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End of an Era

For the week, the Dow declined 1.2% (down 7.9% y-t-d) and the S&P500 fell 1.1% (down 10.4%). the Transports gained 1% (up 4.0%), while the Utilities dipped 0.6% (down 11.6%). The Morgan Stanley Consumer index added 0.1% (down 6.4%) and the Morgan Stanley Cyclicals increased 0.5% (down 8.1%). The small cap Russell 2000 (down 10.8%) and the S&P400 Mid-Caps (down 10%) both gained 0.3%. The NASDAQ100 rose 0.9% (down 15.2%) and the Morgan Stanley High Tech index gained 1.0% (down 15.2%). The Semiconductors dipped 0.2% (down 16.9%), and the Street.com Internet Index fell 0.3% (down 11.8%). The NASDAQ Telecommunications index rallied 1.6% (down 11.1%). The Biotechs jumped 3.4% (down 8.6%). The hyper-volatile financial stocks reversed much of last week's gains. The Broker/Dealers dropped 7.0% (down 27.2%), and the Banks sank 8.4% (down 11.2%). With Bullion rallying $10.70, the HUI gold index gained 2.3% (up 9.7%).

One-month Treasury bill rates jumped 89 bps this past week to 1.275%, with 3-month yields up 64 bps to 1.34%. Two-year government yields rose 5 bps to 1.65%. Five-year T-note yields jumped 14 bps to 2.51%, and ten-year yields increased 10 bps to 3.44%. Long-bond yields advanced 15 bps to 4.32%. The 2yr/10yr spread ended the week at 179 bps. The implied yield on 3-month December '08 Eurodollars rose 5.5 bps to 2.22%. Benchmark Fannie MBS yields jumped 16 bps to 5.26%. The spread between benchmark MBS and Treasuries widened 6 to 182 bps. The spread on Fannie's 5% 2017 note narrowed 2 to 68 bps and the spread on Freddie's 5% 2017 note narrowed 2 to 67 bps. The 10-year dollar swap spread widened 5.8 to 67.8. Corporate bond spreads were mostly narrower. An index of investment grade bond spreads narrowed 13 to 144 bps. Meanwhile, an index of junk bond spreads narrowed 12 to 648 bps.

March 27 - Financial Times (Song Jung-a, Andrew Wood, and Michael MacKenzie): "The world's fifth-largest pension fund said yesterday it would no longer buy US Treasuries because yields were too low, signalling what could be a big shift by financial institutions away from US government debt into higher yielding assets. South Korea's National Pension Service, which has $220bn in assets, said it wanted to broaden its range of foreign investment. 'It is difficult to buy more US Treasuries because the portion of our Treasury investment is already too big and Treasury yields have fallen a lot,' said Kwag Dae-hwan, head of global investments at the NPS."

Investment grade issuance included Goldman Sachs $2.5bn, International Lease Finance $1.0bn, CSX $1.0bn, Newell Rubbermaid $750 million, Mid-American Energy Holdings $650 million, Potomac Electric Power $500 million, Dun & Bradstreet $400 million, Cooper US $300 million, Hershey $250 million, Texas Gas $250 million, Avesta $250 million, Questar Gas $150 million, and International Transmission $100 million.

According to Bloomberg, $2.8bn of junk bonds were issued this week, the largest issuance since November. Issuers included Teppco Partners $1.0bn, Energy Transfer Partners $1.5bn, Fairpoint Communications $550 million, Steel Dynamics $375 million, and Wilmington Trust $200 million.

Convert issuance this week included MGIC $365 million, PHH Corp $220 million, and National Realty Properties $230 million.

International dollar bond issuance included Abitibi-Consol $410 million and Bahamas-Commonwealth $100 million.

German 10-year bund yields jumped 17 bps to 3.93%, as the DAX equities index rallied 3.2% (down 16.3% y-t-d). Japanese 10-year "JGB" yields were little changed at 1.27%. The Nikkei 225 gained 2.7% (down 16.2% y-t-d and 25.7% y-o-y). Emerging equities were mostly higher, while debt markets were relatively quiet. Brazil's benchmark dollar bond yields added 2 bps to 6.30%. Brazil's Bovespa equities index rallied 2.5% (down 5.4% y-t-d). The Mexican Bolsa jumped 3.5% (down 1.9% y-t-d). Mexico's 10-year $ yields declined another 3 bps to 4.89%. Russia's RTS equities index jumped 4.3% (down 10.5% y-t-d). India's Sensex equities index recovered 9.2%, reducing y-t-d losses to 19.3%. China's Shanghai Exchange sank 5.7% this week, with 2008 losses rising to a notable 32.0%.

Freddie Mac 30-year fixed mortgage rates slipped 2 bps this week to 5.85% (down 31bps y-o-y). Fifteen-year fixed rates jumped 7 bps to 5.34% (down 52bps y-o-y). One-year adjustable rates jumped 9 bps to 5.24% (down 19 bps y-o-y).

Bank Credit surged another $41.7bn (week of 3/19) to a record $9.490 TN. Notably, Bank Credit has now increased $277bn y-t-d, or 13.0% annualized. Bank Credit posted a 35-week surge of $847bn (14.6% annualized) and a 52-week rise of $1.154 TN, or 13.8%. For the week, Securities Credit increased $17.8bn. Loans & Leases jumped $24bn to $6.912 TN (35-wk gain of $587bn). C&I loans added $3.3bn, with one-year growth of 20.8%. Real Estate loans rose $9.6bn. Consumer loans slipped $2.5bn, while Securities loans added $2.5bn. Other loans grew $10.9bn. Examining the liability side, Deposits jumped $44bn (3-wk gain $126bn).

