Today's Tidbits

Bank De-Levering Causes Lending to Contract at Fastest Pace Ever Recorded
From Goldman: “There are now also some troubling signals in the weekly bank lending data published by the Fed. Over the last 13 weeks, total bank credit -- which comprises all loans, leases, and securities holdings by commercial banks operating in the US -- has fallen by 9.1% (annualized) in seasonally adjusted terms. This is the fastest rate of decline in the history of the series, which stretches back to 1973. Unlike in 2007 H2, when strong credit extension by the banking sector partially offset the disruptions in the securitization markets, bank credit restraint has thus now started to reinforce the weakness elsewhere in the financial system. This could be the first hard evidence that our "leveraged losses" story -- i.e. banks curtailing lending in response to the depletion of their equity capital and a reduction in target leverage -- is really starting to bite.”
From Citi: “With bank balance sheets still under pressure there is increasing likelihood of the 'adverse feedback loop' between the financial system and the real economy gaining traction.”
From UBS: “…we have great fear that the historic pull-back by the banks from the loan markets will have serious, long-term ramifications for the US economy.”
BIS Warns of Risk of a Severe Slowdown in US
From The Wall Street Journal: “The global economy may be close to a "tipping point" that could see it enter a slowdown so severe that it transforms the current period of rising inflation into a period of falling prices, the Bank for International Settlements said Monday. In its annual report, the central bank for central banks said the impact of rising food and energy prices on consumers' incomes, combined with heavy household debts and a pullback in bank lending, may lead to a slowdown in global growth that "could prove to be much greater and longer-lasting than would be required to keep inflation under control." "Over time, this could potentially even lead to deflation," it said…The BIS said that in the early part of this decade, central banks had failed to set interest rates high enough to restrain an unsustainable credit boom…To be sure, the BIS regards a slide into deflation as an unlikely outcome, and for now rising inflation is a more imminent danger than a severe slowdown…While a severe slowdown is not inevitable, the BIS believes that the risks of a sharp downturn are very real, and centered on the financial system. It warned that the process of cutting back on borrowing after many years of accumulating debt could lead to "much slower growth than is generally expected." Within the financial sector, the BIS said the reduced availability of credit could force some institutions to sell assets at a time when buyers are hard to find -- an outcome that could lead to another round of price declines and losses at banks. "The impact of such fire sales on prices, and on the capital of financial institutions, could be substantial," it said. Tighter credit conditions could also hit non-financial companies and households hard, increasing defaults on bank loans and placing financial institutions in even greater difficulty. The BIS said the U.S. economy is most at risk from problems in the financial system. But it added that there are "suspicions that a number of other countries with low household savings rates might be similarly, if less significantly, affected." And it warned that while the U.S. dollar's depreciation against other major currencies has so far been "remarkably orderly," that might not continue to be the case. "Foreign investors in U.S. dollar assets have seen big losses," it said. "While unlikely ... a sudden rush for the exits cannot be ruled out completely."
