Economic Calendar

Monday, November 3, 2008

Risk Aversion Ebbs this Morning... Comdol Time?


Currency Currents
Daily Forex Fundamentals | Written by Black Swan Capital | Nov 03 08 13:24 GMT |

Key News

Key Reports Due (WSJ):

  • 10:00a.m. Sep Construction Spending: Expected: -0.7%. Previous: Unch.
  • 10:00a.m. Oct ISM Manufacturing Business Index: Expected: 41.5. Previous: 43.5.

Quotable

"Historically, economists have evaluated the economy's overall leverage in terms of nonfinancial debt. The theory for this is that the financial sector takes on debt in order to make loans for the nonfinancial sector; thus, to include financial debt would result in double counting. The logic of that approach is not valid in the current situation. The leverage in the financial system, including the financial intermediaries and government sponsored entities like Fannie and Freddie, is clearly excessive and the source of much distress in the economy. When viewed on this more comprehensive basis, total leverage of the U.S. economy surged to an all time peak for the past 92 years that records have been kept. Total U.S. debt in the second quarter jumped to 357% of GDP, up from an average of 195% from 1916 to the present. In less than five years, the total debt to GDP ratio jumped more than 50%.

"As the chart indicates, 300% was the 1933 high of the total debt to GDP ratio. The current peak, however, was reached due to a surge in debt, while the 1933 peak reflected a dramatic fall of nominal GDP, the denominator of the ratio. The new record level of debt in the second quarter reflected the worsening situation among corporations, both financial and nonfinancial. Clearly the magnitude of the debt problem is unprecedented and years, not months or quarters, will be required to bring debt into some reasonable relationship with economic activity. As long as this situation persists, the U.S. faces a difficult economic environment. This is due to the fact that over the past four decades every additional dollar of debt created 86 cents worth of GDP, and with debt shrinking, GDP will struggle to generate positive growth."

Hoisington Management Third Quarter Review & Outlook

FX Trading - Risk Aversion Ebbs this Morning... Comdol Time?

Gold is sharply higher this morning... up $20 bucks. Stocks globally are doing well and premarket SPU is bidding a bit higher. Oil is trying to turn higher.

Ebb in risk aversion means a flow of risk appetite by definition. And risk appetite may mean it's time for commodities, which have been body slammed, to make a decent correction; maybe of the multi-week variety. Thus, maybe it's time to own some Comdols again i.e. commodity dollars, fist three letters of each word, for those not yet super-fx-trader slang literate.

The chart above is a 240-min chart of oil, gold, and Aussie. All have broken above their nasty down trends of late on this near-term basis.

Jack Crooks
Black Swan Capital

http://www.blackswantrading.com

Black Swan Capital's Currency Snapshot is strictly an informational publication and does not provide individual, customized investment advice. The money you allocate to futures or forex should be strictly the money you can afford to risk. Detailed disclaimer can be found at http://www.blackswantrading.com/disclaimer.html


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Will the Reserve Bank of Australia Deliver a 50bp Rate Cut?

Daily Forex Fundamentals | Written by DailyFX | Nov 03 08 13:16 GMT |

Trading the News: RBA Rate Decision

What's Expected

Time of release: 11/04/2008 03:30 GMT, 22:30 EST
Primary Pair Impact : AUDUSD
Expected: 5.50%

Effect the RBA Rate Decision had on AUDUSD over the past 3 releases

October 2008 RBA Rate Decision

The Reserve Bank of Australia lowered the benchmark interest rate by 100bp for the first time since 1992 as fears of a global meltdown intensified. The RBA minutes showed that the central bank slashed borrowing costs for the second consecutive meeting to lower the interest rate to 6.00%, stating that the unexpected move was ‘appropriate' in order to stave off further downturns in the $1T economy. Meanwhile, Governor Glenn Stevens said that the risk of a ‘global catastrophe' has died down as a result of the extraordinary efforts taken on by policy makers worldwide, but has raised speculation that the RBA will continue to ease policy further as the major economies around the world slip into a recession.

September 2008 RBA Rate Decision

Comments by RBA Governor Stevens following the 25bp rate cut to 7.00% in September indicates that the bank will hold a dovish outlook going forward, and suggests that bank may consider lowering the benchmark interest further as growth prospects deteriorate. Falling commodity prices paired with mounting downside growth risks has led the Reserve Bank of Australia to lower borrowing costs for the first time since the end of 2001, with Governor Stevens holding a dour outlook for the $1 trillion economy as he predicts tightening credit conditions to force business and consumers to cutback on borrowing, and anticipates private-sector spending to weaken in the months ahead. He went on to note that he also anticipates the unemployment rate to rise throughout 2009, which only strengthens the argument that the central bank will look to lower rates further in the near-term.

August 2008 RBA Rate Decision

Governor Stevens following the RBA's decision to leave rates on hold, sent a clear signal that a rate cut was imminent. The central bank kept their benchmark interest rate on hold at an 11-year high of 7.25%, but the elevated credit costs are slowing growth. As the downside risks grow and oil prices ease the MPC is moving its focus from price stability toward stimulating growth. Indeed, Governor Steven's stated "With demand slowing, the board's view is that scope to move towards a less restrictive stance of monetary policy in the period ahead is increasing." The dovish comments would spark bearish price action that would have triggered a long trade worth at least 75 points.

How To Trade This Event Risk

The Reserve Bank of Australia rate decision will set the stage this week as Governor Glenn Stevens is anticipated to lower the benchmark interest rate by 50bp to 5.50% ahead of the ECB and BoE policy meeting on Thursday. The central bank is expected to ease policy for the third consecutive meeting as fears of a global recession continues to pose a threat to the $1T economy. Increased concerns of a sever downturn has certainly take a toll on consumers as the Westpac confidence index fell 11.0% in October to reach its lowest level in more than two years. In addition, the survey showed that consumers' willingness to buy major household items fell at its fastest pace since recordkeeping began in 1975, indicating that private-sector consumption may weaken further over the coming months as firms continue to cutback on employment. The jobless rate in September increased to 4.3% from 4.1%, and conditions are anticipated only get worse as skilled vacancies decline 3.7% in October. Despite expectations for a rate cut this week, Credit Suisse overnight index swaps are showing that market participants anticipate the RBA to ease policy further as they expect the central bank to cut 150bp over the next 12 months, which would only stoke increased selling pressures for the Australian dollar in the near-term. In addition, narrowing demands for carry trades paired with the downturn in the financial market has certainly limited the appeal of the high-yielding currency, and the aussie may face increased selling pressures over the coming months as investors continue to curb their temperament for risk.

