While FDIC-insured banks reported a net income of $2.8 billion in the third quarter, bank lending fell by 2.8%, the most since records were first kept in 1984 and the fifth consecutive quarter loan balances declined. The FDIC's Deposit Insurance Fund (DIF) went into the red at the end of September and the bank insurer today (Tuesday) revealed just how steep the loss it was when the quarter ended: $8.2 billion.

"A few very large banks are making a pile of money, and the rest of the industry is hurting," Westwood Capital LLC Managing Director Daniel Alpert said in an interview with The Associated Press. Alpert points to a variety of government subsidies, including capital injections, asset guarantees and low-cost borrowing that are costing taxpayers without improving the economy.

"We're creating riskless profits for the big banks," he said.

The number of banks on the FDIC's "problem list" in the United States grew to 552 in the third quarter, up from 416 in the previous period. That's the largest number of banks on the list since December 1993, when there were 575. For the first nine months of 2009, a total of 95 banks failed at a cost of $25 billion to the DIF.

Since the end of the third quarter, an additional 34 banks have failed, bringing the year's total to 124, almost five times more than the 25 banks that were deemed insolvent in 2008.

The FDIC's has set aside $38.9 billion in provisions for failures in 2010, and it will get an additional $45 billion by Dec. 30 from three years' worth of prepaid assessments, giving the DIF $83.9 billion.

However, FDIC officials anticipate bank failures will cost the DIF $100 billion in the next five years, leaving the FDIC with two options:

• Draw on its credit line of up to $500 billion from the Treasury.
• Levy a special assessment on banks.

Have Credit, Will Borrow

Although the FDIC won't need the full $500 billion in credit from Uncle Sam, any borrowing from this line will mean drawing funds the U.S. Federal Reserve doesn't have on its books. In other words, the Fed would need to print this money, which would put further pressure on inflation and correctly be perceived as another taxpayer bailout.

In his 2010 Outlook for the banking sector, Money Morning's Martin Hutchinson said soaring commodity and oil prices all but ensure the Fed will raise interest rates some time in 2010. But doing so will affect the very banks the FDIC insures, reducing the profitability of lending and undermine the prices of assets like houses and commercial real estate, thus causing larger bad debts.

Then there's the political firestorm that will result from the FDIC borrowing money from the very people that own the bank deposits it protects.

"Calling on taxpayers to bail out the FDIC's insurance fund is like asking your parents to support your crack habit," said Money Morning Contributing Editor Shah Gilani. "There's only one direction that moral compass will take you: down."

If the FDIC does tap its credit line with the Treasury, it wouldn't be the first time. It turned to the line during the savings-and-loan crisis of the early 1990s. But absent from that crisis was the $750 billion the U.S. government has already loaned to banks through the Troubled Asset Relief Program (TARP).

The American public, which struggled amid a credit crunch last fall, has already expressed rage at the Treasury's unwritten "too big to fail" policy for certain banks such as Bank of America Corp. (NYSE: BAC) and Citigroup Inc. (NYSE: C).

More Unforeseen Premiums Would Weigh Heavily on Troubled Banks

Should the FDIC's allotted $83.9 billion not be enough, it could once again impose more special assessments on banks as it did last spring, generating $6.2 billion for the DIF.

As the FDIC's list of "problem banks" continues to grow, some may not be able endure the sudden decline in earnings that would come from a special assessment by the FDIC.

Banks' income statements already have other pressures to contend with. Loan losses continued to gain in the third quarter, rising 80.5% to $50.8 billion, led by commercial real estate, the FDIC said.

Not only could a special assessment hurt banks, but it could also be counterproductive to the FDIC as it rescues the banks that can't afford any extra expenses. The hundreds of troubled banks on the FDIC's "problem list" won't be able to contribute any more to the insurance fund, says Money Morning's Gilani.

"Demanding that remaining problem banks pay higher premiums could easily force them over the brink," Gilani said, adding that although this scenario would be problematic, "at least it attaches a much-needed dose of reality into the risk formula banks all but have abandoned in years past."

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A panel of 48 economists surveyed by the National Association for Business Economics (NABE) showed gross domestic product (GDP) in the United States will grow by 3.2%, but job losses won't bottom until the first quarter of next year. A previous NABE forecast said employers would add 12,000 to payrolls in that quarter.

"While the recovery has been jobless so far, that should change," said Lynn Reaser, NABE president and chief economist at Point Loma Nazarene University in San Diego. "Within the next few months, companies should be adding instead of cutting jobs."

NABE's GDP forecast is one of the most optimistic forecasts for the United States. Money Morning's "Outlook 2010" series showed a range of U.S. growth between 1.0% and 2.0%.

The U.S. economy "will be lucky to do 2.0%" next year, Money Morning Chief Investment Strategist Keith Fitz-Gerald said. "The economy faces some very difficult challenges. There's a slight chance – depending on what happens with some outside factors – that the U.S. could do 2.5%, but I really doubt it. China could actually pull us along [to higher-than-expected growth], but those are some long odds."

NABE panelists still see "a relatively sluggish consumer upturn," but expect strong gains in housing, low inflation and a continuing rally of equities markets. Additionally, the majority of panelists believe the U.S. Federal Reserve's policies will keep inflation low, but are "extremely" concerned about the nation's high deficit, which will reach a record $1.6 trillion in 2009, the White House Office of Management and Budget (OMB) and the Congressional Budget Office (CBO) said earlier this year.

Jobless Recovery

The current jobless recovery "will not remain jobless for long," the NABE said.

For the first time since 1983, unemployment cracked the psychologically important 10% barrier last month. Roughly 190,000 jobs in the United States were lost, surpassing economists' estimates of 175,000 payroll cuts.

NABE expects job growth in the fourth quarter of next year to match the number of losses the United States is currently experiencing.

"We have been losing jobs on the order of about 200,000 per month in the last couple of months," NABE's Reaser said in an interview with National Public Radio (NPR) . "We think a year from now, companies will be adding about 200,000 jobs per month."

Still, 61% of the economists polled by NABE say a complete recovery of more than 7.3 million jobs lost since the recession began in December 2007 won't happen until 2012. Although job growth will return next year, the average unemployment rate in the fourth quarter will be "stubbornly high" at 9.6%.

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• Money Morning:
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• Money Morning:
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• NPR:
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At a news conference in Seoul, President Obama and Korean President Lee Myung-bak, both showed willingness to renegotiate elements of the deal and to have both countries ratify it as soon as possible.

"I am a strong believer that both countries can benefit from expanding our trade ties," President Obama said. "I have told President Lee and his team that I am committed to seeing the two countries work together to move this agreement forward."

That could be easier said than done, especially for Capitol Hill democrats that rely on support from labor unions.

"Before we move forward with the U.S.-Korea Free Trade Agreement, I feel it necessary to remind my colleagues in Congress that the draft agreement allows Korean discriminatory treatment of imported U.S. automobiles to perpetuate," said U.S. Rep. John Dingell, D-MI today (Friday).

Certain Korean cars are among the bestsellers here, he said, while U.S. automakers have "grave difficulties accessing the market."

Those difficulties can be attributed to an 8% duty on U.S. auto exports to Korea as well as taxes on engine displacement, both of which would be removed under the trade agreement.

Despite this, officials in both Washington and Detroit say the deal doesn't address certain non-tariff barriers, which are preventing more American cars from entering Korea, a report in The Korea Herald says.

Kim Do-hoon, an economist at the Korea Institute for Industrial Economics and Trade (KIET) argues the deal addresses all U.S. concerns, including Seoul's safety and environmental standards as well as the removal of the duty on autos.

The opposition to the deal stems from Korea's domestic auto tax laws on larger cars, which are typically American, Kim says. Korea's auto registration tax and special consumption tax are on the rise as a measure to contain the growing demand for bigger cars by Korean consumers.

