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Financial Bubbles Rages On


The Dow and S&P500 were about unchanged this holiday-shortened week. The Transports added 1.2% and the Utilities were up 1.7%. The Morgan Stanley Cyclical index was up 0.5%, and the Morgan Stanley Consumer index was down 0.6%. The broader market speculative surge continues. The Russell 2000 added 1% this week. The Russell is already up 7% y-t-d, with a 52-week gain of 55.4%. The S&P400 Mid-cap index added almost 1%, increasing y-t-d gains to 4%. The highflying technology sector came under some selling pressure this week, following last week's surge. The NASDAQ100 declined 1.5% and the Morgan Stanley High Tech index fell 2.4%. The Semiconductors dropped 5.7% (up 4% y-t-d). The Street.com Internet index was slightly positive (up 9% y-t-d), while the NASDAQ Telecommunications index declined almost 2% (up 9% y-t-d). The Biotechs gained 1%, increasing 2004 gains to almost 7%. Financial stocks were this week's speculative vehicle of choice. The Broker/Dealers' 1.3% rise increased y-t-d gains to 9%. The Banks added 1% (up 2.4% y-t-d). The NASDAQ Financial index is up 3.4% y-t-d and the NASDAQ insurance index 5.4%. Small cap financial stocks are on fire, with the NASDAQ Other Financial Index's almost 3% rise increasing 2004 gains to 11% (up 91% over 52 weeks!). With bullion rising $1.33, the HUI Gold index was up less than 1%.

Today's abrupt reversal at least temporarily halted what appeared an incipient bond market melt-up. For the week, 2-year Treasury yields were unchanged at 1.66%. Five-year yields rose 3 basis points to 3.06%, and 10-year Treasury yields rose 4 basis points to 4.07%. Fannie Mae benchmark mortgage-backed yields rose 2 basis points. Agency spreads generally rose one basis point. The 10-year dollar swap spread added 1 to 37.25. The implied yield on December Eurodollar declined 2 basis points to 1.885%. Corporate spreads were generally little changed to slightly wider on the week.

Bloomberg had about $8 billion of corporate issuance during the shortened week. Investment grade issuers included Morgan Stanley $1.6 billion, Goldman Sachs EUR 1.5 billion, Bank of America $1 billion, Allied Waste $825 million, Procter & Gamble $500 million, Fifth Third Bank $375 million, Nationwide Building Society $400 million, MBIA $150 million, Halliburton $500 million, John Hancock $300 million, Jefferson-Pilot Corp $300 million, and Developers Diversified Realty $275 million.

January 22 - Dow Jones (Simona Covel): "Drive-by deals are in the driver's seat in the junk bond market. With investors desperate for yield, even jumbo offerings can forgo the cost and hassle of a roadshow and instead be announced, shopped and priced in a single day. 'We're in a strange environment where a lot of the deals can get done without a roadshow,' said Kevin McCormick, a high-yield portfolio manager with Weiss, Peck & Greer, which has $18 billion in assets under management. A combination of high demand and limited new issuance is fueling investors' urgency."

And today from Bloomberg: "U.S. high-yield, or 'junk' bond sales...totaled $8.4 billion in January, according to Bloomberg data. In the same three-week period a year ago, sales totaled $2.2 billion." Junk bond fund received $220 million this week (from AMG), in what has been a steady stream of inflows. Junk bond issuers included United Rentals $1.375 billion, Mail Well $320 million, Portola Packaging $180 million, UAP Holding Corp $125 million, and Kingsway America $100 million.

Convert issuers included Teva Pharmaceutical $1 billion and Komag $70 million.

Foreign dollar debt issuers included Chile $600 million, Republic of Panama $250 million, Corp Andina De Fomento $200 million, and Cosipa $175 million.

