IIIInstitutional nstitutional nstitutional nstitutional IIIInvesting nvesting nvesting nvesting TTTTodayodayodayoday

Issue No 4 June 2008

CCCCongratulations to anyone who still lives in

the same house that they have been living in

for the past 9 rate hikes and owe the bank

money. While on the personal front the average

South African has much to worry about the

average institutional fund is seeing a healthy

return on investment in the money markets.

The Reserve Bank opted to stick to its guns and

increase rates against a backdrop of concerns

from civil society groups, unions and

economists. SA economy is slowing down SA economy is slowing down SA economy is slowing down SA economy is slowing down ----

MboweniMboweniMboweniMboweni.

South Africans are not the only ones at risk of

loosing their homes. Ordinary Americans are

also counting pennies albeit for different

reasons. Mortgage Foreclosures Rise to New Mortgage Foreclosures Rise to New Mortgage Foreclosures Rise to New Mortgage Foreclosures Rise to New

Heights. Heights. Heights. Heights. As if this were not enough Jim Loney

notes in his article Subprime delinquencies may Subprime delinquencies may Subprime delinquencies may Subprime delinquencies may

rise into 2009: NARrise into 2009: NARrise into 2009: NARrise into 2009: NAR that the delinquency rate

on U.S. subprime mortgages may continue to

rise into next year. However on a more positive

note there are signs the subprime crisis may be

peaking.

When considering the current state of financial

markets I am reminded of the Chinese curse (or

blessing depending on who you consult) “may

you live in interesting times”……

If you still have an appetite for the markets

Andrian Savillle offers an interesting viewpoint

in Which sectors are past their sell Which sectors are past their sell Which sectors are past their sell Which sectors are past their sell----by date?by date?by date?by date? For

another outlook see Hot commodities don’t Hot commodities don’t Hot commodities don’t Hot commodities don’t

mean healthy earningsmean healthy earningsmean healthy earningsmean healthy earnings. . . .

In light of the recent shenanigans in the

financial markets most of us have lost the

feeling of being titanium plated, bullet proof

and ten feet tall but some hedge funds have

however taken a different view. They are

stepping in places that banks fear to even give

a preliminary glance as the flight to quality

continues. As Banks Shun Loans, Hedge Funds As Banks Shun Loans, Hedge Funds As Banks Shun Loans, Hedge Funds As Banks Shun Loans, Hedge Funds

Move InMove InMove InMove In.

The IMF shines a much needed solar powered

torch at the end of a short but very dark tunnel.

According to International Monetary Fund head

Dominique Strauss-Kahn the worst of the

financial crisis appears to be over but the major

economies are likely to grow sluggishly for the

rest of this year, Global economy still bruised Global economy still bruised Global economy still bruised Global economy still bruised

but getting better: IMFbut getting better: IMFbut getting better: IMFbut getting better: IMF

Fitch Ratings said in a special report published

on Thursday that the fast-growing

microfinance industry, which provides financial

services to low-income populations in

emerging markets, could be exposed to greater

risks. This presents a dilemma in an economy

like South Africa’s that is experiencing a sharp

increase in the cost of living and ordinary

individuals would typically turn to micro

financiers to cushion the rough ride. Fitch sees Fitch sees Fitch sees Fitch sees

risks for microfinancerisks for microfinancerisks for microfinancerisks for microfinance. . . .

In the article Very young veterans don’t get Very young veterans don’t get Very young veterans don’t get Very young veterans don’t get

pensionspensionspensionspensions National Treasury attempts to clarify

the position of ‘very young’ veterans. The

special pensions amendment bill which is

before parliament’s finance committee aims to

reduce the qualifying age for pension

entitlement from 35 on December 1 1996 to

30.

In Plain EnglishIn Plain EnglishIn Plain EnglishIn Plain English

Real vs Nominal returns: Real returns are

nominal returns adjusted for the effects of

increasing price levels (inflation). Therefore if

the (nominal) return on an investment is say

13% over the last year and inflation currently

sits at 3% for the last year (don’t shot me I am

an optimist and bullish on the economy in the

long run). The real return for this investment

would be 10% (nominal – inflation). Most money

managers report on nominal and not real

returns.

Flight to quality: In uncertain economic periods

investors tend to prefer more secure

investments that carry less risk then those that

carry more risk. For example some might

prefer government bonds when they would

under more certain economic conditions buy

corporate bonds. This is known as a flight to

quality. Typically the spreads between quality

and “junk” will increase during these periods as

investors require even higher returns

(compensation) to compensate them for the

risks they are taking.

