30nov09 wilmot shadows 2parte cs

8/14/2019 30nov09 Wilmot Shadows 2parte Cs

http://slidepdf.com/reader/full/30nov09-wilmot-shadows-2parte-cs 1/15

ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES ARE IN THE DISCLOSURE APPENDIX. FOR OTHER

IMPORTANT DISCLOSURES, PLEASE REFER TO https://firesearchdisclosure.credit-suisse.com.

Market Focus

Global Strategy

Long Shadows: The Sequel

“There can be no doubt that besides the regular types of the circulating medium

….there exist still other forms of media of exchange which occasionally or

permanently do the service of money.

Now while for certain practical purposes we are accustomed to distinguish these

forms of media of exchange from money proper as being mere substitutes for

money, it is clear that, other things equal, any increase or decrease of these

money substitutes will have exactly the same effects as an increase or decrease of the quantity of money proper…”.

Friedrich Hayek, Prices and Production 1931 - 1935.

We update our estimates and analysis of the “shadow money stock” in the US.

Direct bank lending only accounts for about half of total private credit, which

means that incorporating shadow money and credit into traditional analysis is

absolutely essential in assessing inflation and deflation risks.

We draw four main conclusions:

First, there is absolutely NO evidence that the unprecedented increase in public

deficits and the Fed’s balance sheet has yet created an inflationary overhang of excess liquidity. The effective money stock (M2 plus shadow money) has

grown only 2.5% p.a. since February 2007.

Second, restoring funding liquidity to the financial system was the right thing to

do, and has almost certainly prevented a deflationary disaster.

Third, just as the devastating wholesale funding run on the shadow banking

system prefigured a collapse in commercial bank willingness to lend, it is now

leading the way in restoring credit availability to markets and the economy.

Effective money growth has accelerated in the last six months.

Fourth, huge volatility in the oil price over the past 18 months has led to much

larger swings in the effective money stock measured in real terms. Equity

prices and production have mirrored those swings quite closely. Going forward,

we expect somewhat slower real growth in effective money.

Special Note: on Tuesday 1st December, Jonathan Wilmot will be a guest editor

on FT Alphaville, the opinion and news blog of the Financial Times. Our posts

will appear simultaneously on the global strategy blog page.

30 November 2009Fixed Income Research

http://www.credit-suisse.com/researchandanalytics

Contributors

Jonathan Wilmot

+44 20 7888 3807

[email protected]

James Sweeney

+1 212 538 4648

[email protected]

Matthias Klein

+1 212 325 1790

[email protected]

Aimi Plant

+44 20 7888 7054

[email protected]

Wenzhe Zhao

+44 20 7883 8189

[email protected]

http://www.credit-suisse.com/globalstrategyblog

http://www.credit-suisse.com/globalstrategyblog



30 November 2009

Market Focus 2

The Dark Side of the Moon

In May, we showed that a rising public debt and a bigger Fed balance sheet were

substituting for a collapse in private debt, lending, and leverage. We presented a

framework for quantifying this and estimated that the huge expansion of the monetary

base and of public debt (public shadow money) had merely offset a sharp contraction of

private shadow money.

This broad conclusion remains true today: our measure of the US effective money stock,

which includes bank deposits (M2) plus public and private shadow money, is up 6.8%

since Q1 2007, just before the financial crisis began. For comparison, nominal GDP has

risen 3.4% over the same period (Exhibits 1 & 2 below). All of this modest excess growth

of money reflects the 3.7% growth in effective money since April.

Restoring funding liquidity has allowed private shadow money to rebound by about $1

trillion over the past six months. (Recall that it plunged some $3.6 trillion during the crisis.)

Public shadow money is up just $150bn since April, after soaring $3 trillion in the crisis.

Further credit healing should allow public shadow money growth to slow further, or even

contract as the private balance sheet begins to function again.

If we are correct, extreme opinions about both inflation and deflation are simply not

supported by the facts, and stem from not understanding how the modern financialsystem really works, and so looking at incomplete measures of money and credit.

