EVERY ACTION

Liquidity is as liquidity does.

And in markets few things are more important than the appearance of adequate liquidity. Isn't that what Fed Chair Janet Yellen's recent squealing about invoking exit fees on money markets was all about?

Well, a story in the Financial Times today, "Repo fails spark fears of risk to US Treasuries," calls attention to what could be another liquidity squeeze waiting in the wings to happen.

US Treasury bonds are  supposed to be some of the easiest to buy and sell, yet all is not well in one of the world's biggest and most liquid markets. 

The smooth functioning of the $12tn US Treasury market depends on the health of its underlyoing machinery, in particular the repurchase, or "repo," market. This is where government securities are regularly lent out and borrowed between various investors and dealers.

These are short term transactions that help investors sell bonds when they want to change directions as in the face of suspected rising interest rates. In other words, it about liquidity. The whole system depends on, guess, paying the piper or returning your securities on time.

Something called a failure happens when a borrowed security is not returned on time and causes settlement problems across the entire "repo" landscape. As is usually the case since these securities are lent out more than once there is more than just borrower and lender involved here. 

Think of a daisy chain of borrows, banks and dealers. A couple of weak links and you're starting to get the picture. Of late, according the FT article, there's been a big jump in the fail rate. Per Federal Reserve data the peak in failures happened back in 2011.

Back in 2011 interest rates were declining not rising. Now even though there is what the Times calls subdued activity in this market, failures are on the rise. That brings up an ugly concern should interest rates move up higher or faster than anticipated.

As one market observer quoted by the Times puts it: "If the market is as liquid as everyone says it it, then why did we have this sudden burst of fails?"  That sudden burst, the Times notes, since records have been kept occurred since the beginning of this June when "seven of the 10 largest fail-to-deliver days" hit the market.

So far none of the fails have come from dealers, but if that should occur it could signal look out below. Short-term debt plays a key role in keeping the current financial system afloat. It has to do with collateral. One thing adding to the problem is recent regulations. Fewer players now want to be a part of  the daisy chain owing to the added costs of playing. 

So much for every action evoking a reaction. 
t. man hatter

THE PERFECT CALM

 
 t. man hatter
The weaker the oil price gets the more you should become a buyer.

The concerns pushing oil prices lower are more economic than geopolitical at the moment. No big surprise here. Sending Brent crude, the world benchmark for crude oil, to a 13 month low recently during intraday trading makes the news a bit more tantalizing, giving headline writers something to get a grasp on.

Economic pundits are scrambling to reconfigure their demand projections, extrapolating from a weaker than expected second quarter growth number around the world. Factor in Japan, Europe and the Russian sanctions that have yet to be felt and you're starting to get the picture. The energy sky is falling.

And Libya just shipped its first load of oil since last year. North American energy output is soaring despite fracking, transportation fears and anti-pipeline protests. We like to heat and cool our homes but only if you get us that volatile, smelly burning stuff by Immaculate Conception or, better yet, some government regulation.

In Europe refineries are running at bigger slowdown rates. If demand gets any weaker it will most likely join Japan in another episode of the lost decade. We are daily hearing warnings that start with : "Unless....," dire stuff all. Copper, the doctor of all metals, swooned again over fears about Chinese demand coupled with China's lowering its oil import.

Beside the North American output, so the story goes, a glut of oil in the Atlantic Basin and North Sea are compounding things. West Texas Intermediate after falling to a new low rallied to close at $97.42. Iraqi oil once thought to be at risk looks less risky.

Suppositions that Brent could breach the $100 level soon make the rounds daily.

The whole thing reminds of a scene from a famous long-ago movie where a defense attorney is grilling a prosecution witness about the witnesses' point of view.

"Maybe from where you're sitting," the witness responds to the attorney. "But I'm sitting over here."

Now we don't know about you but from where we're sitting the story has all the elements of the "Perfect  Calm."  And we all pretty much know what followed that.

NIMBY NUTS

In our recent "What The Market Offers" blurb a few days ago we brought up what to us is some of the craziness surrounding today's environmental movement.

Everyone's got a beef and nobody wants it in their backyard or running through their environmentally-sensitive soil.

