White House Says Treasury Will Be "Running On Fumes" Shortly

Contrary to calculations performed by Barclays and other analysts (including Stone McCarthy first presented on Zero Hedge), which speculated that the Treasury would have enough cash to last it through August 15th due to an increase in tax receipt, the White House's press secretary Jay Carney said that the Treasury will be "running on fumes" if the debt ceiling is not raised by August 2, naturally adding the traditional doomsday phrase that it is a "crisis situation." He had also added previously that tax revenues are not coming at an accelerated pace and that the cash will not last longer than Tim Geithner's original forecast of August 2. As the chart below shows the Treasury had $75 billion in cash as of last night, and will raise another $55 billion in net cash over upon settlement of this week's auctions. In other words, Geithner now predicts that the pro forma cash of $130 billion will last the US just one week. Well, at least we can see what the source of all the problems is.

From Reuters:

White House press secretary Jay Carney said that at midnight on August 2 the country will lose its authority to borrow for the first time, meaning there is no alternative for Democrats and Republicans other than to compromise over a deal to reduce the deficit and lift the debt ceiling.

"People keep paying their taxes. Revenue comes in. Money comes in. The problem is there is not enough money because we can no longer borrow money to pay all our bills. You're basically running on fumes," Carney told reporters. "It is a crisis situation."

Rating agencies warn they could downgrade the top-notch U.S. AAA credit rating if the United States misses debt payments or if it fails to take significant steps toward controlling the long-term budget deficit. 

Carney said that if there is no deal by August 2, the failure of Congress to have acted would send shock waves through financial markets. "There will be assessments made by investors around the globe about what the heck is happening in Washington," he said.

We will present an updated cash burn analysts from Stone McCarthy as soon as one is available, probably in the next 2 hours.

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Treasury dilemma: Debt Crisis vs. Safety

Investors are seeking quality, but with talk of defaults and debt ceilings, Treasuries just aren't the stellar attraction of "fear money" they once were. At the trough of equity trade in Friday' session, the long bond was treading water near 126, which was a gain of less than a handle on the day. Although 25 ticks is respectable, it could have easily been twice that in a more panic stricken environment or one in which investors put more value into the premise of "return of capital" rather than "return on capital". In other words, the mentality of investors in 2011 is far calmer than that of 2010. Only time will tell if panic will begin to set in, or if cool heads will continue to guide trade.

It has been a dreadfully slow news week, and today was no exception. Unfortunately, next week won't be much better; aside from retail sales and PPI the market will be left to sulk over last weeks disastrous data. With this in mind, as well as the tendency for Treasuries to "go out with a bang" we have to lean toward at least one more new high before a reversal (yes, yesterday's trade fooled us a bit).

Seasonality in Treasuries suggests some near-term softness could be followed by a mid to late summer rally...and yes, this can happen regardless of fundamentals, debt ceilings or even Treasury credit downgrades. It is often the less obvious market forces that guide trade, while the masses focus on the obvious (remember, most people lose trading on leverage).

That said, we'd rather be bears than bulls for the time being. Ideally, we would be most comfortable looking lower from what we see as significant resistance levels of 127ish and 124'10 in the September bond and note, respectively. In the meantime, look for support in bond futures near 124'13 and in the note near 122'26.* Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data. However, market analysis and commentary does. Charts provided by Track 'n Trade, Gecko software.

**Seasonality is already factored into current prices, any references to such does not indicate future market action.

Treasury Bond and Note Option and Futures Trading Recommendations
**There is unlimited risk in naked option selling.

June 1 - Clients were recommended to sell July bond 128 calls for about 30 ticks.

June 6 - Clients were advised to offset short bond calls at 15 ticks, or a profit of $235 to $300 per contract before transaction costs.

In other markets....

June 2 - Clients were recommended to sell the July Euro 150 calls for about 36 ticks.

June 7 - Clients were advised to add to their short Euro call position by selling the 151 call for 37 ticks.

June 9 - Clients were advised to offset the July 151 Euro call near 17 to lock in a profit of about $250 before commissions and fees.

June 10 - Clients were advised to buy back the July Euro 150 call for about 14 ticks to lock in a profit of $275 per contract assuming an entry of 3

(Our clients receive short option trading ideas in other markets such as gold, crude oil, corn, soybeans, Euro, Yen, and more. Email us for more information)

Carley Garner
Senior Analyst / Commodity Broker
DeCarley Trading

cgarner@DeCarleyTrading.com

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*Due to the volatile nature of the futures markets some information and charts in this report may not be timely.

There is substantial risk of loss in trading futures and options.

Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.

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