Where is IOC Technically?

[Tree]

Trans Wrote:

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Two updates: first, IOC, second Overall market, all in mho. IOC appears to be a hiccup from emerging up from its 2 year consolidation pattern, although it may linger around the seventies , low 80's a bit longer. However, that would strengthen it technically for a major breakout to the upside. I believe IOC is behaving similarly to the big breakout 2 years ago around 40-42. If so, a break above the old highs 82-84 would project to the 120-130 area, taking place in 3-4 months. OBV to make new yearly highs (closing 7/24) is only +107,000 volume to the upside (closing volume). In short, IOC may break to new OBV highs and linger a week or so, but this is a pretty good indicator that price follows volume (meaning OBV) Now, I've been waiting on this for almost 40 years.....The most powerful tool in the Fed's arsenal fighting recession is Bank Reserve Requirements. The last two cuts in Bank Reserve Requirements was 11/13/74 and 1/20/75. All Reserve Requirement cuts have produced 20% or greater market rallies in the following 18 month periods. This tool amounts to an overnight immediate expansion of loanable funds in banks, and has no lag effect such as interest rate cuts do. I credit Norm Fosback's research many years ago and would highly recommend his book "Stock Market Logic" . Norm states categorically that a reduction in the reserve requirement on demand deposits for large city banks "is the single most bullish event in the world of stock price behavior." I believe a global dragging economically has a very good chance of seeing the Fed resort to this incredibly powerful stimulus tool. My bank loan model shows bank loans so far here are moving in a slight uptrend, even though the economy is sagging a bit here, as well as globally. China uses this tool quite a bit in conducting their monetary policy, I like it because it works without the customary interest rate cut lag, which incidentally is quite lengthy in impacting the economy. As a result, I may be wrong, but believe China is in better shape to counter their slowdown than many investors think. This time around, I would like to see bank reserve requirements cut by the Fed, and stipulations by the Fed, if the increased reserves were used for bank loans, not wall street speculation. I believe it would work very well, so don't be surprised if this Fed event unfolds ahead. I doubt , with 37 years of non use, virtually all of wall street aren't aware of this powerful Fed tool. So, when the Fed says they still have weapons left, I smile when the most powerful tool is mostly forgotten. Anyway, if you see this tool eventually used, be aware of its bullish significance. [/quote]

Thanks for the excellent info Tran.  Hope Mitt does just this next January!  

[ValueSleuth]

Chart-wise, there is a rising wedge forming. If the wedge formation continues, resolution should not be long in coming. This type of formation usually results in one of two spectacular outcomes -- either a collapse, if the metrics of the wedge indicate weakness; or a surge, if the metrics of the wedge indicate strength. In IOC's case, the metrics are clearly indicating strength -- higher highs on RSI, MACD and the like, along with all the other reported T/A factors. An alternative to the wedge resolution would be further sideways consolidation in the low $80s prior to a breakout -- which should be just as spectacular as the aforementioned wedge breakout to the upside. In any event, I have not changed my target of $130-$140 for the breakout above long-term resistance in the low to mid-$80s. We have two announcements that could be game changing -- a massive find at T-2, and/or deals on SD, SM, operator, Gulf plant approval, etc. Take your pick as to which comes first. VS

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Two updates: first, IOC, second Overall market, all in mho. IOC appears to be a hiccup from emerging up from its 2 year consolidation pattern, although it may linger around the seventies , low 80's a bit longer. However, that would strengthen it technically for a major breakout to the upside. I believe IOC is behaving similarly to the big breakout 2 years ago around 40-42. If so, a break above the old highs 82-84 would project to the 120-130 area, taking place in 3-4 months. OBV to make new yearly highs (closing 7/24) is only +107,000 volume to the upside (closing volume). In short, IOC may break to new OBV highs and linger a week or so, but this is a pretty good indicator that price follows volume (meaning OBV) Now, I've been waiting on this for almost 40 years.....The most powerful tool in the Fed's arsenal fighting recession is Bank Reserve Requirements. The last two cuts in Bank Reserve Requirements was 11/13/74 and 1/20/75. All Reserve Requirement cuts have produced 20% or greater market rallies in the following 18 month periods. This tool amounts to an overnight immediate expansion of loanable funds in banks, and has no lag effect such as interest rate cuts do. I credit Norm Fosback's research many years ago and would highly recommend his book "Stock Market Logic" . Norm states categorically that a reduction in the reserve requirement on demand deposits for large city banks "is the single most bullish event in the world of stock price behavior." I believe a global dragging economically has a very good chance of seeing the Fed resort to this incredibly powerful stimulus tool. My bank loan model shows bank loans so far here are moving in a slight uptrend, even though the economy is sagging a bit here, as well as globally. China uses this tool quite a bit in conducting their monetary policy, I like it because it works without the customary interest rate cut lag, which incidentally is quite lengthy in impacting the economy. As a result, I may be wrong, but believe China is in better shape to counter their slowdown than many investors think. This time around, I would like to see bank reserve requirements cut by the Fed, and stipulations by the Fed, if the increased reserves were used for bank loans, not wall street speculation. I believe it would work very well, so don't be surprised if this Fed event unfolds ahead. I doubt , with 37 years of non use, virtually all of wall street aren't aware of this powerful Fed tool. So, when the Fed says they still have weapons left, I smile when the most powerful tool is mostly forgotten. Anyway, if you see this tool eventually used, be aware of its bullish significance.

