The seductive summer rally is appearing increasingly vulnerable. The Dow and S&P ended the week almost where they began. The Transports added 0.5%, while the Utilities gained 1% (up 15% y-t-d). The Morgan Stanley Cyclical index was slightly positive, and the Morgan Stanley Consumer index rose 1%. The small cap Russell 2000 posted a slight gain, increasing year-to-date gains to 4.3%. The S&P400 Mid-cap index gained 1%, with 2005 gains rising to 8.6%. Technology stocks continued their recent outperformance (to the major indices). The NASDAQ100 and Morgan Stanley High Tech indices were slightly positive. The Semiconductors were about unchanged (up 9.5% y-t-d). The Street.com Internet Index and NASDAQ Telecommunications index each added 1%. The Biotechs rose 1% (up 14% y-t-d). Financial stocks were on the defensive. The highflying Broker/Dealers were hit for 2% (up 10% y-t-d), while the Banks were down 1.5% (down 4% y-t-d). Although bullion gained $4.80, the HUI gold index declined 2.5%.

Has the bond bear quietly made his long-awaited arrival? For the week, two-year Treasury yields jumped 11 basis points to 4.02%, the highest level since July 13, 2001. Five-year government yields rose 9 basis points to 4.12%, the high since this past April 8. Ten-year Treasury yields gained 6 basis points for the week to 4.28%, and long-bond yields rose 3 basis points to 4.47%. The spread between 2 and 10-year government yields dropped to 26. Benchmark Fannie Mae MBS yields rose 6 basis points, in line with Treasuries. The spread (to 10-year Treasuries) on Fannie's 4 5/8% 2014 note declined 2.5 basis points to 29, and the spread on Freddie's 5% 2014 note narrowed 3 to 28. The 10-year dollar swap spread added 0.5 to 44.5. Corporate bonds generally traded in line with Treasuries, although auto bond and CDS spreads continue to perform well. Junk bond spreads were little changed for the week. The implied yield on 3-month December Eurodollars surged 9.5 basis points to 4.265%, a 3-month high.

This week's investment grade issuers included Citigroup $1.25 billion, L-3 Communications $1.0 billion, Wachovia $800 million, US Bank $750 million, Chartered Semiconductor $625 million, Mid-Atlantic Military $600 million, JPMorgan $500 million, Energy Transfer PTT Public $350 million, Burlington Northern $200 million, and Methanex $200 million.

Junk bond funds reported outflows of $104.8 million (from AMG). Junk issuers included Sungard Data $3.0 billion and FTI Consulting $200 million.

July 27 - Bloomberg (David Russell and Ed Leefeldt): "SunGard Data Systems Inc. raised $7.5 billion in loans and junk bonds today to fund the largest leveraged buyout since the RJR Nabisco Inc. takeover in 1989. SunGard and seven buyout groups led by Silver Lake Partners moved up a $2 billion bond sale by one day, increased the size by 60 percent and lowered yields, all signs of strong investor demand. SunGard also cut interest margins on a $4 billion term loan, the biggest such borrowing since 1998."

Convert issuance included L-3 Communications $600 million, Manor Care $400 million, and Barnes Group $85 million.

Foreign dollar debt issuance included Commonwealth Bank of Australia $2.0 billion.

Japanese 10-year JGB yields jumped 7 basis points this week to 1.30%. Emerging debt markets were mixed. Brazilian benchmark dollar bond yields declined 7 basis points to 7.85%. Mexican govt. yields were about unchanged at 5.50%. Russian 10-year dollar Eurobond yields added one basis point to 6.05%.

Freddie Mac posted 30-year fixed mortgage rates rose 4 basis points to 5.77%, up 24 basis points in four weeks (down 31 basis points from one year ago). Fifteen-year fixed mortgage rates added 2 basis points to 5.34%. One-year adjustable rates gained 4 basis points to 4.46%, up 22 basis points in four week and 29 basis points higher than a year earlier. The Mortgage Bankers Association Purchase Applications Index was about unchanged last week. Purchase applications were up 9% compared to one year ago, with dollar volume up 21%. Refi applications dropped 11.4%. The average new Purchase mortgage rose to $239,400. The average ARM jumped to $350,500. The percentage of ARMs increased to 29.4% of total applications.

Broad money supply (M3) surged $30.4 billion to $9.749 Trillion (week of July 18). Year-to-date, M3 has expanded at a 5.1% growth rate, with M3-less Money Funds expanding at a 6.7% pace. For the week, Currency added $0.3 billion. Demand & Checkable Deposits were unchanged. Savings Deposits jumped $24.8 billion. Small Denominated Deposits gained $3.0 billion. Retail Money Fund deposits dipped $3.2 billion, while Institutional Money Fund deposits declined $2.1 billion. Large Denominated Deposits rose $2.6 billion. For the week, Repurchase Agreements rose $3.5 billion, and Eurodollar deposits added $1.5 billion.

