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Upcoming Liquidity Pump Calendar
The most recent weapon in the Fed's arsenal to pump liquidity into the market, which has for weeks now been groaning higher on liquidity fumes and on algorithmic speculation, is presented in the calendar below. Market bears would be well advised to familiarize themselves with it, because if history is any indication, these are the days when Primary Dealers will go berserk, funneling generous Fed liquidity from one asset class (70 Days CMB T-Bills) into another (equities).
What is the reason for our alarm?
As readers will recall, several days ago the Treasury announced it would wind down its Supplemental Financing Program from $200 billion to a nominal $15 billion. Some have interpreted this as a means to maintain the total Federal debt under the "default" threshold until the Federal Debt ceiling is increased from $12.1 trillion to $13 trillion. The Treasury's presented reason: "This action is being taken to preserve flexibility in the conduct of debt management policy" which, the running joke among market specialists goes, is a euphemism for gunning the equity market into suborbital space. After all - as President Obama and his administration have repeatedly demonstrated, the only apparent metric by which they judge their performance, now that the President's ratings have taken a sharp leg down, is the relative performance of the Dow Jones (alas, nobody in the administration seems to have heard of the S&P yet).
So what does the Treasury's action mean practically? In a nutshell, each and every week, for six weeks in a row, either $30 or $35 billion of 70-Day Cash Management Bills will be allowed to mature without a requirement for the Primary Dealers to roll these securities. 70 Day CMBs, or special dispensation Treasuries, all with a 70 Day maturity, are the securities that make up the Supplemental Financing Program which, as noted earlier, is now in the process of being unwound. Readers can find the CUSIPs, maturities, and all other data on the following TreasuryDirect page (select CMB for Term when performing the search). And while there is a total of $200 billion that will mature in 6 weekly intervals, with the proceeds returned to the bidders, there is approximately $114 billion in these securities held by Primary Dealers, which, due to the lack of the roll, will now be freely available to the PBs to dispose as they see fit. Think of this as the funny money which keeps pushing the market ever higher either through direct purchases of equities or by allocating more capital to other, traditional T-Bills, keeping appropriate rates at record lows and perpetuating the dollar carry trade.
Now due to the dramatic difference in capital leverage between the Fed and Primary Dealers (i.e., banks), the leverage applied to this newly freed capital can easily hit 30-40x, in essence granting PBs up to $5 trillion in purchasing power to lift all offers in whatever the bankrupt stock de jour is. Granted, that would likely never occur, as Primary Dealers all play by the book, and would never abuse capital reallocation for such nefarious purposes as killing whatever shorts the market may have remaining, which in turn are much more liberal at pursuing any and all offers without regard for getting a good price (10-30 minute rallies into the close of day come to mind), than traditional long-term investors who keep seeing unprecedented market moves at specific time intervals, and can not understand how someone will keep chasing offers for the sake of merely transacting with no regard for where the prints actually occurs.
Thus, even with Treasury QE coming to a close, the wily Chairman is keeping all the aces hidden up his sleeve, in case the market needs a little old-natured propping, especially with the President in rally mode to generate any and all support for floundering healthcare reform. The last thing one would want is to have reform opponents be able to use a down market day as justification to discredit his attempts at running a Planned economy.
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http://baselinescenario.com/2009/09/17/why-didnt-the-major-bank-ceos-sho...
http://www.whitehouse.gov/the_press_office/Expected-attendees-at-the-Pre...
That article does indeed have an interesting point that I did not notice earlier; but would it not make sense that the CEOs in question were all absent b/c they were being briefed in a secret meeting on the content's of Tyler's article instead by Tim/Ben instead?
The reason the CEO's weren't seen out front was because they were busy in the back signing checks for Friends of Barack Democratic campaign coffers.
Gotta know where your bread is buttered when ole 'B'ody 'O'dor crashes the market and declares martial law.
let's wait for Q3 earnings, shall we
http://www.businessinsider.com/john-carney-is-wells-fargo-making-aigs-su...
Wow. Does October really have 6 Thursdays?
No, the first pink square is Sept 24th. That sure would be something though wouldn't it?
There is a bit of a flaw in your analysis.
You state that the bills will mature without the requirement that the primary dealers will roll those bills at maturity.
You then posit that the primary dealers will use those funds to gun the equity market.
That is a nice fairy tale but makes no sense.
First of all it is quite unlikely that the primary dealer community would hold that bill for 70 days. They own the bill at a yield of 0.185 basis points.
For the sake of simplicity let us assume that they are able to finance them at percent. They make 18.5 basis point per day on their holding.
That would not be an efficient use of scarce capital in an era when balance sheet space is scarce.
