This Sums Up Everything

http://fofoa.blogspot.com/2011/04/deflation-or-hyperinflation.html

It can be a tough read. However, I highly recommend it. One of the most well written articles I have seen to date. On my second read, already.

How long it takes to fully play out is the big question.

I've been adding to my CDE calls every time it dips. Generally CDE rallies early market and gives it all back and then some late morning. That seems to be the best time to move in to more contracts.

I am sitting on a lot of them now. Couldn't help myself. Earnings on May 9th. My guess is $235-240MM revenue with 0.70-0.75 EPS.

Early Stages of the End Game

Every day that goes by now my conviction grows that the Federal Reserve Note will become absolutely worthless in due time. I thought(and bet) that the UST and FRB would make some play to really put faith in the dollar and get their bounce. Instead, they have gone out of their way to trash it. All of them with their head in the sand sticking to the script.

This feels like we are finally moving into the early(very early) stages of total world economic warfare. The panic is starting, for those that pay attention to this sort of thing anyways. Those that are fixated on the royal wedding and American Idol are quietly sleeping right now without a care in the world. They, with their head in the sands also, will not even see it coming and will think it suddenly happened out of nowhere.

Everyone agreed that derivatives were a major cause of the last melt-down. Yet, I am willing to bet derivatives are bigger than ever and specifically bond derivatives are multiples of what they were in 08.

Just look at gold and silver. Silver has gone absolutely parabolic. No question about it. Granted, it could be some sort of squeeze or some large money moving in. Gold hasn't quite moved parabolic, but is steady higher. Gasoline topped out at about $4.11 national average in 08. We are pennies from that amount today. Now, not only are people paying more for gas but also food. The consumer couldn't afford it then and they certainly cannot afford it now.

On the flip-side, people are going back to work. I don't know many people left who are looking for work and cannot find it. People are getting raises, again. People are getting bonuses, again. People are spending, again. Most have forgotten about our former brush with the financial abyss. We basically are passing through the eye of the storm and everything seems just fine.

So I am on quite a rant and this did have an overall purpose. Here is what is dominating my thoughts lately, "What if the Fed 'forgives' their UST debts?". This would be one desperation move only in the most desperate situation. I can't wrap my head around how its possible. But, something tells me it is. If they haircut everyone, its game over. I get that.

What if this has been the point all along? Default on yourself? Let everyone else keep their full face value. This would make China happy. What if they then turn around and wipe out the excess cash reserves side on the primary dealer banks to wipe out any shred of QE? Maybe even nationalize the banks to make it happen. Investors might get rattled but eventually settle down and buy more USTs. The alternative is much, much worse. Rising interest rates is game over for everyone. Should the world not play along, they can always just go all the way and default on everyone.

Maybe its much simpler and the Fed lets the UST roll all of their debt into 30 year coupons. Turn the entire funding need into the largest time frame possible? Although the debt would remain, it would not turn into a funding crisis. I have little doubt the Fed has already ran each possibility through every possible scenario to determine their best path. They won't go down without a fight.

Just wanted to get thoughts on paper. Something has to give. Silver at $48.28 as I type. How far is this thing going to climb?

Hanging Out

Pretty much sitting back. Sold most of my USO options when it was in the 43's. I held on to the June 36's for insurance. Moved into CDE calls at May 36's and June 35's.

Amazing run in silver. I'm not sure where that thing might eventually slow down. I am guessing we see another good report by CDE around May 9th or so. Hoping to see another move in the stock like we had last quarter.

I pretty much want to sit neutral for awhile. There is too much going on and nothing seems to be acting correctly. Somehow the dollar and bonds managed to rally when the S&P went negative watch on UST.

Something has to give here. This could get ugly quick.

Happy Capitulation Day!

I slowly unwound most of my positions over the course of the week. It is clear that momentum is overwhelming on the kill the dollar/buy anything else trade. I was fortunate to at least have a lot of TLT 91 puts to ease a little of the pain(there was still a LOT of pain).

