Life in OUR America, The Livyjr Files Volume 7 Options

[Livyjr]

"US manufacturing contracted in February"

By MADLEN READ, Associated Press

Last updated: 1:02 p.m., Monday, March 3, 2008

NEW YORK -- U.S. manufacturing activity declined in February to its weakest level in nearly five years, an industry group survey showed Monday, heralding more instability in the job market and frailty in the overall economy.

After reporting modest growth for January, the Institute for Supply Management said its February manufacturing index registered at 48.3 -- its weakest reading since April 2003, but above Wall Street's even poorer expectations.

A reading above 50 indicates expansion, and anything below that shows contraction.

The February figure was a bit better than the median forecast of 48.1 of economists polled by Thomson Financial/IFR.

But it was slightly worse than December's reading of 48.4.

Manufacturers have been struggling with the rising cost of raw materials and languid demand in the housing market.

Industries reporting declining activity last month included furniture, textiles, machinery and chemical products; those reporting growth included apparel, leather, wood, plastics and rubber, and food and beverage.

It's too soon to determine whether economic reports prove that the nation's economy is headed for, or already in, a recession.

Recession is normally defined by two straight quarters of declines in gross domestic output.

But recession or not, Monday's manufacturing data supported the argument that the economy is indeed on the wane.

"You can't paint a happy face on this data," said Wachovia Corp. economist Mark Vitner.

"The economy may not be in recession, but it's not that far off."

The report's employment index fell to 46.0 from 47.1 in January, indicating accelerating contraction -- an inauspicious piece of news ahead of Friday's employment report for February from the Labor Department.

On average, economists are forecasting a slight increase in payrolls, but some predict they will decline for a second straight month.

January's net jobs loss was the first in almost four years.

And meanwhile, production stalled sharply -- the production index fell to 50.7 in February from 55.2 in January.

Other worrisome categories were new orders, which also showed an accelerated contraction, and prices, which continued to increase, albeit at a slower pace than in January.

The big reason manufacturing is not dropping off more severely is exports, said Norbert Ore, chairman of ISM's manufacturing business survey committee.

"It appears right now that manufacturing is weathering the storm better than other parts of the economy, particularly the financial sector," Ore said.

The ISM's survey of February's service sector will be released Wednesday -- the group's most recent report showed the service economy contracting sharply in January.

Ore said eight of the 18 industries that the ISM manufacturing survey follows are closely tied to the export markets.

Exports are holding up well due to the weak dollar, which makes U.S. goods attractive to foreign buyers.

The ISM's manufacturing index was released at the same time the Commerce Department reported that construction spending fell by 1.7 percent in January, its widest drop in 14 years.

The two reports bolsters the argument for the Federal Reserve, which has already lowered key interest rates by more than 2 percent since last summer, to reduce rates again.

Rate cuts tend to spur economic growth.

[Livyjr]

"Buffett: US essentially in recession"

By JOSH FUNK, Associated Press

Last updated: 5:42 p.m., Monday, March 3, 2008

OMAHA, Neb. -- Billionaire Warren Buffett said Monday that the U.S. economy is essentially in a recession even if it hasn't met the technical definition of one yet.

Buffett said in an interview with cable network CNBC the reports he gets from the retail businesses his holding company owns show a significant slowdown in purchases.

The chairman and CEO of Omaha-based Berkshire Hathaway Inc. said millions of people have also lost equity in their homes because home prices have dropped.

"I would say, by any commonsense definition, we are in a recession," Buffett said on CNBC.

But Buffett said it's not clear how far the recession will go because that is difficult to predict.

The technical definition of a recession most economists use is two consecutive quarters of negative growth in the nation's gross domestic product.

On Thursday, the Commerce Department reported that the gross domestic product increased at a low 0.6 percent pace in the quarter that ended Dec. 31.

In the July-September quarter, the economy grew at a brisk 4.9 percent.

Gross domestic product measures the value of all goods and services produced in the United States and is the best barometer of the country's economic health.

A survey released last week by the National Association for Business Economics showed that 45 percent of economists are predicting a recession in 2008.

But Buffett said the U.S. economy will be fine in the long run.

"Over time, my children are going to live better than I do, although they don't believe it," Buffett said.

Buffett's appearance on television came on the heels of his annual letter to shareholders, which he released Friday along with Berkshire's 2007 financial report.

In the letter, Buffett predicted that the insurance industry will see lower underwriting profit margins in 2008 because premium prices are down, and the industry's luck will certainly change.

"It's a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008," he said.

"Prices are down, and exposures inexorably rise."

"Even if the U.S. has its third consecutive catastrophe-light year, industry profit margins will probably shrink by 4 percentage points or so."

"If the winds roar or the earth trembles, results could be far worse."

Buffett said Berkshire's insurance group, which includes GEICO, reinsurance giant General Re and several other firms, generated $2.2 billion net income from insurance underwriting in 2007.

That's down from the previous year when it posted a $2.5 billion underwriting profit.

When Berkshire's shareholders aren't worrying about insurance profits, they're likely fretting about who will run Berkshire after Buffett is gone.

The 77-year-old Buffett offered a few new clues in his annual letter and during the CNBC interview.

To replace Buffett, Berkshire plans to split his job into three parts -- chief investment officer, chief executive officer and chairman.

Buffett wrote in his letter that over the past year he identified four investment managers outside Berkshire who could take over managing the company's $75 billion stock portfolio and investing its $44.3 billion cash.

Buffett said on CNBC that none of the four CIO candidates is a woman and that very few women applied for the job.

Buffett has previously said that Berkshire's board had three outstanding internal candidates for chief executive.

And Buffett's son, Howard, who already serves on Berkshire's board, will become chairman after Warren Buffett's death.

Buffett also said on CNBC:

-- That he doesn't agree on everything with his favorite presidential candidates, Democrats Hillary Clinton and Barack Obama, and he wouldn't want either one to succeed him as Berkshire's chief capital allocater.

"I would certainly appoint either one of them to run a business, but running a business is a little different than my job."

-- On why the U.S. trade deficit is a long-term problem.

"Over time, it's like eating an extra 100 calories at every meal."

"You don't sit down at the table and get up and everybody says 'My God, you're fat.'"

"But if you keep doing it over time, pretty soon they'll say, 'My God, he's gotten fat.'"

-- On stock bargains now:

"Certainly, I find more things to look at now than I did six months or a year ago."

"But I would say it's changed more dramatically in the fixed-income market than it has in the equity market."

-- On the cause of the credit crisis:

"The mistake was in lending unwisely."

"There were a lot of dumb lending practices."

Berkshire owns more than 60 subsidiaries including insurance, clothing, furniture, natural gas, corporate jet and candy companies.

Berkshire also has major investments in such companies as Coca-Cola Co. and Wells Fargo & Co.

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On the Net:

Berkshire Hathaway Inc.: http://www.berkshirehathaway.com

CNBC's Warren Buffett Watch: http://buffettwatch.cnbc.com

[Livyjr]

"Pentagon cites China space focus"

By ROBERT BURNS, AP Military Writer

3 March 2008

WASHINGTON - China is developing the ability to limit or prevent the use of satellites by potential adversaries during times of crisis, the Pentagon said Monday in a report to Congress.

The report, the latest in a series of annual assessments of China's military power, highlights developments in China's commercial space program and asserts that some can be of military use.

And it says Chinese leaders have been silent on the question of a military motivation for their space programs.

The Chinese military, known as the People's Liberation Army, is acquiring technologies to improve its ability to operate in space and is "developing the ability to attack an adversary's space assets," the report said.

"PLA writings emphasize the necessity of 'destroying, damaging, and interfering with the enemy's reconnaissance/observation and communications satellites,' suggesting that such systems, as well as navigation and early warning satellites, could be among initial targets of attack to 'blind and deafen the enemy," the report said.

The Bush administration was highly critical of China's shootdown in January 2007 of one of its weather satellites, asserting that the orbiting debris created by the attack poses a danger to other assets in space.

Last month, when the Pentagon shot down a dead U.S. spy satellite, China expressed concern, although U.S. officials said the shootdown did not mean the United States had dropped its objections to possessing a permanent anti-satellite capability.

More broadly, the Pentagon report released Monday asserted that Beijing's reluctance to share details about its military buildup poses a risk to stability in Asia.

It said the international community has limited knowledge of the motivations, decision-making and capabilities of China's military modernization.

This includes a lack of clarity about China's defense spending.

Washington contends that Beijing understates that spending program by the equivalent of tens of billions of dollars.

"The lack of transparency in China's military and security affairs poses risks to stability by increasing the potential for misunderstanding and miscalculation," the report said.

"This situation will naturally and understandably lead to hedging against the unknown."

This year's report place increased emphasis on concern about China's space programs and potential for space warfare.

It also said China is improving its own satellite capability, including construction of a new satellite launch complex on Hainan Island.

And it said China expects to replace all foreign-produced satellites in its inventory with home-produced models by 2010.

In a similar vein, the report said China appears to be developing a cyberwarfare capability.

"In the past year, numerous computer networks around the world, including those owned by the U.S. government, were subject to intrusions that appear to have originated within the PRC," the report said, using the initials for the People's Republic of China.

"These intrusions require many of the skills and capabilities that would also be required for computer network attack."

The overall military buildup in China has increased in recent years, the Pentagon said.

"China's expanding and improving military capabilities are changing East Asian military balances; improvements in China's strategic capabilities have implications beyond the Asia-Pacific region," the report said.

The main short-term focus of China's military buildup is the Taiwan Strait, the report said.

As of November 2007, the Chinese military had deployed between 990 and 1,070 short-range ballistic missiles to garrisons opposite Taiwan, according to the Pentagon's latest estimate.

