Three-month Treasury bill rates jumped 15 bps this week to 3.14%. Two-year government yields fell 9 bps to 3.11%. Five-year T-Note yields declined 8 bps to 3.50%, and ten-year yields dropped 10 bps to 4.08%. Long-bond yields fell 9 bps to 4.49%. The 2yr/10yr spread ended the week at 97 bps, after beginning the year at a negative 11 bps. The implied yield on 3-month December ’08 Eurodollars sank 14 bps to 3.425%. Benchmark Fannie MBS yields fell 14 bps to 5.56%, this week outperforming Treasuries. The spread on Fannie’s 5% 2017 note was little changed at 49 bps, and the spread on Freddie’s 5% 2017 note was slightly wider at 49 bps. The 10-year dollar swap spread declined 0.8 bps to 64.7. Corporate bond spreads were again mixed, with the spread on an index of junk bonds ending the week about 25 bps narrower.
December 24 – Bloomberg (Jeremy R. Cooke): “U.S. state and local government borrowing will drop to about $100 million during this holiday-shortened week…after municipal-bond sales reached an all-time high during 2007… Issuance of state and local bonds due in more than 13 months reached about $428 billion for the year through last week, based on Thomson Financial data… The preliminary total is 5% more than the $408 billion record set in 2005.”
There were no corporate debt issues this week..
December 28 – Bloomberg (Junko Fujita): “Citigroup Inc., Bank of America Corp. and 30 other issuers from Iceland to Australia drove yen-denominated bond sales in Japan to a seven-year high as they took advantage of the lowest rates in the industrialized world. Sales of samurai bonds, debt sold by overseas borrowers mainly to Japanese investors, tripled to 2.2 trillion yen ($19.3bn) this year, from 741 billion yen in 2006, according to data compiled by Bloomberg.”
German 10-year bund yields were unchanged for the week at 4.30%, while the DAX equities index jumped 2.8% (up 22.3% y-t-d). Japanese “JGB” yields dropped 5 bps to 1.50%. The Nikkei 225 gained 1.8%, cutting 2007 losses to 11.1%. Emerging equities and debt markets were mixed to higher. Brazil’s benchmark dollar bond yields rose 6 bps to 5.71%. Brazil’s Bovespa equities index jumped 3.5% (up 43.7% y-t-d). The Mexican Bolsa gained 1.9% (up 12.3% y-t-d). Mexico’s 10-year $ yields declined 6 bps to 5.41%. Russia’s RTS equities index slipped 0.2% (up 19.2% y-t-d). India’s Sensex equities index surged 5.8% (up 46.6% y-t-d). China’s Shanghai Exchange rose 3.1%, increasing y-t-d gains to 97%.
Freddie Mac posted 30-year fixed mortgage rates added 3 bps this week to 6.17% (down 1 bp y-o-y). Fifteen-year fixed rates were unchanged at 5.79% (down 14bps y-o-y). One-year adjustable rates dipped 2 bps to 5.53% (up 6bps y-o-y).
Bank Credit surged $71.6bn during the week (12/19) to a record $9.165 TN. Bank Credit has posted a 22-week gain of $593bn (16.2% annualized) and a y-t-d rise of $943bn, an 11.6% pace. For the week, Securities Credit jumped $37bn. Loans & Leases rose $34.7bn to a record $6.787 TN (22-wk gain of $462bn). C&I loans gained $8.8bn (2007 growth rate of 20.7%). Real Estate loans jumped $16.7bn, increasing 2007 growth to 7.8%. Consumer loans increased $2.9bn. Securities loans dipped $3.0bn, while Other loans jumped $10.2bn. On the liability side, (previous M3) Large Time Deposits declined $2.9bn.
M2 (narrow) “money” supply increased $3.6bn to a record $7.460 TN (week of 12/17). Narrow “money” has expanded $417bn y-t-d, or 6.0% annualized. For the week, Currency dipped $0.4bn, and Demand & Checkable Deposits fell $9.8bn. Savings Deposits increased $9.7bn, and Small Denominated Deposits grew $2.4bn. Retail Money Fund assets added $1.5bn.
Total Money Market Fund Assets (from Invest. Co Inst) declined $5.7bn last week to $3.110 TN. Money Fund Assets have posted a 22-week surge of $527bn (48% annualized) and a one-year increase of $729bn (30.6%).
Total Commercial Paper added $1.2bn to $1.785 TN. CP is now down $438bn over the past 20 weeks. Asset-backed CP dropped another $15.9bn (20-wk drop of $448bn) last week to $764bn. Year-to-date, total CP has contracted $189bn, or 9.6%, with ABCP down $307bn (29%).
Fed Foreign Holdings of Treasury, Agency Debt last week (ended 12/26) jumped $8.5bn to a record $2.056 TN. “Custody holdings” were up $304bn y-t-d (17.4% annualized). Federal Reserve Credit expanded $2.6bn last week to $874bn. Fed Credit has increased $21.3bn y-t-d (2.5%).
International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – were up $1.251 TN y-t-d, or 26%, to $6.061 TN.
