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India, China Face Fallout as U.S. Cuts Interest Rates (Update1)
By Cherian Thomas and Nipa Piboontanasawat

Oct. 31 (Bloomberg) — India and China may be forced to further restrict bank lending as declining U.S. interest rates prompt investors to pump record cash into the world’s two fastest-growing economies.

Reserve Bank of India Governor Yaga Venugopal Reddy, who yesterday ordered lenders to set aside more deposits for a fourth time in 2007, said inflows from abroad accelerated after the Federal Reserve lowered rates on Sept. 18. Economists expect China to ask banks to hold more deposits as reserves for a ninth time this year, as the Fed prepares to cut rates again today.

The Fed’s actions threaten to spur inflation in India and China, where stocks have soared to records as a stampede of foreign money stokes share and property prices. Chinese and Indian shares have added $882 billion since the U.S. reduced rates, almost a third of the $3 trillion gain in their combined market capitalization this year.

“If the U.S. cuts rates, it will have Asia’s blood on its hands,” said Marc Faber, managing director of Hong Kong-based Marc Faber Ltd. and publisher of the Gloom, Boom & Doom Report. “The Fed is pursuing an easy monetary policy that is creating massive bubbles outside the U.S.”

The U.S. central bank, which cut its key federal funds rate by 50 basis points last month, may follow up with a further quarter-point reduction today to 4.5 percent to avoid a recession, according to the median forecast of 108 analysts.

Raising the Odds

Traders have raised the odds of a rate cut, with some even expecting a half-point reduction, after the U.S. housing slump cost the world’s largest financial institutions more than $30 billion in the third-quarter.

Merrill Lynch & Co., the world’s biggest brokerage, reported a $2.24 billion third-quarter loss, six times what the firm forecast three weeks earlier, as subprime mortgages, asset- backed bonds and loans went bad. Merrill yesterday ousted Stan O’Neal as chairman and chief executive officer.

As investors look for havens in Asia, the stock markets of China and India have more than doubled their market capitalization this year. Prices of some apartments in Mumbai, India’s financial capital, match those in Manhattan. In Shenzhen, the Chinese city which borders Hong Kong, average new home prices soared 18 percent in August.

“The People’s Bank of China will turn to raising banks’ reserve requirements again,” said Suan Teck Kin, an economist at United Overseas Bank Group in Singapore. “The U.S. rate cuts would widen the spread and make investing in China more attractive.”

Surging Growth

Foreign investors are flocking into China and India to also gain from their surging economic growth. China’s $2.7 trillion economy, which contributes a tenth of global growth, has expanded more than 11 percent for the past three quarters. India’s government expects its $906 billion economy to grow an annual 9 percent for the third straight year.

People’s Bank of China Governor Zhou Xiaochuan has raised the reserve limit for its lenders to 13 percent from 9 percent at the start of the year. The Reserve Bank of India yesterday lifted its cash reserve ratio for the fourth time this year to 7.50 percent, a 225 basis point increase from January.

“India is not done yet,” said Robert Prior-Wandesforde, senior Asian economist at HSBC Holdings Plc in Singapore, who expects a further 50 basis point increase in the cash reserve ratio. “The Reserve Bank is not going to be in for an easy ride over coming months.”

The proportion of analysts who expect India’s central bank to use the cash reserve ratio as a tool to drain excess cash from the economy and fight inflation is rising.

Foreign Investment

More than half of economists surveyed by Bloomberg News expect a further half-point rise. That compares with a tenth of economists who accurately predicted July’s increase and a third who got it right on yesterday’s decision.

Foreign funds bought a net $259.6 million of Indian shares yesterday even after the stock market regulator last week took steps to restrict share purchases by overseas investors.

These investors have bought $18.97 billion of stocks and bonds this year, double the record $9.46 billion in 2005. That’s driven India’s benchmark Sensitive index 45 percent higher this year to a record and the rupee by 12.6 percent.

“We expect capital inflows into India to remain strong, backed by robust economic growth, high interest rates and sound economic fundamentals,” said Sonal Varma, India economist at Lehman Brothers Securities Ltd. in Mumbai.

