For the week, the Dow gained 1.0% (2006 gain of 16.3%), and the S&P500 added 0.5% (up 13.6%). The Transports gained 1.1% (up 8.7%), and the Morgan Stanley Cyclical index rose 1.3% (up 13.8%). The Morgan Stanley Consumer index added 0.3% (up 17.6%) and the Utilities 0.2% (up 15.8%). The small cap Russell 2000 gained 0.9% (up 17.0%), and the S&P400 Mid-cap index increased 0.3% (up 9.0%). The NASDAQ100 gained 0.5% (up 6.8%), and the Morgan Stanley High Tech index 0.8% (up 8.8%). The Semiconductors gained 0.9% (down 2.4%). The Street.com Internet Index rose 0.4% (up 17.6%), and the NASDAQ Telecommunications index gained 0.8% (up 27.8%). The Biotechs increased 0.4% (up 10.8%). The Broker/Dealers jumped 1.7% (up 23.1%), and the Banks added 0.2% (up 13.2%). With Bullion gaining $15.60, the HUI Gold index advanced 3.0% (up 22.2%).
Two-year government yields jumped 9 bps to 4.81% (gain of 20bps for the month). Five-year yields rose 10 bps to 4.69%, and 10-year Treasury yields increased 8 bps to 4.70% (high since 11/1). Long-bond yields rose 5 bps to 4.81%. The 2yr/10yr spread ended the week inverted 11 bps. The implied yield on 3-month December ’07 Eurodollars jumped 13 bps to 4.95% (high since 10/25), with yields up 29.5 bps during December. Benchmark Fannie Mae MBS yields gained 7 bps to 5.79%, this week outperforming Treasuries. The spread on Fannie’s 5 1/4% 2016 note narrowed 3 to 28, and the spread on Freddie’s 5 1/2% 2016 note narrowed 3 to 26. The 10-year dollar swap spread declined 1.25 to 47.75. Corporate bond spreads were mostly narrower, with junk spreads narrowing as much as 8 bps.
Holiday-week issuance slowed to less than a trickle.
December 28 – Bloomberg (Lester Pimentel and Valerie Rota): “Latin American bonds gained for a fifth year and rose more than fixed-income markets in Europe and Asia as record exports of oil, copper and gold helped governments repay debt. The region’s dollar-denominated securities gained 12.4 percent this year, pushing yields to record lows compared with U.S. Treasuries… It was the best performance since 2004, when Latin American debt returned 13.3 percent. Latin American bonds have doubled in the past five years...”
Japanese 10-year “JGB” yields jumped 8.5 bps this week to 1.675%. The Nikkei 225 index added 0.7% (up 6.9% y-t-d). German 10-year bund yields rose 7 bps to 3.94%. Emerging markets ended a historic year positively. Brazil’s benchmark dollar bond yields added 2 bps this week to 6.0%. Brazil’s Bovespa equities index gained 2.2% (up 32.9% y-t-d). The Mexican Bolsa jumped 3.5%, increasing 2006 gains to 48.6%. Mexico’s 10-year $ yields increased 7 bps to 5.59%. Russia’s 10-year Eurodollar yields gained 5 bps to 6.63%. The Russian RTS equities index jumped 3.2% (up 69% y-t-d). India’s Sensex equities index advanced 3%, raising 2006 gains to 46.7%. China’s Shanghai Composite index surged 14.2%, increasing y-t-d gains to an amazing 130%.
Freddie Mac posted 30-year fixed mortgage rates increased 5 bps to 6.18%, down four bps from one year ago. Fifteen-year fixed mortgage rates rose 4 bps to 5.93% (up 17 bps y-o-y). And one-year adjustable rates increased 3 bps to 5.47% (up 32 bps y-o-y). The Mortgage Bankers Association Purchase Applications Index dropped (a holiday-impacted) 10.6% this week. Purchase Applications were down 0.1% from one year ago, with dollar volume increasing 3.5%. Refi applications sank 18.5%. The average new Purchase mortgage declined to $229,300 (down 3.0% y-o-y), and the average ARM fell to $382,900 (up 8.0% y-o-y).
