Dow Tanks 724 Points on China Tariff Announcement, VIX Spikes To 23.34 (Trump Wants Quid Pro Quo)

The US plans to impose tariffs on up to $60bn in Chinese goods and limit the country’s investment in the US in retaliation for years of alleged intellectual property theft (such as my book which is sold in China, yet I have never received a penny in royalties). But it is more about inequality in tariffs where China has higher tariffs on US imports than the US has on Chinese imports.

As Dr. Hannibal Lecter once uttered, “Quid pro quo.”


Financials and Industrials led the way down.


The VIX spiked to 23.34.


The media ignores the fact that Fed rate increases coupled with balance sheet decay has helped make the equities markets more fragile.


Some Toys ‘R’ Us Stores May Be Worthless, Deutsche Bank Says

Beleaguered retail chain Toys ‘R’ Us is packing a punch for CMBS investors.

  • Properties in CMBS backed by 123 stores may be reappraised
  • Subordinated bondholders could lose control with lower value

Some Toys “R” Us stores could turn out to be worthless to commercial mortgage-bond investors.

As many as 26 of the weakest properties in a 2016 commercial mortgage-bond deal secured by 123 Toys “R” Us stores may have little or no value, Deutsche Bank AG analysts Ed Reardon and Simon Mui wrote in a note Wednesday. The stores backing the $512 million bond had an estimated value of around $618 million in 2016 if they were to be vacated and re-leased. But that figure could be one-third lower now because retailers’ revenues have been dropping and more have been filing for bankruptcy.

The properties are probably subject to a new appraisal following the Wayne, New Jersey-based toy store’s bankruptcy filing in September 2017, based on the securities’ offering documents, the analysts wrote. An appraised value of less than $495 million could lead to the most junior bondholders losing control of servicing decisions or taking losses, the analysts wrote.

Toys “R” Us sold the bonds in October 2016, less than a year before it filed for bankruptcy. The largest portion of the offering received AAA ratings from S&P Global Ratings and Morningstar Credit Ratings. The $63 million Class F piece of the deal, which would be the first to take losses, had junk ratings.

Such ‘Flux’

The analysts estimated a new appraisal may value the properties at $407 million. Adding difficulty to valuations are the varying types of store locations — including outside malls, strip centers and standalone locations — and a retail industry “in such a state of flux.”

Real estate investment trusts including Retail Properties of America Inc.DDR Corp.and Kimco Realty Corp. are candidates to purchase some of the spaces in primary and secondary markets because many already operate similar properties, the analysts said. Local real estate investors may be the best option for lower-value lots, but could also end up buying mid-tier spaces if national buyers pass.

Potential replacement tenants “have significant negotiating power” when leasing the spaces, the analysts said. Some loans in the deal have other large vacancies nearby, or other weak tenants that may close stores. In some cases, potential replacement tenants like Michaels Cos. and Dick’s Sporting Goods Inc. already have stores near or in the same shopping strip where a Toys “R” Us is closing, meaning they’re unlikely to step in and lease.

“Buyers of these properties face massive execution risk,” the analysts said, noting that owners of the spaces may face lower-than-expected rents, more retailer defaults or a long leasing process.

The TRU portfolio is truly awful.
And CMBX BB S6 is showing a dramatic decline since mid-2015 as retail concerns mount.

With retail store closings continuing to ramp up, retail REITs and CMBS investors had better watch out.


Fed Comes A Little Bit Closer To Taylor Rule (Raises Target Rate To 1.75% While TR Rudebusch Calls For 6.62% — Only 447 Basis Points To Go!)

Yes, Jay (Powell) and the Americans (FOMC) came a little bit closer to The Taylor Rule (Rudebusch Model) with the FOMC voting to increase their target rate to 1.75%. The lower bound is now 1.50%.


The Taylor Rule (Rudebusch Model) calls for a Fed Funds Target rate of 6.62%. Only 447 basis points left to go, Jay!


The sentiment for 4 rate hikes in 2018 is growing.


The Fed Dots Plot for today’s meeting shows optimism over economic growth.


I was hoping that Jay Powell was going to sing a ballad to former Fed Chair Janet Yellen.