The error involves too much focus on commercial bank assets and deposits, which no

longer dominate either credit flows or liquid, money like assets. Like the dark side of the

moon, shadow money is hard to see. But just because we can’t always see it does not

mean we should ignore it.

No scientist would make such an elementary error as ignoring the gravitational pull of

invisible things, and nor should participants in financial markets. Unfortunately, a great

deal of bad analysis and potentially bad investment decisions are currently flowing from

making exactly this kind of mistake.

Understanding what is happening to shadow money and credit is therefore of profound

importance to us all.

Exhibit 1: Total Effective Money Stock and Nominal GDP

10000

15000

20000

25000

30000

35000

Feb-07 Jul-08 Nov-08 Apr-09 Oct-09

1.7

1.75

1.8

1.85

1.9

1.95

2

2.05

2.1

2.15Effective Money

Nominal GDP

Ratio of Effective Money to Nominal GDP

$ Bn

Source: Credit Suisse



30 November 2009

Market Focus 3

Fixing a Deflationary Hole

Last spring, we described the collapse of private shadow money, which includes non-

agency RMBS, CMBS, investment grade corporate bonds, high yield bonds, and other

ABS. We calculated shadow money for each type of debt by multiplying an estimate of the

current market value by one minus the prevailing repo market haircut.

For example, we calculated that the outstanding investment grade bond stock had a

market value of $5811bn and a median repo haircut of 25%, so it represented shadowmoney of $4359bn ($5811 * (1 – 25%)).

Exhibit 2:US Effective Money (Public versus Private)

Billion $

10000

11000

12000

13000

14000

15000

16000

17000


Private Effective Money = Inside Money + Private Fundable Debt

Public Effective Money = Outside Money + Government-backed Debt


Exhibit 3: Cumulative Change in Money Stocks

Trillion $

-5

-4

-3

-2

-1

0

1

2

3

4

5


Public Effective Money

Inside Money (Bank Deposits minus Reserves)

Private Shadow Money


Private shadow money fell from $9.5tr to $5.9tr between early 2007 and last April. How

big was this $3.6tr fall? Colossal: roughly 40% of the broad M2 money stock, which is

around $8.4tr, and nearly 15% of the effective money stock. And initially at least bigger

than the public sector response, leading to a slight fall in effective money.



30 November 2009

Market Focus 4

Falling debt prices, negative net issuance, and sharply rising repo haircuts caused the

reduction. Before the crisis, these securities were so easy to borrow against that their

owners almost didn't need cash. It is in this sense that we say these bonds were "money,"

and this is why the collapse of the moneyness of collateral generally posed such gigantic

risks to the financial system.

As Hayek (and others) knew many years ago, it is not a great logical leap to call private

debt instruments money. Most of the M2 money stock is "inside money," bank debt todepositors, not claims on the government. Milton Freidman himself focused on the M2

money stock in his most famous work, acknowledging the obvious fact that private sector

debt could be money (see Exhibit 4). Our framework takes account of that in a world with

shadow banks, and where collateral itself can mimic money.

The bank share of household credit has fallen from 79% in 1973 to 30.4% today. (See

Exhibit 5.) The M2 money stock therefore once backed around three quarters of

household debt, where now the fraction is nearer a third. Shadow banks have filled the

breach. Just as we view credit assets as a whole without ignoring non-bank assets, we

should be looking at liabilities – money – in a unified way too.

Exhibit 4: US Money Supply

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08

M2

Monetary Base

Outside Money = Monetary Base

Inside Money = M2 - Monetary Base

$Bn

Source: Credit Suisse, Datastream

Exhibit 5: US Bank Share of Credit Outstanding

0%

20%

40%

60%

80%

100%

Mar-52 Mar-62 Mar-72 Mar-82 Mar-92 Mar-02

Bank Share of Household Mortgage Credit

Bank Share of Consumer Credit

Bank Share of Total Household Credit Market

Source: Credit Suisse, Haver Analytics



30 November 2009

Market Focus 5

Our analysis suggests that aggregate credit has begun to recover from the crisis. This is

clear either from the asset (total debt) side or the liability (funding or money) side.

