UNEDITED!

The stock market run ran further. For the week, the Dow gained 1.6% and the S&P500 1.3%. The Transports added 1%, increasing y-t-d gains to 26%. The Utilities rose 1.7%, with 2004 gains of almost 23%. The Morgan Stanley Cyclical index rose 1.4%, and the Morgan Stanley Consumer index gained 1.3%. The broader market moved further into record territory. The small cap Russell 2000 and S&P400 Mid-cap indices were up about 1%, increasing year-to-date gains to 17% and 14%. The NASDAQ100 gained 1%, with the Morgan Stanley High tech index up 1.5%. The Semiconductors added 0.6% and The Street.com Internet index was slightly positive. The NASDAQ Telecommunications index gained almost 2%. The Biotechs rose 1.5%. The Broker/Dealers gained 1% and the Banks jumped 2%. With bullion up 74 cents to $442.24, the HUI gold index posted a small advance this week.

Interest-rate markets were uncharacteristically quiet. For the week, 2-year Treasury yields were unchanged at 3.0%. Five-year Treasury rates declined one basis point to 3.57%. Ten-year Treasury yields rose one basis point to 4.21%. Long-bond yields ended the week at 4.84%, up one basis point for the short week. Benchmark Fannie Mae MBS yields were unchanged. The spread (to 10-year Treasuries) on Fannie's 4 5/8% 2014 note narrowed one basis point to 40, and the spread on Freddie's 5% 2014 note widened one basis points to 35. The 10-year dollar swap spread gained 1.75 to 41.50. Corporate bonds were also little changed. The implied yield on 3-month March Eurodollars declined 1.5 basis points to 2.90%.

December 20 - Bloomberg (Monee Fields-White and Vivianne C. Rodrigues): "U.S. President George W. Bush enters his second term awash in red ink. The nation confronts a series of annual budget deficits that may total $3.6 trillion by 2014, the Congressional Budget Office says. As the government seeks to finance those gaps in the bond market, an often-unruly brand of investor has been buying U.S. Treasuries as never before: hedge funds. Loosely regulated investment vehicles for institutions and the wealthy, hedge funds piled into the $3.8 trillion Treasury market during 2004. One clue to their purchases: Investors based in the Bahamas, Bermuda, the Cayman Islands, the Netherlands Antilles and Panama -- tax-friendly jurisdictions where thousands of these funds are registered -- have amassed some of the world's largest holdings of U.S. government securities, Treasury Department figures show. Caribbean Treasury investments soared 54 percent to $85.2 billion during the first 10 months of 2004, seven times the 8.3 percent increase in all of 2003. The region is now the fourth-largest holder of U.S. government debt, behind Japan, China and the U.K."

December corporate bond issues are up to $49.5 billion, "the busiest December since 2001" (from Bloomberg). This week's junk issuers included Level 3 Communications $345 million, Global Crossing $200 million, and ACIH $174 million.

December 20 - Financial Times (Jennifer Hughes): "US high yield, or junk bond, issuance, has reached record levels this year as companies have sought to take advantage of investors' appetite for risk. Issuance to date has totaled $139.8bn, beating $136bn last year and just edging ahead of 1998's $137.8bn, according to Thomson Financial... the proportion of triple-C rated debt considered extremely speculative has risen from 8.7 per cent last year to 17.1 per cent this year."

The week's convert issuers included Synaptics $125 million, Cray $80 million, and Mindspeed Tech $46 million.

Japanese 10-year JGB yields dropped 5 basis points to 1.34%. Brazilian benchmark bond yields declined 8 basis points to 7.72%. Mexican govt. yields ended the week at 5.13%, up one basis point for the week. Russian 10-year dollar Eurobond yields declined 7 basis points to 5.82%.

December 23 - Bloomberg (Andrew J. Barden): "Venezuela and other developing nations that export oil led a rally in emerging-market debt this year... Venezuelan foreign-currency bonds jumped 23 percent this year, the world's second-best performer after defaulted Argentine debt, JPMorgan Chase & Co. indexes show... Ecuador's bonds returned 20 percent and Nigerian bonds 14 percent..."

