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US Markets in Puppy Buying mode?

Written by A Forex View From Afar on Tuesday, March 11, 2008

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Equity, Forex and Bond Traders are now acting like small puppies, reach your arms out to stroke them, and they start yelling for joy.

Our puppy-traders started the buying frenzy once with the news that The Fed, with the help of other ECB, BoC, BoE, and SNB will continue Financial Auctions together, while Swedish Riksbank and Bank of Japan have announced they won't sustain the Term Securities Lending Facility auctions.

The rumor was seen as so big that S&P 500 futures jumped from 6 points to 26 points (about 2%) in no time.

The important news is that the maturity was extended from overnight to 28 days, while the counter-parties were extended to federal agency debt, federal agency residential -mortgage backed securities and non-agency AAA/Aaa-rated private-label residential mortgage backed securities.

The good part is banks will be able to get some liquidity from mortgage backed securities making them collaterals. The mortgage backed securities market is now at a freezing point, with no transactions done this year. this could thaw them a bit.

After the good things were said, the bad part followed very closely; This will be the third attempt for "United Central Banks" Auctions. The first two, in December and January, only managed to send down the Dollar Libor rates, it achieved nothing more than giving Institutions cheap money to offset bad debt against.

Mortgages Securities are accepted as collateral under the new scheme (they are the ones that stayed at the soul of the sub-prime). My big question is how many of them still have AAA debt rating to be accepted as collateral by the FED? And from the ones who did retain AAA rating, how many of them were left so by rating agencies so Banks won't have to write them down...Is this what the Fed wants as a counterpart? There were enough questions previously in regard to how sub-prime debt was valued by the rating agency, and how the Crisis was caused by the cutting of that debt valuation in July and October.

My second thought is that all of these auctions are sterilized by the Fed so the monetary base remains constant. This means if bank A borrows $5bn, the Fed will need to sell Treasury bonds worth of $5bn. Going above the fact that the Fed will receive sub-prime debt in the place of Treasury Bonds, the US Treasury already has problems selling it's month to month debt, and with the Fed's new T-bills in the market it will make it even harder.

Not everyone can go to the Fed and place its assets, only the primary dealers can. My opinion is that the market may not get to see too much of the $200bn, it will be "safe guarded" by dealers, as it was with the rest of the auctions.

Going back to the blog's post main theme, what was all the joy-about? I really can't see the reason. Our Puppy Markets are just looking for every possible reason to buy.

In the foreign exchange market, the dollar was by far oversold and now we created the base for future dollar-shorts trades, aka buying on dips. We needed a pullback, maybe not as violent as the one we had today, but hey, a Dip is a Dip, as they say.

Hope the puppies won't get to scared went the Big Dogs are let off their leash.

FT: Fed liquidity plan set to boost stocks
Bloomberg: Fed to Lend $200 Billion, Take on Mortgage Securities
WSJ: Fed Expands Securities Lending

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