As bad as the markets looked today — and at times, there was some heavy selling — the word that kept coming back to me was resilient. It looked as if buyers were under every bid, and that the market might even close flat today.
And why not? The Bulls will argue that new highs are bullish, the overall trend is upwards, that the credit crunch/housing debacle/slowing earnings are already well known, and therefore discounted by the markets. Besides, Tech looks great.
Then, there’s the liquidity factor: Through their repos (a/k/a M3),
Central Banks have injected plenty of liquid cash ($400B) into the system.
Bears can argue the economy is slowing and earnings are showing signs of disappointment. Market internals have been weak, with light volume on rallies and the advance decline line mediocre. Investors Intelligence shows bullishness rose to 60.2 from 56.5 last week (highest level since Dec 2005), while Bears fell to 21.5 from 25. The leaders are getting frothy, with Google (GOOG) now worth more than VIA, CBS, TWX and DIS — combined. On top of that, no one really knows how bad the financial sector is.
~~~
That is the question before you this evening: What beats what? Does economic weakness trump market momentum? Does a likely earnings slowdown trump trend? And does liquidity trump everything else?
What say ye?
I say ANYTHING could happen.
That was easy to answer.
I simply subscribe to the idea that, as Twain said, “history does not repeat itself, but it does rhyme.” Considering the recent records on market indexes, the fact that this Bull Market is the fourth longest in history, the uncertainty over the full impact of the housing and credit crises, and the looming presidential election, history tells us that there is currently more downside pressure than upside potential for stocks. Can the market overcome those pressures? Yes. Are we closer to a significant or even prolonged decline for stocks (Bear market) than we were yesterday? Most definitely. Do we really know either way? No.
Until the big players start selling the market will most likely continue to rise.
My question is the same. The only answer I can come up with – the pattern has been repeated a few times since last summer. This Fed will provide ample liquidity and now, cut rates as much as needed, to keep the party going. Someday, it will end. Softening economy, softer earnings growth (maybe even zero growth now) and a full fledged credit crisis have been unable to keep this market down (with a little help from Bailout Ben). So what are the odds that my shorts start to make money now? None. Sound like sour grapes. It sucks to be right and down.
Could it be Bernanke only has a limited amount of bullets and will seek fire them unpredictably to keep the buzzards at bay?
I believe the strength/weakness of earnings report will determine if we continue seeing upside or begin the long journey downwards
I have the answer, the market will tank (eventually) and then it will go up again (eventually). It’s going up now so eventually it will go down. In the meantime, get drunk, do drugs (in moderation) and get laid.
What I have decided is the game is so rigged against me that I won’t waste my money or time playing in it. What seems clear to me is that over time those in power will continue to devalue the dollar over the long haul. We may have a short term bounce but in the next 5 years I see the dollar continuing to fall. I am moving my money out of dollars and investing in non dollar denominated assets and markets. The fed can fire all the bullets it wants. It won’t leave me holding the bag with shorts because this market makes no logical sense to me.
there are a few elements at play here Barry, and they remain the same as they were for a while now:
– an accommodative fed
– a weak US dollar, not weak enough to be ultra inflationary
– higher commodity prices signaling global growth but not high enough to prevent growth; at least not at the surface yet
– a mature US economy
– emotional element associated with bull markets
– friendly tax policy; for how long though?
– corporate buybacks ooze confidence
its an overall stock friendly environment. Now, the trader in me did take charge and I sold out my positions over the past week, after the big runup. I may have missed the top, but Ill be on sidelines for while until more clarity comes in.
There’s only one question I wonder about: What will the next surprise be? It’s never what you think it may be.
In the short run the bulls can have it their way.
In the long run (12 months) the bears always win.
centrals aren’t injecting new money
they are just rolling over current repos
anyhow what’s 400bb in a mega trillion market?
back to the Bear Cave as I quietly read “Anatomy of a Bear” (good book)
rgds pcm
The reality is that the only thing that matters is price movement; however, inside that reality are clues as to potential direction of movement. Low volume upthrusts or distribution days during market climbs have merit as potential warning flags for market tops.
But what is the cause?
