For the week, two-year Treasury yields rose 5 bps to 4.86%. Five-year yields gained 4 bps to 4.75%, and bellwether 10-year yields added 2 bps to 4.79%. Long-bond yields actually dipped one basis point to 4.91%. The 2yr/10yr spread ended the week inverted 7 bps. The implied yield on 3-month December ’06 Eurodollars rose 2.5 bps to 5.395%. Benchmark Fannie Mae MBS yields rose 4 bps to 6.00%, this week somewhat underperforming Treasuries. The spread on Fannie’s 4 5/8% 2014 note narrowed 2 bps to 32, and the spread on Freddie’s 5% 2014 note narrowed one to 32. The 10-year dollar swap spread increased 1.2 to 54.5. Corporate bond prices held together well in the face of huge supply, with junk spreads widening only slightly.
Investment grade issuers included US Bancorp $2.5 billion, Goldman Sachs $1.5 billion, Istar Financial $1.2 billion, Healthcare Properties $1.0 billion, International Lease Finance $850 million, Sun Life $750 million, PMI Group $400 million, CSX $400 million, FPL Capital $350 million, Cargill $300 million, Puget Energy $300 million, Janus $275 million, UGI Utilities $275 million, Ventas Realty $225 million, MGIC $200 million, and Toyota Motor Credit $150 million.
Junk bond funds saw outflows of $20 million during the week (from AMG). Junk issuers included Anadarko $5.5 billion, Seagate Technology $1.5 billion, Lyondell Chemical $1.75 billion, Berry Plastics $750 million, Agile Property $400 million and Monongahela Power $150 million.
Convertible issuers included Americredit $500 million, Triumph Group $200 million, Polymedica $180 million, and New Plan Excel $175 million.
International dollar debt issuers included Italy $3.0 billion, Turkey $1.5 billion, Philippines $770 million, ALB Finance $350 million, Glitnir Banki $250 million and Banco Votorantim $200 million.
Japanese 10-year “JGB” yields declined 5 bps this week to 1.66%. The Nikkei 225 index fell 1.3% (down 1.5% y-t-d). German 10-year bund yields dipped one basis point to 3.77%. Emerging debt and equities markets were mixed. Brazil’s benchmark dollar bond yields dipped 3 bps to 6.37%. Brazil’s Bovespa equity index declined 1.1%, reducing 2006 gains to 8.1%. The Mexican Bolsa jumped 3.6% this week, increasing y-t-d gains to 21.0%. Mexico’s 10-year $ yields were unchanged at 5.82%. Russian 10-year dollar Eurobond yields rose 4 bps to 6.83%. The Russian RTS equities index lost 2.5%, reducing 2006 gains to 38% and 52-week gains to 71%. India’s Sensex equities index gained almost 1% (up 28% y-t-d).
Freddie Mac posted 30-year fixed mortgage rates dropped 4 bps to 6.43%, a 24-week low but up 69 basis points from one year ago. Fifteen-year fixed mortgage rates fell 5 bps to 6.11%, 79 bps higher than a year earlier. One-year adjustable rates declined 3 bps to 5.60%, an increase of 114 bps y-o-y. The Mortgage Bankers Association Purchase Applications Index jumped 5.3% (2-wk gain of 9.1%) this week to a 9-week high. Purchase Applications were down 19% from one year ago, with dollar volume down 24%. Refi applications added 0.1%. The average new Purchase mortgage increased to $216,000, and the average ARM jumped to a record $369,900.
Bank Credit expanded $7.0 billion last week to a record $8.060TN (8-wk gain of $115bn). Year-to-date, Bank Credit has expanded $553 billion, or 10.6% annualized. Bank Credit inflated $655 billion, or 9.5%, over 52 weeks. For the week, Securities Credit increased $4.6 billion. Loans & Leases added $2.8 billion during the week and were up $370 billion y-t-d (9.8% annualized). Commercial & Industrial (C&I) Loans have expanded at a 16.2% rate y-t-d and 14.7% over the past year. For the week, C&I loans gained $1.3 billion, and Real Estate loans increased $2.5 billion. Real Estate loans have expanded at a 10.5% rate y-t-d and were up 10.1% during the past 52 weeks. For the week, Consumer loans expanded $3.3 billion, while Securities loans declined $6.3 billion. Other loans were up $2.0 billion. On the liability side, (previous M3 component) Large Time Deposits slipped $2.6 billion.
M2 (narrow) “money” supply jumped $23.3 billion to $6.900 TN (week of September 4th). Year-to-date, narrow “money” has expanded $214 billion, or 4.6% annualized. Over 52 weeks, M2 has inflated $322 billion, or 4.9%. For the week, Currency dipped $0.6 billion, while Demand & Checkable Deposits jumped $9.8 billion. Savings Deposits rose $8.0 billion, and Small Denominated Deposits gained $5.4 billion. Retail Money Fund assets increased $0.7 billion.
Total Money Market Fund Assets, as reported by the Investment Company Institute, increased $4.5 billion last week to $2.230 Trillion. Money Fund Assets have increased $173 billion y-t-d, or 11.8% annualized, with a one-year gain of $263 billion (13.4%).
