Net Free or Borrowed Reserves, Beam Me Up Scotty (Graph)

FED continues to add fuel. $885 Billion is a new all time high.

The series is calculated by the Federal Reserve Bank of St.Louis.

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Original content Bob DeMarco, All American Investor

Net Free or Borrowed Reserves (Graph)

The series is calculated by the Federal Reserve Bank of St.Louis.

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 700 articles with more than 18,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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FED Net Free or Borrowed Reserves Soaring (Graph)

Excess reserves minus discount window borrowings plus secondary borrowings.

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Roubini on Gold, China, IMF Sales

Gold is a special commodity in that the fundamentals of physical supply and demand are minor influences on its price. Gold’s price is most often driven by speculative demand for a hedge against inflation or economic uncertainty. Many investors see gold as a substitute for fiat currencies. Consequently, gold prices sometimes track changes in central bank holdings of gold.

Gold markets largely ignored China’s surprise revelation that it had increased its gold reserves as much of this had already been priced in by speculators. Moreover, China produces its own gold. The increase in China's gold holdings is just a mere drop in the bucket of its total $1.9 trillion in foreign exchange reserves. Gold's share in China's foreign exchange reserves remains much lower than the global average and well below the U.S. share. But China's interest in gold is consistent with its taste for real assets to gradually diversify from its U.S. bond-heavy portfolio. If other central banks followed suit, gold demand could increase sharply.

IMF gold sales will likely have little impact on gold prices if it sells its gold to central banks rather than the free market. The European Central Bank Gold Agreement’s expiration in September 2009 may have more impact. The signatories are likely to renew the agreement and continue limiting central bank gold sales. Fears that monetization of rising public debts will erode currency values may spark demand for gold as an inflation hedge.

Source RGE Monitor Newsletter and RGE Monitor

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Stocks Don't Fight the Tape

I first heard Martin Zweig utter these words--Don't Fight the Tape--at speech he gave in New York city. At the time it really caught my attention. A very simple rule that is easy to understand.

When the Federal Reserve lowered bank reserve requirements at the depths of the recession in 1991-1992, Zweig went bullish after being bearish for some time. He astutely understood that the FED action would have a major impact on banks and then the stock market. Stocks began their march up to 10,000 on the Dow shortly thereafter.

When the Treasury announced this week that they would be purchasing $1 Trillion in assets--Treasuries, mortgages, etc.--those words of Zweig immediately came to mind. The immediate reaction to the news was a monster reversal and rally in the stock market. Jim Cramer was at his manic best right after the news. In the next few days as Congress spent hours and hours discussing the AIG bonuses the market sagged. Nothing like obscuring the real issues to get some free face time--the $165 million is a drop in the bucket.

I think the news that the Treasury is going to buy assets, and keep interest rates low for a long time bears close watching. Often it takes more than a few days for news of this magnitude to get into the market.

Frankly, this is a very bullish development. The big question for me is simple. Is this the news that will help the market consolidate, or is this big big news that sends the market sharply higher. My guess is that we are going to have one monster rally shortly. I could envision the market on the S and P 500 soaring up to 900 or 1000. That would qualify as one heck of a rally.

The best approach in my opinion is to buy stocks that will benefit from inflation. An ETF like MOO would benefit from an increase in inflation (note: I own this ETF).

For those of you that are bearish remember these words--Don't Fight the Tape. For those of you that are bullish take heart--a big bear market rally is coming soon.

Investing Strategy

Martin Zweig's basic stock market strategy is to be fully invested in the market when the indications are positive and to sell stocks when indications become negative. Risk minimization and loss limitation are crucial to his strategy. His book Winning on Wall Street describes how he determines whether to be fully invested or not.

Zweig says, "People somehow think you must buy at the bottom and sell at the top to be successful in the market. That's nonsense. The idea is to buy when the probability is greatest that the market is going to advance". Zweig uses fundamental company data to select stocks to buy while the market is positive.

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Has Chinese reserve growth stopped?

I ran across an interesting discussion of Chinese external surpluses over on the Peterson Institute website. The article entitled Is China Losing Its Appetite for External Surpluses? contains an interesting discussion about China’s official holdings of foreign exchange reserves. Some are concluding that China is experiencing substantial capital outflows. Nicholas Hardy's take on the issue is that it could be explained by "the use of foreign exchange to clean up the balance sheet of the Agricultural Bank of China (ABC)".

Either way China's holdings of foreign exchange reserves bears close watching in the months ahead as this could become a major issue in both the stock and bond markets. Discussion and analysis of this issue is likely to create increased volatility in the bond markets. It might be a good idea to pay attention. This could also lead to some good trading opportunities.

In the past clean ups of the balance sheets of state-owned banks, the forex used was not transferred from official reserves to Central Huijin (which is now part of the China Investment Corporation, China’s sovereign wealth fund) until just before the clean up was undertaken. I believe this practice has not changed and that centrally funded write-offs of nonperforming loans of the Agricultural Bank of China could account for $90 billion to $100 billion of the “unexplained capital outflow” in the fourth quarter of 2008. Thus the combined centrally financed injection of capital, which has been reported, and nonperforming loan write offs, which have not been reported, for the Agricultural Bank of China could have reduced officially reported official foreign exchange holdings by $110 billion to $120 billion.

Is China Losing Its Appetite for External Surpluses?

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