The Dow gained 2.8% to a new all-time high, and the S&P500 rose 2.2% to a new 6-year high. The Transports jumped 3.4% to a new record high (up 14.2% y-t-d), and the Utilities increased 2.2% to a new record high (up 12.5% y-t-d). The Morgan Stanley Cyclical index rose 2.1% (up 11.8% y-t-d) to a new high. The Morgan Stanley Consumer index added 1.2% to new record. The small cap Russell 2000 gained 1.2% (closed at record high on Monday) and the S&P400 Mid-Cap index 1.4% (to a record high). The NASDAQ100 rose 1.6% and the Morgan Stanley High Tech index 1.1%. The Semiconductors jumped 3.1%. The Street.com Internet Index added 0.5%, and the NASDAQ Telecommunications index gained 0.9%. Financials rallied sharply. The Broker/Dealers and Banks both surged 3.6%. Despite bullion's $6.0 advance, the HUI Gold index declined 2.3%.

Two-year government yields dropped 11bps to 4.65%. Five-year yields fell 12bps to 4.57%, and 10-year Treasury yields declined 9bps to 4.67%. Long-bond yields fell 8bps to 4.85%. The 2yr/10yr spread ended the week at a positive 2bps. The implied yield on 3-month December '07 Eurodollars dropped 10bps to 5.015%. Benchmark Fannie Mae MBS yields fell 8bps to 5.78%, this weekly slightly underperforming Treasuries. The spread on Fannie's 5 1/4% 2016 note narrowed one to 32, and the spread on Freddie's 5 1/2% 2016 note narrowed one to 32. The 10-year dollar swap spread declined one to 52.5. Corporate bonds traded in line with Treasuries, with a junk bond spread index little changed.

Investment grade issuers included Wachovia $1.5bn, Federal Farm Credit $1.5bn, HSBC $1.0bn, CSX $1.0bn, GS-Caltex $500 million and Brookfield Power $250 million.

Junk issuers included Energy Partners $450 million, Cimarex Energy $350 million, TAX Capital $300 million, and East Lane RE $250 million.

This week's convert issuers included Linear Tech $1.7bn St. Jude Medical $1.2bn, RAIT Financial $425 million, Lawson Software $240 million and Delta Petroleum $100 million.

International issuers included Banco Sabadell $2.0bn, Oester Kontrollbank $1.0bn, Globo Communications $200 million, and Haina Finance $175 million.

Japanese 10-year "JGB" yields rose 2bps to 1.68%. The Nikkei 225 added 0.5% (up 1.3% y-t-d). German 10-year bund yields dipped 3bps to 4.20%, notably underperforming Treasuries. Emerging markets were generally strong. Brazil's benchmark dollar bond yields sank 18bps this week to (an amazing) 5.47%. Brazil's Bovespa equities index rose 3.1% to a new record (up 11.1% y-t-d). The Mexican Bolsa added 0.2% to new highs (up 12.8% y-t-d). Mexico's 10-year $ yields dropped 12bps to a record low 5.43%. Russia's RTS equities index declined 1.5% (up 2.6% y-t-d). India's Sensex equities index jumped 3.8% for the week (up 0.8% y-t-d). China's (wild) Shanghai Composite index ended the week 1.9% higher at another record, increasing 2007 gains to 34%.

Freddie Mac posted 30-year fixed mortgage rates declined 5bps to 6.17% (down 36bps y-o-y). Fifteen-year fixed rates dipped 2bps to 5.89% (down 28bps y-o-y). One-year adjustable rates declined 2bps to 5.45% (down 18 bps y-o-y). The Mortgage Bankers Association Purchase Applications Index declined 4.2% this week. Purchase Applications were down 2.5% from one year ago, with dollar volume 2.0% lower. Refi applications slipped 0.3% for the week, although dollar volume was up 36.3% from a year earlier. The average new Purchase mortgage declined to a 12-week low $235,200 (up 0.5% y-o-y), and the average ARM increased to $393,800 (up 12.9% y-o-y).

Bank Credit declined $4.4bn (week of 4/11) to $8.410 TN. For the week, Securities Credit fell $4.4bn. Loans & Leases were little changed at $6.114 TN. C&I loans declined $5.6bn, while Real Estate loans jumped $14.8bn. Consumer loans added $1.7bn, while Securities loans declined $4.3bn. Other loans dropped $6.6bn. On the liability side, (previous M3) Large Time Deposits gained $2.6bn.

