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Friday, March 31, 2023


Twisted Tuesday – Treasuries are not an Option

Remember Operation Twist?

Last week, Freddie Mac reported record lows on rates, with the 30-year notes at 3.91%.  This has not, of course, encouraged many people to go out and buy homes but it has DISCOURAGED people from putting their money into bonds and ENCOURAGED them to put their money into stocks.  There is, however, a problem with this.  When people put money into Treasuries, it is "locked up" for a period of time but stocks are more liquid so, as soon as rates begin going up (and they will when the panic in Europe subsides despite the Fed’s efforts), then money can come out of stocks as quickly as it went in and move into 5% paper

See, I said 5% paper and you were thinking "Yeah, I’d like some of that."  So are Trillions of Dollars worth of other investors and that means, I am sorry to tell you, that this little Federally-funded rally is full of holes you can drive a truck through.  

The Fed’s stimulus plan is the central bank’s third definitive attempt to aid the U.S.’s patchy economy since 2008. As expectations grew that the Fed would act in the weeks leading up to the bank’s actual announcement, which came Sept. 21, 10-year yields dropped nearly 0.30 percentage point. Since the Fed’s official statement, yields have already risen modestly, to 2.026% on Friday, from 1.95% on Sept. 20.

The program’s final debt purchase of the year was Thursday, when the Fed bought $4.6 billion in long-dated securities. The final sale Wednesday targets $8 billion to $8.75 billion worth of notes due in 2014. It will be a holiday-shortened week: The bond market was shut Monday and will close early, at 2 p.m., on Friday.

The problem is some corners of the market think the Fed’s tools are losing their punch. The financial system is already flush with money from the bank’s previous easing programs, and analysts argue that the Fed’s extra money is increasingly less useful. Borrowing costs, for instance, are at all-time lows and yet many investors aren’t taking advantage.  If Operation Twist isn’t enough to get us through 2012 – what’s going to be left in the Fed’s tool belt once the Global panic into Dollars begins to subside?  


You can see, on the above chart, where the Fed announced Operation Twist in September as it allowed the oil crooks to borrow cheaply and jam prices back from $80 to $100 (25%) and that took money OUT of consumers’ pockets into Q4 but at least they were able to increase their debt load as borrowing costs came down so it all works out – for the oil companies…

Banks in Europe paid attention to my cash call this weekend and parked a record $540Bn in the ECB’s overnight deposit facility, up from $500Bn the day before.  The previous record overnight deposits were $501Bn, at the onset of the Greek crisis in June of 2010 so – DESPITE all the nonsense to calm the markets – the European banks are as panicked now as they have ever been and the inter-bank lending system (LIBOR) is less liquid now than it was in the crash of 2008.  

The ECB’s so-called benchmark allotment pointed to a major liquidity overhang in the euro zone’s financial system Tuesday. Benchmark allotment, which is the ECB’s estimate of the liquidity banks need to conduct routine operations, was minus €493 billion. The negative allotment figure indicates the presence of excess liquidity in the financial system.  The ECB further said banks borrowed €6.13 billion from the ECB’s overnight lending facility, compared with €6.34 billion borrowed Thursday.  When markets are functioning properly, banks only use the facility to the tune of a few hundred million euros overnight.

I’m sorry to be a Debbie Downer for the holidays but it’s my job to search the truth and, as I was doing research for this year’s Secret Santa’s Inflation Hedges, I discovered that I can’t advocate any at the moment because the pressure is more deflationary than inflationary and, in fact, I am leaning towards putting up Secret Santa’s Disaster Hedges for 2012 – getting in-line with the Mayans for the moment.  

I’m still gathering my evidence so I don’t want to jump the gun but, as you can see from this post – I’m very much in macro mode at the moment, looking out at the bigger picture as we prepare to re-allocate our capital for 2012.  

Barring some immediate disaster this week (and we are short already), our Secret Santa Hedges for 2011 are 4 for 4 with all 4 of our trades up well over 100% and XLF and XLE both at max returns with DBA just off our $29 target at $28.60 but that only applies to very greedy people who didn’t take this trade off the table in August, when DBA was $34 and we soured on the sector.  I’ll do a full write-up as we officially close out that portfolio this weekend but, as I said, I can’t in good conscience replace it with 4 more bullish positions for 2012 as I’m not finding 4 things to be bullish about.

