Just the Facts

By: Doug Noland | Sat, Feb 25, 2006
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Crosscurrents... For the week, the Dow dipped 0.5%, while the S&P500 added 0.2%. The Transports were up 0.7% to a new record high this week. The Utilities gained 0.5%. The Morgan Stanley Consumer index added 0.1%, while the Morgan Stanley Cyclical index fell 1.2%. The broader market was stronger than the major averages. The small cap Russell 2000 added 0.8% this week to trade to a new record high (up 9.4% y-t-d). The S&P400 Mid-cap index was up 0.8%. Technology stocks were generally on the defensive. The NASDAQ100 added 0.1%, while the Morgan Stanley High Tech index was down 0.7%. The Semiconductors fell 2.1%. The Street.com Internet Index increased 0.2%, while the NASDAQ Telecommunications index declined 0.5% (up 11.9% y-t-d). The Biotechs jumped 2.2%, increasing y-t-d gains to 9.2%. Financial stocks were strong. The Broker/Dealers jumped 2.2% (up 14.3% y-t-d), and the Banks gained 1.8%. With bullion up $6.95 to $559.05, the HUI gold index was up 2.3%.

Japanese yields are moving higher... For the week, two-year US Treasury yields increased 4 bps to 4.72%. Five-year government yields jumped 8 bps to 4.63%, and bellwether 10-year Treasury yields added 3 bps to 4.57%. Long-bond yields increased 2 bps to 4.52%. The spread between (the new) 2 and 10-year yields ended the week at negative 15 bps. Benchmark Fannie Mae MBS yields declined 3 bps to 5.80%, this week nicely outperforming Treasuries. The spread on Fannie's 4 5/8% 2014 note was little changed at 33.5, and the spread on Freddie's 5% 2014 note was unchanged at 35. The 10-year dollar swap spread declined 0.5 to 52.5. Investment-grade spreads were little changed. Junk spreads narrowed again this week and are now approaching 6-month lows. The implied yield on 3-month December '06 Eurodollars jumped 7.5 bps to 5.12%.

February 21 - Financial Times (Jennifer Hughes): "US companies have already issued almost $100bn worth of investment-grade bonds this year as huge acquisition-related deals pushed borrowing to its highest level in five years. Highly rated companies have borrowed $98.5bn since the beginning of this year, according to Thomson Financial - an 11 per cent increase on the same period in 2005 and the biggest total since the $112.5bn of debt issued in 2001. 'It's the long-predicted [mergers and acquisition] boom coming to the bond markets,' said Jim Turner, head of North American debt capital markets at BNP Paribas... Michael Mutti, credit strategist at Bear Stearns, said: "Companies are also being pressured by shareholders to lever up and that could also lead to more borrowing."

Companies have been using up cash piles for new investment and to raise dividends to shareholders."

It was a slow, holiday-shortened week. Investment grade issuers included Washington Mutual $2.0 billion, Principal Life $350 million, Health Care Properties $150 million, and Duke Energy $125 million.

Junk issuers included Station Casinos $300 million, Case New Holland $500 million, and Hovnanian $300 million.

Foreign dollar debt issuers European Investment Bank $1.0 billion, CESP Energy $300 million and Jamaica $250 million.

February 24 - Bloomberg (Chris Cooper): "Japan's five-year notes tumbled, pushing yields to the highest since 2000, after the Yomiuri newspaper said the central bank may start to end its five-year deflation-fighting policy as early as next month. The Bank of Japan may rein in its policy of making funds available to banks when board members end a two-day meeting on March 9, the Yomiuri said. A change may lead to the bank raising interest rates from near zero percent and prompt investors to demand higher yields in the world's biggest bond market."

Japanese 10-year JGB yields jumped 7.5 bps this week to 1.585%, as the Nikkei 225 index rose 2.5% (unchanged y-t-d). Emerging markets were generally firm. Brazil's benchmark dollar bond yields dipped 3 bps to 6.12%. Brazil's Bovespa equity index added 0.5% (up 15.4% y-t-d). The Mexican Bolsa surged 3.4%, with y-t-d gains of 7.3%. Mexican 10-year govt. yields dropped 9 bps to 5.37%. Russian 10-year dollar Eurobond yields rose 3 bps to 6.60%. The Russian RTS index surged 6.6%, increasing 2006 gains to a blistering 30% (one-yr. gain of 112%).

