The Dow gained 3.2% this week, and the S&P 500 rose 3.1%. The Utilities added 1.2%, increasing y-t-d gains to 7.3%. The Morgan Stanley Consumer index gained 2.1%. The Morgan Stanley Cyclical index rose 2.5%, while the Transports declined 1.0%. The broader market rallied sharply. The small cap Russell 2000 surged 4.2%, and the S&P400 Mid-cap index gained 4.0%. The NASDAQ100 gained 4.0%, and the Morgan Stanley High Tech index rose 3.8%. The Semiconductors surged 7.1%. The Street.com Internet Index gained 1.6%, and the NASDAQ Telecommunications index advanced 3.6%. The Biotechs jumped 4.6%. The Broker/Dealers surged 4.6% (up 7.8% y-t-d), and the Banks gained 2.3% (up 7.3% y-t-d). With bullion up $15.20, the HUI gold index rose 6.6%.
For the week, two-year Treasury yields sank 10 bps to 4.97%. Five-year yields dropped 8 bps to 4.91%, and bellwether 10-year yields declined 5 bps to 4.99%. Long-bond yields slipped 2 bps to 5.07%. The 2yr/10yr spread ended the week at a positive 2 bps. Benchmark Fannie Mae MBS yields fell 10 bps to an 8-week low 6.17%, this week outperforming Treasuries. The spread on Fannie’s 4 5/8% 2014 note ended the week 2 narrower at 36, and the spread on Freddie’s 5% 2014 note 2 narrower at 36. The 10-year dollar swap spread declined 1.7 to 57. Corporate bond spreads narrowed moderately. The implied yield on 3-month December ’06 Eurodollars dropped 8.5 bps to 5.45%.
Investment grade issuers included Merrill Lynch $3.75 billion, Citigroup $1.0 billion, Wachovia $1.0 billion, CIT Group $1.25 billion, American Express $750 million, Capital One $650 million, and Weingarten Realty $575 million.
Junk issuers included Petrohawk Energy $775 million, Verso Paper $900 million, Corning $250 million, and H&E Equipment Services $250 million.
Foreign dollar debt issuers included Philippines $3.2 billion, Uruguay $1.2 billion, and Panama $900 million.
Japanese 10-year “JGB” yields jumped 11 bps this week to 1.92%. The Nikkei 225 index gained 3.5%, reducing 2006 losses to 4.8%. German 10-year bund yields dipped 3 bps to 3.92%. Emerging debt and equities markets were exceptionally strong. Brazil’s benchmark dollar bond yields dropped 20 bps to 6.61%, the low yield since late May and down 90 bps from June highs. Brazil’s Bovespa equity index surged 5.3%, increasing 2006 gains to 11.7%. The Mexican Bolsa gained 3.7% this week (up 13.8% y-t-d). Mexico’s 10-year $ yields declined 6 bps to 5.97%, lows since March and down 63 bps from June high yields. Russian 10-year dollar Eurobond yields declined 3 bps to 6.92%. The Russian RTS equities index rose 4.4%, increasing 2006 gains to 38% and 52-week gains to 100%. India’s Sensex equities index jumped 6% (up 13.6% y-t-d).
Freddie Mac posted 30-year fixed mortgage rates dropped 8 bps to 6.72%, up 95 basis points from one year ago. Fifteen-year fixed mortgage rates fell 7 bps to 6.34%, 100 bps higher than a year earlier. One-year adjustable rates dipped 2 bps to 5.78%, an increase of 132 bps. The Mortgage Bankers Association Purchase Applications Index dipped 2.4% this week. Purchase Applications were down 19% from one year ago, with dollar volume down 19.5%. Refi applications added 0.6% last week. The average new Purchase mortgage rose to $222,700 and the average ARM jumped to $347,200.
Bank Credit surged $35 billion last week to a record $7.980 Trillion, with a y-t-d gain of $474 billion, or 11.3% annualized. Bank Credit inflated $705 billion, or 9.7%, over 52 weeks. For the week, Securities Credit increased $9.0 billion. Loans & Leases jumped $26.0 billion during the week, and were up $305 billion y-t-d (10.0% annualized). Commercial & Industrial (C&I) Loans have expanded at a 14.4% rate y-t-d and 12.5% over the past year. For the week, C&I loans rose $7.1 billion, and Real Estate loans added $1.6 billion. Real Estate loans have expanded at a 12.8% rate y-t-d and were up 12.4% during the past 52 weeks. For the week, Consumer loans expanded $7.2 billion, and Securities loans increased $5.4 billion. Other loans gained $5.4 billion. On the liability side, (previous M3 component) Large Time Deposits declined $6.3 billion.