trans,

I believe the Reserve Requirements have effectively been changed many times since the mid-70s -- in one way or another.

Research on the subject turns up many articles about the methods the Fed has used to periodically adjust the system, including increasing the amounts of reserves that are not subject to any reserve and broadening the amounts subject to various reserve percentages on an increasing scale.

The weapon may not be as potent as you might think -- and only puts the banking system in greater jeopardy.

Despite their protestations to the contrary, the Fed's tools are becoming ever more impotent with interest rates at current levels and their purchases of newly issued government debt at someting like 70%.  Nobody wants the stuff at the interest rates offered, so the Fed is forced to buy it.  We're in a sorry situation.

When businesses are sitting on mountains of cash and don't want to invest due to FISCAL uncertainty and slack economic activity, the Fed can't do much -- again with interest rates at such low levels.

The Emperor has lost most of his clothes and isn't doing well in the ongoing poker game.

VS

[admin]

["I've been waiting on this for almost 40 years.....The most powerful tool in the Fed's arsenal fighting recession is Bank Reserve Requirements. The last two cuts in Bank Reserve Requirements was 11/13/74 and 1/20/75. All Reserve Requirement cuts have produced 20% or greater market rallies in the following 18 month periods. This tool amounts to an overnight immediate expansion of loanable funds in banks, and has no lag effect such as interest rate cuts do. I credit Norm Fosback's research many years ago and would highly recommend his book "Stock Market Logic"]

Hadn't thought of that, I have to say. They use it in China but very rarely in the West (at least not that I'm aware off).

Not so sure it will work, besides psychology (which nevertheless might be important to underpin asset prices). Banks are stuffed with reserves already, it's credit demand which is the problem.

But for sure we're going to see something coordinated by central banks pretty soon.

[trans]

Chart-wise, there is a rising wedge forming. If the wedge formation continues, resolution should not be long in coming. This type of formation usually results in one of two spectacular outcomes -- either a collapse, if the metrics of the wedge indicate weakness; or a surge, if the metrics of the wedge indicate strength. In IOC's case, the metrics are clearly indicating strength -- higher highs on RSI, MACD and the like, along with all the other reported T/A factors. An alternative to the wedge resolution would be further sideways consolidation in the low $80s prior to a breakout -- which should be just as spectacular as the aforementioned wedge breakout to the upside. In any event, I have not changed my target of $130-$140 for the breakout above long-term resistance in the low to mid-$80s. We have two announcements that could be game changing -- a massive find at T-2, and/or deals on SD, SM, operator, Gulf plant approval, etc. Take your pick as to which comes first. VS

---

Two updates: first, IOC, second Overall market, all in mho. IOC appears to be a hiccup from emerging up from its 2 year consolidation pattern, although it may linger around the seventies , low 80's a bit longer. However, that would strengthen it technically for a major breakout to the upside. I believe IOC is behaving similarly to the big breakout 2 years ago around 40-42. If so, a break above the old highs 82-84 would project to the 120-130 area, taking place in 3-4 months. OBV to make new yearly highs (closing 7/24) is only +107,000 volume to the upside (closing volume). In short, IOC may break to new OBV highs and linger a week or so, but this is a pretty good indicator that price follows volume (meaning OBV) Now, I've been waiting on this for almost 40 years.....The most powerful tool in the Fed's arsenal fighting recession is Bank Reserve Requirements. The last two cuts in Bank Reserve Requirements was 11/13/74 and 1/20/75. All Reserve Requirement cuts have produced 20% or greater market rallies in the following 18 month periods. This tool amounts to an overnight immediate expansion of loanable funds in banks, and has no lag effect such as interest rate cuts do. I credit Norm Fosback's research many years ago and would highly recommend his book "Stock Market Logic" . Norm states categorically that a reduction in the reserve requirement on demand deposits for large city banks "is the single most bullish event in the world of stock price behavior." I believe a global dragging economically has a very good chance of seeing the Fed resort to this incredibly powerful stimulus tool. My bank loan model shows bank loans so far here are moving in a slight uptrend, even though the economy is sagging a bit here, as well as globally. China uses this tool quite a bit in conducting their monetary policy, I like it because it works without the customary interest rate cut lag, which incidentally is quite lengthy in impacting the economy. As a result, I may be wrong, but believe China is in better shape to counter their slowdown than many investors think. This time around, I would like to see bank reserve requirements cut by the Fed, and stipulations by the Fed, if the increased reserves were used for bank loans, not wall street speculation. I believe it would work very well, so don't be surprised if this Fed event unfolds ahead. I doubt , with 37 years of non use, virtually all of wall street aren't aware of this powerful Fed tool. So, when the Fed says they still have weapons left, I smile when the most powerful tool is mostly forgotten. Anyway, if you see this tool eventually used, be aware of its bullish significance.

