Cum On Feel The (Repo) Noize: Repo Rates Stable After Fed Rate Cuts And $500 Billion Purchase Of T-bills, Etc.

Cum on feel the (repo) Noize!

As The Federal Reserve attempted to “normalize” interest rates by raising The Fed Funds Target rate (upper bound) and shrink their balance sheet, all hell broke loose in the repo market (see whites spikes).

A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a form of short-term borrowing, mainly in government securities (Agency MBS, Treasuries). The dealer sells the underlying security to investors and buys them back shortly afterwards, usually the following day.’

Repo rates historically have been near zero %.   But repo rates are now about 20 basis points about the Fed Funds Target Rate (upper bound).


Here are The Fed’s System Open Market (SOM) Holdings of T-bills and Notes/Bonds.


So much for The Fed trying to normalize what Bernanke and Yellen did since 2008.

Fed Chair Jerome “Noddy” Powell. Baby, baby, baby!


TBAC-o Road! U.S. Treasury To Begin Selling 20-year Bonds In First Half Of 2020


The Congressional Budget Office is projecting that the deficit, which has surged during the Trump administration (even though the Federal Budget is controlled by the Democrat-held House of Representatives), will top $1 trillion in the current budget year and remain above $1 trillion over the next decade.

This is a bit of a stretch. The US Federal budget deficit actually hit -$1 trillion in 2009-2011. And is now predicted to hit -$1 trillion again.


Hence, the reason for a new Treasury instrument that is less expensive than the 30-year Treasury bond.

Why is the song Wipeout running through my mind?



The Walking Dead: Over 40% Of Listed Companies Don’t Earn A Profit

It’s absolutely stunning how the Fed/ECB/BoJ injected upwards of $1.1 trillion into global markets in the last quarter and cut rates 80 times in the past 12 months, which allowed money-losing companies to survive another day.The leader of all this insanity is Telsa, the biggest money-losing company on Wall Street, has soared 120% since the Fed launched ‘Not QE.’Tesla investors are convinced that fundamentals are driving the stock higher, but that might not be the case, as central bank liquidity has been pouring into anything with a CUSIP.The company has lost money over the last 12 months, and to be fair, Elon Musk reported one quarter that turned a profit, but overall – Tesla is a blackhole. Its market capitalization is larger than Ford and General Motors put together. When you listen to Tesla investors, near-term profitability isn’t important because if it were, the stock would be much lower.

The Wall Street Journal notes that in the past 12 months, 40% of all US-listed companies were losing money, the highest level since the late 1990s – or a period also referred to as the Dot Com bubble. 

Jay Ritter, a finance professor at the University of Florida, provided The Journal with a chart that shows the percentage of money-losing IPOs hit 81% in 2018, the same level that was also seen in 2000. 

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Instead of fighting zombie companies, The Fed is throwing bodies at them!


S&P 500 Price-to-Sales Ratio ABOVE Bubble Level (Will It Continue?)

2020 should be an interesting year. After all, 2019 was one of the best years for the S&P 500 in history.


Will the bull run continue? Currently, the S&P 500 Price-to-Sales ratio is above the level seen in the bubble of 1999.


All measures of the S&P 500 index are growing with cash flow per share growing at 32.03%!


On the other hand, the VIX index is a historically LOW levels.


Are we in a bubble? I call it “The Pepperjack  Turducken Slammer Bubble.” It could deflate and ooze at any time.



Reversal Of (Housing) Fortune? US Home Price Growth Turns With Fed Balance Sheet Expansion

As we begin another semester at George Mason University School of Business, it is time to review the state of the US housing market … in terms of YoY prices.

The FHFA home price index YoY has been slowing since May 2018. The Case-Shiller National Home price index YoY slowed over the same time frame BUT reversed course about the time when The Federal Reserve added to its balance sheet.


Will the FHFA home price index reverse course as well???




Philly Fed’s Leading Index Growing At 1.4% And Growing In 41 States (41 Out of 50 Ain’t Bad!)

The Federal Reserve Bank of Philadelphia has released the leading indexes for the 50 states for November 2019. The indexes are a six-month forecast of the state coincident indexes (also released by the Bank). Forty-one state coincident indexes are projected to grow over the next six months, and nine are expected to decrease. For comparison purposes, the Philadelphia Fed has also developed a similar leading index for its U.S. coincident index, which is projected to grow 1.4 percent over the next six months.

At the national level, the leading index for the US is stable and growing at 1.4%.

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At the state level, green is good. Salmon, gray and red are not.

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To paraphrase Meatloaf, 41 out of 50 ain’t bad.

T-Dazzle! Is The Fed The New Investment Performance Benchmark? (Hint: All Assets Beat It)

Can you say Treasury-dazzle or T-Dazzle?