Regards

Editor

Note: This newsletter is provided compliments

of Mokorosi Financial Consulting. To learn

more about Mokorosi Financial Consulting and

the services we offer please contact Jolly

Mokorosi at jmokorosi@gmail.com .

Mokorosi Financial Consulting does not

endorse the views of the authors of the

attached articles.

Copying the material in this newsletter without

proper referencing or letting us know and

claiming it as your own work will lead to bad

karma.

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AAAArticlesrticlesrticlesrticles

SA economy is slowing down SA economy is slowing down SA economy is slowing down SA economy is slowing down ---- Mboweni Mboweni Mboweni Mboweni

Pretoria - South Africa's Reserve Bank raised its key repo rate by 50 basis points to 12 percent on

Thursday, below forecasts, after inflation surged to a five-and-a-half year high and moved further away

from the target range.

The half-percentage-point rise extends a monetary tightening cycle, and brings to 500 basis points

hikes since June 2006 to try to tame inflation.

The targeted CPIX gauge surged to 10.4 percent year-on-year in April - the 13th month it has exceeded

the 3 to 6 percent band - prompting hawkish comments from central bank governor Tito Mboweni last

month.

Mboweni said that the rand currency was vulnerable to perceptions of a widening of the country's

current account deficit. He also added that the economy was showing signs of slowing down.

Source: http://www.busrep.co.za/index.php?fSectionId=561&fArticleId=4451934

Very young veterans don’t get pensionsVery young veterans don’t get pensionsVery young veterans don’t get pensionsVery young veterans don’t get pensions

By Michael Hamlyn

The Treasury has set its face against granting special pensions to freedom fighters who were under 19

in 1985, five years before the struggle was officially abandoned on February 2 1990.

The special pensions amendment bill which is before parliament’s finance committee aims to reduce the

qualifying age for pension entitlement from 35 on December 1 1996 to 30, but a number of struggle

veteran organisations including Apla, the PAC, MK, Azanla, Azapo, and ex-political prisoners committee

members sought a reduction on the grounds that even though young, these veterans also suffered.

Some reckoned the qualifying age should be 25, some 21, and some that there should be no age

restriction at all.

Marion Mthembu from the Treasury told the committee, however, that the reason for the special

pension entitlement was to compensate those who because of their involvement in the struggle were

not able to contribute in the normal way to pension funds.

The rules say the individual must have at least five years in the struggle, and for someone to qualify at

age 30, and to have spent five years in the struggle they would have to have been 19 in 1985.

"Below 19 they would not have been in full-time work," Mthembu said.

"They might have been in casual employment or working after school, but they would not have

contributed to a pension fund."

She added: "According to general trends in the pension environment, persons typically only start

providing for a pension at the age of 25 years."

Mthembu also turned down a PAC request that the minimum service criterion be lowered to one year, or

removed altogether.

Azapo also proposed the minimum should be three years. But Mthembu said that it was important that

the same criteria apply to the 30-35 year-old as applied to those over 35.

But she did yield over the question of disqualification because of conviction for a crime after February 2

1990. The PAC, Azanla and Azapo all argued that not all political organisation suspended their armed

struggle on that date. The Treasury agreed and has removed the disqualification clause.

However, Mthembu explained that it would be "an administrative nightmare" to allow for new

applications from people who had already been disqualified for this reason.

It would, she agreed, create a disparity between the age groups, but she promised that "These persons

will be dealt with on an individual basis."

The pensions are all paid at normal retirement age.

Source: http://www.thetimes.co.za/Business/BusinessTimes/Article.aspx?id=784705

Global economy still bruised but getting better: IMFGlobal economy still bruised but getting better: IMFGlobal economy still bruised but getting better: IMFGlobal economy still bruised but getting better: IMF

Osaka - The worst of the financial crisis appears to be over but the major economies are likely to grow

sluggishly for the rest of this year, International Monetary Fund head Dominique Strauss-Kahn said

Friday.

"We have good reason to think that the financial crisis is mostly behind us but it's too soon to say" for

sure, he told reporters on the sidelines of a meeting of finance ministers of the Group of Eight rich

nations here.

The IMF expects "several quarters of soft growth" in developed countries with a proper recovery unlikely

until 2009, he said.

