Trading Greenspan, Part I
By Tony Crescenzi

Federal Reserve Chairman Alan Greenspan is perceived as an enigma, a man
whose message is cloaked behind a wall of obtuse language. The markets spend
an inordinate amount of time trying to break down that wall, hoping they might at
last find the Holy Grail on Greenspanisms.
But for most, understanding
Greenspan to the point where both he and the Fed are even semi-
predictable, and hence, tradable, is an elusive challenge
. Greenspan is
therefore seen as a distraction to investors who would rather focus on companies
and industry fundamentals than monetary policy.
But Greenspan’s influence is
too powerful to be ignored, so investors must labor over his every word
.

Is Greenspan, in fact, unhittable—throwing the markets curveballs when they are
looking fastball, or is he telegraphing his pitches first?
I, for one, fully believe
that he reveals his pitches so that anyone, including you, can pick them up
before he delivers them
. When you look closely, Greenspan, and the Fed in
general, are surprisingly open and their predictability far less daunting than
legend has it. In fact, the Fed sometimes strains to signal their intentions before
they act. Why they do this is clear (this may come as a shock to some of you):
they are on our side. Incredibly, this is as forgotten as a trip to the dentist.

Don’t fight the Fed; follow them

Testimony:

Bond
futures
(32’s
)
February
July

Eurodollars
futures
(ticks)

July

1993

+7

-5

Unch

-3

-3

-10

1994

+14

-31

Unch

-9

Unch

-16


-55

+40

-6

+3

-12

+7

1998

-29

+18

-2

Unch

-9

Unch

1999

-29



4.6 bps
7 bps
8 bps

As the table shows, sharp reactions have generally followed Greenspan’s initial
testimony (Greenspan appears before both the House and Senate—usually just
a few days apart—but the text of his speeches on both days is the same, as is
required by law). The table shows that the front-month bond contract has
averaged an absolute change of 33/32 on the first day of Greenspan’s testimony.
That there have been sharp reactions should not be too surprising.
But what
stands out, and what is the most tradable, is the follow-through; the market
usually continues to move in the same direction as it did on the first day of
testimony and the cumulative reaction is usually double that of the initial
reaction. It goes on: one month later, the reaction nearly doubles again
(also in the same direction).Ostensibly, the reaction is so sharp because the market believes that what it
hears from Greenspan is an unmistakable reflection of the Fed’s policy leaning.