Despite the dour outlook for the Australian economy, retail spending increased 0.2% from August, which suggests that economic activity is holding up fairly well amid the downturn in the global economy, which should help to ease growth concerns for the RBA. Furthermore, Governor Stevens noted that risks of a ‘global catastrophe' have diminished as a result of the extraordinary efforts taken on by policy makers around the globe, which could allow the central bank to surprise the markets by holding the benchmark interest rate steady at 6.00% or by delivering a 25bp to lower the key rate to 5.75%. Therefore, if the RBA fails to deliver a 50bp cut, we will favor a bullish outlook for the Australian dollar, and will look for a green, five-minute candle following the release to confirm a long trade for two lots of AUDUSD. We will then place our initial stop at the nearby swing low (or reasonable distance), and this risk will determine our first target. Our second target will be base on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

However, as the major economies in the Pacific slip into a recession, the RBA may in fact lower borrowing costs by 50bp in order to avoid a sever downturn in the economy. Accordingly, an inline print would certainly favor a bearish outlook for the aussie, and we will follow the same setup for the short trade as the long trade listed above, just in reverse.

DailyFX

Disclaimer

Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.


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Daily Forex Fundamentals | Written by DailyFX | Nov 03 08 13:10 GMT |

European Manufacturing Falters, Stoking Increased Fears of a Global Recession

Fundamental Headlines

  • Rescue Cash Lures Thousands of Banks - Wall Street Journal
  • UAW Vies to Be Central Player in GM-Chrysler Deal - Wall Street Journal
  • Panasonic in talks on Sanyo Electric takeover - Financial Times
  • Commerzbank to Tap German Rescue Fund; SocGen Profit Drops 84% - Bloomberg
  • HSBC Defies Brown Call to Pass on Full U.K. Rate Cut - Bloomberg

EURUSD - Manufacturing in the Euro-Zone contracted for the fifth consecutive month, while the final PMI reading edged lower to a record low reading of 41.1 from an initial reading of 41.3. In addition, manufacturing activity in Germany fell for the third straight month to reach its lowest level on record as the index plunged to 42.9 from 47.4 in September. Meanwhile, European Commission lowered the 2009 growth forecast to 0.1% following an initial estimate of 0.9%. The bigger than expected decline in production paired with the dour outlook has certainly heightened fears that the European economy may slip into a recession by the end of the year, and has raised bets that the European Central Bank will indeed deliver another 50bp rate cut this week.

GBPUSD - U.K. manufacturing contracted for the sixth consecutive month, but pulled back from the record low reading of 41.0 to hold at 41.5 in October. Despite the unexpected improvement, the growth outlook for Europe’s second largest economy remains bleak as the U.K. slipped into a recession during the second half of the year, and conditions may only get worse as economic activity throughout the global economy deteriorates. Meanwhile, the British pound may face increased selling pressures later this week as the Bank of England is widely expected to lower the benchmark interest rate by 50bp to 4.00%.

USDCHF - Manufacturing activity in Switzerland contracted for the second straight month as fears of a global recession pushed firms to cutback on production. The SVME index slipped to 47.0 from 47.8 in September, but crossed the wires much stronger than the 45.3 estimate held by economists. Despite the better than expected reading, economic activity may weaken further over the coming months as growth prospects for the entire world deteriorate. Meanwhile, concerns of a severe downturn in the economy has already spurred bets that the Swiss National Bank will opt to lower the benchmark interest rate further in order to stave off further downturns in the economy, which could limit buying pressures for the Swiss franc in the near-term.

DailyFX

Disclaimer

Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.





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London Session Recap

Daily Forex Fundamentals | Written by Forex.com | Nov 03 08 13:03 GMT |

In a relatively quiet London session, the buck had an overall mixed performance against the majors. EUR/USD was about 20 pips higher into the 1.2845/50 zone despite poor economic data out of the Euro-zone. French and German October PMI manufacturing indexes were revised lower to 40.6 and 42.9 respectively -- both worse than expected. Meanwhile, the Euro-zone measure fell to 41.1 from 41.3 previously.

GBP/USD was crushed more than -110 pips on poor economic data and growing speculation that the BOE will cut rates more than the currently expected -50 bps this week. PMI manufacturing for the UK was a touch better than expected but the report looked terrible nonetheless, coming at a paltry 41.5 after a similar 41.2 print the prior month. This saw Cable dip from an open near 1.6300 towards the 1.6185/90 area in London trading.

The JPY crosses were pretty much unchanged and held on to the gains in the previous session. USD/JPY was sitting near 99.20/30 and right where it opened London trading. EUR/JPY was up a modest 15 pips towards the 127.40/50 area. US stock futures are pointing to a small positive open, but the ISM manufacturing report looms at 1000ET and this could throw a wrench into the good US equity performance seen over the last few days. Look for a change in direction here to see JPY crosses follow lower.

Upcoming Economic Data Releases (NY Session) Prior Estimate

  • 11/3/2008 15:00 GMT US ISM Manufacturing OCT 43.5 41.8
  • 11/3/2008 15:00 GMT US ISM Prices Paid OCT 53.5 48
  • 11/3/2008 15:00 GMT US Construction Spending MoM SEP 0.00% -0.80%
  • 11/3/2008 16:00 GMT EC Euro-Area Finance Ministers Meet 3-Nov
  • 11/3/2008 US Domestic Vehicle Sales OCT 9.6M 9.1M
  • 11/3/2008 US Total Vehicle Sales OCT 12.5M 12.0M

Forex.com
http://www.forex.com

DISCLAIMER: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.



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FX Thoughts for the Day

Daily Forex Technicals | Written by Kshitij Consultancy Services | Nov 03 08 13:42 GMT |

USD-CHF @ 1.1558/63... Could rise towards 1.1650

R: 1.1625-50 / 1.1700 / 1.1750
S: 1.1550 / 1.1470-50 / 1.1400 / 1.1350-25 / 1.1250-20

Finding some Support at 1.1470 the pair risen once again, negating the immediate bearishness that was expected to lead to a slip towards 1.1400.

For now, there is a bullish flag formation on the hourly chart, which indicates that there is a possibility of a rise towards 1.1650, on a rise past 1.1590. Having said this, the pair could continue to vacillate between 1.1550-1.1475 for the day if the flag does not hold.

Overall the pair has bullish momentum, which has been restricted by the Resistance at 1.1700-50. A re-test of the Resistance might result in a break above.

GBP-USD @ 1.6179/83... Could slip lower

R: 1.6300 / 1.6350 / 1.6400-50
S: 1.6200 / 1.6000 / 1.5900-5800

Cable rose to a high of 1.64 only to find a strong Resistance in the region. A slip since then has brought the pair lower during the day. There is a minor Support in the region between 1.6175?6200.

