Shares of MF Global Ltd. (MF) – the largest broker of exchange-traded futures and options – plunged more than 25% yesterday (Thursday) when it was discovered that a rogue trader had run up $141.5 million in losses.

While the amount was nowhere near the $7.2 billion a rogue trader lost Societe Generale (OTC:SCGLY) just last month, the loss is still a crippling blow, as the firm was forced to honor the trades.

Memphis-based broker Evan Dooley, 40, is alleged to have made several unauthorized trades on wheat futures, which resulted in the losses. While Dooley’s actions didn’t cause a sizeable enough loss to earn him a spot in the Rogue Trader Hall of Shame [Editor's note: Please see the sidebar below.], he did end his trading career – MF Global said it terminated him effective immediately.

The loss caused Fitch Ratings to place MF Global on a negative watch, The Associated Press reported. While Fitch feels the brokerage firm is likely to have enough liquidity to cover a loss that represents approximately one-third of the MF Global’s pre-tax earnings, Fitch noted the rogue trades and resulting loss "questions the robustness of risk measurement" and represents "a substantial portion" of the company’s profit.

"All it takes is somebody with enough understanding of how these trading, settlement and risk-management systems fit together and where the gaps are to create a problem," Adam Honore, an analyst at Boston-based financial services consulting firm Aite Group LLC, told Bloomberg News. "SocGen was another example, and this is not going to be the last."

Honore’s comments mirror those made by Money Morning Investment Director Keith Fitz-Gerald just Societe Generale scandal broke.

"Despite the fact that the world is now clamoring for more oversight and controls, we suggest that no amount of regulation will help," Fitz-Gerald said, soon after the Societe Generale scandal broke.

At the time, Fitz-Gerald predicted we would see more rogue trades in the future.

"Clever traders will always find ways to game the system and their supervisors will unwittingly encourage this behavior by maintaining the outrageous bonus structures and payouts for which Wall Street is now synonymous," Fitz-Gerald said.

MF Global, formerly the brokerage unit of Man Group PLC – the world’s biggest publicly traded hedge-fund manager – was spun off in a $2.92 billion initial public offering (IPO) in July.
The London-based Man Group retained an 18.6% stake in the company.

MF Global stock lost $8.09, a 27.63% decline, to close at $21.19 yesterday.

News and Related Story Links:

• Bloomberg:
  MF Global Says Unauthorized Bets Lost $141.5 Million

• Forbes:
  Fitch Puts MF Global on Negative Review

• Money Morning:
  Rogue Trader Costs Societe Generale $7.2 Billion

• Money Morning:
  Societe Generale’s $7.14 Billion Blow Out Won’t Be the Last

 The September U.S. trade deficit narrowed slightly from the month before, as the U.S. dollar continued its slump and continued global growth continued to boost demand for lower-priced U.S. goods.

The trade gap shrank 0.6% to $56.5 billion from a revised $56.8 billion in August, according to Friday’s report from the U.S. Commerce Department. Through September, the trade deficit is running at an annual rate of $703.4 billion, down 7.4% from last year’s $758.5 billion. 

Global trade, instead of being "the drag that it has been for the last 15 years, is finally becoming a net positive," Brian Fabbri, chief economist at BNP Paribas (BNP) told Bloomberg News. "It will revise real GDP growth up."

A weak dollar made U.S. exports all the more attractive to red-hot foreign economies looking for bargains.  Exports rose 1.1%, reaching a new high for the seventh consecutive month. The total value of exports out of the country was $140.1 billion.

The dollar has fallen to record lows against the 13-nation European euro currency, which means that U.S. products are cheaper in those markets. It also means European goods are more expensive for American consumers. As a result, the U.S. trade deficit with the European Union dropped 37.1% to $6.4 billion.

The deficit with Canada, America’s largest trading partner, dropped by 3.2% to $4.9 billion, while the imbalance with Mexico fell 9.3% to $6.3 billion. Skyrocketing growth in foreign economies were also integral in the demand for U.S. exports.

China, India, and South America, in particular, were eager to fuel their economic expansions with American goods. China’s economy has expanded by more than 11% in each of the past two quarters. India grew 9.3% in the 12 months ended in June, and Argentina, South America’s second-largest economy, expanded 8.7% according to Bloomberg News.

