Saturday, September 20, 2014

08/31/2007 Just the Facts *

During another volatile week, the Dow slipped 0.2% (up 7.2% y-t-d) and the S&P500 declined 0.4% (up 3.9%). The Tranports fell 0.8% (up 7.0%), and the Morgan Stanley Cyclical index dipped 0.4% (up 15%). The Morgan Stanley Consumer index lost 0.7% (up 2.7%), and the Utilities were hit for 2.5% (up 4.3%). The small cap Russell 2000 fell 0.8% (up 2.2%), and the S&P400 Mid-cap index dipped 0.2% (up 7.3%). Technology stocks remain strong performers. The NASDAQ100 rose 1.4% (up 13.2%), and the Morgan Stanley High Tech index gained 1.0% (up 11.9%). The Semiconductors added 0.3% (up 6.3%). The Internet Index increased 1.0% (up 11.9%), and the NASDAQ Telecommunications jumped 2.8% (up 17.2%). The Biotechs rallied 0.2% (up 2.9%). Financial stocks were under pressure. The Broker/Dealers fell 2.1% (down 8.1%), and the Banks dropped 2.8% (down 9.8%). With bullion up $4.60, the HUI Gold index gained 0.7% (down 3.3%).

Three-month T-bill rates rose 87 bps this week to 4.13%, recovering a good chunk of the previous two-week yield collapse. Two-year U.S. government yields fell 16 bps to 4.14%. Five-year yields sank 16 bps to 4.25%. Ten-year Treasury yields dropped 9 bps to 4.53%. Long-bond yields ended the week down 6 bps to 4.83%. The 2yr/10yr spread ended the week at 39 bps. The implied yield on 3-month December ’07 Eurodollars declined 4 bps to 4.93%. Benchmark Fannie Mae MBS yields added one basis point to 6.01%, this week posting poor relative performance versus Treasuries. The spread on Fannie’s 5% 2017 note narrowed 3 to 53, and the spread on Freddie’s 5% 2017 note narrowed 3 to 53. The 10-year dollar swap spread increased 3.3 to 69.5. Corporate bond spreads were mixed, with the spread on a junk index ending the week 13 bps wider.

Investment grade debt issuers included AT&T $2bn, Capital One $1.5bn, Nisource Finance $800 million, Enterprise Products $800 million, Nationwide Life $500 million, Realty Income $550 million, Macy's $350 million, and Penn Electric $300 million.

August 31 – Bloomberg (Bryan Keogh): “Investors added $83 million to high-yield bond funds, the first infusion in 12 weeks…JPMorgan Chase & Co. said, citing AMG… High-yield mutual funds had reported outflows of $3.8 billion in the past 11 weeks…”

German 10-year bund yields dipped 2 bps to 4.24%, while the DAX equities index rallied 1.7% (up 15.8% y-t-d). Japanese 10-year “JGB” yields added one basis point to 1.60%. The Nikkei 225 gained 2.0% (down 3.8% y-t-d). Emerging debt and equity markets were mostly higher. Brazil’s benchmark dollar bond yields declined 5 bps this week to 6.01%. Brazil’s Bovespa equities index surged 3.1% (up 22.9% y-t-d). The Mexican Bolsa gained 1.0% (up 14.7% y-t-d). Mexico’s 10-year $ yields dropped 13 bps to 5.60%. Russia’s RTS equities index rose 3.0% (down 0.1% y-t-d). India’s Sensex equities index surged 6.2% (up 11.1% y-t-d). China’s Shanghai Composite index gained another 2.2% to another record high (up 95% y-t-d and 215% over the past year). Hong Kong's Hang Seng also closed today at a record high, increasing y-t-d gains to 20%.

Freddie Mac posted 30-year fixed mortgage rates fell 7 bps this past week to 6.45% (up one basis point y-o-y). Fifteen-year fixed rates declined 6 bps to 6.12% (down 2bps y-o-y). Moving notably higher, one-year adjustable rates surged 24 bps to 5.84% - the highest level since June '01 and up 25 bps y-o-y.

