Morning Audibles 3.31.10 - Last Day of MBS Purchases by Fed

If anybody really thinks this is the end of the line, they probably need their head examined. But it's nice to observe occasions with a little cake and a few party favors.

After all, tomorrow is April Fools Day, and therefore we have more important things on hand to celebrate in this country.


I could probably be really funny here and conjecture about all the things that might happen as MBS purchases by the FED fade under the carpet into the past, but I'd rather take a more normal approach, and treat it for what it is... Here, I'll give you the Easter Bunny version (so as to be seasonal).

Let's review what the Fed buying MBS did in the first place.



- Helped bolster fraudulent balance sheets for the next wave of liquidations.
- Given banks time to raise capital & loan loss reserves ahead of that.
- Given a feeling of 'safety' (with implicit guarantees)
- Allow for a period of "risk on" trades to occur (more on that later)*
- Create a hypothetical conduit for "risk on" trades to unwind to a desired direction (don't laugh or spit out your coffee when I say that, while I doubt that was "in the plan" - I don't think the FED is that smart), It may end up as a bonus feature.

Still, while it is now easy to understand what this form of QE accomplished in hindsight, it is difficult to understand what the withdraw of such will produce.

Remember, this move has been 'telegraphed' for a long time. Amen Ra (on this blog, and many other blogs, for that matter, have even taken to doing "countdowns" as the final day approached. To offer a comparison, remember back in February (on the Thursday before OPEX - after the close of the markets) when the FED did a surprise hike on the "discount rate"? Remember the market reaction? A quick "whoosh" in AH trading, but by the next morning, algos & HFT were treating it as nothing ever happened. Now, remember, the "raising of the discount rate" was another move that was widely telegraphed (yet nobody was sure when it was coming). This policy shift (with regards to MBS), has been known about for quite some time.

So I'm going to hazard a guess that BASICALLY NOTHING HAPPENS. Or, if it does (and on what day it occurs), will likely be attributable to the mysterious way in which the markets move in aggregate.

Bottom line? This is "priced in" (and has been for quite some time).

Now we can get in to OTHER hypothesis. Being "priced in" could actually mean that a "RISK OFF*" trend needs to ensue (as hinted about above). It's a matter of 'timing'. The official end of these purchases by the Fed comes at the end of the first quarter. So it could be, in hindsight, that the apparent strength in equities over the past 6-8 weeks (especially PD bank stocks), has been typical "window dressing" in anticipation of the final event. I mean, even if you own a "clunker" car, you're probably going to slop it up with a little "Armor-All" if someone is going to take a look at it. Right?

So I'd nominate the same hypothesis as we've been doing for the past few weeks as the possible outcome.

- Equities are probably a little overbought 'technically' here, it's probably time for a little correction
- The dollar seems to be readying for its final medium term rally of strength
- The Treasury needs yields to flatten (appropriate time for some RISK ON trades)

These are "highly probable" occurrences, but, as always, the TIMING can't be predicted. The exact duration & steepness of the move (how far - how fast) is tough to determine as well. So if you're looking at in terms of equity index levels, what does it mean? 1150? 1120? 1000? Do we push minimally higher first?

My best guess is that if we push higher now (say, within the next 3 trading days), it will only be 'marginally' higher (I've set 1183 as a bogey in that case). One thing that this Fed & this Administration have successfully accomplished thus far is to EXTEND & PRETEND. Someday we'll probably crash. But the easiest way to "get by" in the meantime is to AVOID going totally vertical.

ANOTHER date coming up on the calendar is April 14th (the anniversary of the sinking of the Titanic). I suppose we need to get about "re-arranging some deck chairs" in order to pay proper tribute.

So RELAX, and enjoy the cruise in one of these babies!