Rate Complex Forensics
by Russ Winter, Wednesday June 01 2005
Committment of Trader COT forensics give us some idea about what may be going on with the 10 year Treasury. I'll readily admit there are a bunch of numbers here, but anybody in the market ought to get this Spec/Fund, commercial pattern down. It's really dominating the market.
The data shows that the large specs (usually funds) covered most of their ten year Treasury shorts (leaving short 10,578, was 106,118 in March) during the week of May 17. The commercials let them have part of their winning long positions (198,389, was 471,085 in March). The small specs largely just held their shorts (364,967 vs. 434,947). The small specs were the foils for the Gottdammerung part of this opera performance. Finally last week (the 24th), the large specs went seriously long (98,463) the 10 year, and the commercials sold (down to 94,730 long) their positions to them to allow it, and the small spec squeeze was on in earnest. They (small) covered down to 193,192, or about 172,000 contracts with options in just one week (through May 24th).
The set up going into this week was the large specs squeezing the small specs, with the commercials just going home, leaving the "toilet ripping off the walls and lamp shade" part of the party to large specs. At least that's what the specs think, as actually the commercials are likely lurking outside in the darkness, setting up the trip wires. It would seem apparent, that this last stage has been a squeeze on small specs, by the large specs, not the commercials. That's a weaker operation normally. As the large specs tend to overstay their welcome on these orgiastic trades, I would expect to see the small specs go neutral. I expect the large specs, with these huge offside long positions (as opposed to huge offside short positions in March), and the commercials to go short. If the small specs ended up long the notes with the big funds, and against the commercials, wouldn't that be special! Then the plug really gets pulled.
Unlike the note and bonds, the Eurodollar as of the last COTs (May 24th) showed the commercials still heavy into the short squeeze game on small specs. Here the big specs finally got out of the way after being hammered, in March they were short 483,309 ED, but on May 24 they were long 30,162 ED. The commercials who were still long 550,520 (from 1,148,084 in March), have just continued to fillet the small specs this week, (who were still short 580,681) for 17 more bps on the Dec and 10 more on the Sept.
Eurodollars(CME)(Globex) Sep 96.33 3.67%
Eurodollars(CME)(Globex) Dec 96.25 3.75%
Eurodollars(CME)(Globex) Mar 96.21 3.79%
This appears to be pricing one more "hard" rate hike. In otherwords, 25 bps, and aren't we tough, blah, blah. Ministry of Truth apparatcheks Wayne Angell and Larry Kudlow were on CNBC this afternoon with the pom poms out, singing the praises, completely decked with knee pads, and finally letting the cognoscenti "in on it". Newspeak rectification is now official.
We will have to look at new COTs to dissect what's in store next. One can only imagine. Unfortunately they won't be out until Monday after the close because of the holiday.
One caveat as this phase plays out. There is a very tough May year over year CPI comparison coming up June 15th. Take note however that later July-August-September comparisons are particularly inflation easy.
Source: Idorfman.com
This may be used by Ministry of Truth operatives as propaganda to allow the Fed to do what it does best, be easy and gloat. The scenarios all play out differently and perversely. The ten year might actually sell off when the market finally figures the rate hikes are done. But keep this in mind. Make sure commercials are firmly short before wading into short 10 years Treasuries, or any other interest rate play.
Russ Winter is a private investor who leads a popular message board at Silicion Investor. The views expressed are those of the writer only, and not necessarily those of The Wall Street Examiner, its publisher, editors, or staff. The purpose of this article is for education and information only, and should under no circumstances be construed as an invitation to purchase or sell securities. Neither the writer nor The Wall Street Examiner undertake to update this article. Readers are urged to consult with a qualified financial professional before making any investment decision.
The Wall Street Examiner welcomes all well reasoned points of view. If you would like to submit an article contact editor Lee Adler.
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