Once again, the US bond market is signalling the real direction for the US economy and US investors.
Stress levels are high from missed earnings (the weak US dollar is starting to save lots and lots of companies from reporting bad earnings) and from the continuing erosion of confidence about the imploding sub-prime mortgage and associated structured finance markets.
And while stocks fell Tuesday and then had a 'deadcat bounce' yesterday, the US bond market again rallied with the yield on 10-year bonds down to 4.90% as investors continued to park their money in a "safe haven".
Driving it down was the failure of the financing of the buyouts of Chrysler and the Alliance Boots retailing group in the UK at a cost $US20 billion in bonds being left with the investment banks which couldn't convince buyers to take them.
Sales of US pre-owned houses fell in June to a newfive-year low and a second Australian hedge fund has stopped trading while it looks at its situation.
The shocker in the US though was the worse than expected figures from Countrywide Financial, the biggest mortgage lender in the US, and a forecast from its chief executive that the housing slump won't improve for at least 18 months!
As well, figures were released showing Californian mortgage defaults (the biggest property market in the US) ran at their highest level in a decade in the June quarter.
And sales of collateralised debt obligations, (CDOs) have slumped so far this month, according to Wall Street investment bank, JPMorgan. The bank said CDO issuance was running at $US19.9 billion, down from $US50.6 billion in June and the lowest in more than a year. And there's concern about CLOs (or Collaterised Loan Obligations which are created when junk bond are sliced and diced in the way that home mortgages are).
And America's most respected bond manager, Bill gross of Pimco, warned that the problems in the sub-prime mortgage market were spilling into junk bond markets and said that credit markets are facing a "sudden liquidity crisis."
The US dollar again fell sharply, especially after the statement from Countrywide Financial Corp. It reported its third straight quarterly earnings fall because more consumers have fallen behind on home equity loan payments.
Countrywide's CEO Angelo Mozilo told a conference call on the figures that US housing market is unlikely to recover before 2009 because lenders and homeowners have to work through an oversupply of unsold existing and new houses, stagnating to falling home prices and the continuing fallout of the sub-prime mortgage mess which has seen a significant tightening of lending standards, and therefore less business for the US mortgage industry.
In a conference call that lasted three hours, Mozilo reported earnings down a third in the second quarter and the company more than quadrupled its loan loss provisions to $US291 million in the quarter.
"`We are experiencing home price depreciation almost like never before, with the exception of the Great Depression,'' He said it would take all of next year for the mortgage market to "turn this battleship around,'' before demand rebounds in 2009. "This is a huge battleship, and we're headed in the wrong direction."
California mortgage defaults rose to the highest level in a decade in the second quarter as falling home sales and higher interest rates battered the housing market.
DataQuick Information Systems, a provider of real estate data, said in a statement that Californian homeowners received 53,943 default notices, more than double the 20,909 filed a year ago. The June quarter default level was the highest since the fourth quarter of 1996.
Bloomberg reported that at least 35 bond and loan deals worldwide have been pulled, delayed or restructured in the past five weeks.
Around $US300 in new junk bonds are expected to be issued in the US over the rest of 2007 but that is now looking problematic.
Allison Transmission has postponed the $US3.1billion loan deal to fund its buy-out from General Motors. This has raised concerns that investment banks may be forced to add to the $US12 billion or more in unsold high-yield debt they already can't sell.
The US real estate industry peak body, the National Association of Realtors, issues its monthly report on sales of existing homes tonight (Australian time) and it is expected to show a four-year low in the annual rate of sales of 'pre-owned homes'.
And tonight (our time), the US Census Bureau releases the June figures for new housing starts which could show further weakness and confirm the growing nature of the slowdown.
And, in dramatic commentary in his monthly column, Bill Gross, the manager of the world's largest bond fund (and noted financial conservative) says the cheap financing that fuelled the leveraged buyout boom is over.
"The tide appears to be going out for levered equity financiers and in for the passive owl money managers of the debt market,'' Gross, who is chief investment officer at Pacific Investment Management Co (Pimco) wrote. He said this change "promises to have severe ramifications for those caught in its wake."
Investors are shunning CDOs after the near-collapse of two hedge funds run by Bear Stearns Cos. that owned the securities. Standard & Poor's downgraded bonds from 75 CDOs as mortgages to people with poor credit defaulted at record rates. Concerns about losses on home loans are rattling investors across the credit spectrum.
"Some wonder what squelched the hunger of potential lenders so abruptly, while in the same breath suggesting that the sub-prime crisis is "isolated" and not contagious to other markets or even the overall economy.
"Not so, and the sudden liquidity crisis in the high yie