Total Commercial Paper gained $4.1 billion last week (6-wk gain of $74.2bn) to a record $1.864 Trillion. Total CP is up $223 billion y-t-d, or 19.1% annualized, while having expanded $263 billion over the past 52 weeks (16.5%).
Asset-backed Securities (ABS) issuance this week surged to $34 billion. Year-to-date total ABS issuance of $516 billion (tallied by JPMorgan) is running about 4% below 2005’s record pace, with y-t-d Home Equity Loan ABS sales of $347 billion slightly behind last year.
Fed Foreign Holdings of Treasury, Agency Debt added $1.8 billion to a record $1.682 Trillion for the week ended September 13th. “Custody” holdings were up $163 billion y-t-d, or 15.1% annualized, and $222 billion (15.2%) over the past 52 weeks. Federal Reserve Credit dropped $5.6 billion to $826.5 billion. Fed Credit is now about unchanged y-t-d. Fed Credit is up 3.2% ($25.9bn) over the past year.
International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – were up $547 billion y-t-d (19.0% annualized) and $647 billion (16.4%) in the past year to a record $4.593 Trillion.
September 12 – Bloomberg (Mark Drajem and Shamim Adam): “A ‘disorderly’ drop in the dollar is the biggest risk to world financial markets, the International Monetary Fund said, urging policy makers to prepare and act quickly when asset prices slump. Investors are buying U.S. bonds under the assumption that the dollar won't slide, and a drop in the currency might turn into a rout as foreign investors and central banks move to cut losses, the global financial watchdog said…”
The dollar index was little changed at 85.66. On the upside, the New Zealand dollar gained 4.0%, the Paraguay Guarani 1.9%, the Hungarian forint 1.6%, the Iceland krona 1.4%, and the Polish zloty 1.1%. On the downside, the Croatian kuna fell 1.1%, the Belize dollar 1.0%, the Swiss franc 0.7%, and the Singapore dollar 0.6%.
Gold dropped 5.3% to $578.50, and Silver sank 11.5% to $10.875. Copper fell 7.2%, reducing 2006 gains to 72%. October crude dropped $2.85 to end the week at $63.40. October Unleaded Gasoline declined 2.1%, and October Natural Gas sank 11.1%. For the week, the CRB index dropped 4.4% (down 7.7% y-t-d). The Goldman Sachs Commodities Index (GSCI) fell 2.6%, fully erasing 2006 gains.
September 13 – Bloomberg (Masahiro Hidaka and Lily Nonomiya): “Bank of Japan board member Atsushi Mizuno said policy makers remain committed to gradually raising interest rates even after recent signs of slower economic growth and lower-than-expected inflation. ‘Things are in line with our scenario’ that prices are rising and the economy is expanding, Mizuno said…’I want to emphasize that that means fine adjustments will continue to be made to interest rates.’”
September 12 – Bloomberg (Toru Fujioka): “Japan’s producer prices rose at the fastest pace in 25 years… An index of prices that companies pay for energy and raw materials such as iron ore increased 3.4 percent in August from a year earlier…”
September 13 – Financial Times (Michiyo Nakamoto): “Japan’s big banks are coming out of their shells and taking the plunge into overseas markets again. After a decade that saw the Japanese banks retreat into their home market to deal with mountains of bad loans, this year has seen a number of small but significant steps by Japanese banks venturing into neighbouring countries in Asia… While the moves are cautious, they represent a turning point for Japan’s big banks, which have spent the best part of the past decade focused on resolving the bad loan crisis at home.”
September 13 – Bloomberg (Jason Clenfield): “Japan’s current account surplus widened in July, as overseas demand for automobiles increased and companies brought home profit from abroad. The surplus rose 7.1 percent to 1.81 trillion yen ($15 billion) from a year earlier…”
September 11 – Bloomberg (Nerys Avery and Yanping Li): “China’s trade surplus rose to a record for the fourth straight month in August as exports reached an all-time high… The gap widened to $18.8 billion last month from $14.6 billion in July… Exports surged 32.8 percent in August from a year earlier, the biggest gain since January 2005, while imports jumped 24.6 percent, the largest increase since February…”
September 13 – Bloomberg (Nerys Avery): “China’s industrial production rose at the slowest pace in 17 months as government curbs on investment began to cool the world's fastest-growing major economy. Output at manufacturers, mines and power plants climbed 15.7 percent in August from a year earlier to 735.6 billion yuan ($92.5 billion), the second-highest on record…”
September 14 – Bloomberg (Nerys Avery): “China’s investment in factories and real estate slowed for a second straight month in August, the National Bureau of Statistics said… Fixed-asset investment in towns and cities climbed 29.1 percent through August from a year earlier…after rising 30.5 percent in the first seven months…”
September 12 – Bloomberg (Nipa Piboontanasawat and Nerys Avery): “China’s retail sales grew 13.8 percent in August as rising incomes spurred consumer spending in the world’s fastest-growing major economy.”
September 12 – Bloomberg (Luo Jun): “China’s M2 money supply growth slowed in August after the central bank took measures to reduce liquidity… M2…rose 17.94 percent in August…”
September 12 – Bloomberg (Xiao Yu): “China’s crude oil imports jumped 35 percent in August, the most in seven months, on increased energy demand in the world’s fastest-growing major economy.”