M2 (narrow) "money" jumped $17.7bn to a record $7.220 TN (week of 4/9). Narrow "money" has expanded $177bn y-t-d, or 8.7% annualized, and $460bn, or 6.8%, over the past year. For the week, Currency gained $1.1bn, and Demand & Checkable Deposits jumped $25bn. Savings Deposits declined $12.8bn, while Small Denominated Deposits added $1.5bn. Retail Money Fund assets increased $2.6bn.

Total Money Market Fund Assets (from Invest. Co Inst) dropped $27bn last week to $2.441 TN. Money Fund Assets have increased $59bn y-t-d, a 8.1% rate, and $392bn over 52 weeks, or 19.1%.

Total Commercial Paper declined $15.1bn last week to $2.035 TN, with a y-t-d gain of $61.1bn (10.1% annualized). CP has increased $345bn, or 20.4%, over the past 52 weeks.

Asset-backed Securities (ABS) issuance quickened to $12bn. Year-to-date total ABS issuance of $209bn (tallied by JPMorgan) is now running slightly ahead of comparable 2006. At $111bn, y-t-d Home Equity ABS issuance is about 27% below last year's pace. Year-to-date US CDO issuance of $101 billion is running 23% ahead of comparable 2006.

Fed Foreign Holdings of Treasury, Agency Debt rose $4.6bn last week (ended 4/18) to a record $1.916 TN, with a y-t-d gain of $164bn (30.4% annualized). "Custody" holdings expanded $311bn during the past year, or 19.4%. Federal Reserve Credit last week gained $1.8bn to $851bn (down $1.0bn y-t-d). Fed Credit was up $27.5bn y-o-y, or 3.3%.

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up an amazing $432bn y-t-d (29% annualized) and $918 bn y-o-y (21%) to a record $5.2 TN.

April 19 - Bloomberg (Maria Levitov): "Russia's foreign currency and gold reserves, the world's third largest, surged $10.3 billion in a week to a record on higher prices for oil and natural gas, the country's main exports. The reserves climbed to $356.6 billion..."

Currency Watch:

The dollar index declined 0.6% to 81.45. On the upside, the Polish zloty gained 1.3%, the Iceland krona 1.2%, the New Zealand dollar 1.1%, the Turkish lira 1.0% and the Japanese yen 0.9%. On the downside, the Paraguay guarani declined 0.4% and the Israeli shekel 0.3%.

Commodities Watch

April 18 - Bloomberg (Wang Ying): "China, the world's second-biggest energy consumer, plans to build uranium stockpiles by 2010 to ensure fuel supplies for its nuclear power plant expansions. The country will build 'strategic uranium stockpiles' and commercial storages of the fuel as China wants to boost nuclear usage in its power generation, the Commission of Science and Technology and Industry for National Defense said..."

April 20 - Bloomberg (Xiaowei Li): "China's production of metals for its power, manufacturing and construction industries surged in the first quarter... Production of aluminum, a lightweight metal used in car and plane parts, rose 37% from the same period last year..."

April 19 - Bloomberg (Hans van Leeuwen): "Emerging economies' demand for resources may sustain high commodity prices for several decades, Australia's central bank said. While China's appetite for commodities has prompted mining and energy companies to expand production, which may dampen prices, that effect will be countered by rising demand..."

For the week, Gold gained 0.9% to $691.55, while Silver slipped 1.0% to $13.995. Copper rose another 2.4%. June crude declined $2.22 to $64.11. May gasoline declined 1.9% and May Natural Gas fell 5.4%. For the week, the CRB index declined 1.8% (up 1.6% y-t-d), and the Goldman Sachs Commodities Index (GSCI) fell 2.2% (up 7.7% y-t-d).

Japan Watch:

April 19 - Bloomberg (Jason Clenfield): "Demand for services in Japan unexpectedly rose to a record in February, suggesting consumers may drive growth in the world's second-largest economy."

China Watch:

April 20 - Financial Times (Richard McGregor and Dave Shellock): "China's economy went into overdrive in the first quarter, heightening the prospect of further rate rises and monetary tightening... Confounding analysts who had expected the economy to slow slightly this year, the National Bureau of Statistics in Beijing announced that gross domestic product increased 11.1% in the first quarter compared with 10.4 per cent in the final three months of 2006. China has grown by more than 10% for the past four years in succession... 'This economy has not landed - it has refuelled in mid-flight and is flying higher again,' said Stephen Green, of Standard Chartered bank in Shanghai. Inflation was higher, reaching 3.3% in March, a level outside the central bank's comfort zone..."

