I won't make too much out of one session, but it was interesting to watch the dollar immediately succumb to continued selling pressure. The dollar index closed today below 87 for the first time since November 1996. Bonds were aggressively sold while commodities were bought. Ten-year Treasury yields jumped 12 basis points to the highest level in a month. Even before the strong ISM report, U.S. fixed income and equities were noticeably underperforming Europe. The CRB index added 1% today. An index of Emerging Markets American Depository Receipts (ADRs) was up 3.4% this afternoon.

The Fed's Foreign (Custody) Holdings of U.S. Debt increased $6.2 billion last week and $12.7 billion over two weeks. For the year, Custody holdings surged $216 billion, or 25%, to $1.067 Trillion.

Total Bank Credit increased $16.7 billion over the past two weeks. Securities holdings added $2.1 billion. Loans & Leases were up $14.6 billion. Commercial & Industrial loans dipped $3.7 billion, and Real Estate loans declined $5.2 billion. Consumer loans added $3.9 billion and Securities loans were about unchanged. Other Loans jumped $19.3 billion.

Broad money supply (M3) declined $30 billion over the two weeks ended 12/22. Currency was up $1 billion and Checkable Deposits were up $10.5 billion. Savings Deposits dropped $18.4 billion and Small Denominated Deposits dipped $3.6 billion. Retail Money Fund deposits were down $8.2 billion and Institutional Money Fund deposits declined $5.9 billion. Large Denominated Deposits added $2.1 billion. Repurchase Agreements declined $9.3 billion and Eurodollars were down $0.4 billion.

Junk bond funds saw inflows of $92.1 million (from AMG), the ninth straight week of positive flows.

Next week I will take a shot at "Issues 2004," but 2003 is deserving of an end of year recap. It was an historic year for the Great Credit Bubble, with U.S. led lending, speculating and liquidity excess prevailing across the globe like never before.

January 2 - Dow Jones (Tom Sullivan and Christine Richard): "Low interest rates and a recovering economy fueled a record $4.938 (up 25% y/y) trillion in global private sector bond sales for 2003. The final data, released Wednesday by Thomson Financial Securities Data, underscore just how big the bond business has become. The numbers include issuance of corporate debt, federal agency debt, taxable municipal bonds, debt backed by mortgages and debt backed by assets such as credit card receivables and home equity loans. By comparison, issuance in 2002 totaled $3.938 trillion, according to Thomson. In 1990, global private sector debt issuance stood at just over $500 billion, or about one-tenth of this year's level... For 2003, however, debt issuance climbed in almost all categories and there were records in many. Nearly 60% of the total debt sold in 2003 was issued by companies located in the Americas, with the vast majority of that issuance by U.S. corporations."

Here in the U.S., the Dow Jones Industrials gained 25%, the S&P500 26%, Dow Transports 30%, and Dow Utilities 24%. The NASDAQ100 surged 49% and the NASDAQ Composite 50%. In the technology sector, the Morgan Stanley High Tech index jumped 65%, the Semiconductors 76%, The Street.com Internet index 79%, and the NASDAQ Telecommunications index 69%. The small Cap Russell 2000 gained 45% and the S&P400 Mid-Cap index was up 34%. The AMEX Biotech index gained 45%. The AMEX Securities Broker/Dealer index jumped 59% and the Philly/KBW Bank index gained 30%. The NYSE Financial index gained 28% and the "NASDAQ Other Financial" index was up 71%.

The leading S&P groups included Internet Software and Services (up 175%), Diversified Minerals and Mining 144%, Homebuilding 97%, Semiconductors 96%, Computers & Electronics 93%, Internet Retailers 90%, Wireless Services 78%, Office Electronics 71%, and Construction & Farm Machinery 70%. For the fourth quarter, the leading S&P groups included Steel (up 49%), Aluminum (45%), Diversified Metals & Mining 43%, and Automobile Manufacturing 39%.