With the securitization market clogged up, the banking system balance sheet is ballooning. Bank Credit surged $57bn (week of 8/22) to a record $8.788 TN (4-wk gain of $147bn). For the week, Securities Credit jumped $31.6bn. Loans & Leases expanded $25.5bn to $6.433 TN (4-wk gain of $42.4bn). C&I loans rose $16.7bn, and Real Estate loans increased $10.4bn. Consumer loans dipped $1.1bn. Securities loans increased $5.4bn, while Other loans declined $6.1bn. On the liability side, (previous M3) Large Time Deposits increased $7.7bn.

M2 (narrow) “money” surged $43.6bn to $7.333 TN (week of 8/20). Narrow “money” has expanded $289bn y-t-d, or 6.5% annualized, and $463bn, or 6.7%, over the past year. For the week, Currency was unchanged, while Demand & Checkable Deposits declined $6.1bn. Savings Deposits jumped $38.9bn, and Small Denominated Deposits added $1.7bn. Retail Money Fund assets rose $9.1bn.

Total Money Market Fund Assets (from Invest. Co Inst) declined $12.9bn last week to $2.764 TN. Money Fund Assets have increased $382bn y-t-d, a 23.8% rate, and $563bn over 52 weeks, or 25.6%.

Total Commercial Paper contracted another $62.8bn last week to $1.979 TN, reducing y-t-d gains to only $5.1bn. Asset-backed commercial paper fell $59.4bn to $985bn, with a 3-week decline of $188.4bn (after beginning the year at $1.084TN). Total CP has increased $136bn, or 7.4%, over the past 52 weeks.

Fed Foreign Holdings of Treasury, Agency Debt last week (ended 8/29) declined $7.1bn to $1.979 TN. “Custody holdings” were up $228bn y-t-d (19.3% annualized) and $300bn during the past year, or 17.9%. Federal Reserve Credit last week declined $1.7bn to $850bn. Fed Credit has declined $2.2bn y-t-d, although Fed Credit has increased $21.1bn over the past year (2.5%).

International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – were up $873bn y-t-d (27% annualized) and $1.113 TN y-o-y (24.3%) to $5.684 TN.
Credit Market Dislocation Watch:

August 29 – Bloomberg (Jody Shenn): “K. Terrence ‘Terry'’ Wakefield, head of Wakefield Co., a…mortgage-industry consultant, comments on the home-loan market. Wakefield is a former Salomon Brothers executive who helped run a mortgage lender that began as joint venture between Salomon…and a predecessor to Prudential Financial Inc.: On the market for U.S. mortgages not expected to be packaged into bonds guaranteed by government-chartered companies Fannie Mae and Freddie Mac: ‘This is unquestionably the worst it’s been. I’ve never seen a secondary market, since it was founded back in the late 1970s, where you couldn't sell loans. Where there was no bid.’ On the future for bonds without guarantees from government-linked entities: ‘I’m not suggesting the non-agency mortgage-backed securities market is dead. It will resuscitate but under a very different set of rules, because the rules of the past do not work…’ On third-party mortgage brokers: ‘Investors are not going to buy any more loans originated by brokers in the old model. I think their role in the process is going to fundamentally change.'"

August 29 – Bloomberg (Mark Gilbert): “The U.S. mortgage market is in ‘turmoil,’ according to H&R Block Inc. Chief Executive Officer Mark Ernst… ‘The loan originations market is in the midst of the most severe dislocation it has seen in years, maybe the most severe since the 1930s,’ Ernst said on a conference call today.”

August 30 – Financial Times (Paul J Davies): “One by one, some of the off-balance sheet vehicles run by banks and asset managers that buy bonds backed by mortgage and other debt are beginning to breach their investment rules that could force them into a fire- sale of their assets. Asked recently what such a vehicle’s next step was, one manager forced to begin selling assets responded with grim humour: ‘I don’t know – I’ll have to read the instructions.’ The manager is unlikely to be alone among his peers in reaching for the chapter of an operating manual they hoped never to consult. While it might sound a bit like trying to learn the workings of a parachute after already having jumped from the plane, the comment illustrates the mechanical nature of a group of investors who hold nearly $400bn worth of assets. Once triggers are breached, managers have no room for manoeuvre… The vehicles that live and die by such tight rules are structured investment vehicles (SIVs) and their near-cousins, SIV-lites, which focus exclusively on mortgage-backed bonds and collateralised debt obligations… They have been laid low by two factors. First, they have recently faced difficulties in raising funding since the short-term debt markets they rely on heavily have seized up. Second, the market values for some types of the assets they hold have been falling as investors have deserted asset-backed securities over fears of contagion from the US subprime mortgage markets.”

