So, You Think You've About Wrapped Things Up?

By: Doug Noland | Fri, Apr 21, 2006
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For the week, the Dow jumped 1.9%, and the S&P500 gained 1.7%. The Transports rose 1.3%, increasing y-t-d gains to 12.2%. The Morgan Stanley Cyclical index jumped 2.9%, increasing 2006 gains to 8.6%. The Utilities surged 3.6%, and the Morgan Stanley Consumer index added 0.9%. The broader market was very strong. The small cap Russell 2000 surged 2.8% (up 14.7% y-t-d), and the S&P400 Mid-cap index gained 3.1% (up 9.5% y-t-d). Technology stock were mixed but generally underperformed. The NASDAQ100 slipped 0.2%, and the Morgan Stanley High Tech index declined 0.3%. The Semiconductors gained 2%, and The Street.com Internet Index advanced 1.6%. The highflying NASDAQ Telecommunications index declined 1.4%. Financial stocks were strong, with the Broker/Dealers up 4.0% (up 22.5% y-t-d), and the Banks up 1.6% (up 4.5% y-t-d). With bullion surging $31 to $634, the HUI gold index gained 7%.

For the week, two-year Treasury yields fell 6 bps to 4.89%, and five-year yields declined 6 bps to 4.91%. Bellwether 10-year yields fell 4 bps to 5.01%. Long-bond yields dipped 2 bps to 5.09%. The 2yr/10yr spread increased 2 bps, ending the week at a positive 12 bps. Benchmark Fannie Mae MBS yields dropped 7 bps to 6.085%, this week again outperforming Treasuries. The spread on Fannie's 4 5/8% 2014 note narrowed 3 to 26, and the spread on Freddie's 5% 2014 note narrowed 2.5 to 29. The 10-year dollar swap spread declined 2.5 to 52.25. Investment grade and junk bond spreads were generally little changed this week. The implied yield on 3-month December '06 Eurodollars declined 5.5 bps to 5.29%.

Investment grade issuers included Charter One Bank $1.5 billion, Lehman Brothers $500 million, Lennar $500 million, Health Management $400 million, Pacific Life $320 million, Zions Bancorp $250 million, Florida Power & Light $300 million, and Horace Mann Education $125 million.

April 19 - Bloomberg (Caroline Salas): "The fastest-growing part of the bond market is turning 2006 into a record year for loans to companies with ratings below investment grade. Sales of collateralized loan obligations, bonds backed by a variety of loans, more than doubled in the first quarter to $17 billion from $8 billion a year earlier, according to Standard & Poor's."

Junk issuers included Chemtura $500 million, Sensata Technologies $450 million, Affinion Group $355 million, Mariner Energy $300 million, and XM Satellite $200 million.

Convert issuers included Gilead Sciences $1.2 billion.

Foreign dollar debt issuers included BNP Paribas $3.0 billion, Ontario Province $1.0 billion, El Salvador $775 million, Banco Hipotecario $250 million, and Braskem $200 million.

Japanese 10-year JGB yields declined about 6 bps this week to 1.905%. The Nikkei 225 index gained 1% (up 8.0% y-t-d). German 10-year bund yields were unchanged at 3.95%. Emerging debt and equity markets were strong. Brazil's benchmark dollar bond yields dropped 10 bps to 6.76%. Brazil's Bovespa equity index rose 3.5%, increasing 2006 gains to 18.9%. The Mexican Bolsa surged 4.4%, with y-t-d gains increasing to 13.3%. Mexican 10-year $ yields fell 10 bps to 6.11% this week. Russian 10-year dollar Eurobond yields were unchanged at 6.69%. The Russian RTS equities index jumped 3.8%, increasing 2006 gains to 43.7% and 52-week gains to 137%. India's Sensex equities surged 7%, increasing y-t-d gains to 28%.

Freddie Mac posted 30-year fixed mortgage rates rose 4 bps to 6.53%, up 73 basis points from one year ago. Fifteen-year fixed mortgage rates gained 3 bps to 6.17%, up 81 bps in a year. One-year adjustable rates increased 2 bps to 5.63%, an increase of 137 bps over the past year. The Mortgage Bankers Association Purchase Applications Index declined 2.5% last week. Purchase Applications were down 12.7% from one year ago, with dollar volume down 9.3%. Refi applications slipped 0.4% last week. The average new Purchase mortgage declined to $234,000, and the average ARM fell to $348,700.