January 1 Bloomberg - "More than 90 percent of the stocks in the Standard & Poor's 500 Index rallied in 2003, the benchmark's broadest advance in at least 23 years... The biggest gains came in shares of companies such as Avaya, which had little or no earnings at the start of 2003 and stock prices in the single digits. Avaya, unprofitable in 2002, made money in its fiscal third quarter... 'We've been very surprised by the strength of the lower-quality, unprofitable companies,' said James Gribbell, who helps manage $1.5 billion at David L. Babson & Co... 'Companies with lower returns on capital and low returns on equity have outperformed more highly profitable companies by two to three times.'"

January 2 - Dow Jones (Mike Esterl): "Equities enjoyed a banner year around the globe in 2003, but nowhere were the returns as dramatic as in emerging markets. Emerging market stocks soared 17% in the fourth quarter and 52% for the full year in dollar terms, according to Morgan Stanley's benchmark MSCI index... Thailand was the top equities performer among developing countries, jumping 134% in dollar terms... China, the World's fastest-growing economy, watched its stocks soar 81% last year, including a 34% rise in the fourth quarter... Turkey was the No. 2 performer among emerging market equities, lifting 122% as the country continued to edge back from financial collapse... The hottest region for investors in 2003, though, was Latin America, where equities rose 67% amid receding insolvency fears..."

Other gains (in local currencies) included Mexico's Bolsa index up 44%, Argentina's Marvel up 104%, Chile up 48%, Venezuela 177%, Peru 75%, Columbia 41%, and Jamaica 49%.

In Europe, UK's FTSE 100 gained 14%, Paris' CAC40 16%, Germany's DAX 37%, Spain's IBEX 28%, Italy's Milan 12%, Sweden's OMX 29% and the Swiss Market Index 19%. Emerging European bourses posted strong gains. Greece jumped 30%, Poland 45%, Czech Republic 43%, Russia 58%, and Hungary 20%.

Equities surged throughout Asia. Japan's Nikkei 225 added 24.5%, Hong Kong's Hang Seng 35.0%, Taiwan 32%, South Korea 29%, New Zealand 25.6%, Thailand 117%, Indonesia 63%, India 76%, Singapore 32%, Malaysia 23%, and Philippines 42%.

Stock gains were buttressed by collapsing yields and surging global debt issuance.

January 2 - Dow Jones (Angela Pruitt): "In another stellar year, emerging market debt posted its best performance in 2003 in seven years, while it also outshined its fixed-income peers. The asset class posted a whopping 28.825% return last year as measured by J.P. Morgan's widely-tracked Emerging Markets Bond Index Plus (EMBI+), double the 14.24% return booked in 2002. The index closed out the year with a spread of 418 basis points over U.S. Treasurys, compared with 765 basis points at the end of 2002. The gains in emerging markets dwarfed the 2.44% rise in U.S. Treasury bonds and were a tad better than the 27.9% return seen in the U.S. high-yield sector in 2003... The last time emerging market debt had a better year was in 1996, when the EMBI+ rose 39%. It has booked positive returns in four of the last five years, however. There wasn't one sovereign listed on the 19-country EMBI+ that posted a negative return."

Domestic Credit Inflation Watch:

For the year, Treasury yields rose moderately as the yield curve steepened. Two-year Treasury yields rose 22 basis points to 1.83%. Five-year yields jumped 51 basis points to 3.25% and 10-year yields rose 43 basis points to 4.25%. Long-bond yields increased 30 basis points to 5.075%.

Risk assets dramatically outperformed. The S&P Corporate Investment Grade index spread to Treasuries narrowed 77 basis points to 164. Junk bond spreads collapsed, with the S&P Speculative Grade index spread to Treasuries sinking 550 basis points.