August 30 – Dow Jones (Anousha Sakoui ): “Collapsing structured investment vehicles, or SIVs, hit by the global credit market turmoil are to offload around $43 billion of assets in forced sales, which would put further pressure on prices, analysts said… This is in addition to leveraged loans being shed by credit investors needing to meet margin calls and billions of new loans underwritten by banks to fund recent leveraged buyouts. One European head of leveraged finance estimated the volume of unsold leverage loans to be around EUR85 billion. Carlyle Capital Corp. Ltd., a listed investment fund that recently received $200 million in emergency financing from U.S. parent, private equity firm Carlyle Group, said Wednesday it had also sold $900 million of assets. The sale of assets, many of them to Carlyle Group, were to help cushion the fund against margin calls from its main lenders.”

August 30 – Financial Times (Stacy-Marie Ishmael ): “Structured investment vehicles and their SIV-lite cousins, which look to profit from the differences between cheap short-term debt funding and higher longer-term investment returns, manage about $400bn in assets, according… Moody’s… Turmoil in the asset-backed commercial paper market has led to funding difficulties, while their asset values have declined as investors have fled all kinds of structured products. This has forced a number of such vehicles to begin selling assets. IKB’s $14bn Rhinebridge SIV sold $176m of its assets on Tuesday rather than try to draw on liquidity facilities. The SIV was the first to face a ratings downgrade because of the disruption in the commercial paper market…. This week, Cheyne Finance, an SIV managed by London-based hedge fund Cheyne Capital, said it would soon have to begin selling its $6.6bn in assets after value declines in its mostly mortgage-backed debt investments led it to breach a capital-adequacy test. SIV-lites, which are less diverse in their investments and focus mainly on mortgage-backed debt and complex structured bonds known as collateralised debt obligations, have fared worse. Four of the five deals that exist have hit trouble. Golden Key, run by Avendis Financial Services, is liquidating its $5.5bn portfolio… Solent Capital’s Mainsail II SIV-lite has also been forced to sell off its $4.5bn in assets. Sachsen Funding I, run by Sachsen LB, the stricken German Landesbank, is a $3bn+ SIV-lite that has also faced funding problems….”

August 30 – Bloomberg (Aaron Kirchfeld): “Landesbank Sachsen Girozentrale, the German state-owned bank ravaged by investments in U.S. subprime mortgages, had ‘secret’ investments of up to 46 billion euros ($63 billion), Sueddeutsche Zeitung said, citing Saxony’s government finance committee. In addition to off-balance sheet investments in Dublin, SachsenLB also created so-called conduits in Leipzig in 2003 under the code name ‘Dublin II,’ the newspaper said. The 13 affiliates in both cities account for the lion's share of the bank’s off-balance sheet total of 65 billion euros…”

August 31 – Bloomberg (Sebastian Boyd): “Barclays Plc will help rescue a $1.6 billion debt fund run by London-based asset manager Cairn Capital after it was unable to raise money in the credit markets. Barclays’s securities unit will provide money to refinance the fund’s asset-backed commercial paper as it falls due, the London-based bank said… The fund has $1.6 billion of U.S. securities mostly backed by home loans, according to a Cairn Capital spokesman who declined to be identified.”

