Tag: news

In the aftermath of yesterday’s announcement by the Fed that the central bank is starting to buy corporate bonds (not ETFs), something it had said it would do three months ago yet which either the algos or the Robinhooders never quite grasped and which sent stocks soaring even though it wasn’t actual news, some have asked what exactly was the purpose of the Fed’s market-moving press release. As it turns out, there was a very strategic purspose for the Fed to do what it just did, and it involves around the just announced Broad Market Index, which effectively grants the Fed a $250 billion monetization loophole.

BMO’s Daniel Krieter explains below.

What did the Fed do? Initially, the SMCCF was structured to hold two types of investments, “Eligible Individual Corporate Bonds” and “Eligible ETFs”. Yesterday, the Fed introduced a third category: “Eligible Broad Market Index Bonds”. This new category allows the Fed to immediately begin buying individual corporate bonds in much larger volume than previously anticipated. However, while the creation of this category came as a surprise, the announcement that the Fed would buy individual corporate bonds initially came in March.

What are Eligible Broad Market Index Bonds? Bonds that are included in the Fed’s newly created Broad Market Index. These are corporate bonds that, at the time of purchase, (i) are issued by an issuer that is created or organized in the United States or under the laws of the United States; (ii) are issued by an issuer that meets the rating requirements for eligible individual corporate bonds; (iii) are issued by an issuer that is not an insured depository institution, depository institution holding company, or subsidiary of a depository institution holding company, as such terms are defined in the Dodd-Frank Act; and (iv) have a remaining maturity of 5 years or less.

What is the difference between Eligible Individual Corporate Bonds and Eligible Broad Market Index Bonds? Very little. In addition to the requirements for Eligible Broad Market Index Bonds, Eligible Individual Corporate Bonds must also be issued by a company: 1) with “significant operations and a majority of its employees based in the United States,” 2) that has not received specific support under the CARES Act; and 3) satisfies the conflict of interests requirement in the CARES Act. Thus, Eligible Individual Corporate Bonds must meet a stricter set of criteria for purchase by the Fed.

Why is this important? The SMCCF is funded with money from Treasury authorized by the CARES Act, and therefore comes  with restrictions. As stated in Section 4003(c)(3)(c) of the CARES Act, any Fed facility to which Treasury makes a contribution  shall only purchase obligations or other interests (other than securities that are based on an index or that are based on a diversified pool of securities) from…[businesses] that have significant operations in and a majority of its employees based in the United States.”

The requirement that businesses have significant U.S. operations and a majority of its employees in the U.S. proved problematic for the Fed since the only way the central bank could realistically adhere to this was by having individual corporations certify their compliance with these prerequisites. Having a large percentage of hundreds of American corporations certify compliance was very difficult from an operational standpoint to begin with, and became even more so when certification potentially became stigmatized after credit spreads rallied so significantly. Without certification, the Fed was potentially left with a huge liquidity facility that wasn’t allowed to buy anything but ETFs.

How did the Fed get around certification? By identifying a loophole. Section 4003(c)(3)(c) requires purchases of only companies with “significant operations in and a majority of its employees based in the Untied States” unless the purchases are (emphasis ours) “securities based on an index or that are based on a diversified pool of securities.” This clause was likely included to allow the Fed to buy ETFs. Instead, the Fed created its own index of corporate bonds, the “Broad Market Index,” and will now purchase individual corporate bonds based on this index under this clause. In one swift stroke, the Fed essentially made the entire universe of non-financial corporate debt under five years immediately eligible for purchase.

How will purchases work mechanically? The Broad Market Index is intended to track the composition of the broad, diversified universe of secondary market bonds that meet the criteria specified in the Term Sheet for Eligible Broad Market Index Bonds, subject to generally applicable issuer-level caps specified by the Term Sheet. Each time the index is refreshed (approximately every month), the SMCCF will identify all secondary market bonds that meet the criteria for Eligible Broad Market Index Bonds. Next, limits relevant to each issuer, calculated on a par basis as the lesser of the cap of 10% of an issuer’s maximum historical outstanding bonds and 1.5% of the maximum combined CCF facility size, will be applied to generate the index contribution for each eligible issuer. These contributions will then be aggregated, and the proportion of each issuer’s bonds in the aggregate form their weight in the index. Individual issuer weights will form the basis of sector weights, with each issuer mapped to one of twelve sectors (shown below). Purchases will track as closely as possible the sector weights in the index, and any overage or shortfall during a month will be addressed in the following month’s purchases.

