I am writing this week’s edition of “Words” from New York as a cold Big Apple readies itself for the Christmas season (and tempts European tourists with dollar bargains). Irrespective of the fact that NYC was supposedly displaced by London as the financial capital of the world, it remains a fascinating hub for the investment fraternity and a seriously good adrenalin booster.

My meetings of the past two days are testimony of this. Included on the itinerary were: a discussion with friend Barry Ritholtz’s about his new stock-screening system, IQ Fusion; a visit to the headquarters of Minyanville, the very slick cyberspace financial community created by Todd Harrison and his team (I have recently started contributing editorial content to the ‘Ville.); a “happy hour” at the classic Bull & Bear bar at The Waldorf-Astoria where Fox Business Network’s Cody Willard was interviewing a number of investment luminaries, including Jeff Saut and Tony Dwyer; a unique “Holiday Festivus” BBQ in the heart of Manhattan in aid of Minyanville’s Ruby Peck Foundation for children’s education; and a superb viewing, together with business partner John Mauldin, of the Radio City Christmas Spectacular featuring The Rockettes.

Enough said of the good times in NYC. Let’s get back to another adrenalin booster – the business of reviewing the financial markets’ actions of the past week on the basis of economic statistics, a performance chart and some thought-provoking quotes from an array of market commentators.

Economy
Better-than-expected US productivity and jobs reports eased concerns that the world’s largest economy will fall into recession. Meanwhile the housing sector continues to weaken, thereby negatively affecting consumer sentiment. While the mixed economic data have most observers expecting an interest rate cut, there is a fair amount of doubt about whether the Fed Funds rate will be reduced by a quarter or half a percentage point at the FOMC’s meeting on Tuesday, December 11.

On Thursday the White House announced a “bail-out plan” to stem the wave of residential mortgage foreclosures in the US by offering many sub-prime borrowers burdened with adjustable-rate mortgages a five-year mortgage-rate freeze. This announcement was not universally praised as gleaned from Richard Russell’s reaction: “… all it will do is allow selected homeowners to hang on a while longer to their homes, but for most it will just delay the inevitable”.

In general, investors were hesitant to make large moves before next week’s policy-setting meeting.

WEEK’S ECONOMIC REPORTS
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Source: Gold Seeker Weekly Wrap-Up, December 7, 2007.

This week’s economic highlights include Pending Home Sales on Monday, Wholesale Inventories and an FOMC policy statement on Tuesday, Export and Import Prices, the Trade Balance, and the Treasury Budget on Wednesday, Retail Sales, PPI, Initial Jobless Claims, and Business Inventories on Thursday, and CPI, Industrial Production, and Capacity Utilization on Friday.

Markets
The performance chart obtained from the Wall Street Journal Online indicates how different global markets fared during the past week.

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Source: Wall Street Journal Online, December 2, 2007.

The US stock market indices rallied on the back of the Bush Administration’s “sub-prime rescue plan”, recording gains for the second week running. Europe also edged higher, helped by Wall Street and a good performance from interest-rate-sensitive stocks in the UK. The Nikkei 225 Average rose to a one-month high (notwithstanding disappointing GDP data), with the rest of Asia and other emerging markets also jumping on the bandwagon.

The Bank of England (BoE) cut interest rates by 25 basis points to 5.5% on Thursday, following a surprise quarter-point cut to 4.25% by the Bank of Canada on Tuesday.

Interest-rate differentials (factoring in a smaller-than-previously-expected Fed Funds rate cut) resulted in the British pound coming under pressure and the US dollar index edging up against a basket of currencies. Global bond markets also cottoned on to the less gloomy economic outlook, causing the first weekly increase in yields in a month.

The oil price was influenced during the week by OPEC’s decision on Wednesday not to increase its oil output, but it eventually edged lower on doubts that demand levels can support current prices, as well as reports of additional exploration for new deposits.

As far as other commodities were concerned, precious metals gained handsomely during the week, but industrial metals (-2.3%) came under renewed pressure.

Now for some words (and graphs) from the investment wise that will hopefully assist to make sense of the ups and downs of financial markets in the run-up to the Christmas holiday period.

Fox Business Network: “Happy Hour” interview with Jim Rogers
“A Bull in China” author Jim Rogers talks with Cody Willard and Rebecca Gomez of Fox Business Network about the state of the US financial markets, the role of the Federal Reserve and the growing Chinese economy. Click here for the video clip.

