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Guest Post: Are Repos Signaling A Buy Or A Sell Opportunity?
Submitted by Yves Lamoureux, Investment Advisor, Macquarie Private Wealth
Are repos signaling a buy or a sell opportunity ?
The study of repurchase agreements (or repos) gives us a recent insight into the big players’ view.
The theory behind repurchase agreements is that large banks use them to buy and sell stocks. A repo is, by definition, a contract giving the seller of a security the right to buy that security back after a stated period of time, at a stated price. The buyer in turn keeps the interest.
Repurchase agreements are an important tool of the Federal Reserve that allows them short-term control of money. In the face of this market correction, is there going to be an encore of purchasing agreements that leads to a probable rebound?
We have already demonstrated the Federal Reserve’s use of this tool before on a smaller scale and we present today the larger cumulative view as well.
Up until about early 2008, the correlation had moved up to 0.86 or 0.75 squared. It broke down after that period. This is one reason that we will show the larger, updated version today.
I feel that the ascending rate of cumulative repos is simply unsustainable.
I have been a good observer of this over time. I recognize the typical activity that is always a precursor. The market usually corroborates the buying or selling at turning point. This is no surprise with a 0.86 correlation coefficient.
The heavy lifting done by key players did little to prevent a massive drop from happening.
One would always prefer to be on the same side of the trade.
Selling is the predominant force now. It does not give great confidence in trying to establish positions.
Those repos will equally need to be unwound if players were to change their minds and decide not to support the market at key points. It is a rather large problem. This would, therefore, negate the buying opportunity that lower prices can afford.
I still believe that a sudden buying bonanza is just around the corner and there are many buyers waiting for it with patience and, most importantly, large reserves of cash.
The opinions contained in this report are those of the author and are not necessarily those of Macquarie Private Wealth Inc (MPW). Every effort has been made to ensure that the contents of this document have been compiled or derived from sources believed to be reliable and contains information and opinions which are accurate and complete. However, neither the author nor MPW makes any representation or warranty, expressed or implied, in respect thereof, or takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. No entity within the Macquarie Group of companies is registered as a bank or an authorized foreign bank in Canada under the Bank Act, S.C. 1991, c. 46 and no entity within the Macquarie Group of companies is regulated in Canada as a financial institution, bank holding company or an insurance holding company. Macquarie Bank Limited ABN 46 008 583 542 (MBL) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. MBL is not authorised to conduct business in Canada. No entity within the Macquarie Group of companies other than MBL is an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia), and their obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of any other Macquarie Group company. Macquarie Private Wealth Inc is a member of CIPF and IIROC.
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"there are many buyers waiting for it with patience and, most importantly, large reserves of cash."
But if those buyers buy, then sellers now will have large reserves of cash and will be ready to buy. So, regardless of who buys and sells, and what the level of the market is, we always have people with large reserves of cash.
Does it mean that the market should go up to infiniti?
yes.
Giving folks benefits now whilst promising them still more benefits in the future even when though mathematically and logically those foreshadowed distributions are in fact impossible to pay must rely on the naivete of investors and the charisma of the schemer to persuade the gentle masses to reinvest their winnings.
nice infomercial, nice try.
no thanks !
I find this line of reasoning to be operationally very questionable. A repo with the Fed is an overnight loan of collateral for FED cash which generally will reside on the repo desk's balance sheet at the dealer. Any left over cash from the operation would find its way to fund other illiquid securities at the dealers shop like loans, mortgages or some other crap they would have to pay Libor + for. To conclude that the dealer is goin out and buyin a bunch of AMZN, AAPL and GOOG is a tad aggressive even for GS.
It would be correct to conclude that easing funding demands for the dealer might free up other working capital, but on a overnight basis only generally.
On the correlation thingy, well a butterfly in Africa....
Frankly,and for a long time now,the only market mover force was the Eur/Jpy carry trade. I don't think anybody else beside some currency/spx computer's model diven are buying this market anymore...
The Federal Reserve is a Den of Thieves. Filthy Fucking Thieves. If you fell you must participate in their scams I would keep one hand on my wallet and the other on my keys. Make sure you know where the door's at.
I'm not sure I follow. She seemed to be painting a picture of bearishness with the statement that repos cannot continue their exponential climb, then she turns around and says there will be a sudden buying bonanza???
When folks finally see that they can’t just get someone else to pay for all this, there will likely be a huge tax rebellion
which will cause more short term problems, but may in the long term (hopefully) have the effect of getting the government to manage our money better. In the meantime, let’s hope we don’t have too many large national disasters, military conflicts, pandemics or the like to deal with. This country is in a lot of trouble and we need to start thinking like Americans instead of Republicans or Democrats if we’re going to get through this mess……
Meanwhile experts say the market will crash sometime this year..
Fasten your seatbelts...
Housing values need to drop a lot more if a speculative buyer thinks he can have renters pay his mortgage. This will be a renters market. Or are there millions of "flippers" and they are going to flip the houses to each other for small profits?Good luck with that circle jerk.
Ladies and gentlemen Id like to direct you to this Zero Hedge post from January
http://www.zerohedge.com/article/bottom-home-prices-decade-away
I cant believe some of these posts that sound like realtors talking.Housing isn't even considered an investment grade asset anymore. They are still going down in value.
For those that didn't lose their shirt in this recession go buy houses there's plenty of time left to lose loads of money.
Remember that sideways is a direction that can continue for 10 years or more in that market.
This makes absolutely no sense.
Even the definition of repo is wrong. The seller doesn't "have the right" to buy it back, the seller MUST buy the security back.
Repo's are simply a short term financing and cash management tool.
As for the corelation? Spurious would be an overstatment.
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