The shrinking trade deficit could prompt analysts to raise their expectations for U.S. economic growth, in spite of the severe fallout from the collapse of the housing sector. Some analysts even believe that last quarter’s gross-domestic product (GDP) growth rate of 3.9% could be revised up to 5%.

"The Fed has at least one sector to bank on if it is hoping that the economy will skirt a recession," said Joel Naroff, president and chief economist at Naroff Economics, an economic-research firm based in Pennsylvania. "For equity investors, the narrowing trade deficit is one piece of good news in an environment where we are suffering from a continuing barrage of financial sector losses."

News and Related Story Links:

• Bloomberg:
  U.S. Trade Gap Unexpectedly Shrinks as Exports Soar 

• Money Morning:
  U.S. Economic Growth Accelerates in Turbulent Third Quarter

• Money Morning:
  Five Ways to Profit as the U.S. Dollar Turns Into the "Bernanke Peso" 

• Money Morning:
  Send in the Clowns: Bush Administration Pursues Economic Policy of Benign Neglect

• Money Morning:
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• Money Morning:
  Oil Prices Hit New Record at $97 a Barrel as the Dollar Weakens and Commodities Continue to Soar

• Money Morning:
  Why This "Bernanke Put" Could Make for the Scariest Halloween Ever

Bank of Japan policymakers yesterday (Thursday) voted 8-1 to leave the key overnight lending rate unchanged at 0.5%. Japan’s central bank last raised interest rates in February, when it lifted the overnight rate by a quarter of a percentage point.

The announcement was published on the Bank of Japan’s website yesterday afternoon. Bank of Japan Governor Toshihiko Fukui said the board considered the stability of global financial markets, and chose to act independently of the central banks of the Group of Seven industrialized nations.

Lehman Brothers Holdings Inc. (LEH) Chief Japan Economist Hiroshi Shiraishi told MarketWatch that "there is still a high degree of uncertainty over the outlook for financial markets and the global economy."

Japan’s economy is still being buoyed by its exports. A recession in the United States would cause Japan’s exports to drop and destabilize its economy. Shiraishi thinks the Japanese central bank will stand pat at least until the first quarter of 2008.

"You have to wait at least a couple of quarters to see if the U.S. economy is going into a recession or not," he said.

Domestic economic confidence is mixed and shaky. The September "tankan" survey – a gauge of confidence among business owners – was released last week. It showed that confidence among Japan’s largest manufacturers was still hovering near the two-year high established last quarter. Reportedly, those big firms are planning to boost capital spending by 8.7%, up from an earlier estimate of 7.7% in June.

However, confidence among smaller companies fell for the three consecutive months ending in September, the survey showed. Those firms plan to reduce their capital spending by 10.5%. Fukui and the central bank will have to monitor the domestic economy closely for signs of slowing in other areas.

It is the fourth straight month the bank failed to reach a unanimous decision on interest rates. While the Bank of Japan would like to achieve a sense of unanimity on its interest rate policy, board members have struggled to reach a consensus on just what the best coarse of action should be.

Some members think lifting rates could lead to income gains for Japanese households, and help to spur economic spending. Others are holding out for more favorable economic conditions.

News and Related Story Links:

· Money Morning Investment Research:
Japan’s Politics Shouldn’t Derail Its Economy: Profiting from the New Prime Minister.

Gold prices rallied to their highest level in 27 years Friday, fueled by the continued decline of the U.S. dollar. Meanwhile, crude oil surrendered early price gains, but still managed to stay above the $82 level.

Friday marked the close of a quarter that saw pricing volatility that spanned almost all the top asset classes – including stocks, bonds, precious metals and crude oil.

U.S. stocks finished the third quarter on a slightly downbeat note on Friday. The Dow Jones Industrial Average fell 17.31 points, or 0.12%, to end the week and the quarter at 13,895.63. The broader Standard & Poor’s 500 Index fell 4.63 points, or 0.3%, to 1,526.75. The tech-laden Nasdaq composite index was off 8.09 points, or 0.3%, to 2,701.5.

Gold Prices Surge

Gold’s price surge is almost directly related to the dollar’s plummet. The dollar hit yet another record low against the euro Friday, the seventh straight trading day it has done so.

