Page 2 of 3 CREDIT BUBBLE BULLETIN Bankruptcy ahead
Commentary and weekly watch by Doug Noland
My bet is that this massive government intrusion into mortgage finance
eventually backfires. It puts Washington on course for bankrupting the country,
while doing little to direct financial and real resources in a manner to spur
needed economic restructuring.
For the week, the S&P500 gained 2.5% (up 18.3% y-t-d), and the Dow rose
2.2% (up 11.9% y-t-d). The Banks surged 5.0% (up 7.6%), and the Broker/Dealers
jumped 3.9% (up 53.8%). The Morgan Stanley Cyclicals increased 1.5% (up 58.3%),
and Transports added 0.1% (up 12.5%). The Morgan Stanley Consumer index added
1.1% (up 16.1%), and the Utilities advanced 3.6% (up 1.0%). The broader market
remains quite strong. The S&P 400 Mid-Caps jumped 3.3% (up 30.3%), and the
small cap Russell 2000 surged 4.1% (up 23.7%). The Nasdaq100 gained 2.4% (up
42.4%) and the Morgan Stanley High Tech added 1.7% (up 58.2%). The
Semiconductors gained 1.6% (up 53.9%). The InteractiveWeek Internet index rose
2.7% (up 62.9%). The Biotechs jumped 3.1% (up 47.9%). Although Bullion gained
$2.30, the HUI gold index slipped 0.5% (up 40.2%).
One-month Treasury bill rates ended the week at 3 bps, and three-month bills
closed at 8 bps. Two-year government yields rose 8 bps to 0.94%. Five-year
T-note yields jumped 15 bps to 2.43%. Ten-year yields were 12 bps higher to
3.47%. Long bond yields gained 4 bps to 4.22%. Benchmark Fannie MBS yields
increased 8 bps to 4.38%. The spread between 10-year Treasuries and benchmark
MBS narrowed 4 to 91. Agency 10-yr debt spreads narrowed one to 17 bps. The
implied yield on December 2010 eurodollar futures jumped 21 bps to 1.875%. The
2-year dollar swap spread increased 4.5 to 36.5 bps; the 10-year dollar swap
spread increased 3.5 to 20.75 bps; and the 30-year swap spread increased 6.25
to negative 9.5 bps. Corporate bond spreads narrowed notably to pre-Lehman
levels. An index of investment grade bond spreads narrowed 19 bps to 143, while
an index of junk spreads narrowed 35 to 657 bps.
Corporate debt issuance was strong. Investment grade issuers included Morgan
Stanley $3.0 billion, Citigroup $5.0 billion, Cenovus Energy $3.5 billion,
Newmont Mining $2.0 billion, DirectTV $2.0 billion, GE Capital $600 million,
Exelon Generation $1.5 billion, PNC $500 million, Markel $350 million, Kimco
Realty $300 million, Toll Brothers $250 million, Avista $250 million, National
Life Insurance $100 million, and Duke Energy $100 million.
Junk bond funds enjoyed inflows of $339 million (from AMG). Junk issuers
included Newpage $1.7 billion, Ford Motor Credit $1.0 billion, CSN Island $750
million, Blockbuster $675 million, Felcor Lodging $630 million, Frontier
Communications $600 million, Textron $600 million, Qwest $550 million, MGM
Mirage $475 million, Del Monte Foods $450 million, Country Garden $375 million,
Continental Resources $300 million, and Concho Resources $300 million.
I saw no convert issues.