The is a bigger probability that the Support at 1.6200 will give way as the BOE is expected to lower interest rates. The US ISM scheduled to release today would also be a crucial data release. With an expectation of 41.60 the market has factored in a slight dip from last release at 43.50. To see the ISM chart click on: http://www.kshitij.com/fundamentals/funcharts/usism.shtml

Overall the pair is expected to trade within 1.58-66, as it remains ranged. The bias however, will be bearish as the downtrend could resume after the small relief rally that saw the pair test 1.6675 last week.

AUD-USD @ 0.6765/61... RBA rate cut tomorrow

R: 0.6850 / 0.6900-25 / 0.6975
S: 0.6775 / 0.6700 / 0.6650-00 / 0.6525-00

The pair is unable to rise beyond 0.6900 owing to the Resistance. Also the fact that Dollar-Yen has once again slipped to 99.00 also does not help the pair. For now, it has some Support in the 0.6720 region, however, as the RBA is set to cut interest rates tomorrow a sharp rise from the current levels is not likely.

Overall the rate cut could see the pair slip lower. However, the statement released by the RBA will be crucial to judge the dept of the problem that the economy currently faces. Also how strongly the RBA hints at further rate cuts for the future would be of importance. To see the chart of RBA interest rates click on: http://www.kshitij.com/fundamentals/funcharts/aurba.shtml

Kshitij Consultancy Service
http://www.fxthoughts.com

Legal disclaimer and risk disclosure

These views/ forecasts/ suggestions, though proferred with the best of intentions, are based on our reading of the market at the time of writing. They are subject to change without notice.Though the information sources are believed to be reliable, the information is not guaranteed for accuracy. Those acting in the market on the basis of these are themselves responsibly for any profits or losses that might occur, without recourse to us. World financial markets, and especially the Foreign Exchange markets, are inherently risky and it is assumed that those who trade these markets are fully aware of the risk of real loss involved.





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Currency Technical Report

Daily Forex Technicals | Written by FX Greece | Nov 03 08 13:31 GMT |

EUR/USD

Resistance: 1,2865-75/ 1,2940/ 1,3000/ 1,3050/ 1,3100-20/ 1,3170
Support : 1,2800-10/ 1,2750/ 1,2700-10/ 1,2620/ 1,2575-80/ 1,2500/ 1,2440/ 1,2390/ 1,2330...

Comment : A week full of important economic announcements is starting, with interest rate decisions from Europe and UK, Non Farm Payrolls and unemployment rate from US, ISM, US elections and many more that are likely to cause high volatility in the markets. The expected rate cut from Europe may compensated by negative economic released, expected from US, so we cannot make a clear prediction.

As we mentioned in our previous analysis, market's prediction this period is difficult and so do short term strategies .

According to the technical outlook, oscillators are in an oversold area and a base is being formed in the weekly chart, while in the daily chart Thursday's and Friday's negative candles give a negative sentiment.

First basic support is found at 1,2580-2620, followed by 1,2400-50.

The big fall from 1,3290-00 tops makes the reaction from Sunday's open corrective, as at 1,2900-20 the 38,2% retracement level will be completed (the decline from 1,3297- 1,2667).

We will focus on 1,2980-00 area(50%) in the beginning of the week, and an upward break could lead to 1,3170 or previous tops. A sideways consolidation is possible and we should wait for the market's reaction in the beginning of the week and the month in order to form a more detailed strategy.

STRATEGY

Buy: The last reaction cancels any buy strategy at current levels, so we should wait until a break of 1,2930, with stops below 1,2870 and target at 1,2980-00, or a retracement to Friday's lows or support levels at 1,2580-00...

Buy orders could also be tried at a possible break of 1,3030, with target at 1,3170-00 or previous tops...

Sell: Bears should appear at 1,2975-00 resistance levels and also at 1,2910-20 area. We should try sell orders at these levels only with the intention to add positions at 1,2975-00. Stops could be set above 1,3060 and target at 1,2800-30...

Sell positions could be tried at a break of 1,2750, with target at 1,2650-60 or 1,2580-00 and stops above 1,2810...

Due to high volatility we should keep our positions small...

FX Greece

DISCLAIMER

  1. The details and information included in the above analysis, are part of research based exclusively on currency charts and are of purely instructional and educational nature. None of the information featuring in the analysis can be considered as an invitation for opening positions in FOREX market or in the market of forward contracts or any securities listed on an organized or unorganized market.
  2. We assume no responsibility for any kind of losses ,profits or property loss resulting, in whole or in part, from acts that are based either directly or indirectly on the processing or the use of information, details and strategies, the reader may find in the analysis. The readers hold full responsibility for the use and the results of their actions.
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Europe stocks extend losses on autos, Vodafone

FRANKFURT, Nov 3 (Reuters) - European stocks extended losses on Monday afternoon, led by Germany's Volkswagen (VOWG.DE: Quote, Profile, Research, Stock Buzz) after Deutsche Boerse cut the company's weight in the blue chip DAX .GDAXI index and Vodafone (VOD.L: Quote, Profile, Research, Stock Buzz).

At 1357 GMT, the pan-European FTSEurofirst 300 index was down 0.7 percent at 922.27 points, having risen earlier by as much as 1 percent.

Vodafone shed 5.9 percent after a source familiar with the situation told Reuters that the company was calling analysts to collate consensus numbers ahead of its next set of results, following traders cited a rumour it was guiding lower.

Volkswagen fell 15.7 percent, while Daimler (DAIGn.DE: Quote, Profile, Research, Stock Buzz) was down 2.2 percent.

Barclays (BARC.L: Quote, Profile, Research, Stock Buzz) was one of the notable laggards in the banking sector, down 6.1 percent on continued concern over the cost of its 7.3 billion pound cash injection. (Reporting by Tyler Sitte)





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US STOCKS-Flat open seen as credit thaw offsets caution

* Credit thaw underpins sentiment before election day

* Manufacturing data eyed, automakers to post sales

* Wal-Mart rises after broker upgrade (Recasts first paragraph, updates prices)

By Ellis Mnyandu

NEW YORK, Nov 3 (Reuters) - U.S. stocks headed for a flat open on Monday as caution ahead of key economic data offset signs of more thawing in credit markets.

Trading was likely to be light as Americans prepare to head to the polls on Tuesday to choose the next U.S. president, with investors sidelined ahead of the outcome of the elections.

Wal-Mart Stores (WMT.N: Quote, Profile, Research, Stock Buzz), up nearly 2 percent before the bell, is among stocks to watch after a brokerage raised its rating on the retailer.

Shares of Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz) slipped 0.5 percent to $92 before the bell after Merrill Lynch forecast the U.S. bank to post a fourth-quarter loss instead of the profit that Merrill had previously forecast.