As a result gold for December delivery rose $11 (1.5%), to $759.90, on the New York Mercantile Exchange. In intraday trading it soared as high as $752.50, a new 27-year high.

Gold first surged into this rarified level two Thursdays ago, when spot gold touched $738.10 an ounce. That was its highest price since January 1980, when the yellow metal hit an all-time high of $850 an ounce.

The dollar’s decline has been fueled by a ballooning trade deficit and rate cuts by the U.S. Federal Reserve, which are expected to resume in the coming months.

Greg Wilkins, chief executive of Barrick Gold Corp the world’s biggest gold producer, told Reuters-U.K. on Sept. 21 that current U.S. conditions of low interest rates and potential inflationary pressures had created a "perfect storm" for gold prices.

In yet another sign that the Western world has become economically "decoupled" from some of the newly capitalist markets in Asia and elsewhere, Wilkins noted that jewelry demand had been coming largely from developing countries that have enjoyed strong economic growth – and that even a ‘global chill’ from a worst-case scenario U.S. recession would not derail that demand.

"Gold is returning to its historical attribute as a monetary instrument," Peter Spina, an analyst at GoldSeek.com, told MarketWatch.com. "With the U.S. dollar falling to new lows, capital is looking for a preservation of wealth asset. As foreign currencies become more expensive and suspect themselves, gold is quickly becoming an asset choice," he went on to say.

Mining and metals stocks and indexes all moved higher on Friday. The CBOE Gold Index (GOX) rose 0.7% to close at 169.24. Philadelphia Gold and Silver Index (XAU) surged 0.8% to close at 168.81.

If you are searching for gold-related investments, there’s Barrick Gold Corp., (ABX), the world’s No. 1 gold producer, whose shares closed Friday at $40.28, up $1.10, or 2.81% each.

If exchange-traded funds (ETFs) are more to your liking, there’s the Market Vectors Gold Miners ETF (GDX), which closed Friday at $45.35, up $1.02, or 2.3%. There’s also the streetTracks Gold Trust ETF (GLD), which closed at $73.51, up 81 cents, or 1.1%.

Understanding that overseas growth is responsible for the surge in gold prices, an indirect way to play gold is to invest in the broader story of China’s record expansion. To do that, a good China-focused mutual fund is your best bet. One fund our analysts like a lot because of the company that runs it is the U.S. Global Investors China Region Opportunity Fund (USCOX).

Outlook for Oil and Stocks

Crude hit an intraday high of $83.76 before retreating to $82.58 a barrel on the NYMEX. Because oil is priced in U.S. dollars this jump can also be attributed to the sliding currency.

After moving higher Thursday and early Friday, crude oil prices shifted lower. November West Texas Intermediate crude oil fell $1.22 to $81.66 per barrel.

From what Standard & Poor’s Equity Research Chief Economist David Wyss characterized as a "surprising" move by the U.S. Federal Reserve on September 18, S&P’s Investment Policy Committee upped its year-end target for the S&P 500 index to 1,560, from a previous forecast of 1,510. Wyss said that he and his fellow S&P forecasters are now predicting the S&P 500 to deliver full-year gains of 10%, not including dividends.

To take advantage of the changed market circumstances, S&P Equity Strategy changed its sector-allocation recommendations: Technology is now overweight (previously marketweight), and materials and utilities are now marketweight (previously underweight). At the same time, S&P Equity Strategy reduced its allocation recommendation on health care to marketweight.

The two sectors that historically perform the best in the six months after an initial Fed rate cut are technology and consumer discretionary. However, S&P Equity Strategy still advises an underweight allocation to consumer discretionary, specifically citing concerns about housing and auto sales.

S&P Economics says the Fed move reduces the risk of recession in the next 12 months to a 33% chance, down from a previous forecast of 40%. Wyss expects another Fed rate cut, to 4.5%, in October.

The big even on the data calendar this week is the release of September employment report, planned for Friday. Weak numbers from the August report were a key catalyst behind the Fed’s Sept. 18 decision to cut interest rates by half a percentage point. Other reports scheduled for release include September ISM and vehicle sales today (Monday), pending home sales tomorrow (Tuesday); the September ISM non-manufacturing index, the ADP employment report, Challenger job layoffs, and the weekly MBA mortgage data on Wednesday; Monster.com employment index, jobless claims, and factory goods on Thursday, according to S&P.