M2 (narrow) "money" supply surged $38.7bn to a record $7.689 TN (week of 3/17). Narrow "money" has now expanded $226bn y-t-d, or 14.3% annualized, with a y-o-y rise of $522bn, or 7.3%. For the week, Currency added $0.4bn, while Demand & Checkable Deposits declined $4.2bn. Savings Deposits jumped $32.4bn (2-wk gain $68.6bn), while Small Denominated Deposits dipped $1.3bn. Retail Money Fund assets rose $11.5bn.

Total Money Market Fund assets (from Invest Co Inst) surged $37.9bn last week (y-t-d gain $392bn) to a record $3.506 TN. Money Fund assets have posted a 35-week rise of $922bn (53% annualized) and a one-year increase of $1.073 TN (44.1%).

Asset-Backed Securities (ABS) issuance increased to $4.6bn. Year-to-date total US ABS issuance of $46.5bn (tallied by JPMorgan's Christopher Flanagan) is running only 23% of the level from comparable 2007. Home Equity ABS issuance of $197 million is a fraction of comparable 2007's $107bn. Year-to-date CDO issuance of $9.5bn compares to the year ago $107bn.

Total Commercial Paper increased $2.2bn to $1.833 TN. CP has declined $391bn over the past 33 weeks. Asset-backed CP declined $2.6bn (33-wk drop of $418bn) to $778bn. Over the past year, total CP has contracted $222bn, or 10.8%, with ABCP down $291bn, or 27.2%.

Fed Foreign Holdings of Treasury, Agency Debt last week (ended 3/26) jumped $15.8bn to a record $2.184 TN. "Custody holdings" were up $128bn y-t-d, or 24.9% annualized, and $305bn year-over-year (16.2%). Federal Reserve Credit dropped $9.3bn to $869bn. Fed Credit has contracted $4.1bn y-t-d, while having increased $17.3bn y-o-y (2.0%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $1.387 TN y-o-y, or 27.4%, to a record $6.453 TN.

Global Credit Market Dislocation Watch:

March 27 - Financial Times (Michael Mackenzie): "The Federal Reserve goes to work today with a new liquidity programme that traders hope will unblock the crucial plumbing that underpins the financial markets. The repurchase, or repo market, where fixed-income securities are lent out for cash over short periods of time, is an essential component of modern finance because it provides banks with the ability to fund themselves. The failure of Bear Stearns to access the repo market sparked its near collapse and eventual rescue by JPMorgan Chase under the supervision of the Fed. 'Repos are the lifeblood of most financial intermediaries, providing a means to finance their inventories,' said James Kauffman, head of fixed income at ING... Fears about the credit quality of counterparties in the wake of Bear being shut out of repo still resonate in the market, say traders. Meanwhile, banks and investors are shoring up their balance sheets with top-quality US Treasuries before they close their books for the first quarter on Monday... 'There is a scramble for collateral. Everyone wants to borrow Treasuries,' said Michael Kastner, portfolio manager at SterlingStamos."

March 27 - Financial Times (Joanna Chung, Krishna Guha and Gillian Tett): "The US is sending in the cavalry to fight the crisis in the credit and housing markets - unleashing government-sponsored enterprises to buy and hold mortgage-backed securities (MBS) for which there is little private demand. The move marks a new stage in the policy response to the credit crisis, in which the US government is increasingly deploying all the tools at its disposal... to prevent a full-blown credit crunch. It also marks an expansion of what Michael Feroli, an economist at JPMorgan, calls the 'socialisation of housing finance' in the US - ever greater reliance on Fannie Mae, Freddie Mac and the Federal Home Loan Banks to sustain the flow of funds into the crisis-hit housing sector... Regulators this week gave the FHLB - a network of bank co-operatives founded in the Great Depression - permission to double investments in MBS for two years. The Federal Housing Finance Board, which regulates the FHLB, said this "could provide well in excess of $100bn in additional liquidity' to the MBS market. The move followed last week's decision to reduce the capital surcharge imposed on Fannie Mae and Freddie Mac... The Office of Federal Housing Oversight, which regulates Fannie and Freddie, said this would 'provide up to $200bn of immediate liquidity' to the mortgage markets. The decisions were orchestrated by Hank Paulson, the US Treasury secretary..."

March 27 - Financial Times (Francesco Guerrera and Joshua Chaffin): "The acrimonious collapse of the $19bn buy-out of Clear Channel has dealt a major blow to the once-symbiotic relationship between private equity groups and banks. At the height of the private equity boom of 2005, 2006 buy-out executives and investment bankers waxed lyrical about their iron-clad 'partnerships' on daring leveraged bids for ever-larger companies. Their alliance was built on the mutual appetite for the high returns available at a time when debt was cheap and readily available. But with credit markets frozen and banks buckling under the weight of mortgage-related losses, the hitherto allies have become enemies. Yesterday's decision by Bain Capital and Thomas H Lee to file two lawsuits against the banks, led by Citigroup, that had agreed to fund the Clear Channel deal, marks a new escalation in the battle between deal-makers and deal-funders. Legal experts say this is the first time a major buy-out deal has ended in a legal squabble between buy-out funds and banks."

March 27 - The Wall Street Journal (Lauren Etter and Scott Patterson): "A fault line is emerging in the U.S. farm economy, as rising grain prices and the credit crunch combine to squeeze grain elevators, a crucial business link between farmers and markets. Grain elevators that collect grains from farmers and sell them up the food chain have seen their costs of doing business balloon as prices of corn, wheat, soybeans and other grains have soared to record levels. At the same time, lenders chastened by the subprime mortgage crisis have grown increasingly reluctant to extend money to tide the elevators over. Some elevators already have gone out of business... If many more elevators fold, there could be a cascading financial impact on banks and financial institutions that manage futures accounts for elevators. 'We could have an explosive problem on our hands,' says Diana Klemme, vice president at Grain Service Corp..."