Perfektenschlag! U.S. Starter Homes Are Scarcer, Pricier, Smaller and More Run-Down (Perfect Storm For Affordable Housing)

Combine insane land use restrictions (zoning), influx of millions of immigrants from south of the border, a booming tech industry and super low interest rates from The Federal Reserve and we have  “Perfektenschlag” for US affordable housing policy: the perfectly UNAFFORDABLE HOUSING MARKET (aka, coastal California).

(Bloomberg) – Homebuyers in the U.S. have plenty to grouse about these days. Prices have climbed steeply in many metro areas, mortgage rates are rising and inventory is thin. But for people looking to purchase their first home, it’s ugly out there.

“Starter homes have become scarcer, pricier, smaller, older and more likely in need of some TLC” than they were six years ago, the real estate website Trulia reported Wednesday after analyzing housing stock across the country.  Trulia began tracking prices and inventory in 2012.

It’s grim all over. American homes are at their least affordable in the report’s history. But the median listing price of available starter homes has risen 9.6 percent in the past year, easily beating out the trade-up and premium categories, while starter-home supply has fallen to a new low this quarter, Trulia reported.

Perhaps the most striking finding is that the very buyers who are typically least able to plunk down a lot of money are confronted with the least affordable homes. The share of income needed by those in the market for a premium home was 15 percent, and for a trade-up home 27 percent. For a starter it was 41 percent.

Adding insult to injury, the homes aimed at first-time buyers are less likely to be ready for human habitation than others, with fixer-uppers accounting for 11.2 percent of the category. They’re about nine years older than they were in 2012, and 2 percent smaller.

On the bright side, 2 percent isn’t a whole lot smaller. Until you learn that homes overall are more than 8 percent bigger.

The markets that are the least affordable are concentrated in California with Boston being the sole market not located in the Golden State. In some of the most expensive places in the country like San Francisco, San Jose and Los Angeles, those income earners at the bottom third of the market would need to spend all their income and more (over 100%) to afford a median starter home.  The starter home price among all ten of these markets has also increased since this time last year.


Combine California Governor Jerry “Moonbeam” Brown and former UC Berkeley economics professor Janet Yellen collaborating on affordable housing policy, and you get the median price of a starter home in San Francisco of $820,550.


Yes, throw in California’s tight land use controls, a legislature that encourages open borders, a Federal Reserve keeping interest rate extremely low for a decade and a booming technology sector and we have an AFFORDABLE HOUSING CRISIS in coastal cities.


Or as Dwight Schrute said, “Perfektenschlag.”


Born To Run! Libor Rises for 30th Straight Day Ahead of Fed Decision (Highest Since Financial Crisis)

With a rate increase a foregone conclusion when the Federal Reserve concludes its two-day policy meeting on Wednesday, traders have been actively pricing it in. The three-month U.S. dollar London interbank offered rate, or Libor, which is one of the benchmarks for setting borrowing rates worldwide, has been on the rise since Feb. 7, reaching 2.25 percent, the highest since 2008 (and the financial crisis).


Meanwhile, its gap over similar-maturity risk-free rates, known as the Libor-OIS spread, has more than doubled since the end of January to 55 basis points, a level unseen since 2009.


With The Fed taking its foot off the monetary brakes (at long last), Libor and the Libor-OIS are “born to run.” UP!

Here is my friend, Atlanta Fed’s President Raphael Bostic, and Fed Chair Jerome Powell.


Fed Enters Brave New Forecasting World Beset With Same Old Data (Actual data look very similar to those Fed faced in December)

The Fed’s Open Market Committee (FOMC) is meeting today and tomorrow to decide what to do. Well, it is pretty much a foregone conclusion that the Fed Funds Target Rate (upper bound) will be raised to 1.75% from 1.50%.


But what is different at this meeting than at the last meeting in 2017? In short, GDP is expected to growth at a faster pace and inflation is rising ever so slowly.

(Bloomberg) -By Jeanna Smialek- Federal Reserve officials will face an unusual predicament as they update their economic projections this week: Everything has changed but the data.

