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Is The Load of Cash Fannie and Freddie Dumped On The US Treasury Coming Back To Investors? UPDATE

Show me the money! Click to enlarge

Show me the money! Click to enlarge

One of the issues I addressed in the Treasury update posted this weekend is what happened to all the cash Fannie and Freddie just dumped into the US Treasury. Below is what I wrote last week before I knew the answer.

On Friday Fannie and Freddie paid a dividend of $66 billion to the US Treasury. This is a huge windfall for the government and the US taxpayer.

Normally when the Treasury gets a tax windfall it pays down debt over the next couple of weeks. Those paydowns are cash credits to the accounts of the holders of the paper, often Primary Dealers or large investors. Those paydowns are usually immediately put back to work in the markets. The reduction of Treasury supply in the weeks of the paydowns also means that there’s insufficient supply to absorb all the Fedbucks being pumped through dealer accounts under QE. It’s a case of all that cash with no place to go. So typically asset prices rally in those weeks. The fair haired child asset class this year has been US stocks.

Will these GSE dividend payments be put to similar use? It could be a very bullish couple of weeks if so.  Stay tuned.

As it turned out, the Federal Government had already used the anticipated cash to pay down some paper over the last several weeks, keeping cash on hand lower than normal in the process. When they got the dividend, cash levels rebounded to a level higher than last year on the same date.

Another dividend is probably coming from the GSEs in the third quarter although it should be much smaller than this one was, thanks to the rise in mortgage rates cutting off the flow of refi business, and damaging the GSE portfolios in other ways.  If mortgage rates are now in a longer term uptrend, that will be the end of that gravy train for the US Treasury and taxpayer.

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I’ve been watching the Fed’s operations every day ever since it started publishing them daily in 2002 along with its balance sheet and the commercial banking system balance sheet. I also closely follow  Treasury operations, revenues, and outlays weekly. As the famous financial philosopher L. Berra wisely said, “You can observe a lot by watching.” I invite you to watch along with me, and observe a lot.

This week’s Treasury Update is :  Price Is Right Musical Chairs- More Players, More Cash, Less Chairs

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Skating on Thin Ice, Keep Life Preservers Handy

We may be skating on very thin ice here, but the weight of the evidence still supports a weak bull case for the near to intermediate term. So I’m adding buy picks on the chart pick list and adjusting trailing stops to account for the risk.

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These reports are not investment advice. They are for informational purposes, for a broad audience of investment and trading professionals, and other experienced investors and traders. Chart pick performance changes week to week and past performance may not indicate future results, as you know. Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance. 

Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here. 

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