Well, here's another read on the subject and just how wacko it can get. Whatever you do don't take our word for it. Read the article and decide for yourself. Here's a brief quote to wet your appetite.

Practicing politics in Massachusetts must be like steering a ship toward a safe harbor while running away from a hurricane. Certainly Massachusetts Governor Deval Patrick, who is being battered by environmentalists, must feel that way.

Patrick it should be noted is a Democrat who earlier was praised by many of these same people who now want to filet him. 

Understand that the Northeast has long wanted to bring more natural gas to the energy-starved region for a long time. Then go back and read Senator Warren's comments about providing energy the Massachusetts way we quoted in our blurb.

Put that in perspective with Senator Markey's silly comment we also quoted and you'll get an idea just how knotty this issue can get.

http://blogs.platts.com/2014/08/05/new-england-natural-gas-pipeline/

MONEY MADE HERE

The news is out, all over town. You've been seen running around.

Those words from an old Jerry Lee Lewis song, without much imagination, easily apply to the European Union mess.

The news is out all over Euro town and the ECB bureaucrats along with their illustrious leader, Mario the Dragster Draghi, have been caught stalling around.

Forget Godot or Abernomics, folks in the EU are waiting for Mr. Draghi and his lumbering crew of central bankers to QE things back to normal, whatever that is. 

Forget too the Call of the Wild; this is a call for Keynesian money printing in the modern-day wild and wooly world of central banking's version of:  If it's broke we can't fix it. But we can paper it over so the rough edges won't show until the next time.

It's those rough edges that political plasters like Renzi and Hollande never want to fix, just toss a little economic plaster over the cracks and keep moving before everybody gets their bifocals adjusted.

If today's numbers about France and the German 10-year bund yield are any indication, patience is growing short. The yield on the German benchmark bund dropped below 1% and France's economic growth pulled an apparent Houdini, disappearing without ever putting in an appearance.

Question: Contraction is to stagnation as?

Answer: Germany is to France.

There's one thing you can bet on. There's going to be some money made here. 
t. man hatter

TURN OUT THE LIGHTS THE PARTY'S OVER

 
 t. man hatter
We recently noted that we all know where easy money goes.

There's an old warning about if you're playing poker and after a certain time you don't know who the pasty is, you're it.

Just substitute easy money for poker and you'll get the drift. Here are some recent comments about Europe and it's economic plight.
--Japanification of Europe
--ECB needs to act now
--Germany stalls
--Latest inflation figures call for ultimate bazooka from ECB
--Can't wait to start QE

The ultimate big bazooka is oiling up the printing presses and warming up the helicopters to drop this stuff throughout Euroland. Supposedly, according to EU regulations, asset inflation is verboten as in against the law.

But one need only remember that illegal is only illegal as long as bureaucrats and politicians say it is. In the shifting sands world of these folks concrete doesn't exist. Forget the Rock of Gibraltar or even the Rock of Ages. This is rocky terrain looking for a place to landslide.

QE to the Germans is economic hemlock. They don't want it and most likely won't tolerate it. Nor should they. That big cracking sound you hear in the background just might be the EU coming apart at the periphery if QE gets unleashed.

What many of these people don't get is QE rhymes with Keynesianism and Keynesianism is belly up at the bar. And has been for a long time but someone forgot to turn out the lights as they were leaving.

WORTH A LOOK

Here's a few interesting charts from http://shortsideoflong.com/2014/08/bearish-agricultural-sentiment/. and the Wall Street Journal.

We apologize for the vagueness, but checkout the charts at the above link. A few short years ago we had agriculture shortages much of it owing to a huge drought. Cattlemen took their cows to market early because they couldn't afford the high costs of  feed.

That later led to higher beef prices. California is still in the midst of an horrific drought. The ISIS in Iraq just seized control of much of that country's wheat. The Ukraine situation lingers on and Ukraine is a large producer of wheat.

Today's WSJ carried an article about corn and soybean record crops.

Soybean prices fell nearly 2% as government forecasters estimated this year's crop would be by far the largest in history.
 

Wheat also declined, while corn rose modestly after the U.S. Agriculture Department projected lower-than-expected yields.