We’ll see how Europe acts this week but already they are not acting "fixed" and, if a Trillion Dollar commitment can’t cheer them up – what will it take?  

Let’s be careful out there!  


Top picture credit: thestreet.com 

Cooling Off chart from the Wall St. Journal

Cartoon credit: Bizarro Comic


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 rustle123: Thanks
Thanks for that answer.  I’m as interested in overall mindset of you smart guys as I am specific picks and pans.

AUD/USD stuck at 1.0150ish, and NZD/USD trading lower against higher European and US equities………
usually AUD/USD trades up with equities and the same for AUD/JPY trading lower near 79.00

That’s a great clip.

Thanks for the insight. i think it does make sense to but up another 1000 here.

pstas/CNQ – my top pick in that sector is CPG, crescent point energy – but they only trade on the tse.

Phil / Thoughts on OXY?
I’m looking to sell some puts for good entries on some energy stocks for 2012.   OXY was reccommended by MHFT and doing some research on my own, there seems to be some upside.  Would you enter a position on them?

We might eventually get back to a more balanced life…

Under an agreement reached this week with organized labor representatives, staff members at Volkswagen will receive e-mails via BlackBerry from half an hour before they start work until half an hour after they finish. Beyond that, they will be in a "blackout mode" where they can’t be reached. Board-level executives, however, will still be attached to their BlackBerrys after-hours as the agreement only was made with unionized employees. Volkswagen is one of the very first companies to take such a drastic step to force workers toward a better work-life balance. 

Pstas – if you are looking at CNQ for dividend, might look at ERF as well.  COSWF may have put in a double bottom recently but at these prices, would consider more a diversification play and would certainly not enter with more than a 1/4 position if itching to cover oil sands…

Oil/phil – yes, but can they keep it unreal through expiration this week?

Any thoughts on calendar PUT spread for LULU

SCO – sold Jan 36p for $1.70

On December 12 I posted this:

JRW III (premium)



Good morning, nothing new……………….


IWM  71.87,  72.15,  72.56,  72.98,  73.24,  73.51,  74.12,  74.62,  74.80  and  75.06

I have descending trend lines at IWM 72.96 and 72ish; the lower should hold.

I expect a Santa Rally to begin later this week or early next; this from Bespoke:

We just hit IWM 75.04, so don’t say you didn’t get anything good for Christmas !!  😎

Phil / WFR – I sold ten Jan ’12 $6 puts for about 1k back in Oct.  would you roll these out or take shares and do buy/write?  Thx. 

good morning from hawaii.
What say you to an AAPL April 2012 $390/420 BCS, financed almost completely (net -$1.63)
If you don’t like it, how should I watch it after getting into it today, if I like it?

thats April $370 puts

Phil / OXY
Thanks!  Sounds like a great plan.  And I FINALLY understand buying the BCS that’s fully in the money.  The $10 spread will be worth $10 if OXY stays above $90 on exp, and I’m only paying $8.20, which gets me the $1.80 "free".  
Just re-stating in case there are other ppl who are Slow learners like me.  Only took a year……

Commodities Gone Wild-ish
As WTI crosses $101 on its way to three-week highs (managing its largest 5-day rally in two months – above), we thought a reflection on the newsflow this morning would be both instructive and modestly humorous. At 1111ET, Bloomberg pronounced (on the loss of the $100 level, the drop in Commitment of Traders long positions, and impending doom that spells)…
    Oil Traders Flee as Crude Price Swings From $100: Energy Markets
And then at 1131ET, 20 minutes later (as consumer confidence jumped and WTI breached above $100)…
    Oil Rises as U.S. Consumer Confidence Gains Amid Iranian Threat
The Iranian threat headlines were, however, at 0944ET
so what is driving oil now?
It is evident that noone has any idea what is going on but for sure, the discussion we pointed to earlier that the equity market (and implicitly the macro-economy seemingly) can only go up if credit creation is ‘impulsed’ and with the baseline here for energy, we are becoming more and more sensitive to credit shocks and less and less capable of breaking into a virtuous circle of growth (as antithetically the energy ‘tax’ anchors us to low/no growth given the monetary drivers).
We have seen bigger moves and more volume obviously but on a day with little real newsflow and macro data that is mixed at best, these moves are notable.