Bank Credit expanded $25.2 billion last week to a record $7.755 Trillion, with a y-t-d gain of $249 billion, or 11.5% annualized. Over the past year, Bank Credit inflated $726 billion, or 10.3%. For the week, Securities Credit surged $45.2 billion. Loans & Leases declined $20.1 billion for the week, with a y-t-d gain of $132 billion (8.4% annualized). Commercial & Industrial (C&I) Loans have expanded at a 12.4% rate y-t-d and 12.6% over the past year. For the week, C&I loans declined $6.8 billion, and Real Estate loans dipped $2.9 billion. Real Estate loans have expanded at a 9.6% rate y-t-d and were up 12.2% during the past 52 weeks. For the week, Consumer loans rose $3.9 billion, while Securities loans fell $18.7 billion. Other loans expanded $4.4 billion. On the liability side, (previous M3 component) Large Time Deposits gained $7.0 billion, with a six-week gain of $68.1 billion.

M2 (narrow) "money" supply dropped $23.8 billion to $6.774 Trillion (week of April 10). Year-to-date, M2 has expanded $84.5 billion, or 4.4% annualized. Over 52 weeks, M2 inflated $301.1 billion, or 4.7%. For the week, Currency was unchanged. Demand & Checkable Deposits sank $50.8 billion (tax payments!). Savings Deposits jumped $27.2 billion (refunds?), and Small Denominated Deposits increased $3.1 billion. Retail Money Fund deposits declined $3.4 billion.

Total Money Market Fund Assets, as reported by the Investment Company Institute, declined $6.8 billion last week (week ended April 19) to $2.050 Trillion. Money Fund Assets are down $7.6 billion y-t-d, with a one-year gain of $154 billion (8.1%).

Total Commercial Paper gained $10.4 billion last week to $1.691 Trillion. Total CP is up $41.5 billion y-t-d (16wks), or 8.2% annualized, while having expanded $212.7 billion over the past 52 weeks, or 14.4%.

Fed Foreign Holdings of Treasury, Agency Debt ("US marketable securities held by the NY Fed in custody for foreign official and international accounts") jumped $12.3 billion to $1.605 Trillion for the week ended April 19. "Custody" holdings are up $85.6 billion y-t-d, or 18.3% annualized, and $215.7 billion (15.5%) over the past 52 weeks. Federal Reserve Credit rose $5.9 billion last week to $823.7 billion. Fed Credit has declined $2.7 billion y-t-d, or 1.0% annualized. Fed Credit expanded 4.9% ($38.1bn) during the past year.

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - are up $279 billion y-t-d (22% annualized) and were up $493 billion, or 12.9%, over the past 12 months to a record $4.326 Trillion.

Currency Watch:

April 21 - Bloomberg (Jonas Bergman): "Sweden's central bank said it raised its holdings of euros to 50 percent in its currency reserves, cut holdings of U.S. dollars and eliminated the Japanese yen to limit fluctuations in its earnings. The holdings of euros were raised to 50 percent from 37 percent over the past four weeks... U.S. dollar holdings were reduced to 20 percent from 37 percent..."

April 21 - Bloomberg (John Fraher): "Russian Finance Minister Alexei Kudrin said his colleagues around the world are concerned the dollar's 'instability' in recent years is hurting its credibility as a reserve currency. 'If a currency is used for different reserve purposes, reliability is needed,' Kudrin told reporters... 'The international community can hardly be satisfied with this instability' in the dollar 'in the past years,' he said..."

April 17 - The Wall Street Journal (Mark Whitehouse): "The value of the U.S. dollar has big implications for the global economy. It's also profoundly hard to predict. Still, some intrepid economists believe they have an insight: Follow the oil money. Over the past few years, the rising price of oil has shifted a big chunk of the world's wealth into the hands of exporters from the Middle East, Latin America and Russia, making their investment decisions an important driver of global markets. Their penchant for dollar-denominated investments has helped buoy the U.S. currency, confounding economists' predictions that the U.S.'s growing debts must eventually scare investors away and cause the dollar to fall. Now, though, some economists expect oil producers to shift their investments away from dollars, allowing the U.S. currency to resume a slide that started back in 2001. They cite a litany of reasons: renascent economies in Europe and Japan, political reactions in the U.S. against foreign investment and those nagging U.S. debts, among other reasons."

The dollar index was hit for 1.8% this week. On the upside, the Polish zloty rose 3.5%, the Hungarian forint 3.1%, the Czech koruna 2.9%, and the Australian dollar 2.2%. On the downside, the Iceland krona fell 2.2%, the Philippines peso 0.7%, and the Chilean peso 0.7%.