A report released Friday showed consumer spending rose 0.6% in August, better than the market had expected. U.S. personal income rose 0.3%.


News and Related Story Links:

• The Outlook/Standard & Poor’s: Market Snapshot:
  Stocks End Modestly Lower.

• MarketWatch.com:
  Gold Rallies to 27-Year Peak as Dollar Tumbles.
• Money Morning Investment Analysis:
  The Baywatch Effect: Can China’s Growth Help Gold Prices Triple?

• The Outlook/Standard & Poor’s:
  A Fed-Fueled Sector Shift.

• Reuters:
  Despite Gains, Gold Lacks Broad Investor Appeal.

Expect increased trading volume and market volatility today (Friday) as index futures, market index options, stock options, and stock futures all expire on the same day.  While index futures and options typically share simultaneous expirations on the third Friday of every month, quadruple witching days usually only come about on the third Friday of every March, June, September, and December.

Many investors scramble to unwind their positions in their contracts before they expire, which includes repurchasing contracts and closing out other positions used to hedge against those contracts. So, quadruple witching days are usually marked by periods of volatility in stock and derivative prices, and increased trading volumes.

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By Jason Simpkins
Staff Writer

Clearly agitated by controversy related to the safety of its exports, China is striking back. Early this week, Beijing rebuffed shipments of both Canadian and American meat products, citing safety concerns.

Shipments of pork kidney from the United States and spare ribs from Canada were rejected, after Chinese authorities found evidence of the growth agent ractopamine. Ractopamine is an adrenal stimulant used to make pork leaner. China has banned the substance since 2002.

The timing is both interesting and precarious, given that China is currently experiencing a domestic pork shortage, which has resulted in rising food prices and rampant inflation. According to Xinhua, the state-run news service, Chinese officials have said they expect the shortage continue into 2008. But prices have already started to recede from their August high. Reportedly, prices have fallen 11.3% in the September’s early goings.

Inflation reached a ten-year high of 6.5% in August.

The fact that China would send back a shipment of pork products even as it faces an inflationary crisis underscores just how determined the nation is to strike back at the United States over trade relations. China’s product safety agency, the Administration for Quality Supervision, Inspection, and Quarantine (AQSIQ) has made a point of stepping up its inspections of U.S. imports.

Authorities used to inspect as little as 5% of the nation’s imported goods, but now are checking every single shipment of American poultry, pork, and beef. The effort has had little impact on the bottom lines of manufacturers and retailers, but is very clearly a pointed political statement. China, which maintains a multi-billion-dollar trade surplus with the United States, has accused the U.S. government of using over-hyped safety concerns as an excuse to block imports from China.

Altercations such as these have been a routine occurrence all summer long. It began when such Chinese-made products such as toothpaste and pet food were found to pose serious health risks. Then, in June, Chinese authorities banned chicken imports from two Tyson Food (TSN) plants after finding salmonella in a number of shipments. In July, the United States restricted imports of five different types of seafood from China, a measure Beijing criticized as unnecessary and excessive.

Then came the great Mattel Inc. (MAT) toy controversy, which really exacerbated the already-strained trade relations between the two countries.

On Aug. 14 and Sept. 3, Mattel recalled a total of roughly 20 million Chinese-made toys. Some of them involved lead paint from Chinese suppliers. More than 90%, however, were recalled because of dangerously designed magnets that could come loose and create choking hazards.

This issue in particular has become a sore point with U.S. consumers, and has become a media cause celebre.

And the conflict hasn’t ended with product recalls either.

Beijing is also filing a separate grievance with the World Trade Organization (WTO).

This dispute, also with the United States, concerns anti-subsidy duties on Chinese paper exports. The United States broke a 23-year precedent by imposing countervailing duties on exports from what it refers to as a ‘non-market economy.’

Such duties are imposed if domestic companies are able to prove that the exporter’s government is subsidizing their overseas competitors. The United States has accused China of offering tax breaks and generous loans giving their exports an unfair advantage. It has also accused China of ‘dumping,’ or selling a product at a lower, even predatory, price.

