On March 18 of this year the Treasury announced they would buy $300 billion of Treasury paper to support the market. They will finish the program this week and some are worried about possible fallout in the market. Public US debt expanded by a net $719 billion the last two quarters. The government bought the above mentioned $300 billion (most of it during the two quarter span). Very active foreign buying saw total foreign holdings increase by almost $67 billion in July and August alone. It's estimated foreign buying accounted for 60% of the total needed after the US Treasury's purchase of $300 billion. Commercial banks accounted for most of the rest. A Treasury is zero risk weighted on a banks balance sheet and is very liquid. Borrowing at a near zero interest rate, and buying government bonds (that are zero risk weighted) is an easy trade for a bank to make. The question is will there be enough incremental buying to substitute for the government exiting the market.
If this weeks auctions of Treasury paper is any indication our government can continue to deficit spend to its' hearts content. The two year note on Tuesday was well received with a bid to cover of 3.63 times (363 bonds bid for every 100 offered) against a 2009 average of 2.84 times. "Indirect" buying (which includes foreign participation) accounted for 44.5% of the auction versus 42.9% average this year. Wednesday's five year offering was equally well received with a 2.63 bid to cover (against an average this year of 2.24) and indirect buying of a surprisingly high 54.8% (2009 average 43.3%). Risk aversion is a theme in the market and demand seems adequate for now. The Treasury must think the same since they announced they will extend the average due date of its outstanding debt to 72 months from a recent multi-decade low of 49 months. That will require a lot of 10 year and 30 year bonds to be sold and even in light of that - and the knowledge the government was mopping up its purchase program - the market embraced these most recent auctions.
Durable goods orders for September came out Wednesday morning.
The total was up 1.0%, a bit below expectations. This move up only partially reversed last months decline of -2.6%. We are still -24% compared to last year at this time. Soleil's chief economic advisor, Lyle Gramley, feels this is entirely consistent with the modest recovery he is forecasting. One good aspect of the report was that durable goods inventories declined 1% compared to -1.5% last month which indicates we are closer to an inventory turn and the benefits that would bring to reported GDP.
September also saw new home sales fall -3.6% from the prior month to 402,000 units. Since construction delays would be involved with a new home, the need to apply earlier for the $8000 tax credit could well make this report the early warning sign that home sales, both new and existing, might slump temporarily without the credit. We are still, notes my partner Lyle, 22% above the pace of this past January. Low mortgage rates and better valuations might well counter the potential absence of the tax credit. Inventory of unsold new homes was constant at 7.5 months. Total inventory was 251,000 units which is down over 50% from the 2006 peak, and the lowest since 1982 (thanks Brian Wesbury of FT Advisors for that). The median home price actually rose from $199,900 in August to $204,800, and the average price was up to $282,600.
A downturn in the market like we saw Wednesday brings out all the amateur technicians, myself included. From a recent high on the S&P of about 1100, support is probably going to be encountered at the 50 day moving average of 1050. Since I just noticed we are below that maybe the 100 day at 998 is where extra strong support will be found. I figure after the rally we have had since March of this year a 10% setback would be very normal and actually welcome. But better not listen to me on this stuff.