Commodities Watch:

It was wild and at times breathtaking, but at week's end copper and zinc traded to new record highs, gold ended above $630, and silver closed above $13. For the week, June crude surged $4.35 to a record $75.17. May Unleaded Gasoline jumped 6.2%, and May Natural Gas surged 11.9%. For the week, the CRB index gained 4.8% (y-t-d up 8.1%) to an all-time high. The Goldman Sachs Commodities Index (GSCI) surged 6.2% to a new record high. The GSCI is up 15.4% y-t-d, with a 52-week gain of 31.4%.

Japan Watch:

April 21 - Bloomberg (Lily Nonomiya): "Japanese Finance Minister Sadakazu Tanigaki said increases in the nation's benchmark government bond yields are unwelcome at a time when the world's second-largest economy is trying to stamp out deflation. 'Recent gains in long-term bond yields have been a little fast,' Tanigaki told reporters...Abrupt interest-rate gains at a time when the economy hasn't completely emerged from deflation are undesirable.'"

China Watch:

April 20 - Bloomberg (Nerys Avery): "China's government said a surge in investment that propelled first-quarter economic expansion of 10.2 percent needs 'attention' and signaled it will curb lending in the world's fastest-growing major economy. Investment in factories and roads in urban areas rose 29.8 percent in the quarter from a year earlier..."

April 19 - Bloomberg (Samuel Shen): "China's investment in fixed assets rose 27.7 percent in the first quarter, a faster pace than the 22.8 percent of a year earlier, the Securities Times reported..."

April 18 - Financial Times (Tom Mitchell): "Shenzhen, one of China's leading manufacturing centres, is considering increasing its minimum wage by up to 23 per cent, highlighting the growing cost pressures facing manufacturers and setting a benchmark for rises in the South China region."

April 16 - Bloomberg (Yanping Li): "China's retail sales rose 12.2 percent from a year earlier in the first quarter, Assistant Commerce Minister Huang Hai said, helping to prevent a surplus of factory capacity in the fastest-growing major economy. The government is planning steps to 'ensure that people have more to spend and are more certain about their future in order to spend,' Huang said at a press conference in Beijing..."

April 20 - Bloomberg (Wing-Gar Cheng): "China's spending on coal mines and alumina output jumped more than 40 percent in the first quarter as demand for raw materials soared in the world's fastest-growing major economy."

April 20 - Bloomberg (Nerys Avery): "JPMorgan Chase & Co. raised its estimate for China's economic growth in 2006 to 9.6 percent from 9.2 percent citing stronger-than-expected expansion in the first quarter."

Asia Boom Watch:

April 19 - Bloomberg (Victoria Batchelor and Amit Prakash): "The International Monetary Fund raised its 2006 growth forecast for Asia excluding Japan because of faster-than-expected expansion in China and India. The IMF predicts Asian economies excluding Japan will expand 7.9 percent this year, 1 percentage point higher than its Sept. 21 forecast of 6.9 percent. It raised its 2006 growth forecast for China to 9.5 percent from 8.2 percent previously and for India to 7.3 percent from 6.3 percent."

April 18 - Bloomberg (Archana Chaudhary): "Reserve Bank of India Deputy Governor Rakesh Mohan comments on rising prices of land and housing, and the central bank's measures to curb lending... 'Land prices have gone up in many cities. The land price component in housing loans has been increasing. Although there are many indicators that economic growth will be good in the medium term, the central bank is watching the housing sector with concern... That is the reason why we have increased the risk weightage. Credit growth can't continue at 30 percent a year and money supply can't grow at 12 percent a year.'"

April 18 - Bloomberg (Kyunghee Park): "Hyundai Heavy Industries Co. and eight other dockyards in South Korea won orders for new vessels valued at a record $12 billion in the first quarter... Dockyards in South Korea, home to three of the world's biggest shipbuilders, secured in the first three months orders of 4.92 million compensated gross tons...19 percent more than a year earlier..."

April 16 - Bloomberg (Seyoon Kim): "South Korea's economy may expand 5.3 percent this year, helped by rising exports, a recovery in consumer spending and corporate investment, state-run Korea Development Institute said..."

April 21 - Bloomberg (Theresa Tang): "Taiwan's jobless rate fell to a five-year low in March... The seasonally adjusted unemployment rate dropped to 3.94 percent last month..."

April 19 - Bloomberg (Stephanie Phang): "Malaysia's inflation rate accelerated in March to the highest in seven years as transport costs surged after the government raised fuel prices. The consumer price index jumped 4.8 percent last month from a year earlier, after gaining 3.2 percent in February..."

April 16 - Bloomberg (Aloysius Unditu): "Indonesia expects its economy to expand in the 5.7 percent-to-6 percent range this year, Finance Minister Sri Mulyani Indrawati said."