Freddie Mac posted 30-year fixed mortgage rates dipped 2 bps to 6.26%, up 57 basis points from one year ago. Fifteen-year fixed mortgage rates declined 2 bps to 5.89% (up 67 bps in a year). One-year adjustable rates fell 4 bps to 5.32%, an increase of 116 basis points from one year ago. The Mortgage Bankers Association Purchase Applications Index rose 4.3% last week. Purchase Applications were down 2.6% from one year ago, with dollar volume 2.4% lower. Refi applications declined 4%. The average new Purchase mortgage declined to $222,900, while the average ARM increased to $337,700.

Broad money supply (M3) added $1.5 billion to a record $10.281 Trillion (week of Feb. 13). Year-to-date, M3 has expanded at a 5.2% annualized rate. During the past 52 weeks, M3 has expanded 8.4%, with M3-less Money Funds up 8.6%. For the week, Currency was about unchanged. Demand & Checkable Deposits dropped $26.9 billion. Savings Deposits surged $21.9 billion, and Small Denominated Deposits gained $5.1 billion. Retail Money Fund deposits increased $3.2 billion, while Institutional Money Fund deposits dropped $9.6 billion. Large Denominated Deposits jumped $10.5 billion. Over the past 52 weeks, Large Deposits were up $267 billion, or 23.4%. For the week, Repurchase Agreements declined $3.6 billion. Eurodollar deposits added $1.0 billion.

Bank Credit is out of the 2006 starting blocks quickly. Bank Credit jumped $38.8 billion last week to a record $7.631 Trillion, with a y-t-d gain of $124.5 billion, or 12.3% annualized. Over the past 52 weeks, Bank Credit has inflated $701.3 billion, or 10.1%. For the week, Securities Credit jumped $21.6 billion. Loans & Leases were up 12.3% over the past 52 weeks, with Commercial & Industrial (C&I) Loans up 14.8%. For the week, C&I loans gained $3.1 billion, while Real Estate loans added $1.2 billion. Real Estate loans have expanded at a 10.6% rate y-t-d and 14.5% during the past 52 weeks. For the week, Consumer loans increased $1.0 billion, and Securities loans jumped $11.3 billion. Other loans added $0.6 billion.

Total Commercial Paper rose $6.7 billion last week to $1.681 Trillion. Total CP is up $32.0 billion y-t-d (8wks), or 12.6% annualized, while having expanded $241 billion over the past 52 weeks, or 16.7%. Last week, Financial Sector CP borrowings jumped $8.4 billion to $1.545 Trillion (up $37bn y-t-d), with a 52-week gain of $247 billion, or 19.0%. Non-financial CP dipped $1.7 billion to $136 billion, with a 52-week decline of 4.6%.

At $15 billion, Asset-backed securities (ABS) issuance remained strong last week (from JPMorgan). Home Equity Loan (HEL) ABS issuance totaled $11 billion. Year-to-date ABS issuance of $112 billion is running 17% ahead of 2005's record pace, and y-t-d HEL issuance of $78 billion is 33% ahead of last year's record boom.

Fed Foreign Holdings of Treasury, Agency Debt surged $15.7 billion to a record $1.572 Trillion for the week ended February 22. "Custody" holdings are up $53.3 billion y-t-d, or 22.8% annualized, and $208 billion (15.2%) over the past 52 weeks. Federal Reserve Credit has declined $10.6 billion y-t-d, or 8.3% annualized, to $815.8 billion. Fed Credit has expanded 4.5% over the past 52 weeks.

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $459 billion, or 12.4%, over the past 12 months to a record $4.168 Trillion. U.S. reserve assets were down 7.8% over the past year to $38 billion, slightly larger than Libya's and smaller than Poland's.

February 21 - Bloomberg (Halia Pavliva): "Russia will probably add about $70 billion to its foreign currency and gold reserves this year because of the high price of oil...citing Alexei Ulyukayev, first deputy chairman at the central bank."

Currency Watch:

The dollar index was again little changed for the week. On the upside, the Chilean peso gained 1.2%, the Japanese yen 1.0%, the South Korean won 0.7%, and the Singapore dollar 0.6%. On the downside, the Iceland krona was down 4.8%, the South African rand 1.4%, the Swedish krona 1.1%, and the Brazilian real 1.0%.

