Page 1 of 2 CREDIT BUBBLE BULLETIN The funds are flowing By Doug Noland
Former US Treasury secretary Paul O'Neill commented that the "Fed put the punch
back into the punchbowl". For last week, the Dow and S&P500 gained 2.8%,
increasing year-to-date gains to 10.9% and 7.6%. The Morgan Stanley Cyclical
index jumped 4.3% (up 18.2% year-to-date), and the Morgan Stanley Consumer
index gained 3.1% (up 6.6%).
Utilities rose 2.3% (up 9.7%), and the transports added 0.6% (up 5.9%). The
small cap Russell 2000 rallied 3.1% (up 3.2%), and the S&P400 Mid-Cap index
gained 2.2% (up 9.6%). Technology stocks added to already strong gains. The
NASDAQ100 rose 2.4% (up 16.7%), and the Morgan Stanley High Tech index gained
2.6% (up 16.7%). Semiconductors increased 2.9% (up
7.1%). The Street.com Internet index advanced 2.0% (up 15.7%), and the NASDAQ
telecommunications index jumped 3.3% (up 19.9%).
Broker/dealers (down 4.0%) and banks (down 7.7%) both gained 2.3%. With bullion
rising $23.90, the HUI gold index surged 9.4% (up 18.2%). The Fed threw the
yield curve for a loop. Three-month T-bill rates sank 23 basis points last week
to 3.76%. Two-year US government yields were unchanged at 4.04%.
Meanwhile, five-year yields rose 12 basis points to 4.29% and 10-year Treasury
yields 16 basis points to 4.62%. Long-bond yields ended the week 16.5 basis
points higher at 4.885%. The 2-year/10year spread ended the week at 58 basis
points, the high since May '05. The implied yield on three-month December '07
Eurodollars fell 15 bps to 4.74%. Benchmark Fannie Mae MBS yields rose 5 basis
points to 5.95%, this week meaningfully outperforming Treasuries. The spread on
Fannie's 5% 2017 note narrowed 3 to 46, and the spread on Freddie's 5% 2017
note narrowed 3.5 to 45.6.
The 10-year dollar swap spread declined 3 to 64.3. Corporate bond spreads
narrowed. The spread on a junk index ended the week 6 basis points narrower.
Investment grade debt issuers included Tyco $2.05bn, Marathon Oil $1.5bn,
Suncor $1.15bn, Rockies Express $600 million, Leucadia National $500 million,
Southwest Air $500 million, Weyerhaeuser $450 million, Liberty Properties $300
million, Avery Dennison $250 million, and San Diego G&E $250 million. Junk
issuers included RH Donnelley $1.0bn, Compucom Systems $210 million and
Baseline Oil $165 million.
Convert issuers included Powerwave Technologies $150 million and Equinix $350
million. Foreign dollar bond issuance included Barclays $2.0bn, Glitnir Bank
$1.0bn, Rede Empresas Energia $575 million, and Canadian National Railroad $550
million.
German 10-year bund yields surged 19 bps to 4.36%, as the DAX equities index
jumped 4.0% (up 18.2% year-to-date). Japanese 10-year "JGB" yields rose 13.5
bsais points to 1.675%. The Nikkei 225 rose 3.1% (down 5.3% year-to-date).
Emerging debt markets were mixed to higher, while equities went higher and
higher. Brazil's benchmark dollar bond yields fell 10 basis points to 5.85%.
Brazil's Bovespa equities index burst 5.7% higher (up 30% year-to-date). The
Mexican Bolsa gained 1.6% (up 15.6% year-to-date).
Mexico's 10-year $ yields rose 7 basis points to 5.56%. Russia's RTS equities
index jumped 4.3% (up 5.4% year-to-date). India's Sensex equities index surged
6.2% (up 20.1% year-to-date). China's Shanghai Composite index added 2.7% to
close at yet another record high (up 104% year-to-date and 213% over the past
year).
Freddie Mac posted 30-year fixed mortgage rates rose 3 basis points last week
to 6.34% (down 6 basis points year-on-year). Fifteen-year fixed rates added one
basis point to 5.98% (down 8 basis points year-on-year). One-year adjustable
rates dipped one basis point to 5.65% (up 11 basis points year-on-year).
Bank Credit increased $11.4 bn (week of 9/12) to a record $8.924 TN. After a
seven-week surge of $284bn, bank credit has now increased $628bn year-to-date,
or a rate of 10.6%. For the week, Securities Credit surged $26.9bn. Loans and
leases dropped $15.5bn to $6.528 TN (seven-week gain of $200bn). C&I loans
gained $12.15bn and real estate loans added $0.2bn. Consumer loans fell
$10.0bn. Securities loans were little changed, while Other loans dropped
$17.1bn. On the liability side, (previous M3) Large time deposits supped
$23.9bn.