Credit Market Dislocation Watch:
December 27 – International Herald Tribune (Floyd Norris): “‘The severity of the subprime debacle may be only a prologue to the main act, a tragedy on the grand stage in the corporate credit markets,’ wrote Ted Seides, the director of investments at Protégé Partners, a hedge fund of funds, in Economics and Portfolio Strategy. ‘Over the past decade, the exponential growth of credit derivatives has created unprecedented amounts of financial leverage on corporate credit,’ he added. ‘Similar to the growth of subprime mortgages, the rapid rise of credit products required ideal economic conditions and disconnected the assessors of risk from those bearing it.’”
December 27 – Bloomberg (Elizabeth Hester and Adam Haigh): “Citigroup Inc., JPMorgan Chase & Co. and Merrill Lynch & Co. may write down an additional $34 billion in securities linked to the collapse of the subprime mortgage market, according to Goldman Sachs Group Inc. Citigroup, the biggest U.S. bank, may reduce the value of its holdings by $18.7 billion in the fourth quarter and cut its dividend 40%, Goldman analyst William Tanona said…”
December 28 – Bloomberg (Bryan Keogh and Pierre Paulden): “Citigroup Inc., Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. are offering discounts of as much as 10 cents on the dollar to clear a $231 billion backlog of high-yield bonds and loans… While lenders reduced the overhang by 32% since July, they are struggling to unload debt from this year’s record $438 billion of leveraged buyouts after losses from securities linked to subprime mortgages reduced demand for higher-yielding assets…”
December 28 – The Wall Street Journal (Gregory Zuckerman and Alistair MacDonald): “It isn’t just consumers who are having a harder time getting credit from lenders. It’s hedge funds, too. Investment banks are cutting back on loans to hedge funds, eliminating some clients and raising borrowing fees for others… ‘Banks aren’t in a position to be accommodating at the moment,’ said Michael Hintze, chief executive of CQS, a…hedge fund with $9bn under management. If the change continues, it could put some pressure on the profits of the prime-brokerage units of the major banks, which make big money by lending to hedge funds… The move also could put pressure on the returns of some hedge funds, which often rely on healthy doses of borrowed money, or leverage, to boost their returns. ‘Leverage definitely drives returns,’ says David Gold, an executive at Watson Wyatt Worldwide… In particular, Mr. Gold says quantitative funds -- those that trade using certain computer models -- are seeing their borrowing ability reduced… He says the move by the banks will have the biggest impact on smaller hedge funds.”
December 28 - Bloomberg (Sree Vidya Bhaktavatsalam): “Legg Mason Inc. pumped $1.12 billion into two non-U.S. cash funds to prevent losses, the biggest bailout by a money manager tied to asset-backed debt sold by structured investment vehicles.”
December 27 – Financial Times (Deborah Brewster): “More than 10 North American banks and fund managers have collectively injected $3bn into their money market and cash funds since October to stem losses. Janus, the fund manager, this week became the latest to bail out its money market funds. It put in $109m to buy troubled asset-backed securities from its funds. Half a dozen firms have made similar moves. The bail-outs, in the form of guarantees, credit lines and the buying out of troubled securities, are intended to stop funds falling below the $1 a share promised to investors. They show how seriously the parent companies take the reputational risk of ‘breaking the buck’.”
December 28 – The Wall Street Journal (Sudeep Reddy): “The Federal Reserve’s first auction of $20 billion in loans to banks under an initiative aimed at unfreezing money markets drew 93 bidders, indicating interest from all sorts of banks across the country. But the first details of where the money went suggest the biggest borrowers are near Wall Street. The central bank said $16.5 billion of loans under its ‘term auction facility’ went to institutions in the New York district, where many of the nation’s largest banks have their headquarters.”
December 27 – Bloomberg (Cecile Gutscher and Christine Richard): “ACA Capital Holdings Inc., the bond insurer that lost its investment-grade credit rating last week, agreed to give control to regulators to avert bankruptcy. ACA Financial Guaranty Corp., a unit of ACA Capital, will seek approval from the Maryland Insurance Administration before pledging or assigning assets or paying dividends, the…company said… S&P sliced ACA’s rating 12 levels to CCC, casting doubt on more than $75 billion of debt the company guarantees, including $69 billion of securities such as collateralized debt obligations. ACA reached agreements to avoid posting collateral until Jan. 18 against credit derivatives it uses to insure the debt.”
December 28 – The Wall Street Journal (John Hechinger): “SLM Corp. cited potentially grim prospects for its main federally guaranteed student-loan business, and indicated it was accelerating its push into private loans that aren’t backed by the U.S. government. The biggest student lender…also disclosed that it faced a federal inquiry into its billing practices for high-return loans and a recent lawsuit from customers alleging racial discrimination. Sallie Mae disclosed both its strategy and the actions it faced in a securities filing yesterday detailing $2.5 billion in stock offerings. The company is using the proceeds to pay off a soured bet on its stock price and shore up its credit rating. Sallie Mae's stock has plunged this year after Congress slashed subsidies to student lenders and a $25 billion takeover bid by a group of investors, led by private-equity firm J.C. Flowers & Co., fell through.”