M2 (narrow) “money” supply was about unchanged at $6.861 Trillion (week of July 17). Year-to-date, narrow “money” has expanded $180 billion, or 4.8% annualized. Over 52 weeks, M2 has inflated $322 billion, or 4.9%. Currency added $0.2 billion for the week, while Demand & Checkable Deposits dropped $20.6 billion. Savings Deposits jumped $15.4 billion, and Small Denominated Deposits increased $5.2 billion. Retail Money Fund assets dipped $0.5 billion.
Total Money Market Fund Assets, as reported by the Investment Company Institute, declined $0.7 billion last week to $2.149 Trillion. Money Fund Assets have increased $92 billion y-t-d, or 7.7% annualized, with a one-year gain of $232 billion (12.1%).
Total Commercial Paper expanded $6.7 billion last week to $1.793 Trillion. Total CP is up $152 billion y-t-d, or 16.1% annualized, while having expanded $262 billion over the past 52 weeks (17.1%).
Asset-backed Securities (ABS) issuance this week increased to $12 billion. Year-to-date total ABS issuance of $406 billion (tallied by JPMorgan) is running about 5% below 2005’s record pace, with y-t-d Home Equity Loan ABS sales of $282 billion 4% above last year.
Fed Foreign Holdings of Treasury, Agency Debt jumped $11.3 billion to a record $1.645 Trillion for the week ended July 26th. “Custody” holdings were up $126 billion y-t-d, or 14.3% annualized, and $191 billion (13.2%) over the past 52 weeks. Federal Reserve Credit declined $4.8 billion to $826 billion. Fed Credit has declined $0.5 billion y-t-d, or 0.1% annualized. Fed Credit is up 4.1% ($32.6bn) over the past year.
International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – were up $508 billion y-t-d (22% annualized) and $657 billion (17%) in the past year to $4.555 Trillion.
July 27– Bloomberg (Svenja O’Donnell): “Russia’s foreign currency and gold reserves surged to a record $262.9 billion, surpassing Taiwan’s to become the world's third largest as oil and gas prices hover near all-time highs.”
July 25– Bloomberg (Christina Soon): “China should increasingly diversify its foreign-exchange reserves to reduce the risk of losses from declines in the dollar, the country's National Bureau of Statistics said… ‘The U.S. dollar may continue to weaken, increasing the risks of foreign-exchange losses in our currency reserves,’ the statement said.”
The dollar index declined 0.6% to 85.19. On the upside, Turkish lira rose 3.8%, the Hungarian forint 2.4%, the South African rand 2.3%, and the Australian dollar 1.9%. On the downside, New Zealand dollar declined 1.1%, the Ukraine hryvnia 0.6%, and the South Korean won 0.4%.
July 28 – Financial Times (Raphael Minder and Chris Flood): “Continued dry and hot weather around the globe on Thursday triggered a sharp cut in forecasts for wheat harvests. The International Grains Council cut its 2006-07 forecast for world wheat output from 605m tonnes to 596m tonnes, a fall of 21m tonnes compared with the previous year. The IGC said EU producers were the most affected…”
Gold gained 2.5% to $635, and Silver jumped 4.8% to $11.37. Copper surged 6.6%. September crude declined $1.19 to end the week at $73.24. August Unleaded Gasoline dipped 2.4%, while September Natural Gas surged 15%. For the week, the CRB index gained 1.2% (y-t-d up 3.6%). The Goldman Sachs Commodities Index (GSCI) added 0.5% (up 12.7% y-t-d).
July 28 – Bloomberg (Mayumi Otsuma): “Japan’s consumer prices climbed for an eighth month in June and the labor market improved… Core consumer prices…rose 0.6 percent from a year earlier, the same pace as May and the fastest in eight years… The jobs-to-applicants ratio…gained to a 14-year high of 1.08…”
July 26 – Bloomberg (John Liu): “China will overtake Japan to become the third-biggest market for U.S. exports this year if current growth levels continue, U.S. Under Secretary of Commerce Franklin Lavin said… U.S. exports to China rose 36.5 percent from a year earlier during the first five months of 2006…”
July 28 – Bloomberg (Jianguo Jiang): “China’s economy is forecast to grow 11 percent in the third quarter from a year earlier, the China Securities Journal said, citing a research institute affiliated with the government’s top planning agency.”
