This page has been archived and commenting is disabled.
Bank Of America's Jeff Rosenberg Attempts To Debunk POMO "Conspiracy" Theory, Fails
Various rumblings started at Zero Hedge and a few other fringe sites, and now essentially mainstream (not to mention emanating from such firms as, oops, Goldman Sachs) as pertains to a rather curious correlation between POMO days and market outperformance, appear to have finally gotten to such institutional stalwarts as Bank of America and its traditionally imperturbable Jeff Rosenberg (whose opinion we tend to respect). In a piece released tonight titled appropriately enough, "The POMO Conspiracy Theory", Rosenberg (not to be confused with former M-Lyncher David) sets off to debunk that POMO days have an impact on risk assets. Alas, he fails. The conclusion: "Our analysis points to the correlation, but not causality of POMO with rising stock prices." Sure enough, if one could confirm definitive "causality" of Fed intervention in the stocks markets, that would pretty much be the ballgame right there. And it appears that even his correlation results force Rosenberg to step back: "We likely are about to get a lot more days of POMO if the market’s expectations of $500bn further expansion of the Fed’s balance sheet is confirmed at the conclusion of Wednesday’s FOMC meeting. If the correlation of POMO purchases and stock prices were to continue to hold going forward as it has since August, than we should expect more frequent days where stocks go up as the Fed pumps in liquidity into the financial markets." Thank you for proving our point Jeffrey. Amusingly, at the end of his "debunking", Rosenberg, in typical banker fashion inverts the argument by 180 degrees, and says essentially that even if POMO is goosing markets, it basically creates a self-fulfilling prophecy that "can contribute to a better economic outcome" as it boosts inflation expectations. Jeffrey: a better outcome yes, but for you. And nobody else.
Anyway, here is the "debunking." We leave it up to our readers to make up their own mind.
The POMO Conspiracy Theory
Like all good conspiracy theories, the POMO Conspiracy Theory starts with an element of fact: Of the 24 days in which Permanent Open Market Operations (POMO)1 were conducted by the New York Federal Reserve since August 17th to affect the Fed’s policy of reinvesting paydowns from its mortgage portfolio into Treasuries, on 15 of these days, or 63% of the time, stocks rose. Does that mean stocks rise because the Fed is purchasing Treasuries? We think not, and find such claims in line with other theories of the conspiratorial type. Yet enough investors have asked us this question to prompt a bit more analysis. And while the facts do suggest some correlation between POMO purchases and stock market performance, other facts belie the argument of causality.
Consider the simple two-way table analysis of Figure 1. The basic observation supports the theory: on POMO days, stocks tend to go up more than they go down. Specifically on 63% of the time (15/24) stocks tend to rise when the Fed is purchasing Treasuries. Moreover, on days when stocks go down, that tends to be more associated with non-POMO days - 57% of the time (12/21).However, by the same set of observations we can also argue that of the days when stocks go up, there is nearly an equal chance that increase is associated with POMO purchases as not 48% (15/31).
Furthermore, if we focus on the 10 POMO days with a significant stock market increase (greater than 0.5% increase in the S&P 500), 6 occurred on days with economic data that met or exceeded expectations. Further casting doubt on the POMO effect on the market, on 8 out of the 15 POMO days with rising stock markets, bond prices were falling. Hence how the Fed’s purchases of Treasuries could support the stock market but not be supportive of the bond market appears at odds with the “theory” (though one further twist of the argument could be that after selling Treasuries to the Fed, investors continued selling bonds in order to – you guessed it – buy stocks.)
A corollary to the POMO theory should also apply: if POMO purchases of Treasuries positively impacts the stock market, then the size of those purchases should also be positively related to the size of the positive impact. Yet the opposite is true: the rank order correlation of POMO purchase size and SPX performance on the 15 days when the stocks went up was actually a negative 20%. That means stocks went up less on days with larger POMO purchase amounts and went up more on days with smaller POMO amounts.
While we may be skeptical of the merits of the POMO Conspiracy Theory, its mere existence is testament to the fact that “Conspiracism” is not limited to the realm of History. Our analysis points to the correlation, but not causality of POMO with rising stock prices. But we likely are about to get a lot more days of POMO if the market’s expectations of $500bn further expansion of the Fed’s balance sheet is confirmed at the conclusion of Wednesday’s FOMC meeting. If the correlation of POMO purchases and stock prices were to continue to hold going forward as it has since August, than we should expect more frequent days where stocks go up as the Fed pumps in liquidity into the financial markets. Based on the analysis above that may simply mean stocks are more likely to go up if economic performance going forward ends up generally better than expected.
