Page 2 of
5 CREDIT-BUBBLE
BULLETIN What
is left that is
sellable? Commentary and weekly
watch by Doug Noland
in five years. For the
year, the asset credit market instruments grew 40%
to $815 billion. Agency/MBS holdings doubled to
$278 billion. Corporate bonds increased $43
billion, security credit $33 billion, and
miscellaneous assets $35 billion. On the liability
side, security repos increased $79 billion to
$1.151 trillion. Due to affiliates was little
changed at $901 billion.
Taking up the
slack from faltering Wall Street securitization
markets, money market funds expanded an
unprecedented SAAR $820 billion during Q4 to
$3.053 trillion. For the year, money funds rose
$740 billion, or 32%. Examining the increase in
asset categories, repos increased $175 billion
(44%) to $570 billion, Open-market paper $103
billion (17%) to $711 billion, Treasuries
$95
billion (115%) to $178 billion, municipal debt
$103 billion (28%) to $474 billion, and agency
obligations $81 billion (61%) to $212 billion.
Corporate bond holdings were little changed for
the year at $377 billion.
Examining
various other financial sector categories, Fed
Funds and repos declined at a 31% rate during Q4
to $2.571 trillion. This reduced 2007 growth to
$77.5 billion (3.1%), down sharply from 2006’s
$496 billion (25%) expansion. Savings institutions
reduced assets at an 11.4% pace during Q4 to
$1.815 trillion, reducing 2007 growth to 5.8%.
REIT liabilities contracted at a 9.0% rate during
Q4 to $588 billion. REITs liabilities were down
$33 billion during 2007 (6%), after expanding $93
billion during 2006. Finance company assets
contracted at a 2.6% rate during Q4 (to
$1.911trillion), reducing 2007 growth to 2.9%.
Credit unions expanded at a 5.3% pace during Q4
(to $759 billion) and 6.0% for the year.
As always, the household (and non-profit)
balance sheet provides invaluable credit-bubble
insight. For the first time since 2002, household
assets actually declined ($308 billion) during the
quarter. Both real estate ($95 billion) and
financial asset ($254 billion) values fell,
although this decline was quite moderate compared
to what will unfold this year. And with household
liabilities increasing $225 billion, household net
worth actually declined $533 billion during Q4.
For all of 2007, household assets increased $2.838
trillion (4.1%) to $72.093 trillion, while
liabilities rose $920 billion (6.8%) to $14.375
trillion.
Net worth increased $1.918
trillion for the year to $57.718 trillion. This
was, however, less than half the annual average
net worth inflation of $4.207 trillion that had
fueled the bubble economy during the previous
four-year boom. The downside of the credit bubble
will have households taking on additional debt
(though at a slower pace), as asset values decline
precipitously. Evaporating net worth is now having
a meaningful impact on confidence, consumption and
investment decisions, and this effect will only
escalate over the coming weeks and months.
WEEKLY WATCH For the week, the
Dow fell 3.0% (down 10.3% y-t-d) and the
S&P500 declined 2.9% (down 11.9%). The Morgan
Stanley Cyclical index dropped 3.1% (down 10.1%),
and the Morgan Stanley Consumer index declined
2.4% (down 9.9%). The Transports slipped 1.3%
(down 1.3%), while the Utilities recovered 0.3%
(down 11.7%). The small cap Russell 2000 was hit
for 3.8% (down 13.8%), and the S&P400 Mid-Caps
were smacked for 3.5% (down 11.3%). The NASDAQ100
(down 18.1%) and the Morgan Stanley High Tech
(down 16.7%) indexes were both down 2.1%. The
Semiconductors fell 1.0% (down 15.5%). The
Street.com Internet Index declined 2.1% (down
14%), and the NASDAQ Telecommunications index
dropped 3.7% (down 12.7%). The Biotechs fell 4.1%
(down 12%). Financials remain under intense
selling pressure. The Broker/Dealers sank 7.1%
(down 18.6%), and the Banks dropped 6.1% (down
13%). With Bullion little changed, the HUI Gold
index added 0.3% (up 19%).
Three-month
Treasury bill rates sank 40 bps this past week to
1.44%. Two-year government yields fell 10 bps to
1.52%. Five-year T-note yields declined 4 bps to
2.43%, while ten-year yields added 2.5 bps to
3.53%. Long-bond yields jumped 14 bps to 4.54%.
The 2yr/10yr spread ended the week at 201 bps. The
implied yield on 3-month December ’08 Eurodollars
rose 4.5 bps to 2.255%. Benchmark Fannie MBS
yields surged 40 bps to 5.74%, this week getting
killed against Treasuries. The spread between MBS
and Treasuries jumped 38 to an alarming 220 bps.
The spread on Fannie’s 5% 2017 note was 14 wider
at 88 bps and the spread on Freddie’s 5% 2017 note
was 14 wider at 87 bps. The 10-year dollar swap
spread surged 15 to 86. Corporate bond spreads
were wider, with financial sector risk premiums
blowing out this week. An index of investment
grade bonds spreads was 13 wider to a record 178,
and an index of junk bonds spreads 20 wider to 620
bps.
Investment grade issuance included
Kellogg $750 million, Waste Management $600
million, Praxair $500 million, Kansas City P&L
$350 million, Mattel $350 million, Cigna $300
million, Public Service E&G $300 million,
Pitrillioney Bowes $250 million, and Scana Corp
$250 million.
The junk bond market remains
essentially closed for business.
Convert
issuance included Central Euro Media $425 million,
Nuvasive $200 million, Bill Barrett $173 million
and Stillwater Mining $165 million.