September 14 – Bloomberg (Josephine Lau and Yidi Zhao): “China halted sales of domestic brokerages to international firms, thwarting plans by companies including Citigroup Inc. and Merrill Lynch & Co. to increase…”
September 13 – Bloomberg (Irene Shen): “Office rents in Shanghai’s financial district may surge 27 percent to a record by the end of next year as overseas banks expand in the world’s fastest-growing major economy, Jones Lang LaSalle Inc. forecast.”
September 11 – Bloomberg (Kelvin Wong): “Hong Kong’s top-quality office rents
jumped 39 percent in August from a year earlier… according to property consultant Knight Frank Petty Ltd.”
Asia Boom Watch:
September 14 – Bloomberg (Shamim Adam): “The International Monetary Fund raised its 2006 growth forecast for Asia excluding Japan, saying economies around the region are benefiting from the expansion in China and India. The IMF predicts Asian economies excluding Japan will expand 8.3 percent this year, a 0.4 percentage point increase from its April 19 forecast…”
September 12 – Bloomberg (Paul Basken): “South Korea and other Asian nations are outpacing the U.S. and Europe in grade-school and university education, potentially threatening Western economic dominance, the Organization for Economic Cooperation and Development reported. The U.S. spends more on primary and secondary education than most developed countries, yet has larger classes, lower test scores and higher dropout rates…”
September 12 – Bloomberg (Cherian Thomas): “India’s industrial production grew in July at the fastest pace in a decade… Production at factories, utilities and mines rose 12.4 percent from a year earlier…”
September 11 – Financial Times (Amy Yee): “India’s fast-growing car industry hopes to quadruple total sales to $145bn over the next decade through a plan that seeks to boost research and development and increase exports… The sector is targeting 16 per cent annual growth to boost revenues to $145bn by 2016, or 10 per cent of GDP, according to a plan unveiled last week... In the next 10 years the auto industry will require $35bn-40bn of investment, or four times the total investment of the last 16 years, said Anand Mahindra, managing director of truck and tractor maker Mahindra & Mahindra.”
September 13 – XFN: “South Korea’s jobless rate slowed to 3.4% in August from 3.6% a year earlier as the telecom, financial, construction and service sectors hired more workers, the National Statistical Office said.”
Unbalanced Global Economy Watch:
September 13 – Bloomberg (John Fraher): “Average global salaries will rise more than inflation next year as faster economic growth boosts pay demands in countries from China to Paraguay, a survey by Mercer Human Resources Consulting showed. Pay will increase 5.9 percent on average around the world in 2007, 1.9 percentage points above forecast inflation, said Mercer… In China, nominal pay will jump 7.2 percent…”
September 12 – Bloomberg (Greg Quinn): “Canadian employers’ hiring intentions for the fourth quarter rebounded to match a five-year high set between April and June, led by record demand for construction workers, according to a poll by Manpower Inc.”
September 12 – Bloomberg (Craig Stirling): “U.K. inflation unexpectedly quickened in August to match the highest level in nine years, strengthening the case for an increase in interest rates in Europe’s second-biggest economy. Consumer prices rose 2.5 percent from a year earlier…”
September 13 – Bloomberg (Laura Humble): “Unemployment in the U.K., Europe’s second-biggest economy, fell the most in more than a year in August and wage growth accelerated, strengthening the case for a interest-rate increase from the Bank of England…”
September 11 – Bloomberg (Craig Stirling): “U.K. house-price inflation reached a 14-month high in July, suggesting the $6.8 trillion residential property market was gathering momentum…”
September 11 – Bloomberg (Laura Humble): “Britain’s trade deficit unexpectedly widened in July as exports fell, diminishing the prospect that trade will contribute to economic growth this year. The shortfall was 6.33 billion pounds ($11.8 billion)…”
September 11 – Bloomberg (Jonas Bergman): “Swedish unemployment declined in August as faster economic growth boosted demand for workers… The…jobless rate fell to 4.6 percent from 5.2 percent in July and 5.5 percent in the same month a year earlier…”
September 13 – Financial Times (John Authers): “Could central and eastern Europe be the new powder keg of global emerging markets? The International Monetary Fund’s latest Global Financial Stability report warned that investment flows to the region could prove unsustainable, and warned of the risk of ‘severe corrections’. It said: ‘Current account deficits are large in the Baltics, Bulgaria, Hungary, Romania, the Slovak Republic and Turkey; fiscal deficits are high in some other countries such as Hungary; and the ratio of private sector credit to gross domestic product has risen particularly strongly in the Baltics, Bulgaria and Slovenia.’ According to the latest performance data from Hedge Fund Research of Chicago, eastern Europe/CIS hedge funds have beaten all other strategies so far this year. By the end of August, they were up 23.3 per cent, twice the return of any other sector - even energy funds had made only 11.75 per cent.”
September 11 – Bloomberg (Svenja O’Donnell): “Russia’s economic growth rate
quickened in the second quarter as the price of crude oil, the country’s most important export, rose to records. Gross domestic product rose 7.4 percent after a 5.5 percent increase in the previous quarter…”
September 11 – Bloomberg (Steve Bryant): “Turkey’s economic growth accelerated to 7.5 percent in the second quarter as domestic and government spending drove expansion in the construction and manufacturing industries.”