Whether QE2 is causal or merely correlated to that economic performance remains to be seen. And while we have our doubts, the extent stock prices increase is what matters as the transmission of QE (both 1 and 2) into the real economy occurs through the wealth effect of rising stock prices. And that effect itself, if successful, can contribute to a better economic outcome. Such a scenario of asset inflation – as we discussed earlier (see research links in sidebar) – remains at the heart of our favorable outlook towards continued compression in risky asset spreads.
»
- 8329 reads
- Printer-friendly version
- Send to friend
- advertisements -
What about the correlation b/w POMO and Gold bitchez???
I'd say yes. With silver oscillating around movements in gold.
With regard to POMO I maintain that the Fed is goosing the market partly by letting us turn perception into reality. If they didn't want a POMO effect, then they wouldn't publish the dates. If we as the market want to call their bluff, we should sell into the rise rather than buy prior to it.
Better still – buy gold.
"if POMO is goosing markets, it basically creates a self-fulfilling prophecy that "can contribute to a better economic outcome" as it boosts inflation expectations".
Yeah, and what about the expectation that sniffing fairy dust will contribute to a better economic outcome?
at some point, its going to penetrate the massive clouds around the heads of these guys, that inflation is going to kill off whatever little is left of the upper middle, middle and lower classes.
.....and there will be no more peasants to fleece.
of course, before that point where they all die, we have to go thru the pitchfork stage........
its going to be an exciting year ahead. do we know if jeffery has bought his island yet?
Correlation does not presuppose causation -- until it does.
And in a stunning example of critical thinking and logic, Jeff Rosenberg debunks the notion that when it rains (liquidity) one becomes wet. The public keepers of the myth are working overtime to paper over the obvious.
"Our analysis points to the correlation, but not causality of rain falling from the sky and your clothes becoming wet. We've determined that your wet skivvies were caused by your failure to hold, let alone carry, your own water. And your back is wet either because you're an illegal immigrant or you spilled some of the water your carrying."
News at 11.
as someone I admire said today, "panem et circenses"
http://en.wikipedia.org/wiki/Bread_and_circuses
How many readers have bought 14 extra refrigerators because they expect the price to go up?
OK, this whole notion of inflation "expectations" is insane. It is hard to see how anyone benefits from rising consumer prices, but it's insane to think that prices rise because consumers "expect" them to.
But this is the religion known as monetarism. Monetarism is falsely offered as the "opposite" of Keynesianism, the way that the Coke party is false offered as the opposite of the Pepsi party.
What will increase in price first.....essentials or another refrig?
Coffee 13 yr highs, sugar 30 year highs, wheat 2 yr highs, corn up 70% since may....Expect it or not it's happening. Inflation used to be measured by mostly food prices...
Durable goods tend to rise very slowly under inflationary pressures. Consumer staples, such as rice, corn, wheat, oil, cotton etc etc etc, tend to rise sharply.
And of course its just coincidence that QE2 is gonna be implimented right around bonus time.
Thread soundtrack...
http://www.youtube.com/watch?v=xTsTIS-8III
appropriately from a former porn actress...
http://en.wikipedia.org/wiki/Andrea_True
Alternate lyrics: pomofo... How do you like it? How do you like it?
Too many moving parts and unintended consequences for something NOT to go wrong with all the Fed alchemy.
You just don't know what you don't know. It's called a central planner knowledge gap for good reason.
So, what's the plan B with these guys at the Fed anyway? Just curious.
.
We are going to need a continuous open thread on POMO. It would appear that it will be with us for a while and if we put our heads together here we might be able to figure out a way to prove the manipulation ... or better yet benefit from it
from Bear, a real loser in the "POMO Wars"
"Permanent Open Market Operations (POMO)1 were conducted by the New York Federal Reserve since August 17th to affect the Fed’s policy of reinvesting paydowns from its mortgage portfolio into Treasuries"
What paydowns are these? Are these MBS actually being amortised?
Principal payments on MBS usually happen when there is a refinance of the underlying note.
I thought POMO involved the interest payments also.
There is a difference between asset inflation and living inflation. Assets are still below 2008 levels so they are not inflated so to speak. However the derivatives market mess means no matter how much you print it all goes into a black hole.
Sure pumping oil up will cause real inflation, but traditional inflation also means wages rise, which they are not.
Looking at whether the market went up or down is too simplistic.
Suppose that POMO really does goose the market, then a day that would otherwise end at -5% might end at -1%. This -1% does not indicate that POMO failed to goose the market because the market ended red instead of green (as Rosenberg claims), rather the manipulation is a huge +4%.
So the only real way to say for sure whether or not POMO gooses the market is to assess market performance relative to external, independent metrics that cannot be influenced (rapidly) by POMO themselves, comparing relative performances on POMO and non POMO days. The question is not whether or not the market closes red or green on POMO days, the question is whether or not the market closes red or green relative to an independent metric and whether or not this relative comparison differs on POMO and non POMO days.