The return of credit began with the improvement in money markets and was clearly helped

by explicit and implicit involvement of governments in unsecured lending markets. Exhibit

6 below shows the TED and LIBOR/OIS spreads have returned to normal levels quickly.

The $1tr rebound in private shadow money since April has been driven by a reversal of all

three factors that caused the collapse. First, prices of debt securities have risen sharply(see Exhibit 7), especially for lower corporate debt, and spreads have collapsed.

Second, issuance of private sector debt has picked up for corporate bonds and some

asset-backed securities. (See Exhibits 10-12.)

Third, and importantly, repo market haircuts have started to come down. Although

demand for financing risky debt purchases is not yet high – perhaps unsurprising with

spreads still generally elevated – the availability of leverage and cash against collateral

has sharply and rapidly recovered. This mimics the behaviour of call money rates backed

by equity collateral after 19th century banking panics.

Exhibit 6: Funding Liquidity Indicator

(Ted Spread + Libor-OIS, Log Std Dev)

-3

-2

-1

0

1

2

3

4

5

6

7

8

86 88 90 92 94 96 98 00 02 04 06 08 Source: Credit Suisse

Exhibit 7: Leverage Loan and High Yield Price Indices

60

65

70

75

80

85

90

95

100

10/17/07 3/12/08 7/22/08 11/25/08 4/7/09 8/13/09

CDX HY IndexPrice

LCDX Price


Meanwhile, public shadow money (treasuries, agencies, and agency MBS) growth has

slowed. It has risen by just $150bn since April, compared with a $3tr increase between

early 2007 and this April, reflecting the huge fiscal stimulus and the growth of the RMBS

market as a proportion of total new mortgage issuance. Of course, that earlier growth in

public shadow money represented a concerted effort by the public sector to fill the gaping

hole opened by the collapse of private debt markets.



30 November 2009

Market Focus 6

The recent small increase in public shadow money is due to offsetting underlying factors.

The treasury bond stock has increased and there have been small declines in public debt

haircuts. However, the agency bond stock has declined and outstanding agency

mortgages also have declined, reflecting weak demand for new mortgages. We subtract

the Fed's purchases of MBS, treasuries and agencies from public shadow money because

quantitative easing is a substitution of outside (base) money for shadow money, not a net

creation of new liquid assets.

It is good news that shadow money is recovering and the recovery is being done by the

private sector, not governments. Of course, low cash rates and government intervention

in some markets have been essential to stabilise the system, but if economic growth

returns, these public sector crutches are unlikely to be necessary for long. Private credit

markets will increasingly be able to stand on their own.

Credit Healing Led By Shadow Banks

Chairman Bernanke acknowledged recently that credit was beginning to flow again in

parts of the economy.

"Interbank and other short-term funding markets are functioning more normally; interest

rate spreads on mortgages, corporate bonds, and other credit products have narrowed significantly; stock prices have rebounded; and some securitization markets have resumed

operation. In particular, borrowers with access to public equity and bond markets,

including most large firms, now generally are able to obtain credit without great difficulty.

Other borrowers, such as state and local governments, have experienced improvement in

their credit access as well ."

Of course, it would be quite wrong to suggest that this improvement in securitised lending

to better quality borrowers reflects a full credit recovery. It is, however, likely to

“foreshadow” a more general improvement in credit conditions.

For now aggregate credit demand remains weak, even as supply starts to improve. Even

within the shadow banking nexus, total repo market activity has not recovered significantly

in volume terms. Who needs significant leverage when yields on risky assets are still

somewhat elevated? Competition to finance hedge funds has however clearly beenreflected in better repo terms recently, meaning that potential leverage could increase as

and if economic conditions improve further.

More obviously, credit is not flowing (for both demand-side and supply-side reasons) to

commercial real estate, non-agency mortgage lending, and small business lending.