That compares with 900 such missiles reported in last year's Pentagon report.

Every spring, the Pentagon is required by Congress to provide a comprehensive assessment of China's security and military strategy, an analysis of developments in its military doctrine and capabilities, and an update on the security situation in the Taiwan Strait.

The reports have largely mirrored a consensus Bush administration view that China is rapidly modernizing its military, underreporting the extent of its defense investment and remaining deliberately oblique about its long-term intentions.

U.S.-China military relations have been strained in recent years over numerous issues, not limited to American concerns about the scope of Beijing's military buildup.

But there also have been some positive moves, including a pair of agreements signed last week in Shanghai — one on installing a telephone hotline between the Chinese Ministry of Defense and the U.S. Defense Department, and the other on research in Chinese military archives related to U.S. MIAs from the Korean War.
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EDs: The entire report can be viewed at: http://www.defenselink.mil/pubs/pdfs/China...y_Report_08.pdf

[Livyjr]

FINANCIAL TIMES

"America’s economy risks mother of all meltdowns"

By Martin Wolf

Published: February 19 2008 18:21 | Last updated: February 19 2008 18:21

“I would tell audiences that we were facing not a bubble but a froth – lots of small, local bubbles that never grew to a scale that could threaten the health of the overall economy.”

Alan Greenspan, The Age of Turbulence.

That used to be Mr Greenspan’s view of the US housing bubble.

He was wrong, alas.

So how bad might this downturn get?

To answer this question we should ask a true bear.

My favourite one is Nouriel Roubini of New York University’s Stern School of Business, founder of RGE monitor.

Recently, Professor Roubini’s scenarios have been dire enough to make the flesh creep.

But his thinking deserves to be taken seriously.

He first predicted a US recession in July 2006*.

At that time, his view was extremely controversial.

It is so no longer.

Now he states that there is “a rising probability of a ‘catastrophic’ financial and economic outcome”**.

The characteristics of this scenario are, he argues:

“A vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe.”

Prof Roubini is even fonder of lists than I am.

Here are his 12 – yes, 12 – steps to financial disaster.

Step one is the worst housing recession in US history.

House prices will, he says, fall by 20 to 30 per cent from their peak, which would wipe out between $4,000bn and $6,000bn in household wealth.

Ten million households will end up with negative equity and so with a huge incentive to put the house keys in the post and depart for greener fields.

Many more home-builders will be bankrupted.

Step two would be further losses, beyond the $250bn-$300bn now estimated, for subprime mortgages.

About 60 per cent of all mortgage origination between 2005 and 2007 had “reckless or toxic features”, argues Prof Roubini.

Goldman Sachs estimates mortgage losses at $400bn.

But if home prices fell by more than 20 per cent, losses would be bigger.

That would further impair the banks’ ability to offer credit.

Step three would be big losses on unsecured consumer debt: credit cards, auto loans, student loans and so forth.

The “credit crunch” would then spread from mortgages to a wide range of consumer credit.

Step four would be the downgrading of the monoline insurers, which do not deserve the AAA rating on which their business depends.

A further $150bn writedown of asset-backed securities would then ensue.

Step five would be the meltdown of the commercial property market, while step six would be bankruptcy of a large regional or national bank.

Step seven would be big losses on reckless leveraged buy-outs.

Hundreds of billions of dollars of such loans are now stuck on the balance sheets of financial institutions.

Step eight would be a wave of corporate defaults.

On average, US companies are in decent shape, but a “fat tail” of companies has low profitability and heavy debt.

Such defaults would spread losses in “credit default swaps”, which insure such debt.

The losses could be $250bn.

Some insurers might go bankrupt.

Step nine would be a meltdown in the “shadow financial system”.

Dealing with the distress of hedge funds, special investment vehicles and so forth will be made more difficult by the fact that they have no direct access to lending from central banks.

Step 10 would be a further collapse in stock prices.

Failures of hedge funds, margin calls and shorting could lead to cascading falls in prices.

Step 11 would be a drying-up of liquidity in a range of financial markets, including interbank and money markets.

Behind this would be a jump in concerns about solvency.

Step 12 would be “a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices”.

These, then, are 12 steps to meltdown.

In all, argues Prof Roubini:

“Total losses in the financial system will add up to more than $1,000bn and the economic recession will become deeper more protracted and severe.”

This, he suggests, is the “nightmare scenario” keeping Ben Bernanke and colleagues at the US Federal Reserve awake.

It explains why, having failed to appreciate the dangers for so long, the Fed has lowered rates by 200 basis points this year.

This is insurance against a financial meltdown.

Is this kind of scenario at least plausible?

It is.

Furthermore, we can be confident that it would, if it came to pass, end all stories about “decoupling”.

If it lasts six quarters, as Prof Roubini warns, offsetting policy action in the rest of the world would be too little, too late.

Can the Fed head this danger off?

In a subsequent piece, Prof Roubini gives eight reasons why it cannot***.

(He really loves lists!)

These are, in brief:

US monetary easing is constrained by risks to the dollar and inflation;

aggressive easing deals only with illiquidity, not insolvency; the monoline insurers will lose their credit ratings, with dire consequences;

overall losses will be too large for sovereign wealth funds to deal with;

public intervention is too small to stabilise housing losses;

the Fed cannot address the problems of the shadow financial system;

regulators cannot find a good middle way between transparency over losses and regulatory forbearance, both of which are needed;

and, finally, the transactions-oriented financial system is itself in deep crisis.

The risks are indeed high and the ability of the authorities to deal with them more limited than most people hope.

This is not to suggest that there are no ways out.

Unfortunately, they are poisonous ones.

In the last resort, governments resolve financial crises.

This is an iron law.

Rescues can occur via overt government assumption of bad debt, inflation, or both.

Japan chose the first, much to the distaste of its ministry of finance.

But Japan is a creditor country whose savers have complete confidence in the solvency of their government.

The US, however, is a debtor.

It must keep the trust of foreigners.

Should it fail to do so, the inflationary solution becomes probable.

This is quite enough to explain why gold costs $920 an ounce.

The connection between the bursting of the housing bubble and the fragility of the financial system has created huge dangers, for the US and the rest of the world.

The US public sector is now coming to the rescue, led by the Fed.

In the end, they will succeed.

But the journey is likely to be wretchedly uncomfortable.

*A Coming Recession in the US Economy? July 17 2006, www.rgemonitor.com;

**The Rising Risk of a Systemic Financial Meltdown, February 5 2008;

***Can the Fed and Policy Makers Avoid a Systemic Financial Meltdown? Most Likely Not, February 8 2008

martin.wolf@ft.com

http://www.ft.com/cms/s/0/4d19518c-df0d-11...00779fd2ac.html

[Livyjr]

"Oil slips to $102 a barrel"

By PABLO GORONDI, Associated Press

Last updated: 7:12 a.m., Tuesday, March 4, 2008

Oil prices slipped Tuesday after climbing to a new record of almost $104 a barrel a day earlier and then falling back as traders booked profits.

The decline came as it appears OPEC ministers, gathering for a meeting Wednesday, have all but ruled out pumping more oil to ease record-high prices.

Chakib Khelil, president of the Organization of Petroleum Exporting Countries, said the 13-nation cartel is shying away from boosting production because of the U.S. economic slowdown, political turmoil in the Middle East and expectations of slackening global demand for crude.

Light, sweet crude for April delivery on the New York Mercantile Exchange fell 45 cents to $102.00 a barrel in electronic trading by midday in Europe.

The contract traded as high as $103.95 a barrel Monday before retreating to settle at $102.45, up 61 cents from the end of last week.

In London, Brent crude futures fell 36 cents to $100.12 a barrel by midday Tuesday on the ICE Futures exchange.

Oil futures -- propelled by the weak U.S. dollar -- climbed past $103.76 a barrel Monday on the New York Mercantile Exchange, breaking what many analysts consider to be the true record high for oil after the $38 per barrel price from 1980 is adjusted for inflation.

"Every other day, we've got a new record," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.

"It's due to the phenomenon of investors getting into commodities, the hard assets, to find a safer haven and a hedge against inflation."

Oil's most recent run into record territory has been driven by the dollar's slump against other world currencies.

"Energy prices are firm."

"With the dollar sinking to a record low ... WTI bulls took the bait and bid the NYMEX to a record," said The Schork Report, edited by Stephen Schork.

"Thus, as goes the greenback so shall go WTI, in the opposite direction."

WTI is the benchmark U.S. oil contract.

The dollar's decline to historic levels Monday was spurred by news that construction spending in the U.S. took its biggest nosedive in 14 years.

Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is falling.

Gold, copper and wheat are among the other commodities that have rallied as the dollar has fallen.

Investors are also keeping an eye on Wednesday's OPEC meeting.

Most expect the Organization of Petroleum Exporting Countries to hold output steady.

"It's going to be a nonevent," Shum said.

"With pricing above $100, it's politically unacceptable to cut production even though fundamentals are weakening."

Analyst estimates for where oil goes from here vary widely.

Some predict an eventual decline to the $65 or $70 range as supplies continue to grow and demand falls.

Others see prices rising as high as $120 as investment capital continues to flow into oil.

Shum said investor demand for commodities was likely to remain strong in the near term amid expectations that further interest rate cuts by the U.S. central bank will keep the greenback from strengthening.

"Looking at the momentum, I think oil could go higher in the near term," he said.

Shum warned, though, that underlying fundamentals of oil supply and demand do not justify the price surge.

That "points to a risk that the price may fall sharply because it appears to be a price bubble that could potentially collapse," he said.

