Fed Watch Thread

[flow5]

ZEROHEDGE: " Today's $29 billion 7 year auction closed at 2.83%, 2.86 Bid To Cover. Unlike yesterday's 5 Year, the WI action is inverted, with the yield dropping immediately following the bond issuance to under 2.79%. What is stunning is that the Indirect Bidders took down 64.2% of the auction, which while we don't have the historical record currently, i likely on the highest in recent history. The massive Indirect participation meant Primary Dealers were left with just 31.2% of the take down. In other words, as we have been claiming for about 3 months now, the volatility from stocks, which are now an inert "asset" class melting up regardless of newsflow, fundamentals, or technicals, has moved entirely to bonds and currencies. Since nobody is left trading stocks, the daytraders are increasingly forced to trade vol in such traditionally stable products as govvies. At this rate of central planning, we expect the VIX to plunge to single digits soon, as the MOVE index explodes sooner or later"

"From my records this is the second highest Indirect takedown on the books. 6/25/2009 - Indirects took down just a tad over 67% of the auction"

[flow5]

ZEROHEDGE: "And like that, Brian Sack's market manipulation for 2010 is over. Then again, with practically no trading days left, and no volume to speak of, it was to be expected. Of today's $5.4 billion POMO, which brings the Fed's Treasury holdings ever higher in the trillion club, $2.4 billion went to buy back the PV6 which were auctioned off barely a month ago. This means that 15% of the Primary Dealer allottment of that particular auction ($16.4 billion) has already been sold back to the Fed at a decent profit. And so the shell game continues. What is ore surprising is why the PW4s auctioned off on Monday were neither in the inclusion, nor exclusion lists for today's POMO. After all, there is nothing the PDs would love more than a last minute taxpayer gift to the tune of a few hundred million in a quick two day flip to pad that third private island sinking fund with that little extra in risk free compensation"
=================
But the "free market" priced it.

[flow5]

Date 1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr

12/01/10 0.17 0.16 0.20 0.28 0.53 0.84 1.64 2.33 2.97 3.95 4.24

12/15/10 0.08 0.14 0.20 0.30 0.68 1.08 2.11 2.88 3.53 4.37 4.59
12/16/10 0.08 0.13 0.19 0.31 0.66 1.05 2.06 2.81 3.47 4.32 4.57

12/29/10 0.05 0.13 0.20 0.30 0.64 1.05 2.03 2.75 3.35 4.19 4.41


flow5
Message #242 - 12/16/10 06:45 PM
Trend reversal? Buy some muni's & sell some stocks?
flow5
Message #248 - 12/16/10 08:06 PM
Short-term ->buy bonds?

[flow5]

I.e., contrary to Jim Bullard's (Pres.& CEO-St. Louis Fed) DEC 2 speech:

"Maximum effects on the real economy take (6 to 12 months) and CAN BE DIFFICULT TO DISENTANGLE, but should be conventional as well"

Apparently Ph.D's in economics don't spend any time watching & trading the money markets.

Roc’s in (MVt) are always measured with the same length of time as the specific economic lag (as its influence approaches its maximum impact (not date range); as demonstrated by the clustering on a scatter plot diagram).

Contrary to economic theory, & Nobel laureate, Dr. Milton Friedman, monetary lags are not “long and variable”. The lags for monetary flows (MVt), i.e. the proxies for (1) real-growth, and for (2) inflation indices, are historically (for the last 97 years), always, fixed in length. However, the FED's target, nominal gdp?, varies widely

[flow5]

WASHINGTON—More banks failed in 2010 than any year since the savings-and-loan crisis ended in 1992, but regulators said Wednesday that they believe failures have passed their peak.

So far this year, the 157 banks that failed had total assets of $92.1 billion compared to 140 bank failures with total assets of $169.7 billion in 2009.


www.businessinsider.com/the-banking-industry-has-a-big-cleanup-ahead-of-it-2010-12

[flow5]

Gold down, CRB index down, Dollar index down, Crude down, DOW & S&P down. All reacting to the expectation of higher mortgage & bond rates.

quotes.ino.com/chart/?s=CBOT_US.H11

Mar contract is down, but back months June & Sept are up.