"Our auto taxation system is of a domestic issue and not deliberately aimed at being a non-tariff barrier, so it could be that this is acting as a misunderstanding," Kim said. "This is a domestic issue, a policy-related measure aimed at encouraging consumption of smaller cars to reflect our national challenges, whether it be environmental or traffic-related. I don't think the U.S. should mistake our local taxation regulations as an intentional means by the Korean government to prevent American automakers from making business here."

When it comes to autos, there's a huge trade imbalance between the United States and Korea. In 2008, U.S. auto exports of 7,000 to Korea represented just 1% of Korean imports.

However, many analysts believe this imbalance is being dictated by the market not trade barriers.

"The Korean government has opened up the domestic car market to the fullest satisfaction of the U.S. in the FTA," KIET's Kim said. "There is no more to open up in this sector, so I think it is only fair to say that the auto issue is more of a subject of political rhetoric for the Obama administration aimed at catering to the sensitive labor group."

It is not clear whether further negotiation on autos is an option.

"If automobiles are a problem, we are in a position to discuss them again," President Lee said yesterday (Thursday) during a joint news conference with President Obama.

However, one official from the Korean president's office speaking to The Herald on the condition of the anonymity says a deal is a deal.

"If we rewrite the document, that is a renegotiation. It is the government's policy that the agreement not be changed."

Korean Trade Minister Kim Jong-hoon appeared to clarify the Korean president's remarks, saying "it just means if they say there are problems, we are willing to listen. But I believe most of the problems [the United States] prepare and bring to us, if they do, will be those that can be addressed by simple explanations," he added.

News and Related Story Links:

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Comcast, the United States' largest cable television provider, is hoping to avoid becoming the next newspaper or record company by expanding its role from an entertainment medium to a content provider.

"The world of cable delivery is about to change," Forrester Research (Nasdaq: FORR) analyst James McQuivey told the Los Angeles Times. "Cable companies for years have made their living by selling consumers hundreds of television channels bundled together. But the future is going to be very different, and cable companies instead will be selling an 'entertainment experience.'"

While Comcast is now a major player in the Internet service provider (ISP) business as well as telephone service, more than half of its revenue comes from its cable TV customers. But factors working against Comcast include:

• More Competition: No longer limited to satellite TV providers, telephone companies continue to widen their reach through fiber-optic cable.
• Higher fees for content: The fees Comcast pays for programs from TV networks are on the rise.

The likely Comcast-NBC deal would give the cable provider a 51% stake in NBC, while GE would retain a 49% stake and contribute roughly $12 billion in debt to the new company, according to The New York Times. GE would eventually sell its ownership interest over a period of several years. The two companies agreed to value NBC at about $30 billion, Bloomberg News reported.

Paris-based Vivendi SA, which owns 20% of NBC, has no intention of being a part of the new entity, Vivendi Chief Financial Officer Philippe Capron said at a Morgan Stanley (NYSE: MS) conference in Barcelona.

Vivendi is seen as the last obstacle for GE to strike a deal with Comcast, and Vivendi is asking GE for a higher price for its stake and certain deal protections, two people familiar with the matter told The Wall Street Journal.

Competition Likely to Change Comcast's Business Model

More than 54% of Comcast's top line comes from its TV customers, who are fleeing.

Rate increases have helped offset 10 consecutive quarters of net subscriber losses, but Comcast can only raise rates so many times before it alienates its customer base.

When the market decides it can no longer bear Comcast's rate increases, the company will likely turn to advertising revenue, which currently represents just 3.6% of sales. A deal with NBC Universal brings to the table more ad revenue from its 11 networks -including Bravo, USA Network and MSNBC – aligning the Comcast-NBC with media giants like Viacom Inc. (NYSE: VIA) and The Walt Disney Corp. (NYSE: DIS).

There are also Comcast's interactive, targeted ads a la Google Inc. (Nasdaq: GOOG), which generated just $15 million in sales in the third quarter. So far, these ads reach only a few subscribers in isolated areas across the country.

"But the big number," Chief Operating Officer Stephen Burke said of interactive ads earlier this month, "will be generated when the industry gets together and allows a national advertiser the ability to advertise across the country."

Cable operators like Comcast once had entire regions to themselves. But in the mid-1990s companies like The DirecTV Group (Nasdaq: DTV) and Dish Network Corp (Nasdaq: DISH) – with much-smaller dishes to mount than what was previously available – made it easy for consumers to switch to satellite TV.

From 2007 to 2008, DirecTV grew its subscriber base 4.6% while Comcast's shrank 0.8%. DirecTV now has 18 million TV subscribers to Comcast's 23.7 million.

Comcast and its satellite rivals saw new challengers with fiber-optic TV and Internet service, particularly Verizon Communications Inc.'s (NYSE: VZ) FiOS. Similar to the dawn of cable, Verizon's biggest challenge is burying the cables in neighborhoods (cable companies use copper-based coaxial cables versus FiOS' fiber-optic cables, so they can't share wires). As it installs more fiber in neighborhoods, Verizon is becoming more of a threat to Comcast.

Both providers use their market penetration – or how many customers they have out of the total amount of wired homes – as a key measurement for growth. Comcast was wired in 51 million U.S. homes at the end of the third quarter and saw its video penetration fall by two percentage points to 46.5%, compared to 48.5% in the same period a year ago.

Verizon FiOS TV, while available in far fewer homes – 10.9 million – is penetrating the number of wired homes fast, with a 24.7% penetration in the third quarter compared to 19.7% in the same quarter last year.

Because the number of wired homes grew by almost 2% in the past year, Comcast's market penetration on the surface looks flat. But that's not the case.

Comcast actually lost TV customers, going from 24.4 million subscribers in third-quarter 2008 to 23.7 million in this year's comparable quarter – a loss of roughly 700,000. Verizon's FiOS TV, which started in Texas in 2005, now has 2.7 million subscribers.

Comcast's penetration of homes that can receive its Internet service is growing, but at a slower rate than Verizon's. Of the 50.8 million homes wired for Comcast Internet, penetration was 30.9% in the third quarter versus 29.5% a year ago. Verizon's FiOS equivalent jumped to a penetration of 28.5% of the 11.5 million wired homes in the third quarter, compared to 24.2% in the same period last year.

Why Rent When You Can Buy?

Carrying cable channels like MTV, Comedy Central and the Disney Channel doesn't come cheap, and it's getting more expensive for Comcast as content providers try to make up for ad dollars lost to the recession.

Broadcast networks such as Fox and CBS intend to charge for their over-the-air channels that they once transmitted for free, putting pressure on cable companies' bottom line.

"Comcast's fear is that it will become more difficult to pass those price hikes on to viewers because of the increased competition," Jason Bazinet, a media analyst with Citigroup Global (NYSE: C) told the LA Times.

"If you are [Comcast Chief Executive Officer] Brian Roberts, buying a content company is a hedge against these rising programming costs," he said.

This would enable Comcast to help set the prices itself.

"For Comcast," Bazinet noted, "you would be collecting as many checks as you are cutting them."

Buying NBC would also make Comcast a bigger player in the sports arena; it already owns nine regional networks as well as the cable channel Versus. NBC brings to the table the NFL, NCAA football, the PGA and the Olympics. The deal would put Comcast in the same space as Disney's ESPN, according to Bazinet.

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• The New York Times:
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• Bloomberg News:
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• The Wall Street Journal:
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Speaking to the press at the Singapore Foreign Correspondents Association, Zoellick said policymakers must be vigilant in preventing asset bubbles and that the private sector is needed to stoke demand.

"And so when that stimulus money has run its course, then the question will be, will the private sector rebuild demand?" he said.

Part of the problem going forward for East Asian economies is policymakers typically follow the U.S. Federal Reserve. However, nations choosing to do this may face challenges because the recovery won’t be symmetrical.

