Page 2 of 4 CREDIT BUBBLE BULLETIN The Wall Street bust
Commentary and weekly watch by Doug Noland
M2 (narrow) "money" supply surged $166bn to $7.900 TN (week of 9/22). Narrow
"money" has expanded $437bn y-t-d, or 8.0% annualized, with a y-o-y rise of
$518bn, or 7.0%. For the week, Currency increased $3.7bn, and Demand &
Checkable Deposits jumped $44.8bn. Savings Deposits ballooned $93.5bn, and
Small Denominated Deposits gained $9.3bn. Retail Money Funds increased $1.8bn.
Total Money Market Fund assets (from Invest Co Inst) were little changed at
$3.399 TN, with a y-t-d expansion of $286bn, or
12.2% annualized. Money Fund assets have posted a one-year increase of $507bn
(17.5%).
There was no Asset-Backed Securities (ABS) issuance this week. Year-to-date
total US ABS issuance of $129bn (tallied by JPMorgan's Christopher Flanagan) is
running at 26% of comparable 2007. Home Equity ABS issuance of $303 million
compares with 2007's $224bn. Year-to-date CDO issuance of $24bn compares to the
year ago $286bn.
Total Commercial Paper outstanding sank $95bn this week to a 3-year low $1.607
TN, with CP now down $178bn y-t-d. Asset-backed CP dropped $29bn last week to
$724bn, with 2008 now showing a decline of $48bn. Over the past year, total CP
has contracted $253bn, or 13.6%.
Federal Reserve Credit ballooned $254bn to a record $1.389 TN, with a historic
3-week increase of $457bn. Fed Credit has expanded $515bn y-t-d (77%
annualized) and $527bn y-o-y (61%). Fed Foreign Holdings of Treasury, Agency
Debt last week (ended 9/30) jumped $43.8bn to $2.466 TN. "Custody holdings"
were up $409bn y-t-d, or 25.9% annualized, and $467bn y-o-y (23.4%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $1.179 TN y-o-y, or 20.5%, to $6.925 TN.
Global Credit Market Dislocation Watch
October 3 - Bloomberg (Duane D. Stanford, Gabrielle Coppola and John Detrixhe):
"Almost 100 US corporate treasurers gathered for an emergency conference call
yesterday to warn each other that banks are using any excuse to charge more to
renew lines of credit. 'Capital is fleeing to safety,' said Edward E. Liebert,
treasurer of Rohm & Haas Co., who took part in the 90-minute call organized
by the National Association of Corporate Treasurers. 'Interbank lending is not
free-flowing any more,' said Liebert ... chairman of the ... trade group."
October 1 - Bloomberg (Kelly Riddell): "Carmike Cinemas Inc., the third-
largest US theater chain by screens, suspended its dividend, while Duke Energy
Corp., owner of utilities in five US states, tapped $1 billion from a credit
agreement and RC2 Corp., the maker of infant and preschool products, canceled
an acquisition. The paralysis in credit markets is changing how US companies do
business as banks pull back on loans or make them prohibitively expensive. Some
companies are closing plants and stores, postponing takeovers and grabbing any
available credit in a fight for survival. 'If businesses don't have access to
capital, smaller companies in particular, they might get wiped out,' said Alec
Young, a ... strategist at S&P's. 'It's impossible to quantify how
expensive this crisis is going to be for Corporate America; there's unlimited
downside.'"
September 30 - Bloomberg (Jeremy R. Cooke): "US state and local government
bonds are headed for their worst quarterly performance in as much as 14 years
as a wave of Wall Street consolidation undermines support for the municipal
market. Tax-exempt bonds have fallen 3.15 percent since the end of June,
according to Merrill Lynch & Co.'s total-return Municipal Master Index. The
quarter's decline may exceed the 3.18% drop in the second period of 2004, which
was the steepest since the 5.75% decline in the first three months of 1994."
October 3 - Bloomberg (Jeremy R. Cooke): "US states and municipalities were all
but shut out of the tax-exempt bond market for a third week, as borrowers
managed to sell less than 15% of a typical week's new fixed-rate issues, data
compiled by Bloomberg show ... 'This market has run into trouble again,' T.J.