December 27 – Bloomberg (Laura Cochrane): “Westfield Group, the world’s biggest shopping center owner, scrapped plans to sell A$700 million ($611 million) of U.K. and New Zealand assets after failing to find buyers following the slump in the U.S. subprime market. The sale of the remaining third of a 530 million pound ($1.05bn) U.K. Shopping Centre Fund has been stopped, Chief Financial Officer Peter Allen said… The Sydney-based company also canceled the sale of two shopping centers in New Zealand…”
December 24 – Bloomberg (Sean B. Pasternak): “The market for non-bank asset-backed commercial paper will reopen after a group of investors holding about C$33 billion ($33.3 billion) of the short-term debt struck a deal to restructure the securities. The group, led by Toronto lawyer Purdy Crawford, agreed yesterday to swap the commercial paper for longer-term notes, ending a four-month freeze in trading of the securities.”
December 28 – Bloomberg (Laura Cochrane): “Centro Properties Group, the owner of U.S. malls that lost 80% of its market value last week, said two of its funds will pay reduced dividends for the fourth quarter. The A$2.4 billion ($2.1 billion) Centro Direct Property Fund and the A$1.9 billion Centro Direct Property Fund International will pay unit holders less than in the three months to September because they are majority invested in other Centro managed funds, Alan Hayden, manager of the domestic fund, said…”
December 28 – Bloomberg (Stuart Kelly): “Rams Home Loans Group Ltd., the Australian mortgage company that failed to refinance more than A$6 billion ($5.3 billion) in short-term loans this year, today extended the maturity of two of its funding facilities. Rams extended a A$500 million loan to May 2 from Dec. 31, the Sydney-based non-bank lender said in a statement to the Australian stock exchange. A separate A$250 million facility was extended to Jan. 31 from Dec. 31, Rams said.”
Currency Watch:
December 28 – Bloomberg (Christopher Swann and Kevin Carmichael): “The dollar’s share of global foreign-exchange reserves fell to a record low in the third quarter as demand for U.S. assets waned after the subprime-mortgage market collapsed. The U.S. currency accounted for 63.8% of reserves at the end of September, down from 65% at the end of June, the International Monetary Fund said… The share of euros increased to 26.4%, from 25.5%. The figures suggest central banks diversified out of the dollar as it fell to the lowest level in a decade. Investors sold a record amount of U.S. securities in August when defaults on subprime mortgages rippled through financial markets and the Federal Reserve signaled it would cut interest rates.”
December 27 – Financial Times (Daniel Dombey): “At the end of a year in which the dollar has endured a marked decline against other currencies, an unsettling question is beginning to be voiced: can the troubles of the US currency be confined to the financial world or are they set to undermine Washington’s place on the international stage? ‘This is the neglected dimension of the dollar’s decline,’ says Flynt Leverett, a former senior National Security Council official under President George W. Bush. ‘What has been said about the fall of the dollar is almost all couched in economic terms. But currency politics is very, very powerful and is part of what has made the US a hegemon for so long, like Britain before it.’ Along with some other commentators, Mr Leverett brackets the dollar’s recent fragility with related phenomena, such as the greater international use of rival currencies… ‘Americans will certainly find global hegemony a lot more expensive if the dollar falls off its perch,’ adds Kenneth Rogoff, former chief economist of the International Monetary Fund…”
The greenback rally ended abruptly, with the dollar index suffering a 1.9% loss this week to 76.22. Over the past five sessions, the Swedish krona increased 2.9%, the Norwegian krone 2.9%, the Swiss franc 2.7%, the South African rand 2.4%, the Danish krone 2.4%, the euro 2.3%, and the Japanese yen 1.8%. On the downside, the Mexican peso declined 0.9%.
Commodities Watch:
December 28 – Bloomberg (Pham-Duy Nguyen): “Gold rose, heading for the biggest annual gain since 1979, as a decline in the dollar boosts demand for the precious metal as an alternative investment. Gold has gained 31% this year as a weaker U.S. currency, record energy costs and continuing conflict in the Middle East sparked demand for the metal. Investment in the StreetTracks Gold Trust, an exchange-traded fund backed by bullion, has climbed to a record 628 metric tons. ‘Gold currently has such a strong supporting cast in the dollar, energy prices and geopolitical tensions,’ said Matt Zeman, metals trader at LaSalle Futures Group in Chicago. ‘One would be hard-pressed to find a reason for gold not to continue to rally at this point.’”
December 28 – Bloomberg (Halia Pavliva): “Platinum, little changed, headed for the biggest annual gain since 2003 after the slumping dollar enhanced the appeal of the precious metal as a hedge against rising consumer prices. Palladium rose. Platinum was up 34% this year… ‘Platinum is behaving more and more as a hedge against inflation, just like gold and silver,’ said Ralph Preston, a strategist at Heritage West Financial Inc. in San Diego. ‘It will go much higher, as the weakening dollar is continuing to support platinum.’”