 The USDA's forecast for a bumper soybean crop reflects near-perfect weather in the U.S. Midwest this season and an 11% increase in harvested acres of the oilseeds. As much as three times the normal amount of rain has fallen in the past three months in the Farm Belt, improving soil moisture and leading to the best conditions for the soybean crop in a decade, according to federal data.

U.S. soybean stockpiles in the 2014-15 season will more than triple from a year earlier, the USDA estimated, alleviating concerns about low inventories that have plagued food producers and other soybean buyers for several years.

WHAT THE MARKET OFFERS

 
t. man hatter
So what are they giving us?

In our recent post, So?, we mentioned energy. Well, today, September crude futures closed up 22 cents or 0.2%, with futures up four of the last five trading sessions. Some say this in part is owing to investor concerns about international trouble spots.

So far for August futures are still down 0.6%. One of the problems with crude is it has to travel someway. So geopolitical is not the only threat.

In their zeal to purify the globe, those nutty Al Gore-like environmental purists dislike pipelines, rail road cars and oil tankers. But it's a two-way thoroughfare. Cheap U.S. domestic crude oil versus heavier, higher sulpur content, more expensive imported crude.

According to Houston-based RBC Energy LLC, refineries in Texas, the home of big refinery Valero, companies are scrambling to build pipelines to connect Texas oil fields to Gulf Coast refineries. Current pipeline capacity of 1.4 mbd is projected to hit 2.9 mbd by the end of next year.

Oil tanker deliveries to the Gulf dropped from 1.5 million barrels in 2011 and to less than 1.0 million to date.

Kinder Morgan, the big pipeline energy company, has been much in the news of late, not all of it favorable, given this recent protest in Boston.

U.S. Sen. Elizabeth Warren said in a statement she opposed the current Kinder Morgan proposal, saying the state must upgrade its energy infrastructure in ways that are “consistent with Massachusetts’ commitment to environmental conservation, clean energy, and energy efficiency.”

U.S. Sen. Ed Markey also opposed the pipeline as proposed because it raises “serious questions,” including whether it is too large for the state’s energy needs and could result in the natural gas being exported rather than used locally. And Congressman James McGovern, a Worcester Democrat, said the proposed pipeline route was “irresponsible” because it cuts through environmentally-sensitive lands and local farms.

Warren's description is of particular note: "clean energy and energy efficiency" sounds like a fair and accurate one of natural gas. That's how even most environmentalists who promote natural gas describe it, clean and efficient. Apparently, she thinks they do something special in Massachusetts.  

A possible future presidential candidate, Warren is no friend of the energy business. Markey's comment is even more ludicrous, too big for the state's needs and could be exported rather than used locally. One of the Kinder Morgan proposals was to increase natural gas for the entire Northeast. Maybe the rest of the northeast needs to find out what Markey really thinks of them.

 All lands, Mr. Markey, are environmentally-sensitive. Otherwise, climate change, global warming or however one chooses to define it has no real purpose for being implemented
http://fuelfix.com/blog/2014/07/31/boston-protesters-rally-against-kinder-morgan-gas-pipeline/

On another note directly related to our what-are-they-giving-us theme, this chart from Richard Bernstein Advisers pretty much says it all.

.... mom and pop stink it up on a pretty steady basis and have lagged gains in every asset class, with the exceptions of Asian emerging markets and Japanese equities, over the last 20 years. The average investor has even managed to underperform cash – represented in the chart by 3-month T-bills.

“They could have improved performance by simply buying and holding any asset class other than Asian emerging market or Japanese equities,” wrote Bernstein, the former Merrill Lynch strategist who now heads his own eponymously named shop. (Read the note here.)

The chronic underperformance “suggests investors’ timing of asset allocation decisions must have been particularly poor, i.e., investors consistently bought assets that were overvalued and sold assets that were undervalued. They bought high and sold low,” he said.

As the chart suggests to us at least average retail investors almost never take what the market is giving.And one of the many reasons is what the market gives is often perceived as unwanted or damaged goods.
http://blogs.marketwatch.com/thetell/2014/08/13/1-chart-shows-just-how-badly-average-investor-lags-even-cash/




 

SO?

If you're the type of  investor who can look ahead and block out much of the nasty sounding news, and there seems a lot around these days, you might want to consider placing some bets where others are avoiding.

