Page 2 of 5 CREDIT BUBBLE BULLETIN Froth comes off latte economy
Commentary and market watch by Doug Noland
these firms, the entire "conventional" mortgage market is at great risk to any
insurance-related dislocation. If much of the "private mortgage insurance"
industry loses it capacity to write new policies - or if this insurance is no
longer trusted by the agencies or the marketplace - this would be tantamount to
a major tightening in the thus far bullet-proof "conventional" mortgage market.
Or, said differently, if significant down payments come to be required for
mortgages related to the GSEs (government-sponsored enterprises, such as
mortgage finance agencies Fannie Mae and Freddie Mac) the effects will be felt
immediately in neighborhoods all across the US - not to mention the acutely
vulnerable consumption-based US bubble economy.
WEEKLY WATCH
For the week, the Dow slipped 0.5% (down 14.9% y-t-d), and the S&P500
declined 1.2% (down 14.0%). Economically-sensitive issues were hammered. The
Morgan Stanley Cyclicals sank 5.0% (down 18.3%), and the Transports fell 4.9%
(up 2.4%). Defensive issues fared better. The Morgan Stanley Consumer index
dipped only 0.2% (down 12.2%), while the Utilities gained 1.9% (down 5.5%). The
broader-market played some downside catch-up with the major averages. The small
cap Russell 2000 dropped 4.9% (down 13.1%), and the S&P400 Mid-Caps sank
4.6% (down 8.3%). The NASDAQ100 declined 2.2% (down 12.9%), and the Morgan
Stanley High Tech index fell 2.1% (down 12.0%). The Semiconductors dropped
4.1%, increasing y-t-d losses to 13.1%. The Street.com Internet Index declined
0.8% (down 10.0%), and the NASDAQ Telecommunications index fell 3.5% (down
10.7%). The Broker/Dealers dropped 3.4% (down 30.6%), and the Banks shed
another 3.4% (down 35.3%). Although Bullion added about $5, the HUI gold index
declined 3.5% (up 6.5%).
One-month Treasury bill rates jumped 53 bps this week to 1.85%, and 3-month
yields added one basis point to to 1.85%. Two-year government yields declined
10 bps to 2.53%. Five-year T-note yields declined 7 bps to 3.28%, while 10-year
yields added one basis point to 3.98%. Long-bond yields increased 2 bps to
4.54%. The 2yr/10yr spread widened 10 to 145 bps. The implied yield on 3-month
December '09 Eurodollars dropped 13 bps to 3.935%. Benchmark Fannie MBS yields
jumped 14 bps to 5.95%. The spread between benchmark MBS and 10-year Treasuries
widened a notable 13 to 198, the high since the height of the March financial
crisis. The spread on Fannie's 5% 2017 note widened 4 bps to 81.6 bps, and the
spread on Freddie's 5% 2017 note widened 4 bps to 81.5 bps - both highs since
March. The 10-year dollar swap spread increased 4.5 to 75.5. Corporate bond
spreads were wider. An index of investment grade bond spreads widened 5 to 147
bps, and an index of junk bond spreads widened 4 bps to 538 bps.
I noted no investment grade issuance this week.
Junk issuers included Rite Aid $470 million and Fox Acquisition $200 million.
Convert issuance this week included Smithfield Foods $350 million.
International dollar bond issuance included Intelsat $1.0bn and Oceanografia
$335 million.
German 10-year bund yields dipped 3 bps to 4.49%. The German DAX equities index
declined 2.3% (down 22.3% y-t-d). Japanese 10-year "JGB" yields added 2 bps to
1.63%. The Nikkei 225 lost 2.3% (down 13.5% y-t-d and 27.1% y-o-y). Emerging
markets were hit rather hard. Brazil's benchmark dollar bond yields rose 6 bps
to 5.83%. Brazil's Bovespa equities index sank 7.7% (down 7.1% y-t-d). The
Mexican Bolsa fell 3.3% (down 4.1% y-t-d). Mexico's 10-year $ yields rose 7 bps
to 5.52%. Russia's RTS equities index was hit for 5.6% (down 4.5% y-t-d).
