After getting my butt handed to me in September, I took some time to re-evaluate some of my calls. I was betting on a general fall in the market, but the Fed had other ideas. I didn't fully appreciate just how far the Fed current bond liquidity program would boost stocks. It was hard for me to wrap my head around the concept that stocks, bonds, and precious metals could all go up at the same time(almost tick-for-tick).
My entire premise for being short has been the fact that I believe(d) that the Fed does want to roll out additional QE. However, there's no way they would be able to do so into a heated market. September generally isn't the best time for stocks and I thought I would set up my puts a little early just in case the fallout happened sooner than later. I was 100% wrong.
Part of my overall strategy was thinking the banks would show lowered earnings across the board. Make no mistake about it, each and every TBTF/PD bank can pick to make whatever they want. If they need a spare billion or two for earnings they can just borrow it from their loss reserve book(this is what they did to show strong Q2 numbers).
If the Feds plan is to truly roll out a giant $1T+ QE in November, it will have to be into a dire mood on Wall Street. The only way to obtain this mood is for the main PD banks to show some mediocre(or worse) numbers in Q3. Most of the banks report mid-October. That would lead to about 2-3 weeks of a sour market, which could lower the indexes but not too much damage being done before the Fed meeting. So goes the banks, so goes the market.
The banks will go along with this because they know they are the direct beneficiaries of any QE program and taking a few dollar hit to their stock price short-term will be more than made up through much larger bonuses for next year. They would also be the ones that would be buying all the put protection for events that they already know are scheduled.
Yet, everyone is screaming that a giant QE2 will be the end of the dollar. That is clearly the expectation. That makes me think Bernanke won't go all-in, yet. If he merely opens up some liquidity programs(most likely to benefit CRE) then the market won't take kindly to that. I would expect something significant with strong wording towards further action, if necessary.
If Bernanke shoots the moon in November with QE anywhere north of $1T, then I will be cashing out much larger chunks of my brokerage account much sooner. Right now, I liquidate a portion every year and invest the proceeds in PM's. I am no longer under the spell that my Roth IRA will still be there when I am 65.
So in case any of you have been away, this is a recap of what is happening. The Fed buys the US bonds/notes from the primary dealer banks and pays for it with the wave of Bernanke's magic wand with fresh USDs. The PD's then take the proceeds and levers it up through their shadow banking off-shore accounts to buy any risk asset they can get their hands on.
So, I have added TBT 34 Nov calls and VXX 20 Nov calls to my list of future failed bets. Something has to give and when it does its going to be ugly. I still have full faith in CDE and will be the only equity in a functioning company that I am willing to own from here on in. I did sell some this week so I can cash some out to buy some more gold.
I am still holding a nice chunk of WAMPQ. The case is moving slowly, but surely, in the right direction. November will be the examiner report and will certainly be worth paying attention to. Some have asked if I like WAMUQ. I did, back when the ratio of WAMPQ/WAMUQ was around 500. Now that it is down to 150ish, I prefer WAMPQ. WAMPQ has a $1000 per share liquidation value and is currently trading for $30. I originally bought at $3 a share.
Feel free to ask some Q's in this thread.
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