Lee Adler of the Wall Street Examiner reviewed the Treasury schedule to explain this week’s stock market action. “The Treasury calendar was heavy this week, with 3 and 10 year notes and 30 year bonds auctioned in addition to the weekly bill auctions. It got even heavier when the Treasury announced a surprise $15 billion cash management bill to tide the government over until June 15 tax collections and note and bond settlements.
“About $9 billion in T-bills would have been paid down on Thursday, June 9, but the CMB issuance turned that into a $6 billion cash drain on the market. That’s not a big deal, but the swing from a paydown to a drain probably contributed to the market’s general weakness. It’s becoming increasingly apparent that POMO alone, without the help of the FCBs [foreign central banks] and commercial banks, cannot do the job of keeping both stocks and Treasuries levitated. Gains in one must come at the expense of the other.” (Our emphasis)
Quoting Seeking Alpha’s Market Currents, “The Fed surpasses China as the largest holder of U.S. Treasuries, thanks to multiple QE operations. By the time QEII ends this month, the Fed will hold 16% of U.S. paper vs. 12% for the Chinese. Hopefully, the 3rd biggest holders – American households – will pick up the slack when the Fed steps away.”
Phil replied “Whuck?!? They are totally on drugs if they think households have nothing better to do with their money than buy 10-year TBills at 3%! You know, we talk a lot about why the Fed can’t end QE2, and we keep getting distracted from this key point – who the hell else is going to buy $140Bn worth of TBills per month? The “slack” referred to in this news item is the $120Bn a month worth of notes the Fed is now buying. If you want to participate, take a quick poll of your neighbours and ask them how many TBills they’ll be buying next month, now that QE2 is running out…
“It’s hard to keep the dollar down at this point. UK Manufacturing fell the most in 30 months in April, dropping 1.5% in a single month… Saudi Arabia says they will bump up supply by 1.5M barrels a day to 10 mln bpd, another reason we will be selling into any BS oil rally, and loving our long-term short positions. If people sour on oil and other commodities, then they are forced to sell those shiny bits of metal and barrels of black goo in exchange for US DOLLARS. That then creates a DEMAND for US DOLLARS, which makes the Dollar’s value go up. Isn’t this all so convenient?”
The European debt crisis has been another major influence on the markets lately, as the ever-changing story about how Greece can be fixed, or not, has been whipping the markets back and forth for weeks. Turmoil in the Eurozone combined with disaster in Japan leaves the U.S. Dollar looking rather good by comparison.
Currently we remain bullish on the Dollar, while leaning bearish on equities…
While there will always be individual winners and losers, we expect the end of QE2 to negatively affect the overall stock market. With QE the Fed has effectively been pumping up the equity markets at the expense of the economy. As Jesse of Jesse’s Cafe Americain opined: “Neither stimulus nor tax cuts will work on an economy that is broken from years of public policy that favoured job destruction and median wage stagnation. It is like putting gas into a car wrapped around a telephone pole.”
Similarly, Robert Reich observed, “The real economy is catching up with the financial economy, as it always does eventually. Wall Street is built on smoke and mirrors, while the real economy is based on jobs and wages. Smoke and mirrors can only take you so far – as we learned so painfully three years ago.
“Jobs and wages stink, if you haven’t noticed. They’ve been bad for months, even before this week’s data made it fairly clear the recovery has stalled… And Washington? Completely clueless. Our representatives in the nation’s capital continue to obsess about future budget deficits and games of chicken over raising the debt ceiling — neither of which has anything at all to do with the stalled recovery and the carnage on the Street.” (The Stalled Recovery, Smoke and Mirrors, and the Carnage on the Street)
The U.S. economy is trapped in a very bad hangover caused by too much debt, too much leverage, bad policies, and too much stimulus applied in ways that failed to promote employment or confidence. More of the same is, not surprisingly, only making matters worse. The global economy is so rattled by price inflation, unemployment, natural disasters and global financial and political instability that it doesn’t know if it’s been “shot, [email protected]*#ed, powder-burned or snakebit,” to paraphrase General Taylor in the movie “Good Morning Vietnam.”
Non-PSW members, click here to sign up for a free trial to Stock World Weekly
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.