Stock markets around the world slumped Friday after President Barack Obama unveiled plans to limit the size and scope of US banks and financial firms in a fresh offensive against Wall Street excesses.

Markets from New York to Tokyo reacted with barely-restrained panic to Obama’s drive to limit the size of the largest banks and introduce measures to curb “excessive” risk taking.

“Never again will the American taxpayer be held hostage by a bank that is too big to fail,” vowed Obama, flanked by former Federal Reserve chief Paul Volcker who advised the president on the rules.

He promised to “protect” taxpayers by preventing banks or financial institutions from owning, investing in or sponsoring hedge fund or private equity funds.

Wall Street gave an immediate thumbs down to the plans as US stocks plunged, with the blue-chip Dow Jones Industrial Average down more than 200 points or two percent in Thursday trading.

The news then sent shockwaves though Asian stock markets with the region’s financial centers suffering heavy losses in Friday trading. European exchanges later opened under pressure.

Obama’s measures would effectively force financial firms to choose between lucrative proprietary activities — trading in stocks and sometimes risky financial instruments for their own benefit — and traditional activities, like making loans and collecting deposits.

The initiative, which must be approved by Congress, includes a new proposal to limit the consolidation of the finance sector, placing broader limits on “excessive growth of the market share of liabilities” at the largest financial firms.

Obama blamed banks for sparking the worst economic crisis since the Great Depression with “huge reckless risks in pursuit of quick profits and massive bonuses” in a “binge of irresponsibility.”

“My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout,” the president said.

He vowed to enact the reforms in Congress, even if Wall Street deployed an army of lobbyists to kill them.

“If these folks want a fight, it’s a fight I’m ready to have,” he vowed defiantly.

The announcement was the latest attempt by the White House to harness public rage at Wall Street bonuses and the financial crisis.

David Easthope, analyst with Celent, a research and consulting firm, said the effort could hit the banks in one of their most profitable areas.

Proprietary trading “has been the sweet spot for leading investment banks over the last few years, and executives will be concerned that Washington will be taking away the frosting,” he said.

The Financial Services Roundtable, which represents 100 of the largest integrated financial firms, said the proposal would do little to improve risk management or protect consumers from irresponsible loans and trades.

“The proposal will restrict lending, increase risk, decrease stability in the system, and limit our ability to help create jobs,” said Steve Bartlett, president and chief executive for the Roundtable.

The group represents 100 top financial services firms providing banking, insurance, and investment products and services.

Obama’s first year in office was dominated by efforts to rescue a handful of banks that threatened to topple the US economy after being exposed to massive losses on the subprime mortgage market.

According to Treasury officials, about 205 billion dollars was pumped into 707 banks under the government rescue plans.

Obama has sounded a tougher tone towards banks in recent weeks as he faced widespread voter anger at the massive government bailout, which came as Americans faced surging unemployment, home foreclosures and national debt.

Top Obama economic aide Austan Goolsbee sought to counter criticism that the plan is returning to the Depression-era law creating a wall between investment and commercial banks.

“It’s not returning to Glass-Steagall,” Goolsbee said.

While the act repealed in 1999 forbid underwriting securities or investing in securities by any commercial bank, Goolsbee said, “This is not that. This says a bank cannot own a hedge fund, cannot own a private equity fund or do trading for its own account that is not related to its client business.”

He added that the goal is “to get back to the fundamental nature of the bank, which is serving its clients, rather than investing for its own profit.”

In some recent editorial I have referred to methodology and making sure whatever system you use is well founded and has been successfully tested. I would like to elaborate a little more on this.

Firstly let’s look at methodology. Basically these fall into four categories. The first is Fundamental and even though I don’t personally use this approach nevertheless it is used by the vast majority of investors - retail and institutional.

The next three are technical. The first are what I would call trend following indicators; the second range trading indicators and the third are what I would call pattern recognition such as Elliott Wave and Gann.

I personally use Elliott and have so for the last 15 years. Perhaps conservative at times but it does not lose you money in my view. If you are going to use technical’s then it is important to have at least a basic understanding of each of the three so you can make an informed decision. No approach is the Holy Grail. Yet I see many would-be successful investors waste effort searching for the easy route to riches. It does not exist. It is like the ‘Long March’ it is one step at a time. But with experience under your belt there are short cuts.

The reason I mention this is that I also see many study one approach, try it and give up as it does not bring the instant riches. And they then spend a fortune studying the next system.

But I also see others who are too mite minded to properly invest in education.

I will also say here that it does not matter which system you use as long as you use it with an applied approach and with discipline. They all work. I would say you could choose any approach and apply it in this way and you will succeed.

The other key point is that you must apply it in a measured way. That is, you try your new found knowledge steadily. Many investors jump in head first after a training seminar. You apply your learning in small easy comfortable steps at first using a small trading kitty.

The sleep test is important here but to mix my metaphors - you must at some point fully immerse yourself after putting your toe in the water.

It reminds me of that old adage ’slowly slowly catchee monkey’.

Global Investor: Earnings Falsely
Discount a Strong Recovery in 2010

Thus far into the corporate earnings season, the results have best unimpressive. And U.S. Treasuries have noticed, as the benchmark yield on ten-year paper declines from 3.84% on December 31 to 3.70% this morning.

For the most part, revenues are flat to slightly higher while net income has indeed increased – but compared to 12 months ago that comparison is pretty easy. Combined with fudged accounting rules in the United States since May and creative accounting elsewhere, it’s no wonder banks have recovered sharply. Plus, let’s not forget the Fed’s greatest gift of all – providing a remarkably profitable spread trade where banks received near-zero percent money and thereafter reinvest in longer dated paper or make loans at a sharply higher rate of return.

With the exception of China, India and several other advanced emerging markets like Chile and Brazil, the global economy is not booming any time soon.

The West remains stuck in a debt-infested rut and the markets have begun to protest the mountains of money created since late 2008 to arrest falling prices; government bond yields are now rising over the last six weeks as the risk of a sovereign default grows. Dubai, Iceland and Greece are just the tip of the iceberg or the hors d’oeuvre before the main course.

