Monday, July 2, 2007

[Latest Global Dollar Liquidity Measure: +14.6% annual growth rate; latest Endogenous Liquidity Index: -4.6%]

Another day, another drop in our Endogenous Liquidity Index. Once again, all components showed weakness: CDS spreads, cash bond spreads, volatility measures, financial innovation measures. While most of the talk is about CDOs containing asset-backed securities, one has to wonder about the fate of the so-called synthetic CDOs, as CDS spreads continue to climb.

- The FT's Tony Jackson on CDS, CDOs & derivatives. Rightly focuses on synthetic CDOs. "[Credit derivatives] will still be in demand for their original function of hedging risk. They may be less so as a means of blindly assuming risk in the hunt for yield".

- Bloomberg's Mark Pittman on the CDO deb√Ęcle. Contains lots of quotes from angry- and bearish fund managers. "We remain nervous about the end of the week, when many leveraged investors in the CDO markets will have to mark down their positions, debt strategists at Barclays Capital in New York said in a June 28 report".

- Morgan Stanley's Richard Berner on the turn in the credit cycle. "The turn in the credit cycle has begun", writes Mr. Berber in this interesting piece. He then asks, rhetorically: "Could this so-far orderly renormalization now morph into an ugly credit crunch that would slam the brakes on the economy and corporate leverage?"

- Bank Credit Analyst feeling less pessimistic. Canada-based BCA acknowledges the increase in quality spreads, but concludes that "the shakeout in sub-prime debt is not over, but may now be contained to lower quality securities, with less risk of a contagion into credit spreads and the banking sector".

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