Yes, its true. The liquidity programs we’ve come to know and love–the true “pumps”—are stagnating or contracting, and it’s clear SPY doesn’t like this. We are our own out there people. Let me break down for you how and why that is; and what we can do to save our tendies.
First, let’s take a quick look at the vehicles that the FED has used to keep us propped up that I’m referencing:
Overnight short-term loans (Repo, Reverse Repo operations) What It Is More detailed description I did back in the day here, but this is the process by which the FED has been giving banks overnight loans so they could make asset purchases. They used to give these loans to each other, but the process became fucked up and expensive and the FED stepped in to fix this by offering the loans themselves at a low rate. Once the pandemic hit, they took the unprecedented step of offering the loans with zero additional interest for themselves, basically offering free money. ‘0 basis points over IOER’ is nerd speak for ‘fucking free money’ -Did it work? Yes.
Fed Policy typically takes a couple of months to affect the market. With that in mind, you can see that the performance of SPY correlates with the interest rate and bid volume on overnight repo operations. Free money policy was instituted in March, and the impact gained full strength in the spring. look at this insane Repo activity in early June when the loans were free money. SPY was +7% month to date!
Treasuries I won’t go too deep into treasury purchases and its effect on market activity, but the simplified version is this; if the FED needs to flood the market with money by pushing people to invest in vehicles aside from safe, boomer treasuries, they will buy up the treasuries themselves. This raises the price of treasuries by starving the market, thus giving them less yield–in other words, making them less valuable. With less yield, people turn to stocks. That’s an oversimplified version of how it works, but you get the gist; the FED buys treasuries so people buy stonks. -Did it work? Yes. Take a look at the yield rate on treasuries here. At this time in 2019, the 20 year yield was up as high as 2.2%. But, take a look at what happens after March. The Fed begins buying up the treasuries, and the yield goes down to .98 in April. All you need to know is that means the yield on treasuries was dogshit so people were pressured to buy stonks. “How do you know this was the Fed’s doing?” They said it. Here is one of many statements from the FED saying “we are going to by the fuck out of treasuries at an increased rate because of COVID”. How increased? Take a look at this photo, we are talking about an average of 10 or 20 billion dollars, to 80 million dollars a clip. treasury spending increased 3 fold
Bond Repurchases In March the FED announced they would be buying corporate bonds in another major boost to available liquidity. Just as SPY got shaky, it was an added boost immeditely after the June crash (a crash, btw, caused by a change in the repo loan interest rates). Basically, when large companies need money they issue bonds to shore up cash that are available to the public (same shit as treasuries, basically)–the FED is now buying those bonds. This direct infusion of cash from the FED is about as close to outright buying stock in companies as you can get. Did it work? Yes. See: June rebound. Also google some of the types of companies they’re buying bonds from. There’s a reason why the fact that nobody is paying rent hasn’t caused a mortgage-backed credit crisis for major banks…yet.
So, weve established the main tools the FED uses to prop up the market and that they work. What’s the problem, and why am I saying JPOW has forsaken us?
Because the Fed’s balance sheet has been contracting, and with that these programs are no longer offering nearly as favorable terms as they once were, but the market isn’t strong enough to handle those unfavorable terms.
here’s a graph from the FED showing their flatlining balance sheet The FED is spending less overall than it was earlier this year (remember, it takes a couple months for spending policy to catch up in the market). This was bound to happen, but the problem is the key programs I mentioned are all at obviously ineffective levels and haven’t been increased. a) Repo operations haven’t been at a lower cost interest level since July, from +0 basis points over the standard interest rate, to +5–and on longer term loan operations +10. The market has not responded kindly to losing their free money, looking at the monthly SPY charts. b) While generous, the treasuries purchases have stalled out at 80 million. More importantly, the FED hasn’t facilitated any key changes to which terms they purchase (long v short, etc). The market has responded to this stagnation with stagnation, looking at the monthly SPY charts. c) Bond purchases not set to increase: The FED is still purchasing bonds, but have also stagnated the rates of that along with the other two facilities. Kaplan, the Dallas Fed Chair who’s always running his mouth, has indicated a lack of support for increased corporate bond purchases.
What the contracting FED balance sheet, the stagnation of these increased liquidity programs, and the lackluster performance of SPY over the past three months combine to signal is that the market/SPY is NOT healthy enough on their own to continue its rise. If you take the 5 day election bump out the picture, SPY has performed over 50% less than its aggregrate performance April-August.
Why did I say don’t buy the dip YET? Is help coming? Yes. Two options: 1) The stimulus: if enhanced UI benefits are improved, the spending in the consumer goods and credit market would provide a huge boost that could offset the economic effects of an increasingly bleek jobs situation.
2) The FOMC meeting on the 16th: this is where the FED would make any decisive changes on the lending programs mentioned here. My guy /u/curiousmaniac pointed out to me that these changes, if they even happened, likely wouldn’t come to fruition in the new year (even if the policy is changed on the 16th).
So yeah, you might wanna chill on SPY. I hear you saying “where was this BEFORE TODAY?! REVISIONIST HISTORY” -here’s my DD from Tuesday saying not to go near SPY without a stimulus -heres my tweet from last week calling the top of SPY at 370 To be fair, I’m wrong a fucking ton, as we all are lol. but gotta flx those few sweet moments you get it right.
Positions: TLT is my new hedge against SPY because VIX and its derivatives are ass rn. I dont buy puts cuz im not sweet like that. (here’s my DD on VIX 101 if you’re curious) Other than that, monthly stimulus plays that favor consumer spending (on places that are at an advantage from hybrid online/retail models due to lockdown), TOL (housing numbers explode when stimmy passes), and TDOC because TDOC is dope.
WMT: 1/8 155c TGT: 1/8 180c TDOC 11/24 200c TDOC 1/15 205c AAPL: 1/8 126c HPQ: 1/15 25c TOL 1/15 46c
TLDR: FED tools are drying up, SPY is toodangerous for now–market isn’t strong enough on its own yet. Count on monthlies that are a hybrid of pandemic retail/online winnersin preparation for the stimulus, and pay attention the results of FOMC meeting on the 16th. VXX sucks and I’m using TLT as a hedge.
TLDR of the TLDR: PLTR 1/15 500c, GME 12/24 35c
ill try to update contextual news and moves here at the end of the day if alot of people read this, and moves on my twitter yourboymilt since theres no notification thing here (not my fault mods)