In the United States, still nursing deep wounds inflicted by the credit crash, consumption is still largely impaired. Consumers have boosted spending compared to 12 months ago and that’s normally a good sign. However, the big gains in retail are coming from the likes of discount stores, not high-end retailing or even Wal-Mart Stores. Consumers are frugal. I suppose the “feel good” factor is long gone and won’t make a comeback until real estate recovers combined with jobs growth.

Finally, it’s noteworthy to point out again that following big declines in U.S. economic output over the past 100 years, the economy has always recovered sharply. Actually, a boom is more accurate…

The bigger the drop in GDP, the bigger the bounce. Indeed, as outlined here recently, courtesy of Grant’s Interest Rate Observer, the U.S. economy went through the roof starting in 1934 following a massive 27% crash in output from 1929 to 1933. The same story, though not as sexy, occurred in prior booms and busts.

If the above historical association is true then what can we expect in 2010? Will the United States post a significant economic recovery?

Increasingly, even amid a wall of government stimulus spending, the economy is not bouncing back vigorously. You have to wonder what lies ahead once Washington starts pulling back on spending or if the Fed is forced by the markets to start raising interest rates. There’s not much juice left here unless business spending really takes off.

singapore stock market news,australia stock market ,china stock market ,usa stock market

we’ll start with the question everyone’s asking this time of year—what should we be expecting in 2010?

A: The basic story hasn’t changed; the global economy is going through a period of rapid change and the center of the world – both economically and strategically – is shifting to the East, mainly Asia. We’re moving toward a multi-polar world order, much different from the world we have been living in at the end of the last century.

We expect that world GDP growth will accelerate to about 4% in 2010 and that more than 70% of that growth will come from new markets such as China, India and Brazil. Meanwhile, immense amounts of capital will flow to markets that experience a stronger economic growth pace…it’s just a basic law of finance and is proven by the growing capital flows to these markets.

These capital inflows have helped push up equity prices in emerging markets by 50% to 100% in the last couple of months. As a result, many investors now believe that these markets are overvalued. We strongly disagree with that assertion…

We admit that these markets might look expensive when compared to Western markets. However, investors need to realize that we are dealing with a strong and very powerful paradigm shift here, which could result in chronically high demand for investments in these regions for many years to come.

Q: What’s your take on this equity rally?

A: Many investors missed the rally (or a good portion of it ) and are still on the sidelines, waiting to enter the market when markets consolidate. This seems to be one of the reasons why markets seem so well supported against the downside at the moment. I mean; when was the last time you saw a significant 3%+ move to the downside? It’s been a while.

And, when stories like Dubai – the darling of investors– running out of money don’t even cause a market sell-off…well, the market is probably too protected on the downside. With the global economy in recovery mode, ample cash sitting on the sidelines and corporate profitability on the rise, we believe there is a good chance to see further upward momentum in equity markets next year.

Of course, our scenario is based on the assumption that we don’t get any surprise shocks next year – internal or external to financial markets. What could be a possible shock in the future? A terrorist attack, a pandemic flu or another geopolitical event? It could be any of those things. But markets are showing signs of resilience…and we think even the consequences of such an event should be predictable and manageable.

Q: How are the Western countries – Europe…the U.S., the UK – looking to you right now?

A: We do believe that Western economies will recover as global growth once again accelerates. Accelerating growth combined with a generally high degree of operating leverage means we’ll likely see corporate profits that surprise to the upside over the next couple of quarters.

There are; however, going to be significant differences in countries’ relative performance during this economic rebound…we’re most concerned about the United States as well as some European nations.

On the other hand we’re very upbeat on countries such as Australia, Norway and Switzerland for various reasons.

Q: Any other trends you’re looking out for?

A: We’re expecting a relatively strong upward pressure on energy and commodity prices. More than what most investors might be expecting. A normalization of global growth – combined with the unique supply and demand curves for energy and commodities – is set to result in an exponential price increase. Gold and other precious metals are a special case and are driven by other factors.

The concern about the global financial system and the generation of ample (and probably excess) liquidity by central banks around the world has increased concerns about paper money as a store of value. These concerns are valid in our view and we don’t think gold is overvalued at current prices considering all the factors previously explained. We can see gold prices taking a breather here for a couple of months with the most likely scenario being trading within some range.

Rising inflationary pressures, which we can see emerging in the next 2-3 years could eventually, help in driving the price of gold to $2,000…

Santa came early for Wall Street this year by giving the S&P 500 a 22 percent gain for 2009, and with just eight trading days left in the year, stock investors are not expecting to find much more under the tree.

The Grinch showed up early, too, with a heavy winter snowstorm on the East Coast forcing some stores and malls to close on “Super Saturday” — on the last holiday shopping weekend before Christmas.

Investors will be anxious to find out if consumers stepped up their online shopping to get all those stockings filled before Christmas morning, which falls on Friday this year.

With consumers in focus in the countdown to Christmas, this week’s major U.S. economic indicators will include the Reuters/University of Michigan consumer sentiment index, personal income and spending data, and the latest weekly jobless claims. On Thursday, the New York Stock Exchange trading floor will close early in observance of Christmas Eve.

Financial markets will be closed on Friday for Christmas Day.

Investors will also pay attention this week to a final reading on third-quarter gross domestic product. But with the market already factoring in an economic recovery, the GDP data could evoke a muted response. Existing home sales and new home sales also will be worth noting, due to the central role the housing sector’s collapse played in last year’s financial crisis.

Tensions between Iraq and Iran over a disputed oilfield will also be on the radar and could hurt stocks if the situation escalates.

Markets historically enjoy a short, sweet “Santa Claus rally” in December’s final days and early January.

But with the S&P 500 (.SPX) climbing 63 percent from March’s 12-year closing low, investors question what catalyst could drive the market significantly higher.

“I thought there might be one more push higher, but it now looks like investors are willing to let the market consolidate its gains this year, and are happy to lock in the profits that they’ve established,” said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.

The Standard & Poor’s 500 Index has drifted in a range between 1,085 and 1,119 since the start of November as market players became more concerned with preserving 2009’s gains rather than taking risky bets. The S&P 500 is up 22.1 percent for the year.

This month, the U.S. dollar’s rebound has limited the stock market’s gains as the inverse correlation between the greenback and equities deteriorated.

On the plus side, though, is the ritual of year-end window dressing, when fund managers sell underperformers and buy some gainers to spruce up portfolios, which could lift stocks that have done well this year.

