Outlook grim for U.S asset managers' earnings

 * BlackRock kicks off sector's reporting season on Tuesday

 * Stock fund outflows rising, could last at least a year

 * Industry valuations dip

 By Muralikumar Anantharaman

 BOSTON, Oct 20 (Reuters) - Earnings at U.S. money
management companies likely slumped in the third quarter and
may deteriorate further in the short term as financial market
turmoil slashes asset values and forces heavy outflows from
funds.

 Their shares have been battered -- with some down as much
as 70 percent so far in 2008 -- and the sector's once-rich
valuations are now more down-to-earth. But given market
conditions, a sustained recovery for the sector is not in the
cards.

 "We are seeing considerable declines in the earnings power
of all the asset managers because of the pace and extent to
which the global markets have sold off," said Michael Kim, an
analyst at Sandler O'Neill & Partners.

 "And we are in the early innings of significant outflows to
come. That will weigh on the shares," Kim added.

 BlackRock Inc (BLK.N: Quote, Profile, Research, Stock Buzz), the largest publicly traded U.S.
asset manager, kicks off the sector's earnings season when it
reports third-quarter results on Tuesday.

 Over the next two weeks, a string of companies, including
Legg Mason Inc (LM.N: Quote, Profile, Research, Stock Buzz), Franklin Resources Inc (BEN.N: Quote, Profile, Research, Stock Buzz), T. Rowe
Price Group Inc (TROW.O: Quote, Profile, Research, Stock Buzz), Janus Capital Group Inc (JNS.N: Quote, Profile, Research, Stock Buzz),
Invesco Ltd (IVZ.N: Quote, Profile, Research, Stock Buzz), AllianceBernstein Holding LP (AB.N: Quote, Profile, Research, Stock Buzz) and
Affiliated Managers Group Inc (AMG.N: Quote, Profile, Research, Stock Buzz), will report earnings.

 Some prominent companies have already signaled what to
expect.

 Earlier this month, Franklin, Invesco and AllianceBernstein
reported early estimates of assets under management, the main
driver of revenue and profit for money managers, which showed
assets fell between 5.9 percent and 12.6 percent in the quarter
to Sept. 30.

 Panicky investors responded to the worsening of the credit
crisis from mid-September by rushing to the exits -- pulling
out a record $104.4 billion from U.S. mutual funds in September
alone, according to research firm Lipper Inc.

 'TIME TO BE GREEDY'

 With markets plunging in October, money managers have been
saddled with steeper drops in asset values and higher fund
outflows. The first two weeks of October saw outflows of $24
billion from stock funds, compared with $23 billion for all of
September, Merrill Lynch said in a report on Monday.

 Analysts estimated those outflows could last for at least
another year.

 "Outflows that follow particularly acute and concentrated
declines in equity values and draw an emotionally charged
response from investors are likely to endure, possibly for a
year or more after the market begins a sustained rebound,"
Keefe, Bruyette & Woods said in a report last week. The same
pattern was seen after the 1987 stock market crash, it said.

 The asset managers may have to take other hits. BlackRock,
Franklin, Janus and Federated wrote down the values of seed
capital investments -- companies putting their own money into
new mutual funds and hedge funds -- in the first quarter, and
expectations are that some of the firms could book additional
losses on those investments in the third quarter.

 Some companies may have to put up more capital to back
ailing money-market funds that made riskier investments.

 The funds have been hurt by the declining values of
holdings in asset-backed commercial paper due to the credit
crisis and have been forced to step in and shield clients from
losses.

 Legg Mason has said it expects to take a noncash charge of
$187 million, or $1.33 a share, in the quarter ended in
September for providing an additional $630 million in capital
for the money-market funds. Janus could also take a fresh
charge for supporting some of its money-market funds.

 The market meltdown has slashed valuations of asset
managers, whose shares have generally held up better than those
of banks and brokerages because they do not risk their own
capital.

 Janus, for instance, now trades at 9.3 times current
earnings, compared with 24 times six months ago and 35 times
two years ago.

 "Investors are less willing to allocate multiples to these
stocks similar to where they have traded historically," said
Kim of Sandler O'Neill.

 Some long-term investors, however, are welcoming the
opportunity to buy the stocks at fire-sale prices.

 "We love this industry," said John Miller, a fund manager
at Ariel Investments, which owns Janus, Franklin and T. Rowe
shares and recently bought more of them with a plan to hold
them for five or 10 years. "This is the time to be greedy."

 Companies      Q3 estimates,(vs Q2)       P/E  share price

               (Sept qtr, cents per shr)        (y-t-d, %)

 Alliance            74  (96)             6.00   -67.73

 BlackRock          187 (214)            18.04   -31.40

 Federated           54  (56)            10.24   -45.55

 Franklin           147 (171)             9.41   -41.40

 Invesco             34  (41)            10.10   -53.31

 Janus               24  (34)             9.30   -65.18

 Legg*               86 (-22)             8.75   -69.98

 T. Rowe             56  (60)            16.04   -35.17

 * Excludes noncash charge. Legg's P/E is based on earnings
estimated for year ending in March 2009.
(Editing by Jeffrey Benkoe)

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European stocks extend gains as US stocks rise

LONDON, Oct 20 (Reuters) - European shares extended gains on Monday afternoon after U.S. stocks opened higher as Federal Reserve Chairman Ben Barnanke said another economic stimulus plan may be needed to revive lagging growth.

At 1417 GMT the FTSEurofirst 300 index was up 3.1 percent at 922.55, while the Dow Jones industrial average .DJI gained 1.9 percent at 9,019.63.

Energy stocks were the top-weighted gainers on the FTSEurofirst 300, with BP (BP.L: Quote, Profile, Research, Stock Buzz) soaring 8.4 percent and Total (TOTF.PA: Quote, Profile, Research, Stock Buzz) advancing 7.1 percent. (Reporting by Joanne Frearson)

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FTSE gains 1.8 pct as energy, miners recover

* FTSE 100 gains 1.8 percent

* Miners, energy stocks lifted by higher commodity prices

* Confidence on financial markets boosted by govt measures

By Simon Falush

LONDON, Oct 20 (Reuters) - The UK's leading index of shares gained 1.8 percent by midday on Monday as confidence grew that the financial crisis may be easing, boosting commodity prices and energy and mining stocks.

By 1029 GMT the FTSE 100 .FTSE was up 71.74 points at 4,134.75 having gained 5.2 percent on Friday.

Governments around the world have pledged about $3.2 trillion to guarantee bank deposits and interbank lending and Dutch bank ING (ING.AS: Quote, Profile, Research, Stock Buzz) became the latest to need government support, with Dutch authorities pumping in $13.5 billion.

Markets were also soothed somewhat by interbank dollar lending rates falling and by a pledge from European Central Bank President Jean-Claude Trichet on Sunday to do what it takes to restore confidence.

Mining stocks were firmer, recovering from recent heavy losses as metals prices bounced back from multi-year lows set last week as fears eased about the extent of the fall-off in demand.

Xstrata (XTA.L: Quote, Profile, Research, Stock Buzz), Eurasian Natural Resources (ENRC.L: Quote, Profile, Research, Stock Buzz) and Anglo American (AAL.L: Quote, Profile, Research, Stock Buzz) gained between 2 percent and 4.3 percent.

However markets remain skittish and volatile and investors are still reluctant to plunge back into the markets, analysts said.

"It's a bit like tap dancing on thin ice, said Justin Urquhart Stewart, director at Seven Investment Management. "You can enjoy it on days like this, but don't jump up and down too hard because you can go straight through the stuff.

"There are rallies on more positive days, but the overall picture is still highly unreliable."

ENERGY GAINS

Energy stocks rose as oil rose nearly $2 per barrel CLc1 on expectations that OPEC could cut output this week to lift prices which have plunged more than 50 percent from a record high in just three months.