I'm struggling to think of an "independent" metric in this case. Seems everything is equally available to be traded by cashed up primary dealers. Perhaps there is latency between markets though that is long enough to make an independence call. Someone smarter than me can suggest something.
[edit] Actually, the metric is obvious, it's the economy, as demonstrated in an earlier ZH article and even better over at the Automatic Earth
So perhaps a good metric with sufficient (daily) resolution is the Growth Index maintained by the Consumer Metrics Institute. I suggest that someone with time compares the CMI Growth Index to the S&P 500 on POMO and non POMO days. I don't have time, but I'd suggest the result will be instructive. [/edit]
Nice try Rosenberg. Thanks for sharing your Rosenberg Stupidity Theory.
I read an article about this Rosenberg guy funding up the BAC-PAC with direct cash infusions used to influence Washington banking regulations and policy. (Bank of America Corporation Federal PAC)
Rosenberg is an anal-ist hired by the banks to engineer the offloading of toxicity to taxpayers. This unbelievable quote comes from the man himself trying to formulate ways to steal more money from the taxpayer.
"Having effectively guaranteed the short-term markets, that risks shifts to the government," wrote Bank of America Securities-Merrill Lynch analysts led by Jeffrey Rosenberg, in a note issued early Tuesday.
http://www.marketwatch.com/story/cost-buy-protection-against-us-government
After weakening .gov with his junk gambling trades gone bad he buys protection for the bank AGAINST the US government. Talk about hypocrisy.
Jefferey Rosenberg; BAD FOR AMERICA.
Actually he is an anal-cyst. Rosenberg is very good at what he does- deceives.
The most intriguing chart is figure 3 - POMO Rank order correlation. It clearly shows the law of dimishing returns in action. The more POMO pumped, the less impact on the markets, which indicates to me, just as the insiders are selling like mad dogs, that something, somthing, ain't what it seems to be. Watch out!
Deception.
These masters of deception are committing crimes against this country. I call for a tribunal to prosecute these financial treasonous crimes.
1) Insure your freedom by funding up the BAC-PAC.
2) Short your country future financial condition using fancy credit default products.
3) Destroy your countries financial condition using highly leveraged fancy credit & derivative products.
4) Reap the profits from your treasonous actions.
5) Deny, deny, deny.
Increased inflation expectation... yes my inflation expectations are very high on all the things I need so I won't buy all the things I don't.
From his correlation of POMO size and market moves he concludes the data suggest a small negative relationship. Given how close it is to zero (-0.18), really all it says is size either does not matter or is, in most cases, insufficient to overcome other confounding influences. And that's really a key to exercises such as these: we dont live in a 2-dimensional world and liquidity isnt the only influence on securities' prices. Yes, it's important; but it is not all. But when you're the Fed and your only tool is a hammer...
If Mr R were truly interested in disentangling this relationship, he might look more closely at the 9 outliers where POMO correlated with down moves. Oftentimes, there's a lot more information in the deviants than in the correlates. But that would presuppose he's interested in uncovering facts and not shilling for his bankrupt employer and its handmaiden.
It's amazing how Banksters refer to any theory that may not be "mainstream" as CONSPIRACY. I recently read an interesting article that described how any idea is a THEORY. It is, by definition, unproven and different from existing theories or ideas. The only way for a theory to gain enough attention to become a belief is by gaining support of the mainstream. It shows the ignorance of Rosenberg to label this a CONSPIRACY, when in fact he should just call it a THEORY. Unfortunately, he labels it as CONSPIRACY because it directly opposes his point of view. There's no conspiracy here, just interested market participants searching for truth.
Pathetic. Amazing to believe that investors pay BAC for his biased viewpoint.
It would also be interesting to note the intra day swings on POMO days and non POMO days. They calculate the return of stocks based on the OPEN and CLOSE. Maybe they should look at the movement from the prior day's low to the present day's high. The closing price is painted and doesn't seem to tell the real truth. The issue of return seems to be more of "Is there an opportunity to pick up 20pts on the ES futures during the east coast day time trading session".
“Mr Bernanke’s argument for QE is based on the “portfolio balance” theory which stresses that, when the Fed buys bonds, investors increase their demand for other assets, particularly equities, raising their price and increasing household wealth and spending. Equity prices have already risen by 10 per cent since Mr Bernanke discussed this approach. But how much further will equity prices rise and what will that do to GDP?
Neither theory nor past experience can answer the first question. Much of the share price increase induced by QE may already have occurred based on expectations. An optimistic guess would be another 10 per cent. Since households have about $7,000bn in equities, that would imply a wealth gain of $700bn, raising consumer spending by about one-quarter of one per cent of GDP, a welcome but trivially small effect on incomes and employment.”
