Page 1 of 3 CREDIT BUBBLE BULLETIN
Just the facts
Weekly watch by Doug Noland
For the week, the S&P500 jumped 10.7% (down 39% y-t-d), and the Dow
increased 8.9% (down 33.4%). The broader market rallied sharply. The small cap
Russell 2000 surged 14.1% (down 38.2%), and the S&P400 Mid-Caps jumped
14.2% (down 40%). The Morgan Stanley Cyclicals rallied 14.3% (down 53%), and
the Morgan Stanley Consumer index rose 6.8% (down 26%). The Transports gained
11.1% (down 23.2%), and the Utilities added 3.8% (down 28.7%). The NASDAQ100
gained 8.4% (down 43.1%), the Morgan Stanley High Tech index 8.8% (down 46.7%),
and the Semiconductors 9.1% (down 51.4%). The Street.com Internet Index rose
8.7% (down 38.1%) and the NASDAQ Telecommunications index 9.3% (down 43.7%).
The Biotechs
rallied 8.8% (down 24.2%). The Broker/Dealers surged 27.4% (down 62.6%) and the
Banks 22.9% (down 46%). With Bullion rallying $19, the HUI Gold index gained
14.0% (down 39.6%).
One-month Treasury bill rates ended the week at .01% and three-month yields at
0.02%. Two-year government yields dropped 11 bps to 0.985%. Five-year T-note
yields fell 9 bps this week to 1.92%. Ten-year yields sank 27 bps to 2.92%, and
long-bond yields dropped 25 bps to 3.44%. The implied yield on 3-month December
'09 Eurodollars declined 9 bps to 2.07%. Benchmark Fannie MBS yields collapsed
47 bps to 4.83%. The spread between benchmark MBS and 10-year T-notes narrowed
19 to 191 bps. Agency 10-yr debt spreads narrowed 44 to 117 bps. The 2-year
dollar swap spread increased 2 to 108.25 bps, while the 10-year dollar swap
spread declined 1.5 to 20.25 bps, and the 30-year swap spread declined 4.25 to
negative 41.5 bps. Corporate bond spreads were mixed. An index of investment
grade bond spreads narrowed 30 to 240 bps, while an index of junk bond spreads
widened 89 to 1144 bps.
Investment-grade debt issuance included JPMorgan Chase $6.5bn, Morgan Stanley
$6.75bn TN, Goldman Sachs $5.0bn, Dominion Resources $600 million, Burlington
Northern $500 million, and Public Service E&G $275 million.
I saw no junk, convert or international debt issues.
German 10-year bund yields fell 13 bps to 3.25%. The German DAX equities index
rallied 13% (down 42.1% y-t-d). Japanese 10-year "JGB" yields were unchanged at
1.39%. The Nikkei 225 jumped 10.5% (down 44.4% y-t-d). Emerging markets
rallied. Brazil's benchmark dollar bond yields sank 73 bps to 7.88%. Brazil's
Bovespa equities index surged 17.1% (down 42.7% y-t-d). The Mexican Bolsa rose
12.5% (down 30.5% y-t-d). Mexico's 10-year $ yields dropped 65 bps to 7.44%.
Russia's RTS equities index gained 13.4% (down 71.3% y-t-d). India's Sensex
equities index gained 2.0%, with y-t-d losses down to 55.2%. China's Shanghai
Exchange declined 5.0%, with y-t-d losses of 64.4%.
Freddie Mac 30-year fixed mortgage rates dropped 7 bps to 5.97% (down 13bps
y-o-y). Fifteen-year fixed rates added one basis point to 5.74% (down one ps
y-o-y). One-year ARMs declined 11 bps to 5.18% (down 25bps y-o-y). Bankrate's
survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates 25 bps
lower this week to 7.29% (up 66bps y-o-y).
Bank Credit dropped $59.5bn to $9.854 TN (week of 11/19). Bank Credit has
expanded $641bn y-t-d, or 7.7% annualized. Bank Credit posted a 52-week rise of
$647bn, or 7.0%. For the week, Securities Credit declined $24.4bn. Loans &
Leases dropped $35.1bn to $7.148 TN (52-wk gain of $421bn, or 6.3%). C&I
loans fell $14.0bn, with y-t-d growth of 11.3%. Real Estate loans declined
$11.1bn (up 5.5% y-t-d). Consumer loans were little changed, while Securities
loans increased $12.3bn. Other loans sank $22.5bn.
M2 (narrow) "money" supply jumped $22.5bn to $7.929 TN (week of 11/17). Narrow
"money" has expanded $467bn y-t-d, or 7.1% annualized, with a y-o-y rise of
$522bn, or 7.0%. For the week, Currency added $0.7bn, while Demand &
Checkable Deposits declined $3.7bn. Savings Deposits rose $23.6bn, and Small
Denominated Deposits increased $4.6bn. Retail Money Funds dipped $2.6bn.
Total Money Market Fund assets (from Invest Co Inst) increased $33.0bn to
$3.714 TN, with a y-t-d expansion of $601bn, or 21.4% annualized. Money Fund
assets have posted a one-year increase of $641bn (20.9%).
Asset-Backed Securities (ABS) issuance remains light. Year-to-date total US ABS
issuance of $130bn (tallied by JPMorgan's Christopher Flanagan) is running at
24% of comparable 2007. Home Equity ABS issuance of $351 million compares with
2007's $232bn. Year-to-date CDO issuance of $31bn compares to the year ago
$306bn.
Total Commercial Paper outstanding increased $26.1bn this week to $1.640 TN,
with CP down $145bn y-t-d. Asset-backed CP rose $5.8bn, with 2008 posting a
decline of $26.0bn. Over the past year, total CP has contracted $214bn, or
11.5%.
