03/31/2006 A Notable Quarter of Global Asset Inflation *

For the week, the Dow declined 1.5%, reducing y-t-d gains to 3.66%. The S&P slipped 0.6%, reducing 2006 gains to 3.73%. The Transports added 0.9%, increasing y-t-d gains to 8.87%. The interest-rate sensitive Utilities declined 2.4% (down 2.79% y-t-d). The Morgan Stanley Cyclical index added 0.1% (up 3.67%), while the Morgan Stanley Consumer index declined 1.3% (up 2.76% y-t-d). The highflying small cap run continued. The Russell 2000 rose 1.5%, increasing 2006 gains to 13.65%. The S&P400 Mid-Cap index added 0.7%, with the y-t-d advance rising to 7.33%. The NASDAQ100 gained 1.4% this week, increasing 2006 gains to 3.55%. The Morgan Stanley High Tech index added 1.6% (up 4.96% y-t-d). The Semiconductors declined 1.0% (up 4.20% y-t-d), while The Street.com Internet Index added 0.7% (up 4.17%). The NASDAQ Telecommunications index jumped 2.0%, increasing 2006 gains to 22.75%. The Biotechs added 0.4% (up 4.70%). Financial stocks were mixed. The highflying Broker/Dealers gained 2.0%, increasing y-t-d gains to 16.86%. The Banks declined 2.30%, reducing 2006 gains to 2.30%. With bullion this week surging $23.55 to $583.65, the HUI Gold index jumped 7%. Bullion gained 12.9% during the quarter, and the HUI rose 21.46%. For the week, two-year US Treasury yields rose 11 bps to 4.82%, and five-year yields jumped 15 bps to 4.81%. Bellwether 10-year Treasury yields surged 18 bps to 4.85%, the highest level since May 2004. Long-bond yields jumped 20 bps to 4.89%. The 2yr/10yr spread reversed 7 bps, ending the week at a positive 3 bps. Benchmark Fannie Mae MBS yields rose 16 bps to 6.01%, the first break above 6.0% since June 2002. The spread on Fannie’s 4 5/8% 2014 note narrowed 2.5 bps to 30, and the spread on Freddie’s 5% 2014 note narrowed 3 bps to 31. The 10-year dollar swap spread increased one to 54.0. Corporate bond spreads narrowed again this week, with junk spreads narrowing sharply. The implied yield on 3-month December ’06 Eurodollars surged 17.5 bps to 5.255%.           Investment grade issuers included Lehman Brothers $2.0 billion, Tennessee Valley Authority $1.0 billion, Bottling Group $800 million, RBCF $525 million, and Chartered Semiconductor $300 million.  Junk issuers included Diageo $1.0 billion, Host Marriot $800 million, Dynegy $750 million, Newfield Exploration $550 million, KB Home $300 million, Reckson $275 million, French Lick Resorts $270 million, Nevada Holdings $250 million, Festival Fun $150 million, and Hanover Compressor $150 million. Foreign dollar debt issuers included Qantas Airways $200 million and Gol $200 million.  Japanese 10-year JGB yields increased 4.5 bps this week to 1.77%, as the Nikkei 225 index rose 3.0% (up 5.9% y-t-d).  German 10-year bund yields jumped 14 bps to 3.77%, with yields up 47 bps during the quarter. Emerging debt markets ended the quarter generally under pressure, while equities largely held their own. Brazil’s benchmark dollar bond yields rose 17 bps to 6.63%, although yields declined 26 bps during the quarter. Brazil’s Bovespa equity index rose 1%, increasing 2006 gains to 13.44%. The Mexican Bolsa dipped 0.4%, reducing y-t-d gains to 8.26%. Mexican 10-year govt. yields jumped 17 bps to 5.97% this week, with yields up 66 bps y-t-d. Russian 10-year dollar Eurobond yields dropped 13 bps to 6.57% (up 12bps y-t-d).  The Russian RTS equities index added 1%, increasing 2006 gains to 27.50%. India’s Sensex equities index jumped 3.0%, increasing y-t-d gains to 20.03%. Freddie Mac posted 30-year fixed mortgage rates added 3 bps to 6.35%, up 31 basis points from one year ago. Fifteen-year fixed mortgage rates gained 3 bps to 6.00% (up 42 bps in a year). One-year adjustable rates jumped 10 bps to 5.51%, an increase of 118 bps over the past year. The Mortgage Bankers Association Purchase Applications Index rose 2.7% last week. Purchase Applications were down 1% from one year ago, with dollar volume 1% lower. Refi applications dipped 1.0%. The average new Purchase mortgage rose to $234,300, and the average ARM increased to $347,100. Bank Credit jumped $23.5 