Royal Dutch Shell (RDSa.L: Quote, Profile, Research, Stock Buzz) gained 6.2 percent, BP (BP.L: Quote, Profile, Research, Stock Buzz) added 7.1 percent while Cairn Energy (CNE.L: Quote, Profile, Research, Stock Buzz) rose 5 percent.

Some banks benefited as shaky confidence on the financial sector improved slightly with the gummed up interbank lending market starting to ease.

Barclays (BARC.L: Quote, Profile, Research, Stock Buzz) added 4.2 percent, Lloyds TSB (LLOY.L: Quote, Profile, Research, Stock Buzz) advanced 2.3 percent and Standard Chartered (STAN.L: Quote, Profile, Research, Stock Buzz) gained 1.9 percent.

Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz) added 4.5 percent after the Sunday Times reported private equity firm CVC Capital Partners has teamed up with Swiss Re (RUKN.VX: Quote, Profile, Research, Stock Buzz), the world's largest reinsurance group, to bid for a majority stake in the UK bank's insurance assets.

Gains were tempered by Fitch Ratings on Friday downgrading ratings on Royal Bank of Scotland, citing growing risk and a deteriorating outlook for some of its main businesses. [ID:nN17476641]

The interbank cost of borrowing dollars fell again in Europe on Monday and dollar and euro interest rate swap spreads narrowed as dealers said banks were lending dollars to European banks on Friday rather than simply hoarding cash.

Not all banks were up, however, with heavy-weighted HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz) losing 0.9 percent and embattled mortgage bank HBOS (HBOS.L: Quote, Profile, Research, Stock Buzz) falling 2.5 percent.

Prudential (PRU.L: Quote, Profile, Research, Stock Buzz) added 12.3 percent after the Sunday Times reported it is in talks with two strategic partners and is eying AIG's Asian business.

Nerves on the state of the global economy were not far from the surface as China reported below-forecast growth and other insurers were in the red.

Aviva (AV.L: Quote, Profile, Research, Stock Buzz), Standard Life (SL.L: Quote, Profile, Research, Stock Buzz) and RSA Insurance Group (RSA.L: Quote, Profile, Research, Stock Buzz) were down between 2.3 and 7.2 percent on lingering concerns about the impact of falling global equity and bond prices on the sector's capital strength.

(Editing by Sharon Lindores)

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US STOCKS-Wall St extends gains on energy, Bernanke

NEW YORK, Oct 20 (Reuters) - U.S. stocks extended gains on Monday as investors snapped up beaten-down energy shares and Federal Reserve Chairman Ben Bernanke said another economic stimulus plan may be needed to revive lagging growth.

Bernanke's remarks were prepared for delivery to a congressional committee.

The Dow Jones industrial average .DJI was up 208.91 points, or 2.36 percent, at 9,061.13. The Standard & Poor's 500 Index .SPX was up 23.96 points, or 2.55 percent, at 964.51. The Nasdaq Composite Index .IXIC was up 24.85 points, or 1.45 percent, at 1,736.14.

The S&P energy index shot up nearly 7 percent following positive broker comments on sector bellwethers such as Exxon Mobil Corp (XOM.N: Quote, Profile, Research, Stock Buzz), which rose more than 5 percent. (Reporting by Ellis Mnyandu; Editing by Kenneth Barry)

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U.K. Budget Deficit Swells to Post-War High on Slump

By Mark Deen

Oct. 20 (Bloomberg) -- Britain posted its biggest six-month budget deficit since World War II as the slide into a recession hobbled tax receipts and government spending jumped.

The 37.6 billion-pound shortfall ($65 billion) in the fiscal first half through September was the largest since records started in 1946, when Clement Attlee was prime minister, the Office for National Statistics said in London today. Last month, the deficit widened to 8.1 billion pounds.

With the economy next year facing its first full-year contraction since 1991, Chancellor of the Exchequer Alistair Darling has pledged to keep spending on job-creating projects such as building work. Tax increases and spending restraint will eventually be needed to fill the hole in the public finances, economists say.

``The pain cannot be delayed forever,'' said Gemma Tetlow, a senior research economist at the Institute for Fiscal Studies in London. ``Once the current crisis abates, this government, or its successor, is likely to have to introduce a combination of new tax raising measures and further spending cuts as a share of national income to reduce borrowing and debt.''

The deficit in the six months through September exceeded the 35.8 billion-pound shortfall for the whole of the previous fiscal year, which ended March 31. Spending rose 6.1 percent, three times the pace of tax receipts. The shortfall was 21.5 billion pounds in the same six months last year.

Tax Losses

The budget gap was last as wide in the aftermath of World War II, when the country, its resources depleted by the six-year military effort, was forced to borrow $4.34 billion from the U.S. to stave off bankruptcy.

The Treasury is losing tax revenue as the housing slump deepens and the credit crisis hammers the earnings of financial firms, which contribute a quarter of all taxes from company profits. Corporation tax receipts fell 8 percent in September from a year earlier. At the same time, the government faces higher spending on welfare payments as unemployment climbs.

The International Monetary Fund predicts the U.K. economy will contract 0.1 percent next year after forecasting growth of 1.6 percent six months ago.

``At a time when every country has been affected by the global financial crisis that we are seeing Britain cannot be immune from what is happening and that is going to have an impact on the British public finances,'' Michael Ellam, a spokesman for Prime Minister Gordon Brown, told reporters in London today.

`Destabilizing Factor'

The deficit may reach 64 billion pounds for the year as whole as the economic slump saps tax receipts, 21 billion pounds more than Darling forecast seven months ago, according to the IFS.

That's equal to 4.4 percent of gross domestic product. Some economists say the shortfall may total as much as 7 percent by 2010, the highest since the aftermath of the last recession. Brown has to hold a general election by the middle of that year at the latest.

``The speed with which the political debate is turning to fiscal loosening raises the risks that the overall fiscal loosening in the recession and pre-election period will be so big that the deficit itself will become a destabilizing factor for the economy,'' said Michael Saunders, chief Western European economist at Citigroup Inc. in London say.

Political Revival

The government has already given away almost 4 billion pounds in emergency tax cuts since March to ease the impact of higher food and fuel prices and the credit crunch.

Brown is now seeking to build on a revival in opinion polls that began last month as voters approved of his handling of the meltdown in the banking industry.

In recent weeks, the government has seized Bradford & Bingley Plc, pledged up to 50 billion pounds to buy stakes in cash-strapped banks and promised to compensate Britons who lost money in collapsed Icelandic banks.

Those commitments may lift debt to more than 50 percent of gross domestic product, the highest since Britain sought an IMF bailout in 1977, according to the IFS.

Darling will use his pre-budget report before the end of the year to admit that his March forecasts for the economy were far too optimistic, and abandon a decade-old pledge to keep government debt below 40 percent of GDP, economists say.

In September, net debt stood at 43.4 percent of GDP, or 645.3 billion pounds, compared with 36.2 percent a year earlier. Much of the increase was due to the inclusion of 81.9 billion pounds of liabilities at Northern Rock Plc, the mortgage lender that was nationalized in February.

To contact the reporters on this story: Mark Deen in London at markdeen@bloomberg.net

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India Lowers Key Rate for the First Time Since 2004

By Cherian Thomas

Oct. 20 (Bloomberg) -- India's central bank unexpectedly lowered its key repurchase rate for the first time since 2004 as the global credit-market turmoil threatens to plunge the world economy into recession.

The Reserve Bank of India cut its overnight lending rate to 8 percent from 9 percent, according to a statement in Mumbai today. The action came after the bank reduced the cash reserve ratio by 2.5 percentage points to 6.5 percent effective Oct. 11.

The move signaled Governor Duvvuri Subbarao sees weaker growth as a bigger threat than inflation in Asia's third-largest economy. China's economic growth slumped to a five-year low last quarter and Vietnam reduced borrowing costs today, as JPMorgan Chase & Co. and UBS AG said the world economy is sliding into its first recession since 2001.

