Page 2 of 3 CREDIT BUBBLE BULLETIN The Greenspan episode
Commentary and weekly watch by Doug Noland
Investment grade issuance included Citigroup $4.75 billion, Wal-Mart $2.5
billion, WEA Finance $1.1 billion, Duke Energy $900 million, Monsanto $550
million, Pacific Life $500 million, Public Service E&G $400 million, and
National Fuel Gas $300 million.
Junk issuers included Markwest Energy $400 million, Nielsen $220 million, and
Polyone $80 million.
Convert issuance this week included Virgin Media $1.0 billion, LKD Solar $400
million, Endo Pharmaceutical $380 million, and Globalstar $135 million.
International dollar bond issuance included HSBK $500 million, Videotron $455
million, and Odebrecht Finance $400 million.
German 10-year bund yields declined 4 bps to 3.91%, as the DAX equities index
fell 2.4% (down 18.1% y-t-d). Japanese 10-year
"JGB" yields rose 4 bps to 1.37%. The Nikkei 225 posted a slight gain (down 13%
y-t-d and 24.6% y-o-y). Emerging debt markets were strong and equities mostly
held their own. Brazil’s benchmark dollar bond yields dropped another 9 bps to
6.09%. Brazil’s Bovespa equities index dropped 2.9% (down 2.0% y-t-d). The
Mexican Bolsa dipped 0.8% (up 6.0% y-t-d). Mexico’s 10-year $ yields sank 13
bps to 4.67%. Russia’s RTS equities index rallied 2.6% (down 7.8% y-t-d).
India’s Sensex equities index gained 3.0%, reducing y-t-d losses to 22.1%.
China’s Shanghai Exchange actually mustered a 1.4% gain, with 2008 losses at
33.6%.
Freddie Mac 30-year fixed mortgage rates were unchanged at 5.88% (down 34bps
y-o-y). Fifteen-year fixed rates were unchanged at 5.42% (down 48 bps y-o-y).
One-year adjustable rates dipped one basis point to 5.18% (down 29bps y-o-y).
Bank Credit dropped (an unusual and perhaps explainable) $103 billion to $9.433
TN (week of 4/2). This reduced y-t-d Bank Credit growth to $50.8 billion, or
8.9% annualized. Bank Credit posted a 37-week surge of $790 billion (12.8%
annualized) and a 52-week rise of $1.115 TN, or 12.1%. For the week, Securities
Credit dropped $41 billion. Loans & Leases sank $61 billion to $6.871 TN
(37-wk gain of $546 billion). C&I loans declined $14 billion, with one-year
growth of 21%. Real Estate loans dropped $25.6 billion. Consumer loans dipped
$1.2 billion, while Securities loans added $0.4 billion. Other loans fell $20.7
billion. Examining the liability side, Deposits dropped $65.7 billion, "Net Due
to Foreign" declined $36.3 billion, and "Other Liabilities" fell $42.4 billion.
M2 (narrow) "money" supply dropped $30.3bn to $7.670 TN (week of 3/31). Narrow
"money" has expanded $208bn y-t-d, or 11.1% annualized, with a y-o-y rise of
$479bn, or 7.7%. For the week, Currency dipped $1.9bn, while Demand &
Checkable Deposits increased $10.1bn. Savings Deposits dropped $42.3bn, and
Small Denominated Deposits declined $3.6bn. Retail Money Fund assets grew
$7.5bn.
Total Money Market Fund assets (from Invest Co Inst) jumped $38bn last week to
a record $3.536 TN, posting a y-t-d gain of $423bn, or 50.5% annualized. Money
Fund assets have posted a 37-week rise of $953bn (51.8% annualized) and a
one-year increase of $1.086 TN (44.3%).
Asset-Backed Securities (ABS) issuance increased to $5.0bn. Year-to-date total
US ABS issuance of $53.4bn (tallied by JPMorgan's Christopher Flanagan) is
running 24% of the comparable level from 2007. Home Equity ABS issuance of $303
million is a fraction of comparable 2007's $121bn. Year-to-date CDO issuance of
$10.8bn compares to the year ago $122bn.