Freddie posted 30-year fixed mortgage rates declined 2 basis points to 5.64% last week (down 23 basis points in two weeks!). Fifteen-year fixed mortgage rates declined two basis points to 4.95%. One year adjustable-rate mortgages could be had at 3.56%, down 6 basis points for the week. One year-adjustable rates were down 20 basis points in two weeks to the lowest level since mid-July.

Fed Foreign ("Custody") Holdings of Treasury, Agency Debt surged $22.2 billion last week to $1.105 Trillion. Custody holdings have increased $102.85 billion in 10 weeks, or better than 50% annualized. Over the past 52 week, Custody Holdings were up an unprecedented $247 billion, or 29%.

Broad money supply (M3) jumped $37 billion for the week of January 12. The two-week gain of $66.9 billion is the strongest since July. For the week, Demand and Checkable Deposits declined by $31.3 billion, while Savings Deposits surged $54.2 billion. Small Denominated Deposits dipped $1.4 billion. Retail Money Fund deposits declined $9.0 billion and Institutional Money Fund deposits dropped $14.4 billion. Large Denominated Deposits jumped $21.5 billion (up $63.4 billion in two weeks!). Repurchase Agreements rose $11.9 billion and Eurodollar deposits gained $5.6 billion. Over the past 20 weeks, Retail Money Fund deposits have declined $87 billion, or 26% annualized, to $791.5 billion. During the same period, Institutional Money Fund deposits have contracted $70 billion, or 15% annualized, to $1.1 Trillion. We remain in the heart of a major disintermediation out of low-yielding money fund deposits and into securities.

Bank Credit rose $20.1 billion for the week ended January 14 (2-week gains of $43.4 billion. Securities holdings increased $17.3 billion, as "Other" securities surged a noteworthy $19.8 billion. Loans & Leases added $2.8 billion (2-week gain of $38.5bn). Real Estate loans declined $3.2 billion and Consumer loans were about unchanged. Security loans were up $5.8 billion ($24.5 billion in two weeks). On the liability side, Deposits were up $25.6 billion, with two-week gains of $47.9 billion. Bank Credit has increased $100 billion, or 8.4% annualized, over the past ten weeks. Elsewhere, Total Commercial Paper (CP) borrowing rose $4.3 billion, with three-week gains of a notable $24.0 billion. Non-financial CP was up $3.7 billion (up $6.8 billion over three weeks), and Financial sector CP was up $0.6 billion.

Commodities Watch:

The CRB index mustered a small gain for the 4-day trading week. Stronger energy prices led the Goldman Sachs Commodity index to a 1.5% gain. Copper gained 3% this week to a 7-year high. Aluminum prices rose to the 3-year highs.

Currency Watch:

January 21 - Times of London (Leo Lewis): "Japan's Ministry of Finance has lost more than (pounds) 40 billion ($72bn dollars) in the past financial year trying to bet against currency speculators, The Times has learnt. Cabinet Office insiders admitted yesterday that the currency losses have spiraled out of control, after a renewed attempt by the Finance Ministry to prop up the dollar and talk down the value of the yen... This month the Government has already spent a record sum trying to prevent the yen from rising too high against the dollar... One currency broker in Nomura...said: 'The (ministry) is like an intervention junkie at the moment. The effect of each shot of dollar buying is getting less and less, which means the shots have to be bigger and bigger...'"

Currency markets now appear to have entered a new stage of heightened volatility. No longer is dollar weakness necessarily a one-way bet, a dynamic that will make derivative-related trading strategies all the more challenging. The Canadian dollar today suffered its largest one-day decline since 1987, while the Mexican peso enjoyed its biggest gain in 32 months (both according to Bloomberg). Instability abounds.

Global Reflation Watch:

January 20 - Bloomberg: "Japan's central bank unexpectedly decided to add cash to the economy, which may help slow the yen's 10 percent rise against the dollar the past year and protect an export-led recovery in the world's second-largest economy. The bank's policy board decided by a majority vote to raise the upper limit of the reserves it makes available to commercial banks to 35 trillion yen ($326 billion) from 32 trillion yen, the
first increase since October."

