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bart
09-17-06, 07:36 PM
Management or Manipulation: The TIO Story


A TIO is an abbreviation for Term Investment Option, and is a way for the Treasury to make extra income.
From the treasury site here (http://www.fms.treas.gov/tip/), the "Treasury will periodically auction excess operating funds to participants for a fixed term at a rate determined through a competitive bidding process." Another view of TIOs from the St. Louis Fed is here (http://stlouisfed.org/publications/cb/2004/d/pages/investment_options.html).

Now for some interesting quotes, with our comments, from a few Federal Reserve members over the last 17 years:

* "The stock market is certainly not too big for the Fed to handle. The foreign exchange and government securities markets are vastly larger. Daily trading volume in the New York foreign exchange market is $130 billion. The daily volume for Treasury Securities is about $110 billion. The combined value of daily equity trading on the New York Exchange, the American Stock Exchange and the NASDAQ over-the-counter market ranges between $7 billion and $10 billion."
-- Former Federal Reserve governor, Robert Heller in the Wall Street Journal on October 27, 1989

1. Governor Heller actually admits that the Fed can "handle" the stock market, way back in 1989.
2. The Fed already participates in the $110 billion daily Treasury Securities market. All activity of all the stock markets is less than 10% of the size of the Treasury market.


* "An appropriate institution should be charged with the job of preventing chaos in the market: the Federal Reserve....The Fed already buys and sells foreign exchange to prevent disorderly conditions in foreign exchange markets. The Fed has assumed a similar responsibility in the market for government securities. The stock market is the only major market without a marketmaker of unchallenged liquidity or a buyer of last resort." ... "The Fed could support the stock market directly by buying market averages in the futures market, thus stabilizing the market as a whole."
-- Former Federal Reserve governor, Robert Heller in the Wall Street Journal on October 27, 1989

1. Another admission by Governor Heller that the Fed, way back in 1989, assumed responsibility for preventing "disorderly conditions" in the market for treasury bonds and bills.
2. He also observes the lack of a "buyer of last resort", even though the Executive Order establishing the "Working Group on Financial Markets" (also sometimes called the Plunge Protection Team, or PPT) was issued earlier in 1988. The avowed purpose of the PPT is to prevent or control a large stock market crash like what occurred in October 1987.


"Executive Order 12631 - Working Group on Financial Markets - Mar. 18, 1988; 53 FR 9421, 3 CFR, 1988 Comp., p. 559:
By virtue of the authority vested in me as President by the Constitution and laws of the United States of America, and in order to establish a Working Group on Financial Markets, it is hereby ordered as follows:
o the Secretary of the Treasury, or his designee;
o the Chairman of the Board of Governors of the Federal Reserve System, or his designee;
o the Chairman of the Securities and Exchange Commission, or his designee; and
o the Chairman of the Commodity Futures Trading Commission, or her designee. "
3. A method of "supporting" the stock market via buying futures was named.



* "The last duty of a central banker is to tell the public the truth."
-- Alan Blinder, Vice Chairman of the Federal Reserve, on PBS’s Nightly Business Report in 1994

1. Oh...
2. Our favorite quote from a member of the Federal Reserve.



* "In today's markets, for example, there is an increased reliance on private counterparty surveillance as the primary means of financial control. Governments supplement private surveillance when they judge that market imperfections could lead to sub-optimal economic performance.”
-- Alan Greenspan, during a Sept. 2002 speech in London entitled "Regulation, Innovation, and Wealth Creation" (source) (http://www.federalreserve.gov/boarddocs/speeches/2002/200209252/default.htm)

1. "Private counterparty surveillance"? Is this "Fed-speak" for the PPT since the Fed is actually a private organization, or perhaps for the CRMPG (http://www.crmpolicygroup.org/index.html)? Even without the benefit of a tinfoil hat, the concept of private and controlling surveillance of the market is quite disturbing.
2. An admission that governments interfere ("supplement") during periods of "sub-optimal" performance, from the Maestro. We wonder who defines what is sub-optimal, at the very least, and also note that September 2002 was also the approximate bottom in the U.S. stock markets.
3. The first public TIO transaction from the U.S. Treasury was in April 2002.







The running TIO total pool and the S&P 500, since early 2006

Just simply notice the very high correlations between the dates a TIO transaction starts and ends with the up and down moves of the S&P 500. Also note that TIOs aren't the only tool in the Fed's toolbox.

http://www.NowAndFutures.com/daily/tio_repo_sp500_daily.png


Management or Manipulation: You decide


Original link (http://www.NowAndFutures.com/articles/20060917management_or_manipulation_tio_story.html)

Finster
09-18-06, 02:34 PM
1. "Private counterparty surveillance"? Is this "Fed-speak" for the PPT since the Fed is actually a private organization, or perhaps for the CRMPG (http://www.crmpolicygroup.org/index.html)? Even without the benefit of a tinfoil hat, the concept of private and controlling surveillance of the market is quite disturbing.