Bank Credit rose $15.4 billion last week. Year-to-date, Bank Credit has expanded $489.9 billion, or 13.0% annualized. Securities Credit gained $4.1 billion during the week, with a year-to-date gain of $148.5 billion (13.9% ann.). Loans & Leases have expanded at a 13.1% pace so far during 2005, with Commercial & Industrial (C&I) Loans up an annualized 19.1%. For the week, C&I loans rose $7.7 billion, while Real Estate loans increased $5.5 billion. Real Estate loans have expanded at a 16.0% rate during the first 29 weeks of 2005 to $2.769 Trillion. Real Estate loans were up $361 billion, or 15.0%, over the past 52 weeks. For the week, Consumer loans added $4.2 billion, while Securities loans dropped $19.0 billion. Other loans rose $13.1 billion.

Total Commercial Paper added $0.5 billion last week to $1.545 Trillion. Total CP has expanded $131.5 billion y-t-d, a rate of 16.1% (up 14.4% over the past 52 weeks). Financial CP gained $2.6 billion last week to $1.405 Trillion, with a y-t-d gain of $120 billion (16.2% ann.). Non-financial CP declined $2.1 billion to $140.8 billion (up 15.1% ann. y-t-d and 5.2% over 52 wks).

ABS issuance slipped to $11.4 billion (from JPMorgan). Year-to-date issuance of $427 billion is 22% ahead of comparable 2004. Home Equity Loan ABS issuance of $271 billion is 26% above comparable 2004.

Fed Foreign Holdings of Treasury, Agency Debt gained $8.0 billion to $1.454 Trillion for the week ended July 27. "Custody" holdings are up $118.3 billion, or 15.3% annualized, year-to-date (up $214.6bn, or 17.3%, over 52 weeks). Federal Reserve Credit declined $3.0 billion to $793.3 billion. Fed Credit has increased 0.6% annualized y-t-d (up $41.1bn, or 5.4%, over 52 weeks).

July 28 - Bloomberg (Brian Swint and John Fraher): "Money supply growth in the 12 countries sharing the euro unexpectedly accelerated in June, limiting the European Central Bank's scope to reduce rates. M3, the ECB's money supply measure, rose 7.5 percent in June from a year earlier after growing 7.3 percent in May... Private sector loans rose the most in four years. The lowest interest rates in almost six decades have helped fuel a surge in house prices in France, Spain and Ireland, prompting concern about diverging growth and inflation rates across the euro region. With oil prices near a record, the bank is reluctant to cut rates even as Italy and Germany pressure the ECB to do more for economic growth."

July 27 - Bloomberg (Mayumi Otsuma): "The Bank of Japan will not shift monetary policy until it is sure that deflation won't return... [Governor Toshihiko] Fukui said the central bank will not immediately move to change policy even after the economy emerges from its lull... 'We will not move to shift policy unless we are sure deflation will not come back and the economy continues to show steady growth.'"

Currency Watch:

The dollar index posted a small decline this week. On the upside, the Brazilian real jumped 4.6%, largely recovering its recent sharp decline. The Mexican peso gained 1.4%, the Chilean peso added 1.2%, and the South African rand and the Norwegian krone both gained 1.0%. On the downside, the Philippine peso declined 1.0%, the Japanese yen 0.9%, and the Australian dollar 0.8%.

Commodities Watch

July 29 - Bloomberg (Koh Chin Ling): "China's grain shortfall may expand 25

percent this year as the country's farmers struggle to boost production fast enough to meet growing demand. China, the world's biggest consumer of wheat, rice and corn, may need about 25 million metric tons of grain more than it's forecast to produce this year, Zeng Liying, deputy director of the State Grain Administration (said)... That compares with a shortfall of 20 million tons in 2004. 'The long-term grain supply and demand situation is tightly balanced. Consumption continues to rise, yet there is great difficulty in raising production' because of urbanization, water shortages, and lagging technology and investment in farming infrastructure... China, once the U.S.'s biggest competitor in corn exports to Asia, may become a major importer of the grain as the country's 1.3 billion people eat more pork and chicken, increasing demand for animal feed."

July 27 - Bloomberg (Jennifer Itzenson): "Copper prices in New York rose, eclipsing yesterday's record high, as global inventories declined, signaling growing demand for the metal used in homes, cars and appliances. Stockpiles monitored by the London Metal Exchange fell 300 metric tons today to 26,550 tons. Inventories have dropped 46 percent this year..."

September crude oil jumped $1.92 to $60.57. For the week, the CRB index rose 2.5%, increasing y-t-d gains to 9.9%. The Goldman Sachs Commodities index added 3%, with 2005 gains rising to 29.7%.