March 26 - Financial Times (David Ibison): "Fears that Iceland could be the first country to fall victim of the global financial turmoil grew on Tuesday when its central bank abruptly increased interest rates 1.25 percentage points to 15% in an attempt to restore confidence in its struggling currency and stave off a full-blown economic crisis. The bank said 'deteriorating financial conditions in global markets' had contributed to the emergency move. Confidence in the krona, Iceland's currency, has been shattered this year because of perceived economic imbalances in the economy and fears the banking sector is in danger of collapse. The krona has weakened by 22% against the euro so far this year. The rapid weakening of the currency prompted the central bank to adopt unusually blunt language...warning if the decline was not reversed Iceland faced 'spiralling increases in prices, wages and the price of foreign exchange'. 'Only time will tell if this works,' Ingimundur Fridriksson, governor of the central bank, told the FT. 'We are a small open economy and we are obviously affected by moves in the international economy.'"

March 28 - Bloomberg (Abigail Moses): "The risk of Iceland's biggest banks defaulting rose above 49% as contagion from the U.S. subprime crisis spreads, credit-default swaps show."

March 25 - Bloomberg (Caroline Salas): "High-yield, high-risk bonds are off to their worst start ever, and the biggest investors say there's no recovery in sight. Junk bonds have fallen an average 3.9% this year, losing about $35 billion, according to data from Merrill Lynch & Co. indexes."

March 27 - Financial Times (Chris Giles and James Politi): "Central banks' efforts to ease strains in the money markets are failing to stop financial institutions from hoarding cash, stoking fears that the recent respite in equity markets may not signal the end of the credit crisis. Banks' borrowing costs - a sign of their willingness to lend to each other - in the US, eurozone and the UK rose again even after the Federal Reserve's unprecedented activity in lending to retail and investment banks against weaker than usual collateral and similar action in Europe."

March 28 - Bloomberg (Shelley Smith): "Companies in Europe sold 54% fewer bonds this quarter as rising borrowing costs led to the slowest start for the market since the recession in 2002 that followed the collapse of internet stocks. Sales totalled 137 billion euros ($216 billion), down from 296 billion euros in the same period last year, according to...Bloomberg. No company has issued high-yield, high- risk, or junk, bonds in Europe since July, the longest closure in at least a decade."

March 26 - Bloomberg (Cecile Gutscher): "Loans used to finance leveraged buyouts in Europe are mostly trading below 90% of their face value, according to S&P. Two-thirds of the loans to companies ranked as high-yield, high-risk are priced 10% below their issue price... That's up from less than a quarter of loans trading at these prices in December... Banks are holding 65 billion euros ($102bn) of unsold debt, according to S&P."

March 26 - Bloomberg (Peter Robison): "Peloton Partners LLP liquidated a $1.8 billion London hedge fund, gadget-retailer Sharper Image Corp. filed for bankruptcy -- and Monica Tomasso is paying 35% interest to expand her school-lunch business. The global credit crisis is squeezing businesses from the biggest, like Peloton, whose fund collapsed this month after banks demanded repayment of loans used to bet on mortgage securities, to the smallest, such as Tomasso, whose Health e-Lunch Kids Inc. sells 6,000 meals a month online to parents in Fairfax, Virginia. Credit is drying up as lenders, staggered by losses, try to raise capital and clamp down on financing for a U.S. economy that likely is in recession, economists at Goldman Sachs Group Inc. said... The supply of credit for businesses and consumers may decline $2 trillion, the report said, equivalent to 7% of household, corporate and government debt."

Currency Watch:

The dollar index sank 1.4%, ending the week at 71.68. For the week on the upside, the Norwegian krone gained 3.4%, the Swedish krona 2.8%, the Swiss franc 2.6%, the Danish krone 2.5%, the Euro 2.4%, and the Japanese yen 1.5%. On the downside, the Taiwanese dollar declined 0.5%, the Canadian dollar 0.5%, and the South African rand 0.2%.

Commodities Watch:

March 24 - Bloomberg (Abeer Allam): "The Egyptian government will take stricter measures against bakers who sell subsidized flour on the black market, causing a shortage of bread, Al-Ahram reported, citing Prime Minister Ahmed Nazif. The government will end the 'bread crisis' within six weeks by taking over the distribution of baked bread, the state- run newspaper reported."

Gold rallied 1.2% to $930 and Silver 6.5% to $17.94. May Copper surged 7.2%. May Crude gained $3.52 to $105.38. April Gasoline jumped 3.7% and April Natural Gas gained 4.1%. May Wheat added 1.5%. The CRB index rose 3.4% (up 10% y-t-d). The Goldman Sachs Commodities Index (GSCI) jumped 3.7% (up 12.5% y-t-d and 46.6% y-o-y).

China Watch:

March 24 - Bloomberg (William Bi): "China's demand for meat, vegetable oil and fresh milk will outstrip supply for at least the first six months of this year, the Ministry of Commerce said... Coal, fuel, pig iron and iron ore may also suffer from supply shortages..."

Japan Watch:

March 24 - Bloomberg (Lily Nonomiya): "Confidence among Japanese manufacturers fell to the lowest level in at least four years..."

March 26 - Bloomberg (Jason Clenfield): "Japan's export growth unexpectedly accelerated in February as demand from emerging markets helped automakers ride out the U.S. slump. Exports...climbed 8.7% from a year earlier after increasing 7.6% in January, the Finance Ministry said..."

