Monday October 19 Housing and Economic stories

TOP STORIES:

It Looks Like Free Money Is Available in the Credit Market - (www.bloomberg.com) A credit market curiosity, presented for your enjoyment. Here is so-called 'skew' in Markit's North American High Yield CDX, a derivatives index tied to the credit default swaps (CDS) of 100 junk-rated companies and one of the most liquid credit-trading instruments around. The skew, or difference between the price of the CDX index and its underlying constituents hit negative 30 basis points this week, a level not seen since 2012 -- when credit markets were roiled in the wake of a large seafaring mammal. Normally when the index trades so out of line with its constituents, such skew is quickly arbitraged out of existence by traders who can make easy money from the discrepancy.  Of course, 'should' is the operative word here, because these types of trades have a history of blowing up spectacularly in the face of persistent distortions. (And it's one reason why hedge funds who had been trying to arbitrage a positive skew in a particular investment-grade CDX index were so incensed at JPMorgan's infamous London Whale activity).

Puerto Rico Willingness to Pay Test Coming Sooner Than Expected - (www.bloomberg.com) Puerto Rico is only eight weeks away from letting investors know whether the commonwealth will live up to its pledge to use all legally available resources to pay off bonds as the Caribbean island’s cash dwindles. The Government Development Bank, which handles funding for the island, has $267 million of bonds maturing Dec. 1 that Puerto Rico assures repayment on through what’s known as a general obligation guarantee, according to bond documents. The commonwealth doesn’t have traditional general obligation payments due until Jan. 1. Overall, the bank owes $354 million of principal and interest on Dec. 1. MBIA’s National Public Finance Guarantee Corp. insurers the GDB bonds.

Something’s Up: Panic Buying of Super-Liquid Treasuries - (www.wolfstreet.com)  Despite the rally in stocks that left the S&P 500 up for the fifth day in a row, the longest such series since December, there was, at the other end of the spectrum, a whiff of panic. It wasn’t that visible in ten-year Treasuries, though intense buying drove them higher, with the yield dropping to 1.989% Monday morning, the lowest since April, before ending the day at 2.06%. It was in short maturities, the safest and most liquid financial assets in the world: The US Treasury was able to sell $21 billion of six-month bills at a minuscule yield of 0.065%. It also auctioned off $21 billion in three-month bills. Each dollar of the bills offered got chased by $4.14 in bids – the highest bid-to-cover ratio since June 22 when China was in full-crash mode. With buyers jostling for position to grab whatever they could, these bills sold at a yield of zero for the first time in history. But this was the first time for the Treasury to sell three-month bills at zero yield.

U.S. system designed to prevent financial crisis ‘likely to fail,’ say experts - (www.marketwatch.com) The current U.S.regulatory structure designed to prevent another financial crisis is “Balkanized,” a “mess” and likely to fail when needed, experts said. “The current U.S. institutional set-up is likely to fail in a crisis, and will be doing less to prevent a crisis than it should be,” said Adam Posen, president of the Peterson Institute for International Economics, at a two-day conference on financial stability sponsored by the Boston Federal Reserve. Posen said that U.S. regulators, including the Fed, don’t have the tools or the mandates from Congress that they need. Posen was especially critical of the umbrella group of regulators, the Financial Stability Oversight Council, that was set up by Dodd Frank to identify and deal with financial stability risks.

The government’s favorite sector has the scariest long-term chart - (www.marketwatch.com) It’s no secret the financial sector is a huge part of the U.S. economy and stock market. Courtesy of quantitative easing (QE) and its zero-interest-rate policy (ZIRP), financials should be sky high. But they aren't. In fact, the Financial Select Sector SPDR ETF XLF, -0.22%  chart is the most bearish looking chart on my radar. Here is why: To provide a big picture perspective, the XLF chart goes back a whole decade. "Likely in expectation of an eventual interest-rate hike money is pouring into bank and financial stocks and ETFs (buy the rumor). This has generally limited up-side or led to corrections. The XLF is up against resistance around 25.82 as breadth is lagging. Unless XLF can break above 25.82, it may start to peel back. Even if it does break higher, upside may be short-lived."

OTHER STORIES:

Marc Faber: We Have Colossal Asset Inflation - (www.bloomberg.com)
Paul Tudor Jones Sees Choppier Markets as Fed Shifts Focus - (www.bloomberg.com)

In Ben Bernanke’s Memoir, a Candid Look at Lehman Brothers’ Collapse - (www.nytimes.com)
NATO denounces Russian incursion into Turkish airspace - (www.reuters.com)
U.S. Concludes Russia Targeting CIA-Backed Rebels in Syria - (online.wsj.com)

IMF trims global forecast, as Brazil, Canada outlooks deteriorate - (www.marketwatch.com)

Bernanke: More execs should have gone to jail after financial crisis - (www.marketwatch.com)