Page 1 of 2 CREDIT BUBBLE BULLETIN Just the facts
Weekly watch by Doug Noland
For the holiday week, the S&P500 jumped 6.8% ('08 decline 38.5%) and the
Dow gained 6.1% (down 33.8%). The broader market also rallied sharply into
year-end and to begin the New Year. The small cap Russell 2000 jumped 6.1%
(down 34.8%) and the S&P400 Mid-Caps rose 7.1% (down 37.3%). The Morgan
Stanley Cyclical index gained 9.5% (down 52.5%), and the Morgan Stanley
Consumer index advanced 5.4% (down 25.4%). The Transports surged 8.3% (down
22.6%), and the Utilities gained 4.8% (down 29.9%). The NASDAQ100 rallied 6.6%
(down 41.9%), and the Morgan Stanley High Tech index increased 7.9% (down
45.2%). The Semiconductors rose 10.2% (down 48%), The
Street.com Internet Index 2.7% (down 36.2%), and the NASDAQ Telecommunications
index 6.0% (down 43%). The Biotechs gained 4.9% (down 17.7%). The
Broker/Dealers rallied 12.1% (down 62.7%), and the Banks rose 7.7% (down 50%).
With Bullion gaining $6, the HUI Gold index increased 3.5% (down 26.1%).
One-month Treasury bill rates ended the week at 2 bps and three-month bills at
9 bps. Two-year government yields ended down 3 bps at 0.77%. Five-year T-note
yields jumped 21 bps last week to 1.55%. Ten-year yields rose 27 bps to 2.40%,
and long-bond yields gained 22 bps to 2.85%. The implied yield on 3-month
December '09 Eurodollars increased 9 bps to 1.61%. Benchmark Fannie MBS yields
surged 27 bps to 4.19%. The spread between benchmark MBS and 10-year T-notes
increased one basis point to 80. Agency 10-yr debt spreads increased 2 to 81
bps. The 2-year dollar swap spread increased 11 to 78 bps; the 10-year dollar
swap spread declined 0.75 to 37.75 bps, and the 30-year swap spread increased
1.5 to positive 12.5 bps. Corporate bond spreads were mixed to narrower. An
index of investment grade bond spreads declined 4 to 200 bps, while an index of
junk bond spreads widened 18 to 1,278 bps.
I saw no debt issuance last week.
German 10-year bund yields added one basis point to 2.95%. The German DAX
equities index surged 7.4% ('08 decline 40.4%). Japanese 10-year "JGB" yields
declined 4 bps to 1.16%. The Nikkei 225 gained 1.4% ('08 decline 42.1%).
Emerging bonds and equities were mostly higher. Brazil's benchmark dollar bond
yields fell 13 bps to 6.12%. Brazil's Bovespa equities index rallied 8.4% ('08
decline 41.2%). The Mexican Bolsa increased 3.2% ('08 decline 24.2%). Mexico's
10-year $ yields rose 5 bps to 5.90%. Russia's RTS equities index fell 2% ('08
decline 72.4%). India's Sensex equities index ralllied 6.7% ('08 decline
52.4%). China's Shanghai Exchange declined 1.7% ('08 decline 65.4%).
Freddie Mac 30-year fixed mortgage rates declined 5 bps to 5.10% (down 97bps
y-o-y), with a 9-wk decline of 136 bps. Fifteen-year fixed rates fell 8 bps to
4.83% (down 85bps y-o-y). One-year ARMs dropped 10 bps to 4.85% (down 63bps
y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed
jumbo rates last week at 6.96% (up 23bps y-o-y).
Bank Credit dropped $73.2bn to $9.886 TN (week of 12/24). Bank Credit expanded
$673bn y-t-d, or 7.3% annualized. Bank Credit surged $494bn over the past 16
weeks. For the week, Securities Credit dropped $50.3bn. Loans & Leases
declined $22.9bn to $7.123 TN (52-wk gain of $292bn, or 4.3%). C&I loans
fell $9.8bn, with y-t-d growth to 8.8%. Real Estate loans sank $23bn (up 4.6%
y-t-d). Consumer loans were unchanged, while Securities loans gained $12bn.
Other loans slipped $2.2bn.
Total Commercial Paper outstanding dropped $20.4bn last week to $1.681 TN, with
CP down $117bn for the year (6.5%). Asset-backed CP was little changed at
$733bn, with 2008 posting a decline of $64bn (8%).
Federal Reserve Credit expanded $39.3bn to a record $2.247 TN, with a historic
16-wk increase of $1.358 Trillion. Fed Credit expanded $1.355 TN for the year
(152%). Fed Foreign Holdings of Treasury, Agency Debt last week (ended 12/31)
rose $6.8bn to $2.516 TN. "Custody holdings" were up $456bn for the year, or
22.5%.
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $660bn y-o-y, or 10.8%, to $6.765 TN.