trans,

I believe the Reserve Requirements have effectively been changed many times since the mid-70s -- in one way or another.

Research on the subject turns up many articles about the methods the Fed has used to periodically adjust the system, including increasing the amounts of reserves that are not subject to any reserve and broadening the amounts subject to various reserve percentages on an increasing scale.

The weapon may not be as potent as you might think -- and only puts the banking system in greater jeopardy.

Despite their protestations to the contrary, the Fed's tools are becoming ever more impotent with interest rates at current levels and their purchases of newly issued government debt at someting like 70%.  Nobody wants the stuff at the interest rates offered, so the Fed is forced to buy it.  We're in a sorry situation.

When businesses are sitting on mountains of cash and don't want to invest due to FISCAL uncertainty and slack economic activity, the Fed can't do much -- again with interest rates at such low levels.

The Emperor has lost most of his clothes and isn't doing well in the ongoing poker game.

VS

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Well, the history of this manuver certainly tells all of us to pay attention. This is not a short term behavior tool, but it s been 100% effective so far. I personally believe if the global economy slows more, it will apen and fake the hell out of wall street, we'll see how things go. Just issued a warning, because no one on wall strret sees this, but be assured Bernake and the Fed does

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That's when they use it VS, and it kicks the banks in the ass to get on with their primary business at a higher level. Actually , in my work so far, they are starting to step up to the plate. A fed maneuver like this is like a boot in the ass.....imo

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That's when they use it VS, and it kicks the banks in the ass to get on with their primary business at a higher level. Actually , in my work so far, they are starting to step up to the plate. A fed maneuver like this is like a boot in the ass.....imo

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VS, two years ago I would say the banking system was not in a position to do this, and the Bernanke Fed backed off of it because of this reason. However, in the past two years, much healing has taken place in the banking system and I believe they are much better situated to go this route if call upon....Hope I'm right on this..

[jft310]

In a training period with Smith Barney several years ago or so(Ho Ho on that one.) we were asked to read Stock Market Logic.Excellent stuff.

[admin]

Trans, there is good news and bad news (as I see it). In a way, the US is a bright spot. Although they pussyhandled the banks, but they did one thing right. They really forced them to go to the capital markets, hence their balance sheets are way more healthy than their European counterparts. Another positive thing is that the US if much further down the deleveraging process than most (Japan is a bit of a separate case).

But to quote Koo from Nomura, who is very familiar with this territory, if the central bank cuts interest rates to zero and nothing happens, you're not in an ordinary economy. Banks can lend. They sit on tons of excess reserves, but credit demand is pretty weak still. Companies have record profits and are sitting on $5 trillion in cash, while demand and capacity utilization is tepid at best.

But I expect nevertheless that central banks will throw everything and the kitchen sink at it if Europe starts to unravel, and equity markets might very well be the main theater of impact, as I can't see it having much effect in the real economy, to be honest.

[ValueSleuth]

One thing the Fed could do, as Alan Blinder pointed out recently in the WSJ, is to eliminate the .25% the Fed pays the banks for keeping their excess reserves on deposit with the Fed.  Even beyond that, the Fed could CHARGE the banks for keeping the excess reserves on deposit with the Fed.

That would be an incentive to the banks to do something else with the excess reserves.

Who knows, they might even loosen up their lending?

......but, with the economy we have, there isn't much demand for loans.  Most businesses don't want to do much until the FISCAL CLIFF problem is addressed -- and not by some mickey-mouse several month extension of all the subject tax policies that has been proposed by certain politicians until some COMPREHENSIVE TAX REFORMS can be conjured up.