March 27 - Bloomberg (Mayumi Otsuma): "Japan's consumer prices rose at the fastest pace in a decade in February as companies passed on higher costs of oil and food to households."

India Watch:

March 28 - Bloomberg (Cherian Thomas): "India's inflation accelerated to a 13-month high, constraining the central bank's ability to cut interest rates to arrest an economic slowdown. Wholesale prices rose 6.68% in the week ended March 15 from a year earlier..."

March 27 - Bloomberg (Steven Gwynn-Jones and Cherian Thomas): "India's economy may grow at the slowest pace in four years in the next 12 months as a global slowdown reduces foreign investment and exports, Finance Minister Palaniappan Chidambaram said."

Asia Bubble Watch:

March 28 - Financial Times (Roel Landingin): "Philippine fast-food chains are to begin offering half servings of rice in a move to help the government ease demand for the staple and avert a possible shortage with global rice inventories sitting at 25-year lows. Jollibee Foods, the country's biggest restaurant chain... said its operations managers were planning how to implement the plan... McDonald's is also considering serving half portions in more than 250 stores."

March 24 - Bloomberg (Shamim Adam): "Singapore's inflation in February held near the highest since 1982, signaling the central bank may allow the currency to strengthen to contain price pressures. The consumer price index jumped 6.5% from a year earlier..."

March 27 - Bloomberg (Nguyen Dieu Tu Uyen): "Vietnamese consumption has declined 7.4% in March, compared with last month, as inflation accelerated, Tuoi Tre newspaper reported, citing Tran Thi Hang, a director at the General Statistics Office in Hanoi."

Unbalanced Global Economy Watch:

March 28 - Bloomberg (Sandrine Rastello and Helene Fouquet): "French consumer confidence fell to a record low, the budget deficit exceeded government estimates and retail sales growth slowed, as accelerating inflation took its toll on the euro region's second-largest economy."

March 26 - Bloomberg (Charles Penty): "Spanish mortgage loans to homebuyers fell 28% in January from a year earlier, more evidence of a slowing housing market, the government said."

March 24 - Bloomberg (Alex Nicholson): "Consumer price inflation in Russia, the world's largest energy producer, accelerated in February to its fastest pace in more than 2 1/2 years as food and oil costs rose. The annual rate increased to 12.7%..."

March 25 - Bloomberg (Paul Abelsky): "Dekra Group, a Russian developer, plans to spend more than $1 billion on the construction of 'Yuppie Town,' a group of commercial and residential properties near Moscow's new financial district."

March 28 - Bloomberg (Tasneem Brogger): "Iceland's inflation rate rose to a six-year high in March after the krona lost almost one fifth of its value against the euro in the past month... Inflation accelerated to 8.7% from 6.8% in February..."

March 26 - Bloomberg (Nasreen Seria): "South African inflation accelerated to more than 9 percent in February for the first time in almost five years, adding to pressure on the central bank to raise interest rates."

March 27 - Financial Times (William MacNamara): "One of the starkest symbols of Zimbabwe's economic -collapse is a small train-load of granite that travels once a day to the port of Beira in Mozambique. Representing the last gasp of a once-famous export economy known for its tobacco, sugar, minerals and other commodities, the granite shipment is the only bulk export now moving by rail down the Beira Corridor, the trade artery that has for more than a century linked landlocked Zimbabwe to the sea. Trade along this vital route has slowed to a trickle, reflecting Zimbabwe's wrecked economy perhaps more vividly than the country's 100,000% inflation and empty shop shelves."

Central Banker Watch:

March 28 - Bloomberg (Craig Torres and Vivien Lou Chen): "Federal Reserve officials may be rethinking their aversion to acting against asset-price bubbles, an article of faith during former Chairman Alan Greenspan's 18 years at the helm. After this month's near-collapse of Bear Stearns Cos., Minneapolis Fed Bank President Gary Stern -- the longest-serving policy maker -- said in a speech yesterday that it's possible 'to build support' for practices 'designed to prevent excesses.' ...For Fed policy makers, 'the consequences of their permissiveness have become so disastrous that they simply can't keep singing the same old tune in public,' said Tom Schlesinger, executive director at the Financial Markets Center..."

March 28 - Bloomberg (Gabi Thesing): "European Central Bank Governing Council member Axel Weber said the bank will raise interest rates if needed to curb inflation in the 15 nations sharing the euro. While the current benchmark rate of 4% is helping to contain inflation, the ECB 'will act' if its price-stability goal is threatened, Weber said..."

March 26 - Bloomberg (Brian Swint and Svenja O'Donnell): "Bank of England Governor Mervyn King comments... On bank liquidity and capital, King said: 'The problem of illiquidity is very great, but it is the illiquidity of a stock that's been created in the past. I would not be opposed to a process in which the banks would find more capital. Most central banks would see this as a very desirable development.' On inflation, King said: 'The impact on food prices can be seen on CPI' and it's 'running at a much higher rate than it was a year ago, and we expect more of that coming through.'"

Bursting Bubble Economy Watch:

March 26 - The Wall Street Journal (Sudeep Reddy): "Consumer confidence is tumbling as the decline in home prices accelerates. The Conference Board's barometer of consumer confidence plummeted 11.9 points to 64.5, marking a downturn in sentiment to levels usually seen only during recessions. Consumer expectations about the future plunged to their lowest point since 1973... Major gauges of U.S. home prices, meanwhile, offered new evidence that a glut of unsold homes is weighing on the market. House prices fell 2.4% in January from December, and were down 10.7% from a year earlier, according to the Standard & Poor's/Case-Shiller index of 20 major cities. In the past three months, home prices have fallen at an annualized rate of 20%, sparing few areas of the country."