``They must have been worried about global growth, big economies and the region slowing,'' said Sailesh Jha, senior regional economist at Barclays Capital in Singapore, citing China's GDP report earlier today.

Bonds reversed losses after the central bank's announcement, while the key stock index, which surged after the rate decision, pared gains at the 3:30 p.m. close in Mumbai. The rupee weakened.

The yield on the most frequently traded 13-year government bonds slid 28 basis points to 7.72 percent. The key Sensitive Index, which gained as much as 5.6 percent, rose 2.5 percent to 10,223.09. The rupee fell 0.2 percent to 48.9750 a dollar. A basis point is 0.01 percentage point.

Policy Statement

Subbarao, who took office last month and is scheduled to release his first quarterly monetary policy statement on Oct. 24, can afford to reverse four years of tighter credit as declining commodities prices ease pressure on inflation.

India's key wholesale price inflation slowed more than economists expected to 11.44 percent in the week to Oct. 4, a four-month low. Crude oil prices have halved since their peak in July. The Reuters/Jefferies CRB Index of 19 commodities dropped to the lowest in four years on Oct. 17.

``We expect a further reduction in wholesale price inflation in the next two months,'' Prime Minister Manmohan Singh told lawmakers in parliament today. ``Nevertheless, we must be prepared for a temporary slowdown in the Indian economy. Increased public expenditure is an important part of the solution.''

Finance Minister Palaniappan Chidambaram today sought parliament's approval to spend an extra 2.4 trillion rupees ($49 billion) on rural jobs, food and oil subsidies in the year ending March 31 to boost the economy, which grew at a record 8.8 percent pace since 2004.

`Indirect Admission'

``A 100 basis point cut is an indirect admission that not all is hunky dory with the India growth story,'' said Nandkumar Surti, who manages 16 billion rupees in debt funds as chief financial officer at JPMorgan Asset Management India Pvt. in Mumbai. ``One way to look at it is that the global problem has begun to affect us.''

The International Monetary Fund said growth in India's economy may slow to 7.9 percent in 2008 and slide further to 6.9 percent in 2009. The IMF estimates India's economy grew 9.3 percent in 2007.

The collapse of banks in the U.S. and Europe prompted the IMF this month to also scale back its forecast for world growth in 2009 to 3 percent, a level the fund itself has called the dividing line between a global recession and expansion, from 3.9 percent this year.

Global Action

Only India and China among the so-called BRIC economies have joined global policy makers around the world to cut interest rates to avert a recession. Russia lowered its reserve requirement for the second time in a month, while Brazil reduced the measure Oct. 13 for the fourth time in three weeks.

Slowing inflation in China enabled the central bank on Oct. 8 to cut interest rates for the second time in three weeks. It reduced the one-year lending rate to 6.93 percent from 7.2 percent on the same day the Federal Reserve, European Central Bank and three others lowered rates in an unprecedented coordinated action. China also reduced the proportion of deposits that lenders must set aside as reserves by 0.5 percentage point.

China's economy, the biggest contributor to global growth, expanded 9 percent in the third quarter from a year earlier, the statistics bureau said today.

Indian real-estate developers are facing a shortage of funds, Macquarie Research said in a report last week, which may slow demand for steel, cement and transportation.

`Capital Crunch'

``The capital crunch has hit the real estate sector very hard,'' Macquarie analysts Unmesh Sharma and Bharat Rathi said. ``We believe the tightness will continue for a few more months, given the difficulty in raising capital through bank debt, equity markets and (more recently) private equity.''

The decline in demand is already showing in India. The nation's output at factories, utilities and mines rose 1.3 percent in August from a year earlier after a revised 7.4 percent gain in July, as rising borrowing costs since 2004 have sapped consumer demand.

Last week, Jet Airways (India) Ltd. and Kingfisher Airlines Ltd, India's two largest domestic carriers, agreed to cut duplicate routes to counter slowing demand and save as much as 15 billion rupees.

``Downside risks to India's growth have increased, while the upside risks to inflation have receded,'' said Rajeev Malik, regional economist at Macquarie Group Ltd. in Singapore. ``We expect inflation to continue improving, thereby facilitating a shift in the RBI's monetary stance.''

To contact the reporter on this story: Cherian Thomas in New Delhi at Cthomas1@bloomberg.net.

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Leading Economic Indicators in U.S. Unexpectedly Rise

By Timothy R. Homan

Oct. 20 (Bloomberg) -- The index of U.S. leading economic indicators unexpectedly rose in September, led by a surge in the money supply as the Federal Reserve pumped cash into the economy to unfreeze clogged credit markets.

The Conference Board's gauge increased 0.3 percent after a 0.9 percent decline the prior month that was almost twice as large as previously estimated, the New York-based private research group said today. The index points to the direction of the economy over the next three to six months.

Credit tightened further this month making it even more difficult for consumers and businesses to borrow. Fed Chairman Ben S. Bernanke today warned that the economy would probably slow for ``several quarters'' as spending and business investment weakened.

``October's index will plunge,'' said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York, who correctly forecast the gain. The index ``is consistent with recession, and it has not hit bottom yet.''

The leading index was forecast to decline 0.1 percent, according to the median of 53 economists in a Bloomberg News survey. Estimates ranged from a drop of 0.6 percent to a gain of 0.5 percent.

Stocks Rise

Stocks maintained gains following the report, reflecting a drop in global money-market rates. The Standard & Poor's 500 index rose 2% to 959.6 at 10:50 a.m. in New York. Treasury securities were little changed.

The measure decreased at a 2.5 percent annual pace over the past six months. A decline of around 4 percent to 4.5 percent at an annual pace is one signal a recession is imminent, according to the Conference Board. The gauge met that requirement in January, when it dropped at a 4.7 percent pace.

``The extreme volatility in the financial market, and the near freeze-up of credit, will no doubt weaken the economy further,'' Ken Goldstein, an economist at the Conference Board, said in a statement. ``Data on hand reflect a contracting economy, but not one in free fall.''

Six of the 10 indicators in today's report contributed to the gain. In addition to the money supply and interest-rate spread, consumer expectations, supplier deliveries and orders for capital and consumer goods, were positive.

Growing Pessimism

The jump in consumer expectations was already reversed this month. The Reuters/University of Michigan's preliminary October sentiment index last week showed Americans' outlook on the economy sank. Overall confidence dropped by the most on record.

A drop in building permits, an increase in jobless claims, a drop in stock prices and a decrease in manufacturing hours were negative factors in the leading index.

Economists surveyed by Bloomberg in the first week of October anticipated the economy contracted at a 0.2 percent annual pace last quarter and will shrink at a 0.8 percent pace in the last three months of the year. Declines in consumer spending will tip the economy into a recession, the survey showed.

``Incoming data on consumer spending, housing and business investment have all showed significant slowing over the past few months, and key determinants of spending have worsened,'' Bernanke said today during testimony before Congress. ``The pace of economic activity is likely to be below that of its longer-run potential for several quarters.''

Endorses Stimulus

Bernanke, broke with the Bush Administration, and endorsed consideration of a second fiscal stimulus package.

The housing slump is showing no indication of abating. Building permits, a sign of future construction, dropped 8.3 percent in September, matching the lowest level since 1981, and single-family home starts fell to a 26-year low, the Commerce Department reported last week.

The U.S. has lost 760,000 jobs so far this year, and the jobless rate held at a five-year high of 6.1 percent in September. More job cuts are on the way.

Danaher Corp., the maker of Craftsman tools and Tektronix measuring devices, said last week it plans to eliminate 1,000 jobs and close 12 factories. Lawrence Culp, chief executive officer of the Washington-based company, said in a conference call Oct. 16 that the steps were taken to ``get ready for what may come'' as the U.S. economy falters.

The Standard & Poor's 500 index averaged 1217 in September, down from 1281.47 in August. Stock prices this month are down even more. The index averaged 1,001.38 during the first 17 days of October.