Freddie Mac posted 30-year fixed mortgage rates rose 8 basis points this week to 5.75%. Fifteen-year fixed mortgage rates jumped 7 basis points to 5.18%. One-year adjustable-rate mortgages could be had at 4.17%, down 1 basis point for the week. The Mortgage Bankers Association Purchase application index declined 3.6% for the week. Purchase applications were up about 15% from one year ago, with dollar volume up 29%. Refi applications rose 5.7% during the week. The average new Purchase mortgage dipped to $225,500, while the average ARM increased to $314,300. ARMs rose slightly to 34.4% of total applications.

Broad money supply (M3) declined $4.1 billion (week of December 13) to $9.352 Trillion. Year-to-date (50 weeks), broad money is up $532.3 billion, or 6.3% annualized. For the week, Currency contracted $1.0 billion. Demand & Checkable Deposits declined $4.7 billion. Savings Deposits were unchanged (y-t-d gain of $358bn, or 11.8% annualized). Small Denominated Deposits added $1.6 billion. Retail Money Fund deposits expanded $5.9 billion, and Institutional Money Fund deposits rose $3.9 billion. Large Denominated Deposits declined $6.5 billion. Repurchase Agreements fell $6.1 billion, while Eurodollar deposits added $2.7 billion.

Total Commercial Paper rose $5.6 billion to $1.402 Trillion. Financial CP jumped $6.8 billion to $1.268 Trillion, expanding at a 9.5% rate so far this year. Non-financial CP dipped $1.2 billion (up 25.3% annualized y-t-d) to $134.8 billion. Year-to-date, Total CP is up $134.4 billion, or 10.8% annualized.

Fed Foreign "Custody" Holdings of Treasury, Agency Debt rose $4.0 billion to $1.330 Trillion for the week ended December 22. Year-to-date, Custody Holdings are up $263.4 billion, or 25.2% annualized. Federal Reserve Credit added $1.8 billion for the week to $784.5 billion, with y-t-d gains of $37.9 billion (5.2% annualized).

This week's ABS issuance slowed to $3.5 billion (from JPMorgan). Total year-to-date issuance of $620 billion is 37% ahead of comparable 2003. 2004 home equity ABS issuance of $411 billion is running 81% ahead of last year's record pace.

Currency Watch:

It has been another alarming case of the dollar unable to muster even a feeble bear market rally. The euro closed today at a record 135.14. The dollar index declined about 1% to end the week at 81.55. The South African rand traded to a six-year high.

Commodities Watch:

December 21 - Bloomberg (Wing-Gar Cheng): "China's crude oil imports in November rose at the fastest pace in five months as government measures to slow the economy failed to curb fuel demand growth. Oil imports to the world's second-largest energy market rose 46 percent to 11.12 million metric tons in November from a year earlier, more than October's 34 percent increase..."

December 23 - Bloomberg (Simon Casey): "Aluminum futures rose in London to a 9-1/2 year high as hedge funds and other speculative investors bought the metal on forecasts of increasing demand in 2005. Demand for the lightweight metal in products such as beverage cans and cars will rise 5.2 percent next year to 31.4 million metric tons, beating production by 450,000..."

December 21 - Bloomberg (Gavin Evans): "World milk powder prices may remain close to $2,000 a ton for the next two years, aided by rising demand and the slow recovery of Australia's dairy industry following a drought, a New Zealand government forecast said. Rising demand, and reduced production in Australia, the third largest producer after New Zealand and Europe, helped push skim milk powder prices to a record $2,300 a ton in November... World dairy prices have almost doubled since falling to a 10-year low in mid-2002..."

Energy prices weakened after last week's sharp rally. January Crude Oil declined $2.39 this week to $44.18. The Goldman Sachs Commodities index sank 4.3% for the week, reducing year-to-date gains to 22.1%. The CRB index fell 0.7%, with 2004 gains of 11.7%.

China Watch:

December 23 - XFN: "China is likely to experience a 'catastrophic' drought next year, threatening water supplies and grain production, the China Daily reported, citing a leading water official. Wang Shucheng, minister of water resources, has urged water supply authorities to prepare for a possible disaster to mitigate losses, the newspaper said. 'From now on, water authorities must take whatever measures they can to increase water storage facilities and promote water conservation to ensure the water supply for the upcoming year,' Wang said at a water resources conference..."

