Weird Day

Dollar up, Dow up.

Commodities down, Treasuries up.

In times like these what do I look at? Does the market come roaring back with the Primary Dealer Lending Facility and the AAA/Treasury swap at the Fed? Or is the Treasury bill market correct in predicting deflation?

Let's tackle each of these one at a time.

Dollar up. The dollar was up, but strangely not against the Yen. The easy-out explanation is that the Yen was given continued support by traders who used Yen carry trade to finance commodity speculation.

Dow up. Especially financials. This is probably due to the easing of fear caused by Bear Stearns' failure last week. However, the usual correlation is dollar up, Dow down. Just look at Japan. The Yen is up 12%, and the Nikkei is down 16%. Why? When Yen go up, it takes money out of the Nikkei and into bonds. Cash and bonds are worth more.

Commodities down. This could have something to do with the huge chunk of change the Fed took out of the markets yesterday with their sale of Treasuries. Or it could have to do with the fact that MF Global and NYMEX are tightening margin requirements for commodities.

Treasuries up. You'd think that commodities selling off would cause a run to Treasuries, but this is ridiculous. The 3-month T-bill is at 0.21%. Despite the run up of stocks, Treasuries plunged again today. The 30-year bond yield fell to 4.17%. The should cause the dollar to be worth less, not more.

So, what's the important thing here? Stocks or Treasuries? Treasuries. They're the thing to watch. Stocks are just jumping around like crazy, but Treasuries are sucking up money like there's no tomorrow. It's a giant sucking sound. Expect more stories like this: CIT taps $7.3 billion credit line. Why would they need to do that? Because they're out of money. The last lines of this Bloomberg article about CIT are especially telling: "Once a company draws on the lines, banks are required to set aside capital to cushion themselves against potential losses." If the Fed swapping Treasuries for AAA's was inflationary, the increased supply of Treasuries sold by banks and the Fed would have lowered prices and driven yields up, not down. The Fed is trying to chase people out of Treasuries and failing miserably. Unfortunately, I have not played this well. While my TLT call is up, the long bond has not risen anywhere near as much as the two year.

This is NOT inflationary. Stocks jumping against the grain today were an anamoly, not a sign of things to come. While it would have been nice to take profits earlier this week and short back in again, I'm right where I want to be.