Unbalanced Global Economy Watch:

April 19 - Bloomberg (William McQuillen and Kevin Carmichael): "The global Economy continues to exceed expectations, even in the face of high oil prices, natural disasters and a record U.S. current-account deficit, the International Monetary Fund said... World gross domestic product will rise 4.9 percent this year before leveling off to 4.7 percent in 2007... The 2006 projection is 0.6 percentage points higher that what the IMF said in September, and is up from the 4.8 percent in 2005."

April 20 - Financial Times: "LVMH, the world's biggest luxury goods group, reaffirmed a bullish 2006 outlook after reporting a forecast-beating 15 per cent rise in first-quarter sales..."

April 19 - Bloomberg (Gabi Thesing): "German producer price inflation held at a 24-year high in March as energy costs increased. Goods from plastics to newsprint were 5.9 percent more expensive than a year earlier..."

April 18 - Bloomberg (Laura Humble): "U.K. consumers' inflation expectations reached a record in March as oil prices approached all-time highs again, the Bank of England said. The rate of inflation will accelerate to 2.7 percent over the next 12 months..."

April 21 - Bloomberg (Tasneem Brogger): "Danish house prices rose at the fastest pace in at least 20 years in the first quarter as unemployment hit a 30-year low and home buyers used loans with interest rate caps to guard against higher borrowing costs. House prices surged 24.4 percent from the same period a year ago..."

April 18 - Bloomberg (Garfield Reynolds): "Russian industrial production surged 10.7 percent last month from February, the fastest monthly pace in four years, as oil and gas output rebounded."

April 18 - Bloomberg (Jason Gale): "Prices for racehorses, favored trophies for the world's wealthy, soared 28 percent on the first day of Australia's Easter Yearling Sale as the nation's economy booms and the stock market rallies to an all-time high. The opening 166 lots sold in the first session of the sale, the world's third-biggest auction of year-old foals, averaged A$260,663 ($192,400)..."

April 19 - Bloomberg (Tracy Withers): "New Zealand's annual inflation rate accelerated in the first quarter as fuel prices and the cost of house construction rose, dimming prospects the central bank will cut interest rates this year. Consumer prices rose 3.4 percent from a year earlier, which was faster than the 3.2 percent pace in the fourth quarter..."

Latin America Watch:

April 21 - Bloomberg (Adriana Arai and Norberto Bogard): "Mexico's central bank raised its 2006 growth estimate to as much as 4 percent from 3.7 percent after the economy expanded more than expected in the first quarter, Governor Guillermo Ortiz said. 'The latest indicators signal a stronger economy, fueled by the industrial, manufacturing and service sectors. The first quarter was strong and growth was slightly above 5 percent and for the whole of the year growth will be close to 4 percent.'"

April 20 - Bloomberg (Patrick Harrington): "Mexico's March unemployment rate fell from February as surging economic output spurred hiring. Mexico's jobless rate fell to 3.42 percent from 3.60 percent in February..."

April 20 - Bloomberg (Daniel Helft): "Argentina's economy expanded at its fastest pace in four months in February, led by a surge in exports. The economy, which has expanded more than 8 percent in each of the past three years, grew 9.5 percent from the year-earlier period..."

Bubble Economy Watch:

March's reading of the Consumer Price Index was up 3.4% from March 2005, and the Producer Price Index was up 3.5%. March Housing Starts were a weaker-than-expected 1.96 million annualized rate, down 7.8% from the year earlier month. Building Permits were down 5.5% from March 2005 to a less-than-expected 2.059 million annualized pace.

April 21 - Bloomberg (Courtney Schlisserman): "More U.S. companies were able to raise prices in the first quarter as their costs jumped for materials and labor, a survey by the National Association for Business Economics showed. The poll found that 41 percent of executives said their prices rose during the quarter, up from the 34 percent who said so ...in January. Sixty percent said their materials costs have increased and more than half expect them to keep rising."

April 20 - EconoPlay.com (Gary Rosenberger): "The housing market continued its slow and inexorable retreat this spring as higher mortgage rates and spiraling inventories rammed into a dearth of buyers - chastening sellers into reducing asking prices or into taking their homes off the market, say residential brokers. Capital flight from real estate is especially evident in the glutted condominium market, where a large backlog of still uncompleted projects faces a dark future... In Boston, Denver and elsewhere, foreclosures are on an upswing for those who bought too big a home when adjustable mortgage rates were at all-time lows, giving a false appearance of affordability, and who now suffer the penalty of mortgage rates that moved to three-year highs... There appears to be some resiliency in the market - with home builders driving volume sales through incentives or straight-out price reductions. But one potentially troublesome pattern is a tendency to continue construction in markets that already appear to be overbuilt."