"I think one of the questions here will be the timing of how they manage the interest rates and the risk that they could get some inflation and even asset bubbles which obviously, if they become a serious issue, could undermine confidence going forward," he said.

Asian economies are already self-sustaining, argues Money Morning Contributing Editor Martin Hutchinson, a leading expert on international financial markets. But the problems could be ahead for nations such as the United States and United Kingdom.

"At some point they will have to remove stimulus, as the rising commodity prices will feed through to inflation," said Hutchinson, who sees the current surge in commodities and stock equities as a bubble that has profit opportunities for investors.

World policymakers should keep existing stimulus packages in place, but hold off on implementing new ones, Zoellick says.

Once those packages are removed, it’s up to consumers to pick up the slack – a scenario that the Zoellick fears won’t happen quickly enough in the United States, which is expected to ease its current monetary policy by the middle of next year.

"If you've got large scale unemployment, if you've got consumers rebuilding savings and deleveraging, I don't think the consumer is going to play that role," Zoellick said. "What's the other source of demand?"

Unemployment, which economists expect to remain elevated in 2010, could have an adverse affect on banks already inundated with toxic assets, as more consumers default on their loans.

"You're going to have problems with delinquencies of credit card loans, consumer loans, people won't be able to pay their mortgages," said Zoellick. "Some banks are going to continue to be troubled by bad loans."

Indeed, even with numerous government programs in place to help consumers keep their homes in the United States, and the nation could be at the dawn of a second wave of foreclosures.

"Foreclosures should remain really high as long as unemployment is rising, and that is through next spring," economist Mark Zandi of Moody’s Economy.com told USA Today. "They should be very high into spring."

Zandi’s forecast is optimistic compared to one by Rick Sharga, senior vice president for marketing at research firm RealtyTrac Inc.

"We’d hoped this year would be the peak as far as foreclosures, but we’ve since concluded it will not be," said Sharga. "We should see a peak in foreclosures at the end of 2010."

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• China's currency, the yuan, which Beijing keeps undervalued to boost exports.
• The large trade imbalance between China and the United States.
• And a pending free trade agreement (FTA) with South Korea.

Analysts believe President Obama will push to ratify a free trade deal with South Korea that was signed in 2007 but has failed to pass legislatures in both countries. Many also hope he will pursue other agreements like it.

"We are standing on the sidelines while Asian nations clinch new trade deals," said Thomas Donohue, president and chief executive officer at the U.S. Chamber of Commerce. "We'll pay the price if this continues. It's time to see action from Washington."

There are 168 free trade agreements currently in place in Asia, up from just 22 in 1980, according to the U.S. Trade Representative. Eighteen more have been completed but not yet implemented and 70 more are being negotiated. However, the United States has only two FTAs with Asia-Pacific countries: Singapore and Australia.

Former President George W. Bush pledged U.S. participation in the Trans-Pacific Strategic Economic Partnership Agreement, also known as "P4," which includes Singapore, Chile, New Zealand and Brunei. In addition to its FTA with Singapore, the United States has an agreement with Chile, but would need deals with New Zealand and Brunei to become a full member of the pact.

So far, the White House has stalled on P4 negotiations as it reviews the U.S. trade agenda. U.S. Trade Representative Ron Kirk said the talks are "the most practical way to be engaged" with the region, but declined to say when or even if the United States would resume negotiations over the agreement.

When President Obama stops in Singapore this weekend, he will participate in the Annual Economic Cooperation summit, where he'll be pressed on the United States' trade stance. He'll then face questions next week in Seoul over ratification of a 2007 FTA with South Korea.

Trade Representative Kirk said last week the Obama administration would not send the deal to Congress for a vote until Seoul allows more U.S. exports, including automobiles.

"Our market is open to Korean autos," Kirk said in a speech to the U.S.-Korea Business Council. "All we are asking for is for our own auto companies to be able to compete on a level playing field in the Korean market."

Ratification of the South Korea FTA would eliminate an 8% duty on U.S. auto imports. South Korea President Lee Myung-Bak said in June that he was committed to the deal, but declined to set a timeframe.

Trade Imbalance, Yuan Highlight Full Agenda for Obama in China

The most closely watched part of President Obama's visit will be next week when he visits Shanghai and Beijing.

Speaking to Reuters, the president said he would raise with Chinese leaders the sensitive issue of the yuan, which hasn't appreciated since July 2008 and is considered to be a large factor contributing to the U.S. trade deficit with China, which stood at $20.2 billion as of October.

"As we emerge from an emergency situation, a crisis situation, I believe China will be increasingly interested in finding a model that is sustainable over the long term," President Obama said. "They have a huge amount of U.S. dollars that they are holding, so our success is important to them."

Still, the president warned if currency and yuan issues don't get resolved, he thinks "both economically and politically it would put enormous strains on the relationship."

It's unlikely that China's will reverse its stance on the yuan, as exports are still suffering, having fallen 15.2% in September.

Beijing will hold its official line on the nation's exchange-rate policy, Qin Gang, spokesman for China's Ministry of Foreign Affairs told Dow Jones Newswire. The government will continue to reform its exchange-rate regime by raising rate flexibility while still keeping the yuan rate basically static.

Qin also reiterated the Red Dragon's concerns about the United States, calling on the American government to maintain the medium- and long-term sustainability of its fiscal policy.

"This will be conducive to the stability of the U.S. dollar exchange rate and it will be conducive to China and the whole world," Qin said.

Governments in trade surplus countries – such as China – must act to cut the disparity between saving and investment so they can raise demand in their own economies, U.S. Federal Reserve Chairman Ben Bernanke said last month at a conference of the Federal Reserve Bank of San Francisco.

"Admittedly, just as increasing private saving in the United States is challenging, promoting consumption in a high-saving country is not unnecessarily straightforward," Bernanke said, suggesting that governments remove its citizens' motive for saving by making pension systems stronger and increasing spending on health care and education.

President Obama will also attempt to cool tensions over the trade spat that has escalated between the two countries in the last few months.

In September President Obama imposed a 35% tariff – on top of the existing 4% duty – on Chinese tires coming into the United States. That order came mainly at the behest of the United Steelworkers union, which says 5,000 union jobs have been lost since 2004 because low-cost Chinese tires are flooding the market. From 2004 to 2008, the number of tire imports from China has tripled.

That was followed in October by a U.S. investigation into seamless steel pipe imports from China. The government agency will make a decision on preliminary anti-dumping duties in December and could impose new duties of almost 100% on imports of steel pipes from China as soon as February.

China responded with an "anti-dumping" probe into U.S. auto parts and chicken meat imports. Beijing is also investigating Detroit's "Big Three" automakers to determine whether or not they are receiving U.S. government subsidies, or selling their products in China below market costs.

The United States isn't seeking to engage in trade protectionism, U.S. State Department official Robert Hormats told Chinese university students yesterday (Tuesday), but acknowledged the trade tensions between the world's No. 1 and No. 3 economies.

"Support for international trade in the United States is much less today than it was several years ago," Hormats said, adding that especially with rising unemployment "there is skepticism about trade, and I have to say that to you candidly."

Hormats stressed the United States would rather settle the dispute as opposed to taking them to the World Trade Organization (WTO).

"I know the tire case caused a great deal of tension in China," Hormats said. "But I want to assure you that the U.S. is not a protectionist country."

News and Related Story Links:

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Although there are some signs show the United States is headed toward a recovery, rising unemployment is weighing on consumers, who continue to cut back on discretionary spending.

The fast-food giant said its same-store sales in the United States dipped slightly in October, falling 0.1%. But overseas was a different story for McDonald's. Same-store sales in Europe grew 6.4% and sales in the Asia/Pacific region, the Middle East and Africa collectively grew 4.7%.