Volatility may increase this week as fewer participants make it easier to push the market around. Indeed, the market has generally climbed on light volume this year, but most analysts expect stocks to grind sideways in the days ahead.

“You will probably see some modest window dressing going on, so in my opinion, you could see higher-quality stocks do a bit better,” said Haag Sherman, co-founder and chief investment officer of Salient Partners, an investment firm in Houston. “But I don’t think there’s going to be any material movements between now and year-end.”

RETAIL’S “ARCTIC WINTER”

Most importantly for the market’s outlook, investors will assess the holiday shopping season after “Super Saturday” weekend. Retailers had hoped to see a surge of shoppers over the last weekend before Christmas. But that was before Mother Nature played her wild card with a huge East Coast snowstorm that made driving and even walking dangerous in many areas.

Even before the storm, experts doubted whether “Super Saturday” shopping would be enough to push holiday sales much above last year ’s dismal tally.

Last year was the first time that holiday sales fell during this decade, according to the International Council of Shopping Centers, as shoppers fretted about the financial crisis and growing unemployment.

Spending has remained anemic this year. Consumers’ reluctance to spend remains one of the biggest headwinds to the U.S. economic recovery.

“Last year was a train wreck. It was the arctic winter of retail,” said Lawrence Creatura, equity market strategist and portfolio manager at Federated Clover Capital Advisors in Rochester, New York. “Surpassing that is not a high hurdle.”

A snapshot of how retailers fared over the weekend will come from anecdotal evidence about how busy - or not — stores were, as well as sales and traffic data from ShopperTrak, a private firm that monitors such statistics.

Further insight into consumers’ purchasing power and their inclination to spend will come on Wednesday from a final reading of December consumer sentiment from the Reuters/University of Michigan data. Economists expect an index reading of 73.5, compared with a previous reading of 67.4, according to a Reuters poll.

The struggling job market’s pulse will be taken on Thursday, with the release of initial claims for jobless benefits, expected to fall to 470,000 from 480,000 the week before. For details on economic indicators, see

Only a few major earnings reports are on tap, including results from Walgreen Co (WAG.N), ConAgra Foods Inc (CAG.N) and Micron Technology Inc (MU.N).

MODEST GROWTH IN GDP AND HOME SALES

The government’s final look at third-quarter gross domestic product, due on Tuesday, is expected to show the U.S. economy grew at an annual rate of 2.8 percent in the stretch from July through September, in line with the previous reading.

Existing home sales for November also will be released on Tuesday; economists forecast sales will rise to a seasonally adjusted annual pace of 6.25 million units from 6.10 million in October.

On Wednesday, new home sales for November are expected to edge up to a seasonally adjusted annual rate of 440,000 units from 430,000 in October.

EYES ON IRAQ AND IRAN

A potential headwind for markets could be any increase in tensions between Iraq and Iran. On Friday, Iraq demanded that Iran immediately withdraw its soldiers from a disputed oilfield on the two countries’ border, but Iran denied any incursion.

But on Sunday, officials from both countries said Iranian troops have withdrawn partly from a disputed oil area claimed by both Tehran and Baghdad, possibly defusing a border feud straining the two nations’ delicate ties.

While the stock market showed no reaction on Friday, an escalation in hostility between Iraq and Iran could push investors out of stocks and into safe-haven assets such as the dollar or U.S. Treasury bonds.

“Any acceleration of aggression, or potential disruption in the supply of oil would have a more meaningful impact on investor sentiment,” Creatura said.

U.S. crude oil futures settled on Friday at $73.36 a barrel, up 71 cents, or almost 1 percent, with Middle Eastern tensions supporting oil prices.

The last few years have seen Exchange Traded Funds or ETFs, become exceptionally popular, especially in the United States. This popularity is well justified as ETFs offer an easy way of gaining exposure to stock groups and commodities.

Broad market and industry group based funds attract the most volume, but there are also ETFs on currencies, a wide range of other commodities and even short positions. This makes matching an index like the S&P 500, hedging currency risk or profiting from a falling market far more accessible - and cheaper - for the average investor than ever before.

A good example is the iShares FTSE/Xinhua China ETF. This matches the movement of the top 25 Chinese shares and can be traded in the US via the symbol FXI (NYSE) or in Australia through IZZ (ASX). The FXI is currently up 97.5% from its March low, outperforming the SPX which is up 66%.

US FTSE China ETF vs. S&P 500

click to enlarge

However, as with any financial instrument or investment, it is vital that investors do their homework before diving in. In Australia, one consideration for ETFs is dividends and more importantly, if the dividends are franked. For those unfamiliar with franking credits, the ASX website defines a fully franked dividend as:

“Dividend paid by a company out of profits on which the company has already paid tax. The investor is entitled to an imputation credit, or reduction in the amount of income tax that must be paid, up to the amount of tax already paid by the company.” www.asx.com.au

Franking credits are part of the dividend imputation system and both avoid the double taxation of company profits and offer a tax incentive to invest in shares.

Checking the specifications of the IZZ (ASX) ETF reveals that the dividends are not franked. While not a show stopper, this could make a significant difference at tax time and therefore should be understood in advance.

Of more concern is the way that some ETFs are calculated. Take the Ultra-short Oil & Gas ETF (DUG:NYSE). As the word ‘short’ suggests, the DUG is designed to move inverse to the Oil & Gas sector. Not only that, ‘ultra’ means it will move twice the distance in the opposite direction, or will it?

The chart below shows the Oil & Gas Index (DJUSEN: CBOT) compared to the DXD. Note that in 2008, while the DJUSEN made a lower low in November than in October, the ‘ultra-short’ DUG failed to make a higher high.

Ultra-Short Oil & Gas ETF vs. Oil & Gas Sector Index

click to enlarge

This can be taken a step further by introducing the Ultra (long) Oil & Gas ETF (DIG:NYSE) which is designed to give double the long exposure. Now, one would quite naturally expect that if you bought both the DIG and DUG on the same day, you would be perfectly hedged (obviously this would not be done in practice) and therefore whatever loss was made on one leg would be balanced out by an equal sized profit on the other leg. Not the case! Buying both on October 10th 2008 could have resulted in a loss on both positions as the chart shows.

