Goldman Advises Clients To Front Run The Fed Via POMO

Tyler Durden's picture

After a few months of breaking down what the simplest trade in the world is, that would be frontrunning the Fed for the cheap seats, Zero Hedge is happy to advise our readers that finally Goldman Sachs itself has capitulated and is now indirectly telling its clients to frontrun Ben Bernanke via POMO. No complicated value investor nonsense, no pair trades, no cap structure arbitrage, no hedging, no levered beta plays. Buy ahead of POMO. Sell. Rinse. Repeat.

From a GS distribution to clients:

On the interplay between the FED and STOCKS: Since Sept 1 – when QE was becoming a mainstream focus – if you only owned S&P on days when the Fed conducted Open Market Operations (in US Treasuries), your cumulative return is over 11%.  in addition, 6 of the 7 times when S&P rallied 1% or more, OMO was conducted that day. this compares to a YTD return of 5.8%.  the point: you would have outperformed the market 2x by being long on just the 16 days when – this is the important part – you knew in advance that OMO was to be conducted. The market's performance on the 19 non-OMO days: +70bps.

And there you have it - the top in frontrunning the Federal Reserve is now in.

The most recent Fed POMO calendar is linked (there is one tomorrow). Frontrun away.

Oh, and Ben, your criminal organization will one day pay for making a complete manipulated travesty out of capital markets.

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TheGreatPonzi's picture

This is disgusting. The FED and Golman marching hand in hand, as always.

kato's picture

don't balme it on Goldman. they are just stating the obvious for people like you who are stupid to otherwise see it for yourselves.

TheGreatPonzi's picture

Go fuck yourself, stupid douchebag

Chemba's picture

what an insightful comment.  consistent with an ignorant populist trailer dweller

goldmiddelfinger's picture

What's your problem with trailers?

StychoKiller's picture

What's everyone's problem with douchebags?  They serve a useful purpose.  Call these jokers "tits on a boar", the point is more obvious that way.

rocker's picture

What's insightful. Maybe the fact that this should put somebody in JAIL from Godman Shafts.

A crime worse than Insider Trading.  Called "Collusion."  Who Signs Off Quarterly. Lord Blankfein ???

the rookie cynic's picture

Add racketeering, fraud, and treason.

outernational's picture

my experience doing the opposite of what GS recommends has done me very well in the last 3 years...


EscapeKey's picture

Right, so that means this avenue is officially tapped.

What will the Fed resort to now - emergency, unannounced POMOps?

dlmaniac's picture

All signs continue to point to a modern day rotten Rome empire collapse.

espirit's picture

Don't forget we have the reverse repo's, which are not on Pomo days, are they?

Need a schedule for the RR days, a strategy for when they occur on the same day (don't laugh yet), and a way to play the inverse (GS strategy).

OK, laugh-or-cry.

rocker's picture

I like the way you think.

Ras Bongo's picture

Now that GS has called the top, primary dealers will use FED cash to short the market from now. That is what will happen!

Rodent Freikorps's picture

THE AGONIST - Business Suits and Combat Boots (OFFICIAL VIDEO)


goldmiddelfinger's picture

It just fuckin pisses me off.

THE DORK OF CORK's picture

Fred Zwicky would describe these guys as "Spherical Bastards" as they are bastards any which way you look at them.

Although they use the hyperbolic trajectory of compound interest to completly fuck with decent people who believe in honouring their contracts.

If debt could describe a spherical trajectory not unlike their morals we would have little problem with these lowlifes.




obamaphobe's picture

time to fade the pomo...

Gen X Gen Y Hybrid's picture

Sweet. So a crash is finally coming now.

Sam Clemons's picture

Yep, once everyone knows what is happening, its no longer useful.  Gold-bugs suspected for years that the Fed would be forced to monetize debt.  Which is why I think everything has reached a near-term top.

Orly's picture

The effects of POMO are like a narcotic drug.  The more you take, the less they work, so you take more until it doesn't work at all.

The effects of Swiss currency intervention are similar.  The Japanese, the same.  They have earned their lessons (but the Japanese will "intervene" nonetheless on 15 November, 2010, at 0130 ET...).

Mayhaps Goldman knows such stuff and is actually setting their clients up with their "fix" but the effects get less and less each time, with the "bummer" buzz lasting longer and longer.  Now Goldman says to take the POMO pill?  Awful suspicious.