July 26 – Bloomberg (Vicki Kwong): “Shanghai, Shenzhen and China’s other ports handled 22 percent more containers in the first half, as rising exports from the world's fourth-largest economy boosted demand. The nation’s major sea and river ports handled 42.1 million 20-foot containers in the first six months of the year…”
July 26 – MarketNewsInternational: “Chinese Premier Wen Jiabao reiterated Wednesday earlier government pledges to curb lending activities and fixed-asset investment in a bid to keep the economy from overheating and said that ‘comprehensive measures’ will be introduced to tackle excess liquidity in the banking system.”
July 24– Bloomberg (Nipa Piboontanasawat): “China’s retail sales rose at a slower pace in June from the previous month, the National Bureau of Statistics said… Sales rose 13.9 percent last month to $75.7 billion from a year earlier, after climbing 14.2 percent in May.”
July 27– Bloomberg (Nerys Avery): “China’s credit rating was raised one level by Standard & Poor’s after the government improved bank finances and clamped down on lending to cool the world’s fastest-growing major economy. S&P raised its long-term foreign and local currency rating to A from A-, citing ‘persistent efforts to strengthen the banking sector’ and the economy’s ‘excellent growth prospects.’”
Asia Boom Watch:
July 26 – Bloomberg (Sumit Sharma and Ashok Bhattacharjee): “Indian banks said loan demand will keep growing after the central bank raised its benchmark interest rate to a four-year high, as rising wages and earnings allow customers to afford higher borrowing costs… ‘Consumer demand for credit even on a relatively higher base could grow 25 percent in the current year,’ said Kalpana Morparia, joint managing director of ICICI Bank… ‘This is one time all engines from a credit perspective are firing ahead.’”
July 25– Bloomberg (Seyoon Kim): “South Korea’s economy grew at its slowest pace in more than a year in the second quarter as consumer spending cooled and construction fell. The won dropped. Asia’s third-largest economy expanded 0.8 percent from the first quarter, when it advanced 1.2 percent…”
July 24– Bloomberg (Theresa Tang): “Taiwan’s export orders rose 20.6 percent in June to $24.9 billion from a year earlier, the Ministry of Economic Affairs said…”
July 26 – Bloomberg (Shamim Adam): “Singapore’s manufacturing grew in June at the fastest pace in more than two years as semiconductor and drug companies boosted production to meet overseas orders. Industrial production…increased a seasonally adjusted 19.3 percent from May…”
Unbalanced Global Economy Watch:
July 27– Bloomberg (Kamil Tchorek): “International airline passenger traffic climbed 6.7 percent in the first six months of 2006 as economic growth encouraged tourism and business travel.”
July 27– Bloomberg (Craig Stirling): “The value of U.K. mortgages approved by lenders rose by a record in June, the British Bankers’ Association said, a sign the $6.2 trillion property market may continue to strengthen in the second half.”
July 28 – Bloomberg (John Fraher): “Money-supply growth in the dozen nations sharing the euro slowed in June from the fastest pace in more than three years… M3, the ECB’s preferred measure of money supply, rose 8.5 percent from a year earlier after…8.8 percent in May. Loans to companies and consumers rose 11 percent in June after jumping 11.4 percent in the previous month, the most since the bank took charge of monetary policy in 1999.”
July 27 – Bloomberg (Francois de Beaupuy and Gabriele Parussini): “French joblessness fell in June for a fifth month, sending the unemployment rate to 9 percent, the lowest in four years…”
July 27– Bloomberg (Tasneem Brogger): “Denmark’s jobless rate remained at the lowest rate since 1974 in June, increasing concern about a shortage of labor as companies struggle to find workers. The seasonally-adjusted unemployment rate held at 4.5 percent…”
July 26 – Bloomberg (Evalinde Eelens): “The Belgian economy expanded 0.8 percent in the second quarter, giving the sixth-largest euro-area nation its strongest first-half growth since 2002.”