Of course, most commercial mortgages and small business loans, and some non-agency

(jumbo) mortgages are not securitized, and so this partly reflects the commercial banks’

current extreme caution with their balance sheets. The primary reason for this, in our view,

continues to be banks' concern about the value of real estate collateral (see Exhibit 11),

which have now overshot their long-term trends on the downside by just as much or more

than they overshot on the upside before.



30 November 2009

Market Focus 7

Exhibit 8: Average Existing House Prices

6.2

6.4

6.6

6.8

7.0

7.2

7.4

7.6

Jan-68 Jan-72 Jan-76 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08

Real Average Existing House Price (log scale)

Real Case-Shiller Composite Index (log scale)

Real OFHEO/FHFA House Price Index (log scale)

Trend = 1.5% per

annum


Exhibit 9: US Bank Assets: Loans and Leases

6000

6200

6400

6600

6800

7000

7200

7400

1/5/07 7/5/07 1/5/08 7/5/08 1/5/09 7/5/09


Indeed, if you look at average existing house prices in real terms, they recently bottomed

out some 5 standard deviations below their 40-year trend. Nothing remotely like the

recent crash has occurred before, reflecting the much greater proportion of foreclosures

and forced sales when securitised loans go bad.

It will take time to chew through the backlog of potential foreclosures, and many analysts,

including commercial bank economists, think this supply overhang will lead to renewed

price falls. Against that there is increasing awareness that renting the house back to

troubled borrowers is often a better solution for both lender and borrower than foreclosure,and affordability has never been higher.

For our purposes, however, the key point is that traditional commercial bank lending –

even to small businesses - will only recover properly if and when house prices rebound

more decisively. That in turn will take a combination of time to work through the bad

mortgage pool with improving income growth and job prospects as other parts of the credit

system start functioning again.



30 November 2009

Market Focus 8

Exhibit 10: Auto Loan and Credit Card ABS Issuance

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009 Q3 2009

Auto Loan ABS

Credit Card ABS

Source: Credit Suisse, SIFMA

Exhibit 11: US Investment Grade Issuance

0

50

100

150

200

250

300

350

Q1-2001 Q1-2002 Q1-2003 Q1-2004 Q1-2005 Q1-2006 Q1-2007 Q1-2008 Q1-2009 Q1-2010

Oct/Nov pace

$bnUS IG


Exhibit 12: US High Yield Bond Issuance

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

8/26/05 2/26/06 8/26/06 2/26/07 8/26/07 2/26/08 8/26/08 2/26/09 8/26/09

High Yield Issuance ($mn, 4WMA)




30 November 2009

Market Focus 9

The charts above illustrate that this is happening, and rather faster than most people

expected. There are other hopeful signs too. Private equity activity is showing signs of

picking up. A wave of mergers is expected. IPO activity has increased sharply in the past

few months and strong private debt issuance has meant larger companies have made

significant progress in terming out their debts, and indeed are paying down less ”reliable”

bank loans. In many cases, large companies also seem to be financing their smaller

suppliers directly, and non-bank pools of capital are seeking opportunities where banks

remain reluctant to lend.

The emergence of a bigger ABS market for repackaged small business loans would

certainly help the process. SBA loans with government insurance are already a major

market, but we would like to see securitization used more thoroughly in this sector. If

banks remain structurally unable or unwilling to do this lending, then shadow banks should

step in, perhaps with some government assistance.

Meanwhile, we consistently hear from institutional investors struggling with low nominal

yields that they would like to buy newly issued ABS securities, if only the volume were

there. To begin with, the securitised markets had needed Fed or government help to

recover, but that no longer seems to be the case.

If risk averse banks are unable to absorb new credit supply, it should surprise no one if

new shadow bank debt (asset backed securities) is issued to fund an increase of lendingto these sectors. That means more mortgage, credit card, and instalment loan-backed

ABS. Improved financing for all these types of debt bolsters demand and creates

moneyness in the new securities.

A further increase in the effective money stock, especially if it occurs via an expansion of

private shadow money, would be very beneficial for growth and would help lead the

economy to more normal levels of growth.