There is a substantial difference between increasing the money supply and increasing liquidity – increases in the money supply will lead to inflation while increases in liquidity facillitate the “ability to transact”, which does not cause true inflation but may well allow redistribution of capital as well as the formation of bubbles. The Fed’s repo infusions have been of the latter variety, meant to help facilliate banking business due to the frozen ABCP markets.
This market and commodities upturn has not been spurred by a furious Fed pumping, per se, as increasing money supply. More likely, the upthrust has been a realignment of capital as previous buyers of ABCP rolled over into securities, commodities, or bonds. Because this market has capital limits, unlike the Fed if it were indeed pumping in money stock, this infusion has limited upside.
On the other hand, central banks have taught investors that asset values rather than currency values will be protected at all costs, meaning that in times of economic duress there is a propensity to buy assets instead of holding currency. It would therefore be no surprise to watch assets continue to rise as economic momentum tumbles – it is not a true rise in asset expectations but more a flight from holding currency.
It is then at these extremes of flight that markets crumble – there is no single reason, but at some point these “new group flight” investors start to move back out of assets and the parting selloff begins a self-perpetuating selloff.
The only thing the real economy causes is the length, depth, and duration of the selloff.
In my views, a lot of the current upward movement has been caused by normally non-equity buyers moving capital into equities, and at the point when their more normal capital vehicles are deemed safe and sound the selloff will commence.
Barry et al:
You guys are under-appreciating just how strong global growth is and just how low interest rates are.
In the U.S. it’s creating a bifurcated stock market with domestic companies seeing recession and multi-nationals seeing boom.
To the extent that indices like the Dow are comprise of big multi-nationals, they are benefiting tremendously from the combination of weaker dollar and strong growth abroad.
This only ends when the inflation cycle gets out of hand and/or the growth cycle slows too much. But with real rates under 2%, it’s going to take a helluva big slowdown in other countries to get the big bear market everyone is looking for.
Best.
~~~
BR: Thats been a theme of mine for quite some time now — weak US dollar and strong overseas growth benefits large cap multinational industrials & exporters.
Winston – so your saying that at no point will the fed act to support our currency.
did I interpret that right? I have to disagree. I just think this is a new fed that is more concerned with economic stability, than inflation or pricing stability, at the moment. The key phrase here is, “at the moment”
I dont think this fed knows its true self yet.
It has been a long time since I’ve noticed anyone here mention that the market needed a 10% correction to remain healthy altho that was a constant theme during the winter and spring of 2006. Then the May-July drop occurred, but I don’t think it was more than 8% (at least in large caps) and nobody thought that was enough to do the trick.
So now we’ve had the 10% correction with a moderately impressive recovery and have apparently gotten most of the really bad news out of the way, so it’s very probable that things will continue to rise for the next few months at least. Not in a straight line or necessarily at a steep angle, but the general direction of the market is up.
1Q 2008 may see a pullback, but I find it hard to believe that we will go into a presidential election with a falling market or a visible recession. You can argue with some validity that the whole thing is rigged to the long side to a greater extreme than ever before, but the game can go on indefinitely anyway.
==whipsaw==
We’ll have our answer on Monday next week as the next round of ABCP rolls over. Alot from the past 2 months have been kept on the books (fictitious capital) and will likely come off this month. Could get really ugly.
I am trying to put my finger on this “global growth” thing? Any help? What exactly do we export? Do we have any hope of our exports EVER matching our imports? What exactly does the weak dollar help? We sell more of what exactly when the dollar is weak? Other than a few engineering companies and a few airplane sales…help me out Barry. Can we get some specifics.
UrbanDigs:
You make a reasonable point and it certainly does lie with the political mood of the country.
However, this particular Fed believes (as I am sure did Greenspan) that it is necessary to keep a 1-2% inflation “buffer” against the possibility of deflation.
Inflation is a monetary event and it decreases the dollar value.
So maybe it is too strong to say that “a” Fed would n-e-v-e-r protect the dollar, but I do believe that the currenct political climate along with current and previous Fed did not and do not particularly care about the dollar’s relative value but only that it remains the world’s reserve currency.
my friends, give things a little patience. we are one month out from a change in the fed. we all know that in trading the first move is usually the wrong one. we have had a one directional market since the 18th. i would step back from the immediate term and give the bulls enough rope to hang themselves. it looks as if the noose is getting snug right around the neck.