Federal Reserve Credit dropped $85.0bn to $2.093 TN, with a historic 11-wk
increase of $1.206 Trillion. Fed Credit has expanded $1.220 TN y-t-d (151%
annualized) and $1.224 Trillion y-o-y (141%). Fed Foreign Holdings of Treasury,
Agency Debt last week (ended 11/26) declined $3.0bn to $2.498 TN. "Custody
holdings" were up $442bn y-t-d, or 23.3% annualized, and $467bn y-o-y (23%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - have dropped a notable $213bn over the past six weeks. During the
past year reserves were up $745bn, or 12.4%, to $6.734 TN.
Global Credit Market Dislocation Watch
November 24 - Bloomberg (Mark Pittman and Bob Ivry): "The US government is
prepared to lend more than $7.4 trillion on behalf of American taxpayers, or
half the value of everything produced in the nation last year, to rescue the
financial system since the credit markets seized up 15 months ago. The
unprecedented pledge of funds includes $2.8 trillion already tapped by
financial institutions in the biggest response to an economic emergency since
the New Deal of the 1930s, according to data compiled by Bloomberg. The
commitment dwarfs the only plan approved by lawmakers, the Treasury
Department's $700 billion Troubled Asset Relief Program. Federal Reserve
lending last week was 1,900 times the weekly average for the three years before
the crisis."
November 24 - Bloomberg (Bradley Keoun): "Citigroup Inc., facing the threat of
a breakup or sale, received $306 billion of US government guarantees for
troubled mortgages and toxic assets to stabilize the bank ... Citigroup also
will get a $20 billion cash injection from the Treasury Department, adding to
the $25 billion the company received last month under the Troubled Asset Relief
Program. In return for the cash and guarantees, the government will get $27
billion of preferred shares paying an 8% dividend."
November 26 - Wall Street Journal (Jessica Holzer): "US banks posted net
earnings of just $1.7 billion in the third quarter of 2008, the industry's
second lowest since 1990, the Federal Deposit Insurance Corp. reported ...
Mounting expenses for credit losses and soured investments dented bank profits
during the quarter, pushing nearly one in four banks into a loss. All told,
nine banks failed during the quarter, the most since the third quarter of 1993
... Third quarter net income of $1.7 billion marks a decline of 94% from the
$28.7 billion banks earned in the third quarter of 2007."
November 26 - Bloomberg (Alison Vekshin): "The Federal Deposit Insurance Corp.
said banks categorized as 'problem' institutions increased 46% in the third
quarter to the highest level in 13 years ... The FDIC identified 171 problem
banks as of Sept. 30, up from 117 in the second quarter and the highest since
December 1995, the regulator said ... 'We've had profound problems in our
financial markets that are taking a rising toll on the real economy,' FDIC
Chairman Sheila Bair said ... "
November 28 - The Wall Street Journal Europe (Fredrik Erixon and Razeen Sally):
"World leaders have sounded alarm bells against a repeat of the 1930s, when
tit-for-tat protectionism followed hard on the heels of the Wall Street crash.
But they are fighting the wrong enemy. Current events suggest a different, but
still vexing, scenario: the creeping protectionism of the 1970s, rather than
the spiraling protectionism of the 1930s. In the 1970s, oil-price hikes and
other shocks triggered inward-looking, mercantilist policies, including in
Europe and the United States. Immediate policy responses were not overly
protectionist: There was no equivalent of America's 1930 Smoot-Hawley tariff.
But escalating domestic interventions on both sides of the Atlantic exacerbated
economic stress and prolonged stagnation. Not least, they spawned protectionist
pressures. Industry after industry, coddled by government subsidies at home,
sought protection from foreign competition. The result was the 'new
protectionism' of the 1970s and 1980s."
November 26 - Bloomberg (Michael Shanahan): "The cost of hedging against losses
on US Treasuries surged to an all-time high after the Federal Reserve's new
$800 billion effort to combat the financial crisis raised concern about
ballooning government debt. Benchmark 10-year credit-default swaps on US
government bonds jumped six basis points to 56 ... The contracts have risen
from below two basis points at the start of the credit crisis in July 2007.
'There is a lot more money to be spent and it is not clear how it is going to
be financed,' said Tim Brunne, a ... strategist at UniCredit SpA."
November 26 - Bloomberg (John Glover): "Financing costs for high-risk, high-
yield companies in Europe rose to a record for a fourth day amid concern the
recession will deepen, driving up defaults ... The value of high-yield loans
used to finance leveraged buyouts held close to record lows ... 'Things can get
worse as the economy weakens and defaults rise,' said Chris O'Hare, who manages
about $1.5 billion of high-yield debt at Investec Asset Management ... "
November 25 - Bloomberg (Tasneem Brogger): "Iceland's economy will contract
9.3% next year as the failure of its banks and the collapse of the currency
lead to a slump in spending and investment, the Organization for Economic
Cooperation and Development said."
November 24 - Bloomberg (Alex Nicholson): "Russians withdrew 6% of bank
deposits last month, Interfax said."
November 25 - Bloomberg (Christopher Swann): "The International Monetary Fund
this month lent more money to cash-strapped governments than it has in the past
five years combined. The IMF agreed this month to $41.8 billion in loans,
approving $16.4 billion for Ukraine, $15.7 billion for Hungary, $2.1 billion
for Iceland and $7.6 billion for Pakistan. Financing is in the works for
Serbia, Turkey, Belarus and Latvia, turning eastern Europe into a regional ward
of the IMF the way Southeast Asia was a decade ago."
November 25 - Bloomberg (Rebecca Keenan): "BHP Billiton Ltd. abandoned its
year-long pursuit of Rio Tinto Group, blaming the rout in commodities prices
and the credit-market squeeze for derailing the biggest hostile offer. Marius
Kloppers, ceo of the
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