September 14 – Bloomberg (Nasreen Seria): “Sub-Saharan Africa’s economy will
probably expand 6.3 percent next year, the fastest pace in more than three decades, boosted by higher output from oil-exporting countries such as Angola, the International Monetary Fund said. Growth in the region is forecast to reach 5.2 percent this year…”
September 12 – Bloomberg (Tasneem Brogger): “Iceland’s unemployment rate dropped to 1.2 percent in August, the lowest since October 2001, a sign the labor market is tightening even after the central bank raised borrowing costs to a record.”
September 13 – Bloomberg (Madelene Pearson): “Australia, the world’s biggest shipper of coal and iron ore, increased minerals and energy exports by 32 percent to a record in fiscal 2006… Export sales rose to A$90.5 billion ($67.9 billion) in the 12 months ended June 30…”
Latin American Boom Watch:
September 14 – Bloomberg (Heather Walsh): “Latin American and Caribbean economies will expand more quickly this year than previously forecast, fueled by rising domestic spending and demand for commodities exports, the International Monetary Fund said. Argentina and Venezuela will lead a 4.8 percent expansion this year… Growth will compare with the IMF's 4.3 percent forecast made in April…”
September 12 – Bloomberg (Patrick Harrington): “Mexico’s industrial production rose more than 5 percent for a third straight month in July as automobile manufacturers increased output for export. Production rose 5.8 percent from a year earlier…”
September 12 – Bloomberg (Valerie Rota): “Barclays Capital, one of six banks granted a license this year to operate in Mexico, plans to begin issuing and trading bonds based on mortgage loans, amid an expanding market for mortgage-backed bonds…”
September 14 – Bloomberg (Eliana Raszewski): “Argentina’s economy expanded at the slowest path in two years in the second quarter. Gross domestic product…grew 7.9 percent in the second…”
September 15 – Bloomberg (Daniel Helft): “Argentine President Nestor Kirchner
proposed to increase spending 14.7 percent next year, pacing the expected growth in revenue…”
September 15 – Bloomberg (Alex Emery): “Peru’s economy grew 9 percent in July as copper, silver and natural gas production surged…”
September 12 – Bloomberg (Guillermo Parra-Bernal): “Cuba’s economy grew a faster-than-expected 12.5 percent in the first half of 2006, boosted by a surge in the construction, transport and services industries… This year the economy is likely to attain a second straight year of growth exceeding 10 percent as local investment and proceeds from exports such as nickel and sugar cane boost government coffers and workers’ incomes…”
Central Banker Watch:
September 12 – Bloomberg (Matthew Brockett and Andreas Scholz): “European Central Bank council member Nicholas Garganas said economic growth and inflation may prove even stronger than forecast by the bank and suggested he sees scope to keep raising interest rates. ‘There is still a considerable amount or degree of monetary accommodation which needs to be withdrawn.’ He ‘would not be surprised’ if both inflation and growth were in the upper part of the ECB’s new forecast ranges this year and next.”
September 14 – Bloomberg (Alice Ratcliffe): “The Swiss central bank raised its main interest rate for the fourth time in a year to prevent the fastest growth since 2000 fueling inflation in Europe’s eighth-largest economy. The Swiss National Bank increased the three-month Libor target by a quarter point to 1.75 percent.”
September 14 – Bloomberg (Tasneem Brogger): “Iceland’s central bank raised the benchmark interest rate to a record 14 percent as it seeks to cool inflation that stands at three times its target.”
September 14 – Bloomberg (Kim Kyoungwha): “Central banks, under growing pressure to increase returns from investments of foreign exchange reserves, plan to diversify out of government bonds, Bank of Korea’s deputy governor Rhee Yeung Kyun said. ‘Non-government securities with higher risk and non-traditional profiles are no longer out of bounds,’ Rhee said at a conference on management of reserves, hosted by the World Bank and Bank of Korea…”
Bubble Economy Watch:
The July Trade Deficit was up 17% from one year ago to a record $68.04 billion. Goods Imports were up 15% from July 2005 to a record $159.1 billion. Exports were up 14% y-o-y to $85.7 billion. Over two years, Imports have increased 29% and Exports 27%.
August Retail Sales were up 6.8% from a year earlier, with Sales Ex-Autos up 7.7%. August Import Prices were up 6.6% y-o-y. Initial Jobless Claims declined to 308,000, a 7-week low.
