Loan Derivatives Indexes Drop to Record as LBO Debt Hits Snags

" Indexes that allow investors to bet on the health of the leveraged loan market, which has fueled the private-equity boom, fell to the lowest since they started trading as investor demand for the debt wanes.

The indexes are falling as Chrysler has been forced to raise its proposed interest rates to fund the takeover of its auto and finance units by Cerberus Capital Management LP and as investors speculate that Kohlberg Kravis Roberts & Co. may have to offer higher rates to investors on 9 billion pounds (18.5 billion) of loans to finance the buyout of U.K. pharmacist Alliance Boots Plc.

"Boots and Chrysler are two absolutely huge deals that are being seen as the test for appetite for risk,'' said Gary Jenkins, partner of London-based credit fund Synapse. "There's undoubtedly been a transfer of power towards the investor base.''

There is "kind of a little freeze in the marketplace,'' JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said July 18 on a conference call with investors. "If you see this continue you will see the Street taking on a lot of bridge loans and more aggressive repricing of those things.'' JPMorgan is the biggest U.S. underwriter of leveraged loans, according to data compiled by Bloomberg. "

Its getting bad enough that a significant number of deals are falling through:

" At least 17 speculative-grade companies canceled or restructured loan or bond offerings since mid-June. "

Source: Loan Derivatives Indexes Drop to Record as LBO Debt Hits Snags (http://www.bloomberg.com/apps/news?pid=20601009&sid=afYkFIWr9684&refer=bond)

China Raises Rates After Fastest Growth in 12 Years

" China raised interest rates for the third time since March to cool the fastest pace of economic growth in 12 years and restrain inflation.

The benchmark one-year lending rate will rise by 0.27 percent point to an eight-year high of 6.84 percent tomorrow, the People's Bank of China said. The deposit rate will increase by the same amount to 3.33 percent and a tax on interest income will be cut on Aug. 15 to encourage saving.

Premier Wen Jiabao aims to slow lending and investment fueled by record exports after China announced second-quarter growth of 11.9 percent yesterday. As well as raising interest rates, the government has ordered banks to set aside larger money reserves five times this year. Consumer prices rose the most in 33 months in June, factory and property spending have surged, and the key stock index has almost doubled in value this year. "

Source: China Raises Rates After Fastest Growth in 12 Years (Update5) (http://www.bloomberg.com/apps/news?pid=20601087&sid=aDXmePVdZC4A&refer=home)

Treasury 10-Year Yield Falls Below 5 Percent on Credit Concern

" Treasuries rose, pushing the benchmark 10-year note's yield below 5 percent, on speculation rising subprime mortgage defaults will lead to higher interest rates for private borrowers and curb economic growth.

Ten-year notes strengthened the most in more than a week as Standard & Poor's cut ratings on European collateralized debt obligations and gauges of investor appetite for corporate bonds and loans fell.

"There's a sense that crises in financial markets would force central banks' hands,'' said Tom McGlade, who trades 30- year Treasuries in Greenwich, Connecticut, at RBS Greenwich Capital "That's part of why the market rallies in a fear-trade environment.'' The firm is one of the 21 primary U.S. government securities dealers that underwrite Treasury auctions. "

Source: Treasury 10-Year Yield Falls Below 5 Percent on Credit Concern (http://www.bloomberg.com/apps/news?pid=20601087&sid=alYI7EFkBNcs&refer=home)

U.S. Economy: Leading Index Fell More Than Forecast

" A measure of the economy's future fell more than forecast in June, pulled down by a slump in building permits that signals housing will remain the biggest drag on growth.

The Conference Board's leading economic indicator index declined 0.3 percent after rising a revised 0.2 percent in May, the New York-based research group said today. A report from the Federal Reserve Bank of Philadelphia showed manufacturing in the region cooled.