April 19 - Bloomberg (Yanping Li): "China will take measures to further strengthen controls over fixed-asset investment, curb lending and narrow its widening trade surplus, Premier Wen Jiabao said. The government 'needs to take a combination of economic and legal measures to strengthen macro controls, speed up economic restructuring and prevent the economy from growing overheated.'"

April 16 - New York Times (Keith Bradsher): "At booth after booth at China's main trade fair this week, the refrain from Chinese business executives is the same: the American market is not as crucial as it used to be. Instead, Chinese producers of everything from socket wrenches to sport utility vehicles say, their fastest growth these days lies in Europe, Africa, the Middle East, South America and elsewhere in Asia -- in other words, practically anywhere other than the United States. So it is throughout China. With ample support from the Beijing government -- including a flurry of trade missions to Africa and assistance with trade fairs in Germany, Australia or someplace in between -- Chinese companies are poised to expand into the markets of many of the world's rapidly growing economies."

April 17 - Market News International: "Chinese urban fixed asset investment accelerated to 25.3% y/y in the first quarter, according to...the National Development and Reform.

Commission... The first quarter figures indicate investment accelerated in March after a growth rate of 23.4% posted in January and February, which included the Chinese New Year holiday."

April 20 - Bloomberg (Bei Hu): "China Citic Bank Corp. sold $5.4 billion of stock in the world's biggest offering this year, said two people with direct knowledge of the matter."

April 19 - Bloomberg (Ting Ting Ng): "Hong Kong's jobless rate held at its lowest level since June 1998...unemployment for the first quarter was unchanged at 4.3%..."

India Watch:

April 19 - Bloomberg (Cherian Thomas and Kartik Goyal): "Indian banks should slow loan growth to high-risk businesses and give priority to lending to the productive sectors, Finance Minister P. Chidambaram said. 'Credit growth at 30% has to be moderated and therefore banks must rebalance their credit portfolio... I have asked banks to moderate credit growth to sectors identified as high risk by Reserve Bank, especially real-estate and capital markets.'"

Asia Boom Watch:

April 18 - Bloomberg (Hans van Leeuwen): "The Asia-Pacific region's developing economies will expand at an average of more than 7% this year as demand from China, India and Japan fuel growth even amid a U.S. slowdown, the United Nations said."

Unbalanced Global Economy Watch:

April 17 - Market News International (Heather Scott): "After a modest slowdown last year, the Canadian economy is on track for 3% growth in 2008, buoyed by job growth and solid fiscal and monetary policy, Canada Finance Minister Jim Flaherty said..."

April 17 - Bloomberg (Brian Swint and Jennifer Ryan): "U.K. inflation unexpectedly accelerated to 3.1% in March, the fastest pace in a decade, sending the pound to $2 for the first time since September 1992 on speculation interest rates will keep rising."

April 20 - Bloomberg (Svenja O'Donnell): "U.K. pay bargainers agreed to wage increases at the fastest pace in eight years in the first quarter to compensate for accelerating inflation... Salaries rose a median 3.5%, up from 3% in the final quarter of last year..."

April 16 - Bloomberg (Jennifer Ryan): "London homeowners gained an average 76,000 pounds ($150,000) on the value of their property in the past year, triple the median salary, as U.K. house prices rose the most since 2003..."

April 19 - Bloomberg (Andreas Cremer): "Germany's five leading economic research institutes today raised their forecast for growth this year by two thirds... Europe's largest economy will expand 2.4% this year and next..."

April 17 - Bloomberg (Jonas Bergman): "Sweden Finance Minister Anders Borg comments on growth in the labor market: 'It took a very long time for jobs to come during the economic upturn, but it happened during 2006. I hoped, and many economists thought, that it was a delayed effect and that job growth would now be sustained during a longer period. But we are seeing labor constraints relatively quickly and many companies are citing a lack of workers as a reason for cutting back on production. We're also seeing that wage gains look to be bigger going forward. It's surprising that it's happening so quickly.'"

April 16 - Bloomberg (Maria Levitov): "Russia's industrial production expanded an annual 7.9% in March, Economy Minister German Gref said..."

April 18 - Bloomberg (Dania Saadi): "Egypt's inflation rate rose to 12.8% in March, the highest in more than two years, putting pressure on the central bank to raise interest rates."