In other Nymex trading, heating oil futures fell 1.68 cents to $2.824 a gallon while gasoline prices dropped 0.85 cent to $2.663 a gallon.

Natural gas futures rose 1.4 cent to $9.36 per 1,000 cubic feet.

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Associated Press writer Gillian Wong in Singapore contributed to this report.

[Livyjr]

"Intel lowers gross profit margin outlook"

By JORDAN ROBERTSON, Associated Press

Last updated: 10:22 p.m., Monday, March 3, 2008

SAN JOSE, Calif. -- Intel Corp. lowered its profit forecast for its fiscal first quarter Monday, blaming the shortfall on a steeper-than-expected drop in prices for memory chips.

The Santa Clara-based company, the world's largest semiconductor maker, said slumping prices for a type of memory called NAND flash depressed profits more than anticipated.

NAND flash is commonly used in portable electronic devices like digital cameras and MP3 players.

Intel said its gross profit margin -- a key measure of profitability that gauges a company's ability to control manufacturing costs -- would come in at 54 percent of revenues, plus or minus a percentage point.

That's down from its previous forecast of 56 percent, plus or minus a couple percentage points.

The company said its other guidance had not changed, including its expectation of revenue between $9.4 billion and $10 billion for the quarter.

Analysts surveyed by Thomson Financial on average expect Intel to ring up sales of $9.7 billion.

The company is expected to provide more details on the shortfall Wednesday during a meeting with investors at its Silicon Valley headquarters.

Intel's announcement reflects a trend that has benefited makers of personal computers and electronic gadgets but cut into chip makers' profits.

Intel's primary business is making microprocessors -- the brains of personal computers -- but it also makes memory chips.

The company's microprocessor business is thriving from robust PC demand, but Monday's announcement illustrates that Intel is still vulnerable to swings in the volatile memory market, which has been under intense pricing pressure because of oversupply.

Other companies have also been hurt by falling memory-chip prices.

Samsung Electronics Co., the world's largest manufacturer of memory chips, saw its profit sink more than 6 percent last year, dragged down by plunging prices for NAND flash chips and DRAM, or dynamic random access memory, the most common type of memory chip in personal computers.

Analysts are warning the pressure could continue into 2008 because of global economic uncertainty that is causing companies to clamp down on spending.

NAND flash makers are likely to look back "with nostalgia" on 2007, a year in which sales grew more than 12 percent to $13.9 billion, according to market research firm iSuppli Corp.

Last month the firm cut its 2008 forecast for NAND revenue growth from 27 percent to the single-digit range.

The move was triggered by iPod maker Apple Inc. apparently slashing its NAND order forecast, warning suppliers that it would likely buy fewer of the chips because of slowing growth in demand, according to iSuppli.

Intel is the fifth largest maker of NAND flash, behind Samsung, Toshiba Corp., Hynix Semiconductor Inc. and Micron Technology Inc., according to a ranking by iSuppli.

Intel has benefited from making a quicker transition to a new chip-making process than its smaller rival, Advanced Micro Devices Inc.

The two compete primarily in the market for microprocessors.

The new manufacturing process shrinks the size of the circuitry on the chips to an average width of 45 nanometers -- or 45 billionths of a meter -- which clears the way to add more transistors to each chip, which improves performance.

Intel made nearly $7 billion in fiscal 2007, which ended in December, an improvement of roughly $2 billion over 2006, when the company was hurt by a fierce price battle with AMD.

AMD, meanwhile, lost nearly $3.4 billion last year, dragged down primarily by expenses from a costly acquisition.

Shares of Intel gained 4 cents to $20.01 during the regular trading session Monday, before falling 46 cents to $19.55 in after-hours trading following the announcement.

[Livyjr]

"Stocks pull off lows on bargain hunting"

By MADLEN READ, Associated Press

Last updated: 5:53 p.m., Tuesday, March 4, 2008

NEW YORK -- Wall Street closed mixed Tuesday, recuperating from a sharp plunge as investors snapped up bargain stocks on rumors that a bond insurer rescue plan is progressing and upbeat comments from Cisco Systems Inc.

Earlier in the session, the market sank after Merrill Lynch lowered its full-year earnings prediction for Citigroup Inc., which a Dubai fund executive said will need to raise more cash to stay in business.

Another damper on trading was Intel Corp., which lowered its forecast for first-quarter profit margins.

But in afternoon trading, the stock market showed signs of optimism.

The financial sector regained some steam after CNBC reported that a plan to save the bond insurer Ambac Financial is advancing nicely.

Technology stocks rebounded too after a Dow Jones Newswires report that Cisco CEO John Chambers said he is "even more comfortable" with the long-term growth targets the company has outlined.

Wall Street is jittery, however, and as the volatility of the past several months has proved, the market's optimism can quickly turn to pessimism from one day to the next.

While some investors search for bargains when stocks sink, the overall market is plagued by persistent worries about the bad debt held by the world's banks.

"What we're seeing is a very nervous market, and nervousness breeds volatility," said Anthony Conroy, managing director and head trader for BNY ConvergEx Group.

"It took years to put this stuff on their books -- it's not going to come off quickly."

The Dow Jones industrial average fell 45.10, or 0.37 percent, to 12,213.80, after tumbling more than 200 points earlier in the day.

Broader stock indicators finished mixed, also rebounding off their lows of the session.

The Standard & Poor's 500 index fell 4.59, or 0.34 percent, to 1,326.75, while the Nasdaq composite index rose 1.68, or 0.07 percent, to 2,260.28.

Bond prices sank as stocks regained their footing.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.63 percent from 3.56 percent late Monday.

Wall Street has been extremely turbulent as it tries to gauge whether the economy is in recession -- and whether investors have been too optimistic about corporate profits bouncing back in the second half of the year.

"The soft economy creates a difficult profit environment for most firms."

"And with investors' skepticism at high levels, they are quick to sell," said Alan Gayle, senior investment strategist at Trusco Capital Management.

Citigroup, a Dow component, fell 99 cents, or 4.3 percent, to $22.10, after hitting a new nine-year low.

The head of a government-owned investment firm in Dubai said Citigroup would need to raise more than nearly $20 billion it has already nabbed over the past few months to fix its debt problems.

Financial companies are poring over their books to determine what loans remain sound, what debt might be in trouble, and how much all of it is worth.

A precipitous slowdown in the housing market last year revealed the fallacy upon which many loans were made -- the belief that home prices would continue to rise and that consumers could always wipe away their debts by refinancing.

Now, banks are not only strapped with souring mortgages, but the prospect of big losses from other types of consumer and corporate debt.

Though some banks rebounded on the Ambac rumor, other banks declined alongside Citi, including Dow components Bank of America Corp. and JPMorgan Chase & Co.

Bank of America fell $1.05 to $79.62, and JPMorgan fell 63 cents to $39.19.

Ambac rose 78 cents, or 7.9 percent, to $10.72, while MBIA Inc., another bond insurer, rose 36 cents, or 2.9 percent, to $12.98.

After calming words from its CEO, Cisco recovered from its lows to close down 11 cents at $24.29.

Another Nasdaq stock, Amazon.com, shot up $2.91, or 4.7 percent, to $65.34 on comments from its chief financial officer about the online retailer's 2008 revenue forecast that the market interpreted positively.

Dow component Intel also rebounded, finishing down a penny at $20 a share.

Wall Street is particularly anxious over the technology sector, which was very strong in 2007 and is now one of the weakest in the market along with financials.

"Long term, tech will remain an important sector, but it is a cyclical sector and can be very volatile," Gayle said. "If there is a belief that our economy -- and the global economy -- is going to move to a slower pace of growth, then cyclical industries like tech are going to be impacted."

The dollar weakened against most other major currencies, while gold prices rose.

Light, sweet crude fell $2.93 to settle at $99.52 a barrel on the New York Mercantile Exchange.

Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange.

Consolidated volume came to 4.61 billion shares, up from 3.99 billion shares on Monday.

The Russell 2000 index of smaller companies fell 3.24, or 0.47 percent, to 680.98.

Overseas, Japan's Nikkei stock average edged up less than 0.01 percent.

Britain's FTSE 100 fell 0.87 percent, Germany's DAX index fell 2.17 percent, and France's CAC-40 finished down 1.41 percent.

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On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

[Livyjr]

"Economy quotes from Wednesday hearing"

Associated Press

Last updated: 4:12 p.m., Wednesday, February 27, 2008

Some quotes from the House Financial Services Committee's hearing on the state of the economy Wednesday featuring testimony from Federal Reserve Chairman Ben Bernanke:

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"The economic situation has become distinctly less favorable since the time of our July report."

"Strains in financial markets, which first became evident late last summer, have persisted; and pressures on bank capital and the continued poor functioning of markets for securitized credit have led to tighter credit conditions for many households and businesses."

-- Bernanke.

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"Heightened investor concerns about the credit quality of mortgages, especially subprime mortgages with adjustable interest rates, triggered the financial turmoil."

"However, other factors, including a broader retrenchment in the willingness of investors to bear risk, difficulties in valuing complex or illiquid financial products, uncertainties about the exposures of major financial institutions to credit losses, and concerns about the weaker outlook for economic growth, have also roiled the financial markets in recent months."

-- Bernanke.

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"I think regulation can often be helpful in situations where there's an asymmetry of information or knowledge; where one side of the transaction is far more informed than the other side of the transaction."

" ... I think there can be circumstances when the products are very complicated, that it's important to help make sure that there are disclosures and practices so that the consumer can understand properly, you know, what it is that they're buying."

-- Bernanke.

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"What's interesting is the extent to which this is a very different kind of downturn."

