The Rotten Underpinnings Of Our Financial System Exposed
December 23 2009

Money supply narrows, troubled banks still on life support, debt and problems will cascade through bond and stock markets, little or no criminal charges against banks and other lenders who bought up toxic waste debts, political influence helps poor banks, profits dont stop Goldman Sachs from generous bailouts and debt forgiveness.

Last week the Dow fell 1.4%, the S&P 0.4% and Nasdaq rose 0.9% and the Russell 2000 1.7%. Cyclicals rose 1.4%; transports 0.8% as consumers fell 1.8%; utilities 0.9% and banks fell 2.1%; broker/dealers rose 0.5%, as high tech rose 2%; semis rose 2.9%; Internets 0.6% and biotechs fell 0.2%. Gold fell $2.00 and the HUI fell 3.2% as our government shorted the shares. The dollar rose 1.5% to close at 77.73.

Two-year T-bill yields fell 1 bp to 0.72%, the 10’s fell 1 bps to 3.54% and the 10-year German bund fell 7 bps to 3.13%.

Freddie Mac’s 30-year fixed rate mortgages rose 13 bps to 4.94%; 15’s rose 6 bps to 4.38% and one-year ARMs rose 10 bps to 4.34%.

Fed credit expanded $22.8 billion. Fed foreign holdings of Treasuries and Agency debt rose $4.9 billion to a record $2.949 trillion. Custody holdings for foreign central banks have expanded at a 17.9% rate ytd, and were up $450 billion over the past year, or 18%.

M2 narrow money supply fell $12.8 billion to $8.402 trillion.

Total money market fund assets fell $54.1 billion to a 23-month low of $3.26 trillion. This is very significant. Players believe Treasuries are safe. Are they in for a surprise! Assets have declined $561 billion ytd, or 15.2% annualized.

Distressed debt – defined as a bond trading at less than 50 cents on the dollar – is rapidly disappearing from US financial markets as yield-hungry investors push up the prices for even the most beaten-down securities. Bonds trading at less than 50 cents on the dollar now account for only 1.1% of the high-yield market, or $8.9bn in securities, down from 27.5%, or $202bn in bonds, a year ago, according to JPMorgan data. The intense demand for once-distressed bonds is stirring the debate about whether investors are acting wisely or piling into junk bonds because of a lack of opportunities elsewhere in the fixed-income markets. With the Federal Reserve keeping its overnight lending rate near zero, the yield on a two-year Treasury remains less than 1%. ‘The Fed’s zero interest rate policy has been a catalyst for billions and billions of dollars flowing into the high-yield market,’ said Tim Donohue, managing director for high-yield markets at JPMorgan. ‘The government is holding down interest rates and, as a result, cash is chasing one of the few asset classes that still offers a healthy yield.’â€