There are thus parallel money and credit universes currently. One includes mostly

securities and has rebounded sharply. The other includes mostly loans and has not.

Depending on one's perspective, credit markets might now look depressed, recovering, or

schizophrenic.

But the bottom line is actually very straightforward: it is the shadow banking system that isleading the recovery in credit supply to markets and the economy. And the further this

goes, the more likely that house prices will recover and the more conventional forms of

bank lending will recover also.

Bubble Talk and Regulatory Risks

This means, in effect, that the very system that collapsed before with such devastating

consequences is now the main hope for recovery!

That is both deeply confusing and a source of concern to many people. The common

political mantra is that Main Street needs to be protected from the greed of Wall Street.

While that may have had some truth to it before, it is not the issue now. The next wave of

securitization will be better priced and better rated than the old, and the collateral behind

those loans is for the most part cheap or very cheap, rather than expensive. Faulty

assumptions are much less likely next time around. And euphoric lending conditions, of

the type we saw in 2006/7, seem many years away at least.

Of course, there are those who contest this: the air is thick with talk of new bubbles and

the ”unjustified” recovery in the stock market. Most of this chatter is misconceived in our

view: indeed talk of bubbles is itself becoming a bit of a bubble.



30 November 2009

Market Focus 10

None of the metrics we have always looked at to identify major overshoots in assets prices

indicate that house prices, credit, or equities are expensive. Quite the opposite in fact,

especially for house prices, as noted above.

Simple as they are (they mostly rely on looking at outsized deviations from long-term

trends) these indicators flashed strong warning signals for equities in 1999/2000, and for

both housing and credit in 2006/7.

The grain of truth in the bubble discussion has to do with the possibility of overvaluing far distant cash flows when the appropriate discount rate is very low. For example, where

expected long-term earnings growth for a technology stock, or for emerging equities is way

above long-term bond yields (think China where the government has just issued a 50-year

bond with a nominal yield of 4.3%), simple arithmetic pushes towards extremely high

valuations, which will be highly vulnerable either to a small downward revision to expected

earnings growth, or a modest increase in the discount rate.

So while it may be true that low interest rates and bond yields create an underlying

tendency for bubble valuations to arise, there seems to us to be absolutely no clear

evidence that this has already happened for the most important asset classes in the US.

Nor that it is likely any time soon.

A rather greater threat to the markets and the economy right now, in our opinion, is that

the political climate and partial understanding of how the financial really works could lead

to well intentioned but harmful regulation or new legislation.

One example is a proposal recently introduced to Congress to limit the government’s

exposure to the guarantees of any financial institution or bank that should fail in the future.

The idea is that any lender to that institution or bank would have to take the first 20% of

any loss, with the government liable for the remaining 80%.

While this may seem sensible and prudent at first sight, the way the legislation seems to

be drafted suggests that repo transactions would be included under this general provision.

So the legislation could be interpreted as mandating a 20 percentage point increase in

haircuts on virtually all private repo transactions! That could have a devastating effect on

the recovery in funding liquidity, and the ability of the shadow banking system to function

as a conduit for credit.Or to put it differently, it would be the equivalent of slashing the shadow money stock at

the stroke of the pen, and in principle could restart the debt deflation spiral.

At the limit, therefore, this kind of legislation might just be the modern day equivalent of the

Smoot-Hawley Act in 1930, or the Fed’s 1931 decision to hike interest rates to defend the

dollar in the midst of the depression.

Fortunately we think there is enough understanding of the issues at stake in Washington

to make it very unlikely that the proposal will pass, but it does illustrate the potential

dangers of not understanding the shadow money story.

Revisiting the Pigou Effect

Finally, it is worth saying something about the effect of oil prices on the shadow money

story. Arthur Pigou (1877-1959) was a friend and mentor of Keynes, but also a fierce

intellectual critic of his General Theory . Though primarily a disciple of Alfred Marshall and

welfare economist, he is best known among macro-economists for his “classical” argument

against Keynes’s idea of the possibility of persistent under-employment.

