Kudos to MMs

trefoil · Sep 4, 2009

Down slightly in GDX, that is, as I write this. Rest of the market looks OK.

jack hershey · Sep 4, 2009

Quote from nitro:

I'm sorry I don't get it. Most tightly hedged positions don't make money. Are you saying you are just going for a small move?
More...

You have held short from 1030 down to 992 and in a few minutes ES is going through 1015 for the third time today. A run of 51 points (both directions included).

Did you cover the short @1015 for a net of 15 points or will you let it keep running?

nitro · Sep 4, 2009

Quote from jack hershey:

You have held short from 1030 down to 992 and in a few minutes ES is going through 1015 for the third time today. A run of 51 points (both directions included).

Did you cover the short @1015 for a net of 15 points or will you let it keep running?
More...

No. Going short into the weekend, but I will be ready on the ES open on Sunday. Everything is so easy in hindsight, but perhaps I should have taken 99x, seeing that every unemployment day for months has been an up day. In addition, holidays tend to be slow days, and slow days tend to go higher.

Sooo easy in hindsite, and a bit frustrated...

jack hershey · Sep 4, 2009

Quote from nitro:

No. Going short into the weekend, but I will be ready on the ES open on Sunday. Everything is so easy in hindsight, but perhaps I should have taken 99x, seeing that every unemployment day for months has been an up day. In addition, holidays tend to be slow days, and slow days tend to go higher.

Sooo easy in hindsite, and a bit frustrated...
More...

Thanks.

nitro · Sep 6, 2009

FINDING THE RIGHT TOOLS FOR THE EXIT STRATEGY JOB
By Steven K. Beckner
Friday, Sept. 4, 2009

Although Federal Reserve Chairman Ben Bernanke and his colleagues
have repeatedly said they have "the tools" to tighten monetary policy
when the time comes, those tools and the exact "exit strategy" for using
them are still being crafted.

Also yet to be determined is which tools to use and in what order.
That's a matter that can only be decided as the country continues to
emerge from its economic and financial morass.

The Fed has two broad methods it can use to tighten when the time
comes: raising interest rates and/or reducing reserve balances. And
there is an array of tools the Fed can use to implement those
strategies. That presents both an opportunity and a conundrum. How and
when those tactics are used to implement the exit strategy will depend
on how economic and financial conditions evolve.

Among the many challenges is one presented by Fannie Mae and
Freddie Mac. Those massive home-financing "government sponsored
enterprises" now under federal conservatorship, have been near the
center of the financial crisis since the beginning. And they continue to
complicate the Fed's life prospectively, albeit in a different way -- by
threatening to undermine the effectiveness of one of the tools the Fed
is counting on most to help it eventually tighten credit and contain
inflation.

That tool is the Fed's ability, since last October, to pay interest
on reserves. Currently the Fed is paying 25 basis points on reserves,
which is the upper end of the Fed's 0%-0.25% target range for the
federal funds rate.

As and when the Federal Open Market Committee begins raising its
federal funds rate target, the Fed's aim is to pay enough interest on
reserves to discourage financial institutions with deposits at the Fed
from lending their vast reserves into the funds market and undercutting
the federal funds rate.

As Bernanke explained in a July 21 op-ed article in the Wall Street
Journal, "Banks generally will not lend funds in the money market at an
interest rate lower than the rate they can earn risk-free at the Federal
Reserve. Moreover, they should compete to borrow any funds that are
offered in private markets at rates below the interest rate on reserve
balances because, by so doing, they can earn a spread without risk."

"Thus the interest rate that the Fed pays should tend to put a
floor under short-term market rates, including our policy target, the
federal-funds rate," Bernanke wrote. "Raising the rate paid on reserve
balances also discourages excessive growth in money or credit, because
banks will not want to lend out their reserves at rates below what they
can earn at the Fed."

But there's a rub. Because the Fed cannot pay interest on reserves
held by the GSEs, those institutions have partially thwarted the Fed's
ability to set a floor under the effective funds rate by lending in the
funds market, as seen last fall. And there is concern at the Fed that
the GSEs will undercut the floor in the future when the time comes to
raise the funds rate.

If, for example, the FOMC were to decide to increase the funds rate
to 1% and to pay an equivalent amount of interest on reserves, but the
GSEs are unable to earn that 1% on their Fed deposits, the GSEs will
inevitably lend those funds in the market and drive the effective funds
rate below the 1% target.

Carnegie-Mellon University Professor Marvin Goodriend, a leading
exponent of using the interest-on-reserves policy instrument in
conjunction with quantitative easing, said that, ideally, he would like
to see GSE deposits either removed from the Fed balance sheet or be paid
interest. "That would be the most direct approach to clearing this up."

"This is a priority, so we need to deal with it as directly as
possible and make (interest on reserves) work as cleanly as possible as
a floor" under the funds rate, said Goodfriend, former director of
research at the Richmond Federal Reserve Bank.

