We Interrupt This Market Rally for the Largest Bond Sale in History

The Burden of Proof
Tyler Durden had a fascinating report out over the weekend that generated plenty of interest. The title is as sensational as it gets:
An Overview Of The Fed's Intervention In Equity Markets Via The Primary Dealer Credit Facility
I will not go over the whole article, you would do well to read the entire thing.

After that title I was looking forward to some carbon paper copies of stock buy orders with Ben Bernanke's signature on them. Something like:

"BUY 10,000 shares GOOG at ASK. Authorized by Boom Boom Bernanke."

In the end, the author Tyler Durden submits that the Fed used the Primary Dealer network to buy equities by channeling funds to them via the multitude of lending facilities.

Of course, there are other views and Ed Harrison of Credit Writedowns was underwhelmed by the article.

From my seat it seems semantics are at play here. Did the Fed directly buy equities? Of course not, not even those guys are that stupid. Did the Fed accept anything and everything as collateral for loans to the banks, who then turned around and ignited a 60% rally in the markets (with huge moves up for banking stocks) with the new found cash? It is hardly debatable. Did the Fed give a wink and a smile to the banks to do this very thing? I cannot be sure, but the burden of proof is on the Fed, not me.

Until the Fed releases what kinds of collateral they are holding and how much they lent out based on said assets, nobody can really know. Audit the Fed and let's see.

If You Have Nothing to Hide, You Have Nothing to Fear
At some point in every socialistic society, the Government becomes so all knowing and all powerful that they feel it is their duty to make right all the wrongs of the country. If a few principles have to be bent for the greater good, then so be it. If you happen to have a safety deposit box in the English bank in the story you need to feel better that the target of the raid was illegal assets, not your hard earned stuff. Of course, good luck getting your stuff back.:

The Raid that Rocked the Met
Why gun and drugs operation on 6,717 safety deposit boxes could cost taxpayer a fortune.

More than 500 officers smashed their way into thousands of safety-deposit boxes to retrieve guns, drugs and millions of pounds of criminal assets. At least, that's what was supposed to happen.

The entire article is a great read.

Some pictures from the story:

Police cutting open the boxes with grinders.

The loot:


Now I want to be clear here. This operation was focused and well studied to target drugs, drug money, and weapons. On the face of it, all noble actions.

Of course there are problems. The police are overwhelmed by the non criminal box owners wanting their items back. Of course it seems a few stacks of bills may have been "lost" during this process. Add to this, by definition items in the boxes are not declared anywhere, so you could have fraud by the box holders (I had 3 million dollars in there! Where is it?), or theft by the authorities (We only found 10 pounds sterling in there, not 3 Million, honest!).

If you are not a criminal you have nothing to fear except it may take a while to get your stuff back, and maybe not all of it comes back. But you did help fight the war on drugs, so you have that going for you. Which is nice.

At least if your safety deposit box is making you worry, you need never fear your bank deposits here in the USA. We have the FDIC, which guarantees your dollars will be there in the morning. Sheila Bair wanted you to know:

Of course the Fed can make it so that your dollars are not worth anything, but they will indeed be there, so relax.

Your Regularly Scheduled Rally Will Resume After this Brief Interruption for the the Largest Bond Sale in History
This week's 100 Billion Dollar plus funding bonanza will need a little help to make sure all goes well. In an effort to gets some traction, the dollar moved massively (snark) higher Monday (an entire point up! A monster 1/75th of a jump!) and this caused the equity market to have a fit. A move from 75 on the dollar index all the way up to 77 may just bet the ticket to scaring the foolish into piling into US debt. It cracks me up that the same game gets played and the supposedly nuanced bond market types swallow the bait every time.

Of course the bond sales this week will go perfectly, perhaps with the best participation rates ever seen. After that, the regularly scheduled market rally will resume either Friday or next Monday at the latest. Position accordingly.

Of course there is always one annoying guy at the party that tries to screw things up for everyone, and the #1 stock for the momentum "It's a new Era" type traders coughed up a hair ball tonight.

Baidu (BIDU) came in a bit under estimates across the board, which is no easy feat this earnings season (see earnings call transcript here). Of course this represents a great buying opportunity after a 12% move down after hours. Remember the beauty of dollar cost averaging!

If you are a nervous holder of BIDU here, allow the sage voices on the Yahoo Message boards to put your mind at ease:

just spoke to large investor - very excited about quarter.
2. slowing rev not a surprise - and not indicative of slowing momentum
3. EPS impact should not be that significant, as margins on Nest significantly higher
4. Expects company to highlight that rev momentum should quickly reaccelerate in Q1
5. Thinks announcement was a bit naive, but expects the take home message will be - and should be - Q3 rev and earning growth reflects a business expereincing extremely strong fundamentals right now, and that should quickly resume following the transition.
6. Does not expect 2010 forecasts to be reduced - in fact - expects them to INCREASE - reflecting the 9 mo trend of 2009

Buying on 20% ah selloff.

I had wondered what had happened to Casey Serin but it is clear Mr. Serin moved on from his real estate empire into BIDU stock and sees this pull back as a "sweet deal".

Comments

[Dave Wrixon:]

What worries me most about the Fed is whether what they declare as their total balance sheet is actually anywhere like accurate. Until they are independently audited, I will always be suffering from the impression that there a lot more dollars in circulation than anyone is actually admitting to.