December 22 - XFN: "Combined profits among China's industrial firms rose 38.8% year-on-year to 1.02 trillion yuan in the first 11 months of this year, the National Bureau of Statistics said."

December 21 - XFN: "The combined cargo throughput of China's ports surged 30.46% year-on-year to 295.04 million tons in November, the Ministry of Communications said in a statement. From January to November, cargo turnover of all sea and river ports amounted to 3.02 billion tons, up 126.4% year-on-year."

Asia Inflationary Boom Watch:

December 23 - Bloomberg (Theresa Tang): "Taiwan's export orders rose in November at the fastest pace in seven months as consumers in China, the U.S. and Europe, the island's biggest overseas markets, bought more of the island's electronics goods. Orders -- indicative of shipments in one to three months --jumped 30 percent from a year earlier to $19.8 billion after climbing 25 percent in October..."

December 22 - Bloomberg (Jun Ebias): "Philippine imports rose to a record in October, climbing at their fastest pace in four months as higher oil prices boosted the nation's fuel bill. Purchases from abroad surged 16 percent from a year earlier to $3.67 billion after climbing 15 percent in September..."

Global Reflation Watch:

December 21 - Bloomberg (Sam Fleming): "An index measuring changes in U.K. house prices fell in the three months through November to the lowest since December 1992, suggesting a decline in the nation's property market is deepening."

December 21 - Bloomberg (Sandrine Rastello): "Household spending in France, Europe's third-largest economy, rose the most in five months in November on purchases of cars and home appliances, underpinning expectations for a recovery in consumer demand this quarter. Purchases of manufactured goods increased 1.5 percent from October..."

December 23 - Bloomberg (Tracy Withers): "New Zealand's annual trade deficit widened to a record in November as imports soared by almost a fifth after consumers and companies bought more cars and machinery... Imports gained 19 percent from a year earlier to a record NZ$3.3 billion... In November, exports increased 9.6 percent from a year earlier to NZ$2.62 billion."

December 22 - Bloomberg (Tracy Withers): "New Zealand credit card spending rose 10 percent in November from a year earlier, according to a report released by the Reserve Bank in Wellington..."

Bubble Economy Watch:

December 20 - Bloomberg (Kristy McKeaney): "U.S. spending on Visa brand cards rose last week compared with the same week last year, according to VISA. In the week ending Dec. 19 purchases with Visa debit and credit cards rose 15.6 percent to $28.847 billion..."

December 21 - RockyMountain News (John Rebchook): "More than 11,000 real estate foreclosures have been filed in the seven-county Denver area through November, about 18 percent more than in all of last year. And public trustees are estimating that 2004 will end with about 12,290 foreclosures, making it the second-worst year on record. Only 1988, when there were 17,122 foreclosures, topped this year. Last year, 9,431 foreclosures were filed, which had been the second-worst year. And there's no sign of a slowdown... 'They just keep coming in droves,' said Bonny Kovtynovich, deputy public trustee in Adams County."

November combined Port of Long Beach and Port of Los Angeles Inbound containers were up 15% from one year ago to 631,572. Combined Outbound containers were up 5% to 189,719. Containers leaving the two ports empty were up 22% from a year earlier to 391,715, or 62% of total Inbound containers. November Empty containers were an all-time record.

November Personal Income was up 0.3%, with a y-o-y gain of 4.9%. Personal Spending was up 0.2%, with a y-o-y gain of 6.1%. November Durable Goods orders were up a much stronger-than-expected 1.6%, with a y-o-y gain of 9.7%. The volatile home sales data had November New Home Sales down 12% from October (up 3.6% from Nov. 2003) to a 1.125 million annual pace. Year-to-date, New Home Sales are running 9.4% ahead of last year's record pace. November University of Michigan Consumer Confidence was reported at 97.1, the highest reading since January. For comparison, the December 2003 reading was 92.6, December 2002 86.7, December 2001 88.8, and December 2000 98.4

Mortgage Finance Bubble Watch:

