Treasury Market Practices Group Addresses Failure To Deliver January 20th, 2009

• Tags: Credit Crisis repo Treasury
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The flight to safety on account of the ongoing credit crisis has precipitated a sub-crisis in the repo market. Failure to deliver Treasuries on repos have increased dramatically. It is speculated that the low interest rates, and thus low penalties, create a disincentive for counter parties to deliver Treasuries in a repo transaction.

Treasury Market Practices Group Addresses Problems

The scarcity of US Treasuries for repo transactions also manifested itself in a sharp increase in the number of Treasury settlement fails. Whereas fails to deliver Treasuries had averaged around $90 billion per week during the two years preceding the crisis, they rose to above $1 trillion during the Bear Stearns episode and then soared to record highs of almost $2.7 trillion following the Lehman default. The extraordinarily low GC repo rates during this period exacerbated the problem by reducing the cost of failing.

Normally, the failing party would borrow the necessary security through a reverse repo to avoid failing. But when repo rates are close to zero, the interest rate earned overnight is below the cost to borrow the required securities, so there is no incentive to avoid failing (Fleming and Garbade (2005)). As settlement fails increased, investors who had previously lent out their Treasuries pulled back from the repo markets, as the low GC rates available were not enough to compensate for the risk that the securities might not come back. These dynamics have been recognised by the Treasury Market Practices Group, a body of market participants convened by the Federal Reserve Bank of
New York, which in November proposed several measures aimed at reducing the number and persistence of fails.

Source: Bank of International Settlements Quarterly Report

Relevant Links: Treasury Market Practices Group

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Bet Against The American Consumer December 30th, 2008

• Categories: Economy
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One of the more interesting outcomes of the negative economic and financial feedback loop is the time honored investment axiom of never betting against the American consumer has been discredited. In fact betting against the American consumer has been a relative attractive position as households and individuals join other entities in readjusting their credit exposure lower, contributing to a precipitous drop in final sales and services.

The rate of growth in Household Credit Market Debt Outstanding is at the series lowest level in the recorded period. This is representative of a significant shift lower in demand for debt linked to households and individuals. I read it as a distaste by Wall Street for risk tied to consumers.

The relationship between slowing household credit growth and declining consumer demand is most notable in the charted time series comparing the year over year change in Retail and Food Service Sales and Household Credit Market Debt Outstanding.

Unsurprisingly, today’s sales figures, the lowest in six years according to a Bloomberg report, paints a bleak picture for retailers across the country.

Image Source: Wall Street Journal

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Day 80 For S&P 500 and The 50 Day Exponential Moving Average December 22nd, 2008

• Tags: Charts Technical Analysis
• Categories: Charts Technical Analysis
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Today was the 80th consecutive trading day that the SPX failed to close above the 50dEMA.

Going back to 1950, based on my data, 80 consecutive daily closes beneath the fifty day exponential moving average represents the fourth longest streak on record and is exceeded only by streaks of 83 days in 1974, 88 days in 1962 and 83 days in 1957.

I have charted the periods noted above to see if there are similarities in the manner in which price responded once the streak of closing beneath the 50 day EMA concluded.

S&P 500 in 1957, Eighty-Three Consecutive Days Closing Below The 50 Day EMA

S&P 500 in 1962, Eighty-Eight Consecutive Days Closing Below The 50 Day EMA

S&P 500 in 1974, Eighty-Three Consecutive Days Closing Below The 50 Day EMA

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The Federal Reserve Banking System - Building A Monopoly One Crisis At A Time December 18th, 2008

• Tags: Federal Reserve New Economy PPT
• Categories: Federal Reserve PPT
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Total Borrowings of Depository Institutions from the Federal Reserve is a data point catching alot of attention as the financial universe reaches for some form of a new normal. There is concern about what the large increase in the figure represents and what it may entail.

Data Measured By Total Borrowings of Depository Institutions from the Federal Reserve

What data does the total borrowings of depository institutions from the Federal Reserve actually measure? According to the note section of the website, the series represents:

• primary, secondary, and seasonal credit
• primary dealer and other broker-dealer credit
• asset-backed commercial paper
• money market mutual fund liquidity facility
• other credit extensions, inclusive of credit extended to American International Group, Inc.

Time series of total borrowings

The most noticeable feature of the following chart is the data is figuratively moving off of the chart. Realistically, the axis needs to be realigned to accommodate the nominal increase in year over year increases.

Time series of total borrowings represented in year over year change in total dollars through December 10th, 2008

Time series of total borrowings represented in year over year change in total dollars through December 10th, 2000

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JP Morgan’s Expanding Triangle December 8th, 2008

• Categories: Charts Technical Analysis
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Just dropping an interesting chart.

For well over a year now, JPM has been bounded by a very large expanding triangle formation. In late November, it appeared that the pattern would finally resolve to the downside. However, the recent market strength and some easing of credit conditions has shot price back into the boundaries of the expanding triangle pattern. JP Morgan Chase is a hundred billion dollar plus business; which makes the massive volatility unsettling.

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