Just the Facts

By: Doug Noland | Sun, May 23, 2010
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For the week, the S&P500 dropped 4.2% (down 2.5% y-t-d), and the Dow fell 4.0% (down 2.3%). The Banks sank 5.4% (up 18.0%), and the Broker/Dealers dropped 4.0% (down 5.7%). The Morgan Stanley Cyclicals sank 5.6% (up 1.0%), and the Transports dropped 5.5% (up 3.5%). The Morgan Stanley Consumer index declined 3.4% (down 0.1%), and the Utilities sank 4.3% (down 8.1%). The S&P 400 Mid-Caps dropped 5.0% (up 3.2%), and the small cap Russell 2000 was slammed for 6.4% (up 3.8%). The Nasdaq100 fell 4.4% (down 2.0%), and the Morgan Stanley High Tech index declined 3.7% (down 5.7%). The Semiconductors declined 1.3% (down 3.0%). The InteractiveWeek Internet index dropped 4.2% (down 0.2%). The Biotechs dropped 4.2% (up 10.4%). With bullion sinking $56, the HUI gold index was hammered for 11.4% (up 0.5%).

One-month Treasury bill rates ended the week at 15 bps and three-month bills closed at 15 bps. Two-year government yields dipped 2 bps to 0.73%. Five-year T-note yields fell 12 bps to 1.99%. Ten-year yields sank 22 bps to 3.24%. Long bond yields dropped 23 bps to 4.11%. Benchmark Fannie MBS yields dropped 12 bps to 4.09%. The spread between 10-year Treasury and benchmark MBS yields widened 10 bps to 85 bps. Agency 10-yr debt spreads were little changed at 40 bps. The implied yield on December 2010 eurodollar futures jumped 13 bps to 0.995%. The 10-year dollar swap spread increased 1.25 to 4.75. The 30-year swap spread declined 1.75 to negative 20.25. Corporate bond spreads widened. An index of junk bond spreads widened 13 to 523 bps.

Debt issuance remained slow. Investment grade issuers EOG Resources $1.0bn, Franklin Resources $900 million, L-3 Communications $800 million, Public Service E&G $300 million, Appalachian Power $300 million, Kilroy Realty $250 million, Entergy Texas $200 million, and Alberto-Culver $150 million.

Junk issuers included J.C. Penney $400 million, Calpine $400 million, American Tire $250 million, Dave & Busters $200 million, and Hillman Group $150 million.

I saw no converts issued.

International dollar debt sales included Export Development Canada $1.0bn, Manitoba $600 million and International Bank of Reconstruction and Recovery $100 million.

U.K. 10-year gilt yields sank 20 bps to 3.55%, while German bund yields dropped 20 bps to a record low 2.66%. Greek bond yields rose 11 bps to 7.82%, while 10-year Portuguese yields were little changed at 4.63%. The German DAX equities index sank 3.8% (down 2.2% y-t-d). Japanese 10-year "JGB" yields fell 6 bps to 1.235%. The Nikkei 225 dropped 6.5% (down 7.2%). Emerging markets were under additional pressure. For the week, Brazil's Bovespa equities index dropped 5.0% (down 12.1%), and Mexico's Bolsa declined 3.7% (down 4.6%). Russia's RTS equities index sank 8.5% (down 9.9%). India's Sensex equities index declined 3.2% (down 5.8%). China's Shanghai Exchange fell 4.2% (down 21.2%). Brazil's benchmark dollar bond yields rose 5 bps to 4.91%, and Mexico's benchmark bond yields rose 6 bps to 4.95%.

Freddie Mac 30-year fixed mortgage rates declined 7 bps last week to 4.93% (up 11bps y-o-y). Fifteen-year fixed rates fell 6 bps to 4.30% (down 20bps y-o-y). One-year ARMs dropped 5 bps to 4.02% (down 80bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 4 bps to 5.59% (down 76bps y-o-y).