September 1 – The Times (Siobhan Kennedy): “The banks that underwrote the $45 billion acquisition of TXU Corp, the world’s biggest buyout, have offered to pay the $1 billion (£495 million) break fee in a desperate attempt to convince the private equity backers to drop their bid. It is understood that the banks asked Kohlberg Kravis Roberts and TPG to consider withdrawing their offer after the turmoil in the credit markets meant that the banks would have little or no chance of syndicating the record-breaking $37 billion loan to investors. The banks include Goldman Sachs, Morgan Stanley, Citigroup, Lehman Brothers and JPMorgan.”

August 30 – Bloomberg (Laura Cochrane and Tiffany Kary): “Basis Capital Fund Management Ltd., the Australian investment company that hired Blackstone Group LP to sell assets, sought bankruptcy protection for its second-biggest hedge fund. The Sydney-based company’s petition to liquidate the Basis Yield Alpha Fund stokes concern that the rout in the U.S. subprime market will lead other hedge funds to report losses when they disclose August valuations to investors next week, said James Chirnside, chief investment officer at Asia Pacific Asset Management in Sydney.”

August 29 – Bloomberg (Darrell Hassler and Laura Cochrane): “Cheyne Capital Management Ltd., the hedge fund manager set up by former Morgan Stanley bankers Stuart Fiertz and Jonathan Lourie, may liquidate the assets backing a commercial paper program after a global credit market rout. The Cheyne Finance LLC fund has been selling assets and has enough cash to repay commercial paper due through November…Cheyne Capital Management said… ‘Investors are not going to refinance you in this environment,’ said Craig Saalmann, credit strategist at JPMorgan Chase & Co… Companies that depend on commercial paper, debt due in 270 days or less, are facing funding shortages as investors balk at buying asset-backed, short-term debt after losses on U.S. home loans to risky borrowers caused turmoil in global credit markets. The retreat has caused asset-backed commercial paper yields to rise to five-year highs. Cheyne said it has drawn on all three of its liquidity facilities and will continue to sell assets to meet its liabilities.”

August 30 – The Wall Street Journal (David Reilly and Carrick Mollenkamp): “The subprime-mortgage downturn keeps showing up in unexpected places in unusual ways. The latest are conduits, which have put some of the world’s biggest banks under the spotlight for their lucrative but little-known and poorly disclosed operations. Most recently, State Street Corp., the big Boston bank and money manager, saw its share price fall on fears about its exposure to about $28 billion in off-balance-sheet conduits. State Street said in a statement that the credit quality of the assets in its conduits ‘is very good,’ and the conduits are still selling commercial paper. Overseas, HBOS PLC, the United Kingdom’s fourth-largest bank by market value, stepped in when a conduit with $36.7 billion in commercial paper outstanding ran into trouble. Other U.S. banks haven’t had problems so far, but investors are anxious, given a dearth of information. ‘We cannot rule out ‘black holes’ at certain banks,’ Merrill Lynch said in a recent report.”

August 30 – Bloomberg (Chia-Peck Wong): “DBS Group Holdings Ltd., Singapore’s largest bank, said it had S$2.4 billion ($1.6 billion) at risk from collateralized debt obligations, more than earlier stated, after an entity it manages was forced to seek funding. Red Orchid Secured Assets, or Rosa, needed the financial lifeline because of turmoil in credit markets…”

August 30 – Bloomberg (Liz Capo McCormick): “Volatility on options for U.S. interest-rate swaps has resumed rising this week amid renewed investor concern that the fallout from the credit crunch is spreading among money-market assets. The normalized volatility on three-month options for two-year interest rate swaps rose to 117.75 basis points, from 116.75 basis points on Aug. 24. So-called swaption volatility had reached 131.35 basis points on Aug. 21, the highest since at least May 2005, when Bloomberg began compiling data. Normalized volatility signals traders’ expectations for swings in swap rates over the next year.”