billion last week to a record $7.701 Trillion, with a y-t-d gain of $194.8 billion, or 11.2% annualized. Over the past year, Bank Credit inflated $653 billion, or 9.3%. For the week, Securities Credit rose $7.1 billion. Loans & Leases jumped $16.3 billion, with a y-t-d gain of $117.7 billion (9.3% annualized). Commercial & Industrial (C&I) Loans have expanded at a 12.3% rate y-t-d and 12.7% over the past year. For the week, C&I loans dipped $4.2 billion, while Real Estate loans jumped $11.8 billion. Real Estate loans have expanded at a 10.9% rate y-t-d and were up 12.7% during the past 52 weeks. For the week, Consumer loans gained $4.3 billion, and Securities loans added $2.5 billion. Other loans rose $2.2 billion.   On the liability side, (previous M3 component) Large Time Deposits dipped $1.2 billion. M2 money supply jumped $25.9 billion to $6.779 Trillion (week of March 20). Year-to-date, M2 has expanded $89.4 billion, or 5.8% annualized. Over 52 weeks, M2 inflated $298 billion, or 4.6%. For the week, Currency added $0.5 billion. Demand & Checkable Deposits jumped $22.7 billion. Savings Deposits dipped $2.0 billion, while Small Denominated Deposits increased $4.1 billion. Retail Money Fund deposits added $0.6 billion. Total Money Market Fund Assets, as reported by the Investment Company Institute, increased $1.0 billion last week (week ended March 29) to $2.056 Trillion. Money Market Fund Assets are about unchanged y-t-d, with a one-year gain of $150 billion (7.8%).  Total Commercial Paper dipped $0.5 billion last week to $1.711 Trillion. Total CP is up $61.8 billion y-t-d (13wks), or 15.0% annualized, while having expanded $262 billion over the past 52 weeks, or 18.1%. Last week, Financial Sector CP borrowings fell $11.3 billion to $1.565 Trillion (up $57.1bn y-t-d), with a 52-week gain of $273 billion, or 20.9%. Non-financial CP jumped $10.8 billion to $146 billion, with a 52-week declined of 7.5%.  March 31 – Reuters (Nancy Leinfuss): “Strong demand for higher quality, low duration investments kept the pipeline of new supply active in the U.S. asset-backed securities  market this year, market participants say. In the first quarter, issuers sold $254.2 billion in ABS deals versus $250.1 billion for the same period, a year ago, according to Thomson Financial. Investor appetite for the asset class backed by pools of home equity, auto, credit card and student loan receivables, stayed robust.” Asset-backed Securities (ABS) issuance slowed somewhat to $17 billion. Year-to-date total ABS issuance of $184.4 billion (tallied by JPMorgan) is 12% ahead of 2005’s record pace, with y-t-d Home Equity Loan ABS issuance of $136.8 billion running 28% above last year. Fed Foreign Holdings of Treasury, Agency Debt (“US marketable securities held by the NY Fed in custody for foreign official and international accounts”) increased $5.2 billion to $1.592 Trillion for the week ended March 29. “Custody” holdings were up $73 billion y-t-d, or 19.3% annualized, and $198.3 billion (14.3%) over the past 52 weeks. Federal Reserve Credit declined $6.7 billion last week to $814 billion. Fed Credit has declined $12.3 billion y-t-d, or 6.0% annualized. Fed Credit expanded 4.8% during the past year.  International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – are up $209 billion y-t-d (20.6% annualized) and were up $463 billion, or 12.3%, over the past 12 months to a record $4.255 Trillion.   March 29 – UPI: “China has surpassed Japan in foreign exchange reserves, China Business News reports, which could intensify U.S. pressure for Beijing to revalue its yuan. China’s foreign exchange reserves reached $853.7 billion at the end of February, the newspaper reported Tuesday. Japan’s Finance Ministry said earlier this month that Japan’s forex reserves were $850 billion at the end of February.” Currency Watch: The dollar index fell slightly this week and ended the quarter down 1.7%. On the upside this week, the Czech koruna gained 1.7%, the Hungarian forint 1.7%, the South African rand 1.6%, the Australian dollar 1.5%, the New Zealand dollar 1.5%, and the Iceland krona 1.2%. For the week on the downside, the Colombian peso fell 1.3%, the Japanese yen 0.9%, and the British pound 0.5%. Year-to-date, the big gainers include the Indonesian rupiah up 8.4%, the Brazilian real 7.9%, Romanian leu 7.0%, Thai baht 5.5%, Czech Koruna 4.5%, the Philippines peso 4.0%, the South Korean won 4.0%, and the Russian ruble 3.7%. Year-to-date on the downside, the Zimbabwe dollar fell 14.7%, the Iceland krona 11.8%, the New Zealand dollar 10.0%, and the Chilean peso 2.7%. The Euro gained 2.35% against the dollar, the British pound 0.8%, and the Swiss franc 0.7%.    