Short-term money flows (real-output), spike in JAN (+9 from Nov to Dec). Not coincidently, Chicago factory orders reached highest level in 22 years.

[flow5]

After the 1st qtr, real-output will show above average growth. Feb month-end is the time to short bonds.

[flow5]

The Census Bureau reported this week that state and local tax revenues increased by 5.21% in the third quarter compared to a year ago, which is the largest quarterly increase since the fourth quarter of 2007. Here's a breakdown by category for the third quarter 2010 vs. 2009:

Individual income tax: +4.78%
Property taxes: +7.77%
General sales taxes: +4.01%
Motor fuel taxes: +8.21%
Tobacco taxes: +8.25%
Alcoholic beverage taxes: +1.90%
Corporation income taxes: - 3.26%

The increases in state tax revenues in the the third quarter provide more evidence that economic activity (income, retail sales, etc.) continues to improve, and we can probably look forward to even greater improvements in the fourth quarter. -- MARK PERRY

[flow5]

Not much tax selling this DEC. So the January effect to be bigger?

"the phenomenon in which small-cap securities often have had higher rates of return than large-cap stocks in the January months in the 20th Century"

[flow5]

"The amount an investor is taxed depends on both his or her tax bracket, and the amount of time the investment was held before being sold. Short-term capital gains are taxed at the investor's ordinary income tax rate, and are defined as investments held for a year or less before being sold. Long-term capital gains, which apply to assets held for more than one year, are taxed at a lower rate than short-term gains.

In 2003, this rate was reduced to 15%, and to 5% for individuals in the lowest two income tax brackets. These reduced tax rates were passed with a sunset provision and are effective through 2010. On Dec 17, 2010, President Barack Obama is expected to sign a bill extending this to 2012.[1] If they are not extended before the end of 2012, they will expire and revert to the rates in effect before 2003, which were generally 20%.

The reduced 15% tax rate on qualified dividends and long term capital gains, previously scheduled to expire in 2008, was extended through 2010 as a result of the Tax Reconciliation Act signed into law by President George W. Bush on May 17, 2006. This was extended through 2012 by President Barack Obama on Dec 17, 2010. As a result:

In 2008-2012, the tax rate on qualified dividends and long term capital gains is 0% for those in the 10% and 15% income tax brackets.

After 2012, dividends will be taxed at the taxpayer's ordinary income tax rate, regardless of his or her tax bracket.

After 2012, the long-term capital gains tax rate will be 20% (10% for taxpayers in the 15% tax bracket).

After 2012, the qualified five-year 18% capital gains rate (8% for taxpayers in the 15% tax bracket) will be reinstated.

When the taxable gain or loss resulting from the sale of an asset is calculated, its cost basis is used rather than its actual purchase price. The cost basis is an adjustment of the purchase price that takes into account factors such as fees paid (brokerage fees, certain legal fees, sales fees), taxes paid (including sales tax, excise taxes, real estate taxes, etc.), and depreciation.

en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States

[flow5]

CME Group's - CBOT 30 year U.S. Treasury Bond Futures (US):

From the contract high of 129.6 - to the contract low of 118.7, there were 10.9 points. That translates into a $10,281.25 move per contract.

Initial margin is $3,713 and maintenance is $2,750. A 1/32 minimum tick change is $31.25.

quotes.ino.com/chart/?s=CBOT_US.H11
=========

ED Eurodollar, 90-Day $1,000,000 HMUZ CME

TB Treasury Bills, 90-Day $1,000,000 HMUZ CME

FF Fed Funds, 30-Day $5,000,000 All Months CBOT

EM Libor** $3,000,000 All Months CME

TU Treasury Notes, 2-Year $200,000 HMUZ CBOT

FV Treasury Notes, 5-Year $100,000 HMUZ CBOT

TY Treasury Notes, 10-Year $100,000, 6% HMUZ CBOT

US Treasury Bonds, 30-Year $100,000, 6% HMUZ CBOT

MB Municipal Bonds $100,000 HMUZ CBOT

[flow5]

New #'s. Too much money. Bernanke overdid it. Sell bonds. Sell stocks JAN month-end.

