.

European economic confidence fell in December to the lowest in almost two years as orders weakened and soaring prices for food and energy pushed up inflation. An index of executive and consumer sentiment in the euro area slipped to 104.7, the lowest since March 2006, from 104.8 in November, the European Commission in Brussels said today.

Japanese stocks dropped, sending the Topix index below 1,400 at the close for the first time in two years, on concern the U.S. economy is heading for a recession. The Nikkei 225 Stock Average lost 190.86, or 1.3 percent, to 14,500.55 at the close of trading in Tokyo. The broader Topix fell 19.20, or 1.4 percent, to 1,392.71, finishing below 1,400 for the first time since Oct. 25, 2005. In Hong Kong the Hang Seng index closed down 340.20 pts (1.24%). On the mainland the Shanghai Composite index closed up 31.77 pts (0.59%). National benchmarks decreased in eight of the 18 western European markets. The U.K.'s FTSE 100 climbed 0.4 percent. France's CAC 40 added 0.5 percent and Germany's DAX gained 0.6 percent. The Stoxx 50 increased 0.7 percent, while the Euro Stoxx 50, a measure for the euro region, added 0.5 percent.

Option Trading results Sep07 to Dec07

From Sep1 to Dec31 48 short to medium term option trades were executed. The strategy was short term call and put buying and short term call and put selling and was adjusted according to the macro environment. Two trades could not be fully identified and were therefore omited from this valuation. On Dec31 45 trades were closed and 3 trades were still open. There were 18 winners and 26 losers and one option trade was unchanged. Total gain was 98,940USD with ROI of 37pc. The average gain over all option trades executed was 41.2pc, with the winners gaining 154pc on average and the losers losing 41pc on average.

(for details click on the tables)