Commodities Watch: March 27 – Bloomberg (Wing-Gar Cheng): “China increased oil imports for a second month in February as refiners…built crude stockpiles because they expect higher domestic fuel prices. Purchases by the world’s second-largest oil consumer rose 7.9 percent from a year earlier to 11.2 million metric tons (82 million barrels)… The nation’s oil import bill jumped 57 percent to $4.95 billion last month…” March 31 – Bloomberg (Jeb Blount): “Cia. Vale do Rio Doce, the world’s largest iron-ore producer, wants steelmakers in Asia and Europe to pay 24 percent more for iron ore in 2006 than they paid in 2005, Vale spokesman Fernando Thompson said…” Gold traded yesterday to the highest level ($594.60) since January 1981 (according to Bloomberg). Sugar traded to the highest level since 1989. May crude rose $2.37 to $66.63. May Unleaded Gasoline rose 3.8%, while May Natural Gas declined 3.3%. For the week, the CRB index rose 1.9% (y-t-d up 0.4%). The Goldman Sachs Commodities index jumped 2.4%, increasing y-t-d gains to 2.5%.   Japan Watch: March 31 – Financial Times (David Turner): “Japan’s unemployment rate has plunged to its lowest level in almost eight years, government figures showed on Friday, confirming the country’s continuing economic recovery and pointing to a further strengthening of inflationary pressure… According to the government, the rate dropped to 4.1 per cent in February, the lowest since July 1998 and down from 4.5 per cent in January - the biggest monthly drop on record… The jobs-to-applicants ratio rose to a 14-year high of 1.04…” March 27 – Bloomberg (Kyoko Shimodoi and Mayumi Otsuma): “Japan must cut spending by almost a fifth to eliminate the annual fiscal deficit by 2011 and stop expanding public debt, a Ministry of Finance advisory panel said. The government needs to reduce spending by 13.1 trillion yen ($112 billion), or 18 percent of the level budgeted for the year…to meet the goal without increasing taxes…” March 31 – Bloomberg (Megumi Yamanaka): “Japan, the world’s largest consumer of crude oil after the U.S. and China, said oil imports rose 11 percent in February. Oil imports were 21.3 million kiloliters (134 million barrels) last month… Japan imports more than 99 percent of its oil, according to the ministry.” China Watch: March 27 – Bloomberg (Xiao Yu): “China should use its increasing foreign-exchange reserves to buy gold, the Financial News reported, citing an official at the Bank of China. The government should buy gold with foreign reserves to ‘diversify and gain higher returns’ on the assets, the central-bank affiliated newspaper reported, citing Wang Yuanlong, a doctor of economics and a board member of Bank of China’s Australian unit.” March 27 – Bloomberg (Jianguo Jiang): “China’s economic growth may slow to 8.9 percent this year, the China Securities Journal said, citing a central bank report. The consumer price index may rise about 2 percent this year, the newspaper said… China’s economy expanded 9.9 percent in 2005 with inflation at 1.8 percent, according to government data.” Asia Boom Watch: March 30 – Bloomberg (Amit Prakash): “The World Bank raised its 2006 growth forecast for most of Asia as demand for the region’s technology exports accelerates in the U.S., Europe and Japan. The Washington-based lender increased its 2006 forecast for East Asia, which excludes Japan and the Indian subcontinent, to 6.6 percent from a November estimate of 6.2 percent, citing faster expansion in the region's export-reliant economies. ‘A lot of the