I felt dirty shorting silver and gold and pretty much decided to never do that again. They are my favorite investment(in its physical form) and even though I was shorting paper it still didn't feel right.

I was dead wrong on the bounce in the dollar. I shouldn't have gone against the momentum there. I thought a lot this week about not going against the herd in a momentum trade in the future. The herd has spoken and they decided the dollar is bad.

So I sold every option position I had, except my UUP May 22's. I did start to add USO puts, in both May and June. Strikes range between 38-43. The world cannot function for long with oil this high. It will slowly strangle most advanced economies and there is a chance the central banks conceive a scheme to bring it back down. They don't mind their currency weakening, they don't necessarily mind high PM prices. However, they know keeping oil this high for too long will doom every margin on the board and employers cannot raise wages, yet. I bet they are busy inventing a "crisis" to cause oil longs to head for the exits.

Then again, what do I know. I just gave back about 50% of my trading portfolio in just shy of a month(a new record!). Fourth(or fifth?) time in 3 years I've given back half my porfolio. Like each time before, I will look to get more defensive. I will take things a little slower over the next few weeks and possibly set up a hedge play. Each low has been higher than the low before it.

I feel fortunate to still be up for the year. Granted, it is a very, very small gain now. Basically a rounding error. Is it better to double your portfolio and immediately give back the gain or lose half your portfolio and immediately double that back to even? Either way, you are right back where you started. However, making it and then losing it has a little more sting to it.

Happy trading. I plan on being more of a spectator for a little while. I have a vacation coming up next week. Probably good timing.

The Central Banker Empire Strikes Back

They are really try to sell the fact that they can tighten liquidity and raise rates, aren't they? Both the Fed and their Euro counterpart are really trying to push the fact that they will raise rates and possibly siphon off liquidity. The ECB is supposed to raise rates from 1% to 1.25%(Wow, 1.25, how will the banks survive borrowing at 1.25). The Fed had one of their minions come out and say they will raise by 75 bps on the fed rate.

Our US banks don't even care what you make the fed rate. The Fed gave them well north of $1T free cash to park on their books. They don't ever have to go to the window again. Well, all those variable rate mortgages on the books still care. They care, a lot! The treasury cares what rate they have to pay back interest at. They also care, a lot!

The Fed claims they are even thinking of scaling back treasury buys. The only problem is since the Fed is basically the only buyer of treasuries this year, who is in line to pick up the pieces?

My feeling is everything the Fed says or does has a very specific planned out reason to it. They say they are going to raise rates later on this year to possibly put a lid on commodities and to possibly get suckers to buy up treasuries now, in anticipation of fiscal tightening(and therefore, appreciation on any bond purchases in the meantime). Whether they really planned to, or not, doesn't even matter. Expectations are what they are trying to manipulate.

The Fed absolutely, positively, without a doubt, cannot let interest rates get away from them since they have so much interest rate risk on their books. The US treasury feels the exact same way. Granted, the treasury needs them low so they can continue to borrow.

So moving on to trading. I was quite perplexed to not see the US long bond fall hard this week into a rising market. I don't think I understand why. However, I still plan on holding my puts here since I see a few catalysts coming up. UUP managed to run up almost to 22 on Friday before giving back the entire gain! That one hurt. I have a lot of calls, a lot.

I timed out my GLD 139 puts pretty well on Friday and came out at a 300% gain but lost out on the SLV 36's I was trying to hold out. PM's rebounded nicely on Friday afternoon. With all of this positioning by the central banks, it would appear IF PM's were going to show weakness that it might be now.

Gas is almost back up to $4, again. Yet, the Fed pinky-swears that there is very, very low inflation.

Again, on Friday AM:

-Dollar up

-Equities up

- Long bond up

WTF? How does that keep happening! It faded, of course.

Something has got to give.

I think this will be a relatively slow week in the markets. However, you never know anymore.