April 19 - CNNMoney.com: "The number of households with a net worth of $1 million or more, not including the primary home, rose 11 percent to a record 8.3 million in 2005, according to a report released Wednesday by the Spectrem Group. That's the second year in a row the millionaire account hit an all-time high. ...the number of households with a net worth of $5 million or more rose 26 percent to a record 930,000. Households with a net worth between $500,000 and $1 million also hit an all-time high of 14 million, up 7 percent..."

Mortgage Finance Bubble Watch:

April 19 - Dow Jones (Danielle Reed): "Here's a solution for the cash-strapped home buyer: take out a mortgage loan and pay it back about half a century from now. The 50-year mortgage doesn't exist yet, though the idea is being seriously batted around among lenders as home price increases continue to far outpace income gains making monthly payments on more traditional loans less affordable. The once-rare 40-year mortgage has already surged in popularity and at least one lender is offering a mortgage five years longer. Ownit Mortgage Solutions has rolled out a 45-year loan that it calls 'the perfect alternative' to interest-only loans 'for borrowers who desire affordable monthly payments.'"

Energy and Crude Liquidity Watch:

April 20 - Financial Times (Neil Buckley): "Eight years after defaulting on its domestic debt and plunging into financial crisis, Russia today has money problems of an entirely different nature - it has more cash than it can handle. Record oil prices and a doubling of its oil exports since 2000 have brought petro-dollars flooding into the special stabilisation fund set up by the government in 2004. Its purpose is to create a national nest egg in case oil prices fall... But with the fund now topping $60bn interest groups are lobbying for the money to be spent on tax cuts, infrastructure and social spending, or propping up ailing industries."

Fiscal Deficit Watch:

April 20 - Washington Post (Jonathan Weisman): "With the expected passage this spring of the largest emergency spending bill in history, annual war expenditures in Iraq will have nearly doubled since the U.S. invasion, as the military confronts the rapidly escalating cost of repairing, rebuilding and replacing equipment chewed up by three years of combat. The cost of the war in U.S. fatalities has declined this year, but the cost in treasure continues to rise, from $48 billion in 2003 to $59 billion in 2004 to $81 billion in 2005 to an anticipated $94 billion in 2006, according to the Center for Strategic and Budgetary Assessments. The U.S. government is now spending nearly $10 billion a month in Iraq and Afghanistan, up from $8.2 billion a year ago... Annual war costs in Iraq are easily outpacing the $61 billion a year that the United States spent in Vietnam between 1964 and 1972, in today's dollars... 'We did not predict early on that we would have the number of electronic jammers that we've got. We did not predict we'd have as many [heavily] armored vehicles that we have, nor did we have a good prediction about what our battle losses would be,' Army Chief of Staff Peter J. Schoomaker recently told the Senate Armed Services Committee."

Speculator Watch:

April 20 - Financial Times (Paul J. Davies): Hedge funds saw inflows of more than $24bn in new money in the first quarter of this year following a small loss of funds at the end of 2005, as improving performances encourage investors to return to the industry, according to Hedge Fund Research. The surge of cash...helped take assets under management to almost $1,200bn, according to the group, which monitors more than 9,000 funds worldwide."

April 18 - Bloomberg (Kevin Carmichael): "Hedge funds pose a diminishing threat to the financial system because their managers have improved oversight to satisfy pension plans and other institutional investors, Emil Henry, Treasury's assistant secretary for financial institutions, said today."

Financial Sphere Earnings Watch:

Highlights from Citigroup's quarter included, "International earnings increased 47%, driven by record international revenues, up 19%... Record corporate and investment banking revenues, up 21%... Record international corporate and investment banking revenues, up 34%... Record fixed income markets revenue of $3.15 billion, up 8%; record equity market revenues of $1.18 billion, up 67%... U.S. consumer average loans grew 10%...and commercial business core loans, up 23%... Record Smith Barney revenues, up 19%..." Total Assets surged a record $92.2 billion during the quarter (25% annualized) to $1.586 Trillion. Trading Account Assets jumped $32.3 billion to $328.1 billion, and "Fed funds and 'Repo'" expanded $11.2 billion to $239.5 billion. Investments gained $13.4 billion to $194.0 billion. Consumer Loans rose $7.5 billion (to $462.1bn) and Corporate Loans jumped $14.4 billion ($143.2bn). The company repurchased 43 million shares of stock during the quarter at a cost of about $2.0 billion.

