Here's this week's exciting newsletter, Stock World Weekly: Under Pressure

Excerpts:

What prompted the CME Group to raise margin requirements? Considering that inflation has become a worldwide problem, it is not farfetched to speculate that the Federal Reserve told the CME group to take action to bring commodity prices down. Bill Schmick, author of the blog “A few dollars more,” posited:

“The Federal Reserve Bank has been targeting asset classes, such as the stock market, in their effort to spark a long-lasting economic recovery in this country. One fly in the ointment has been the spike in commodity prices, especially oil and food, as speculators borrowed money from the Fed at very low prices and made millions by betting on higher commodity prices.

“Oil had reached as high as $112/bbl. and gas prices at the pump were skyrocketing in response. A similar trend was underway in food. The Fed is under increasing pressure and criticism as core inflation remains quite moderate, but consumers and corporations were paying more and more for energy and food (two non-core inflation items). The Fed’s Chairman, Ben Bernanke, has argued that prices for these non-core items are beyond their control. But are they?

“Is it beyond reason to speculate that the CME may have received a call from Big Ben over at the Fed? If the Fed can target an upturn in the stock market, how difficult would it be to engineer a deflating of the commodity bubble through the stiffening of margin requirements?”(A Windfall in Disguise?)

[...]

We have been observing a strong inverse correlation between the Dollar and equities, summarized by our catchphrase: “When the Dollar pops, the markets drop.” The reason is uncertain, and this inverse relationship has not always been the case. Perhaps it is a function of how the Fed is influencing the markets, with its QE2 scheme of issuing money to the PDs (investment banks, such as Goldman Sachs and JP Morgan) to buy Treasuries; the PDs turn around and flip them back to the Fed. Last week’s POMO schedule prompted Lee Adler to predict, “$11-15 billion in POMO and $16 billion in Treasury paydowns will hit the market over the next two days. There’s more of a chance that the market will break on Monday [May 16] when the Treasury will settle $68 billion in new notes and bonds.”

Increased liquidity in the hands of the PDs has artificially supported Treasury prices, holding yields down and devaluing the Dollar. Dollars, losing value and earning no interest, naturally flow into commodities - as “speculation” - and equity markets (“risk on” trades).

Washington’s blog estimated that High Frequency Trading accounts for up to 70% of trading volume. (What Percentage of U.S. Equity Trades Are High Frequency Trades?) Are the opposite moves in the Dollar and equities largely due to HFT programs running algorithms that buy stocks when the Dollar drops and sell stocks when the dollar rises? Trader Mark thinks it’s that simple, “If you are bringing anything above and beyond first grade logic to this market, it is too much. It just amazes me that literally armies of PhDs can’t come up with an algorithm a bit more sophisticated than ‘IF dollar zig THEN market zag.’”

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Lee Adler commented on POMO, the debt ceiling, and how the government is planning to pay its bills. In his discussion, the term “paydown” refers to a payoff of outstanding debt by the Treasury. It is the return of capital to lenders (investors or holders). With Treasury bills, much of the debt is held by the Primary Dealers, so the paydown results in cash coming back to the PD’s accounts. Lee writes, “The markets stumbled through this week in spite of having plenty of POMO and $16 billion in Treasury bill paydowns on Thursday to stoke the speculative fires... But alas, a minor problem looms. The Treasury will issue $68 billion in net new debt on Monday that the market must pay for. The Treasury says it’s $72 billion. For some reason it is not accounting for $4 billion in 30 year bonds supposedly maturing that day. My surmise is that these bonds were previously called.

“Either way, it’s the biggest net settlement since last November 15... So there could be some pressure in [the Treasury] market as well as stocks early in the week ahead. Some of that adjustment seems to have begun on Friday. Paydowns will return next week as only bills will be auctioned. That combined with POMO should give the markets a firmer tone later in the week. Then the supply bogeyman will return going in to the end of the month.

[...]

“Supply will be light next week with a net paydown of around $15 billion scheduled for Thursday, delaying the debt ceiling drop dead day to May 31 when the next round of notes, bonds and TIPS will settle. The TBAC [Treasury Borrowing Advisory Committee] says that will amount to $61 billion. This thing is up to John Boehner now. Like Newt’s great political blunder in 1994, will this be Boehner’s boner? It’s in his hands.” (Lee Adler, Markets Look to Boehner)

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