The United States was likely to start to see a rebound at the end of 2008 or in early 2009 with Europe

following close behind, the IMF head said, predicting a U-shaped recovery rather than a V-shaped one.

Growth has slowed in most major economies in the wake of a slump in the US housing sector, which

triggered turmoil on world financial markets last year and led to a credit crunch as banks became

reluctant to lend to each another.

Strauss-Kahn noted that problems in the US housing sector continued, which was increasing the risk of

financial losses for banks.

G8 finance ministers are meeting in Japan to discuss threats to the global economy from soaring oil and

food prices as well as the lingering fallout from the subprime loan crisis sparked by a wave of defaults

on US mortgages. – AFP

Source: http://www.busrep.co.za/index.php?fSectionId=565&fArticleId=4453625

Fitch sees risks for microfinanceFitch sees risks for microfinanceFitch sees risks for microfinanceFitch sees risks for microfinance

Fitch Ratings said in a special report published on Thursday that the fast-growing microfinance

industry, which provides financial services to low-income populations in emerging markets, could be

exposed to greater risks.

Separately, the agency has published its rating criteria that formalise the agency’s existing approach to

microfinance institutions (MFIs).

Fitch notes that high growth and transformation within the microfinance sector puts pressure on

internal control systems, and places new demands on the quality of management and corporate

governance. Increased access to commercial funding brings new demands in risk management,

disclosure, and moves MFIs away from their traditional base of public or donor funding. Transformation

to for-profit and regulated structures heightens the risk of "mission drift", leading the MFI away from its

traditional social mission.

"As microfinance institutions transform and their clients become more integrated into the mainstream

financial sector, convergence occurs between microfinance and mainstream banking," says Mark Young,

managing director in Fitch’s Financial Institutions group in London.

"In Fitch’s view, this convergence could reduce their resilience to the broader economy. The

microfinance sector’s success could bring some of the greatest risks it has yet to face."

The microfinance sector was estimated to have a total asset size of more than US$34 billion at end-

2006, and is set to experience continued fast growth rates. There are important differences in risk

profiles between conventional banks and MFIs.

Despite these differences, Fitch believes its current bank rating methodology and rating scales can

accommodate the wide variety of MFIs, of which the agency rates 24 in Latin America (national ratings)

and 10 in Eastern Europe and Asia (international ratings).

"The success and growth of microfinance in the past decade have mainly hinged on the successful

management of the ’double bottom line’ of both financial and social performances, and on a track-

record of low loan loss rates, although this has occurred during a relatively benign economic

environment," says Sandra Mai Hamilton, associate director in Fitch’s Financial Institutions group in

London.

Fitch retains the same analytical framework for MFIs as for rating banks. However, certain risks are of

greater significance due to the specialised nature of MFI activities, their ownership profiles, legal

structures, and operating and regulatory environment.

Fitch pays particular attention to operation and credit risk management, corporate governance, funding

and liquidity, capitalisation and likelihood of support from stakeholders.

Source: http://www.thetimes.co.za/Business/BusinessTimes/Article.aspx?id=784707

As Banks Shun Loans, Hedge Funds Move In As Banks Shun Loans, Hedge Funds Move In As Banks Shun Loans, Hedge Funds Move In As Banks Shun Loans, Hedge Funds Move In

By Louise Story

Companies traditionally get loans from banks, but with so many lenders stretched and with credit so

tight these days, businesses are turning to what might seem like an unlikely source for cash: hedge

funds.

As banks retrench, hedge funds increasingly are offering loans to companies, usually at interest rates

that are far higher than those that banks charge. More than 100 funds specialize in lending, and several

big ones, like Fortress Investment Group and Citadel Investment Group, are starting to follow suit.

While some funds have been offering loans for a few years, more are moving in because the credit

squeeze has hobbled many banks and left hard-pressed companies hungry for cash.

“Anybody who needs money is going to a hedge fund now,” said Matthew T. Hoffman, chief investment

officer of Weston Capital Management, a fund of hedge funds in Westport, Conn. “These funds have

been inundated with requests. The volume of requests has gone up probably five times.”

The hedge funds are hardly being generous. They often charge rates of as much as 3.2 percentage

points more than bank rates.

“You’re talking to people who are very thirsty or hungry to get double-digit returns,” said Ed Banks,

chief investment officer of Washington Corner, a hedge fund in New Jersey. “And they know you’re

coming hat in hand.”