" ... We are in a downturn, maybe a recession, maybe about to get one, in which the single biggest cause was excessive deregulation: the failure to understand that a vibrant, free enterprise system needs as a partner a public sector that understands how the market works, supports it, helps create the conditions in which the free market can then flourish, but also provide a set of rules that diminish abuses."

-- Rep. Barney Frank, D-Mass.

"Bernanke calls for more mortgage relief"

By JEANNINE AVERSA, Associated Press

Last updated: 4:53 p.m., Tuesday, March 4, 2008

WASHINGTON -- Battling a dangerous wave of home foreclosures, Federal Reserve Chairman Ben Bernanke called Tuesday for additional relief and urged lenders to help distressed owners by lowering the amount of their loans.

"This situation calls for a vigorous response," Bernanke said in a speech to a banking group meeting in Orlando, Fla.

Even with some relief efforts under way by industry and government, foreclosures and late payments on home mortgages are likely to rise "for a while longer," Bernanke warned.

Rising foreclosures threaten to worsen the problems in the housing market and for the national economy, which many fear is on the verge of a recession or in one already.

"Reducing the rate of preventable foreclosures would promote economic stability for households, neighborhoods and the nation as a whole," Bernanke said.

"Although lenders and servicers have scaled up their efforts and adopted a wider variety of loss-mitigation techniques, more can, and should, be done," the Fed chief said.

One of the suggestions Bernanke made was for mortgage and other financial companies to reduce the amount of the loan to provide relief to a struggling owner.

"Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure," Bernanke said.

Bernanke acknowledged this idea might be a tough sell to lenders.

Lenders, he said, are reluctant to write down principal.

"They say that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again," Bernanke said.

Bill Stevens, chief executive officer of CapitalBank in Greenwood, S.C., said:

"We've been talking about it as bankers."

"It's a tough business decision."

Tom Loonan, vice president of the State Bank of Easton in Minnesota, suggested that debt relief for some who got in over their heads may anger others, who took out mortgages that they could afford.

"There's going to be some animosity," he said.

Still, Bernanke suggested such longer-term permanent solutions may work better than shorter-term and temporary ones, where the distressed homeowner could find himself in trouble again.

"When the mortgage is 'under water' a reduction in principal may increase the expected payoff by reducing the risk of default and foreclosure," he said.

On Wall Street, anxious investors pulled the Dow Jones industrials down 45.10 points.

To date, permanent home mortgage modifications that have occurred have typically involved a reduction in the interest rate, while reductions of the principal balance of the loan have been quite rare, he said.

"Measures that lead to a sustainable outcome are to be preferred to temporary palliatives, which may only put off foreclosure and perhaps increase its ultimate costs," Bernanke said.

Brookly McLaughlin, spokeswoman for the Treasury Department, which has been leading the Bush administration's relief efforts, noted that foreclosures are expensive for both lenders and homeowners, giving parties an incentive to renegotiate a mortgage contract.

However, "we're not going to dictate how those renegotiations should be accomplished," she said.

"If lenders find that in some cases a principal writedown is less costly than foreclosure, then that is an option they have the incentive to consider."

More than half of the projected 1.5 million home foreclosure proceedings started in 2007 were on subprime loans given to borrowers with blemished credit histories or low incomes.

The housing collapse dragged down home values, clobbering these subprime borrowers.

Many were left with mortgages that exceeded the value of their homes.

They were further socked by low introductory rates on their adjustable mortgages resetting to higher rates, making their monthly payments difficult or impossible, to afford.

Problems in the credit markets have made refinancing a mortgage harder.

This year, about 1.5 million loans -- representing more than 40 percent of the outstanding stock of subprime adjustable-rate mortgages -- are scheduled to reset to higher rates, Bernanke said.

The Fed estimates that the interest rate on a typical subprime ARM slated to reset in the current quarter will increase to about 9.25 percent from just above 8 percent.

That would raise the monthly payment by more than 10 percent, to $1,500 on average, he said.

Declines in short-term interest rates and a Bush administration initiative involving rate freezes will "reduce the impact somewhat, but interest rate resets will nevertheless impose stress on many households," Bernanke said.

Sheila Bair, chairman of the Federal Deposit Insurance Corp., also said it's important to think long-term.

"Repayment plans or brief deferrals of payments will not allow us to get past our current problems."

"They are analogous to 'kicking the can down the road,'" she told lawmakers Tuesday.

On Capitol Hill, a number of measures have been offered to help stressed homeowners.

Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, welcomed Bernanke's call for more action.

"It is now clear that we will not be able to avert a more serious and prolonged economic slowdown if we don't address the problem of increasing mortgage foreclosures," Frank said.

"Bernanke's willingness to work with us in a cooperative way, and his outline of the principles that we should be applying are very hopeful signs."

--------

Associated Press Writer Travis Reed contributed to this report from Orlando, Fla.

------

On the Net:

Federal Reserve: http://www.federalreserve.gov/

This post has been edited by Livyjr: Mar 5 2008, 06:46 AM

[Livyjr]

FINANCIAL TIMES

"America’s economy risks mother of all meltdowns"

By Martin Wolf

Published: February 19 2008 18:21 | Last updated: February 19 2008 18:21

Recently, Professor Roubini’s scenarios have been dire enough to make the flesh creep.

But his thinking deserves to be taken seriously.

He first predicted a US recession in July 2006.

At that time, his view was extremely controversial.

It is so no longer.

Now he states that there is “a rising probability of a ‘catastrophic’ financial and economic outcome”.

The characteristics of this scenario are, he argues:

“A vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe.”

Here are his 12 – yes, 12 – steps to financial disaster.

Step one is the worst housing recession in US history.

House prices will, he says, fall by 20 to 30 per cent from their peak, which would wipe out between $4,000bn and $6,000bn in household wealth.

Ten million households will end up with negative equity and so with a huge incentive to put the house keys in the post and depart for greener fields.

Many more home-builders will be bankrupted.

Step two would be further losses, beyond the $250bn-$300bn now estimated, for subprime mortgages.

About 60 per cent of all mortgage origination between 2005 and 2007 had “reckless or toxic features”, argues Prof Roubini.

Goldman Sachs estimates mortgage losses at $400bn.

But if home prices fell by more than 20 per cent, losses would be bigger.

That would further impair the banks’ ability to offer credit.

Step three would be big losses on unsecured consumer debt: credit cards, auto loans, student loans and so forth.

The “credit crunch” would then spread from mortgages to a wide range of consumer credit.

Step four would be the downgrading of the monoline insurers, which do not deserve the AAA rating on which their business depends.

A further $150bn writedown of asset-backed securities would then ensue.

Step five would be the meltdown of the commercial property market, while step six would be bankruptcy of a large regional or national bank.

Step seven would be big losses on reckless leveraged buy-outs.

Hundreds of billions of dollars of such loans are now stuck on the balance sheets of financial institutions.

Step eight would be a wave of corporate defaults.

On average, US companies are in decent shape, but a “fat tail” of companies has low profitability and heavy debt.

Such defaults would spread losses in “credit default swaps”, which insure such debt.

The losses could be $250bn.

Some insurers might go bankrupt.

Step nine would be a meltdown in the “shadow financial system”.

Dealing with the distress of hedge funds, special investment vehicles and so forth will be made more difficult by the fact that they have no direct access to lending from central banks.

Step 10 would be a further collapse in stock prices.

Failures of hedge funds, margin calls and shorting could lead to cascading falls in prices.

Step 11 would be a drying-up of liquidity in a range of financial markets, including interbank and money markets.

Behind this would be a jump in concerns about solvency.

Step 12 would be “a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices”.

These, then, are 12 steps to meltdown.

In all, argues Prof Roubini:

“Total losses in the financial system will add up to more than $1,000bn and the economic recession will become deeper more protracted and severe.”

This, he suggests, is the “nightmare scenario” keeping Ben Bernanke and colleagues at the US Federal Reserve awake.

It explains why, having failed to appreciate the dangers for so long, the Fed has lowered rates by 200 basis points this year.

martin.wolf@ft.com

http://www.ft.com/cms/s/0/4d19518c-df0d-11...00779fd2ac.html

"Citi falls on worries about cash levels"

By MADLEN READ, Associated Press

Last updated: 5:53 p.m., Tuesday, March 4, 2008

NEW YORK -- Citigroup shares sank to their lowest level in more than nine years, as stockholders recoiled at forecasts of more losses at the troubled bank and comments from a Middle East fund executive that Citi must raise more cash to stay in business.

Samir al-Ansari, chief executive of the $13 billion government-owned investment firm Dubai International Capital, said Tuesday at a private equity conference that it will take more than the combined efforts of the Gulf's wealthiest investors -- the Abu Dhabi Investment Authority, the Kuwait Investment Authority and Saudi Prince Alwaleed bin Talal -- to save Citigroup.

Back in January, Citi raised $12.5 billion from a group of investors including the Kuwait Investment Authority, the Government of Singapore Investment Corp. and Prince Alwaleed.

And last year, Citi nabbed $7.6 billion from the Abu Dhabi Investment Authority, a sovereign wealth fund owned by the ruling elite of the United Arab Emirates, the world's fourth-largest oil exporter, in return for a 4.9 percent stake.

But a person familiar with Citigroup, who spoke on condition of anonymity because of the private nature of capital-raising efforts, said the bank is not actively seeking more cash from sovereign wealth funds.

The person said demand for Citi stock had been significantly higher, but the bank decided the $12.5 billion was enough.

The reason many shareholders are selling off is that Citi is poised to suffer additional losses due to defaulting loans.

Having already written down $18 billion in bad mortgage-related debt in the fourth quarter, Merrill Lynch analysts predicted that Citi will have to write down another $18 billion in mortgage and other debt in the first quarter, according to Dow Jones Newswires.