Mortgage Demand Continues to Weaken as Banks Hoard Capital
From Bloomberg: “Subprime and Alt-A mortgage bonds, trading at or near record lows, may continue their declines as banks limit purchases of some securities and are forced to sell off what they hold, JPMorgan Chase & Co. analysts said. Prices for typical fixed-rate Alt-A bonds rated AAA have tumbled to near an all-time low of less than $84 per $100 of principal from about $87 in April, JPMorgan said. Subprime debt is also down, … AAA bonds lost 5.1 percent in three months, Lehman Brothers Holdings Inc. index data show. A year after the subprime meltdown roiled credit investors, the market for new non-agency mortgage bonds is no closer to reopening. Banks have a ``long way to go,'' after raising about $400 billion of capital, JPMorgan analyst Chris Flanagan said in a report. Banks will need about $115 billion simply to offset downgrades among the $1 trillion of AAA subprime and Alt-A bonds, he wrote, as lower quarter-end prices suggest new writedowns. ``In a world of insufficient capital, value no longer really matters,…A year after the collapse of two Bear Stearns Cos. edge funds began a global credit crisis, investors including Fannie Mae's Paul Norris see few signs of revival in the market for new non-agency mortgage bonds backed by even the safest home loans. ``It's maybe not going to be until the end of the year at least,'' Norris, who helps manage $106 billion of the debt as a director of mortgage portfolio investments at Washington-based Fannie Mae, said at a conference last week. On-agency bonds, once the most profitable home-loan debt for Wall Street, lack guarantees from government-chartered Fannie Mae and Freddie Mack or U.S. agency Ginnie Mae. Issuance of such bonds fell 92 percent to $37 billion this year through May…Other issuance was packaging meant to improve banks' capital ratios or financing options. More than $9 billion were repackagings of existing bonds meant to leave some of the debt less exposed to losses on the underlying loans. ...The drying up of lending facilitated by non-agency bond sales is boosting mortgage defaults by contributing to property- price declines and preventing refinancing, according to UBS analyst Laurie Goodman. Buyers have disappeared amid unprecedented U.S. home-price drops, foreclosure rates and bank losses. Bonds backed by subprime or second mortgages have cost holders an average of 15 percent so far this year, Lehman Brothers index data show. Top-rated bonds backed by Alt-A adjustable-rate mortgages may now fetch $5 to $10 less per $100 than their fixed-rate counterparts, according to JPMorgan. Some junior AAA securities tied to option ARMs, which allow borrowers to pay less than the interest they owe, may sell for $38, according to a June 27 report from Barclays Capital. The last-to-be-repaid of originally AAA rated subprime-mortgage bonds created in first half of 2007 fell last week to $45.89, a Markit ABX index suggests…Total issuance of U.S. mortgage securities may drop 34 percent to $1.4 trillion this year, according to UBS, with the non-agency segment accounting for 9 percent. In 2007, the share was 38 percent, down from a record 55 percent in 2005 and 2006. Non-agency bonds outstanding shrunk $70 billion in the first quarter to $2.13 trillion, after an almost five-fold rise since 2001 that fueled a record housing boom, according to the latest Federal Reserve data. This year, the market may fall by $385 billion, Bank of America Corp. estimates. hat's partly because borrowers are refinancing into fixed- rate loans packaged into agency mortgage securities, a market that may grow $613 billion, up from a record $505 billion last year…Selling bonds backed by even ``super clean'' jumbo loans -- with fixed rates, at least 25 percent down payments and high credit scores -- with interest rates needed to woo consumers is unprofitable at the bond yields now necessary to attract investors, according to a June 20 report from JPMorgan. Jumbo loans are larger than Fannie Mae and Freddie Mac limits, from $417,000 to $729,500 in certain areas.”
Rebate Checks Aren’t Being Spent on Durable Goods
From Merrill Lynch: “As we saw on Friday with that 1.9% bounce in personal income in May, the tax rebates are starting to percolate and the estimate was that the stimulus came to $48 billion during the month, but excluding government transfer payments, real incomes were actually down at a 0.3% annual rate in May. This was the third decline in a row, and is one of the four metrics the NBER uses in its recession methodology…So while the data are now being skewed by the tax rebates, beneath the surface what we see is that organic real wages remain under downward pressure, which is a huge signal that the buying power is going to fade away once the tax cuts run their course post-July. Now, consumer spending did rise a healthy 0.8% in nominal terms in May but fully 60% of that increase was absorbed by groceries, gasoline, utilities and transportation prices. Outside of that, the spending was centered in a select group of soft non-durables - the sort of things that you can stretch a $600 check towards: this included electronics, computers, hand tools, books and magazines, toys, sporting equipment, movies, which soared 25% in one month, restaurants, toiletries, and non-prescription drugs…As mentioned above, people also got caught up in their utility bills where payments surged 6%. And in a real sign of despair, a good chunk of the spending went into lotteries (+0.9%) and casino gambling (+3%). And, they must have been at the blackjack table all night because spending on hotel rooms actually declined 1.6%. In this sense, very little of the spending went into anything that would represent a long-term commitment to the economy - motor vehicles, home furnishings, major appliances, clothing and jewelry either lagged the overall spending gain or declined outright. My favorite indicator for travel plans is luggage sales, and in a month where after-tax income surged 5.3%, buying of suitcases and the like fell 0.4%.”