growth is being fueled by exports,’ [said] Homi Kharas, the bank’s chief economist for East Asia and the Pacific… ‘Growth is very broad based. Coming into 2006, things look quite strong.’” March 27 – Bloomberg (Kartik Goyal): “India’s revenue from direct taxes such as company and personal income tax rose 24 percent so far in the current financial year, said a finance ministry official… Revenue from direct taxes rose to 1.48 trillion rupees ($33 billion)…  Collections from company tax rose 19 percent…while revenue from personal income tax rose 32 percent…” March 27 – Bloomberg (Shamim Adam): “Singapore’s factory production grew in February at almost double the pace economists had expected as pharmaceuticals output from companies such as Merck & Co. increased more than four-fold. Manufacturing, which accounts for a quarter of Singapore’s $119 billion economy, rose by a seasonally adjusted 17.6 percent from January…” Unbalanced Global Economy Watch: March 28 – Bloomberg (Simone Meier): “Money supply growth in the economy of the dozen euro nations accelerated in February to the fastest in five months, giving the European Central Bank room to raise interest rates further… M3, the ECB’s preferred measure of money supply, rose 8 percent from a year earlier, up from a 7.6 percent gain in January… ECB council members including Axel Weber and Yves Mersch have cited concern about rising liquidity and oil-driven inflation in the euro region, suggesting they may back an interest rate increase from 2.5 percent...” March 29 – Bloomberg (Simone Meier): “European Central Bank council member Yves Mersch said the impact of higher oil costs is starting to feed through to other prices in the economy of the dozen euro nations, suggesting he may back further interest rate increases.  ‘We’re beginning to see a certain impact of indirect price rises,’ Mersch told the International Herald Tribune… The comments were confirmed by the Luxembourg Central Bank, which he heads. The ECB still has ‘to walk the talk’ in delivering price stability, Mersch said.” March 28 – Bloomberg (Sheyam Ghieth): “Italian business confidence climbed to a five-year high as rising orders heightened optimism that Europe’s accelerating economy is stimulating demand for Italian exports…” March 31 – Bloomberg (Fergal O’Brien): “Irish lending growth accelerated to a five-month high in February, boosted by spending on cars and property. Lending rose an annual 29.4 percent, compared with 28.8 percent in January… Mortgage lending rose an annual 27.7 percent…” March 29 – Bloomberg (Tracy Withers): “U.K. economic growth accelerated to the fastest pace in a year in the fourth quarter, powered by a pickup in services and government spending. Expansion quickened to 0.6 percent in the three months to Dec. 31 from 0.5 percent in the previous quarter… The annual rate of growth was 1.8 percent, the same as in the third quarter.” March 27 – Bloomberg (Laura Humble): “U.K. house prices rose in March by the most in more than a year an a half, led by a jump in London, a survey by Hometrack showed. The average cost of a home in England and Wales rose 0.5 percent, the biggest gain since June 2004, to 162,500 pounds ($282,000) from Feb. 17 to March 17…” March 31 – Bloomberg (Trygve Meyer): “The pace of borrowing by Norwegian households and businesses advanced in February, increasing pressure on the Nordic country's central bank to raise interest rates for a fourth time since June. Credit growth for households, companies and municipalities accelerated to an annual 13.8 percent from a revised 13.3 percent a month earlier…” March 30 – Bloomberg (Tasneem Brogger): “Iceland’s central bank, seeking to quell a speculative run on the national currency, raised its benchmark interest rate by a greater-than-expected three quarters of a percentage point. The krona gained. Reykjavik-based Sedlabanki increased the repurchase rate to 11.5 percent… Investors have poured into Iceland to take advantage of state-asset sales and tax cuts, driving the krona up 41 percent against the dollar in the four years through December and sending the benchmark stock index to a record high.” March 29 – Bloomberg (Gemma Daley): “Australian exports reached a record A$176.7 billion ($124 billion) in 2005, fuelled by extra commodities shipped to China, Trade Minister Mark Vaile said. ‘China is generating a lot of demand,’ Vaile told the National Press Club in Canberra. ‘Whether you are a farmer battling against the forces of nature to get your livestock or grain to market, a worker on the factory line or an engineer designing a bridge, you will be affected by the rise of China.’ Australia is the world’s largest shipper of alumina and coal, with raw materials making up almost 60 percent of the nation’s export earnings. Minerals and energy exports surged 47 percent in 2005.” March 31 – Bloomberg (Victoria Batchelor): “Australian retail sales increased more than twice as much as expected and building approvals gained from a five-year low in February, helping spur a rebound in economic growth. Retail sales rose 0.7 percent from January, when they gained a revised 0.9 percent, and approvals to build homes and apartments climbed 2.2 percent… Credit provided to consumers and businesses jumped 1.4 percent, the largest increase in two years…” March 29 – Bloomberg (Tracy Withers): “New Zealand consumer confidence fell to the lowest in more than five years in the first quarter because of expectations that record-high interest rates will crimp incomes and make jobs less secure.” Latin America Watch: March 31 – Bloomberg (Andrea Jaramillo): “Colombia’s economy expanded in the fourth quarter, making 2005 the fastest year of growth in a decade, as a strengthening peso and falling interest rates spurred a surge in consumer demand… The Colombian economy expanded 5.13 percent in 2005, following revised growth of 4.78 percent in 2004…” Bubble Economy Watch: March 28 – New York Times (David Cay Johnston): “The number of American households with a net worth of $1 million or more, excluding their principal residence, grew to a record 8.9 million last year, the British market research firm TNS Financial Services said in a report…More than one in seven of the households were in just 13 of the nation’s 3,140 counties, TNS said. The number of millionaire families rose to 7.1 million in 1999…and then, after the Internet bubble burst, dropped steadily to 5.5 million by 2002. The ranks of millionaire households rose to 6.2 million in 2003 and 8.2 million in 2004, she said. In most large counties, about one household in 12, or about 8.5 percent, was worth $1 million or more… The exception was Nassau County on Long Island, where millionaire families were more than twice as common, at 17.5 percent of all households. The households had an average net worth, excluding principal residence, of nearly $2.2 million, of which more than $1.4 million was in liquid, or investable, assets.” March 29 – Bloomberg (Bob Willis): “Consumer confidence in the U.S. economy jumped in March to the highest level in almost four years, driven by a strengthening labor market that’s lifting incomes and giving Americans the means to spend. The Conference Board’s confidence index rose to 107.2, the highest since May 2002, from 102.7 in February… The number of people who said jobs were plentiful increased to the highest level since before the September 2001 terrorist attacks, helping power spending and the economy.” March 24 – Dow Jones: “Banks have kept easing credit standards and non-price lending terms despite monetary policy-tightening the Federal Reserve began in mid-2004, Fed Chairman Ben Bernanke said this week in a letter to a U.S. lawmaker. ‘The available evidence suggests that credit standards and a number of non-price lending terms for both households and businesses have eased as the FOMC (Federal Open Market Committee) has raised its target for the federal funds rate," Bernanke said in a letter to Rep. Harold Ford, D-Tenn.” Energy and Crude Liquidity Watch: March 27 – Financial Times (Carola Hoyos): “Mergers and acquisitions in the oil and gas industry tripled in value last year to $160bn - the highest level since the boom year of 1998 when Exxon and Mobil