Tuesday, June 9, 2009

Lets Get Ready To Rumble!

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."

Quick Take:

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.

Bottom Line:

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.


flipdippy said...

Seems like there is analysis paralysis from traders, investors, economists, you name it.

Good cases to be made for tomorrow being the catalyst to launch S&P to or over 1K, or could be a sell the news event regardless since the S&P is far overdue for a pullback, bull market or not.

I'm placing bets short on SDS/RNOW/SKF/SRS with very very tight stops through Friday.

On a real estate note, this shocked me. A home in my development closed in Feb 09 and is back on the market in June 09 as a foreclosure...how can it happen that quickly?


CT-Hilltopper said...

I'm taking Karl's advice and sitting it out. I have the money I need (for now)and I don't trust the market.

Plus I finally have the apartments rented, so I'm good.

I reserve the right to move into something at a future date if I think I can make money on it and I happen to feel a need to replenish cash, however.

It would literally have to be an in and out deal though. Quick. Make my money and gone.

I don't trust anything about this market.

Anonymous said...

Here is the Q1 2009 vacancy report for Northern California (published by Cornish & Carey Commercial).

Industrial Vacancy Rate
Q1'08 Q2'08 Q3'08 Q4'08 Q1'09
7.17% 6.87% 6.33% 6.66% 8.62%

Warehouse Vacancy Rate
Q1'08 Q2'08 Q3'08 Q4'08 Q1'09
10.51% 10.66% 10.85% 10.50% 12.53%

R&D Vacancy Rate
Q1'08 Q2'08 Q3'08 Q4'08 Q1'09
18.06% 21.56% 23.03% 23.84% 26.00%

It sure looks like the economy is recovering well! ;)

Jeff said...


I like it. I am hedged short.

I think either way the economy is toast. Either the bond market forces the Fed to stop spending by shooting yields to the moon or The Fed does it themselves.

Either way we reach the same conclusion. It just becomes a matter of how long they can keep this game going.

A collapse is inevitable.

Jeff said...


Congrats on the apartments!

There is nothing wrong with th sidelines here. The game is so rigged right now I don't think anyone is very confident in how this plays out tomorrow.

Like Flip said, analysis paralysis. Sit back and enjoy the show tomorrow!

Jeff said...


Thanks for sharing such "Green shoots"!

I guess we should all continue buying commercial real estate? Paul Krugman said the recession is over right?:)

Perhaps its time for some IYR PUTS.
SRS is now trading at $17. I never thought in a million years I would ever see it that low. Some of these derivative ETF's are a ripoff.

Although I must admit. FAZ at $4.50 is looking pretty damn juicy. After the TARP escape what catalyst takes the financials higher? I see nothing but pain.

I will sit out the credit market games this week before I start looking at this stuff.


John Maynes said...

Although I must admit. FAZ at $4.50 is looking pretty damn juicy.

That's precisely what you said when SRS was at $80!!!

Jeff said...

Actually it was $85 not 80!

Get your damn facts straight!!!


Jeff said...


The Supreme Court rolled over on the Chrysler bondholder case. God help this country:

"Ending four days of intense, round-the-clock and high-stakes legal maneuvering in the Supreme Court, the Justices on Tuesday evening removed a legal obstacle to sale of the troubled auto industry giant, Chrysler. Insisting that it was denying a postponement “in this case alone,” the two-page order said the challengers had not met their burden of showing that a postponement was justified."

Jeff said...

Futures Update

ES is surging tonight up +7. I have no clue why. Perhaps someone knows that the 10 year auction has bidders tomorrow?

At a loss folks. There is nothing on the wires that should have ignited this.

Like I said in my post today. Never underestimate the fraud thats taking place in the markets.

Rock on! I guess the recession is ober! NOT!

flipdippy said...

Didn't take long for the drama to start.

Russia is cutting their US treasury holdings:


Looks like the open was a head fake. Reasonably confident we'll see a sell off this afternoon.

Jeff said...



Scary man.

Yields are creeping up heading into the auction results. Thats not a good sign.

The 10-year is at 3.91.

I am getting very nervous. I think we might see a bad auction today.

We will know at 1pm.

Geez. This is crazy!

Anonymous said...


Is it 1PM EST?

Jeff said...



Fed bought $3.5 billion in longer term treasuries today:

"NEW YORK (MarketWatch) -- The Federal Reserve Bank of New York bought $3.5 billion in Treasurys maturing between 2019 and 2026 on Wednesday, the second operation this week and the latest in the central bank's attempts to keep a lid on borrowing costs and spur economic activity.

Dealers offered $10.979 billion to be purchased. The last three times the Fed bought from this maturity range, it purchased about $2.91 billion on average. The central bank is expected to release its schedule of upcoming buybacks later in the session.

Bonds of most maturities stayed lower ahead of the government's sale of $19 billion in 10-year notes. Yields on the benchmark security (UST10Y 3.90, +0.04, +1.12%) , which move inversely to prices, rose 4 basis points to 3.90%."


Get ready folks.

Lets see what happens!

Anonymous said...

So what is the verdict Jeff?

Anonymous said...

Found it. Fed sold $19B in 10-yrs notes at 3.99%.


Anonymous said...

Swiss publication writer supports Ron Paul’s Audit the Fed Campaign. The Fed threatening Lewis and Bank of America is just business as usual by the Fed and the government. Still
BOA is just as guilty as the Fed in creating the financial meltdown.

Review the following URL for the essay which covers the Ron Paul's Audit the Fed Campaign & Beware False Bank Profits From Accounting Shenanigans at:

Readers can receive the newsletter by sending name and e-mail to: contact(at) bfi-consulting.com