Reduced Credit Lines Pulling Down FICO Scores as Credit Gard Debt Grows Fast
From AP: “Just as Americans grow more reliant on credit cards to help pay monthly bills, they're being hit with a one-two punch: Card companies are reducing borrowing limits for tens of thousands of consumers, which then can lead to lower credit scores. Those facing this predicament might not even know it until they apply for a loan or another credit car, and then get denied because their credit score has dropped. This is an unintended consequence of the financial world's widespread ratcheting down of risk. Banks and other card lenders are trying to better protect themselves from more massive losses like those they've seen from subprime mortgages. As a result, they are looking for ways to reduce their exposure to cardholders more likely to default. That's why they are lowering credit limits, which means they are reducing the maximum amount of credit extended to an individual, along with boosting card interest rates and allowing fewer balance transfers…As the housing and mortgage markets have collapsed, lenders have also reduced the limits on what are known as home equity lines of credit, or HELOCs. Net home equity extraction fell nearly 60 percent from a year earlier to $205 billion in the first quarter, according to Merrill Lynch. The investment bank also notes that some $1.2 trillion in equity and housing wealth was wiped out in the first quarter alone because of plunging home values. At the same time, revolving credit usage – which includes credit cards – accelerated sharply to a year-over-year growth rate of about 8 percent in recent months. That's the fastest rate in seven years and well ahead of the 2 to 3 percent rate of growth from 2004 through 2006 when home equity lines of credit were a bigger source of cash for consumers, according to Merrill. But as credit cards are used more frequently, that often results in bigger balances left on the cards. What's worrisome is that consumers who are faced with a number of ugly economic scenarios hitting at once – falling home prices, surging commodities costs and a weak job outlook – won't be able to pay their bills….“Business conditions continue to weaken in the U.S. and so far this month we have seen credit indicators deteriorate beyond our expectations,” American Express' CEO Kenneth Chenault said in a statement. That's why card companies including Washington Mutual, HSBC and Wells Fargo are lowering their credit limits, according to data from the consulting firm Institutional Risk Analytics. Consumer advocates aren't saying that is bad news – in fact, they believe it helps prevent cardholders from overextending themselves and is preferred to having a sudden surge in card interest rates…A lower FICO score could make it more expensive for someone trying to borrow money. For instance, someone taking out a $25,000 36-month auto loan would see an interest rate of about 6.4 percent and a monthly payment of $765 if they were in the highest range of FICO scores of 720 to 850, according to Fair Isaac's Web site myFICO.com. That then jumps to an interest rate of 7.3 percent and a monthly payment of $776 for those with a score of 690 to 719 and as much as 15 percent or $866 a month for those with the lowest FICO range of 500 to 589. According to the Comptroller of the Currency, one of the government agencies that regulate U.S. banks, companies must notify cardholders at least 15 days in advance before making changes in the terms of their account, such as lowering the credit limit. But they don't have to explain how that could change an individual's credit score. That puts the burden on consumers to watch out for this. They better so they don't get blindsided.”
MISC
From Barron’s: "In the average bear market, the Dow Jones Industrial Average has fallen 30% and sometimes much, much more. The Dow decline of 2000 through 2003 involved a loss of 55%, the bear of '73-'74 caused a 50% loss and the 1929 market wiped out a full 85% of the Dow's value."