The costs for bank to borrow dollars from each other again fell, sending three-month rates down for a 17th straight day and boosting hopes that steps to restore confidence in credit markets are paying off.

Free-flowing credit is seen as crucial in helping avert an acute downturn as investors fret about a global recession.

"The fact that interbank rates are really coming down is an indication that we should begin to see the credit markets respond and that's going to be the key," said Peter Cardillo, chief market economist at Avalon Partners in New York.

He added that the market has probably discounted an election victory of Democrat Barack Obama, heading into Tuesday's U.S. presidential election.

"It looks like we will have a Democratic president, so the election and the anticipation of the economic data is probably going to keep the market in a very tight range for most of the session today and tomorrow as we go to the polls."

S&P 500 futures SPc1 shed 2.40 points and were about even with fair value, a formula to evaluate pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures DJc1 dipped 22 points and Nasdaq 100 NDc1 futures shed 2.00 points.

Monday's economic diary includes the Institute for Supply Management October manufacturing index at 10 a.m. (1400 GMT). Economists in a Reuters survey expect a reading of 41.5 versus 43.5 in September. But the highlight of the week will be Friday's report on October U.S. nonfarm payrolls.

J.P. Morgan Securities raised Wal-Mart Stores Inc (WMT.N: Quote, Profile, Research, Stock Buzz), a Dow component, to "overweight" from "neutral." Goldman Sachs added Boeing (BA.N: Quote, Profile, Research, Stock Buzz) to a "conviction sell" list, according to theflyonthewall.com.

Obama heads into Tuesday's voting in a comfortable position, with Republican opponent John McCain struggling to overtake his lead in every national opinion poll and to hold off his challenge in about a dozen states won by President George W. Bush in 2004.

Obama leads McCain in six of eight key battleground states, including the big prizes of Florida and Ohio, according to a series of Reuters/Zogby polls released on Monday.

Obama holds a 7-point edge over McCain among likely U.S. voters in a separate Reuters/C-SPAN/Zogby national tracking poll, up 1 percentage point from Sunday. The telephone poll has a margin of error of 2.9 percentage points. [ID:nN03354084].

U.S. stocks ended one of their worst months on record on Friday but signs of further thawing in credit markets sparked a search for bargains. (Editing by James Dalgleish)





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FTSE rises at midday, miners offset bank losses

* FTSE 100 rises 0.6 pct

* Miners and oils track firmer raw material prices

* Banks fall, bleak outlook for sector

By Harpreet Bhal

LONDON, Nov 3 (Reuters) - Britain's leading share index had edged up by midday on Monday, sustained by gains in commodity stocks, while concern about Barclays' (BARC.L: Quote, Profile, Research, Stock Buzz) fundraising dented banking stocks.

Miners were among the top performers on the FTSE 100 .FTSE as improved risk appetite boosted metal prices, while energy shares rallied as the price of crude oil CLc1 rose modestly.

By 1205 GMT, the benchmark index rose 25.79 points to 4,402.66, on track for a fifth day of gains, its longest since December 2007.

The index gained 12.7 percent last week, its strongest week on record, fed by anticipation of a widely-expected interest rate cut from the Bank of England later this week, although it was down 10.7 percent in October.

Mike Lenhoff, chief strategist at Brewin Dolphin said the market has reacted positively to a spate of interest rate cuts in the United States, China, India and Japan, turning the spotlight to the BoE on Thursday.

"The underlying tone of the market has improved. There is an encouraging feel to what is going on," he said.

However, he said the outlook for the banking sector remained unfavourable as potential recession in Britain has prompted fears of further write-downs and bad debts.

Banks tempered gains on the broader market, as Barclays dropped 4.9 percent on concern that its $12 billion capital fundraising is too expensive. Analysts at Merril Lynch estimated the fundraising may cost investors 3.2 billion pounds.

Lloyds TSB (LLOY.L: Quote, Profile, Research, Stock Buzz), the British bank in the process of buying rival HBOS (HBOS.L: Quote, Profile, Research, Stock Buzz), lost 0.7 percent after it said its profits for the first nine months of the year fell sharply as a result of financial market turmoil and rising bad debts.

HBOS climbed 4.3 percent after the Sunday Times newspaper said Lloyds TSB could face competition for its bid from HBOS's Internet banking unit.

HBSC (HSBA.L: Quote, Profile, Research, Stock Buzz) and Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz) fell 2.9 and 1.4 percent respectively, while Standard Chartered advanced 3.2 percent.

Among other decliners were index-heavyweights Vodafone (VOD.L: Quote, Profile, Research, Stock Buzz) and supermarket group Tesco (TSCO.L: Quote, Profile, Research, Stock Buzz). Tesco fell 3.7 percent, while Vodafone shed 4.3 percent.

Helping keep the FTSE 100 in positive territory were the commodity stocks as a weaker dollar supported base and precious metal prices, while crude oil futures turned positive.

Kazakhmys (KAZ.L: Quote, Profile, Research, Stock Buzz) surged 13.3 percent, lifted by rising copper prices. Xstrata (XTA.L: Quote, Profile, Research, Stock Buzz), Vedanta Resources (VED.L: Quote, Profile, Research, Stock Buzz), Lonmin (LMI.L: Quote, Profile, Research, Stock Buzz) and Eurasian (ENRC.L: Quote, Profile, Research, Stock Buzz) added between 6.5 and 7.9 percent. Rio Tinto (RIO.L: Quote, Profile, Research, Stock Buzz) added 1.9 percent, after the company said its new ilmenite project is on track to produce and the company sees most of its projects in a strong position to weather any economic scenario.

Energy firms also recorded gains, with BP (BP.L: Quote, Profile, Research, Stock Buzz) and Royal Dutch Shell (RDSa.L: Quote, Profile, Research, Stock Buzz) up between 0.8 and 1.6 percent, while Cairn Energy (CNE.L: Quote, Profile, Research, Stock Buzz) gained 7 percent. (Editing by Hans Peters)





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Fed's Lacker Says Economy Worsening Credit Crunch

By Craig Torres

Nov. 3 (Bloomberg) -- Falling U.S. economic growth and rising unemployment may further erode banks' willingness to lend to consumers and businesses, Richmond Federal Reserve Bank President Jeffrey Lacker said.

``The deterioration of economic conditions is playing a more prominent role in the tightening of credit terms right now than the direct effects of financial market turbulence,'' Lacker said today in the text of remarks prepared for a conference in Jerusalem.

The Federal Reserve, responding to increasing signs of flagging growth, cut the benchmark interest rate by half a percentage point on Oct. 29 to 1 percent, matching a half- century low.