Bank Credit jumped $29.2 billion during the week of 12/20 to $8.288 TN. Year-to-date, Bank Credit has expanded $781 billion, or 10.6% annualized. For the week, Securities Credit declined $4.8 billion. Loans & Leases surged $34.0 billion, with a y-t-d gain of $593 billion (11.0% annualized). Commercial & Industrial (C&I) Loans have expanded at a 15.1% rate y-t-d. For the week, C&I loans jumped $16.3 billion, and Real Estate loans gained $17.8 billion. Real Estate loans have expanded at a 14.7% rate y-t-d. For the week, Consumer loans added $0.3 billion, while Securities loans fell $9.7 billion. Other loans increased $9.4 billion. On the liability side, (previous M3) Large Time Deposits declined $9.0 billion.
M2 (narrow) “money” jumped $14.2 billion to a record $7.011 TN (week of 12/18). Year-to-date, narrow “money” has expanded $325 billion, or 6.0% annualized. M2 has expanded at a 7.6% pace over the past 20 weeks. For the week, Currency added $0.8 billion, while Demand & Checkable Deposits declined $4.7 billion. Savings Deposits expanded $13.9 billion, and Small Denominated Deposits added $1.4 billion. Retail Money Fund assets increased $2.7 billion.
Total Money Market Fund Assets, as reported by the Investment Company Institute, increased $6.57 billion last week to $2.382 Trillion. Money Fund Assets have increased $325 billion y-t-d, or 15.8% annualized. Money Fund Assets have expanded at a 24.5% rate over the past 20 weeks.
Total Commercial Paper jumped $23.7 billion last week to a record $1.974 Trillion. Total CP is up $333 billion y-t-d, or 20.3% annualized. Total CP has expanded at a 26% rate over the past 20 weeks.
Fed Foreign Holdings of Treasury, Agency Debt increased $10.0 billion last week (ended 12/27) to a record $1.752 Trillion. “Custody” holdings were up $233 billion y-t-d, or 15.3% annualized. Federal Reserve Credit rose $7.0 billion to $852 billion. Fed Credit was up $25.8 billion y-t-d, or 3.1% annualized.
International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – were up $765 billion y-t-d (18.9% annualized) to a record $4.811 Trillion.
December 29 – Bloomberg (Anoop Agrawal): “India’s foreign-exchange reserves rose $714 million to $176.23 billion in the week ended Dec. 22… India's foreign-exchange reserves rose by $32.18 billion over the past year…”
Currency Watch:
December 27 – Bloomberg (Matthew Brown): “The United Arab Emirates will convert 8 percent of its foreign-exchange reserves from dollars into euros before September after the U.S. currency slumped this year, the country’s central bank governor said.”
The dollar this week dipped 0.3% to 83.43. On the upside, the Slovakia koruna gained 0.9%, the Norwegian krone 0.7%, the Hungarian forint 0.7%, and the Czech koruna 0.6%. On the downside, the Canadian dollar declined 0.5%, the Australian dollar 0.3%, the New Zealand dollar 0.3%, and the Singapore dollar 0.2%.
For the year, the dollar index dropped 8.3%. On the upside, the Slovakia koruna gained 21.8%, the Romanian leu 21.3%, the Czech koruna 17.9%, the Swedish krona 15.9%, the Thai baht 15.7%, the British pound 13.7%, the Hungarian forint 11.9%, the Danish krone 11.5%, and the Euro 11.4%. On the downside, the Iceland krona declined 11.1%, the South African rand 9.7%, the Nicaragua cordoba 8.6%, the Turkish lira 4.7%, and the Chilean peso 3.8%.
Commodities Watch:
December 27 – Bloomberg (Li Yanping): “China will use its foreign exchange reserves to buy minerals and other ‘strategic resources,’ the state-run news agency Xinhua said, citing Vice Premier Zeng Peiyan. China will build reserves of major mineral resources including coal, iron and oil, while improving the utilization efficiency to sustain the country’s economic expansion, Zeng said…”
December 27 – Bloomberg (Chanyaporn Chanjaroen): “Tin climbed to the highest in at least 17 years on speculation Indonesia, the world’s second-biggest producer, may limit exports of the refined metal next year.”