International dollar-denominated debt issuance remained strong. Issuers
included SFEF $4.5 billion, Shell $4.0 billion, Barclays Bank $2.0 billion,
Export Development Canada $1.0 billion, Voto-Votorantim $1.0 billion, Central
American Bank $500 million, Axtel SAB $300 million and Corporacion GEO $250
U.K. 10-year gilt yields jumped 13 bps to 3.74%, and German bund yields rose 14
bps to 3.37%. The German DAX equities index gained 1.4% (up 18.6%). Japanese
10-year "JGB" yields gained 4 bps to 1.34%. The Nikkei 225 slipped 0.7% (up
17.1%). Emerging markets were mostly strong. Russia's RTS equities index surged
4.1% (up 97.1%). India's Sensex equities index gained 2.9% (up 73.5%). China's
Shanghai Exchange declined 0.9%, lowering 2009 gains to 62.7%. Brazil's
benchmark dollar bond yields fell 7 bps to 5.12%. Brazil's Bovespa equities
index jumped 4.0% (up 61.7% y-t-d). The Mexican Bolsa gained 2.1% (up 33.8%
y-t-d). Mexico's 10-year $ yields bps to 5.5%.
Freddie Mac 30-year fixed mortgage rates declined 3 bps to 5.04% (down 74bps
y-o-y). Fifteen-year fixed rates dipped 3 bps to 4.47% (down 88bps y-o-y).
One-year ARMs dropped 6 bps to 4.58% (down 45bps y-o-y). Bankrate's survey of
jumbo mortgage borrowing costs had 30-yr fixed jumbo rates unchanged at 6.18%
(down 75bps y-o-y).
Federal Reserve Credit rose $19.0 billion last week to a 17-wk high $2.089
trillion. Fed Credit has declined $158 billion y-t-d, although it expanded
$1.157 trillion over the past 52 weeks (124%). Elsewhere, Fed Foreign Holdings
of Treasury, Agency Debt this past week (ended 9/16) jumped $15.0 billion to a
record $2.843 trillion. "Custody holdings" have expanded at an 18.2% rate
y-t-d, and were up $434 billion over the past year, or 18.0%.
M2 (narrow) "money" supply rose $12.6 billion to $8.306 trillion (week of 9/7).
Narrow "money" has expanded at a 2.0% rate y-t-d and 8.0% over the past year.
For the week, Currency increased $3.2 billion, and Demand & Checkable
Deposits rose $28.4 billion. Savings Deposits declined $8.0 billion, and Small
Denominated Deposits fell $6.7 billion. Retail Money Funds declined $4.3
Total Money Market Fund assets (from Invest Co Inst) sank $61.0 billion to
$3.482 trillion. Money fund assets have declined $348 billion y-t-d, or 12.8%
annualized. Money funds increased $70 billion, or 2.0%, over the past year.
Total Commercial Paper outstanding increased $16.1 billion (5-wk gain of $115
billion) to a 13-wk high $1.190 trillion. CP has declined $492 billion y-t-d
(41% annualized) and $6574 billion over the past year (33%). Asset-backed CP
rose $18.0 billion to $502 billion, with a 52-wk drop of $260 billion (34%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $275 billion y-o-y to $7.204 trillion. Reserves have
increased $440 billion year-to-date.
Global Credit Market Watch
September 18 - Bloomberg (John Detrixhe): "Citigroup Inc. and Morgan Stanley
led the most US corporate bond sales in four months this week ... Borrowers
sold at least $39 billion of debt ... Including high-yield, high-risk, or junk,
debt, companies have borrowed at least $932 billion in bonds this year, a 37%
increase from 2008."
September 15 - Bloomberg (Laura Cochrane and Lester Pimentel): "Emerging-market
borrowing costs fell to levels before the collapse of Lehman ... The extra
yield investors demand to own developing-nations' bonds instead of US
Treasuries dropped 13 bps today to 3.31 percentage points ... "
September 17 - Bloomberg (Jeremy R. Cooke): "State and local government bonds
returned 14% this year so far, beating their performance during the comparable
period in every year since Merrill Lynch & Co.'s Municipal Master Index
began in 1989."
September 17 - Bloomberg (Mary Schlangenstein): "AMR Corp.'s American Airlines,
the world's second-largest carrier, said it raised $2.9 billion in cash and
financing and will add flying at four US hubs to focus on the most-profitable
parts of its network."