Policy makers may need to cut further if weak growth continues to restrain credit, Fed watchers say. Some 19 of 42 economists surveyed by Bloomberg News expect a reduction of at least a quarter point at the next meeting of the central bank on Dec. 16.

Future rate decisions will depends on ``how the data comes in,'' Lacker said in a questions-and-answers session after the speech. There was a ``distinct shift in the mood'' across the economy in September and ``it's going to take a little while to understand what this translates into in terms of economic activity,'' he said.

`Reasonable' Forecasts

Predictions of an economic recovery next year are ``reasonable,'' Lacker said, adding that policy makers should ensure inflation expectations remain contained when an expansion takes hold.

``As a recovery begins, the path of least resistance is often to hold the policy rate at a low level until it is completely clear that recuperation is complete,'' Lacker said. ``It is crucial that we not allow expectations of future inflation to ratchet higher during this recession.''

The U.S. economy contracted at a 0.3 percent annual pace from July to Sept., the Commerce Department reported Oct. 30, for the biggest decline since 2001.

``It's definitely a recession at this point,'' Lacker said. ``How deep, how steep it's going to be is uncertain. I think it's more likely of a fairly moderate size. I don't foresee a 10-year Great Depression.''

The federal funds rate is ``stimulative,'' financial shocks have dissipated and energy prices are falling, he said.

Housing Drag

Credit-market turmoil may have been intensified by the ``disparate responses'' by government to troubled financial institutions, Lacker said in remarks to the Global Interdependence Center at Hebrew University. Instability in equities and other worldwide markets worsened after the U.S. government decided not to avert a bankruptcy filing by Lehman Brothers Holdings Inc. on Sept. 15.

``Once households are convinced that an end to the deterioration in the labor-market conditions and the fall in equity and home prices is in view,'' consumer spending ``is likely to pickup substantially,'' Lacker said. ``The drag from housing seems likely to lessen in the next year'' possibly reaching a bottom ``around the middle of 2009.''

Unemployment is at a five-year high of 6.1 percent and may rise to 8 percent by the end of 2009, according to Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York. Consumer spending fell 0.3 percent in September, the biggest decline in four years, the Commerce Department said Oct. 31.

Mortgage Collapse

``In times like this there is just a wider range of uncertainty,'' said Lacker today. ``Things have to be data- dependent.''

The collapse of the U.S. mortgage market has paralyzed lending worldwide and led to losses and writedowns at financial institutions totaling $686 billion. The Fed financed a $29 billion portfolio of Bear Stearns Cos. securities in March to facilitate a merger with JPMorgan Chase & Co.

The central bank agreed in September to loan as much as $85 billion to insurer American International Group Inc. and the U.S. Treasury seized control of Fannie Mae and Freddie Mac, the largest sources of money for U.S. home loans.

Lacker, 53, said in June that the Fed should set rules and boundaries for its direct loans to avoid provoking more costly risk-taking by financial institutions too reliant on the federal safety net.

Growth Outlook

During recent turmoil, ``market participants have at times faced uncertainty about prospective public sector intervention,'' Lacker said today. Shifting expectations about when the government would let a firm fail ``may have added volatility to financial asset markets that were already roiled by an increasingly uncertain growth outlook.''

The Fed redoubled its support last month to financial markets, agreeing to finance the commercial paper issuance of General Electric Co. and other corporations and help money- market mutual funds raise cash to meet shareholder redemptions.

Lacker placed some of the blame for the mortgage boom on ``official policies aimed at increasing home-ownership,'' which provided ``some positive inducement'' for risk-taking by mortgage lenders. It's also ``plausible'' the Fed left its policy rate too low for too long in 2003 and 2004, he said. The federal funds rate stood at 1 percent even though the economy was expanding.

Inflation expectations will be shaped by the Fed's monetary stimulus and how long ``that stimulus remains,'' Lacker said. A voting member of the Federal Open Market Committee next year, Lacker dissented during the last four meetings of 2006, preferring an increase in interest rates.

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net





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Trichet Extends Power, May Cut Rates at Fastest Pace

By John Fraher

Nov. 3 (Bloomberg) -- Jean-Claude Trichet is extending the European Central Bank's powers just as it gears up for what may be the fastest round of interest-rate cuts in its 10-year history.

President Trichet has pushed the central bank's reach into the euro region's neighboring economies as they struggle to cope with the financial crisis, and has approved record lending to banks. Economists predict the ECB will slash its benchmark rate, currently at 3.75 percent, to 2.5 percent by April after a likely cut on Nov. 6.

``The ECB is at times playing the role of lender of last resort for the whole European financial system,'' said Guillaume Menuet, a senior European economist at Merrill Lynch & Co. in London. ``Its mandate is being implicitly expanded.''

While Trichet's remit applies just to the 15-nation euro region, the absence of an institution charged with financial stability across the 27-member European Union created a vacuum the ECB is trying to fill. In the past three weeks alone, it gave a 5 billion-euro ($6.4 billion) loan to Hungary, set up currency swaps with Denmark and Switzerland and increased its lending to euro-region banks to more than $1 trillion.

Hungarian Prime Minister Ferenc Gyurcsany said on Oct. 28 he's lobbying EU leaders to allow the ECB to provide liquidity outside the euro area. ECB Executive Board member Lorenzo Bini Smaghi said on Oct. 31 the bank stands ready to help ``other'' eastern European countries that are ``asking for our help.''

The Hungarian, Polish and Czech stock indexes all fell more than 24 percent last month.

`Major Danger'

Economists expect more rate cuts from the ECB as it tries to cushion an economy hurtling toward a recession. The European Commission today called for ``coordinated action'' by policy makers to support the economy as a report showed manufacturing contracted at a record pace last month.

The central bank will probably cut its key rate by a half point this week, taking it to 3.25 percent, according to the median of 50 forecasts in a Bloomberg News survey. It will deliver another 75 basis points of easing in the following five months.

Consumer and executive confidence in the euro region's economic outlook plunged by the most since at least 1985 in October, the European Commission said Oct. 30.

``The ECB is only too well aware that extended, deep recession is now the major danger facing the euro-zone economies,'' said Howard Archer, chief European economist at IHS Global Insight in London.

Market Strains

The Bank of England will probably also cut its benchmark by 50 basis points, taking it to 4 percent, according to a separate survey.

Trichet and other policy makers are still trying to ease strains in financial markets that are crippling the global economy. Europe's corporate debt markets endured their worst month on record in October and the gap between the yields on 10- year German and Italian government bonds widened to 1.27 percent on Oct. 31, the most since 1997.

