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the global debt crisis turns increasingly ugly, the Great Credit Bubble continues
to inflate at home. By Douglas C. Noland from Prudent Bear Mutual Fund 17th July, 2001. Nothing like global financial crisis to excite U.S. equity players. For the week, the Dow jumped almost 3%, with the S&P500 adding 2%. Economically sensitive issues shined, as the Transports surged 7% and the Morgan Stanley Cyclical index jumped 5%. The Morgan Stanley Cyclical index now sports a double-digit year-to-date gain. For the week, the Morgan Stanley Consumer index was unchanged and the Utilities declined 2%. The broader market enjoyed gains, with the small-cap Russell 2000 adding 2% and the S&P400 Mid-Cap index gaining 1%. Technology stocks rallied sharply, with the NASDAQ100 and Semiconductors jumping 5%, and the Morgan Stanley High Tech index adding 6%. The Street.com Internet and NASDAQ Telecommunications indices were up 1%. Biotech stocks came under heavy selling pressure, with the AMEX Biotechnology index dropping 5% for the week. Despite a late week rally, the S&P Bank and AMEX Securities Broker/Dealer indices ended largely unchanged. With bullion adding $1, the HUI Gold index gained 3%.The U.S. credit market enjoyed gains, although they were unimpressive considering the global backdrop. For the week, two-year Treasury yields declined 5 basis points to 4.08%. The yield curve generally flattened this week, with 5-year yields declining 8 basis points (4.75%) and 10-year yields 13 basis points (5.22%). Long-bond yields declined 11 basis points to 5.62%. Mortgage-backs somewhat underperformed, with yields declining 10 basis points. Agency yields generally declined 12 basis points. The benchmark 10-year dollar swap spread added 1 to 88. Unstable global currency market conditions continue, although the dollar index gained only slightly this week. Broad money supply surged $42.8 billion last week, making it $696.5 billion since the end of October, a 15% growth rate over 35 weeks. Institutional money market fund assets increased almost $18 billion last week, and have now expanded by $300 billion since October, a growth rate of 62%. This afternoon from Larry Kudlow: "There are not enough dollars being created by the Fed...it is incumbent that the Fed start expanding the monetary base. It should be growing closer to 10% than four and one-half percent…" Standard and Poor’s reported that 101 companies defaulted on $57.9 billion of debt during the first half, easily surpassing the $42.3 billion for all of last year. Defaults are on pace for 3.81% of total S&P rated debt, already nearing record levels from 1991. While the global debt crisis turns increasingly ugly, the Great Credit Bubble continues to inflate at home. MBNA, "the world’s largest publicly traded credit card company," this week reported a 35% year over year increase in company revenues. The company’s total managed loan portfolio jumped 18% (y-o-y) to $90.4 billion. MBNA also reported an 18% growth rate for customer purchase volume during the quarter, while adding 2.2 million new accounts (190,000 over the Internet). According to the company, "The typical new Customer has a $70,000 annual household income, has been employed for 11 years, owns a home, and has a 17-year history of paying bills promptly." While the company securitizes a large portion of its loans, it has nonetheless expanded its assets by 28% over the past year to $40.4 billion. Total assets have increased 137% since 1996. During the quarter, credit loses increased to 4.82%, compared to 4.35% the previous quarter and 3.95% last year. Elsewhere, J.P. Morgan’s weekly report on bankruptcies had about 25,000 new filings last week, 20% above year ago levels. Year-to-date, bankruptcy filings are running up 23%, with MasterCard International forecasting a 21% increase in bankruptcies to 1.5 million this year. Also catching my eye was the headline "Bank of Marin Reports Record Earnings Growth…" This California bank reported a 30% increase in loans for the year.From company CEO Stanford L. Kurland: "Countrywide established new all-time records in June for all three key production benchmarks: fundings, applications and pipeline. Maintaining a trend, June fundings provided the fourth consecutive monthly record at $11.4 billion, 108 percent higher than in June 2000. Refinances are not the only driver as purchase fundings also set a new record at $5.9 billion and provided 52 percent of total fundings. Record average daily applications of $737 million were 104 percent higher than last year. The record pipeline of loans in process of $18.7 billion is 96 percent higher than last year. All-time highs for applications and pipeline are leading indicators that fundings should remain strong in the coming months." Along with surging refinancings, purchase fundings were up 29% and home equity fundings up 52% from last year.Wednesday, the Mortgage Bankers Association reported a sharp drop in applications to refinance. The weekly index dropped 20% to the lowest level since December. Purchase applications continue to demonstrate resiliency, with the weekly index almost unchanged from one year ago. And while it does take weeks for the pipeline of funded mortgages to make its way onto the balance sheets of Fannie Mae and Freddie Mac, this historic refinancing boom with its powerful liquidity affect for the U.S. financial system has clearly passed its peak. The impact of this liquidity surge has been evident in booming asset-backed security (ABS) issuance. According to Thompson financial services, year-to-date home-equity-backed issuance of $50 billion is up 35%, with $41.1 billion of auto-backed issuance up 39%. Credit card-backed issuance of $40.8 billion has surged 76%, and will soon surpass 1999’s total issuance of $41.6 billion. Total year-to-date ABS issuance of $187.4 billion is running 16% above last year. Of total ABS, home equity comprises 26.7%, auto 21.9%, credit card 21.8%, student loan 2.4%, manufactured housing 1.4%, equipment 1.4% and "other" 24.5%. From Hedgeworld.com: "Convertible arbitrage, a stalwart strategy for many funds of funds, has suffered from sub-par performance over the last few months. Some industry observers, citing declining market volatility, shrinking convertible premiums, and a significant increase in new client assets, are calling for the strategy to earn less-than-stellar returns until market conditions become more favorable." http://www.investavenue.com |