Bank of America, the second-largest U.S. bank, reported first quarter Net Income of $4.99 billion, up 14% from comparable 2005. Capital Markets and Advisory Services Total Revenues were up 19% y-o-y to $2.216 billion. Investment Banking Revenues jumped 39% to $522 million. Fixed Income Sales & Trading Revenues were up 19% to $1.223 billion. Average Trading Assets were up 14% y-o-y to $314 billion. Global Consumer & Small Business Revenues were up 8% y-o-y. Home Equity Revenues were up 9% y-o-y, with originations up 23% to $18.6 billion. Mortgage unit Revenues were down 24%, with originations down 1% to $17.3 billion. Global Corporate & Investment Banking Revenues were up 1% to $5.56 billion. Average Commercial Loans were up 22% annualized during the quarter and 15% y-o-y to $225 billion. The company repurchased 88.5 million shares during the quarter.

JPMorgan first quarter Total Net Revenues were up 12% from comparable 2005 to a record $15.2 billion. Highlights included Investment Banking (IB) total revenues of a record $4.7 billion (up 12% y-o-y), with IB fees of $1.2 billion up 19% y-o-y "driven by strong advisory and record loan syndication fees (IB revenues up 33% in Europe and 39% in Asia)... Debt underwriting fees...were up 18%... Record Equities Markets revenue of $1.2 billion on broad-based strength." Retail Financial Services revenues were down 2% y-o-y (weak mortgage banking), while Commercial Banking Revenues rose 9% y-o-y. Total Assets surged $74.3 billion during the quarter (25% annualized) to $1.273 billion. The Asset "Fed funds and 'Repo'" jumped $19.8 billion to $153.8 billion, and total Trading Assets increased $13.6 billion to $312 billion. Securities holdings rose $19.5 billion to $67.1 billion. Meanwhile, Loans gained $12.7 billion to $424.8 billion (Commercial Banking loans up 9% y-o-y "due to growth across all segments). On the Liability side, Deposits surged $29.5 billion to $584.4 billion. "Fed funds and 'Repo'" jumped $25.1 billion to $125.9 billion. Total Trade Liabilities gained $14.2 billion to $160.1 billion. Long-term Debt expanded $3.8 billion to $112.1 billion. The company repurchased 31.8 million shares during the quarter at a cost of $1.29 billion.

Wells Fargo earned a record $2.02 billion during the first quarter, a gain of 9% from Q1 2005. Highlights included, "Revenue up 6 percent from prior year; 17 percent revenue growth in businesses other than Wells Fargo Home Mortgage... Average core deposits up 10 percent from prior year... Average commercial and commercial real estate loans increased $11.4 billion, or 11 percent, from first quarter 2005 and increased $2.6 billion, or 10 percent annualized, from fourth quarter 2005... Mortgage originations of $91 billion, up 40 percent from prior year... Mortgage application pipeline of $59 billion, up 18% from prior quarter." Home Equity average loans expanded 12% annualized during the quarter. Total Assets were up 13% y-o-y to $492.4 billion. The company repurchased 10.3 million shares during the quarter at a cost of $646 million.

Merrill Lynch "reported its highest quarterly net revenues ever, at $8.0 billion, for the first quarter...up 28% from prior-year..." Global Markets and Investment Banking (GMI) Net Revenues were a record $4.6 billion, up 37% from the year-ago quarter. "Equities Markets net revenues increased 62%, with strong performance in every major revenue category... Debt Markets net revenues set a new record, up 26%, driven primarily by the trading of interest rate and credit products. Investment Banking net revenues were 30% higher..." Principal Transactions Net Revenues were up 111% from the year-ago period to a blistering $1.993 billion. "Merrill Lynch repurchased 25.8 million shares of its common stock for $2.0 billion during the first quarter..."

Mortgage REIT Thornburg's Total Assets expanded $3.6 billion during the quarter, or 34% annualized, to $46.1 billion. Total Assets were up 49% over the past four quarters.

So, You Think You've About Wrapped Things Up?

Has the Fed About Wrapped Things Up? This apparently is the message being telegraphed to the markets. Tuesday, San Francisco Federal Reserve Bank President (and voting FOMC member) Janet Yellen caught the markets' and media's fancy, declaring that she was 'highly alert' to the Fed's tightening policy "going too far." And with Wednesday's release of the March FOMC meeting minutes came this zinger of capricious dovishness: "Most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much." On the back of this revelation, the Dow Jones Industrial Average gained almost 200 points and the broader market surged to new record highs. Definitely not to be outdone, the CRB and Goldman Sachs Commodities indices surged to new all-time highs; crude oil jumped to a record high, while Gold surpassed $640 and silver $14 an ounce.

