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Kind Of Bearish
Take note: Lee Adler is Kind Of Bearish.
Courtesy of Lee Adler of the Wall Street Examiner
A massive wave of panic buying has sent Treasury yields plunging to record lows. Data shows foreign central banks were net sellers in recent weeks, continuing a trend of weakening FCB buying. Under the circumstances, the Treasury panic may not be long for this world, although yields appear to have more downside technically. The target still appears to be around 1.60 on the 10 year Treasury.
The previous tight correlation between Treasury yields and FCB buying has broken since April 2011. Treasury prices have continued to rise and yields fall in spite of the reduction in FCB buying. That spread has widened dramatically in August and September. This is unsustainable.
The problem with reduced FCB subsidies for the Treasuries is that levels of new Treasury supply which could once be easily digested by the market present a bigger problem now. Net new supply for the big September 15 settlement appears to be "only" $15-$25 billion. There was a time that the market would have digested that with relative ease. Stocks might have taken a small liquidation hit from that, or stock rallies might have been blunted a bit. That was when FCBs were absorbing 25% of new supply or more, week in and week out. With FCBs actually disgorging some of their Treasury holdings, adding to supply rather than absorbing it, the corollary is that more stock liquidation will be required to absorb the same amount of paper auctioned by the Treasury than was the case in the past.
I have covered, in the Fed Report, the case for believing that the Treasury rally is driven largely by the panic flight of capital from European banks and bank paper. This in turn has led to short covering of Treasuries and margin calls on Treasury shorts, which in turn has resulted in selling of equities. The lower yields go, the more this trend will be exacerbated. Falling yields also have a psychological effect in sending the message that they signal a weakening economy. That triggers more selling of equities and buying of Treasuries in a vicious cycle.
So a 1.60 yield on the 10 year, assuming we get there, could be incredibly bad news for the stock market. In the July-August plunge, the S&P lost about 2 points for every point that the 10 year yield dropped. If that ratio holds up and yields reach that target area of 1.60, the SPX would have a hypothetical target of around 1035.
Naturally, there's no guarantee that yields will make it that low, or that if they do, the correlation will remain the same, but things are heading in that direction. Increasing Treasury supply without the buying support of FCBs could slow or finally reverse the decline in yields, especially at the end of September, with the next round of note sales. At that point stocks could continue to do worse, as the Primary Dealers and others would need to liquidate more equities to absorb constantly increasing waves of Treasury supply. The additional tax cuts proposed in the new "jobbed" bill will only exacerbate the supply problem in the short run. So, in case I didn't make myself clear, I guess I'm kind of bearish. DOH!!
The article above is the summary lead-in to this week's Wall Street Examiner Professional Edition Treasury Update. For more, try WSE's Professional Edition risk free for 30 days.
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The 10 year is so freaking low THAT'S IT LIKE A FREAKING SIGN OF GOD SAYING:
THIS IS YOU LAST CHANCE TO LEND MONEY ON THE CHEAP FOR 2% TO REBUILD AMERIKA! IN 2 YEARS FROM NOW IT WILL BE AT 12%!
And if the FED prints money, they are going to close that window.
SO:
Lend money cheap now for as long as the rates stay below 4% AND ONLY IF IT GOES ABOVE 4% DO A QE!
So no QE3 this year.
Just run the deficit higher at low rates.
Don't fight the "defaltion". The future inflation will cover it all more than enough.
Use it.
I can't see how this gets better. No confidence, no jobs, no banking stability, less pay, less production, morons in goernment, huge gov. debt, huge personal debt, housing crashing, the market crashing and the world economy teetering on the edge of collapse. Call me pesimistic but where is the bright white light at the end of the tunnel.
Maybe hope for a alien invasion? Elsewise we are toast.
but only if they bring silver, gold and diamonds with them.
Because if those Aliens expect a free ride and SS, they might be in for a surprise....
Deflation baby!
seems counterintuitive, if money isn't going into Treasuries, then it must go somewhere? then doesn't Bernanke/IMF friends of the US, loan money to the FCB, who in turn buy our bonds? isn't that how the taxpayer is endlessly duped.
the Obama jobs bill should be called the Wall Street bonus bill. Right behind it they're waiting to give corporate America a tax holiday, and when that money comes home, there better be some volume on Wall Street.
i predict, that unless the status quo gets this market over 3% YOY gains, (better than bonds) that they won't get reelected, or reappointed or anything. monday should be bear trap day. get ready.
It ain't gonna happen. Congress is gridlocked and the FED is on the defense with major political candidates now calling for Bernanke's head on a platter. All I can say is batten down the hatches. The 10 year below 2% is screaming one thing; DEFLATION! Stocks are toast.
The 10 year below 2% also is a leading economic indicator. You are so right.
The economy is toast and in this case stocks have been lagging the 10 year. I guess, thanks to the Bernanke.
Stocks need to catch up ,drop and reset for leg II down.
We are now, "Worse than Japan". How long will it take for the market to figure this out?
It doesn't have to be on a platter.
His head could be on a pike, in a bucket, rolling down a hill, being used for soccer,... any number of places it can go.
Maybe a contest for the most creative use of Bernanke's severed head? But what would the prize be other than the admiration of the ZH community? How about a book deal, I own a book called "101 things to do with a dead cat". There might be a market. WB you up for it? <sarcasm I hope>
Sorry but the futures printed 1078 two weeks ago. Time to recalculate
Max, what do you mean? What would be your correlated target?