September 12 – Dow Jones (John McAuley): “Companies plan to increase hiring at a slightly slower rate in the fourth quarter of 2006, but foresee net hiring remaining near the same rate that has prevailed for the past year… Of nearly 14,000 employers interviewed, 28% indicated they actually intend to increase hiring in the second quarter, while only 8% indicated they planned to reduce staff in the latest Manpower, Inc. survey…”
September 12 – Bloomberg (Adrian Cox): “Goldman Sachs Group Inc… said it set aside as much as $542,000 in pay per employee for the first three fiscal quarters, already beating the total for the whole of last year. Goldman said today it provided $13.9 billion in compensation for its 25,647 employees…”
September 14 – Bloomberg (Chris Dolmetsch): “The New York City Taxi & Limousine Commission may raise the average cab fare by almost $1, or about 11 percent…”
Real Estate Bubble Watch:
September 15 – EconoPlay.com (Gary Rosenberger): “The housing freefall picked up speed in August as buyers either stood in the wings with visions of an impending fire sale or were frightened off by the harsh media spotlight on the market, say residential builders. Builders took extra steps to engage buyers with new come-ons, like a free car in the garage, effectively decreasing new home valuations – but buyers seemed determined to hold out for something more Maserati than Mini Cooper… If there is one emerging pattern, it’s that the largest builders are suffering a disproportionate share of the pain just as they were inordinately rewarded during the boom. Smaller custom builders seem better able to adjust. Some are doing just fine in the remaining strong pockets or in markets that were overlooked during the upturn, where business is up. All builders, but for a few specializing in multimillion dollar homes, face reluctant or scared buyers.”
September 13 – Bloomberg (Kathleen M. Howley): “U.S. foreclosures begun on prime adjustable-rate mortgages rose to a four-year high in the second quarter, a sign more homeowners with good credit ratings are having trouble paying their bills. The share of the loans entering foreclosure…climbed to 0.27 percent at the end of June, the highest since 2002’s third quarter…”
September 15 – Bloomberg (Craig Torres and Alison Vekshin): “Federal Reserve Governor Susan Bies said bank examiners are finding weakening risk management and ‘softening’ underwriting standards for commercial real estate loans in U.S. financial institutions.”
September 12 – Bloomberg (James R. Hagerty): “A continued rise in inventories of unsold homes in August is likely to put more downward pressure on home prices in many parts of the U.S. Inventories of homes in 18 large metropolitan areas across the country expanded by 4.7% in August from a month earlier, according to…ZipRealty Inc…. The biggest increases -- 16% in the Dallas area and 13% in Seattle -- came in markets that have been relatively strong recently. A sharp rise in inventories in those areas is likely to help restrain price increases. Other sizable increases came in Orlando, Fla. (8%), San Francisco (6.1%) and Miami (5.6%).”
September 13 – Bloomberg (Peter Woodifield): “Global investment in real estate may increase 26 percent to $600 billion this year, fueled by companies such as private equity firms seeking higher returns, according to Jones Lang LaSalle Inc. In the first half, spending on property climbed 30 percent to $290 billion… The money invested in the Americas gained 27 percent to $129 billion, while the value of transactions in Germany and Japan more than doubled.”
Financial Sphere Bubble Watch:
September 11 – Financial Times (Gillian Tett and Paul J Davies): “Hedge funds have quietly gobbled up record amounts of ultra risky corporate instruments in Europe in recent months… According to data compiled by Credit Suisse…, in the second quarter of this year almost $3.8bn of ‘payment in kind’ (PIK) notes - a type of high-risk, high-return instrument - were sold to investors by private equity-owned companies. This is equivalent to a quarter of all the high-yield bonds issued in Europe…”
Energy Boom and Crude Liquidity Watch:
September 12 – Bloomberg (Jim Efstathiou Jr.): “Middle East oil producers will spend $94 billion in the oil and natural gas industries by 2011 to help meet future demands for energy, Saudi Arabia Oil Minister Ali al-Naimi said.”
September 11 – Financial Times (Stefan Wagstyl): “Russia plans a massive increase in the scale of its exports of oil and gas to Asia in its quest to expand its political and economic role as a global energy supplier, Vladimir Putin has said. According to the Russian president, it plans to export 30 per cent of its oil and gas to Asia in 10-15 years compared with 3 per cent today.”
September 14 – Bloomberg (Margot Habiby): “The continental U.S. endured the hottest summer since the Dust Bowl of the 1930s, and the second-warmest since recordkeeping began more than a century ago, U.S. forecasters said…”
September 13 – Associated Press: “Wildfires across the country have scorched more land in 2006 than in any year since at least 1960, burning an area twice the size of New Jersey… As of Wednesday, blazes had torched 8.69 million acres, or 13,584 square miles… Federal officials attributed the increase to two consecutive seasons of hot and dry weather that left forest and ranges parched and easily ignited by lightning.”
September 15 – Bloomberg (Michael Heath): “Russia, the world’s fourth-largest wheat producer, harvested 15 percent less grain as of Sept. 1 than at the same time last year, after a drought in some regions of the country.”
September 13 – Bloomberg (Darrell Hassler): “Hedge fund trading of bonds and derivatives in the U.S. more than doubled in the past year, giving them so much influence that some markets can’t operate efficiently without them, according to Greenwich Associates. Hedge funds accounted for 45 percent of annual trading in emerging-market bonds, 47 percent of distressed debt and 55 percent of credit derivatives in the 12 months ended March 30, Greenwich said… Over the same period, overall trading in bonds and derivatives rose 25 percent…”
September 15 – Bloomberg (Matthew Keenan): “Stanford University’s endowment fund, the third-biggest among U.S. higher-education institutions, rose 19.4 percent this year, led by international stocks, and real estate and energy investments. The returns helped increase assets to $15.2 billion as of June 30…”
After 11 months of the fiscal year, federal receipts are running 11.7% ahead of fiscal 2005. Individual Income Tax Receipts are up 12.4%, and Corporate Income Receipts are 29% ahead. Total Spending is running 7.6% ahead of last year, with Social Security up 4.7%, National Defense 6%, Medicare 13.7%, Interest 22.2%, and Health 1.5%.