Federal Reserve Credit surged $28.9bn last week to a record $2.339 TN. Fed Credit was up $119bn y-t-d (14% annualized) and $174bn, or 8.0%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 5/19) declined $7.1bn to $3.057 TN. "Custody holdings" have increased $101bn y-t-d (8.9% annualized), with a one-year rise of $347bn, or 12.8%.

M2 (narrow) "money" supply was up $25.3bn to $8.530 TN (week of 5/10). Narrow "money" has declined $17.2bn y-t-d. Over the past year, M2 grew 1.5%. For the week, Currency added $1.1bn, while Demand & Checkable Deposits sank $36.0bn. Savings Deposits surged $67.3bn, while Small Denominated Deposits declined $3.6bn. Retail Money Fund assets fell $3.3bn.

Total Money Market Fund assets (from Invest Co Inst) dropped $33.6bn to $2.844 TN. In the first 20 weeks of the year, money fund assets have dropped $449bn, with a one-year decline of $929bn, or 24.6%.

Total Commercial Paper outstanding dropped $27.0bn last week to $1.076 TN. CP has declined $94bn, or 20.9% annualized, year-to-date, and was down $208bn from a year ago (16.2%).

International reserve assets (excluding gold) - as tallied by Bloomberg's Alex Tanzi - were up $1.679 TN y-o-y, or 25.1%, to a record $8.379 TN. Reserves in China increased 25.3% y-o-y to $2.447 TN.


Global Credit Market Watch:

May 21 - Financial Times (Quentin Peel): "Germany on Thursday stepped up the pressure for a global agreement on tighter financial regulation, a banking tax or levy and a financial transaction tax, while spelling out the rules it wants members of the eurozone to adopt to curb their public debts and deficit spending. Angela Merkel, the chancellor, held fraught talks with parties in the Bundestag to win support for Germany to guarantee credits of up to €150bn ($187bn, £130bn) as its contribution to the €750bn stabilisation package for the eurozone. It was clear that she would win a majority for the move from her centre-right coalition but fail to win cross-party support from the opposition Social Democrats and Greens."

May 17 - Bloomberg (Ben Moshinsky): "Sovereign credit-default swap transactions face mandatory disclosure rules in the wake of the Greek debt crisis, the European Union's financial services commissioner said... Michel Barnier said he would deal with the sovereign CDS market 'very severely.' Credit-rating companies should also be subject to tougher transparency rules when rating a country's ability to pay back its debt, he said. 'These people don't like being out in the light of day,' Barnier said of sovereign CDS traders... 'We'll flood them with light.' German Chancellor Angela Merkel and French President Nicolas Sarkozy have called for curbs on speculating with sovereign credit-default swaps, which many blame for exacerbating Greece's fiscal woes. They have also called for a review of European Union rules regulating credit-ratings companies."

May 18 - Bloomberg (Ben Moshinsky): "European Union finance ministers approved a draft law to tighten hedge-fund regulations that has drawn objections from the U.K. and the U.S. The proposal, which would impose transparency standards on hedge-fund managers based outside of the EU, was adopted at a regular ministerial meeting in Brussels... The draft law also would set restrictions on investment managers' bonuses and on the use of debt."

May 21 - Bloomberg (Tony Barrett): "Surging market volatility on Europe's debt troubles rivals past crises... The...Chicago Board Options Exchange Volatility Index, the benchmark gauge of U.S. stock options known as the VIX, jumped to 45.79 by yesterday's close, the highest since the financial crisis spurred by the bankruptcy of Lehman Brothers Holdings Inc. and above levels following the LTCM debacle, the 2001 attacks on the U.S., and WorldCom."

May 21 - Bloomberg (Jonathan Burgos and Garfield Reynolds): "Investors withdrew some $12 billion from U.S. and European equity funds in the week to May 19, the most in almost two years...EPFR Global said..."

May 21 - Bloomberg (Tim Catts): "Sales of U.S. corporate bonds fell 67% this week and issuance of high-yield company debt plunged to the lowest this year amid rising investor concern that a $1 trillion rescue package won't help indebted European nations avoid default... Overall sales fell to the second-lowest this year...

