We were scrolling through our backed up Inbox and came across this FRNY missive from last Thursday:

Effective July 27, 2009, Nomura Securities International, Inc. has been added to the list of primary dealers.

In way of background, primary dealers are the Kahuna’s that participate in the US Treasury auctions and are required to sop up any excess Treasuries, thus ensuring that Treasury auctions never fail (technically anyway). 

Consider the following:

• Nomura was a primary dealer previously, but withdrew in Nov 07, which was largely an admission of failure of their attempted expansion into the global marketplace.
• Nomura acquired Lehman’s top-of-the-line fixed income operations in Sep 08.
• Most of the Lehman traders still work for Nomura (at least until their guaranteed bonus is paid sometime in September or October).
• Nomura wants to keep its Lehman talent.
• Nomura wants to become a global player.
• Failing at the same thing twice for a Japanese company would be extremely shameful and would be avoided at all costs.
• Further ramps in equities increase the probability of future Treasury auctions going poorly and would eventually see another big leg down in Treasuries.
• In this situation, Nomura would take a bath on its forced Treasury purchases at auction.

Assuming Nomura had its pick of months to become a primary dealer again, is it likely that they see a bottom in Treasuries and a top in equities?  Just a thought for consideration.  Nomura is no Goldman in terms of political connections in the US–but they are the go-to Japanese firm and would likely have high level access at the BoJ.

Update 11:18 am EDT:  Could the forced auction purchases be a loss leader for lucrative guaranteed trades?  Possibly, but that’s still a potentially multi-billion dollar gamble.

10:07 am EDT:  As we write, we got a spike high on the ISM report, which was better than expected and, after a brief dip, the ES is climbing higher.  If we can’t get new highs on volume by 10:30 am, we get bearish.  Otherwise, we’re still looking for longs above 990.

The Precise Take – Equities on fire overnight with an eye on ISM Manufacturing at 10:00 am

Looking to our leading markets, gold has broken to the upside outside its consolidating wedge that we noted last Thursday, crude has punched higher and is on a three day tear, the US Dollar index has broken strong support and long term Treasuries have retraced about 50% of Friday’s large gain.  All of this points to higher highs in equities on a continuation of the inflation-based rally.  When leaders speak, we must listen, but also plan for contingencies.  The one bearish scenario that could unfold today and point to a correction over the coming weeks would be for gold and the Dollar to reverse their overnight action on a poor ISM report at 10:00 am, with gold eventually closing lower today and inside its consolidating wedge and the Dollar closing higher, above its support line.  Otherwise, within the framework of our Grand Unified Theory of Market Manipulation (G.U.T.), we expect to see higher highs in equities until the 30 year hits either 116’07 support or retraces to its swing low from last week at 115’15. 

In the ES, we’re bullish above 990.50, except that we would fade a spike high at 10:00 am if the report is bearish and equities react accordingly.  Overnight, the ES hit our potential reversal zone (including the daily R2’s and weekly R1) of 995.75 to 997.75, which will be the key hurdle for the bulls to get over in the first hour to make new highs.  Aside for some minor Fibonacci extensions, above 997.75, as resistance we only have day-session-only R3 at 1,007.00.  The 1,000 level, however, in the futures and cash will likely be psychological resistance.  We don’t get outright bearish until…

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Correction:  The levels for the 30 year above are actually for the 10.  Correct support for the 30 is 116’18.5 and 114’30.  HT RW

Background

There is much speculation and anecdotal information regarding the rally that began March 6 2009, which have suggested the gains are the result of massive manipulation on the part of the Federal Reserve (FR) and the large institutions that dominate Treasury securities dealing, program trading and the derivatives markets.   Traders have reported that traditional indicators and metrics used for market analysis stopped working for periods of time or altogether, and that correlations among markets have been erratic and quick to change.  Record program trading by Goldman Sachs as reported by the NYSE, heightened focus on high frequency trading (HFT), outsized profits by the large and well-connected banks, along with unprecedented intervention by the FR in the markets only fuel the manipulation speculation. 

If we had a big picture model (a Grand Unified Theory, or G.U.T.) that described the intentions, motivations and actions of the influential players, we could attempt to predict future market direction.  A limiting factor is that the rules of the game have changed quickly, and what we believe is important to the major players now may not necessarily have been important twelve or even six months ago.  Accordingly, while we will present as much supportive data as possible, our sample sizes will be small and we will rely on educated conjecture when necessary.  As such, we would expect to be, at worst, self-referentially coherent and, at best, correct in our predictions for the coming weeks and months. 

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