Coincident Index

The index of coincident indicators, a gauge of current economic activity, dropped 0.5 percent, the biggest decline since August 2005, after no change in August.

The index tracks payrolls, incomes, sales and production, which, combined with gross domestic product, are the figures used by the National Bureau of Economic Research to determine whether a recession has begun. The measure peaked one year ago, which is why some economists anticipate the group will eventually announce an economic contraction started in late 2007 or early 2008.

The gauge of lagging indicators decreased 0.2 percent. The index measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net



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Bernanke Backs More Stimulus, Citing `Weak' Outlook

By Scott Lanman

Oct. 20 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke endorsed consideration of a fiscal stimulus package, citing the chance of a ``protracted slowdown'' and a ``weak'' outlook for the U.S. economy into next year

Lawmakers ``should consider including measures to help improve access to credit by consumers, homebuyers, businesses and other borrowers,'' Bernanke said in testimony to the House Budget Committee. ``Such actions might be particularly effective at promoting economic growth and job creation,'' he said, calling consideration of a stimulus ``appropriate.''

Bernanke's remarks differ with the Bush administration's position and may give momentum to legislation being proposed by House Democrats; in January Bernanke told the same panel a stimulus ``could be helpful'' and urged lawmakers to act ``quickly.'' The impact of that $168 billion measure faded by July, and economists anticipate the economy will contract in the current quarter.

The Bush administration has been cool to the prospect of another stimulus. Press Secretary Dana Perino, responding to reporters' questions Oct. 16, said that ``a lot of conversations about a second stimulus took place just last month'' with Congress, but ``we didn't think'' the proposals put forward ``would help bring money into the economy.''

House Speaker Nancy Pelosi has proposed a fiscal stimulus of as much as $150 billion to aid the economy after the credit crunch deepened in recent months and the impact of the first stimulus package wore off.

Wisconsin Representative Paul Ryan, the budget panel's ranking Republican, said in the hearing that the Democratic plan is ``bloated'' and may balloon the budget deficit to $1 trillion.

Giving `Validity'

Bernanke's support would lend the Democrats' plan both ``validity'' and bipartisan sheen that would make it easier to approve, Representative Scott Garrett, a New Jersey Republican on the committee, said before the testimony. Garrett said he intends to ask Bernanke why ``we didn't see more of a lasting positive result'' from the first stimulus.

The plan floated by Pelosi, a California Democrat, includes increased federal spending on unemployment benefits, food stamps, highway-construction projects and aid to cash-strapped state governments. No vote has been set.

``Any fiscal action inevitably involves tradeoffs'' that may ``burden future generations,'' Bernanke said. Yet ``with the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate.''

Evidence of a recession increased last week, as confidence among Americans fell by the most on record and single-family housing starts hit a 26-year low. Industrial output fell 6 percent in the third quarter, the most since 1991, and a factory index for the Philadelphia region hit an 18-year low this month.

Below Potential

``The pace of economic activity is likely to be below that of its longer-run potential for several quarters,'' Bernanke said in today's testimony. ``The slowing in spending and activity spans most major sectors.''

The Fed lowered its benchmark interest rate a half point on Oct. 8 to 1.5 percent in an unprecedented coordinated action with other central banks. Traders see about a 46 percent chance of a half-point cut at or before the Federal Open Market Committee's Oct. 28-29 meeting, futures prices show. The contracts indicate 100 percent probability of a quarter-point move.

As the credit crisis intensified into a freeze in early September, the Fed took unprecedented actions: rescuing insurer American International Group Inc. with an $85 billion loan, later supplemented by $38 billion of additional credit; backing legislation to spend up to $700 billion on recapitalizing banks and buying distressed assets; and setting up a short-term funding backstop for U.S. companies through commercial-paper purchases.

Aiding Banks

U.S. regulators last week announced fresh efforts to jump- start lending. The Treasury committed $250 billion in taxpayer funds to private banks and the Federal Deposit Insurance Corp. extended its insurance to include new debt sold by banks.

``These measures were announced less than a week ago, and, although there have been some encouraging signs, it is too early to assess their full effects,'' Bernanke said.

Still, the actions ``should help rebuild confidence in the financial system,'' Bernanke said. While the rescue legislation was ``critical'' for helping to contain ``damage to the broader economy,'' stabilizing the financial system ``will not quickly eliminate the challenges still faced by the broader economy,'' he said.

Business spending may decline further in coming months, and homebuilding may keep contracting into 2009, Bernanke said. Lower commodity prices and the slowing economy ``should bring inflation down to levels consistent with price stability,'' he said.

Today's comments echo Bernanke's warning last week that the economy may be in for a prolonged period of sub-par growth. ``A broader economic recovery will not happen right away,'' and ``economic activity will fall short of potential for a time,'' he said in an Oct. 15 speech.

Treasury Secretary Henry Paulson is scheduled at 11:30 a.m. in Washington today to present further details on how banks may participate in the government's plan to inject capital into the financial system.

The House budget panel is chaired by Representative John Spratt, a South Carolina Democrat who represents Dillon County, where Bernanke grew up.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net



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G-7 to Contract Most Since Great Depression, Deutsche Says

By Jennifer Ryan

Oct. 20 (Bloomberg) -- The economy of the Group of Seven nations will contract by the most since the Great Depression next year as tighter credit markets hurt consumption, forcing central banks to cut interest rates, Deutsche Bank AG said.

The combined G-7 will contract 1.1 percent in 2009 after expanding 0.8 percent this year, Deutsche Bank economists Peter Hooper and Thomas Mayer said in a research note. The U.S. will shrink 1 percent, the euro region will contract 1.4 percent and Japan will shrink 1.2 percent, they said.

The economic slump follows a yearlong credit squeeze that's toppled banks including Lehman Brothers Holdings Inc. and culminated in the Standard & Poor's 500 Index's worst weekly decline since 1933. Higher credit costs will strangle consumer spending and business investment just as unemployment rises, the Deutsche Bank economists said.

``We now expect a major recession for the world economy over the year ahead,'' Mayer and other economists said. ``A major cutback in credit to the real economy across the world has led to the deterioration in the outlook. We were not anticipating such a huge financial shock since our Oct. 3 forecasts.''

The G-7 consists of the U.S., Canada, Japan, France, Italy, Germany and the U.K. Growth across the world economy as a whole will slow to 1.2 percent from 3.2 percent this year, the slowest since the early 1980s, according to Deutsche Bank forecasts.

A global recession and cooling inflation will give the Federal Reserve, the European Central Bank and the Bank of Japan scope to help the economy with lower rates, Deutsche Bank forecast.

Fed Cuts

The Fed will cut the benchmark interest rate to 1 percent at its Oct. 29 meeting from the current 1.5 percent, Deutsche Bank said. It previously predicted rates to fall to that level over a period of 12 months and the economy to stagnate in 2009.

Mayer said he hasn't cut economic forecasts ``by such a large amount in such a short period of time'' in the 20 years he's been working in finance.

The ECB will lower its key rate to a record 1.5 percent over the next 12 months from the current 3.75 percent, Deutsche Bank said. The economists previously forecast the central bank to cut to 3 percent over the period and the economy to shrink 0.2 percent next year.

The Bank of Japan will lower its benchmark to 0.25 percent in early 2009, against an earlier forecast of no change, Deutsche Bank said. The rate is now 0.5 percent. The economists also said Japan's economy would shrink 1.2 percent, which compares with a previous forecast that it would expand 0.4 percent.

Global inflation will slow to 3.1 percent from 5.6 percent this year, Deutsche Bank said. The forecasts exclude data for economic growth during World War II, Deutsche Bank said.

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net

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Saudi Arabia Seeks Oil Price of `Around $70,' IMF Says

By Matthew Brown

Oct. 20 (Bloomberg) -- Saudi Arabia and many of its Gulf neighbors believe $70 a barrel is a fair price for crude, the International Monetary Fund said as OPEC producers meet to discuss output quotas in Vienna later this week.