merged, BP took over Amoco, and Total bought PetroFina. Deals by Chinese oil and natural gas companies, meanwhile, are expected to have grown sixfold to $6bn in 2005 as they became big international players, buying assets from Ecuador to Sudan and Syria, according to an authoritative industry study.” Speculator Watch: March 26 – Financial Times (Stephen Schurr): “Hedge funds’ assets under management around the world have topped $1,500bn, with the US alone surpassing $1,000bn, according to a new survey from HedgeFund Intelligence. The report…also shows that European hedge fund assets have topped $325bn, up 25 per cent from last year’s survey. London hedge fund managers run $255.5bn, or 78 per cent, demonstrating how the City is rapidly become a significant centre for hedge funds as they become global enterprises….Asian funds climbed to $115bn as hedge funds rushed to take advantage of the growth in emerging markets there as well as the economic recovery in Japan. The study also indicated that the biggest funds continue to get bigger. The US “Billion Dollar Club” – hedge funds with assets of more than $1bn – now accounts for more than $850bn in assets. Funds with less than $1bn hold at least $200bn, the study found. “The passing of the $1,500bn mark shows how strongly the hedge fund sector is growing, particularly given the difficult market conditions encountered by many hedge fund managers in the past 12 months,” said Neil Wilson, managing editor of HedgeFund Intelligence. “All three of the major regions are attracting a good flow of new investment money…” A Notable Quarter of Global Asset Inflation: I believe it’s worth detailing the first quarter’s broad based global equities market asset inflation. London’s FTSE100 gained 6.15%, Germany’s DAX 10.29%, France’s CAC40 10.72%, Spain’s IBEX 10.44%, the Swiss Market Index 5.79%, Italy’s MIB 7.40%, Portugal’s PSI 17.71%, the Irish Overall Index 9.53%, Iceland’s ICEX index 6.50%, Netherland’s Amsterdam Exchanges Index 7.30%, Belgium’s BEL20 10.2%, Luxembourg LuxX index 14.6%, Denmark’s OMX Copenhagen 20 0.4%, Finland’s Helsinki index 15.2%, Norway’s OBX index 18.1%, Sweden’s Stockholm 30 index 10.41%, and Austria’s Austrian Traded ATX 12.9%. Greece’s major equities index jumped 12.5%, Turkey 7.9%, Cyprus 44.4%, Malta 30.7%, Bulgaria 5.4%, Poland 13.0%, Czech Republic 3.5%, Hungary 11.0%, Romania 13.9%, Ukraine 21.3%, Slovakia 0.9%, and Croatia 21.8%. On the downside, Slovenia declined 4.1%, Estonia slipped 0.4%, Latvia dropped 8.9%, and Lithuania fell 5.1%. The major equities index in South Africa jumped 11.43%, Tunisia 15.8%, Morocco 32.8%, Namibia 14.5%, Botswana 9.68%, Egypt 4.4% and Kenya 3.6%. Some of the highflying Middle East markets came back to earth a little. The Kuwait Global index fell 12.24%, Qatar’s DSM index dropped 19.1%, Israel’s Tel Aviv 25 index declined 1.2%, Bahrain fell 3.6% and Jordan dropped 13.7%. The wild Saudi SE index actually ended the quarter up 2.08%, with a 52-week gain of 62%. Asia remains strong. The Nikkei 225 rose 5.89%, with a 12-month rise of 46%. Hong Kong’s Hang Seng rose 6.24%, China’s Shanghai A 11.5%, China’s Shanghai B 42.4% and South Korea’s KRX 0.52%. The major equities index in Singapore rose 7.93%, Thailand 2.73%, Malaysia 2.98%, Philippines 4.77%, Indonesia 13.79%, Vietnam 63.76%, and Sri Lanka 17.8%. Australia ASX 200 gained 7.69%, and New Zealand’s NZX 50 rose 9.85%.  India’s Sensex jumped 20.0% and Pakistan’s Karachi 100 20.19%. The Latin American equities boom ran unabated. Argentine’s Merval gained 16.67%, Brazil’s Bovespa 13.44%, Mexico’s Bolsa 8.26%, and Chile’s Select index 11.07%.  Venezuela’s major equities index jumped 51.42%, Peru 23.39%, Colombia 16.62%, Costa Rica 2.79%, and Bermuda 13.32%. Closer to home, Canada’s TSX Composite index gained 7.44%. Throw in gold’s 12.9% gain, silver’s 28.6%, copper’s 9.2%, lead’s 13.5%, aluminum’s 8.9%, nickel’s 12.6%, zinc’s 13.1%, crude oil’s 9.2% and the ongoing rise in global real estate prices and you’ve got A Notable Quarter of Global Asset Inflation.  Little wonder global bond markets are in retreat.