The ECB has responded by ramping up lending to cash- strapped banks, offering unlimited funds. The central bank said on Oct. 21 that lending to financial institutions jumped to a record, surging 68 percent from the first week of September.

That may create problems for the ECB as the risk of possible collateral losses grows, says Natacha Valla, a former ECB economist and now at Goldman Sachs Group Inc. in Paris.

Not Alone

``They have challenges for the future in having a balance sheet of unprecedented size,'' said Valla. ``The have to know how to deal with such a balance sheet, how much capital they have to hold, what it means for risk management. There is a whole set of questions that now have to be answered.''

The ECB isn't the only European institution trying to guarantee financial stability. The EU said on Oct. 29 it's ready to contribute 6.5 billion euros to an International Monetary Fund-led rescue package for Hungary, and European governments coordinated efforts last month to shore up the region's banking system.

Still, some economists and politicians say the ECB's pivotal position at the heart of the financial system should be more formally recognized.

Hungary's Gyurcsany said on Oct. 28 he wants EU leaders to allow the ECB to accept local government bonds as collateral for foreign-currency swaps, saying ``it is extremely important from Poland to Hungary to have these repo facilities in place.''

``My dream is that the ECB gets a financial stability mandate, which is not the case so far,'' said Valla. ``The ECB really has demonstrated it can fulfill such a mandate.''

To contact the reporter on this story: John Fraher in London at jfraher@bloomberg.net





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EU Says Europe Economy Probably Already in Recession

By Fergal O'Brien

Nov. 3 (Bloomberg) -- The European Commission said the region's economy probably entered a recession this year and will stagnate in 2009, increasing pressure on political leaders to collaborate on measures to tackle the financial crisis.

Economic growth in the euro area will slump to 0.1 percent next year, the worst performance since 1993, the Brussels-based commission said today. It also estimated that gross domestic product will shrink for three consecutive quarters this year and cut its forecast for full-year 2008 growth to 1.2 percent from 1.3 percent previously.

Euro-area finance ministers meet today to try to overcome the worst financial crisis since the Great Depression. While France and Germany led European governments in committing a combined $1.7 trillion to protect the region's banks, and the European Central Bank now offers unlimited loans in an attempt to get credit moving, there has been no unified government response. Chancellor Angela Merkel last week proposed a 50 billion-euro ($64 billion) package to revive the German economy.

``A recession in 2009 seems now unavoidable,'' said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Plc in London. ``Today's new GDP forecast of 0.1 percent for 2009 by the European Commission still looks too optimistic to us.''

Economists at BNP Paribas and Citigroup Inc. also said the EU remains overly optimistic, with both predicting the euro area will shrink next year. The EU partly acknowledged this, saying its forecasts are subject to ``considerable uncertainty and downside risks.''

Record Pace

European manufacturing contracted at a record pace in October and faster than initially estimated, according to separate figures published today. Figures last week showed that executive and consumer confidence has dropped to a 15-year low.

Stocks and the euro pared gains after today's reports. The euro was at $1.2838 as of 13:43 a.m., compared with $1.2898 earlier, while the Dow Jones Stoxx 600 was up 0.3 percent at 222.66, paring an earlier gain of 1 percent.

European 10-year government bonds advanced, with the yield on the German bund, Europe's benchmark government security, falling 5 basis points to 3.84 percent.

The commission said GDP in the euro region will probably contract by 0.1 percent in both the third and fourth quarters after shrinking 0.2 percent in the second quarter, pushing the region into a recession, defined as two straight quarters of contraction.

Profit Forecast

Paris-based L'Oreal SA, the world's largest cosmetics maker, last week cut sales and profit forecast for the third time in less than four months. Deutsche Lufthansa AG, Europe's second-biggest airline, lowered its earnings forecast.

``The economic horizon has now significantly darkened,'' European Economic and Monetary Affairs Commissioner Joaquin Almunia said in today's report. ``We need a coordinated action at the EU level to support the economy similar to what we have done for the financial sector.''

Government measures to tackle the economic fallout from the credit crunch have so far been piecemeal, with governments including Italy, France and Germany planning their own tax breaks or stimulus packages. The EU in late October pledged to present a recovery plan this month and EU leaders are scheduled to meet this week to coordinate their position before a summit of world leaders hosted by President George W. Bush on Nov. 15.

French President Nicolas Sarkozy has been pushing for a unified action and that is ``a goal the president never gave up on,'' French Finance Minister Christine Lagarde said today in an interview. ``So I'm not going to give up on it either.''

Central Banks

In addition to flooding markets with cash, central banks across the world have also begun slashing interest rates to limit the economic impact of the financial crisis. The European Central Bank is set to cut its benchmark rate this week for the second time in less than a month after the U.S. Federal Reserve lowered its rate to match the lowest level in a half-century. Policy makers in Japan, India and Norway have also cut borrowing costs.

The Irish, Spanish and U.K. economies will all contract next year, while Germany, Europe's largest economy, France and Italy will stagnate. For 2010, the EU sees the overall euro-area economy expanding by 0.9 percent.

Coupled with the drop in oil prices, the slowdown will cool inflation, which may ease to 2.2 percent in 2009 from 3.5 percent this year, the EU said. It will also push the euro region's unemployment rate to 8.4 percent next year from 7.6 percent this year. EU countries' budget deficits are likely to widen, with the euro-area average forecast to increase to 1.8 percent next year, which would be the biggest since 2005.

Growth is ``at a standstill'' in many European economies, Almunia said. ``The economic situation is exceptionally uncertain.''

To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net.





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Shell Signs Abu Dhabi Memorandum on Gas Exploration

By Anthony DiPaola and Fred Pals

Nov. 3 (Bloomberg) -- Royal Dutch Shell Plc, Europe's largest oil company, signed a memorandum of understanding with Abu Dhabi that may lead to deep-offshore natural-gas exploration.

It's too early to estimate potential reserves, Shell's Head of Exploration Malcolm Brinded said today in an interview in Abu Dhabi. The Hague-based Shell will evaluate potential joint exploration, development and production.

``Shell hopes to move forward rapidly with final agreements in order to quickly begin joint exploration and development activities,'' the company said in an e-mailed statement today.

Shell plans to counter lost production in Nigeria and Russia by mining Canadian oil sands and a Qatari gas-to-liquids venture. The company's production has declined over the past five years and fell below 3 million barrels of oil equivalent a day for the first time in more than a decade in the third quarter. Shell forecasts annual production growth of 2 percent to 3 percent from 2010.

Shell has earmarked between $35 billion to $36 billion in spending for this year and the company has said it remains committed to ``long-term'' projects despite the financial crisis and lower oil prices. Investment decisions will be based on local costs and labor availability as well as the oil price.