For the week, Gold rose 2.5% to $636.70, and Silver gained 2.8% to $13.015. Copper added 0.3%, increasing y-t-d gains to about 40%. February crude fell $1.24 to end the year at $61.07. January Unleaded Gasoline dropped 5%, and January Natural Gas fell 3.8%. For the week, the CRB index declined 0.5% (down 7.4% y-t-d), and The Goldman Sachs Commodities Index (GSCI) fell 1.9% (up 0.5% y-t-d).
Japan Watch:
December 27 – MarketNewsInternational: “Credit ratings at Japanese companies continue to improve, with Rating & Investment Information Inc. and three other ratings agencies expected to upgrade the credit standings of 323 firms in 2006, up 21 from the previous year and hitting a record number for the third straight year, the Nihon Keizai Shimbun said…”
December 26 – Bloomberg (Mayumi Otsuma and Jason Clenfield): “Japan’s inflation rate rose last month and the jobless rate unexpectedly fell to an eight-year low… Core consumer prices…climbed 0.2 percent from a year earlier…The unemployment rate dropped to 4%...”
China Watch:
December 27 – Financial Times (Sundeep Tucker): “Twelve months ago even the most optimistic pundit dared not dream that a Chinese bank would this year grab the record for the world’s biggest stock market listing. Right up until the summer, analysts were predicting that the flotation of the Industrial and Commercial Bank of China would raise “only” $12bn or so. The mainland’s largest lender was in deep financial trouble just two years ago, and the odds were long that investors would be bullish enough to catapult ICBC’s offering above the $18.4bn raised in 1998 by Japan’s NTT DoCoMo. As it turned out…ICBC raised $21.9bn in a simultaneous listing in Hong Kong and Shanghai… The Hong Kong listing raised $16.1bn, but retail and institutional demand for the stock topped a barely believable $500bn.”
December 28 – Bloomberg (Zhang Dingmin): “China’s central bank will have soaked up a net 770 billion yuan ($98.7 billion) of liquidity from the market this year by the end of today, a historic high, the China Securities Journal reported…”
December 28 – Bloomberg (Nipa Piboontanasawat and Shamim Adam): “Hong Kong’s exports rose at the fastest pace in eight months in November as the city’s port shipped more products to mainland China, Europe and the U.S. Overseas sales rose 14.2 percent from a year earlier to…$29 billion…”
India Watch:
December 27 – Bloomberg (Kartik Goyal): “India expects overseas investment to more than double to $11 billion in the fiscal year ending March, 2007, from $5.5 a year earlier, Trade Minister Kamal Nath said.”
December 29 – Bloomberg (Anoop Agrawal): “India’s current account deficit widened to $6.9 billion in the three months ended Sept. 30, from $3.6 billion a year earlier as oil imports rose. Oil imports increased 31 percent in the quarter through Sept. 30…”
Asia Boom Watch:
December 27 – Financial Times (Sundeep Tucker): “Private equity deals hit a record $48bn in the Asia-Pacific region this year, more than four times that of 2005… The region benefited from a combination of conditions that helped drive activity. Asia is home to the world’s fastest-growing economies and many governments were more open to private equity capital. Asia also benefited from a glut of liquidity in the debt markets, while Asia’s entrenched family dynasties for the first time began to entertain the prospect of selling control to foreign private equity.”
December 28 – Bloomberg (Kim Kyoungwha): “South Korea posted a record current account surplus of $4.24 billion in November, the Bank of Korea said…”
December 25 – Bloomberg (Seyoon Kim): “South Korea’s economic growth may slow to 4.4 percent next year from a projected 5 percent expansion this year, state-run think tank Korea Development Institute said. That compares with the institute's earlier forecast of 4.3 percent for next year…”
December 26 – Bloomberg (Shamim Adam): “Singapore’s industrial production grew in November at almost three times the expected pace as pharmaceutical companies such as Pfizer Inc. increased output. Manufacturing, which accounts for a quarter of Singapore’s $118 billion economy, increased 14.7% from a year earlier…”
December 28 – Bloomberg (Luzi Ann Javier): “Philippine imports rose in October…as chipmakers boosted purchases of raw materials for electronic products. Overseas purchases climbed 12.5 percent from a year earlier to $4.68 billion…”
Unbalanced Global Economy Watch:
December 27 – Financial Times (Peter Smith): “European private equity notched up deals worth a record $214bn in 2006 but the region’s role as the world’s most fertile buy-out market - a crown it has held for five years - was dramatically regained by the US market. Research from Thomson Financial shows the US deal market was nearly twice as big as Europe with deals worth more than $400bn, treble the previous year, while Asia, including Australasia, grew nearly five-fold to $48bn.”