The idea was that with unemployed resources, prices would fall and the real value of

money balances would rise, leading to higher spending and thus eventually to a recovery

in employment and income. (Curiously enough, a version of the Pigou effect plays an

important role in providing a solution to the problem of price level indeterminacy in some

modern New Keynesian models!)



30 November 2009

Market Focus 11

Because oil prices have been so volatile in recent years, so has headline inflation, veering

between five percent and minus 2 percent within the space of eighteen months.

The timing of these swings, moreover, means that the swing in the effective money stock,

when measured in real terms, was considerably larger than the swing in the nominal

effective money stock.

In effect, the Pigou effect actually deepened the deflationary shock to effective money in

the run-up to the crisis, and has led to a sharper rebound since. From February 2007 toNovember 2009, the real effective money stock fell by 10% - but since last November, has

rebounded by somewhat more, helped by the sharp fall in inflation, to stand just above its

pre-crisis level. The chart below plots the real effective money stock against the S&P 500,

but could equally have been plotted against industrial production or real GDP with very

similar results.

Exhibit 13: Real Effective Money vs. S&P 500

120

122

124

126

128

130

132134

136

138

140


600

700

800

900

1000

1100

1200

1300

1400

1500Real Effective Money

S&P 500 (RHS)


The good news is that the real effective money stock has so far recovered more fully thaneither the equity market or production and GDP, suggesting some room for catch-up. The

potentially less good news for asset markets is that the rebound in oil prices and headline

inflation will soon be slowing down the recovery in real money balances, as indeed will a

gradual move towards winding down QE. Equally, however, should the Saudis decide to

increase oil production in an effort to cap prices, and even bring them down a little, that

may be just as important at the margin in supporting further recovery in consumer

spending and real incomes as what the Fed does.

From now on, we will be closely monitoring the effective money stock in both nominal and

real terms. Any serious approach to inflation and deflation demands nothing less.

We thank Carl Lantz of the US Interest Rates Strategy Team for his continued contributions.



30 November 2009

Market Focus 12

Exhibit 14: US Public Credit Market Debt Issuance- Annual

0

500

1000

1500

2000

2500

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

YTD

0

500

1000

1500

2000

2500

3000

3500

4000

4500Treasuries

Agencies

Agency MBS

' '

$ Bn


Exhibit 15: US Private Credit Market Debt Issuance -Annual

0

200

400

600

800

1000

1200

1999 2001 2003 2005 2007 2009YTD

0

500

1000

1500

2000

2500

3000Corporate DebtConvertible DebtABSNon-Agency MBSTotal Debt, RHS

$Bn $Bn


Exhibit 16: US private Credit Market Debt Issuance - Monthly

0

20

40

60

80

100

120

140

160

180

200

J a n - 0 8

F e b - 0 8

M a r - 0 8

A p r - 0 8

M a y - 0 8

J u n - 0 8

J u l - 0 8

A u g - 0 8

S e p - 0 8

O c t - 0 8

N o v - 0 8

D e c - 0 8

J a n - 0 9

F e b - 0 9

M a r - 0 9

A p r - 0 9

M a y - 0 9

J u n - 0 9

J u l - 0 9

A u g - 0 9

S e p - 0 9

O c t - 0 9

Total Monthly US Private Credit Market

Debt Issuance

(Includes Corp Bonds, Convertibles, MBS,

ABS)




FIXED INCOME GLOBAL STRATEGY RESEARCH

Jonathan Wilmot, Managing Director

Chief Global Strategist

+44 20 7888 3807

Bunt Ghosh, Managing Director

Global Head of Fixed Income Research

+44 20 7888 3042

LONDON One Cabot Square, London E14 4QJ, United Kingdom

Paul McGinnie, Director

44 20 7883 6481

[email protected]

Aimi Plant, Associate

44 20 7888 7054

[email protected]

Wenzhe Zhao, Associate

44 20 7883 8189

[email protected]

NEW YORK 11 Madison Avenue, New York, NY 10010

James Sweeney, Director 1 212 538 4648 [email protected]

