Open Market Operations
Junk economics and the Taylor Rule guide the Fed's QE2 monetary policy. Junk or not, the important thing is that they believe it. So does Goldman Sachs. How many dollars will the Fed print? $1Trn, $2Trn, $4Trn? You should know that they are all just guessing and have no idea how this will come out. Remember this word: stagflation.
Now is the time to own gold stocks. Most gold companies will report their Q3 earnings at the end of October. Due to a higher year-over-year average spot gold price (which has increased 27.8% to $1,228/oz in Q3 2010 vs. $961/oz in Q3 2009), virtually every precious metal company is forecast to exhibit substantial net income growth. These fantastic net income results will be augmented by higher by-product prices (average silver, copper, and zinc prices were up 28.7%, 24.2%, and 14.8% year-over-year), which should set the stage for banner year-over-year earnings increases. One of the best axioms for investing is painfully obvious, but so often forgotten by seasoned investors: it’s all about earnings. Earnings are what drive stock prices over the long term. Investors seek out earnings growth wherever they can find it, and we can’t think of a single equity sector that exhibits better year-over-year earnings growth potential than the gold producers. We expect that to change over the next two quarters as investors realize how much stronger gold producers’ earnings will be at $1,350 gold. As countries decide to burn their currencies in the devaluation race, gold has responded, and now it’s the producers turn to perform. We’ll gladly take the earnings. - Eric Sprott
Two simple charts tell it all. Bonus: at the end, we explain how to make Paul Krugman squirm.
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.
If you’re worried about the future of the stock market and have yet to take steps to prepare for the Second Round of the Financial Crisis… I highly suggest you download my FREE Special Report specifying exactly how to prepare for what’s to come.
I call it The Financial Crisis “Round Two” Survival Kit. And its 17 pages contain a wealth of information about portfolio protection, which investments to own and how to take out Catastrophe Insurance on the stock market (this “insurance” paid out triple digit gains in the Autumn of 2008).
Again, this is all 100% FREE. To pick up your copy today, got to http://www.gainspainscapital.com and click on FREE REPORTS.
Lately, it appears, it has gotten trendy to bash the New York Fed's Permanent Open Market Operations (POMO), especially by various self-appointed godfathers of the blogosphere. The logic goes, or so we interpret the thinking, that any given POMO is nothing but yet another component of the various signals that enter into the "perfectly efficient market" and the Fed's intervention is something that is perfectly acceptable, should be a tradeable event, and is nothing of real significance (and, of course, the original narrative would come wrapped in 10 paragraphs or so of fluff). Whatever. Below, in collaboration with John Lohman, we show what the market would look like without POMO, versus a market that is predicated exclusively on FRBNY interventions. The bottom line: starting with the first POMO in 2005, when the S&P was at 1,200 and continuing through today, the broader market index would have been at just over 800 if performance from POMO days was excluded. Alternatively, purely POMO days would have had the effect of doubling the stock market in the past 5 years. We hope readers can decide on their own whether Fed intervention in this case implies causation.
Over the last two weeks, I’ve called for a reversal in stocks. It seems I’ve completely underestimated the ability of the Federal Reserve and its Primary Dealers to ramp the market higher on next to no volume.
Indeed, stocks have soared in the last six weeks, posting their best September performance in 71 years and rising roughly 12% from trough to peak. This surpasses even July’s monster rally of 11.1% from trough to peak, stands as the most aggressive rally since the April 2010 top.
A couple trillion here, a couple trillion there adds up to real money ...
For the little guy or the economy as a whole, that is ... But it's GREAT for the people who really matter
Mark Pittman's last valiant effort to bring some transparency to the most destructive organization in the history of mankind has succeeded. According to testimony to be delivered to the House tomorrow, "under a framework established by
the act, the Federal Reserve will, by December 1, provide detailed
information regarding individual transactions conducted across a range
of credit and liquidity programs over the period from December 1, 2007,
to July 20, 2010. This information will include the names of
counterparties, the date and dollar value of individual transactions,
the terms of repayment, and other relevant information. On an ongoing
basis, subject to lags specified by the Congress to protect the efficacy
of the programs, the Federal Reserve also will routinely provide
information regarding the identities of counterparties, amounts financed
or purchased and collateral pledged for transactions under the discount
window, open market operations, and emergency lending facilities." Luckily this action by Bernanke will prevent the rioting that would have followed an appeal to the Supreme court, which would have certainly sided with the secretive group of Keynesian priests. If nothing else, the plethora of data will keep the blogosphere preoccupied for days upon days, rummaging through millions of pages of explicit corruption.
Unbeknownst to most investors, last week Ben Bernanke pumped an additional $11.05 BILLION into the system ON TOP of the $11.15 pumped via the POMOs. In plain terms, the Fed juiced the system by $20+ billion in a single week, bringing its liquidity pumps RIGHT BACK QE 1 LEVELS.
In a surprising, and at the same time completely expected reversal, all those who thought that Monday's always close due to mutual fund inflows were stunned to see a red close. Which should not be too surprising: after all there was no POMO today - period. The only days that now have a chance of closing in the red is when the Fed is not directly involved in greasing stocks through its open market operations. Which means tomorrow should most likely end green - Tuesday and Thursday are this week's POMOs: tomorrow the Fed will buyback TIPS maturing without maturity limitation, while Thursday will see the monetization of longer-dated bonds, due 2/15/2021 – 8/15/2040. Following these two actions, the Fed will next send Amazon, Netflix and Apple to fresh quintuple digit forward PEs on October 5 and 6.
Last week I forecast that we would see a reversal in stocks. The market did indeed show signs of breaking down on Wednesday and Thursday, however, the Fed’s juice managed to keep stocks afloat and closing in the green for the week. All told, the Fed injected more than $10 billion into the market directly via its three Permanent Open Market Operations (POMO) pumps. However, Bailout Ben wasn’t content with mere open market juicing, so he pumped another $10 billion into the system “behind the scenes.”
With FRBNY Brian Sack's Permanent Open Market Operations (POMO) now firmly back on the scene, and by all appearances about to grow orders of magnitude larger than the prevailing $10 billion a week levels following implementation of QE2, we have been bombarded by requests to explain the methodology behind what the 10:15 am - 11:00 am liquidity intervention by the Fed means in terms of asset prices. We recently presented Nic Lenoir's observations on how POMO impacts rates on an intraday basis. However, the most comprehensive report on the issue comes courtesy of Bob English as the Precision Report. His analysis titled A Grand Unified Theory on Market Manipulation is a must read for everyone who dares to trade ahead of the Fed on POMO days (which, incidentally, this week will be on Tuesday and Thursday). While the report is as of August 2009, the logic behind it is as relevant and applicable today as it was when first written.
It is no secret that the Federal Reserve, and its now semi-daily interventions in market liquidity via ever increasing Permanent Open Market Operations (aka POMOs, next on deck - Wednesday and Friday for a total of about $7-8 billion), is rather hell bent on creating the impression that the economy is alive and well courtesy of a ramping stock market (when the causal relationship is always the other way around, but who cares). A reader got so disgusted by the POMO ramp game, he sent in an angry letter to Brian Sack's henchmen. Here is the Fed's response.