World growth trumps US housing led slowdown.
Exports and cheaper dollar trump US recession.
Growth stocks (ag, tech, oil, infrastructure) trump misbehaving stocks (homebuilders, retail, financial).
Realities of the market trump my bearish intellectual leanings.
It’s nice to see the wall of worry crumble.
Barry, welcome 1973. What a year that was, two years after my father died…Christ is there a reason for living? Well, I got through it and a bunch of problems later on…but how stupid was the FED and the Leadership back then…dam I thought Jesus could do a better job and got born-again! lol
Ok, Economic weakness trumps everything soon the numbers will start coming in so obviously downward-sloping that nothing will be left accept the crying…and perhaps nashing of teeth!
I certainly believe that actual economic weakness would trump the trend or the trading action. The real question here is exactly how weak will the economy get? I think most investors already expect some weakness, but most don’t expect a recession. It is all about expectations vs. reality.
Markets are 70% psychological and 30% fundamental.
That means that market momentum trumps all, and this almost 100% true in the short-run.
Great blog, Barry.
Winston Munn,
Good posts!! I would really like to see a nice spike up first, lets say 14700’ish on Dow.. That final capitulation of the bears and the ridiculous buying of the bulls, then….bye bye…
Here’s the deal that no one seems willing to admit. The fed NEEDS a bubble. They see the housing bubble crashing and the related fallout. If they didn’t intervene in a big dollar killing way, it would mean banks blowing up, tax revenue going way down, and the country entering a serious recession.
So… the fed tries to revive one of its favorite bubbles: the stock market bubble. If people and companies start raking it in the stock market again, we will see some pickup in the real economy and good continual tax collection and possibly a virtuous circle created for a few years off the new, new stock bubble.
Hence, they bail out the bursting bubble by creating a new one and everyone jumps along for the ride.
In the short run the bulls can have it their way.
In the long run (12 months) the bears always win.
Posted by: Owner Earnings | Oct 10, 2007 9:25:42 PM
Umm. when have the bears ever won in the long run? I’m looking at Dow all time highs and S&P all time highs, not sure what you’re looking at.
“The fed NEEDS a bubble.” © Mike B
^^that’s a wrap folks. that’s all that needs to be said.
it’s the only politically feasible way out of this mess.
the fed wants another bubble, so the fed’s gonna get one.
embrace it.
“What beats what” is just a battle of nebulous conjectures. Market pundits, trading pros and everyday schmoes all come up with loose arguments such as “export improvements due to weaker dollar will offset domestic slowdown” or “stock market wealth effect will offset declining home value wealth effect”. These arguments are only explored on a gut level, with no real delving into the degrees to which the various effects will impact the direction of the market. They are often also only viewed or discussed in isolation.
What we should all be able to see is that the interconnectedness of many of these issues is given very short shrift in mainstream discussions of the market and the economy, largely because of the bulletpointy nature of our public discourse. Issues are distilled to easily digestible thoughts that carry a lot of currency in public psychology until they are replaced.
“Subprime is contained” – yes, to the Earth’s atmosphere. “Credit crunch” – most people didn’t fully understand what it meant, but it spooked a lot of people and tanked the market until it was replaced by “the Fed cut rates!” Everybody knows what that means – it’s great! Unless it doesn’t work. Here’s what’s on it’s way: “recession” is getting mentioned a lot more in the media these days. Official recessions get declared well after they’ve already begun, as we know, but the acknowledgement is preceded by gradual movement in the public forum from “there’s no danger of a recession” to “there’s the possibility of a recession” to “there’s a recession in X region or Y sector” to “Maria Bartiromo is actually not that hot, plus we’re in a recession” to “holy crap, will this recession ever end?” at which point the recession is already over.
The fact that we’re having this discussion means the recession already started, plus Maria Bartiromo is totally flat.
If you sell the stock market, you can:
hold cash as it devalues
buy treasuries, which are only over inflation ex-inflation
buy FDIC insured CDs from your friendly (mortgage affiliated) bank
buy cdos, and shake the package to see if it’s already broken or not
buy abcp
or maybe buy another house, or land
or an antique watch
This is like getting the pick of the litter at Omega-Mu.
Might as well stay home with a movie, pizza, and a beverage.