Marta, a fixed-income strategist at RBC Capital Markets ... said ... 'The most
recent dislocation will exacerbate the negative developments already taking
place for state and local government finances.'"
October 2 - Dow Jones (Cynthia Koons): "The junk bond market suffered its
largest monthly decline in more than 20 years last month ... The widely quoted
Merrill Lynch Master II index was down 8.3% for September, spelling
year-to-date returns of negative 10.6%... 'Underlying it all is just a
breakdown of ordinary banking, the nuts and bolts of the credit markets,
counter-party approvals, and the commercial paper market,' [Marty] Fridson
said."
October 2 - Bloomberg (Pierre Paulden): "High-risk, high-yield loans posted
their worst monthly performance on record as prices tumbled to new lows after
Lehman Brothers Holdings Inc. filed for bankruptcy ... The S&P/LSTA
Leveraged Loan Index returned a negative 6.15% in September ... Leveraged loan
prices tumbled 8.57 cents in September to a record low of 79.8 cents on the
dollar ... 'There is pure turmoil in the financial industry and that's driving
the leveraged loan market,' said Darin Schmalz, a Fitch ... analyst."
October 2 - Bloomberg (Bryan Keogh): "Yields over benchmark rates on US
speculative-grade bonds widened to the highest on record�. Merrill Lynch
... data show. The gap between high-yield bonds and similar-maturity Treasuries
jumped 28 bps to 1,124 yesterday, the most since Merrill began compiling spread
data ... in Dec. 1996. The previous high was 1,120 basis points on Oct. 10,
2002."
October 3 - Bloomberg (Justin Carrigan): "Money-market rates in Europe rose to
records ... The euro interbank offered rate, or Euribor, that banks charge each
other for three-month loans increased to an all-time high of 5.34% today ...
The Libor-OIS spread, a gauge of cash scarcity among banks, widened to a record
and Asian bank rates climbed to the highest levels in at least nine months."
October 3 - Bloomberg (Denis Maternovsky and William Mauldin): "Developing
nations' borrowing costs jumped to the highest in four years compared with US
rates while stocks headed for the worst week since 2002, as the global banking
crisis drives investors from emerging markets ... The extra yield investors
demand on developing-nation bonds over Treasuries increased 14 bps to 4.45
percentage points, the highest level since 2004, JPMorgan Chase & Co.'s
EMBI+ Index shows."
October 3 - Bloomberg (Katherine Burton and Tom Cahill): "Maverick Capital
Ltd., Greenlight Capital LLC and The Children's Investment Fund Management LLP
fell more than 12% in September as stock hedge funds posted record monthly
losses and braced for client defections. Lee Ainslie's Maverick Capital
declined 19.5% and Greenlight Capital, run by David Einhorn, was down 12.8%,
according to investors ... Children's Investment, overseen by Chris Hohn ...
fell 15%... Stock hedge funds fell an average of 8.6% in September, the biggest
one-month loss since Hedge Fund Research Inc. began collecting data in 1990."
September 30 - Bloomberg (Alexis Leondis): "Reserve Management Corp.'s decision
to liquidate its Primary Fund, the money-market mutual fund that had $40
billion of Redemptions, has investors in other Reserve funds wondering if and
when they will get their cash. 'No one has told me when I'll get a payout. Both
times I have called Reserve, it's the same answer - no news,' said Eric Olsen,
44, a software professional in Seattle, who has most of his retirement savings
in the Reserve US Treasury Fund. Olsen said his confidence is waning and he
assumes he will lose money if the Treasury Fund is eventually liquidated.
Reserve Primary Fund fell to 97 cents a share on Sept. 16 from losses on
short-term debt issued by Lehman Brothers Holdings Inc. It was the first
registered money-market fund in 14 years to fall below the $1-a-share price
paid by investors, known as 'breaking the buck.' All 23 Reserve funds are
closed to new investors and redemptions for funds, excluding Primary, have been
delayed."
