credit bubble bulletin
some interesting snips
Interesting that even Noland is dismissing the inversion of the yield curve
It also seems like he has given up hoping the market goes down
December 29 – Financial Times (Richard Beales): “Junk-rated US companies borrowed a record $295bn in the loan market this year, trumping 2004’s volume, itself a high. Meanwhile, issuance of high-yield bonds dipped 26 per cent this year compared with last year. The contrast partly reflects a transfer of some financing activity to the so-called leveraged loan market from the high-yield bond market, which experienced several rocky patches this year - notably during the turmoil sparked by the rating downgrades of General Motors… Steven Miller, managing director at Standard & Poor’s Leveraged Commentary & Data, says that heavy issuance of collateralised loan obligations - loan portfolios repackaged and sold in slices bearing different levels of credit risk - underpinned demand for loans. That in turn was fuelled by investor appetite for CLO instruments, which offer extra yield compared with direct investments in similarly-rated loans.”
December 28 – CFO Magazine (Stephen Taub): “It looks like 2005 is the hottest year for mergers and acquisitions since 2000, the peak of the stock-market boom. According to a preliminary report by Dealogic released on December 21, just prior to the traditionally quiet holiday week, global M&A volume increased 38 percent, to $2.9 trillion, compared with $2.1 trillion in 2004. In the fourth quarter alone, reported Dealogic, volume topped $783.4 billion, making it the largest quarter of the year and the fourth-largest on record.”
December 26 – BusinessWeek (Roben Farzad): “While workaday traders and portfolio managers were struggling to generate returns in 2005, one corner of Wall Street was thriving: mergers and acquisitions. When the books close on the year, U.S. M&A activity likely will have touched $1 trillion, up from $824 billion in 2004, according to Thomson Financial. Many signs point to an acceleration in deals in 2006. The hottest sectors, according to market watchers: finance, technology, and energy. Plus anywhere cash-rich private-equity funds care to dabble. Record inflows into private-equity funds are giving them plenty of ammunition…”
December 28 – Marketwatch: “Companies planned to shell out record amounts to buy their own shares and other public companies in 2005, which could be a positive sign for stocks next year, TrimTabs Investment Research said… The Santa Rosa, Calif.-based liquidity tracker reported that 1,012 U.S. public companies announced $456 billion in stock buybacks this year, breaking the previous record set in 2004 when 728 companies said they would repurchase $312 billion worth of their own stock. Additionally, TrimTabs reported cash takeovers of public companies amounting to $277 billion were announced in 2005, another annual record.”
Yet nowhere is the Global Liquidity Glut more conspicuous than with this year’s global equities performance. Leading European equity indices enjoyed a stellar year. The major UK index (FTSE100) was up 16.7%, Germany (DAX) 27.1%, France (CAC40) 23.4%, Switzerland (Swiss Mkt) 33.2%, Spain (IBEX35) 18.2%, Italy (Milan MIB30) 13.3%, Netherlands 25.5%, Portugal (PSI) 17.2%, Ireland 18.8%, Sweden (OMX 30) 29.4%, Norway (OBX Stock) 35.5%, Finland (OMX Helsinki) 31.1%, Denmark (Copenhagen 20) 37.3%, Belgium (BEL20) 21.0%, Luxembourg 26.7%, and Iceland (ICEX15) 64.7%.
Gains were generally greater in Eastern Europe. Russia (RTS) surged 83.3%, Austria 50.8%, Hungary 41.0%, Poland (WSE WIG) 33.7%, Czech Republic 42.7%, Romania 50.9%, Ukraine 35.8%, Slovakia 26.4%, Estonia 48.0%, Latvia 63.5%, Lithuania 41.0%, Bulgaria 32.0%, Croatia (Zagreb) 27.2% and Greece 31.5%.