April 16 - Bloomberg (Tracy Withers): "New Zealand house price inflation accelerated to a six-month high in March, adding to signs that a resurgent property market may prompt the central bank to raise interest rates... House prices rose 9.8% in March from a year earlier..."

Latin American Boom Watch:

April 19 - Bloomberg (Eliana Raszewski): "Argentina's industrial output grew 7% in March from a year earlier led by a surge in production from the country's automotive factories."

Bubble Economy Watch:

April 16 - The Wall Street Journal (Uren Etter, Julie Jargon, and Conor Dougherty): "Americans face sizable increases in their grocery bills this year as a boom in ethanol production diverts more corn from the nation's dinner table to its gas tank. Indeed, their pocketbooks could feel the pinch for years to come. High corn prices, bad weather and steep energy costs have combined to make food a bigger potential contributor to inflation this year than it has been at least since 2004, when a cutback in dairy production boosted dairy prices and beef prices rose as mad-cow disease disrupted trade. The Agriculture department says that retail food prices are likely to climb by 2.5% to 3.5% in 2007..."

April 19 - Bloomberg (Martin Z. Braun): "New York City's...unemployment rate fell to 4.3% in March, the lowest rate since the state began collecting data in 1976, amid growth in professional services, construction, and the securities industry. Statewide, unemployment declined to 4.1% from a 4.8% rate in March 2006..."

April 20 - New York Times (Ellen Rosen): "For corporate lawyers of a certain age, it seems like the 1980s all over again. Proxy fights, once the exclusive domain of investors like Carl C. Icahn, are on the rise. The primary cause is easy to spot: "The resurgence of shareholder activism is a direct result of the growth of hedge funds," said Marc Weingarten, a partner at Schulte Roth & Zabel... The result is a boon both to law firms that originally advised hedge funds...as well as to those with more traditional corporate finance practices..."

Financial Sphere Bubble Watch:

April 18 - Bloomberg (Shannon D. Harrington and Hamish Risk): "The global market for credit derivatives, which investors use to speculate on the financial health of companies and countries, more than doubled in size in the past year to cover $34.5 trillion of securities. The amount of outstanding credit-default swaps has now doubled for the third year in a row, the International Swaps and Derivatives Association said... 'It's hard to see volume growth tailing off,' said Lisa Watkinson, head of structured credit business development at Lehman Brothers..."

April 16 - Bloomberg (James M. O'Neill and Brian K. Sullivan): "SLM Corp., the largest U.S. student-loan provider, accepted a $25 billion takeover bid from a group led by J.C. Flowers & Co.... Flowers, together with Friedman Fleischer & Lowe LLC, JPMorgan Chase & Co. and Bank of America Corp., offered $60 a share for SLM, known as Sallie Mae, or 28 percent more than the April 13 closing price... Demand for student loans has surged an average 27% each of the last six years as more students borrow to attend universities such as Harvard, Princeton and Yale."

Mortgage Finance Bubble Watch:

April 19 - Market News International (Margaret Chadbourn): "Distress in the subprime sector of the U.S. housing market has revitalized lawmakers' efforts to revamp the Federal Housing Administration mortgage insurance program. 'There is an affordable housing crisis in America. I believe the FHA modernization bill points us in the direction of a solution to help meet the housing needs for many Americans,' Rep. Maxine Waters, said... Waters is a co-sponsor of a bill with House Services Chairman Barney Frank that would increase FHA loan limits in high-cost pockets of the country; allow FHA to provide low-downpayment loans competitive to those offered by private lenders; eliminate fee hikes on certain FHA loans; and permit the FHA to underwrite loans to borrowers with higher credit risks."

April 19 - The Wall Street Journal (James R. Hagerty and Damian Paletta): "Freddie Mac and Fannie Mae said they expect to buy tens of billions of dollars of newly created subprime mortgage loans over the next few years to help prop up the roughly $1.3 trillion subprime market as lenders tighten their credit standards or flee altogether. The move shows how the two government-sponsored companies are redeeming themselves on Capitol Hill by depicting themselves as part of the solution to surging defaults on subprime mortgages, those for borrowers with weak credit records or high debt in relation to income."

April 19 - Bloomberg (Bradley Keoun): "Merrill Lynch & Co. said its newly acquired First Franklin unit made record numbers of subprime home loans in January and February and added staff, even as a surge in defaults forced rival mortgage lenders into bankruptcy. 'We were able to build on our platform, actually hire highly talented people from competition, as some of our competitors fell away,' Merrill CFO Jeffrey Edwards said..."

