Lee AdlerThe dealers have significantly hedged their bond longs since April, but the price damage that we expected, in both bonds, stocks, and everything else, was an inevitable result of that. To deleverage means to liquidate existing positions. Liquidate means sell. The dealers and their biggest customers have been doing just that. To build up hedges, they’ve also been selling futures, adding to the pressure.
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But unfortunately, they reduced hedges during the recent bond market selloff. The dealers are the Wrong Way Marshalls of the bond market.
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This market selling pressure comes as no surprise to us. The forces of this spiral have been building for the past two years, first as Treasury supply overwhelmed the market beginning in August 2020, and then subsequently, as the Fed moved to tighten policy. The dealers have never been properly positioned for this. It’s the mirror image of their massively wrong positioning in 2007 that triggered the 2008 crash. Non subscribers, click here to read this report.
The problem now is that their hedging may not be enough. The spiral of falling prices, collateral calls, and more liquidation has now taken on a life of its own. The technical analysis of the Treasury market says there’s more of that to come, with conventional price projections pointing to the xxx% range on the 10 year yield as the next target for the bond market. Needless to say, that should also be catastrophic for US stocks. Non subscribers, click here to read this report.
From past reports:
7/27/22 The bottom line is this. Don’t be fooled by what the media is touting as a massive rally in bonds. Yes, it looks big, and it probably has a little further to go over the next couple of weeks. But in the big picture, it’s nothing. And it’s likely to stay that way. Non subscribers, click here to read this report.
Meanwhile, the dealers have mitigated some of their risk, but they and their big bank parents remain at great risk if bond prices start declining again. That should happen as liquidity begins to tighten again in the second half of August. Non subscribers, click here to read this report.
The bond rally should have a bit further to go, but I’d be a seller on the first technical signs that the trend is turning. And when bond yields start to rise again, and bond prices start falling again, I’d expect stocks to suffer from the same adverse liquidity factors that would be pulling the bond market down. Non subscribers, click here to read this report.
LATE BULLETIN! HOLY COW, as I was proofreading this report, I just checked the Treasury issuance schedule for this week, and the Treasury will issue $40 billion in new T-bills on Monday. That will upset the apple cart, but at this point I won’t rewrite this entire report. Let’s just accelerate the time frame for when I expect the market to begin experiencing tighter liquidity from mid-month, to the beginning of August. We need to be on the lookout for signs of reversal in the bond rally sooner that I originally thought. Non subscribers, click here to read this report.
But at least this news confirms my earlier forecast that the T-bill paydowns would end in July, making for tighter liquidity in conjunction with the Fed’s QT program. And lest we forget, they plan to double the amount of system withdrawals in that program beginning in September. Non subscribers, click here to read this report.
6/13/22 Primary dealers have finally taken aggressive action to mitigate the losses in their bond portfolios. But it is too late. The damage is done, and the pressure will only get worse as the Fed pulls money out of the banking system and forces the Treasury to borrow even more money to pay off the Fed. Non subscribers, click here to read this report.
In everything we look at in the Primary Dealer positions and related data we see only stress and more stress. This is unfolding exactly as we expected. There are no secrets here. We knew all this was coming simply by watching the data and Fed policy as we have month in and month out. It only proves again and again, Rule Number One. Don’t fight the Fed. Non subscribers, click here to read this report.
Shockingly, the Dealers seem not to have followed the Rule, and now they’re screwed, and so is the world of investors. For those who can’t sell short, there are no good options. No pun intended. Non subscribers, click here to read this report.
5/14/22 That all means that a double whammy will hit the market in mid June, at a time when Primary Dealers and the banking system are already weakened by huge losses in their bond portfolios. Some of these highly leveraged dealers will be forced by their lenders or their parent bank holding companies to liquidate anything that they can to pay back the margin and repo loans that funded the purchases of all this paper. Non subscribers, click here to read this report.
There are no doubt other big leveraged players out there with massive losses that will be forced to liquidate by margin calls. The selling will not be limited to the bond market. It will hit stocks too, and anything else that isn’t tied down. Non subscribers, click here to read this report.
If this analysis is correct, the weakness that we have seen in the market over the past couple of months will be seen as but an opening act. Conditions will worsen. Stocks and bonds will decline even faster this summer. Non subscribers, click here to read this report.
Consequently, the strategic and tactical outlook remains the same. Sell all rallies. Non subscribers, click here to read this report.
4/11/22 So what would I do with this information? The same thing I’ve been doing for the past 20 months. They’re gifts to us on the way to Dante’s Inferno. If I owned bonds, I would sell them. If I owned stocks, I would sell them. And I would keep looking for stocks to short on the rallies. Non subscribers, click here to read this report.
I know. Cash is trash when inflation is high and interest rates are negative to inflation, but it’s less trashy than assets that are actively losing value. The strategy that I think makes the most sense in such an environment is to trade stocks from the short side. I publish the weekly swing trade chart picks for those who are looking for ideas along those lines. https://liquiditytrader.com/index.php/category/technical-market-timing/ ….Non subscribers, click here to read this report.
The problem after that is that the Primary Dealers and the biggest banks who own them have enormous hidden losses that aren’t showing up yet on bank earnings statements or balance sheets. As market conditions tighten in the second half of this year and margin calls beget losses, which beget more margin calls, those hidden losses will start to show up. Banks will be forced to liquidate some of their assets and will be forced to report some of those losses. Non subscribers, click here to read this report.
2/20/22The bottom line is that the financial market is moving toward a crisis. Fast. It will continue to do so as the Fed cuts QE first to zero. It will do so even more as the Fed shrinks its balance sheet by allowing maturing paper to be paid off rather than rolled over. If they do that, the pressure on on Primary Dealers will only get worse. They have not established the net short positions needed to manage it. Non subscribers, click here to read this report.
On average, their positioning is not good for a decline in bond prices (rise in yields.) Some Primary Dealers are probably well positioned. That means that some, if not most, are not. Those who are not well positioned are almost certainly already in trouble. Non subscribers, click here to read this report.
This won’t end well.Non subscribers, click here to read this report.
I’ve opined to stay away from the bond market for the past 18 months. Nothing has changed. Bond rallies are selling opportunities. The pressure on the bond market has infected the stock market, and will continue to do so. I continue to look for swing trade short selling opportunities in the Technical Trader reports. Non subscribers, click here to read this report.
1/25/22But now the Fed is getting out of the buying business. No more backstopping the dealers with constant massive funding. Meanwhile, the dealers are still REQUIRED, by virtue of their status as Primary Dealers, to still buy Treasuries. Non subscribers, click here to read this report.
How exactly will they be able to do that without steadily being cashed out by the Fed to the tune of a hundred and some billion per month, month in and month out? Non subscribers, click here to read this report.
The Fed will probably tell us tomorrow that it’s going to zero purchases after March. The dealers must keep buying. There are only two ways they can fulfill that responsibility. They’ll either have to sell stuff first. Stuff, as in other Treasuries, other fixed income instruments, OR, drum roll please…… Stocks! Or they will need to borrow more money, that is, increase their leverage even more. Non subscribers, click here to read this report.
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