December 28 – Bloomberg (William Bi): “Soybean futures in Chicago rose to the highest in 34 years and corn reached an 11-year high as a jump in crude oil prices may increase demand for the crops to make biofuels at a time of reduced supplies… ‘We haven't seen signs that the recent rallies are curbing demand’ for either corn or soybeans, said Sun Rui, a Beijing-based trader at Cofco Ltd., China’s largest grain trader.”
December 26 – Bloomberg (William Bi): “Soybean futures in China, the world’s biggest consumer of the commodity, surged to a record as traders speculated vegetable oil demand may outstrip supplies resulting from government efforts to control food prices. The price of soybean oil…also rose to a record… The government has tried to lower vegetable oil prices by selling from state reserves and allowing soybean imports at reduced tariffs until the end of March.”
December 26 – Bloomberg (Halia Pavliva): “Copper rose for a fifth straight session, the longest rally in four months, on speculation demand will climb in China, the world’s largest consumer of the metal. China will eliminate a 2% import duty on copper cathodes and anodes next month… Copper prices have more than doubled in the past three years as usage surged in China… China’s imports of refined copper in the 11 months ended Nov. 31 surged 89% to 1.4 million tons from a year earlier…”
December 26 – Bloomberg (Aya Takada): “Natural rubber futures in Tokyo, the global benchmark, rose to the highest in seven weeks on expectations output in Thailand, the world’ largest producer, will start declining early next year… Rubber for June delivery gained as much as…0.8%... The contract has gained 23% this year, heading for the third straight annual gain…”
Commodities ended an exceptional year strongly. For the week, Gold surged 3.4% to $839.30 (up 31.8% y-t-d), and Silver jumped 2.8% to $14.895 (up 15.2%). March Copper declined 0.8% (up approx. 7%). February Crude jumped $2.78 to $96.09 (up approx. 57%). February Gasoline rose 3.6% (up approx. 49%), and January Natural Gas increased 1.1%. (up approx. 17%) March Wheat sank 6.7% (up approx. 77%). For the week, the CRB index gained 1.1%, with a y-t-d gain of 16.5%. The Goldman Sachs Commodities Index (GSCI) inflated 1.5%, increasing 2007 gains to 40.6%.
China Watch:
December 25 – Bloomberg (Tian Ying): “China’s tax revenue is expected to rise 30% in 2007 from a year earlier as economic growth boosts companies’ and individuals’ incomes, the state-run Xinhua News Agency reported.”
December 27 – Bloomberg (Li Yanping): “Chinese industrial companies’ profits rose 36.7% in the first 11 months, outpacing the gain a year earlier and making it harder for the government to tame investment and prevent economic overheating… That’s more than the almost 31% increase through November 2006. Sales jumped 27.6% to 35.5 trillion yuan.”
December 27 – The Wall Street Journal (David Winning and Sherry Su): “China unleashed a string of metal-export tax increases and import-duty cuts aimed at shifting its economy away from energy-intensive industries. It also announced steps intended to ease the country’s worst fuel crisis in years. The moves by the Ministry of Finance were signaled last week when the government said 600 kinds of products would carry temporary export levies in 2008, while import tariffs on other goods would be overhauled.”
December 26 – The Wall Street Journal (Kaja Whitehouse): “The latest year-to-date performance numbers from hedge funds that invest in China’s red-hot market appear impressive… The average China-focused hedge fund is reporting a double-digit percentage gain for the 11 months ended in November, with a few up more than 100%.”
December 26 – Bloomberg (Feiwen Rong and William Bi): “Pork prices in China, the world’s biggest producer and consumer of the meat, rose for an 11th week as demand and higher livestock farming costs thwarted government efforts to boost supply and tame inflation… The wholesale price of pork…gained 1.4% to 20.97 yuan ($2.86) a kilogram, up 53% in the past year…”
December 27 – Bloomberg (Chia-Peck Wong): “The value of new mortgages in Hong Kong rose 76% from a year ago to the most since July 1997, as economic growth and low interest rates fueled demand for loans.”
Japan Watch:
December 26 - Dow Jones Newswire: “A cautious view of Japan’s economy is spreading among business leaders, with the percentage of corporate chiefs who said the economy is expanding plunging to 64% in a recent Nikkei Inc. survey from 79% in October, The Nikkei reported…”
December 28 – Bloomberg (Mayumi Otsuma): “Japan’s inflation rose at the fastest pace in more than nine years in November and industrial production and household spending fell, signaling rising oil costs may derail the economy's longest postwar expansion. Core consumer prices, which exclude fresh food, climbed 0.4% from a year earlier…”
Asian Bubble Watch:
December 24 – Bloomberg (Shamim Adam): “Singapore’s inflation accelerated in November to the highest in 25 years as consumers paid more for food and transportation. The consumer price index jumped 4.2% from a year earlier…”
December 26 – Bloomberg (Nguyen Dieu Tu Uyen): “Vietnam’s inflation may reach a 10-year high of more than 12.6% this year, Saigon Giai Phong newspaper reported, citing Vo Hong Phuc, minister of planning and investment.”