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Source: Fox Business Network, December 5, 2007

Wallstrip: Interview with Barry Ritholtz
Barry Ritholtz is described as follows by Howard Lindzon on Wallstrip: “He’s a big dude. He has big opinions. He thinks constantly about the Big Picture. He has some big new plans in stock research software. He waves his hands in a big way. He’s big into cigars, movies, music, blogging, linking …” Click here or on the picture below for Lindsay Campbell’s interview with Barry on how he sees the financial landscape.

Source: Wallstrip and YouTube, December 8, 2007.

Bloomberg: Bush’s subprime mortgage freeze stymies bond market
“President George W. Bush’s plan to freeze interest rates on some subprime mortgages may prove to be a cure that breeds another disease. ‘If the government goes in and changes contracts it will definitely have a chilling effect on the securitization of mortgages,’ said Milton Ezrati, senior economist and market strategist at Lord Abbett & Co. in Jersey City, New Jersey, which oversees $120 billion in assets. ‘When the government comes in and says you have contracted to have this arrangement and you can no longer have it, I think it opens the door for lawsuits.’

“Bush and Treasury Secretary Henry Paulson yesterday announced an agreement with lenders that will fix rates on some loans for five years. The deal will help borrowers who will fall behind once rates reset to higher levels through July 2010. The plan may force investors in the $6.3 trillion market for home-loan bonds, created by pooling loans and funneling interest payments to bondholders, to revalue their holdings.

“‘It could end up there’s less confidence in the viability in the bond markets and the mortgage markets going forward and it could lead to higher interest rates and higher mortgage rates for everybody,’ said Kenneth Hackel, managing director of fixed- income strategy at RBS Greenwich Capital Markets. Hackel said in an interview … that he has been ‘fielding a lot of calls’ from clients ‘pounding the tables and beating the drums.’”

Source: Caroline Salas and Jody Shenn, Bloomberg, December 7, 2007.

Richard Russell (Dow Theory Letters): President Bush’s housing plan
“The housing mess – they’re all looking to Washington for help and wondering whether ‘the big bailout’ is on its way. It isn’t. But consider this – mass foreclosures are not going to look pretty in an election year.

“The clueless politicians, as usual, want to do something. President Bush has a plan, he wants to freeze mortgage rates for the next five years! I don’t think this is legal. But since when has illegality stopped this administration. If Bush actually gets away with this, all it will do is allow selected home owners to hang on a while longer to their homes, but for most it will just delay the inevitable.”

Source: Dow Theory Letters, December 6, 2007.

DavidFuller (Fullermoney): Subprime rate five-year fix
“My initial impression is that the five-year fixed agreement will be highly controversial, not least with people who have been making their mortgage payments all along. However they will be assisted as lower short-term rates – current and pending – filter through the economy.

“The question is who pays for the subsidised mortgages? The firms which enticed unsuitable borrowers, if there is any moral justice to all this.

“I would not be surprised to see US short-term rates cut further than most people currently expect – sort of a Marshall Plan for homeowners, the housing sector and lenders – and stay lower for longer than generally forecast. If so, this would be far better for the US stock market than for bonds or the dollar over the next couple of years.”

Source: David Fuller, Fullermoney.com, December 6, 2007.

Financial Times: FedEx warns over economic slowdown
“Fred Smith, the chief executive of FedEx, the logistics giant, has warned that global growth will not be enough to counter a US slowdown, raising doubts over corporate America’s ability to export its way out of a sluggish domestic economy. The warning from Mr Smith, a respected business leader whose company is both a gauge and a beneficiary of globalisation, will deepen investor pessimism over the prospect that the world economy could ‘decouple’ and survive a US downturn unscathed.

“In an interview with the Financial Times … Mr Smith dismissed suggestions that the rapid pace of economic development in emerging markets would offset a US slowdown. ‘Growth elsewhere helps cushion the shock but nothing can displace a slowdown in the US,’ he said. ‘I don’t care how optimistic people are about China or anything else, [the US] is still 25 per cent of the world’s economic activity so when it slows down it is going to have an effect.’”