January 23 - Bloomberg: "Brazil, Mexico and Venezuela are leading Latin American borrowers in selling a record amount of international bonds this month as the outlook for faster global economic growth boosts investors' appetite for riskier assets. The region's governments and companies have raised $8.63 billion so far this month...That's more than the $8 billion sold in June 1997. The debt market has become more attractive as the average borrowing rate for Latin American issuers has fallen to 8.69 percent from 12.73 percent a year ago, according to J.P. Morgan Chase & Co. With U.S. interest rates at their lowest in four decades, the yields are attractive to investors."

January 22 - Bloomberg: "Emerging market equity funds received a record amount of money last year as stocks in developing countries set the pace among major global indexes... Investors poured $12.5 billion into funds that invest in regions such as Asia, Latin America and Eastern Europe, surpassing the previous high of $10.9 billion in 1996, according to EmergingPortfolio.com Fund Research... Investors have added $1.32 billion to emerging market stock funds in the first two weeks of 2004..."

January 23 - Bloomberg: "Brazil's jobless rate fell to a 12-month low in December as rising consumer demand prompted companies such as automakers Volkswagen AG and Ford Motor Co. to add staff. The unemployment rate fell to 10.9 percent in December from 12.2 percent the previous month and a two-year high of 13 percent in August..."

January 22 - Bloomberg: "Argentina's economy will expand 6 percent in 2004, because of increased consumer spending and higher exports, the central bank said... Argentina's central bank expects gross domestic product to rise 2 percentage points more than was set in the 2004 federal budget, powered by record low interest rates, increased trade abroad and higher spending by domestic consumers."

January 22 - Bloomberg: "Chilean retail sales rose at their fastest pace in six years in 2003 as a stronger peso made foreign goods less expensive and falling unemployment spurred spending. Sales rose 3.6 percent from 2002, the biggest increase since 1997."

January 21 - Bloomberg: "Britain's budget deficit widened to a record 13.1 billion pounds ($24 billion) in December as Prime Minister Tony Blair's government boosted spending, the statistics office said... The Treasury's preferred measure, public-sector net borrowing, or PSNB, increased to 5.26 billion pounds from 4.48 billion pounds. Overall spending, including interest payments, climbed 9.3 percent to 39.5 billion pounds, as expenditure by government departments leapt 12.3 percent to 35.7 billion pounds."

January 21 - Bloomberg: "U.K. mortgage lending growth accelerated in December from the previous month, the British Bankers' Association (BBA) said, suggesting an increase in interest rates hasn't curtailed consumer demand for home loans. December net mortgage-lending rose 5.41 billion pounds ($9.9 billion), compared with 4.78 billion pounds in November..."

January 22 - Bloomberg: "U.K. house-price growth in December was the quickest for more than a year, the Royal Institution of Chartered Surveyors said, suggesting further increases in interest rates may be needed to cool the market."

Asia Watch:

January 20 - Bloomberg: "China's economy grew 9.9 percent in the fourth quarter from a year ago as companies such as Shanghai Automotive Industry Corp. and Motorola Inc. expanded to meet surging consumer demand and export orders. The world's sixth-largest economy accelerated from a revised 9.6 percent rate in the third quarter, the National Bureau of Statistics said... Gross domestic product for 2003 rose 9.1 percent, the fastest in six years, to 11.7 trillion yuan ($1.41 trillion). China helped drive a global recovery last year, consuming 55 percent of the world's cement production and 36 percent of its steel, the bureau said. The government forecast slower growth this year and said it has no plans to rein in money supply or allow its currency to strengthen... China's industrial production rose a record 18 percent in December, which, adjusting for new year holidays in January and February, was the fastest since records began in 1995... Surging investment and production helped create 8.5 million new jobs in China last year, Li said. That's helping boost incomes in the world's most-populous nation. The average disposable income last year rose 9.3 percent"

January 22 - Bloomberg: "China's finished steel imports rose 52 percent to 37.2 million tons in 2003 from a year earlier, the Tex Report said, citing preliminary data collected by the Japan Iron & Steel Federation from the Chinese customs department."