July 27– Bloomberg (Jonas Bergman): “Norway’s jobless rate fell in July as surging energy prices spur investment in the nation’s petroleum industry. The unemployment rate fell to 2.8 percent from 3.7 percent a year earlier…”
July 28 – Bloomberg (Jonas Bergman): “Swedish retail sales increased for a 10th month in June as declining unemployment and tax returns boosted incomes and lifted consumer demand. Sales rose…7.4 percent from a year earlier…”
July 25– Bloomberg (Alistair Holloway): “Finland’s jobless rate fell to 8.1 percent in June, the lowest rate for that month in 15 years…”
July 26 – Bloomberg (Steve Bryant): “Turkey may attract as much as $24.25 billion in direct foreign investment this year, according to a presentation Economy Minister Ali Babacan made…”
July 25– Bloomberg (Gemma Daley): “When Daniel Stojanoski failed to land an information-technology job in Sydney, he headed west. Now he earns A$96,000 ($72,000) a year driving a 200-ton truck at BHP Billiton Ltd.’s iron ore mine in the state of Western Australia. ‘I went for the money,’ said Stojanoski, 26, who pockets almost double the average wage and 16 percent more than a systems analyst. He’s among thousands of workers from Australia’s most populous eastern states trekking 3,729 miles west as a China-fueled minerals boom creates the nation’s best-paid workforce and hottest housing market.”
July 28 – Bloomberg (Gemma Daley): “Australia’s peak union movement has sought a record 6.2 percent, or A$30 ($23) a week, pay increase for 1.6 million workers earning the minimum wage.”
July 26 – Bloomberg (Nasreen Seria): “South African inflation accelerated to 4.8 percent in June, the fastest pace in 10 months, led by gasoline costs, adding to the case for an interest rate increase next month.”
Latin America Watch:
July 25– Bloomberg (Heather Walsh): “Latin American and Caribbean economies probably will expand 5 percent in 2006, led by Argentina and Venezuela, as demand for the region’ commodity exports rises, a United Nations commission said….”
July 24– Bloomberg (Patrick Harrington and Adriana Arai): “Mexico’s exports surged for a second month in June… Exports climbed to $21.2 billion from $18.3 billion a year earlier… Imports rose 17.9 percent from a year earlier to $21.7 billion.”
July 26 – Bloomberg (Alex Emery): “Peru’s exports rose to a monthly record in June on surging sales of copper, gold and zinc. Exports rose 39.4 percent to $1.98 billion…”
Central Bank Watch:
June 26 – Financial Times (Raphael Minder): “Australia’s central bank is expected to raise interest rates as early as next Wednesday following a consumer price report that showed inflation accelerating past the limit targeted by the bank… Consumer prices rose 1.6 per cent in the quarter to the end of June, lifting the annual inflation rate to 4 per cent. Mineral-rich Australia is enjoying an economic boom on the back of record revenues from commodities.”
Bubble Economy Watch:
Second Quarter Advanced GDP expanded a nominal 5.8%, down from the first quarter’s 5.8% but matching the year ago period. The Employment Cost index rose 0.9% during the second quarter (up 3.0% y-o-y). June Durable Goods Orders were reported stronger-than-expected and up 6.2% from a year earlier. New Orders Ex-Transportation were up 8.7% from June 2005.
Real Estate Bubble Watch:
Total June Home Sales were down 9.3% from a year ago to an annualized pace of 7.751 million units. Exiting Home Sales were down 8.9% y-o-y (6.62mm), and New Home Sales were down 11.1%. Thus far, Home Prices are holding up. Existing Home Average (mean) Prices were up 1.2% to a record $279,400, and New Home Average Prices were up 3.9% y-o-y to $290,600 (lowest average since December ’05). Year-to-date, Existing Home Sales are running 4.6% below last year’s record pace, while New Home Sales are running 10.9% below. Total Home Sales Calculated Transaction Value (factoring in both volume and prices) was down 7.8% y-o-y in June, although year-to-date CTV is only 1.4% below last year’s booming pace.
Median Home Sales Prices rose to a record $575,800 in California during June, a y-o-y increase of 6.2% ($33,470). Condo Median Prices were up 1.3% y-o-y to $430,600. Sales for the month were down a notable 26.3% compared to June 2005. The Unsold Inventory of Homes jumped to 6.2 months, up from May’s 5.9 months and the year ago 2.5. The median number of days to sell a home rose to 46 days, up from the year earlier 28 days.
July 25 – Florida Association of Realtors: “Rising mortgage rates, rising inventory levels, rising insurance premiums and higher energy costs impacted Florida’s housing sector in June… Statewide, the existing-home median price rose 3 percent to $257,800 last month… A total of 18,089 existing single-family homes were sold statewide last month, a decrease of 29 percent… In June 2001, the statewide median sales price was $132,500, representing an increase of about 94.5 percent over the five-year period…”
July 26 – Bloomberg (Cassie M. Chew): “Rents at shopping malls and strip centers increased and vacancies decreased during the second quarter, while retail sales slowed, the Wall Street Journal reported. Shopping-mall rents rose 1 percent to $38.89 a square foot, the largest quarterly increase in almost three years, and strip-mall rents rose almost a point to $18.65 a square foot…”
Financial Bubble Watch:
July 24 – Financial Times (Lex Column): “The phrase ‘throwing off cash’ has taken on a new meaning in recent years. Awash with the stuff, companies are buying back shares at an unprecedented pace. Last week, Microsoft announced plans to buy back another $40bn of its stock. Standard & Poor’s calculates that members of the S&P 500 spent $100bn in the first quarter alone. Annualised, that would be 15 per cent higher than last year’s record level, and more than double total repurchases in 2004.”