Economists predict that it is only a matter of time before the cutback in bank lending causes a

slowdown in industries far from Wall Street. Just over half of domestic banks reported that they

tightened standards on commercial lending in April in a Federal Reserve survey, up from 30 percent in

January.

But hedge funds may fill a small part of the void. The number of hedge funds that specialize in what is

called “asset-based lending” has quadrupled in the last three years, according to HedgeFund.net, a

hedge fund information service owned by Channel Capital Group. New funds of this sort include the

Weston Fund in Riverside, Conn., founded in January, and the Genesis Merchant Partners fund, which

opened in Greenwich, Conn., last week.

These banklike hedge funds had about $12 billion in assets to lend as of the end of last year, up from

$900 million three years ago, according to HedgeFund.net. Big funds like Citadel and private equity

giants like Cerberus Capital Management have even more. Unlike banks, which raise money from

depositors, hedge funds are not regulated. The funds get their capital from wealthy investors.

Y. Judd Shoval founded a lending hedge fund, Ambit Funding, in early 2005 after a career running local

banks. Consolidation in the banking industry left a niche for hedge funds for a variety of loan types, he

said, and his fund makes commercial loans in 12 states.

Mr. Shoval does much the same type of lending he did at banks. His depositors are not banking

customers who can access their money 24 hours a day, but rather investors who have a six month lock-

up on their money. And he charges the standard hedge fund fees to investors.

“We are a hedge fund, but we look at each situation through the prism of a bank,” Mr. Shoval said.

To be sure, there were hedge funds that jumped in during the loose lending of recent years and lost

money on loans, just as the banks did. And hedge funds may find their investors weary of investing

more heavily in loans because such debt is often illiquid and hard to value, said Michael Zupon, a

managing director and head of the domestic leveraged finance group at the Carlyle Group.

And hedge funds, those often secretive, sometimes volatile investment vehicles, often arouse

suspicions. Some companies still remember tales that circulated in the late 1990s about hedge funds

that purchased stakes in small companies through what was known as a “death-spiral convertible.”

These shares can be converted into common stock as a company’s share price drops, and that strategy

is said to be returning now.

“Hedge funds have been known to come in and profit from a company’s demise,” said Meredith Jones,

managing director of PerTrac Financial Solutions, a financial software company.

But, Ms. Jones said, may distressed companies have little choice but turn to hedge funds.

“It’s kind of like: do you sign a lease with your landlord? Well, if you don’t, you don’t have a place to

live,” she said.

Some hedge funds have been hoarding cash for the time when companies are desperate, said Michael

Fuller, managing director of Private Advisors, which manages a fund of funds of direct-lending hedge

funds. The terms banks were offering in recent years were so generous, with such low interest rates,

that some hedge fund managers refrained from lending, he said.

“Up until six months ago, they couldn’t compete,” Mr. Fuller said. “So they just waited and held lots of

cash on their books. Now Wall Street is spitting stuff out. Some are great investments.”

Source:

http://www.nytimes.com/2008/06/13/business/13hedge.html?_r=1&ref=business&oref=slogin

Mortgage Foreclosures Rise to New HeightsMortgage Foreclosures Rise to New HeightsMortgage Foreclosures Rise to New HeightsMortgage Foreclosures Rise to New Heights

U.S. home foreclosures and mortgage delinquencies hit record highs in the first quarter as the sharp

housing downturn put more American households under financial strain, data released Thursday

showed.

Nearly one in a hundred homes, or 0.99 percent, were driven into a foreclosure proceeding in the first

quarter, the Mortgage Bankers Association said, up from 0.83 percent in the fourth quarter and the

highest on records dating to 1979.

As the pace of failing loans quickened, the trade group said the overall share of homes in foreclosure

rose to an all-time high of 2.47 percent from 2.04 percent. At the same time, the mortgage delinquency

rate rose to a record 6.35 percent, suggesting foreclosures are likely to continue to mount.

The association said that while the national home loan picture darkened overall, risky loans written in a

handful of states accounted for the largest share of failing mortgages.

"The national increase is clearly driven by certain loan types in certain states," said MBA senior

researcher Jay Brinkmann.

Arizona, California, Florida and Nevada account for a quarter of outstanding home loans and 42 percent

of foreclosure starts, the trade group said.

While many regions of the country should see their rate of failing loans hit bottom by the end of the

year, troubles in those four coastal and southwest states will persist for longer, Brinkmann said.