M2 (narrow) "money" fell $17.3bn to $7.349 TN (week of 9/10). Narrow "money"
has expanded $305bn year-to-ddate, or 6.1% annualized, and $473bn, or 6.9%,
over the past year. For the week, Currency added $0.3bn, while Demand &
Checkable Deposits sank $49bn. Savings deposits jumped $34.2bn, and small
denominated deposits added $1.1bn. Retail money fund assets declined $3.7bn.
Total Money Market Fund Assets (from Inves. Co Inst) dipped $3.1bn to $2.825
TN. Money Fund Assets have increased $443bn year-to-date, a 25.5% rate, and
$600bn over 52 weeks, or 26.9%.
Total CP dropped another $48bn to $1.869 TN, boosting the six-week decline to
$354.4bn. Asset-backed CP dropped another $15.9bn (6-wk drop of $244.5bn) to
$928.9bn. Year-to-date, total CP is now down $105.2bn, with ABCP declining
$155bn. Over the past year, Total CP is now down $13bn, or 0.7%.
Asset-backed Securities (ABS) issuance increased modesly to $7.2bn last week.
Year-to-date total US ABS issuance of $453bn (tallied by JP Morgan) is now
running 29% behind comparable 2006. At $209bn, year-to-date home equity ABS
sales are 49% below last year's pace. Year-to-date US CDO issuance of $260
billion is running 5% ahead of 2006 sales.
Fed Foreign Holdings of Treasury, Agency Debt (week ended 9/19) rose $6.2bn to
$1.987 TN. "Custody holdings" were up $235bn year-to-date (18.4% annualized)
and $314bn during the past year, or 18.8%. Federal Reserve Credit last week
declined $4.2bn to $853bn. Fed Credit has increased $0.8bn y-t-d and $24.1bn
over the past year (2.9%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi – were up $933bn y-t-d (26.5% annualized) and $1.153 TN y-o-y
(25.1%) to $5.743 TN.
Credit market dislocation watch
September 22 - Financial Times (James Politi): "KKR and Goldman Sachs yesterday
attempted to pull the plug on the $8bn buy-out of Harman International, the
high-end US electronics company, as the battle over the completion of deals
signed before the credit squeeze turned increasingly ugly. The move by KKR and
Goldman's private equity arm could prove to be a watershed moment for buy-out
firms that went on an extraordinary dealmaking binge earlier this year but are
now facing higher financing costs and a shaky economic outlook.
"It signals that in certain cases, private equity groups are willing to
sacrifice the reputational risk associated with abandoning deals, and the
danger of not being viewed as credible buyers in future takeovers, in order to
clear unwanted deals from their table in this cycle. KKR and Goldman told
Harman that they could walk away from the deal because of a "material adverse
change" in the contract - presumably a deterioration in the company's main
business of supplying audio systems to luxury carmakers such as Mercedes and
BMW. But Harman disputed the claim by KKR and Goldman, saying it 'disagrees
that a MAC has occurred or that it has breached the merger agreement'."
September 21 - Financial Times (Chris Giles and Peter Thal Larsen): "On Monday
evening Mervyn King believed the first real crisis of his Bank of England
stewardship had – as he put it to friends – been sorted. Beset by images of
customers rushing to withdraw their money from Northern Rock, Alistair Darling,
the chancellor, had offered depositors a blanket assurance that their cash was
safe. But within five days, Mr King's optimism had been proved comprehensively
and humiliatingly unfounded. In one of the most extraordinary weeks in British
banking history – one which saw the global credit squeeze spill on to the
nation's streets – the bank had on Wednesday performed an abrupt volte face. It
had decided to extend emergency lending against mortgage collateral to all
banks – a step that just 24 hours earlier the governor had privately ruled out.
As the week draws to a close the focus of account holders and bank chief
executives alike is on what happened in those missing hours. What persuaded the
Bank to capitulate and throw its own money and good name into rescuing
commercial banks from their own funding mistakes?"
September 21 - Financial Times (Javier Blas): "Gold reached its highest price
yesterday for almost 28 years at more than $735 a troy ounce. Investors rushed
to buy the yellow metal amid US dollar weakness and inflation concerns. Bullion
hit an intraday high of $738.30 an ounce, the highest level since February
1980, and was later trading at $737.35-$738.05 an ounce, up 15% this year. Gold
was at a high of $850 an ounce in January 1980. It reached $730 in May 2006,
which was a 26-year high. The price jump came after the US dollar fell to a
record low of $1.4087 to the euro. The US currency has sunk since the Federal
Reserve cut interest rates by 50 basis points to 4.75% on Tuesday in an attempt
to prop up economic growth."