January 20 - Bloomberg: "Chinese investment in industry and public works projects, which accounts for about a third of the nation's economy, rose 23 percent in December to 802.5 billion yuan ($97 billion). Fixed-asset investment was up 26.7 percent in 2003... Chinese retail sales last month grew 10.9 percent, the National Statistics Bureau reported today. For 2003, sales were up 9.1 percent."

January 22 - Bloomberg: "India's long-term foreign-currency rating was raised one level by Moody's Investors Service to investment grade for the first time in almost six years, a move which may reduce overseas borrowing costs for Indian companies. Moody's raised the rating to Baa3 from Ba1 with a stable outlook because of increasing foreign-exchange reserves, accelerating economic growth and higher overseas investment..."

January 21 - Bloomberg: "Bangkok Bank Pcl, Thailand's biggest lender, and three of its biggest rivals have reported a surge in 2003 earnings, providing evidence demand for credit is increasing as economic growth accelerates. Bangkok Bank's 2003 net income rose by a record 81 percent to 11.35 billion baht ($289.8 million) in the year to Dec. 31... Net loans expanded 2.2 percent, exceeding its target, the bank said. 'We are now confident that the credit cycle is picking up,' said Thananchai Jittanoon, an analyst at UOB Kay Hian Securities (Thailand) Ltd. 'The banks have been advancing corporate term loans to companies in the petrochemical, consumer finance and other industries.'"

January 20 - Bloomberg: "India's economy may grow faster than expected in the year to March 31, 2004, as heavier rains boost farm production, raising the incomes of 700 million rural dwellers, the National Council for Applied Economic Research said. Gross domestic product will grow 8 percent, faster than the 7.1 percent it predicted in October, the economic research institute said..."

January 20 - Bloomberg: "Taiwan's export orders rose 20 percent to a record $15.7 billion last month because of higher Chinese and U.S. demand for the island's computer chips, flat-panel displays and other electronics goods... Orders from Hong Kong rose 25 percent to $3.7 billion in December... Most Taiwanese goods bound for China are shipped via Hong Kong because of transport restrictions between Taiwan and its political rival. Orders from the U.S. rose 15 percent last month to $4.2 billion. Orders from Europe increased 26 percent to $2.6 billion and those from Japan rose 10 percent to $1.6 billion."

Domestic Credit Inflation Watch:

The Mortgage Bankers Association Application index surged 36% this past week, the strongest gain in three years (according to Bloomberg). Refi applications shot 52% higher to the strongest reading since early August. Moreover, Purchase applications jumped 19% (25% over two weeks!) to an all-time record high. Purchase application volume was up 40% from a year earlier, with dollar volume up a whopping 62%. The average purchase application was for $211,800. Adjustable-rate applications accounted for almost 28% of total applications, with an average amount of $308,200.

December Housing Starts were reported 7% above the consensus estimate to an annualized rate of 2.088 million. This was up 15% from December 2002 to the fastest pace since February 1984. Total Starts of 1.848 million place 2003 as the strongest year since 1978, with Permits issued at the strongest pace since 1972. When compared to December 1997, December 2003 Starts were up 33%, Permits were up 32% and Homes Under Construction were up 34%.