From Barron’s: “S&P500 investors are on the verge of experiencing something not seen for a very long time -- a losing decade. If markets continue their losing streak for a few more months, that is a realistic possibility. The S&P500 is now down 4.8% since June of 1999. To hit the decade mark, the SPX would need to be below the 1998 close of 1,229 -- less than 50 points below Friday's close of 1278.38 come December 31st. This has not occurred since the 1930s.”
From Barclays: “The aggressive sell-off in equities last week suggests the S&P500 is poised to retest its 2008 low, but oversold momentum implies the risk of a snap-back is growing. What is surprising is that the talk of a global slowdown and weaker equity markets is having no impact on commodities, which continue to surge higher. Most surprising of all, copper appears poised to retest its 2008 following the gains last week and the higher oil price. In some part, this could be explained by a weaker dollar but it suggests this is not going to be a straight forward week of trading. In FX markets, risk reduction is the theme with the carry trade under pressure…”
From UBS: “The BIS Annual Report came out earlier this morning and in that report the BIS warned that the unwind of the credit bubble could, after a period of temporary inflation, turn into a deflationary battle that would be hard for global central banks to fight.”
From Lehman: “We aren't going to see any refi driven prepayments for years.”
From PIMCO: “…gross private domestic investment (machines, houses, inventories) has declined by $200 billion since its peak in late 2006.”
From JPMorgan: “The growth/inflation trade-off is getting worse for developed economies. At the same time as inflation is reaching new highs in G3, the Euro area and Japanese economies are weakening into midyear, with the risks skewed to the downside to our already anaemic growth forecasts…How central banks will manage this mix of weakening growth and rising inflation remains unclear. Our calls anticipate a series of one-off moves by the ECB, the Fed and the BoE, but much will depend on exactly how the growth/inflation mix evolves over the next few months. The ECB is set to raise rates next week but it is far from certain what the Fed and the BoE will do. EM policy makers are facing a much more serious inflation problem, with signs of overheating and wage/price acceleration. Their reluctance to respond aggressively to the inflation threat now is eroding their credibility, raising the risk that they will have to move more abruptly next year, damaging their economies and local markets.”
From Lehman: “Stocks are as cheaply priced now as they were in 1974 or 1978, relative to 'risk-free' rates, which suggests that 'stagflation' is no longer viewed as a possibility, but a probability by equity investors.”
From Citi: “CDS spreads have been ticking up ominously in recent sessions as equities come under further pressure. The uptick has not been as dramatic as in previous bouts of 'risk aversion' but we are seeing movements in cross-JPY in FX space which is reminiscent of developments earlier in the year.”
From Merrill Lynch: “During the last week, NYMEX crude oil prices rose US$7.71 (+5.8%) to US$139.64/bbl. Natural gas prices rose US$0.24 (+1.9%) to US$13.11/mmbtu.”
From BMO: “The preliminary estimate for Eurozone CPI jumped 4.0% y/y in June, up 0.3 percentage points from May and the fastest increase since mid-1992.”
From JPMorgan: “…Russia which has become investors’ preferred country for commodity exposure. In contrast, Brazil continues to experience large outflows with $6bn withdrawn over the past month.”
From JPMorgan: “The bottom seems to have fallen out of the UK housing market this spring. UK mortgage purchase applications nosedived to 42,000 in May (consensus 51k), down almost 70% from the November 2006 peak. Recently, we downgraded our house price forecast to show a decline of 12%oya by the end of this year, but risks to this forecast are to the downside. Relatedly, UK consumer confidence declined in June to the lowest on record since the survey began in 1986.”
End-of-Day Market Update
From RBSGC: “Quarter-end, month-end, were the main constraints and motivations for lackluster trading Monday, which left yields little changed from Friday's robust closing levels, but the curve a tad flatter… Stocks managed a small bounce for an inside day. But if anything supported the interest rate market it was stocks -- selectively. Freddie and Fannie both lost about 6%, Lehman was off nearly 10%, but the headlines were merely about the price action itself vs. a new explanation for the price action. And weakness in these issues, the financials in general, are simply par for the course. We note that the S&P Banks and Brokerage indexes are now through their March lows… To underscore the subdued activity, volume amounted to 81% of average.”