"We're encouraged by continued strength in the international business, which more than offset the anticipated domestic softness," David Tarantino, an analyst with Robert W. Baird & Co. Inc., wrote in a note obtained by Bloomberg News. Tarantino rates McDonald's shares "outperform."

Other global companies have seen similar results:

• The Coca-Cola Co. (NYSE: KO): The soft drink maker in the third quarter saw its year-over-year volume in North America drop 4%, but said its "Open Happiness" ad campaign is going over well internationally. Unit case volume for Coke products in Mexico grew 8%, 6% in Italy, 3% in China and 27% in India.

• General Motors Corp. (NYSE: GRM): The automaker's sales in China continued to flourish last month as the government kept its stimulus policy in place. While GM did show domestic growth of 4.7% in October compared to a year ago, it more than doubled its October 2008 sales in China, with 166,911 cars sold in what is now the world's biggest auto market.

• Yum! Brands Inc. (NYSE: YUM): The owner of the Pizza Hut, Taco Bell and Kentucky Fried Chicken brands saw flat same-store sales in the third quarter for China, and a 5% drop here in the United States. However, its overall revenue in China grew 11% thanks to torrid expansion – it opened 88 locations there just in that quarter alone. Yum's international sales excluding China gained 4%.

• The Dow Chemical Co. (NYSE: DOW): Although the chemical maker suffered steep volume declines in most territories, its Asia Pacific region was the lone bright spot, growing 2%, compared to 13% drops in North America and Europe. The bleeding was minor in areas that included emerging markets, with a 1% drop in Latin America, India, the Middle East and Africa.

Billions of dollars in stimulus money are still playing a big role in emerging markets such as China, where aggressive cuts on sales taxes on small automobiles have helped. The United Kingdom last week approved an extra $41 billion in stimulus.

In the United States, a 10.2% unemployment level and waning consumer confidence could force Washington to consider a second stimulus.

"The unemployment rate of 10.2% is problematic because it gives a sense of urgency to Washington, D.C. Washington will be looking for any increase in stimulus," Tom Sowanick, co-president and chief investment officer at OmniVest Group LLC told Reuters.

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“Over the next two years, if capacity comes on line as planned, production of these bulk commodities could increase by around one third, with further significant increases possible over the remainder of the decade,” the RBA said

As a result of this expected boom in the commodities sector, the RBA raised its forecast for growth of Australia’s economy from 0.5% to 1.75%, and boosted its 2010 estimate a full percentage point to 3.25%.

“The RBA here is foreshadowing years of expansion based on resources, population and Asian demand,” Su-Lin Ong, a senior economist with RBC Capital Markets Corp. told Reuters. “It’s big picture positive for Australia and the Australian dollar, and means rates are going nowhere but up.”

At the forefront of the Australian economic boom will be the nation’s huge natural gas reserves, particularly the Gorgon gas field, first discovered in 1981. Developers Chevron Australia, Shell Development Australia and Mobil Australia Resources in September got their first approval to begin work on the field, which has more than 40 trillion cubic feet of gas.

The Gorgon field, Australia’s largest natural resource, is responsible for the nation’s largest trade deal ever with the world’s fastest-growing economy: China. Inked last summer, the deal calls for PetroChina Co. Ltd. (NYSE: PTR) – Asia’s largest oil and gas company – to buy 2.25 million tons per year of liquefied natural gas (LNG) from Gorgon over a period of 20 years.

“The Gorgon Project is globally and nationally significant with a resource base of more than 40 trillion cubic feet of gas and an estimated economic life of at least 40 years from the time of start-up,” said Chevron Australia Managing Director, Roy Krzywosinski.

“Furthermore, the Gorgon Project is Australia’s largest single resource project and is set to deliver significant economic benefits and create around 10,000 indirect and direct jobs during peak construction.”

While Australia patiently waits for the first Gorgon LNG to ship in 2014, it expects LNG from the $12 billion Pluto project in early 2011, just six years after the field was discovered. Combined with the larger Gorgon project, the RBA says LNG exports could grow three to four times, rivaling its mineral exports.

“Production increases of this magnitude would likely see the value of LNG exports increase towards a similar share of total exports as for coal or iron ore,” the RBA said.

Encouraging as this growth may be to Aussies, it won’t come without some growing pains.

Australia faces an “extended period of prosperity in the years ahead,” meaning a strain will be put on the country’s housing and labor markets, RBA Deputy Governor Ric Battelino said at a conference last week.

Australia’s population is growing more than 2% per year, with two-thirds of the growth coming from immigration in the past year.

“Workers are likely to be in short supply, leading to strong demand for skilled migrants and therefore fast population growth,” Battellino said. “This, in turn, will have flow-on effects for housing markets.”

That bodes well for home prices in Australia, which gained 3.7% in the third quarter and are up 6.5% on the year, according to market research firm Australian Property Monitors. But that’s not going to help a buyer if there aren’t enough homes on the market.

“We’ve got to get ahead of the curve,” Australian Treasurer Wayne Swan said in October at a press conference. “We’ve not been building enough houses and we have strong population growth so it will be very important as we move through to economic recovery to ensure we don’t have capacity constraints that flow from the shortage of housing.”

Australia is Leading the West’s Recovery

Looking at interest rate increases in Australia could serve as a sign of things to come in other Western nations, most of which have kept their key lending rates at record lows.

Inflation in Australia may be a leading indicator of inflation in the United States, but until the United States or the European Union begins to raise their interest rates, “we'll carry on in the current modest recovery with commodities bubble,” said Money Morning Contributing Editor Martin Hutchinson, an investment banker with more than 25 years’ experience.

Still, unusually low interest rates worldwide should give way to rising prices, and Hutchinson says to “watch for U.S. inflation to start ticking up soon.”

The U.S. Federal Reserve should begin to raise its key interest rates sometime next year, but has yet to give any specifics, stating last week that current economic conditions are “likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

Meanwhile, the United Kingdom also kept interest rates low as it continues to inject money into its system, announcing Thursday that it will spend another $41 billion (25 billion pounds) on stimulus measures.

Australia’s 5.7% unemployment rate looks tame next to the United States’ 10.2% and the United Kingdom’s 7.9%. Even commodities-rich Canada saw its rate swing back up again to 8.6% in October.

In the United States, programs like the Car Allowance Rebate System, better known as “Cash for Clunkers,” helped prop its economy up 3.5% in the third quarter, while the United Kingdom’s gross domestic product (GDP) disappointed, falling 0.4% as consumers put more of their earnings toward paying off debt.

News and Related Story Links:

• Reserve Bank of Australia:
  Statement on Monetary Policy
• Reuters:
  Australia Cbank Sees Gradual Rate Rise, Good Times
• Wikipedia:
  Gorgon Gas Project
• Chevron:
  Chevron Welcomes Australian Commonwealth Government Environmental Approval for the Gorgon Project
• Woodside Petroleum:
  Pluto LNG Project
• Bloomberg News:
  RBA Says Australian GDP to Grow Faster, Rates to Rise
• Dow Jones Newswires:
  Australia's Swan: Need To Do More On Housing Supply
• U.S. Federal Reserve:
  November Meeting Statement
• CNN:
  Banks Pump $41B More Into UK Economy
• Money Morning:
  Canada: China’s Personal Shopping Mall
• Money Morning:
  U.S. Economic Growth Surprises in the Third Quarter
• Money Morning:
  United Kingdom GDP Report Disappoints, Forcing BOE to Rethink Monetary Policy

Disney's fourth park outside the United States will be the first on mainland China, giving the company a new avenue to market its popular properties in the restriction-laden Red Dragon. The park, to be located in the Pudong district between Shanghai's main international airport and its downtown area, will target China's growing middle class.