Total Commercial Paper declined $10.8bn to $1.817 TN. CP has declined $407bn
over the past 35 weeks. Asset-backed CP fell $5.2bn (35-wk drop of $414bn) to
$781bn. Over the past year, total CP has contracted $234bn, or 11.4%, with ABCP
down $305bn, or 28.1%.
Fed Foreign Holdings of Treasury, Agency Debt last week (ended 4/9) increased
$12.5bn to a record $2.219 TN. "Custody holdings" were up $162bn y-t-d, or
27.3% annualized, and $307bn year-over-year (16.1%). Federal Reserve Credit
dropped $8.7bn to $867bn. Fed Credit has contracted $6.7bn y-t-d, while having
increased $17.4bn y-o-y (2.1%).
International reserve assets (excluding gold) - as accumulated by Bloomberg’s
Alex Tanzi - were up $1.419 TN y-o-y, or 27.1%, to a record $6.652 TN.
Global Credit Market Dislocation Watch
April 8 - Bloomberg (Christopher Swann): "The International Monetary Fund said
losses stemming from the US mortgage crisis may approach $1 trillion, citing a
‘collective failure’ to predict the breadth of the crisis. Falling US house
prices and rising delinquencies may lead to $565 billion in residential
mortgage-market losses, the IMF said… Total losses, including those tied to
commercial real estate, may reach $945 billion, the fund said. The fund also
saw as much as $90 billion in further losses from potential downgrades of bond
insurance companies."
April 10 - Financial Times (Krishna Guha and Chris Giles): "The world’s leading
banks yesterday publicly accepted much of the blame for the credit crisis, as
the International Monetary Fund slashed its estimates for global growth and
warned that the US downturn would last longer than most people expect. The IMF
said the US would suffer a recession this year, recovery would not begin until
next year, and growth would remain well below trend even in 2009. The Institute
of International Finance, meanwhile, representing more than 375 of the world’s
largest financial companies, acknowledged ‘major points of weaknesses in
business practices’, including bankers’ pay and the management of risk. But it
said it would be ‘completely wrong’ for the authorities to impose much greater
regulation on the industry."
April 9 - Bloomberg (Jody Shenn and Pierre Paulden): "Wall Street firms may be
bundling high-yield, high-risk corporate loans into securities to use as
collateral to borrow from the US government, according to a report by Morgan
Stanley analysts. Securities firms can borrow against collateralized loan
obligations at the Federal Reserve’s Primary Dealer Credit Facility… The Fed
set up the facility last month, its first extension of credit to non-banks
since the Great Depression."
April 11 - The Wall Street Journal (Serena Ng and Susanne Craig): "Financial
engineering helped get Wall Street into its current credit-market problems.
Now, Wall Street’s Lehman Brothers…is using a little engineering -- and some
help from the US Federal Reserve -- to bolster its finances. In recent weeks,
Lehman moved $2.8 billion in loans, including some risky leveraged-buyout debt
that has been difficult to sell, into a newly created investment vehicle it
named ‘Freedom,’ which in turn issued debt securities backed by the loans.
About $2.26 billion of the securities received investment-grade credit ratings
from Moody’s… and S&P. Lehman then pledged some of the securities as
collateral for a low-interest, short-term cash loan from the Federal Reserve…
One person familiar with the matter said the vehicle was named Freedom because
it was designed to give Lehman freedom to tap as much cash as possible if
needed. The size of the borrowing from the Fed wasn't known, but the person
said it wasn’t ‘material’ and was meant as a test of what the Fed would
accept."