August 31 – Bloomberg (Ron Harui): “Volatility implied by one-month dollar-yen options surged to the highest in more than eight years this month on speculation credit-market losses will deepen. Volatility, a gauge of expected exchange-rate fluctuations, headed for the biggest monthly percentage gain since March 2000, as traders bought options to hedge against further strength in the yen. The currency rose for a second month versus the dollar as investors reduced so-called carry trades on concern a rout in the U.S. subprime market will prompt hedge funds to report losses. ‘The rise in volatility suggests people are very worried about how much losses hedge funds may report,’ said Shinichi Takasaka, a foreign exchange and financial products manager at Mitsubishi UFJ Trust & Banking Corp. in Tokyo.’”
Currency Watch:

The dollar index rose slightly to 80.745. On the upside, the Turkish lira increased 1.7%, the South African rand 1.3%, the Mexican peso 0.4%, and the British pound 0.3%. On the downside, the Colombian peso declined 2.3%, the New Zealand dollar 2.0%, and the Brazilian real 0.5%. 

Commodities Watch:

August 31 – Bloomberg (Jae Hur): “Wheat futures in Chicago climbed to a record, heading for the biggest monthly gain in 34 years, as demand from importers including South Korea and India reduced global inventories. Prices of the grain have doubled in the past year as adverse weather in Ukraine, Canada, Europe and Australia damaged crops. Global stockpiles will fall to the lowest in 26 years by May 31, according to the U.S. Department of Agriculture.”

For the week, Gold added 0.7% to $673, and Silver 1.1% to $12.23. Copper gained 1.4%. September crude jumped $2.95 to $74.04. September gasoline rose 3.6%, while October Natural Gas sank another 4.7%. For the week, the CRB index increased 1.0% (up 0.5% y-t-d), and the Goldman Sachs Commodities Index (GSCI) jumped 2.1% (up 14.1% y-t-d).
Japan Watch:

August 30 – Bloomberg (Mayumi Otsuma): “Japan’s government may have to set aside a record budget for debt repayments next fiscal year as outstanding bond issuances rise and interest rates increase. Interest payments on government bonds and debt-redemption costs will probably surge 6% to a record 22.2 trillion yen ($192 billion) in the year that starts April 1, according to government officials who spoke on the condition of anonymity. That will account for more than a quarter of total spending.”
China Watch:

August 29 – Bloomberg (Li Yanping): “China’s deputy central bank governor Su Ning said the authority will ‘actively’ take measures later this year to stabilize inflation after prices climbed. ‘The People’s Bank of China has been closely monitoring current rising inflation,’ Su told reporters… ‘So far the measures we've taken to curb price increases have shown some effect.’ China’s inflation rate surged to a 10-year high of 5.6% in July. The central bank raised benchmark interest rates in March, May, July and August. Inflation was 3.5% for the January to July period…"

August 30 – Bloomberg (Allen T. Cheng): “China’s Finance Minister Jin Renqing resigned for ‘personal reasons,’ the State Council said, after newspapers reported that the 63-year-old had been accused of improper conduct.”
India Watch:

August 31 – Bloomberg (Cherian Thomas): “India's economic growth unexpectedly accelerated last quarter, stoking inflation concerns that may force the central bank to raise interest rates further…. South Asia’s largest economy expanded 9.3% in the three months to June 30 from a year earlier, after gaining 9.1% in the previous quarter…”
Asia Boom Watch:

August 30 – Bloomberg (Karl Lester M. Yap and Luzi Ann Javier): “The Philippine economy expanded at the fastest pace in two decades as the government spent more on roads, bridges and schools and consumers bought mobile phones and new homes. The $117 billion Southeast Asian economy grew 7.5% in the three months ended June 30 from a year earlier…” 

Unbalanced Global Economy Watch:

August 30 – Bloomberg (Robert Hutton): “U.K. lenders responsible for 12% of the nation’s mortgages are tightening standards for loans on house purchases, withdrawing offers and raising the cost for borrowers with less than perfect credit. Merrill Lynch & Co.'s Mortgages Plc unit said yesterday that it raised its interest rates. Northern Rock Plc, the Newcastle upon Tyne building society that had 8.4% of the market last year, and Residential Capital Corp.'s GMAC-RFC unit, with a 3.5% share, said they stopped some offers and lifted costs for others. Deutsche Bank AG did the same, while Investec Plc’s divisions have stopped subprime lending.”