Asha Bangalore (Northern Trust): Employment report – headlines justify posture of hawks but details favor doves
“The hawks have the headlines of the employment report, the threat from higher inflation due to rising oil prices, and the new plan to relieve resets of subprime mortgages at higher rates to defend their position and hold the federal funds rate at 4.50%. The doves have the details of the employment report pointing to weakness in hiring on a trend basis, the continuing widening of credit market spreads (see Charts), rising foreclosures, increasing defaults on auto loans, declining consumer confidence, and the unsavory manifestations of the credit market crisis with the fund that was frozen in Florida as an example.

“A lively debate at the December 11 FOMC is nearly certain. Bernanke last week noted that the Federal Reserve ‘is following the evolution of financial conditions carefully, with particular attention to the question of how strains in financial markets might affect the broader economy.’ This statement with Kohn echoing similar concerns supports expectations of a lower federal funds rate on December 11. The compromise is likely to be lowering the federal funds rate 25 basis points to 4.25% and a 50 bps cut in the discount rate to 4.50%.”

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Source: Asha Bangalore, Northern Trust – Daily Global Commentary, December 7, 2007.

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Source: Asha Bangalore: Northern Trust – Daily Global Commentary, December 7, 2007.

Chart of the Day: US home price decline greatest since 1970
“The US real estate market continues to struggle. For some perspective, today’s top chart illustrates the US median price (adjusted for inflation) of a single-family home over the past 37 years while today’s bottom chart presents the annual percentage change in home prices (also adjusted for inflation). While the 1995 to 2005 rally in home prices was impressive, so to has been the following decline. In fact, the current decline is greater than any since 1970.”
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Source: Chart of the Day, December 7, 2007.

The Washington Post: It’s not 1929, but it’s the biggest mess since
“It was Charles Mackay, the 19th-century Scottish journalist, who observed that men go mad in herds but only come to their senses one by one.

“We are only at the beginning of the financial world coming to its senses after the bursting of the biggest credit bubble the world has seen. Everyone seems to acknowledge now that there will be lots of mortgage foreclosures and that house prices will fall nationally for the first time since the Great Depression. Some lenders and hedge funds have failed, while some banks have taken painful write-offs and fired executives. There’s even a growing recognition that a recession is over the horizon.

“But let me assure you, you ain’t seen nothing, yet.

“What’s important to understand is that, contrary to what you heard from President Bush yesterday, this isn’t just a mortgage or housing crisis. The financial giants that originated, packaged, rated and insured all those subprime mortgages were the same ones, run by the same executives, with the same fee incentives, using the same financial technologies and risk-management systems, who originated, packaged, rated and insured home-equity loans, commercial real estate loans, credit card loans and loans to finance corporate buyouts.

“It is highly unlikely that these organizations did a significantly better job with those other lines of business than they did with mortgages. But the extent of those misjudgments will be revealed only once the economy has slowed, as it surely will. And it is why the Federal Reserve is now willing to toss aside concerns about inflation, the dollar and bailing out Wall Street, and move aggressively to cut interest rates and pump additional funds directly into the banking system.

“This may not be 1929. But it’s a good bet that it’s way more serious than the junk bond crisis of 1987, the S&L crisis of 1990 or the bursting of the tech bubble in 2001.”

Source: Steven Pearlstein, The Washington Post, December 5, 2007.

MarketWatch: Serious housing downturn – Fed will have to be very aggressive
“’This is the most serious housing downturn since the Great Depression. It is very special, and we all missed it,’ said Mark Zandi, chief economist at Moody’s Economy.com at a forum on Monday.

“’The Fed will have to be very aggressive. The futures market is anticipating a 3.5% Fed funds target and I would agree with that,’ Zandi said.

Source: Greg Robb, MarketWatch, December 4, 2007.

David Fuller (Fullermoney): Central banks to use all policy pools at their disposal
“There is a growing and I believe now widespread perception that Western central banks are behind the curve of events. This is certainly my view, as stated daily … Consequently, to mitigate economic damage from the credit crisis of confidence and to underpin stock markets, they need to pump in more liquidity to offset that which has floated off to money heaven, via write-downs and trading losses.

“They also need to slash short-term rates and reassure everyone that they will use all policy tools at their disposal to mitigate downside risks for the economy. I believe the Fed and even the BoE is now moving in this direction, albeit grudgingly. We will soon know and I recommend 50 basis point cuts this month, followed by another 25 basis points in January, and more later on if necessary.”

Source: David Fuller, Fullermoney, December 4, 2007.