December 23 - Dow Jones (Christine Richard and Allison Bisbey Colter): "Now that Fannie Mae has fallen short of its minimum capital requirement, there is some speculation that the mortgage finance giant may have to suspend its dividend payments, at least temporarily, to shore up its capital. Fannie's regulator, the Office of Federal Housing Enterprise Oversight, said late Tuesday that, as of Sept. 30, the company was 'significantly undercapitalized,' making it necessary for the mortgage giant to seek the regulator's approval to pay dividends. And at least one equity analyst raised the possibility of a dividend suspension... As of Sept. 30, Fannie's capital totaled $28.86 billion, or $2.98 billion shy of OFHEO's requirement. And beginning in mid-2005, the company will have to hold 30% more capital than in its normal minimum until it satisfies the regulator's concerns about corporate governance and accounting policies."

November was another slow month for Freddie Mac. The company's Total Book of Business increased $3.5 billion, or 2.8% annualized, to $1.497 Trillion. Year-to-date, the Book of Business has increased 6.3% annualized. Freddie's Retained Mortgage Portfolio contracted at a 6% rate during the month to $657.0 billion, while having grown at a 1.6% pace y-t-d.

Things were also slow at troubled Fannie Mae. The company's Book of Business expanded at a 3.3% rate during November to $2.306 Trillion. This was the slowest growth since July. Fannie's Retained Portfolio contracted at a 0.8% rate, the first decline since May. After 11 months, Fannie's Book of Business has expanded this year at a 5.3% rate and Retained Portfolio at a 1.7% rate. Combined Fannie and Freddie Books of Business and Retained Portfolios expanded at a 3% rate and contracted at a 3% rate, respectively, during the month.

December 23 - PRNewswire: "Steady declines in office vacancy rates across most of the nation's major markets, together with persistent reports of a continually strengthening economy, are helping many investors finally see the proverbial 'light at the end of the tunnel,' according to the PricewaterhouseCoopers fourth quarter 2004 Korpacz Real Estate Investor Survey(R)... 'With vacancy rates edging down in many markets and underlying economics heating up both nationally and locally, there has been an unending supply of capital looking to be placed into commercial real estate...'"

ARM behemoth GoldenWest Financial enjoyed a strong November. Originations were up 26% from November 2003 to $4.14 billion. Loans expanded at a 27% rate to $100.8 billion, and have expanded at a 31% rate so far this year. For the year, Total Deposits have increased at a 13.3% rate to $52.4 billion, while Federal Home Loan Bank Borrowings have expanded at a 54% rate to almost $33 billion. Total Assets are up 31% from 12 months ago to $104.6 billion. For the month, 99% of mortgage originations were adjustable-rate, with refinancings accounting for 75%.

Financial Sector Bubble Watch:

The OCC's (Office of the Comptroller of the Currency) third quarter Derivatives Report confirms the ongoing expansion of the Derivatives Bubble. Total U.S. Commercial Bank Derivative positions expanded at a 16% rate during the quarter to $84.18 Trillion (up 26% from one year ago). By "type," Interest Rate derivative contracts expanded at a 14% rate to $73.0 Trillion, Foreign Exchange at an 8% rate to $7.9 Trillion, Credit at a 114% rate to $1.90 Trillion, and Other at a 57% rate to $1.33 Trillion. Over the past year, Interest Rate positions are up 26%, Foreign Exchange 14%, Credit 130%, and Other 27%. By Product, Swaps expanded at a 26% rate (up 31% over four quarters) to $52.9 billion. Futures & Forwards contracted at a 29% rate to $11.37 Trillion, while Options increased at a 9% rate to $18.0 Trillion. From one year ago, Futures & Forwards were up 4% and Options 27%. By largest holder, JPMorgan positions expanded at a 9% rate to $43.03 Trillion (up 27% from Q3 2003), Bank of America contracted 3% to $16.55 Trillion (up 20% from Q3 2003), and Citigroup contracted at a 17% rate (up 43% from Q3 2003) to $15.53 Trillion.

