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Suresh
Joined: 16 Sep 2005
Posts: 8388
Location: Maryland
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Subject: TrimTabs CEO wonders whether Fed or Treasury has been buying SP 500 futures
 Posted: Wed Jan 06, 2010 1:56 pm |
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If Mr. Biderman is correct that the Federal Reserve has become a hedge fund trading stocks perhaps to create a wealth effect, then it's possible that the Federal Reserve might feel equally comfortable intervening in the bond markets, absorbing the bond sales of early would-be bond vigilantes.
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Zero Hedge: TrimTabs Asks: Who Is Responsible For The Non-Stop Market Rally Since March; Gives Some Suggestions
Submitted by TrimTabs' Charles Biderman
Are Federal Reserve and U.S. Government Rigging Stock Market? We Have No Evidence They Are, but They Could Be. We Do Not Know Source of Money That Pushed Market Cap Up $6+ Trillion since Mid-March.
The most positive economic development in 2009 was the stock market rally. Since the middle of March, the market cap of all U.S. stocks has soared more than $6 trillion. The “wealth effect” of rising stock prices has soothed the nerves and boosted the net worth of the half of Americans who own stock.
We cannot identify the source of the new money that pushed stock prices up so far so fast. For the most part, the money did not from the traditional players that provided money in the past:
* Companies. Corporate America has been a huge net seller. The float of shares has ballooned $133 billion since the start of April.
* Retail investor funds. Retail investors have hardly bought any U.S. equities. Bond funds, yes. U.S equity funds, no. U.S. equity funds and ETFs have received just $17 billion since the start of April. Over that same time frame bond mutual funds and ETFs received $351 billion.
* Retail investor direct. We doubt retail investors were big direct purchases of equities. Market volatility in this decade has been the highest since the 1930s, and we no evidence retail investors were piling into individual stocks. Also, retail investor sentiment has been mostly neutral since the rally began.
* Foreign investors. Foreign investors have provided some buying power, purchasing $109 billion in U.S. stocks from April through October. But we suspect foreign purchases slowed in November and December because the U.S. dollar was weakening.
* Hedge funds. We have no way to track in real time what hedge funds do, and they may well have shifted some assets into U.S. equities. But we doubt their buying power was enormous because they posted an outflow of $12 billion from April through November.
* Pension funds. All the anecdotal evidence we have indicates that pension funds have not been making a huge asset allocation shift and have not moved more than about $100 billion from bonds and cash into U.S. equities since the rally began.
If the money to boost stock prices did not come from the traditional players, it had to have come from somewhere else.
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As far as we know, it is not illegal for the Federal Reserve or the U.S. Treasury to buy S&P 500 futures. Moreover, several officials have suggested the government should support stock prices. For example, former Fed board member Robert Heller opined in the Wall Street Journal in 1989, “Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole.” In a Financial Times article in 2002, an unidentified Fed official was quoted as acknowledging that policymakers had considered buying U.S. equities directly, not just futures. The official mentioned that the Fed could “theoretically buy anything to pump money into the system.” In an article in the Daily Telegraph in 2006, former Clinton administration official George Stephanopoulos mentioned the existence of “an informal agreement among the major banks to come in and start to buy stock if there appears to be a problem.”
Think back to mid-March 2009. Nothing positive was happening, and investor sentiment was horrible.
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One way to manipulate the stock market would be for the Fed or the Treasury to buy $20 billion, plus or minus, of S&P 500 stock futures each month for a year. Depending on margin levels, $20 billion per month would translate into at least $100 billion in notional buying power. Given the hugely oversold market early in March, not only would a new $100 billion per month of buying power have stopped stock prices from plunging, but it would have encouraged huge amounts of sideline cash to flow into equities to absorb the $300 billion in newly printed shares that have been sold since the start of April.
This type of intervention could explain some of the unusual market action in recent months, with stock prices grinding higher on low volume even as companies sold huge amounts of new shares and retail investors stayed on the sidelines. For example, Tyler Durden of ZeroHedge has pointed out that virtually all of the market’s upside since mid-September has come from after-hours S&P 500 futures activity.