Ms. Yellen was interviewed Wednesday on CNBC. In response to a question on the degree of Fed concern with rising commodities prices, Ms. Yellen downplayed the risk, stating that it was a reflection of the strong global economy. She immediately noted that the Fed was carefully monitoring "inflation expectations" and, in this regard, was comforted by the narrow TIPS (Treasury Inflation Protected Securities) bond spread. With the Fed blithely fixated on the TIPS market, investors and speculators across the globe are in a frantic stampede to acquire assets for protection against and to profit from what they must expect will be the most powerful ongoing inflationary forces in many years. At this point not all too surprising, the Fed is content to focus on one of the very few indicators not signaling a problematic monetary backdrop.

It is crucial for the Fed and investors to recognize that TIPS spreads are today an especially poor barometer of the predominant global inflationary pressures (explaining why they are losing significant relative value to commodities and global asset markets). The principal of a TIPS investment is protected only against the loss of monetary value associated with a decline in a narrow facet of inflation - the government's measurement of an aggregate of consumer prices. Irrespective of the myriad problems with the methodology of the government's calculations, this period's gross inflation (loss of purchasing power) is manifesting in surging energy, commodities, and global asset prices generally - largely outside of CPI. To be sure, TIPS spreads are today an especially deceiving indictor of general monetary conditions, and it is unbecoming of the Fed to give it significant weight in policy analysis.

As astute analysts appreciate, financial sector earnings reports continue to be an excellent indictor of monetary conditions. First quarter releases certainly corroborate the message of inflating international markets: global monetary conditions remain ultra-loose.

Citigroup's Total Assets expanded at a 24.7% rate during the first quarter to $1.586 Trillion. The combined Asset items "Federal Funds Sold and 'Repos,'" "Trading Account Assets," and "Investments" increased $67.7 billion, or 39% annualized, to $762 billion during the quarter. Total Loans increased $21.8 billion, or 14.9% annualized, to $605 billion. It is also worth noting that while Consumer loans grew at a 6.6% rate (to $462bn), Corporate loans expanded at a 44.6% pace (to $143bn). Almost without exception, the major U.S. money-center "banks" are moving aggressively to capital markets and business lending (certainly including international) to compensate for the slowing growth and declining margins in U.S. mortgage/consumer finance. I am reminded how, back in the second half of 2003 and into 2004, the mortgage lenders reacted to the end of the refi boom by aggressively crafting exotic new products and lowering lending standards. This push to expand the profitability of purchase mortgage originations proved a major Credit Bubble "evolution" and exacerbation. We now witness similar dynamics for The Globalization of the Credit Bubble.

With Merrill Lynch reporting 28% y-o-y Net Revenues growth, we have now seen blow-out first quarter numbers from all the major securities firms. And while we'll have to wait for the 10Q to examine Merrill's Balance Sheet, combined Total Assets from Goldman Sachs, Lehman Brothers, Bear Stearns, and Morgan Stanley expanded during the first quarter by $150.2 billion, or 26% annualized, to $2.458 Trillion (up 21% y-o-y). All the firms are in the midst of a huge expansion in business overseas, including debt, equities, derivatives and commodities markets. And it is worth noting that the hedge fund community enjoyed inflows of $24 billion during the first quarter, apparently pushing industry assets above $1.2 Trillion.

I have written in the past that "the U.S. economy is how the Credit system lends." Today, it more appropriately stated that "the global economy and markets are how the global Credit and speculation apparatuses direct finance." An over-liquefied global financial system (U.S. - and others' - Current Account Deficits), an energized and expanding leveraged speculating community and highly aggressive financial institutions combine for a powerfully inflationary global monetary backdrop, as is witnessed throughout the markets.

Here at home, Citigroup, JPMorgan, Bank of America, Wells Fargo and Wachovia combined to expand assets at a 23% annualized clip during the quarter to $5.269 Trillion (some impact from acquisitions). Citi, Morgan and BofA were notable for big gains in their capital markets and trading businesses, as well as strong growth in commercial lending. Mortgage behemoth Wells Fargo is pushing home equity and commercial lending, as its traditional mortgage business slows. Virtually across the board, deteriorating net interest margins are driving a push for lending volume (wherever it can be found), as well as for trading profits.

As recipients of a little slice of each monetary inflation (new Credit, equity or derivative instrument), the major financial institutions are enjoying an unprecedented Credit Bubble Blow-off Windfall. Significant portions of this bounty go directly to compensation and stock buybacks. This compensation is a not insignificant element of the enormous Asset Bubble-related income bonanza today feeding the U.S. Bubble Economy. And the massive buybacks - Citi, BofA, JPMorgan and Merrill combined to repurchased 189 million shares DURING THE QUARTER - work to bolster stock market liquidity that works to sustain the Credit Bubble. And, you can be sure, giant pay packages (certainly including option grants) and aggressive stock buyback schemes are not indicative of managements about to become more conservative in lending or market activities.