Commodities Watch:

It is worth noting that gold is demonstrating impressive safe haven qualities, surging $10 today after the attempted terrorist attack on a Saudi oil complex. This week saw April crude oil jump $1.62 to $62.91. April Unleaded Gasoline dipped 0.6%, and April Natural Gas slipped 0.8%. For the week, the CRB index rose 0.8%, reducing the y-t-d decline to 0.9%. The Goldman Sachs Commodities index jumped 1.9% this week, with the 2006 decline reduced to 1.8%.

China Watch:

February 24 - MarketNews Int.: "China's GDP is expected to grow 9.6% in 2006, a slight slowdown from the 9.9% growth in 2005, said a government researcher. Lu Zhongyuan, director of the Macroeconomic Research at the Development Research Center under the State Council, said...that economic growth, which started gaining momentum from the second half of 2002, has peaked in 2005 and is expected to moderate in coming years."

February 22 - Bloomberg (Clare Cheung): "Hong Kong's economy grew last year at the second-fastest pace since 2000, powered by rising exports and consumer spending. Growth will probably slow in 2006, the government said. Gross domestic product expanded 7.3 percent after 8.6 percent growth in 2004..."

February 21 - Bloomberg (Philip Lagerkranser): "Hong Kong's consumer prices advanced in January at the fastest pace in more than seven years as rents rose and food and travel became more expensive... Prices climbed 2.6 percent from a year earlier after gaining 1.8 percent in December..."

Asia Boom Watch:

February 23 - Bloomberg (Anand Krishnamoorthy and Cherian Thomas): "Indian railways may tomorrow unveil its biggest spending plan in a decade as faster economic growth stokes demand for transporting goods from coal to cars, threatening to choke Asia's oldest network. Railways Minister Lalu Prasad plans to build 10,000 kilometers (6,215 miles) of dedicated freight lines by 2010."

February 22 - Bloomberg (Cherian Thomas): "Indian Prime Minister Manmohan Singh said the 'economy is poised to grow between 8 percent and 10 percent' each year, helping to reduce poverty in the country. 'Meaningful solution to the problem of mass poverty can best be found in a framework of rapid economic growth,' Singh told the upper house of parliament today. 'Growth may be necessary condition,' but not the only condition."

February 19 - New York Times (Martin Fackler): "Yuka Yamamoto dutifully quit work to assume her expected role as suburban homemaker when she married six years ago. But she quickly grew bored at home, and when she saw a television program about online stock investing, she took $2,000 in savings and gave it a try. Today, Ms. Yamamoto says she has turned her initial investment into more than $1 million as a day trader... And by writing books and holding seminars on trading strategies, she has also become a celebrity among homemakers who are investors. She says she has met thousands of other married women who now play the stock market online, many without their husbands' full knowledge. Having overcome the country's sluggishness in embracing cyberspace and deregulating discount brokerage firms, day-trading has taken off in Japan... The number of accounts at Japan's electronic brokerage firms reached 7.9 million last September, up from 296,941 in 1999..."

February 23 - Bloomberg (Theresa Tang and James Peng): "Taiwan's economy expanded in the fourth quarter at the fastest pace in 18 months as electronics exports jumped. The government raised its growth forecast for 2006. Gross domestic product rose 6.4 percent from a year earlier after climbing 4.4 percent in the third quarter..."

February 23 - Bloomberg (George Hsu and Theresa Tang): "Taiwan's export orders rose at the slowest pace in six months in January as customers in China trimmed their purchasing requests to prevent stockpiles from building up during the Lunar New Year period. Orders, indicative of actual shipments in one to three months, gained 20 percent from a year earlier after climbing 24 percent in December..."

February 22 - Bloomberg (Stephanie Phang): "Malaysia raised its key interest rate a second time in three months to curb inflation, predicting the economy will gain momentum after a fourth-quarter slowdown. Bank Negara Malaysia raised the overnight policy rate by a quarter percentage point to 3.25 percent...the economy grew 5.2 percent in the fourth quarter..."

Unbalanced Global Economy Watch:

February 21 - Bloomberg (Gabi Thesing): "The outlook for global economic growth is the brightest in a year-and-a-half, according to a quarterly survey by Germany's Ifo economic research institute. The world economic climate index rose to 109.2 in January from 99.3 in October, Munich-based Ifo said..."

February 24 - Bloomberg (Alexandre Deslongchamps): "Canadian business profits rose 4.4 percent to a record in the fourth quarter, led by banks and retailers. Profits rose to C$57.5 billion ($49.9 billion), the 14th increase in the last 16 quarters, Statistics Canada said... Banks and other deposit-taking institutions posted an 8.5 percent increase to C$14.1 billion, while non-financial companies' profits advanced 3.2 percent to C$43.4 billion."