Bloomberg: US corporate profits are in a recession, and the entire economy may not be far behind.
“Slower sales and higher energy and labor costs are forcing companies from Bear Stearns to Pitney Bowes to reduce spending and hiring. Their efforts to keep earnings from eroding even further raise the risk that the economy, already weakened by the steepest housing slide since 1991, may shrink sometime next year.

“’The earnings recession has already arrived,’ says David Rosenberg, North America economist for Merrill Lynch in New York. ‘We are going to see an economic recession in ’08.’

“Corporate profits, as measured by the Commerce Department, fell at an annual rate of $19.3 billion in the third quarter from the second, as domestic earnings dropped by $41.2 billion. The drag from sagging US sales and huge writedowns offset robust earnings abroad, fueled by the weak US dollar. The fourth quarter may be an even bigger bust.

“’In the third quarter, the tide shifted, and for the worse,’ says Joseph Quinlan, chief market strategist for Bank of America Corp. in Charlotte, North Carolina. ‘The domestic-profits squeeze is in its early stages and will be severe enough to overwhelm strong foreign earnings.’

“Profits for the Standard & Poor’s 500 companies fell almost 25 percent on a per-share basis in the third quarter, the biggest year-over-year decline in almost five years. David Wyss, S&P’s chief economist, expects their earnings to fall as much as 30 percent in the fourth quarter as companies take more writedowns for bad investments. Excluding such extraordinary items, operating profits may fall as well, he says.

Source: Rich Miller, Bloomberg, December 3, 2007.

Richard Russell (Dow Theory Letters): Stock market strategies to follow at this point
“I’ll remind subscribers that rallies in bear markets can arrive suddenly and they can be violent. In fact, bear market rallies often look better than the real thing. Bear rallies often recover in a few days what it took the bear weeks or even months to accomplish on the downside.

“For my money, there are two intelligent strategies that one can follow at this point. Subscribers know that I’ve always advocated the compounding way. That means accumulating good quality, dividend-paying stocks – and buying this type of stock whether the market rallies or declines. Rallies increase the value of your portfolio. Declines present the opportunity to accumulate additional stocks at increasingly attractive prices. An essential part of the compounding process is that ALL dividends must be reinvested in dividend-paying stocks or even in bonds.

“For those who are unable to follow the compounding ‘road to riches,’ my advice now is to thin out your holdings. The idea is to have cash for the purpose of buying good stocks when the bear market hits bottom. Where or when will this bear market hit bottom? The answer is ‘blowin’ in the wind.’

“I have many subscribers who have been compounding good stocks and bonds over the years, some for decades. So far, I haven’t heard any complaints. Millionaire compounders may have complaints, but one of them is not a complaint about poverty.”

Source: Richard Russell, Dow Theory Letters, December 3 and 5, 2007.

John Hussman (Hussman Funds):
“As for stocks, I noted a couple of weeks ago (extending Jim Stack’s analysis) that in each instance that the market declined materially after successive discount rate cuts, S&P 500 earnings were down sharply a year later. Given that a large portion of S&P 500 profits are from financials, that profit margins in other industries are well above historical norms, and that profit margins have always collapsed during recessions, my impression is that S&P 500 earnings could easily fall by 40% over the next 18 months (investors who view this as impossible haven’t examined earnings history). This could become far worse than a 5% decline off the high, which is where the S&P 500 is now.

“It’s possible that investors could adopt a fresh willingness to speculate on the hopes and eventuality of a Fed rate cut (the economic news this week will determine the likelihood of 25 vs. 50). Regardless, given the economic backdrop, my impression is that any such speculation would be short-lived – as it has after other Fed cuts this year. For now, we don’t have evidence to support any amount of bullish speculation. Our own investment position doesn’t rely on a recession or a bear market, but those outcomes are increasingly probable rather than simply possible.

Source: John Hussman, Hussman Funds, December 4, 2007.