October
2 - Bloomberg (David Olmos and David Mildenberg): "Wachovia Corp. curbed
access to a $9.3 billion investment fund used by more than 900 colleges to
pay salaries, maintenance and other expenses and said it plans to sell the portfolio
by the end of the year. Colleges can only redeem 34% of their investments
in the short-term Commonfund because of the 'liquidity squeeze,' said
Laura Fay, a spokeswoman for ... Wachovia ... Fay said the 'unprecedented environment'
in the market contributed to Wachovia's decision to curtail the fund
and plan its closure by Dec. 31. Whether the fund can provide all of
the money to the colleges 'depends if some of the pressure eases in the market
place,' Fay said. 'Our intent is to unwind the portfolio in as prudent a way as
possible and provide as much liquidity as we can.'"
October 1 - Bloomberg (Neil Unmack): "Sigma Finance Corp., the $27 billion
investment company run by London-based asset manager Gordian Knot Ltd., may
hand 'significant' losses to bondholders if lenders start a firesale of assets,
Moody's said ... One of Sigma's lenders served it a notice of default,
prompting the termination of a short-term loan agreement ... That may cause
other banks to close the contracts, known as repurchase agreements, Moody's
said. To recover their investments, those banks may sell the assets Sigma
pledged as collateral on the loans. Sigma posted $25 billion of its assets to
banks under the repurchase agreements, known as repos, leaving $2 billion to
repay $5.9 billion of bonds."
October 1 - Bloomberg (Neil Unmack): "Sigma Finance Corp., the $27 billion
structured investment vehicle managed by Gordian Knot Ltd., said it will cease
trading and may appoint a receiver as a result of financial-market turmoil. 'In
the meantime, both Gordian and Sigma are taking all necessary steps to ensure
that the interests of all creditors of Sigma are safeguarded,' the fund said
... 'Sigma will not be making any payments to counterparties during this
period.'"
October 2 - Bloomberg (Ambereen Choudhury and Elisa Martinuzzi): "The pace of
mergers and acquisitions declined 28% this year as the credit crisis checked
companies' ability to fund deals ... Companies announced takeovers valued at
$2.37 trillion in the first nine months of the year, down from the record $3.29
trillion in the year-earlier period ... The value of US mergers dropped 35%,
while dealmaking in Europe and the Middle East declined 28%, the data show.
Only takeovers in Asia, excluding Japan, increased, showing an 11% gain."
October 3 - Bloomberg (Maria Levitov): "Russia faces a 'very difficult
situation' on the interbank loans market as banks have all but stopped lending
to each other, Interfax cited Deputy Finance Minister Dmitry Pankin as saying."
October 1 - Bloomberg (Bradley Cook): "Russian companies must repay $120
billion of foreign loans by 2010, Interfax reported, citing central bank First
Deputy Chairman Alexei Ulyukayev. About $40 billion of that is due this year
and $80 billion next year."
Currency Watch
October 3 - Bloomberg (Carlos Caminada): "Aracruz Celulose SA, the world's
biggest eucalyptus-pulp maker, dropped the most in a decade ... after saying it
may lose about $1 billion from derivative investments ... The Brazilian
currency's 22% slump since Aug. 1, after a four-year winning streak, is leading
to losses for commodity exporters who sought to hedge against a weaker dollar."
The dollar index surged 4.4% to 80.31. For the week on the downside, the
Brazilian real declined 9.8%, the Australian dollar 6.9%, the Norwegian krone
6.2%, the Swedish krona 6.1%, the Euro 5.7%, the Danish Krone 5.7%, the South
Korean won 5.6%, the South African rand 4.8%, the Canadian dollar 4.5%, the
Mexican peso 4.3%, and the British pound 3.9%. Examining this week's rout in
some of the "emerging" currencies, the Iceland krona declined 16.3%, the
Romanian leu 10.6%, the Hungarian forint 8.2%, the Czech koruna 7.3%, the
Polish zloty 6.9%, the Turkish lira 6.3%, the South Korean won 5.6%, and the
Chilean peso 5.4%.
Commodities Watch
October 3 - Bloomberg (Glenys Sim): "Copper, corn and silver drove commodities
toward their biggest weekly decline in more than 50 years on concern that the
worst financial crisis since the Great Depression will push the US into
recession. Commodities,
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