Unbalanced Global Economy Watch:
December 26 – The Wall Street Journal (Alex Frangos): “Some of the biggest cities in the world are proposing the most ambitious real-estate projects in a generation… The list is long and expensive, with more than 15 ventures, some of which are expected to cost as much as $30 billion: Four in New York City, at least three in Dubai, two in London, Chicago and Milan, and one in Amsterdam, Los Angeles, Paris and Mumbai. Reasons for the projects vary….”
December 26 – Bloomberg (Craig Stirling): “U.K. house prices fell the most in three years in December, and the threat of more declines may cause the property market to seize up in 2008, Hometrack Ltd. said. The average cost of a home in England and Wales slipped for a third month, dropping 0.3% to 175,200 pounds ($348,350)…”
December 27 – Bloomberg (Christian Vits): “Inflation in the German state of Saxony held above 3 percent for a second month in December, driven by higher oil and food costs. Prices rose 3.1% from a year earlier…”
December 26 – Bloomberg (Ben Sills and Todd White): “Producer-price inflation in Spain accelerated for a third month in November as higher oil costs squeezed manufacturers. The price of goods leaving Spain's factories, farms and mines rose 5.4% from the year earlier…”
December 28 - Bloomberg (Aleksandra Nenadovic): “Serbian central bank Governor Radovan Jelasic said inflation is accelerating because of record oil prices and the government’s failure to limit wages and cut costs at state companies. The inflation rate will be ‘about’ 10% this year…”
December 26 – Bloomberg (Henry Meyer): “The Russian government will submit amendments to the federal budget to keep its promise of boosting wages, Prime Minister Viktor Zubkov told newly elected lawmakers. ‘I especially underline the importance of passing amendments to the budget to increase the wages of government employees and military personnel,’ Zubkov said… ‘We should strictly fulfill all our promises to citizens,’ he told the Duma’s opening session… Higher-than-anticipated inflation this year made it necessary to budget extra funds for salaries, Zubkov said.”
December 27 – Bloomberg (Steve Bryant): “Turkey’s central bank said it’s closely watching food and energy prices for signs they could upset the slowdown in inflation the bank forecasts. The government plans to boost household electricity prices by 15% in early 2008… A summer drought pushed up grocery prices and helped accelerate inflation to 8.4% in November.”
Bubble Economy Watch:
December 27 – The Wall Street Journal (James R. Hagerty and Kelly Evans): “A closely watched gauge of U.S. home prices shows they are falling sharply across most of the nation, as a deepening slump in the housing market threatens to damp consumer spending. Home prices in 10 major metropolitan areas in October were down 6.7% from a year earlier, according to the S&P/Case-Shiller home-price indexes… That exceeded the previous record year-to-year decline of 6.3% in April 1991… New statistics from the Census Bureau…indicate a slowdown in the number of Americans moving to states that led the housing boom Nevada, Florida and Arizona.”
December 28 – Bloomberg (Bob Willis): “Sales of new homes in the U.S. fell to a 12-year low in November, pointing to bigger declines in construction that will hobble economic growth throughout 2008. Purchases dropped 9% to an annual pace of 647,000 and October sales were revised down to a 711,000 rate… The deepest housing recession in 16 years will worsen as discounts fail to lure buyers and mounting foreclosures swell the glut of unsold properties.”
December 25 – Associated Press: “Americans are falling behind on their credit card payments at an alarming rate, sending delinquencies and defaults surging by double-digit percentages in the last year and prompting warnings of worse to come… Experts say these signs of the deterioration of finances of many households are partly a byproduct of the sub-prime mortgage crisis and could spell more trouble ahead for an already sputtering economy… The value of credit card accounts at least 30 days late jumped 26% to $17.3 billion in October from a year earlier at 17 large credit card trusts… At the same time, defaults… rose 18% to almost $961 million in October… Some of the nation’s biggest lenders -- including Advanta, GE Money Bank and HSBC -- reported increases of 50% or more in the value of accounts that were at least 90 days delinquent when compared with the same period a year ago.”
December 27 – Dow Jones (Chia-Peck Wong): “U.S. retail foot traffic for the week ended Dec. 22 fell ‘a significant’ 10.6%, contributing to a sales drop of 2.2% during the same period, according to ShopperTrak… which gauges mall traffic. Total U.S. foot traffic for the month of December through Christmas Eve declined 4.36%, while total holiday season foot traffic… was expected to decline 2.5%...”
