A “Perfect Storm” Could Be Forming Right Here

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A “Perfect Storm” Could Be Forming Right Here

From Bloomberg:

In the relative calm that is the market for U.S. Treasuries, a sense of unease over a vital cog in the financial system’s plumbing is beginning to rise.

The Federal Reserve’s bond purchases combined with demand from banks to meet tightened regulatory requirements is making it harder for traders to easily borrow and lend certain desired securities in the $1.6 trillion-a-day market for repurchase agreements. That’s causing such trades to go uncompleted at some of the highest rates since the financial crisis.

Disruptions in so-called repos, which Wall Street’s biggest banks rely on for their day-to-day financing needs, are another unintended consequence of extraordinary central-bank policies that pulled the economy out of the worst financial crisis since the Great Depression. They also belie the stability projected by bond yields at about record lows.

“You have a little bit of a perfect storm here,” said Stanley Sun, a New York-based interest-rate strategist at Nomura Holdings Inc., one of the 22 primary dealers that bid at Treasury auctions, in a telephone interview June 30.

Smoothly functioning repo trading is vital to the health of markets. The fall of Bear Stearns Cos., which was taken over by JPMorgan Chase & Co. in 2008 after an emergency bailout orchestrated by the Fed, and the collapse of Lehman Brothers Holdings Inc., whose bankruptcy in September of that year plunged markets into a crisis, were hastened after they lost access to such financing.

Cash Transaction

In a typical repo, a dealer needing short-term cash often borrows money from another dealer, a hedge fund or a money-market fund, putting up Treasuries as collateral. The cash lender can then use the securities to complete other trades, such as to close out short positions where it needs to deliver bonds.

Negative rates happen when certain Treasuries are in such high demand or short supply that lenders of cash are actually paying collateral providers interest so they can obtain the needed securities. Traders said that is a big reason why repo rates on desired Treasuries have recently gotten as low as negative 3 percent.

Now, more repo trades are going uncompleted, or failing, because it’s either too difficult or expensive for the borrower to obtain and deliver Treasuries. Such failures to deliver Treasuries have averaged $65.6 billion a week this year, reaching as much as $197.6 billion in the week ended June 18, Fed data show.

Uncompleted trades averaged $51.6 billion in 2013, and $28.8 billion in 2012, according to the Fed. In those cases, the borrower pays a 3 percent penalty.

Liquidity Issues

“The effect of all the collateral issues we see now is an indication of not so much how things are, but how bad things will be when you really need liquidity,” said Jeffrey Snider, chief investment strategist at West Palm Beach, Florida-based Alhambra Investment Partners LLC, in a telephone interview June 30. “That’s when you get into potentially dire situations.”

The conditions for repo stress were on display last month. The 2.5 percent note due in May 2024 reached negative 3 percentage points in repo in the days preceding a June 11 Treasury auction of $21 billion in notes to finance government operations.

http://thecrux.com/bond-warning-a-serious-problem-could-be-growing-here/

http://www.bloomberg.com/news/2014-07-06/bond-anxiety-grows-in-1-6-trillion-repo-market-as-failures-soar.html

A Retailer That’s Closely Tied To The Housing Market Is Crashing After A Profit Warning Due To The Economy

Lumber Liquidators, a retailer of specialty hardwood flooring, just announced a warning that might make housing market watchers nervous.

“Customer traffic to our stores was significantly weaker than we expected, particularly in geographic areas severely impacted by the unusually harsh weather in the first quarter,” said CEO Robert Lynch. “The improvement in customer demand we experienced beginning in mid-March did not carry into May, and June weakened further. Our reduced customer traffic has coincided with certain weak macroeconomic trends related to residential remodeling, including existing home sales, which have generally been lower in 2014 than the corresponding periods in 2013. We now believe the prolonged purchase cycle associated with our customers’ discretionary, large-ticket home improvement projects is likely to be delayed for some customers into the fall flooring season, and for others, into spring of 2015.”
Read more: http://www.businessinsider.com/lumber-liquidators-warning-2014-7#ixzz371o6GCuv

It’s Beyond A Bubble: Median LBO Multiple Soars To Mindblowing 11.6x

While we have extensively discussed the emergence of the M&A bubble in recent months, with merger and acquisition activity in 2014 set to match or surpass the previous, 2007, record…

….

According to just released data by Murray Devine, the Median Ebitda multiple for buyouts has exploded to nosebleed levels, rising by over one full turn of EBITDA since 2013 alone, and at 11.5x in the first half of 2014 is nearly 2x higher than during the last LBO bubble peak in 2008, when the average company was taken private at aconservative 9.6x EV/EBITDA.

http://www.zerohedge.com/news/2014-07-09/its-beyond-bubble-median-lbo-multiple-soars-mindblowing-116x

Treasury Curve Collapses To Flattest Since Feb 2009

Charts: Bloomberg

http://www.zerohedge.com/news/2014-07-09/treasury-curve-collapses-flattest-feb-2009

Credit Guarantees, Fraud, Corruption Fuel China’s Credit Bubble; Bankruptcies Rock Loan Guarantors; Beginning of the End?

Bankruptcies Rock Loan Guarantors

In China, loan guarantors are going bust at a sharp pace. Many more bankruptcies are on the way. The setup is quite reminiscent of the implosion of credit insurers Ambac and MBIA during the US housing bust.

The South China Post reports Bankruptcies Rock Loan Guarantors.

Read more at

http://globaleconomicanalysis.blogspot.com/2014/07/credit-guarantees-fraud-corruption-fuel.html#Whk47xWLwgHBriQ7.99

Marc Faber and Peter Schiff may be just what this rally needs

On CNBC’s “Futures Now,” “Dr. Doom” Marc Faber presented a dire assessment of a broad range of investments, from the American stock market to bonds and real estate, proclaiming that “it’s a colossal bubble in all asset prices, and eventually it will burst, and maybe it has begun to burst already.”

The publisher of the Gloom, Boom & Doom report, who is now calling for a 30 percent crash in the S&P 500, put it even more succinctly at the very end of the interview Tuesday: “We’re all doomed! We’re all doomed!”

http://www.cnbc.com/id/101822953

‘Rotten rotation’ could signal bull market living on borrowed time

http://blogs.marketwatch.com/thetell/2014/07/09/rotten-rotation-could-signal-bull-market-living-on-borrowed-time/

Headlines:

Profits Vanish in Venezuela After Currency Devaluation
BOJ may slightly cut economic forecast, policy seen steady
Michigan Teacher Pension Costs Increase To Nearly $1 Billion Per Year
Violent worker protests in Buenos Aires as Argentina stares second debt default in the face
Austrian lower house approves Hypo haircut law
Flint, Michigan considers filing for bankruptcy
Tuition going up 3% at Pennsylvania’s state-owned colleges
Miami-Dade mayor’s proposed budget cuts police, parks, libraries
Stockton will have to repay $4M, could lose properties
Pension, pay hikes prove costly for LAUSD (Los Angeles)
Thirst for yield drives investors deeper into European ‘junk’ bonds
City may sue firm over 2001 pension estimates (Houston)
Alaska Taps Rainy-Day Cash for Pension Gap
Judge suggests Stockton worker pensions could be reduced in city’s bankruptcy case

Read more at http://investmentwatchblog.com/a-perfect-storm-could-be-forming-right-here/#rHekQLhC5VCgDAGb.99

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A “Perfect Storm” Could Be Forming Right Here