To fight inflation, Reddy has increased the central bank’s benchmark rate nine times since October 2004. Higher rates have widened the spread between two-year Indian government bonds and similar maturity U.S. Treasury notes to 3.82 percent from as low as 1.84 percent in June, Bloomberg data shows, attracting more investors from abroad.

“A more aggressive pace of rate cuts in the U.S. could pressure the Reserve Bank of India to ease early next year,” said Rajeev Malik, senior economist at JPMorgan Chase & Co. in Singapore. “That will avoid making its job more difficult owing to a widening differential between Indian and U.S. policy rates.”

India Rate Forecasts

---------------------------------------------------------------
                                                         Cash
                                            Reverse   Reserve
Company                         Repo Rate      Repo     Ratio
---------------------------------------------------------------
Anand Rathi Securities               7.75%     6.00%     8.00%
Calyon Hong Kong                     7.75%     6.00%     7.50%
CRISIL Ltd.                          7.75%     6.00%     8.00%
DBS Group                            7.75%     6.00%     8.00%
Edelweiss Securities                 7.75%     6.00%     7.50%
Forecast Singapore                   7.75%     6.00%     8.00%
ICICI Securities                     7.75%     6.00%     7.50%
ING Investment Mgmt.                 7.75%     6.00%     7.50%
ING Vysya Bank                       7.75%     6.00%     7.50%
JPMorgan Chase Bank                  7.75%     6.00%     8.00%
Kotak Mahindra Bank                  7.75%     6.00%     7.50%
Lehman Brothers                      7.75%     6.00%     8.00%
Yes Bank                             7.50%     5.75%     7.50%
RPG Foundation                       n/a       n/a       8.00%
HSBC Holdings                        n/a       n/a       8.00%
---------------------------------------------------------------

Note: * DBS expects 50bps hike in or by Jan. 2008.

** JP Morgan Chase expects a CRR hike of 50bps

if capital inflows remain strong.

# Lehman expects 50bps hike in Jan. 2008.

To contact the reporter on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net .

Last Updated: October 31, 2007 02:27 EDT http://www.bloomberg.com/apps/news?

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Bloomberg Orders City Hiring Freeze, Budget Cuts (Update3)
By Henry Goldman

Oct. 30 (Bloomberg) — New York Mayor Michael Bloomberg ordered agency heads to freeze all city hiring and cut their budgets this year and next, anticipating less revenue as Wall Street profits drop and real estate sales slow.

Department heads must trim spending by 2.5 percent in the current fiscal year ending June 30, and by 5 percent in fiscal 2009, city budget director Mark Page said in a memorandum sent out today. The reductions would save New York $500 million this year and $1 billion next year, Page said.

“If additional expenses are critical, you should reprioritize your existing budget,” Page told city agency heads. The memo came the same day state budget officials said securities firms’ weakening outlook will lower tax collections and widen a projected budget deficit.

New York faces less revenue after a booming real estate market and surging Wall Street profits resulted in surpluses in recent years that helped New York win its highest debt ratings. Page attributed the revenue decline to a slowing housing market, the lack of large commercial real estate sales, tight credit, hedge fund losses and a general slowing of the national economy.

“Since the budget was adopted in June, the major economic analysts have lowered their national growth forecasts for 2008 significantly,” said Page’s memorandum, which the mayor’s office distributed. “This slowing of the national economy and the local real estate market has a direct impact on the amount of the city’s tax receipts.”

The mayor ordered agency heads to cut all hiring except “for positions immediately impacting public health and safety,” Page said.

Widening Gaps

The budget director predicted a $2.7 billion budget shortfall in fiscal 2009, $1.15 billion more than he projected in July. For 2010, he predicts a $4.8 billion gap, $1.4 billion more than the administration had anticipated. The $6.5 billion deficit now expected for fiscal 2011 is $2.1 billion more than previously calculated.

State law requires New York City to balance its budget. In the event it doesn’t, the state has the power to take over city operations through its Financial Control Board, created during a fiscal crisis in the 1970s when the city almost went bankrupt.