Matthias Klein, Associate1 212 325 [email protected]



Disclosure Appendix

Analyst CertificationJonathan Wilmot, James Sweeney, Matthias Klein, Aimi Plant and Wenzhe Zhao each certify, with respect to the companies or securities that he or sheanalyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) nopart of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

Important DisclosuresCredit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail, please refer toCredit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse’s policy is to publish research reports as it deems appropriate, based on developments with the subject issuer, the sector or the market thatmay have a material impact on the research views or opinions stated herein.The analyst(s) involved in the preparation of this research report received compensation that is based upon various factors, including Credit Suisse's totalrevenues, a portion of which are generated by Credit Suisse's Investment Banking and Fixed Income Divisions.Credit Suisse may trade as principal in the securities or derivatives of the issuers that are the subject of this report. At any point in time, Credit Suisse is likely to have significant holdings in the securities mentioned in this report. As at the date of this report, Credit Suisse acts as a market maker or liquidity provider in the debt securities of the subject issuer(s) mentioned in this report.For important disclosure information on securities recommended in this report, please visit the website at https://firesearchdisclosure.credit-suisse.com or call +1-212-538-7625.For the history of any relative value trade ideas suggested by the Fixed Income research department as well as fundamental recommendations provided bythe Emerging Markets Sovereign Strategy Group over the previous 12 months, please view the document at http://research-and-analytics.csfb.com/docpopup.asp?ctbdocid=330703_1_en . Credit Suisse clients with access to the Locus website may refer to http://www.credit-

suisse.com/locus .For the history of recommendations provided by Technical Analysis, please visit the website at http://www.credit-suisse.com/techanalysis.Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used,by any taxpayer for the purposes of avoiding any penalties.

Emerging Markets Bond Recommendation DefinitionsBuy: Indicates a recommended buy on our expectation that the issue will deliver a return higher than the risk-free rate.Sell: Indicates a recommended sell on our expectation that the issue will deliver a return lower than the risk-free rate.

Corporate Bond Fundamental Recommendation DefinitionsBuy: Indicates a recommended buy on our expectation that the issue will be a top performer in its sector.Outperform: Indicates an above-average total return performer within its sector. Bonds in this category have stable or improving credit profiles and areundervalued, or they may be weaker credits that, we believe, are cheap relative to the sector and are expected to outperform on a total-return basis. Thesebonds may possess price risk in a volatile environment.Market Perform: Indicates a bond that is expected to return average performance in its sector.Underperform: Indicates a below-average total-return performer within its sector. Bonds in this category have weak or worsening credit trends, or they may

be stable credits that, we believe, are overvalued or rich relative to the sector.Sell: Indicates a recommended sell on the expectation that the issue will be among the poor performers in its sector.Restricted: In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including aninvestment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.Not Rated: Credit Suisse Global Credit Research or Global Leveraged Finance Research covers the issuer but currently does not offer an investment viewon the subject issue.Not Covered: Neither Credit Suisse Global Credit Research nor Global Leveraged Finance Research covers the issuer or offers an investment view on theissuer or any securities related to it. Any communication from Research on securities or companies that Credit Suisse does not cover is a reasonable, non-material deduction based on an analysis of publicly available information.

Corporate Bond Risk Category DefinitionsIn addition to the recommendation, each issue may have a risk category indicating that it is an appropriate holding for an "average" high yield investor,designated as Market, or that it has a higher or lower risk profile, designated as Speculative and Conservative, respectively.