Energy Boom and Crude Liquidity Watch:
July 27 – Bloomberg (Joe Carroll): “Exxon Mobil Corp. and Royal Dutch Shell Plc, the world’s biggest and third-largest oil companies, posted combined second-quarter profits of almost $18 billion on record crude prices. Net income at Exxon Mobil rose 36 percent from a year earlier to $10.4 billion… Shell…said its profit jumped 40 percent to $7.32 billion… Both companies exceeded analyst expectations.”
July 28 – Bloomberg (Jim Kennett): “Baker Hughes Inc., the world’s third-largest oilfield-services provider, said second-quarter profit rose more than sixfold because of an increase in demand for drilling as oil prices surge. Net income climbed to $1.39 billion… Revenue gained 25 percent to $2.2 billion. ‘The second quarter was another strong quarter for Baker Hughes,’ Chief Executive Chad Deaton said… ‘The entire industry will continue to be challenged to provide energy to meet global demand…’”
July 26 – Bloomberg (Abdulla Fardan): “Saudi Arabia, the world’s largest oil producer, will receive a record $203 billion in oil revenue this year, Saudi-owned al-Hayat newspaper reported… Revenue will be about 25 percent higher than the $162 billion earned in 2005… Saudi American Bank projected that Saudi gross domestic product will grow 20 percent in nominal terms this year…”
July 26 - The American Petroleum Institute: “High oil prices continue to stoke U.S. drilling activity as first-half 2006 data reveals nearly twice the level of activity recorded during the lows of the early to mid-1990s… A 20-year high estimated 24,729 oil wells, natural gas wells and dry holes were completed in the first half of 2006. In the second quarter of 2006 alone, there were an estimated 12,681 completions, the highest single quarter estimate since the first quarter of 1986.”
July 26 – Bloomberg (Greg Chang): “U.S. demand for electricity set a record last week as hot weather drove energy consumption in the south-central and Rocky Mountain regions, the Edison Electric Institute industry group said.”
July 24– Bloomberg (Greg Chang): “California’s power-grid operator declared a stage 1 emergency as the state braces for another day of record power demand and the possibility of the most severe electricity emergency in five years as a heat wave persists… The state is forecasting electricity demand will reach about 52,000 megawatts, compared with a record 49,036 megawatts set at the end of last week, said today… Consumption is surpassing previous forecasts made by the system operator, which previously this year said that demand would peak at about 46,000 megawatts under ‘most likely conditions.’”
July 26 – UPI: “Global warming is reportedly having a dramatic effect on the Matterhorn in the European Alps, with landslides and flaking becoming more numerous. The landslides are being caused by retreating ice cover, with zero temperatures now found only above approximately 13,000 feet, global warming expert Michele Comi told the Italian news agency ANSA. ‘This means that all the rock fractures generally held together by the ice, which acts as a glue, give way because the ice melts, leading to a situation of instability… Geologically speaking, the process is normal. What isn’t normal is the acceleration of these phenomena.’”
July 26 – Bloomberg (Marek Miler): “The Czech Republic’s power system regained stability after it suffered the worst failure in the country’s history, triggered by record electricity consumption and hot weather.”
July 27 – Financial Times (Stephen Schurr): “The number of new hedge fund launches in Europe reached another record level in the first half of this year… According to a survey from EuroHedge magazine, at least 170 European hedge funds were launched until the end of June, up15 per cent from 150 in 2005’s first half. The new fund launches collectively raised $11.4bn, down 12 per cent from $13bn in the year-earlier period.”
July 26 – Bloomberg (Martin Z. Braun): “New York City ended fiscal 2006 on June 30 with a record $6.1 billion surplus as Wall Street profits and surging real estate values boosted revenue, State Comptroller Alan Hevesi said.”