Page instructed agency heads to return proposals to meet budget decrease targets by Nov. 19.

State Shortfall

New York state faces a budget gap of $4.3 billion next year, up from $3.6 billion estimated three months ago, as losses at financial firms such as Merrill Lynch & Co. and job cuts reduce tax revenue, the Division of Budget said today.

The state normally collects about 20 percent of its revenue from taxes on securities firms and employees. Budget planners reduced estimated personal tax collections by $500 million in the current year and $650 million in the year beginning April 1 because of recently announced investment bank losses.

The 2007 Wall Street bonus pool will be smaller than last year’s record $23.9 billion, though “the decline may be modest given the performance of large firms during the first half of the year,” according to a report released today on the securities industry by New York Comptroller Thomas DiNapoli.

The shrinkage of bonus pools will be further limited because those year-end payments “tend to decline at a slower rate than profits,” the report said.

The comptroller’s report didn’t estimate year-end bonus pools or employment at financial firms, noting that some investment banks have announced plans to cut staff.

Tax Collections

Personal and business tax collections from the securities industry account for almost 9 percent of tax revenue for New York City and as much as 20 percent for the state. Wall Street accounts for 5 percent of jobs in New York City and 23 percent of wages.

Among the seven largest financial firms based in New York City, profits through the first nine months of the year were slightly ahead of last year’s record, even with a decline of almost 65 percent in the third quarter.

“The fourth quarter will determine the outcome for the year and set the stage for 2008,” according to the comptroller’s report.

The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.

To contact the reporter on this story: Henry Goldman in New York at hgoldman@bloomberg.net .

Last Updated: October 30, 2007 17:12 EDT

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Greenspan Says China Stock Market Is a Speculative Bubble That Will Burst Former Federal Reserve Chairman Alan Greenspan said China’s stock market is a speculative bubble that will burst.

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Greenspan Says China’s Stock-Market Bubble May Burst (Update2)
By Scott Lanman and Sree Vidya Bhaktavatsalam

Oct. 30 (Bloomberg) — Former Federal Reserve Chairman Alan Greenspan said China’s stock market is a speculative bubble that will burst.

Asked if China was in a state of “irrational exuberance,” a phrase Greenspan made famous in 1996, the former chairman said, “I think so,” speaking to a conference of insurance executives in Boston today. “When you don’t expect it, it breaks,” Greenspan said of the bubble.

His comments reprise remarks from May, when Greenspan said he was concerned Chinese equities might undergo a “dramatic contraction” after its main stock index at the time had jumped more than 90 percent since the start of the year.

Greenspan’s latest words of concern come at a time when investors are increasing bets on Chinese equities. Yesterday, PetroChina Co. and Alibaba.com Ltd. sold stock valued at more than $10 billion.

PetroChina, the world’s second-largest company by market value, raised 66.8 billion yuan ($8.9 billion) in the biggest stock sale this year. Alibaba, the operator of China’s largest trading Web site for companies, sold $1.5 billion of shares in the second-biggest initial public offering of an Internet company after Google Inc., said two people with knowledge of the matter.

China’s benchmark CSI 300 Index has surged 170 percent this year as the country’s households invest more of their $2.3 trillion of savings in equities. The rally has given China more of the world’s 10 largest companies than the U.S. for the first time and prompted billionaire investor Warren Buffett to warn that prices have risen too fast.

`Carried Away’

China’s stock market value is $3.7 trillion, compared with $18.7 trillion for the U.S.

“It’s easy to be carried away in the stock market when things are going very well,” Buffett said Oct. 24. “We at Berkshire never buy stocks when we see prices soaring.”

Greenspan also said the view of many analysts that the U.S. current-account deficit will cause further declines in the dollar isn’t valid.

“We are likely to see a long-term erosion of the dollar,” in part because “others are doing much better,” he said.

Greenspan said Oct. 24 that the dollar’s decline to a record against the euro also reflects on a widening interest- rate gap between the U.S. and the euro region.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net ; Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net .

