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ES and the Great POMO Rally
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ES and the Great POMO Rally

  #851 (permalink)
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tomgilb View Post
OK, back on track and on topic:

This link explains the market situation very well, IMO.
Hussman Funds - Weekly Market Comment: A Reprieve from Misguided Recklessness - August 29, 2011

If his analysis proves accurate, we'll see unbelievably lower lows.

Here's an excerpt:

"Historically, the typical bull-bear market cycle has produced a range of 10-year prospective returns in a band between about 7.5% and 13%. That band presently corresponds to a range for the S&P 500 index between 600 and 1000. A 10% prospective return is right in the middle, at about 800 on the S&P. Once you recognize that profit margins are in fact cyclical, that range is about right, as uncomfortable as it may be to contemplate. Jeremy Grantham of GMO estimates that fair value is "no higher than 950." A tighter norm for prospective return between 9-11% maps to an S&P 500 between 750 and 850.
Finally, while I certainly would not expect it in the absence of extreme macroeconomic upheaval, major secular undervaluation as we observed in 1950, 1974 and 1982 would presently map to about 400 on the S&P 500. When you think of "once in a generation" valuations and "secular bear market lows" - that number, not anything near present levels, should be what crosses your mind. I am well aware that even discussing numbers like these, given the present mindset of investors, is likely to be dismissed as utterly ridiculous. Frankly, I would rather risk the ridicule of those who pay lip-service to research, cash flows, fundamentals, and value than to pretend these outcomes are impossible, when the historical record (and even the experience of the past decade) strongly indicates otherwise."

Yikes!

Thank you for bringing this back on topic.

Should the market continue as it has, I could certainly see price get down to this area. The big question is what Bernanke will do next. Many are predicting that the Fed will announce an Operation Twist like program that may have similar effects on the markets by the Fed selling shorter term maturities and buying longer term maturities with the intent of flattening the yield curve. This would most likely modestly raise rates on shorter term maturities while decreasing rates on longer term maturities. The net effect being to sell shorter maturities to the open market and buy the longer term maturities from the primary dealer banks. This would create a higher demand for longer term maturities and would have the primary dealer banks grab up these securities from the US Treasury auctions with the intent of flipping them to the Fed just as they did with QE I & II. They would then do what they do best with that cash which is to goose the market up.

My only qualm with this is that it is essentially attempting the same game with regards to stocks which raises doubts as QE2 had less effect on the market vs QE1 and investors could potentially recognize this as more of the same which wouldn't bring the rush to risk on again for an extended period as the past QE's did. The ironic thing with this idea (Operation Twist) is that Bernanke already conducted an analysis on the effectiveness of this program and stated that is was largely viewed as a failure.

This is just my speculation of course and I don't formulate any trading decisions based on it as I rely on Technical Analysis for the most part. But it is something to watch for going forward.


Last edited by Private Banker; September 11th, 2011 at 11:57 AM.
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  #852 (permalink)
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From the FOMC meeting:

"Participants discussed the range of policy tools available to promote a stronger economic recovery should the Committee judge that providing additional monetary accommodation was warranted."


Some argued that additional asset purchases could be used to provide more accommodation by lowering longer-term interest rates, aka-LSAP or QE3. QE2 did nothing to raise the rate of employment, nor did it help the housing crisis. All it did was create inflation and widen the wealth gap. Monetizing the debt (QE2) was a failure, so who in their right mind would consider doing it again?

As PB explained, some thought that increasing the average maturity of the Fed’s portfolio, would lower long term rates, without increasing the Fed’s balance sheet or reserve balances, aka-Operation Twist. Considering the fact that we already have record-low long-term rates, it hardly seems likely that this strategy would boost economic activity,

Another idea was to reduce the interest rate paid on excess reserve balances in order to help in easing financial conditions, aka-IOER. This might be helpful, but in of itself, is not the answer.

And finally, some argued that the Fed should do nothing. They argued that providing additional stimulus at this time would risk boosting inflation without providing a significant gain in output or employment, aka -Do Nothing. We all know this isn’t going to happen, because the Fed’s Keynesian logic dictates they add liquidity.

Whatever the Fed chooses to do or not to do, it is essentially a moot point. The monetary pumps are already flowing in Europe, and Europe’s equity markets have not responded positively.

The only way I want to be long U.S.equities, is if I am short European equities against them.


Last edited by tigertrader; September 11th, 2011 at 05:02 PM.
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Private Banker View Post
Thank you for bringing this back on topic.

Should the market continue as it has, I could certainly see price get down to this area. The big question is what Bernanke will do next. Many are predicting that the Fed will announce an Operation Twist like program that may have similar effects on the markets by the Fed selling shorter term maturities and buying longer term maturities with the intent of flattening the yield curve. This would most likely modestly raise rates on shorter term maturities while decreasing rates on longer term maturities. The net effect being to sell shorter maturities to the open market and buy the longer term maturities from the primary dealer banks. This would create a higher demand for longer term maturities and would have the primary dealer banks grab up these securities from the US Treasury auctions with the intent of flipping them to the Fed just as they did with QE I & II. They would then do what they do best with that cash which is to goose the market up.