It wouldn't surprise me if the next ramp off the POMO lasts for fifteen minutes, only to have the markets tank thereafter.

This is just more sucker bait.  Don't bite.



P.S.  Speaking of Goldman, get long EURCHF after the end of next week.  You'll be glad you did.

goldmiddelfinger's picture

While ya can blast 20 blunts don't down 20 martinis!

f16hoser's picture

I agree! I've been out of the S&P for months. When I see 8000 Dow and 800 S&P I'll get back in. Too many variables going on right now sprinkled with midterm elections. If Democrats do as bad as everyone thinks, our lame duck Congress/President will do horrible things by years end and markets don't like that. Buy Gold/Silver bullion/ETF's and ride this one out. JMO



rosiescenario's picture

...when one is "doing God's work" then normal, socially accepted mores no longer need apply. Yes, bait is the right description.

AccreditedEYE's picture

Orly! Are you buying UNG into this weakness? (or UNL)

Orly's picture

Buy and hold UNG until the cows come home.  This is a twenty-five year, dare I say, "investment."

ThisIsBob's picture

What everybody knows apparently is worth knowing.

Boston Wealth's picture

The most lucrative POMO type is tomorrow...

The most impact seemed to be with Coupon Purchases (listed as "Outright Treasury Coupon Purchase" on the Fed's website). And the most positive of all were large Coupon Purchases – if the operation was greater than $3.5 billion on those days, a month later, the S&P 500 was positive 89% of the time (33 out of 37 days) with a median return of +3.4%.

rocker's picture

Thank You Very Much. Advantage to ZH followers.

naufalsanaullah's picture

one minute GS is "screwing over" its clients, the next you're quoting Hatzius's "second-half slowdown" as gospel.

so which is it?

i'd advise against fading the pomo move. everyone and their mother (including bill gross's) knows 10yr yields at 2.5% makes zero sense. but front-running synthetic, albeit temporary, demand from the fed is a good trade. as long as you're the one dumping the bonds to the fed when they buy.

same way, get long risk ahead of pomo and sell into close tomorrow. the market hasn't discounted pomo buying because the fed will always increase liquidity from the point at which it is at at the time.

Tyler Durden's picture

Hatzius certainly deserves credit for being the first on all of Wall Street to switch his view when it was merited (if 18 months overdue). Just as Goldman deserves credit for top ticking the EUR and Gold with Patek Phillipe precision.

And you are absolutely right, there are always greater fools who will do the easiest thing and trade alongside the Fed, as they are too lazy to do their own homework on how to properly hedge for the moment when the Fed and the great unwashed masses no longer are the marginal force.

You are also totally right that the 10 yr is a joke at 2.5%. When the Fed buys every single bond outstanding in one year the 10 yr will be trading at the discount rate.

As to your last point that the market's stupidity discounting mechanism is broken - you are spot on. However, if you are saying there is no diminishing return on infinite liquidity (and thus debt), we will take the other side any day. So will gold.


goldmiddelfinger's picture

"When the Fed buys every single bond outstanding in one year the 10 yr will be trading at the discount rate. "


And the Fed will be the only bid

naufalsanaullah's picture

top-ticking gold? we'll see if gold isn't above 1650/oz on oct 12, 2011. my guess is it definitely will be.

gs, like every other bank, probably pulls a bit of shenanigans regarding clients in the timing of their calls, but not by top-ticking markets they call long, but rather advising long-term buys at short-term overbought highs.

the fx team has been absolutely wrong about euro, but their repeatedly highest conviction call was to stay long audcad after pushing the buy in aug if i remember, 700 pips ago.

my point is, there's no screw-the-client universality present in the data.

and the greater-fools problem doesn't apply to pomo-driven risk-on because it is a matter of time arbitrage. the fed can be your greater fool (in the context of bonds) and you know exactly WHEN it will be buying. in regards to risk assets, again the timing is already given to you via the fed's pomo schedule.

we'll see if the 10yr gets below 2% anytime soon. by the time the fed is buying every bond outstanding, like you say, it will no longer be the marginal force. post-qe discounting, yields are going to rise. you're the one who pointed out the abysmal 30yr auction the other day. steepener trade is back on in the back-end (eg 10s30s) and it's going to spend the next few years creeping down the curve.

