Courtesy of Lee Adler of the Wall Street Examiner
Excerpts:
When all is said and done there will be a lot of homeless cash lying around the Street on September 18. It’s a perfect setup for a rally concurrent with the FOMC policy announcement.
The fix is in. These are the keys to what may lie ahead.
Cash management bills issued in August and rolled over this week will expire on September 12 and 16, concurrent with the Fed’s MBS settlement period and the mid month round of longer term Treasury issuance. These funds will be enough to not only absorb the new Treasury supply, there will be some $70 billion left over to tilt the playing field positively even if the Fed announces the Taper on September 18, as I am guessing it will. This is market rigging at its finest.
The Treasury sold $55 billion in unexpected cash management bills since August 13. This absorbed liquidity pumped into the market (via Primary Dealers) by the Fed, making the mid month through end of month much rockier than it would have been without that additional Treasury supply. The Treasury also boosted the last three 4-week bill offerings by $5 to $10 billion each for a total supply increase of $70 billion above what was expected. These Treasury operations have absorbed Fed QE money, creating a somewhat hostile market environment, in contrast to the period from November 2012 through July, when Fed QE combined with declining Treasury supply to form a bullish environment.
The BLS revised the jobs number for July sharply lower, proving yet again that the initial release is all but worthless. The market’s focus on that number and the fact that the Fed may use the disappointing August number in its policy making process is insane. The August nonfarm payrolls number is almost certainly too low given the strength in August withholding (for taxes). If this leads to the Fed deciding not to taper QE, the asset bubbles will only grow, leading to even greater danger.
The cash from the expiring CMBs will be available to be rolled right into the new supply, making that supply hit not only less disruptive but will leave excess cash available to be shunted into other bonds, stocks, or elsewhere. While the Fed did not settle any MBS purchases over the past week, it purchases and closes the usual $11 billion or so in Treasuries every week. That cash is available to keep a bid under both bonds and stocks.
At the same time, the Fed does its mid month round of MBS purchase settlements September 12-20. That should again total approximately $65 billion. It will also continue to settle $11 billion per week of Treasuries. It may cut that rate going forward, along with some reduction of MBS purchases. I am guessing that a small tapering of purchases will be announced in the September 18 FOMC statement. While many observers expect such an announcement to be bearish, between the Treasury paydowns and Fed purchase settlements that week, over $100 billion in cash will come pouring in to the coffers of the dealers and other players. I would not bet against it having some short term success. How much that changes in subsequent weeks and months depends on whether the Fed does in fact taper its purchases, and if so, by how much.
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