February 20 - Financial Times (Sarah Witt): "In the latest sign of a revival in the UK housing market, a survey by a leading property website showed that house prices rose at their fastest rate in two years during February... the average asking price for a residential property had breached £200,000 to stand at £201,600 - a rise of 2.7 per cent from the previous month..."

February 21 - Financial Times (Scheherazade Daneshkhu): "UK government tax receipts from companies soared last month thanks to strong profits made by North Sea oil corporations and healthy returns in the financial sector... The 14 per cent rise in tax receipts last month compared to January 2005 enabled the public sector to run a surplus of £12.6bn ($22bn)..."

February 22 - Bloomberg (Gabi Thesing): "The German economy, Europe's largest, failed to grow in the fourth quarter as household spending declined the most in four years and trade didn't contribute to growth. Gross domestic product, the value of all goods and services, was unchanged from the third quarter, when it gained 0.6 percent..."

February 20 - Bloomberg (Gabi Thesing): "Producer price inflation in Germany, Europe's largest economy, accelerated the most in almost 24 years, led by prices for oil and other forms of energy. Goods from plastics to newsprint were 5.6 percent more expensive in January than a year ago..."

February 23 - Bloomberg (Matthew Brockett): "Business confidence in Germany, Europe's largest economy, unexpectedly rose to the highest in more than 14 years this month, a sign that economic growth is accelerating in the 12 nations sharing the euro."

February 22 - Bloomberg (Simone Meier): "French executives' confidence rose in February to the highest in more than a year after a bigger-than-expected increase in consumer spending, suggesting Europe's third-largest economy is picking up."

February 22 - MarketNews International: "Spanish GDP rose a robust 0.9% M/M in 4Q, and 3.5% Y/Y, as an improvement in the foreign trade balance offset a slight deceleration of domestic demand, Spanish statistics institute INE said..."

February 24 - Bloomberg (Jonas Bergman): "Sweden's trade surplus in January widened from a year earlier as exports surged. The surplus grew to 15.3 billion kronor ($1.9 billion) from 9.9 billion a year earlier... Exports rose 23 percent to 84.4 billion kronor and imports increased 18 percent to 69.1 billion kronor from a year ago."

February 20 - Bloomberg (Dorota Bartyzel): "The Polish economy will grow 'about' 4.5 percent this year, PAP reported, citing the Finance Ministry. The ministry's original forecast was 4.3 percent."

February 22 - Bloomberg (Victoria Batchelor): "Australian business investment rose almost three times as much as economists expected in the fourth quarter as miners expanded production to meet surging Chinese demand, driving growth in Asia-Pacific's fifth-largest economy. Capital spending on equipment, buildings and plant climbed 9.2 percent in the three months ended Dec. 31..."

Latin America Watch:

February 24 - Bloomberg (Guillermo Parra-Bernal): "Brazil's economy expanded less than analysts estimated in the fourth quarter as a stronger currency prompted some manufacturers to curb output and a drought in the south damaged rice and soybean crops. Gross domestic product...grew 1.4 percent in the October-to-December period..."

Bubble Economy Watch:

January's reading of the Consumer Price Index was up 4.0% from January 2005. January Durable Goods Orders (down 10.2% from Dec., Ex-Transports up 0.6%) were up 5.7% from January 2005 - Ex-Transports up 9.4% y-o-y. Non-defense Capital Goods Orders were up 9.8% from January 2005.

February 24 - Econoplay.com (Gary Rosenberger): "Record construction spending in 2005 spilled into the first quarter with no soft spots detected in any segment - private or public, residential or commercial - other than disappointing progress in hurricane reconstruction, say construction executives. Spiraling building material costs are generating concerns, as they force developers to re-evaluate bids or downsize projects that have become too ambitious and too expensive for what they had budgeted at the drawing board stage. Builders are also running into capacity constraints, with the strong flow of new orders beginning to outpace the availability of skilled labor - reminiscent of the tight labor pools experienced in the late '90s and 2000. Mysteriously, there are few signs of a slowdown in condominium construction despite numerous accounts of overbuilding... 'I haven't seen anything slow down - but I've had people go back to get more funding for projects because of higher materials costs," said Rita Thompson, manager of business development for Clark Construction in Bethesda, Maryland. "That especially applies to government projects where the funding came years before. Anything that got a dollar price on it in 2004 is totally out of line today." The lion's share of the business continues to be medical and education..."