My only qualm with this is that it is essentially attempting the same game with regards to stocks which raises doubts as QE2 had less effect on the market vs QE1 and investors could potentially recognize this as more of the same which wouldn't bring the rush to risk on again for an extended period as the past QE's did. The ironic thing with this idea (Operation Twist) is that Bernanke already conducted an analysis on the effectiveness of this program and stated that is was largely viewed as a failure.

This is just my speculation of course and I don't formulate any trading decisions based on it as I rely on Technical Analysis for the most part. But it is something to watch for going forward.

As I had anticipated, the FOMC has revealed their next intent of stimulus for the deteriorating economy which is indeed an "Operation Twist" like program with the Fed to sell $400 billion worth of US Treasury holdings with a maturity of 3 years or less and purchase $400 billion worth of US Treasuries with maturities of 6 - 30 year maturities with the intent of flattening the yield curve. It's astonishing that the Fed would pursue this course of action as the last Operation Twist is considered to be a total failure. Even Bernanke concluded this in a research report he put out a few years back. This action has to signal the end of Bernanke's career as Fed chairman. The political pressure now on him and the continued dissensions within the FOMC point to a potential exit. He's been a complete failure in his role and has continued to do the wrong thing. His interview on 60 minutes a while back stating that he's 100% sure QE2 will work is just one of his many comical follies.

This announcement was a huge disappointment for equities and resulted in a nice drop in price across the board in all the indices. Couple that with today's announcement of Moody's and S&P's downgrades on several banks most notably, BAC, C & WFC put some serious pressure on the market. It was also a double wammy for the Codger of Omaha... The ES is still within a pennant formation but has also formed another head and shoulders within the pennant and is looking to be in big trouble. The USD broke through it's small bearish trend line and will probably look to test the last swing high in January of 81.635. Bonds shot up huge sending rates to below December of 2008's low as expected with this type of program. It will be interesting to see how much lower the Fed can push rates as they are at extreme levels.

Going forward, I don't think equities will benefit much from operation twist as I previously speculated and we may see some serious fire works should this H&S pattern play out. Additionally, we may be seeing the true signs that the Fed may be out of bullets and could continue to see weakness in risk assets for quite a while. One benefit to all of this is it has provided some amazing volatility and has created at incredible intra-day trading environment. I would imagine that this should stick around for a while.

Cheers,
PB

Attached Thumbnails
ES and the Great POMO Rally-2011-09-21-es.jpg   ES and the Great POMO Rally-2011-09-21-usd.jpg   ES and the Great POMO Rally-2011-09-21-zb.jpg   ES and the Great POMO Rally-2011-09-21-10yrrates.jpg  
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  #854 (permalink)
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Private Banker View Post
As I had anticipated, the FOMC has revealed their next intent of stimulus for the deteriorating economy which is indeed an "Operation Twist" like program with the Fed to sell $400 billion worth of US Treasury holdings with a maturity of 3 years or less and purchase $400 billion worth of US Treasuries with maturities of 6 - 30 year maturities with the intent of flattening the yield curve. It's astonishing that the Fed would pursue this course of action as the last Operation Twist is considered to be a total failure. Even Bernanke concluded this in a research report he put out a few years back. This action has to signal the end of Bernanke's career as Fed chairman. The political pressure now on him and the continued dissensions within the FOMC point to a potential exit. He's been a complete failure in his role and has continued to do the wrong thing. His interview on 60 minutes a while back stating that he's 100% sure QE2 will work is just one of his many comical follies.

This announcement was a huge disappointment for equities and resulted in a nice drop in price across the board in all the indices. Couple that with today's announcement of Moody's and S&P's downgrades on several banks most notably, BAC, C & WFC put some serious pressure on the market. It was also a double wammy for the Codger of Omaha... The ES is still within a pennant formation but has also formed another head and shoulders within the pennant and is looking to be in big trouble. The USD broke through it's small bearish trend line and will probably look to test the last swing high in January of 81.635. Bonds shot up huge sending rates to below December of 2008's low as expected with this type of program. It will be interesting to see how much lower the Fed can push rates as they are at extreme levels.

Going forward, I don't think equities will benefit much from operation twist as I previously speculated and we may see some serious fire works should this H&S pattern play out. Additionally, we may be seeing the true signs that the Fed may be out of bullets and could continue to see weakness in risk assets for quite a while. One benefit to all of this is it has provided some amazing volatility and has created at incredible intra-day trading environment. I would imagine that this should stick around for a while.