GaveKal: An equity market rebound in stall?
“… what is interesting has been the markets’ reactions to the Fed’s statements. In late October, the Fed comes out on the hawkish side and, as it does, the US$ tanks, oil and gold shoot up and bonds rally massively. In late November, the Fed changes course and start to sound more dovish and what happens? The US$ rallies (it is back to above parity against the CA$ and at 1.46 against the Euro) and oil and gold pull back. In other words, as the Fed turned dovish, oil failed to break US$100/bl, and the Euro failed to break 1.50/US$. So are oil and gold now behaving as stocks that “stop going up on good news”? It certainly feels that way. Consider the following:

US$-euro exchange rate: could one have imagined a worse possible news-flow for the US$? Not only did the Fed turn dovish last week but we also saw very weak US durable good orders, new and existing and home sales and jobless claims. In fact, almost every piece of economic data last week confirmed that the US economy is slowing hard; a fact driven home by the growing number of companies warning of weaker than expected sales (Sears, Dell …).

Oil: meanwhile the news on the energy front, from the 208 militants arrested in Saudi Arabia that were trying to blow up the country’s energy infrastructure, to the fire in the Enbridge pipeline, should have been bullish for a market currently perceived as massively tight. Yet, it was not and oil failed to break though the psychological US$100/bl mark.

“From our experience, news-flow tends to come in waves. For example, one may get for a few weeks a bunch of bullish energy news. But then, this reverses and gives way to a few weeks of bearish news. And with that in mind, one has to be very wary of assets that do not rise on the perceived ‘good news’, for when the ‘bad news’ hits, these tend to go down. With that in mind, we must say that we are very encouraged by the US$’s recent resilience in the face of bad news, and the fact that commodity prices are no longer rising in the face of good news. If these latest moves announce a greater US$ bull market, and a commodity market correction, then the Fed will have plenty of room to follow a more accommodative policy. We may be moving into a period where the combination of a dovish OPEC, a dovish Fed and a booming China triggers a solid equity market rebound.”

Source: Gavekal – Checking the Boxes, December 3, 2007.

BCA Research: Global versus domestic – a no longer a one horse race?
“It has paid nicely to hold a portfolio heavily skewed to global-oriented groups while underemphasizing domestic-geared industries. With the Fed in easing mode, it is appropriate to ask whether this positioning is still warranted? The short answer is yes, although relative returns won’t be as lopsided going forward.

“Our recent portfolio shifts have been to get less negative on select domestic industries (banks, consumer electronics retailers), and book profits in a few global industries (i.e. aerospace & defense, communications equipment), but we do not envision a more concerted or aggressive move into domestic groups. Exporters continue to do far better than producers reliant on domestic demand, as highlighted by the widening gap between the ISM export index and US consumer spending. The weak dollar and relatively better overseas demand are helping to support exporters in the face of a still sluggish domestic picture. Consequently, there are still gains to be had from holding a globally-skewed equity portfolio, but investors will need to become more selective.”

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Source: BCA Research, December 6, 2007.

Sakthi Siva (UBS Investment Research): Is Shanghai finally deflating?
“While investor focus is largely on US sub-prime and the risk of recession, we highlight that an equally important issue for Asian investors (particularly given most are still Overweight China) is the 20% fall in the Shanghai Composite from its October 16 high of 6093. The key question is whether this is the start of the Shanghai bubble finally deflating.

“Current 20% correction is the biggest correction this year
While there have already been 4 previous corrections this year ranging from 6% in August to 16% in May, we highlight that this 20% correction is the biggest and longest one. More significantly, this correction started from a historic PE of 75x – the level at which 3 of the last 4 bubbles burst. If we average the Nasdaq 100, Nasdaq Composite in 2000, Japan in the late 1980s and Shanghai in 2001, the average was also 75x.

“Taiwan bubble did get to 105x on historic PE
While the Taiwan bubble did get as high as 105x in 1990, 3 of the last 4 bubbles burst at 75x. If Shanghai follows the path of these bubbles, it could rally 10% near term before the final drop (see Chart below).

“But is Shanghai different because of strong EPS growth?
While some investors are convinced that Shanghai is different from these other bubbles because of strong EPS growth (40%), … some of this EPS growth is not operational and from stock market gains and all the other bubbles also enjoyed strong EPS growth (between 20% to 100%).”

Shanghai versus 3 other bubbles (Shanghai in 2001, Japan in 1980s, Nasdaq)

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Source: Sakthi Siva, UBS Investment Research, November 28, 2007.

David Fuller (Fullermoney): Financial covers – contrary indicators
“… when a financial story dominates the front page, the move discussed is probably over for at least the short term and one should take a contrary view. In contrast, the best investment stories are found buried in the back pages, or may not be on the radar at all.