Ultra Oil & Gas vs. Ultra-short Oil & Gas

click to enlarge

Essentially, the reason for this abnormality is the method used to calculate the movement of ETFs. So the simple solution is always to check the performance of an ETF to see what it is based on. This can be done easily in products like ProfitSource via the overlay feature used in the charts above. One instrument can even be inverted when comparing short ETFs.

There are also indicators like Relative Strength Comparison that will compare the performance of one symbol to another. If a symbol is exactly correlated to the comparison symbol, the RSC will have a value of 100. The chart below illustrates just how well correlated the SPY (S&P 500) ETF is to the S&P 500 Index.

S&P 500 ETF vs. S&P 500 Index

click to enlarge

An ETF with the kind of correlation above, makes for a very simple way to match the performance of an index – the goal of many fund managers – at a low cost when compared to other alternatives.

All-in-all, exchange traded funds are very useful. However, like anything, it is important to understand what you are trading.

Oscillating around can also mean being thrown around. I would like to add a little more to the subject of the oscillator which I touched on last week. I noted my concern then about when the oscillator goes too far below zero. I happened across an example this week which illustrates the point and the risks associated with buying stocks when the oscillator goes too far below zero.

Let’s turn to REX a stock I had been watching several days ago and look at the chart as it was back on November 3:

click to enlarge

We saw a sharp fall in the oscillator and this was a signal to beware. Let’s look a few days forward:

click to enlarge

The stock fell 6% on November 25 – but the horse had already bolted – the oscillator was already out of control. Oscillators that fall so low are indicating the stock will struggle to recover.

Go one more day forward:

The stock at the time of writing had recovered the 6% but the Elliott count changed with this new data:

click to enlarge

Meaning the 6% recovery had now become maybe a dead cat bounce.

Not the stuff to dine out on but at the same time interesting formations.

That’s compared to paper or electronic money which isn’t rare, it is ‘perishable’ in that it can be erased by the click of a button, but it’s just as easy to produce more of it, also by the click of a button.

The one thing paper money has in common with gold is that it’s relatively easy to move it around. Although at today’s prices an ounce of gold would take up less space in your wallet than twelve $100 notes.

So arguably, gold is easier to move than paper money.

But that doesn’t really help to explain whether gold can keep going up or not.

If we look at a longer term view of the gold price, you can see that gold has had plenty of corrections over the last thirty-odd years:

In fact, following the last peak nearly thirty years ago, gold went into a long term bear market. That was until Alan Greenspan started the disastrous policy of keeping interest rates artificially low at 1% during the early 2000’s.

Since then - just as then UK chancellor of the exchequer Gordon Brown decided to sell half the UKs gold stock - gold has barely looked back.

In US dollar terms it was trading below USD$300 an ounce in 2000 (Gordon Brown’s selling price!), compared to USD$1,164 today.

In percentage terms that’s an increase of 288%.

If we were talking about the housing market or the stock market we’d quite rightly say that following such a gain it was a bubble waiting to be popped.

In that case how is it possible for gold to buck that?

Look, let me state for the record that we don’t consider our self to be a diehard gold bug. But even so, do you know what, you don’t have to be a gold bug to see that the case for gold is as compelling today at USD$1,164 an ounce as it was at USD$300 an ounce.

All you need to do is accept that gold has certain benefits when compared to paper or electronic money. Those are the benefits I highlighted above.

If you accept those benefits are valid then all you need to do is look at the policy actions of certain central banks to see how they are eroding and even destroying any remaining value there is in paper money.

CIT files for Chapter 11 bankruptcy protection

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After struggling for months to avert bankruptcy, lender CIT Group has filed for Chapter 11 protection in an attempt to restructure its debt while trying to keep badly needed loans flowing to thousands of mid-sized and small businesses.

CIT made the filing in New York bankruptcy court Sunday, after a debt-exchange offer to bondholders failed. CIT said in a statement that its bondholders overwhelmingly opted for a prepackaged reorganization plan which will reduce total debt by $10 billion while allowing the company to continue to do business.

The Chapter 11 filing is one of the biggest in U.S. corporate history, following Lehman Brothers, Washington Mutual, WorldCom and General Motors. CIT’s bankruptcy filing shows $71 billion in finance and leasing assets against total debt of $64.9 billion.

A prepackaged bankruptcy, which has the support of major bondholders, speeds up the process of restructuring CIT’s debt and could allow it to exit court protection by the end of the year. In addition to reducing its debt, CIT said the plan cuts cash needs over the next three years, which should help it return to profitability more quickly.

“The decision to proceed with our plan of reorganization will allow CIT to continue to provide funding to our small business and middle market customers, two sectors that remain vitally important to the U.S. economy,” said Jeffrey M. Peek, chairman and CEO. Peek has said he plans to step down at the end of the year.

CIT’s move will wipe out current holders of its common and preferred stock. That means the U.S. government will likely lose the $2.3 billion it sunk into CIT last year in return for preferred shares to prop up the ailing company. The government could have lost billions more, however, had it not declined to hand over more aid to the company earlier this year.

Treasury Department spokesman Andrew Williams said the government will be closely monitoring the bankruptcy proceedings, but acknowledged that “recovery to preferred and common equityholders will be minimal.”

Common stockholders set to lose their investment include FMR LLC of Boston with a 9.9 percent stake in CIT and San Diego-based Brandes Investment Partners LP with a 9.7 percent equity position, according to CIT’s filing.

CIT has been trying to fend off disaster for several months and narrowly avoided collapse in July. It has struggled to find funding as sources it previously relied on, such as short-term debt, evaporated during the credit crisis.

The company received $4.5 billion in credit from its own lenders and bondholders last week, reportedly made a deal with Goldman Sachs to lower debt payments, and negotiated a $1 billion line of credit from billionaire investor and bondholder Carl Icahn. But the company failed to convince bondholders to support a debt-exchange offer, a step that would have trimmed at least $5.7 billion from its debt burden and given CIT more time to pay off what it owes.

Analysts warned that the bankruptcy could add to the uncertainty around loans for the nation’s small businesses, especially retailers, which make up a significant portion of CIT’s clients and are already struggling with tight credit markets.

CIT is the financier for about 2,000 vendors that supply merchandise to more than 300,000 stores, many of which are gearing up for the critical holiday shopping season. They rely on the lender to cover costs ranging from paying for orders to making payroll. Any disruption caused by bankruptcy could wreak havoc on their operations, Joe Alouf, a partner with Eaglepoint Advisors, a crisis management company that is partly owned by Kurt Salmon Associates.