December 27 – Bloomberg (Brian Swint): “U.K. house prices increased at the fastest annual pace in more than two years in December, led by gains in London, research company Hometrack said. …prices for homes in England and Wales rose 5.7% in the year ending this month…”
December 29 – Bloomberg (Robin Wigglesworth): “Norway’s domestic credit growth accelerated to 14.8 percent in November, putting pressure on the central bank to quicken the pace of interest rate increases.”
December 27 – Bloomberg (Michael Heath): “Russia’s Economy Ministry raised its GDP growth estimates for 2006 through 2010 by as much as 0.2 percent, Interfax reported… The ministry now expects 2006 growth of 6.9 percent…”
December 28 – Bloomberg (Bradley Cook): “Russian consumer-price growth is accelerating ‘considerably’ this month compared with previous months, Finance Minister Alexei Kudrin told a government meeting today…”
December 29 – Bloomberg (Mike Cohen): “South African credit growth slowed in November… Growth in borrowing by households and companies slowed to 26.8 percent, from 27.5 percent in October”
Latin American Boom Watch:
December 27 – Bloomberg (Eliana Raszewski): “Argentina’s retail sales for the Christmas period rose to a 10-year high because consumers had higher wages to spend and borrowed more money, El Cronista said. Argentine Chamber of Commerce…said Christmas sales rose as much as 30%...”
Central Banker Watch:
December 29 – Bloomberg (Robin Wigglesworth): “Eurozone M3 money supply surged to its highest level in almost 17 years in November, far exceeding expectations… Meanwhile, growth of loans extended to the eurozone private sector was steady in the latest month but remained at a very elevated level. The latest monetary data increase the odds of additional interest rate tightening by the ECB… The annual growth rate of the broad M3…increased to a seasonally adjusted 9.3% in November from…8.5% in October. This was the highest rate since April 1990… Growth in total credit extended to the private sector, which includes households and companies, eased to 11.9% from 12.1% but remained high.”
Bubble Economy Watch:
December Consumer Confidence jumped 3.7 points to 109, the highest since April and the second-highest level since May 2002.
December 28 – Dow Jones: “The earnings of companies in the Standard & Poor’s 500 index that have issued third-quarter reports are running 19.5% higher than year-earlier results, according to Thomson First Call. Of the 500 companies, 486, or 97%, had reported earnings for the quarter as of Thursday. So far, third-quarter earnings have come in 6.1% higher than analysts’ expectations.”
December 29 – Financial Times (Deborah Brewster and Peter Aspden): “When Picasso’s ‘Boy with a Pipe’ fetched a record $104m at a Sotheby’s New York uction in 2004, it was the talk of the town. Never before had an artwork commanded more than $100m and the deal made news outside the art world. Two years later David Geffen…sold almost half a billion dollars’ worth of paintings within a few months - one, Jackson Pollock’s ‘No.5, 1948’, for $140m - and few blinked. The sales were merely the latest sign of a boom that has seen salerooms packed and art fairs proliferate. The year had already seen Ronald Lauder, the cosmetics heir, pay $135m for a work by Gustav Klimt, ‘Adele Bloch-Bauer 1’. Steve Wynn, the casino owner, agreed to sell Picasso’s ‘Le Reve’ for $140m to Steve Cohen, a hedge fund mogul… In a fitting climax, 50,000 people descended on Miami this month for a five-day frenzy of art sales under the umbrella of the Art Basel fair. More jets were rented for the event than for the Super Bowl. Art prices in the US rose this year by an average of 27 per cent - the steepest ever, according to Artprice.com…”
December 28 – PRNewswire: “On Jan. 1, 2007, a $1 toll increase will go into effect on the Bay Area’s seven state-owned toll bridges. Tolls on the affected bridges -- Antioch, Benicia-Martinez, Carquinez, Dumbarton, Richmond-San Rafael, San Francisco-Oakland Bay and San Mateo-Hayward -- will rise to $4 from the current $3 level.”