The market is acting like a hooker on crack.
She is impossible to predict …
– On good news …she rally’s.
– On bad news …she rally’s.
– On no news …sometimes she drops …and sometimes she rally’s.
– On fake news (i.e. Buffet buying Bear) …she rally’s.
The higher she goes the harder she will crash …but nobody knows when!
And of course, Big Ben (her pimp) keeps her going with more crack as needed.
I don’t want this crazy bitch anywhere near my money!
I’m out of equities …probably shift most of it to FX and wait for the crash.
I wish you and John Hussman would get your story straight as to wether the Fed is or is not injecting liquidity via Repos
~~~
BR: I have a lot of respect for John, but I disagree with his latest column that the CBers cannot inject liquidity . . .
It is usually the bulls that start the bear.
It drives liquidity out of the market that simply cannot be replaced and something comes along and spades the bull.
All those long investers get nervous and start going bear themselves creating some impressive losses.
My advice is get out of the market Anytime now to 15,000 range. You will probably miss some upside, but the implosion will offset that. Get all bears out creating the double feedback loop that implodes the beast. That is, how it seems bull markets end.
Oh, yeah, don’t jump back in right away. Give it some time.
I agree w Owner Earnings. Where is this $400 bb of which u speak? I see the Fed just rolling over existing (short) repos – practically no new $.
I don’t think that there have been any permanent open market operations since May.
stop looking at our stock market for a moment and notice that China is up 2% every day. day after day after….
Lurker – China is just silly. There will be a price to pay for that.
I agree with momentum in our markets, and stated the reasons I think stocks are in favor. I mean, where else are you going to put your assets. But things change, they always do.
I dont think we have seen the full effect of housing yet. Everyone thinks its baked in and done already.
In the short run the bulls can have it their way.
In the long run (12 months) the bears always win.
Posted by: Owner Earnings | Oct 10, 2007 9:25:42 PM
Umm. when have the bears ever won in the long run? I’m looking at Dow all time highs and S&P all time highs, not sure what you’re looking at.
I got a chuckle out of that comment as well! The most consistent traders I work with are neither bulls nor bears. As a matter of fact, when I read a strategist (real traders rarely talk) with a one way thesis, I know I’m dealing with a piker. There are always areas of the market where demand is winning, and areas of the market where supply is winning. Traders/Investors could improve their returns significantly if they could escape the amateurish bull/bear/economic/Fed/C.Bank nonsense that is constantly bandied about. Price is the only reality (supply/demand)…fortunately very few traders can be that honest with themselves, and they cling to useless opinions…which are worth about a nickel.
On my site I have compiled a list of what would, what could, and what will not sink the market. Here I would like to show the what would and what will not lists:
What Will (may take a combination of two or three)
The host of Economic Disconnect goes long the total market (that’s a 20% correction)
Existing home sales for 2008 after April are estimated at 3.0 million units (current estimate for next year is 5.78 million, and falling)
The Dollar falls below the 70 level (its at 78.3 right now)
Due to above dollar collapse, The FED hike rates to 8%
Consumer spending drops by double digits % wise month to month (and no 5-9% won’t do it)
A major bank or brokerage fails (I mean BofA, Citi, Merril, the big ones.)
What will not
Home sales (new and existing) continuing to fall at a steady rate (5-10% year over year even against a bad year this year)
FED stays pat on rates
Consumer spending is negative, but under a 5% decline comparably
A major bank basically fails, but is propped up or “taken over” by another bank with the help of the FED
The dollar anywhere over 70 on the index
A major homebuilder goes under, or two, or three
The host of this blog goes short the total market (that’s a 25% pop to the upside)
Unemployment rises to 5.3%
The what will not sink the market list is scary, but it will only succeed in causing serial “bottom callers” to harp on the worst is over line until the next data comes out, then that point is the bottom. If this list is occurring, talk of FED cutting will keep the market frothy and happy.
There is 3 lists that will be worth checking over time. My humble estimation of the 3 possibilities comes out like this for the next calendar year:
What Will = 10%
What Could = 10%
What Will Not = 80%
Sorry to disappoint any bears out there, but I figure we are looking at a dismal year for earnings, home prices, home sales, consumer sales, the dollar, employment, and inflation. And I do not think any of that will get in the way of Mr. Market. The current psychology is so out of touch, most are going to be buying all year so they do not miss the “bottom of the cycle” even though we are already priced for near top end of a cycle.