“CIT is the 600-pound gorilla in the industry,” Alouf said.

But CIT has already pulled back sharply on its lending to businesses as it tried to preserve cash. According to its most recent quarterly earnings report, the company originated just $4.4 billion worth of new business during the first six months of 2009 compared to $11.3 billion in the first half of 2008.

CIT said Sunday the bankruptcy filing is only for the holding company, and won’t affect its operating subsidiaries, such as Utah-based CIT Bank. CIT has filed a number of first-day motions to allow it to continue operations, including requests to keep paying wages and other employee benefits and to pay its vendors and certain other creditors in full.

The company has retained Evercore Partners and FTI Consulting as its financial advisers and Skadden, Arps, Slate, Meagher & Flom LLP as legal counsel in connection with the restructuring plan and Chapter 11 cases.

Houlihan Lokey Howard & Zukin Capital Inc. serves as financial adviser, and Paul, Weiss, Rifkind, Wharton & Garrison LLP serves as legal counsel to the bondholders’ committee.

LOS ANGELES - U.S. Bancorp on Friday acquired nine banks held by FBOP Corp, picking up $18.4 billion in assets after regulators seized a major Los Angeles lender and eight other banks in the latest failures to emerge from the financial crisis.

Among the banks Minneapolis-based U.S. Bancorp acquired was Los Angeles-based California National Bank, taken over by regulators on Friday in what the Los Angeles Times called the fourth-largest U.S. bank failure this year.

Bank failures in 2009 hit 106 last week, their highest annual level since 1992, with more expected to come. The largest institution to fail in the current financial crisis was Washington Mutual, which boasted $307 billion in assets when it was shuttered in September 2008.

Visibly worried employees lined up to file into Cal National’s head offices in the heart of a deserted downtown Los Angeles on a chilly Friday evening, where they had their employers’ fate explained to them, regulators said.

“We’re getting ready to turn everything over to U.S. Bank,” said Roberta Valdez, a spokeswoman for the Federal Deposit Insurance Corp, which helped supervise the transfer of FBOP’s assets. “They will continue to operate as normal in the interim,” she added, referring to lenders acquired from FBOP.

U.S. Bancorp — which has been buying up distressed assets this year — is picking up eight other lenders once owned by FBOP, a private Illinois group with over $18 billion in assets that owns banks in Texas, Illinois, Arizona and California.

Cal National is FBOP’s largest bank by branches. Others that will now go under the U.S. Bancorp umbrella included BankUSA, Citizens National Bank, Madisonville State Bank, North Houston Bank, Pacific National Bank, Park National Bank, San Diego National Bank, and the Community Bank of Lemont.

“This transaction is consistent with the growth strategy that we have outlined many times in the past, which includes enhancing our existing franchise through low-risk, in-market acquisitions,” said Rick Hartnack, vice chairman of consumer banking for U.S. Bancorp.

“This transaction adds scale to our current California, Illinois and Arizona footprints.”

NEXT BIG HEADACHE

In the “near future,” all nine lenders’ branches will be re-branded U.S. Bank, which is the California-focused unit of U.S. Bancorp’s that operates a network of more than 770 branches across Illinois, Arizona and California.

U.S. Bancorp did not specify what would happen to the new employees it inherits.

Cal National operates 68 branches across Southern California with more than $7 billion in assets. As of June 30, the lender maintained five times as much foreclosed property on its books and twice as many non-current loans as it had a year earlier, according to the Los Angeles Times, which first reported news of its evening takeover on Friday.

Cal National lost about $500 million on heavy investments in Fannie Mae and Freddie Mac preferred shares, the newspaper added, referring to securities rendered nearly worthless by the government takeover of the mortgage firms last year.

A bank official who answered the main number at Cal National’s headquarters said they could not talk at the time.

More lenders are expected to go under this year as the industry tries to get a handle on commercial real estate loans that will continue to worsen, as more strip malls go vacant and residential developments stall.

Banks held about $1.7 trillion in commercial real estate loans at the end of September, according to Federal Reserve data, or about 15 percent of their total assets. But to the extent these loans weaken, small banks are likely to be hit the hardest because larger banks were better diversified.

Banks that analysts say could risk big losses include Salt Lake City’s Zions Bancorp, Columbus, Georgia’s Synovus Financial Corp and Dallas-based Comerica Inc.

The Wall Street Journal had reported earlier this month that U.S. Bancorp was conducting due diligence on FBOP.

Before FBOP, U.S. Bancorp bought Downey Savings of Newport Beach and PFF Bank & Trust of Pomona when those thrifts failed last November, the newspaper said. Just this month, U.S. Bancorp bought 20 Nevada branches from BB&T Corp., which had acquired them as part of its deal to buy Colonial BancGroup Inc, it added.

WASHINGTON (AFP) - – The United States rebounded from recession in the third quarter, posting its strongest economic growth in two years as government stimulus spurred consumer spending, official data showed Thursday.

After four negative quarters, the world’s largest economy grew at a seasonally adjusted 3.5 percent annual rate in the July-September period from the second quarter, the Commerce Department said.

The increase was the first since the second quarter of 2008 and the strongest expansion since the 2007 third quarter, when a US subprime mortgage crisis triggered a global financial crisis that hammered the world economy.

The expansion followed an unrevised 0.7 percent decline in the second quarter.

The department’s first estimate of third-quarter gross domestic product (GDP), a broad measure of the country’s output of goods and services, was slightly higher than the 3.2 percent reading expected by most analysts.

President Barack Obama welcomed the data as “an affirmation that this recession is abating and the steps weve taken have made a difference.”

But, he warned: “We have a long way to go to fully restore our economy, and recover from what has been the longest and deepest downturn since the Great Depression.”

“The benchmark I use to measure the strength of our economy is not just whether our GDP is growing, but whether we are creating jobs, whether families are having an easier time paying their bills, whether our businesses are hiring and doing well.”

While a recession is widely regarded as ended by one quarter of economic growth, in the United States the economy will not be officially out of recession until it has been declared by the National Bureau of Economic Research.