August 31 – Bloomberg (Victoria Batchelor and Gemma Daley): “Australia’s trade deficit narrowed more than expected in July as China's demand for commodity exports saw it surpass Japan as the nation's largest trading partner. The trade shortfall shrank to A$756 million ($617 million) from a revised A$1.74 billion in June as exports of aluminum, zinc and wheat increased, the Bureau of Statistics said… Exports rose 2 percent and imports fell 3 percent… China-Australia trade totaled A$50.5 billion in the year to July, up 20.2% on a year earlier. Japan-Australia trade totaled A$49.7 billion.”

Bursting Bubble Economy Watch:

August 30 – Bloomberg (Bob Willis): “First-time applications for jobless benefits unexpectedly increased for a fifth week, the longest streak since May last year, suggesting the housing recession and related turmoil in credit markets are costing jobs. Initial unemployment claims climbed by 9,000 to 334,000 in the week that ended Aug. 25, the highest level since April…” 

Central Banker Watch:

August 30 – Federal Reserve Chairman Ben Bernanke: “"The Federal Reserve stands ready to take additional actions as needed to provide liquidity and promote the orderly functioning of markets… It is not the responsibility of the Federal Reserve -- nor would it be appropriate -- to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy.’”

August 31 – Bloomberg (Craig Torres): “Former Federal Reserve Governor Edward Gramlich said stronger protections for mortgage borrowers are needed to prevent another credit bubble if the central bank cuts interest rates. ‘This whole subprime experience has demonstrated that taking rates down could have some real costs in terms of encouraging excessive subprime borrowing,’ Gramlich wrote in a paper presented to an annual Federal Reserve conference. He urged policy makers to ‘make sure the subprime structural problems are fixed before we repeat the low-interest-rate cycle.’” 

GSE Watch:

August 30 – Bloomberg (James Tyson): “Federal Reserve Chairman Ben S. Bernanke said relaxing portfolio limits on Fannie Mae and Freddie Mac isn’t necessary for the two largest U.S. mortgage finance companies to help stem a surge in foreclosures. Federal caps on the companies’ combined $1.4 trillion in mortgages and mortgage bonds ‘need not be lifted to allow them to accommodate new borrowers,’ Bernanke said in an Aug. 27 letter to Senator Charles Schumer… Bernanke’s view is in line with the companies' regulator and with President George W. Bush.”

August 30 – Bloomberg (James Tyson): “Freddie Mac, the second-biggest U.S. mortgage finance company, reported quarterly profit fell 45% after setting aside $320 million for losses as the housing slump deepened. Freddie Mac shares fell the most in more than two years after net income declined to $764 million…from $1.4 billion…a year earlier. Revenue dropped 4.8% to $2.26 billion… The provision for loan losses shows the worst real estate market in 16 years has spread beyond subprime borrowers to homeowners with good credit. Freddie Mac, which owns or guarantees about one in every five U.S. residential mortgages, anticipates the slump may last for 18 months, Chief Executive Officer Richard Syron said… ‘We were not immune to market forces and we continue to take a cautious view toward the housing market,’ Syron said.” 

Mortgage Finance Bust Watch:

August 31 – The Wall Street Journal (Michael Corkery and James R. Hagerty): “Investors played a big role in pumping up home prices during the housing boom. Now, they account for an outsize proportion of loan defaults, mortgage bankers and builders say. A survey by the Mortgage Bankers Association found that mortgages on properties that aren’t occupied by the owner -- mostly investment homes -- account for between 21% and 32% of the defaults on prime-quality home loans in Arizona, California, Florida and Nevada, states where overdue payments are mounting fast. Defaults were high on both prime and subprime loans… The four states were among the favorites of speculators during the housing boom. When the market was hot, many speculators bought homes hoping to flip them for a quick profit. But now that home prices have turned lower, that strategy is backfiring. As a result, some investors have "simply walked away from their mortgages,’ said Doug Duncan, chief economist of the MBA, echoing recent comments from executives of Countrywide Financial Corp., the nation's largest mortgage lender.” 