Liquidity indulged both Asian markets and economies, with the unrelenting Chinese economic boom and reinvigorated Japanese equities major 2005 developments. Japanese stocks generally enjoyed their strongest gains since 1986. The Nikkei 225 surged 40.2%, with the Topix up 43.5%. The Topix small cap index posted a 58.7% advance. South Korea’s KOSPI index surged 54.0%, closing today at an all-time high. India’s BSE surged 42.3%, ending the year at a record high. Indonesia (Composite) gained 16.2%, Singapore 13.6%, Philippines 15.0%, Vietnam 28.5%, Sri Lanka 27.6%, Thailand 6.8%, Taiwan 6.7%, and Hong Kong (Hang Seng) 4.5%. Malaysia (Composite) slipped 0.8% and Chinese equities continued their struggle. The Shanghai A index fell 8.2% and the Shanghai B sank 18%. Australia (All Ordinaries) gained 17.6% and New Zealand (NZX 50) 10.0%.
With Asian demand more than partially responsible for crude’s 40% gain this year, the already rampant flow of liquidity to the Middle East turned into a gusher. Saudi Arabia’s major equities index surged 104.1%, as a historic mania took hold. Kuwait (Global) rose 67.6%, United Arab Emirates 131.3%, Egypt (Hermes) 131.7%, Israel (Tel Aviv 25) 33.3%, Turkey (ISE 100) 59.3%, Bahrain (All Share) 23.8%, Qatar 70.2%, Jordan 92.9% and Oman 44.5%. Elsewhere, Pakistan gained 53.7%, Lebanon 106%, Cyprus 51.6%, Malta 62.3%, South Africa (Top 40) 44.1%, Morocco 19.8%, Tunisia 21.1% and Kenya 35.7%.
Closer to home, Canada’s TSE Composite index jumped 21.9%. Liquidity gushed into Latin America as well. Mexico (Bolsa) surged 37.8%, Brazil (Bovespa) 27.7%, Argentina (Merval) 12.2%, Chile (Select) 9.35%, Peru (General) 29.4%, Colombia 118.9%, Costa Rica 28.4%, and Bermuda 21.1%. Venezuela fell 32.4%.
Ten-year Treasury yields ended the year at 4.39%, a one basis point inversion from the two-year’s 4.40%. With all the attention the so-called “inversion” is receiving, I’ll make a few brief comments. First off all, 10-year yields remain above the current 4.25% overnight “Fed funds” borrowing rate. Three-month T-bills still yields remain slightly below 4%. It is also worth noting that “repo” (short-term securities funding) rates these days consistently trade below Fed funds, often significantly. More importantly, we today operate in a Global Wall Street/Securities Finance and massive Global Leveraged Speculating Community environment. Traditional pricing signals provided by the shape and steepness of the yield curve cannot be expected to operate in today’s most atypical environment.
The Marginal Buyers of Treasury and Agency securities these days are foreign central banks deluged with dollar liquidity (and insignificant funding costs). There is also the key issue of global leveraged players tapping inexpensive funding sources, such as borrowing in yen, euros and francs. It would be quite illuminating to know the scope of liquidity created in the process of borrowing cheaply in Japan to leverage in higher-yielding U.S. and emerging debt securities. A fortune could have been (and likely was) made borrowing in Japan to purchase, say, Brazilian bonds. The Brazilian real rose better than 30% against the yen, while Brazil’s long-term bonds posted double-digit returns. It would, as well, be fascinating to know the size of short positions in Japanese government bonds used as a cheap funding source for securities speculation across the globe. There is certainly no inversion between 10-year U.S. yields and overseas borrowing costs. Surely, today’s 2/10 Treasury “inversion” is symptomatic of the Global Liquidity Glut, providing little in the way of relevance for economic analysis.
As for economic analysis, the fourth quarter provided further evidence that Europe and Japan are emerging from their respective malaise. Concurrently, perceptions hardened that the U.S. housing market was softening. The risk of over-heating and the necessity for problematic Fed tightenings have apparently abated. Energy prices are generally thought to have peaked. But this sanguine view downplays Global Liquidity Glut dynamics. The global monetary system has completely lost its bearings, and such a circumstance is not known for sanguine outcomes. The unbalanced global economy is more energized today than it was one year ago, while financial conditions are more accommodative. It is conventional wisdom that U.S. markets and the economy are now several years into a post-Bubble recovery. The past year has provided convincing evidence that the protracted U.S. Bubble has become only more unwieldy and global in stature.
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