Well here we are folks. One day before the potential moment of truth. I feel like I am getting ready to watch a heavyweight title fight in Chicago tomorrow!
You could just feel the tension in the market today. Stocks were pretty flat as the stock market prepares to hold its breath awaiting the results of the 10 year treasury auction in the bond market tomorrow at 1pm.
Volume was extremely light. We traded under 1 billion shares. My guess is many traders are afraid to front run the long end auctions over the next two days. It was a perfect day for the sidelines!
We did have a 3 year treasury auction today that saw very strong demand. This may be ominous for the long end auctions tomorrow and Thursday because it reinforces the thesis that the FCB's want to stay in the short end of the yield curve. Treasury yield's remained fairly steady throughout the day.
My Contrarion Side:
Could the long end auction's go smoothly and turn this week's sales into one giant nothingburger event? Yes, and this is the risk if you are on the short side. Never underestimate the Fed's ability to find buyers for these auctions. They realize the game is over if they can't fund them so you need to be very careful here.
I have positioned short in equities but my positions are small. The Fed is like a large rabid dog right now that's been cornered(by the credit markets). This makes them extremely dangerous.
The contrarion in me is telling me to buy some SPY calls because it seems like everyone is bearish on these auctions. I am also tempted to go long treasuries via TLT calls for a quick trade based on the same thesis.
Both of these bets would pay off big if the Fed pulls a rabbit out of its hat and pulls of this week's long end auctions with strong bid to cover ratio's. I might actually pull the trigger on one or both of these as a hedge to my shorts.
You almost need to think like a criminal in order to trade these markets. You can never underestimate the Fed because they have taken fraud and manipulation to a level that's never been seen before. Betting with them has been more profitable then betting against them since March.
Either way, staying hedged going into this announcement is probably a smart approach if you are conservative.
Don't get me wrong here folks, its only a matter of time before we see a failed auction. The Fed's attempt to re inflate this bubble will ultimately result in a colossal failure. I am starting to wonder if the Fed will even be around after this crisis is over.
Today's news around the House filing a subpoena demanding that the Fed hand over internal notes around the BofA/Merrill merger is a VERY interesting developement:
"WASHINGTON -- U.S. House lawmakers on Tuesday said they would file a subpoena to compel the Federal Reserve to turn over internal notes and emails detailing the central bank's role in encouraging Bank of America Corp. to complete its acquisition of Merrill Lynch & Co.
The House Committee on Oversight and Government Reform, chaired by Rep. Edolphus Towns (D., N.Y.), has asked the Fed to turn over documents requested by the panel last week. The documents requested include emails to and from Chairman Ben Bernanke, as well as handwritten notes from meetings and conversations involving Bernanke, then Treasury Secretary Henry Paulson and Bank of America CEO Kenneth Lewis.
The request is being made ahead of a Thursday hearing in which Mr. Lewis is scheduled to appear before House lawmakers. Congressional investigators have been investigating the details of Bank of America's acquisition of Merrill Lynch, as well as the government's decision to give the company $20 billion in additional government aid in January.
Additionally, lawmakers have been examining testimony given by Mr. Lewis to New York Attorney General Andrew Cuomo in which he suggested top Fed and Treasury officials pressured him to complete the deal for Merrill Lynch despite ballooning losses at the securities firm."
Whoa! What a story this could turn out to be if it gets some serious legs. The ramification's of this would be huge if there is strong proof that the Fed strong armed Ken Lewis into gobbling up Merrill Lynch and its billions of dollars in losses. We all know this is how it went down. Proving it however is a different story.
The fallout if these accusations are proven are mindboggling:
Gee...Do you think the BofA shareholders might have a lawsuit here the Fed is found guilty? Bank of America's shares have been down as much as 79% since the September 15th merger announcement.
Paulson, Bernanke, and the rest of the thugs at the Fed and Treasury all need to go to prison in my view. They have done nothing but lace the pockets of their banking buddies at our expense ever since this crisis started.
I pray that we see some justice here! The RULE OF LAW must be re-established in this country or we will never recover from this crisis.
The SCOTUS decision around the Indiana pensioner's is another critical case that the Supreme Court must take in order to restore the rule of law! The bondholder's were screwed in this deal as the White House threatened them with their lives if they didn't agree to take pennies on the dollar on their Chrysler bonds. This CANNOT be allowed to happen. PERIOD!!!
No one will want to invest in this country if its that's filled with a bunch of thugs at the top.
Let the fireworks begin! Tomorrow could be a historic day in the credit markets.
We could see a huge sell off if these bond auctions end up with ugly tails or even worse: FAIL. My hunch is that the long end auctions this week will be sold without too much pain.
However, if the auctions go off without a problem, it will come with a price:
I believe that the FCB's(specifically China) have most likely demanded reduced spending and deficits in exchange for their continued treasury purchases.
Lets face it. The FCB's know they have the Fed by the balls and so does Ben. I think all of the jawboning by the Fed this week about pulling liquidity and reducing spending followed by the president's speech today around PAYGO might have tipped their hand in terms of folding to worldwide pressure.
If the US caved on spending concessions, the sales will be strong this week.
If no promises were made to the FCB's, all hell could break loose tomorrow as the worlds begins to runaway from our debt. An equity crash isn't out of the question if the auctions are a disaster.
Disclaimer: The following paragraphs should not be taken as investment advice. These are just my thoughts:
If deals were made to the FCB's and stocks pop following successful 10/30 year treasury auctions today and Thursday, I believe it would be wise to then take some money off the table on the long side.
I say this because the Fed will then have to fulfill their promises to the FCB's of less spending moving forward. This will threaten many of the bailouts as liquidity is pulled and spending is cut throughout the government's budget.
This will be extremely bearish for equities because the bailed out companies will be forced to stop sucking off the government tit. Without this option, many of them will have no choice but to go bankrupt down the road.
Be VERY careful this week! This is an extremely dangerous market.
Stay Tuned! I will be here with extensive coverage tomorrow.