International dollar bond issuance
included Philips Electronics $3.0 billion.
German 10-year bund yields dropped 10 bps
to 3.79%, as the DAX equities index sank 3.5%
(down 19.3% y-t-d). Japanese "JGB" yields were
little changed at 1.35%. The Nikkei 225 dropped
6.0% (down 16.5% y-t-d and 23.8% y-o-y). Emerging
markets were under moderate selling pressure.
Brazil’s benchmark dollar bond yields rose 10 bps
to 5.75%. Brazil’s Bovespa equities index declined
2.6% (down 3.2% y-t-d). The Mexican Bolsa fell
1.1% (down 3.1% y-t-d). Mexico’s 10-year $ yields
rose 9 bps to 5.12%.Russia’s RTS equities index
declined 2.5% (down 12.1% y-t-d). India’s Sensex
equities index was clobbered for 10.4%, boosting
y-t-d declines to 21.3%. China’s Shanghai Exchange
slipped 1.1% this week (down 18.3% y-t-d).
Freddie Mac 30-year fixed mortgage rates
dropped 21 bps this week to 6.03% (reversing last
week's increase), with rates now down 11 bps over
the past year. Fifteen-year fixed rates dropped 25
bps to 5.47% (down 39bps y-o-y). One-year
adjustable rates fell 17 bps to 4.94% (down 53bps
y-o-y).
Bank Credit surged $37.4 billion
during the most recent data week (2/27) to a
record $9.370 trillion. Bank Credit has now posted
a 32-week surge of $727 billion (13.7% annualized)
and a 52-week rise of $956 billion, or 11.4%. For
the week, Securities Credit jumped $28.8 billion.
Loans & Leases increased $8.6 billion to a
record $6.894 trillion (32-wk gain of $570
billion). C&I loans gained $5.9 billion, with
one-year growth of 22.5%. Real Estate loans rose
$8.7 billion (up 7.7% y-o-y). Consumer loans
declined $3.0 billion. Securities loans fell $10.0
billion, while Other loans increased $7.0 billion.
Examining the liability side, "Other Liabilities"
jumped $44 billion.
M2 (narrow) "money"
supply surged $33.1 billion to a record $7.630
trillion (week of 2/25). Narrow "money" expanded
$168 billion over the past eight weeks, or 14.6%
annualized, with a y-o-y rise of $484 billion, or
6.8%. For the week, Currency slipped $0.1 billion,
while Demand & Checkable Deposits increased
$7.4 billion. Savings Deposits jumped $23.4
billion (3-wk gain $64 billion), while Small
Denominated Deposits declined $3.6 billion. Retail
Money Fund assets rose $6.1 billion.
Total
Money Market Fund assets (from Invest Co Inst)
jumped $22.6 billion last week (9-wk gain $337
billion) to a record $3.451 trillion. Money Fund
assets have posted a 32-week rise of $844 billion
(53% annualized) and a one-year increase of $1.017
trillion (42%).
Asset-Backed Securities
(ABS) issuance increased to $4 billion.
Year-to-date total US ABS issuance of $37 billion
(tallied by JPMorgan's Christopher Flanagan) is
running only 26% of the level from comparable
2007. Home Equity ABS issuance of $197 million is
a fraction of comparable 2007's $74 billion.
Year-to-date CDO issuance of $3 billion compares
to the year ago $78 billion.
Total
Commercial Paper increased $19.4 billion to $1.860
trillion. CP has declined $363 billion over the
past 30 weeks. Asset-backed CP declined $1.6
billion (30-wk drop of $405 billion) to $790
billion. Over the past year, total CP has
contracted $133 billion, or 6.7%, with ABCP down
$260 billion, or 24.8%.
Fed Foreign
Holdings of Treasury, Agency Debt last week (ended
3/5) increased $8.6 billion to a record $2.150
trillion. "Custody holdings" were up $93.6 billion
y-t-d, or 23.7% annualized, and $302 billion
year-over-year (16.3%). Federal Reserve Credit
expanded $6.7 billion to $873.3 billion. Fed
Credit has contracted $199 million y-t-d, while
having expanded $21.5 billion y-o-y (2.5%).
International reserve assets (excluding
gold) - as accumulated by Bloomberg’s Alex Tanzi –
were up $1.364 trillion y-o-y, or 27%, to a record
$6.401 trillion.
March 5 – Bloomberg
(Aaron Pan): "China’s January foreign-exchange
reserves rose $61.6 billion to $1.59 trillion,
Reuters reported… If confirmed, that would be a
record one-month increase."
Global
Credit Market Dislocation Watch March 7 –
Financial Times (Michael Mackenzie and Saskia
Scholtes): "A palpable sense of crisis pervades
global trading floors. Not since the meltdown of
the Long-Term Capital Management hedge fund in
1998 have interest rate and derivative markets
suffered such a breakdown in confidence. In the
past decade the scale of bond and derivative
trading has expanded enormously, as global banks
have provided easy access to trading for hedge
funds and other investors. That source of cash has
dried up as banks seek to protect their
deteriorating balance sheets amid writedowns of
impaired assets. Big banks have pulled back from
lending to clients for trading, starting a vicious
downward spiral across the mortgage, interest rate
swap, municipal bond, corporate debt and global
credit derivative markets. As investors have
purged mortgages from portfolios, interest rate
swap spreads – a barometer of bank credit risk –
have surged more than a percentage point above
Treasury bond yields. In the credit derivatives
market, the cost of buying insurance against
corporate default has hit highs in the US, Europe
and Japan… Many expect the turmoil to go on for
much
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