Meanwhile, Goldman Sachs analysts issued a note saying a modeling miscalculation led it to overestimate its profit forecast for Citi.

Goldman on Tuesday lowered its prediction of a first-quarter profit at Citi of 15 cents a share to a first-quarter loss of a $1 a share.

It also reduced its 2008 full-year profit estimate to $1.35 a share from $2.50 a share.

Citigroup shares -- which have shed about 50 percent since the credit markets froze up last summer -- dropped another 4.3 percent to close at $22.10 Tuesday on the New York Stock Exchange.

In January, Citigroup reported losses of almost $10 billion in the fourth quarter, spurred by $18 billion in write-downs.

In addition to capital injections from sovereign wealth funds, the bank has been raising cash through small asset sales of nonessential assets and nearly halving its dividend in January.

"Not only do they need to raise more money, but they should've suspended their dividend six months ago," said Christopher Whalen, managing director of consulting firm Institutional Risk Analytics.

"They're trying to do this in bite-size pieces."

"But everyone's still waiting for the other shoe to drop."

Citi Chief Financial Officer Gary Crittenden said in January the $12.5 billion stake, along with a $2 billion stock sale the bank completed soon afterward, was enough to address "potential capital shortfall under multiple scenarios."

"They're saying it's enough -- it's not enough," Whalen said, noting that further losses from consumer debt will draw down Citi's cash levels.

Citi executives pointed in January to the bank's Tier 1 capital ratio -- essentially, its ratio of cash to debt -- which lifted from just above 7 percent to 8.8 percent.

The Federal Deposit Insurance Corp. says that for a bank to be considered well-capitalized, its Tier 1 capital ratio must be above 6 percent.

Dubai International Capital is an investment firm controlled by Dubai's ruler Sheik Mohammed bin Rashid al Maktoum.

It already owns stakes in HSBC Holdings PLC and Standard Chartered PLC, but not in Citi.

[Livyjr]

"Speculation adds to oil price surge"

By H. JOSEF HEBERT, Associated Press

Last updated: 1:33 p.m., Tuesday, March 4, 2008

WASHINGTON -- Market speculation on energy prices may have added as much as 10 percent to crude oil costs and the peak may be yet to come, a top Energy Department official said Tuesday.

Guy Caruso, head of the department's Energy Information Administration, told a Senate hearing that supply and demand would suggest a price of about $90 a barrel.

Prices fluctuated around $102 a barrel Tuesday -- although futures prices later dropped below $100 a barrel on the New York Mercantile Exchange -- on word that the Organization of Petroleum Exporting Countries are likely to keep production as is when they meet on Wednesday.

Oil prices had surged to $104 a barrel on Monday.

President Bush, meanwhile, chided OPEC for failing to pump more oil as energy prices soar and the U.S. economy slumps.

"My advice to OPEC is understand the consequences of high energy prices," Bush said after an Oval Office meeting with Jordan's King Abdullah II.

"I think it's a mistake to have your biggest customers' economies slowing down as a result of higher energy prices," Bush said.

Caruso said that supply and demand cannot account for all of the recent price surge.

"Something is clearly going on," he told the Senate Energy and Natural Resources Committee.

Caruso said that in the long run oil prices are forecast to decline, but he acknowledged any short-term predictions are uncertain and prices could increase further.

"I think it's difficult to say whether this is a peak because there's so much uncertainty," said Caruso.

Sen. Byron Dorgan, D-N.D., asked Caruso to explain the recent surge in oil prices.

"I am fairly well convinced that in the short term what we have is an unbelievable orgy of speculation," Dorgan said.

"There's clearly been a surge in moneys coming in to commodities markets, including energy, which has had some upward effect on the price above the trendline," Caruso responded.

He said it was difficult to say whether speculation contributed $5 or $10 to the most recent surge, but that his agency's estimate of where prices should be, based on supply and demand, was about $90 a barrel.

Caruso said higher oil prices also stem in part from strong global economic growth, shortages of experience workers, equipment and construction material in the oil industry, and political instability in regions of major oil production.

Energy analysts also have cited the shift of money from the stock market to the commodity markets, including energy, as well as the declining value of the dollar and political turmoil in the Middle East, Nigeria and Venezuela, and a buildup of military forces on the Venezuela-Colombia border in recent days.

Caruso said his agency's forecast shows oil prices declining over the next eight years, and then resuming an upward direction.

The Energy Information Administration's long-term energy forecast expects oil prices to average $57 a barrel by 2016, declining because of increased production of crude oil and availability of alternative fuels including ethanol.

But then increased demand is projected to push crude prices higher again to an average of well over $100 a barrel by 2030.

That brought a skeptical response from some senators.

"We're looking at $100 barrel today."

"I'm not confident in these projections in any way shape or form," said Sen. Kenneth Salazar, D-Colo., adding that he would not rule out $100 oil through 2015.

Caruso acknowledged difficulty in predicting short and long-term prices given today's price volatility.

"In the long run we do think...that high prices do stimulate investment on the supply side," he said.

"We do think that over time the (fundamental) economics should prevail."

"It's our view that the longer term impact of the current high oil prices will lead to more exploration and development and investment."

But Caruso noted the EIA has hedged its numbers for 2030.

It said crude oil prices could be $111 a barrel by 2030 under one economic scenario, but as much as $185 a barrel under another set of economic assumptions.

------

On the Net:

Energy Information Administration: http://www.eia.doe.gov

[Livyjr]

"Speculation adds to oil price surge"

By H. JOSEF HEBERT, Associated Press

Last updated: 1:33 p.m., Tuesday, March 4, 2008

WASHINGTON -- Market speculation on energy prices may have added as much as 10 percent to crude oil costs and the peak may be yet to come, a top Energy Department official said Tuesday.

President Bush, meanwhile, chided OPEC for failing to pump more oil as energy prices soar and the U.S. economy slumps.

"My advice to OPEC is understand the consequences of high energy prices," Bush said after an Oval Office meeting with Jordan's King Abdullah II.

"I think it's a mistake to have your biggest customers' economies slowing down as a result of higher energy prices," Bush said.

"Oil falls on OPEC worries, supply view"

By JOHN WILEN, Associated Press

Last updated: 4:53 p.m., Tuesday, March 4, 2008

NEW YORK -- Oil futures fell sharply Tuesday, dropping below $100 on the possibility that OPEC will boost production and on expectations that crude inventories are continuing to rise.

Light, sweet crude for April delivery fell $2.93 to settle at $99.52 on the New York Mercantile Exchange after dropping as low as $98.87 earlier.

It was crude's first move below the $100 mark this week and its lowest settlement price since Feb. 25.

Chakib Khelil, president of the Organization of Petroleum Exporting Countries, said the cartel is shying away from boosting production due to expectations that global demand for crude will fall during the second quarter.

But some investors are betting the cartel will boost production to bring prices down.

OPEC ministers, who meet Wednesday, are worried that soaring oil prices will help push the U.S. into a recession, which would further cut demand for crude.

"Whether enshrined in a formal quota hike or more surreptitious, an OPEC output hike seems a distinctly stronger possibility that the market has apparently priced in," said Antoine Halff, an analyst at Newedge USA LLC in a research note.

Prices were also pressured by expectations that domestic crude inventories rose by 2.3 million barrels last week, according to analysts surveyed by Dow Jones Newswires.

The Energy Department's Energy Information Administration will issue its weekly inventory report on Wednesday.

EIA Administrator Guy Caruso on Tuesday predicted crude prices will fall to $57 a barrel by 2016 as exploration and development expands, bringing new supplies to the market.

Prices rose as high as $103.95 a barrel Monday, climbing past the $103.76 price many analysts consider to be the true record high for oil after the $38 per barrel price from 1980 is adjusted for inflation.

Analysts attribute much of the recent runup in oil prices to speculative investors driven to the market by the falling dollar.

Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the greenback is falling.

This view of oil futures as a safe haven for money during turbulent times has in many cases rendered reports on inventories and demand moot.

"With the emphasis on the financial aspects, inventories are just below the radar," said Michael Lynch, president of Strategic Energy & Economic Research Inc. in Amherst, Mass.

But that can only last so long, many analysts say.

At some point, fundamentals will reassert themselves on the market.

While oil supplies are rising, several forecasters have recently cut back demand growth predictions for this year.

Still, Tuesday's downturn may not be the beginning of an end to oil's bull run, said Tom Kloza, publisher and chief oil analyst at the Oil Price Information Service in Wall, N.J.

Indeed, futures should be expected to stall from time to time during rallies as investors sell to lock in profits, he said.

Oil's recent rise has boosted gas prices, which rose 0.3 cent overnight to a national average of $3.168 a gallon, according to AAA and the Oil Price Information Service.

Diesel prices also rose overnight to a new record of $3.681 a gallon.

Many analysts expect gas prices to rise to near $4 this spring, well above last May's record of $3.227 a gallon.

Other energy futures were mixed Tuesday.

In Nymex trading, April heating oil futures fell 4.9 cents to settle at $2.7918 a gallon while April gasoline futures dropped 14.29 cents to settle at $2.5291 a gallon.

Natural gas futures rose 0.7 cents to settle at $9.353 per 1,000 cubic feet.

In London, Brent crude futures fell $2.96 to settle at $97.52 a barrel on the ICE Futures exchange.

------

Associated Press writers Adam Schreck in New York, Pablo Gorondi in Budapest and Gillian Wong in Singapore contributed to this report.

[Livyjr]

"Long-term Treasurys hit by inflation"

By LESLIE WINES, Associated Press

Last updated: 5:42 p.m., Tuesday, March 4, 2008

NEW YORK -- Long-term Treasury prices fell Tuesday after an inflation warning from a Federal Reserve official intensified the nervousness about commodities prices.

