Treasury Tuesday – What A Coincidence – Capital Forced into TBills

What a happy coincidence! 

The Treasury had to sell $66Bn worth of notes this week and there was no POMO for the Fed to bid with.  The US could have been really screwed but, luckily, the market crashed and everyone is panicking – INTO TREASURIES!  Isn’t that convenient?  With our 10-year auction tomorrow and the $33Bn 5-year auction today, yesterday’s panic sent the 10-year yield down to 2.82% – the lowest yield since December 1st and it should be even better this morning with TLT flying up to 97.50 and possibly getting back to November highs (hint for those of you not catching a theme – that was pre-POMO) if we can top 98. 

As you can see on David Fry’s chart, we are now repeating the pattern we had last summer but, unfortunately, last summer was annoying as we fell from 11,258 at the end of April to 9,614 in the beginning of July (14.6%), back to 10,720 (11.5%) in early August and then back to 10,000 (6.7%) at the end of the month and THEN there were first rumors and then confirmation of QE2 and by February we were back to 12,391 (up 23.9%).  A drop and a pop and a drop and a pop later, and here we are, right back at 12,500 in early July with our TBills back where they were in early July of last year. 

Sting and Jung would call this "synchronicity", which is "a coincidence in time of two or more causally unrelated events which have the same or similar meaning" – kind of the Universe’s way of starting conspiracy theories.  Well, for whatever reason, it sure is LUCKY that the global markets are crashing the same week the US has to borrow a crap-load of money, isn’t it?  Last year our motto was – "Hey, we may be a giant mess but at least we’re not Europe" and, this year our motto is "Hey, we may be a giant mess but at least we’re not Europe OR Japan."   Perhaps next year we can add China to that list as the Hang Seng dropped 684 points this morning, all the way down to 21,663 or as the great Surfaris said:  Wipeout!  

Despite Asia’s poor performance and Europe’s terrible open, the run up in the Dollar to 77 early this morning looked like our typical 3am trade so I sent out an Alert to Members at 3:40 am suggesting we go long on the Dow Futures (/YM) over the 12,400 line (contracts pay $5 per point) and on the Nasdaq Futures (/NQ) over the 2,350 line (contract pays $20 per point) as the Dollar (/DX) fell below 77.  While we waited, we played Copper Futures (/HG) short at $4.35 and those bad boys stopped us out at $4.32 for a $1,260 gain per contract.  The early bird may get the worm but we’re busy making enough money for a gourmet breakfast!  

Now we’ll have to wait and see if I picked a good bottom (of course we will take the money and run if rejected at 12,500!).  It’s 8:30 and the Dollar is testing that 76.50 line as it looks like the BOJ is sticking to our plan and buying up the Pound and Euro and leaving the Dollar alone because crashing the US Markets won’t help the Nikkei this evening.  What will help the Nikkei is our -$50.2Bn  trade deficit for May.  -$42.7Bn was expected by Economorons, who seem unable to grasp the concept that when oil is at $100 – it tends to add to the trade deficit.  

That’s right, last May (2010), we imported 357M barrels of petroleum products and paid $27.7Bn for them but this May, we imported 350M barrels and paid $38.7Bn for them.  See (and I’m explaining this for Bernanke’s benefit) – if you pay MUCH MORE MONEY for the same stuff – THAT’s INFLATION!  On the bright side, China’s FX reserves jumped yet another $153Bn in the quarter, not holding $3.2Tn in cash (mostly ours), which means it is going to be quite a while before China has to admit they have any problems with their economy.  The difference between China and the US is that we borrow money to buy things from them – a subtle but important distinction!  

Of course a little inflation isn’t stopping the unstoppable US consumer as ICSC Retail Store Sales are up 0.4% for the week and up 5.5% year over year.  The strength in sales is attributed to demand for seasonal goods tied to hot weather and back-to-school sales but it seems a bit early for back-to-school (I’m a parent) so I’d have to say the truth is that they haven’t got a clue why sales are picking up despite weakening Consumer Confidence.  Redbook’s same-store sales confirm the trend, showing 5.4% year on year growth, which is the best reading we’ve had since the crash.  Thursday, we get the more detailed Government Retail Sales Report but we got preliminaries last week and they looked strong (but then the markets collapsed anyway, so take it with a grain of salt).  

Pre-market update:  Just before the bell, the Futures are much improved after an Italian bond auction "wasn’t a disaster" and News Corp. (NWS) announced a $5B stock repurchase.  There is also a rumor that as many as 6 Spanish lenders have failed the new and improved EU bank stress tests. The failures look to be technical in nature, as regulators are not allowing cash set aside to cover losses to be counted as core capital. Results are to be released on Friday at 3pm but this should take the sting out of a bad report.  

Also, strangely enough, EU markets are improving as Dutch Finance Minister, de Jager says the "knot" of wanting private sector involvement in debt restructuring without calling it default has been broken.  It seems the  markets are just happy to see their leaders acknowledging reality.  If only that would catch on in this country!  With our own debt talks going nowhere, Gerald Seib reckons Obama is pushing for the grand deal of $4T, which the GOP is resisting, as it will make good election politics for him, although less so for his fellow Democrats.  And if you’ve got to cut Medicare and hurt the elderly, better not to drag it out. 

Let’s watch that Dollar on the 75.50 line and – be careful out there!