I think it will take into 2009 for reality to have crashed against the optimism for so long, that the market finally relents and starts down.
Barry,
Can you cite some sources/hard data to build you case that shows that the Fed is injecting liquidity? Maybe do an entire post on it… Hussman lays out his case fairly well and it would be informative to see another perspective. Thanks!
Thanks in part to Norman Fosback, every stock jockey is programmed to buy stocks after Fosback’s “two tumbles and a jump” is triggered.
So, at least in the first few weeks after the indicator is triggered, liquidity trumps all.
This market reminds me of the period between the February selloff and the July highs. The level of complacency is, quite frankly, astounding, although nobody ever said the market had to be rational. If you take away the Fed days, not one of the rally days has been on even average volume; we’re just slowly creeping up.
I believe the market is going up simply because it wants to. In the short-intermediate term, I don’t think this rally has little to do with the underlying economic fundamentals – good or bad.
I also believe the market participants are hoping that the Fed will bail them out (again). The advance is still narrow and the other internals poor. Give it time, but I suspect that we will roll over again.
Barry: One suggestion on resolving the “injection of liquidity by the FED”. Perhaps you could organize a round table with James Hamilton, John Hussman and others who might fit the bill to have a dialog about liquidity. May be get Felix Salmon or someone more suitable to moderate the debate.
Topics could include not just the discussion of repos, but also FED’s permanent operations, as well as treasury’s mechanisms for raising cash among others.
Eventhough stocks are making new highs nominally, they are still losing ground to Gold. Pyrrhic victory I say.
I also believe the market participants are hoping that the Fed will bail them out (again). The advance is still narrow and the other internals poor. Give it time, but I suspect that we will roll over again.
Posted by: Peter Davis | Oct 11, 2007 9:36:00 AM
The market advance is many things, but “narrow” is not one of them. This is as broad based a rally as I’ve seen in 15 years. I’ve got 40/40 sectors bullish percent charts in X’s….very rare. Volume is what it is…a talking point that sometimes means something…sometimes means nothing. My buddy (trader) complained about the same volume concern…I asked him what would happen if volume picks up. His response ” I’m f*cked”. One of the sharpest traders I ever saw operate (both sides of the market) told me “price trumps volume because price will create volume” Bingo.
When I look at investing, I always compare. While our Indexes are making new highs, once we compare those returns against [you pick…it won’t matter] we see that these nominal highs are a complete joke. Factor in inflation and the devaluation of the Dollar, and you will see you are going nowhere fast.
The FED is in bed with Wall Street. Look no further than all the conversations BenDover had with his cronies in Aug. and Sept., and you can see it’s rigged just like 5 card Monty. Wall Street was tipped off to the FED moves from day one. There is no efficient market or discounting. This occurred in the old days when a freeer market was allowed. Today credit must be originated in excess of the debt obligations outstanding or the music stops.
In 2000 our debt stood at 4.5 trillion. 220 years of spending accounted for the deficit. From 2000 to 2007 our deficit has doubled, and with M3 running at better than 14%, we will double again in 5 years.
We are f**ked folks. A confiscation of wealth is occurring like never before in our history. Oh, and the Dollar just hit $77.94, so please enjoy the glorious gains sheeple.
Just a few months ago, the whole world was going to get bought up by private equity! No one seems to be talking about that anymore!
Equity markets will drop when:
1. eps decline… in a few quarters when local market decline is larger than impact of falling dollar on profits.
2. when the regulators let stuff fail because they can’t support everything. We need to see money instantly vanish for markets to drop. As long as these failing securities are being propped up, money flows from bonds to equity or from risk to safer grounds.
When the Cdn dollar was at 65 cents, I felt so poor compared to Americans. Now I just keep on getting richer and richer by the day. Even my cdn cash is doing better than if I had put it in US equity!!!
I feel bad for all those Cdn investors who were told to increase their weight in US equities. Cash is king right now in Canada! I guess after the US eps drop, it will be time to pick us some US stocks. I’m patiently waiting tha tfast approcahing hour.