There was erratic price action throughout the day, but 10-year and 30-year bonds sold off decisively after Dallas Fed President Richard Fisher warned that the Fed should not assume that weaker economic growth will curb higher prices.

Fisher, who voted against a 0.50 percentage point cut in the fed funds rate in late January, said it would be worth the price of slower growth to keep inflation in check.

"The inflation vigilantes grew more concerned after Fisher's remarks," said Kim Rupert, managing director of fixed income at Action Economics.

Traders sold the 10-year and 30-year bonds to drive their yields higher, as long-term yields generally conform to expectations for inflation over time.

The benchmark 10-year Treasury note fell 6/32 to 99 11/32 with a yield of 3.58 percent, up from 3.55 percent late Monday, according to BGCantor Market Data.

Prices and yields move in opposite directions.

The 30-year long bond fell 1 23/32 to 98 6/32 with a yield of 4.49 percent, up from 4.43 percent late Monday.

The 2-year note gained 4/32 to 100 25/32 with a 1.60 percent yield, down from 1.64 percent the day before.

Heavy selling in after hours trade sent yields higher.

At 5:30 p.m. Eastern time, the 10-year yield was 3.63 percent, the 30-year yield was 4.52 percent and the 2-year yield was 1.66 percent.

The yield on the 3-month note fell to 1.67 percent from 1.73 percent late Monday as the discount rate dropped to 1.64 percent from 1.70 percent.

The 2-year is most sensitive to interest rate policy; its yield fell to a four-year low after a warning about the economy from Fed Chairman Ben Bernanke of further erosion in the housing sector.

The remark was seen as indicating the central bank will need to cut rates more to stimulate the economy.

Bernanke warned of further erosion in the housing sector.

The purchasing of 2-year maturities sent the yields on those notes as low as 1.49 percent, its weakest level since March, 2004.

This was a strong signal by traders that they believe the Fed funds rate, now 3 percent, is too high and will come down further.

The Fed's next monetary policy meeting is on March 18 and a reduction of about 0.50 percentage points is expected on or before then by the bond market.

The Treasury market along with the Fed is now concerned that the economy is facing a worst-case scenario of inflation rising at the same time that the economy is fumbling.

A vigorous recent commodities sector rally has raised concerns that inflation is poised to move even higher as the year unfolds.

However, the commodities rally was temporarily thwarted Tuesday.

Crude oil futures, which on Monday approached $104 for the first time, fell Tuesday ahead of a Wednesday meeting of OPEC ministers.

The ministers have all but ruled out increasing production, a worrisome development that could send futures prices still higher later in the week.

A skidding dollar has caused nervous investors to hedge by buying gold and other previous metals, sending those commodities to new highs also.

On Tuesday, gold for April delivery ended lower, after hitting a new record of $992 an ounce the day before.

There also was a new high for platinum early Tuesday, $2,308.80 an ounce, although that metal later closed lower.

Other Fed officials also made worrisome remarks about the economy Tuesday.

Vice Chairman Donald Kohn said in prepared remarks to U.S. senators that banks likely face more asset write-downs but their cash levels are sound.

And Fed Governor Frederic Mishkin told business economist he saw "significant risks" to growth and that the economic outlook has deteriorated.

[Livyjr]

"Gold plummets on profit-taking"

By STEVENSON JACOBS, Associated Press

Last updated: 3:42 p.m., Tuesday, March 4, 2008

NEW YORK -- Gold fell sharply Tuesday after crude oil retreated and traders cashed in profits following the metal's flirtation with the historic $1,000 mark.

Silver and copper also declined.

Other commodities fell across the board, with corn, wheat, soybean and energy futures all trading lower in a broad futures sell-off.

Gold has gained more than 15 percent this year, driven up by record high oil prices, steep declines in the dollar and worries about a U.S. recession.

The most-actively traded April contract hit an intraday high of $992 an ounce on Monday -- a record high and just shy of the psychologically important $1,000 barrier.

Gold's failure to breach the $1,000 mark triggered a sell-off, sending the metal $17.90 lower to settle at $966.30 an ounce Tuesday on the New York Mercantile Exchange.

Gold fluctuated widely, trading as high as $990.30 and as low as $958.30.

"Inability to keep the $1,000 level worried latecomers to the party," George Gero, vice president with RBC Capital Markets Global Futures, said in a note.

"However, past sell-offs turned out to be a buying opportunity."

Other precious metals also fell Tuesday.

Silver for March delivery fell from a 27-year high to settle at $19.738 an ounce, down 33.5 cents on the Nymex.

Copper for March delivery slipped 110.4 cents to settle at $3.8270 a pound.

Gold has been on a meteoric rise, soaring nearly 32 percent in 2007.

The decline of the 15-nation euro has been a strong driver of the metal, which is viewed as a safe-haven investment in times of rising inflation and economic instability.

The euro traded at $1.5209, up from $1.5192 late Monday in New York.

A weak dollar encourages investors to shift funds into hard assets like gold, which are known for holding their value.

It also makes dollar-denominated commodities like gold cheaper for overseas buyers.

Gold's fortunes also have been closely linked to crude oil, which fell below $100 Tuesday on the possibility that OPEC will boost production and on expectations that crude inventories are continuing to rise.

"Oil is definitely a part of (gold's decline)."

"If you had seen oil go to $107, you would have seen gold hit $1,000."

"It's prima facie evidence of where funds are putting their money," said Jon Nadler, analyst with Kitco Bullion Dealers Montreal.

Light, sweet crude for April delivery fell $2.93 to settle at $99.52 a barrel on the Nymex after dropping as low as $98.87 earlier.

It was crude's first move below the $100 mark this week and its lowest settlement price since Feb. 25.

Prices rose as high as $103.95 Monday, climbing past the $103.76 price many analysts consider to be the true record high for oil.

Other energy futures also fell Tuesday.

April heating oil futures fell 4.9 cents to settle at $2.7918 a gallon on the Nymex, while April gasoline futures dropped 14.29 cents to settle at $2.5291 a gallon.

In agriculture markets, corn and soybeans plummeted a day after hitting record-highs on expectations of growing global demand amid dwindling stockpiles.

Soybeans for May delivery dropped 48.75 cents to settle at $15.1075 a bushel on the Chicago Board of Trade, while March corn lost 12.5 cents to settle at $5.43 a bushel.

Wheat, meanwhile, fell 15 cents to settle at $10.875 a bushel on the CBOT.

[Livyjr]

"Staples can't find 'Easy' button for '08'"

By MARK JEWELL, Associated Press

Last updated: 5:42 p.m., Tuesday, March 4, 2008

BOSTON -- While Staples Inc. is weathering the economic downturn better than rival Office Depot Inc., the world's largest office products supplier sees no quick turnaround from sagging U.S. customer demand.

The chain of more than 2,000 stores and 76,000 employees on Tuesday trimmed its profit and sales forecasts for the full year, and reported its fourth-quarter profit dipped 1 percent.

Staples' retail customer traffic fell 6 percent in the fourth quarter, and "remains choppy," Staples Chairman and Chief Executive Ron Sargent told analysts on a conference call.

"I feel like we're kind of bumping along the bottom of this recession."

Shares of the Framingham, Mass.-based retailer fell 27 cents, or 1.2 percent, to close at $22.22 Tuesday, after dropping almost 5 percent earlier in the session.

Staples earned $333.2 million, or 47 cents per share in the three months ended Feb. 2, matching the expectations of analysts surveyed by Thomson Financial.

In the same quarter a year earlier, Staples' profit was $336.5 million, or 46 cents per share.

Sales rose 1 percent to $5.32 billion -- just shy of analysts' expectations for $5.37 billion -- from $5.29 billion a year earlier.

Staples' latest results were for a period with 13 weeks, one less week than in the same fiscal quarter in 2006.

Using a 13-week comparison in both quarters, Staples' per-share profit rose 15 percent, with sales up 8 percent.

Staples' earnings came a week after Delray Beach, Fla.-based Office Depot reported its fourth-quarter profit tumbled 85 percent.

The drop was due in part to slumping sales in places with sharp housing market downturns like Florida -- a state where Office Depot is more heavily invested than Staples.

Staples also has recently maintained stronger profit margins than Office Depot and another rival OfficeMax Inc., said Dan Davidowitz, a portfolio manager with Polen Capital Management, which holds about $30 million worth of shares in Staples.

"Their margins have held up well," Davidowitz said.

"They've been very strong operators in a difficult environment."

Nevertheless, Staples' sales at North American stores open at least a year -- a key measure of retail performance -- fell 6 percent, driven by weak sales of office furniture and business machines.

That decline was partly offset by a 4 percent increase in sales of delivered business products.

International sales rose 13 percent, but just 3 percent accounting for fluctuating currency.

Staples forecasts sales to grow in the mid-single digits in percentage terms in 2008, down from a forecast it offered in November for a 2008 sales growth in the high single digits.

Staples expects per-share earnings to increase in the high single digits for the year, compared with the previous forecast of growth in the low teens.

The company is more cautious after a sales slowdown that bottomed out in December before improving slightly in January.

"At this point, we're feeling less confident about our ability to forecast demand, and that's why we've revised our guidance for the short term," Sargent told analysts.

However, the company is sticking with plans to add 100 stores this year, compared with 120 last year.

Staples also is increasing this year's annual dividend to shareholders to 33 cents per share from 29 cents per share a year ago.

Staples executives declined to take analysts' questions on whether the company might increase its $3.67 billion bid to acquire Netherlands-based Corporate Express NV, which rejected Staples' unsolicited offer as too low on Feb. 19.