February 22 - Bloomberg (Kerry Young): "U.S. spending for health care may double to $4 trillion by 2015, propelled by an aging population using more drugs, hospital care and technology, according to a government forecast."

February 23 - Bloomberg (Henry Goldman): "New York City, where officials have already projected a $4.5 billion surplus this year, may reap another $500 million in additional revenue before June 30, when fiscal 2006 ends, state Comptroller Alan Hevesi said."

Mortgage Finance Bubble Watch:

February 24 - Bloomberg (Al Yoon and Miles Weiss): "Fannie Mae's internal accountants realized they had a problem when they saw the largest U.S. mortgage finance company was unlikely to make its own 1996 profit target of $2.48 cents a share. 'What do I have up my sleeve to solve an earnings shortfall?' Vice President of Financial Reporting Leanne Spencer asked in an undated memo to Chief Financial Officer Timothy Howard... She suggested 'management items' that could boost pretax income by $6 million. The exchange was one of at least two deliberate attempts to fudge numbers to meet financial targets that led to $10.8 billion in accounting errors at the government-chartered company. The report concluded that Fannie Mae, which controlled assets exceeding $1 trillion, developed a culture that fostered misleading results and employed a staff 'unqualified' to detect errors by top management."

Energy and Crude Liquidity Watch:

February 21 - Bloomberg (Brendan Murray): "President George W. Bush said the rising cost of crude oil is making the development of energy from agricultural waste and other alternative sources economically viable. Higher oil prices over the last year are acting 'like hidden taxes' on U.S. consumers that can be removed only by developing alternatives to imported petroleum. 'In order for us to achieve this national goal of becoming less dependent on foreign sources of oil, we've got to spend money' on research, Bush said..."

February 20 - Reuters (Tony Munroe and Dayan Candappa): "Later this year, Akbar Shah plans to bring a couple dozen of the Middle East Gulf's richest people -- and their chequebooks -- to Asia on a hunt for investments. Middle Eastern wealth, inflated by high oil prices, is increasingly finding its way into Asian assets ranging from property and infrastructure to stocks and buyouts. Some market watchers say Asian bourses should enjoy a lift from the influx of oil money, with Gulf investors expected to buy more than $360 billion in overseas assets during 2005 and 2006, according to the Institute of International Finance. 'The Middle East names, even the governments, are looking to diversify, and where else but where there's huge opportunity,' said Shah, managing director and Middle East region head of Citigroup Global Wealth Management."

February 22 - Bloomberg (Halia Pavliva): "Russia's current account surplus widened to a preliminary $86.6 billion in 2005, increasing an annual 48 percent because of the high price of oil and gas, the Economy Ministry said. Oil and gas, the country's major export communities, accounted for 61 percent of Russia's export revenue in 2005..."

February 22 - Bloomberg (Garfield Reynolds): "Russia received $53.7 billion of investment last year, a 32 percent increase from 2004 as companies attracted more loans from abroad amid the high price of oil and gas, the country's major export commodities."

February 22 - Bloomberg (Todd Prince): "Russia aims to triple the size of its aviation industry over the next decade by pumping $10 billion into the new state-controlled holding company... President Vladimir Putin yesterday ordered the creation of OAO Unified Aircraft Corp. from state and private companies so the former Soviet state's industry can increase its share of the global aerospace market."

Speculator Watch:

February 21 - Financial Times (Peter Smith): "Stephen Schwarzman, head of Blackstone, yesterday warned the buy-out industry that prices being paid for assets were in 'nose bleed territory' and 'seeds of excess' were being sown. Mr. Schwarzman said private equity had operated in highly favourable conditions in recent years and its returns had been 'amazing'... 'We have low [interest] rates, tons of money in both the private equity and debt markets, an environment where economies are expanding, where there is real growth around the world and where there is enormous M&A activity as assets change hands,' he told a packed audience of buy-out executives at the Super Return conference in Frankfurt. 'But when it ends, it always ends badly. One of those signs is when the dummies can get money and that's where we are now.' 'The torrent of money that has been unleashed is remarkable to those of us that have raised money over a long period of time,' he said."

An unforeseen commitment arose at week's end, so it's Just the Facts this week. Please accept my apologies.


 

Doug Noland

Author: Doug Noland

Doug Noland
The Credit Bubble Bulletin
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