Last Updated: October 30, 2007 16:26 EDT

Crude oil continues record breaking run

By Javier Blas

Published: October 29 2007 10:30 | Last updated: October 29 2007 23:41

Crude oil prices continued their record-breaking run amid fresh supply interruptions on Monday while gold surged towards the key $800 level and platinum also hit a new peak.

Crude breached the $93 level for the first time yesterday after Pemex, the state-owned oil company of Mexico, shut about 600,000 barrels a day of oil production, 20 per cent of its total, due to bad weather in the Gulf of Mexico.

Nymex December West Texas Intermediate rose $1.94 to a record $93.80 a barrel.

Low levels of oil stocks remain a concern in a tight market. US crude inventories stand 19.9m barrels or 5.9 per cent below last year’s levels.

“Lower inventories decrease the market’s ability to cope with temporary shocks,” said Francisco Blanch, head of commodities research at Merrill Lynch. “Oil price volatility could increase further as this [inventory] cushion is reduced.”

ICE December Brent hit the key $90-a-barrel level for the first time, eased back a bit, then moved forward to to trade $1.80 higher at $90.49 a barrel.

“There is nothing out there that suggests that we have seen the highs in these markets,” said analysts at Cameron Hanover.

“Only one (factor) seems capable of ending the bull market in crude oil. That’s a recession. Right now, the Fed seems determined to prevent one.”

The new supply pressures emerged against a background of rising geopolitical tensions in the Middle East. Turkey bombed Kurdish rebels in the south-east of the country and the possibility of a Turkish cross-border incursion into northern Iraq is fuelling acute concerns about the likelihood for further destabilising violence in the region.

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Shhh, NYSE Aims to Bring Back Blocks

By AARON LUCCHETTI
October 30, 2007

The Big Board wants to see big blocks again.

Block trades, or chunks of stock that trade together, were once a staple of the New York Stock Exchange. But in recent years, as more trading has gone electronic, investors have turned to computer algorithms to slice orders greater than 10,000 shares into smaller pieces of a few hundred shares at a time. This gives traders, who often want to guard their trading strategies, anonymity.

BLOCK PARTY

•  The News: The NYSE plans a new effort to bring back more “block trades” to the exchange.

•  Background: Increased electronic trading makes it hard for investors to trade in blocks of 10,000-plus shares. Instead, they break up their orders.

•  What’s Next: NYSE aims for a 2008 launch of a block-trading platform with BIDS Holdings.

Now, the exchange, owned by NYSE Euronext, is hoping to reverse this trend in a joint venture to be announced as early as today with a dozen Wall Street firms that the NYSE hopes will help it regain market share while addressing the Street’s desire to do big trades discreetly.

The joint venture will be half-owned by the Big Board and half-owned by a Wall Street consortium called BIDS Holdings LP, a New York upstart owned by 12 brokerage firms that control a trading platform designed to help big traders complete trades without necessarily showing their hand.

The Wall Street firms behind the effort include Morgan Stanley, Citigroup Inc. and Goldman Sachs Group Inc. It is expected to start in the second quarter of next year.

The yet-to-be-named venture will specialize in putting big investors together who have orders of 10,000 shares or more. For the NYSE, the move represents a push by President Duncan Niederauer to regain market share at the exchange.

Mr. Niederauer says institutional investors would like it to be easier to trade large blocks.

“It’s the single biggest thing we hear from our customers,” says Mr. Niederauer, who joined NYSE this year from Goldman. “The market structure we’ve ended up with is great for trading, but it’s not great for investing.”

Despite increasing competition, NYSE is still enjoying rising volumes because of its own electronic enhancements and a rising tide of trading activity, but the declining activity in big trades has been unrelenting. Since January 2004, the monthly activity in block trading at the exchange has declined 78%, from 494,600 trades to 107,800 trades last month.

Big trades are especially profitable for exchanges like NYSE, because they can garner a trading fee without eating up costly technology resources that thousands of small trades do.

In recent years, more big trades have gone away from exchange to newer platforms run by companies like Liquidnet Holdings Inc., Investment Technology Group Inc. and Pipeline Trading Systems LLC because they offer quick and anonymous trade executions.