The minute the term "COMPREHENSIVE" is heard, watch out.  The politicos are set to end up with a camel, when instead they were attempting to create a horse.

VS

[ValueSleuth]

One thing the Fed could do, as Alan Blinder pointed out recently in the WSJ, is to eliminate the .25% the Fed pays the banks for keeping their excess reserves on deposit with the Fed.  Even beyond that, the Fed could CHARGE the banks for keeping the excess reserves on deposit with the Fed.

That would be an incentive to the banks to do something else with the excess reserves.

Who knows, they might even loosen up their lending?

......but, with the economy we have, there isn't much demand for loans.  Most businesses don't want to do much until the FISCAL CLIFF problem is addressed -- and not by some mickey-mouse several month extension of all the subject tax policies that has been proposed by certain politicians until some COMPREHENSIVE TAX REFORMS can be conjured up.

The minute the term "COMPREHENSIVE" is heard, watch out.  The politicos are set to end up with a camel, when instead they were attempting to create a horse.

VS

What I predicted could well be on the way.  See below.

VS

Fed Weighs Cutting Interest on Banks’ Reserves After ECB Move

By Caroline Salas Gage and Liz Capo McCormick - Jul 30, 2012 12:00 AM ET

Federal Reserve Chairman Ben S. Bernanke may be taking another look at cutting the interest rate the Fed pays on bank reserves to bring down short-term borrowing costs and spur the slowing U.S. expansion.

Bernanke testified to Congress on July 17 that reducing the rate from its current 0.25 percent is one of several easing steps the Fed might take to reduce unemployment stuck above 8 percent for more than three years. In February, by contrast, the Fed chairman told Congress that lowering the rate might drive away investors from short-term money markets.

Enlarge image

Ben S. Bernanke, chairman of the U.S. Federal Reserve, waits to deliver his semiannual monetary policy report to the House Financial Services Committee in Washington. Photographer: Joshua Roberts/Bloomberg

12:00

July 27 (Bloomberg) -- John Taylor, chairman and chief executive officer of FX Concepts LLC, talks about the European debt crisis, the U.S. economy and Federal Reserve policy. Taylor, speaking with Sara Eisen on Bloomberg Television's "Money Moves," also discusses the outlook for currencies. (Source: Bloomberg)

4:11

July 26 (Bloomberg) -- Stephen Stanley, chief economist at Pierpont Securities LLC, talks about the outlook for Federal Reserve policy and the U.S. economy. He speaks with Tom Keene, Sara Eisen and Scarlet Fu on Bloomberg Television's "Surveillance." (Source: Bloomberg)

2:52

July 25 (Bloomberg) -- Allen Sinai, chief executive officer of Decision Economics Inc., talks about the outlook for the Federal Reserve's policies. He speaks with Mark Crumpton on Bloomberg Television's "Bottom Line." (Source: Bloomberg)

6:03

July 25 (Bloomberg) -- Stephen Roach, a professor at Yale University and former non-executive chairman for Morgan Stanley in Asia, talks about the outlook for another round of stimulus from the Federal Reserve. Roach speaks with Betty Liu and Dominic Chu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

Enlarge image

Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: Joshua Roberts/Bloomberg

“They’re reconsidering it,” said Ward McCarthy, a former Richmond Fed economist. A July 5 decision by the European Central Bank to cut its deposit rate to zero is prompting renewed interest in the strategy, said McCarthy, chief financial economist at Jefferies & Co. McCarthy said it’s unlikely the Fed will reduce the rate at a two-day meeting that starts tomorrow.

Policy makers meeting this week are looking for new monetary tools after the Fed lowered its benchmark interest rate to near zero in December 2008 and purchased $2.3 trillion of securities to spur the economy. A government report on July 27 showed economic growth slowed to a 1.5 percent annual rate in the second quarter as consumers curbed spending.

“They are at the end of their rope and are probably searching for every last option for what they can do,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York and a former economist for the Fed Board in Washington. “You can’t rule anything out because they’re going to flail around and try every last thing they can.”

Time Frame

Feroli said the Fed may extend its time frame for keeping interest rates low beyond late 2014 at the coming meeting. Another option mentioned by Bernanke is a new round of large- scale bond purchases, which McCarthy said is more likely to occur later this year than in August.

Central banks around the world are digging deeper into their tool kits in search of innovative ways to unclog bank lending. The FOMC meeting ends one day before ECB President Mario Draghi’s Governing Council and Bank of England Governor Mervyn King’s Monetary Policy Committee.

The institutions’ last meetings ended with the Fed prolonging its Operation Twist program to extend the maturities of assets on its balance sheet, the ECB cutting its benchmark rate to a record low 0.75 percent and the BOE restarting bond buying.

