What to Ignore Wednesday – How About $359Bn of Repo Failures?

$359,000,000,000.  

Even these days, that seems like a big number, right? It's not on the chart but you get the idea, the last time repo failure leaped up like this was ahead of the great crash of 2008 but why worry?  Both mini-spikes last year led to big market pullbacks but Trump's election saved us and now we're just happily ignorning over $1 TRILLION in failures in the past 3 weeks alone.  

A “ repo fail” is pretty simple and straightforward; when the obligation of any seller to deliver agreed upon securities remains open following the close of business on the agreed date of the transaction.  These are, after all, repurchase agreements, which means exactly what the name implies; I buy bonds from you today and agree to sell them back tomorrow (or whenever).  If I don’t sell them back to you tomorrow, we have a fail.  The reason for them relates to what repurchase agreements actually are; collateralized short-term loans, mostly overnight. They are structured as repurchases for historical reasons that since the 1980’s have been superseded by this reality.

In 2008, this relationship was very easily established; T-bill rates in particular would trade in equivalent yield far less than they otherwise “should” given money substitutes (such as the IOER). Bill rates fell sharply in the wake of Lehman’s insolvency, and repo fails exploded into what is now the textbook (well, one not written by an Economist, anyway) case.  Thus, whenever we find an outbreak of fails it is for various reasons a tightening of collateral conditions. Some prove innocuous; most do not, especially any that would linger.

Something is hindering the flow of collateral – what it is remains to be determined…

Image result for equifax hackI know there's a lot to keep track of but let's remember that Equifax was hacked and, if you are a US citizen who has ever applied for credit, then ALL of your personal information is out there.  Well, not ALL – just the stuff they ask you for on a loan application.  This morning we just head from Yahoo that 3 BILLION customer records were hacked at that company and, of course, there's the Wells Fargo nonsense – which shows you what
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Troubling Tuesday – Broken Market is Good for You but GREAT for Me!

Is everything really awesome?

Or is the stock market broken?  Can the stock market be broken?  Something is clearly wrong at this point as market prices have nothing to do with earnings, which have dropped dramatically this year, running 15% lower than they were at the start of 2017 yet the market is acting as if those projections were being exceeded by 15%.

As a fundamental value investor, it's very hard for me to get behind a rally that has taken the Russell (IWM) up 18% in 9 months and all of that has come since the Russell went back to 0% in mid-August – so we're talking 18% in 45 days.  Yes, there is a little sour grapes here as the Russell is one of our hedges but that's BECAUSE the run is so ridiculous – that's what makes it a good hedge (in theory).   

What makes it a bad hedge is it's been up 23 of the past 28 days – an incredible run that is very close to mirroring the previous record, which was set in 1998, right before the small caps collapsed 38%, leading the rest of the market lower in a correction that was sparked by concerns over Russia's economic collapse as well as data that showed the US economy slowing.  

Our biggest fear duing this rally has not been Russia but China and Japan, as both countries are 250% in debt and can't afford a misstep but, so far, they haven't had one and their economies have both shown signs of improvement this summer.  Despite the turmoil in Spain and Brexit, the EU seems intact and the broad story of a Global recovery seems to be holding water – so many good reasons for the broad-market rally to continue – but that doesn't mean the Russell can't be getting ahead of itself.

Of course the big catalyst is Trump's proposed tax cut – that's what sparked an 18% gain in 90 days but is the tax cut REALLY going to happen or is yet another Republican fantasy being sold to us by an Administration that is 0/1,000 in passing legislation so far?  

As…
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Mandalay Monday Mayhem – Biggest Mass Shooting in History Starts the Week Off with a Bang!

‘Horror show’: Vegas eyewitnesses recount chaos of Mandalay Bay shootingAnother day, another mass shooting.

At least 50 people are dead and 200 are injured as a gunman (American male, 64) opened fire on the crowd from the 32nd floor of the Mandalay Bay hotel in Las Vegas, which overlooked the concert.  According to the NRA, if only the crowd were all armed as well, they could have opened fire at the hotel and then the hotel residents, packing their legally purchased firearms, could have returned fire on the crowd and later we could sort through all the bodies and figure out who started it.  Wouldn't that be better than just banning the guns?

As it is, this is simply horrific and yet another concert tragedy to bookend the Summer of 2017.   The bombing in Manchester in May was terrorism, this was just a pissed off white guy, opening fire on a country music crowd, of all things.  There's no amount of concert security that can protect you from automatic weapons fire from a hotel across the street. 

All of Las Vegas went into lockdown following the incident, with flights grounded and guests ordered to remain in their rooms while police ran down leads on possible accomplices or other planned attacks.  Thankfully, nothting else has happened – but this one was more than enough!  

Typically, the markets seem unphased by tragedy – and there was plenty of it over the weekend beginning with the massive unfairness of the Trump Tax Plan, which turns out to be exactly what we thought it would be – yet another transfer of wealth from the poor to the rich.  As I have pointed out before, the rich have not gotten so rich that any attempt to increase their own wealth comes at a horrific cost to the "losers" in the equations – which is pretty much anyone not already in the Top 1%.  

The new tax framework, which the White House rolled out Wednesday, is heavy on cuts for corporations, which tend to reward shareholders, as well as reductions for business owners. As a result, its benefits are skewed toward the wealthy – just over half of the cuts, which total $2.4Tn over a decade, would go to the Top 1% of taxpayers, who would see their after-tax incomes
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