CME and Margin Adjustments

It wasn't that long ago that the CME came under enough suspicion that they came out with an explanation or the other side of the story on margin requirements. The entire article can be found here.

After something like 4 consecutive hikes in silver margins, the CME had some explaining to do. JPM had just lost the battle to protect its short position in Silver somewhere around $37 and silver went parabolic. Parabolic moves always have my attention as they tend to continue the parabolic curve and head the other direction, but in this case, silver had been suppressed so long, it was far, far away from the geological price or fair price as compared to gold. Economically the ratio between the price of gold and silver has long stood at about 16:1, the mining ratio changes through the decades, but falls somewhere around 8:1 so the price of silver was way undervalued as compared to the price of gold. The silver bugs won, Blythe Masters lost, or so everyone thought, enter the COMEX stage right....

The silver rally, while volatile, still was far away from fair value for silver, then the CME steps in with a series of consecutive margin hikes, about 1 every 2-3 days until they killed the silver rally and then issued the above statement about volatility and margin requirements to justify all of it. There was no mention of directives from Bernanke as you might expect.

If we are to believe that the CME and others were hiking margin requirements to meet current volatility, how on earth do they lower e-mini contract margin rates and other equity related margin rates in the face of rising volatility? It seems obvious that the CME is a political and monetary policy tool. Today's end of day negative 1 min divergence was solid enough, the rally that followed suggests to me that the margin decrease was leaked toward the end of the day, rallying equities. Talk about a parabolic move-look at the market at about 3:10 p.m. today.

As I said in one of tonight's post, Wall Street needs to pull investors and retail traders back into the market, lowering margin rates for ES is a great way to do that, although a contradiction to the CME's post silver explanation-another event that left retail holding the bag-as well as a few hedge funds.

I'll have to take a closer look at Silver, but I believe that gold will see one of its few serious pullbacks to the $145 or even $140 level, unless something big happens in the interim, I'd personally wait for the pullback and take a look there.

As for equities, why the sudden rush to lift the market? To bring in the CME to lower margin rates in a market that is getting more volatile smells of desperation, but in the short term I believe it has the potential of achieving the goal of a false breakout, to bring investors back into the market and quickly. I suppose Brian Sack at the NY Fed couldn't get it done quick enough, so they brought in the heavy artillery.

This after hours revelation has me rethinking the short term on long positions, I'd still be looking to clean up those positions and raise cash, but they now may have a  little more time to run then previously thought.

Watch closely for the cats and dogs rally, the cheap stocks making 30-50% 1 day gains, it's always a sign of the end. If you happen to run into one, I suggest taking double digit profits that are accrued over a day or two, those are market gifts and they don't come around all that often and don't last all that long. I'll be looking at the C&D trades to see what's setting up and how they are reacting.

One thing is for sure though, last Monday, as 3C demonstrated with a very strong 15 min positive divergence on a deep gap lower, was never meant to go any lower and the move above $135 that I've been expecting for some time now, looks to be the low end of the target range at this point.

Watch Greece carefully over the next few days, the sudden rush to lift equities quickly (as I said, wreaks of desperation), it may have a lot more to do with the Greek situation, specifically a planned default and exit from the E.U. which would have resounding effects on the entire Euro zone and throw Europe right back into recession. Also watch what China does in Europe, do they buy European Bonds or back off real fast? If they start selling through London, you now Greece is about to reintroduce their own currency and leave the EU, ECB and IMF holding the bag. Soon after look for a military coupe in Greece.

Finally, is it coincidence that on the same day Chicago PMI plummets from 67.6 to 55.6 (consensus at 62) with contraction sitting only 5.61 points away, the CME lowers ES margins? Honestly, with numbers like that who really wants to invest in risk assets when we are that close to contraction? That was the biggest plunge in Chicago PMI since Lehman was "asked/advised/told" by the SEC to file bankruptcy, an event Brian Sack is probably still undergoing therapy for PTSD. The very reminder of PMI coming in on a plunge not seen since the Lehman bankruptcy probably elicited an emergency visit to Sack's therapist, right after he called the CME of course.

Look for more bad numbers the rest of the week, but the numbers won't matter to retail if Sack can touch the Greed nerve and make retail think they're about to miss the next big bull market rally as ES are ramped every day until the dirty deed is done.

By the way, in overnight action, Australian GDP just came in at -1.2 (not 1.2-negative 1.2) Q.o.Q. Most Asian and Indian markets are trading higher, the Euro is higher on none other then Greece (perfect setup with a falling dollar for rising equities tomorrow, but don't forget the larger trend underway in the dollar). Dow Futures are up 67 points at last check. Mission accomplished, but it's not like we didn't expect it.