April 11 - Financial Times (Paul J Davies): "Banks involved in lending to
riskier companies, such as those bought out in debt-funded private equity
deals, could face a new drain on their balance sheets from borrowers drawing
down extra funding. There is a growing trend of highly leveraged companies
taking extra debt by drawing on so-called revolver facilities, which are
prearranged guarantees to lend. These facilities are granted by banks for a
fee… Analysts said that these companies were increasingly concerned about their
ability to refinance debt and the fact that banks might try to walk away from
such facilities. ‘The easy conclusion to make . . . is that a lot of companies
may now draw on their revolvers because they are concerned about counterparty
risk and the implications of banks’ trying to walk away from the [Clear
Channel] deal,’ said Bradley Rogoff, analyst at Lehman Brothers…"
April 8 - Bloomberg (Neil Unmack and Sree Vidya Bhaktavatsalam): "Gordian Knot
Ltd. founders Stephen Partridge-Hicks and Nicholas Sossidis, who started the
$400 billion market for structured investment vehicles that crashed last year,
are fighting for the survival of their flagship fund. Gordian’s Sigma Finance
Corp. must refinance $20 billion of debt by September in a market where even
the biggest banks are struggling to borrow, according to Moody’s…"
April 10 - Bloomberg (Yalman Onaran and Joyce Moullakis): "Lehman Brothers
Holdings Inc. bailed out five of its short-term debt funds... Lehman took $1.8
billion of assets from the funds onto its books… The company recorded a $300
million loss from the bailout in the first-quarter, according to a person
familiar with the writedown. Credit Suisse Group took a $780 million charge in
February when it bought assets from its money-market funds. Legg Mason Inc.
agreed last month to provide as much as $400 million to help a similar fund.
General Electric Co.'s GE Asset Management liquidated a short-term bond fund in
November after it lost about $225 million."
April 10 - Bloomberg (William Selway and Martin Z. Braun): "Financial advisers
for Jefferson County, Alabama, met yesterday with Bush administration and
Federal Reserve officials as the county contends with rising borrowing costs
that have pushed it close to bankruptcy… Jefferson County, home to Birmingham,
is reeling from interest rates on its variable rate bonds that jumped as high
as 10% when the auction-rate securities market collapsed and the county’s
bonds, backed by ailing insurers FGIC Corp. and XL Capital Assurance, were
shunned by investors… Jefferson County’s financial problems have been
compounded by $5.4 billion of interest-rate swaps with JPMorgan…, Bank of
America…, Bear Stearns Cos. and Lehman Brothers…that were intended to shield it
from higher borrowing costs."
April 8 - The Wall Street Journal (Keith J. Winstein): "Education Resources
Institute Inc., a Boston nonprofit that insures more than $17 billion in
privately issued student loans, filed for bankruptcy-court protection, beset by
defaults, delinquencies and shrinking revenue… The filing… adds more tumult to
the shaky student-loan market, where some lenders have been taking write-downs
and dropping or curbing their lending programs amid broader problems in the
credit markets."
April 9 - Financial Times (Michael Mackenzie): "A key driver of the bull run in
US and UK stock markets in the years before the credit crunch is being
reversed. A wave of corporate share buybacks and a surge in private equity
takeovers of listed companies helped propel stock prices higher before the
turmoil in credit markets. The trend, fuelled by cheap debt, became known by
the ugly name of ‘deequitisation’ as the equity base of stock markets shrunk.
That shift, however, has turned as financial companies raise equity capital to
repair balance sheets, private equity deals slow to a trickle and the cost of
raising corporate debt rises sharply as its availability dries up. Companies
are increasingly looking to raise funds through equity issues instead of debt
and conserve cash by scaling down on share buybacks… Already in the first
quarter, stock buybacks in the US dropped to their lowest in five quarters to
$136.3bn, according to…TrimTabs."
April 10 - Bloomberg (Jody Shenn): "The Federal Home Loan Bank of Chicago’s
counterparty credit ratings may be cut by S&P, which cited the end of
merger talks with the bank’s Dallas counterpart. The deal’s collapse ‘heightens
our concerns regarding the strategic direction and financial condition’ of the
government- chartered cooperative, S&P analyst Daniel Teclaw…said…."
April 10 - Bloomberg (Patricia Kuo and Bei Hu): "Billionaire George Soros said
the seizure in global credit markets caused by the subprime collapse will get
worse before it gets better. Lack of oversight is partly responsible for
problems in the financial markets, Soros told reporters… He said regulators and
the US administration ‘failed to perform their job’ in a crisis that began in
the US housing market… ‘This is a man-made crisis and it’s made by this false
belief that markets correct their own excesses,’ Soros, 77, said. ‘It will take
much longer for the full effect of the decline in the housing market to be
felt.’"
