CME Increases Treasury Collateral Haircut

Market Conditions: 6/30/11

The S&P move on Thursday was not genuine. The tape’s price action and correlation to leading stocks was off. The market moved at a peculiar time: An hour earlier than usual and with unusually sudden volume at a time when the market is rising on low volume. Fund window dressing has been mentioned and that’s likely the reason.

Parts of the market are at their tipping point:

  • Food prices have gotten attention lately because of their volatility and crop reports. Corn and wheat proved to be good shorts with sugar about to follow suit (/ZC, /ZW, /SB).
  • Crude and NatGas are on the up and up (/CL, /NG). NatGas had a positive EIA report Thursday and crude has faded the increase in supply from the US and IEA last week by gaining $5/barrel over the last three days.
  • Equity primary leaders are failing to retrace to their highs while stocks in secondary sectors extend from their base to all time highs.
  • The Euro is showing volatility (indecision) after the Greek bailout while the USD sits just above it’s inflationary lows ready to break out. The two currencies prove to be on different timelines with the US dollar leading the Euro.

Treasuries (/ZN)

  • (Over)Sold with exuberance on austerity measures vote (raises yield, decreases nominal).
  • June 30, 2011 marks the end of QE2. Today the US gov’t auctioned the last of the treasuries and “QE2.5” is supposedly in the works for another temporary fix.
  • Treasuries are also known as a safe haven for equities i.e. S&P 500 and DJIA [r(/ES) && r(/YM) == -1] = 1.

Crude (/CL)

  • Crude prices normally rise following economic strength because the more money made and spent in an economy means more can be charged for a tank of gas i.e. crude demand increases through a revaluation of buying power vs necessity to determine value, and price/barrel is adjusted on this basis.
  • Crude is a few points above its recent low of 90 a barrel and its recent range goes up to 115 which it will inevitably go back to and above. Look at price data 10, 30, 50, and 100 years previous to see how inflation trends.
  • The U.S. economy is about to enter a state of recession within nine months (Europe has time in the bank for the same reason we did with QE about 3 years).

NatGas (/NG)

  • Stocks making all time highs include LULU, FOSL, CMG, CAT. Primary leaders like AAPL aren’t reaching previous highs.
  • Broad market indices the last 3 days had the largest percent increase since February.


  • EUR/USD fluctuating through pips by the hundreds.
  • US Dollar (/DX) hovering above extreme inflationary lows.

Thursday Trades

IEF: +0.0

/ES: -8.75
/ZN: -‘160

Tuesday Trades

TUES (11/23) [buy when there’s blood in the streets]

MU – Started position. Great relative strength.
CME – Added to position. Cheap premium.
LMT – Falling wedge. Triple bottom.  sitting on the lows.
LLL – Started position on long-term TL support.

/ZN – looking to 126’05 to put on short position on the 10-years.

MELI – Took remaining profits.

Monday Trades

MON (11/22) [Have enough patience to let setups come to you]

DO – Added to position. Cheap premium.

VIX – Rotated capital to DO.
MELI (1/2) – Scaling out of profits.

/ZN – Looking to yields and indicators to exit hedge.

Treasurys Update

The Fed is buying Treasurys every day this week.  It says it will also use cash from expiring mortgages to buy more Treasurys increasing total purchases from $600b to $900b.

From WSJ (“Bond Market Defies Fed”):

TUES: Fed buying 2- to 3-year notes

WED: Fed buying 8- to 10-year notes

There may  be a lag in price effect from the announcement date to the Fed purchasing date.  Watch the effect of Fed buying 2- to 3-year notes today and see if the price action is is repeated tomorrow in the 8- to 10-year notes; we are looking for a leading indicator for the 10-years.  Bond shorts should be weary of this decline being a pullback, then rally, and then a further pullback.  Always watch for the shake-and-bake and choose your exit in advance.

So far yields on 2-, 3-, 10-, and 30-year notes are down from yesterday but still up from last weeks levels (via yahoo bonds center).

Lots of action on the floor of the CME pit today. Pit population was gauged at 66% after 12pm EST. Heavy selling in the e-mini, 10-years selling off, dollar up.