December 28 – The Wall Street Journal (Kelly Evans): “Business demand for big-ticket goods has softened in recent months, a sign that stress from the housing and credit markets is damaging other sectors of the slowing U.S. economy. New orders for durable goods…rose just 0.1% in November from the previous month after falling three months in a row… Shipments of Manufactured goods dropped, and inventories rose, offering evidence of faltering demand… Orders for nondefense capital goods excluding aircraft, a gauge of business investment, dropped 0.4% after falling 2.9% in October. So far this year, orders are 1.8% below last year’s level. ‘This evidence reinforces the likelihood that the economy will slow dramatically in the fourth quarter,’ Nigel Gault, U.S. economist at forecaster Global Insight…”
Latin America Watch:
December 26 – Bloomberg (Telma Marotto and Andre Soliani): “Brazilian bank lending rose 3.1% in November from a month earlier as record low interest rates and higher employment encouraged consumers to borrow more. State and non-state bank loans increased to 908.8bn reais ($509.3bn)… Lending climbed 26.7% from November ‘06”
December 28 - Bloomberg (Carlos Barletta and Lester Pimentel): “The Costa Rican central bank’s 23-year hold on the country’s currency may be coming to an end as surging inflation puts pressure on the government to abandon its policy of fixing the colon's exchange rate. Higher oil prices have pushed up annual inflation to 10%, the highest in Central America, and forced the central bank to allow the colon to gain against the dollar for the first time since 1984.”
MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:
December 27 – Market News International (Theodore Kim): “The deterioration in the performance of non-Agency Residential Mortgage Backed Securities started initially in subprime and, at least in terms of market volatility and spread widening, spilled quickly over into most other structured credit products. While the jury still may be out on whether the credit quality of commercial real estate or consumer credit card collateral backing ABS is turning for the worse, according to Standard and Poor’s, many Alt-A mortgage deals are already showing signs that they may be the next domino to fall. Alt-A severe delinquencies…have been increasing in recent months. The rate of delinquencies for 2006 originated deals is now running at more than double those of the 2005 vintage and more than four times those of 2004 and 2003. By far the worst vintage may be 2007.”
December 28 – The Wall Street Journal (Karen Richardson): “Warren Buffett, seizing a chance to profit from turmoil in the nation's credit markets, is starting up a bond insurer that aims to make it cheaper for local governments to borrow and promises to be a tough competitor for the industry’s embattled incumbents. The billionaire investor’s Berkshire Hathaway Assurance Corp., set to open for business today in New York state, will guarantee the bonds that cities, counties and states use to finance sewer systems, schools, hospitals and other public projects.”
Mortgage Finance Bust Watch:
December 26 – The Wall Street Journal (Kemba J. Dunham and Jennifer S. Forsyth): “The credit crunch triggered by the downturn in the housing market is creating problems in commercial real estate, driving down prices of office buildings, shopping malls and apartment complexes, and leaving some owners scrambling for cash. One victim is Centro Properties Group, the fifth-largest owner of shopping centers in the U.S. The Australian real-estate company saw its share price fall by 90% in two days last week as it struggled to refinance short-term debt it took on to fund its $6.2 billion acquisition of New Plan Excel, one of the biggest owners of strip malls in the U.S. Centro had planned to pay off the short-term loans by selling long-term debt via the commercial mortgage-backed securities market, but the lack of buyers forced it to get a two-month extension from its creditors.”
Real Estate Bubbles Watch:
December 26 – Bloomberg (James Kraus): “U.S. commercial real estate sales have halved in the past few months, driving down prices and leaving banks with $65 billion of loans they can’t sell to investors, the Wall Street Journal reported. Sales of major U.S. office properties fell 55% to $7 billion in November from a year earlier, the Journal said today, citing Real Capital Analytics.”
December 23 – Bloomberg (Sebastian Boyd): “Property funds may seek to sell a record 43 billion euros ($62 billion) of European commercial real estate in the next three years, the Sunday Telegraph said, citing a report by an industry group. U.K. fund managers may struggle to persuade investors to agree to extend the life of funds as they mature, according to the report from the European Association for Investors…”
Financial Sphere Bubble Watch:
December 28 – Bloomberg (Alison Vekshin): “U.S. bank revenue from trading derivatives and other contracts fell 62% in the third quarter, driven by the recent tightening of credit markets… The lost derivatives revenue will affect five U.S. commercial banks the most, the [OCC] said. JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wachovia Corp. and HSBC Bank USA accounted for 97% of the industry’s total derivatives trading revenue, according to the report.”
December 28 – OCC’s Quarterly Report on Bank Derivatives Activities: “Insured U.S. commercial banks generated $2.3 billion in trading revenues during the third quarter of 2007, down 48% from a year earlier… ‘The third quarter trading numbers reflect the effects of the recent turmoil in the credit markets,’ said Kathryn E. Dick, Deputy Comptroller for Credit and Market Risk. ‘Credit trading books were adversely impacted by rising credit spreads, poor liquidity, and ineffective hedging during the quarter.’ The OCC reported that revenues from credit intermediation declined $3.5 billion to a loss of $2.7 billion. Revenues from interest rate contracts increased $102 million to a record $3.1 billion, and revenues from foreign exchange transactions increased 59% to $2.0 billion. ‘Strong client demand for both interest rate and foreign exchange products boosted revenues in these sectors and helped to soften the impact of the poor performance of credit products,’ Ms. Dick said. The OCC also reported that the notional amount of derivatives held by insured U.S. commercial banks increased $19.7 trillion in the quarter to a record $172 trillion. The third quarter derivatives total is 36% higher than in the same period in 2006. Credit derivatives, the fastest growing product in the derivatives market, increased 19% during the quarter to a notional level of $14.0 trillion, 77% higher than a year ago. The OCC reported that the net current credit exposure, the primary metric the OCC uses to measure credit risk in derivatives activities, rose $53 billion during the quarter to $252 billion.”