China Watch:

July 25 - Bloomberg (A. Craig Copetas and Nerys Avery): "China won't make its currency fully convertible for at least five years because it worries hedge funds may force the yuan to plunge, much as happened to the Korean won and Thai baht during the 1997 Asian financial crisis, said Li Deshui, a member of the central bank's monetary Committee. 'There's more than $800 billion to $1 trillion of hedge funds in the world and the Chinese financial system is relatively weak,' Li, 61, said in an interview. 'If the (yuan) becomes fully convertible it would be attacked by these hedge funds.'"

July 25 - Bloomberg (Jianguo Jiang): "China's property price growth picked up in the first half of 2005 from the first five months... Prices rose an average 10.1 percent from a year earlier, the Beijing-based bureau said... That's higher than the 8.9 percent increase the bureau reported in June for the first five months."

July 26 - XFN: "China's industrial firms' profits rose 19.1% year-on-year to 626.6 bln yuan in the first half, the National Bureau of Statistics said... That compares with an increase of 15.8% in the first five months and 41.6% for the first half last year."

July 26 - XFN: "China's major ports handled 1.87 bln tons of cargo in the first half this year, up 18.7% year-on-year, the Ministry of Communications said... First-half container throughput at the ports increased 24% from a year earlier to 34.28 mln TEUs (twenty-foot equivalent units)."

July 26 - Bloomberg (Joshua Fellman): "Hong Kong's exports rose more than expected in June as the city's ports handled more electronic parts en route to China and Chinese-made computers, clothing and washing machines bound for the U.S. and Europe. Exports, about 95 percent of which are made elsewhere, increased 12.6 percent from a year earlier to HK$189.5 billion ($24.4 billion)..."

July 22 - Bloomberg (Joshua Fellman): "Hong Kong's inflation accelerated to a seven-year high of 1.2 percent in June as flooding in China damaged crops, making some food more expensive. The rate rose from 0.8 percent in May and was the highest since September 1998."

Asia Boom Watch:

July 26 - Bloomberg (William Sim and Seyoon Kim): "South Korea's economy grew in the second quarter at the fastest pace in more than a year as consumer spending, investment and construction picked up. Gross domestic product rose a seasonally adjusted 1.2 percent from the previous quarter, the central bank said... Growth was faster than the 0.4 percent rate in the first quarter..."

July 27 - Bloomberg (Seyoon Kim): "South Korea had its credit rating raised to the highest since before the Asian financial crisis by Standard & Poor's because of improving external finances and banks' credit controls. South Korea's long- and short-term foreign currency debt rating was raised to A from A-, with a stable outlook, the company said in a statement. That's the highest rating since S&P downgraded South Korea to A- from A+ on Nov. 25, 1997."

July 26 - Bloomberg (Sara Webb): "Singapore's manufacturing expanded in June for the second month this year, rising at four times the pace expected by economists, as drugs and electronics makers increased output and shipyards won more orders. Factory output rose a seasonally adjusted 9.2 percent from May, when it fell a revised 4.5 percent..."

July 27 - Bloomberg (Laurent Malespine): "Thailand's trade deficit rose in June to the highest in nine years as fuel imports doubled, the commerce ministry said... The deficit widened to $1.88 billion, the highest since April 1996..."

Unbalanced Global Economy Watch:

July 29 - MarketNews: "The European Commission's Business Climate Indicator (BCI) rose in June for the second month in a row, making the biggest one-month leap since an increase of 0.45 point in April 2004..."

July 29 - Bloomberg (Sharon Smyth): "Spain's government may raise its 2005 economic growth forecasts to 3.3 percent from 2.9 percent today at its last cabinet meeting before the summer break, Expansion reported..."

July 26 - Bloomberg (Ben Sills): "Spain, Europe's fifth largest economy, posted a record trade deficit in May as the value of imports from China surged. The deficit reached 6.4 billion euros as imports grew 12.9 percent from the year earlier period to 19.7 billion euros, the Ministry of Industry, Tourism and Trade said... Imports from China grew 63 percent to 993 million euros, 5 percent of the total."

July 29 - Bloomberg (Fergal O'Brien): "Irish mortgage lending grew at the fastest pace on record last month as rising employment and the lowest interest rates in 60 years bolstered demand for property. The amount advanced to homebuyers rose by 2.1 billion euros ($2.5 billion) in June compared with 1.68 billion euros in May, the country's central bank said... That's the largest monthly increase since the bank began compiling the data in 1996."

July 26 - Bloomberg (Tasneem Brogger): "Danish house prices rose at the fastest pace in a decade in the second quarter as record-low interest rates prompted Danes to take out more mortgage loans. The average price of a house rose 14.2 percent from the same period last year..."