[bimetalaupt]

Sell Bonds with QE2 600 Billion.. OK but Sell Stock on the same driver? maybe Sell Russell 2000...I still find gold overpriced per the M1 of the USA.. Add China and India then it is all about Central Bank of South Korea???

The odds are one of the three must be a buy?

Just a thought,
Bruce

[bimetalaupt]

Flow5,
Return to the buy for QQQQ... AKA PowerSharesQQQ... Call it a 19% discount from Central Tendency!!!! MARKET IT .. i HAD JUST GOT THIS TO WORK WITH THE OLD EDITOR.. FROM MMXI V 2.0.1 SUPER-IRON

Just a thought,
Bi
12/30/10 Central Tendency current discount sd close 2009 2010 profits Target (11/1/2011)
djia 10717.8784800949 11569.71 -7.362600444653% 12.4192% 10428 289.878480094949 12055.0764865131
djtm 13181.19696 13145.01 0.27529046% 15.5340884% 11182.39 1998.80696 16279.3346104841
djua 428.65221716130 404.750 5.905427% 23.0158258711 379.200 49.4522171613093 513.481823028113
russell 2m 677.361018841748 789.74 -14.22987074% 19.47698363% 625.39 51.9710188417479 839.134521458285
qqqq 65.1107259003456 54.715 18.9997731890% 18.3264% 45.98 19.1307259003456 72.7902481334273

[bimetalaupt]

QQQQ
CENTRAL TENDENCY = 65.11
CURRENT PRICE = 54.715
DISCOUNT = 18.999773+ CALL IT 19%
STANDARD DEVIATION (SD)= 18.3264%
TARGET PRICE FOR NOW SHOULD READ (12/31/2011) $72.7902...

Just a thought and output from a math model that has no ego!!!

Bi Metal Au Pt

[flow5]

Short-term horizon:

2010 jan ;;;;; 0.22 ;;;;; 0.54
;;;;; feb ;;;;; 0.08 ;;;;; 0.52
;;;;; mar ;;;;; 0.07 ;;;;; 0.53
;;;;; apr ;;;;; 0.13 ;;;;; 0.54
;;;;; may ;;;;; 0.05 ;;;;; 0.53
;;;;; jun ;;;;; 0.03 ;;;;; 0.50
;;;;; jul ;;;;; 0.07 ;;;;; 0.48
;;;;; aug ;;;;; 0.07 ;;;;; 0.49
;;;;; sep ;;;;; 0.06 ;;;;; 0.51
;;;;; oct ;;;;; 0.03 ;;;;; 0.47
;;;;; nov ;;;;; 0.00 ;;;;; 0.42
;;;;; dec ;;;;; 0.11 ;;;;; 0.34
2011 jan ;;;;; 0.10 ;;;;; 0.25
;;;;; feb ;;;;; 0.05 ;;;;; 0.22
;;;;; mar ;;;;; 0.06 ;;;;; 0.21
;;;;; apr ;;;;; 0.10 ;;;;; 0.24

==========

1st column; proxy for real-output: (-5) drop from jan > feb; short-term > sell stocks; long-term still buy. I.e., by the time these numbers are finalized, the swing should be more pronounced.

I thought bonds were oversold as the proxy for inflation (2nd column), is now "free falling". But short-term money growth is too rapid:

3 month m1 is growing @ 20.5 SA annual rate percent change, & 13 week m1 is growing @ 15.7 SA annual rate percent change (WSJ Federal Reserve Monetary Data table)

DEC 29: SOMA holdings @ 2,149,525,358.4;
Change From Prior Week (-)7,409,306.9

"On August 10, 2010, the Federal Open Market Committee directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities (agency MBS) in longer-term Treasury securities. The most recent H.4.1 data release indicates that outright holdings of domestic securities in the System Open Market Account (SOMA) totaled $2.054 trillion as of August 4, 2010"

SOMA is NOW UP $96b since the start of the first reinvestment of principal & interest announcement (@ 2,054T)

Gold's still a sell (esp. in JAN) because (1) U.S. dollar index should rise (vis a' vis interest rate differentials), (2) seasonals, (3) Bernanke & co. is going to have to begin thinking about "tightening".