Ballooning Financial Sphere Watch:
Citigroup reported second quarter Net Earnings of $5.265 billion, up 4% from the year ago period (Income from Continuing Operations up 11%). Total U.S. Consumer Revenues were up 1% versus Q2 2005, with Total International Consumer Revenues up 12%. International Revenues increased 17%. International Credit Card Revenue growth of 28% “was driven by higher purchase sales and average loans… Loan growth was led by Mexico, Asia, and Latin America.” International corporate and investment banking revenues jumped 23%. “Fixed income markets revenues of $2.76 billion, up 51%, were driven by strong results in municipals, foreign exchange, and credit products. Equity markets revenues of $1.15 billion, up 30%, reflected strong performances in derivatives, convertibles, and cash trading.” “Global wealth management revenues were up 19%, with client assets under fee-based management up 23%.” Compensation expense was up 22% from Q2 2005 to $7.37 billion. Total Assets expanded 10% annualized to $1.627 Trillion. Loans expanded at a 21% rate during the quarter to $637 billion, with Consumer Loans expanding at a 16% rate (to $481bn) and Commercial Loans at a 37% pace (to $156bn). Commercial Loans grew at a 21% rate during the first half. For the second quarter, Total Trading, Brokerage, and Fed Funds Assets declined slightly to $757 billion. The bank repurchased 41 million shares of stock during the quarter.
Bank of America reported second quarter Net Income of $5.48 billion, up 18% from the year ago period. “Total loans and leases grew 17% in Global Corporate and Investment Banking from the second quarter of 2005 as businesses continued to invest and expand.” “Capital Markets and Advisory Services had revenue of $2.12 billion, an increase of 39% from the second quarter of 2005… Investment banking fee income…reached a record $645 million in the second quarter… Total assets under management in Global Wealth and Investment Management hit the $500 billion milestone, an increase of 13% from the second quarter of 2005…” Total bank Assets expanded $70.1 billion, or 20.4% annualized, during the quarter to $1.445 Trillion. Average loans expanded at a 12.8% annualized rate to $636 billion. Loan growth was robust throughout, with residential mortgage, home equity, and commercial loans all expanding at double-digit rates during the quarter. On the Liability side for the quarter, Total Deposits declined $5.5 billion, while Fed Funds and “Repos” jumped $22 billion, “Trading Account Liabilities” increased $6.4 billion, and “Commercial Paper and Other Short-Term Borrowings” surged $37.5 billion. The company repurchased 83.1 million shares during the quarter.
JPMorganChase reported second quarter Net Income of $3.5 billion, up from Q2 2005’s $1.0 billion (which was reduced by a $1.2 billion litigation reserve charge). Investment Banking Earnings of $839 million were up 37% from Q2 2005, with Net Revenue of $4.2 billion up 52%. “Fixed Income Markets Revenue of $2.0 billion was up 43% due to stronger performance across essentially all products.” Hurt somewhat by weakened mortgage business returns, Retail Financial Services Net income was down 11% from a year earlier to $868 million. Commercial Banking, on the other hand, saw Net Revenue jump 9% to $949 million (Net Income up 80% to $283 million). Average Commercial Loans were up 12% annualized during the quarter and 10% from a year ago. Treasury & Securities Services saw Net Income jump 68% to a record $316 million. “Average liability balances were $194 billion, an increase of 26%. Assets under custody increased to $11.5 Trillion, up 19%.” Asset & Wealth Management Net Revenues ($1.6bn) and Net Income ($343 million) each increased 21%. “Assets under supervision were $1.2 Trillion, up 11%, or $120 billion, from the prior year…” Total Assets expanded at a 17.2% rate during the quarter to $1.328 Trillion, with first-half growth an annualized 22%. Loans expanded at a 22% rate during the quarter, and total Trading Assets grew at a 48% rate. The company repurchased 17.7 million shares during the quarter, increasing y-t-d purchases to 49.5 million.
Wells Fargo reported record Net Income of $2.089 billion for the second quarter, an increase of 9% from the year ago period. Total Revenue expanded 12% annualized during the quarter. “Average consumer loans (excluding real estate 1-4 family first mortgages) were up 14% from the prior year and up 16% (annualized) on a linked-quarter basis.” Average Commercial Loans expanded at a 13.6% annualized rate during the quarter (up 12.1% y-o-y), and Average Home Equity Loans expanded at a 23.6% rate. Mortgage originations of $116 billion were up $25 billion from the first quarter and were up 36% from the year ago period. Total Assets growth slowed to 6% (to $500 billion) due to a sale of adjustable-rate mortgages. Average Assets increased 13% annualized during the quarter. On the Liability side, Total Deposits were up 19% from one year ago and expanded 4% annualized during the second quarter.