The designation of China as a ‘non-market economy’ makes it easier for domestic companies to win anti-dumping actions against Chinese goods.

In March, the U.S. Commerce Department imposed countervailing duties of 10.9% and 20.4% on Chinese producers of coated paper. China retaliated, saying the United States failed to demonstrate to what degree China’s government subsidy program has benefited its exports, as mandated by the WTO.

News and Related Story Links:

• Money Morning News:
  As China Soars, Prices Are Rising More Than Most Realize.
• MSNBC. COM:
  China rejects U.S. imports, citing sanitary code.

July was a good month for U.S. exports. According to Tuesday’s report from the Commerce Department, the exportation of U.S. good and services increased 2.7% – the fastest seasonally adjusted growth in more than three years. And enough to put a small dent in the U.S. trade deficit, shrinking it by three-tenths of a percent.

Of course the declining dollar has made U.S. goods cheaper for foreign consumers. According to the Fed, the dollar has dropped 7.9% since early 2006.  Rampant levels of global growth have also fueled this small boom – the only scrap of good news for investors since the dismal employment report on Sept.7. In fact, the value of U.S. exports hit new highs with increases in capital goods (5.2%), consumer goods (4.2%), automobiles and auto parts (14.6%), and foods (3.9%). 

On the flip side, U.S. consumers imported record values of foods and feed.  Imports from China were valued at $28.6 billion, as the U.S. trade gap with China widened to $23.8 billion in July. The gap now stands at $141.3 billion for all of 2007, a 16% increase from last year.

According to government data, China’s exports rose 22.7% to $111.36 billion, and the country’s imports were up 20.1% to $86.38 billion.  China has its own problems however, as its inflation has now spiked to 6.5%, its highest point in more than a decade. Beijing has already raised interest rates four times this year, but the moves have failed to curtail the nation’s rapid economic acceleration.

Related News and Story Links:

• Money Morning News: China’s Blazing Economy Dema
• Money Morning News: China Insists It Won’t Dump its Dollarsnds Fourth Rate Hike in Five Months.
• Money Morning News: As China Soars, Prices Are Rising More Than Most Realize..
• Money Morning News Analysis: Are the U.S. and China Headed for an All-Out Trade War?

China sold $79 billion in bonds — the world’s biggest bond sale — to help fund a state-run investment company that will help manage its $1.33 trillion in foreign-exchange reserves, also the world’s biggest.

China’s Ministry of Finance said in a statement yesterday (Wednesday) that it sold the 10-year bonds carrying 4.3% yields to the state central bank. Future sales may include bonds with terms of 15 or more years.

As of June, about 70% of China’s forex reserves are believed to be held in U.S. dollar-dominated paper, mostly government bonds.

The statement said the bond sale will “help reduce the size of foreign-exchange reserves and improve returns,” and noted that the longer maturities will “diversify bond types and the duration structure.”

The state-run company, China Investment Co. Ltd., will diversify – and maximize returns on – a portion of China’s foreign-exchange reserves. It has been in its formative stages for months, but made a significant purchase when it anted $3 billion for a 10% stake in New York’s Blackstone Group LP (NYSE: BX), in May. Since Blackstone’s June 22 IPO, the private equity firm’s stock price has dropped 34.5%, as worldwide credit problems continue to grow.

The credit crisis may get worse before it gets better in the coming months, as more than 2 million adjustable rate mortgages (ARMs) are ready to “re-set” – industry parlance for boosting their rates.
Credit worries pummeled stocks worldwide again yesterday. The Dow Jones Industrial Average dropped 207.61 points, or 1.6%, to close at 13,028.92 – just above the “psychologically important” barrier of 13,000, which was first traversed back in April. The Standard & Poor’s 500 Index fell 26 points (1.8%), and the Nasdaq Composite lost 43 points (1.7%). The FTSE 100 index dropped 1.1% and the Dow Jones Stoxx 600 index fell 1.2%, its third drop in four sessions.

Credit fears drove the declines, although lackluster reports from several retailers, including Wal-Mart Stores Inc. (NYSE: WMT) and Home Depot Inc. (NYSE: HD) put a chill in investors’ confidence about consumers.