This is not because the financial press is stupid – far from it. However it would not sell as many copies of newspapers and magazines without reflecting back the consensus view. In that roll the press can be more descriptive and emotional than analytical.

“And in case you missed their [The Economist’s] latest cover …”

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Source: David Fuller, Fullermoney, December 6, 2007.

Resource Investor: ECB sells off 42 tonnes of gold – will China start buying?
“The European Central Bank (ECB) announced it sold 42 metric tonnes of gold Friday (November 30, 2007). According to the World Gold Council, that accounts for almost half of the 103 tonnes sold off by central banks in the past two months. The sell-off supported gold’s recent correction, but gold could be in for a rally when emerging economies – specifically China and Russia – start stocking up on reserves …

“A move to increase gold holdings by China appears to be a question of when rather than if, because at the rate with which they are piling up forex reserves, the weighting of gold in China’s reserve portfolio is actually decreasing. When China starts buying, gold will begin the next leg up in its bull run.

“Russia has already begun buying gold, adding 310 000 ounces in October for a total reserve base of 1.5 million ounces.

Source: Jane Louis, Resource Investor, December 3, 2007.

Richard Russell (Dow Theory Letters): Gold is in a primary bull market – hold on to it
“Ironically, many of the long-time ‘gold-bugs’ have turned queasy or actually intermediate-term bearish on gold – and they have sold out their long-held gold positions. I’ve warned against just this kind of action. Gold is in a primary bull market. The gold bull will do everything possible to get you off his back. So far, he’s done an excellent job. I’m simply amazed at the number of confirmed, old-time ‘gold-bugs’ that are now clean of gold. They’re out and on the sideline, waiting for the ‘big correction.’ Maybe they’ll get it, but maybe they won’t. So good luck to all you clever gold traders.”

Source: Richard Russell, Dow Theory Letters, December 4, 2007.

Asha Bangalore (Northern Trust): Gold to benefit from demise of fiat currencies
“… the odds are that the Bank of England (BOE) will begin a series of policy interest rate cuts soon in an attempt to forestall the onset of a UK recession. And after the BOE cuts, the European Central Bank will likely cut its policy rate. The Bank of Japan won’t cut. It just won’t raise its policy rate as it had intended to several months ago. These actions by developed-world central banks might cushion the foreign exchange value of the US dollar.

“As the Chart illustrates further, central banks in the developed world are cutting their policy interests as their all-items inflation rates go vertical. So, while fiat currencies float along in tandem as their supplies increase in tandem, all of them are likely to sink in value relative to the genuine ‘reserve currency’ – gold. As developed-world central banks attempt to figuratively and literally ‘paper-over’ the credit market implosion by creating more central bank money, the price of gold in terms of these fiat currencies – not just the US dollar – is likely to keep on rising.”

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Source: Asha Bangalore, Northern Trust – Daily Global Commentary, December 4, 2007.

AJ Cilliers (Marketviews): Invest with the best of the Brits
“London has emerged as a strong contender for the title of Financial Capital of the World, so surely there must be a British fund manager or two to rival their American cousins across the Atlantic?

“Well, how about Anthony Bolton? Anthony who? We’ll forgive your ignorance, because he’s not exactly a household name, is he? Yet, as the UK’s Money Observer magazine points out, Bolton would probably be regarded as a national hero had he plied his trade in the U S of A. As it is Bolton is British-born and bred, and known only to an admiring City (as the Brits refer to their financial capital) and to a grateful band of investors …

“In case you think that Bolton has been something of a flash in the pan, you should know that he has been running Fidelity’s UK-based Special Situations fund since its inception in 1979. Over almost three decades he has achieved a mind-boggling average annual compound return of around 20%, compared to the market’s far more modest average of 7.7 percent.

“Based on his years of experience, where does Bolton see the markets going right now? He believes that, after a four-year bull market, we are more likely to have a full-blown bear market than a mere correction. The good news, though, is that the bull market will then resume its course. Britain’s best investor does warn, however, that the US mortgage crisis is not one that will be solved overnight. As he says, ‘When people buy a lot of assets they thought were riskless and then lose a bundle, it is a behaviour-changing event whose effects do not disappear really quickly.’

“If Bolton is right, and he has certainly called the markets correctly in the past, then it would appear that the picnic could be over for a while as the bears re-emerge from the woods. But, on the brighter side, this could also herald an era of opportunity – especially for old-fashioned, contrarian value investors.”