Some analysts expect an eventual agreement for an acquisition that would expand Staples' profitable segments serving business customers and overseas clientele.

"I'm sure they're still interested in Corporate Express," Davidowitz said.

"It would probably be a decent return on their investment, even if they offer a higher price."

[Livyjr]

"Bush: US is not headed into recession"

By TERENCE HUNT, AP White House Correspondent

28 February 2008

WASHINGTON - President Bush said Thursday the country is not recession-bound and, despite expressing concern about slowing economic growth, rejected for now any additional stimulus efforts.

Bush's view of the economy was decidedly rosier than that of many economists, who say the country is nearing recession territory or may already be there.

Bush also telegraphed optimism about the U.S. dollar, which has been declining in value.

"I believe that our economy has got the fundamentals in place for us to ... grow and continue growing, more robustly hopefully than we're growing now," he said.

"So we're still for a strong dollar."

"Dollar falls in Europe, Canada, Japan"

By ERIN CONROY, Associated Press

Last updated: 5:33 p.m., Tuesday, March 4, 2008

NEW YORK -- The dollar fell Tuesday, hovering near its all-time low against the euro, after the Bank of Canada cut its interest rate by half a percentage point to 3.5 percent and indicated that more trims will be needed to deal with a deteriorating U.S. economy.

The dollar fell to 1.0042 Canadian dollars in late New York trading, from 1.0074 Canadian cents on Monday.

The euro bought $1.5208, up from $1.5192 on Monday after touching a record high of $1.5266.

The British pound rose slightly to $1.9859 from $1.9847, while the dollar fell to 103.14 Japanese yen from 103.96 the day before.

Tuesday marked the first time the Canadian bank reduced borrowing costs by a half point since November 2001 -- two months after the Sept. 11 attacks.

The central bank said more rate cuts may be required soon, possibly as early as April.

Meanwhile, Australia's central bank raised its key interest rate Tuesday to the highest level in 12 years to combat inflation, bucking the trend among major central banks to cut rates in hopes of stimulating their economies.

The Reserve Bank of Australia's lifted the key rate by a quarter point to 7.25 percent.

Michael Woolfolk, senior currency strategist at the Bank of New York, said traders will be looking for indications about future interest rate moves from the European Central Bank on Thursday, when ECB staff economists will also unveil inflation projections for 2009.

While the Federal Reserve has cut rates in an attempt to loosen the credit squeeze, the ECB has so far been reluctant to do so over worries about accelerating inflation.

The dollar was battered Monday by another series of weak economic reports from Washington, while speculation has been growing that the Fed might cut rates by as much as three-quarters of a percentage point this month.

While lower interest rates can jump-start a nation's economy, they can weaken its currency as traders transfer funds to countries where they can earn higher returns.

"There's been a lot of pressure on the dollar this week, and we believe it will continue to pull back," Woolfolk said.

"But the dollar remains very much out of favor in the current economic environment and will continue to deteriorate over the course of the second quarter of the year."

Meanwhile, the yen's rise has caused concern in Japan.

Japan's economy minister, Hiroko Ota, described the dollar's fall as "abnormally rapid."

Since the start of the year, the dollar has fallen more than 7 percent against the yen.

That erodes Japanese exporters' overseas earnings and makes their exports more expensive.

In other New York trading, the dollar fell to 1.0363 Swiss francs from 1.0424 Swiss francs.

[Livyjr]

"Sovereign funds may not save Citigroup"

Associated Press

Last updated: 12:22 p.m., Tuesday, March 4, 2008

DUBAI, United Arab Emirates -- Citigroup shares dropped more than 6 percent Tuesday after the head of Dubai International Capital said that Mideast sovereign wealth funds may fail to save Citigroup unless more cash is pumped into the bank.

Samir al-Ansari, chief executive of the $13 billion government-owned investment firm, said at a private equity conference that it will take more than the combined efforts of the Gulf's wealthiest investors -- the Abu Dhabi Investment Authority, the Kuwait Investment Authority and Saudi Prince Alwaleed bin Talal -- to save the U.S.-based bank.

Citigroup shares, which have lost about third of their value since November, dropped another 6.4 percent to $21.61 on the New York Stock Exchange.

The intervention of Gulf countries awash with cash from record oil earnings has failed to stem the decline seen since last year, triggered by Citigroup's $11 billion subprime write-down last year.

Last year, the Abu Dhabi Investment Authority, a sovereign wealth fund owned by the ruling elite of the United Arab Emirates, the world's fourth-largest oil exporter, pumped $7.6 billion into Citigroup for a 4.9 percent stake.

Earlier this year, the Kuwait Investment Authority announced a $3 billion investment in the bank.

But al-Ansari said "it would take a lot more money to rescue Citigroup," Dow Jones Newswires reported on Tuesday.

He said more write-downs were expected and Gulf investors would be required to bolster Citigroup.

Dubai International Capital is an investment firm controlled by Dubai's ruler Sheik Mohammed bin Rashid al Maktoum.

It already owns stakes in HSBC Holdings PLC and Standard Chartered PLC.

Last year, Dubai International Capital also bought a 3.12 percent in European Aeronautic Defence & Space Co. NV, the parent of planemaker Airbus.

In January, Citigroup reported loses of almost $10 billion in the fourth quarter, spurred by $18 billion in write-downs.

Citigroup said it planned to raise $14.5 billion in capital by selling stakes to wealthy Gulf investors, including Saudi Prince Alwaleed, the lenders' largest single shareholder.

[Livyjr]

"New agreement on appraisals will benefit independent firms"

By MARCY GORDON, Associated Press

Last updated: 6:13 p.m., Tuesday, March 4, 2008

WASHINGTON -- A new agreement by Fannie Mae and Freddie Mac to only buy mortgages for which appraisals are made by firms independent from lenders will shake up the industry, analysts said.

The accord announced Monday between the country's two largest mortgage purchasers and New York Attorney General Andrew Cuomo likely will benefit independent appraisal firms and could force lenders that own appraisal operations to sell them off.

Cuomo's office has investigated billions of dollars of home loans that Fannie and Freddie bought from lenders, including the largest U.S. savings and loan, Washington Mutual Inc.

He says that lenders have pressured appraisers to inflate the listed value of homes, contributing to a national mortgage crisis that is forcing families into foreclosure.

With the cost of a home appraisal running about $300-$400, the industry has reaped billions in revenue a year during the housing boom of recent years.

The agreement ends the practice of lenders using their in-house staff for initial home appraisals and prohibits the use of appraisal-management companies owned or controlled by lenders.

Among the lenders that own such companies are Wells Fargo & Co. and Countrywide Financial Corp.

Appraisal-management firms act as intermediaries between lenders and appraisers.

"It's going to create massive change," said Brian Chappelle, a partner at Potomac Partners in Washington, D.C., a consulting firm to the mortgage industry.

"It's going to be a huge boon to independent appraisal firms."

Independent firms that are owned by public companies are LSI, based in Coraopolis, Pa., and owned by Fidelity National Information Services Inc., and Poway, Calif.-based eAppraiseIT, part of First American Corp.

Jeff Schurman, executive director of the Title-Appraisal Vendor Management Association, and Bill Garber, government affairs director at the Appraisal Institute, also see such a reshaping of the appraisal industry landscape.

For the appraisal companies owned by lenders, "it penalizes them because they're captive," Schurman said.

The trade group representing mortgage brokers, which often designate specific appraisers under the current system, protested the agreement and threatened legal action.

The agreement "will increase costs to consumers by removing thousands of small-business competitors from the marketplace," Roy DeLoach, executive vice president of the National Association of Mortgage Brokers, said in a statement.

Shares of Wells Fargo slipped 4 cents to close at $28.83 Tuesday; Countrywide stock fell 24 cents to $5.93.

Shares of Fidelity National declined 21 cents to $40.80 and First American fell 50 cents to $33.

[Livyjr]

"Helicopter crash in Iraq kills 8"

By SAMEER N. YACOUB, Associated Press Writer

4 March 2008

BAGHDAD - An Iraqi military helicopter crashed in northern Iraq, killing an American soldier and seven other people, the U.S. military said Tuesday.

The announcement came on a day that recorded little violence in Iraq.

The country's president announced he would visit neighboring Turkey, and the prime minister called for the release of a kidnapped Chaldean Catholic archbishop.

The Russian-made M-17 helicopter was found Tuesday south of Beiji, about 90 miles south of Mosul, a day after it was reported missing.

The Iraqi Defense Ministry said the aircraft got caught in bad weather.

All eight people on board the helicopter died, including the U.S. soldier, said military spokesman Lt. Michael Street.

An Iraqi air force official said six Iraqis and two foreigners were on board.

The official, who spoke on condition of anonymity because he wasn't authorized to release the information, did not give the nationality of the other foreigner.

Street said he was unaware that another foreigner was aboard the helicopter.

Meanwhile, the U.S. military said it killed three extremists in an effort to capture an al-Qaida in Iraq leader in eastern Baghdad.

The targeted individual was not killed, but three associates were when they failed to heed troops' demands that they halt their vehicle.

A civilian was injured in the clash, the statement said.

The military also said that Iraqi special forces, with guidance from their U.S. counterparts, detained two al-Qaida in Iraq suspects in raids Saturday.

On Tuesday, Iraqi police arrested eight alleged al-Qaida members in Samarra, 60 miles north of Baghdad, according to local police Col. Mazin Younis.

A separate police unit led a joint operation with U.S. forces in Wasit province, 100 miles southeast of Baghdad, that netted 26 suspected Shiite extremists, the military said.