Foreclosure Watch:

April 18 - Bloomberg (Bob Ivry): "Banks began foreclosure proceedings against 47% more U.S. homeowners last month compared with a year ago as falling housing prices made it more difficult for borrowers to refinance mortgages. More than 149,000 filings were posted in March... California filings rose to 31,434, more than triple the number a year ago. Nevada and Colorado had the largest percentage gains."

April 16 - Bloomberg (Bob Ivry): "The number of U.S. homes entering foreclosure in the first quarter doubled from a year earlier as property prices stagnated and owners struggled to refinance mortgages. Owners of 168,829 homes in the first three months of 2007 received notice that lenders had filed for foreclosure due to failure to pay loans or liens, Foreclosures.com said..."

MBS/ABS/CDO Watch:

April 16 - Bloomberg (Caroline Salas): "Collateralized debt obligations may contain $18 billion to $25 billion of losses because of a rising number of bad home loans, according to Lehman Brothers... 'The majority of the marked-to-market losses are contained within CDOs,' Lehman analysts...said... The losses for CDOs containing asset-backed securities is 'very meaningful for current holders of CDOs' and 'a manageable number from an overall capital markets perspective.'"

April 18 - Bloomberg (Jody Shenn): "Sales of new bonds backed by so-called Alt-A home loans rose in the first quarter as issuance of riskier subprime securities slid further, according to industry newsletter Inside MBS & ABS. Issuance of bonds of Alt-A home loans, which are made to people with good credit histories who opt for atypical underwriting or loan terms, climbed 2.7% from a year earlier to $98.7 billion... Sales of bonds backed by subprime home loans fell 22% to $88 billion, dropping below Alt-A for the first time..."

April 19 - Bloomberg: "First-quarter sales of European asset-backed bonds almost doubled year over year, to $169 billion, according to a survey by the European Securitization Forum..."

Real Estate Bubbles Watch:

April 20 - Bloomberg (Brian Louis): "The 'Chicago Spire,' planned as the world's tallest residential building, won the approval of the Chicago Plan Commission..., clearing the way for construction to begin on the skyscraper. The proposed building is being developed by Dublin-based Shelbourne Development Ltd... 'The Chicago Spire will be one of the most exquisite addresses in the United States and abroad,' Garrett Kelleher, executive chairman of Shelbourne Development, said... The planned 2,000-foot-tall building will stand at the mouth of the Chicago River on the shore of Lake Michigan. It will have 1,200 condominiums and be 150 floors tall..."

April 17 - Bloomberg (Daniel Taub): "U.S. office rents rose 11% in the first quarter and vacancies dipped close to the lowest since before the Sept. 11, 2001, terrorist attacks, as companies added employees, increasing demand for working space. Rents gained as the average office vacancy rate in U.S. downtowns fell to 9.9% in the first quarter, from 12.6% a year earlier..."

April 18 - Bloomberg (Brian Louis): "Luxury home prices slid in New York's Long Island and Queens in the first quarter as more property came onto the market and took longer to sell, appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate said. The median sales price fell 5.3% to $900,000 from a year earlier..."

Energy Boom and Crude Liquidity Watch:

April 16 - Bloomberg (Massoud A. Derhally): "Export earnings of the Gulf states are expected to reach $544 billion in 2007 as the countries benefit from higher oil prices, Arab News reported, citing a report by World Business."

April 18 - Bloomberg (Yuriy Humber and Bradley Cook): "Russia plans to build the world's longest tunnel, a transport and pipeline link under the Bering Strait to Alaska, as part of a $65 billion project to supply the U.S. with oil, natural gas and electricity from Siberia."

April 18 - Bloomberg (Nesa Subrahmaniyan): "Saudi Aramco, the world's largest state oil company, said a shortage of refining capacity to process so-called heavy-sour crudes will persist because of rising construction costs. Rising prices of steel and other construction materials have prompted companies and governments to delay or cancel projects..."

Climate Watch:

April 20 - Financial Times (Richard McGregor): "Anyone looking for reasons why the world should care about China's economy and its propensity to grow at double-digit rates may have found it yesterday - not in Beijing, but in Paris at the International Energy Agency. According to the IEA, the country...could overtake the US as the world's largest emitter of greenhouse gases this year or in 2008. This is at least 12 months earlier than its recent estimate of 2009."