"Shanghai Disney would be a huge boom," Shaun Rein, managing director of China Market Research Group told Bloomberg News. "You have 80 million people within 3 hours' driving distance."

Still, a densely populated area doesn't necessarily make for an economic slam-dunk. Take Disneyland Hong Kong, for instance: It's easily accessible to about 60 million people in the Guangdong province and burgeoning Macau, but it drew just 5.2 million people in its first fiscal year, 2005-2006 – short of Disney's goal for 5.6 million visitors.

Things didn't get much better in the following two years, as visits dropped to 4 million and 4.5 million, respectively. Meanwhile, nearby Ocean Park in 2008 enjoyed its fifth straight year of more than 5 million visitors, Fortune magazine reported.

It's generally accepted that Disney's shortcomings in Hong Kong and its other international locations were due to a failure to adapt to the local cultures.

"I wasn't trying to kill the Mouse," Ocean Park Chairman Allan Zeman told Fortune. "They've done it themselves."

Indeed, it's often said that Disney force-feeds its products to international markets, thus homogenizing culture.

"Ocean Park is more fun – Disneyland is more for kids," Ocean Park visitor Frankie Tong told The New York Times today (Wednesday). "Disneylands are more or less the same in places all over the world – Disney is more American."

Disney's new leadership, under the direction of Chief Executive Officer Bob Iger changed this unofficial policy, adapting to the uniqueness of local markets and partnering with locals. The company also incorporated local customs. (Serving alcohol at Disneyland Paris helped turn it into a financial success.)

The coming theme park in Shanghai represents a new way for Disney to stoke demand for its properties without much government scrutiny.

Unlike Western nations that consistently snap up the many forms of Disney media, including movies, video games and television shows, China keeps a tight grip on the media crosses its borders.

For example, only 20 foreign films are allowed into China each year, reducing Disney's chances of showing its popular movies there.

Disney's Shanghai park "gives Disney an opportunity to monetize its brand without necessarily having to produce filmed content," David Bank, an analyst with RBC Capital Markets Corp. told Bloomberg.

A theme park sans regulatory hurdles is "the real key to making money in China for the media companies," he added.

"The cultural implication is significant as Disney theme parks represent a certain kind Western thinking," Chinese University hotel and tourism management associate professor Leung Wai-kin told Bloomberg in a phone interview. "It doesn't mean the government agrees to it but at least it's comfortable with it."

Reports indicate the new 1,000-acre park will cost Disney $3.6 billion (24.5 billion yuan). Disney's theme park business is second only to its media arm, and saw its profit decline 19% to $521 million in the second quarter as consumers curbed their spending.

News and Related Story Links:

• Wikipedia:
  Pudong
• Bloomberg News:
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• Wikipedia:
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• Wikipedia:
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• Money Morning:
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• Wikipedia:
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• Fortune:
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• The New York Times:
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• The New York Times:
  China Approves Disney Theme Park in Shanghai
• Wikipedia:
  Disneyland Paris
• Wikipedia:
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Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) acquired railroad Burlington Northern Santa Fe Corp. (NYSE: BNI) in a deal valued at $44 billion, the largest in Berkshire's history.

Berkshire, which already owns 22.6% of the company, will pay $100 per share in cash and stock for the remainder of Burlington's business. The offer values Burlington stock at a 31.5% premium to its Monday close. The deal, expected to close in the first quarter of next year, includes $10 billion in Burlington debt.

Buffet said the purchase was not just an affirmation of his confidence in the U.S. railroad industry, but a vote of confidence for the U.S. economy as a whole.

"It's an all-in wager on the economic future of the United States," Buffet said. "I love these bets."

Investors on both sides of the table will benefit from the deal: Burlington shareholders can take the premium on Monday's closing price, or they can opt for Berkshire stock, which represents 40% of the deal. Meanwhile, shareholders of Berkshire's class B stock get extra shares thanks to a 50-to-1 split the company announced in conjunction with the Burlington deal.

A shares of Berkshire, which represent the majority of shares in the deal, rose $1,700, or 1.72% to closed yesterday at $100,405.00 per share in trading today. Pre-split shares of class B stock rose $60.35, or 1.85%, to close at $3,325.35.

"The small shareholder can have exactly the same availability that would have only been available to a big shareholder," Buffett told CNBC's "Squawk Box" this morning in an interview.

Berkshire's deal highlights Buffett's affinity for profitable companies that don't rely on high technology: Burlington is the largest transporter of coal, hauling enough to power 10% of the homes in the United States.

The deal also represents a complete reversal of the stance Berkshire took on railroads just a few years ago.

"Warren and I have hated railroads our entire life," Charles T. Munger, the vice chairman of Berkshire Hathaway, said in 2007, the year his company first started investing in Burlington. "They're capital-intensive, heavily unionized, with some make-work rules, heavily regulated, and long competed with a comparative disadvantage versus the trucking industry, which has a very efficient method of propulsion (diesel engines) and uses free public roads. Railroads have long been a terrible business and have been lousy for investors."

But rising prices for diesel fuel, growing highway congestion and growing environmental concerns helped change Berkshire's position.

"As oil prices go up, higher diesel fuel raises costs for rails, but it raises costs for its competitors, truckers, roughly by a factor of four," Buffett told shareholders in 2007 at his company's annual meeting. "There could be a lot more business there than there was in the past."

Unlike trucks, trains don't get stuck in traffic and when trains carry 100 tons over 1,000 miles, they produce 45% less pollution than a long-haul truck does, according to Burlington.

News and Related Story Links:

• CNBC:
  Berkshire for $65.30 a Share? Giant Plans 50-1 Stock Split
• Wesco Financial Corp.:
  Whitney Tilson's 2007 Wesco Annual Meeting Notes
• Berkshire Hathaway:
  Berkshire Hathaway Inc. To Acquire Burlington Northern Santa Fe
• Berkshire Hathaway:
  Berkshire Hathaway Inc. Board of Directors Approves 50-for-1 Split of Its Class B Common Stock
• Money Morning:
  Berkshire's Back, So What's Warren Buffett Buying Now?
• Money Morning:
  Obama's High-Speed Vision Gets Railroad Companies Back on Track
• Money Morning:
  Railroad Play Burlington Northern Hauling Gains for Warren Buffett's Berkshire

And now, with the proliferation of smartphones, Google is pursuing a broader range of mobile initiatives that will make it a leader in mobile software and take its advertising business into territory that so far has been uncharted.

Google's original business model, as it applies to its trademark search engine, was to give away a product and have it funnel users to its targeted ads. Last year, the company built on that model by giving away its operating system (OS), Android, to any wireless handset maker that would have it.

So far, Android has only appeared on 12 phones worldwide since its launch a little more than a year ago. But according to industry analysts, that's just the beginning.

Market research firm Gartner Inc. (NYSE: IT) expects Android to appear on 14.5% of all mobile phones by the end of 2012, second in market share behind Nokia Corp.'s (NYSE ADR: NOK) Symbian OS, which the firm predicts will command a whopping 39% of the market. Apple Inc.'s (Nasdaq: AAPL) iPhone OS will be third by that time with 13.7%, while Microsoft Corp.'s (Nasdaq: MSFT) Windows Mobile will be fourth with 12.8% of the market.

Gartner predicts Research in Motion Ltd.'s (Nasdaq: RIMM) BlackBerry OS, currently No. 1 in the United States and No. 2 in the world, will fall to fifth place with a 12.5% market share.

"Android adoption is literally about to explode," Google Chairman and Chief Executive Officer Eric Schmidt told analysts in a conference call last month. "You have all the necessary conditions: You have the vendors, you have the distribution, and so forth."