Unemployment remains a key hurdle to sustained recovery. The jobless rate rose to a new 26-year high of 9.8 percent in September and is expected to hit double digits. Since the official start of recession in December 2007, the number of unemployed has climbed by 7.6 million to 15.1 million.

The Labor Department reported Thursday that new weekly claims for unemployment benefits fell slightly.

“The recession is over, but don’t be fooled by today’s number — the underlying rate of recovery is weaker,” said Nariman Behravesh, chief economist at IHS Global Insight.

Behravesh said that underlying growth was closer to 2.0 percent and predicted momentum would only pick up in the second half of next year as consumers and businesses grow more confident.

After shrinking a sharp 6.4 percent in the first quarter, the world’s largest economy has been on life support from the federal 787-billion-dollar emergency stimulus and other support measures.

The third-quarter rebound was led by consumer spending, which accounts for two-thirds of US economic activity and added 2.36 percentage points to GDP growth.

Consumer spending surged 3.4 percent after a 0.9 percent drop in the second quarter, a rise the department said “largely reflected” auto purchases under the government’s popular “cash-for-clunkers” program in July and August.

Dean Baker, co-director of the Center for Economic and Policy Research, noted that, excluding the auto sector, consumption grew at a 1.0 percent annual rate.

“With disposable income falling due to continued job losses and declining hourly wages, and the reversal of the surge in car sales, consumption growth will almost certainly be negative in the fourth quarter,” Baker said.

Other leading drivers of third-quarter growth were business inventories and home building.

The core inflation rate — which strips out volatile food and energy prices — fell to 1.4 percent from 2.0 percent, indicating inflationary pressures remain tame amid economic weakness.

The Federal Reserve, which keeps a close eye on the reading, is widely expected to leave its key interest rate unchanged at nearly zero when policymakers meet on November 3-4.

“If we do indeed get a second consecutive quarter of good growth, there will be a lot of pressure on the Fed to start raising rates,” said Joel Naroff of Naroff Economic Advisors.

“Indeed, I wouldnt be surprised if the markets start pricing that into bond yields during the rest of the year.”

Why Shorting US bonds Could be Your Best Trade

Yesterday’s The Independent newspaper in the UK reported a number of nations are planning to dump the US dollar to price crude oil. You shouldn’t underestimate the importance of this news.

It would be the ultimate snub to America. And it would jeopardize their plans to print their way out of trouble.

Should it happen, it would define worldwide markets and set the overall direction for years to come.

Naturally, you might expect me to look at the crude oil chart. But no. The place to look is the US bond market. Because without all of those recycled ‘petrodollars,’ where would the demand come from for the mountain of debt the US is unleashing on the world?

Last night saw the largest ever issue of 3-year bonds in the United States. It was USD$39 billion worth. And that’s only part of a total USD$162 billion of short and long term debt to be sold this week!

So, is the world finally tired of accepting pieces of paper printed by the Fed for their assets? And if so what does that mean for the markets?

These are big questions and ones that need to be understood so you can align your portfolio to the forces that will shape the markets for years to come.

If oil dollars are no longer recycled into US bonds, one of the last remaining legs will be pulled out from under the US bond market. And it’s at a time when they can least afford it. This will have a knock on effect to the pricing of all US debt, including housing mortgages which are priced off longer dated bonds.

If you look at the monthly chart for US 10 year bonds, it’s quite incredible…

Click to enlarge

If you’re a trader with access to trading US bonds, an easy trading idea is to short them now. Just put in a stop above 122.

An alternative trade is to buy long dated out of the money puts (for example 114 strike), and then hedge your position once it gets there.

Either way, there’s money to be made on the downside here.

This chart has all the moons aligned at the moment so it’s well worth keeping your eye on it. I believe it will give you an insight into the future stock market direction.

But take a look at the chart again. Notice the old major high from 2003 of about 120. We had a major false break of that level in 2008 with the blow off rally to 129. The failure of that rally saw a pullback to the midpoint of the range between 108 to 120 in June this year. That’s around the 114 level.

Since then we’ve had a rally in an ABC formation to retest the top edge of the range (what I like to call the distribution of price, or just distribution) at 120. This also lines up perfectly with the downtrend from the 129 high.

An overlap at “a” will signal the probability of a failure back inside the 108-120 distribution with an initial target back to the midpoint at 114. However, a failure there could see a quick move back to the other edge of the distribution at 108 and from there the whole bond complex would look very weak indeed.

If you’re a trader that believes in head and shoulders formations (I’m a bit of a skeptic to be honest) notice how the last two years price action is shaping up as a perfect head and shoulders.

News such as this is the necessary catalyst to a reassessment of US bond demand and has the ability to spook investor appetite. All investors should understand the consequences of this news and be ready to act if it proves true.

HONG KONG (Dow Jones)–Interest in Asian markets revived in September, with some attention shifting to the region’s bonds from stocks, according to results of Dow Jones’ monthly survey of fund managers.

Fund managers moved to an “overweight” position on Asian ex-Japan bonds during the month, up from “slightly overweight” in August. Managers maintained a “slightly overweight” stance on Asia ex-Japan stocks. Weightings reflect managers’ portfolio composition compared with benchmark indexes.

Fund flows in September echoed the enthusiasm for Asian markets. Asian funds, particularly bond funds, saw very strong inflows during the month. Global and emerging markets bond funds as well as global equity funds posted their biggest inflows year-to-date in the week ending Sept. 17, according to fund flow tracker EPFR Global.

Funds with Asian mandates were hit by some redemptions this past week amid new US-Chinese trade tensions, EPFR said. With the U.S. imposing fresh levies on Chinese tire exports and China threatening to retaliate, China equity funds saw US$477 million in redemptions last week as investors rotated Asian exposure to India and Korea.

The big run-up in Asian stock markets in recent months also gave investors some pause and made bonds look more attractive by comparison. Invesco, which has US$413.9 billion in assets under management worldwide, noted that stock valuations globally have returned to long-term average “not expensive but no longer cheap.”

A big question for fund managers is whether or not earnings at Asian companies will continue to rise. Those that are optimistic about global recovery or the ability for Asian economies to “decouple” from the U.S. or Europe see room for more earnings growth.

“Valuations have risen, but we are expecting earnings to see further upwards revisions,” said Simon Godfrey, investment specialist at Fortis Investments in Hong Kong, who projects better year-on-year comparisons starting in the fourth quarter.