September 21 - Financial Times (Michael Mackenzie in New York and Krishna Guha
and Eoin Callan): "The dollar plunged, government bond yields soared and the
price of oil hit a record high yesterday amid growing concern that interest
rate cuts by the Federal Reserve could stoke inflation. The gyrations came as
Ben Bernanke, Fed chairman, told Congress that the 50 basis point cut in rates
this week was a pre-emptive move to prevent market turmoil from harming the
economy. He said the Fed cut rates 'to try to get out ahead of the situation
and try to forestall potential effects of tighter credit conditions on the
broader economy'."
September 21 - Financial Times (Francesco Guerrera ): "Corporate America is
about to be hit by a new wave of business failures as the credit squeeze forces
weak, highly leveraged, companies to default on $35bn-worth of debt, Standard
& Poor's warned ... The credit rating agency said that the slowing economy
and ongoing liquidity squeeze put some 75 junk-rated companies, mostly in the
media, healthcare and consumer products sectors, at a high risk of default over
the next 15 months. John Bilardello, S&P's head of corporate ratings, said
the level of defaults could turn out to be much higher if the economy and the
debt markets were to worsen further in 2008."
September 21 - Financial Times (Paul J Davies): "Structured investment vehicles
(SIVs) will remain under pressure if there is not a quick improvement in
short-term funding markets, and more vehicles are likely to face ratings
downgrades, according to Derivative Fitch, the rating agency. The agency said
it did not expect a short-term improvement in either the short-term commercial
paper environment or for the illiquidity and re-pricing of credit risk in the
market. SIVs, which aim to profit from the difference between cheap short-term
borrowing rates in the money markets and the higher returns available on longer
term debt investments, have come under pressure during the turmoil of recent
months."
Currency watch
September 21 - Financial Times (Peter Garnham ): "The Canadian dollar rose to
parity against the US dollar for the first time since 1976 yesterday, buoyed by
soaring oil prices and broad-based weakness in the greenback. Adam Cole, at RBC
Capital Markets, said he expected the Canadian dollar to continue its upward
path. 'Canada produces the commodities the world wants - it is still the number
one commodity play among major currencies,' he said." The dollar index sank
1.3% to 78.60. On the upside, the New Zealand dollar increased 5.3%, the
Australian dollar 4.0%, the Brazilian real 2.8%, the South African rand 3.1%,
the Canadian dollar 2.7%, and the Swedish krona 2.7%. On the downside, the
Japanese yen declined 0.3%. The Euro gained 1.6% to a record high.
Commodities watch
For last week, Gold jumped 3.4% to $731.5 and Silver 7.2% to $13.62. December
Copper rose 5.9%. November crude ended the week at a record $81.62, up $3.53 on
the week. October gasoline gained 3.5%, while October Natural Gas declined
3.2%. December Wheat was little changed. For the week, the CRB index surged
3.8% (up 8.4% year-to-date), and the Goldman Sachs Commodities Index (GSCI)
jumped 3.5% (up 25.5% year-to-date).
Japan
watch September 18 – Bloomberg (Toru Fujioka): "Japanese
households' assets rose to a record in the three months ended June 30, as
individuals earned higher returns on stocks, mutual funds and bonds. The value
of households’ assets rose 2.9% to 1,555 trillion yen ($13.5 trillion) from a
year earlier, the Bank of Japan said ..."
September 19 – Bloomberg (Kathleen Chu): "Land prices in Japan's three largest
metropolitan areas rose for a second-straight year, and nationwide commercial
land prices rose for the first time in 16 years as the country's property
market continued its rebound. The value of property in the Tokyo, Osaka and
Nagoya regions gained 5.1% on average for the year ended June 30 ..."
China watch
September 19 – Market News International: "China's retail sales are expected to
rise 15% to 8.8 trln yuan in 2007, the Ministry of Commerce's Department of
market regulation said ... In the first eight months, retail sales were up
15.7% ..."
India
watch September 21 – Bloomberg (Cherian Thomas): "India may cut
cash held by lenders for the fourth time this year as currency sales by the
central bank aimed at curbing rupee gains flood the economy with excess money,
Credit Suisse AG and Nomura Securities Co said. India's currency has
strengthened beyond 40 per dollar for the first time in nine years amid
unprecedented overseas investment in local shares. The central bank has
injected rupees worth $43.1 billion in the nine months to July, almost three
times the amount in previous nine months."