Here's how Android is igniting that "explosion:"

• Open source code: Android, based on a Linux kernel is distributed for free to handset makers, which then can customize it any way they wish. This gives handset makers a way to differentiate their Android phones from others.
• Developer appeal: With a growing number of handset makers using the platform and availability on almost every wireless carrier in the world, the Android Market – Google's equivalent to Apple's App Store – will have the broadest reach. Also, there's no cost of entry for developers, unlike the $99 Apple charges or the $200 RIM gets.
• Consumer appeal: Just like developers, the wide availability of Android on numerous phones and carriers will draw consumers looking for an alternative to the iPhone. Currently the number of apps in the Android Market pales in comparison to the App Store – 10,000 versus 85,000 – but the gap should narrow over time as more consumers and developers embrace the platform.
• Advertiser appeal: Google is already synonymous with desktop search, and the growing number of mobile web users will look to a familiar name to find what they need on the Internet, as well as what's around their area. The company is also starting to integrate its popular targeted ads into the free apps distributed on Android Market.

While Android isn't the first platform for Google's numerous free properties to appear, it's the leading candidate to be the one that drives Google's growth to the next level.

Google's software as a service (SaaS) model has rivals like Microsoft perplexed.

"I don't really understand their strategy. Maybe somebody else does," said Microsoft Chief Executive Officer Steve Ballmer at a conference last year. "If I went to my shareholder meeting, my analyst meeting, and said, 'hey, we've just launched a new product that has no revenue model!'…I'm not sure that my investors would take that very well. But that's kind of what Google's telling their investors about Android."

Ballmer contends that wireless carriers would ask to be paid to carry Google's search, but since that statement, there's been no mention of such actions.

The Google Mobile Effect

Google's aim is to put all of its products in consumers' pockets, purses or belt clips, and it's not just limited to search.

Last week Google revealed it was working on a free navigation application for the latest version of Android to be released on Friday. The news forced shares of GPS giants Garmin Ltd. (Nasdaq: GRMN) and TomTom NV down 16.4% and 20.8% respectively.

Of the plethora of products Google is bringing to Android the one that has the most potential is Google Docs, which gives users access to word processing, spreadsheet and presentation programs.

Google is selling licenses to use Docs to companies for $50 per user per year, which it says is one-third the cost of competing applications. Google Docs can be viewed through Android's built-in Web browser, but so far only spreadsheets can be edited.

The company's working on giving Android users full functionality enjoyed by computer users. Google's advantage will be in the cloud, which it is positioning as a more efficient way of working, since it prevents two different copies of the same edited file from being e-mailed among employees.

Similar mobile platforms such as BlackBerry and Windows Mobile already offer the ability to edit files through their phones, but still require users to e-mail them to one another. Google's competitors all have cloud initiatives, but Google has a head start – and the momentum.

"Inherently, Android is tailor-made for enterprise business of its open platform," Jason MacKenzie, vice president of North America operations at HTC Corp. told The Wall Street Journal.

Google Your Neighborhood

Internet searches are becoming more local, and Google knows this.

If an Android user searches the phrase "pizza" using Google's mobile search, the results will not only yield every pizza shop in the area but also highlight any paid advertisement by shop owners.

Roughly 97% of Google's revenue comes from its targeted ads, and its foray into mobile searches – not just on Android – could keep that number high for the foreseeable future.

"Advertisers are seeing 10 [times the] increase in click-thrus via mobile devices," Citigroup Inc. (NYSE: C) analyst Mark Mahaney wrote earlier this year. "Mobile search activity is ramping fast this smartphone summer, and ad dollars are following."

While Google is already dipping its toes into the local advertising waters, rising sales of smart phones bode well. Adoption of smartphones – which are more Web-friendly – is on the rise, despite a slumping overall mobile phone market.

While sales in the overall mobile phone market fell 6.1% in the second quarter, smartphone sales grew 27%, according to Gartner.

Smartphones represent a new avenue for consumers and businesses to use the Internet, and Google CEO Schmidt reiterated his company's SaaS stance when an analyst asked if there was no opportunity for it to make money despite development costs.

"For example, our Android product, there are many other pieces of technology that Google builds and the rough argument is that we do things that are strategic because they get people to ultimately use the Internet in a clever and new way," Schmidt said. "We know that as they use the Internet more, they ultimately search more or watch more on YouTube and we then know that our advertising works in a particularly strong and targeted way."

News and Related Story Links:

• Google:
  Google Mobile
• Wikipedia:
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• Wikipedia:
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• Google:
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• Google:
  Adsense for Mobile Applications
• Wikipedia:
  Software as a Service
• CNET:
  Ballmer Dismisses Google Android
• Google:
  Google Maps Navigation
• Google:
  Google Docs
• Google:
  Google Apps Benefits
• Wikipedia:
  Cloud Computing
• TechCrunch:
  Will Online Advertising Recovery Be Led By Retail and Mobile?
• SeekingAlpha:
  Google Inc. Q3 2009 Earnings Call Transcript

South Korea's Samsung Electronics Co. Ltd. (PINK: SSNLF) saw operating profit in its semiconductor business improve by more than 84%, rising to $968.8 million (1.15 trillion won) in the third quarter, up from $160 million (190 billion won) in the same period a year ago. The company is seeing growing strength in PCs, for which it is the world's largest supplier in dynamic random access memory (DRAM) chips.

Samsung's overall profit, which tripled to $3.1 billion (3.72 won), was buoyed not only by its chip business, but its flat panel television and mobile phone businesses. A weak won enabled it to undercut its Japanese rivals decimated by a strong yen.

"The company will continue posting solid earnings next year, and the semiconductor business will be the key driver," Lee Jin Woo, a fund manager at KTB Asset Management Co. in Seoul told Bloomberg News. "As Intel and other chipmakers forecast, I see strong PC demand."

To meet that demand, Samsung said it will boost its 2010 capital spending on semiconductors to $4.2 billion (5 trillion won), up from $3.3 billion (4 trillion won) this year. Another $2.9 billion (3.5 trillion won) will be spent on its LCD technology.

According to Dramexchange Tech Inc., prices for benchmark DRAM chips have more than tripled this year after falling 62% in 2008 as the worst economic downturn since the 1930s tightened its grip on consumer spending.

"Amid rising demand for highly-advanced and low-voltage consumer products, Samsung will use most of the projected investment to migrate into thinner technologies for PC and flash memory chips," Robert Yi, head of Samsung's investor relations team told The Korea Times. Flash memory is used in everything from MP3 players to cell phones.

Samsung executives showed cautious optimism for the fourth quarter.

"Looking ahead, we forecast a solid fourth quarter supported by seasonal demand for consumer electronics, though the appreciation of the won and increased marketing expenses may lead to a quarter-on-quarter decline in profit," said Yi.

In Japan, Toshiba Corp.'s chip division returned to profitability following cost cuts, stronger demand, and higher prices for semiconductors. The Tokyo-based chipmaker saw its semiconductor division swing from a $32.5 million (29.3 billion yen) loss to a net income of $57.7 million (5.2 billion yen), the first profit in the division in more than two years.

Toshiba, the world's No. 2 maker of NAND flash memory behind Samsung, sees stronger demand in products that use this type of memory. Toshiba supplies NAND memory for Apple Inc.'s (Nasdaq: AAPL) iPhone and Sony Corp.'s (NYSE ADR: SNE) PlayStation 3 (PS3).

Market share for Apple's iPhone continued to grow last quarter, rising to 2.9%. And Sony's PS3 is gaining momentum after a price cut: It outsold Nintendo Co. Ltd.'s (OTC ADR: NTDOY) market-leading Wii console for the first time last month in Japan and the United States, despite being No. 3 in market share behind Nintendo and Microsoft Corp. (Nasdaq: MSFT).

Like Samsung, Toshiba was cautious about the future and said NAND prices may soften a bit after rising 20% in the six months ended Sept. 30.

"There is still uncertainty for the October-December quarter as well as the January-March quarter," Fumio Muraoka, Toshiba's corporate senior executive vice president told Dow Jones Newswires. "We need to see the outcome of the shopping season for Thanksgiving and Christmas."

