Wednesday, February 23, 2011

What a Difference a Day Makes!

Whoa!  I don't even know where to start today.  Should I begin with $100 oil or the ugly bond auction. 

Let's start with the 5 year bond auction and the 10 year bond's reaction to it:

My Take:

Today was a scary day.  There was nowhere safe for money to hide.  Cash started flying into treasuries in the morning as stocks sold off thanks to more Lybian mayhem.

That was working just fine until the bond auction was announced at 1PM.  Santelli gave it a D-.  Here are the ugly details:

"Bonds fell after the five-year note auction drew a high yield of 2.19 percent and a bid-to-cover ratio of 2.69, below the average bid-to-cover ratio of 2.79 posted over the past ten auctions.

The bid-to-cover ratio is a measure of demand that indicates the amount of bids for each dollar worth of securities being sold."

Take Continued:

As you can see above, treasuries sold off following the poor auction results. 

Folks, I don't what to say here....If we can't sell bonds now when stocks are selling off at the same time the Middle East is in the process of blowing up then when in the heck can we sell them???

The bond action spooked me more than the revolution in Libya today.  All I can say is this is a really really bad sign for treasuries moving forward.

Is the Fed Waking Up? 

Sure sounds like it.  Two of the Fed presidents created some serious waves today. The Fed's Plosser first came out with this bomb:

"WASHINGTON (MarketWatch) -- One of the most hawkish of the new voting members of the Federal Open Market Committee, Philadelphia Fed President Charles Plosser, on Wednesday said he's considering voting against continuing the $600 billion bond buying program but is also concerned about undermining the Fed's credibility. "Based on my reading of the economic outlook and challenges that the economy faces, I have expressed some doubts that the benefits outweigh the costs of this policy," Plosser said before the Rotary Club in Birmingham, Ala. "However, I supported continuation of the policy in January because it is generally a good practice for a central bank to do what it says it is going to do unless circumstances significantly change." He said should economic prospects continue to strengthen, he would not rule out voting to bring the bond buy program to an early close. "If the growth rates of employment and output begin to accelerate or if inflation or inflation expectations begin to rise, then it may be time to begin taking our foot off the accelerator," he said. "


Kansas City Fed President Hoenig then hit the wires with a fiery speech that was directed at the TBTF banks.  Here is the speech:

"Fed’s Hoenig Says U.S. Should Break Up Largest Financial Institutions

“I am convinced that the existence of too big to fail
financial institutions poses the greatest risk to the U.S.
economy,” Hoenig said today in Washington in the text of
remarks prepared for a speech. “They must be broken up. We must
not allow organizations operating under the safety net to pursue
high-risk activities and we cannot let large organizations put
our financial system at risk.”

Quick Take

Talk is cheap but this is a start!  Don't think for a second that the political chaos we are witnessing in the Middle East didn't have anything to do with these speeches.

The Fed is well aware of what money printing does.  They are also smart enough to realize that they need to hedge when their games start self destructing on them and the rest of the world.

They can tell us that they see no inflation until it's completely obvious that it's staring us right in the face.

In case you didn't notice we have definitely reached that tipping point:

I mean Christ....

When oil hits $100 a barrel, gold soars over $1400 an ounce, and monarchies start toppling due to soaring food costs I think it's kinda hard for the Fed to come on TV and tell us "we see no signs of inflation".

They understand that people are only stupid to a point.   The question now is will they ACT.  The Fed has a tendency to do a lot of barking instead of biting.  I will congratulate them when I see action Jackson.

The Bottom Line

$100 dollar oil is gonna hurt folks.  I wouldn't be surprised to see $4-5 gas by the summer which is when demand starts peaking.  That's a big punch to the gut for the consumer.

Today's Fed speeches were VERY interesting to say the least.  My guess is the Bernanke is taking some SERIOUS heat from the world's central bankers.  Most commodities are denominated in dollars folks which means the Fed's money printing creates and imports inflation to the rest of the world!

Let me remind you what the dollar has been looking like recently in case you haven't noticed:

This recent price action is going to only make matters worse overseas.  BTW, the dollar is selling off hard ahter hours tonight.

The fact that the Fed is hinting that they might end their QE program tells me that their arm is being seriously twisted by the powers around the globe.

The governments of the world were more than happy to play along with the Fed's games until they realized that they might lose power in doing so.

Folks I don't know how else to say this:  If the Fed is forced to stop QE then the financial system as we know it is toast.  Bond yields will immediately soar(they already are) and the banks will be toast because they own billions and billions of them. 

The Fed knows this, and I think it's a little too coincidental that Hoenig's speech focused on breaking up the TBTF banks.

It's too early to tell what's going down here but today's events are certainly interesting to say the least. 

That's about it folks.  You all saw the market today.  It was ugly, and if the Fed is forced to pull back on QE it's going to get even uglier.

Let's see if the robots can create a bounce tomorrow after two nasty days of selling.


Herb said...

It looks like $150/brrl might be a possibility if Libya turns into a bloody(er) mess.

Jeff said...

Yup Herb

I could see it.

If Saudi Arabia folds it will be even worse.

Crazy crazy times

FuzzTone said...

It looks to me like the hideout is the Swiss Franc. Joe 6P has nowhere to go.

Jeff said...



They are tryin to pump the market this morning but it's a struggle after the bad GDP number.

If this pump fails a reversal in a few hours would not surprise me.

Wouldn't be surprised to see us move higher today though