Pink Tickets On 'QT' Days

Authored by Kevin Muir via The Macro Tourist blog,

I know I have told this story before, but it bears repeating. Way back in 2011 I was watching the S&P like a hawk. Trading each squiggle, I tried to understand what was driving the markets at every point. I focused on technical levels, monitored the news and spent way too long staring at the screens.

But on some days, the stock market would get mysteriously strong. It would usually occur mid-morning. Often stocks would sag near the open, look like they wanted to break lower, when all of a sudden - out of the blue - stocks would go bid. I couldn’t understand it. There was no “reason” why they should be rising. Yet they did.

It took me a while, but eventually, I figured it out.

Although it flies directly in the face of Dr. Malkiel’s Random Walk Down Wall Street, the days when the Fed expanded their balance sheet through bond purchases resulted in outsized stock market gains. These bond buys were conducted through Permanent-Open-Market-Operations (POMO) and the great thing about a transparent Federal Reserve is that they listed the schedule in advance, so it was easy to measure the relationship between POMO operations and stock market performance.

I know it seems crazy, but the Federal Reserve’s bond buying had a direct and immediate effect on the stock market. I don’t know why the relationship would be so unequivocal, but I learned the hard way not to fight the Fed on days when they pulled out the blue tickets in the bond market. I even tracked the amount of bond buying versus the stock market outperformance to make sure it wasn’t all in my head. Sure enough, the larger the bond buys, the bigger the outperformance.

Now eventually the market figured it out and the relationship became less reliable, but that process took years.

Fast forward to today. Although the Federal Reserve has a broad schedule for winding down their balance sheet, they are not systematically selling off their portfolio. No, instead they are allowing their portfolio to mature, and at times not reinvesting the proceeds.

This means that the process is somewhat lumpy. Whereas quantitative easing purchases would be limited to $5 billion or so on any one day, with the quantitative tightening balance sheet wind-down, the maturing days can be many magnitudes larger.

Take today for example. The Federal Reserve owns the following bonds:

  • $3,888,900,000 of the 9.125% of 05/15/2018

  • $542,818,700 of the 1% of 05/15/2018

  • $21,795,923,000 of the 3.875% of 05/15/2018

That’s over $26 billion of bonds maturing today.

I am not some lonely lunatic who singularly believes the Federal Reserve’s POMO operations directly affect the stock market.

If you don’t already follow the terrific Martingale_Macro, then give him a click. I’ll leave the math jokes aside, but will highlight that he has already observed the reverse of my quantitative easing stock market outperformance with the following table of stock market declines on quantitative tightening days:

Brilliant! I should have been on this way earlier.

The days when the Federal Reserve has a large bond maturity have seen abnormally large declines in the S&P 500. I am writing this before the close, but it’s no surprise that today’s stock market performance is weak.

I can almost hear the cries of disdain - “sure, lots of good that does bringing this to our attention after the decline.” Ahh, but here’s my value add - the Federal Reserve publishes their portfolio for everyone to see:

The next big maturity day is May 31st. On that day we get almost $29 billion maturing on month-end. Watch out below.

For those that want to play along at home, here is the link for the Federal Reserve’s portfolio. I will leave it to all the efficient market theorists to buy on those days. I’ll be pulling out the pink tickets…


DingleBarryObummer Tue, 05/15/2018 - 18:27 Permalink

Dear ZeroHedge community,

I've been doing some thinking, and the slogan "End The Fed" is abysmal.  Yes, it's short and even; fits nice on a book.  But, to most people, the term "Fed" means either (a.) nothing at all, or (b.) something to do with the Federal Government (like an FBI agent), and we all know it's not part of the federal government.  They just named it that to confuse people.  Basically it's the most confusing horrible slogan ever.  If it was an advertising slogan for a product your business would flop harder than Solyndra.

On the other hand, everyone knows the word "bank."  That's where the money comes from!  It's a word everyone can sink their teeth into.  How about "Give the Central Banks the Boot!"?? I'm very open to suggestions.  Ron Paul is correct but his execution is ineffective.  These days everything is about "meme magic," so it definitely has to be real good.


gdpetti Team_Huli Wed, 05/16/2018 - 11:39 Permalink

Yes... but that's not good for business, is it? Or we should hope he knew that.... as it ties in with so  many other 'dates' on the calender. That said, hasn't this message of OT or market decline been telegraphed by most of its leading participants for many months now?? It's the classic takedown... pump and dump.... but this time is different, as that 'dump' is the entire OWO... establishment, which includes its 'deep state'... and all sectors from Hollywood to NYC, all markets etc. How to play that? It's a game of musical chairs... usually the 'pull the rug' dates are before the open after a weekend....  Corporates will be finishing up their buybacks and then what? The usual adage is the Fed will jump back in.. but when the NWO puppet masters order their OWO puppets to 'pull the rug'.... will they  not follow orders?  Maybe the real con is getting the herd to follow along to the upside and downside... until they get pushed over the cliff and can't escape.... bank holiday... and all of WallStreet's a bank these days, right?... shut down all of it... all the debit/credit cards... Got cash?

In reply to by Team_Huli

J J Pettigrew Tue, 05/15/2018 - 18:41 Permalink

If the Fed was held to their THREE mandates..

Maximum employment

Stable Prices

Moderate Long term interest rates...

everything would be palatable

HOWEVER, they have rewritten, self authored their own mandates...

They are now Central Planners...Market supporters....and promoters of INFLATION!!

Let them be the balancer of the imbalances that occasionally arise when banks lend long and borrow short and get in short term distress.

HOWEVER, HOLD THEM TO THEIR MANDATES and DO NOT allow them to self author their directives.

J J Pettigrew Tue, 05/15/2018 - 18:44 Permalink

Bernanke PROMISED the unwind would be allowing their portfolio to mature....


The trigger point was to be when unemployment dipped below 6.5%.....

that was years ago....

Another LIAR in Washington DC...

Son of Captain Nemo Tue, 05/15/2018 - 21:19 Permalink

FUCK THIS READ!... 2011 was about THE LAST "window of opportunity" 3 years after the banker bailouts before it could NO LONGER BE "SALVAGED" AGAIN!!!


Because when you can accumulate $6.5 trillion with a "T" in 2015 ALONE that is unaccounted for debt to a military that ain't "winning" ANYTHING with it's terrorism and paid for terrorist "proxies"!... You know it's MUCH WORSE and beyond SALVAGE then you or anyone else in your Country that is a $taxpayer to it CAN IMAGINE!!!


You had your "ship to sail it out of the storm" 2 years after this organization came into existence in 2008 ( to get it out of further "entanglements... BUT instead you raised a "middle digit" to it and kept telling yourself life WAS GOOD when you knew GOD DAMN WELL THAT IT WASN'T!...

Nothin but PERFECT ASSHOLES in pox Americana!!!