December 28 – Bloomberg (Carol Wolf): “PetSmart Inc.’s four-footed clients can lounge on hypoallergenic lambskin blankets, watch television and snack on lactose-free, fat-free ice cream while staying at a PetsHotel when their owners are away for the holidays. ‘I’ve been inside stores that have hotels,’ said Walter Todd…with Greenwood Capital… ‘They are pretty impressive. You wouldn’t mind staying in one yourself.’”
Financial Sphere Bubble Watch:
December 29 – Financial Times (Anuj Gangahar): “US companies raised the highest amount of money for six years through initial public offerings in 2006… The fourth quarter’s 94 US registered deals raised $19bn, the most IPOs in a single quarter since the third quarter of 2000 when 136 deals came to market, according to Dealogic… In terms of value, it was the highest quarterly figure since the second quarter of 2001.”
Real Estate Bubble Watch:
November Total (new and existing) U.S. Home Sales were reported at a somewhat-stronger-than expected 7.253 million annualized pace. For perspective, 2005 Total Sales were a record 8.354 million, up from 2004’s 7.987 million, 2003’s 7.269 million, 2002’s 6.604 million, 2001’s 6.240 million and 2000’s 6.048 million. And while y-t-d Total Home Sales are running 8.4% below last year’s level, we’re still on track for the third strongest year on record. On the pricing front, Average (mean) Exiting Home Sales Prices were little changed from October and down 2.2% from November 2005. Average New Home Prices were down $6,000 from October but were up 0.2% y-o-y.
California Home Sales were down 22.2% y-o-y during November. The Unsold Inventory Index rose to 7.4 months, up from October’s 7.2 and the year earlier period’s 3.6 months. So far, however, prices are holding firm. The Median Price increased $3,670 during the month to $555,290. This was up 1.4% ($7,420) over the past year, 18% ($83,310) over two years, 44% ($170,820) over three years, and 122% ($304,630) during the past six years. Median Condo Prices were down 2.2% y-o-y to $424,740 (2-yr gain of 12%).
December 28 – Bloomberg (Brian Louis): “Illinois single-family and condominium sales fell in November from a year earlier for the seventh straight month, the Illinois Association of Realtors said… Home sales fell 17.6 percent to 11,281 in November from 13,691 in November 2005… The state’s median home price was $199,000, down 0.5 percent from…November 2005.”
December 28 – Florida Association of Realtors: “Sales of existing homes and condos in Florida were down in November… A total of 11,912 existing single-family homes sold statewide last month, a decrease of 30 percent from…homes sold during the previous November… The statewide existing-home median price was $242,500 last month; a year ago, it was $250,400 for a decrease of 3 percent…”
M&A and Private-Equity Bubble Watch:
December 27 – Bloomberg (Dana Cimilluca and Julia Werdigier): “As hot as the mergers market is now, it’s about to get hotter. All the variables are in place for acquisitions in 2007 to surpass this year’s record $3.6 trillion. U.S. stocks are trading close to the cheapest price-to-earnings levels in a decade, data compiled by Bloomberg show. Yields on junk bonds used to finance takeovers also are near 10-year lows, according to Merrill Lynch & Co. Leveraged buyout firms have $1.6 trillion to spend, Morgan Stanley estimates. ‘There hasn’t been a period I’ve seen in my career when all of those factors that influence M&A activity have been as strong,’ said Stefan Selig, the global head of mergers and acquisitions at…Bank of America…”
December 27 – Financial Times (Peter Smith): “Texas Pacific Group has beaten Blackstone and Kohlberg Kravis Roberts to become the world’s most prolific buy-out group in 2006, notching up 17 deals with an aggregate value of just over $101bn. The figures reflect an extraordinary year for private equity in which the value of announced deals has risen to a record $700bn, more than double the record set in 2005 and 20 times bigger than in 1996, according to Thomson Financial…The wave of private equity deal activity, accounting for nearly one-fifth of all global mergers and acquisitions, has helped underpin a huge rise in the value of stock markets globally… Blackstone topped the US table and took part in global deals worth $93bn, while KKR, number one in Europe, managed a world total of $78bn. Bain Capital booked $85bn-worth of deals. The US regained its crown from Europe as the world’s most active private equity market, recording $403bn of announced deals, treble that of 2005.”