But others, such as Standard Life Investments, are taking a more cautious approach, saying that “long-term valuations remain a concern.”

Within the region, Indonesian stocks become the top favorite during the month. Fund managers became more “overweight” position on Indonesian stocks in August.

“The economic environment and corporate earnings in Indonesia remained strong and we think it can weather the economic downturn fairly well,” said Invesco, which remains comfortable with the country’s banking sector.

Indonesia’s Jakarta Composite Index, or JCIindex, is up 4.3% in the last month and up more than 82% year to date.

“We like Indonesia very much - especially the financial sector as the banks are slow to cut lending rates despite the strong monetary easing,” Godfrey said, adding that the firm likes materials companies which are benefitting from growing demand China and India.

In other parts of Asia, Chinese and Indian stocks continued to be favorites.

Chinese authorities sparked some alarm by announcing plans to curb overcapacity and redundant construction in major industrial sectors, But Invesco said it was not alarmed by the plans, seeing them as “supply side adjustments” rather than a move to tighten policies.

Encouraged, the firm said it selectively increased exposure in retail clothing and goods, technology as well as other consumer plays.

India has been favored for being relatively insulated from the global economic downturn and for its strong domestic growth story.

Each month, Dow Jones Newswires surveys fund managers on portfolio weighting recommendations for the succeeding months, with most looking at a 12-month horizon. This latest survey was taken over the past week. The respondents for this month’s survey were Aberdeen Asset Management, Credit Agricole Asset Management, Fortis Investments, Invesco, J.P. Morgan Asset Management, Prudential Asset Management, Schroder Investment Management and Standard Life Investments.

For the survey, each participant was asked to assign recommendations to each asset class. The weightings from each fund manager were then averaged: 0 is neutral, up to +0.5 is slightly overweight, above +0.5 to +1 is overweight, above +1 is very overweight. Meanwhile, 0 to -0.5 is slightly underweight, below -0.5 to -1 is underweight, below -1 is very underweight.

 OVERALL GLOBAL WEIGHTINGS
               Sept09  Aug     July    June   May    April
Cash           -0.50   -0.50    -0.50   -0.25   0     +0.25
Bonds          +0.25   +0.50    +0.25   +0.50  +0.50  +0.50
Equities       +0.50   +0.50    +0.50    0      0      0
Commodities    +0.50   +0.25    +0.25   +0.25  +0.25  -0.50 

GLOBAL BONDS    Sept09  Aug     July   June   May    April
Asia ex-Japan   +0.50  +0.25    +0.25  +0.50  +0.50  +0.50
Japan           -0.25  -0.25     0     -0.25  -0.25  -0.50
North America    0     +0.25     0     +0.25   0     -0.50
Europe           0     +0.25    +0.25  +0.25   0     -0.25
Non-Asian       +0.50  +0.50    +0.75  +0.50  +0.50  +0.25
emerging mkts 

GLOBAL EQUITIES   Sept09  Aug     July   June   May   April
Asia ex-Japan     +0.25  +0.25   +0.50   0     +0.25  +0.50
Japan             -0.25  -0.25    0     -0.50  -0.25  -0.25
North America     -0.25   0      -0.25   0     -0.25   0
Europe             0      0      -0.25  +0.25   0     -0.25
Non-Asian         +0.50  +0.50   +0.50  +0.25  +0.25  +0.25
emerging mkts 

ASIAN EQUITIES    Sept09   Aug    July   June   May   April
Japan              0       0     -0.25  -0.50  -0.25  -0.25
China             +0.50   +0.50  +0.75  +0.50  +0.50  +0.50
Hong Kong         +0.25   +0.25  +0.50   0     +0.25  +0.50
Taiwan            +0.25   -0.25  -0.25  -0.50  -0.25  -0.25
South Korea        0      -0.25   0     -0.25   0     -0.25
Singapore         -0.25   -0.25   0      0     -0.25   0
Indonesia         +0.75   +0.50  +0.50  +0.50  +0.50  +0.25
Philippines       -0.25    0      0      0     -0.25   0
Thailand          +0.25   +0.25   0      0      0      0
Malaysia          -0.25   -0.50  -0.75  -0.50  -0.50  -0.50
Australia         +0.50   -0.75  -0.75  -0.25  -0.25  -0.25
New Zealand       -0.50   -0.50  -0.50  -0.75  -0.75  -0.50
India             +0.50   +0.25  +0.50  +0.75  +0.75  +0.25

These are the securities directly issued by the US Government which have the longest maturity (30years). The contracts are not quoted with decimals but with fractions. For instance, the prices soared during 2 months last year (November and December 2008, between points A and B on the chart) from 112 20/32 to 141 28/32.

Click to enlarge

As you know, bond prices move on the opposite direction of interest rates. In the real economy, there are of course other factors such as relative risk, expectations on degree of confidence that impact bond prices. But the surge in November and December last year corresponds to the time where the Fed smashed the interest rates to attempt boosting the economy.

In just 2 months, bond prices rose by 26%, an unusual volatility for those contracts. However they have corrected back to the initial point of this surge (point C). This new low just below 112 posted in June has created a “double bottom” pattern that is considered as a strong support zone. That’s why a new rebound was generated from point C. Currently the bonds are traded around above 119. This medium-term bullish trend is backed by an ascending support line that goes through higher lows posted during the last three months. This is the immediate support.

On the upside, the objective is the level of 123 16/32, which is “only” less than 4% higher than the current levels. This potential resistance (blue horizontal line) is a key support that has been successfully a high and a low level. It corresponds firstly to a peak posted one year ago in September 2008 (point D), then a new low (point E in late February 2009). It became a new high once again (point F) while prices were correcting strongly a few months ago.

Many indicators have recently turned bearish. Therefore a test of the current support is likely to last more. If this level holds, then a quick spike to 123 16/32 is probable. If it is cleared, the intermediary support around 115 would become the new target for the bears.

US recession over, but economy still weak: Bernanke

WASHINGTON (AFP) - - Federal Reserve chairman Ben Bernanke said Tuesday the US recession “is very likely over” technically but that the economy remains weak due to difficult credit conditions and high unemployment.

Bernanke, speaking at a Washington forum, said the economy is likely to show growth in the third quarter after a slump that began in late 2007 in his clearest comments to date indicating the economy has turned a corner.