"The magnitude of the problem there is kind of dwarfing developments in the rest of the country," he

said. The performance of riskier and safer loan types is remarkably different in all parts of the country,

the group said in its report.

Among prime loans, which are extended to borrowers with good credit, the delinquency rate was 3.71

percent compared to 3.24 percent in the last quarter. The delinquency rate for subprime loans, available

to borrowers with shaky credit, climbed to 18.79 percent from 17.31 percent in the previous quarter.

The increase in foreclosures is largely driven by sinking home values, which leaves borrowers with a

home worth less than the mortgage and gives an incentive to simply walk away from a house. About 1.2

million foreclosed homes should return to the market this year, a research note from Lehman Brothers

said.

"Rising foreclosures add to an already bloated inventory, crowd out regular sales and further depress

home prices. The housing pain looks set to continue," the research note said.

Source: http://www.cnbc.com/id/24985818

Which sectors are past their sellWhich sectors are past their sellWhich sectors are past their sellWhich sectors are past their sell----by date?by date?by date?by date?

By Adrian Saville,

If we look at the market at a super-sector level, it is obvious that there is a major divergence taking

place between the resources sector and the financial and industrial sectors, which means that there are

likely to be growing opportunities in the undervalued areas. The table below shows the three main

sectors and their p:e ratios and dividend yields.

p:e ratiop:e ratiop:e ratiop:e ratio dividend yielddividend yielddividend yielddividend yield

Resources sector 22.2 1.8%

Financial sector 8.6 5.5%

Industrial sector 11.8 2.5%

There is a clear theme in the world economy, resulting from the sub-prime crisis that has been in

evidence since the middle of 2007 which is impacting on certain commodity markets. Central banks

initiated a range of policy actions in the second quarter of 2007, slashing interest rates and pumping

liquidity into the system to restore health to the financial sector and capital markets more broadly.

Without hesitation, the speculators pounced on the global low interest rate environment, turning their

attention away from the credit markets and towards commodity markets, with the result that prices of

hard and soft commodities have scaled new heights in 2008. Moreover, inflows into commodity funds

so far this year have already exceeded the flows seen in each of 2003, 2004 and 2005, and almost

match the annual figure for 2006.

Although there are good reasons for the commodity markets to be firm, with strong physical demand,

prices have leapt into "excessive exuberance" territory, indicative of bubble-type environment. At this

stage, perhaps 25%-30% of some commodity prices can be attributed to speculation rather than

fundamental demand.

However, when a sector becomes fully priced, it does not mean that the entire sector is stretched.

Often, there are only some elements driving the sector upwards, while other parts lag. For example, in

the late 1990s, when the telecom, media and technology stocks raced ahead of the market, clearly not

all industrial stocks were overvalued. More recently, we have seen the building and construction sector

rise to an exotic level, but this again did not mean that all industrial stocks were expensive.

So we need to look at the market in a more comprehensive way. Because the resources index is high at

present, we can't infer that all resources stocks are overvalued.

Some good evidence of this comes from comparing the values of, say pulp and paper counters with

those of the mining sectors. Look at the following ratios:

price:book ratioprice:book ratioprice:book ratioprice:book ratio

Mondi 1.1

Sappi 1.7

Anglo Platinum 10.1

If I had to unpack the super-sectors and look at some of their underlying elements with a view to

switching between the sectors, the following themes stand out:

Their time will comeTheir time will comeTheir time will comeTheir time will come Past their sellPast their sellPast their sellPast their sell----by dateby dateby dateby date

Resources: Forestry and paper

Chemicals

Gold mining

Platinum mines (although varied)

Some of the General Mining stocks

Many of the Industrial Metals

Industrials: Industrial Services

Personal Goods

Technology

Construction (more derating needed, but

some are looking interesting)

General Industrials

Travel & Leisure

Media

Financials: Banks Investment Trusts

Life Insurers

Asset Managers

Non-Life Insurers

Other General Financials

I have always maintained that a wise investor is a patient one. These sectors aren't necessarily going to

take off like a rocket in the near future and they may need a catalyst to spark the turnaround. However,

this does indicate where value can be found.

Finally, it goes without saying that stock selection is as important as sector rotation. Once you have

found the sectors that are likely to outperform, attention must then turn to a search for quality

companies within that sector.