[flow5]

DAILY AVG IN MILLIONS

Two weeks ended % CHANGE IN WEEKLY AVERAGES
12/29/2010 12/15/2010 13-wk 26-wk 52-wk

Total reserves $1,060,970 $1,097,067 ...6.9 -5.6 -5.5

Nonborrowed reserves 1,015,629 1,051,378 ...10.2 -1.4 5.9

Required reserves† 69,775 72,220 ...16.0 16.3 10.6

Excess reserves 991,196 1,024,847 ...6.3 -7.0 -9.0

Borrowings from Fed 45342 45689 ... -55.5 -67.9 -72.3

Free reserves†† 945,854 979,158 ...9.8 -2.6 2.1
================

Is the FED too tight? too loose? or about right? I.e., how fast are required reserves growing relative to excess reserves, & SOMA holdings?

[flow5]

Think of buying bonds "for a short-term trade" as playing the game of chicken, one must time their swerve, just before the market crashes.

[flow5]

The contractual clearing balances maintained by the member banks peaked on DEC 3 2003 @ $12.360b. They averaged $9b in 2005, $7b in 2006, $6b in 2007 and plateaued @ $7.716b on OCT 8 2008. These balances have steadily fallen to a level @ $2.359b (new low) as of DEC 29 2010.

"A clearing balance requirement is an amount that an institution may contract to maintain with a Reserve Bank in addition to any reserve balance requirement. End-of-day balances held to meet a clearing balance requirement (up to a specified maximum amount) generate earnings credits that may be used to offset charges resulting from the institution’s use of eligible Federal Reserve services. A Reserve Bank may impose a clearing balance requirement if an institution has a history of frequent daylight or overnight overdrafts."
====================

Bank liquidity is still peaking.

[comokate]

bump :-)

[flow5]

Inflation and the U.S. Dollar
By Christopher Vecchio,
31 December 2010 17:20 GMT Despite the Fed’s policies of expanding the monetary supply indefinitely – not materially, but through large scale asset purchases – the inflation rate has yet to reach the central bank’s target of 2 percent over the medium term. Over the past 12 months, inflation has been slowly creeping upward, albeit at a slower pace than the Federal Reserve desires. The Consumer Price Index has risen 1.1 percent, while core PCE prices have risen approximately 1.2 percent over this same time frame. Given the current slack in the system – high unemployment and low capacity utilization – low inflation should be expected. That being said, inflation is expected to be 1.5 percent for 2011; and on a quarter-by-quarter basis, from first to fourth, respectively: 1.1 percent, 1.6 percent, 1.7 percent, and 1.65 percent.


When considering hedging against inflationary pressures with regards to trading the U.S. Dollar, it is important to consider when the Federal Reserve is anticipated by the market to increase interest rates. Market consensus, for now, sees the benchmark interest rate holding at 25 basis points through end of the third quarter, with a 25 basis points increase sometime during the fourth quarter. The Bank of England and the European Central Bank are forecasted to take similar routes: while the rates are different for these central banks, they both are expected to hold the main refinancing rate constant until the fourth quarter, when a 25 basis points increase is expected.


As currency traders know, interest rates, inflation, and exchange rates are highly correlated. If interest rates are expected to remain within the same yield differentials over the next four quarters, then differentials in inflation and interest rates can be used to forecast how the Dollar will move against other currencies such as the Pound and the Euro.


Primarily, what can be derived from inflation rate expectations and nominal interest rate expectations are real interest rate expectations, the rate of interest an investor receives after subtracting inflation. As noted by the tables above, the real interest rate among the United States, Great Britain, and the European Union are expected to be negative throughout 2011 – real interest rates for the United States, Great Britain, and the European Union have been negative for some time. Despite the Fed’s efforts towards expanding the monetary supply, which in theory should be increasing inflationary pressures, such has not occurred nor is expected to boost underlying consumer prices that greatly in the United States, according to market sentiment. Accordingly, the Federal Reserve has found little evidence to raise interest rates.