Intel Corp. (NYSE: INTC) earlier this month soundly beat Wall Street estimates, posting a profit of $1.9 billion, or 33 cents per share on revenue of $9.4 billion. Analysts' consensus estimates called for earnings of 28 cents on revenue of $9.0 billion, according to Thomson Reuters Corp. (NYSE: TRI)

Shortly after Intel's earnings, Texas Instruments Inc. (NYSE: TXN), the world's No. 4 chipmaker, also beat analyst expectations, reporting a profit of $2.88 billion, or 43 cents per share. Analysts polled by Thomson Reuters expected a net income of a $2.82 billion profit, or 39 cents per share.

Given the microchip's ubiquitous nature, the companies that make them can be viewed as a kind of leading economic indicator. Companies that intend to produce products down the road have to place orders for chips or for equipment now, meaning an uptick in semiconductor-sector business activity today and represent a jump in broader economic growth tomorrow.

News and Related Story Links:

• Bloomberg News:
  Samsung Profit Triples to Record on Chip, LCD Prices
• The Korea Times:
  Samsung to Splurge on Chips, LCDs
• The Wall Street Journal:
  Samsung,Toshiba Post Solid July-Sep Results On Higher Chip Prices

There’s much left to be sorted out in any possible deal, such as intellectual property concerns, but a completed sale of the money-losing Volvo is just one more smudge that will be wiped clean from Ford’s balance sheet. Ford put the Swedish luxury automaker up for sale in December last year.

“Ford believes Geely has the potential to be a responsible future owner of Volvo and to take the business forward while preserving its core values and the independence of the Swedish brand,” said Chief Financial Officer Lewis Booth. “But there is much work that needs to be completed in the more substantive discussions that are agreed to take place.”

Still, without assurances that it can trust its intellectual property in the hands of a Chinese company, Ford could walk away from a Geely deal. Technology found in Volvos will be used in future Ford products.

Earlier this month, the Federal Bureau of Investigation (FBI) arrested former Ford engineer Xiang Dong Yu, and charged him with the theft of more than 4,000 documents from Ford as he tried to get a job with Shanghai Automotive Industry Corp., Bloomberg News reported, citing a U.S. indictment. The 10-year Ford veteran was hired by Beijing Auto.

“Volvo is completely integrated into Ford’s product development strategy, and Ford should be concerned about where its vehicle architectures will end up,” Michael Robinet, a CSM Worldwide analyst told Bloomberg. “This is akin to selling a room on your house. You can’t separate it easily.”

Putting Volvo on the market is just one of several steps the Dearborn, Mich. automaker has taken to right itself after losing record amounts of money in the past few years. Since 2006, it cleaned out its upper management, sold its Jaguar Land Rover line and took out
an $18 billion loan in 2006 that helped it refuse federal bailout money last year.

Now, it appears Ford is on the brink of the black.

“I think we are beginning to kind of see the fruits of the longer-term efforts,” Barclays Capital analyst Brian Johnson told the Detroit Free Press. “We expect profitability in 2010.”

Ford looks to be headed in the direction of profitability, and the consensus among analyst estimates supports that. It’s still expected to lose $1.34 per share for the year, but 2010 estimates say the automaker will earn 11 cents per share next year.

This year has been a lackluster year for all automakers, but Ford managed to turn the worst financial downturn since World War II into a seized opportunity, whereas its American rivals General Motors Corp. (NYSE: GRM) and Chrysler Group LLC each lost ground, according to CNW Marketing Research Inc.

“The Ford story is that they have taken advantage of the fact that they were the sole domestic brand not to take a government bailout and not to file for bankruptcy,” Efraim Levy, an auto-industry stock analyst at Standard & Poor's told The Wall Street Journal. “But those benefits will fade in 2010 as the weaker competitors distance themselves from the bankruptcy filings and start to introduce some fresh product.”

Ford is also gaining ground in what is now the world’s largest market for automobiles: China. Its September sales grew 79% year-on-year in the Red Dragon, selling 119,338 units. GM is still king there, selling 181,148 vehicles last month. Ford understands the importance of China and is in the process of building its third Chinese auto plant, which will give Ford the capability to produce 150,000 more vehicles annually. It currently makes 450,000 vehicles on the mainland.

“China is one of the few markets worldwide which still keeps growing this year,” Zhang Xin, an analyst at Guotai Junan Securities in Beijing told The Associated Press. “It's obvious any automaker would like to set up plants here.”

Ford choosing Geely as Volvo's preferred buyer lends credence to a Money Morning report written by Investment Director Keith Fitz-Gerald earlier this year, which said that China's acquisition of overseas auto assets could be mutally beneficial to both parties.

"Top-tier managers of China-based companies recognize that the acquisition of overseas assets can strengthen their company’s domestic competitiveness," Fitz-Gerald wrote. "And with a market as big as Mainland China, that’s logical. But what might not occur to Western business leaders is that Chinese executives don’t yet view themselves has having global-branding expertise, particularly when it comes to the so-called 'design elements.'"

News and Related Story Links:

• Bloomberg News:
  Geely, Ford Volvo Talks Said to Falter on Safeguards
• Detroit Free Press:
  Ford’s Success Comes at a Price
• Yahoo Finance:
  Analyst Estimates for Ford
• The Wall Street Journal:
  Ford Gains While Detroit Rivals Slip
• The Huffington Post:
  Ford China Plant: Automaker Will Build $490 Million Facility

The RBI now expects a higher rate of inflation compared to its July estimate, but still kept its key lending rate, the repurchase rate at 4.75%. The reverse repurchase or "repo" rate of 3.25% was also untouched.

"Keeping in view the global trend in commodity prices and the domestic demand-supply balance, the baseline projection for [wholesale price index] inflation at end-March 2010 is placed at 6.5% with an upside bias," RBI Governor Duvvuri Subbarao wrote in his review of monetary policy, which was published today. The estimate was up from 5% in the RBI's July review.

A growing concern about inflation as well as the RBI's removal of emergency liquidity support measures sent India's key equity market, the Sensex, down 2.3% – the most in the last six weeks. Real estate shares were hardest hit, falling 6.2%.

The RBI raised the statutory liquidity ratio (SLR) to 25% from 24%, but noted that with current bank SLR holdings at 27.6%, the increase won't have an impact on the system's cash flow.

India is expected to join other nations in loosening its monetary policy in 2010, but held off this time around because "the recovery is as yet fragile." The monsoon season in southwest India – a key sugar cane growing region – was so bad this year, India went from being a net exporter to net importer.

"It is imperative to continue with the accommodative stance to compensate for the decline in agricultural output and till there is firm evidence of sustained global recovery," Governor Subbarao said.

Australia is the only G-20 economy to raise interest rates so far, but other nations are expected to follow in the coming months, including India, Canada and South Korea, while all G-20 nations to proceed with their so-called "exit strategies" by the end of April, a Reuters poll showed.

"We will start to see G-20 economies exiting now, starting with the emerging ones and then the advanced countries," Mridul Saggar, chief economist at Kotak Securities Ltd. told Bloomberg News. "In India's case, growth is coming back on track and inflation is becoming quite a concern."

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Six banks failed on Friday, bringing the total number of banks failed this year to 106. That's more than four times the amount of bank failures in 2008, and it's only October. Still, the number is dwarfed by the 534 failures seen in 1989 at the height of the savings-and-loan crisis.

"The number of failures we are experiencing is significantly lower than those the FDIC has handled during past crises," FDIC Chairwoman Sheila Bair said in a video message to depositors.

While bank failures have slowed in recent months from 2009's peak of 24 in July, that doesn't mean banks can breathe easy just yet. There is no pattern for bank failures from month to month, FDIC spokesman David Barr says.