March 27 - New York Times (Vikas Bajaj): "Little by little, millions of Americans surrendered equity in their homes in recent years. Lulled by good times, they borrowed -- sometimes heavily -- against the roofs over their heads. Now the bill is coming due. As the housing market spirals downward, home equity loans, which turn home sweet home into cash sweet cash, are becoming the next flash point in the mortgage crisis. Americans owe a staggering $1.1 trillion on home equity loans -- and banks are increasingly worried they may not get some of that money back. To get it, many lenders are taking the extraordinary step of preventing some people from selling their homes or refinancing their mortgages unless they pay off all or part of their home equity loans first... It is a remarkable turnabout for the many Americans who have come to regard a home as an A.T.M. with three bedrooms and 1.5 baths... The result is a nation that only half-owns its homes. While homeownership climbed to record heights in recent years, home equity... has fallen below 50% for the first time, according to the Federal Reserve."

March 26 - Bloomberg (Greg Miles and Jeff Green): "The U.S. is in a 'bad' automotive recession and 'unprecedented' debt crisis, and the uncertainty makes it premature to consider automotive investments, said Jerry York, an aide to billionaire investor Kirk Kerkorian. The oil shock in the 1970s, the near-bankruptcy of the former Chrysler Corp. in the 1980s and the current liquidity squeeze mark the only times York says he's been 'scared' in a career spanning more than 45 years."

March 27 - Financial Times (Andrew Edgecliffe-Johnson): "The US is already seeing a slowdown in advertising spending, according to research... that showed cutbacks by big carmakers and media groups are weighing on broadcasters and newspaper publishers. 'The ad market remains stalled and is being engulfed by the spreading pessimism about general economic conditions," said Jon Swallen, senior vice-president for research at TNS media intelligence, which tracks advertising spending for 2.8m brands in 20 media categories."

March 26 - Bloomberg (Vivien Lou Chen): "Miami-area homeowner Richard Welch is spending $70 less on groceries a week after his house lost $145,000 in value. Rita Roland cut off 11 inches of hair to save on salon trips, and Victor Parris stopped drinking his favorite brands of dark ale. 'Absolutely, I feel less wealthy than I did in 2006,' said Welch, 48, a corporate tax auditor. He said he and his wife, Barbara, are slashing spending by 30%..."

March 28 - Bloomberg (Sharon L. Lynch and Kathleen M. Howley): "Vacation home sales in the U.S. tumbled 31% last year and real estate bought for speculation dropped 18% as mortgage lenders tightened standards, the National Association of Realtors said."

California Watch:

March 28 - Bloomberg (Josh P. Hamilton): "California may start a bond insurer to compete with billionaire Warren Buffett's Berkshire Hathaway Inc., state Treasurer Bill Lockyer said. California spends millions of dollars annually for insurance to boost ratings on its public debt and lower the interest rate it pays, Lockyer said in an interview. He's 'urging' the state to create the new insurer to capture money that would go to companies such as...MBIA Inc. and Ambac... now...Berkshire."

MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:

March 25 - Bloomberg (Mark Pittman): "Defaults on subprime mortgages rose in February as some borrowers faced rising payments on adjustable loans, according to data on the debt underlying the benchmark Markit ABX derivatives indexes. About one-third of loan balances backing 20 subprime bonds created in the first half of 2006 were in default, up 2.2% points from the previous month to 32.92%, according to Wachovia Corp. analysts... 'Credit performance in the underlying indexes remains abysmal, in our opinion,' Wachovia analysts...led by Glenn Schultz, wrote..."

March 27 - Dow Jones (Lavonne Kuykendall): "As the U.S. housing downturn continues, Assured Guaranty Ltd. is re-examining lending documents for some of the $2.1 billion in guarantees it wrote for home equity lines of credit issued by Countrywide Financial Corp. to see if the loans meet Countrywide's stated terms. If they don't, Assured Guaranty will ask Countrywide to make good on the loans either by taking them back or replacing them with better loans. The examination revolves around representations and warranties in the contracts themselves, Bob Mills, Assured Guaranty's CFO, said... 'We are evaluating that situation and documentation.' Problems that could invalidate a loan would include whether the housing values, credit scores and terms were as promised, Mills said."

Real Estate Bubble Watch:

March 24 - Florida Association of Realtors: "Turmoil in the mortgage market continued to impact Florida's housing sector in February. Statewide, sales of existing single-family homes totaled 8,310 last month while 11,132 homes sold in February 2007 for a decrease of 25% in the year-to-year comparison... Florida's median sales price for existing single-family homes last month was $198,900; a year ago, it was $237,000 for a 16% decrease."

March 24 - The Wall Street Journal (Jennifer S. Forsyth and Jonathan Karp): "The condominium market is about to get worse as many cities brace for a flood of new supply this year -- the result of construction started at the height of the housing boom. More than 4,000 new units will be completed in both Atlanta and Phoenix by the end of the year. Developers in Miami and Fort Lauderdale, Fla., are readying nearly 10,000 total new units... San Diego...will add 2,500 units... The U.S. finished 2007 with a supply of condos large enough to absorb 10 months of demand, the highest level since the National Association of Realtors began the tally in 1999."

March 27 - Bloomberg (Nguyen Dieu Tu Uyen): "Home sales slumped this year in Greenwich, Connecticut, as North America's hedge-fund capital experiences the effects of the credit crisis that has slashed Wall Street payrolls and profits. January and February home sales fell 29% to 75 houses in the town that's home to more than 100 hedge funds, property broker Prudential Connecticut Realty said... The total value of properties sold dropped 18 percent to $215.1 million..."