Monetary Disorder Watch:
Goldman Sachs reported third quarter Net Income of $1.594 billion, down 1% from the year ago period. Net Revenues were up 2% to $7.463 billion. Nine-month Revenues were up 51% from comparable 2005 to $27.90 billion, with Net Earnings up 60% to $6.385 billion. “During the third quarter, Goldman Sachs surpassed its previous annual record for net revenues… Fixed Income, Currency and Commodities (FICC) generated its third highest quarterly net revenues of $2.74 billion. Assets under management increased to a record $629 billion, 21% higher than a year ago, including net asset inflows of $30 billion during the quarter.” Investment Banking Net Revenues were up 27% to $1.29 billion. Financial Advisory Net Revenues were up 9%... “Net revenues in the firm’s Underwriting business were $679 million, 49% higher than the third quarter of 2005. Net revenues were significantly higher in debt underwriting, primarily due to an increase in leveraged finance activity and equity underwriting.” Compensation & Benefits Expense declined slightly y-o-y to $3.51 billion. Goldman repurchased 3.8 million shares during the quarter, with the board authorizing the repurchase of an additional 60 million shares.
Lehman Brothers’ third quarter Net Income of $916 million was up 7% from the year ago period. Nine month Net Income of $3.0 billion was up 26% from comparable 2005. Net Revenues of $4.2 billion were up 8% from Q3 2005. Capital Markets Net Revenues were up 13% to $2.8 billion (“third highest quarter ever”), with Fixed Income Capital Markets Revenues up 6% to $2.0 billion. Investment Management Revenues were a record $605 million, up 18%. Assets Under Management were up 26% from a year earlier. Investment Banking Revenues declined 11% to $726 million. Compensation & Benefit Expenses were up 8% to $2.06 billion, or almost half of Net Revenues. For the first nine months of the year, Principal Transaction Revenues were up 21% from comparable 2005 to $7.183 billion. Company Total Assets expanded $18.8 billion during the quarter, or 16.5% annualized, to $475 billion. Assets were up 23.6% y-o-y, with a two-year gain of ($134.1bn) 39.3%.
Bear Stearns reported third quarter Net Income of $438 million, up 16% from the year ago period. Net Revenues were up 17% y-o-y to $2.1 billion. Highlights included: “Institutional Equities net revenues were $436 million for the third quarter…a 31% increase… Fixed Income net revenues were $878 million…up 19%... Wealth Management net revenues for the quarter…were $231 million, an increase of 36%... Investment Banking net revenues were $232 million…down 23%...” Principal Transactions Revenues were up 23.9% y-o-y during the quarter to $1.093 billion. Employee Compensation and Benefits Expense was up 20.4% y-o-y to $1.025 billion.
Today’s CPI report was just right (ignoring, that is, the troubling 3.8% y-o-y gain). Recent market behavior has been, for most, better than just right. With oil and gold in rapid retreat and down significantly from earlier highs, talk returns to Goldilocks and her latent global dis/deflationary pressures. Certainly, the prevailing policymaker and bond market view that globalization is a dis-inflationary phenomenon has been bolstered by recent market trading, as much as I view this line of thinking dangerously misguided. And, no doubt about it, those of the bullish persuasion will get all bullied up by recent market action. Yet, examining a most extraordinary environment, I do see ample evidence supporting a rather Un-Goldilocks view of Intensifying Monetary Disorder.
The New Zealand dollar jumped better than 4% this week. The “Kiwi” dollar is now a notable 12% above its late June lows, although it remains 3% below where it began the year. Market expectations that 7% (today 7.25%) short-term interest rates would choke a vulnerable New Zealander economy and incite a run on its securities markets have not come to fruition. Inflation has also proved resilient, with central bank Governor Alan Bollard now signaling that he will be in no rush to lower rates. The Iceland Krona gained 1.5% this week and has regained a good chunk of the huge decline from earlier in the year. Iceland’s economy, markets and inflation have also demonstrated notable resiliency, thus far flustering those trumpeting acute fragility. Focusing on global currency and securities markets, indicators of international liquidity continue to signal overabundance.
Here at home, the S&P500 Homebuilding index surged 10% this week. The Morgan Stanley Retail Index (35 companies) jumped 6.1% during the week to reach a new record high, in the process increasing y-t-d gains to 9.8% (2-year gain of 39.2%). The S&P500 Supercomposite Restaurants Index jumped 4.1%, increasing y-t-d gains to 9.3% (2-year gain of 35.1%). The Broker/Dealer index surged 7.4% this week, increasing y-t-d gains to 14.6% (2-year gains of 75.6%). The NYSE Financial Index (399 companies) jumped 1.9%. The NYSE Financials are up 10.1% so far during 2006, with a two-year gain of 29.8%. Up 2% this week and 8.2% y-t-d, the PHLX/KBW Bank Index is only about 1% off its all-time record high. The NASDAQ Others Financial Index surged 5.5% this week, increasing y-t-d gains to 11.8% (2-year gain of 46.1%!). Elsewhere, the Interactive Week Internet Index jumped 4.9% and the AMEX Airline index 6.7%. Making the rather questionable presumption that market prices are a reflection of future prospects, sectors that I would expect to offer early indication of economic weakness and/or systemic liquidity issues are conspicuously indicating neither.