Global Credit Market Dislocation Watch
December 31 - Bloomberg (James Sterngold): "It has been a year of record
misery: the largest bankruptcy, bank failure and Ponzi scheme in US history;
$720 billion in writedowns and losses by financial institutions; $30.1 trillion
in market valuation wiped out. The biggest loss and the hardest thing to
recover, though, may be something that can't be precisely measured - confidence
in the markets and the firms that rely on them. 'The wholesale funding model
lost its credibility," said David Hendler, senior analyst at ... CreditSights
Inc. "That started the semi-nationalization of funding in the financial
markets. It's a real chink in the armor of capitalism as supposedly the best
process for allocating capital. The government is now deciding who gets access
to capital.'"
January 1 - Dow Jones (Rob Curran and Kejal Vyas): "This was the worst year for
equities and many other investments since the depths of the Great Depression.
The Dow Jones Industrial Average fell 34% in 2008, its biggest loss since 1931
... The broader S&P 500 ended the year down 38%, the largest loss since
1937 ... The technology-oriented Nasdaq Composite shed 40.5%, the worst
performance in a history dating back to 1971 ... 'Devastation,' said Howard
Silverblatt ... analyst at S&P…"
December 31 - Bloomberg (Gabrielle Coppola and Bryan Keogh): "US corporate bond
sales fell 28% in 2008 to the lowest in three years as a recession and seizure
in credit markets pushed borrowing costs higher. JPMorgan Chase ... and ...
Verizon Communications ... led $805 billion of investment-grade offerings, a
21% drop from 2007. High-yield sales were the lowest in at least a decade.
Financial issuance plunged 31%."
December 23 - Wall Street Journal (Gerald F. Seib): "The new edition of Foreign
Affairs magazine has a pair of articles about the global financial mess that
carry these disturbing headlines: 'A Weakening of the West,' reads one, and
'The Rise of the Chinese Model' the other. Those two pieces frame a serious but
little-discussed strategic problem for President-elect Barack Obama. The
meltdown in financial markets hasn't simply damaged the American economy. It
also has tarnished the US economic model, and threatens to reduce Washington's
ability to exert influence around the globe. The 'Anglo-Saxon brand of
market-based capitalism' is under a cloud, Roger Altman, former US deputy
Treasury secretary ... writes in one of the Foreign Affairs pieces. 'The US
financial system is seen as having failed.' That can't be good for America's
moral authority."December 24 - Bloomberg (Stanley White and Shigeki Nozawa):
"Japan should write-off its holdings of Treasuries because the US government
will struggle to finance increasing debt levels needed to dig the economy out
of recession, said Akio Mikuni, president of credit ratings agency Mikuni &
Co. The dollar may lose as much as 40% of its value to 50 yen or 60 yen from
the current spot rate of 90.40 today in Tokyo unless Japan takes 'drastic
measures' to help bail out the US economy, Mikuni said ... 'It's difficult for
the US to borrow its way out of this problem,' Mikuni said ... 'Japan can help
by extending debt cancellations.'"
December 31 - Bloomberg (Jeremy R. Cooke and Michael McDonald): "The worst year
for municipal bond investors since 1999 may further reduce demand for
tax-exempt debt just as state governments face the biggest budget deficits in
at least a quarter-century. State and local borrowers sold $385 billion of
long-term bonds through yesterday, down 9% from 2007, according to ... Thomson
Reuters ... The combination of the worst financial crisis since World War II
and the collapse of the $330 billion auction-rate debt market will leave 41
states and the District of Columbia with shortfalls just as financing sources
diminish."
January 2 - Wall Street Journal (Craig Karmin): "After suffering through 2008,
some big pension funds are having second thoughts about their exposure to
private-equity firms, hedge funds and other nontraditional investments. Across
the US , pension-fund managers and investment officers have been scrutinizing
their asset allocations, especially toward so-called alternative investments.
In addition to wilted returns, pension funds are leery because some hedge funds
have made it hard to cash out ... 'What we saw as an asset before, we now see
as a liability,' says Christopher Ailman, chief investment officer of the
California State Teachers' Retirement System, the country's second-largest
public pension fund by assets."
January 2 - Bloomberg (Lindsay Fortado): "Linklaters, hired to advise on four
of the 10 biggest deals in 2008, led all law firms in mergers and acquisitions
during the smallest deal market in four years ... Sullivan & Cromwell
ranked second among firms representing buyers and sellers as total announced
mergers, acquisitions and divestitures plunged 38% to $2.50 trillion from $4.06
trillion last year."
December 30 - Bloomberg (Makiko Kitamura and Alan Ohnsman): "Toyota Motor Corp.
and Honda Motor Co., Japan's two largest carmakers, may modify their so-called
'just-in-time' manufacturing system to avoid possible supplier bankruptcies
disrupting production. General Motors Corp. and Chrysler LLC are battling to
restructure after winning $13.4 billion in emergency federal loans to keep them
operating through March. Detroit's woes could lead to a 'supplier shock,'
crippling US production at Japanese and other foreign carmakers, according to
the Center for Automotive Research."