GSE Watch:

March 27 - Financial Times (Gillian Tett): "The Federal Home Loan Banking system is seeking to enter the so-called 'monoline' insurance market to help local governments hurt by the credit market storm. Some banks in the government-sponsored network want to offer their top-notch credit ratings to municipal infrastructure projects - and thus fulfil the role traditionally taken by monoline insurance groups such as MBIA... John Price, president of the Federal Home Loan Bank of Pittsburgh, and chairman of the 12-strong banking network, said: 'This [offer of credit support] would be to address a market failure, or an absence of the market - that is what Government State Enterprises [such as the FHLB network] are for. Essentially we would be lending our [credit rating] to small projects . . . such as a $6m hospital deal.' The plans are likely to be welcomed by many local politicians, since municipalities across the US have faced a funding crisis in recent weeks due to the monoline woes. However, it is also likely to trigger further debate about how policymakers are turning to state, or quasi-state, entities to stabilise the financial sector. The FHLB has already been propping up some large US lenders by making large loans to these institutions... On Monday the Federal Housing Finance Board, the FHLB's regulator, announced an expansion of its role, by giving the system more freedom to raise purchases of mortgage-backed securities. Mr Price yesterday insisted that the FHLB system was unlikely to suffer any losses as a result of its expanded activity in the US mortgage market or financial system."

March 26 - Bloomberg (John Glover): "The ability of Fannie Mae and Freddie Mac to sustain their top AAA ratings is 'open to question' amid rising delinquencies on their loans and guarantees, CreditSights Inc. strategists said... The notional debt and guarantees of the government-sponsored enterprises total $5.7 trillion, CreditSights said. With about $70.8 billion of shareholder equity, the companies combined are 20 times leveraged to direct liabilities and 80 times relative to total debt and guarantees... 'Without the implied guarantee of the U.S. government,' the strategy team...wrote..., the AAA ratings 'could be difficult to justify even in good times.' With delinquency rates soaring more than 90% in the year through January, 'the sustainability of the AAA ratings is even more open to question,' they wrote."

Muni Watch:

March 28 - Bloomberg (Jeremy R. Cooke and Darrell Preston): "Auction-rate bond failures rose to about 71% this week... The amount of auctions that failed to draw enough buyers to a market that also includes debt of student lenders and closed- end mutual funds increased from 69% last week... States and municipalities are fleeing the auction-rate market after it began collapsing about seven weeks ago..."

March 28 - Bloomberg (Adam L. Cataldo): "UBS AG has cut the value of the auction-rate securities its customers have in their accounts by about 5 percent following more than a month of market upheaval. 'This is the right thing to do,' said Michelle Creeden, a UBS spokeswoman... UBS will inform clients of the reduced value of their holdings via their online statements..."

Fiscal Watch:

March 25 - Bloomberg (Jeremy R. Cooke): "U.S. states face a tougher budget year in fiscal 2009 as a prolonged housing slump drags down revenue and prompts spending cuts, use of reserves and more planned borrowing, S&P said. States will have to fill gaps of more than $30 billion to balance budgets for 2009 in response to reduced tax revenue... 'It's clear that fiscal 2008 is far more challenging than most people originally envisioned, and fiscal 2009 will be even more difficult for most states,' S&P credit analysts Robin Prunty and Howard Mischel said... 'As in past downturns, state revenues will probably continue to decline well after the economy begins to rebound.'"

March 22 - Bloomberg (Karen Gullo): "San Francisco will have a $338.4 million deficit in next year's budget, a number that has grown $87 million in the past few weeks, the San Francisco Chronicle reported."

March 24 - Bloomberg (Martin Z. Braun): "New York's state Metropolitan Transportation Authority said its March real estate tax collections will fall $32 million below projection as credit markets squeeze residential and commercial real estate deals."

Speculator Watch:

March 27 - The Wall Street Journal (Jenny Strasburg): "Ten years after overseeing a hedge-fund collapse that buckled the world's financial markets, John Meriwether again is scrambling to stem losses and keep investors from jumping ship. Mr. Meriwether is best known as a founder of Long-Term Capital Management, which in 1998 lost $4 billion. That helped foster a global financial crisis and triggered both a Wall Street-led bailout and congressional hearings on the dangers of hedge funds, the freewheeling pools for wealthy investors and institutions that often trade heavily and rely on borrowed money to bolster returns. Now, Mr. Meriwether's biggest fund, a bond portfolio, has plunged 28% this year; another, broader market fund is down 6%. Both had subpar performances last year. Some investors in the funds are seeking to get their money out. Mr. Meriwether and his colleagues at JWM Partners LLC...are trying to reassure investors in the two funds that they have slashed risk and will use their experience to survive this market crisis, preserving about $1.4 billion in assets. The struggles represent a warning signal to investors that the perils of the current crisis aren't over despite lower market values and government efforts to calm the financial system. The credit crunch and market volatility have roughed up other multibillion-dollar hedge funds, which on average have lost about 3.35% this year, according to Hedge Fund Research... Platinum Grove Asset Management, the $6 billion hedge-fund firm run by LTCM alumnus Myron Scholes, has lost 13% this month on credit trades... Also, Farallon Capital Management LLC in San Francisco, which manages about $36 billion, has lost 5.6% this year through last week in its flagship Farallon Capital Partners fund. And Steven Cohen's SAC Multistrategy Fund is down about 3% this year through last week... The...firm oversees $16 billion."