Tyler Durden's picture

They certainly top-ticked gold in the time frame 95% of "investors" trade these days which is 168 hours at most.

The 10s30s is only so steep as to provoke the Fed to start buying the long-end. The same way the USDJPY is at record lows to incite the BOJ into action again and again. There are only $500 billion in 10 year plus bonds available. Unless the Fed wants a complete catastrophe and have an average duration of 2 years it will have to buy the available bonds soon (post SOMA adjustment).

As for the Fed's time arbitrage, this is precisely what the Fed, and even the banks, are trying to avoid: being seen as an object of frontrunning. Which is why unless they shock everyone, and kill the market on November 3 by not announcing QE2, the Fed effectively signs its own suicide release form.

The whole point here is that the Fed needs to show it no longer can be front run by something as simplistic as a financial blog or even a Goldman Sachs letter to clients. Unless it can pull it off it has lost all credibility.

As for Goldman's top 9 trades of 2010... take you time and get back to me on how many of them are currently profitable.

naufalsanaullah's picture

regardless of the prevailing timeframe of choice for investors these days, the timeframe for the gold thesis presented by gs was 12mo.

regarding long bonds, fed's marginal impact is quickly decreasing. buying further up the yield curve brings issues of sovereign creditworthiness that, although probably won't cause any apocalyptic rises in long yields due to tsy liquidations (i'd like to see china/japan pull off a run on ust's without committing economic suicide well before any effects manifest), will have a very damaging impact politically regarding deficit spending, especially in this new wave of austerity demands.

qe was to recapitalize banking system. inflation, GDP growth, etc will all come once IOER is lowered (which won't occur until bernanke/geithner are "satisfied" with bank capitalization levels). you can't push on a string but you can turn that string into a steel rod overnight by eliminating the risk-free basis, causing velocity to accelerate.

i agree the fed needs to pull a rabbit out of its hat soon, but i doubt it will come in the form of not announcing qe2. first of all, from the fed's eyes, what is so bad about bringing the entire market to go lower the treasury's cost of borrowing and increase american corporations' market capitalizations? more importantly, the shock & awe is to address confidence crises, which is not the issue at hand. the issue is the lack of effect of monetary policy on the real economy, as deflation risk reigns supreme and unemployment is going nowhere. unemployment can tick up in the near-term via more spending (which i'm opposed to and question the sustainability of any labor increases resulting) but the fed is signing its own suicide form if it goes long bonds then. as such, the rabbit under shalom bernanke's yarmulke will likely come in the form of finally addressing the money velocity issue by eliminating IOER before shrinking the fed's balance sheet, effectively turning hundreds of billions of digital reserves into currency in circulation overnight. that sets up rate hike potentials as well eventually. it's all inflationary, but it'll be better than the rest of the world, due to the fact that the fed is merely abusing reserve currency privileges that other CBs unfortunately cannot.

gs's top trades of 2010, long gold call, and fx calls are all from different desks and teams. john noyce was pretty much spot-on on his short euro and long bond calls over the summer and then again with his long euro call later in the summer. not saying gs is worth listening to or frontrunning (in fact i'd typically take the other side of their trade), just saying again that it's not as simple as you make it out to be.

RecklessMonkeys's picture


The whole point here is that the Fed needs to show it no longer can be front run by something as simplistic as a financial blog or even a Goldman Sachs

Perhaps the Fed wants to be front run. Why else would they publish the purchase dates?

The front runners may well be doing all the heavy lifting while the PD's keep cash in reserve as plunge protection. The mere perception that a market can't fall is enough for it to rise.


Problem will be when the selloffs get more dramatic. Maybe GS have figured out that QE 2 will only be QE Lite++. That is, a short term disappointment. Even so, that's a great time to cover your short gold positions.


There simply has to be QE coming. I suspect it will take the form of multiple ongoing announcements - QE(N) - of a lazy half a Trillion, rather than bazooka fire.

What better way to boil a frog?


And will each purchase date still be published?

Furthermore - are GS now simply looking to accentuate the POMO effect?


Are the Fed and Co creating a reality out of perception?


Is Zero Hedge being gamed by the Fed?


naufalsanaullah's picture

ps don't get me wrong, i'm not a prototypical perpetual bond bear myopically focused solely on debt/GDP ratios. i was pushing long bond theses this past spring and early summer in fact.

additionally, i'm no delusionary regarding wall street shenanigans. my point isn't to defend gs so much as to question whether the sensationalism is really warranted. the zero hedge basement army seems to love it though, and i guess it's a fresh break from the other side of the fence.