But, barring some change in the law, neither alternative seems
likely in the near future. By law, the Fed has long acted as the fiscal
agent for the GSEs. However, last Fall's Emergency Economic
Stabilization Act of 2008 limited the payment of interest to only
depository institutions, and the GSEs are not considered depository
institutions.

How to make interest on reserves work more effectively when it
comes time to raise the funds rate is a matter of no little
consternation and exit strategizing at the Fed, as suggested in the
minutes of the mid-August FOMC meeting.

"The staff presented an update on the continuing development of
several tools that could help support a smooth withdrawal of policy
accommodation at the appropriate time," the minutes disclosed.

"These measures include executing reverse repurchase agreements on
a large scale, potentially with counterparties other than the primary
dealers; implementing a term deposit facility that would be available to
depository institutions in order to reduce the supply of excess
reserves; and taking steps to tighten the link between the interest rate
paid on reserve balances held at the Federal Reserve Banks and the
federal funds rate," the minutes said, adding that "several participants
noted the need to continue refining the Committee's strategy for an
eventual withdrawal of policy accommodation."

These are not separate and distinct measures, but would go hand in
hand with the effort to "tighten the link" between the interest paid on
reserves and the funds rate target.

Take reverse repurchase agreements, in which the Fed sells
securities from its portfolio, thereby removing funds from the market,
and agrees to buy them back at a later date.

The minutes' reference to doing reverse repos with "counterparties
other than the primary dealers" seems clearly aimed at nondepository
institutions like the GSEs.

As the Fed explained in its July Monetary Policy Report to
Congress, "Eliminating the incentive of nondepository institutions to
lend their excess funds into short-term money markets would help ensure
that raising the rate of interest paid on reserves would raise the
federal funds rate and tighten monetary conditions even if the level of
reserve balances were to remain high."

Bernanke addressed the issue in his op-ed, after observing that
"some large lenders in the federal-funds market, notably
government-sponsored enterprises such as Fannie Mae and Freddie Mac, are
ineligible to receive interest on balances held at the Fed, and thus
they have an incentive to lend in that market at rates below what the
Fed pays banks."

If a gap between the federal-funds rate and the rate the Fed pays
on reserves persists, he said, "the problem can be addressed by
supplementing payment of interest on reserves with steps to reduce
reserves and drain excess liquidity from marketsâthe second means of
tightening monetary policy." And the first method he listed was
"arranging large-scale reverse repurchase agreements with financial
market participants, including banks, government-sponsored enterprises
and other institutions."

Goodfriend said that "if the Fed were to offer these kinds of
reverses they could be offered in a way that would be most attractive to
the GSEs. ... To the extent (the reverse repos) absorb funds that would
push the funds rate up to the target."

One way or another, Goodfriend stressed that ways must be found to
prevent the GSEs from undermining the Fed's ability to raise the funds
rate and set a floor under it. "It's a matter of rejiggling the ways the
GSEs manage their deposits," he said. "It seems like the fix ought to be
made there."

"In an exit strategy, job one is to create full confidence in the
Fed," he said. "You need to do that in the cleanest way possible. This
is the front line of our defense against inflation. You don't want to
run an exit strategy hoping for the best; you prepare for the worst."

The beauty of interest on reserves, if it can be made to work
properly as it does for a number of foreign central banks, is that it
theoretically opens a second channel for conducting monetary policy.
More...

Continued below...

nitro · Sep 6, 2009

Continued from above...

The Fed can either raise the funds rate and in turn influence other
rates across the yield curve, bolstered by the interest on reserves
floor. Or it can tighten quantitatively, just as it eased quantitatively
by taking "steps to reduce the overall level of reserve balances" per
the Monetary Policy Report.

There too reverse repurchase agreements can lend a hand. Secondly,
the Treasury could sell more "supplemental bills" and deposit the
proceeds with the Fed. "When purchasers pay for the securities, the
Treasury's account at the Federal Reserve rises and reserve balances
decline," Bernanke noted.

A third possibility, one mentioned in the staff presentation to the
FOMC, would be for the Fed to offer to let banks -- but not GSEs -- put
their reserve balances in term deposits. That would have the effect of
immobilizing those reserves for the duration of the term.

Term deposits at the Fed "would pay interest but would not have the
liquidity and transactions features of reserve balances," the Monetary
Policy Report said. "Term deposits could not be counted toward reserve
requirements, nor could they be used to avoid overnight overdraft
penalties in reserve accounts."

Goodfriend agreed that term deposits could be helpful in keeping
some liquidity out of the money market and helping the Fed tighten
credit, but he said it could be "a little tricky."

"The Fed could offer a rate above the overnight rate in return for
tying up reserves, but the question is how much of a premium should it
pay," he said. "If you're in an exit strategy where everybody expects
the funds rate to move up over time, you'd have to pay enough to cover
anticipated increases in the funds rate."