Bears don’t have tunnel vision of investing in all stocks all the time. Try sitting in cash (treasuries) since 99. That takes patience.
I found this thread very valuable.
Who is j-daddy? Good stuff man.
The market going higher is not really what matters. What matters is that you are measuring things with a shrinking yardstick. It is the dollar that’s losing value!
Oil back above 83. Gold above 750. Copper at 3.70. Grains just below their recent highs. The Euro back above 1.42. USDCAD at 0.97.
The point is that, unless the Fed changes course, the USD will lose value against real things, no matter what central banks of countries with Current-Account surpluses do with their exchange rates:
– if they stop intervening and let their currencies appreciate against the USD, prices will keep stable in those currencies, but will rise in USD;
– if they keep buying dollars and printing huge amounts of their currencies, they will keep the exchange rates stable but will have high inflation, so prices of real things in USD will rise just the same.
Players all over the world are starting to assume this. The US is risking a massive run away from the USD and the loss of its role as reserve currency.
The one thing the Fed can do to stop this collision course is to send a very strong signal that they care about the USD’s role as international reserve currency and about it keeping its purchasing power in internationally traded goods. That signal would be a surprise rate HIKE of 50 bp before Oct 31.
After all, the last rate cut was based on wrong data input (Aug NFP -4K when it turned out to be +89K). A decent retail sales data tomorrow would round up the needed support for reversing that cut.
Barry, welcome 1973. What a year that was, two years after my father died…Christ is there a reason for living? Well, I got through it and a bunch of problems later on…but how stupid was the FED and the Leadership back then…dam I thought Jesus could do a better job and got born-again! lol
Posted by: Justin | Oct 10, 2007 10:38:23 PM
Jesus ain’t the reason for this season. I’m thinking man with greed and fear has done this with a friend with a tail. We never learn!
Real Think,
Well said!!
for you people who STILL demonstrate the faintest notion about Repo’s…….
As I have said before and will say again….the FED has no say in where that money they line up to get goes. So use you imagination if you were one of the brokers who needed cash where would you put it to work??? Does the old adage “hold and Hope” mean anything to ya???
If you allow the irresponsible to continue to be that way then you will never get a grasp when the first layer of bullshit is peeled off.
You all make it sound like there is a 1:1 relationship in turning over that insolvent boat loan for cash…..cash THAT IS USED IN ANY WAY THE BROKERS (who got us in this mess) SEE FIT.
That is the printing press in full operation.
Just because the Fed is taking in collateral that is basically worthless (if it were it would’nt be exchanged for cash now would it??)and shoving money out the door in the form of mainline injections to the market does’nt mean that it’s not, efectively, printing up money. It is when the collateral is worthless.
Did’nt you people take an economics course at some point???
Ciao
MS
Real Think wrote: “After all, the last rate cut was based on wrong data input (Aug NFP -4K when it turned out to be +89K).”
I believe this somewhat mistaken. The rate cut was based on correct data, all right, it just didn’t have anything to do with jobs.
Stock markets down, ABCP market frozen, bank risk rising…this is the real data the Fed was watching.
The cut was a cinch well before the jobbed jobs jolted jubilation.
Gotta make hay before the coming $Trillion tax hike.
Bears will be right starting Nov ’09.
The market will take a right hand turn, just as this country takes a hard left hand turn.
Actually, it would be even better if the Fed reversed the cut in the face of a BAD retail sales data tomorrow. Because that would send this message to the world: “We acknowledge the important role the USD plays in global trade and we assure all countries that our monetary policy will be geared first and foremost to preserve the purchasing power of the USD for international transactions, so that countries can confidently hold it (or debt denominated in it) as a store of value.”
Conversely, this was Sep. 18’s message: “Look, the only thing we care about when setting our monetary policy is the level of our internal economic activity. And by that we mean mainly the production of goods and services that you can’t buy from us. We don’t care much about our currency holding its purchasing power internally, let alone when measured in internationally traded goods. So, if you use our currency to trade between yourselves, it’s your problem. And if you are so stupid as to use it (or debt denominated in it) for holding your savings, you do need professional help.”
