MARKET COMMENT
March 8, 2007
The Fed has been conducting 1 day repurchase agreements [“repos” or short-term loans] for much of the past week in
amounts ranging from $4-7 billion.
These
funds are bid for by the primary dealer network and recently have been done
beneath the Fed Funds rate.
A pretty good deal for the borrowers,
right?
Sometimes repos aren’t even repaid
and when that happens money is created out of thin air.
[Think money supply growth.]
The primary dealers will use the money as they see fit but
may rout much of it to their trading desks to play trade with.
Today’s 14-day $15 billion repo
gives the dealers two weeks [“your tax dollars at work”] to “use” that money.
If the money should wind-up at trading desks
you can rest assured program trading, “this machine starts automatically”, will
be the result.
Or, the funds could help
cover some subprime lending problems which we
featured in a Bloomberg article yesterday.
When we advised earlier this week that “Big Brother is Watching” we weren’t kidding.
The equity markets bounced today on the back of strength
overseas.
It may seem unusual for US
stocks to follow overseas markets but that’s where troubles first began.
Last week investors’ rediscovered risk and
many moved to the sidelines.
So far this
week the appetite for risk has quickly returned as some investors sensed buying
opportunities.
The behavior is
schizophrenic but that’s the market we have.
When markets are in rally mode and cash on the sidelines [and obviously juiced
higher by the Fed] is great, bad news is pushed to the side.
Negative retail sales numbers were dismissed as cold weather
related.
Later rumors of a bankruptcy
filing by subprime mortgage lender New Century
Financial only gave markets a slight pause.
Bulls chattered today that the subprime
problems and fears are overblown.
Tomorrow we get the employment report and with so much fresh
cash in circulation even a bad number may get shrugged-off.
So I guess the question remains, are we back to total asset
inflation again where all markets everywhere rally?
The best, or most humorous, story of the day has to be D.R.
Horton CEO Donald Tomnitz who said, “I don’t want to
get too sophisticated here, but ’07 is going to suck, all 12 months of the
calendar year.”
Oh, and with that kind of guidance the stock
went up!
Tomorrow the employment numbers come out and they’ll no
doubt move markets.
But with markets
juiced with more Fed injections the machines are on autopilot.
Don’t mess with Big Brother’s machines!
Have a pleasant weekend.
Disclaimer:
Among
other positions, the ETF Digest maintains positions in:
EEM, GLD and IEF.