"It's not a formulaic process," Barr told Money Morning, adding that the clip of bank failures "do ebb and flow."

The FDIC expects the current pace of bank failures to last through 2010.

Despite the rash of bank failures since the recession began in December 2007 and the fact that the FDIC insurance fund now has a negative balance, deposits are backed by the "full faith and credit" of the U.S. government.

Such a backing helps one of the FDIC's main priorities: maintaining the public's confidence. And from the looks of things – at least as far as bank deposits go – that confidence has withstood the worst financial crisis since the Great Depression. Insured deposits have grown almost $400 billion from the end of June 2008 to the end of June 2009, when deposits totaled more than $4.8 trillion.

"As evidenced by the stability of insured deposits throughout last year, this mission has been a success," FDIC spokesman Andrew Gray told The Associated Press.

So far, the FDIC has avoided tapping its $500 billion credit line with the U.S. Treasury. Earlier this year, it levied a $6.2 billion special assessment on banks to cover its insurance fund, and will likely have banks prepay their quarterly assessments for the next 13 quarters by the end of this year. The prepayment is expected to generate $45 billion.

Bad loans from the commercial real estate market will probably be the catalyst that keeps bank failures going.

Roughly $530 billion in mortgage-backed securities are due for refinancing between now and 2011, according to property researcher Foresight Analytics LLC. Foresight estimates that the U.S. banking sector could incur as much as $250 billion in commercial real estate losses, enough to cause as many as 700 banks to fail in that time.

News and Related Story Links:

• YouTube:
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• FDIC:
  Quarterly Banking Profile
• The Associated Press:
  Bank Failures Hit 106 for Year; Many More Are Weak
• Money Morning:
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Pay cuts by the administration’s “pay czar” Ken Feinberg, affect the top-paid executives at the companies that received the most money under the Troubled Asset Relief Program (TARP), but with a relatively narrow scope: 175 salaries were slashed among seven companies.

Still, the widespread news of the cuts – which on average reduced total compensation by 50% – was met with glee from American taxpayers, which funded the bailouts of the firms. A survey conducted by ABC News and The Washington Post showed the majority of Americans in all political parties supported the measure: 79% of Democrats, 70% of Independents and 62% of Republicans.

Now, with the public behind it, Congress will likely ride the wave of momentum to pass legislation that will give shareholders more of a voice on executive pay.

And it’s already halfway there: the House of Representatives in July passed the Corporate and Financial Institution Compensation Fairness Act, which gives investors a nonbinding annual advisory vote on executive compensation and federal regulators the power to stop any “perverse” incentives that may threaten the stabilities of the companies or the economy.

Shortly before the House passed its so-called say-on-pay bill, it was revealed that thousands of employees at TARP recipients received bonuses of $1 million each.

“What we’ve seen on Wall Street in the last many years is turning that concept of pay for performance on its head,” U.S. Rep Chris Van Hollen, D-MD told The New York Times after the House passed the bill.

A similar bill dubbed the Shareholders Bill of Rights Act was introduced earlier this year by U.S. Sen. Charles Schumer, D-NY. However, unlike the House bill, the Senate bill would require a split in the jobs of chairman and chief executive officer, as well as require the chairman to be an independent director.

In a letter to pay czar Feinberg last week, Schumer urged him to also revamp the TARP firms’ corporate governance across the board.

“These companies are the poster children for the total breakdown in corporate governance and lack of effective board oversight that contributed to the recent crisis,” wrote Schumer. “I believe these reforms are critical if the government is serious about turning these companies around, returning them to private sector ownership and ensuring they participate in the markets as responsible corporate citizens.”

Feinberg cut executive pay at companies that received the most in federal money: Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC), American International Group Inc. (NYSE: AIG), General Motors Corp. (NYSE: GRM), Chrysler Group LLC, as well as the financing arms of the two automakers, GMAC LLC (NYSE: GMA) and Chrysler Financial.

The Case for Companies 

There’s concern that the recent pay cuts, as well as the passing of any legislation that gives investors a say on pay will result in a talent exodus to companies that won’t be bound to the regulations, such as privately held companies.

"This is genuinely a talent business," said Howard Berg, president of Jackson Consulting Group in an interview with Forbes. "To my mind there's no difference between [former Citi energy trader Andrew Hall, who was owed $100 million] and Travolta, A-Rod and Tiger Woods. They should be paid for their talent."
Before Feinberg cut the pay packages of 25 of the most highly compensated executives at each of the seven firms, many were already driven away by the uncertainty of working for companies under Capitol Hill’s microscope. 

At Bank of America, only 14 of the 25 highly paid executives were left by the time Feinberg’s decision was made. Only 13 of the 25 at AIG remained.
“There's no question people have left because of uncertainty of our ability to pay,” an executive at one of the affected firms told The Washington Post. “It's a highly competitive market out there.”

If the amount of executives who fled before Feinberg’s decision is a sign of things to come once Congress likely passes say-on-pay legislation, the ripple effect could go well beyond the financial sector.

Any legislation regulating executive pay is being met with sharp opposition from most Republicans as well as the U.S. Chamber of Commerce, the nation’s biggest business lobby.

“This legislation would create a command-and-control regulatory scheme,” said Tom Quaadman, executive director at the Chamber’s Center for Capital Markets Competitiveness. “Employee compensation should be a decision made by appropriate levels of management or the board of directors and based on a variety of factors, including merit and promotion.”

GOP lawmakers blasted the House’s bill that was passed last summer, saying it’s not up to Congress to tell corporations what they can do.

“There is no question that there have been some questionable decisions made by some of our major corporations regarding executive pay,” said U.S. Sen. Spencer Bachus, R-AL. “However, I strongly believe that it is neither the executive branch nor Congress’s role to mandate compensation policies, or the role of this Congress or the executive branch to say who sits on a corporate board of directors or interfere with governance in any way.”

A Proactive Stance

While shareholders of many companies are proposing their own say-on-pay policies, some companies aren’t waiting for Washington and have already instituted them.

Aflac Inc. (NYSE: AFL) was the first public company to adopt a say-on-pay policy in 2007 and believes such a measure helps it better gauge how it compensates executives. Shareholders resoundingly approved the idea, with a 93% vote in favor of it.

“Our shareholders, as owners of the company, have the right to know how executive compensation works,” Chief Executive Officer Daniel Amos said then. “An advisory vote on our compensation report is a helpful avenue for our shareholders to provide feedback on our pay-for-performance compensation philosophy and pay package.”

Since then, say on pay has become increasingly en vogue. The bulk of the companies come from the technology sector, with companies like Intel Corp. (Nasdaq: INTC), Apple Inc. (Nasdaq: AAPL) and Microsoft Corp. (Nasdaq: MSFT) all giving shareholders advisory votes on executive compensation.

Still, there are plenty of non-financial companies out there that aren’t receptive to the idea.

Comcast Corp. (Nasdaq: CMSA) Chief Executive Officer Brian Roberts said executive pay has long been the responsibility of a company's board of directors and a shareholder vote on compensation raises "the troubling aspects of how capitalism functions in American business and the world economy."

News and Related Story Links:

• The Washington Post:
  Americans: Restrict Their Pay
• Govtrack.us:
  Corporate and Financial Institution Compensation Fairness Act of 2009
• The New York Times:
  House Approves Limits on Executive Pay
• Senator Charles Schumer:
  Schumer To Pay Czar: Fix Corporate Governance, Not Just Bonuses, At Rescued Companies
• The Wall Street Journal:
  Citi in $100 Million Pay Clash
• The Washington Post:
  Top Employees Leave Financial Firms Ahead of Pay Cuts
• The New York Times:
  House Panel Clashes Over Pay Restrictions
• ABC News:
  Comcast “Say on Pay” Shareholder Proposal Fails