By reducing the interest it pays on excess reserves, a central bank gives financial institutions an incentive to shift their money into lending that yields a higher return. The aim is to expand the supply of credit and speed economic growth.

Excess Reserves

Excess reserves have mushroomed as the Fed bought securities from banks in its bid to lower long-term interest rates. The amount of such reserves at the Fed was $1.49 trillion on July 25, up from $991 billion at the end of 2010 and $2.4 billion at the end of 2007, Fed data show.

Traders have speculated the Fed will follow the ECB, pushing short-term rates lower in the U.S., according to Jim Lee, head of U.S. derivative strategy at Royal Bank of Scotland Group Plc’s RBS Securities Inc. in Stamford, Connecticut. The fed funds effective rate fell to 14 basis points on July 27 from 17 basis points on July 5. A basis point is 0.01 percentage point.

“Part of the reason for the demand this month for short- term U.S. debt has been due to speculation that the Fed will cut the IOER following the ECB’s move and given the lack of disruptions in European money markets,” Lee said in an interview, referring to the interest rate on excess reserves.

The yield on the two-year Treasury note was 0.24 percent on July 27, down from 0.29 percent on July 5, while the implied yield for eurodollar futures that expire in December has fallen about 10 basis points during the period. The rate is based on expectations for three-month dollar Libor, or the London interbank offered rate.

Lottery Tickets

“Clearly the market is purchasing some lottery tickets in case the Fed does cut the IOER,” Lee said. The Fed has held the rate at 25 basis points since December 2008.

After the ECB’s cut, deposits at the central bank fell to 321 billion euros ($396 billion) on July 26, the least since Dec. 21.

The ECB’s move fueled investor demand for short-term sovereign debt from the region’s safest nations, including Germany, Austria, and Finland, driving rates lower, with some of them falling below zero for the first time. Investors holding debt with a negative yield to maturity will receive less than they paid to buy the securities.

The central bank’s action hasn’t caused significant disruptions in European markets, said Alex Roever, head of short-term fixed-income strategy at JPMorgan in New York.

Market Stability

Market stability following the ECB’s move has probably prompted Bernanke to reconsider, Feroli said. Rising short-term borrowing costs may have also made the tool more appealing.

The fed funds effective rate -- at 14 basis points on July 27 -- has increased from six basis points at the end of September. That month the Fed announced its Operation Twist plan extending the average maturity of bonds in its portfolio by selling short-term securities and buying longer-term debt.

Also, the average rate for borrowing and lending Treasuries for one day through repurchase agreements, or repos, rose to as high this year as 0.297 percent on July 2, from minus 0.001 percent at the end of last year, a Depository Trust & Clearing Corp. index of General Collateral Finance repos shows. The rate was 0.172 percent on July 27. Securities dealers use repos to finance holdings and increase leverage.

Size of Cut

If Bernanke decided to lower the deposit rate, he would probably reduce it by about 10 or 12 basis points, instead of to zero, Feroli said.

A reduction may pose fewer political disadvantages than Bernanke’s other stimulus options, including an expansion of the Fed’s balance sheet. The central bank’s purchase of $2.3 trillion in securities during two rounds of so-called quantitative easing has drawn fire from lawmakers, including House Speaker John Boehner, an Ohio Republican, concerned about inflation risks.

In contrast, some lawmakers have urged Bernanke to stop paying interest on reserves.

“What you’re actually doing by this is sort of incentivizing the banks” to “keep their excess reserves at the Fed,” Representative Scott Garrett, a Republican from New Jersey, said to Bernanke during Feb. 29 congressional testimony by the central bank chief. “Isn’t that sort of counter to what your policy should be?”

Bernanke said the benefits from a rate reduction would be “pretty small.” Also, a cut would risk triggering some “financial side effects.”

Other Tools

The Fed’s other stimulus tools include altering the language on the outlook for interest rates and using the so- called discount window for direct lending to banks, Bernanke said in July 17 congressional testimony.

“That’s a range of things that we could do,” Bernanke said. “Each one of them has costs and benefits, and that’s an important part of the calculation.”

An IOER reduction alone probably wouldn’t buoy economic growth, said George Goncalves, head of interest-rate strategy in New York at Nomura Holdings Inc., a primary dealer.

The Fed may make the cut “in combination with a change in communication policy” extending the Fed’s commitment to hold the main interest rate close to zero beyond late 2014, or paired with another round of quantitative easing, Goncalves said.

To contact the reporters on this story: Caroline Salas Gage in New York at csalas1@bloomberg.net; Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net