December 31 - Bloomberg - "U.S. corporate bonds finished their best year since at least 1986 as an expanding economy boosted investors' confidence in the ability of companies to make debt payments. The extra yield, or spread, investors demand to own corporate debt rather than Treasuries narrowed to 93 basis points from 185 a year ago, according to New York-based Merrill Lynch & Co. One basis point is 0.01 percentage point. The spread is the narrowest since August 1998."

December 31 - Bond Week: "Nearly all of the performance measures indicate just how solid of a year the high yield market had, but perhaps the best one has to do with the growth in supply. New issuance rose a whopping 95% this year, to $112 billion, according to Standard and Poor's. Meanwhile, positive fundamental and technical developments helped create one of the best years in the junk bond market in recent memory... The Merrill Lynch High Yield Index posted a 25% return up to the end of November."

According to Merrill Lynch, "The all US Convertibles index picked-up 8.5% in 4Q03 and is up 27.2% in 2003 as underlying stocks expanded 58.0%." Speculative Grade Convertibles surged 12.0% during the quarter (underlying stocks up 20.1%) to end the year up 42.0%.

According to Thomson Financial Services, Total U.S. Debt Issuance surged 19% to $3.209 Trillion. Long-term Issuance increased 20% to $2.752 Trillion, while Short-term Issuance was up 9% to $444 billion. High-grade Corporate Issuance increased 20% to $659 billion. MBS issuance increased 12% to $900 billion. Issuance of Convertible securities increased 61% to $96.4 billion. Preferred issuance surged 98% to $35.5 billion. Yankee (foreign dollar denominated debt) Issuance increased 58% to $93.6 billion.

Bloomberg tallied CMO (collateralized mortgage obligations) issuance of $1.052 Trillion, up 26% from 2002 and almost double volume from 2001. Bloomberg's total Agency MBS Pool issuance through November sums to $2.0 Trillion, up about 40% from the comparable total from 2002.

January 2 - Bloomberg: "Citigroup, UBS Financial Services and Merrill Lynch & Co. took the top municipal bond underwriting slots as state and local governments borrowed a record $379.1 billion to close budget gaps at low interest rates... Total municipal bond issuance rose 6.5 percent from a record $355.9 billion in 2002."

January 1 - Chicago Sun-Times (David Roeder): "Chicago's futures markets Wednesday celebrated a record-setting year in business for 2003... For the first time in any year, combined volume at the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT) topped 1 billion contracts in 2003. Both exchanges easily shattered volume records set just a year ago. Many trends worked in the exchanges' favor. The return of U.S. government deficits sparked volume in futures on Treasury debt. Fluctuations in the dollar brought out the foreign currency traders. Wild cards ranging from quirky weather to mad cow disease encouraged trading in agricultural futures. And perhaps most important potent of all, an appreciating stock market led to more activity in stock index futures, a product that increasingly became the domain of electronic traders. Merc officials said 2003 volume was 640 million contracts, up 15 percent from last year. The Board of Trade reported a yearend count of 454 million contracts, about a third more than its result in 2002." S&P 500 index volume was up 23% for the year. December volume at the CME was up 53%.

Currency Watch:

December 31 - Dow Jones (Jamie McGeever): "What a year it was for the dollar and there's little sign of respite on the horizon. The world's premier reserve asset, trading currency and traditional store of value in times of war and global political tension plummeted to new depths in 2003, with the speed of its fall in the last quarter surprising even the most seasoned currency veterans and long-time dollar bears. Hit by a wave of negative sentiment, the greenback closes the year at its lowest point against the euro since that currency' inception on Jan. 1, 1999 and at multiyear troughs against most other major and second-tier counterparts."

December 31 - Bloomberg: "Canada's dollar wrapped up its biggest year against the U.S. dollar in more than five decades, as international investors flocked to Canadian debt securities for their higher yields. The Canadian dollar surged 21 percent, the most since 1951 when the Bank of Canada began recording foreign-exchange data."