Asia watch
September 21 – Bloomberg (Perris Lee): "Taiwan's export orders grew at a slower
pace in August as a housing recession eroded demand from the US, the island's
second-biggest overseas market. Orders for shipment overseas rose 16.32% from a
year earlier, slowing from July's 23.49% gain ..."
September 21 – Bloomberg (Karl Lester M. Yap): "Philippine money supply grew
less than 20% in August, central bank Deputy Governor Diwa Guinigundo told
reporters ..."
Unbalanced global economy watch
September 18 – Bloomberg (David M Levitt and Bryan Keogh): "The world economy
'is probably at its scariest point since the Depression' as fallout from the US
subprime mortgage crisis crimps access to credit, said Ethan Penner, a pioneer
of the $600 billion commercial mortgage-backed securities market in the early
1990s. 'We're probably at the closest point to a big meltdown, a
depression-type meltdown than we have been in our lives,' said Penner ... now a
principal at real estate fund management firm Lubert-Adler Partners LP ... The
US housing market is an 'unmitigated disaster' ... As foreclosures rise,
lenders will try to sell the properties they acquire at depressed prices,
dragging the market down further, he said."
September 19 – The Wall Street Journal Europe: "UK housing boom has been a long
time coming, but it has finally arrived. The 3% August drop in the average
house price, as reported by property Web site Rightmove, certifies the
beginning of the new era. The end comes when prices are too high by any measure
... The Bank of England tried to prick the bubble with rhetoric and higher
interest rates. But its tactics proved much less potent than the credit
crunch."
September 19 – Bloomberg (Fergal O’Brien): "Europe's manufacturing and service
industries grew at the slowest pace in two years this month after paralysis in
the credit markets hurt banks, adding to evidence economic growth is waning."
Latin America watch
September 19 –Dow Jones (Anthony Harrup): "First it was tortillas, then milk,
and now Mexican bread prices are going up, corroborating the central bank's
persistent warnings about food prices threatening its inflation outlook.
Mexico's baking industry confirmed this week that it plans to raise bread
prices by 15% to 17% on average to recoup rising costs of wheat flour and other
raw materials. Antonio Arias Ordonez, president of the Mexican Bakeries
Industry Chamber, said he expects all of the country’s roughly 26,500 bread
shops to raise their prices. 'It would be unusual if they didn't after raw
materials costs have risen between 55% and 65%' Arias said ... Apart from
flour, prices of margarine, eggs and sugar, have also been rising, he added."
Bubble economy watch
September 21 - Financial Times (Francesco Guerrera ): "Victory lap or last
hurrah? Buy-out titans and hedge fund managers stormed the citadel of US wealth
last year, barging their way into the Forbes 400 annual list of richest
Americans on the back of buoyant capital markets and record merger activity.
Nearly half of the 45 new entrants in the magazine's latest tally of US
billionaires – which was topped once again by Bill Gates – came from the
neighbouring worlds of private equity and hedge funds. But before Connecticut
yacht dealers and Palm Beach property agents begin bombarding 'new super rich'
such as Carlyle's David Rubenstein and hedge fund manager John Paulson with
phone calls, they might want to consider the ephemeral nature of fortunes
gained in such volatile industries."
September 18 – Bloomberg (Carlyn Kolker): "US companies increased total
compensation for their chief in-house lawyers by 14% in 2007, according to a
survey by legal consultant Altman Weil Inc., which cited competition for legal
talent ... Median total pay for chief legal officers was $457,000, according to
the survey ... Salaries rose 5.8% to $300,000, and bonuses were up 43% to
$157,000. 'This may reflect a need to counter the dramatic increases in law
firm starting salaries as general counsel compete with law firms for talent,'
Altman Weil consultant James Wilber said ... Several New York-based law firms
raised pay for first-year attorneys to $160,000 this year."
Central banker watch
September 18 – Bloomberg (Bob Willis and Tom Keene): "Conrad DeQuadros, senior
economist at Bear Stearns & Co. in New York, comments on the Federal
Reserve's decision yesterday to cut its benchmark interest rate to 4.75% from
5.25%. In a note to clients, he and Bear Stearns chief US economist John Ryding
called yesterday a 'black day' for the Fed. Dequadros spoke in an interview ...
On the language in his note: It is strong language. For the Fed to cut rates
aggressively while citing that inflation risks remain, that risks the Fed's
inflation fighting credibility ... There are also issues of credibility about
Fed communications in that there was no signal from Fed officials that such a
move was
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