Fiscal Watch:

April 19 - The Wall Street Journal (John J. Fialka): "Government auditors are warning that two federal insurance programs face 'many billions' of dollars in possible damage claims, because they haven't acted to limit risks from storms and floods resulting from climate change, the way many private insurers have."

April 19 - Bloomberg (Darrell Preston): "Texas owes state workers $50 billion in future retirement benefits and refuses to acknowledge the obligation. Texas Comptroller Susan Combs says she won't follow a new national accounting standard that requires states and cities to disclose the estimated costs of benefits promised to retired workers... The government would need to set aside $4 billion a year over the next decade to keep from falling short on what it owes, according to...the state's Legislative Budget Board."

Speculator Watch:

April 19 - Bloomberg (Jenny Strasburg): "Hedge funds globally attracted $60 billion in new money during the first quarter, almost half the amount raised all of last year. The industry now oversees $1.57 trillion. Funds more than tripled their fundraising from the final three months of 2006, according to...Hedge Fund Research Inc... Net deposits to fund managers in 2006 totaled $126 billion."

April 16 - Bloomberg (Andrei Postelnicu): "Hedge-fund managers based in London looked after six times more assets last year than they did in 2002 and have more than doubled their market share of assets in the same period, a survey said. Assets overseen by firms...last year jumped 40% from a year earlier to $360 billion. London accounted for 21% of the $1.5 trillion managed by hedge funds worldwide..."

April 18 - Dow Jones (Marietta Cauchi): "Private equity raised some $88 billion in the first quarter of 2007 with mega-funds dominating the fundraising market...Private Equity Intelligence said... The amount raised is less than the $104 billion snagged in the same period in 2006 but the industry looks set to match last year's total of $453 billion and even reach $500 billion, said PEI."

April 18 - Bloomberg (Ari Levy and Elizabeth Hester): "Seven years after the Internet bubble burst, investors say it's time to recoup their Silicon Valley losses. Technology firms backed by venture capitalists raised $701 million in seven initial public offerings last quarter, equaling the third period of 2004 as the busiest since 2000, according to Dow Jones VentureOne..."

Financial Earnings:

April 18 - Bloomberg (Jenny Strasburg): "Fortress Investment Group LLC, the first U.S. manager of private-equity and hedge funds to go public, said net income more than doubled in 2006, driven by increased asset-management fees and hedge-fund gains. Fortress earned $442.9 million, compared with $192.7 million in 2005..."

Citigroup Net Income was up 36% y-o-y to $2.621bn. "Revenues were a record, up 15%, driven by 23% growth in markets & banking, including record revenues in fixed income and equity markets, investment banking and transaction services." "Fixed income markets revenues increased 20% to a record $3.8 billion, driven by improved results across all products... Gross investment banking revenues were a record $1.8 billion, reflecting record equity underwriting revenues, up 83%, and record advisory and other fees, up 45%." Average Consumers Loans grew 16% y-o-y. International Consumer (excluding Japan) Average Loans grew 25%. Total Assets expanded $136.5bn, or 29% annualized, during the quarter to $2.021 TN (up $435bn, or 27% y-o-y). Total Loans expanded $14.2bn, while the combined (capital mkt) Assets "fed funds and repos", Trading Account Assets, and Investments surged $100.2bn (up $299bn, or 38%, over the past year). On the Liability side, U.S. Deposits increased $4.5bn, while "Fed Funds" jumped $44.4bn and Trading Account Liabilities rose $28.0bn. Over the past year, the Liability "Fed Funds" jumped $114bn, or 40%, to $393.7bn.

JPMorganChase reported first quarter Net Income of $4.8bn, up 55% from Q1 2006. "Net Revenue was a record $6.3 billion, up 30% from the prior year, driven by record investment banking fees and record market results. Investment banking fees of $1.7 billion were up 48% from the prior year driven by record debt and record equity underwriting as well as strong advisory fees. Debt underwriting fees...were up 52% driven by record bond underwriting fees and strong loan syndication fees... Record Fixed Income Markets revenue of $2.6 billion was up 25%... Record Equity Markets revenue of $1.5 billion increased 22%... Credit Portfolio revenue...was up 23%..." "Ranked #1 in Global Syndicated Loans: #2 in Global Announced M&A..." Asset Management Net Income was up 36%. "Assets under supervision were $1.4 trillion, up 17%, or $198 billion, from the prior year." At its Treasury & Securities Services division, "assets under custody increased to $14.7 trillion, up 31%." Commercial Banking saw Average Loan and Lease balances up 13% over the prior year. "Mortgage loan originations of $34.1 billion were up 21%..." The total Provision for Losses was up 25% y-o-y to $1.6bn. Total Assets surged $57.4bn, or 17% annualized, to $1.409 Trillion (up 10.7% y-o-y). Trading Assets jumped $64bn during the quarter and were up $114bn (44%) y-o-y to $374bn. On the Liability side, Total Deposits were up 8% y-o-y to $630bn, while "Fed Fund and repos" jumped 45% to $219bn. The company repurchased 80.9 million shares of stock for the quarter at a cost of $4.0bn.