Source:

http://www.moneyweb.co.za/mw/view/mw/en/page662?oid=210444&sn=Blog%20detail%20back%20b

utton

Hot coHot coHot coHot commodities don’t mean healthy earningsmmodities don’t mean healthy earningsmmodities don’t mean healthy earningsmmodities don’t mean healthy earnings

The worldwide commodity boom might still be in full swing, but South African mining houses may see

their earnings moving sideways from next year on the back of rising costs and production problems,

says a mining analyst.

Gary Quinn, mining analyst and equity fund manager at Prudential Portfolio Managers (SA), says despite

the incredible run that commodity stocks have experienced in recent months, this is probably not the

time to put new money into commodities.

"We don’t have a pessimistic view on commodities, but we are increasingly developing a muted view on

earnings growth. The reality is that share prices tend to follow earnings cycles ultimately it is difficult

for share prices to move higher if earnings are moving sideways."

He says ironically the supply and infrastructure problems in the mining sector that have caused

commodity prices to rocket, will eventually impact on the earnings growth potential of these stocks.

"The operational problems currently facing mining companies would normally lead them to perform

poorly. But instead commodity prices shot up as a result of supply problems, rescuing a couple of

companies from poor performance."

Quinn comments that without doubt, the biggest driver of commodity prices this year has been the

disruption in supply of resources.

"The price of platinum is up 40% for the year to date. For now this incredible increase in the commodity

price has bailed out Amplats, despite the company’s production problems caused by Eskom’s woes and

safety issues."

Factors contributing to the declining supply of commodities include worldwide power shortages. South

Africa is not the only producer of resources affected by a volatile power supply North America, Australia

and Chile are grappling with similar constraints.

Government interference in a number of countries has impacted negatively on supply. This includes the

withdrawal of mining licences and the levying of ever-increasing royalties and taxes.

Heavy taxes imposed on oil companies, for example, have created a disincentive to open new oil fields.

The average tax rate on oil companies is now 70%, compared to 30% some 10 years ago. Adverse

weather conditions, like the heavy rains in Australia, have also contributed to supply problems.

Quinn says platinum production was down 15% in the first quarter this year, with Amplats alone coming

in 400,000 ounces short of production targets. Gold was down 19%, diamonds 18%, copper 5% and coal

5.6%. Overall, mining production was down more than 11% in the first quarter this year.

Therefore, while supply constraints continue to push up commodity prices, mining houses are also

increasingly feeling the pinch of rising production costs against lower output. If not curbed this will

impact on the ability to grow earnings, says Quinn.

He points out that while retailers are able to pass on increasing costs to consumers, the same is not

true for mining companies. "Because the price of commodities is not determined by individual

companies, they cannot load it to make up for increased operating costs."

This means, says Quinn, that mining houses have no choice but to absorb the increase in costs and find

ways to achieve more effective cost-cutting opportunities.

"If they don’t and earnings start to move sideways and eventually drop, the boom cycle has to make way

for the bust cycle.

"We have been in the commodities boom for so long, it has become hard to predict the ultimate top of

the cycle. The last low was in 1999 since the up cycle has been so drawn out, the downturn may be just

as gradual."

Quinn has prepared his portfolios for a potential slowing, believing that the commodity boom cycle is

about 80% complete. He adds, however, that as a value manager he is always on the lookout for the

exceptions, and there are still some.

"There are still opportunities in paper and steel. Paper prices are lower now than they were in 1999 and

margins are low as well. There is a lot of scope for earnings growth. And profitability in steel is up by

30%," he concludes.

Source: http://www.thetimes.co.za/Business/BusinessTimes/Article.aspx?id=784683

RBA chief highlights inflation threatRBA chief highlights inflation threatRBA chief highlights inflation threatRBA chief highlights inflation threat

'The prospect of inflation has presented a larger and more immediate danger to us than it has, thus far,

to the US.'

Australia faces a major challenge to achieve an economic slowdown that drags inflation lower at the

time of a commodity boom, says Reserve Bank Governor Glenn Stevens.

The inflation problem in Australia, the central bank boss told a lunch in Melbourne, was more severe

than that facing the US because of the expansionary influence of the local resources sector.

Mr Stevens told the local chapter of the Amercian Chamber of Commerce the current commodities cycle

may destabilise the Australian economy as it bolsters national income while fanning a higher inflation

rate.

''The very large change in prices for mineral and energy resources is the most expansionary external

shock to affect the economy for 50 years or more,'' Mr Stevens said, according to a copy of his planned

speech.