The leading index was forecast to fall 0.1 percent, according to the median of economists' projections in a Bloomberg News survey, after an originally reported May increase of 0.3 percent. The index, which points to the economy's outlook over the next three to six months, has been down in four of the first six months of 2007. "

Source: U.S. Economy: Leading Index Fell More Than Forecast (Update3) (http://www.bloomberg.com/apps/news?pid=20601068&sid=axufkStBbqA8&refer=economy)

Philadelphia Fed's Factory Index Fell to 9.2 in July

" Manufacturing in the Philadelphia region slowed more than forecast this month as orders cooled.

The Federal Reserve Bank of Philadelphia's general economic index decreased to 9.2 in July from 18 in June, which was the highest level in more than two years, the bank said today. A positive number signals expansion.

Elevated energy costs and slowing consumer demand may be prompting manufacturers to think twice about cranking up production. Today's report raises questions about the strength of the rebound in manufacturing, which is forecast to help the economy withstand the deepest housing recession in 16 years. "

Source: Philadelphia Fed's Factory Index Fell to 9.2 in July (Update1) (http://www.bloomberg.com/apps/news?pid=20601087&sid=a2BDS4edRZy0&refer=home)

U.S. Initial Jobless Claims Fell 8,000 to 301,000

" First-time claims for jobless benefits unexpectedly fell last week to the lowest in two months, a sign that the U.S. labor market remains resilient.

Initial jobless claims decreased by 8,000 to 301,000 in the week that ended July 14, the Labor Department said today in Washington. The four-week moving average, a less volatile measure, fell to 312,000 from 318,250. "

Source: U.S. Initial Jobless Claims Fell 8,000 to 301,000 (Update1) (http://www.bloomberg.com/apps/news?pid=20601068&sid=aVRms53vBFjo&refer=economy)

China's Economy Grows at Fastest Pace in 12 Years

" China's economy grew at the fastest pace in 12 years in the second quarter and inflation surged, prompting speculation the government will raise interest rates and push the currency higher to cool growth.

Gross domestic product expanded 11.9 percent from a year earlier, the statistics bureau said in Beijing today, exceeding all estimates of 23 economists surveyed by Bloomberg. Inflation climbed to 4.4 percent in June, the fastest since September 2004, breaching the central bank's 3 percent target for a fourth month.

Growth was powered by investment in factories and real estate that the government has been unable to cool with two rate increases this year and restrictions on bank lending. Allowing the yuan to strengthen may also help quell tensions with the U.S. and Europe, which say China's record exports reflect the unfair advantage of an artificially low currency.

" Accelerating inflation and a rebound in fixed-asset investment heighten the risk of overheating,'' said Wang Qing, chief China economist at Morgan Stanley in Hong Kong. "Demand in key sectors is not outstripping supply yet, but the government is concerned.'' Wang expects an interest-rate increase "any time from now.'' "

Source: China's Economy Grows at Fastest Pace in 12 Years (Update6) (http://www.bloomberg.com/apps/news?pid=20601068&sid=araJdCuBhd4M&refer=economy)

Fed Trims Growth Forecasts; Inflation Projections Unchanged

" Federal Reserve policy makers trimmed their forecasts for U.S. economic growth this year and next on weaker-than-anticipated home building, while keeping their inflation projections unchanged.

The economy will grow by 2.25 percent to 2.5 percent in the fourth quarter of 2007 from a year before, compared with a range of 2.5 percent to 3 percent given in February, the Fed said in its semiannual monetary policy report to Congress. The central bank's preferred inflation gauge will rise by 2 percent to 2.25 percent this year, the same range as in the last report.

The lack of any major shift in policy makers' outlook may reinforce investors' expectations that Chairman Ben S. Bernanke and his colleagues will keep interest rates unchanged into next year. Bernanke said in prepared testimony today that economic growth will pick up in 2008 and inflation should ease. "

Source: Fed Trims Growth Forecasts; Inflation Projections Unchanged (http://www.bloomberg.com/apps/news?pid=20601068&sid=aOI6Ky7KGIQA&refer=economy)

Lehman Brothers Says Subprime Speculation `Unfounded'

" Lehman Brothers Holdings Inc., the largest underwriter of U.S. mortgage bonds, denied speculation that it may face greater potential losses from subprime mortgages than previously disclosed.