It will not be possible for the SMCCF’s purchases to exactly replicate the index at all times. As a result, the primary focus of the SMCCF’s Eligible Broad Market Index Bond purchases will be to track as closely as possible the sectoral weights of the index. Eligible Broad Market Index Bond purchases will also generally track the ratings and maturity profile of the index. However, the maturity profile of the purchases is expected to be several months longer than the index’s maturity profile, as the SMCCF will likely underweight purchases of bonds maturing within six months of the date of purchase.

What are the estimated sector weights? We estimate the total size of the Fed’s Broad Market Index will initially be around $400-450 bn, with our proxy index having a face value of $426.9 bn and sector weights shown below.

Do any individual borrowers benefit from the Fed’s announcement? USD debt of corporations incorporated in the United States but without significant operations or a majority of its employees in the United States theoretically benefit. These bonds are now eligible for Fed purchase, but were originally expected to be excluded. In its FAQs, the Fed defines “significant operations in the U.S.” as a company with greater than 50% of its consolidated assets in, annual consolidated net income generated in, annual consolidated net operating revenues generated in, or annual consolidated operating expenses (excluding interest expense and any other expenses associated with debt service) generated in the United States as reflected in its most recent audited financial statements. However, in reality, we do not expect to see significant outperformace for this type of borrower. While difficult to quantify given difficulty in isolating borrowers that meet this criteria, we do not expect a significant discount ever developed for this type of borrower that would now be corrected.

How big will SMCCF purchases be? The total size of the program (up to $250 bn through Sept 30) gives the Fed plenty of room to ramp up purchases quite aggressively, although the Fed will leave purchases well below the implied maximum pace as long as market conditions remain constructive. As of last Wednesday, the Fed had purchased $5.5 bn in cumulative ETFs through just over four weeks.

We expect the pace will grow as the Fed begins to buy individual bonds, although it will remain dependent upon market functioning. To this point, conditions deteriorated significantly late last week, and this may have been a catalyst for yesterday’s announcement. In normal times, we expect the Fed to purchase around $2-5 bn each week with the potential to ramp up purchases to several times that amount.

Will the Fed still buy “Eligible Individual Corporate Bonds”? Yes. The Fed’s updated FAQs are very clear that the central bank still intends to buy eligible individual corporate bonds. A borrower would need to certify compliance with the significant operations and majority of employees prerequisites in order to be eligible. Upon certification, it appears that the Fed would then buy more secondary market debt of a certified borrower than they otherwise would, according to the Broad Market Index weights. Alongside the PMCCF, these purchases are “expected to become operational in the near future,” according to the Fed’s announcement yesterday.

How can the Fed provide further support to the market, if necessary, with the known corporate buying programs? It is unlikely that any further announcements regarding the PMCCF or SMCCF purchases of Eligible Individual Corporate Bonds result in incremental risk asset performance because these facilities are now truly emergency facilities. We can’t imagine any borrower certifying given associated stigma unless market conditions worsen materially. Therefore, the only thing the Fed can do to existing facilities now is increase/change their size limits. Currently, PMCCF capacity is $500 bn and SMCCF capacity is $250 bn for a total of $750 bn. With the expectation that the PMCCF will not likely get much utilization unless market conditions worsen materially, the Fed could reduce some of the PMCCF’s capacity and add it to the SMCCF. Or, they could increase the aggregate size of the programs.

In keeping with the Republican plan for tackling police reform, which involves a legislative component being handled by the Senate  (an effort led by the only black senate Republican, SC’s Tim Scott), President Trump signed an executive order limiting the use of chokeholds by police across the country and require the creation of a federal database of police misconduct, among other measures.

The EO is part of what could become a spate of several orders as negotiations continue and lawmakers in both parties try to hammer out a compromise plan as Republicans bet that shifting public opinion on police misconduct could create space for a compromise.

According to Axios, the EO is intended to “send a message” to Congress that the president is willing to work with them, as he encouraged lawmakers to pass a compromise plan.

Trump said he had spoken privately with the families of victims of police violence, including Ahmaud Arbery, Botham Jean, Antwon Rose II, Jemel Roberson, Atatiana Jefferson, Michael Dean, Darius Tarver, Cameron Lamb and Everett Palmer, Jr (though notably Floyd’s family was not present).

“We have to find common ground. But I strongly oppose the radical and dangerous efforts to defend, dismantle and dissolve our police departments, especially now when we achieved the lowest recorded crime rates in recent history,” Trump said.

