A CASE STUDY ON THE FED’S PERMANENT OPEN MARKET OPERATIONS
by ilene - October 25th, 2010 7:01 pm
A CASE STUDY ON THE FED’S PERMANENT OPEN MARKET OPERATIONS
Courtesy of The Pragmatic Capitalist
On Friday I posted a story highlighting the market’s outperformance when the Fed performs its Permanent Open Market Operations (POMO). POMO is nothing new for the Fed so a one month data set is really nothing more than datamining. If we look back at the data over the course of the last 5 years we obtain a much more realistic (and potentially disturbing) perspective of the market’s performance on days when the Fed performs its POMOs.
Since October 2005 there have been 205 operations. On the day the operation was performed the market finished negative 41% of the time, positive 53% of the time and finished flat 6% of the time. The total return on these days was +27.28%. This is equivalent to a +48.6% annualized gain. A look under the hood provides a more useful perspective on the data, however.
Of the days that were positive 63% of the total gains occurred on just 3 days in March 2009. If we remove these three days the total gains equal +9.98%. This is equivalent to a +18% annualized gain. If we remove the best AND worst three days from the set the total return surges to 18.1% or a 33.1% annualized gain.
Perhaps the most interesting perspective in all of this is just looking at the market’s long-term performance when the Fed is conducting these operations. As you can see below the market has performed dramatically different when the Fed is conducting POMO’s. The Fed ceased POMO’s in May of 2007 after a fairly steady schedule. The market declined almost 20% in the following year and a half. They did not initiate the program again until September of 2008 when the economy was melting down. Technically, the program began on September 19th 2008 just days before the Lehman crash. This skews the beginning point of the credit crisis set of operations enormously. If we take that exact starting point the market fell -2% between then and the last operation on March 24th 2010. Of course, one could easily argue that the September 2008 operations were largely useless as the market was already in meltdown mode.
Between March 24th and August 17th of 2010 when the program was halted the market declined -6.5%. Since restarting the program in August the market has risen 8.3%.
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Money Markets are the New Suspenders
by ilene - September 29th, 2009 3:04 am
Money Markets are the New Suspenders
By EB, courtesy of Zero Hedge
The Financial Times recently reported on the Fed’s latest exit strategy to eventually contain the inflation zombie:
During the crisis, the Fed created roughly $800bn of additional bank reserves to finance asset purchases and loans. This total is likely to rise in the coming months as the central bank completes its asset purchases and the Treasury unwinds financing it provided to the Fed. Fed officials think they could raise interest rates even with this excess supply of reserves by offering to pay banks to deposit their surplus funds with it rather than lend them out. However, they also want to use reverse repos in tandem to soak up some of the excess reserves. Policymakers call this a “belt and braces approach”. [The latter, clearly a nod to the great Gekko.]
TD touched on this last Thursday, and we will expand upon it here as it is particularly relevant to our ongoing theory that it is the proceeds from permanent open market operations (POMOs) and their close cousins that are driving equities. Though this may be received wisdom to ZH readers, the Fed has done us the favor of providing additional evidence through the FT story. A bit of background, as we are new contributors to this forum:
Money Supply: Based on our previous research on the effects of swings in M2 non-seasonally adjusted money supply (M2) on the stock market, we were a bit surprised in July 09 by the resiliency of the rally, which continued in the face of such a dramatic contraction in M2. The dismal Durable Goods report from last Friday confirms that the capital goods sector is still under significant pressure as a result of a lack of money in the general economy. With banks not lending to normal businesses and consumer credit contracting equally as violently, what is the basis for this rally and from where does the never-ending flow of equities juice flow?
Bank Non-Borrowed Excess Reserves: The Fed statistic that most closely correlates with the 2009 equities run-up appears to be bank non-borrowed excess reserves (bank NBER), which
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW.