May 18 - Bloomberg (Elizabeth Stanton): "Investors should sell U.S. stocks because the market is at risk of a 'major crash,' Richard Russell, editor of the Dow Theory Letters newsletter, said... The decline would follow should the Dow Jones Industrial Average and Dow Jones Transportation Average fall below their May 7 levels, he said... 'If I read the stock market correctly, it's telling me that there is a surprise ahead,' Russell wrote. 'And that surprise will be a reversal to the downside for the economy, plus a collection of other troubles ahead.' ...Russell, 85, has published Dow Theory Letters every three weeks since 1958 and posts daily market commentaries on his website."

May 18 - Bloomberg (Aaron Kirchfeld, Niklas Magnusson and Elena Logutenkova): "Europe's banks are facing déjà vu. Less than two years after the collapse of Lehman Brothers Holdings Inc., fresh tremors in the debt markets are threatening to shake the financial system. This time the concern isn't about subprime mortgages or exotic derivatives, it's about banks' holdings of bonds sold by European Union governments including Greece, Portugal and Spain. Pledges of $1 trillion in EU aid have failed to shore up the euro or dispel doubts about the region's finances... 'There's a concern this may be Lehman II,' said Konrad Becker, a...banking analyst at Merck Finck & Co. 'The direct risks of writedowns and loan defaults combined with indirect ones such as mistrust between banks could lead to a systemic crisis.'"


Global Government Finance Bubble Watch:

May 21 - Bloomberg (Alison Vekshin and Phil Mattingly): "The U.S. Senate, bringing Congress to the brink of passing the most comprehensive regulation of the financial industry since the Great Depression, approved a bill that imposes restrictions on proprietary trading by banks and creates a consumer protection agency designed to prevent lending abuses that triggered the housing collapse and the worst unemployment in almost three decades. The legislation...requiring reconciliation with a bill passed by the House of Representatives in December, provides a mechanism for liquidating financial institutions, until recently considered too big to fail, a council of regulators monitoring threats to the economy and specific restraints on the trading of so-called derivatives, which spawned the toxic debts that seized up the credit markets in 2007 and 2008 and prompted the Federal Reserve to make trillions of dollars of loans to banks on the brink of insolvency."

May 18- Bloomberg (Tim Catts): "Two years after suffering $213.2 billion of losses when debt markets froze, investors in junk bond are accepting what Moody's... calls the weakest creditor protections since 2007. Even with housing starts hovering at their lowest levels on record, Beazer Homes USA Inc. managed to sell bonds this month on terms that allow it to add more debt."


Currency Watch:

In an especially wild week for the currency markets, the dollar index dipped 0.8% to 85.38 (up 19.7% y-t-d). For the week on the upside, the Japanese yen increased 2.7% and the Euro gained 1.7%. For the week on the downside, the South Korean won declined 8.0%, the Australian dollar 6.1%, the New Zealand dollar 4.0%, the South African rand 3.9%, the Norwegian krone 3.2%, the Brazilian real 2.9%, the Mexican peso 2.8%, the Canadian dollar 2.3%, the Taiwanese dollar 1.5%, the Swiss franc 1.4%, the Singapore dollar 1.3%, the Swedish krona 0.8%, and the British pound 0.5%.


Commodities Watch:

The CRB index dropped 2.8% (down 11.3% y-t-d). The Goldman Sachs Commodities Index (GSCI) sank 5.5% (down 9.7% y-t-d). Spot Gold was hit for 4.6% to $1,177 (up 7.3% y-t-d). Silver was slammed for 8.1% to $17.66 (up 4.8% y-t-d). July Crude sank $5.25 to $70.18 (down 12% y-t-d). June Gasoline fell 7.8% (down 4.3% y-t-d), and June Natural Gas dropped 6.2% (down 27% y-t-d). July Copper declined 1.3% (down 8% y-t-d). May Wheat was little changed (down 13% y-t-d), while May Corn gained 1.7% (down 11% y-t-d).


