The Myth of Fed Injections

Every week many people post about large Fed injections and their effect on the stock market. This activity is particularly strong on Thursdays when most TOMOs are due. Big media outlets and lots of bloggers will claim that the Fed has injected or withdrawn billions of dollars and that this will somehow have an effect on the stock market.

This Google spreadsheet computed all fed injections since Jan 2006, and computed its correlation to the DJIA and SP500 indexes (through DIA and SPY), using nearly 600 data points. The complete spreadsheet is here.

A correlation analysis was done on this "injections" and the stock market movements for each quarter since Q1 2006. Results:

- The correlation between Fed injections and DIA is -0.06.
- The correlation between Fed injections and SPY is -0.17.

The correlation between the SPY and the DIA is 0.95. A number close to zero means there is no correlation, a number close to 1 indicates a high correlation.

Performance Performance Fed "Injections" (in $B) DIA SPY Q1 06 -20 2.75% 2.47% Q2 06 4.5 0.43% -1.89% Q3 06 -9.75 4.05% 4.52% Q4 06 19.25 6.68% 6.42% Q1 07 -7.5 5.51% 6.48% Q2 07 -8 8.53% 5.82% Q3 07 19.5 2.85% 0.52% Q4 07 1.75 -3.96% -5.24% Correlation -0.0625 -0.17 SPY vs DIA 0.95

Next time you hear or read about the Fed injections and the market, perhaps it's best to ignore!

Results of Investing in Straddles in January

The following is a list of straddle results performed on several ETFs on January 4 2008. This table shows the results if you had bought both calls and puts on that day. Strangles/straddles are great if you are not sure of market direction. If the market does move either way you win.

To performer was the DIA 130-126 position. DIA at the time was trading at 128.17. Yesterday's close was 121.77.

Overall, investors on DIA, SPY, and even IWM would have done very well. The only losing positions were XLF and an extreme IWM straddle.

You can view the complete list, and in much better formatting, at: http://nexalogic.com/strangles.html

Before Move After Current price Month C/P Stk Value # Req Value PROFIT ROI IWM Jan C 74 $0.87 12 5.56% $0.00 -$10.00 $324.00 15.61% Jan-04 71.8 P 70 $0.92 11 -5.00% $2.20 $2,410.00 Jan-18 67.88 C 75 $0.57 18 6.14% $0.00 -$10.00 $182.00 8.79% P 69 $0.64 16 -5.58% $1.42 $2,262.00 IWM Jan C 73 $1.24 8 4.96% $0.00 -$10.00 $464.00 22.79% Jan-04 71.95 P 71 $1.28 8 -4.82% $3.15 $2,510.00 Jan-18 67.88 C 72 $1.75 6 4.86% $0.00 -$10.00 $320.00 15.31% P 72 $1.70 6 -4.73% $4.05 $2,420.00 IWM Jan C 76 $0.37 27 6.58% $0.00 -$10.00 -$379.00 -18.66% Jan-04 72.09 P 68 $0.46 22 -6.82% $0.76 $1,662.00 Jan-18 76.88 SPY Jan C 141 $2.99 4 3.60% $7.95 $3,170.00 $779.00 32.18% Jan-04 141.31 P 141 $2.41 5 -4.04% $0.08 $30.00 Jan-18 133.43 C 142 $2.44 4 3.92% $0.00 -$10.00 $1,200.00 61.22% P 141 $2.41 4 -3.65% $7.95 $3,170.00 SPY Jan C 143 $1.95 5 3.96% $0.00 -$10.00 $1,290.00 65.48% Jan-04 141.31 P 140 $1.95 5 -3.69% $6.56 $3,270.00 Jan-18 133.43 C 144 $1.52 9 4.14% $0.00 -$10.00 $1,848.00 68.44% P 139 $1.64 8 -3.87% $5.71 $4,558.00 XLF Jan C 27 $1.17 8 5.38% $0.00 -$10.00 -$121.00 -6.42% Jan-04 27.32 P 27 $0.62 15 -7.72% $1.19 $1,775.00 Jan-18 25.8 C 28 $0.63 16 7.06% $0.00 -$10.00 -$136.00 -6.73% P 27 $0.62 16 -5.75% $1.19 $1,894.00 XLF Jan C 29 $0.31 32 8.46% $0.00 -$10.00 -$846.00 -42.22% Jan-04 27.32 P 26 $0.32 31 -7.14% $0.38 $1,168.00 Jan-18 25.8 C 30 $0.12 83 10.80% $0.00 -$10.00 -$2,026.00 -101.00% P 25 $0.15 66 -9.48% $0.00 -$10.00 DIA Jan C 128 $2.47 6 3.39% $0.00 -$10.00 $1,558.00 53.05% Jan-04 128.17 P 128 $2.05 7 -3.66% $6.45 $4,505.00 Jan-18 121.77 C 129 $1.92 7 3.46% $0.00 -$10.00 $1,624.00 59.79% P 127 $1.69 8 -3.73% $5.45 $4,350.00 DIA Jan C 130 $1.49 7 3.64% $0.00 -$10.00 $1,437.00 67.06% Jan-04 128.17 P 126 $1.35 8 -3.91% $4.50 $3,590.00 C 131 $1.08 10 3.88% $0.00 -$10.00 $1,380.00 63.89% P 125 $1.06 10 -4.14% $3.56 $3,550.00

New Potash Company IPOs in Canada

Following on the theme of global food inflation, whose demand is mostly triggered by increased global income (population eating better), Athabasca Potash started trading under symbol API on the Toronto exchange.

Potash has no commercial substitute its application increases yield & plant health.

The company is exploring its Burr Project and recently completed a 2D seismic survey of the project as well as five new exploration drill wells. After the IPO the Company will proceed with further exploration, a scoping study, and a preliminary feasibility study to assess the viability of underground potash mining. Athabasca also plans to conduct exploration programs over the other ten exploration permits it holds in addition to the Burr Project.

API started trading on December 13. The IPO had an offering of 10,140,000 common shares at a price of CDN$4.25 per share, for gross proceeds of CDN$43 million. The stock reached a high of $10.47 and is currently trading at over $10. There are just over 34M shares outstanding. Assays are expected in Q1 2008, new resource estimate in Q2 2008. Production is several years into the future (7-10 years).

The Burr project is located in Saskatchewan, the prime location of reserves of Potash Inc. Saskatchewan holds over 50% of the world’s potash reserves.

Click here for Athabasca Corporate Presentation. I have no position in this company, I am just keeping an eye on it.