California Watch:
December 28 - Los Angeles Times (Christopher Thornberg): “In 2002, the median price of a single-family home in Los Angeles was $270,000 and the median homeowner’s income was $65,000. With a $50,000 down payment, the annual cost of that house (taxes, insurance and payment on a 30-year fixed-rate conventional mortgage) would add up to about 33% of the median household's income -- just under the 35% mark that the Federal Housing Administration calls the upper limit of ‘affordable.’ By 2006, the cost of that same house doubled, to $540,000 -- pushed by unbridled speculation fueled by unparalleled access to mortgage capital. But median income rose a paltry 15%. So today that same set of costs come to 60% of gross income. That might be a manageable burden when home prices are rising at double-digit rates, creating new equity that can be accessed to support spending -- but not when prices are flat and the home-equity ATM is closed… The cold, hard truth is that foreclosures are serving only to hasten the painful process of shifting housing prices back to a level the market can sustain. Prices must and will fall. Everywhere. Probably 25% to 30% from their peak. 2008 is the year when gravity will reassert itself.”
Speculator Watch:
December 28 - Bloomberg (Katherine Burton): “Drake Management LLC suspended most redemptions from its largest hedge fund after losing 23.7% through November, according to a letter sent to investors… Drake will meet about 25% of requested withdrawals from its $3 billion Global Opportunities Fund… The partial redemptions were made possible by an agreement with Drake’s banks, the letter said. The firm’s lenders would have been allowed to terminate transactions and seize collateral if net assets had fallen by 30%.”
Crude Liquidity Watch:
December 27 – Bloomberg (Arif Sharif and Will McSheehy): “United Arab Emirates’ banks will report a 25% increase in combined profit to 24.8 billion dirhams ($6.75 billion) for this year, the Persian Gulf federation’s central bank governor said.”
2007 Wrap-Up:
There’s still Monday’s trading session to officially end the year. I thought I would get my 2007 Wrap-Up out of the way a little prematurely. This will be a work-in-progress, as I plan on editing and amending as year-end data come available.
The year was remarkable for the unusual divergences between bursting Bubbles and others continuing to inflate. This was the case both domestically and globally. As an example, the U.S. KBW Bank index sank 24.8%, while the NASDAQ100 surged 19.9%. The AMEX oil index surged 32.8%, while the S&P500 Homebuilding index collapsed 60%. Globally, major Chinese stock indices about doubled in price, while Japan’s Nikkei 225 fell 11%. In Europe, Britain’s FTSE mustered a 4.1% gain, while Germany’s DAX posted a 22.3% rise.
“Decoupled” Asian Bubbles inflated dangerously. The Chinese Shanghai Composite surged 96.7%, inflating 2-year gains to 355%. China’s CSI 300 index, which includes stocks on the Shenzhen Stock Exchange, gained 162% this year. The Shenzhen Composite was up 420% in two years. Hong Kong’s Hang Seng index rose 37.1% this year, with 2-year gains of 81.2%.
Taiwan’s TAIEX index gained 5.7%, increasing 2-year gains to 28.7%. South Korea’s KOSPI index gained 32.3% (up 39% in 2yrs). Singapore’s Straits Times index advanced 15.4%, increasing 2-year gains to 47.4% (up 156% in 5yrs). Thailand’s Bangkok SET index rose 26.2% (2yr gain of 22%). Malaysia’s Kuala Lumpur Composite index rose 32%, with 2-year gains of 61.6%. Indonesia’s Jakarta index surged 52.1%, with 2-year gains of 136% and 5-year gains of 546%. The major Philippine index posted a 21.4% gain (2yr gain 75.2%). The Vietnam Stock Index gained 23.3%, increasing 2-year gains to 202%.
India’s Sensex index jumped 46.6%, increasing 2-year gains to 118% and 5-year gains to 495%. The Karachi Stock Exchange 100 rose 47.1% (2-yr gain of 56%).
Fourth quarter losses (3.5%) reduced 2007 gains in Australia’s S&P/ASX index to 11.8% (2-year gain 33%). The New Zealand Exchange 50 dipped 0.5%, reducing 2-year gains to 20.7%.
Latin America certainly participated in the Global Bubble Phenomenon. Brazil’s Bovespa index surged 43.7% (2yr gain of 93%). The Mexican Bolsa rose 12.3% (2yr 68%) and Chile’s Select index 13.3% (2yr 56.8%). Argentina’s Merval gained 2.9% (2yr 40%), and Peru’s Lima General index jumped 36.0% (2yr 263%).
