Ironically the start of this bear market rally was kicked off when the Fed started its “Quantitative Easing” program. In layman’s terms this means the government printing money to buy treasuries. It is one of the only times in our monetary history that we have done such a thing and if you have been reading this blog for a long time you know that I call this the “Big Red Button” or the “Nuclear Option”.
I said for a few years that they would only use the “Nuclear Option” if their backs really got against the wall and there was no alternative. I also said that at some point they would do it even though it would be horrible for our economy. Well in March that is exactly where they were and as I expected they hit that button.
In all, the program was somewhat successful in holding rates down for the short run. The 10-year bond was trading at 3.00% when the program was announced. (up from 2.00% at the lows) Even with the massive rally in stocks which would usually cause a large flight from bonds the 10-year today is only trading at 3.40%. This is because the Fed was pouring in billions in purchases every week from today since March.
https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEib-wRSpEUe8bXyGLpqf9rQCIUL68hhhSzBO6ZOKNTdHbIEi_uMZJHPNd7GArux1iTsfbTukPQ_atCi86JZA54d56Eu17roT-mOkxCHHt-K-P-F9vmkFl5YTd_gpmzx1k2qkLRbqGNWY2g/s1600-h/FedTreasuryPurchases.jpg
Now I see this story on Calculated Risk which says that with the Fed’s 1 billion in purchases yesterday they are left with only 2 billion of the initial 300 billion.
http://www.calculatedriskblog.com/2009/10/fed-treasury-purchases-just-2-billion.html
Back in May 2009 I wrote a blog here called:
“Dollar or the bond market Benny, your choice…”
http://caps.fool.com/Blogs/ViewPost.aspx?bpid=198854&t=01001808419327792238
This is what I said at that time, this is when rates started to rise and the dollar first really started to fall.
"
The people selling the bonds were selling to force the Fed to buy more. Whenever a market participant makes a bluff like “Paulson’s Bazooka” from last year the MARKET CALLS THE BLUFF. That is why the yields are rising.
The people selling the dollar on the other hand, were selling because they are AFRAID that the Fed will print money to buy more.
So now the Fed has a choice.
1. Buy more bonds now and continue the dollar obliteration but hold down yields a bit..
2. Don’t buy more bonds and watch the dollar strengthen but yields rocket higher.
Because I think they are going to chose #1 I covered most of my shorts in real life… I went heavily short at 888 back on April 30th and today we closed at the same exact level (888). I still think stocks could be headed a GREAT DEAL lower but I thought the more “sure thing” at this point was gold and gold stocks yet again. Plus those ultrashorts BLOW and I don't like using puts. I bought a lot of gold on the break of $930 a few days ago and some of my favorite miners at the same time.
“
That worked out well, unfortunately I did not have the conviction to hold all of those positions till today but I always hold a good amount of gold.
Anyway….
So now we are at an interesting crossroads. Really I should have saved the title “Dollar or the bond market Benny, your choice…” for today’s post. When I wrote that post the Dollar was trading ABOVE 80 on the USDX and the 10-year bond rate was only 3.20%
Today the dollar is down below 75 and even with all the billions in buying from the Fed rates are just a bit higher at 3.40%. On one had the dollar crash has to be getting out of hand even in the Fed’s mind at this point. We have Oil well over $80 even though there is practically no demand for it because of this dollar issue. On the other hand the real estate market has not turned and higher rates at this time would still be disastrous for this economy.
Because of these issue I believe the Fed will wait before this issue a second Quanitative Easing program. They are going to spend their last 2 billion next week and see how the auctions go without them buying. I think the auctions will go poorly but if stocks were to roll over a bit the “flight to safety” could keep the bond market from outright crashing.
Either way if the Fed does not issue a second program yields are going to go higher unless stocks crash (down more than 30%). Even with a stock market crash I don’t see the 10-year ever getting to it’s December 2008 low yield mark of 2.00% where I called the bottom.
http://caps.fool.com/Blogs/ViewPost.aspx?bpid=120472&t=01001808419327792238
The only way that is going to happen is if they hit the “Big Red Button” again. If they were to do that though I believe we truly would be at the endgame for our currency. Seriously if they were to issue another 1 trillion MBS/Treasury purchase program I would be joining the camp of the hyperinflationists. Currently I am still solidly in the camp of the stagflationists (the guys who are winning).