Oct 27 06:35 AM

[Moon Kil Woong:]

Has anyone ever wrote on the effects of backstops and money supply? In essence, such actions increase the velocity of money artificially. Multiplying this effect by trillions surely had an effect. I wonder what the total liability they are sitting on with those now as rates rise.

My point is there is a lot to worry about on how the Fed has conducted itself, the strength of its balance sheet which they themselves admitted is pretty bad at over 40 to 1 capital to asset ratios without marking to market, and the proporiety and evenhandedness of their actions.

Whether or not Tyler is right or not is not the main issue. The main issue is that the government has the right to know what the Fed is doing since they are 100% backed by the Treasury and taxpayers. If they ever eat it big time they'll make Bear Stearns, AIG, and TARP together look insignificant.

Oct 27 07:17 AM

[Robert Mart...:]

Econ Disconnect:

Thanks for reporting both sides of Zero Hedge's report on Fed intervention in equities.

As Moon Kil Woong pointed out, seekingalpha.com/artic... the lack of transparency from the Fed is unacceptable, since taxpayers are backing up their bets.

What amazes me is how both the media and investors are willing to IGNORE the Fed buying of Treasurys and TIPs. As you and Zero Hedge have noted, Fed purchases are distorting the bid-to-cover ratio, and the Treasury auctions are then reported as a great "success." What's worse, the media then report that inflation is quiescent, since "embedded inflation expectations are so low."
OF COURSE! With the Fed buying Treasury and TIPs left and right, the yield curve is a sham, and indicates NOTHING about actual inflation expectations.

Enough ranting from me. The media will probably pick up on this story AFTER the fact, when Fed purchases stop and Treasury prices plunge.
Thanks for the article.

Rob

P.S. Has Zero Hedge/Tyler Durden stopped contributing to Seeking Alpha? I haven't seen him in a while.

Oct 27 10:17 AM

[goldbug101:]

The only safe deposit box I use is the one in my basement floor surrounded by lots of concrete.

Oct 27 12:17 PM

[Mr. Big:]

When the Fed prints money, it's called quantitative easing.

When the rest of us do it, it's called counterfeiting and we get thrown in jail.

When the Fed uses printed money to corner the Treasury market for the sole purpose of MANIPULATING PRICES, it's called "doing their job".

When the rest of us do it, it's deemed "illegal securities practices" and we are thrown in jail.

When the Fed engages in market operations that can potentially influence the stock markets and public perceptions, they are immune to independant audits or public inquiries.

When the rest of us do it, we have the Fed, the SEC, the FDIC and the IRS all over us the very next day.

Something is not right here.....

Oct 27 12:26 PM

[Dave Wrixon:]

Well they might be criminals but they are licensed criminals.

Oct 27 01:34 PM

[dragonpaw:]

The "something not right here" is the collusion of the fed, the treasury, and the regime in power in an attempt to finesse the economy out of the most severe recession in 70 years. The banksters are more than willing to co-operate as they are primary recipients of the largesse. They are probably immune from legal recourse in the conspiracy. Executive privilege, after all.
Don't worry Nixonites, no tapes to be found.
Average Joe trader is again being set-up to be "fleeced."(Again)
The next downleg of the market will be swift, severe, and unexpected. Triggered by, say (today's guess) Israel bombs Iran nuke facilities. Of course US knows; but Obama is horrified as is his public puppet persona dictates. As the DOW plummets to 5000 or less, the new regime jumps in aggressively and forcefully to restabilize the markets, mankind, indeed the whole world.
The sheeple 'baaah' in unison as the new world order takes shape. But as with all recent US gov't machinations, that shape is anyone's guess. (Unless one can really divinate or calibrate the new chosen'ones true Marxist desires)
"We have seen the enemy..........."

Oct 27 02:06 PM

[Economic Di...:]

All,
Thanks for all the comments.

Goldbug,
The safety deposit box story has not really made news as yet, I think it is pretty important.

Oct 27 05:29 PM

[Mr. Big:]

If there's one thing to be assured of is the record number of back-door dealings that have occurred since the start of the crisis. And I can bet that many of these dealings, should they ever come to public light, would probably spell the end of the social elite that have embedded themselves in the upper echelons of the Treasury, the Fed and the highest levels of government. That is why they will never be audited....there will never be a public inquiry. Words and actions has never gone hand-in-hand with these guys. They say they support a strong dollar, yet they continue printing massive amounts of new money and pledge to keep rates near zero percent. They say they want to increase credit to the general masses, yet credit conditions are now more restrictive than ever before. The fact is, all that bailout money and cash injections has likely gone to provide liquidity for big financial institutions to invest in the markets and drive up prices for their own record profits and big bonuses. In fact, almost every action by the Fed and Treasury has benefited big banks the most.....all at the expense of the tax payer. They threaten to cut the pay from Wallstreet executives......but really, that's just a token gesture..... What's a few million dollars saved, when compared to a hundred billion taken? The focus on executive pay, to me, is just a low-cost ploy to give the public a sense of justice... like giving bread crumbs to a starving man. While the focus is on bank pay, behind the scenes, the Fed and Treasury, together, continue to rape and pillage the value of the US dollar and set the foundations for the erosion of wealth for the American people. At the same time, they fatten the bellies of the Wallstreet elite....their future employers.

If you want to see what the perfect crime looks like, look no further than the offices of Mr. Ben Bernanke and company. In Ben we trust.

Oct 27 09:21 PM