December 27 – New York Times (Donald Greenlees): “After the extraordinary growth in private equity deals in the United States and Europe, Asia is emerging as the next frontier. The top firms are already poised to take advantage. That, at least, is the view of David Bonderman, a co-founder of the Texas Pacific Group, who at a recent conference here referred to an “explosion” in the size of deals in Asia. Despite a surge in the number of homegrown private equity firms, he predicted that just 10 global firms, Texas Pacific among them, would end up leading the Asian market. “It’s going to be a global market dominated by the same global players who dominate the marts in America and Europe,” he said. For such firms, Asia offers a rich bounty. This year, private equity firms committed $28.9 billion through the first nine months of the year to investments in Asian companies outside Japan — a 78 percent increase from a year earlier, according to Dealogic…”
Financial Sphere Bubble Watch:
December 27 – Bloomberg (Harris Rubinroit): “Investors are finding junk bond yields with about half the risk in an unlikely place: the U.S. loan market. Borrowers with non-investment-grade ratings such as photography company Eastman Kodak Co. and tissue maker Georgia Pacific Corp. pay interest of 7.80 percent on average for loans, a quarter of a percentage point below yields on bonds with similar ratings. The gap is the narrowest in eight years… What makes loans more attractive than bonds to many investors is that they are secured by company assets. Creditors have recovered 71 percent of their principal in a default with loans, compared with 38 percent for speculative-grade, or junk, bonds, Moody’s…says.”
Energy Boom and Crude Liquidity Watch:
December 27 – Bloomberg (Matthew Brown): “Kuwait may post a budget surplus of as much as 5 billion Kuwaiti dinars ($17 billion) this fiscal year…”
Climate Watch:
December 29- Associated Press (Rob Gillies): “A giant ice shelf has snapped free from an island south of the North Pole, scientists said Thursday, citing climate change as a ‘major’ reason for the event. The Ayles Ice Shelf - all 41 square miles of it - broke clear 16 months ago from the coast of Ellesmere Island, about 500 miles south of the North Pole in the Canadian Arctic. Scientists discovered the event by using satellite imagery. Within one hour of breaking free, the shelf had formed as a new ice island, leaving a trail of icy boulders floating in its wake. Warwick Vincent of Laval University, who studies Arctic conditions, traveled to the newly formed ice island and couldn’t believe what he saw. ‘This is a dramatic and disturbing event. It shows that we are losing remarkable features of the Canadian North that have been in place for many thousands of years…We are crossing climate thresholds, and these may signal the onset of accelerated change ahead.’”
December 28 – Bloomberg (Kim Chipman): “Global warming is causing sea ice to melt, putting polar bears at risk and prompting the Bush administration to propose listing the cold-weather mammal as a threatened species, Interior Secretary Dirk Kempthorne said.”
2006 Wrap-Up:
For the year, the S&P Homebuilding index declined 20%, while the NYSE Financial index gained almost 20%. Despite the marked slowdown in home construction, transactions and price inflation, the Morgan Stanley Consumer Index jumped 18%. The S&P SuperComposite Restaurants Index surged 21.6% and the Morgan Stanley Retail Index rose 16.5%.
I view 2006 was a decisive year in Credit, market and economic analysis. The ongoing Credit Bubble – certainly stoked this year by the perception of a timid “tightening” cycle’s imminent reversal prior to it ever having achieved actual tightened Financial Conditions – fueled sufficient liquidity to inflate U.S. financial stocks, along with a global M&A Bubble, an unprecedented Global Liquidity Glut, prevailing stock market speculation and inflation, and other inflationary distortions the world over (including ballooning central bank reserves and resulting rampant securities market speculation and inflation).
As an extraordinary year comes to its conclusion, determined analysts today have a clearer appreciation that it was, in reality, not a susceptible U.S. housing Bubble fomenting U.S. and global imbalances. Instead, left to their own devices, the same systematic Credit and speculative excesses that cultivated the tech/telecom Bubble - and then the Mortgage Finance Bubble – simply gravitated to myriad burgeoning Bubbles, including securities leveraging, global M&A, and Credit default swaps (and other Credit “arbitrage”) to list only the most conspicuous. Bigger and more powerful than ever.