Speculation about a planned announcement from Lehman related to its subprime holdings spurred investors to demand higher premiums to insure against the risk of owning Wall Street firms' bonds and helped prompt gains in Treasuries, according to traders including Thomas Tucci, head of U.S. government bond trading at RBC Capital Markets in New York.

"The rumors related to subprime exposure are unfounded,'' Lehman spokeswoman Kerrie Cohen said today. "

Source: Lehman Brothers Says Subprime Speculation `Unfounded' (Update1) (http://www.bloomberg.com/apps/news?pid=20601010&sid=aROhWJadXpcA&refer=news)

NYA: New Highs and New Lows.

TNX: At Support @ 5.00%

JPMorgan's Dimon Sees `A Little Freeze' in Lending for LBOs

" JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said demand for leveraged buyout debt is drying up and banks may be left holding more loans that they can't sell.
There is "kind of a little freeze in the marketplace,'' Dimon said on a conference call with investors to discuss the New York-based bank's second-quarter earnings. "If you see this continue you will see the Street taking on a lot of bridge loans and more aggressive repricing of those things.''

JPMorgan, the third-largest U.S. bank, is among lenders that have been saddled with at least $11 billion of high-yield bonds and loans they haven't been able to readily sell, data compiled by Bear Stearns Cos. analysts show. Investors have balked at the increasing amounts of debt being taken on for LBOs. "

Source: JPMorgan's Dimon Sees `A Little Freeze' in Lending for LBOs (http://www.bloomberg.com/apps/news?pid=20601087&sid=a7aOfSS4q8ak&refer=home)

Moody's Excluded From Rating 70% of New Commercial Mortgages

" Moody's Investors Service has been excluded from rating 70 percent of new commercial mortgage-backed securities after toughening its guidelines.

Moody's has been shut out of nine of the past 13 deals as underwriters sought better ratings from rival companies, Tad Philipp, a managing director at Moody's said today in a telephone interview. The securities had a face value of more than $25 billion.

"There's no doubt in my mind that it's because of the change'' said Philipp, who included a chapter titled "Rating Shopping is Alive and Well'' in a report released today. "Normally, we'd rate 75 percent of the issues, not 30 percent. I guess this is sort of like, no good deed goes unpunished.''

Moody's, the oldest ratings company, in April increased its requirements for the level of protection carried by bonds backed by mortgages on apartment buildings, offices and other commercial property. That means that to get a higher rating for some pieces of the bond, lower-rated pieces would need to be bigger, reducing losses further up the chain. The changes add to the costs to create the securities. "

So basically if you buy new commercial mortgages that are NOT rated by Moody's, you're running a very high risk of buying crap.

Source: Moody's Excluded From Rating 70% of New Commercial Mortgages (http://www.bloomberg.com/apps/news?pid=20601087&sid=aGe00fqDgQys&refer=home)

Bernanke Predicts Stronger Growth, Slowing Inflation

" Federal Reserve Chairman Ben S. Bernanke predicted American economic growth will pick up "a bit'' next year and inflation will recede.

"The U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening'' in 2008, he told the House Financial Services Committee in Washington. "Core inflation should edge a bit lower, on net, over the remainder of this year and next year.''

Bernanke is trying to steer the economy through the worst housing recession since 1991, and he expects the slump in construction to continue to "weigh'' on growth. Inflation, which for three years exceeded the preferred range of several officials, remains ``the predominant policy concern.'' Earlier today, the Labor Department said consumer prices rose 0.2 percent last month, the smallest gain in five months.

The chairman, whose remarks suggested the central bank won't rush to either raise or lower interest rates, also took an additional step on consumer protection by promising tougher rules on mortgage lending. "

Source: Bernanke Predicts Stronger Growth, Slowing Inflation (Update5) (http://www.bloomberg.com/apps/news?pid=20601087&sid=aDqXHV5ojNEc&refer=home)

QQQQ: Weak Earnings and Hedge Fund Failure Catalysts for Correction?