No, I don't think this is Fedspeak for the PPT. At least not in this quote. Surveillance refers to passive observation. The PPT, on the other hand, goes a lot further than just watching.

Naturally there is a slipperly slope involved here, and the suggestion here is that the markets need not only "surveillance", but interference. This shows up in the use of the phrase "market imperfections" - the implication is that these once-free markets had better behave as Greenspan wants them to or else...

Of course, I am nitpcking here; I agree with your post as a whole.

The problem with Greenspan's attitude is the assumption that market risk is something to be avoided. But risk is vital. Even the risk of a stock market crash. If everyone could be certain the stock market would not crash, a disproportionate amount of capital would be put into the stock market, driving prices up to the point of overvaluation and restoring the necessary risk. The only question is whether that risk would remain solely in the stock market or be transferred to people and individuals who do nothing to deserve it.

bart
09-18-06, 03:19 PM
No, I don't think this is Fedspeak for the PPT. At least not in this quote. Surveillance refers to passive observation. The PPT, on the other hand, goes a lot further than just watching.

Naturally there is a slipperly slope involved here, and the suggestion here is that the markets need not only "surveillance", but interference. This shows up in the use of the phrase "market imperfections" - the implication is that these once-free markets had better behave as Greenspan wants them to or else...

Of course, I am nitpcking here; I agree with your post as a whole.

The problem with Greenspan's attitude is the assumption that market risk is something to be avoided. But risk is vital. Even the risk of a stock market crash. If everyone could be certain the stock market would not crash, a disproportionate amount of capital would be put into the stock market, driving prices up to the point of overvaluation and restoring the necessary risk. The only question is whether that risk would remain solely in the stock market or be transferred to people and individuals who do nothing to deserve it.




Thanks Finster - I was wondering whether there was any concern at all about the fairly blatant TIO control operation.


But to your point, here's the sentence immediately prior to that Greenspan quote in the same 2002 speech:


In today's markets, for example, there is an increased reliance on private counterparty surveillance as the primary means of financial control.
(emphasis mine)

Perhaps I should have used both sentences to make a clearer point. Do you still think that "private counterparty surveillance" isn't Fed-speak or doesn't at least strongly imply behind the curtain control? ... and yes, I'm nitpicking a little too.

Finster
09-18-06, 04:41 PM
Thanks Finster - I was wondering whether there was any concern at all about the fairly blatant TIO control operation.


But to your point, here's the sentence immediately prior to that Greenspan quote in the same 2002 speech:


(emphasis mine)

Perhaps I should have used both sentences to make a clearer point. Do you still think that "private counterparty surveillance" isn't Fed-speak or doesn't at least strongly imply behind the curtain control? ... and yes, I'm nitpicking a little too.

I was probably nitpicking an even finer point that you thought. Merely that the Feds conducting a surveillance operation in itself did not amount to PPT-like manipulation. That is a far cry from suggesting that PPT-like manipulation does not occur! :)

jk
09-18-06, 04:52 PM
the crmpg link in your post goes to a PRIVATE surveillance committe with participants from major investment banks. greenspan was always saying how wonderfully the markets were managing risks, and presumably this was one of the mechanisms he had in mind.

i wish we had someone around here with direct knowledge of the otc derivative market. i have read things that imply that at least some otc derivative contracts can be assigned, so that one party may not even know who or what its counterparty IS, let alone how reliable and shock-resistant that counterparty may be.

bart
09-18-06, 05:05 PM
the crmpg link in your post goes to a PRIVATE surveillance committe with participants from major investment banks. greenspan was always saying how wonderfully the markets were managing risks, and presumably this was one of the mechanisms he had in mind.

I don't know if you noticed or not, but that link goes to the CRMPG II. So yes, I strongly suspect Greenspan was referring to the major banks and primary dealers.





i wish we had someone around here with direct knowledge of the otc derivative market. i have read things that imply that at least some otc derivative contracts can be assigned, so that one party may not even know who or what its counterparty IS, let alone how reliable and shock-resistant that counterparty may be.

Very much agreed. Perhaps EJ or Catherine Austin Fitts or someone else may be able to shed additional light in the area.

My best guess is that the initial structure of a contract has key details on both sides, but any hypothecating or similar actions afterwards doesn't. But I have no direct data or proof.

bart
09-18-06, 05:08 PM
I was probably nitpicking an even finer point that you thought. Merely that the Feds conducting a surveillance operation in itself did not amount to PPT-like manipulation. That is a far cry from suggesting that PPT-like manipulation does not occur! :)

Truly, and I was also attempting an amateur "fin". ;)

On a more serious note, do you think the article should have included that other preceding sentence for additional clarity?

Finster
09-18-06, 05:38 PM
Truly, and I was also attempting an amateur "fin". ;)

On a more serious note, do you think the article should have included that other preceding sentence for additional clarity?

