Interdum stultus opportuna loquitur...

Tuesday, September 21, 2004

Fed Tightens - so what else is Newish?

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Federal Reserve Open Market Operations

A $4bill overnight, all of it in market-greasing Treasury-backed collateral. There used to be an unwritten rule that the OMO desk stayed out of the market on FOMC announcement days, but that rule's not been operational for a few months.

The repo was a tad small - under the notional $5bill cutoff for an intraday booster - and the upmove from midnight was only a point and a half. The real juicing came at 4:50 a.m. our time - 35 minutes after the usual FOMC-announcement stop-tickling. The S&P futures moved up 4.5 points in 6 minutes - that's a decent move, and I have not found an explanation for it (except the usual goosing that has been happening with increasing frequency in the last couple of months).

It has to be said that I don't care if the US authorities have decided to manipulate their markets in the lead-up to the election... the only important thing is to be on the right side of the market, or to get out of the road - and quick - when they are doing so.

Economic Statistics

Before the market opened, data were released on Housing Starts. The fact that mortgage rates have softened slightly in the past few months meant that the market expected housing starts to pick up; they did - but by more than expected.

Starts rose 0.6% to 2.000 million, versus a consensus expectation of 1.93m (the estimates ranged from 1.85m to 2m - so the outcome was at the top end of the consensus range). Permits - for which there isn't a consensus estimate - fell 5.5% to 1.952m.

At midnight our time, the State Street Investor Confidence numbers were released. The people who put this number together assert that the index is correlated with risk-taking in portfolios - the higher, the more risk people are prepared to accept in their investment decisions (i.e., a higher exposure to equities overall, and a higher exposure to "beta" within their equities allocation).

It apparently looks at actual levels of risk in portfolios (by which they mean ex ante levels of risk) rather than asking people about their risk tolerance (because people lie in surveys... all the time).

Anyway, it dropped a squidge (from 86.5 down to 85.3).

I have to say that the brevity of the data series (weekly going only back to 1998) means that the jury is out concerning meaningful inference from these numbers. You can't draw meaningful forward looking inferences from a timeframe where the first half is the tail end of a mania. Still, it will be interesting as the data piles up over time.

And of course US "official" interest rates were hiked by the expected 0.25%. Greenstain (and his band of wankers who are so incompetent that they can't make a decent living in the private sector) is locked in to a tightening cycle that the US economy can't afford; just as he was raising rates in 99-00 after the US markets topped, he is raising them now because financial markets want him to, not because it's required. He is a bona fide moron who shold be living in a retirement village for failed entrepreneurs.

The text of the announcement shows that the bankers must have three hands - they couldn't pull themselves that silly with two. There was talk of how the US economy had "gained traction" recently... yes, and the US is winning in Iraq, too... and Iraq will have elections... and Osama and Hussein were chums... and Iraq is loaded with WMDs... and Iraq was involved in 911... and Palestine was Terra Nullius in 1948.

Major US Indices

The DJIA gained 40.04 points (0.39%) to close at 10244.93 points; the broader S&P500 gained 7.1 points (0.63%), finishing the session at 1129.3.

Everything was even more rosy in Tech-Land: the Nasdaq Composite gained 13.11 points (0.69%), to close at 1921.18, while the larger-cap stocks fared better with the Nasdaq100 adding 11.19 points (0.79%), to end at 1435.91 points.

The broader stock market measures were more bullish than the Dow: NYSE Composite Index gained 67.32 points (1.03%), closing at 6633.22, while the broadest measure of US equities, the Wilshire 5000 posted a gain of 73.13 points (0.67%), finishing the session at 11010.22

NYSE Volume was pretty strong, with 1.32 billion shares crossing the tape, whileNasdaq Volume was just a tad below average, with 1.53 billion shares crossing the tape.

Nasdaq Composite1921.1813.110.69%
NYSE Composite6633.2267.321.03%
Wilshire 500011010.2273.130.67%
NYSE Volume1.32bn--
Nasdaq Volume1.53bn--
US 30-yr yld4.84%-0.02%-0.45%

Market Breadth & Internals

On the NYSE the breadth was very strong - advancing issues trounced decliners by 2325 to 969, for a single-day A/D reading of 1356; Nasdaq gainers exceeded losers by 2001 to 1076.

NYSE advancing volume was considerably higher than volume in decliners: 959.91 million shares were traded in stock that rose for the day, while 340.64 million shares changed hands in stocks that lost for the session. Nasdaq advancing volume outpaced volume in decliners by 620.52 to 247 million shares.

140 NYSE-listed stocks rose to new 52-week highs, and 13 posted fresh 52-week lows, while on the Nasdaq there were 65 stocks that hit new 52-week highs, and 24 which fell to fresh 52-week lows.

Advancing Volume (m)959.91620.52
Declining Volume (m)340.64247
New Highs14065
New Lows1324

Market Sentiment

The VIX (Volatility Index) is really getting a bit scary. It is close to 8 year lows, and really indicates a preponderance of bullish sentiment.