December 31 - Bloomberg: "The Australian dollar, the best-performing major currency this year, had its biggest annual gain since the government allowed it to trade freely 20 years ago as the country's higher yields lured investors. The Australian currency has risen 34 percent against the U.S. dollar this year."

The British pound ended the year at the highest level against the dollar since September 1992, up 11% for the year. The South African rand rose 28%, New Zealand dollar 25%, Chilean peso 22%, Swedish krona 21%, the euro 20%, and Danish krone 20%.

December 31 - Bloomberg: "The Brazilian real rose 22 percent in its first yearly gain against the U.S. dollar as record exports and slowing inflation restored investor confidence in the country. The real, created on July 1, 1994, was the sixth-best performing currency against the U.S. dollar this year among the 60 currencies tracked by Bloomberg, as President Luiz Inacio Lula da Silva restored investors' confidence that Brazil would repay its debts and that the economy would grow. 'We see Brazil in an increasingly virtuous cycle, the inflation dynamics have been improved, and everything is working together because monetary and fiscal policy is on track,' said Mohamed El-Erian, who manages $12 billion of emerging market debt..." In a harbinger of a stronger 2004, Brazil posted a record 2003 trade surplus of $24.8 billion. Exports were up 21% y/y to $60.2 billion.

Commodities Watch:

The CRB index ended the year up 9%, with the Goldman Sachs Commodity index up 11%. The Journal of Commerce Industrial Commodities composite index was up 22%. By index component, Textiles were up 10%, Metals 38%, Petro 20%, and Miscellaneous 20%. Gold rose almost 20% to approach a 14-year high.

Global Reflation Watch:

December 30 - Bloomberg: "Japan sold its currency in December for a 10th month this year, according to the Ministry of Finance, trying to stem gains that threaten the nation's exports and may slow economic growth. The Bank of Japan sold 2.25 trillion yen ($21 billion) from Nov. 27 through Dec. 26. The figure boosts yen sales for 2003 to a record 20.1 trillion yen."

My tally has Bank of Japan foreign reserves (largely dollars) up 43% for the year to about $645 billion. The expansion of foreign central bank balance sheets has been nothing less than amazing, providing a rather conspicuous explanation for this year's unprecedented global liquidity.

December 31 - Dow Jones: "Total issuance of international bonds (global bonds, eurocurrency bonds and foreign bonds) rose 37.5% this year to a record $2.2 trillion, says Thomson Financial. The buoyancy of the securitization market, which increased by 71% from the previous year, contributed to this result. Meanwhile, sovereigns overall increase was 39%."

December 31 - Bloomberg: "OAO Gazprom, the Russian natural gas producer, and Petroleo Brasileiro SA, a state-owned oil company, led a record $88 billion of bond sales by emerging-market borrowers in 2003, tapping into demand for higher-yielding assets after U.S. interest rates fell to four-decade lows. Companies in developing nations helped fuel a 70 percent increase in the debt by selling $44.5 billion of international bonds, surpassing government sales for the first time. Latin American companies alone tripled sales to $17 billion. The surge in sales came as credit ratings were raised for Russia and Argentina and amid prospects for faster global economic growth. The premium emerging market bonds pay above U.S. Treasuries narrowed to 4.18 percentage points from 7.65 percentage points at the end of last year... The demand for yield helped boost flows into emerging-market funds this year. Funds that had $13.6 billion at the start of the year showed $3 billion was added during 2003, the most since EmergingPortfolio.com Fund Research in Cambridge, Massachusetts began collecting the data in 1995."

January 1 - Financial Times: "Hedge fund assets are expected to grow by 20 per cent to almost $700 billion in 2004, fuelled by US and Japanese institutional investment, in spite of growing regulatory scrutiny...Japanese investment in hedge funds has risen three-fold in the past two years. Japan's $300bn Government Pension Investment fund, the biggest in the world, said last month it would ask its government for permission to begin investing in hedge funds."