From UBS: “Treasuries fell early from the overnight highs--dragged lower by the European debt markets--before grinding all the way back by the 3pm close… Swaps saw good interest in steepener trades, and swap spreads ended mixed on the day. Agencies saw large month-end extensions out of 1-year paper and into 2-3 year maturities. Agencies outperformed Libor by 2bps in the front end and stayed in line the rest of the way. Mortgages saw fast money short covering early in the morning, which pushed MBS 9 ticks tighter to Treasuries and 7 to swaps. Sellers then emerged at the tights and mortgages went back out to only 1 tighter against Treasuries and swaps. Despite the action, volume was fractions of the norm while liquidity was fleeting, at best. It seems summer has arrived.”
From Bloomberg: “Corn fell the maximum permitted by the Chicago Board of Trade and wheat dropped the most in 13 weeks after the government said U.S. farmers planted more of both crops than previously expected.”
From Bloomberg: “Most U.S. stocks fell for a third day, capping the market's worst month in six years, on concern that deepening mortgage losses will force more banks to cut dividends or sell shares at a discount. Wachovia Corp. tumbled to the lowest since 1992 after an analyst said the lender may cut its payout, while Merrill Lynch & Co. and Citigroup Inc. dropped as JPMorgan Chase & Co. said prices for some mortgage securities may sink further. Lehman Brothers Holdings Inc. plunged as traders speculated the fourth- largest U.S. securities firm may be sold for less than its market value. Devon Energy Corp. led gains in oil producers, which sent the Standard & Poor's 500 Index and Dow Jones Industrial Average higher, after analysts increased profit estimates through 2009. Three stocks dropped for every two that rose on the New York Stock Exchange. The S&P 500 increased 1.62 points, or 0.1 percent, to 1,280, paring its retreat this month to 8.6 percent. The Dow added 3.5 to 11,350.01. The Nasdaq Composite Index lost 22.65, or 1 percent, to 2,292.98… The Dow pared its monthly retreat to 10.2 percent, still the biggest June loss for the 30-stock gauge since 1930. The measure dropped 7.4 percent since the end of March for its third-straight quarterly slide, the longest stretch of declines since 1978. The S&P 500 slid 3.2 percent during the quarter, while the Nasdaq increased 0.6 percent… The Financial Select Sector SPDR Fund, a so-called exchange traded fund that tracks U.S. financial stocks, lost 1.5 percent to $20.26, the lowest since March 2003. The shares, known by their XLF ticker, were the second most-traded among stocks and ETFs in New York today… Newly delinquent homeowners outnumbered those who caught up on overdue payments for a 26th straight month in May, the Mortgage Insurance Companies of America, which tracks loans to people who put down less than 20 percent, said today. ``A lot of people are fearing with these financials, as we hear these second-quarter earnings, that there's going to be a lot more writedowns,''… More than $800 billion in announced buybacks last year helped the S&P 500 and Dow average climb to all-time highs in October. The pace has slowed as the U.S. housing slump spurred the longest steak of earnings declines for S&P 500 companies since 2002. U.S.
companies announced $197 billion in planned buybacks this year through June 26, 52 percent less than during the same period last year, according to Birinyi Associates Inc.”
Three month T-Bill yieldrose 7 bp to 1.73%.
Two year T-Note yield fell 1 bp to 2.62%
Ten year T-Note yield unchanged at 3.97%
Dow rose 3.5 points to 11,350
S&P 500 rose 1.5 to 1280
Dollar indexrose .16 to 72.52
Yen at 106.1 per dollar
Euro at 1.575
Gold fell $3 to $925
Oil fell $0.14 $140.1
*All prices as of 5:20 PM