Courtesy of Lee Adler of the Wall Street Examiner
The composite liquidity indicator rose last week mostly due to the Fed’s first MBS purchase settlements under QE3. The uptrend in market liquidity is still firmly in place. The indicator will make new highs each month ahead as the Fed continues to settle its QE3 MBS purchases. As QE3 cash hits the system, it should have not only a direct impact, but it should also flow through several of the other components of this index. Any deviation from that expectation could be a sign of fundamental problems, with fictitious capital vaporization always lurking just behind the “all is well” façade.
The Fed’s purchases from Primary Dealers carry the heaviest weighting in the index. Foreign central bank purchases are the second most important weight. It has turned modestly bearish. The trend of bank net deposit inflows, not from money market funds, remains very bullish. Bank trading accounts of non Treasury and Agency issues has turned short term bearish and neutral in the bigger picture. That indicator could turn bearish on further weakness, but I would suspect that QE3 cash would bolster this indicator in the months ahead. Bank net purchases of Treasuries and Agencies are neutral, and could break either way in the weeks ahead. QE3 cash flows should now also give an upward push to this indicator.
A fair question would be if this indicator is so bullish, why have stocks been weak lately? This report gives an answer to that question, and provides guidance on what to look out for in the weeks and months ahead.
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