In an environment in which the FOMC has promised cheap financing for an extended period, balance sheet would be allocated to buying the 2 year note (or some other instrument with a longer maturity) when it sags some place north of 1.00 percent. There is at least a little juice in that trade.
Foreign central banks and money funds buy piles of bills. I would bet my money that the bills were quickly distributed to those investors.
Separately, a dealer is not going to hold a security for 70 days.
Furthermore, in the auction of the bill which matures this week the primary dealers took just $ 24.3 billion so even if your far out assumption is correct, then the amount of leverage employed would drop rather quickly from the fanciful number which you cite.
Primary dealers are traders and as a general rule it is anathema to hold a liquid for the 70 days which the post suggests.
http://www.treasurydirect.gov/instit/annceresult/press/preanre/2009/R_20...
I would just venture a question without debating the point of your comment -- so who IS it that happens to hold these bills on the maturity date? Even if consantly traded, SOMEONE owns it on the 70th day, no?
Also, we only have to wait 5-6 days to find out one way or the other...
How does you argument for efficient PD "traders" stand when you consider the sale of newly auctioned off treasuries, back to the Fed via POMOs 5 days post auction, at a loss?
I do not understand your comment.
You assume that every bond sold to the Fed was a sale of a long position. Maybe some traders were setting short positions.You do not know nor do I .
Many dealers run large arbitrage books which are duration neutral. Many dealers leg out of trades via the Fed.
And I thought I recall reading a post here several weeks ago which offered the theory that the Fed and the Treasury were involved in a nefarious conspiracy which protected dealers against loss.
The "nefarious conspiracy" was indeed suggested. And thank you for pointing out that neither you nor I, nor anyone, really knows what primary dealers do.
Then why would you suggest a conspiracy , a club or a cabal?
i suggest you reread the original post
The Federal Reserve announced last November that it would begin to inject liquidity into the system via purchases of MBS and direct obligations of FNMA and Freddie Mac.
I believe they began that exercise in January and then added Treasury securities to the mix in March.
With all that high powered money sloshing around the system between january and early march, why did stock prices crater in that period?
because the idea of backstopping banks losses using taxpayers pockets became the reality in March. so the risks in financial system were diminished in exchange for the whoring of the USD.
ps. JJJ is that you?
"ps. JJJ is that you?"
Was wondering the EXACT same thing!
I say yes. same writing style, same typing errors.
Doesn't this imply a shrinking of the feds balance sheet? As the supp financing program is wound down the fed will most likely let certain liqudity programs wind down/shrink to offset on the asset side of the balance sheet.
But they aren't holding it that long. They buy the treasuries at auction, turn it over to the FR as collateral; the FR would accept that collateral at 100% since it's AAA govt paper and lend to them at the discount window the entire value of the note. Additionally every position must be a long position because the Govt is the short seller in the situation, and the discount windows/overnight windows serve as a hedging function against other positions on books should you want to obtain cash instead of hold the note. Of course you can also game the coupon price but it doesn't seem like that would make much sense as long as equities are rising does it? It would be better to buy the note, use it as collateral, get cash and hold your positions/add to them in a rising market.
I think they won't really be able to gun the market much higher and will instead use the cash to cover losses that are building up one default at a time. I also think the run up in asset prices is going to be met with much covering once unwinding begins.
It would be better to buy the note, use it as collateral, get cash and hold your positions/add to them in a rising market.
That is what you wrote.
I suppose that you are suggesting that the dealers buys the security and then uses it as collateral to borrow from the Federal Reserve and then spends that cash in the equity market.
I hope I got that right.
I think that you are spending the same money twice.
A dealer bids in the auction and buys $ 1billion of any security. For the purpose of this discussion the type of security is not relevant.
The dealer must pay for the security. If I pursue your scenario and have the dealer visit the discount window for that and the dealer obtains the requisite $ 1billion and spends that cash buy Spiders, how does the dealer then pay for the securities.
We still need to plug that hole. How do we do that?
Let the taxpayer plug the hole.
Afterall the taxpayer has had his hole plugged for the duration and will continue to do so.
easy, you go to the Discount Window before the auction and use some toxic stuff, which you have in inexplicably huge amounts on your books, as a collateral virtually at par value since M2M is a relic and there's no way to look into FED's books currently.
taking into consideration that you're one of PD's of course.
it's not at all like spending the money same money twice, first you're guaranteed the UST+interest; so you can deposit it at the FR, and get interest paid on collateral + have cash in hand. The cash can be used to boost capital ratios, enhance existing positions, etc.
Why play the game this way? Well if you're a bank and you don't 'help to keep rates low' and the interest rates get too high you run a higher risk of having your liabilities default on you (this can wipe out all capital very quickly). Other banks/bank holding co's could see you as bucking the trend and try to take you down (request payment a-la AIG) or bring unnecessary scrutiny from federal officials. Thirdly, a failed or weak bond auction wouldn't help anyones' assets. Fourth, as mentioned above is the free money being doled out for playing the game, a bank can't pay themselves interest on their own cash they have to look elsewhere and what else is safer than US govt paper?
