I Like To Be Early - The New York Fed Window Part 2

The premise of this blog is to keep you (and me) ahead of the curve so we don't drive off a cliff. I like to be early in recognizing areas of "interest", much like the police like to pursue and question suspects of "interest".

Back on February 11th, I blogged about the Repo activity at the New York Federal Reserve Window and wondered if anything was up as Novastar was starting to fall into great distress. I was a bit early but suggested that everyone keep an eye on what the Fed was up to.

In the aftermath of the market downturn last week and implosions of various subprime lenders - wow, the Window has been wide open and cash has been flying out. See: http://www.ny.frb.org/markets/omo/dmm/temp.cfm.

What does it mean? It means the Fed is quietly juicing the system with l i q u i d i t y via the major banks (primary dealers) who can get their hands on this cash at slightly below Fed Funds rate levels and borrow it for up to a couple of weeks.

What is it used for? Hmmm. Morgan Stanley's alleged last minute loan to New Century? Quick cash by the billions deployed to the trading desks of the primary dealers? Who knows.

Let's say those billions from the Fed Window, as theorized by a variety of bloggers, have made their way as fresh magic money cash to the trading desks of Wall Street. What intrigues me is that while it may have helped to push the major averages higher during the course of the past week, it sure did not work to get everyone else to buy as trading volumes foundered. Big Board volume sank to only 1.4 bln shares on Friday. Since this past Tuesday, volume was down each day from the previous trading day. So if the blogger theories are right about that Fed Repo money making its way to Wall Street - it's actually a big negative that all it did was to push averages higher but fail to induce broader participation in the market rebound. Either it's time for another theory, or there's more selling ahead. Repo-money supplied trading desks can only go it alone for so long and if the rest of the crowd isn't joining in, I would imagine that a retest of the recent lows ends up only being delayed but still inevitable.