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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: ild who wrote (26413)	2/14/2005 10:59:31 AM
From: russwinter	Respond to of 110194

Wizard behavioral clues coming up Tuesday and Wednesday: Kiting with the Gang by Steve Northwood, Saturday February 12 2005 wallstreetexaminer.com Earlier this week I was wondering how the Fed was going to deal with the financial turbulence of $51 billion in new Treasury paper being dumped on the market all at once. Just as they got everything stabilized after the previous week's rate increase, they had to chart a course through the next seven days of heavy seas, and battering winds. They were faced with figuring out just how much monetization would be needed for the Treasury Debt Tsunami. After the Treasury auctions earlier in the week, settlement began with new requirements (new borrowing after refunding of redemptions) of $11B Thursday, $5B Friday (which will be returned Monday), and Tuesdays $40 Billion in net new financing. Also facing the Fed were $10.5B in assorted expiring repurchases (very short term Fed lending), which had the potential to drain additional liquidity if not refunded. The one wild card in the mix was a large liquidity blast coming from the Treasury thanks to tax refunds, which are issued each Friday of tax season. Yesterday’s refunds totaled approximately $20 Billion, the largest single payday of the season. The Fed doesn’t work in a vacuum in deciding how much liquidity they pump into the system. They seek advice from the Gang (group of 22 major financial institutions that deal directly with the Fed known as Primary Dealers). It seems convenient that those who benefit most from Fed liquidity operations are relied on to advise how much money will be created. My thoughts were that the Fed wouldn’t need to provide much liquidity for the weekly bill settlements if all the money was going to be flushed right through the system as tax refunds. I was surprised – make that shocked -- when the Fed replaced the expiring $10.5 Billion repurchases with $20.25 Billion in 6 and 14 day repurchases, a net add to the system of $9.75 Billion. Obviously the Gang convinced the Fed that they desperately needed liquidity to deal with the huge settlements facing them, and they would need it for longer than just a day. The extra liquidity calmed the markets Thursday and allowed the Gang to easily settle the weekly Treasury auctions. Then came Friday’s flush of $20 Billion into the banking system. Sure, it was direct deposited into Joe Sixpack's bank account, and he certainly didn’t wire it out to his broker to buy the latest hot IPO, but that money is sitting in an account at one of the Gangs banks. Banks don’t let money sit still; they put it to work. I’m not trying to suggest that it was directly invested in the market (that would be illegal) but since these banks (almost) all have investment & clearing houses, excess money in the banking side can displace funds needed -- or wanted – elsewhere in the system. The bottom line is dollars are fungible and they find a home. One week ago a lot of the tax refunds ended up in the bond market (which is legal for banks to do directly), driving down rates. Guess where it ended up this week? One look at the S&P at about 10:30 Friday morning will give you a clue. Let’s step back for a moment and look at a definition: Kiting -- Illegally benefiting from float, for example by depositing and drawing checks between accounts at two or more banks. Now if you take the word illegal out of the definition (we have already ruled that out), the rest sure seems to fit. OK, now the deed is done. Sure there was a little too much liquidity floating around (thanks to the Gangs pleading), and maybe it goosed the market a bit. We will see some distribution in the morning on Monday, while the Gangs’ houses clear their accounts, and probably a mild sell off in the afternoon. So what damage does it cause? If Alan Greenspan and the Fed were complicit, they will accept it with a wink and a nod, there won’t be any problem with future liquidity requests. If, on the other had, the Fed takes a dim view of the Gang's activities and feels that its primary dealers snookered them……. well those repurchases expire beginning on Wednesday, and Tuesday there is still a huge $40 Billion in net new notes to settle.