January 21 - Los Angeles Times (Roger Vincent): "The O.C. (Orange County) remains hot - when it comes to houses. Orange County home prices continued to climb at a torrid pace last month as the median price jumped 21.3% from a year ago to hit an all-time high of $467,000 during a month that saw a 5.8% increase in sales to 4,693. That is the biggest volume for any December since 5,064 homes sold in 1988, and analysts say the pace shows no signs of letting up. 'Indications are that sales counts are going to stay strong,' said John Karevoll, an analyst with DataQuick... appreciation was up across all price categories, from condominiums to high-end luxury homes. 'It was just a darn strong end of the year,' Karevoll said. 'That's all there is to it.' The median price of a new single-family house in Orange County was up 8% from a year ago to $594,000. Other increases were more extreme: The median price for a house that was resold was up 24.1% to $490,000, and resold condominiums climbed 25.3% to $324,500."

Other California real estate headlines this week included, "Home Prices in Ventura County Soar - the median price hits $398,000 for 2003, nearly 20% above the figure for the previous year." "High Desert Home Sales to Remain Hot." "Santa Clara County Home Sales Jump." From the LA Daily News: "The median price of a Southern California home jumped 20 percent in December to a record $346,000, but sales remained at all-time highs, thanks to strong demand and affordable mortgage rates..." But it's not just Southern California. From the Contra Costa Times: "December sales figures for (San Francisco) Bay Area homes show that while prices of homes keep rising, people keep buying. Bay Area home sales last month showed the strongest December performance in 16 years and a 26.3 percent increase over the same period in 2002." The San Mateo Times - where the county saw December sales up 36% y-o-y and a median price of $570,000 - quoted a local real estate executive: 'There were so many buyers vying for so few properties that the only thing that was going to happen was prices would go up.' Let there be no doubt: The Great California Housing and National Mortgage Financial Bubbles Rages On. Interestingly, the Mortgage Bankers Association yesterday raised their 2003 mortgage originations estimate 13% above their December forecast to $3.79 Trillion.

January 20 - Wall Street Journal (James Hagerty): "Membership in the NAR (National Association of Realtors), which includes most of the nation's more active agents and brokers, has surged 27% in the past three years to 977,000. More are on the way: Schools that train people for real-estate licensing exams report booming enrollment. Indeed, the residential real-estate industry has a boom-time mentality reminiscent of the one that pervaded Silicon Valley and Wall Street in the late 1990s. 'The great thing about real estate is that we upsize, we don't downsize,' says Bill Spadea, head of career development at Weichert Realtors, a brokerage that operates on the East Coast."

January 19 - New York Times (Stephanie Strom): "Many nonprofit organizations responding to a new survey managed to increase their revenue in 2003 despite the sputtering economy, but those gains were more than offset by higher costs. While 64 percent of the 236 organizations across the country that responded reported more income, 66 percent said they had higher costs for health and liability insurance as well as for wages and salaries and other expenses. More than half of the respondents reported being in 'severe' or 'very severe' financial stress."

Weakly bankruptcy filings of 28,094 were down about 3% from the comparable week one year earlier. The ABC News/Money Magazine consumer comfort index rose last week to a 21 month high. The Personal Finances component is up a strong 8 points in three weeks.

Financial Sector Earnings Reports:

Earnings season is upon us once again (how time flies...). This reporting period is even more interesting than usual with respect to the financial sector. Earnings are stellar - Fannie 4th quarter Net Income of $2.197 billion vs. Q4 2002's $952.2 million; Citigroup $4.80 billion vs. $2.46 billion; JPMorganChase $1.864 billion vs. a loss of $387 million; Wells Fargo $1.62 billion vs. $1.47 billion; MBNA Financial $703.5 million vs. $540.1 million; and so on. By "definition," reported accounting profits should be nothing less than spectacular during one of history's great lending and speculating follies.

Our focus for this quarter's reports is to try to get a gauge on the degree and composition of lending. Additionally - especially after the fourth quarter's unusual decline in the monetary aggregates - we should pay special attention to the nature of financial sector liabilities being created. All indications have the mortgage finance sector continuing to play the key role of systemic Credit and liquidity creator. The financial sector still much prefers consumer lending to commercial lending. And non-deposit liabilities played an unusually prominent role in funding lending growth during the quarter.