``For many of these countries, in particular Saudi Arabia, the view always was that a price of around $70 was the right price,'' Mohsin Khan, regional director of the IMF, said in an interview in Dubai today.

Saudi Arabia, the largest producer in the Organization of Petroleum Exporting Countries, needs to earn $49 from each barrel of oil it sells to balance its budget, the IMF said today in its economic outlook for the Middle East and Central Asia. The United Arab Emirates needs $23 a barrel, while Qatar needs $24 a barrel, it said.

OPEC, which meets Oct. 24 in Vienna, three weeks earlier than planned, is facing the weakest growth in demand since 1993 just as new fields come on line from Angola to the Gulf of Mexico. Members may cut daily output by as much as 2 million barrels, President Chakib Khelil said yesterday.

Crude oil rose 2.4 percent to $73.54 a barrel at 9:13 a.m. in New York on signs that OPEC may cut output to halt a 50 percent drop in prices since July.

Editors: Shaji Mathew, Jonas Bergman.

To contact the reporter on this story: Matthew Brown in Dubai at mbrown42@bloomberg.net



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Halliburton Has Loss on Debt Costs; Estimates Topped

By Edward Klump

Oct. 20 (Bloomberg) -- Halliburton Co., the world's second- largest oilfield-services provider, posted a third-quarter loss of $21 million on financing costs. The company's shares rose after earnings excluding one-time items exceeded analyst estimates and profit in North America increased.

The loss was 2 cents a share, compared with net income of $727 million, or 79 cents a share, a year earlier, Houston-based Halliburton said today in a statement. Excluding an acquisition charge and $693 million in costs related to redemption of convertible bonds, per-share profit was 76 cents, 2 cents higher than the average of 24 analyst estimates compiled by Bloomberg.

Profit from Halliburton's largest business, completion and production services, climbed 11 percent. That included a 2.8 percent gain in North America, where Halliburton is the biggest provider of pressure pumping, a service where materials such as water or sand are injected into a reservoir to fracture rocks and make gas flow easier.

``What that basically is saying is that pricing has improved for pumping services,'' said Michael Henzi, an analyst at Sterne, Agee & Leach Inc. in Boston who has a ``hold'' rating on Halliburton shares and doesn't own any.

Halliburton rose $2.10, or 12 percent, to $20.36 at 10:21 a.m. in New York Stock Exchange composite trading. Before today, the stock had dropped 52 percent this year.

Spending Cuts

Cuts in capital spending by producers will result in less oil and natural-gas drilling than previously anticipated, Chief Executive Officer David Lesar said in the statement. The reductions will lead to declines in gas supplies and more favorable conditions, he said.

``They are taking a wait-and-see attitude on the future, as expected, I suppose,'' said Pierre Conner, an analyst at Capital One Southcoast Inc. in New Orleans who has an ``add'' rating on Halliburton shares and doesn't own any. ``That's probably the most important thing, even more so than the results being reported today.''

Halliburton has a chance to take market share during the worldwide credit crunch because some competing contractors have less access to capital, Lesar told investors and analysts on a conference call. He said there also may be consolidation in the industry.

The company had $973 million in cash and cash equivalents as of Sept. 30. Halliburton said it has $1.6 billion in unused credit capacity.

Storm Impact

Third-quarter results were hurt by Hurricanes Gustav and Ike, which disrupted output and damaged wells in the Gulf of Mexico on the way to striking the Louisiana and Texas coasts last month. Halliburton said the storms cut its revenue by $74 million and reduced earnings by 4 cents a share.

Halliburton is expanding overseas after gains in oil and gas prices stoked demand for oilfield work from Latin America to Asia. The company opened a Middle East headquarters in Dubai and added technology centers in Russia and Asia.

Third-quarter revenue climbed 24 percent to $4.85 billion, led by a 42 percent gain in Latin America, Halliburton said. The gain was 22 percent in North America, where operating income climbed 14 percent to $569 million. Profit rose 23 percent in the Middle East and Asia.

Oil futures on the New York Mercantile Exchange climbed to a record above $147 a barrel in July, and the average price in the quarter was 57 percent higher than a year earlier. Gas futures traded 44 percent higher and topped $13 per million British thermal units in July.

Highest Since 1985

The number of active oil and gas rigs increased in September to 3,557, the most since 1985, according to a tally by Baker Hughes Inc. The rig count is an indicator of demand for Halliburton's drill bits, well positioning and other products and services.

``The oil-service business is an incredible business when it's tight because pricing improves, your customers are desperate for your products, your margins expand,'' said Dan Pickering, an analyst at Tudor, Pickering, Holt & Co. in Houston. ``When things are softer or slowing, your valuable service becomes more commoditized and the customer is very quick to look for areas to reduce cost.''

Oil tumbled below $70 a barrel last week for the first time since August 2007. Prices will average about $75 a barrel next year, James Crandell, an analyst with Barclays Capital in New York, said in a report this month. North American exploration and production spending will fall 15 percent next year, he said, and spending elsewhere will rise 20 percent.

Schlumberger Ltd., the world's largest oilfield-services company, said Oct. 17 that its third-quarter net income climbed 13 percent to $1.53 billion, or $1.25 a share.

To contact the reporter on this story: Edward Klump in Houston at eklump@bloomberg.net.



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Natural Gas Futures Gain as Lower Temperatures May Lift Demand

By Reg Curren

Oct. 20 (Bloomberg) -- Natural gas futures in New York advanced for the fifth time in six days as colder weather forecast for the U.S. Midwest and Northeast may lift demand for the furnace fuel.

Gas consumption peaks during the cold-weather months, when demand outstrips production. Below-normal temperatures are expected in the eastern half of the country starting Oct. 22 and may last for the next week, according to MDA Federal Inc.'s EarthSat Energy Weather.

``We've got colder-than-normal temperatures coming in and last week's storage was a little disappointing,'' said Phil Flynn, senior trader at Alaron Trading Corp. in Chicago. ``We may have hit a little bit of a seasonal bottom.''

Natural gas for November delivery rose 27.9 cents, or 4.1 percent, to $7.065 per million British thermal units at 10:04 a.m. on the New York Mercantile Exchange. Gas advanced 3.8 percent last week, the biggest gain since the week ended June 6.

``We had been blessed with very nice weather and now we have some cold weather outside the doorstep,'' said Michael Rose, a director of trading at Angus Jackson Inc. in Fort Lauderdale, Florida.

In the U.S., about 52 percent of all households use natural gas as their main heating fuel, according to the Energy Department.

Lower Prices

Commodities, including natural gas, have also been beaten down to prices that now make them attractive to buy, Rose said. Gas has declined 48 percent from a 30-month closing high of $13.577 per million Btu on July 3.

``A lot of people looked at natural gas around $6.50 and viewed that as very cheap for winter time and have been buying it,'' Rose said.

Gas dipped to $6.436 per million Btu on Oct. 16, its lowest price in more than a year.

Inventories of gas rose 79 billion cubic feet in the week ended Oct. 10, below analyst expectations, to 3.277 trillion cubic feet, a department report showed Oct. 16. Stockpiles were 87 billion cubic feet, or 2.6 percent, below inventories for the same period a year earlier.

Supplies last November reached a record 3.545 trillion cubic feet to start the heating season.

Utilities and large industrial users rebuild gas stockpiles in the spring and summer to have enough on hand when the heating season starts.

To contact the reporter on this story: Reg Curren in Calgary at rcurren@bloomberg.net.



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Crude Oil Rises a Second Day on Signs OPEC Will Cut Output

By Mark Shenk

Oct. 20 (Bloomberg) -- Crude oil rose for a second day on signs that the Organization of Petroleum Exporting Countries may cut output to halt a 50 percent drop in prices since July.

OPEC may pare production by 1 million to 2 million barrels a day in stages at an Oct. 24 meeting to stabilize prices, said Chakib Khelil, the group's president. Deutsche Bank AG lowered its 2009 crude-oil price estimate by 35 percent to $60 a barrel, citing the possibility of a ``major world recession.''