Bernanke Chips Away at Greenspan's Free-Market Legacy

" Federal Reserve Chairman Ben S. Bernanke is mobilizing to placate Democrats in Congress who claim he isn't doing enough to crack down on predatory lending.

Bernanke begins two days of testimony to Congress tomorrow, and he is already anticipating the questions. The Fed and state regulators today announced a pilot program to collaborate on supervision and enforcement of non-bank supbrime lenders. The central bank, which House Financial Services Committee Chairman Barney Frank has threatened to strip of some regulatory powers, also plans an overhaul of lenders' disclosure standards.

The steps that Bernanke, 53, is being pushed into amount to rolling back at least part of the free-market legacy bequeathed to him by predecessor Alan Greenspan. During Greenspan's 18-year reign, the central bank was loath to meddle with banks' business practices, relying on guidelines instead of enforceable public rules. "

A Fed that meddles...
That can only speed up the withdrawal of liquidity and accelerate the process of deleveraging...

Source: Bernanke Chips Away at Greenspan's Free-Market Legacy (Update1) (http://www.bloomberg.com/apps/news?pid=20601109&sid=a4Tt6nUF2gKg&refer=home)

U.S. June Housing Starts Rise 2.3%; Permits Decline

" Builders in the U.S. unexpectedly started work on more homes last month while permits for future construction fell to the lowest level in a decade, suggesting a recovery from the housing slump may not be quick.

Housing starts rose 2.3 percent to an annual rate of 1.467 million, led by an increase in apartment buildings, the Commerce Department said today in Washington. Building permits fell 7.5 percent to a 1.406 million rate. "

Why are starts up? Are the builders just finishing the properties and projects they're already committed to? The decline in permits suggest a pretty dismal outlook on the future.

" Rising mortgage rates and stricter lending rules are impeding a rebound in housing, even as builders lower prices and add more incentives. A glut of unsold properties will probably continue to drag down construction and the economy for the rest of the year, economists said. "

The rules and regulations are about to tighten further. The pressure is now even on Bernanke to step in and 'curb predatory lending practices'. (Blogpost: Bernanke Chips Away at Greenspan's Free-Market Legacy)

Source: U.S. June Housing Starts Rise 2.3%; Permits Decline (Update2) (http://www.bloomberg.com/apps/news?pid=20601087&sid=aEXJ4RE0eBvY&refer=home)

U.S. June Consumer Prices Rise 0.2% as Gasoline Fell

" Consumer prices in the U.S. rose 0.2 percent in June, the smallest gain in five months, as gasoline prices retreated from a record.

The increase in the consumer price index followed a 0.7 percent rise in May, the Labor Department said today in Washington. Core prices, which exclude food and energy, rose 0.2 percent and were up 2.2 percent from a year earlier.

The figures come less than two hours before Federal Reserve Chairman Ben S. Bernanke is scheduled to testify before Congress on the state of the economy. Signs that price increases may have peaked will reassure policy makers, who last month said inflation remained their "predominant'' concern. "

Source: U.S. June Consumer Prices Rise 0.2% as Gasoline Fell (Update1) (http://www.bloomberg.com/apps/news?pid=20601087&sid=avXSWGECqhRU&refer=home)

Derivatives Banks Concerned by Hedge Fund Leverage

" Hedge fund borrowing to invest in credit derivatives may magnify volatility in a market slump, according to a Fitch Ratings survey of 65 banks and insurers.

A "dramatic'' increase in hedge funds' use of credit derivatives has pushed their share of trading to 60 percent of credit-default swaps, and about 33 percent of collateralized debt obligations, Fitch said in the report today, citing data from Greenwich Associates. "

The failure of both Bear Stearns funds illustrate just how quickly things can go badly with that kind of leverage. Smaller, less know funds have been succumbing to their wounds almost unnoticed at a pretty decent clip. Things can go from calm to wild eyed panic in a hurry...