Considering that the market isn't really going anywhere, you might not expect folks to be so bullish. But any examination of sentiment data reveals that the herd gets charging hardest right at the high (which is where I think we are at present).

The VIX-SPX ratio rose above 80 again (it's at 82 and change) and the equity put-call ratio (PCR) posted a single-day reading of 0.70. That's a sharp decline from yesterday, but it was a contraction in put buying that drove it, rather than an expansion in call buying. At present the put-call ratio is not at a level that reinforces the ebullience of the VIX and VIX/SPX numbers.

Equity Call Volume2.32m0.13m5.98%
Equity Put Volume1.63m-0.29m-14.96%
CBOE Volatility Index13.66-0.77-5.34%
CBOE Nasdaq Volatility Index20.3-0.26-1.26%


Bonds rose quite hard at the long end, with the benchmark US 30-yr yld shedding 0.022 points to 4.843%. the yield curve steepened as shorter maturities dropped; in effect the bond market is betting that the Federal Reserve is close to the end of its tightening cycle.

When will the bond market vigilantes return? The bond market is supposed to exist to help re-align the rate of time preference by changing the rate at which funds can be inter-temporally substituted. At present the US government is spending like a drunken sailor (growing debt at rates that far exceed economic growth) and adding to bond supply hand-over-fist. And yet bond prices are rising. That is an dis-equation that cannot be sustained - the question is how badly foreign holders of US bonds get burned, and when.

UST 2Y (yld)2.4530.041.7%
UST 5Y (yld)3.2720.010.31%
UST 10Y (yld)4.037-0.01-0.37%
UST 30Y (yld)4.837-0.027-0.56%
The Banks Index gained 0.65 points (0.66%), finishing the session at 99.14; within the index,
  • the Derivative King - JPMorganChase gained $0.72 (1.83%) to close at $40.10; and
  • Citigroup gained $0.25 (0.55%) to close at $45.65

The Broker-dealer Index gained 3.23 points (2.56%), finishing the session at 129.55; the ticket clippers lined up as follows -

  • Merrill Lynch gained $1.87 (3.66%) to close at $52.97
  • Morgan Stanley Dean Witter gained $1.42 (2.79%) to close at $52.38
  • Goldman Sachs gained $3.22 (3.51%) to close at $94.90
  • Lehman Brothers gained $3.73 (4.91%) to close at $79.75

The Philadelphia SOX (Semiconductor) index gained 3.85 points (0.96%), finishing the session at 403.75

  • Triquint gained $0.16 (4.01%) to close at $4.15
  • Micron Technology gained $0.03 (0.24%) to close at $12.76
  • Intel gained $0.16 (0.76%) to close at $21.08
  • Altera gained $0.45 (2.2%) to close at $20.92
  • JDS Uniphase gained $0.09 (2.59%) to close at $3.56

Gold & Silver

Gold strengthened by $4.80 (1.18%), which contributed to the Gold Bugs Index adding 8.19 points (3.97%), finishing the session at 214.36. Silver also had a good day, rising $0.09 (1.49%) to close at $6.35 per ounce. The Gold and Silver Index (XAU) gained 3.24 points (3.48%), finishing the session at 96.37.

PHLX Gold and Silver Index96.373.243.48%
AMEX Gold BUGS Index214.368.193.97%


That unaccountable pillock who (as I said last week) reckoned that oil prices would fall 30%, might do a Greenspan and get the magnitude of the move right but the direction exactly 180 degrees wrong.

Oil was firmer, rising by $0.34 per barrel, closing at $46.7 per barrel and trading for part of the session above $47. This lent a pretty strong bid to stocks in the Oil and Gas Index (XOI) which gained 19.91 points (2.95%) to 695.76 while the Oil service stocks (OSX) Index gained 1.93 points (1.66%) ending the session at 118.53 points.

Reuters CRB27831.09%
Crude Oil Light Sweet46.70.340.73%
AMEX Oil Index695.7619.912.95%
Oil Service Index118.531.931.66%


the US dollar index got pummeled after the FOMC announcement (which the bond and currency markets took to imply a slowing - or abandonment - of the tightening bias). To be frank, I can't understand why people would bother with making marginal changes to currency evaluations based on teensy increments or decrements in official interest rates, when so much else mitigates against holding USD denominated reserves. Just slam the USDX to about 75 (my longer-term target) and be done with it - rather than pussying around.

The principal beneficiaries were the Swiss Franc and the Euro - which is as might be expected given that any gains in the Yen are likely to be capped by BoJ intervention (although they claim they have left that sorry episode behind them).

Australian Dollarar0.70360.0310.47%
Swiss Franc1.2541-0.0179-1.41%

European Markets

France's benchmark CAC-40 Index gained 27.45 points (0.74%) ending the day at 3731.14; the German DAX-30 Index gained 13.34 points (0.34%), closing at 3991.02; and the FTSE-100 Index gained 28.9 points (0.63%), finishing the session at 4608.4