Dear Jim,

Now that it has some breathing room under the debt ceiling, the government is boosting the Supplementary Financing Program back up to $200 billion from $5 billion in order to shore up the Fed’s balance sheet, at least for now:

CIGA John

Treasury to expand Supplementary Financing program
Feb. 23, 2010, 12:01 p.m. EST
By Greg Robb

WASHINGTON (MarketWatch) — The Treasury Department announced Tuesday that it is expanding its Supplementary Financing Program to help the Federal Reserve manage its enormous balance sheet. In a statement, Treasury said it will boost the SFA to $200 billion from its current level of $5 billion. The fund had been up to $200 billion but was scaled back when Congress delayed passage of an increase in the debt limit. Now that an expansion of the debt limit has been signed into law, the department is able to resume the program. Starting on Wednesday, Treasury will conduct the first of eight weekly $25 billion 56-day SFP bills to restore the program. The department said it will then roll the bills over. "We are committed to work with the Fed to ensure they have the flexibility to manage their balance sheet," a Treasury official said.

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Dear Jim,

From this morning’s quarterly refunding announcement:

"Despite the recent decision to reduce the size of the program, Treasury retains the flexibility to increase the SFP in the future.  Such a decision will be made in coordination with the Federal Reserve."

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That is to say, it looks as though the Fed, despite its much-vaunted independence, is at least temporarily replacing most of this sterilized funding with QE in order to let the Treasury avoid the debt ceiling for a while longer.

Regards,
CIGA John

NYSE Composite
CIGA Eric

About this time last week I suggested that the upside force of the tape ^[3] was weakening. Today, the up trend line broke. What cannot go up with force will reverse and attempt to go down with force. The 2/16 gap is pulling hard. A sharp increase or decrease in volume during test of support will be bearish and bullish, respectively.

The retest of the 10/28 swing on 2/05 occurred on shrinking volume. This suggests decreasing downside force. If the 10/28 and 2/05 swing low is tested again on decreasing volume, it will generate another bullish setup that should coincide with another slide in the dollar and rise in gold.

It’s basically a watch and wait now.

NYSE Composite ETF and NYSE Volume:
^[4]

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China Isn’t a ‘Realistic Candidate’ for IMF Gold, Council Says
CIGA Eric

Classic stuff.

China, the world’s biggest gold producer, isn’t a “realistic candidate” to buy bullion from the International Monetary Fund, the World Gold Council said.

“There has been some ill-informed comment that this move tarnished the notion that governments are adding to reserves,” Milling-Stanley said. “There are a lot of central banks out there that are buying local production in local currency. The IMF would have no interest in that local currency. The IMF is looking for dollars.”

(1) Either gold cannot pass from west to east,
(2) Gold is either not available or available in a form China wants, i.e. paper rather than bullion.
(3) The gold counsil is a mouthpiece for the bullion banks.

Source: businessweek.com ^[6]

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Stocks retreat after disappointing consumer report
CIGA Eric

The stock market pulled back Tuesday after a surprising drop in consumer confidence reminded investors of the fragility of the economic recovery.

The Dow Jones industrials were off about 70 points. Interest rates also fell as investors moved money out of stocks and into the safety of Treasuries.

This could have been rewritten as stocks tank, again, during treasury auction week ^[8]. Coincidence? Beat the grass to startle the snakes.

We need to save more, but doing so causing current spending to drop. Any drop in consumption is a big deal when it accounts for more than 70% of GDP. Maybe we can save and consume more simultaneously, thereby, proving that pesky little economic axiom -"there is no such thing as a free lunch" wrong.

Source: finance.yahoo.com ^[9]

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States had to borrow $31B for jobless pay
CIGA Eric

South Carolina and other cash-strapped states borrowed a total of about $31 billion from the federal government over the last two years to provide their unemployed workers with benefit checks, and now as the country climbs out of recession the states must find a way to pay it back.

"First, even discussing this possibility of federal debt forgiveness is yet another indication of the severity of the problem we’ve talked about for a year and a half now — a mismanaged agency in the ESC that lacks real accountability, that has run up a near billion-dollar deficit in the Unemployment Trust Fund," Fox said.

States, like Greece, are in trouble. Unlike Greece, that states have access to the printing press. Whether they can pay them back is questionable. As the article states towards the bottom, "there’s no free money, not in government." There is no free money anywhere. If the perception that free money exists through debt forgiveness or other government programs, the market will take notice and exploit confidence. This means the dark pools of money will attack for profit, as they are doing in Europe right now.

Source: postandcourier.com ^[11]

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