July 28 - Bloomberg (Tasneem Brogger): "Denmark's unemployment rate in June fell to its lowest level since February 2003 as consumer spending and business investment underpinned demand for labor. The jobless rate slid to 5.8 percent from 5.9 percent the previous month..."

July 28 - Bloomberg (Jonas Bergman): "Swedish retail sales in June posted their biggest-ever annual gain as tax refunds and record-low interest rates boosted demand, the statistics office said. Sales surged an annual 9.6 percent in June..."

July 28 - Bloomberg (Halia Pavliva): "Finland's retail sales grew a preliminary 7 percent in June from a year earlier, Statistics Finland said, as consumer spending was bolstered by confidence in the economy."

July 25 - Bloomberg (Eduard Gismatullin): "Russia raised its prediction for economic growth for this year, Interfax cited Andrei Klepach, head of macroeconomic forecasts at the Economy Ministry, as saying. Gross domestic product will expand more than 6 percent in 2005..."

July 28 - Bloomberg (Halia Pavliva): "Russian luxury goods sales growth may triple the pace in western Europe this year as soaring oil prices stoke economic growth and consumers boost spending, said organizers of a luxury-goods fair. Russia sales of goods including Lamborghini sports cars and Versace perfumes will rise 25 percent to 30 percent this year, said Danny Hogers, a director for Amsterdam-based Gijrath Media Group BV..."

Latin America Watch:

July 27 - Bloomberg (Guillermo Parra-Bernal): "The Brazilian government cut its economic growth estimate for the second time this year and said inflation will decline more slowly than previously expected, the Budget and Planning Ministry said...The government lowered its growth estimate to 3.4 percent on July 26 from previous forecasts of 4 percent on May 25..."

Bubble Economy Watch:

June Durable Goods Orders were stronger-than-expected, with a y-o-y gain of 11.7%. Durable Goods Ex-transports were up 10.5% from one year ago. The Chicago Purchasing Managers' Index was reported at a strong 63.5 versus expectations of 55.

Speculator Watch:

July 27 - Bloomberg (Andrew Reierson): "The $8.42 trillion credit-derivatives market is riddled with unconfirmed trades that may undermine confidence, an industry group led by Goldman Sachs Group Inc., Citigroup Inc. and JPMorgan Chase & Co. said. The Counterparty Risk Management Policy Group, a panel of senior officials from financial institutions that first met in 1999 after the collapse of hedge fund Long-Term Capital Management, said an 'urgent' effort is needed to tackle the 'serious'' backlog. The credit-derivatives market than doubled last year, according to the International Swaps and Derivatives Association, leaving companies and banks struggling to keep up with the paperwork. The U.K.'s Financial Services Authority said in February that some credit-derivatives trades go unconfirmed for months and warned users to improve their handling of transactions."

July 28 - Bloomberg (Katherine Burton): "New money placed in hedge funds fell 60 percent in the second quarter as investment returns lagged the overall stock market, according to Hedge Fund Research Inc. Hedge funds, private pools of capital catering to wealthy individuals and institutions, attracted a net $10.9 billion, compared with $27.4 billion in the first quarter..."

Mortgage Finance Bubble Watch:

July 27 - The Wall Street Journal (Jesse Eisinger): "There has been plenty of talk about a housing bubble, but very little about a mortgage bubble. Now investors are starting to see worrisome signs in some banks' latest quarterly earnings reports. In others, such signs are absent. Good news? Nope, because disclosure is so poor at so many banks. As home prices have soared, banks have been enticing customers with sweet-sounding mortgages that lower monthly payments, including interest-only loans. The most dangerous development is mortgages that offer payment options. Typically, these so-called option adjustable-rate mortgages, or option ARMs, let customers choose how much to pay each month. They can make the standard principal-and-interest payment or pay just the interest. And then there's the even dicier option to make just a low minimum payment, as with a credit-card bill."

"A continuing tight supply of homes available for sale, low mortgage rates and high demand impacted Florida's housing market in June, helping to push the statewide median price of existing single-family homes up 31 percent to $248,700; a year ago, it was $189,200, according to the Florida Association of Realtors (FAR). In June 2000, Florida's median sales price was $119,600, according to FAR records, resulting in an increase of nearly 108 percent over the five-year period."

June Existing Home Sales were a stronger-than-expected and record 7.33 million annualized pace. June's record sales were about 4.5% ahead of June 2004, which was at the time a record. Average (mean) Prices were up 9.4% to a record $268,000 (up 21% over two years).

June New Home Sales were reported at a stronger-than-expected and record 1.374 million annualized pace. June Average (mean) Prices were up about 2% from a year earlier to $267,400.

We're flying back to Dallas tomorrow after spending a couple of weeks on the beautiful Oregon coast. It's always great to be home.