One way around that problem would be to offer only term deposits
with a short maturity of a week or so, but then "you're not impounding
reserves by very much."

An added complication is the spread between the federal funds rate
and the primary credit (discount) rate, which the Fed narrowed from 100
basis points to 25 basis points in the course of combatting the
financial crisis. To avoid firms potentially "arbitraging the window,"
i.e. borrowing at the window and lending into the funds market or making
term deposits at the Fed, it might be necessary to widen the spread
between the discount rate and the funds rate back out.

Doing so was mentioned in a broader context by Brian Madigan,
director of the Fed's Division of Monetary Affairs, in a presentation at
the Kansas City Federal Reserve Bank's recent Jackson Hole symposium:
"When market conditions normalize, a wider spread of the primary credit
rate over the funds rate may be needed to provide incentives to all
banks to seek market sources of funds," he said.

Of course, the different methods of tightening are not walled off
from each other. For example, by pushing up the rate paid on reserves,
the Fed would not only support a higher funds rate target, it would
discourage lending.

Nevertheless, given the availability of two policy channels, might
the Fed tighten in one and leave policy loose in the other? In a sense,
it would be doing that by raising the funds rate and the interest paid
on reserves while keeping its balance sheet large. But officials are
skeptical about pursuing an explicit two-track tightening strategy.

Asked earlier this week whether the Fed might conceivably nudge up
the federal funds rate at some point to signal its desire to normalize
rates and prevent inflation, St. Louis Federal Reserve Bank President
James Bullard told me, "I haven't' seen anything that's going to lead me
to that sort of policy."

Bullard made the point that the credit easing policy is designed to
narrow spreads between "segmented" asset markets, where yields on
mortgage backed securities, for example, diverge from yields on, say,
Treasury securities. As Fed Vice Chairman Donald Kohn commented in
Jackson Hole, assets become less substitutable in a financial crisis and
this gives the Fed "scope" to affective relative asset prices -- and in
turn yields.

The conventional policy of changing the federal funds rate target,
on the other hand, depends on the assumption of "perfect asset
substitutabiliity all across the asset spectrum," so that a change in
the funds rate filters through the whole yield curve.

So Bullard suggested it would be "inconsistent" to try to tighten
by raising the funds rate while continuing to conduct credit easing
through asset purchases. Other officials have been similarly skeptical,
telling MNI they expect the Fed will likely need to "do both" rate hikes
and reserve reduction at more or less the same time.

That was also the suggestion of the Monetary Policy Report:
"Despite continued large holdings of assets, the Federal Reserve will
have at its disposal two broad means of tightening monetary policy at
the appropriate time. In principle, either of these methods would
suffice to raise short-term interest rates; however, to ensure
effectiveness, the two methods will most likely be used in combination."

However, it will be difficult for the FOMC to be completely
even-handed in its use of the two methods. Looking at it more
positively, the Fed will have the flexibility to choose among the best
methods of tightening as the situation demands.

"If you're thinking about signaling an exit, you can signal it by
increasing interest rates or by trying to affect spreads," said
Goodfriend. "You can do either one in principle, but you have to choose
where you want the signal to come from depending on the nature of the
economy."

"If you think credit markets are improving, but labor markets are
not, you might want to pull back on credit easing as a signal, but if
labor markets are better but credit markets are not you could use the
funds rate," he continued. "It depends on where the improvement is
taking place, and it's a reasonable horse race right now. Credit markets
are improving slowly, but we're still seeing a contraction in jobs."

Much as the Fed dotes on interest on reserves, officials recognize
it is just one arrow in the quiver.

"It's a tool, but we can't just rely on interest on reserves to do
everything for us going forward -- not with the size of the balance
sheet," Bullard told me.

"We may be able to buy time on that, because it may be awhile
before we raise interest rates or have to raise interest rates on
reserves," he went on. "Right now we're at a quarter of a percent, but
if we get up to 3% or 4% on $1 trillion it starts to be a lot. So I
think it's a tool, but probably not the only one."

"We can't rely just on interest on reserves to manage the balance
sheet," Bullard said. "We're going to have to sell off a portion of our
portfolio when the time comes."
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arbs-r-us · Sep 8, 2009

Quote from nitro:

No. Going short into the weekend, but I will be ready on the ES open on Sunday. Everything is so easy in hindsight, but perhaps I should have taken 99x, seeing that every unemployment day for months has been an up day. In addition, holidays tend to be slow days, and slow days tend to go higher.

Sooo easy in hindsite, and a bit frustrated...
More...

DUDE!! Did you cover? Futes in launch mode tonight!

nitro · Sep 8, 2009

Quote from arbs-r-us:

DUDE!! Did you cover? Futes in launch mode tonight!
More...

No.

nitro · Sep 8, 2009

"FV" ~895

dont · Sep 8, 2009

this thing is starting to irritate me, it should be a lot lower.