Martin Feldstein
http://www.ft.com/cms/s/0/9ba381d0-e6b5-11df-99b3-00144feab49a.html
Correct me if I'm wrong, but if/when the Republican House and conservative Senate/Obama privatize Social Security and send those trillions to Wall Street won't that negate the need for Bernanke to single-handidly prop up "the market"?
Just curious...
POMO! POMO! POMO!
Leo, you seem to have an affinity for bleached blondes.
Not that there's anything wrong with that.
Is the anorexic bleached blonde scarce in Canada?
You could go broke trying to keep that nose packed.
David Rosenberg, Jeffery Rosenberg, Bank of Amerika, Merrill Lynched - They're all basically the same frauds of different names anyways. The point is, this bankster is nothing but a lying Wall Street whore, paid off to spew lies under the Global Banker's "Do ANYTHING to Make Money" mandate.
Did anyone think, he was going to say, "Attention everyone! Yeah, it's true! The POMO operations are pumping the markets up and paying my fat bounses with your tax money!"
Of course not! Why did Bill Clinton put together that little speech "I... did not... have... sexual relations... with that woman... Monica Lewinsky." Because he sure as hell DID HAVE SEXUAL RELATIONS with THAT WOMAN!
"While we may be skeptical of the merits of the POMO Conspiracy Theory, its mere existence is testament to the fact that “Conspiracism” is not limited to the realm of History."
When Your Government CONSTANTLY Engages In Conspiracy Theories -- The People Will Too
Need I remind you of the US Government's long history of pushing conspiracy theories onto the Amerikan Public:
The 1950's:
The 1960's:
The 1970's:
The 1980's:
The 1990's:
The New Century:
Need I go on...
So if your government and "political leaders" constantly engage in conspiracy theories... why wouldn't the Amerikan public pick up on that signal and disbelieve all the disproven conspiracy theories the US government constantly puts forth?
Hmmm?
Damn good. Thanks for the perspective.
One possible addition to your respectable list:
The Bank of America is NOT insolvent.
As the bank conspires with the FED, FASB, and the SEC in an attempt to prove an easily disprovable theory.
the market going up 62.5% of the time does not seem outlandish to me. that's the number, right, 15 of 24 POMO days? and 57% of non-POMO days. so the market has been up 59.6% of all those days.
If they're goosing the market with POMO, they are not getting much bang for their buck. or is it the fact of POMO and what they are doing that causes higher markets on non-POMO days as well?
What has been the ratio of up to down days in the market over the long run? Anyone?
Or any other possible explanation either, implying (I guess) that it must be the most incredible series of coincidences in the history of the universe, including the ones that led to the big bang itself.
Only Wall Street can produce this brand of conveniently arrogant thinking.
I want to Highlight one item by showing the effect of the change/Drop in the USD Index.I'm showing the dates and prices below and using June 7th as my baseline. June 7 is where the USD topped and began to drop [again]. I just thought it worthwhile to show how near unchanged the DOW, S&P 500 is once this is factored-in. I used the benchmark S&P500 here
Jun 07, 2010 = 1050.47 <<<S&P500, USD 88.7
Sep 30, 2010 = 1141.20 <<<S&p500, USD 78.8 [ 11% cheaper dollar ], End of QTR, Q3, factoring-in 11% as a Gain, since the Units/USD are cheaper, should have reslted in an 1166 S&P500 to be Unchanged from June 7
Nov 02, 2010 = 1193.57 <<<S&P500, USD 76.6 [14% cheaper dollar ]
=======================================
Increase of 14% from the Drop in the USD Index from the June 7th 88.7 USD to today's 76.6 applied to the S&P-500 June 7th Close of 1050.47 = 1197.53---so while we see a Numerical Gain its based on a weaker dollar
We have all cheap uggs for sale in our website http://www.salesuggs.org ! You can meet all your needs for UGG hot sale here and will certainly be satisfied with the top quality at low price. All UGGs on sale are made with the 100% genuine sheepskin from Australia and are hand-made in our own factory completely. So you need no to worry about the quality and the cheap UGGs for sale are all to be delivered in free shipping. Enjoy the large discount!
1.
UGG Amberlee
|UGG Kensington
|UGG Elsey
|UGG Langley
|UGG Roxy Short
|UGG Roseberry
|UGG Oliviya
|UGG Raya
UGG Brookfield Short
Welcome to our website-- http://www.ugghots.com , we are making the promotion for many uggs now.Here is a chance for you that you want to buy good ugg classic boots by cheap price.At present our hot sale snow boots has :
| UGG Delaine Boots
| UGG Gaviota Boots
| UGG Gissella Boots
| UGG Evera Shoes
| UGG Upside Boots
I love zerohedge policy. cheap hosting | windows vps