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.
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