Tuesday, January 01, 2008

Happy New Year 2008

Top Line: The start of a new year should give all of us new opportunities to prosper both in the stock market and in our personal lives, including work. The stock market is the reason you have come and our position has not changed (much) since our last post. We think the Dow has a good chance to drop to 12,500. But, with the new year at hand, we think there is a good chance that new money will show up for a few days and send prices higher. That shouldn't last too long but we don't know how high it will take the Dow. As we get more info from the market we will share it.

Here we are on the other side of the holiday weekend and we are looking forward to a new year, just not yet...another few days off would be good. We would say that again in a few days so we might as well get to it. We trust you all had a great couple of weeks. Welcome back.

The past few weeks have included no fresh clues on the state of the market. In fact the Dow has closed the year very close to the level it was on our last post of December 19th, within a 100 points. The FSI, on the other hand, has moved up quite a bit so the speculative juices are flowing. You can check the two numbers from the two dates below. We'll see if that has any forecasting ability for the rest of the market in the next few days.

In the past week or so the market has been trading pretty heavy even as low volume greets traders. The last week of the year usually brings light trading so that is nothing new. We are surprised at the selling pressure even on these low volume days.

We will have more in the next few days as the market reveals itself to us.

In the mean time, we received a question from a reader asking about overnight repos which gets us back into the subject of the Fed--nicely done.

The Fed has the ability to own securities, usually highly rated bonds or US Treasury securities. But, it also has the ability to provide some "overnight" type funds to banks. A repo, repurchase agreement, is the way this is done. The Fed goes in to the market to purchase securities which it uses its cash to do, thereby adding some liquidity to the market. The banks can then have a little extra floating around overnight in order to meet their requirements. This type of transaction is usually done over a Wednesday evening as this it the primary reporting time for banks to the Fed.

The Fed has begun bigger programs over the past few months to alleviate the liquidity issues in the bond market. The first big move was to offer a lower discount rate and broader access to funds from the Fed's, so called, discount window. As the Fed did this, it also said it would provide these funds for 30 days so a bank could have more time to set its house in order.

More recently the Fed has instituted the TAF, term auction facility (see our December 12th post for more info on TAF) which really is a longer term repo. These are agreements the Fed enters into to provide funding for banks. The way this works though is the Fed doesn't do open market transactions, it actually offers funding directly to member banks similar to the discount window. The Fed buys securities, remember these are Highly rated securities, from banks with the intention to sell them back to the banks at a later date--repurchase agreements.

FSI: 106.39 (the past week's high was 108.91 on December 26th)

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