China Bubble Watch:

May 21 - Bloomberg (Chua Kong Ho): "China may ease tightening measures as the deepening European crisis threatens global growth, AMP Capital Investors and BNP Paribas said, while BofA Merrill Lynch Global Research predicted a delay in the yuan's revaluation. The government may postpone an increase in borrowing costs until the third quarter after raising mortgage rates and down payments to curb record gains in home prices, BNP said."

May 19 - Bloomberg: "China's economic planning agency predicted inflation of about 3% this month, a level that economists say could lead to the nation's first interest-rate increase since the financial crisis.

May 19 - Bloomberg (Chia-Peck Wong): "Martin Lee, the youngest son of Hong Kong real estate tycoon Lee Shau-kee, paid HK$1.82 billion ($233 million) for a site in the city's most expensive residential area, signaling luxury home demand is withstanding government measures to avert a bubble."


India Watch:

May 19 - Bloomberg (Kartik Goyal): "India's merchandise exports rose in April for a sixth straight month on growing demand for the nation's cars, jewelry and engineering goods. Overseas shipments rose 36.2% to $16.9 billion from a year earlier... Imports rose 43.3% to $27.3 billion, widening the trade deficit to $10.4 billion in the month."


Asia Bubble Watch:

May 19 - Bloomberg (David Yong and Eunkyung Seo): "Asian countries may benefit from capital controls to help limit inflows that pose a risk to their economies and financial systems, according to the Asian Development Bank. Authorities should consider 'the full array of policy measures available in their toolkit,' the...lender said... 'Volatile capital flows pose a significant risk, affecting both macroeconomic management and overall financial stability,' Vice President B.N. Lohani said..."

May 21 - Bloomberg (Chinmei Sung and Weiyi Lim): "Taiwan's economy grew at the fastest pace in more than 30 years last quarter on surging sales of computer chips and display panels to China... Gross domestic product rose 13.27% the three months to March 31 from a year earlier..."

May 17 - Bloomberg (Shamim Adam): "Singapore's exports rose at the fastest pace since 2005 in April as a recovering global economy lifted shipments by electronic makers. Non-oil domestic exports climbed 29.4% from a year earlier..."


Latin America Bubble Watch:

May 21 - Bloomberg (Gabrielle Coppola and Veronica Navarro Espinosa): "Brazilian companies are avoiding the dollar bond market for a third week, the longest drought since August, as Europe's debt crisis pushes borrowing costs higher. 'This market is closed,' said Guillermo Mondino, head of Latin American research at Barclays..."


Unbalanced Global Economy Watch:

May 21 - Bloomberg (Craig Stirling): "Britain had the biggest fiscal deficit for any April since monthly records began in 1993, underlining the scale of the squeeze to come as Chancellor of the Exchequer George Osborne prepares an emergency budget."

May 18 - Bloomberg (Simone Meier): "European inflation accelerated to a 16-month high and exports jumped the most in more than a year as the economy gathered strength. Consumer prices in the economy of the 16 nations using the euro rose 1.5% in April from a year earlier..."


U.S. Bubble Economy Watch:

May 19 - Bloomberg (Mike Dorning): "Ten months after graduating from Ohio State University with a civil-engineering degree and three internships, Matt Grant finally has a job -- as a banquet waiter at a Clarion Inn... 'It's discouraging right now,' said the 24-year-old, who sent out more than 100 applications for engineering positions. 'It's getting closer to the Class of 2010, their graduation date. I'm starting to worry more.' Schools from Grant's alma mater to Harvard University will soon begin sending a wave of more than 1.6 million men and women with bachelor's degrees into a labor market with a 9.9% jobless rate..."


Derivatives Watch:

May 21 - Bloomberg (Christine Harper and Dawn Kopecki): "Wall Street banks, surprised that the Senate's financial overhaul passed with language that could curtail their derivatives trading, are now hoping the rule can be killed in Congressional negotiations. Lawmakers have been telling Wall Street the Senate provision would fail, 'but it passed, so people are nervous,' said Paul Miller, analyst at FBR Capital Markets... 'The problem is that everybody in Congress wants it out, but nobody wants the responsibility of taking it out.'"