Merrill Lynch reported Net Earnings of $2.2 billion, "up 31% excluding one-time expenses in the prior-year period." First quarter Net Revenues were up 24% y-o-y to $9.9bn. Global Markets and Investment Banking (GMI) were a record $6.5bn, up 43% y-o-y. In GMI, "Fixed Income, Currencies and Commodities net revenues increased 36% to a record $2.8 billion driven by nearly every major revenue category, as revenues from Credit products, real estate, interest rate products and currencies grew to record levels... Equity Markets net revenues increased 50% to a record $2.4 billion, driven by every major business line... Investment Banking net revenues increased 47% to a record $1.4 billion..." "Global Wealth Management net revenues increased 11% to $3.1 billion, driven by every major revenue category..." The company repurchased 22.4 million shares at a cost of $2.0bn during the quarter. Merrill management also stated that its investment banking pipeline ended the quarter at record levels - its debt, equity and advisory pipelines were all at records.

Bank of America reported first quarter Net Income of $5.26bn, up only 5.4% from the year earlier period. "Investment banking fees rose 35 percent... Asset management fees increased 12 percent...Average loans to small businesses with less than $2.5 million in annual sales increased 30%..." The Global Consumer and Small Business Banking division saw first quarter Net Income decline slightly y-o-y from $2.724bn to $2.696bn. Nonperforming Assets increased from the year ago $1.68bn to $2.059bn. Net Charge-offs surged from $822bn (0.54% of outstanding loans) to $1.427bn (0.81%). Total Assets expanded $42.4bn during the quarter, or 11.6% annualized, to $1.502 TN (up 9.2% y-o-y). On the Liability side, Deposits increased $10.4bn, or 1.5%, y-o-y, while "commercial paper and other short-term borrowings" jumped $57.5bn, or 57.8%. The company repurchased 48 million shares during the first quarter.

Wells Fargo reported "record net income of $2.24 billion, up 11% from prior year's $2.02 billion, up 12 percent (annualized) from fourth quarter 2006. Record revenue up 10 percent from the prior year. Average loans up 12 percent (annualized) from prior quarter...up 13 percent from prior year excluding real estate 1-4 family first mortgages." Average commercial loans grew at a 12% rate during the quarter and were up 11% y-o-y. First quarter Credit losses of $715 million (0.90 % of average loans) were down somewhat from Q4's $726 million (0.92%), but were significantly higher than the year ago $433 million (0.56%). Home mortgage originations were up 3% from the prior year to $68bn.

Earnings season provides us a quarterly glimpse into the workings of the Credit system. I was especially interested in the opportunity to examine how various institutions were responding to the subprime meltdown. Were lenders pulling back from home mortgage lending? Were they becoming more risk averse in the lending business generally? Any reverberations in securitizations or derivatives? Most important, are we seeing evidence of slowing financial sector growth - the lifeblood of market liquidity?

Well, in regard to some of these questions, results are inconclusive. Generally, moderately rising Credit costs are putting only greater pressure on profitability for the more traditional banking businesses. Growth has slowed for some, while others are aggressively pursuing growth wherever it can be found. At this point, the more important dynamics remain the move by financial institutions into commercial lending and capital market activities. And as Citigroup's asset growth of $137bn and JPMorgan's $57bn demonstrate, institutions can grow securities market-related assets these days much more readily than they can traditional loans. Need earnings to please Wall Street and support the stock price - go capital markets!

So, to answer a key question, when it comes to market liquidity there is little evidence that subprime problems have led to any restraint in financial sector expansion generally. Perhaps the opposite.