India's Sensex equities index declined another 2.5%, boosting y-t-d losses to
33.7%. China's Shanghai Exchange index fell 2.9%, pushing 2008 losses to 49.3%.
Freddie Mac 30-year fixed mortgage rates fell 10 bps to 6.35% (down 38bps
y-o-y). Fifteen-year fixed rates dropped 12 bps to 5.92% (down 47bps y-o-y).
One-year adjustable rates declined 10 bps to 5.17% (down 54bps y-o-y).
M2 (narrow) "money" supply added $3.6bn to $7.694 TN (week of 6/23). Narrow
"money" has expanded $231bn y-t-d, or 6.4% annualized, with a y-o-y rise of
$432bn, or 5.9%. For the week, Currency slipped $0.8bn, and Demand &
Checkable Deposits fell $2.9bn. Savings Deposits increased $7.7bn, while Small
Denominated Deposits declined $0.9bn. Retail Money Funds dipped $1.1bn.
Total Money Market Fund assets (from Invest Co Inst) were little changed at
$3.456 TN, with a y-t-d increase of $343bn, or 22% annualized. Money Fund
assets have posted a one-year increase of $897bn (35%).
Asset-Backed Securities (ABS) issuance this week slowed to a trickle.
Year-to-date total US ABS issuance of $107bn (tallied by JPMorgan's Christopher
Flanagan) is running at 26% of the comparable level from 2007. Home Equity ABS
issuance of $303 million compares with 2007's $205bn. Year-to-date CDO issuance
of $14.3bn compares to the year ago $236bn.
Total Commercial Paper jumped $27bn to $1.780 TN, dropping the y-t-d decline to
$5.7bn. Asset-backed CP increased $8.1bn last week to $757bn, reducing 2008's
decline to $16.3bn. Over the past year, total CP has contracted $388bn, or
17.9%, with ABCP down $411bn, or 35.2%.
Fed Foreign Holdings of Treasury, Agency Debt last week (ended 7/2) jumped
$23.3bn to a record $2.346 TN. "Custody holdings" were up $289bn y-t-d, or
27.1% annualized, and $363.5bn year-over-year (18.3%). Federal Reserve Credit
surged $15.5bn into quarter-end to $890.0bn. Fed Credit has now increased
$16.5bn y-t-d (3.6% annualized) and $32.7bn y-o-y (3.8%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $1.382 TN y-o-y, or 25.4%, to $6.828 TN.
Global Credit Market Dislocation Watch
June 30 - Reuters: "US mortgage-backed securities issuance plunged more than
80% in the first six months of 2008 from the same period a year earlier.
Thomson Reuters said US mortgage-backed securities issuance totaled $117.4
billion in the first half of 2008, down from $622.1 billion a year earlier, a
drop of 81%. By proceeds, the second quarter 2008 total of $48.6 billion from
83 issues was the lowest quarterly volume since the second quarter 2000�
said Matthew Toole, an analyst at Thomson Reuters. It was the lowest
number of deals in a quarter since the first quarter of 1995� 'Without
the implied US government guarantee that Fannie Mae and Freddie Mac offer it is
hard to bring deals to the market,' he said."
July 3 - Economist: "In finance, as in Greek tragedy, one of the commonest
pairings is between hubris and sheer, toe-curling folly. In the boom years of
2006-07 nothing, it seemed, could constrain the leveraged buy-out (LBO)
industry. In 24 months it pulled off deals with an enterprise value of $1.4
trillion, the equivalent, after adjusting for inflation, of about a third of
all the buy-outs ever done. Thanks to the credit crunch, buy-outs have since
become scarce: so far this year only $131 billion of deals have been announced,
according to Dealogic."
