Lee AdlerYesterday, February 15, 2023, a day that will live in… nobody’s memory, the S&P 500 closed at 4147.60. It first notched that price on the way down on April 29 of last year. Since then the market has traded through this level on no fewer than 19 days.
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In other words, the market has been range bound for nearly 10 months. And so it would seem that everyone can claim victory, bulls, bears, and the flat market crowd, whose number are legion. Not. But because no one is wrong, all of the children of Wall Street are above average, while the stock market is… average. Non subscribers, click here to read this report.
The liquidity picture has told us that the market should be lower, mainly because the Fed is draining $95 billion per month from the banking system and the markets. At the same time, the US Treasury has continued to pound the market with supply (mostly) even with the debt ceiling holding back an increase in the total debt in recent weeks. Non subscribers, click here to read this report.
I say “mostly” because there have been periods of a month or more where the US Treasury, in its infinite wisdom, has decided to pay down hundreds of billions in outstanding US Treasury bills. We’ve recounted those moments here as they happened. Non subscribers, click here to read this report.
When the Treasury does that, it is, in essence and actuality, pumping that money back into the markets. Holders of the T-bills get cash back, and some of those holders use some of that cash—economists say “at the margin”—to buy stocks or bonds. So, typically, during periods of paydowns the asset markets move higher because those erstwhile holders of the T-bills being redeemed, buy stocks or bonds with the cash they get back. Non subscribers, click here to read this report.
Partly as a direct result of that, we saw the lowest low in stock prices last October. But the paydowns had a secondary effect. I recounted in these pages recently that the paydowns enabled the Primary Dealers to do some balance sheet repair, despite the Fed pulling cash out of the banking system via QT. Non subscribers, click here to read this report.
The Primary Dealers are still required to pick up their fair share of Treasury issuance. The burden the has been particularly difficult without the Fed taking that inventory accumulation off their hands as it did under QE. However, the US Treasury’s big campaigns of T-bill paydowns also sent cash back to the Primary Dealers who held some of those bills. They used the cash not to buy more T-bills, but to pay down the repo debt behind the original purchases. They were able to reduce leverage, and position themselves to take on more inventory. Which they have done. Non subscribers, click here to read this report.
Regardless of that, we had seen from the banks’ weekly data on their fixed income holdings that some of them were sitting on hidden losses in their not-marked-to-market long term portfolios. I forecast that we would soon start to see some of them in trouble as they were forced into liquidation mode. So far, only CreditSweets (CS) has floated to the surface, but there are surely other bloated bodies about to be revealed, as the current round of falling bond prices persists. Non subscribers, click here to read this report.
Since October, stocks have made a higher low, followed by a higher high. Transpiring over 4 months, it looks like the start of a bull market. But in my recollections, it would be the weirdest start to a bull market that I’ve seen in 56 years of closely following markets. They typically don’t start until the Fed starts reversing tight policy. Non subscribers, click here to read this report.
Wall Street likes to think that markets anticipate; that they discount the future. They don’t, and they don’t. So I don’t agree that this market is correctly anticipating anything. It has merely been bouncing around on temporary shifts in government liquidity manipulation. Non subscribers, click here to read this report.
I won’t try to directly correlate these actions by the US Treasury with market movements. Others have purported to show that a direct day to day or week to week cause and effect relationship exists. While it is indeed cause and effect, it’s not predictive on a daily basis. It works on trends. Non subscribers, click here to read this report.
First of all, the timing of the deployment of the cash varies among recipients. And second, they choose to deploy it in different asset classes—i.e. stocks, bonds or “other.” If Goldman is going one way on a particular day and JPM is going another it’s not going to show up on the charts as a coherent message. When the Fed is creating a surfeit of cash, it doesn’t matter. But when cash is relatively scarce, it makes a difference. Non subscribers, click here to read this report.
Technical analysis remains the best method for estimating timing of market effects, and in rangebound, illiquid markets, even that is fraught with peril. Non subscribers, click here to read this report.
Last week, we talked about the bizarre decision by the US Treasury to issue even MORE short term debt, while under the constraints of the debt ceiling. Non subscribers, click here to read this report.
This week (February 13-17), the Treasury has shown that it intends to continue pounding the market. Here’s the issuance table since January 31. Another $34 billion today, and $23 billion next Tuesday. That’s on top of the $153 billion in bills since January 31. How in the world are the markets absorbing that without being torn apart? Non subscribers, click here to read this report.
I have the answer, and now you do too. It’s information that will help you understand this game, and win at it. Non subscribers, click here to read this report.
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