Cheers,
PB

I don't think there is anything astonishing about Bernanke's actions, nor do I think his actions are contradictory to what he wrote in the research report you referenced. In fact, I really don't believe that Bernanke himself, thinks that increasing the average maturity (twisting) of the Fed's portfolio, would have any affect on the economy at all. Everyone who has studied economics, including Bernanke is aware that the last "Operation Twist" failed in 1961, and yes, he did reference this fact in that report which was about Fed policy alternatives during a zero fed funds environment. However, Bernanke stated in that report, "for credibility to be maintained, the central bank’s commitments must be consistent with the public’s understanding of the policymakers’ objectives and outlook for the economy" So what did Bernanke do? He chose the monetary equivalent of having one's cake and eating it too - printing money sans the unwanted effects of rising rates due to inflation. Nothing astonishing about that - he had to do something, and he had to send a message, as specious as it may be. The fact that his policy gun is out of bullets is a moot point and has already been fully priced into the market, and has ceased to have an effect on current volatility.

Sorry Mike, but blatant hypocrisy has to be addressed.

I’m not one to back down from a fight whether it is physical or verbal, especially when I am right. PB is guilty of doing, exactly what he criticized and chastised me of doing on this thread, i.e., writing a market commentary, only in PB’s case it was clumsily cloaked in Fed’s clothing.

And, to add insult to injury, he even abandoned his folksy, oh-my gosh approach to his commentaries, in an attempt to mimic (albeit unsuccessfully) my literary style and format, essentially parroting what I had already written.

Once again, it appears to be quite alright to embark on “adventures in financial journalism” as long as PB is the adventurer, and he gets to recount the tales. Unfortunately, his understanding of what is actually taking place, has about as much insight and depth as a report on CNBC.


Last edited by tigertrader; September 27th, 2011 at 07:49 PM.
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  #855 (permalink)
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tigertrader View Post
I don't think there is anything astonishing about Bernanke's actions, nor do I think his actions are contradictory to what he wrote in the research report you referenced. In fact, I really don't believe that Bernanke himself, thinks that increasing the average maturity (twisting) of the Fed's portfolio, would have any affect on the economy at all. Everyone who has studied economics, including Bernanke is aware that the last "Operation Twist" failed in 1961, and yes, he did reference this fact in that report which was about Fed policy alternatives during a zero fed funds environment. However, Bernanke stated in that report, "for credibility to be maintained, the central bank’s commitments must be consistent with the public’s understanding of the policymakers’ objectives and outlook for the economy" So what did Bernanke do? He chose the monetary equivalent of having one's cake and eating it too - printing money sans the unwanted effects of rising rates due to inflation. Nothing astonishing about that - he had to do something, and he had to send a message, as specious as it may be. The fact that his policy gun is out of bullets is a moot point and has already been fully priced into the market, and has ceased to have an effect on current volatility.

Sorry Mike, but blatant hypocrisy has to be addressed.

I’m not one to back down from a fight whether it is physical or verbal, especially when I am right. PB is guilty of doing, exactly what he criticized and chastised me of doing on this thread, i.e., writing a market commentary, only in PB’s case it was clumsily cloaked in Fed’s clothing.

And, to add insult to injury, he even abandoned his folksy, oh-my gosh approach to his commentaries, in an attempt to mimic (albeit unsuccessfully) my literary style and format, essentially parroting what I had already written.

Once again, it appears to be quite alright to embark on “adventures in financial journalism” as long as PB is the adventurer, and he gets to recount the tales. Unfortunately, his understanding of what is actually taking place, has about as much insight and depth as a report on CNBC.

Come on guy... Are you serious?... Don't you have better things to do than get upset over a thread discussion? Hilarious...

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  #856 (permalink)
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For what it's worth (and the risk of copy catting other potential posts), here's the upcoming Op Twist Buy/Sell schedule for the Fed.

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ES and the Great POMO Rally-twist-pomo.jpg   ES and the Great POMO Rally-twist-sell-schedule.jpg  
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  #857 (permalink)
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I might be mistaken, but I think I saw our friend Ben on the TV yesterday, @Private Banker...

Did you get as inspired as I did?

To sell short, I mean...

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Lornz View Post
I might be mistaken, but I think I saw our friend Ben on the TV yesterday, @Private Banker...

Did you get as inspired as I did?

To sell short, I mean...

That was a pretty wild day. Bear market bounce I would suspect. I'm intra-day trading this chaos and I was long on that rip your face off rally in the afternoon but flattened out before the RTH close. That seemed like just another short squeeze. In retrospect, I wish I had established a swing position way back on 7/27 but have been getting some amazing intra-day moves in and have been able to sleep well at night.

Hope you're kicking some serious ass in this market! This is 2008 all over again but maybe more this time.

Cheers,
PB

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  #859 (permalink)
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ES looking to be ripe for a down move. I would think we should see 1070 again in pretty short order.

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I would agree that the ES is looking weak. A couple charts with the wave volume applied.

D

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