December 28 - Bloomberg: "Japan's Economic and Fiscal Policy Minister Heizo Takenaka said the proportion of bad loans held by large banks in Japan is declining quicker than he expected and is approaching a level of less than 5 percent. 'Japan's financial appearance is changing,' Takenaka said...including action by the banks, 'is in line with what we assumed a year ago, or rather a bit faster.'"

January 1 - Bloomberg: "South Korean exports in December rose 32.5 percent from a year earlier to $19.9 billion, the Ministry of Commerce, Industry and Energy said. Imports rose 22.1 percent to $17.6 billion, giving the country a $2.3 billion trade surplus for the month... For the year, exports rose 19.6 percent to $194.3 billion, while imports were up 17.5 percent to $178.8 billion, giving a surplus of $15.5 billion."

January 1 - Bloomberg: "India's exports accelerated in November as Steel Authority of India Ltd. and other steel companies stepped up sales to China and automobile companies sold more abroad as competition from rivals increased at home. Exports rose 13.7 percent to $4.49 billion from a year earlier after gaining 5.1 percent in October... India's oil imports rose 12.4 percent to $12.7 billion in the eight months through November..."

December 31 - Bloomberg: "India's economy grew at its fastest pace in more than six years in July to September...putting it on target for growth in excess of seven percent in the current fiscal year. The $505 billion economy, Asia's third biggest after Japan and China, expanded 8.4 percent from a year earlier in the quarter, accelerating from 5.7 percent growth in the three months to June 30..."

December 31 - Bloomberg: "South Africa's central bank bought $1.1 billion in the currency markets in November as it bolstered its foreign-currency reserves. The South African Reserve Bank's net foreign reserves, known as the net open position in foreign currency, rose to $3.77 billion at the end of November, from $2.69 billion the month Before..." "South African private borrowing growth accelerated in November after the central bank cut its benchmark lending rate to the lowest in 23 years, boosting demand for credit. Borrowing by households and companies, known as private-sector credit extension, increased an annual 21.8 percent, from 19.7 percent in October."

December 31 - Bloomberg: "U.K. house price growth accelerated in December as bankers in the City of London spent bigger annual bonus payments on property, Nationwide Building Society said, increasing the risk of another interest rate increase. The average cost of a home rose 1.5 percent to 134,444 pounds ($241,000), after growing 1.2 percent in November... Prices climbed 15.6 percent in 2003. The Bank of England lifted its benchmark lending rate a quarter point in November to 3.75 percent, the first increase in almost four years designed to slow inflation and house price growth."

Economy Watch:

The December Institute for Supply Management (ISM) Manufacturing index added 3.4 points to 66.2, the strongest reading since December 1983. New Orders surged almost 4 points to 77.6, the highest since July 1950. The Employment component rose to the highest level since December 1999. Prices Paid added 2 to 66, and New Export Orders gained 2.5 to 60.4 (highest since May 1989).

December 30 - Bloomberg - "New York City area business activity expanded in December at the fastest rate in at least a decade, a survey of services and manufacturing executives showed, adding to evidence of an economic recovery in the region. The National Association of Purchasing Management-New York's business activity index, which gauges general economic health, surged to 80.7 this month from 51.9 in November, the highest reading since the survey began in May 1993. A reading of more than 50 indicates expansion. The index measuring service industries, which employ nine of 10 city residents, also expanded at a record pace, climbing to 80.5 from 51.6 last month."