``OPEC is the focus,'' said Michael Fitzpatrick, vice president for energy risk management at MF Global Ltd. in New York. ``We are all waiting to see what OPEC does on Friday. A 1 or 1.5 million-barrel cut looks most likely, but as much as 3 million barrels is a possibility, although done in stages.''

Crude oil for November delivery rose 69 cents, or 1 percent, to $72.54 a barrel at 11:03 a.m. on the New York Mercantile Exchange. Prices are down 18 percent from a year ago.

``Prices will have to break through Thursday's high of $74.50 to convince me that this is anything other than a temporary bounce,'' said Tom Bentz, senior energy analyst at BNP Paribas in New York.

China's economy grew 9 percent in the third quarter, the slowest pace in five years, underscoring concern that the spreading financial crisis threatens the biggest contributor to global growth.

Emergency Meeting

OPEC, supplier of about 40 percent of the world's oil, brought forward to this week a Vienna meeting planned for November to discuss output levels.

While there's a consensus among the group's members to cut output, there's no agreement on the size of the reduction, Khelil, who is also Algeria's oil minister, said in an interview on Algerian television yesterday.

Qatari Oil Minister Abdullah bin Hamad al-Attiyah told Al Jazeera TV the cut will probably be 1 million barrels a day. Saudi Arabia, which dominates OPEC proceedings as the group's largest producer, has yet to comment on its intentions.

Goldman Sachs Group Inc. and Merrill Lynch & Co. said a 1 million-barrel cut is possible. Oil may fall below $60 a barrel if OPEC limits the cut to 1 million barrels a day, Goldman analysts said in a report dated Oct. 17. Merrill analysts said OPEC may trim supplies by 2.4 million barrels a day over 12 months if economic conditions deteriorate.

OPEC's 13 members produced 32.2 million barrels a day in September, according to a Bloomberg News survey of analysts and producers.

Positive News

``The West is going to be angry because the drop in oil prices has been just about the only positive economic news,'' Fitzpatrick said. ``Falling gasoline prices have been a great help to consumers.''

Regular gasoline, averaged nationwide, declined 3.1 cents to $2.923 a gallon, AAA, the nation's largest motorist organization, said today on its Web site. Pump prices have tumbled 29 percent from the record $4.114 a gallon reached on July 17.

``The finance markets are up a bit, which is also helping energy markets,'' Bentz said.

U.S. stocks rose as Halliburton Co.'s better-than-estimated profit improved the earnings outlook for energy companies and a decrease in global money market rates boosted bank shares.

Brent crude oil for December settlement rose $1.85, or 2.7 percent, to $71.45 a barrel on London's ICE Futures Europe exchange.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.



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Kazakhstan to Use Oil Wealth to Avert Bank Failures

By Nariman Gizitdinov and Laura Cochrane

Oct. 20 (Bloomberg) -- Kazakhstan's Prime Minister Karim Masimov said he will spend oil revenue to spur growth and prevent any failure by the central Asian nation's banks, which investors rank as the most prone to default in emerging markets.

``The Kazakh government is ready to step in,'' Masimov said in an interview with Bloomberg in the capital Astana. ``The Kazakh banking system with the support of the government and central bank will fulfill all obligations to international investors.''

Kazakhstan has the highest risk of following Iceland toward a financial industry implosion, based on the cost to protect bonds sold by the country's two biggest lenders. Along with Latvia, Kazakhstan's $100 billion oil-led economy is the most vulnerable to the credit crisis because of its reliance on short-term foreign borrowing, RBC Capital Markets said in a report last week.

The government will buy as much as $5 billion of distressed assets from banks in the next two years and will aid growth by spending up to $10 billion from the National Oil Fund on agriculture and development, Masimov said.

``We have our own specific plan to survive without any external support,'' Masimov said. ``I don't think we need support from the International Monetary Fund or overseas.''

`Canary in Coal Mine'

Iceland turned to the IMF after its three biggest lenders failed to secure short-term funding. Ukraine is also lining up loans from the IMF, while Hungary is getting help from the European Central Bank and the IMF to unblock its credit markets.

The nine countries RBC considers the most at risk from the global credit crisis are all in eastern European and the former Soviet Union. Russia's government has pledged more than $200 billion of support for banks and companies.

``Kazakhstan is like the canary in the coal mine,'' said Nick Chamie, head of emerging-market research for RBC in Toronto. ``It has been feeling the effects of the credit crunch for some time and definitely before the Hungarian and Russian banks because of their reliance on short-term external funding.''

Kazakhstan is facing its worst financial crisis after a decade-long boom in which the economy expanded by an average of 10 percent a year, helped by a surge in the price of oil to a record $147 in July from as little as $25 in 2000. The growth enriched the population of 15.3 million, sending house prices soaring 30 percent last year.

Moody's `Negative'

As oil tumbled to $70 a barrel, property prices in the nation's biggest city Almaty have dropped 15 percent from a year ago, according to the national statistics agency. Net income at Kazakhstan's 36 banks fell 47 percent in the first eight months of this year as lenders put aside more money to cover bad loans, the agency said last month. About 36 percent of all bank loans are secured by property, Financial Supervision Agency chief Yelena Bakhmutova said last month.

Kazakhstan's banks are undergoing a ``survival test,'' Moody's Investors Service said today, assigning a negative outlook.

In contrast with Iceland or Ukraine, Kazakhstan has set aside its oil revenue to weather a financial crisis. The country has $49.5 billion of reserves, including $27.6 billion in the National Oil Fund created eight years ago to guard against a drop in crude, according to central bank data on Oct. 3.

The funds mean the government could repay all $13.7 billion of foreign debt due in the second half this year, including $9.3 billion owed by banks, Goldman Sachs Group Inc. said in a report last week. The reserves would also cover the $16.9 billion of debt maturing next year, including $6.9 billion owned by banks, Goldman said, citing National Bank of Kazakhstan data.

Deficit

``The government has enough firepower to support the banking system,'' Goldman economist Anna Zadornova wrote.

Goldman forecast a current account deficit next year and cut its prediction for economic growth to 3.5 percent for 2009 from a previous 5 percent. Prime Minister Masimov said he expects economic growth of between 5 and 6 percent for 2009, and 4 to 5 percent this year.

``One year ago everyone expected the Kazakh banking system would collapse, but I was sure it will survive,'' Masimov said. ``I can be quite sure that Kazakh banks will not have any problems on the international market.''

Default Swaps

The cost to protect bonds of BTA Bank, Kazakhstan's biggest lender, more than doubled in the past month to 3,685 basis points. Credit-default swaps on AO Kazkommertsbank cost 2,800 basis points, according to prices from CMA Datavision. Contracts on Russia's OAO Sberbank, the next riskiest emerging-market lender, trade for a third of the cost at 980 basis points.

Credit-default swaps protect bondholders against default by paying the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality. A basis point, or 0.01 percentage point, is equivalent to $1,000 on a contract that protects $10 million of debt.

The cost to protect Kazakhstan's government debt against default more than doubled this month to more than 1,000 basis points, the level for borrowers that investors term ``distressed,'' according to CMA Datavision prices on Bloomberg. Only Ukraine ranks as a bigger risk of the emerging-market governments in Europe.

Kazakhstan's main Kzkak Index of stocks lost more than half its value this year.

National Wellbeing

Masimov said the government will provide $5 billion this week for its new National Wellbeing Fund for development projects. A further $5 billion will be kept ``on hold,'' depending on ``what will happen in international markets,'' he said.

The government will also spend at least $1 billion on the distressed bank assets fund. ``The government is ready to increase the fund capitalization up to $5 billion when needed,'' Masimov said. The economy ministry said in a statement today that the government will release 52 billion tenge ($430 million) for the rescue fund.

The money will buy land used as loan collateral at a discounted price, Masimov said. The purchases may start in seven or 10 days. The first $1 billion will come from the budget, and the rest may come from ``different sources,'' Masimov said, without providing details.

