Treasuries topped the day before Fannie and Freddie were bailed out. How interesting! Could this be another sign of the PPT? [see Front Running A Systemic Market Crash: PPT Style] There have been several strong points of correlation between Treasury bonds and the overall stock market. One way to follow this pattern is with the TLT.
What is the TLT?
iShares Lehman 20+ Year Treasury Bond Fund: The Underlying Index measures the performance of public obligations of the U.S. Treasury that have a remaining maturity of 20 or more years. As of May 31, 2008, there were 10 issues in the Underlying Index.
The Underlying Index includes all publicly-issued U.S. Treasury securities that have a remaining maturity of greater than or equal to 20 years, are rated investment grade and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non-convertible.
The Fund generally invests at least 90% of its assets in the bonds of its Underlying Index and at least 95% of its assets in U.S. government bonds.
TLT Weekly Chart
So what is so interesting about this chart? It shows that Treasury bonds have made a new swing high which is now confirmed:
Sept. 8 (Bloomberg) — Treasuries fell the most in almost two months as the government takeover of Fannie Mae and Freddie Mac gave investors confidence to buy higher-yielding assets.
Last Friday’s high corresponds with the swing high of 2007 and several points of overhead resistance in 2008.
TLT vs. SPY
This shows a clear inverse correlation between the TLT and SPY. When Treasuries top out money flows back into the financial heavy stock market.
Each arrow points to swing lows which also showed as swing highs on the TLT, as we saw on Friday. So we’re seeing capitulation in equities and exuberance in government bonds. Nice market timing model eh!?
Evidence of the PPT?
If you asked traders last Thursday when the DOW dropped -345 points if they thought the market would rally hard next week, the answer was probably no. With massive across the board selling the consensus is that everyone was raising capital. Margin calls, hedge fund liquidation, and impending financial disaster were all good reasons to sell.
You can see how range bound the market was through all of August. That trend was broken strongly last week, with the potential of more selling a real possibility. A perfect time to bail out the market.
Who Will Win: Fundamentals or Technicals
The consensus among many traders is fundamentals will eventually trump technical breakouts and the US capital markets will tank further.
The thinking goes: Treasuries get sold, then the dollar drops, which supports financials, which adds to the debt burden, and the heavily weighted market will continue to slide.
The counterpoint goes: Treasuries will be supported because the entire bailout and global equities depend upon it. The Fed’s PPT power is based upon this to prevent a systemic crash.
Here is a collection of some thoughts:
“Tomorrow morning equities are gonna fly, especially financials… for how long, I can’t even begin to predict. But one thing is for certain. The crash is going to be spectacular.” -The Financial Ninja
“Here’s your open thread for the night: How much of this bailout was calculated not at “Systemic Risk,” but instead at Asset Depreciation, i.e, falling stock prices?
Does tomorrow’s gap up hold? Or, is this like all of the previous weekend rescues — rally, failure, new low?” -The Big Picture
The troubled funds were forced to bail themselves out, and that meant selling their winners in long oil contracts, which in turn collapsed the price of oil. This sharp drop in oil prices then wiped out a huge hedge fund that was long oil big-time, causing oil prices to collapse even further. Dollars had to be purchased to acquire the liquidated oil contracts, thus supporting the dollar, and these dollar proceeds were then used to pay down margins at big commercial and investment banks, which then used the margin-covering funds to purchase treasuries not only to make a return, but also to absorb the dollars that had been flushed out by the collapse in oil prices.Also, the bank failures, worldwide recession and the Fannie/Freddie debacle are scaring foreign and domestic investors alike into the perceived safety of treasuries, which means that foreign paper assets are being sold and the foreign currencies received as proceeds are being used to buy dollars, which are the only form of payment acceptable for treasuries, thus further supporting the dollar. This flight to safety ties in with the continual and incessant de-leveraging that remains ongoing in a vain attempt by Wall Street fraudsters to restore capital ratios, and this de-leveraging is making it impossible for the PPT to sustain any stock market rallies. That is why the stock markets are going up and down like a seesaw, bobbing and weaving like a drunken sailor. Banks can no longer buy and hold. They have to take profits off the table as soon as they are earned, or even more pathetically, sell when their losses are reduced by the PPT orchestrated up-ticks in the stock markets. That is how desperate they are. All this dollar strength then ignites a short-squeeze on those who are short the dollar, thus creating yet more support for the dollar. The problem is, the dollar can only be pushed so far before the short-covering expires and the dollar continues its downward trend based on the fundamentals.
Bankers estimate that $1 trillion of China’s total foreign exchange reserves of $1.8 trillion are in American securities.Still China finds itself hemmed in. If it were to curtail its purchases of dollar-denominated securities drastically, the dollar would likely fall and American interest rates could soar.
Along with Treasuries, China has invested heavily in mortgage-backed bonds from Fannie Mae and Freddie Mac, the struggling mortgage finance giants that are sponsored by the United States government. Standard & Poor’s estimates China’s holdings at $340 billion.
Recent Comments