With the stock market’s apparent dramatic reassessment of U.S. financial and economic prospects, one might have expected the bond market to be in hasty retreat. Nope. Bond yields hardly budged this week and remain significantly inverted to overnight lending rates. What gives? Last week, I confessed a case of acute analytical ambiguity-itis, as well as my fear of the market’s saunter into a harrowing Neverland. Well, I suppose only an embittered bear (or, perhaps, a commodities bull or “market neutral” unicorn) would this week cry out that the market has completely succumbed to the “Law of the Jungle.”
But I’m not really in the mood to snivel. The market environment is what the market environment is. And it is very much a creation of, as well as contributor to, the general financial backdrop - one that remains highly speculative and inflationary. The Broker/Dealers (Goldman, Lehman and Bear Stearns) this week reported better-than-expected fiscal third quarter results, an especially inspiriting development considering that they maintained remarkable momentum despite headwinds from the most challenging market environment in many quarters.
For the first nine months or the year, the three Wall Street firms combined for Net Revenues of an incredible $47.8 billion, up 37% from comparable 2005. This provides a valuable reminder that “resiliency” is a defining attribute of contemporary “Wall Street Finance.” As they demonstrated (again) this past quarter, if market dynamics dictate that particular segments of the brokerage/proprietary trading/securities financing/investment banking/derivatives/global finance business face tougher headwinds, it is simply a matter of tacking a bit in another direction. If one sector or region is struggling, just push the others. If one area of the market falls somewhat out of favor, simply fashion and offer buyers (increasingly hedge funds – see “Speculator Watch” above) the type of securities, instruments and/or derivative products with the return, risk and liquidity profile they demand. If clients prefer to leverage U.S. or global securities, fine; need financing to buy companies at home or abroad, no problem; or any complex derivative strategy for any market – now so easily accomplished. And, importantly, championing booms in the relatively better performing areas, sectors and regions works to buttress liquidity for the enjoyment of all (hence, bolstering the lagging – as we witnessed with market pricing this week).
As long as overall system Credit creation remains robust, there will be overly abundant liquidity needing to find a home (note the ongoing huge inflows to Goldman and others’ investment management businesses). A case can be made that one aspect of rising wage inflation is an additional (inflated) amount of finance directed to various market-oriented retirement accounts. From domestic sources as well as from abroad (recycling U.S. Current Account Deficits), the Flow of Finance to the markets appears to be anything but waning. And, all along the way, enterprising Wall Street proprietary trading desks are the first to jump on whatever trend they and their clients labor to popularize, creating only more market liquidity in the process. And don’t be surprised if this afternoon’s announcement of Blackstone Group’s $17.6 billion takeover of Freescale Semiconductor marks an acceleration of large private-equity deals – incorporating heavy leveraging and creating additional liquidity in the process. It is also worth noting that Goldman, Lehman, and Bear Stearns combined to compensate their employees $23.6 billion during the first three quarters of the year. Have there ever been more powerful direct incentives to sustain a financial boom?
July’s much worse-than-expected and record $68.0 billion Trade Deficit was completely disregarded by the markets and hardly even garnered a headline. Ironically, market pundits increasingly adopt the view that inflationary pressures have abated. Meanwhile, the most prominent Inflationary Manifestation – the U.S. Trade Deficit – swells to only more ridiculous dimensions. I have argued for too long that mounting U.S. Current Account Deficits are a consequence of the U.S. Financial Sphere creating excessive Credit/”purchasing power” and then directing resultant abundant financial flows to securities and asset markets (with attendant Financial and Economic Spheres maladjustment). These Monetary Processes and resulting Monetary Disorder are only reinforced by the Bernanke Fed’s abhorrence of popping Bubbles.
I hope readers will connect the dots, although we all know that policymakers never ever will. Runaway U.S. Financial Sphere excess and attendant massive U.S. Current Account Deficits are the primary (inflationary) factor spawning this unparalleled Ballooning Pool of Global Speculative Finance. And it is this increasingly Unwieldy Reservoir of Capricious Financial Flows and Leveraged Speculation that is spurring increasingly destabilizing volatility throughout global currency markets (i.e. New Zealand and Iceland), the emerging markets, energy and commodities, and U.S. and global bonds and equities.
For this week, at least, the markets can relish in the Tantalizing “Upside” of the “Law of the Jungle.” The energy and commodity bulls were taken out to the woodshed, while the equities bears suddenly found themselves on the wrong side of a grisly mauling. The (so-called) “market neutral” players were caught with their longs sinking almost as quickly as their shorts were spiking, having few options but to exacerbate the problem (reverse positions). This follows the recent trampling of the bond bears which, in conjunction with the reversal of what were likely unusually large speculations throughout the energy complex, set in motion speculative trading dynamics inciting a domino unwind of inflationary/bearish positions across a broad swath of markets. What I label “marketplace dislocation” others celebrate as virtual financial nirvana.