To Wear or Not to Wear:
Is the economic boom intact or beginning to rapidly unwind? Are inflationary pressures building, or have they instead peaked right along with home prices? Is the U.S. consumption-based economy at the edge of the proverbial cliff, or is it rather more a case of an Inflationary Bubble Economy continuing to luxuriate in unprecedented Credit and speculative excess? Is reduced liquidity an issue for U.S. and global markets, or is the liquidity backdrop as loose as ever? Has the Fed already overdone it, or is the Bernanke Fed about to make a serious policy error and acquiesce to an inflationary boom?
For me, if there were ever a befuddling backdrop beckoning for analysts to lean heavily on their respective analytical frameworks – that time is right now. To begin with, second quarter financial sector earnings reports offer scant evidence of any significant slowing of system Credit growth. The major “banks” maintain an aggressive business posture, with robust growth in lending and capital markets activities. The push to satisfy Wall Street earnings growth demands is intense, and the ongoing huge stock buybacks are as well indicative of more aggressive lending and market activities to come. Financial conditions remain extraordinarily loose; Credit Availability remains easy and marketplace liquidity abundant. It is worth noting that the NYSE Financial is up almost 7% y-t-d, outperforming the S&P500 and most other indices.
I found Freddie Mac’s Mid-Year Economic Outlook (from a couple weeks back) quite interesting (and they do occupy an enviable catbird seat over the U.S. economy). Freddie economists forecast second-half consumer spending moderation and a general economic slowdown. They expect both 2006 Housing Starts and Total Home Sales to decline 7% from last year’s levels. Home price appreciation is expected to slow to 7%, with Mortgage Originations falling 12%. All the same, “mortgage debt outstanding, supported by new construction and house appreciation, should grow by 13% over 2006…”
It is worth noting that Bank Real Estate Loans expanded at a 13.7% annualized rate during the second quarter (from Fed data), with what appears a major push to finance the commercial real estate sector. Estimates have second quarter bank loan growth as high as 11%, and it is simply difficult to envisage the economy faltering meaningfully in the face of such a rampant expansion of finance. I am reminded of the dramatic falloff of mortgage refinancings in mid-2003. While many of the bearish persuasion expected mortgage lending to subside, the correct analysis was instead that the massive mortgage sector infrastructure put in place for refinancings was to be redeployed to hawk interest-only, negative amortization, and other “exotic” home loans. The upshot was a blow-off period of Mortgage Finance Bubble excess.
I am today mindful of the financial sector simply “redeploying” its lending infrastructure away from household mortgage loans to commercial real estate, corporate, energy, small business, education, etc. It is a central tenet of Macro Credit Theory that if the Financial Sphere is willing to lend and there is a general expansionary/inflationary bias within the Economic Sphere, borrowers will be inclined to borrow and spend.
Some now discuss a looming recession, although a disciplined focus on the Credit system and financial conditions finds such talk premature. Clearly, an increasing number of strapped homeowners face a confluence of rising mortgage payments, surging energy costs, and some even declining home values. Things are rapidly turning sour in the Florida housing market; California is poised for trouble; and highflying markets are vulnerable across the country. The Fed is clearly concerned, and I view this as the major impetus for the Bernanke Fed’s desire to wrap up the “tightening” cycle.
As always, the markets are keenly focused on the Fed’s focus, thus today overstating the immediate influence of household mortgage risk on financial and economic performance. The markets now assume there is sufficient evidence of household mortgage vulnerability to engender the Fed to imminently end rate increases, and all they (the Fed and markets) have been waiting for is some less robust economic data to justify a pause. Now they've got it. The inflationary backdrop is only important as a determinant of how much longer Dr. Bernanke must adorn himself stiflingly in Wolf’s Clothing. This Fed would surely rather tolerate inflation than risk a housing bust.
So, as we’ve done repeatedly over the past few years, we’ll again watch and wait to see what impact declining market yields have on U.S. and global financial markets, economic performance, real estate markets and "animal spirits" generally. From yesterday’s Financial Times: “The [emerging markets] love affair is back on…immediate evidence is of excess cash, which is finding a home in [emerging market] assets.” Brazil’s Bovespa index is now up about 12% y-t-d, the Mexican Bolsa 14%, Argentina’s Merval 10%, Hong Kong’s Hang Seng 14%, Poland’s WIG 29%, Russia’ RTS 38%, and India’s Sensex 14%. Emerging debt markets have quickly returned to a boil. Gold prices are up 23% y-t-d, crude oil 20%, silver 26%, and copper 84%.