``I don't think we will find foreign investors ready to invest in Kazakhstan at this stage,'' and the market may remain closed ``for years,'' Masimov said. ``That is why our strategy is to get our own sources to resolve our problems.''

To contact the reporter on this story: Nariman Gizitdinov in Almaty, through the Moscow newsroom at ngizitdinov@bloomberg.net

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Exelon Offers $6.2 Billion for NRG After Shares Sink

By Jim Polson and Paul Dobson

Oct. 20 (Bloomberg) -- Exelon Corp., the biggest U.S. utility company, offered $6.2 billion for NRG Energy Inc., following Warren Buffett in trying to acquire cheapened power assets after the credit freeze dragged down stock prices.

Exelon's unsolicited, all-stock bid comes after Princeton, New Jersey-based NRG lost half of its market value in two months. Buffett's MidAmerican Energy Holdings Co. agreed on Sept. 18 to buy Constellation Energy Group Inc. for $4.7 billion, less than half the company's market capitalization just a week earlier. Buffett also invested in NRG this year.

Buying NRG, the second-biggest power producer in Texas, would give Chicago-based Exelon more generation outside its Illinois and Pennsylvania operating bases, including a nuclear plant stake southwest of Houston. Nuclear power is about 70 percent cheaper to produce in the U.S. than electricity from the most efficient natural-gas-fueled plants, according to Natixis Bleichroeder Inc. NRG, Exelon and other power producers have proposed 24 new reactors to help add needed generation capacity without increasing greenhouse-gas emissions.

``Exelon couldn't build the plants for the same price it would buy NRG for,'' said Nathan Judge, an analyst at Atlantic Equities in London who rates Exelon shares ``underweight'' and owns none. ``It also gives them access to a bigger balance sheet to fund things like new nuclear plants.''

Premium Is 37%

NRG's owners would get 0.485 share of Exelon for each of their shares, valuing the company at $26.43 a share, Exelon said in a statement late yesterday. The offer is 37 percent higher than NRG's closing price on Oct. 17. NRG traded above $39 as recently as Aug. 28.

Exelon fell $1.55, or 2.8 percent, to $52.95 at 9:56 a.m. in New York Stock Exchange composite trading. The stock has dropped 41 percent since the end of June. NRG jumped 27 percent to $24.52.

NRG's power plants alone are worth $63 a share, more than double Exelon's offer, based on transactions over the past two years, said Gordon Howald, an analyst at Calyon Securities USA Inc. in New York. Buffett's Berkshire Hathaway Inc. acquired its NRG stake in the second quarter, when the stock averaged $42.55.

``Exelon is offering a pretty substantial discount to what Berkshire Hathaway paid,'' said Howald, who rates NRG shares at ``buy'' and owns none. ``The upside potential for NRG as a standalone company is much higher, assuming they can get through this credit crisis. I think they have enough strength to say, `This is not good enough.'''

NRG's Response

The transaction will add to profit in the first full calendar year after its completion, excluding merger-related costs, Exelon said in its statement. NRG said it will review the bid and urged shareholders to take no action.

Exelon Chief Executive Officer John W. Rowe met with NRG's CEO, David Crane, on Sept. 30 to discuss a possible merger, according to Exelon's statement.

NRG rejected a $7.86 billion takeover offer from Atlanta- based Mirant Corp. in 2006. NRG was spurned itself in May on an $11 billion, unsolicited offer for power producer Calpine Corp.

NRG has proposed building two new reactors at its South Texas Project nuclear station by 2015, about a year ahead of a Texas project proposed by Exelon.

``The NRG plant has more political backing than the Exelon plant'' because San Antonio's municipal utility owns 40 percent of the project and the city of Austin owns 16 percent, said Judge of Atlantic Equities.

Credit Rating

Exelon said it would bring a superior credit rating to the table and would reduce NRG's debt leverage.

NRG, which emerged from bankruptcy protection in December 2003, has a rating of Ba3, three levels below investment quality, from Moody's Investors Service. Exelon is rated Baa1, three levels above junk status.

Judge said Exelon's proposed takeover is predicated on expectations of reducing debt costs by financing much of NRG's $8 billion in debt.

``There's refinancing risk, and this is the biggest credit crunch since the Great Depression,'' Judge said. ``This is going to be a real nervous spot for investors.''

Among other transactions this year, National Grid Plc sold its Ravenswood power plant in New York City to TransCanada Corp. for $2.9 billion in April after the U.K. company bought U.S. utility KeySpan Corp. last year for $7.3 billion. Reliant Energy Inc., owner of power plants in nine U.S. states, made a deal this month on preferred stock deal that leaves it open to a takeover.

Stock Offer

For Exelon, buying NRG would increase generation capacity to 47,000 megawatts, most in the U.S., and diversify its holdings, CEO Rowe said in the statement. Exelon, already the largest U.S. nuclear power producer, would have 18,000 megawatts of nuclear capacity. That's enough power for about 14.4 million average U.S. homes, based on an Energy Department estimate.

NRG said in a statement that it's being advised by Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLC. Kirkland & Ellis LLP is legal counsel.

The value of takeovers and asset deals announced by U.S. power companies so far this year has tumbled 67 percent from a year earlier, when buyers led by KKR & Co. LP bought the biggest Texas power producer, the former TXU Corp., in a record leveraged buyout, according to Bloomberg data.

This year's data excludes the Exelon offer and NRG's unsuccessful offer for Calpine.

Berkshire Hathaway, based in Omaha, Nebraska, had 3.24 million NRG shares as of June 30, according to a public filing. Ranked the world's richest man by Forbes magazine, Buffett built Berkshire by investing in out-of-favor securities and buying businesses whose prospects and management he deemed superior.

To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net; Jim Polson in New York at jpolson@bloomberg.net.

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South Africa Rand Falls on Speculation Importers Buying Dollars

By Garth Theunissen

Oct. 20 (Bloomberg) -- South Africa's rand declined against the dollar on speculation the country's importers took advantage of gains that drove the currency to the highest level in three days to buy foreign exchange.

The rand was also hurt as traders bet Finance Minister Trevor Manuel may push the budget into a deficit next year to fund spending on infrastructure and social programs to cushion a slowdown in Africa's biggest economy. The currency earlier rose for a third day versus the dollar, rebounding from a 17 percent plunge on Oct. 15 sparked by concern about a global recession.

``We're seeing strong importer demand below the 10 rand to the dollar level,'' said Ian Martin, a currency strategist at Rand Merchant Bank in Johannesburg. ``Small importers in particular have been rattled by the rand's weakness. Every time the rand strengthens they buy foreign exchange.''

The South African currency fell as much as 2.2 percent to 10.2295 per dollar and traded at 10.2170 as of 4:23 p.m. in Johannesburg, from 10.0126 at the end of last week. Earlier, it strengthened to 9.8250. The rand fell versus all 16 most- actively traded currencies monitored by Bloomberg, slipping 1.5 percent versus the euro to 13.6229, from 13.4260.

South Africa's currency slid 33 percent against the dollar this year, making it the worst-performing major currency in the world, as foreign investors turned net sellers of about 34 billion rand ($3.3 billion) of the country's stocks and bonds. About $30 trillion has been wiped off global stock benchmarks in the past year as the U.S. subprime-mortgage crisis toppled financial institutions and spread to economies around the world.

Precious Metals

The rand declined even as equities gained and gold and platinum prices advanced, boosting the revenue prospects for the world's biggest exporter of precious metals.

``We've definitely seen importer-buying today,'' said Marc Copeland, a currency trader at Investec Capital Markets in Cape Town, where he helps manage about $60 billion in assets. ``People are nervous about further rand weakness. Any deterioration in equity markets will hit the rand hard.''

Copeland said he is ``positioning for further weakness'' in the currency, without giving a trading range. ``It's difficult to say exactly where the rand is going to trade in the current environment,'' he said.