This year should have marked a major inflection point in the U.S. Credit Cycle. The bursting of housing Bubbles was poised to restrain system Credit and liquidity excesses, in the process checking American over-consumption. In short, 2006 should have seen the initiation of the long-overdue adjustment process, with at least some moderation in global imbalances. Instead, a highly energized Credit system in conjunction with an enormous leveraged speculating community indulged in excess that overwhelmed the limited slowing in mortgage Credit growth. Ironically, the obvious financial and economic fragility associated with a vulnerable Mortgage Finance Bubble created an eagerness to position for Bernanke’s maiden easing cycle, an intense market bias that worked with other key dynamics (notably dollar liquidity recycling) to place a low ceiling on market yields. Financial Conditions turned only looser.
This year almost marked the emergence of inflationary pressures in traditional narrow measures of aggregate consumer prices. The CPI posted a 4.3% y-o-y gain in June (4.1% in July), although a sharp reversal of energy prices and pressure on auto prices helped push y-o-y price gains back down to 2.0% by November. And while Personal Income will likely end the year with a better than 6% gain, the consensus has become convinced that heightened inflationary pressures were no more than a fleeting issue.
When it comes to perceived inflationary risks, the markets this year came to fully accept that “globalization” will forever prove a cure-all for any degree of financial excess. I take a much different view, holding that Unlimited Global Finance and resulting Monetary Disorder are fueling epochal “Investment Inflation.” With the liquidity spigot wide open, the Asian Financial/Industrial Revolution ran unabated during 2006. In particular, investment in industrial capacity accelerated in booming China and India, a historic dynamic that worked to keep a lid on global manufactured goods prices.
Heightened “Investment Inflation” did, however, create acute inflationary price effects throughout the metals arena. It was definitely the year of the industrial metals. Nickel gained 150% during 2006, zinc 127%, lead 57%, silver 45%, copper 41%, and aluminum 25%. Gold ended the year with a solid 23% rise. Crude peaked at $78.40 in mid-July before ending the year almost unchanged. We were left to contemplate how high energy prices might have spiked had there been another treacherous hurricane season or geopolitical event. Amaranth and, to much a much lesser extent, the energy commodities bulls experienced the downside of Monetary Disorder and highly speculative markets.
The story of the year, however, was the global securities markets that luxuriated in Monetary Disorder’s “upside.” Where to start… With their economy awash in liquidity (sourced globally and domestically) and the government placing increased pressure on housing speculators, the spirited Chinese bustled right on over to the friendly stock exchange. The Shanghai Composite index ended 2006 with a gain of 130%. Hong Kong’s Hang Seng index jumped 34%. Nearby, Taiwan’s major index increased 19.5%. Stocks in Singapore surged 27.2%, Vietnam 144.5%, Indonesia 55.3%, Malaysia 21.8%, Philippines 42.3% and Sri Lanka 41.6%. The Japanese Nikkei’s 6.9% rise increased 2-year gains to 51.4%. Less impressive, the South Korean Kospi Index gained 4%, while Thailand’s SET index declined 5.9%.
Fueled by enormous global financial flows coupled with runaway domestic Credit growth, India’s Sensex Index surged 46.7%. The global inflationary backdrop supported the Aussie and Kiwi economies and markets. Australia’s major equities index jumped 19.0% and New Zealand’s 20.3%.
Robust Credit and liquidity expansion throughout 2006 supported major asset inflation throughout Europe. As for stocks, UK’s FTSE 100 rose 10.4%, France’s CAC 40 17.5%, Germany’s DAX 22.0%, Spain’s IBEX 31.8%, Italy’s MIB 16.0%, the Swiss Market Index 15.9%, Netherlands’ Amsterdam Exchange’s 13.4%, and Sweden’s Stockholm 30 index 19.5%.