Last year, six Street firms — Citigroup, Goldman Sachs, Morgan Stanley, Merrill Lynch & Co., UBS AG and Lehman Brothers Holdings Inc. — set up BIDS, which stands for Block Interest Discovery Service.

Write to Aaron Lucchetti at aaron.lucchetti@wsj.com

Fed’s Poole, Prone to Speak Out,
Has Ear of Investors

Maverick Central Banker
Is Known for Comments
That Can Move Markets

By SUDEEP REDDY
October 29, 2007; Page A6

ST. LOUIS — In his decade as a Federal Reserve official, William Poole has achieved what eludes many other presidents of regional Fed banks: prominence.

Mr. Poole, president of the Federal Reserve Bank of St. Louis, stands out as a maverick in an institution dominated by the Fed chairman in Washington. He is known for making off-the-cuff, market-moving remarks about the economy — including one in August that the Fed could wait until the next month to move on interest rates, barring a “calamity.”

REAL TIME ECONOMICS

Q&A With St. Louis Fed’s Poole: How central bank officials communicate and how markets respond
10/28/2007

That one sent stocks down, but investors may have gotten the wrong message. Two days later, the Fed lowered the separate discount rate, at which it lends directly to banks, and stocks surged.

Mr. Poole said he speaks more frequently than many colleagues because the public deserves to understand how central bankers think. It is important “to convey information to the market, but at the same time not to be a loose cannon, not to be a random disturbance,” he said. “I’ve concentrated on trying to improve market understanding of the policy process.”

While Fed Chairman Ben Bernanke gets the most attention, the presidents of the 12 regional Fed banks from San Francisco to Boston also shape market predictions of the central bank’s next move. Recent commentary has led markets to anticipate that the Fed on Wednesday will cut the target for the federal-funds rate, at which banks lend to each other overnight, by a quarter percentage point. That would follow a half-percentage-point cut Sept. 18.

Mr. Poole has played a role in pushing the Fed toward loosening. He was recently ahead of colleagues in arguing that the risks to the economy were shifting away from inflation to a more equal balance between risks on the growth and inflation fronts. At the same time, Mr. Poole is adamant in public statements that investors should pay the price for bad bets.

Fed officials face pressure not to send markets into a frenzy or step on the Fed’s chief messenger, the chairman.

But Mr. Poole, who serves as a voter on the Federal Open Market Committee this year, can be unpredictable. His speeches moved the bond market last year more than those by any other Fed official except Mr. Bernanke, according Macroeconomic Advisers LLC, a St. Louis forecaster.

He is known for thinking out loud, answering hypothetical questions about coming data. “He’s been the easiest person in the world to make money off of,” said Stan Jonas, who trades fed-funds futures at Axiom Management in New York.

But Mr. Poole also can leave listeners scratching their heads. Patrick Minford, an economist at the United Kingdom’s Cardiff Business School, quipped at a recent conference honoring Mr. Poole, “His sayings are like the Bible, really: wise and to be treated cautiously.”

Mr. Poole’s August remarks about interest rates led the Fed’s chief spokeswoman to distance the policy committee from his comments. They also led markets to conclude Mr. Poole was a foe of responding to the crisis. It turns out, however, that days earlier his bank became the first of the 12 regional banks to petition the Fed board to cut the discount rate. In a recent interview, Mr. Poole indicated he didn’t want to send markets a misleading signal.

“It would’ve been entirely inappropriate for me to say something that would’ve led the market to believe there was a high probability of imminent Fed action,” Mr. Poole said. However, he said he had “early concern about what was happening” and wanted to be prepared to act if necessary.

The bearded 70-year-old, who steps down in March under the Fed’s retirement rule, dissented at his second Fed meeting in 1998, preferring to raise rates rather than keep them unchanged. Trained at the University of Chicago, he did a stint on Ronald Reagan’s Council of Economic Advisers. His reflective, professorial speaking style reflects a quarter-century teaching at Brown University.

He is guided by a study he co-authored that concludes futures markets predict interest-rate decisions fairly well by the time Fed policy meetings arrive. That suggests policy makers and markets interpret economic data in a similar fashion and arrive at the same conclusion.

