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.

MBS Collapse!

Good Evening Folks!

Stocks were down much of the day before making a huge comeback heading into the close after Paul Krugman called for the recession to be over by September. Good luck with that call Paul! Sold to you!!!!

The way I see it: Today was the calm before the storm. The fireworks really begin on Wednesday and Thursday when the 10 and 30 year auctions are held respectively. The auction details will be announced at 1pm on both days. Make sure you catch Rick Santelli for the announcements. I expect them to be huge market movers one way or the other.

If the auctions go well we could see a big pump. If the tails are huge or god forbid we see a failed auction, I think an equity crash is possible.

MBS Disaster

There were some fireworks in the credit markets today but it had nothing to do with treasuries. MBS(mortgage backed securities) continued to totally collapse. The move today was stunning:

Here is the longer term trend on the FNMA 30 year coupon:

My Take:

Basically what these charts tell you folks is mortgage rates are soaring. The FNMA is the 30 year coupon which is the benchmark from which mortgage rates are set. Like treasuries, the yield is inverse to the chart: The lower The FNMA drops , the higher the yield. Word on the street is rate sheets have had to be updated and increased 2-3 times a day in order to keep up with the collapsing MBS markets.

Moves like this have never been seen before! Not even back in Sept/Oct. when we were on the brink of a financial meltdown. If you look at the first chart above, we saw a -31/32 drop in the FNMA today which equates to almost a full basis point increase on mortgage rates in one day alone!

Mortgage rates by the end of the day at one outfit today were 5.875%.

Bottom Line:

This of course is BB's worse nightmare. The Fed in my view has completely lost control of the bond market. Mortgage rates are soaring despite the massive purchases of MBS's by the Fed. This trend will end up imploding the housing market and the bank's balance sheets if it continues. These moves in MBS are parabolic folks!

Remember, the Fed has promised to buy over $1 trillion dollars of MBS's versus the mere $300 billion that the Fed has allocated for buying treasuries via QE.

The bond market is basically giving Ben one giant middle finger at this point by selling off both. They are screaming: BRING IT ON BEN!

I can't wait to hear the next Fed statement scheduled for later this month. I am sure they are absolutely panicked by what is going on in the bond market. I think the boys in Chicago have had enough of Ben's bullshit.

The Fed is in a real tight spot right now. I personally don't see a way out. If the Fed decides to jump in with more buying of MBS's and treasuries, the bond market may tell Ben to go pound sand and continue to take yields higher. If this happens Ben's screwed and he knows it. If he does nothing and rates keep rising he is pretty much in the same predicament. I wouldn't want to be in his shoes!

The short end of the treasury yield curve also continued to move higher today. This flattening of the 2 year versus 10 year on the yield curve is huge negative for stocks. This puts a nice squeeze on the banker's profits because borrowing short and lending long becomes less profitable as the spreads flatten.

If the MBS action today is in any way indicative of how the bond market is feeling this week, we could be in deep trouble when the treasury auctions hit later this week.

Stay Tuned!

Video Sunday!

Let me put a big fat DISCLAIMER up regarding the first one. Clear the kids out of the room before you watch it. Its filled with graphic language.

I thought this was pretty hilarious. Some of the J6P's that actually pay attention to what is going on out there in the economy have officially going postal. This guy is slowly building a cult following on You Tube.

If you take out the F-bombs the guy actually makes a lot of sense. I wish more Americans would wake up and get a clue!




Inflation Vs. Deflation

We discuss this topic a lot on here. I thought this was an excellent debate around both arguments.

Make sure you listen to economist Joseph LaVorgna in the middle of the video. I consider Joe to be one of the best economists out there. He makes a strong case for deflation in my view. Basically he explains that the Fed has thrown $1 trillion at a $3 trillion problem. This hardly seems inflationary.

I will continue to protect myself with inflationary hedges because I am still fearful that Bernanke will go too far in terms of flooding the market with dollars. Inflation will eventually arrive in my view, but it might be a few years away.

Anyway, enjoy the video!