Real Estate Watch:

May 19 - Bloomberg (Kathleen M. Howley): "A record share of U.S. mortgages were in foreclosure in the first quarter as job losses caused homebuyers to fall behind on monthly payments... The inventory of homes in foreclosure rose to 4.63% from 4.58% in the fourth quarter... The combined share of foreclosures and mortgage delinquencies was 14%, or about one in every seven U.S. mortgages."


Central Bank Watch:

May 19 - Bloomberg (Scott Hamilton and Svenja O'Donnell): "Bank of England Governor Mervyn King downplayed the threat of inflation after consumer prices jumped at the fastest annual pace since 2008, saying the surge is 'temporary' and masks slack in the British economy. Inflation accelerated to 3.7% in April... 'Inflation is getting increasingly worrisome,' said Alan Clarke, an economist at BNP Paribas...'The Bank of England will be concerned that expectations will be dislodged. If I was a betting man I'd say inflation will be on the high side of the Bank of England's forecasts.'"


Muni Watch:

May 17 - Bloomberg (Dunstan McNichol): "Orange County, California, whose 1994 municipal bankruptcy was then the largest in U.S. history, had some advice for Harrisburg, Pennsylvania, the state capital weighing Chapter 9 protection. There are 'positive' elements, county Treasurer Chriss Street said in an unsolicited telephone call, according to Harrisburg Controller Dan Miller... 'Two years after they filed, they had access to capital markets for revenue bonds; seven years after they filed, they had a double-A rating,' Miller said... 'Those were pretty good results."

May 18 - Bloomberg (Martin Z. Braun and William Selway): "A telephone call between a financial adviser in Beverly Hills and a trader in New York was all it took to fleece taxpayers on a water-and-sewer financing deal in West Virginia. The secret conversation was part of a conspiracy stretching across the U.S. by Wall Street banks in the $2.8 trillion municipal bond market. The call came less than two hours before bids were due for contracts to manage $90 million raised with the sale of West Virginia bonds. On one end of the line was Steven Goldberg, a trader with Financial Security Assurance Holdings Ltd. On the other was Zevi Wolmark, of advisory firm CDR Financial Products Inc. Goldberg arranged to pay a kickback to CDR to land the deal, according to government records filed in connection with a U.S. Justice Department indictment of CDR and Wolmark."

May 21 - New York Times (Mary Williams Walsh and Amy Schoenfeld): "In Yonkers, more than 100 retired police officers and firefighters are collecting pensions greater than their pay when they were working. One of the youngest, Hugo Tassone, retired at 44 with a base pay of about $74,000 a year. His pension is now $101,333 a year. It's what the system promised, said Mr. Tassone, now 47... the cost of public pensions has been systemically underestimated nationwide for more than two decades, say some analysts. By these estimates, state and local officials have promised $5 trillion worth of benefits while thinking they were committing taxpayers to roughly half that amount."


New York Watch:

May 21 - Bloomberg (Martin Z. Braun): "New York City faces a $3.3 billion budget deficit in the fiscal year beginning July 1, 2011, about $500 million less than the gap projected by Mayor Michael Bloomberg, the city's Independent Budget Office said."


Speculator Watch:

May 19 - Bloomberg (Tomoko Yamazaki): "Hedge funds globally had net inflows for the third straight month in April, bringing the industry's assets to $1.53 trillion, before Greek debt concerns escalated at the end of the month, Eurekahedge Pte said."

May 19 - Bloomberg (Michael Tsang and Inyoung Hwang): "Initial public offerings from U.S. companies backed by private-equity firms are losing money for investors for the first time in at least a decade, making them the worst performers in 2010's IPO market. The 13 offerings by private-equity funds have fallen 2% in the first month of trading after averaging gains every year since at least 2001... The IPOs have also lagged behind the Standard & Poor's 500 Index... The disparity indicates that investors are becoming less willing to purchase what private-equity firms are selling..."

 

Daddy's little buddy is celebrating his second birthday this evening, so I'll be back to writing next week.

 


 

Doug Noland

Author: Doug Noland

Doug Noland
The Credit Bubble Bulletin
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