Unlike most colleagues, Mr. Poole talks with groups of reporters after his speeches. If Fed officials weren’t out talking, markets would trade on the opinions of private experts, academics and journalists, Mr. Poole said.

“Some of us are right sometimes and wrong at other times, and the market does the best it can to make sense of it,” he said.

Write to Sudeep Reddy at sudeep.reddy@wsj.com

Och-Ziff to Sell $1.26 Billion Stake to Dubai Firm (Update1)
By Elizabeth Hester and Jason Kelly

Oct. 29 (Bloomberg) — Och-Ziff Capital Management Group LLC, the hedge fund firm run by Daniel Och, agreed to sell a $1.26 billion stake to Dubai International Capital LLC, doubling the money it plans to raise in its initial public offering.

Dubai International will buy 38.1 million Class A shares, giving it a 9.9 percent stake in the New York-based hedge-fund manager, according to a filing today with the U.S. Securities and Exchange Commission. The Dubai firm agreed to pay $33 a share, the top end of Och-Ziff’s IPO price range. It would pay less if the shares sell for less in the offering.

Managers of private-equity and hedge funds are selling stakes to non-U.S. investors to raise capital and secure the backing of long-term shareholders. Blackstone Group LP sold a $3 billion stake in May to China’s government as part of its IPO, while Carlyle Group announced a $1.35 billion investment by the government of Abu Dhabi in September.

“The stars are aligned for deals to be done,” said Colin Blaydon, director of the Center of Private Equity and Entrepreneurship at Dartmouth College’s Tuck School of Business. “It’s an investment in the industry, not just putting the money in the hands of investment managers.”

Och-Ziff plans to sell 36 million shares in the IPO at $30 to $33 each.

To contact the reporters on this story: Elizabeth Hester in New York at ehester@bloomberg.net ; Jason Kelly in New York at jkelly14@bloomberg.net .

Last Updated: October 29, 2007 17:55 EDT

Oil Price Up Again Ahead of Fed Meeting

• http://www.nytimes.com/2007/10/29/business/29cnd-econ.html

By MICHAEL M. GRYNBAUM

Published: October 29, 2007

Oil prices rose 1.8 percent today, adding to the 3.7 percent increase last week and raising the specter of inflation one day before the Federal Reserve governors meet to consider whether to adjust interest rates.

Crude oil futures rose above the $93 mark in overnight trading and were up to $93.53 a barrel at the close of exchange trading today, up $1.67 from Friday.

The price is a record in actual dollar terms and some analysts said the commodity is on a steady march toward toppling the inflation-adjusted high of $101.70 it set in April 1980.

“It’s an incredible run,” said Antoine Halff, head of energy research at Fimat in New York. “At this stage you’re kind of grappling for the signal that would start a reversal and it’s just not out there in the market.”

A flare-up in the Middle East, including President Bush’s announcement last week of sanctions against Iran and growing tension between Turkey and Iraqi Kurds, along with reports of reduced supplies in the United States, Mexico, and the Middle East, have contributed to the run, Mr. Halff said. A major Mexican crude producer, Petroleos Mexicanos, announced this morning it had halted production on about 600,000 barrels of oil because of a major storm.

The dollar also continues to weaken against the Euro, making oil more attractive to foreign investors.

But the equities market barely raised a brow. Major stock indexes were up about 0.5 percent in afternoon trading, with the Standard and Poor’s 500-stock index up 4.26 points to 1,539.54 at 2:45 p.m. Stocks showed a similar ambivalence to rising crude prices last week.

Many investors expect a rate cut by the Fed that, they say, will ease financial fallout from the ongoing housing slump and uncertainty in the credit market. Investors are almost certain that the central bank will cut its benchmark interest rates when it meets this week.

But Fed bankers, who are wary that an aggressive cut could be inflationary, might see surging oil costs as a harbinger of higher prices. Expensive energy can pinch consumers’ pocketbooks and eventually lead to a downturn in overall spending, which is a major component of domestic economic growth.