Deficit Report

by Larry Levin

This recent week was rather quiet: 4 of 5 days last week were "balancing" days. Said another way, the majority of the week was plagued by low volume and small range days.

Monday may be more of the same because of its lack of economic news scheduled. The rest of the week contains some important economic data points which could get the market moving.

Although Monday is devoid of the normal news that we would expect to move the market, there is a release that could...could...make people trade. It is the Treasury Budget report, which is a monthly account of the surplus or deficit of the federal government, and we know how much deficit spending has been taking place. It will be released at 1pm Central.

The last report showed a massive deficit of $189.7 billion versus a year-ago May deficit of $165.9 billion. The deficit recently has been boosted by purchases of federal housing agency debt and corporate handouts related to TARP. Moreover, tax receipts were down 18% with year-to-date spending up 19%. Not a good combination, but when has that matter to a politician on either side of the isle?

From Bloomberg we read: The budget data have several direct and indirect meanings for the financial markets. The most direct relationship lies between the size of the budget deficit and the supply of Treasury securities. The higher the deficit, the more Treasury notes and bonds the government must sell to finance its operation. From there it's simple supply and demand -- if demand is constant but the supply of bonds goes up, the price goes down. The same is true if the deficit falls or is eliminated altogether -- the government needs to sell fewer Treasury bonds, so the supply drops and the price of T-bonds rises. In the past few years, the budget deficit has increased dramatically, and this has put more Treasury securities into the market place.

The Federal government borrows money through the issuance of Treasury securities; so higher deficits mean a larger supply of securities and (again, assuming constant demand) lower prices. With notes and bonds, lower prices are equated with higher yields, so in this example, the government borrows money at higher interest rates. That impact ripples across all other interest rate-bearing securities and creates a higher interest-rate environment for stocks, which is bearish.

In addition to following the trend in the budget deficit or surplus, investors can gain valuable insight to the state of the economy by looking at the government's tax receipts. Higher tax receipts lead to an improved deficit situation when economic conditions are strong; conversely, lower tax receipts reflect a sluggish economic environment.



Previous Day's Trading Room Results:

Trade Date: 7/10/09

E-Mini S&P Trades*
(before fees and commissions):


1) FT sell @ 11:10am at 872.75 = b/e (1 lot)

2) TP buy @ 1:20pm at 873.75 = -1.00 (1 lot)

3) Algorithm positions (4)

4) "Reading the Tape" positions (3) ...combined Secret's, Algo, & "Reading the Tape" total...+7.00


Electronic (YM) Mini-Dow:

1) None today



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