Brinded said the company will ``keep investing through the cycle'' and ``expect projects that have been decided on to go ahead.''

Shell Output

Shell's output in Abu Dhabi in 2007 averaged 146,000 barrels of oil equivalent a day, making it the second-largest centre of production for Shell in the Middle East after Oman where it produced 191,000 barrels of oil equivalent a day, according to the company's figures.

Shell has a 9.5 percent stake in the Abu Dhabi Company for Onshore Oil operation, or ADCO, and also has a 15 percent shareholding in Abu Dhabi Gas Industries Ltd, or GASCO, which produces four million tons a year of liquefied natural gas, according to Shell's Web site.

When asked about Shell's existing investment plans, Brinded said ``we'll look carefully at the pace of projects'' and ``expect projects that have been decided on to go ahead.''

To contact the reporters on this story: Anthony DiPaola in Abu Dhabi, through the London newsroom at adipaola@bloomberg.netFred Pals in Amsterdam at fpals@bloomberg.net





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BP's Hayward Says Lower Oil Prices Will Spur Demand

By Ayesha Daya

Nov. 3 (Bloomberg) -- Falling oil prices will spur a recovery in demand for crude, according to Tony Hayward, chief executive officer of BP Plc, Europe's second-biggest oil company.

Oil's 54 percent drop from its July record in New York was caused by higher OPEC output, slower economic growth and lower U.S. consumption, Hayward said in a speech to the Abu Dhabi International Petroleum Exhibition and Conference in the United Arab Emirates.

Lower oil prices haven't stopped or stalled the pace of industrialization, he added.

Hayward cited so-called unconventional projects, including oil sands and Arctic reserves, as key sources of new oil supply.

``Lower trade barriers and tariffs are welcome and necessary'' to help add oil reserves, he said. ``So are strict and enduring fiscal and regulatory policies.''

BP's CEO cited the example of the U.S., which managed to increase oil and gas output for the first time last year since 1991, following policy changes.

He also extolled the virtues of Enhanced Oil Recovery, which involves injecting gas into fields to bring heavier, harder-to-pump oil to the surface.

A 5 percent increase of oil-in-place would add 170 billion barrels to global oil reserves, enough for five years of supply.

``We believe we could add 15-20 percent to recovery rates with EOR,'' Hayward said.

To contact the reporter on this story: Ayesha Daya in Abu Dhabi at adaya1@bloomberg.net





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U.A.E. Implements Oil Cuts Agreed by OPEC, Hamli Says

By Ayesha Daya and Shaji Mathew

Nov. 3 (Bloomberg) -- The United Arab Emirates, the third- largest oil producer in OPEC, is implementing the supply cuts agreed on by the group last month and has informed consumers.

``We have already advised our customers about the cuts,'' Oil Minister Mohamed al-Hamli told reporters in Abu Dhabi today. He declined to specify the size of the reduction.

The Organization of Petroleum Exporting Countries, supplier of more than 40 percent of the world's crude, resolved to slash production by 1.5 million barrels a day at a summit in Vienna in October to stem a decline in oil prices. Crude futures have fallen 53 percent from their record $147.27 a barrel on July 11 and have dropped 27 percent in the past year.

Al-Hamli declined to comment on whether OPEC will need to make a further production cut. Speculation about holding another meeting is premature because the group will meet again in Algeria on Dec. 17 to review the oil market, he said.

OPEC lowered production by 0.3 percent last month to 31.15 million barrels a day after the group in September decided to adhere to official quotas, according to a report by JBC Energy today. Cuts by Saudi Arabia and the United Arab Emirates of about 120,000 barrels a day each were tempered by an increase of 130,000 barrel a day from Iraq, Vienna-based JBC said.

Investments

The decline in prices isn't likely to affect projects that are already planned, al-Hamli said. ``Investment is for the long term, the projects we have already undertaken are going ahead,'' he said. ``It is important to invest in increasing capacity for the next cycle.''

Crude oil for December delivery dropped as much as $1.27, or 1.9 percent, to $66.54 a barrel in electronic trading on the New York Mercantile Exchange. The contract traded at $67.06 a barrel at 10:16 a.m. London time.

``It is common knowledge that the age of easy oil is gone forever,'' al-Hamli said. ``We need to seize the opportunities offered by new discoveries, increase recovery rates from existing fields, improve efficiency and streamline our operations to reduce costs.''

Saudi Arabia, the largest OPEC producer, may renegotiate contracts to increase oil output from the Manifa field and natural-gas production from Karan after energy prices declined, Khaled al-Buraik, executive director of state oil company Saudi Aramco, in an interview today in Abu Dhabi.

``Manifa and Karan may be renegotiated in the current low price environment,'' Buraik said. The changes won't affect the country's plans to increase oil production capacity to 12 million barrels a day next year, he said.

To contact the reporters on this story: Ayesha Daya in Abu Dhabi on adaya1@bloomberg.net; Shaji Mathew in Abu Dhabi on shajimathew@bloomberg.net@bloomberg.net





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Shell Signs Abu Dhabi Memorandum on Gas Exploration

By Anthony DiPaola and Fred Pals

Nov. 3 (Bloomberg) -- Royal Dutch Shell Plc, Europe's largest oil company, signed a memorandum of understanding with Abu Dhabi that may lead to deep-offshore natural-gas exploration.

It's too early to estimate potential reserves, Shell's Head of Exploration Malcolm Brinded said today in an interview in Abu Dhabi. The Hague-based Shell will evaluate potential joint exploration, development and production.

``Shell hopes to move forward rapidly with final agreements in order to quickly begin joint exploration and development activities,'' the company said in an e-mailed statement today.

Shell plans to counter lost production in Nigeria and Russia by mining Canadian oil sands and a Qatari gas-to-liquids venture. The company's production has declined over the past five years and fell below 3 million barrels of oil equivalent a day for the first time in more than a decade in the third quarter. Shell forecasts annual production growth of 2 percent to 3 percent from 2010.

Shell has earmarked between $35 billion to $36 billion in spending for this year and the company has said it remains committed to ``long-term'' projects despite the financial crisis and lower oil prices. Investment decisions will be based on local costs and labor availability as well as the oil price.

Brinded said the company will ``keep investing through the cycle'' and ``expect projects that have been decided on to go ahead.''

Shell Output

Shell's output in Abu Dhabi in 2007 averaged 146,000 barrels of oil equivalent a day, making it the second-largest centre of production for Shell in the Middle East after Oman where it produced 191,000 barrels of oil equivalent a day, according to the company's figures.

Shell has a 9.5 percent stake in the Abu Dhabi Company for Onshore Oil operation, or ADCO, and also has a 15 percent shareholding in Abu Dhabi Gas Industries Ltd, or GASCO, which produces four million tons a year of liquefied natural gas, according to Shell's Web site.