Source: Marketviews, AJ Cilliers, December 3, 2007.

Richard Blackden (Telegraph): FSA issues stark warning on mortgage defaults
“Britain’s top financial regulator has issued a stark warning that more than a million people may find it impossible to refinance their mortgages next year as the turmoil in financial markets deepens. Clive Briault, head of retail markets at the Financial Services Authority, told the Council of Mortgage Lenders today that ‘it would be prudent to assume that market conditions will remain very difficult for a sustained period.’

“The FSA estimates that 1.4 million homeowners have fixed-rate mortgages that expire in 2008, and Mr Briault said that many of these borrowers will ‘find it difficult (if not impossible) to refinance their mortgages on favourable terms, which will leave them facing a significantly higher rate on their borrowings, which may prove too much for them to afford.’

“The warning is the clearest indication of the mounting concern that the financial crisis, which began in the US sub-prime mortgage market, will prove a significant drag on the UK economic growth next year.”

Source: Richard Blackden, Telegraph, December 5, 2007.

MarketWatch: Bank of England cuts key rate quarter point to 5.5%
“The Bank of England cut its key interest rate by a quarter-point Thursday (November 6, 2007) to 5.5% after economic data in the previous couple of days showed a sharp slowdown in consumer confidence and in services sector growth. The rate cut is the first since August 2005 and comes after five hikes since August 2006.

“At the start of the month, most economists had been predicting the bank would hold off until January or February to lower rates. But those expectations shifted shortly ahead of the decision after data showed activity in the dominant services sector hit a four-year low, leaving the bank’s decision on a knife edge. Also likely weighing on the rate-setting committee’s decision was a sharp fall in consumer confidence and a 1.1% drop in house prices in November, according to the latest figures from HBOS division Halifax.

“At 2.1%, inflation stands only slightly above the government’s 2% target. But Governor Mervyn King warned a parliamentary committee at the end of November that rising energy prices could add upward pressure.

“New Star Asset Management’s Simon Ward was one of the economists already predicting a rate cut ahead of the most recent data. ‘Inflation indicators are still flashing warnings signals,’ Ward said in his blog ahead of the rate decision. ‘However, the Monetary Policy Committee has historically been prepared to ease policy despite unsatisfactory inflation indicators if activity data or financial market conditions have shown sufficient weakness,’ he added.

“The Bank of England’s cut came ahead of a rate decision by the European Central Bank, which is expected to keep rates unchanged. It also followed a surprise rate cut from Canada’s central bank earlier in the week.”

Source: Simon Kennedy, MarketWatch, December 6, 2007.

Bloomberg: Wall Street firms subpoenaed
“New York state prosecutors have sent subpoenas to several Wall Street firms seeking information related to the packaging and selling of debt tied to high-risk mortgages, people familiar with the matter say, the latest legal woe to hit the stressed industry.

The subpoenas, sent by the office of New York state’s attorney general, Andrew Cuomo, are broadly written and request information from firms including Merrill Lynch, Bear Stearns and Deutsche Bank AG, people familiar with the matter say.

Source: Kara Scannell, Bloomberg, December 4, 2007.

Reuters: Questions on Paulson’s role at Goldman
“Senate Banking Committee Chairman Chris Dodd said on Tuesday that US Treasury Secretary Henry Paulson needs to clear up questions about his former employer’s role in originating securities related to subprime mortgages. Dodd, who also is a contender for the 2008 Democratic presidential nomination, said he was concerned about issues raised in a New York Times column on December 2, about the activities of Goldman Sachs in reportedly selling collateralized mortgage obligations (CMOs) while Paulson led the Wall Street firm.

The article, by columnist Ben Stein, said Goldman also was selling the securities short. It said a Goldman Sachs spokesman told the newspaper it ‘routinely shorts the securities it underwrites and said that this is disclosed.’ Paulson headed Goldman Sachs until taking over Treasury last year.

“Dodd said he was concerned because it appeared that Goldman Sachs was ‘aggressively pushing subprime mortgages that they knew to be of concern while simultaneously shorting collateralized mortgage obligations.’ Dodd said Paulson should ‘address the concerns’ raised by the New York Times article and added a warning: ‘Failure to do so may be cause for a formal investigation.’”

Source: Glenn Somerville, Reuters, December 4, 2007.

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