Tyler Durden's picture

The sensationalism as you call it is there to force people to think, and hopefully realize that ths market is nothing like what capital markets were before the Fed become the dominant force in every asset class. But that is to be expected when the alternative is a global reset.

You are more than welcome to trade alongside Goldman. Just don't go crying to them hoping they will execute your order when you most need them to.

FOC 1183's picture

I had been in the business all of 3 days in the late 80's as a market maker on the curb (AMEX) in DEC (Digital Equipment). 'Bobby' the Goldman broker walks into the crowd willing to pay a half above theoretical for 300 jan 60 puts.  'Sold' I say, wondering why no one else in the crowd would want to do it.  The stock was halted before we finished writing the tickets (no chance to call my FOC broker on the NYSE for a short to get me delta neutral).  They announced a huge EPS miss and the stock opened $16 lower.

I've had a great (read fortunate) career generating positive returns in19/20 years in zero-sum markets.  It's not sour grapes when I say that Goldman is only successful by trading on inside info and flat out breaking the rules.  They have intelligent analysts, but the firm itself is constantly trading against them, as well as their own clients.  Everyone who has been on the floor or in the business long enough knows it.

John Lohman

PS Tyler: you're right - "it is all a lie at the end of the day".  Now if I can only pass that fucking captcha

naufalsanaullah's picture

inside info in the 80s.

using flow data to complement their own trading ideas now.

the shenanigans may be subtler, but yes they do still exist.

FOC 1183's picture

Of course it's different now.  We're all 'upstairs' and trading screens as we have been for 15 years.  But the point is that they're trading against their own CLIENTS by using their own CLIENT'S order flow (as Kevin Byrne says "same as it ever was").

Repeat: great analysis to the clients (which is already factored into the market by Tudor and Soros) but trade our own capital purely on front-running client order flow and inside info.  The only reason I'm posting is that Tyler is dead right: when Goldman puts this out to clients, the fix is in.  we can all begin to short POMO days. I hate putting stuff like this in print (because the market will always prove you worng), but at least I don't have to pass another captcha

Nihilarian's picture

when Goldman puts this out to clients, the fix is in.  we can all begin to short POMO days.


naufalsanaullah's picture

the sensationalism doesn't force people to think, it gives the sheep a wool blanket under which to hide.

like it or not, much of your audience is a demographic that comes to zh for reinforcement of their preexisting conceptions, not to come to new realizations (which is what zh helped me do, incidentally-- for which i'm grateful). this isn't your fault obviously (the merits of opening ZH up to more of a message board/forum commenter format is another argument for another day) but let's not be disingenuous here.

you won't catch me dead trading alongside goldman or using them to execute orders, but i'll bet you (regardless of your disclaimers) more than a few ZH readers are using your content to feed their own self-delusions that their FAZ holdings will eventually pay off big.

Tyler Durden's picture

W/r/t FAZ, there were those who thought that €1000 OTM calls in VOW GR were delusional. They were proven wrong. That bandwagon was nothing compared to the liquidity bandwagon created by the Fed. Furthermore, you forgot to add that Zero Hedge does not have the world's biggest FICC+Equity flow (and prop although now the PC term is client facing) trading desk in the world. As such, we collect exactly 0% commission on every trade (matched or otherwise), and are happy to share our unaxed views on pretty much anything. Unlike GS, whose opinion is merely to rile up the better bid (or, rarely, offer) and to use the broker of choice to transact (we are confident there is a FAZ 3 bullet pitch at 200 West). Which brings us to your demographic question - whose composition, to my surprise, would surprise you. It always eludes people that for every commentator there are 100-200 (half of which are institutional) readers who read in silence. As for your GS comment: that is also surprising - they do have the best bid/offers in the business. But of course the give up is a little bit of frontrunning (assuming you are big enough... or not, as long as you have a retirement account).

And to your previous comment, we are always in awe by people who can time market inflection points, since we can not. Especially those of the variety when the majority realizes that there is a $3.5-4 trillion (yes, that part of the QE1, Lite, and 2 has been priced in) bid by Ben Bernanke that supports risk. And at last check that was just about 30% of the total market cap.