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Market Not Twisting Fed’s Direction

Liquidity measures were mixed last week. Fed pumping continues at a minimal pace and Operation Twist won’t change that. Foreign central bank buying of Treasuries and Agencies remains exceptionally weak. However, the massive deposit flows from Europe into the US system continued. In spite of that, banks continued to dump Treasuries, adding to the supply. It would seem that foreign private investors, domestic investors, speculators who are well versed in Ben’s ways, and forced short covering were driving the Treasury panic.

The market bid up bond prices in the expectation that the Fed would do the Twist. The Fed had its PR minions out for a month in advance of rubber stamping the decision on September 21. Given such speculation behind that rally and the narrowing of apparent buying support, I wrote a couple of weeks ago that it would seem that the Treasury rally may be entering its final stages.

The composite liquidity indicator upticked last week, and remains in both a short term, intermediate and long term uptrend. The growth rate has slowed dramatically since February, however, while the supply of paper absorbing liquidity, in particular Treasuries, has continued to grow at a record pace. Once the capital flight driven buying panic in Treasuries subsides, the Treasury market will reverse, and stocks may rally briefly, but ultimately, there is not enough total liquidity to support a rally in either market.

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here. 

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