September 14 - Bloomberg (Mark Deen and David Tweed): "Joseph Stiglitz, the
Nobel Prize- winning economist, said the US has failed to fix the underlying
problems of its banking system after the credit crunch and the collapse of
Lehman Brothers Holdings Inc. ‘In the US and many other countries, the
too-big-to-fail banks have become even bigger,' Stiglitz said ... ‘The problems
are worse than they were in 2007 before the crisis.' Stiglitz's views echo
those of former Federal Reserve Chairman Paul Volcker ... "
Government Finance Bubble Watch
September 18 - Bloomberg (Thomas Penny): "Britain posted the biggest budget
deficit for any August since modern records began in 1993 as the recession
destroyed tax revenue and welfare costs soared. The 16.1 billion-pound ($26.3
billion) shortfall compared with a deficit of 9.9 billion pounds a year earlier
September 18 - Bloomberg (Caroline Hyde and Anchalee Worrachate): "Germany and
Austria led governments and companies in Europe selling $21.7 billion of bonds
in the US currency this week to take advantage of the reduced cost of
exchanging the proceeds back into euros. The sales were the most since February
September 18 - Bloomberg (Lester Pimentel and Veronica Navarro Espinosa):
"Mexico sold $1.75 billion of bonds in its first international issue since it
was forced to pull a 21-year debt offer seven months ago ... Yields on Mexico's
2019 bonds have dropped to 5.16% from 6.36% in March ... "
September 16 - Bloomberg (Dan Levy): "Tom Perkins, the venture capitalist whose
firm helped finance Google Inc. and Amazon.com, paid $9.35 million for a
penthouse condominium in the Millennium Tower, San Francisco's tallest
residential tower. The 4,806 square-foot apartment is on the top floor of the
60-story building in the city's South of Market area ... ‘It's a good time to
buy things other than paper,' Perkins, 77, co-founder of ... Kleiner Perkins
Caufield & Byers, said ... "
September 15 - Bloomberg (Paul Abelsky): "Russia's government sees a handful of
regional currencies emerging over the next decade to challenge the dollar, as
long as emerging markets continue to grow, President Dmitry Medvedev's senior
economic adviser said. The world will probably have ‘five or six currency
unions' similar to the euro region ... Arkady Dvorkovich said ... "
The dollar index slipped 0.1% this week to 76.51. For the week on the upside,
the Swedish krona increased 2.0%, the Norwegian krone 1.3%, the Brazilian real
1.2%, the South Korean won 1.2%, the Danish krone 1.0%, the Swiss franc 0.8%,
the Canadian dollar 0.7%, and the Singapore dollar 0.5%. On the downside,
British pound declined 2.4% and the Japanese yen fell 0.7%.
September 16 - Bloomberg: "Commodity demand in China, the largest metals user,
‘is back on track in a very big way,' and copper and coking coal have the best
prospects for price gains ... according to CLSA Research Ltd. ‘Commodities that
give investors the most upside potential when the rest of the world demand
recovers' are those with supply constraints, Andrew Driscoll ... said ... ‘In
the next twelve months, having exposure to copper is going to be a good
investment.' China's $586 billion stimulus plan and a record $1.1 trillion of
lending in the first half of this year have countered a 10-month slump in the
nation's exports, helping Asia to lead a global rebound from the worst slump
since the 1930s. Copper futures have more than doubled this year."
September 17 - Bloomberg (Glenys Sim): "Private investors in China, the world's
largest metals user, have stockpiled ‘substantial' quantities of copper as the
government ramps up stimulus spending to spur the economy, according to Sucden
Financial Ltd. Pig farmers and other speculators may have amassed more than
50,000 metric tons ... "
September 16 - Bloomberg (Zijing Wu): "Chinese companies will step up the pace
of overseas mergers and acquisitions in a ‘new wave' of deals, said Xiong
Weiping, chairman of Aluminum Corp. of China ... ‘Chinese companies will
reinforce the going-out strategy and participate in this new wave of M&As,'
Xiong said ... There will be more mergers and acquisitions in the mining sector
with the end of the financial crisis, he said."