Since March 2009, after a massive intervention by The US Federal Reserve in terms of target rate cuts and assets purchases (QE), the S&P 500 index, the NAREIT Equity index and the NCREIF All-property index have zoomed to all-time highs (note that lack of volatility of the NCREIF commercial property index).


It seems that all assets classes have been “juiced-up” by The Federal Reserve monetary expansion that seems to be permanent. All assets classes can beat it.

And since March 2009, the Treasury actives curve has declined by over 100 bps.


But over the past 30 years, the best performers have not been real estate, but non-real estate companies.


Can you say Treasury Dazzle?


Fed Reverses Course On Balance Sheet Normalization “Temporarily” (Its Always Sunny On Wall Street)

Yes, it is always sunny on Wall Street.  Particularly when The Federal Reserve is running interference like the have since 2007.

The Federal Reserve has reversed course on its unwind of their balance sheet. Allegedly temporarily.


While The Fed kept rates at 25 basis points for a long time (since 2007), they finally started raising them under Fed Chair Jerome Powell.  And had started lowering them again before an apparent halt.


Yes, the year-end repo skitter led The Fed to inject > $200 billion of temporary funding for the banks.


Jerome Powell leading the discussion of Fed policy.


Fed Policies Lead Pension Funds To Take On More Risk In Direct Lending

The Federal Reserve (and other central banks) have been hyperactive in pushing interest rates to near zero (and negative in Europe and Japan). Here is the Fed’s activity.

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One of the by-products of low rate policies is that pension funds cannot meet their projected payouts to retirees. As a result, pension funds are seeking to take-on more risk in their hunt for higher yields.

(Bloomberg) — Arizona’s $41 billion State Retirement System is looking to dedicate one out of every six dollars it manages to direct lending — more than five times the industry average — in a move some see as a harbinger of what’s to come for the booming asset class.

Investors have plowed hundreds of billions of dollars into private-credit funds in recent years, lured by premiums that are more than five percentage points higher than competing public debt. Yet less than 3% of pension portfolios were dedicated to the sector as of December, according to London-based research firm Preqin. That may be about to change.

In a recent survey of firms managing nearly $400 billion in private-credit strategies, nearly 90% said they expect pension funds to up their allocations over the next three years. The Ohio Police & Fire Pension Fund said this month that it was cutting its high-yield exposure as it moves toward a 5% target for private debt. And in its most recent financial statement, the Teachers’ Retirement System of the State of Illinois said it “continues increasing exposures to private debt opportunities,” even as it retreats from fixed income broadly.

“We’ve been invested in private debt since early 2013,” said Al Alaimo, who oversees the Arizona fund’s credit investments and aims to boost direct lending, one of the most popular private-credit strategies, to 17% of the portfolio, from about 13.6% previously. “We were very conscious that we were an early adopter and we tried to lock up as much capacity as we could with managers we perceived as being the best.”

Asset class returns outpace gains from leveraged loans, junk bonds

Now others funds are catching on, too.

The number of U.S. public pensions active in private credit climbed to 281 this year, with a median allocation of 2.9%, up from 186 and 2.1% in 2015, according to Preqin.

That may not seem like much, but with $4.57 trillion in assets, even incremental increases in exposure can mean billions of dollars in inflows for alternative credit managers.

The Arizona State Retirement System invests with some of the biggest players in the business, including Ares Management, HPS Investment Partners, Cerberus Capital Management, GSO Capital Partners, Oaktree Capital Management and Monroe Capital, according to fund documents.

Of course, other problems plague pension funds, such as in the State of Illinois where people are fleeing due to higher taxes … to pay for their underfunded pension plans.

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Illinois’ pension problems are helping Illinois to have a credit rating one notch above junk. The City of Chicago is already rated as junk along with Chicago Public Schools.

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How long before Illinois jumps on the direct lending bandwagon? After all, it is easier to take on more risk than trying to fix the problem.


A Median Sales Price Home in San Francisco Requires Minimum Qualifying Income Of … $309,400

Yes, the San Francisco Bay Area is quite pricey for housing. A peninsula (restricted area) with thriving technology companies (Facebook, Google, Apple, etc.), restrictive zoning and Uber-expensive construction costs result in a mondo-expensive home prices.

San Francisco requires $309,400 in MINIMUM qualify income to purchase a median sales priced house.


If we go down the peninsula to Los Altos Hills, we see available houses in the $2-40 million dollars range.

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Of course, Los Altos Hills is not the median for the SF Bay Area. It is the Bay Area equivalent of Beverly Hills, Bel Air and Westwood in Los Angeles (non-coastal).

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Needless to say, Fannie Mae and Freddie Mac do not buy mortgages from lenders in these areas. That is the province of jumbo lenders and securitizers like Redwood Mortgage Investors.