It’s not superior when, as you note, a pharmacist is perfectly capable of asking you the same 5 questions a doctor can to prescribe flu medicine but without all the expense.  If that doesn’t work ($10 worth of pills) THEN you can go to a doctor but our ass-backwards system has people lining up in doctors offices where they mix all their communicable germs for the hour-plus that they wait
Yes, a lot of this has to do with the US legal system, which needs a licensed physician to hold liable if a patient is prescribed something they are allergic to or that harms them. For example, maybe that person with flu is also an alcoholic, and has a damaged liver, so should not be given Tylenol, which is very bad for the liver, but whether it is worth paying ten times the price for such protections is very questionable.

They will never do a QE3 with oil above or close to $100 a barrel.  The economy would crash if they did because oil would go to 115 and would cripple spending in food, retail, and travel industries to start with.

I own some TSM from $10 any feelings about them going forward?

Phil / OXY
One more question, around your thought process.  Why do you think that selling a put, and buying a in the money BCS is better that doing a buy write on the stock.  Where we buy the stock and sell call’s and put’s against it, to collect the Div?  
Trying to wrap my head around the "why’s" for those two strat’s…

Phil, what do you think about buying RIG here, selling the 2013 $40c & 32.50p @ $10.41 and collecting the 8% div in the interim?

But we were at 140 for about a week, think right around Memorial Day if I remember then quickly came down and the economy is in much worse shape now.  115 would feels like 140 now.  I think the powers that be will intervene before QE3 and get oil back to low 90’s or high 80’s.  All they have to do is say, we’re tapping the reserves which they should do now and buy it back 10-15 bucks cheaper a barrel anyway.

 Environmental concerns about Canadian oilsands – I found this interesting a few months ago – http://www.nationalpost.com/sands+necessary+Greenpeace+founder/5462081/story.html

Health professions – I’ve been wondering where pharmacists would go as they moved into professional pill-counting – now being made obsolete by mechanical pill-counters. Nurses seem to be in a similar flux, moving from the (male) doctor’s right hand to……who knows what? patient care specialists? researchers on patient care?…especially with the burgeoning use of ‘techs’ for damn near everything, including specialty surgical or obstet techs.

PHil, silver down to $28.67, and those March AGQ $75 calls down to .95 (was $2.00 when you mentioned them a couple weeks ago) – is that worth a play?

 Ah, the pharmacist trick!!  I should have known you’d figure it out, O Seeker of Superior Values Everywhere!  Yeah, if you don’t have weird allergies or poor health, pharmacists see enough throughput to be right on top of it.  In the "barely emerging market" countries, where there is a serious profit motive in over-prescribing o the foreigner, pharmacists are much more reliable — they don’t get a cut of the profits.  Even in the U.S., a Russian pharmacist gave me a more coherent explanation of a problem than the "on the one hand, on the other hand" doctor’s explanation.  Apologies to the doctors on the site, but pharmacists probably see fewer hypochondriacs and hence sample a more representative population.

Phil on your OXY recommendation I am looking to buy the stock and sell the May 87.5 call for 13.00 having a premium of 5.10 giving you a return of 1% for each month and aswell sell the Jan 13 67.5 put for 5.20 reducing the cost of the stock purchase. In case the stock goes below 90.00 I still can sleep at night. any thoughts on that thks?

Phil, also BTU screaming cheap at this level ($33.91) – would you suggest a buy-write?

Phil cost comparis on surgeries. All very well I had simular ideas on dental work here in Mexico. But after you count the stay and travel it just does not look so good any more.

No offense to the other countries listed but I’m feeling way more secure having a heart bypass in the US then in Thailand.

DEPO- an exorcism?

Rustle – what EDZ did you pick up today?

Surgery, on the surfice many people think like you, however you will be surprised what up to date equipment they have in other places.
Further more you have an operation done in Germany for example you may find an Indian or African doctor will be operating on you. I am not so sure about your place.

I’m not seeing an EOD Stick, so taking profit here !!

FAS Strangle Experiment – Unless we see a big move in the next 30 minutes, I am tempted to leave the position open overnight. I don’t expect much in the way of news this week (unless you listen to CNBC and expect a nuclear showdown in the Middle-East!) so there should not be durable violent moves either way. And in that case, we’ll adapt.

This is a short week so we need to squeeze as much premium as we can from our setup. More risky of course…

 Seems like good practice – doing nothing!

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