April 9 - Dow Jones: "The bailout of Northern Rock PLC, the nationalized U.K.
mortgage lender, has increased demand for gold as investors, worried that
increased liquidity will erode the pound, look to conserve value by investing
in gold, BlackRock fund manager Graham Birch said… ‘The Northern Rock bailout
has given the impression that there is an infinite supply of money...while gold
is not in infinite supply,’ said Birch, who manages $3.2 billion in funds."
April 7 - Bloomberg (Sarah Shannon): "Office rentals in the City, London’s
financial district, fell by 40% in the six months ended of March as companies
reduced employee levels and stopped looking for additional office space, the
Financial Times said."
Currency Watch
April 11 - Bloomberg (Nipa Piboontanasawat): "China’s foreign-exchange
reserves, the world’s largest, surged to $1.68 trillion at the end of March,
adding pressure on the government to prevent money inflows from fueling
inflation already at an 11-year high. Currency holdings expanded 40% from a
year earlier…"
April 11 - Bloomberg (Simone Meier and Meera Louis): "European finance
ministers, attending the Group of Seven nations meeting… signaled concern about
the euro’s ascent against the dollar. Luxembourg Finance Minister Jean-Claude
Juncker…said… that finance ministers ‘don’t like the recent moves’ and that it
‘will be made clear’ at the G-7 meeting. German Finance Minister Peer
Steinbrueck told reporters that German exports are already ‘massively’ affected
by the euro’s appreciation."
The dollar index declined 0.3%, ending the week at 71.81. For the week on the
upside, the Singapore dollar increased 1.7%, the Japanese yen 1.4%, the Swiss
franc 1.2%, the Brazilian real 1.0%, the Danish krone 0.6%, and the Euro 0.6%.
On the downside, the British pound declined 1.0%, the Canadian dollar 0.9%, the
South Korean won 0.4%, and the New Zealand dollar 0.3%.
Commodities Watch
April 10 - Financial Times (Javier Blas and Chris Flood): "Oil prices jumped to
above $112 a barrel yesterday, a fresh record high that threatens to stoke
inflation further as the Federal Reserve faces pressure to cut interest rates
again to counter the risk of recession… The [Energy] department said this
year’s soaring prices had led it to revise its estimate for Opec’s revenues to
almost $1,000bn, nearly as much as the financial sector is expected to lose
because of the credit crisis."
April 11 - Financial Times (Javier Blas): "Governments are racing to strike
secretive barter and bilateral agreements with food-exporting countries to
secure scarce supplies as the price of agricultural commodities jump to record
highs, diplomats and cereal traders say. The moves coincide with a significant
tightening of the global food market as leading exporters of agricultural
commodities ban foreign sales. The government-to-government contracts could
bypass those restrictions, diplomats say."
April 8 - Bloomberg (Terry Barrett): "Global food prices rose 57% in March from
a year earlier, according to the UN Food and Agriculture organization. From a
month earlier prices rose 1.4%."
April 10 - Financial Times (Javier Blas): "For the past 40 years, consumers
have had the upper-hand in the global rice market, which has witnessed a steady
decline in prices, interrupted only by the brief spike in 1973-74 triggered by
the first oil crisis. The structural decline in prices was the result of the
Green Revolution, the agronomics movement that spread the use of irrigation,
fertiliser and high-yielding varieties of rice in Asia in the late 1960s and
led to bumper crops. Rice production per hectare jumped in developing countries
from 1.7 tonnes in 1961 to 4 tonnes in 2006. This ‘buyers’ market’, however,
has flipped abruptly this year into a ‘sellers’ market’ because of a
fundamental change in the balance between supply and demand. This is likely to
keep prices in the medium-term well above historical levels, analysts and
traders say. The price of Thai medium-quality rice, a global benchmark, traded
on Wednesday at a record high of $854 a tonne… It has more than doubled since
the end of last year."