Over the next year, while interest rates hold, based on real interest rate differentials, one could forecast for the Dollar to gain against the Pound, while the Euro offers a higher rate of return than the Greenback over the same time frame. However, as inflationary pressures rise in the United States, and as the Federal Reserve is forced to raise the main refinancing rate, the Dollar could become a more attractive currency option, and draw the attention of foreign investment, leading to a Dollar appreciation across all of the major currency pairs.
=============
A stronger dollar will keep a lid on gold.

[flow5]

Credit Default Swaps PIIGS vs CINN Group (California, Illinois, New York, New Jersey)

In response to European Sovereign Debt Crisis in Pictures; PIIGS Spreads to Germany at or Near Record Levels I received this chart from Chris Puplava at Financial Sense.

Chris writes "In addition to foreign credit risk (Greece, PIIGS), I’m seeing my CINN STATE (CA, IL, NY, NJ) Credit Default Swap (CDS) composite moving higher again."

Mike "Mish" Shedlock
globaleconomicanalysis.blogspot.com

[flow5]

"From the late 1950's through to the early 1980's, the US savings rate reached ever higher highs, as exactly did the rolling ten year average of US GDP growth. But once the decline in the savings rate began, so did the decline in the longer term growth rate in US GDP. Directionally these two data points are twins."
=============

Personal savings are necessary for high real-investment & is the key to high real-gDp growth as these graphs clearly demonstrate.

SEE:
globaleconomicanalysis.blogspot.com/2010/12/looking-for-love-in-all-wrong-places.html

[flow5]

"Eventually, the Fed must exit its ultra-easy policy. By resuming QE it has made that task more difficult. Officials have assured us that they have the “tools” to execute an effective “exit strategy.” They could:

(1) drain reserves through reverse repurchase agreements and could roll over those reverse repos indefinitely.

(2) convert reserves into term deposits at the Fed, which could not be used as clearing balances or to meet reserve requirements.

(3) hike interest on excess reserves (IOER) to encourage banks to hold them rather than boost lending. That would entail commensurate rises in the Federal Funds Rate. By raising the IOER the Fed can theoretically exit from a zero funds rate without first shrinking its balance sheet.

(4) let maturing securities run off and not replace them.
actively shrink the balance sheet through asset sales."
========================

Inflation will rear its ugly head before un-employment measurably falls.

www.futuresmag.com/Issues/2011/January-2011/Pages/Is-the-Fed-playing-with-fire.aspx

[flow5]

The biggest negative factor in the first half of 2011, according to Levy, "will be the decline of inventory investment," which he said would catch the market by surprise. He noted that "inventories have been rising much too fast" and can't be sustained.

Moreover, Levy states that "export growth will weaken as fiscal tightening and financial problems slow Europe and as the U.S. inventory slowdown hits trading partners in Asia, Latin America and elsewhere."

=============

www.worldmarketmedia.com/1876/section.aspx/2372148/levy-forecast-says-qe2-improved-4q-not-enough-to-prevent-2011-downturn

[flow5]

"Demand for scrap metal remains strong in China, India and Turkey, with international scrap prices recently crossing the $400-per-ton mark. China’s already using more coal than the U.S., Europe and Japan combined, and their need for coal is only expected to keep growing. And the demand for palladium and platinum is so great that thieves are actually stealing catalytic converters from cars to get at the precious metals contained in them" - MARKETWATCH

====

low-priced stock pick now amid high commodity prices are Metalico Inc. /quotes/comstock/14*!mea/quotes/nls/mea (MEA 5.88, +0.23, +4.07%) , a scrap-metal recycler,

[flow5]

1/1/2000 ;;;;; 9709.5 ;;;;;
4/1/2000 ;;;;; 9949.1 ;;;;;
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10/1/2000 ;;;;; 10129.8 ;;;;;
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1/1/2005 ;;;;; 12379.5 ;;;;; 0.067
4/1/2005 ;;;;; 12516.8 ;;;;; 0.063
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10/1/2005 ;;;;; 12915.6 ;;;;; 0.063
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10/1/2009 ;;;;; 14277.3 ;;;;; 0.006
1/1/2010 ;;;;; 14446.4 ;;;;; 0.028
4/1/2010 ;;;;; 14578.7 ;;;;; 0.039
7/1/2010 ;;;;; 14745.1 ;;;;; 0.045
==============

"Keeping interest rates low" (the demand for money paradigm), or the FED's monetary transmission mechanism since 1965, embodies faulty Keynesian dogma.