There should be little dispute regarding the acute global vulnerabilities associated with the leveraged U.S. homeowner here at home and highly leveraged and speculative markets here and across the globe. Yet there is a fine line between vulnerabilities that restrain risk-taking and those systemic vulnerabilities that keep timid central bankers adverse to the risk of taking away the punchbowl. As we are witnessing yet again, the danger of central bankers accommodating a long period of Credit and speculative excess is that the associated fragility will only entrap them in perpetual accommodation.
The global sell-off that transpired during May and June is certainly at least partially explained by the fear – from highly speculative markets - that the Fed and global central bankers were increasingly compelled to tighten financial conditions. I don’t buy into the notion that the Bank of Japan and other central banks were removing liquidity, although there was justifiable angst that central bankers were growing impatient with the sweeping surge in asset and commodities prices. But with the Fed now yearning to wrap things up, the BOJ poised to make Greenspan’s crawling “baby-steps” appear a brisk trot in comparison, the ECB likely not in a position to play the world’s sole responsible central bank, and the weak dollar pressuring the major central banks to limit their rate increases - there is today a definite risk that speculation returns with an emboldened vengeance.
This week, the AMEX Oil Index traded to a new all-time high (up 21% y-t-d). The Philadelphia Stock Exchange Utility Index also traded to a record high (up 7.3% y-t-d). The Broker/Dealer index is up almost 8% y-t-d and 24% over the past year. As such, I’m not about to back away from the view that a energy/alternative-energy/energy infrastructure/energy-related boom is poised to become a potential finance and spending “black hole.” Hot temperatures are again exposing the inadequacies of our nation’s electricity supplies and grid system. When we were building millions of jumbo homes (garages filled with SUVs) out in blistering suburbia, the finance and real resources would have been better spent developing our energy supplies, infrastructure and technologies. Credit Gods willing, the pace of borrowing and spending in these areas will increase and will, in the near-term, work to offset any spending retrenchment from the household sector.
It is worth noting that the homebuilders have been one of the worst performing groups so far this year. The restaurant and retail indices have lagged the general market over the past month. Technology stocks are badly underperforming this year. And as the energy companies enjoy incredible windfall profits, the list of losers to the inflationary boom lengthens. It is also worth noting that U.S. stocks are again generally lagging international equities. The S&P500’s 2.42% y-t-d gain compares to major index gains in the UK of 6.34%, France 6.64%, Germany 5.49%, Switzerland 4.78%, Spain 10.75%, Canada 4.89%, and Australia 4.09%. Of all the major global equities markets, only the Nikkei (down 4.77%) lags the S&P500, although this index still retains a one-year gain of almost 30%.
Attempting to wind up this Bulletin with some analysis, I’ll suggest this: Global financial conditions remain problematically loose, a dynamic that will stoke those sectors, economies, and markets that have been demonstrating robust Inflationary Biases (including energy, metals, commodities generally, “emerging” markets, “developing” economies, and, importantly, global finance). Global Imbalances have nowhere to go but to grow - and grow precariously they will. There should be no mystery surrounding the dollar’s recent poor showing. I have argued that the key issue is not so much Bubbles in energy, emerging markets, metals, commodities, etc., but an intractable Bubble of Dollar Liquidity inundating the world’s markets and economies.
If the allure of global markets and commodities again takes U.S. institutions, hedge funds, and investors by storm, the dollar’s fortitude will be tested. That U.S. securities markets are underperforming and the highly mal-adjusted U.S. Bubble Economy is in the earliest stage of what will prove a wrenching and protracted - and likely stubbornly inflationary - adjustment period bodes poorly for our currency. And considering the highly unstable and deteriorating geopolitical backdrop, it should not be consoling that the Chinese, Russians, and oil producing countries are these days accumulating the vast majority of Bubble Dollar reserves. This is not the “good old days” when our dear friends in Tokyo were accommodating our boom. And, by the way, what are the ramifications for a mixed-up world that increasingly despises us while stockpiling our financial assets?
Yet, fixating on every trivial piece of economic data, the bond market is all giddy with the notion of a Sheepish Gentle Ben – yielding the warm and fuzzies for years to come. Well, I have my doubts this evening that it will take much to incite another speculative run in energy, metals, commodities and emerging markets – in the process inspiring a run away from the dollar – for our Spineless Fed to have to Reluctantly Squirm Back into its Foolhardy Wolf Outfit. One of these days, this whole charade just won’t placate. One of these days the world will simply be Fed up.