''It has occurred at a time when the productive capacity of the economy has already been stretched by

the long expansion.

''The prospect of inflation has presented a larger and more immediate danger to us than it has, thus far,

to the US.''

Mr Stevens said the opposing forces of global slowing economic activity not just in Australia, but

abroad, when coupled with rising resources income were pulling the economy ''in different directions to

an extent seen on few occasions in the past''.

Mr Stevens' highlighting of the inflation threat suggests the Reserve Bank will maintain its tightening

bias towards higher interest rates.

The prospect of another rise in official rates has lately been reduced on interest rate markets, especially

after a fall in the jobs figures for May, reported yesterday.

Mr Stevens said the Australian economy had started to slow noticeably, with a marked reduction in the

spending habits of domestic consumers and households, particularly on credit and in retail sales.

However, he said the task of managing the moderation was made more difficult because of the windfall

that was generated by the resources income.

Australia's terms of trade - the trend of export prices compared with import prices - is expected to rise

by 20% this year after increases of as much as 200% in the coal contract prices for overseas buyers.

Mr Stevens said since 2002, Australia's terms of trade are up by almost 70% compared with the US,

which has seen a reduction of 6% in that time.

The bank's governor said the injection of cash from the resources cycle would increase Australia's GDP

purchasing power and lift gross domestic income this year by as much as 4%.

Subprime delinquencies may rise intoSubprime delinquencies may rise intoSubprime delinquencies may rise intoSubprime delinquencies may rise into 2009: NAR 2009: NAR 2009: NAR 2009: NAR

By Jim Loney

CORAL GABLES, Florida (Reuters) - The delinquency rate on U.S. subprime mortgages may continue to

rise into next year, the National Association of Realtors' chief economist said on Thursday.

However, there are signs the subprime crisis may be peaking, Lawrence Yun told a meeting of real

estate professionals in Coral Gables, Florida.

"I anticipate the subprime delinquency rate to continue to rise for the rest of the year and probably into

the first quarter of next year," Yun said during a presentation on current market conditions.

The delinquency rate on subprime loans is running around 20 percent.

"I would not be surprised if it reached even closer to 25 percent," he said after the speech. "But the pace

of increase will be moderating."

How much, he said, will depend largely on housing prices.

The bursting of the U.S. housing market bubble has thrust the U.S. economy to the verge of a recession

as lenders sharply curtailed credit, foreclosures soared and consumers, a main engine of economic

growth, began to ease back on their spending. The reverberations have been felt around the world.

Yun said that among the positive signs that delinquencies may be nearing a peak was the drop in the

number of adjustable rate loans that were resetting and the rise in the number of safer Federal Housing

Administration loans.

In addition, many speculators have already defaulted and rates on so-called "jumbo-conforming" loans

-- big mortgages that Fannie Mae and Freddie Mac were authorized by recent legislative changes to

finance -- are improving, he said.

With U.S. housing market activity at a 10-year low, pessimistic "psychology" is driving the market, said

Yun, who represents the largest U.S. real estate agents group and is known for his optimism despite the

worst housing downturn in generations.

"There are many people who probably have the capacity to buy a home but they are not buying, they are

sitting on the fence," he said.

Foreclosure rates nationwide, historically around 1 percent, are now running around 2 percent, he said.

According to NAR statistics, the cities with the highest subprime origination rates were Detroit, Miami,

Riverside in California, Cape Coral in Florida, Orlando, Las Vegas and Phoenix.

He called Florida's property market turmoil a "short-term slump" resulting in part from "gamblers"

speculating on real estate, and from a "short-term oversupply."

The south Florida market has been one of the hardest hit in the nation, due in part to the overbuilding

of condominium units, subprime lending and widespread mortgage fraud.

At one point during the peak of the market, Miami, a city of about 400,000 people, had 60,000 condo

units in some stage of planning or construction. Thousands of those units are due to come to the

market in the next 12 months.

Yun said an NAR analysis found a huge variation in south Florida neighborhoods. Prices in those with

few subprime loans were holding up well, while others with large subprime exposure had fallen more

than 35 percent.

"Location, location, location is making a bigger difference than ever," he said, forecasting that by 2013

property owners in Miami could see price appreciation of 20 percent or more from today's levels.

Yun spoke at a real estate congress sponsored by the Realtor Association of Greater Miami and the

Beaches.

Source: http://www.reuters.com/article/ousiv/idUSN1240022720080612?sp=true