“Even though from a technical perspective, the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time as many people will still find that their job security and their employment status is not what they wish it was,” he said in response to a question.

“So that’s a challenge for us and policymakers going forward.”

Bernanke was speaking at a Brookings Institution economic forum a year after the collapse of Lehman Brothers triggered a financial panic and deepened the recession.

A year later, Bernanke said that there is “agreement among the forecasting community at this point that we are in a recovery,” and that growth is occurring in the third quarter and will continue into 2010.

“But the general view of most forecasters is that the pace of growth in 2010 will be moderate, less than you might expect given the depth of the recession because of ongoing headwinds,” he said.

Bernanke said that activity outside the regulated banking system — the so-called shadow banking system — appeared to be reviving even though that sector may be less important than before the recession.

He said he saw “encouraging” signs in securitization — the repackaging of loans that are sold to investors — even in areas not supported by the Fed.

“I imagine that the shadow banking system, at least in the medium term, will not return to the size it was before,” he said.

“On the other hand, there are a lot of securitizations that have proved their viability — mostly plain-vanilla securitizations of various types, in consumer products, consumer lending, student loans, a variety of other things.

“We are seeing now — very encouraging, we’re seeing more activity taking place completely outside of the Fed’s program.”

Still, Bernanke noted that the tighter credit conditions will hurt growth and hurt job creation, thus impacting the overall economy for a time.

“The arithmetic is that unless the economy grows significantly faster than its longer-term growth rate, it’ll be relatively slow in creating jobs over and above those needed to employ people coming into the labor force, and therefore the unemployment rate would tend to come down quite slowly,” he said.

The US economy contracted at a pace of 1.0 percent in the second quarter after a hefty 6.4 percent decline in the first quarter.

But the unemployment rate rose in August to a 26-year high of 9.7 percent as 216,000 jobs were lost. Although the pace of job losses has slowed, many analysts say unemployment could top 10 percent even with a rebounding economy.

Separately, Treasury Secretary Timothy Geithner said that US economic recovery has not yet arrived but is on that way thanks to a range of government actions including some that were “offensive.”

“I would say there’s no recovery yet,” Geithner said in an interview with ABC television.

“We don’t have in place yet a real recovery. We define recovery, and the president will define recovery, as people back to work, people able to get a job again, businesses investing again. And we are not at the point where we can say that yet.”

Geithner said the crisis forced the government into a series of bailouts and other actions to limit the damage, which he said would help foster recovery.

“We got into this because we borrowed too much,” he said.

“We lived beyond our means both as a country — many businesses did it, many families did it, obviously the financial sector did that. But in a crisis, in a fire that was that powerful, the government had to do some deeply offensive things to help contain the damage.”

NEW YORK - Stocks rose on Monday as reports of more merger activity added to a string of recent deals, suggesting investors still see value in the market after its run-up of more than 50 percent since March.

Optimism about potential deals overshadowed concerns about trade friction between the United States and China after Washington imposed special duties on Chinese tire imports.

Shares of power company AES Corp <AES.N> rose 4.5 percent after a Wall Street Journal report that China’s sovereign wealth fund was in talks to take a stake in AES.

Sprint Nextel Corp <S.N> jumped 10.1 percent after a British newspaper reported Germany’s Deutsche Telekom AG <DTEGn.DE> was considering a bid for its U.S. rival.

“The M&A activity is definitely starting to heat up. sparked interest across the whole utility sector,” said Owen Fitzpatrick, head of U.S. Equity Group at Deutsche Bank Private Wealth Management, in New York.

Analysts say M&A activity could help the market stay on its recent uptrend. The benchmark Standard & Poor’s 500 index has gained 55 percent since hitting 12-year lows in early March.

U.S. President Barack Obama, speaking in New York one year after Lehman Brothers’ collapse sent world markets into a tailspin, called on financial firms not to fight regulatory reform, but there was little market reaction.

The Dow Jones industrial average <.DJI> ended up 21.39 points, or 0.22 percent, at 9,626.80. The Standard & Poor’s 500 Index <.SPX> was up 6.61 points, or 0.63 percent, at 1,049.34. The Nasdaq Composite Index <.IXIC> finished 10.88 points higher, or 0.52 percent, at 2,091.78.

Banks, which benefit from M&A activity, were among top gainers as well, with shares of JPMorgan Chase & Co <JPM.N> up 2.9 percent at $43.75 and leading gains on the Dow.

In other merger news, Cadbury Plc <CBRY.L> reiterated its stance on a takeover bid from Kraft Foods Inc <KFT.N> over the weekend as Cadbury’s chairman, Roger Carr, said it was an “unappealing prospect” being absorbed into Kraft’s low-growth, conglomerate business model.

Kraft, which went public last week with a bid for the British confectioner, rose 0.04 percent to $26.11.

Shares of U.S. tire makers also rose, including Goodyear Tire & Rubber Co <GT.N> up 3 percent to $17.78 and Cooper Tire & Rubber Co <CTB.N> up 7.1 percent to $15.60.

But analysts said the trade decision by Obama could open the door to a host of trade complaints against Chinese products, creating tensions as Western nations seek support from the world’s third-largest economy at G20 meetings later this month.

China’s commerce ministry said Sunday it launched an anti-dumping investigation into imports of U.S. chicken products and automotive exporters.

“Although on the surface it could lead to something serious, I think both sides, and certainly China, realize that it not in their best interest to really escalate this,” said Bruce Zaro, chief technical strategist at Delta Global Advisors in Boston.

Shares of AES ended at $14.79 while shares of Sprint closed at $4.15.

On the Nasdaq, shares of Dendreon Corp <DNDN.O> rose 15.1 percent to $27.43 after analysts said there was renewed speculation the company, which is developing a vaccine for prostate cancer, is a takeover target.

Other acquisitions or bids were announced last week in the communications and biotech sectors.

Volume was below average on the New York Stock Exchange, with 1.21 billion shares changing hands, below last year’s estimated daily average of 1.49 billion, while on the Nasdaq, about 2.17 billion shares traded, down from last year’s daily average of 2.28 billion.

Advancing stocks outnumbered declining ones on the NYSE by a ratio of 2 to 1, while advancers beat decliners on the Nasdaq by about 8 to 5.