MS,
A couple of recent snapshots of repos:
Deal Date: Thursday, October 11, 2007
Delivery Date: Thursday, October 11, 2007
Maturity Date: Friday, October 12, 2007
Type of Operation1: Repo
Settlement: Same Day
Term of Operation2: 1 Day
Operation Close Time: 09:50 AM
Results Amount ($B) Rate (%)
Collateral Type
Treasury 8.650
Agency 10.350
Mortgage-Backed 25.100
Accepted: 0
Total 44.100
9.500
Deal Date: Thursday, October 11, 2007
Delivery Date: Thursday, October 11, 2007
Maturity Date: Thursday, October 18, 2007
Type of Operation1: Repo
Settlement: Same Day
Term of Operation2: 7 Days
Operation Close Time: 09:40 AM
Results Amount
Collateral Type Average4 High Low
Treasury 24.700
Agency 28.350
Mortgage-Backed 33.900
Total 86.950
20.000
Notice that 1-day repos were virtually all Treasury with a small degree of GSE – not exactly worthless collateral.
However, I agree that the 7-day were troubling in that MBS was accepted – this again shows the inability of banks to find liquidity for anything having to do with mortgage backed securites. And it also shows the Federal Reserve is propping up the ABCP markets.
Typically, banks balance their reserve requirement by borrowing from other banks that have ended the day with excess reserves. When banks are unwilling to lend to other banks or there is greater need for additional reserves than is in the system, repos are used to balance the books.
This 1 1/2 month-long burst of repo activity clearly shows that banks no longer trust the collateral fellow banks are holding, and are unwilling to lend. Without a market, this collateral is worthless.
The Fed, by its repo actions, has created liquidity in an interbank market that had frozen and was on the verge of collapse. The Fed actions has created a temporary market for paper that couldn’t be used as interbank collateral.
The decision was one of “moral hazard” versus “systemic collapse”.
And the party has only begun.
Someone call Mr. Prince to see why the music stopped. He may be unreachable, as I believe he may have danced right off a cliff. Everyone enjoying their gains today…well danm…look at the markets swoon. The dollar is in the shitter, rates are up…thanks for those great cuts FED and Gold and Silver are on the move.
Boy do I love an efficient and discounting market. Hat’s off to the thieves of Wall Street.
And the party has only begun.
Posted by: Winston Munn | Oct 11, 2007 2:00:20 PM
With GS holding 50% assets in Level II and Level III, I couldn’t agree more. Blood in the streets.
Concerning Repos, what jumps out from the figures of today is that 238.95 Billion was submitted. DAMN!
Liquidity was drained today. 35.50 Billion accepted with with 46 Billion maturing.
Think the banks are having a hard time finding cash? LOL!
Spectre,
There is no doubt banks are still having problems as is shown by the 7-day repos, where the Fed accepted MBS as collateral.
It is good to see your information as it is a fair representation of what actually transpires concerning liquidity – it’s not enough to simply look at repos but these have to be guaged against expirations along with Treasury paydowns and auctions to get an idea of what is really happening on any one day.
The one thing I cannot grasp is why M2 is not skyrocketing – FCBs have decreased their net holdings by about $9B so far this year – not a lot compared to the $2T held – but still they are not buying the additional debt the U.S. has created this year. If FCBs are not financing this debt, who is? The System Open market Account shows no spikes that would indicate monetization by the Fed.
Any ideas there?
We can talk all we want about what the fed will or will not do. I see that the Fed and Treasurey has ratcheted up the repo’s and TIPS auctions in the face of nothing more than banks and brokers trying to protect profit margins.
Make no mistake…this “crisis” has nothing to do with available credit….it’s available for the right price however that would put a serious crimp in (already shrinking) profit margins at said banks and brokers.
The Fed is simply pandering to the current administration and it’s ability to create a crisis when it is convienent for the them to do so. How else do you explain the staggering amounts of “liquidity” that the Fed and Treasurey continue to offer while saying that “We’ve seen the worst already”….
Not according to today’s oversubscribed “auction”…..
but that is another carefully orchestrated mess we’ve yet to deal with.
Ciao
MS
wow am i happy to have found you all. questions and investing neuroses here match mine exactly. for those of you in the ‘its all rigged’ camp, my favorite thing to do these days is to buy odd lots at random over a week on $2 stocks (owned at least 60% institutional) and watch it trigger panic about the arrival of morons.