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It’s The Liquidity, Stupid

Folks like to attribute the market’s movements to news. The only problem is that sometimes the news seems to matter and other times, the market seems to ignore it. That’s because news is noise. The market marches to the drums of liquidity, cycles, and dare I say it, pigman manipulation. As far as this time of year goes, there’s a simple explanation for the market’s usual strength, and it has nothing to do with the news.

The market is usually strong this time of year because the Fed typically goes on a pumping spree in November and December. They do it to grease the skids for the Christmas shopping season. But the conduit is through Open Market Operations directly into the markets via the 22 Primary Dealers. So whether it be the money markets, the bond markets, or yes, the stock market, the cash hits the markets first. The primary dealers put it where they can turn a buck the quickest.

But something looks different this year, and if the Fed keeps it up, Goldilocks and Rosie Scenario are going to have coal in their stockings on Christmas morning.

Just looking at the period of November 1 through December 5 over the last several years. In 2004 the Fed added $11.4 billion to the System Open Market Account (SOMA). In 2005 over the same time span, they added a whopping $24.4 billion. Those numbers are before the really big push which typically comes from December 7 through the 31st.

Even in 2002 and 2003 when the Fed was ostensibly in a tightening cycle (the truth is that they were still growing the SOMA while allowing rates to rise), the Fed pumped up the SOMA by approximately $5 billion in both years from November 1 through December 5.

But this year, suddenly the Fed is playing Scrooge. Possibly concerned about the plunge in the dollar, rising interest rates abroad, and corporate looting thanks to infinite cheap credit, the Fed has pulled back on the throttle.

If they don’t start up the pumps again, it will soon appear that bad news does matter. Of course, it’s not the news. It’s not the economy. “It’s the liquidity, stupid!”

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