Morgan Stanley expanded Total Assets by $30.4 billion, or 16% annualized, during the fourth quarter. Assets increased $172.6 billion for the year, or almost 29%. Total Assets were up 46% over the past two years and 157% since the beginning of 1998. The company reported Net Income of $1.2 billion for the quarter (up 18% from Q4 2003), and $4.5 billion for the fiscal year (up 18% from 2003). The company repurchased 14 million shares during the quarter and 23 million for the year.

Bear Stearns reported quarterly Net Income of $352.6 million, up 22% from the year ago quarter. Full year Net Income rose 16.3% to $1.16 billion. "Capital Markets net revenues for the fourth quarter of 2004 were a record $1.43 billion, up 22.6% from $1.17 billion...Institutional Equities net revenues were $295.3 million, up 10.9%... Fixed income net revenues were $675.2 million, up 4.1%... Investment Banking net revenues were $458.7 million...up 83.3%..." The company did not provide asset data.

December 22 - Bloomberg (Josh P. Hamilton): "Wall Street firms will pay their New York City workers $15.9 billion in bonuses for 2004 as financial services companies head for their fourth-most profitable year, New York State Comptroller Alan Hevesi said. Brokerages and investment banks will award average bonuses of $100,400 per employee to roughly 158,000 people, up from $99,700 a year ago... Bonuses peaked at $19.5 billion in 2000, an average of $101,000 per employee. This year's amount will be the second-biggest ever."

Merry Christmas, Happy Holidays, and Thanks

Awhile back I ended my usual practice of concluding articles (preceding a holiday) with some type of simple holiday greeting. It was a kind of awkward. "Everything sure looks horrible for the markets, the economy is about to fall off a cliff, and there is a pyramid of excess compounding upon excesses -- but go out and have a splendid Fourth of July!" Or, "The entire Credit system is running completely out of control and our (acutely fragile financial and hopelessly maladjusted economic) system is chaotically and irreversibly self-destructing -- have a joyous Easter weekend!" "It looks like the end of the financial system (both domestically and globally!!!) as we know it -- have an especially Merry Christmas and Happy Hanukkah!" Well, I always strive for (slow but steady) refinement and improvement.

This year, I will limit myself to a brief comment about what I view as the overriding shortfall of current analysis, while attempting to use less than half the typical bevy of adjectives. When discussing the dollar (normally I would write "faltering" or "sinking" - perhaps in parentheses - before "dollar"), the current account deficit, the federal budget deficit, mortgage lending excesses, housing Bubbles and the like, there is little if any attention paid to the most important facet of the ongoing inflationary Credit Bubble: distortions and impairment to the structure of the economy. And there has developed a false sense of confidence and security that whatever financial difficulties arise can be rectified through Federal Reserve and global central bank actions - reliquefication, "reflation" and "monetization." Any type of loss can be more than made up for with additional Credit creation, and any bursting Bubble mitigated by collapsing interest rates and manipulating the yield curve. Yet, at this late stage of the Credit Bubble, inflationary manifestations have effects on the economy (I removed "blow off" in parentheses before "stage"; "Great" before "Credit Bubble"; "powerful" before "inflationary"; "especially deleterious" before "effects," and "real" before "economy.") Story to continue...

But such doug boilerplate is certainly not tantamount to spreading holiday good cheer; and I do very much want to wish readers the Merriest of Christmases and the happiest of holidays. It is also a good time to express my sincere appreciation that you find some value in reading my weekly "labor of love." Many thanks for putting up with my endless typos and misspellings, my ramblings and idiosyncrasies, and my repetitive repetition. I may have garnered some valuable insight regarding money and inflation from Mrs. Hill's class back in small-town Oregon, but I was clearly daydreaming about basketball or thinking about the girl sitting at the desk next to mine when I should have been paying attention to grammar lessons. We are all now paying the price... I would also like to pay special year-end gratitude to Mr. Richard Russell and Ms. Kate Welling - two of the very best in the business - for highlighting my work. I am tickled that people I respect so much take an interest in my analysis. I am also deeply appreciative! And, finally, I don't know about everyone else, but I am getting quite excited for 2005! It seems destined to be fascinating, challenging and historic. Such opportunities don't come around all too often. So everyone get plenty of rest, clear your heads and, most importantly, forget about all this "stuff" for a few days. Cherish your time with dear friends and family.