South Africa's benchmark FTSE/JSE Africa All Share Index gained 2.3 percent today, rising for a second day. The equity measure is down 29 percent this year.

Deficit Concern

The country's deficit may be as much as 1 percent of gross domestic product in the year through March 2010, compared with a February estimate of a 0.6 percent surplus, according to Standard Chartered Plc and South Africa's Bureau for Economic Research. Manuel will present his Medium Term Budget Policy Statement at 2 p.m. in Cape Town tomorrow.

``We're one day ahead of a major policy statement, so it stands to reason that investors would hold back on rand positions until they have more certainty,'' said Ian Cruickshanks, head of research at Nedbank Treasury in Johannesburg. Manuel ``may be pushed to send the budget into deficit and that's cause for concern.''

Labor unions and communists have increased their influence over the ruling African National Congress since successfully backing Jacob Zuma to become party president in December. The ANC is pushing to step up spending to boost job creation in the country, where one in four people is unemployed.

Gold climbed for the first time in three days, increasing 1.4 percent to $794.69 an ounce. Platinum snapped a three-day decline, gaining 2.3 percent, to $885.70 an ounce.

South Africa produces almost 80 percent of the world's platinum and about 10 percent of its gold, typically causing the rand to move in tandem with the metals' prices.

Government bonds fell, with the yield on the 13.5 percent security due September 2015 rising about 1 basis point to 9.31 percent. The yield on the 13 percent note maturing in August 2010 rose 4 basis points to 9.56 percent. Yields move inversely to bond prices.

To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net



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Ruble Jumps Most Since 1999 as Central Bank Curbs Speculators

By Emma O'Brien

Oct. 20 (Bloomberg) -- The ruble rose the most against the dollar in more than nine years and Russian stocks and bonds rallied after the central bank curbed speculators betting on the currency's decline.

The ruble strengthened against the dollar and the euro after Bank Rossii limited the amount traders can wager through currency swaps, which allow investors to make bets on the exchange rate without having to convert currency upfront. The Micex Index of shares climbed as much as 6.6 percent, and the yield on the benchmark 30-year government bond retreated from a six-year high as the price of oil, Russia's biggest export earner, rose for a second day.

``They're trying to defend the ruble with tooth and nail, though it remains to be seen whether they'll be successful,'' said Peter Westin, a strategist in Moscow with JPMorgan Chase & Co., the largest U.S. bank by market value. ``We have global momentum and strength with the oil price up and that's helping Russia today.''

The central bank will announce a limit on traders' currency-swap operations every day by 10 a.m. in Moscow, it said today in an e-mailed statement. Today's limit is 50 billion rubles ($1.9 billion).

The new policy will prompt banks betting on a ruble decline to reverse those trades, said Mikhail Galkin, head of fixed- income and credit research at MDM Bank in Moscow.

The currency, which the central bank seeks to keep within a trading band against a basket of dollars and euros, rose as much as 1.8 percent to 25.8838 per dollar today, the biggest gain since May 17, 1999. It was at 26.3135 by 4:53 p.m. in Moscow, from 26.3566 last week. The ruble climbed as much as 1.2 percent to 34.9330 per euro, from 35.3415.

Those gains pushed the ruble 0.1 percent higher against the dollar-euro basket to 30.3642.

Citigroup, Goldman

Citigroup Inc. and Goldman Sachs Group Inc. predicted last week the ruble would weaken as much as 5 percent in the next year as investors keep pulling funds out of the country and the price of oil declines.

The ruble slid to a 20-month low versus the dollar on Oct. 16 and the Micex lost 9.1 percent, as Urals crude, Russia's main export blend, fell below $70 a barrel for the first time in more than a year and the global credit crisis dried up lending among Russian banks. Prices dropped to as little as $66.62 a barrel, below the average price needed to balance Russia's budget next year.

BNP Paribas SA, France's largest bank, also advised clients to ``short the ruble,'' according to an e-mailed note today. A short position is a bet that an asset price will fall. JPMorgan said last week the ruble may drop to as low as 32 versus the basket by year-end and 33.40 by the end of 2009.

`Paying With Blood'

``They are paying with their blood for their mistakes,'' said Evgeniy Nadorshin, a senior economist at Trust.

Urals prices had jumped more than fivefold to a July record of $143 since May 2000, when current Prime Minister Vladimir Putin officially succeeded Boris Yeltsin as Russia's president.

Crude rose 2.3 percent to $73.49 a barrel on the New York Mercantile Exchange today.

Russia's foreign-currency reserves, the world's third- largest, shrank by $15.1 billion to $530.6 in the five days to Oct. 10 as Bank Rossii sold dollars to support the ruble. The bank manages the ruble against a basket to prevent currency fluctuations from hurting the competitiveness of exports. The basket rate is calculated by multiplying the ruble's rate to the dollar by 0.55, the euro rate by 0.45, and adding them together.

``If the ruble was to dramatically weaken it would hurt corporate and financial funding costs and lead to a deterioration of household sentiment,'' said Martin Blum, head of emerging market economics and currency strategy at UniCredit in Vienna. ``The average Joe on the street isn't looking at the basket rate, he's looking at where the ruble is to the dollar.''

Bonds Advance

Russian government bonds rose, with the yield on the 7.5 percent bond due 2030 falling 3 basis points to 10.25 percent. The extra yield investors demand to hold two-year Russian notes over U.S. Treasuries of similar maturity narrowed 21 basis points to 390 points today.

The Micex gained 2 percent to 611.80 and the dollar- denominated RTS Index also snapped three days of declines, rising 4.5 percent to 697.49. Markets were led higher by oil producers, including OAO Gazprom Neft and OAO Lukoil.

Gazprom Neft, the oil arm of Russian gas monopoly OAO Gazprom, climbed 1.80 ruble, or 4.2 percent, to 44.82 rubles, while Lukoil, the country's biggest independent crude producer, gained 43.17 rubles, or 5.2 percent, to 870.98 rubles. OAO Novatek, Russia's second-largest natural-gas producer, added 3.33 rubles, or 4.1 percent, to 85.54 rubles, after the nation's gas prices increased by 0.7 percent at an Oct. 15 auction on the Electronic Trading Platform-000 Mezhregiongaz.

Russia's MosPrime rate, the average interest Russian banks charge to lend money to each other, surged to a record 21 percent today, from 9.83 percent on Oct. 17. Lenders are retaining their cash as 200 billion rubles ($7.7 billion) in value-added tax comes due today, said Vladimir Tikhomirov, chief economist in Moscow for UralSib Financial Corp. in Moscow.

``Banks are scrambling for cash to pay VAT on behalf of their clients,'' he said. ``We have a liquidity crisis because of the global situation which makes it more difficult when big payments are due.''

To contact the reporter on this story: Emma O'Brien in Moscow at eobrien6@bloomberg.net



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Hungarian Forint Falls Versus Euro After Main Rate Kept at 8.5%

By Ewa Krukowska

Oct. 20 (Bloomberg) -- The Hungarian forint fell against the euro after the country's central bank kept its main interest rate at 8.5 percent.

The forint declined to 268.56 versus the euro at 2:06 p.m. in Budapest, from 267.54 at the end of last week. Against the dollar, the forint was little changed at 199.82.

The decision by the Magyar Nemzeti Bank in Budapest was predicted by the median forecast of 15 economists surveyed by Bloomberg. The rate is the second-highest in the European Union, after Romania. The currency lost 10 percent in the past month as investors shunned higher-yielding assets on concern the global financial crisis would entrap Hungary's economy.

Hungary last week became the first East European country to borrow from the European Central Bank to help thaw local markets. The emergency 5 billion-euro ($6.7 billion) financing will only be used if ``all hell breaks loose,'' Andras Simor, the head of the central bank, was quoted as saying by the Wall Street Journal today.

To contact the reporter on this story: Ewa Krukowska in Warsaw at ekrukowska@bloomberg.net

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