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Suresh
Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture. |
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Suresh
Joined: 16 Sep 2005
Posts: 8388
Location: Maryland
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Subject: Fed's MBS purchases may be giving liquidity to prop desks to goose equities
Posted: Fri Jan 22, 2010 1:59 pm |
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If this is actually what is happening, then reinstating Glass-Steagall via the Volcker Rule would put a crimp in the Fed's ability to funnel money to primary dealers' proprietary trading desks.
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Jesse's Cafe Americain: Why Are 86% of the NY Fed's MBS Purchases Occurring During Option Expiration Weeks?
My friends at ContraryInvestor have published some remarkable data this evening in their twice weekly (subscription) analysis of the economy and the markets.
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| Quote: | "...in trying to follow the money we know the bulk of Fed money printing has gone to support the mortgage markets with the Fed buying up a huge swath of MBS since March of last year. From the summer of 2008 until the present, the Fed has been a huge help in getting conventional 30 year mortgage paper costs from the mid-6% range to the high 4% range. Quite the accomplishment.
But if you take a very careful look at the character of the Fed balance sheet since the big time money printing effort started in March of 2009, you'll see that their buying of MBS has been a bit of a multi-use exercise. Without trying to sound conspiratorial, we believe they have also used the MBS buying program to help "support" equity prices by essentially providing liquidity to the aggregate financial market at quite the opportune times...
You may have seen that recently Charley Biderman at MarketTrimTabs has been suggesting that he cannot account in aggregate for just who has been buying equities since March of last year. He suggests that although he cannot prove it, the Fed may indeed be a key buyer. MarketTrimTabs is the keeper of the records of the kingdom when looking at equity mutual fund flows, etc. We even did a bit of this ourselves in a discussion a while back by documenting that traditional equity buyers that have been households and corporations (buybacks) were essentially nowhere to be found in 2009.
In fact, households were selling and on a net basis corporations were issuing equity, not buying it back. That leaves institutions, banking sector prop desks, the hedge community, etc. as the key provocateurs of equity price movements in the rally to date. No wonder Charley is scratching his head a bit and wondering just how we could have scaled the largest 10 month rally in market history without households and corporations playing along. But like Charley, we can prove nothing about the Fed actually acting to buy equities or futures, etc.
But there just happens to be one thing we can prove when we “follow the money” that the Fed has been doing. And it ties right back to their purchasing of MBS in the marketplace. Remember, when the Fed buys a mortgage backed security from the financial sector, it provides liquidity that can 1) be lent out, 2) reinvested in other mortgage backed securities (not a chance), 3) used to buy bonds, or 4) used in prop desk trading. We already know the lending is not happening, MBS purchases have been the province of the Fed with few other buyers, banks have bought bonds, but in moderation, and finally banks are announcing “record trading profits” as per their prop desk activities. Get it? Of course you do. The prop desk destination has been a liquidity magnet.
So here’s the important issue regarding the Fed's MBS purchases relative to equity market outcomes. It’s the timing of the Fed’s MBS purchases that has been the key support to equity prices. And we see it that way when we analytically follow the money. Ok, the chart below chronicles ALL Fed purchases of MBS by the week since March of last year. The blue line is the ongoing level of Fed ownership of MBS as this position has been accumulated over the last 10 months. It’s an almost perfect stair step higher pattern. Although it may seem random, the dates we input into the chart happen to be the weeks ending on a Friday. Friday's of options expiration weeks. Notice a pattern here?
Of course you do. It’s blatantly obvious. To the bottom line, the Fed has been very significantly goosing its purchases of MBS during equity options expiration weeks. In fact, since July, there has only been one options expiration week whereby the Fed did not buy at least $60 billion of MBS during the options expiration week itself, providing instant and meaningful liquidity during options expiration weeks that have historically had an upward bias anyway! Talk about timing of liquidity injections to get maximum effect in the equities market.