Under the order, police departments that meet certain standards on use of force will be eligible for federal grants, senior administration officials explained Tuesday during a call with reporters. Chokeholds must be banned to earn the certification. The order also moves to create a national registry to track officers with multiple excessive force complaints lodged against them.

The order also includes new programs that would help law enforcement officials to better deal with mental illness, homelessness, and addiction.

Authored by ‘Bonchie’ via RedState.com,

Last week, Lancet had to retract the most highly-touted hydroxychloroquine study to date, which was used as evidence for entire countries to change their stance on the drug. The study, which was obviously flawed on its face (I commented well before it was exposed that the groupings made no sense), turned out to be produced by a shell company, with unverified data gathered by non-scientists.

But when that study flopped, another study was immediately latched onto. It’s called the RECOVERY trials and was done in the UK. Supposedly, this study was the counter to the fake study published by Lancet.

It was the proof that “well yeah, that other study was bad, but this one got the same results.”

Well, not so much.

Edmund Fordham wrote a piece on what is an emerging controversy, in which it appears the lead of the RECOVERY trial took hydroxychloroquine for another drug, resulting in a high death rate.

Internet sleuths also got to work on the very heavy doses of the drug that were given – 2400 mg in the first 24 hours, a ‘dose fit for a gorilla’ as one critic had it. Quizzed about this, Landray defended the dosage, twice, as being usual for other diseases such as amoebic dysentery. Say again? Hydroxychloroquine is used for lupus and arthritis as well as malaria, but dysentery? As a footnote in medical history, the older chloroquine was used half a century ago in attempts to control dysentery, but Professor Christian Perronne, head of infectious diseases at Garches, France, told France Soir that it had been abandoned before 1976. Was Landray confusing hydroxychloroquine with the hydroxyquinolines, which are used for dysentery?

1,132 patients died in the RECOVERY trial, with general death rates nearly 10% higher than other country’s hospitals (the trial was randomized through Britain’s NHS). Whether giving people 3x the usual dosage of most other studies played a part is now a very real question.

Landray defended himself twice, but is now claiming he’s being misquoted. The French newspaper who quoted him denies that.

Landray explained there was no approved dosing for Covid because it was a new disease. Well, yes, but the toxic dose won’t change depending on the illness. Asked whether the UK had a maximum dose for hydroxychloroquine, Landray wasn’t sure, but opined it would be much larger, say six to ten times the trial’s dose. That makes 24 whole grams. NICE says about 490 mg per day for a 75kg adult. In France 1800 mg in a day mandates hospitalization as a poisoning. Twenty-four grams at one go would be almost certainly lethal, possibly even to a gorilla. So Landray has had notice of some hard questions on dose, which will no doubt be explained in the full report, not yet released.

In the end, though, this study is just another in a long list which completely miss the mark and it’s good that it was canceled. The effectiveness of hydroxychloroquine to fight coronavirus has always been in the early stages because of how the virus works. Doing trials on extremely sick, hospitalized patients is scientifically counterproductive because the viral infection itself is no longer the issue at that point. As the now-debunked Lancet published study counted in their data, giving hydroxychloroquine without adjacent drugs (anti-biotic and zinc) is pointless and using that data in “studies” to claim the drug doesn’t work at all is incredibly misleading. Why is that even being studied and included in any determination of its effectiveness?

Countries and doctors that report success with hydroxychloroquine already know not to give it to late-stage patients and that it’s ineffective when used alone. What they also know is that it does appear to have benefits for early-stage, non-hospitalized subjects when prescribed properly in conjunction with other drugs. Why is it so difficult for some to separate those things and focus on helping people?

The whole thing feels politicized at this point.

The Capitol Hill Autonomous Zone (CHAZ), or the Capitol Hill Occupied Protest (CHOP), an area occupied by protesters and is also known as a self-declared autonomous zone, based in the Capitol Hill neighborhood of Seattle, Washington, is breathing a sigh of relief early this week as the Seattle City Council voted unanimously to ban police from using chokeholds, tear gas, pepper spray, and other crowd-control weapons, reported King-5 News. 

For readers, here are some of the latest developments in CHOP: 

• Seattle “Autonomous Zone” Now Has A “Heavily-Armed” Warlord As Crime Spikes 300%

• Republic Of CHAZ Begins Reparations; White Participants Pressured To Give Blacks $10 Each

Here’s our tip those who run CHOP:

• A Tip For The “CHAZ Republic”: Start Thinking Like Conservatives

City council voted 9-0 Monday amid new frustrations police officers used tear gas to disperse protesters around CHOP. Council members heard a whole host of complaints from residents forced out of their homes by the gas — even though they were not participating in demonstrations.   