March 28 - Financial Times (James Mackintosh): "Investors in Tisbury Capital are trying to withdraw $1.4bn of the London hedge fund's $2bn of assets under management after the fund abandoned an ill-fated US venture. The scale of the withdrawals will turn Tisbury from one of London's bigger merger arbitrageurs into an also-ran... Tisbury, run by former Citadel trader Gerard Griffin, has broken with hedge fund convention by offering to drop a 10% cap on withdrawals to allow investors to get their money back quickly, as long as they agree to hold on to their share of $300m of hard-to-sell assets. The offer by Mr Griffin is unusual for a hedge fund facing large-scale redemptions, with most choosing either to freeze withdrawals and continue earning fees, or shut down."

March 28 - Dow Jones (Joseph Checkler and Shira Ovide): "Highfields Capital Management's 7.7% stake in radio broadcaster Clear Channel Communications took a big hit Wednesday, but Highfields isn't the only big-name investor that stands to lose if the now-in-jeopardy $19.4 billion private equity buyout of Clear Channel doesn't go through. Among others, Perry Capital, Adage Capital Advisors and Third Point Management show up as holders of more than 3 million Clear Channel shares as of the end of 2007..."

Crude Liquidity Watch:

March 25 - The Wall Street Journal (Tahani Karrar): "Inflation in Saudi Arabia surged to a 27-year high of 8.7% in February, the kingdom's Central Department of Statistics said... The February figure is almost 25% higher than January's 7% inflation rate. Even as the oil-rich Persian Gulf enjoys an economic boom thanks to high petroleum prices, inflation is shaping up as a major challenge. Workers in the United Arab Emirates have rioted recently, protesting their dwindling buying power. Lines for subsidized bread in Egypt have forced the government there to crank up production, a move that's pressuring finances."

March 24 - Bloomberg (Abdulla Fardan and Matthew Brown): "Inflation in the six Gulf Cooperation Council states, including Saudi Arabia, will accelerate to an average of 7% this year from 6% in 2007, the IMF forecast."

March 24 - Bloomberg (Matthew Brown): "Gulf states should drop their currency pegs to the dollar to ease inflation, Emirates Business 24/7 reported, citing Ahmed Humaid Al Tayer, chairman of Emirates NBD PJSC, the United Arab Emirates' largest bank."

March 24 - Bloomberg (Abdulla Fardan and Matthew Brown): "Record inflation rates may persist in the six Gulf Cooperation Council states, including Saudi Arabia, even if they revalue their currencies against the dollar, the International Monetary Fund said. There is no 'quick fix,' to inflation in the region, Gene Leon, an executive with the IMF's Middle East and Central Asia section, said..."

March 24 - Bloomberg (Matthew Brown): "Kuwait tightened commercial banks' lending criteria in an attempt to slow loan growth, Kuwait News Agency reported, citing central bank Governor Sheikh Salem Abdul Aziz Al-Sabah. Loan repayments may be no more than 40% of net salary for employed customers and 30% for retired people..."

March 27 - Bloomberg (Matthew Brown): "Bahrain M3 money supply growth... accelerated to 38% in February from 36% in January."

End of Era:

The Fed-orchestrated 1998 rescue of Long-Term Capital Management (and the "leveraged speculating community") proved instrumental in instigating the "golden age" of Wall Street finance. Thursday from the Wall Street Journal (see Speculator Watch above): "Ten years after overseeing a hedge-fund collapse that buckled the world's financial markets, John Meriwether again is scrambling to stem losses and keep investors from jumping ship. Mr. Meriwether is best known as a founder of Long-Term Capital Management..." Meriwether's largest hedge fund - profitable in each year since its 1999 launch - is down 28% y-t-d. The fund now surely faces investor redemptions, a problematic "high-water mark" (hedge funds must make up for past losses before they can again collect performance fees) and a resulting exodus of top talent.

Again this week, we see one of Wall Street's most "elder leveraged speculators" fall into serious trouble. A strategy that had worked so nicely for almost a decade turned unworkable. While sharply reducing the risk profile and degree of leverage from the LTCM days, Meriwether's bond fund was nonetheless leveraged 14.9 to 1 (according to Jenny Strasburg's WSJ article). As was the case with the Peloton fund and others, the most aggressive use of leverage had navigated to the perceived safest ("money-like") instruments - "His funds' losing positions have included mortgage securities backed by Fannie Mae and Freddie Mac, trades tied to municipal bonds and triple-A-rated commercial mortgage-backed securities".

Understandably, most fully expect Wall Street to rebound and the leveraged speculating community to emerge from current turmoil as it did following LTCM - albeit at a more measured pace. Some assume it's merely a case of our policymakers "playing whack a mole" until they find the requisite instrument(s) to successfully beat down the sources of financial instability. Of course, I view things very differently, instead seeing Merriwether's predicament as emblematic of an End of an Era - with huge ramifications for both the Financial and Economic Spheres. I would expect it will be quite some time before the marketplace (investors as well as lenders) grants Mr. Merriwether or similar leveraged strategies another shot at financial genius. Indeed, there is mounting evidence supporting the Bursting Hedge Fund Bubble Thesis - from the angle of the quality of underlying assets; from the capacity to leverage; from the ability to retain investors; and from a regulatory perspective. And keep in mind that the historic ballooning in the "leveraged speculating community" has been an absolutely instrumental - and extraordinarily opaque - facet of the Bubble in Wall Street finance as well as for the overall Credit Bubble.

I would argue forcefully that the leveraged speculating community for some years now has assumed the key role of unappreciated marginal source of demand for risk assets - risky debt instruments financing asset inflation, in particular. Over time, Wall Street "alchemy" mastered the process of transforming virtually unlimited risky loans into perceived safe and liquid securities. A sizable - and growing - chunk of these securities were then purchased on leverage by the rapidly expanding speculator community, in the process fueling an increasingly mal-adjusted U.S. Bubble Economy. We're now witnessing it all beginning to wind down. End of an Era.