GSE Watch:

December 30 - Bloomberg: "When Treasury Secretary John Snow called on Congress in September to create a 'world-class' regulator to crack down on Fannie Mae and Freddie Mac, the two largest buyers of U.S. home mortgages were ready for him. Fannie Mae and Freddie Mac between them had hired 46 lobbying firms in the first half of this year, including seven of the 20 largest, to reinforce their permanent staffs of 20. They spent at least $9.7 million on lobbying during that time, more than any other company or association, according to PoliticalMoneyLine.com, a nonpartisan group tracking such funds. It wasn't just the numbers, it was the names. Among other recruits, Freddie Mac took on Patrick Cave after he resigned in January as a top official in the Treasury office that's seeking authority over the companies. It hired Terry Haines after he quit that same month as staff director for the House Financial Services Committee, which is considering the legislation. The companies 'are in a class by themselves,' with the most potent lobbying force in Washington, said Senator John Sununu...co-sponsored a bill that would strengthen oversight, in response to accounting errors that led to a $5 billion profit restatement by Freddie Mac this year. The lobbying effort paid off."

California Housing Bubble Watch:

December 29 - California Association of Realtors: "Propelled by double-digit price appreciation that was twice that of the nation, California homesellers reaped a record median gain of $150,000 in 2003, according to the 'State of the Housing Market 2003' report by the California Association of Realtors (C.A.R.). 'Net cash to sellers has never been higher since C.A.R. began conducting our annual survey of the California housing market.' The 'State of the Housing Market 2003' report also revealed that nearly one out of four transactions in 2003 involved a second mortgage, an 18 percent increase compared to 2002 and well above the 20-year record low of 4.4 percent in 1988".

December 30 - Associated Press (Jim Wasserman): "Construction crews wielding saws, hammers and nail guns this year began work on the most new houses in California since 1989 and the most apartments since 1990 - but it isn't enough to ease the nation's worst housing shortage, experts say. California builders Monday reported starting 191,866 homes and apartment since 2003, and predict slightly more next year before rising interest rates force a slowdown in 2005... Home builders credit the construction spree to the lowest interest rates in a generation, giving thousands of people more buying power even as prices surged because of supply and demand. Home values rose an estimated 17% during the year, reaching a median price of $369,500..."

December 30 - California Association of Realtors: "Sales of detached existing single-family homes are expected to decline in 2004 from 2003's record-setting pace, while price appreciation will continue to be driven by strong demographics and higher, though historically low, interest rates in 2004... The median price of a single-family home is forecast to increase 13 percent from $369,500 in 2003 to $417,500 in 2004, while sales are projected to decline 2 percent to 584,600 in 2004 from a record 596,500 in 2003."

December 30 - Florida Association of Realtors: "A strong housing sector pumped up Florida's economy in November and also continued to boost the nation's economic recovery: A total of 10,322 existing single-family homes were sold statewide last month for a 4 percent increase over last year's sales activity of 9,917 homes... Last month, the statewide median sales price rose 13 percent to $172,500..." Year-over-year median prices were up 21% in West Palm Beach/Boca Raton, 20% in Miami, 18% in Naples, 17% in Fort Lauderdale.

Its Wildness Lies in Wait:

As for 2003, the debt issuance and market return numbers speak for themselves. Global markets experienced history's greatest liquidity surge and reflation. Asset inflation - both real and financial - was powerful and all-encompassing. Speculation and inflation were vigorous and indiscriminate. Debt and equity markets were stoked by an unprecedented surge in dollar liquidity and renewed speculation, along with a massive short squeeze. The upshot was a market abnormality with virtually all boats being lifted. Credit market speculation, which had been concentrated in the U.S., was unleashed to play the world. Unprecedented mortgage Credit growth and leveraged speculation fostered excessive dollar liquidity, while the faltering dollar played an instrumental role in the flood of global liquidity. It has had the look and feel of an historic "blow-off," yet it is being dangerously extrapolated into the future.

The liquidity and Credit inflation genie was purposely set loose to goad a seductive boom. Working its usual magic, the latest boom has captivated the gullible imaginations of policymakers, speculators, investors, and the general public. The great havoc such an endeavor creates Lies in Wait.

The American Economic Association holds its annual conference this weekend in San Diego. Chairman Greenspan is on tap to speak tomorrow, with vice chairman Ferguson and governor Bernanke lined up for Sunday.