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5 CREDIT BUBBLE
BULLETIN Crunch time By Doug Noland
predicament to increasingly feed
into the rest of the (finance-driven) real
economy. For one, expect huge finance-related job
cuts over the coming weeks and months. Second,
expect more broad-based tightening of Credit and
Financial Conditions. Third, expect the severity
of the unfolding housing bust to negatively impact
holiday spending and consumer confidence more
generally. In short, expect
intensifying recessionary forces. And,
importantly, expect all of the above to worsen
markedly when the stock market Bubble succumbs.
WEEKLY WRAP
For another
unsettled and volatile week, the Dow added 1.0%
(up 5.7% y-t-d) and the S&P500 0.3% (up 2.9%).
Economically-sensitive issues underperformed. The
Transports declined 0.9% (up 0.1%), and the Morgan
Stanley Cyclical index fell 2.0% (up 9.2%). The
"defensive" Morgan Stanley Consumer index gained
1.9% (up 6.9%), while the Utilities dipped 0.6%
(up 12.9%). The broader market was weaker. The
small cap Russell 2000 declined 0.4% (down 2.3%),
and the S&P400 Mid-Caps fell 1.1% (up 6.0%).
Technology stocks rallied somewhat. The NASDAQ100
gained 0.7% (up 16.6%), and the Morgan Stanley
High Tech index added 0.5% (up 9.0%). The
Semiconductors fell 2.3% (down 8.9%). The
Street.com Internet Index increased 0.5% (up
14.3%), and the NASDAQ Telecommunications index
jumped 2.6% (up 14.5%). The Biotechs gained 1.3%
(up 7.9%). The Broker/Dealers added 0.3% (down
13.6%), while the Banks declined 0.2% (down
20.5%). With Bullion sinking $45, the HUI Gold
index dropped 6.8% (up 21.8%).
Three-month
Treasury bill rates recovered 12 bps this week to
3.42%. Two-year government yields fell 7 bps to
3.33%. Five-year T-Note yields declined 6 bps to
3.69%, and ten-year yields dropped 5 bps to 4.16%.
Long-bond yields fell 7 bps to 4.535%. The
2yr/10yr spread ended the week at 83. The implied
yield on 3-month December ’08 Eurodollars dropped
11.5 bps to 3.785%. Benchmark Fannie Mae MBS
yields dipped only one basis point to 5.70%, again
this week markedly under-performing Treasuries to
the point of pushing agency MBS spreads to the
widest levels in five years. The spread on
Fannie’s 5% 2017 note widened 2 to 65, and the
spread on Freddie’s 5% 2017 note also widened 2 to
65. The 10-year dollar swap spread declined 1.7 to
74.3. Corporate bond spreads widened - especially
throughout the financial sector, as the spread on
an index of junk bonds ended the week 4 bps wider
to the widest level since September.
November 15 – Bloomberg (Fabio Alves):
“Citigroup Inc., the largest U.S. bank by assets,
was punished by investors in its first bond sale
since disclosing almost $17 billion in
credit-market losses. Citigroup yesterday sold $4
billion of 10-year notes at the highest yield
relative to benchmark interest rates in the bank’s
history… The 6.125 percent securities yield 190
basis points more than Treasuries of similar
maturity, up from 118 bps…in a similar offering by
New York-based Citigroup three months ago.”
Investment grade debt issuers included
Citigroup $4.0bn, Fiserv $1.75bn, United
Healthcare $1.6bn, Nstar Electric $300 million,
Potomac Electric $250 million, and Wisconsin
Public Service $125 million.
November 16 –
New York Times (Fabio Alves): “High-yield
corporate bond funds reported their biggest weekly
outflow in two years, according to AMG… Investors
pulled $632 million from high-yield bond funds…”
Junk issuers included Key Energy Services
$425 million, Windstream Regetta $210 million and
Gastar Exploration $100 million.
Convert
issuers included Prologis $1.2bn, and Affymetrix
$275 million.
Foreign dollar bond issuance
included Connacher Oil $600 million, Xstrata
Finance $500 million.
German 10-year bund
yields rose 2 bps to 4.105%, while the DAX
equities index declined 2.6% for the week (up
15.4% y-t-d). Japanese “JGB” yields fell 5.5 bps
to 1.47%. The Nikkei 225 dropped 2.8%, increasing
2007 losses to 12.0%. Emerging debt and equities
markets were curiously mixed. Brazil’s benchmark
dollar bond yields dropped 11 bps to 5.73%.
Brazil’s Bovespa equities index gained 1.6% (up
45.3% y-t-d). The Mexican Bolsa also gained 1.6%
(up 12% y-t-d). Mexico’s 10-year $ yields rose 5
bps to 5.51%. Russia’s RTS equities index fell
3.2% (up 13.9% y-t-d). India’s Sensex equities
index jumped 4.2% (up 42.9% y-t-d). China’s
Shanghai Exchange was little changed, sustaining
y-t-d gains of 98.7% and 52-week gains of 174%.
Freddie Mac posted 30-year fixed mortgage
rates were unchanged this week to 6.24% (and
unchanged y-o-y). Fifteen-year fixed rates
declined 2 bps to 5.88% (down 6bps y-o-y).
One-year adjustable rates were unchanged at 5.50%
(down 3bps y-o-y).
