Monday, June 15, 2009

Is The Rally Over?

You gotta seriously be asking yourself this question today. The buyers have been nowhere to be found over the past week. Even a positive long year bond auction last week failed to attract them. Stocks rose last week following the last long auction, but then gave most of the gains back by the end of the day.

Whats eery about today was there was no real news that triggered this sell off. Usually big corrections tend to come out of nowhere. 1987 anyone?

The question now becomes: Is this just a pullback or the beginnings of something more horrifying? Time will tell. The reflation trade got pummeled today. If you are in metals like myself, make sure you have yourself hedged with short positions.
I am not worried about the metals trade. I think Russia's announcement around having confidence in the US dollar was the big reason for the breakdown of the inflation trade today:

"June 15 (Bloomberg) -- Treasuries rose for a third day after Russian Finance Minister Alexei Kudrin said his nation has full confidence in the dollar and there are no immediate plans to switch to a new reserve currency.

Ten-year notes extended their winning streak to the longest in a month on speculation a U.S. government report will show overseas demand for the nation’s assets increased in April. Kudrin’s comments came after Japanese Finance Minister Kaoru Yosano said his government is confident about the outlook for U.S. Treasuries, helping attract investors after 10-year yields climbed to the highest level in seven months."

Quick Take:

Hmmm....What a coincidence. Japan came out last week and said the same exact thing. Do you think perhaps they are both protecting their massive treasury holdings by talking up the US dollar. This appeared to me to be a coordinated announcement by the ROW in order to restore some confidence in our credit markets and the dollar.

It kind of reminds me of March when the big three banks all announced that things had improved in February. Ha! Yeah things sure are better now! Not!

The world can say anything that they want. Let's see if they back it up with more treasury purchases. CNBC said that FCB purchases of long bonds were down dramatically from the previous month. Everyone has been piling into the short end of the curve.

If they are so confident about the US dollar then why are they running away from our longer term debt? I smell a rat here. Sounds to me like this is nothing but a little jawboning. Keep an eye on the dollar. It made a big move higher today but I don't think this is anything that has legs.

Is the Fed Pulling Liquidity?

I found something interesting in the slosh report this week that I thought I would share with you. The slosh is money(liquidity) that the Fed throws into the banking system in order to keep the banking system liquid which then helps keep real interest rates low.

The last time we saw a crash in equities, the slosh was reduced dramatically by the Fed which resulted in a rise in real interest rates. Rising rates is how the Fed pulls liquidity from the system.

The slosh has been pretty steady over the last few months. However, this week when I took a peek, it looked as if the Fed was getting ready to pull some liquidity:




My Take:

As you can see above, we have over $100 billion in debt that matures later this week. This gives the Fed a golden opportunity to pull liquidity from the system by reducing the slosh by $100+ billion.

I warned everyone last week that if we saw strong bid to cover bond auctions last week that we may very well see a shift in policy from the Fed in terms of them being more disciplined with their spending. My guess is that we made a lot of promises to the ROW in the form of reduced spending in exchange for their continued purchases of our debt.

It wouldn't surprise me in the least if they use this potential slosh reduction as an opportunity to show the ROW that they plan an making good on their promises of being more disciplined. This will not be good for equities if this is the case. All you need to do is go back to September if you want to see what happened the last time the Fed reduced the slosh. Karl Denninger did a great piece last September on the slosh and its catastrophic effects on the stock market.

Bottom Line:

The rally has looked very long in the tooth over the last few weeks. We have a BOATLOAD of treasuries to sell. Pulling liquidity from the stock market would be a very effective way in which they could scare everyone over into the credit markets which would then enable them to sell the trillions of $$$ in debt that's needed in order to finance our spending addiction.

Lets see what happens later this week. I will be keeping a close eye on the slosh. Also in other neww, building sentiment came in at lows not seen since January, and credit card delinquencies sharply rose for all of the major banks as the consumer continues to fold like a tent.

These green shoots are rapidly turning into tumbleweeds and the market certainly reflected it today.

Stay Tuned!

8 comments:

alex said...

Rants are good, but a well documented analysis is much better. So thank you for tonight's post.
Alex

Jeff said...

Alex

Your welcome.

Glad you enjoyed it. Its been hard to analyze the market recently due to all of the manipulation.

It appears that the market may start trading on a more fundemtal basis moving forward. If thats the case you will I hope to get back to more macro analysis.

I don't think there are many more games that the Fed can play although I am sure they will try.

Jeff said...

oops I mean I hope to get back too more macro analysis...Sorry for the typo.

Jeff said...

FYI

Futes are down -3 on the ES.

Asia however is TANKING tonight.

Nikkei and the Hang Seng are down over 2.5%.

Hold on tomorrow folks.

John Maynes said...

The rally ended when CSCO announced pretty good news last week and the market gave a damn shit.

Minton Mckarkquey said...

Spot on analysis. I completely agree that Russia and Japan are talking up the $ - it goes to show the depths of the problem when these guys have to vouch for our currency!

I also think it's inevitable that rates are going to rise considerably shortly. Every time these green shoots appear, the stomping foot of reality crushes them.

Jeff said...

Minton

Mixed messages out of the Bric talks today on the $$$.

Its so difficult to see how thsi all plays out.

they all own so many dollars, and I am sure they don't want to, but they have no alternative.

DIversification. thats my strategy. MArket appears to be rolling over again.

interesting day.

Post up around 6:30

bt310 said...

It appears you were right.