Credit Suisse Credit Rating Definitions

Credit Suisse may assign rating opinions to investment-grade and crossover issuers. Ratings are based on our assessment of a company's creditworthinessand are not recommendations to buy or sell a security. The ratings scale (AAA, AA, A, BBB, BB, B) is dependent on our assessment of an issuer's ability tomeet its financial commitments in a timely manner. Within each category, creditworthiness is further detailed with a scale of High, Mid, or Low – with Highbeing the strongest sub-category rating: High AAA, Mid AAA, Low AAA – obligor's capacity to meet its financial commitments is extremely strong; HighAA, Mid AA, Low AA – obligor's capacity to meet its financial commitments is very strong; High A, Mid A, Low A – obligor's capacity to meet its financialcommitments is strong; High BBB, Mid BBB, Low BBB – obligor's capacity to meet its financial commitments is adequate, but adverseeconomic/operating/financial circumstances are more likely to lead to a weakened capacity to meet its obligations; High BB, Mid BB, Low BB – obligationshave speculative characteristics and are subject to substantial credit risk; High B, Mid B, Low B – obligor's capacity to meet its financial commitments isvery weak and highly vulnerable to adverse economic, operating, and financial circumstances; High CCC, Mid CCC, Low CCC – obligor's capacity to meetits financial commitments is extremely weak and is dependent on favorable economic, operating, and financial circumstances. Credit Suisse's rating opinionsdo not necessarily correlate with those of the rating agencies.

http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html



https://firesearchdisclosure.credit-suisse.com/



http://research-and-analytics.csfb.com/docpopup.asp?ctbdocid=330703_1_en


http://www.credit-suisse.com/locus




http://www.credit-suisse.com/techanalysis

http://www.credit-suisse.com/techanalysis










References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse AG operating under its investment banking division. For more informationon our structure, please use the following link: https://www.credit-suisse.com/who_we_are/en/.This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other

jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates (“CS”) to anyregistration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of thematerial, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates.

The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitationof an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report aresuitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriateto your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you areadvised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change.Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to theextent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent

judgment. CS may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in thisreport. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that suchother reports are brought to the attention of any rec ipient of this report.CS may, to the extent permitted by law, participate or invest in financing transactions with the issuer(s) of the securities referred to in this report, perform services for or solicitbusiness from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investmentsrelated thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. CS may have, within the last three years, served asmanager or co-manager of a public offering of securities for, o r currently may make a primary market in issues of, any or all o f the entities mentioned in this report or may beproviding, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment. Additionalinformation is, subject to duties of confidentiality, available on request. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an assoc iate of CS or CS may be the only market maker in such investments.Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding futureperformance. Information, opinions and estimates contained in this report reflect a judgement at its original date of publication by CS and are subject to change without notice. Theprice, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments issubject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as

ADR’s, the values of which are influenced by currency volatility, effectively assume this risk.Structured securities are complex instruments, typically involve a high degree of r isk and are intended for sale only to sophisticated investors who are capable of understandingand assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limitedto, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risksinvolved in making such a purchase.Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losseswhen that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in

consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed.This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed anysuch site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS’s own website material) is providedsolely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such linkthrough this report or CS’s website shall be at your own risk.This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which isregulated in the United Kingdom by The Financial Services Authority (“FSA”). This report is being distributed in Germany by Credit Suisse Securities (Europe) LimitedNiederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States and Canadaby Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Braz il by Banco de Investimentos Credit Suisse (Brasil) S.A; in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, TheFinancial Futures Association of Japan, Japan Securities Investment Advisers Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriatelyauthorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, CreditSuisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, and elsewhere in the world by the relevant authorised affiliate of the above. Research onTaiwanese securities produced by Credit Suisse AG, Taipei Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia isauthorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This research may not conformto Canadian disclosure requirements.

In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, whichwill vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S.customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect atransaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S.This material is not for distribution to retail clients and is directed exclusively at Credit Suisse's market professional and institutional clients. Recipients who are not marketprofessional or institutional investor clients of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not regulated by theFSA or in respect of which the protections of the FSA for private customers and/or the UK compensation scheme may not be available, and further details as to where this maybe the case are available upon request in respect of this report.Copyright © 2009 CREDIT SUISSE GROUP AG and/or its affiliates. All rights reserved.

Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on whichinvestment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments.When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds,Japanese corporate bonds) from CS as a seller, you will be requested to pay purchase price only.

https://www.credit-suisse.com/who_we_are/en/




30nov09 wilmot shadows 2parte cs

Documents