I certainly won’t be scurrying to jump on the bandwagon suggesting inflationary pressures are waning. It is not inflation that is in retreat but, at least for now, only The Crowd that had placed bets on rising energy and commodities prices. There are two quite distinct dynamics involved, with destabilizing speculation, crowded trades and ensuing tumultuous market dislocations all key marketplace facets of Monetary Disorder. Indeed, the general inflationary backdrop fosters speculations that will inevitably be unwound. And the longer rampant Credit Inflation is accommodated the larger the pool of speculative finance that is allowed to balloon; and the more spectacular the inevitable dislocations. Worse yet, policymakers have adopted an asymmetric stance of ignoring asset price inflation while ensuring aggressive reliquefication in the event of asset price vulnerability. This, as we are again witnessing, nurtures a powerful inflationary bias that significantly increases the likelihood of marketplace dislocations first erupting on the upside (speculative buying panics, short-squeezes and derivative-related “melt-ups”)
Often, and it has certainly been the case in the bond and equity markets, liquidity overabundance can lead to speculators getting squeezed in spite of underlying fundamental trends and prospects. I am reminded of how deteriorating fundamentals induced heavy shorting of technology stocks during the late nineties, only to have excessive marketplace liquidity ensure a spectacular squeeze that took NASDAQ for quite a ride - that is, until it collapsed. Major squeezes can be significant developments with regard to inciting speculation and liquidity creation, working to exacerbate Monetary Disorder.
I suggest this evening that we analyze sinking energy and metals prices – along with spiking equities (homebuilders, retailers, financials, etc.) and bond prices – within the context of heightened Monetary Disorder. Market pricing mechanisms – especially those distorted by highly speculative marketplaces – are these days unusually susceptible to bouts of mis-pricing. The general backdrop remains one of extraordinarily abundant liquidity at home and abroad – liquidity supportive of bond prices within a backdrop where housing vulnerability has basically taken the Fed out of the equation. I certainly don’t believe lagging energy and commodities markets are today reflective of the robust inflationary biases that permeate global economies. Rather, I would expect quiescent bond markets these days to be conducive to continued Credit excess and attendant heightened inflationary pressures.
If I thought that lower energy and commodities prices might cool sector borrowing and spending excesses, I would take recent market trends more seriously as a reflection of general liquidity and inflation trends. But a key aspect of Acute Systemic Monetary Disorder is the rolling nature of sector booms and price Bubbles. It is almost as if one can just pick an area and sit back and wait for the inevitable boom for easy enrichment. The perceived risk vs. reward of chancy endeavors becomes too enticing to resist. It is this Inflationary Psychology that leads to rolling spending booms – certainly including technology, housing, energy, capital goods, exports, healthcare, education, government, etc. – that ensure a Credit-induced Bubble Economy operates at near capacity. Today, lower energy prices, lower market yields, and inflated stock prices will most likely provide general stimulus.
September 14 – Bloomberg (Andreas Scholz and Chris Malpass): “Hans Tietmeyer, who headed Germany’s Bundesbank when it still set the pace for interest rates around Europe, comments on inflation, interest rates and the outlook for economic growth in the U.S… ‘We can’t exclude a hard landing in the U.S., this is a threat to the economic outlook for 2007.’ On currencies: ‘We see a considerable exchange rate risk. That’s going to be an issue in Singapore now [during the G7 meeting]. We can’t control exchange rates, we have to coordinate policy. The biggest risk is: how long will Asians prefer to invest in U.S. dollars?’ On inflation: ‘I still see considerable potential for inflation because of the continuing expansion in money supply. Not enough of this has been absorbed yet. Second-round effects are still limited, but it’s not over yet. And inflation expectations are very unstable. Monetary policy is not restricting growth, and remains clearly accommodative, there’s no question of that. Real interest rates are still low.’”
A learned and accomplished central banker such as Mr. Tietmeyer recognizes Monetary Disorder when he sees it. Sure, the dollar may today appear reasonably surefooted (with dollar bears on their heels), yet Tietmeyer is keenly aware of its deep-rooted fragility. Dollar “stability” demands ongoing massive central bank dollar purchases – support operations certain to only exacerbate Global Monetary Disorder. In concert, domestic and international Credit system dynamics do today buttress U.S. financial and economic Bubbles – housing slowdown notwithstanding. It’s inevitably a losing proposition. .
The market impact of the recent unwind of some commodities and bearish bets is absolutely inconsequential compared to the crisis that will be initiated when Monetary Disorder eventually leads to a scramble (and de-leveraging) out of bursting U.S. and global securities markets Bubbles. Hopefully, this episode does not involve myriad highly inflated Bubbles all bursting simultaneously across the globe, although the nature of current Monetary Disorder would appear to support just such an outcome. If the Bernanke Fed is relieved by – or perhaps even celebratory of – the decline in energy and commodity prices in conjunction with gains in stock and bond prices, I suggest to them that they should instead be extremely concerned with the unprecedented degree of speculation now pemeating U.S. and global securities markets. Rampant and unmanageable Credit Inflation and its myriad effects remain their chief worry. As such, a speculative run in U.S. equities would essentially culminate Monetary Disorder’s worst-case scenario