" U.S. corporate bond risk premiums reached the highest in almost two years last week as hedge funds bought credit-default swaps to offset potential losses from the subprime mortgage rout. Bear Stearns Cos. was forced to provide $1.6 billion for one of two funds that made wrong-way bets on subprime debt. The New York-based firm didn't bail out lenders to the other fund, which borrowed against its investors' capital to take bigger risks. "

Keep watching corporate bond spreads. We still have not even come close to historic and 'normal' levels.

We've gone though the 'accumulate' phase. We've had the 'rally' phase and we're probably quietly into the 'distribution phase' already. That would suggest the 'correction' phase of this market cycle is fast approaching...

" In a market slump, large deals financed with borrowed money, or leverage, may "result in a number of hedge funds and banks attempting to close out positions with no potential takers of credit risk on the other side,'' analysts led by Ian Linnell in London wrote in the report for the 2006 survey. "

The first step of the 'distribution' phase is deleverage...

" "Until all of this recent volatility, investors had been forced down the credit quality ladder, and up in leverage to meet investment targets,'' said Matt King, head of credit products strategy at Citigroup Inc. in London. "Now it appears hedge funds are deleveraging'' to meet demands from their lenders. "

Source: Derivatives Banks Concerned by Hedge Fund Leverage (Update3) (http://www.bloomberg.com/apps/news?pid=20601010&sid=aSkMZE61_VO8&refer=news)

Goldman, JPMorgan Saddled With Debt They Can't Sell

" Goldman Sachs Group Inc., JPMorgan Chase & Co. and the rest of Wall Street are stuck with at least $11 billion of loans and bonds they can't readily sell.

The banks have had to dig into their own pockets to finance parts of at least five leveraged buyouts over the past month because of the worst bear market in high-yield debt in more than two years, data compiled by Bloomberg show. "

Uh oh. The LBO party could slow down significantly. Risk aversion is kicking in. Watch to see if spreads widen and watch the 5 handle on the notes. A safe haven bid that drops rates through 5% could accelerate the dollar decline and also unwind the 'buyout bid' in equities. No more buyouts also equals no more stock market party... and we move into the hangover phase where we reflect on our actions and say ridiculous things suchs as, "I swear. I'm never drinking again." or "I swear. I will never use that much leverage again and pay such ridiculous multiples."

Source: Goldman, JPMorgan Saddled With Debt They Can't Sell (Update2) (http://www.bloomberg.com/apps/news?pid=20601010&sid=axKl6VX_lcco&refer=news)

Bear Stearns Tells Fund Investors `No Value Left'

" Bear Stearns Cos. told investors in its two failed hedge funds that they will get little if any money back after "unprecedented declines'' in the value of AAA rated securities used to bet on subprime mortgages.

Estimates show there is "effectively no value left'' in the High-Grade Structured Credit Strategies Enhanced Leverage Fund and "very little value left'' in the High-Grade Structured Credit Strategies Fund, Bear Stearns said in a two-page letter. The second fund still has "sufficient assets'' to cover the $1.4 billion it owes Bear Stearns, which as creditor gets paid back first, according to the letter, obtained yesterday by Bloomberg News from a person involved in the matter. "

Well, at least Bear Stearns gets its money back. Everybody else: -100%...

" "This is a watershed,'' said Sean Egan, managing director of Egan-Jones Ratings Co. in Haverford, Pennsylvania. "A leading player, which has honed a reputation as a sage investor in mortgage securities, has faltered. It begs the question of how other market participants have fared.'' "

A few more downgrades by Moodys and S&P and we'll suddenly discover a whole pile of dead cockroaches. The market is not taking this well. Futures down significantly this morning and that was after touching 14 000 on the DOW yesterday.

Source: Bear Stearns Tells Fund Investors `No Value Left' (Update2) (http://www.bloomberg.com/apps/news?pid=20601087&sid=ajzRNcPOZAdI&refer=home)