The Fed's QE3 stimulus program has taken on a clearly distinct
rhythm. Thus far, the liquidity injections into the financial
system have come on a selected few strong notes that have occurred
roughly every four weeks. And following this 4/4 meter of the Fed's
newest monetary policy symphony, the next major injection is set to
burst into the market starting next week.
Since the launch of QE3 back in mid September, the Fed's balance
sheet has been trending higher. But it has been doing so with much
(click images to enlarge)
This variation in the movement of the Fed's balance sheet can be
explained by composition of the assets being purchased as part of
the program. QE3, at least to this point, is exclusively focused on
the purchase of mortgage-backed securities ((MBS)) at a rate of $40
billion per month. And although the Fed commenced the purchase of
MBS immediately following their September 13 policy announcement,
the settlement of these purchases is often delayed by several weeks
to a few months. For example, while the Fed committed to purchase a
block of mortgage-backed securities totaling $950 million on
September 14 -- which was the first day that QE3 was put into
action -- this trade is not scheduled to settle until next week.
Thus, it will have taken a full three months for the MBS to be
exchanged for cash in this instance.
Overall, these settlements occur on a few specific dates each
month, which helps explain the rhythmic pattern of the Fed's
balance sheet expansion thus far. The last major MBS settlement
block occurred on November 14, for 30-Year Term Fannie Mae and
Freddie Mac securities and was followed by two smaller MBS
settlement blocks on November 19, for 15-Year Term Fannie Mae and
Freddie Mac securities and November 20, for 30-Year Term Ginnie Mae
securities. This helps explain the big liquidity burst during the
week at the front of the latest meter followed by a second smaller
increase the following week.
Looking ahead, the next major rush of Fed liquidity from MBS
purchases is set to arrive starting next week. The three major
settlement dates for December are December 12 for 30-Year MBS,
December 18 for 15-Year MBS and December 20 for 30-Year GNMA. The
asset totals for these upcoming settlements are already confirmed
to be at least $44.25 billion, $12.65 billion and $13.95 billion,
respectively, and could reasonably come in around $54 billion, $16
billion and $17 billion, respectively, if not more once the final
operational results are revealed by the Federal Reserve Bank of New
York on December 13. This suggests that the amplitude of the MBS
purchases at the beginning of each 4/4 meter is only set to
increase with each passing month, as the preliminary estimates for
December totaling $87 billion are more than 50% higher than
What implications if any does this have for stocks? If recent
history is any guide, it may have an increasingly notable impact.
When the Fed's first QE3 injection found its way into markets in
mid-October, the stock market as measured by the S&P 500 (
) increased by +3%. And when the second larger round of liquidity
flowed into the system in mid-November, stocks advanced a more
pronounced +6% and managed to break back above critical resistance
at the 200-day moving average in the process.
So what might we expected from stocks with the next wave of
liquidity set to arrive next week? Clearly, these forces will be
placing meaningful upward pressure on stock prices. Thus, an even
more robust advance is possible over the coming weeks, but such an
outcome will depend on the various other macroeconomic, political
and market forces also at work in the markets along the way. Most
significantly, events surrounding the fiscal cliff, including
even reaching a compromise resolution
, could send stocks on wild and unpredictable swings at any moment
in time. But all else being equal, these monetary stimulus-induced
forces are likely to provide a steady tailwind for stocks as we
move through the next two weeks.
The Fed's latest symphony is likely to remain in its current 4/4
meter as the first movement plays out through the end of the year.
But as we move into 2013, do not be surprised if the second
movement of the Fed's score takes on a notably quicker tempo. For
once outright U.S. Treasury purchases are added to the composition
as expected, the Fed may be striking a particularly strong note on
the liquidity injection front each and every week. And while this
may help send stocks euphorically floating higher over the coming
months, the key of the Fed' symphony in F Major hints at what may
befall the U.S. economy and its markets once the music of
Bernanke's latest opus finally comes to an end over the next 12 to
18 months. And this final end game outcome will be particularly
worth listening to once it finally arrives.
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
This post is for information purposes only. There are risks
involved with investing including loss of principal. Gerring Wealth
Management (GWM) makes no explicit or implicit guarantee with
respect to performance or the outcome of any investment or
projections made by GWM. There is no guarantee that the goals of
the strategies discussed by GWM will be met.
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