Not critical, but it couldn't hurt. Depends on how many persnickety finsters there are out there reading it... ;)

bart
10-01-06, 06:04 PM
Just an update, showing close-ups for the last few months and showing high correlations for TIOs to be influencing the US stock markets:


Current
http://www.nowandfutures.com/daily/tio_repo_sp500_daily_short_term.png






Aug
http://www.nowandfutures.com/images/tio_200608.png



Jul
http://www.nowandfutures.com/images/tio_200607.png



Jun
http://www.nowandfutures.com/images/tio_200606.png

jk
10-01-06, 07:43 PM
bart,

i'm curious. what kind of correlations do you get for these curves? some of the months look quite convincing- sept and jun. but july just looks random to the naked eye, while aug is in-between.

bart
10-01-06, 10:02 PM
bart,

i'm curious. what kind of correlations do you get for these curves? some of the months look quite convincing- sept and jun. but july just looks random to the naked eye, while aug is in-between.

I haven't bothered with correlations since it doesn't matter.

My basic point is that virtually every time in the last 6 months that TIOs have started a move, it aligns with a relative S&P bottom and the peak of the operation aligns with a relative top, especially when the TIO move is accompanied by a significant TOMO add.

As far as July & August, look at the main chart in the first post in the thread - that should provide a possibly missing perspective.

Do also note that in no way am I stating or even implying that the entire market is being managed or manipulated too.

Jim Nickerson
10-02-06, 12:34 AM
I haven't bothered with correlations since it doesn't matter.

My basic point is that virtually every time in the last 6 months that TIOs have started a move, it aligns with a relative S&P bottom and the peak of the operation aligns with a relative top, especially when the TIO move is accompanied by a significant TOMO add.

As far as July & August, look at the main chart in the first post in the thread - that should provide a possibly missing perspective.

Do also note that in no way am I stating or even implying that the entire market is being managed or manipulated too.
If I am interpreting your Bart-charts correctly, then the implication is for a down move in the S&P over the next 10 days.

When you update these charts on your website, do they also update as posted here?

What is "TOMO"?

Thank you, Bart.

bart
10-02-06, 01:00 AM
If I am interpreting your Bart-charts correctly, then the implication is for a down move in the S&P over the next 10 days.

When you update these charts on your website, do they also update as posted here?

What is "TOMO"?

Thank you, Bart.

My pleasure Jim.


Be *very* cautious on extrapolating those future lines out, since they're only intended to show how long the various TIO and TOMO operations last. But yes - this particular time, I do expect the S&P to be down this coming week but not a lot - perhaps 10-20 points.

Yes, when I update them on my site, they should change here although you may need to refresh the page more than once to see the new one. Just look for a date change in the upper left of the chart for confirmation.

TOMO stands for Temporary Open Market Operation and involves repos (repurchase agreements) that are done by the Fed. Repo here does *not* mean repossession, like on a past due car loan. More detail on the various definitions is available in my glossary too.

Jim Nickerson
10-02-06, 01:14 AM
My pleasure Jim.


Be *very* cautious on extrapolating those future lines out, since they're only intended to show how long the various TIO and TOMO operations last. But yes - this particular time, I do expect the S&P to be down this coming week but not a lot - perhaps 10-20 points.


Awh shoot! I was going to get up early in the morning and bet my farm. Not really. I already have the farm bet, and I am just looking for rays of hope--not many of which do I see.

You know, Bart, the most amazing thing to me about all of what you do on your website and share here, and granted I may not even begin to know all you do, is how in the world do you even begin to stay abreast of it all? Truly amazing to me. I hope you can keep it up.

bart
10-02-06, 02:36 AM
Awh shoot! I was going to get up early in the morning and bet my farm. Not really. I already have the farm bet, and I am just looking for rays of hope--not many of which do I see.

You know, Bart, the most amazing thing to me about all of what you do on your website and share here, and granted I may not even begin to know all you do, is how in the world do you even begin to stay abreast of it all? Truly amazing to me. I hope you can keep it up.

Just watch those farm tools, don't step on a rake and go having it bash you one... ;)

You got me thinking - best guess is I spend about one full day per week on site & chart maintanence, the biggest piece of it being on Friday to update the 80-100 charts that change weekly. That takes 2-3 hours. Much more time is spent reading and posting on the 5 or so boards I'm on.

Having had a long career in the programming, database and systems computer area, there are a lot of time saving things I know about and use too so its probably not as bad as you think. For example, after I save the daily charts to disk (average 4 mouse clicks per chart), its just one keystroke combination to publish them all to my site.

The whole area also holds an intense fascination to me too so its not usually "work"... although stuff like TIOs and their possible/probable implications can be quite upsetting. I've known about them for many months but only recently was able to assemble the public picture and write the article.

bart
10-09-06, 10:26 PM
An update, with two new charts - the first showing the high value of TIOs & TOMOs as a profitable signal since April 2006, and the second showing some conjectures on how they may have been used in 2005.


http://www.nowandfutures.com/images/tio_repo_sp500_signals.png



http://www.nowandfutures.com/daily/tio_repo_sp500_daily2005.png