The more “periphery” European markets posted even greater gains. The major equities index in Ireland rose 27.8%, Portugal 33.3%, Belgium 23.7%, Denmark 12.2%, Finland 17.9%, Norway 33.6%, Austria 21.7%, and Luxembourg 33.0%. Despite a weakened currency, much higher interest rates and a lot of nervousness, Iceland’s ICEX gained 15.8%. Stocks in Poland gained 41.6%, Czech Republic 7.9%, Hungary 19.7% and Bulgaria 48.3%. Russia’s RTS Index surged 70.8%, increasing 2-year gains to 221%. Stocks in Ukraine gained 41.3%, Croatia 60.7%, Slovenia 37.9%, and Estonia 28.9%. Greece equities rose 19.9%, while the Turkish stock market declined 1.7%.
Other spectacular periphery market gains included Morocco 56.7%, Namibia 46.7%, Botswana 74.2%, Nigeria 38.7%, and Kenya 42.1%. Meanwhile, stock markets throughout the Middle East suffered from bursting Bubbles. The Kuwait market dropped 9.2%, Saudi Arabia 52.5%, Jordan 32.6%, Qatar 35.5%, and the United Arab Emirates 43.3%.
Yields in Mexico, Brazil and throughout much of Latin America dropped to record lows. Equity markets rocketed ahead. For the year, the Mexican Bolsa surged 48.6%, the Brazilian Bovespa 32.9%, the Argentine Merval 35.5% and Chile’s Select Index 37.1%. Venezuela’s major equities index surged 156%, Peru 168%, Costa Rica 77%, Bermuda 25%, and Colombia 17.3%.
No doubt the international equities boom was supported by (and lent support to) the global M&A boom. According to Dealogic, global mergers and acquisitions reached $4 Trillion this year, fully 20% higher than the previous record established back in 2000. Private equity spent a record $750 billion, easily doubling 2005’s record. Asia, Europe and North America all enjoyed record M&A activity.
According to Thomson Financial Services (as reported by Dow Jones), total global debt issuance jumped 14.1% from 2005 to a record $6.948 TN. Total securities issuance rose 16% from 2005 to $7.640 TN. Total U.S. debt issuance increased 10.1% this year to $4.085 TN. Long-Term U.S. debt issuance surged 26.6% to $1.513 TN. High-Grade corporate issuance jumped 52.7% to $919 billion, a third higher than 2004’s record. High-Yield issuance surged 52.7% from last year to $150.5 billion (breaking 2004’s record by 5%). Convertible securities issuance jumped 70.9% to $69.4 billion. Preferred issuance jumped 36.9% to $41.0 billion. Despite the housing slowdown, ABS issuance increased 4.4% to $1.223 TN and MBS issuance 2.2% to $1.013 TN. Agency debt issuance increased 7.3% to $349 billion.
The bottom line is that the largest economy in the world – custodian of the global system’s “reserve currency” – has reached the point where only enormous Credit growth and financial sector leveraging are capable of maintaining inflated asset markets and sustaining sufficiently moderate economic expansion. This historic predicament is fomenting Escalating Global Monetary Disorder. Disregard all the “soft-landing” talk as nonsense. While housing and auto sectors were in downturn, the expansive “services”/finance dominated U.S. economy remained firmly entrenched in Bubble Dynamics.
As we Wrap-Up this most challenging year of analysis, the issue has become more well-defined: The sustainability of the U.S. Credit and Economic Bubbles – Bubble joined at the heart. And, no doubt about it, these Bubble did handily endure 2006. But at what cost? The slowdown in housing only allowed greater availability of real and financial resources to build more retail space, hotels, casinos, sports venues and such. Rampant liquidity excess ushered in Telecom and Internet Bubble Part II. Instead of beginning to brace for the inevitable downside of the Credit Cycle, ultra-loose “money” enticed the system into embarking on the greatest expansion of risky Credits and the most outrageous speculation in Credit-related instruments/derivatives the world has ever known. At what cost? Well, a nearly $900 billion Current Account Deficit along with unprecedented speculative flows (to play global markets) literally inundated the world with liquidity.
Despite favorable interest-rate differentials, booming securities markets, moderate economic expansion, and a massive Chinese-led central bank accumulation of dollar securities – our currency once again struggled. The year comes to a close with a troubling dichotomy: On the one hand, there are today’s fervently bullish perceptions with regard to the underlying soundness and resiliency of the U.S. economy and prospects of another banner year for U.S stocks in 2007. On the other hand, there is ominous dollar weakness, with the worn greenback exhibiting the erosion from yet another year of Bubble-induced non-productive debt expansion.