Foreclosure Watch:

August 31 - Dow Jones (Paul Vigna ): “Foreclosure is the new bankruptcy, Susan Sterne of Economic Analysis Associates writes, noting that bankruptcy declarations have fallen dramatically since the passage of a 2005 law making this process more onerous in terms of repaying debt, Market Beat relates. ‘Today’s alternative to the old bankruptcy law's forgiveness is called foreclosure,’ she writes. ‘By funding their spending via mortgage debt, consumers in need of reliquification can accomplish it via foreclosure...and with a foreclosure, they can resume spending just as under the old bankruptcy rules."” 

MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:

August 31 – Bloomberg (Michael McDonald): “The Massachusetts Turnpike Authority faces the possibility of higher borrowing costs because of derivative agreements it made with UBS AG and Lehman Brothers Holdings Inc. involving $800 million of debt for Boston’s ‘Big Dig’ highway project, credit-rating analysts and officials said. UBS may exercise an option it bought from the authority to start an interest-rate swap on the bonds on Sept. 4. Should Lehman exercise a similar option it purchased, the authority may end up paying variable interest rates on more than a third of its debt, a prospect credit raters said is risky given the agency’s pinched finances from cost overruns on the $14.8 billion Big Dig. The authority is among U.S. state and local borrowers lured by the prospect of upfront cash into complex derivative agreements such as swaps, private contracts that aren’t regulated by the Securities and Exchange Commission. The agency received $64.3 million for the options it sold the banks in 2001 and 2002, helping offset revenue lost when it deferred toll increases.” 

Real Estate Bubbles Watch:

August 27- The California Association of Realtors (C.A.R): “Home sales decreased 22.7% in July in California compared with the same period a year ago, while the median price of an existing home increased 3.2%... ‘The decline in sales we experienced in July continues to be driven by both tighter underwriting standards since the start of the year and the adverse psychological impact of news and information regarding increases in foreclosures and the subprime situation,” said C.A.R. President Colleen Badagliacco. ‘Although the median price posted an increase statewide, there is a disparity between the lower-priced or entry-level markets where prices generally are soft at best and sales have declined sharply, and some higher priced markets that continue to experience price appreciation… along with somewhat smaller decreases in sales.” The median price of an existing, single-family detached home in California during July 2007 was $586,030… The July 2007 median price decreased 1.4% percent compared with June’s… ‘With credit drying up in recent weeks, we expect further weakness in sales over the next few months,’ said C.A.R. Vice President and Chief Economist Leslie Appleton-Young….. C.A.R.’s Unsold Inventory Index for existing, single-family detached homes in July 2007 was 10.7 months, compared with 7.3 months (revised) for the same period a year ago.” 

Speculator Watch:

August 29 – Bloomberg (Jenny Strasburg): “Hedge funds doubled their share of U.S. fixed-income trading to 30% and dominated the market for some securities as debt-market volatility increased, according to a study by Greenwich Associates. ‘The recent expansion of hedge-fund positions and trading activity has been so rapid and consistent that it is now no exaggeration to say that hedge funds are no longer just an important part of the market in some fixed-income products; they are the market,’ according to the report… Hedge funds accounted for more than 80% of trading in the debt of financially distressed companies and high-yield derivatives such as credit-default swaps… The loosely regulated investment pools generated almost half of U.S. trading volume in structured credit. Hedge-fund assets worldwide increased almost threefold in the past five years to $1.75 trillion as of June…”

August 30 – The Wall Street Journal (Craig Karmin): “There was a time when debt was considered a boring investment, held primarily by institutions seeking predictable returns or a steady stream of interest payments. A recent study by the consulting firm Greenwich Associates shows how much that’s changed. Hedge funds have quickly become a dominant player in the world of debt. In some corners of the market -- often among the most complex areas -- they are the biggest force by far. Hedge funds are responsible for nearly 30% of all U.S. fixed-income trading, according to the survey. That level, which reflected activity over a 12-month period through April, was double the amount of trading hedge funds accounted for the previous year. Greenwich found hedge-fund trading comprises 55% of U.S. activity in derivatives with investment-grade ratings, and also 55% of the trading volume for emerging-market bonds. The rapid rise in hedge-fund trading underscores the changing nature of the debt markets.”