I.e., a liquidity preference curve is presumed to exist which represents the supply of money. In this system interest is the cost which must be paid, if lenders are to forgo the advantages of liquidity. All of this is estranged from the real world, a world with interest bearing checking accounts & a GR where consumers resorted to tapping their savings.

Aggregate monetary purchasing power (our means-of-payment money X's its transactions rate-of-turnover), fell for 29 consecutive months (which caused the rate-of-change in nominal gDp to consistently fall in tandem during the same time period). I.e., the FED was deliberately (albeit unknowingly), draining liquidity.

What Bernanke did was cut & dry. And it was a crime.

[flow5]

By Hao Li | January 5, 2011 01:33 GMT

The Federal Reserve's second round of quantitative easing (QE2) is pushing oil prices higher, said Andy Xie, a prominent economist in a Caixin op-ed. Oil prices have rallied 20 percent since the Fed first hinted that it will roll out the program.

Federal Reserve Quantitative Easing Xie said the oil rally is not powered by demand from the real economy because oil consumption is only up by possibly one million barrels per day in 2010 compared to 2009. Moreover, 2010's consumption level is still far below those from 2007 or 2008.

Instead, financial speculation, fueled by the rise in money supply via QE2, is responsible for the increase

[flow5]

QE2’s concept was marketed using single-entry based accounting transactions. But fractional reserve banking is a multi-step process.

The Central Bank’s distribution channel (a.k.a. monetary transmission mechanism) is comprised of the primary dealers (19 banks and securities brokerages that trade in U.S. Government securities), and their CUSTOMERS (the investment banks and their mutual fund, hedge fund, pension fund, insurance company, sovereign wealth fund, corporate treasury, & wealthy investor, CLIENTS).

Note that the PDs “purchase the vast majority of the U.S. Treasury securities (T-bills, T-notes, and T-bonds) sold at auction, and RE-SELL them (an established distribution channel), to the public.” – Wikipedia.

These asset speculators (& their proprietary trading operations) are now horizontally integrated, under the Gramm-Leach-Bliley Act passed in 1999 (rather than segregated - under the Glass-Steagall Act of 1932 – an act put in place to curb the type of stock market speculation that characterized the late 1920’s).

Indeed, the distribution channel is international: “according to the Wall Street Journal Europe (2/9/06 p. 20), all of the top ten dealers in the foreign exchange market are also primary dealers, and between them account for almost 73% of forex trading volume” – Wikipedia.

Note also that: commercial bank trading revenues, can be divided into (1) fixed-income, (2) currency, (3) equity, & (4) commodity classifications. I.e., if the NY FED trading desk buys securities, then their owners (or their trading partners & clients), will “buy riskier assets”.

QE2 has both short-run (higher levels of IORs), & long-term implications (ultimately an expansion in the volume and turnover of new money).

[flow5]

Open market operations should be divided into 2 separate classes (#1) purchases from & sales to, the commercial banks; & (#2) purchases from, and sales to, others than banks:

(#1) Transactions between the Reserve banks & the commercial banks directly affect the volume of bank reserves without bringing about any change in the money supply (by definition). The “trading desk” “credits the account of the clearing bank used by the primary dealer from whom the security is purchased”. This alteration in the assets of the commercial banks (the banks’ IORs), increases - by exactly the amount the government securities portfolio was decreased.

(#2) Purchases and sales between the Reserve banks & non-bank investors directly affect both bank reserves and the money supply.

(#2) If the proceeds from the sale of securities, is deposited (credited) to the non-bank public owner’s bank account, excess reserves will increase by less than total reserves (IORs), are increased, since the expansion in Reserve bank credit, will cause an equal increase, in the commercial banks’ deposit liabilities (i.e., causes an increase in the commercial bank's required reserves - provided that the primary deposits are located within "bound" (or relatively large) commercial banks).

(#2) is just a timing issue.