One of  those places might be Europe. The news is out about the EU's three largest economies being in a funk. And along with building suspicion about the weakness of EU banks amid rumors the ECB will soon unravel some form of American-style QE, there's enough gloom to go around for nearly everyone.

We all know what QE or easy money does to asset prices. The assumption that this money will find its way to where it's intended, should QE happen, is just that--an assumption. Even before the recent Russian sanctions were imposed, Europe's economy was anemic. 

A weaker euro and a stronger dollar will help EU exports. And higher US interest rates once they arrive will also help. A story headline in today's Financial Times, "Fears rise as headwinds hit Europe's equity rally," lists all the negatives while also noting that since September of 2011 the FTSE Eurofirst 300 to this July had rallied 60 percent. 

Even basic arithmetic tells you that's better than a 20 percent annual average in less than three years. 

Another area we like and continue to like is energy with its recent weakness. Earlier we wrote about a pullback coming there and we have not changed our minds. Trouble in this sector is good for prices all the while trouble in the EU is viewed as being bad for prices.

What's being priced in to both right now is economic slowdowns. And it appears widespread with only China showing much positive news. So? 

Catalysts like everything else in life come and go. A while back we mentioned how investors were avoiding gold mining stocks. Commodity prices have softened, but apparently bad news hasn't. A correction is one thing, a nasty old bear market another.

One is overdue, the other down the road somewhere. 
t. man hatter



  

PASS IT ALONG

 t. man hatter
One thing politicians, bureaucrats and elitists count on, you can bet, is how few of us take the time to investigate.

Investigate is fungible with knowledge. And like the line in the old song about "love and marriage and a horse and carriage, you can't have one without the other," they go together. In fact, they're inseparable.

Cars initially might have been called horseless carriages, but even today's cars have something called horse power. And many are judged by it. When people can count on your lack of curiosity to investigate, they hold a certain power over you.

Others hate people like billionaire fund manager Paul Singer of the recent hubbub over Argentina's default for taking the time, having the curiosity to read all the fine print. For knowing his legal rights and then standing up for them.

Ignorance may be bliss but it bears a heavy load. Being taken for granted is only one of them. Peter Lynch, the famous former fund manager who helped put the giant mutual fund company Fidelity on the investment map, said: "People spend more time researching their washing machine than they do their stocks."

That should tell us all something we need to know. When we are too busy with our own affairs to take the time to investigate, we deserve what we get. Pass it along.

That's our view. We hope you know yours.

OVER HERE

 
t. man hatter
Job market is improving and that could impact your investment outlook.

The Janet Yellen led Fed has been focusing on jobs and any real pick up there could roll forward a change as to when interest rates go up in the U.S.

According to a story today on Bloomberg, a major shift is now taking place where recruiters are looking of candidates rather than the other way around since the recession ended in 2009. A number of cities are apparently short of workers.

“We’re short of people in a number of cities,” he said.
So he’s changing the focus of his $2.5 billion, Oklahoma City-based business. Instead of concentrating on finding jobs for those who want them, Express Employment is putting more effort into finding workers for companies that need them. 

“We’re back in the recruiting market again,” Funk said.
The 74-year-old industry veteran isn’t the only one to notice the change. Americans who have been hunting for employment for more than six months are finding they’re having better luck landing a job, while people who had given up looking are returning to the labor force to resume their search. 

Companies, meanwhile, are beefing up their in-house recruiting teams and increasingly using complicated computer algorithms to scour the Web for prospective job candidates. 

The other side of this coin is up until now employers have been extremely reluctant to hike wages, a fact that may also be changing. Labor is two-thirds the cost of doing business. 

But the real truth is worker wages have been flat for so long that if you stuck four wheels underneath them they could hall freight for the railroads. 

If wages do start rising in any meaningful way, that will put further pressure on the Fed.The other truth is the inflation number is bogus and hourly wages have not kept up with a number that has been purposely manipulated. 

So behind is a misnomer. A blatant, noon-day highway stick-up would be more correct. 
http://www.bloomberg.com/news/2014-08-10/job-market-tilts-toward-workers-as-u-s-enters-virtuous-cycle.html