Hot off the Fed’s non-monetary printing press is the announcement of a change to the criteria of Agency (Freddie/Fannie) securities that it buys through permanent open market operations.  Newly inserted in the FAQ:

What type of GSE direct obligations will the Federal Reserve purchase under the program?

…Prior to August 31, 2009, purchases were focused on off-the-run securities in that category. Going forward, purchases will include on-the-run securities in that category. This change represents a technical adjustment designed to mitigate market dislocations and to promote overall market functioning.

So, the Fed will now buy newly minted Fannie and Freddie debt (are they running out of older debt?).  Overall, not a big leap (it’s only a $200 B program), but another small step up the ponzi pyramid.  Next, expect loosening of restrictions in the much larger TALF and MBS programs. 

Gaming the Market outlines a typical day at the FRNY trading desk.

Step One (08:30am):

• gather information, macroeconomic news
• desk telephones primary government security dealers
• large banks inform the desk about their reserve needs
• NY Fed gather data to provide forecasts of reserves

Step Two (10:30am):

• call to the Treasury concerning its forecast of its balance for the day

Step Three:

• formulate the actions for the day
• forecasts from Treasury, NY Fed, and Fed BoG combined
• interventions are formulated
• trading plan is formulated

Step Four (11:15am):

• conference call links…
• Manager (and staff)
• Director of the Division of Monetary Affairs at Fed BoG
• a Federal Reserve Bank president who sits on FOMC
• proposed actions for the day are detailed

Step Five (11:40am)

• desk traders contact primary dealers and execute day’s program

Update 2:58 pm:  We didn’t expect to proven correct so quickly!  The Fed just announced it is extending TALF (Term Asset-Backed Securities Loan Facility) from Dec 31 2009 to Jun 30 2010 for newly issued CMBS and Mar 31 2010 for newly issued and legacy ABS.  And, no longer will borrowers from the TALF be restricted to using primary dealers (who have the onerous requirement of buying up Treasuries at sloppy auctions).  Now, there are TALF Agents, with four non-primary dealers named today:

• CastleOak Securities, LP
• Loop Capital Markets, LLC
• Wells Fargo Securities, LLC
• Williams Capital Group, LP

No major changes to the Terms & Conditions of TALF, though we expect eligible collateral standards will eventually be loosened again.

Update 3:15 pm:  As to the above list of TALF Agents, all but Wells Fargo appear to be minority-owned and part of the Fed’s Partnership for Progress program.  So why was Wells Fargo thrown in?  Perhaps because it is the largest bank that is not already a primary dealer.

11:23 am EDT:  The morning rally was indeed a bull trap as the ES has now headed south without pausing (even at the 1015 support level corresponding to the open of the day session).  As we write, it has taken out daily S2.  We will not be looking for longs even at the 1002-1004 strong support level as this could end up being a strong distribution day.

10:20 am EDT:  The ES blew through the daily gap/pivot area, but has printed a spike high (on our 15 min chart) off the 10:00 am reports.  Though it exceeded our key resistance level of 1027.50 by a tick, we will stick with our game plan and look for shorts with tight stops.  Only above 1031.00 or on a retracement to 1015 would we look for longs.  Above 1031, and longs have a very good shot at new contract highs into Friday’s employment report.

On ISM, we quote Dave Rosenberg of Gluskin Sheff from his morning report (written before ISM was released):

So, it is a foregone conclusion that the ISM breaks 50 today — but that was already foreshadowed by the orders and inventory data in the last report.  But here is the reality — the S&P 500 started to price in 50+ more than a month ago. Recall that the ISM broke above the 50 threshold in February 2002 — and that was treated in the media as a watershed event too. But what happened was that even as production rebounded, consumer demand did not and as a result the economy relapsed in the second half of the year and by October we were back below 50 on the ISM and the stock market was testing new cycle lows. A little bit of a history lesson isn’t such a bad thing.

To put a little more granularity on the situation, on that day that ISM crossed above the 50 mark (for the first time in 19 months) back on March 1, 2002, the Dow popped 262 points that day as the herd jumped in right as the “smart money” was ready to get out. Three months hence, the Dow had done more than just give back that advance — it was down 660 points. The yield on the U.S. 10-year Treasury note jumped 10bps on that ISM>50 session, only to then rally 150bps in the next three months in one of the best buying opportunities for bonds in the past decade.

The Precise Take – Continued overnight weakness – will the day session get follow through?

Time Profile:  Today, the Federal Reserve Bank of New York conducts permanent open market operations (POMO) for Treasury securities.  The POMO tape-painting effect has all but disappeared, as evidenced by the charts on page 2. While the noticeable edge was a bullish first hour in July, August reversed the trend with a bearish first hour, mainly due to opening gaps.  Today, we expect an opening gap to the downside, continuing the August trend; however, we can offer nothing more as to the balance of the day from the Time Profile alone.

Trading Today:  Overnight, the ES filled within a tick the market profile volume gap that extended to 1010.50 after selling off at the September 09 contract’s highest point of control at 1025.50.  We would be sellers on an early retracement to the daily gap/pivot area of 1018.50 to 1021.75.  We would also sell a spike high and subsequent reversal on the 10:00 am reports as long as…

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