Folks, this is right out in the open. No mysteries and fully disclosed on the Fed’s own balance sheet. And guess what? It gets better. The second largest weekly period for Fed purchases of MBS outside of the expiration week itself? You guessed it - month end week. Another maximum effect week where we usually see institutions engage in a bit of window dressing. Nothing like providing a few extra chips "on the house", no?
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Now that we have covered this data, the question of "what happens when the Fed stops printing money in March?" takes on much broader meaning and significance. Of course the Fed has not directly been buying equities with their clever and clearly very selective timing of MBS purchases, but they sure as heck were providing the immediate and sizable liquidity for "some one else" to do so during equity periods where they could achieve "maximum effect".
Wildly enough, at least as of last week's option-ex, the Fed was still purchasing $60B in MBS. So, as we stand here today, there are now two more options expirations weeks prior to us theoretically reaching the end of the game for Fed printing and MBS buying. You already know we'll be watching, errr.. following the money that is.
When/if the Fed stops printing to buy MBS, do we also lose an options expiration week and month end equity liquidity sponsor?
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Suresh
Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture. |
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Suresh
Joined: 16 Sep 2005
Posts: 8388
Location: Maryland
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Subject: $40B Blackrock has taken a 5+% position in over 1800 U.S. companies
Posted: Wed Feb 03, 2010 1:32 pm |
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SEC registration of Blackrock's ownership interest in over 1800 companies may be innocuous. Blackrock has acquired Barclays Global Investors' iShares ETFs unit. It is possible that the ETFs collectively own a 5+% interest in over 1800 U.S. companies. Presumably, the ETFs' investors have some sort of claim against those assets. So, it is not as if Blackrock has leveraged its own equity position somehow into a $4 trillion stake in U.S. equities.
I could be wrong. I'm just trying to think of a reasonable, non-conspiratorial explanation for this market oddity.
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The Market Ticker: Where Did They Get The Money? (BlackRock)
One has to wonder.....
| Quote: | We counted over 1,800 13Gs that Blackrock dumped on Friday, which explains why EDGAR might have been a tad bit pokey. The stream started at just after 2 p.m. est and didn’t let up until just after 4:30, when the last one, which reported a 6.5% stake in Vodafone came in. For those less familiar with the 13G, since we don’t often write about these filings, it’s a requirement when ownership exceeds 5% of the outstanding shares. With few rare exceptions, these filings represented new positions for Blackrock since we only counted 11 amended 13Gs, which in itself seems very surprising, given the long list of stocks.
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Let me see if I get this right. 1,800 companies (remember, the Russell 2,000 has 2,000 companies in total in it, the S&P 500 has 500 in it, etc) would comprise a very significant chunk of the entirety of the US stock market. Indeed, the Wilshire 5,000 is widely considered to be "the entire market" (and it more-or-less is.)
Blackrock took a position in that significant chunk to the tune of 5% or more, thus triggering the filing requirement for each of those firms.
Where did Blackrock get the money?
Blackrock has just $3.96 billion in cash on hand according to the most currently numbers on Yahoo Finance. The S&P 500 alone has a market cap of some $13 trillion dollars.
To take a 5% stake in the S&P 500 alone would require $650 billion, or some one hundred and sixty-four times as much money as Blackrock possesses, and yet that would account for less than one third of the filings!
You can't margin (leverage) yourself 164 times legally in any form or fashion in The United States, and such a margin game, assuming you came up with some inventive way to do it, would make all of the firms that blew up in 2008 and 2009 look like pikers (Fannie/Freddie were 80:1 at the time they went boom, as was, roughly, AIG.)
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UPDATE: It has been noted that they closed the acquisition of Barclay's Global Investors and this dump is a consequence of the update of that transaction. Ok, well and good, but the point remains - they've got a book that is now trading against free cash of less than 1% of these disclosures alone. Indeed, it's even worse - their total trading book, according to some sources, is approaching $4 trillion dollars, yet the firm has a market cap of $40 billion and less than $4 billion in actual cash.
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Suresh
Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture. |
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