Ominously, Bank Credit
surged another $73.8bn during the week (11/7) to a
record $9.192 TN. Bank Credit has now posted a
16-week gain of $548bn (20.6% annualized) and
y-t-d rise of $896bn, a 12.5% pace. For the week,
Securities Credit jumped $62.7bn (3-wk gain
$102.7bn). Loans & Leases rose $11.1bn to a
record $6.694 TN (16-wk gain of $381bn). C&I
loans dipped $1.1bn (2007 growth rate 20.2)%. Real
Estate loans increased $2.4bn. Consumer loans rose
$4.5bn. Securities loans jumped $29.3bn, while
Other loans fell $23.8bn. On the liability side,
(previous M3) Large Time Deposits dipped $2.0bn
(5-wk gain of $134bn).
M2 (narrow) “money”
declined $20.3bn to $7.407 TN (week of 11/5).
Narrow “money” has expanded $363bn y-t-d, or 6.0%
annualized, and $454bn, or 6.5%, over the past
year. For the week, Currency dipped $0.6bn, while
Demand & Checkable Deposits increased $28.6bn.
Savings Deposits sank $54bn, while Small
Denominated Deposits added $1.9bn. Retail Money
Fund assets increased $3.4bn.
Total Money
Market Fund Assets (from Invest. Co Inst) jumped
$24.3bn last week to a record $3.025 TN. Money
Fund Assets have now posted an unprecedented
16-week gain of $442bn (59% annualized) and a
y-t-d increase of $643bn (30.5% annualized). Money
fund assets have posted a 52-week gain of $738bn,
or 32.2%.
Total Commercial Paper declined
$4.2bn to $1.862 TN. CP is down $361bn over the
past 14 weeks. Asset-backed CP added $3.4bn (14-wk
drop of $301bn) last week to $882bn. Year-to-date,
total CP has shrunk $112bn, with ABCP down $212bn.
Over the past year, Total CP has declined $68bn,
or 3.5%.
Asset-Backed Securities (ABS)
issuance increased somewhat to $5.0bn this week.
Year-to-date total US ABS issuance of $514bn
(tallied by JPMorgan) is running 35% behind
comparable 2006. At $219bn, y-t-d Home Equity ABS
sales are 56% off last year’s pace. Year-to-date
US CDO issuance of $285 billion is now 11% below
comparable 2006.
Fed Foreign Holdings of
Treasury, Agency Debt last week (ended 11/14) fell
$3.8bn to $2.029 TN. “Custody holdings” were up
$277bn y-t-d (17.8% annualized) and $325bn during
the past year, or 19.1%. Federal Reserve Credit
expanded $1.4bn to $866bn. Fed Credit has
increased $13.6bn y-t-d and $30.9bn over the past
year (3.7%).
International reserve assets
(excluding gold) - as accumulated by Bloomberg’s
Alex Tanzi – were up $1.149 TN y-t-d (27%
annualized) and $1.249 TN year-over-year (26.5%)
to a record $5.960TN.
Credit Market
Dislocation Watch November 13 – Bloomberg
(Carol Massar and Fabio Alves): “There’s a greater
than 50% probability that the financial system
‘will come to a grinding halt’ because of losses
from mortgages, Gregory Peters, head of credit
strategy at Morgan Stanley, said. The world’s
biggest banks and securities firms have written
down at least $45 billion in the value of assets
linked to subprime mortgages for the third quarter
after borrowers with poor credit histories failed
to keep up with payments. Structured investment
vehicles have defaulted on debt, forcing lenders
including Legg Mason Inc. and SunTrust Banks Inc.
to prop up their money-market funds to cushion
them from possible losses. ‘You have the SIVs, you
have the conduits, you have the money-market
funds, you have future losses still in the
dealer’s balance sheet in the banks,’ Peters said…
‘That’s all toppling at once.’ The risk of
systemic shock from the current subprime meltdown
is quite large in the near term, Peters said.
‘It’s an overarching concern that we have,’ he
said.”
November 15 – Bloomberg (Christine
Richard and Cecile Gutscher): “The crisis of
confidence in bond insurers that bestow top credit
ratings on debt sold by borrowers from the New
York Yankees to Citigroup Inc. may cost investors
as much as $200 billion. The AAA ratings of MBIA
Inc., Ambac Financial Group Inc. and their five
smaller competitors are being reviewed by Moody’s…
and Fitch Ratings. Without guarantees, $2.4
trillion of bonds may fall in value and some
issuers would get shut out of the capital markets.
‘We shudder to think of the ramifications,’ said
Greg Peters, head of credit strategy at…Morgan
Stanley… ‘You have politicians, taxpayers,
municipalities, states. It just opens up a
Pandora’s box. That is a huge destabilizing
force.’ For more than 20 years, the safety of
insurance has eased the way for elementary
schools, Wall Street banks and thousands of
municipalities to sell debt with unquestioned
credit quality. Now, mounting downgrades on
insured bonds backed by assets such as mortgages
are raising doubts about the stability of the
guarantors. …MBIA, the world’s largest, has a 27%
probability of default, and Ambac’s is 39%, prices
of derivatives show.”
November 16 – New
York Post (Robby Boyd): “Investment banks,
hammered by massive write-downs and trading losses
since the summer, are radically shifting business
plans of their mortgage-backed securities
departments - and it’s leaving hedge funds out in
the cold. Key asset- and mortgage-backed
securities brokers like UBS and RBS Greenwich
Capital have sharply curtailed their financing
activities to hedge fund clients over the past
several months. When hedge funds can’t get such
financing - also known
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