The Daily Shot - 7/2/14

From: "The Daily Shot" <thedailyshotletter@xxxxxxxxx>
To: <thedailyshot@xxxxxxxxxxxxx>
Date: Thu, 3 Jul 2014 01:03:00 -0400
Greetings,

 

Focusing on the US today, let's start with the concept of "window dressing".
If you are a bank or even a money market fund, you probably want your
financials to show the maximum amount of your overnight liquidity placed
with the Fed's reverse repo program (RRP) rather than with other banks. Your
balance sheet looks less "risky" this way. And since most financial
reporting is done at quarter end (with mid-year and year-end being the most
important dates), you want to place your cash with the Fed on the last day
of the quarter for one night and then take it out. And that's exactly what's
taking place currently.

 



 

Why not leave your liquidity with the Fed for a longer period? Because the
Fed's current RRP rate pays 5 basis points, while the private repo market is
paying about double that. Of course as cash is pulled out of the repo
markets for quarter-end and moved to the Fed or elsewhere, rates in the
private markets rise. Once the liquidity comes back to the private markets
at the start of the new quarter, the repo rates return to normal.

 



 

The larger the RRP program becomes, the stronger this quarter-end effect
will be. Welcome to the wonderful world of window dressing.

  _____  

 

US M&A activity accelerated in Q2, resulting in the most active first half
since 2007. Globally the trend is similar. Reasons for the spike vary from
low financing rates and easy access to debt capital markets to strong equity
prices, with shares used as acquisition "currency". Limitations to internal
costs cutting also drove companies to consolidate externally. The greatest
reason for increased M&A activity however has been the decline in
uncertainty. While many economists, bloggers and the media continue to
ignore this factor, policy uncertainty - more than any specific policy - has
been the key drag on economic activity in general and deal making in
particular.

 



 

  _____  

 

U.S. investment grade (IG) bond volume is up 47% yoy to $252B in 2Q14 -

 



h/t @TRLPC

 

And IG spreads are approaching the bubble years lows.

 



 

  _____  

Finally, we have food for thought. Some may remember me talking about
looming rental housing shortages in the US. This chart shows the beginning
of this trend. 

 



 

  _____  

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The Daily Shot - 7/2/14

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