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Strategies & Market Trends : Currencies and the Global Capital Markets -- Ignore unavailable to you. Want to Upgrade?

To: Gersh Avery who wrote (1290)	2/18/1999 9:52:00 AM
From: Henry Volquardsen	Read Replies (1) \| Respond to of 3536

Hi Gersh, If the large cash movements in the market are related to stock market leverage then yes the Feds add or drain needs would be associated with them. But stock market leverage is not the only factor that effects money market liquidity. The original post, as I recall, was trying to make a direct relationship between Fed activity and stock markets leverage. That is too simplistic. There are numerous factors that cause swings in money market liquidity and stock market leverage is just one of the factors. Another point that came up in the discussion was whether minor changes in Fed Funds would cause changes in the amount of margin debt. My point on that was that margin interest rates are not set according to Fed Funds rates but to the broker loan rate. This is a rate that is fairly stable, similar to the prime rate. So the original contention that Fed efforts to add or drain liquidity would cause changes in the fed funds rate and feed through to margin activity does not hold up, the connective mechanism is not there. It is also my contention that even when the broker loan rate moves and margin rates change this does not have a major factor on margin activity. It has not been my experience that cost of funds is a major consideration when deciding to use margin leverage, at least not in increments of 1/4 point changes. It is different in the bond market where that degree of change would have a larger effect. Henry