So, you think you've about wrapped things up, do you? Surely, the Fed has taken notice of the recent backup in market yields and a 5% 10-year Treasury bond. The Fed is also likely a little unnerved by the buildup in house and condo inventories and the specter of a problematic bursting of some of the more conspicuous housing Bubble markets (including Washington D.C.!). And, perhaps, the Fed is willing to privately throw up its hands and admit that it's unwilling to rein in runaway global liquidity excesses. But please don't rush to signal to over-liquefied and overly speculative markets - not to mention overzealous lenders - that the "tightening" cycle is almost over.

Hopefully, FOMC members took note of the drubbing the dollar suffered this week. There may be days when U.S. central bankers convince themselves that rising market yields or a faltering housing market poses the greatest systemic risk. Yet the dollar is today, and for the foreseeable future, the system's Achilles heel, an inevitable circumstance of the nature of ongoing Credit Bubble excess. And American policymakers may hope that actions (aggressive stimulation) by our trade partners will rectify our Current Account Deficit and global imbalances - thereby negating the necessity for a painful adjustment to the U.S. economy and asset markets. But the reality of the situation is that this approach has and will only continue to export Credit and Speculative Bubble excesses throughout the world. The nature of the current global Credit inflation (and attendant wholesale currency degradation) has manifested into a full-fledged flight to real assets sectors such as energy, metals and real estate.

As the issuer of the world's reserve currency, the U.S. economy has for decades enjoyed the capacity to inflate dollar denominated securities at will. Our competitive advantage in issuing top-rated and liquid securities has served us especially well over the past decade. It was a key facet of "reliquefications" and "reflations" during periods of economic weakness and/or fledgling financial crisis. The much trumpeted "resiliency" of the U.S. economy and banking system owes almost everything to the capacity for the U.S. government and financial sector to endlessly create debt instruments readily accumulated by domestic and foreign holders. And I believe a strong case can be made today that long-term yields would be significantly higher if it weren't for the perception that the Bernanke Fed will aggressively cut rates at the first indication that the U.S. economic Bubble and/or Global Asset Market Bubble are beginning to falter. The blundering Fed apparently not only believes that the U.S. economy is more resilient than in the past, it presumes it now has significant leeway to cut rates and "reflate" when necessary.

But the financial world is changing rapidly and radically. The dollar is methodically losing its status as a stable and reliable reserve currency. At the same time, currencies generally are losing favor to real assets as store of value. Understandably, market participants are questioning the will and capacity for central bankers and policymakers to stabilize the Unwieldy Global Credit system. It would at this point require a determined and concerted effort to instigate some serious financial and economic restraint, especially among American, Chinese and Japanese authorities. No one would dare hold their breath waiting for this outcome.

With faith in the prospects for the dollar and global currencies in retreat, the U.S. is in the process of losing its invaluable competitive advantage issuing top-rated liquid securities. This has huge ramifications come the next period of financial dislocation. The Fed's intent to aggressively cut rates and incite yet another bout of lending and leveraged speculation (Credit Inflation) will likely be obstructed by the unwillingness of foreigners to accumulate more dollar IOUs. In the meantime, I believe the changing global landscape will necessitate that that the U.S. now pays an ongoing significant yield differential. Rampant liquidity and speculative excesses demand that global rates rise across the board, while the stability of the dollar depends upon the Fed's willingness to maintain significant rate differentials. Our foreign creditors will demand higher rates and much tighter monetary conditions, and the Fed's dream of wrapping things up before it gets painful faces the reality that our creditors are increasingly tired of getting hurt.

This week, markets began to demonstrate many of the characteristics one would expect when approaching a key inflection point. There was heightened volatility, spectacular short-squeezes, and palpable euphoria. But there are also indications that the "smart money" is increasingly nervous and beginning to lighten up on some positions (including our currency). It is amazing how many have completely bought into The Notion of a Golden Age of Permanent Global Prosperity; that the omnipotent Fed has everything completely under control; and that surging energy and commodity prices are a sign of how wonderfully healthy the global economy is these day (ignoring that we are instead immersed in history's greatest Credit and Asset Bubbles). One should now be on guard for that exacting oscillation between "gee, things are just marvelously splendid" and the "oh my god, the end is near" - The Unpredictable Greed and Fear Seesaw - that will embroil global markets in an extraordinary period of uncertainty and volatility.

 


 

Doug Noland

Author: Doug Noland

Doug Noland
The Credit Bubble Bulletin
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