Fannie Mae posted a strong fourth quarter, with its Book of Business expanding $70.4 billion, or 13.2% annualized, to $2.198 Trillion. Following its spectacular third-quarter $104.7 billion Retained Portfolio expansion (52% annualized!), the Retained Portfolio declined by $18.7 billion (8.1% annualized) during the fourth quarter to $898 billion. But the "action" was found in the expansion of mortgage-backed securities (MBS). Non-retained MBS expanded by $89.1 billion during the quarter, or at a rate of almost 30%, to $1.3 Trillion. It is worth noting that non-retained MBS expanded at a 39.4% rate during December (Book of Business up at a rate of 16.3% during the month). For 2003, Fannie's Book of Business surged $378.3 billion, or 20%. This was a 44% increase over 2002's record growth, with the Book of Business up 146% since the beginning of 1998. For 2003, the Retained Portfolio expanded $107.6 billion (13.6%) and non-retained MBS jumped $270.7 billion (26.3%). Fannie repurchased 21 million shares of stock during the year.

While we must wait for Freddie's data, it is possible that Fannie and Freddie have combined Book of Business expanded by as much as $140 billion during the fourth quarter. The quantity of MBS sold into the marketplace was similarly enormous. Yet it is not clear today which institutions purchased these securities, as well as what liabilities were created in the process. Bank holdings did not appear to grow substantially during the quarter, although some "trading" positions expanded sharply. The leveraged speculating community; perhaps it was the Wall Street firms and hedge funds? Was it the ballooning REITS? Was the household sector buying MBS products in lieu of bank and money fund deposits? Global central bankers or "all of the above."

Citigroup, the largest U.S. financial institution, expanded Total Assets $55.1 billion, or 18.2% annualized, during the fourth quarter to $1.264 Trillion. Trading assets surged $40 billion during the quarter to $230.9 billion and were up almost 50% from one year ago. Consumer Loans were up $42 billion, or almost 50% annualized, to $380 billion. Year-over-year, Consumer Loans were up 12.5%. Corporate Loans declined by almost $5 billion during the quarter (19% annualized) to $98.1 billion and were down almost 11% y-o-y. On the liability side, Fed Funds increased $13.0 billion (31% annualized) during the fourth quarter, Long-term Borrowings $16.7 billion (46% annualized), and Trading Account Liabilities $7.0 billion (26% annualized). Total U.S. Deposits increased $2.7 billion, or 6.3% annualized. Short-term Debt decreased by $4.0 billion to $36.7 billion. For the year, Total U.S. Deposits increased $5.4 billion (3.2%), Long-Term Debt $35.8 billion (28.2%), Trading Account Liabilities $22.6 billion (24.7%), Fed Funds $18.7 billion (11.5%), and foreign deposits $37.2 billion ($14.3%)

JPMorganChase Investment Banking Fees were up 29% from Q4 2002, with "record earnings of $3.7 billion for the full year, up 183%... Chase Financial Services posted record earnings of $2.5 billion... Record revenues of $14.6 billion were driven primarily by Home Finance revenues which were up 38% from 2002." For the year, Consumer loans expanded 10.1% to $171,277, while Commercial loans declined 9.2% to $83.1 billion. Total Assets were down $21.8 billion during the quarter, with Other Assets declining almost $18 billion. Trading Assets jumped $22.4 billion to $169.1 billion, while Total Loans declined $16.5 billion to $215.0 billion. On the liability side, Deposits increased 7.1% during 2003 to $326.5 billion. Commercial Paper borrowing declined 14% (to $14.3 billion), while Long-Term Debt jumped 21% (to $48.0 billion). Trading Liabilities rose 17% (to $78.2 billon), while Fed Funds & Repos declined 33% (to $113.5 billion).