It's not a zero sum spend the same money twice gambit or you are right it would be pointless; the interest paid to the owner while retaining the ability to use it as collateral without holding is proof of that.
Oh and for the example, lets assume I'm ABC Bank Holding co. within the US. The market is terrible and I've got the balance sheet to prove it, I know that the gov't is providing all the financial support for me and without it I would go under. Now the gov't needs financing (~12T) so they have bond auctions, the money is directly supporting and backstopping my portfolio of failed assets. I can buy the bonds, then use them at the discount windows to get my cash back to support my existing postions or not do that and allow the auctions to fail the backstops to fall out and my bank to slip away into the abyss.
Banks still have plenty of money, we gave it to them via TARP, TALF, PPIP, Milfs (j/k) etc. regular deposits, penalties. There isn't a bank in the world that doesn't have money, the issue is asset liquidity based on the solvency of one's liabilities. If my lending has been sound and I continue to be paid on time all the time with zero defaults this is no big deal.. nothing more than a rough patch and I don't need to sell assets into an illiquid market. If I have non performing assets and need to sell performing assets to cover or make up for my non performing (assuming there are no buyers for junk) illiquid marketplaces can be mean places to do business. The FR is working to provide as much liquidity as possible to counter forced asset sales into a cash weak marketplace; despite what most will have you believe MM accounts, savings accounts, and plenty of investors (GS aside) have stayed of this recent uptick in asset prices.
"Banks still have plenty of money"
The only reason for that is the taxpayer (and future taxpayers)
Get it?
Like everything...it works till' it don't
At the rate we're going the future taxpayer won't have any money. At that point we are Russia when they defaulted (and brought down LTMC)
....Say it can't happen :)
"I think they won't really be able to gun the market much higher and will instead use the cash to cover losses that are building up one default at a time. I also think the run up in asset prices is going to be met with much covering once unwinding begins."
This would explain a lot for me since I am contemplating how they will maintain an orderly sell-off. It may not be rocket fuel for further equity lift off, it may be a sponge to absorb forward selling pressure.
That is a nice fairy tale but makes no sense.
First of all it is quite unlikely that the primary dealer community would hold that bill for 70 days. They own the bill at a yield of 0.185 basis points.
For the sake of simplicity let us assume that they are able to finance them at percent. They make 18.5 basis point per day on their holding.
That would not be an efficient use of scarce capital in an era when balance sheet space is scarce.
Really? Capital is scarce? Thanks for that. But exactly hoe is capital scarce for the PD's when Mark to Market has been suspended indefinitely? WFC is flat out insolvent yet, the CEO says things are going great? Who is the largest holder of mortgages in CA both commercial and residential? And isn't CA bankrupt?
My point is that you assume that there is some rational way to discern what the PDs are doing. There is not. You, nor anyone else outside of a select few can possibly explain the labyrinth that is JPM. Their OTC book is so large and so scary, that no one ever dares mention it in the press. Instead, we focus on Jamie Dimon, while ignoring the almost 100 trillion in notional value on the books. Now, I know, net of swaps and blah, blah, blah it is far less. Nonetheless, to assume that there is any rationale to explain motivation for efficient use of capital is bogus.
These guys are all flying by the seat of their pants and the only thing holding it up is the courts that are bought and paid for.
If Lewis goes down, precedent is set and the SEC is screwed, and by extension so is the cozy relationship of the SEC, FED and the PDs.
What if the market just keeps going up forever - that would be cool, no? Like a balloon that never seems to pop - up up up and away.
That would be cool.
Zimbabwe is cool too.
BTW - I thought Rhodesia was a way better name.
One wonders what Obama & Co will not do to win a second term?
The mid term games begin in earnest.
President Obama has sent a request to Gov. David A. Paterson that he withdraw from the New York governor’s race, fearing that Mr. Paterson cannot recover from his dismal political standing.....
http://www.nytimes.com/2009/09/20/nyregion/20paterson.html?_r=1&hp
All work and no play makes Jack a dull boy
Benjamin Franklin
I have a closing this coming week. 5k commission.
Please god, lets let the shit hit the fan the day after.
"One wonders what Obama & Co will not do to win a second term?"
Really! With the absence of ACORN registering Mickey Mouse and such, Obama will surely need some additional assistance seeing as the Disney cartoons will most likely be sitting out next election.
>> One wonders what Obama & Co will not do to win a second term?
How about starting another war in the middle east under the guise of "protecting our freedom"?