Because I think they know at least as much as I do I believe they will hold off on a second Quantitative Easing program and we will get to see the TRUE treasury market over the next few months.
Let’s hope we don’t have to see what happens if their back gets to the wall again.
Thursday, October 22, 2009
Wednesday, October 21, 2009
Outside Day! Bears take over?
Outside Day:
"Outside days can occur frequently on daily charts. The secret of the outside day is the bigger the better and it has more meaning if found at the end of a trend.
The outside day (OD) should completely encompass the previous day. It must have a higher high than the previous day and a lower low than the previous day.
One of the most important things about this pattern is that the bar closes in the opposite direction of the trend. If the trend is down the close on the OD must be near the high or in the upper part of the bar. The opposite is true of the up trend. The OD may still work if this is not the case but my research show that it is more effective if it does close in the opposite direction."
Stole this from definition from:surefire-trading.com
We even went slightly above all the levels everyone was calling for as the top to hit their stops. Classic market action.
Today's outside day has a range from 1101 to 1080, which is a MASSIVE range. Not to mention we were at key resistance in October (traditionally weak time for stocks) and over 20% above the 200 day moving average AND to top it all off we closed near the lows.. I have not even gotten into the fundamentals but from a purely technical standpoint today was the “waterloo” day for the bears.
The only thing that could have made this better is if we closed below support at 1080… (near where all the bears were calling the top. That old resistance is now support.)
We held this support level into the close. Also volume was not as high as it should have been given the way the market traded.
Still, this massive an outside day, taking into account all of the other factors already stated make today’s reversal look VERY SIGNIFCANT INDEED.
"Outside days can occur frequently on daily charts. The secret of the outside day is the bigger the better and it has more meaning if found at the end of a trend.
The outside day (OD) should completely encompass the previous day. It must have a higher high than the previous day and a lower low than the previous day.
One of the most important things about this pattern is that the bar closes in the opposite direction of the trend. If the trend is down the close on the OD must be near the high or in the upper part of the bar. The opposite is true of the up trend. The OD may still work if this is not the case but my research show that it is more effective if it does close in the opposite direction."
Stole this from definition from:surefire-trading.com
We even went slightly above all the levels everyone was calling for as the top to hit their stops. Classic market action.
Today's outside day has a range from 1101 to 1080, which is a MASSIVE range. Not to mention we were at key resistance in October (traditionally weak time for stocks) and over 20% above the 200 day moving average AND to top it all off we closed near the lows.. I have not even gotten into the fundamentals but from a purely technical standpoint today was the “waterloo” day for the bears.
The only thing that could have made this better is if we closed below support at 1080… (near where all the bears were calling the top. That old resistance is now support.)
We held this support level into the close. Also volume was not as high as it should have been given the way the market traded.
Still, this massive an outside day, taking into account all of the other factors already stated make today’s reversal look VERY SIGNIFCANT INDEED.
Monday, October 19, 2009
Some more longs
Bought MCD @ 57.27
Bought WMT @ 50.2
Bought WM @ 29.78
Bought DUK @ 15.78
Bought BP @ 54.44
Bought CAG @ 21.11
All yielding ~3% or greater, all have a PE of less than 20.
All are off at least 20% from their 5 year high, and 20% off their 5 year low.
Bought WMT @ 50.2
Bought WM @ 29.78
Bought DUK @ 15.78
Bought BP @ 54.44
Bought CAG @ 21.11
All yielding ~3% or greater, all have a PE of less than 20.
All are off at least 20% from their 5 year high, and 20% off their 5 year low.
Averaging down on Verizon (VZ)
Bought some more verizon at $28.98, lowering my cost average to $29.70. Wrote some covered calls on it, too.
Getting more long oil
Covered my Exxon naked put for a 75% gain, bought BP Amoco (BP) outright at $54 and $56.
Tuesday, October 13, 2009
Thursday, October 8, 2009
I'm the proud owner of 200 JNJ
Assigned, as expected (and requested), on my Johnson&Johnson put options. I'm now the proud owner of 200 JNJ shares.
Cost basis is $61.30 net of option premiums collected.
Cost basis is $61.30 net of option premiums collected.
Alcoa Top, Procter Toppy
Selling Alcoa (AA) at almost $15 for a 64% gain, and Procter & Gamble (PG) at $57.53 for a 14% gain.
I'll buy these back at lower levels.
I'll buy these back at lower levels.
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