For the quarter, JPMorgan's Total Deposit liabilities were up $12.9 billion. Interestingly, Federal Funds and Securities Sold under Repurchase Agreements dropped $18.5 billion at the end of the period to $113.5 billion, although the Average Balance for the quarter was $141.1 billion. Many banks make some major position adjustments to reduce trading assets and repurchase agreement funding agreements for quarter and year-end reporting purposes. In this regard, it is interesting to examine weekly Fed reported "Repo Agreements." Ending the week of December 24th at $2.704 Trillion, these positions dropped to $2.288 Trillion on January 7th (before rising back to $2.484 Trillion by January 14).

At Bank of America, "mortgage banking income increased 39 percent to $292 million"; "Record mortgage originations - $131 billion 2003 vs. $88 billion 2002"; "Card income increased 11 percent to $815 million"; "Investment banking income increased 9 percent to $458 million." For the year, Total Average Consumer loans expanded 22% to $239.6 billion, with Average Residential Mortgage loans up 32% to $142.5 billion. Average Total Commercial loans contracted by 10% to $131.5 billion. On the liability side, Average Interest Bearing Deposits were up 12% y-o-y to $296.2 billion, while Average Fed funds and Repos were up 23% to $152.0 billion. During the fourth quarter, Average Total Consumer loans expanded at a 27% rate, while Total Average Commercial loans contracted at 4% rate.

From Wells Fargo: "The purchase mortgage market continued to be strong (during the fourth quarter). While originations for the quarter were down from the prior year, full year originations of $470 billion eclipsed the industry record of $333 billion we set last year." "Average loans of $236 billion for the fourth quarter 2003 increased $56.5 billion, or 31 percent, from fourth quarter 2002, and $19.8 billion, or 37 percent (annualized), on a linked-quarter basis. The double-digit growth in loans was generated by continued strong consumer demand for credit including home equity, residential first mortgage products, credit cards and installment loans." "Average core deposits grew $15 billion, or 8 percent, from fourth quarter 2002, and declined $6 billion on a linked-quarter basis due to a $10 billion decline in mortgage escrow deposits attributable to lower mortgage refinance activity." Commercial Loans expanded at an 8.5% annualized rate during the quarter, but were up only 3% y-o-y. Real Estate 1-4 Family First Mortgage loans doubled during the year to $83.5 billion. Real Estate Construction Loans expanded at a 22% rate during the final three months of 2003. Credit Card Loans expanded at a 26% rate. Real Estate 1-4 Family First Mortgage jumped $16.8 billion during the quarter, while Mortgages Available For Sale dropped $26.3 billion. Home Equity Loan holdings dropped $4.0 billion, so Wells must have been an active securitizer during the fourth quarter. Overall, Total Assets declined $3.0 billion during the quarter to $387.8 billion (up 11% y-o-y).

Washington Mutual ended the year with "Record home loan volume of $384.18 billion," up $104.73 billion, or 37%, from 2002. "Strong home equity loans and lines of credit volume was a record $29.64 billion," up 94% from 2002. "Multi-family lending volume was a record $8.07 billion in 2003," up 38% from 2002." "During 2003, the company repurchased 65.9 million shares of its common stock..., of which 28.7 million shares were repurchased during the fourth quarter..." And while fourth quarter loan volume was down 36% from Q4 2002, home equity loan volumes were up 68%. Adjustable-rate mortgages accounted for 55% of application volume during the fourth quarter, compared with 38% during the third quarter. On the back of the fourth quarter's 16% annualized decline, Total Assets were up about 3% for the year. More interesting is the expansion and composition of liabilities. For the first three quarters of the year, Deposits expanded at a 7% rate (to $164.1bn) and Repurchase Agreements increased at a 30% rate (to $20.5 billion). But during the fourth quarter, deposits actually declined by $11.0 billion (27% annualized), while Repurchase Agreements surged $7.9 billion (154% annualized). For the year, deposits declined 2% and Repos rose 30%.