Reporting last month, Goldman Sachs, Lehman Brothers, Morgan Stanley, and Bear Stearns posted combined (fiscal) first quarter asset growth of an astounding $239bn, or 34% annualized, to surpass $3.0 TN. With the subprime collapse hitting at the end of February (little impact on fiscal Q1), all eyes were on Merrill Lynch's report for quarter ended March 31. Well, Merrill enjoyed a blow-out quarter and was pleased to broadcast that it had taken full advantage of market turbulence (including record subprime originations!) during the period. While Merrill does not release a balance sheet with its earnings release, it's at this point a reasonable assumption that the broker/dealers are well on their way to sustaining last year's incredible 30% growth rate.

Financial sector quarterly revenues data provide evidence as to which businesses and what types of lending are driving system Credit growth (all of them!). Balance sheets - Liabilities, in particular - help inform us as to the nature of financial sector liabilities being created in the process of financing the Credit boom. Confirming record first quarter debt issuance data, the investment banking business has never been stronger. Despite slowing household mortgage debt growth, we're still likely on pace for record securitization issuance this year. And as far as funding financial institution asset growth, it is worth noting the aggressive expansion of "fed funds", "repos" and other non-deposit liabilities. Clearly, M2 (or MZM) "money" supply is capturing little of the enormous ongoing expansion of market-based liquidity creation.

During the first quarter, the Liability "Fed Funds and repos" jumped $44.4bn at Citigroup and $56.7bn at JPMorgan. Goldman, Lehman, Bear Stearns, and Morgan Stanley combined for a $100 billion increase in "Repo" Liabilities, a 77% annualized growth rate. It is worth noting that the first quarter increase in "fed funds and repo" from these six institutions alone ($201bn) was larger than total M2 growth ($160bn) during the period. Over the past year, the Liability "fed funds & repo" increased 41% at Citigroup to $393.7bn and 45% at JPMorgan to $219bn. While quarterly earnings leave many questions unanswered, the issue of a historic runaway increase in securities-based finance has been reconfirmed.

A commentator on CNBC today said that it was "obvious" that Credit growth was slowing significantly. It appears obvious to me that rampant Credit excess runs unabated. Household debt growth may be moderating, while corporate borrowings are likely expanding at low double-digit rates. But it is the growth in financial sector borrowings that holds the key to liquidity puzzle. The leveraging of existing securities (there's $45 TN of Credit market debt outstanding) - by hedge funds, in broker/dealer and bank "trading accounts" - is likely a major source of current liquidity excess.

I will conclude by respectfully taking exception to David Hale's op-ed piece in today's Financial Times, "The Dollar May be Volatile but Pessimists are wrong."

"There is an alternative view of the dollar that is much more optimistic because it focuses on the performance of asset markets rather than the size of the current account deficit. The analysts who focus on asset markets are less apprehensive about the external deficit because they believe the US has a vast capacity for attracting foreign capital. They are not obsessed with the ratio of the current account imbalance to gross domestic product. They instead focus on the ratio of the current account deficit to American asset markets. The total value of household assets in the US is $64,000bn and the total value of non-financial business assets is $32,000bn. If we subtract debt, the net value of private assets is $70,000bn. Real assets (mostly property) are worth $34,600bn, equity in listed companies is worth $19,000bn and other financial assets are worth $19,500bn."

"As the current account deficit is equal to only 1 per cent of the value of private assets, dollar optimists do not think the US faces any great obstacle in funding its external deficit... The reality is that the consumer will sustain US output growth at moderate levels and allow monetary policy to remain unchanged. Fluctuations in the dollar will continue owing to concerns about the economy or Congress embracing protectionism. But America's asset markets are too large and flexible for there to be a sustained interruption of capital inflows and an enduring decline in the dollar exchange rate."

Sure, as long as Credit expands at the current rapid pace the consumer will undoubtedly keep spending and asset markets will keep inflating. And as long as the Credit Bubble is sustained U.S. financial assets may appear sufficiently enticing to our foreign Creditors (although they must not be that attractive or foreign central banks wouldn't have been forced into accumulating about $1 TN of reserves the past year). But this is Ponzi Finance at its most extreme. The U.S. financial sector must now balloon rapidly and incessantly to sustain over-consumption; to maintain inflated real estate and securities values; to support corporate earnings and income growth; and, importantly, to support the ever-growing pyramid of financial sector debt obligations. But as we have been witnessing of late, this kind of Credit system expansion creates only more dollar liquidity to add to the global deluge. If only, in Minsky's language, "Ponzi Finance Units" could live forever. There will, at some point, be a reversal of flows out of Wall Street "finance" that will likely coincide with a flight from the dollar.