December 30 - Bloomberg (Rebecca Christie and David Mildenberg): "GMAC LLC,
bolstered by a $6 billion federal bailout, resumed lending to General Motors
Corp. customers with lower credit scores as the US widened its effort to keep
the automaker in business."
Currency Watch
The dollar index gained 1.2% last week to 81.84. For the week on the upside,
the South African rand increased 4.3%, the Australian dollar 4.0%, the Swedish
krona 3.8%, the Norwegian krone 3.5%, the Brazilian real 2.1%, the New Zealand
dollar 1.8%, and the Canadian dollar 1.4%. On the downside, the Mexican peso
declined 2.3%, the South Korean won 1.7%, the Japanese yen 1.1%, the Swiss
franc 1.1%, the Singapore dollar 0.8%, and the Euro 0.8%.
For the year on the upside, the Japanese yen gained 23.1%, the Swiss franc
6.2%, and the Singapore dollar 0.7%. For the year on the downside, the South
African rand declined 27.7%, the British pound 26.3%, the South Korean won
25.7%, the New Zealand dollar 24.1%, the Brazilian real 23.1%, the Norwegian
krone 21.7%, the Mexican peso 20.9%, the Australian dollar 19.5%, the Canadian
dollar 18.9%, the Swedish krona 17.0%, and the Danish krone 4.0%.
Commodities Watch
January 1 - Bloomberg (Pham-Duy Nguyen): "Commodity prices in 2008 plunged the
most in five decades as demand for energy, metals and grains tumbled in the
second half ... From July to December, the slumping economy drove crude oil,
gasoline, copper, corn, and wheat down from records in the first half. In 2008,
the Reuters/Jefferies CRB Index of 19 raw materials fell 36%, the most since
the gauge debuted in 1956…"
December 31 - Wall Street Journal (Scott Kilman and Roger Thurow): "Benjamin
Riensche has just come off two of his best years in farming. But like growers
all over the globe, he is in the midst of a more turbulent era of sharply
rising and then suddenly falling prices. Now the 47-year-old, who grows corn
and soybeans across 10,000 acres in Iowa, fears he will incur losses in 2009
that would be his first red ink in 16 years. His revenue is falling, but the
costs of seed, fertilizer and machinery have remained high ... 'I never thought
the stakes could get so big,' Mr. Riensche says. 'We've gone from the nickel
slots to world-class poker.'"
December 30 - Bloomberg (Kevin Orland): "US steel-sheet prices fell 17% this
month as the US economy weakened, Purchasing magazine said."
Gold added 0.7% last week to $875 ('08 gain 5.7%), and silver jumped 9.1% to
$11.49 ('08 decline 23%). January Crude rallied $8.63 to $46.34 ('08 decline
54%). January Gasoline surged 25.8% ('08 decline 25%), and January Natural Gas
added 2.7% ('08 decline 59%). March Copper rose 12.1% ('08 decline 54%). March
Wheat increased 2.0% ('08 decline 31%), while Corn was unchanged ('08 decline
54%). The CRB index rallied 8.7% ('08 decline 36%). The Goldman Sachs
Commodities Index (GSCI) jumped 12.9% ('08 decline 42.8%).
China Watch
December 30 - Bloomberg (Wang Ying): "China National Nuclear Corp., the
nation's biggest builder of atomic power plants, secured 350 billion yuan ($51
billion) of credit lines from eight domestic banks told by the state to
increase lending to spur the economy. Lenders ... will extend more loans to
China National Nuclear for the development of atomic power and fuels, the
official Xinhua News Agency reported."
Japan Watch
December 23 - Wall Street Journal (Takashi Nakamichi and Takashi Mochizuki):
"Japanese exports dropped at their fastest rate on record in November and the
government cut its view on the economy in a monthly report, cementing
expectations of a deeper recession here. …exports fell 27% year-to-year in
November to 5.327 trillion yen ($59.77 billion), underlining that the
escalating global downturn and rising yen are taking a toll on Japan's
export-dependent economy."
December 30 - Bloomberg (Keiko Ujikane and Tatsuo Ito): "Japan's economy will
probably shrink at an annual 12.1% pace this quarter, the sharpest drop since
1974, as exports collapse, Barclays Capital said. Gross domestic product in the
three months ending tomorrow will fall at almost three times the 4.1% rate
previously predicted, said Kyohei Morita, chief Japan economist at Barclays ...
'Given the speed and the length of the contraction, this recession could be the
most severe in the postwar era,' Morita said."
Asia Bubble Watch
January 2 - Bloomberg (Shamim Adam): "Singapore said its
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