While December numbers have yet to be reported, better than 25% year-over-year growth pushed International Reserve (central bank) Assets to $6.06 TN. Through September, China’s reserves were up 45% y-o-y to $949bn. Russian reserves were up 56% this year to $466bn, with India’s reserves increasing 56% to $264bn. Brazil’s reserve assets almost doubled to $162bn. OPEC reserves were up 36% y-o-y to $421bn. “Sovereign Wealth Fund” was added to financial market vernacular. The dollar drifted further away from reserve currency status.
Despite the significant fourth quarter U.S. slowdown, 2007 will post only a modest decline from last year's record total global debt issuance. The global IPO market enjoyed a record year approaching $275bn, up from the previous record $242bn set last year. Although second-half deal flow slowed sharply, global M&A activity was still 20% ahead of 2006 (according to Dealogic), led by Asia and the emerging markets.
Gold gained 31.8%, its largest annual gain since the tumultuous year 1979 (when its price doubled) and its seventh straight year of positive returns. Crude oil surged 59%. Heating oil gained 62%, gasoline 54% and natural gas 17%. Despite declining 10% from its recent high, Wheat prices inflated 77% this year. Soybeans prices rose a record 79% this year to the highest level since 1973. After gaining 80% last year, corn climbed another 16% in 2007. Cotton prices rose 20%. The CRB index inflated 16.5% this year, and the more energy-weighted Goldman Sachs Commodities index surged 40.6%. It was the year when the markets came to recognize that significantly higher energy and commodities prices were having only minimal impact on demand.
During the year 2007, it became clear that the Federal Reserve had lost control of inflationary forces. The year ended with Import Prices up 11.4% y-o-y; the Producer Price index up 7.2% y-o-y; and the Consumer Price index up 4.3% y-o-y. Despite a weakened economy and another year of dollar devaluation (and booming exports!), the U.S. Current Account Deficit remained in the neighborhood of $800bn. Coupled with huge speculative outflows seeking profits from global inflation, the world was absolutely inundated with dollar liquidity.
It was, as well, a year of shattered myths: That astute global central bankers have inflation in check; that contemporary finance effectively disburses risk to the marketplace, in the process shielding the banking system from Credit and market risk; that “AAA” stands for safety and liquidity; that nationwide home prices won’t decline; that the Federal Reserve controls marketplace liquidity; that commercial paper is safe; that CDOs make sense; that the financial guarantors face minimal risk. Indeed, the entire bullish notion of contemporary risk modeling, structuring, hedging, and financial guarantees (“Credit insurance”) is now in serious jeopardy.
2007 saw the initial bursting of the Great U.S. Credit Bubble. To be sure, the enormous Bubble in Wall Street-backed finance abruptly went from runaway boom to astounding bust. Much of the mortgage origination market collapsed spectacularly. Thirty percent annualized broker/dealer balance sheet growth came to an abrupt halt during this year’s second half. Booming “private-label” MBS issuance ground to an immediate halt. Mortgage Credit Availability was reduced radically, especially in subprime, "jumbos" and riskier loan categories. The booming asset-backed securities and CDO markets faltered badly. The banking system’s off-balance sheet structured “vehicles” collapsed in illiquidity, another factor forcing the major lending institutions to balloon their balance sheets. The global inter-bank lending market seized up. The hedge fund industry waited anxiously for redemption notices. Counter-party risk became a very serious systemic issue, as did speculative leveraging. The global financial system ends the year on the precipice.
Meantime, U.S. Bank Credit expanded almost 12% during the year, with Commercial & Industrial loans ballooning almost 21%. With Risk Embracement turning to Risk Aversion, the marketplace called upon the Money Fund Complex to Intermediate Risk. Money Fund assets expanded an unprecedented $729bn, or 30.6%. And as liquidity disappeared for Wall Street-backed mortgages, Fannie and Freddie’s Combined Books of Business inflated an unprecedented $600bn (or so). The Federal Home Loan Banking system ballooned its balance sheet by more than $200bn, in the process becoming Lender of Last resort to some very troubled financial institutions. Global central bankers engaged in unparalleled concerted marketplace interventions and liquidity injections, sustaining global Bubbles in the process.
From the Fed’s Q3 “flow of funds,” total (non-financial and financial) U.S. system Credit growth expanded at an annualized $4.99 TN, sustaining the U.S. Bubble Economy but in an Unsustainable Manner – unsustainable in the quantity and structure of Credit and Risk Intermediation, as well as with the nature of economic (Bubble) activity. Financial sector debt expanded at an alarming 15.6% annualized pace, with Bank Credit, GSE, agency MBS, and Money Funds all expanding at double-digit rates. Of late, the Wall Street Credit crunch and severe tightening in risky debt markets have instigated recessionary forces. Many housing markets have gone from bad to worse – on the way to much worse. Florida is a mess, while California is an unfolding disaster. Some analysts have begun to recognize that U.S. asset and debt markets have not faced such precarious dynamics since The Great Depression. Meanwhile, collapsing U.S. and international interest-rates fuel myriad global Bubbles and inflationary pressures. In short, 2007 has been a continuation of the unfolding “worst-case-scenario.”