In a move some economists fear will cause defaults to soar and the U.S. economy to stumble, borrowers who took out these ARMs in 2004 and 2005 – with low introductory “teaser” rates – will now see those rates climb by 35% or more. [For a Money Morning analysis of the credit market problems, click here.]

Two years ago as the housing market boomed, the number of sub-prime ARMs being underwritten was peaking just as lending standards were bottoming out. That means many lenders approved borrowers with questionable credit and little or no proof of income or assets. These buyers may have struggled just to make the low teaser rate payments and will now be saddled with higher adjusted rates.  It’s likely this will cause another large spike in delinquencies.

Also the Securities and Exchange Commission is looking into whether or not many Wall Street firms have been hiding losses from the sub-prime meltdown. According to the Wall Street Journal, regulators will be investigating brokerage firms for any signs of impropriety concerning their mounting losses.

Shares of VMWare Inc. (NYSE: VMW) soared 76% in their first day of trading yesterday (Tuesday), making the Palo Alto-based data-virtualization company the best-performing initial public offering of the year.

Prior to the VMWare offering, the top-performing U.S.-listed IPO was Fortress Investment Group LLC (NYSE: FIG), which climbed 67.6 percent on its Feb.8 market debut.

A unit of data-storage giant EMC Corp. (NYSE: EMC), VMWare raised nearly $1 billion by selling 33 million shares at $29 each. VMWare specializes in a process known as "virtualization." It enables a single computer to function like multiple machines, which means companies can spend less on equipment and energy in their data centers. The rising demand for virtualization software is expected to generate more than $1 billion in sales for VMWare in just this year alone, but many industry analysts say that the greatest profit opportunities for this sector are still ahead.

In a report released yesterday, Jefferies & Co. analyst Katherine Egbert said VMWare appears to be traveling on the same lucrative trajectory as two of the software sector’s biggest success stories: Microsoft Corp. (Nasdaq: MSFT) and Oracle Corp. (Nasdaq: ORCL), two software makers whose combined market value 21 years after their IPOs is a combined $364 billion.

With that promise, it’s no wonder that the company said late last night that the underwriters of its initial public offering had exercised a “green shoe” – or over allotment option – to buy another 4.95 million Class A shares. These shares are in addition to the 33-million share offering of yesterday, and will be bought at the offering price of $29 each.

"This is certainly more than just about anyone expected," Gartner Inc. analyst Tom Bittman told The Associated Press. "Maybe the market is a little giddy."

On Monday, VMWare sold 33 million shares at $29. After the bell rang, the stock had rocketed to $50, on huge volume. It climbed to the $55 mark early afternoon, finally closing at $51 in regular trading. In all, more than 38 million shares changed hands. Citing a report by IPOhome.com, the AP reported that VMWare’s increase from the IPO price was the best first-day gain since last December, when the shares of a smaller high-tech company, Isilon Systems Inc., rose by 78 percent, according to IPOhome.com.

Investors are hoping that VMWare’s launch provides a much-needed kick to the tech sector, which has been down over 13.3% in the last month (the Standard & Poor’s 500 Index is down 7.6% in that span). However, those expectations were met with disappointment Tuesday as the tech sector continued its slide under the weight of the falling stock market.

VMWare is a spin-off of EMC (NYSE: EMC), the world’s No.1 maker of data-storage hardware. After making a name for itself in the ’90s tech boom, EMC bought VMWare for $635 million in 2004. In February, it decided to sell 10% of the unit, prompting chip-giant Intel Corp. (Nasdaq: INTC) to spend $218.5 million for a 2.5% stake in VMWare’s outstanding shares. Not too long later, Cisco Systems Inc. (Nasdaq: CSCO), the biggest maker of computer-networking equipment, bought $150 million in shares for a 1.6% stake.

Why the hype? VMWare’s software allows the powerful server computers that act as the brains and traffic cops of high-speed computer networks to run several different computer-software operating systems – including the Windows Vista system marketed by Microsoft. It will cut the costs of energy, labor and additional servers.

In its registration statement, VMWare said that its net income for the quarter ending June 30 was $34.2 million, more than double the profits of $15.2 million recorded for the same quarter a year earlier. Revenue soared 90% to nearly $297 million.

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