April 7 - Bloomberg (Marianne Stigset and Tony Dreibus): "From Cairo to New
Delhi to Shanghai, the run on rice is threatening to disrupt worldwide food
supplies as much as the scarcity of confidence on Wall Street earlier this year
roiled credit markets. China, Egypt, Vietnam and India, representing more than
a third of global rice exports, curbed sales this year, and Indonesia says it
may do the same… The World Bank in Washington says 33 nations from Mexico to
Yemen may face ‘social unrest’ after food and energy costs increased for six
straight years. Rice, the staple food for half the world, rose 2.4 percent to a
record $20.985 per 100 pounds in Chicago today, double the price a year ago and
a fivefold increase from 2001."
April 11 - Bloomberg (Clarissa Batino and William Bi): "The Philippines said
China turned down a request to supply wheat, adding to concern that the world
faces a worsening shortage of staple foods that has already driven grain prices
to records. ‘China politely turned us down, saying they also need to stock up,’
Trade Secretary Peter Favila said… ‘We’ve alerted all our trade attaches to
find out where we can source wheat, so as not to cause shortages.’"
April 9 - Bloomberg (Abeer Allam and Daniel Williams): "Atyat Musa Bakri, a
Cairo mother of nine children, was waiting in line to buy subsidized bread for
the third time in one day. ‘The more cheap bread I can get, the better,’ she
said as a crowd of about 30 women jostled at a bakery in the Boulaq district.
‘The price of everything is going up and up, so I save on this. I spend all
morning buying cheap bread.’"
April 10 - Bloomberg (Feiwen Rong): "Billionaire investor George Soros said
rising world food costs are ‘of grave concern,’ especially to importing nations
who also have to buy high-priced fuel. Those countries will face increased
inflationary pressure that may lead to ‘social and political disruptions,’
Soros…said…"
April 9 - Associated Press: "BHP Billiton Ltd. said Wednesday that prices this
year for metallurgical coking coal products were expected cost more than three
times what they did last year. The estimate was based on the settlement of
contracts so far by the BHP Billiton Mitsubishi Alliance… ‘Prices for Peak Down
and other similar BMA metallurgical coking coal products are expected to
increase within the range of 206-240% over 2007 levels,’ BHP Billiton said…"
Gold rallied 1.3% to $924.30, while Silver dipped 0.4% to $17.69. May Copper
slipped 0.3%. May Crude jumped $3.91 to $110.14. May Gasoline rose 1.8%, and
May Natural Gas surged 6.2% (up 32% y-t-d). May Wheat dropped 8.0%. The CRB
index jumped 3.1% (up 13.6% y-t-d). The Goldman Sachs Commodities Index (GSCI)
increased 2.9% (up 16.2% y-t-d and 48.3% y-o-y).
China Watch
April 11 - Bloomberg (Nipa Piboontanasawat): "China’s money supply grew at the
slowest pace in more than a year, suggesting government measures to tame
liquidity are working. M2…rose 16.3% in March from a year earlier…"
April 8 - Bloomberg (Tian Ying): "China’s March passenger car sales rose 24%,
the fastest pace in seven months… Chinese drivers bought 700,500 cars last
month… First-quarter sales climbed 20 percent to 1.85 million."
Japan Watch
April 11 - Bloomberg (Keiko Ujikane): "Japan’s wholesale prices rose at the
fastest pace since February 1981, highlighting concern higher fuel and food
costs will fan inflation even as the economy slows. Producer prices climbed
3.9% in March from a year earlier…"
India Watch
April 11 - Bloomberg (Kartik Goyal): "India’s inflation accelerated to the
fastest pace in more than three years, raising concern the central bank may
increase borrowing costs as soon as this month. Wholesale prices rose 7.41%..."
April 11 - Bloomberg (Cherian Thomas and Kartik Goyal): "India scrapped export
incentives for rice, steel and cement to boost local supplies and tame runaway
inflation, which is damping consumer demand for manufactured products."
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