In many ways, it feels like a brave new world. Chairman Jerome Powell makes his debut with an expected interest-rate increase, replacing Janet Yellen. Financial conditions have tightened and the five rate increases under Yellen since December 2015 are finally being felt in the real economy, at least in mortgage rates. Tax reform has passed and Congress is lifting government spending caps, boosting the near-term growth outlook.

Yet Fed officials swear by their data dependence, and the numbers look strikingly similar to when the policy-setting committee last met. The inflation pickup officials have been waiting for still hasn’t materialized, wages are ticking higher but hardly surging, economic growth is chugging along and the job market continues to pull people off the sidelines.


And if we look at the Rudebusch Model for the Taylor Rule, it is screaming for a Fed rate hike even with unemployment rate at 4.1% and Core PCE Inflation at 1.52%.


While The Fed forecasts GDP to grow at 2.5%,


the Atlanta Fed’s GDPNow Forecast for Q1 has fallen to 1.8%. Be warned! This is one noisy forecast model!!


Home prices keep growing at over twice that of hourly wage growth.


Part of The Fed’s Brave New World is trying to cope with housing prices rising over twice as fast as wage growth.



My Kuroda! Not a Single Japanese 10-Year Bond Traded Tuesday (Bank of Japan Bought 75% Of Government Bonds Issued In Last Year)

(Bloomberg) — Some jobs might be threatened by automation. But when it comes to government bond trading in Japan, the biggest threat might be the country’s central bank.

The Bank of Japan has vacuumed up so much of the government bond market — in excess of 40 percent — that it’s left fewer securities for others to buy and sell. Some other buyers, such as pension funds and life insurers, also tend to follow buy-and-hold strategies.

That’s the backdrop to Tuesday’s session, when not a single benchmark 10-year note was traded on exchange, according to Japan Trading Co. data. Barclays Securities Japan rates strategist Naoya Oshikubo, summed it up, with perhaps an understatement: “the JGB market was generally thin.”

Governor Haruhiko Kuroda noted to lawmakers Wednesday that the central bank has bought 75 percent of the government bonds issued in the fiscal year ending this month.

The Japanese sovereign curve remains negative for tenors under 10 years. And the Yen swaps curve is negative for tenors less than 6 months.


You can see how well BOJ’s low interest rate policies have helped housing prices.  … NOT!


This is clearly a time to roll-out the song by The Knacks entitled “My Kuroda!”


US Inflation Sighting In PPI Data (2.5% YoY Highest Since Feb ’12)

Inflation has been sighted in the US at last! The Producer Price Index (less) less the volatile food and energy measures rose to its highest level since February 2012.


The question is … when will it show up in the Core PCE price YoY measure that languished at 1.51%?


Of course, cost-of-living varies dramatically across states with largely west coast and northeast coast states having the highest cost-of-living. Let’s see what happens in these states if inflation REALLY gets hot, hot, hot.

cost of living US


30-year Treasury Auction Strong With $13 Billion Sold To Public (None Bought By The Fed)

Today’s US Treasury 30-year bond auction was strong. $13 billion were sold to the public  and none purchased by The Fed for the first time since the December 12, 2017 auction.


So far, so good. Despite massive Federal spending and projected budget deficits, Treasury auctions are going well.

The 10-year T-Note Volatility index (TYVIX) has declined to around 4.


Inflation Around The Corner? February Inflation Muted (Core 1.8% YoY), Real Hourly Earnings Decline To 0.37% YoY

Janet Yellen kept saying that inflation was just around the corner, but apparently she meant one of those long New York City blocks.

The February inflation numbers are in almost exactly as forecast:  According to the BLS, CPI MoM declined to 0.2% MoM while CPI YoY rose slightly to 2.2%. CORE CPI MoM fell to 0.2% while CORE CPI YoY remained level at 1.8%.


Meanwhile, The Federal Reserve is merrily raising its target rate and letting its T-note portfolio mature in the face of whimpering inflation.


February saw a slight increase real average weekly earnings YoY and a small decrease in real average hourly earnings YoY.


The USD Inflation Swap Forward 5Y5Y remains under 2.5% at 2.4%.


Yellen and The Fed’s big fight for inflation is a no-show. Apparently, the fuse is wet.