Let's check with Jimma, cause it looks to me like the white half of Obama must surely be racist if he is asking a black govenor to withdraw rather than simply gen up some ballot stuffing get him elected, no?
your pal Rosie says (as recently as Fri) that "liquidity" is just another way of saying "I really have no idea". yeah, that fits here.
Perhaps another stock market crash rather than a rally would create the proper impetus for the passage of health care and financial "reform". Aren't more unemployed people along with falling assets values more likely to motivate people to support universal health coverage, sponsored by the government, not to mention financial reform?
After all one should never let a good crisis go to waste to do things one otherwise wouldn't be able to shove down peoples' throats.
This is all going to end so very badly.
The new server farm needs lots of green to run the momo-junker algos, Kamikaze Ben supplies cash to the hungry processors.
So , correct me if I am wrong. S and P 1500 is the next major resistance level?
probably 1122 on spx, though I suspect your remark was sarcasm.
Quite often it's hard to tell sarcasm from sincere comments on this site.
I've been lurking here for the past four or five months and can usually figure out what is being said. But not always.
Could the long term patients in this asylum please be a little less cryptic in your comments so all of us new to the institution can begin to understand.
I happen to be one of the most sarcastic people on the planet, and love saracsm, but maybe an occassional translation (of both the sarcasm and the technical "stuff") for us "Newnuts" would be helpful.
sarcasm mate, too much funny money floating around to make any sense of technicals noe
I'm sorry, did you write "resistance level"??? WTF?
That is SOOOOOOOOO pre-Timmay/Obama/Ben. Resistance is a thing of the past, just like paper checks, locally grown food, and liberty.
A team of community organizers will be at your residence shortly to direct you to the nearest re-education center. In the meantime, please refrain from using such antiquated, churlish language in regard to our free market.
Regarding the S & P, HA HA HA HA HA HA HA.
All the resistors have been burnt out by high capacitance printing presses. But it can fake resistance if it makes you feel more manly and secure.
I do not find sense in the big investment banks gunning up the market.
If I correctly understand the equations, you can only push the market up consistently if you adquire a long exposure to the asset you're pumping. This is no difference in this if you live in 2009 or 1929. Nor is there any difference if you pump the market using high frequency robots or vociferous traders on the floor.
A small speculator can play to ride a bubble waiting to be able to abandon ship just before the wreck, but a large investor can not. The time when the large investor leaves the ship and the time of the wreck coincide because the large investor output caused the wreck.
Why are insiders selling a market ready money that are buying the big investment banks? The market is ridiculously overvalues, everyone knows this. Who is going to be holding the bag? When the big banks are getting rid of long positions that are buying now?
I do not see sense.
There is sense. You do not see it because you are a puppet. It makes a ton of sense to the puppet masters, that's why they are puppet masters and you are not.
Here's how the puppet show works:
1. they pull the strings
2. the politicians and lawmakers/Fed dance
3. we get fucked
Clap, clap, clap.
CLose curtain.
Let me lay it all out for you, bubala!
http://thetaildoesnotwagthedog.blogspot.com/2009/07/in-end-tail-does-not...
Yep, it's crazy. But that's what they think is their best shot.
TD: Great minds think alike:
http://seekingalpha.com/article/162305-funding-a-rally-extension
http://www.precisioncapmgt.com/2009/09/18/how-funny-money-will-keep-this-rally-going-and-why-m2-tells-us-how-it-will-end/
-EB
Very good analysis. shoot me an email when you have a second: tyler at zerohedge
As the article in SeekingAlpha suggests, the bottom could drop out at anytime. If that is the case, why would an institutions want to push their luck and risk being the last one to leave the party? Wouldn't someone try to sell into the liquidity pump?
The whole point of Sarcasm is to seperate the Wheat from the Chaff. If the other doesn't get the sarcasm, they're probably 'too stupid to live' (TM)
Is this the program that is funding the carry trade?
A little help would be appreciated on this article. Not exactly sure what actions the Treasury is taking..
The article lists that it is pumping additional liquidity into the market, although it also lists that it is trying to keep below the current debt ceiling? Are these not conflicting ideas?
If the Treasury is not going to carry forward a Bond, the PBs should get their money back, and the Treasury should have less dollars, although the market should have more?
How would this help the Treasure not hit its debt ceiling?
If the Treasury does not require the rollover of the Cash Management Bills, then the Primary Brokers will receive their money back for these bonds.
Since the Treasury gave the cash for these auctions to the Federal Reserve, then the Fed will give cash to the Treasury, which will forward it to the Primary Brokers.
Does the Federal Reserve have $114 billion in additional cash to give to the Primary Brokers, or will it have to print this money, and is it allowed to print more money?
Sorry, only have a moderate understanding of these items... :)