California adjustable-rate mortgage powerhouse Golden West Financial expanded total assets at a 44% annualized rate during December to $82.55 billion. Total Assets expanded at a 34% rate during the fourth quarter and were up 21% for the year. It is interesting to examine the type of liabilities expanded to fund this extraordinary asset growth. For the first nine months of the year, Total Deposits expanded $5.1 billion, or 17% annualized, while Federal Home Loan Bank (FHLB) Borrowings increased $1.1 billion, or 8% annualized. But the compositions of liabilities changed markedly later in the year. During December, FHLB Borrowings increased $1.3 billion (76% annualized), while Total Deposits rose $238 million (6% annualized). For the quarter, FHLB Borrowings expanded $2.3 billion, or 47% annualized, to $22.0 billion. Total Deposits increased $582 million, or 5% annualized, to $46.7 billion. What a great example this provides of the atypical dynamics of contemporary finance: aggressive lending growth financed by the expansion of (GSE) non-monetary liabilities!

Net Income at Credit Card behemoth MBNA was up 30% y-o-y to $703.5 million. Managed Loans expanded at a 20% annualized rate during the fourth quarter to $118.5 billion. Managed Loans were up 10% y-o-y. "During 2003, the Corporation added 10.7 million new accounts, with 2.7 million new accounts added in the quarter." Total Assets were up 12% y-o-y to $59.1 billion, although Total Assets expanded at a 3% rate during the fourth quarter. And with loans expanding so rapidly, it is no surprise to see the managed delinquency rate (down 9 basis points to 4.39%) and managed Credit losses (down 16 basis points to 4.97%) improve during the quarter.

CapitalOne reported 4th quarter Net Income up 11% y-o-y to $266 million. Total Assets expanded at a 26% rate during the quarter to $46.3 billion, with a second-half growth rate of 29%. Total Assets were up 24% y-o-y and were up almost 400% in just five years. Average Loans expanded at a 32% annual rate during the quarter. Total Managed Loans expanded at a 31% during the quarter to $68.7 billion. Perhaps the Credit card lenders are benefiting from significantly reduced mortgage refis. Are fewer consumers paying down card balances with equity extraction? Allowing card balances to grow, while using liquid balances to play the markets?

New Age subprime mortgage lender New Century Finance expanded Total Assets by $1.3 billion, or 68% annualized, during the quarter to $8.9 billion. Total Assets were up 270% for the year, with 2-year growth of better than 500%. New Century originated $8.25 billion of mortgages during the fourth quarter, up 85% from Q4 2002 and down only slightly from the previous quarter's record originations.

Mortgage real estate investment trust (REIT) Thornburg Mortgage Inc. expanded Total Assets by $1.8 billion, or 42% annualized, during the quarter to $19.12 billion. Total Assets were up 82% for all of 2003. Total Assets are up 335% over the past 10 quarters. Assets are primarily ($18.6 bn) jumbo Adjustable-rate Mortgages. Liabilities comprise mainly Reverse Repurchase Agreements ($13.9bn) and Collateralized Debt Obligations (CDOs) ($3.1bn). The company ended the year with Shareholder's Equity of $1.24 billion.

It is worth noting that the S&P Thrifts & Mortgage Finance index was one of the strongest groups this week, advancing 5.3% in four sessions (up 6.7% y-t-d). Perhaps the marketplace is coming to the realization that - barring an unforeseen spike in rates or some type of financial dislocation - mortgage lending excess is poised to do more than simply endure. But, then again, this is precisely the nature of Credit Bubbles: once commenced, they take on a life of their own and are quite prone to runaway excess. Mortgage finance is, today, in the midst of the blow-off stage for one of history's Great Credit Bubbles. So we should expect the truly spectacular. And when it comes to the California Housing Bubble, it may be worth recalling that the late-nineties technology stock Bubble saw, by October 1999, prices go to what were at the time almost unimaginable extremes. And then the NASDAQ 100 index almost doubled in six precarious months.

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