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When Deleveraging Isn’t a Good Thing

Several banking indicators have exhibited a mild trend of deleveraging that has now persisted over two months. What we don’t know yet is whether it is just a correction of overborrowing during the initial phase of the pandemic and the Fed’s response.

Or is it the beginning of a persistent trend of deleveraging? That’s important because if it is the latter, it would have the power to change the direction of stocks

That could be a good thing over the long term. But it could also lead to another accident in the shorter term, over the next few months.

Unfortunately, so many aspects of this are uncharted waters for us. We can’t look at history and say, oh, this is just like that, or even something like that. We must take our best shot based on the logic of the current circumstances. Another problem is that, while economists assume that humans are rational actors, we know that that’s not often the case. We have to figure out how humans are most likely to behave, rational, irrational, or otherwise.

Ultimately that boils down to divining the trends in the data as it exists. Let’s just look closely at what we know and ask a few questions. Is the current trend persisting? Are there conditions on the horizon that might lead to change? Is change already underway? What are the signs? How will the Fed respond? And more importantly, how long will it take the Fed to respond.

Fortunately, the last two questions don’t need an answer. Because the Fed doesn’t know what it will do until it does it, neither does the market. And it’s likely to take the market longer to figure it out than it takes us, if we’re paying attention. Which we are.

Here’s what we know and what to do about it.

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Jack Be Nimble, Jill Be Quick, This Market’s Not a Monolith

Short term and intermediate trend channels are heading up, but it’s tenuous and there are trading opportunities on both sides of the ledger. We look at trigger points that would signal a big move, and point out a few stocks that look poised to ride the next move.

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Backed By Lansky, Dealers Do Enough To Keep The Players at the Tables

The Meyer Lansky like Fed has cut back QE, but Treasury supply has also receded. So the Fed is still funding most new issuance, either by direct purchase of Treasuries, or indirect funding via purchases of MBS. That has allowed the dealers enough flexibility to keep the players at the gaming tables. Are they being set up for the kill?

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Primary Dealers Deleverage and Grow Cautious

As the Fed has cut back on QE, Primary Dealers have also cut back their inventories of Treasuries and the leverage that they use to finance them. That’s not bullish. Here are the details and a few charts along with a suggested strategy to play the dealers’ game, not the one they want you to play as they set up new traders for the kill.

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