To: ild who wrote (26413)	2/14/2005 2:22:39 PM
From: ild	Read Replies (1) \| Respond to of 110194

Currencies: IMF Gold Revaluation Wouldn?t Tarnish the USD Karin Kimbrough & Sharon Yeshaya (New York) IMF gold sale unlikely Gold took a tumble last week on the back of UK Finance Minister Gordon Brown’s proposal before Parliament to revalue and or sell a portion of the International Monetary Fund’s gold holdings. The communiqué issued from the G7 last weekend said that the IMF would look into the revaluation and sale proposal over the next few months, and that managing director Rodrigo Rato would report back in April, when the IMF is scheduled to meet in Washington. While a revaluation is plausible, we see a sale and revaluation as unlikely. There are several key obstacles. First, the IMF would probably need to get agreement from major gold producers such as Canada and South Africa, which in the past have opposed sales of gold by the IMF because this would be detrimental to the mining companies that are contributors to those countries’ economies. Second, the IMF would need to obtain an 85% favorable vote from its members before being able to revalue or sell any of its gold. The entire G7 represents only 45% of IMF votes, and as discussed below, it’s not even clear that all members of the G7 would be in favor of the IMF doing anything with its gold. The US holds a 17.3% share of the votes, but the US vote would be dependent on approval from both houses of Congress. Moreover, the US administration has already effectively given the thumbs down to any such plan: On February 4, just ahead of the G7 meetings in London, John Taylor, US Treasury Under Secretary, said: “We’re considering all options, but we’re not convinced of gold sales for dealing with debt issues.” Little price impact when IMF last revalued or sold gold Even if the IMF were to decide to revalue or sell part of its gold reserves, we don’t think that the price would necessarily suffer. Previous examples of IMF revaluation and sale did not drive the price lower. Revaluation: In theory, a simple revaluation would not have any material effect on the price of gold. Basically, the IMF would be marking its positions to market, without a supply shock,[1]and we think it is likely to maintain this policy in future. In December 1999, the IMF began revaluing 12.9 million ounces (12%) of its total gold holdings in order to generate funding for the heavily indebted poor countries (HIPC) trust fund. This was a pure revaluation — the IMF did not sell any gold on the open market — and there was no discernible downward effect on the price of gold. Sale: Under the gold sale scenario, there is a theoretical possibility that the price of gold could decline, but in the past this has not happened. Between 1976 and 1980, the IMF sold (but did not revalue) 23.5 mn oz of its gold in a series of pre-announced auctions. In this case, there was no decline in price, because the IMF had given clear signals to the market about its intentions, and scrupulously observed its own auction timetable. Who is selling this year? A number of signatories to the second Central Bank Gold Agreement are on track to sell gold in 2005. France intends to sell 500–600 tonnes over the course of the five-year agreement. Switzerland, which sold the most tonnage under the previous Central Bank Gold Agreement, has already announced intentions to sell a further 130 tonnes before April this year. By contrast, Argentina has been an active buyer of gold throughout the year, picking up almost 55 tonnes in 2004 as it rebuilds its reserves. Speculators in the gold market have long been concerned about the prospect of central bank selling. In June 1997, the Reserve Bank of Australia quietly sold 167 metric tons of its gold reserves (equal to about AUD 2 billion), prompting knock-on declines in the gold price to 11-year lows when market participants became concerned that other central banks might follow the same path. Exchange rate effects Over the years, it has often been suggested that the price of gold affects the value of the USD. However, the available econometric evidence seems to suggest that, if anything, the USD influences gold prices and not vice versa. We note that gold prices have dropped far more than the EUR/USD exchange rate in the last two weeks, which we think is an indication that gold prices are mainly being driven by gold-specific factors currently. Moreover, the 1997 sale of gold by the RBA caused the gold price to fall temporarily, but FX market participants didn’t consider that this action should have much effect on the value of the AUD. Instead, the FX markets were more concerned about the possibility that the RBA would cut interest rates, and this was the reason for the weakening of the AUD/USD rate. Bottom line: USD higher, gold lower Given our constructive views on the direction of the dollar, we think that USD-denominated gold prices are likely to come down over the medium term. But in the very near term, both our metals desk and our technical analyst, Drew Baptiste, expect gold prices to rise. Drew is looking for levels as high as $430–440/oz into late winter but shares our view that over the medium term gold prices will fall further. His six-month target for gold is $370/oz.