July 4 - Financial Times (Sundeep Tucker): "After last year's rush of initial
public offerings in Asia the slowdown has come. In 2007, China's domestic
exchanges and Hong Kong raised a combined $101bn, with other regional bourses
adding a further $25bn. This year, however, has seen a somewhat quieter first
half with Asia Pacific, excluding Japan but including Chinese A-shares, raising
$25.5bn, according to Dealogic. Stock prices in China have tumbled by
more than 50% this year, forcing countless potential issuers to shelve plans to
list. India's market virtually closed to listings in January after the subdued
performance of the $3bn IPO of Reliance Power, the country's largest ever
offering."
July 3 - Dow Jones (Victoria Howley): "Global M&A volume fell 31% in the
first half of this year, with Europe registering the steepest decline of all
the major regions. Global M&A deals were worth $1.87 trillion, compared to
$2.69 trillion in the first half of 2007, according to Dealogic.
Deals involving a European target fell 39% to $645.2 billion from $1.07
trillion in the first six months of 2007� Activity in the US fell 30% to
$694.3 billion, while deals in Asia Pacific rose 5% to $390.7 billion."
June 30 - Reuters: "Sales of US convertible securities fell to $52 billion in
the first half of the year, down from $55 billion a year earlier."
July 1 - Wall Street Journal (Randall Smith): "Wall Street stock and bond sales
picked up slightly in the second quarter from their anemic pace since the
credit crunch began last year. But they remained far below their peak levels of
2005 through mid-2007. The $1.71 trillion in new stocks and bonds issued
in the second quarter was up 27% from the first quarter, according to Thomson
Reuters. But the total was down 31% from the second quarter of 2007,
just before the credit-market downturn."
June 27 - Reuters (Maya Thatcher): "Bond issuance by European companies was
strong in the first half of 2008 despite the credit crisis. Corporate
bond issuance by European companies in 2008 so far was the second strongest
this decade at $143.6bn, just 3% lower than in the same period of 2007. Bond
sales were plentiful in the second quarter, setting an all-time quarterly
record of $108.9 billion."
July 3 - Financial Times (Saskia Scholtes): "As investors digest a recent spate
of rating downgrades for bond insurers, concerns have surfaced about risks that
could further darken the outlook for the most troubled groups and affect the
last remaining insurers with triple A credit ratings. Together with heavy
losses on subprime mortgage-related bonds that they guaranteed, bond insurers,
or monolines, such as Ambac and MBIA are exposed to problems in their so-called
'guaranteed investment contracts' (GIC) businesses. These problems could result
in additional claims on capital at a time they can least sustain them.
FSA� is also facing potential difficulties in its GIC business. Analysts
at Morgan Stanley warned in a recent report: 'In our view, issues associated
with the GIC businesses have the potential to threaten monolines such as FSA,
which have carefully avoided writing protection on [asset-backed] CDOs, and
thus have so far been immune from downgrades.' The deepening crisis for the
bond insurance industry threatens banks with further writedowns on derivatives
contracts that they hold with the insurers, and investors with further
downgrades and market losses on insured bonds they own."
July 3 - Bloomberg (Shannon D. Harrington): "The amount US commercial banks
have at risk in derivatives markets jumped 50% during the first quarter as the
credit crisis triggered an increase in the value of contracts that protect
against borrower defaults and changes in interest rates. The amount of money
banks would be owed if all derivatives contracts were liquidated, known as 'net
current credit exposure,' rose $156 billion in the first quarter to $465
billion, the Office of the Comptroller of the Currency said. That's up
159% from a year earlier. 'Continued declines in interest rates coupled
with widening credit spreads resulted in a significant increase in counterparty
credit risk during the quarter,' Kathryn Dick, deputy comptroller for credit
and market risk, said."
July 2 - Bloomberg (Mark Pittman): "Mountain 1st Bank & Trust Co. Chief
Executive Officer Greg Gibson forecast 12 percent loan growth for his North
Carolina bank this year. Instead, he's spending more time handing out freshly
baked cookies than extending credit. Gibson is 'standing on the brakes' because
Mountain 1st, owned by 1st Financial Services Corp. of
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