It is today analytically imperative to differentiate the authorities' focus on stabilizing marketplace liquidity from the Unfolding Bursting of the Wall Street Bubble. Our policymakers may be exerting meaningful impact on the former, yet the latter remains largely out of their control - and certainly thus far impervious to their actions. Especially when it comes to the key marketplace for agency securities, policymaker efforts are directed at sustaining perceived "moneyness" - through both governmental support (tacit guarantees and Fed liquidity operations) and a renewed bid for mortgages by the GSEs (Fannie, Freddie, and the FHLB). And while such efforts have important ramifications with regard to accommodating the ongoing de-leveraging process (and averting Credit system implosion), they are at the same time completely inadequate when it comes to generating sufficient new Credit to sustain U.S. Financial and Economic Bubbles. "Moneyness" will definitely not be retained in non-agency securitizations, especially as the economy falters.

Debt problems are accelerating and expanding from mortgages to home equity, auto, Credit card, student loans, small business, munis and corporate Credits. At the same time, Wall Street has been significantly tightening lending requirements for the leveraging of all types of debt securities. While the focus has been on mortgage Credit, recent deterioration in other types of loans - and, importantly, the leveraged holders of large amounts of this debt - have major consequences for Credit Availability throughout the Economic Sphere. Housing markets and foreclosures are obviously major issues. Not commonly recognized is the now virtually across the board tightening in Credit throughout the securitization markets (consumer, student, muni and corporate), exerting more expansive headwinds upon the U.S. economy than even the tightening in mortgages (that predominantly impacted transactions and home prices).

February California median home prices declined $20,550 during February to $409,240. Median prices are now down $67,140 in two months and a stunning $179,730 since August. Prices are down 32% from June's high, and are now even 13% below the level from three years ago. Granted, these median prices are impacted by the dearth of sales at the upper-end. Yet it's clear that the California market is in the midst of an historic crash. The Credit standing of Golden State households, businesses, and various governmental agencies now deteriorates by the day. I would argue the explosion over the past three years in "private-label" mortgages, Wall Street balance sheets, hedge fund assets, and California home prices were all part of the same Bubble. This Bubble inflated largely outside the banking system and outside GSE finance - and will now prove stubbornly unaffected by policy maneuvers.

Some argue rather forcefully that we're now immersed in "debt deflation." I understand the basic premise, but to examine double-digit growth in Bank Credit, GSE "books of business" and money fund assets provides a different perspective. To be sure, our Credit system continues to provide sufficient Credit to finance massive Current Account Deficits. And it is this ongoing flow of dollar liquidity that stokes both indomitable dollar devaluation and global Credit excess. Many contend that inflationary pressures are poised to wane as the U.S. economy weakens. I'll suggest that inflation dynamics will prove much more complex and uncooperative. There is further confirmation of the view that the bursting of the Wall Street finance Bubble will have a significantly greater impact on asset prices than on general consumer pricing pressures.

The analysis gets much more challenging in the commodities markets. The simple view holds that commodities are just another Bubble waiting their turn to burst. This thinking gained greater acceptance last week, with the sharp reversal of prices and unwind of speculative positions. And it goes without saying that major speculative excess has developed throughout the commodities complex. I am as well sympathetic to the view that liquidations by the leveraged speculating community could lead to some major price instability. Yet it's my sense that there really is much more to the commodities story - and inflation, more generally - that is not widely appreciated.

The bursting of the Wall Street finance and U.S. Credit Bubbles marks an End of an Era. But the start of a deflationary spiral? Importantly, these bursting Bubbles are in the process of consummating the demise of the dollar as the world's functioning "reserve currency" and monetary standard. Examining global markets, I note the ongoing strength of currencies in China, Russia, Brazil, and India, for example. Considering mounting financial and economic imbalances in all these economies - not too mention histories of less than exemplary monetary management - I can state categorically that these are fundamentally very weak currencies. Today, however, it's all relative to the sickly dollar. In the face of rampant domestic Credit growth, these currencies nonetheless attract endless global finance and appreciate.

When it comes to Ending of Eras, I am increasingly fearful that we are falling deeper into a precarious period devoid of a functioning global currency regime necessary to discipline Credit excess and restrain mounting inflationary pressures. And as long as dollar liquidity inundates the world economy, domestic Credit systems across the globe enjoy the extraordinary capacity to inflate domestic Credit and use this new purchasing power for the benefit of their citizens and economies. And, in particular because of their enormous populations, as long as the Chinese and Indian Credit system enjoy the freedom to inflate at will there will remain significant upside price pressure for energy, food, and various goods and commodities in short supply - hedge fund speculative excess and/or bust notwithstanding.

I throw this analysis out as food for thought. I am increasingly of the mind that commodities should be differentiated from U.S. financial assets when it comes to the consequences from the bursting of the Wall Street finance and leveraged speculating community Bubbles. Prices will likely remain hyper-volatile but (unBubble-like) well-supported by underlying fundamental factors. Similarly, I believe general inflationary pressures may likely prove more significantly influenced by runaway global Credit excesses than by the Wall Street and U.S. asset price busts. If this proves to be the case, perhaps the greater risk is a bursting of the Treasury Market Bubble. It may take some time, but an enormous supply of government debt is in the offing and - let's face it - these instruments will become only less appealing over time. It also begs the question as to the advisability of aggressive Fed rate cuts. They will have little influence on the bursting Wall Street Bubbles but possibly huge effects on global inflationary forces. Little wonder the ECB is so hesitant to lower rates.


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