Video: King-5’s report on Seattle banning police from using tear gas 

Seattle Police Officer Guild President, Mike Solan, said, last week, that officers were forced to use “less than lethal” weapons in the early morning hours of June 8 around the CHOP area to restore public order. These “tools” were mainly tear gas and pepper spray — which were whipped up into the air, in densely packed neighborhoods, and chocked not just protesters, but also residents in their homes. 

On Monday, Seattle Police Chief Carmen Best said, “It has been historically known through the evidence and other research that the use of CS gas, otherwise known as tear gas, can often be a less lethal way of dispersing a crowd without having to go hands-on, without using our riot batons. So it has been determined to be less dangerous to do that. That said, it has been very clear to us that people are not wanting us to use the CS.” 

Video: Police gas Chop 

Best said the police department is speaking with the International Association of Chiefs of Police, exploring other methods to control crowds in the future. 

K. Wyking Garrett, the President of Africatown Community Landtrust, a group of real estate professionals in the Greater Seattle region, said he supports the City Council’s decision to restrict how police deploy tear gas. 

“It is very unfortunate that people expressing their First Amendment rights have been met with extreme violence and escalation by the police presence,” Wyking Garrett said.

On a federal level, President Trump is expected to sign an executive order Tuesday outlining police reform — it will include efforts to track officer misbehavior, incentivize some departments and involve social workers and mental health professionals on some calls.

CHOP occupants can breathe a sigh of relief this week that police will not tear gas or pepper bomb them out of their self-declared autonomous zone. 

Authored by Mike Shedlock via MishTalk,

The Cass Freight Index rebounded 1.6% in May from a deep dive in April.

Rebound Slower Than Expected 

David Ross, CFA at Stifel and author of the Cass Report, says the rebound “unfolded slower than we anticipated.“

He also comments “It won’t be like this for long.”

In a move back in the right direction, Ross says “We do not believe we will reach 2019 freight activity levels until 2021 (at the earliest) due to the significant rise in unemployment and other results of government intervention.”

Shipment Volumes

We are now close to 80% through the second quarter of 2020, and we see volumes down double-digits for most carriers across most modes in the U.S., including truckload, LTL, intermodal, and rail. 

E-commerce (including parcel and big and bulky last mile) remains a hot area, as long-term trends in consumer buying patterns were accelerated in recent months. 

Rail Traffic

Freight Expenditures 

Expenditures had the worst month since the Great Recession.

What ? No May Rebound?

I am not sure why anyone expected a freight rebound in May with all the lockdowns in place.

The Cass report used to be written by Cass. It is now written by Ross. 

For several months I have argued against the perspective of Ross.

But after attempting to portray things in both directions for May, I agree with this key comment: “We do not believe we will reach 2019 freight activity levels until 2021 (at the earliest).”

What About June?

There will be a rebound in June, albeit from an abysmal level.

Fade Trade of the Day: Economy Off to the Races

The risk is people will take any rebound and make a case for a V-Shaped recovery out of it.

That is just what Larry Kudlow, Trump’s economic advisor, did this past weekend.

I called the notion that the “Economy Off to the Races”, the Fade Trade of the Day.

Last week, the WSJ reported that the European Union is planning on filing antitrust charges against Amazon over its treatment of third-party sellers.

Today, the EU ratcheted up their battle against big tech by launching dual antitrust investigations into Apple’s mobile app store and payment platform, Apple Pay.

According to the LA Times, Apple has been accused of restricting developers from notifying iPhone and iPad users how to make purchases outside of apps – an investigation which follows complaints from streaming music platform Spotify and an e-book distributor over how the company operates its App store.

The EU’s second investigation centers around allegations that Apple has been restricting access to Apple Pay, setting conditions on how merchants may use the service on apps and websites, and restricting the ability for some developers to offer Apple’s “tap and go” function on iPhones.

“It appears that Apple obtained a gatekeeper role when it comes to the distribution of apps and content to users of Apple’s popular devices,” said EU Executive Vice President Margrethe Vestager – who has built a reputation as a fierce antitrust hawk.

“It is important that Apple’s measures do not deny consumers the benefits of new payment technologies,” she added, noting that growth in mobile payments has accelerated amid the coronavirus pandemic as people migrate to “contactless” cashless payments in stores.