The raid also uncovered stores of explosives, said the regional police chief, Maj. Gen. Abdul-Hamid Faisal al-Emarah.

Violence has declined in much of Iraq in recent months except for north of Baghdad in Mosul city and Diyala province, where most of the fight is being waged against al-Qaida elements retreating from the west and the capital.

Prime Minister Nouri al-Maliki ordered his security officials to "work hard" to find a Chaldean Catholic archbishop who was kidnapped in Mosul.

Paulos Faraj Rahho was seized and three of his companions were killed Friday when gunmen attacked them soon after he left Mass, the latest in what church members called a series of attacks against Iraq's small Christian community.

Meanwhile, President Jalal Talabani's office announced that he will pay an official visit to Turkey within the next few days.

The exact date has not yet been set.

Turkish troops withdrew from northern Iraq on Feb. 29, ending an eight-day incursion against Kurdish PKK rebels using bases in northern Iraq to launch hit-and-run attacks in Turkey.

Iraqi authorities have said they do not support the PKK but objected to Turkey's military action.

Talabani, himself a Kurd, welcomed the end of the incursion.

[Livyjr]

FINANCIAL TIMES

"Why Washington’s rescue cannot end crisis story"

By Martin Wolf

Published: February 26 2008 17:34 | Last updated: February 26 2008 17:34

Last week’s column on the views of New York University’s Nouriel Roubini (February 20) evoked sharply contrasting responses: optimists argued he was ludicrously pessimistic; pessimists insisted he was ridiculously optimistic.

I am closer to the optimists: the analysis suggested a highly plausible worst case scenario, not the single most likely outcome.

Those who believe even Prof Roubini’s scenario too optimistic ignore an inconvenient truth: the financial system is a subsidiary of the state.

A creditworthy government can and will mount a rescue.

That is both the advantage – and the drawback – of contemporary financial capitalism.

In an introductory chapter to the newest edition of the late Charles Kindleberger’s classic work on financial crises, Robert Aliber of the University of Chicago Graduate School of Business argues that “the years since the early 1970s are unprecedented in terms of the volatility in the prices of commodities, currencies, real estate and stocks, and the frequency and severity of financial crises”.*

We are seeing in the US the latest such crisis.

All these crises are different.

But many have shared common features.

They begin with capital inflows from foreigners seduced by tales of an economic El Dorado.

This generates low real interest rates and a widening current account deficit.

Domestic borrowing and spending surge, particularly investment in property.

Asset prices soar, borrowing increases and the capital inflow grows.

Finally, the bubble bursts, capital floods out and the banking system, burdened with mountains of bad debt, implodes.

With variations, this story has been repeated time and again.

It has been particularly common in emerging economies.

But it is also familiar to those who have followed the US economy in the 2000s.

When bubbles burst, asset prices decline, net worth of non-financial borrowers shrinks and both illiquidity and insolvency emerge in the financial system.

Credit growth slows, or even goes negative, and spending, particularly on investment, weakens.

Most crisis-hit emerging economies experienced huge recessions and a tidal wave of insolvencies.

Indonesia’s gross domestic product fell more than 13 per cent between 1997 and 1998.

Sometimes the fiscal cost has been over 40 per cent of GDP.

By such standards, the impact on the US will be trivial.

At worst, GDP will shrink modestly over several quarters.

The ability to adjust monetary and fiscal policy insures this.

George Magnus of UBS, known for his “Minsky moment”, agrees with Prof Roubini that losses might end up as much as $1,000bn (FT.com, February 25).

But it is possible that even this would fall on private investors and sovereign wealth funds.

In any case, the business of banks is to borrow short and lend long.

Provided the Federal Reserve sets the cost of short-term money below the return on long-term loans, as it has for much of the past two decades, banks can hardly fail to make money.

If the worst comes to the worst, the government can mount a bail-out similar to the one of the bankrupt savings and loan institutions in the 1980s.

The maximum cost would be 7 per cent of GDP.

That would raise US public debt to 70 per cent to GDP and would cost the government a mere 0.2 per cent of GDP, in perpetuity.

That is a fiscal bagatelle.

Because the US borrows in its own currency, it is free of the currency mismatches that made the balance-sheet effects of devaluations devastating for emerging economies.

Devaluation offers, instead, a relatively painless way out of a slowdown: an export surge.

Between the fourth quarter of 2006 and the fourth quarter of 2007, the improvement in US net exports generated 30 per cent of US growth.

The bottom line, then, is that even if things become as bad as I discussed last week, the US government is able to rescue the financial system and the economy.

So what might endanger the US ability to act?

The biggest danger is a loss of US creditworthiness.

In the case of the US, that would show up as a surge in inflation expectations.

But this has not happened.

On the contrary, real and nominal interest rates have declined and implied inflation expectations are below 2.5 per cent a year.

An obvious danger would be a decision by foreigners, particularly foreign governments, to dump their enormous dollar holdings.

But this would be self-destructive.

Like the money-centre banks, the US itself is much “too big to fail”.

Yet before readers conclude there is nothing to worry about, after all, they should remember three points.

The first is that the outcome partly depends on how swiftly and energetically the US authorities act.

It is still likely that there will be a significant slowdown.

The second is that the global outcome also depends on action in the rest of the world aimed at sustaining domestic demand in response to a US shift in spending relative to income.

There is little sign of such action.

The third point is the one raised by Harvard’s Dani Rodrik and Arvind Subramanian, of the Peterson Institute for International Economics in Washington DC, (this page, February 26), namely the dysfunctional way capital flows have worked, once again.

I would broaden their point.

This is not a crisis of “crony capitalism” in emerging economies, but of sophisticated, rules-governed capitalism in the world’s most advanced economy.

The instinct of those responsible will be to mount a rescue and pretend nothing happened.

That would be a huge error.

Those who do not learn from history are condemned to repeat it.

One obvious lesson concerns monetary policy.

Central banks must surely pay more attention to asset prices in future.

It may be impossible to identify bubbles with confidence in advance.

But central bankers will be expected to exercise their judgment, both before and after the fact.

A more fundamental lesson still concerns the way the financial system works.

Outsiders were already aware it was a black box.

But they were prepared to assume that those inside it at least knew what was going on.

This can hardly be true now.

Worse, the institutions that prospered on the upside expect rescue on the downside.

They are right to expect this.

But this can hardly be a tolerable bargain between financial insiders and wider society.

Is such mayhem the best we can expect?

If so, how does one sustain broad public support for what appears so one-sided a game?

Yes, the government can rescue the economy.

It is now being forced to do so.

But that is not the end of this story.

It should only be the beginning.

* Manias, Panics and Crashes, Palgrave, 2005.

martin.wolf@ft.com

http://www.ft.com/cms/s/0/1aa2daea-e48d-11...00779fd2ac.html

[Livyjr]

"OPEC hints output will not change"

By WILLIAM J. KOLE, Associated Press

Last updated: 8:02 a.m., Wednesday, March 5, 2008

VIENNA, Austria -- OPEC's president urged the cartel to maintain "constant vigilance" Wednesday with oil prices hovering above $100 per barrel, but said despite a turbulent world economy, the global market for crude was stable.

OPEC President Chakib Khelil said crude stocks were well within their five-year average and the 13-nation group would likely leave unchanged its global output of about 32 million barrels a day.

Khelil cautioned that the Organization of Petroleum Exporting Countries would have to maintain "constant vigilance" as the weak dollar, the U.S. subprime mortgage crisis and political tensions in the Middle East rattle markets worldwide.

"The growing sense of despondency about the future global economic outlook is generating much uncertainty in energy circles," he said in an opening address to oil ministers gathered in Vienna.

"There have been signs that the oil market is moving into a new phase," Khelil said, adding:

"It should be characterized by stability and not volatility."

Saudi Arabia, OPEC's top producer and by far its most influential member, also said it saw no reason to change output targets -- despite record high prices and a rebuke Tuesday from President Bush.

"Understand the consequences of high energy prices," Bush said after meeting with King Abdullah II of Jordan in the Oval Office.

"I think it's a mistake to have your biggest customers' economies slowing down as a result of higher energy prices," he added.

Japan, the U.S. and other major industrialized nations have urged OPEC -- which supplies about 40 percent of world demand for crude -- to bring more oil on the market and pull down prices, which reached an inflation-adjusted record of nearly $104 a barrel this week.

OPEC is resisting, pointing to slackening demand in the second quarter and suggesting it would hold off to see what happens with supply and prices this spring.

"Why do we need to take any new measure if the health of the market that we follow for our policies is sound?" the pan-Arab newspaper Al Hayat quoted Saudi Oil Minister Ali Naimi as saying.

Naimi told reporters in Vienna that his country is pumping roughly 300,000 barrels a day over its quota and is selling every drop "day in, day out" -- an upbeat assessment.

Analysts said they didn't expect any significant action Wednesday.

"In truth, OPEC's decision not to pump more oil is a reflection that supply is relatively good," said Anthony Sabino, a professor of business at St. John's University in New York.

"What is driving oil prices up to the stratospheric level of over $100 per barrel is the U.S. economy, now undeniably in recession," he said.

"It's not so much the price of oil is going up -- it's that the value of the U.S. dollar, sad to say, is slumping."

Oil shot up a dramatic 19 percent last month as the falling dollar prompted speculators and other investors to shift cash to crude and other commodities as a hedge.

Khelil said Wednesday that OPEC was not happy at the speculation rocking an already jittery market, saying the influence has "not been welcomed by this organization."

Key cartel members said this week that prices in the $85 to $90 per barrel range would be optimal.

The 13 OPEC members are Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela.

Iraq is the only member not subject to the cartel's output quotas.

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On the Net:

OPEC, http://www.opec.org