When asked about Shell's existing investment plans, Brinded said ``we'll look carefully at the pace of projects'' and ``expect projects that have been decided on to go ahead.''

To contact the reporters on this story: Anthony DiPaola in Abu Dhabi, through the London newsroom at adipaola@bloomberg.netFred Pals in Amsterdam at fpals@bloomberg.net




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VeraSun Doomed as Botched Trades Overwhelm Aid, Gates, Khosla

By Joe Carroll and Mario Parker

Nov. 3 (Bloomberg) -- VeraSun Energy Corp. and U.S. ethanol makers backed by Bill Gates and Vinod Khosla are failing after wrong-way bets on corn prices overwhelmed $20 billion in federal aid and government-guaranteed demand for the fuel additive.

VeraSun, the second-largest U.S. ethanol producer, was the latest in a string of distillers stung by imploding hedges when the Brookings, South Dakota-based company filed for Chapter 11 bankruptcy protection on Oct. 31. Biofuel Energy Corp., whose biggest owners are hedge funds run by David Einhorn and Daniel Loeb, and at least six other distillers have shut down or curtailed operations because of volatile corn prices and narrowing ethanol margins.

Ethanol, a form of alcohol used to stretch gasoline supplies, has been a mainstay of every president's plan to cut U.S. reliance on Middle East oil since Jimmy Carter's administration in the 1970s. In the past decade, the federal government paid $20 billion in subsidies to promote use of the additive, and 48 out of 50 states pay additional incentives. Investors from Wall Street to Silicon Valley took a piece of the action after Congress and the White House ordered oil companies three years ago to almost double ethanol use by 2012.

``This does not help improve the perception of the ethanol industry,'' said Pavel Molchanov, an analyst at Raymond James & Associates in Houston. ``There's not going to be anything left for shareholders.''

Corn futures traded in Chicago more than doubled in the past three years as worldwide demand for the crop expanded to make sweeteners and fuel. U.S. ethanol prices dropped 5 percent because output from new mills grew faster than demand, squeezing margins for distillers.

Derivative Contracts

VeraSun said its downfall was the result of derivative contracts entered into earlier this year that left the company on the hook for high-cost corn just as the grain market was poised to crash. As the threat of crop damage from Midwest flooding receded, corn tumbled 48 percent to close at $4.01 a bushel on Oct. 31.

The company abandoned its traditional instrument for managing corn costs -- so-called short positions, or bets prices will decline -- in July after the price of the grain surged $2 a bushel to almost $8 in less than two months because of flooding, public filings showed.

Concerned that crop damage would drive prices even higher, VeraSun's traders locked in prices for corn in July, near the peak in the spot market, and also entered into an arrangement known as an accumulator contract that required the company to double its purchases if the market dropped.

Falling Prices

Prices did just that as floodwaters receded and farmers discovered the crop wasn't as badly damaged as expected, and the worldwide economic slowdown eased demand for grain. VeraSun's hedges required it to pay $6.75 to $7 for each bushel of corn in the third quarter when market prices averaged $5.78, filings showed.

VeraSun spokesman Mike Lockrem didn't return two messages left on his mobile telephone yesterday. Patty Dickerson, director of investor relations, didn't return a message left on her office phone outside regular business hours. Chief Executive Officer Donald Endres couldn't be reached at his South Dakota home.

Earlier in the summer, Microsoft Corp. co-founder Bill Gates sold his stake in Pacific Ethanol Inc. in a series of tranches that culminated in June, public filings showed. Gates had helped legitimize ethanol as a mainstream investment in 2005 when he bought shares in the Sacramento-based company.

Another prominent investor is Khosla, the co-founder of Sun Microsystems Inc., who has bought shares in at least three ethanol producers, including Los Angeles-based Altra Biofuels, which has plants in Indiana and Ohio, and two firms developing technology to distill ethanol from agricultural waste.

Burning Cash

Most analysts failed to anticipate VeraSun's collapse. Among those tracked by Bloomberg, 11 analysts have a ``hold'' rating on its stock, two say ``buy'' and five urge investors to sell.

The company burned through 74 percent its cash during the first half of this year, public filings showed. By late last week, just $6 million of a $126 million revolving credit facility remained available, Moody's Investors Service Inc. said Oct. 30.

VeraSun was facing a ``critical liquidity situation,'' Moody's said just hours before the company announced last week it was seeking protection from creditors in a Wilmington, Delaware, court.

CEO Endres, the company's largest shareholder, sought to raise capital on Sept. 16 with an offering to issue 20 million new shares.

The offering, announced the same day the company disclosed its third-quarter loss could reach $103 million, would have raised $101.6 million, based on the average price of VeraSun shares in the seven days preceding the offering.

Share Sale Canceled

The stock plunged 72 percent in the two days after the loss and share sale were announced and Endres abandoned the offering on Sept. 18.

Other ethanol makers hurt by volatile grain prices, narrowing production margins and the glut of U.S. supply include Gateway Ethanol LLC, Heartland Ethanol LLC, LiquidMaize LLC, Greater Ohio Ethanol, Glacial Lakes Corn Processors and Abengoa SA.

Denver-based Biofuel said in August that it didn't have enough liquidity to cover $46 million in losses on contracts for corn, ethanol and the natural gas used to run its distilleries. The company locked in third- and fourth-quarter corn costs of $7.01 and $6.90 a bushel, respectively. The stock fell 81 percent since the disclosure.

Ethanol Futures

Ethanol futures traded in Chicago fell 26 percent this year, touching a 13-month low of $1.66 a gallon on Oct. 22. The average margin earned from distilling a gallon of ethanol tumbled 68 percent to 41 cents this year from $1.24 in 2006, according to data compiled by Bloomberg.

In addition to the wrong-way bets on corn prices, VeraSun invested in new mills and acquisitions to increase output when a surfeit of U.S. supply was already driving ethanol prices lower.

VeraSun spent $1.5 billion on acquisitions since first selling shares to the public in June 2006, adding eight distilleries to its portfolio. VeraSun also built three new plants with capacity to make 330 million gallons of the fuel annually.

The company halted production last week at a Linden, Indiana, distillery acquired in August 2007 from Dallas-based ASAlliances Biofuels LLC, whose owners included hedge-fund manager D.E. Shaw & Co. The company gave no reason for the Oct. 28 closure, three days before the bankruptcy filing.

VeraSun owns 16 plants in eight states that can produce 1.64 billion gallons of ethanol a year, or about 15 percent of the domestic supply.

To contact the reporters on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net; Mario Parker in Chicago at mparker22@bloomberg.net.





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