Treasuries

I think the COT showing specs short 200k+ contracts of the 10-yr T means bonds are more likely to rise than fall short-term. IMO, the use of Treasuries as an opiate necessitates shorting them, paying the minuscule interest, and ploughing into risk trades. When the risk trades fall, the other end of the carry trades will rise (and has risen impressively). Of course, both sides are probably not matched evenly, so I'm gonna be very careful when those short positions start getting covered.

That's the short-term picture. The long-term picture, according to Dave Rosenberg is also favorable to Treasuries. Deflation is non-existent, and demand for credit is low. Corporations have a lot of cash, and consumers are cutting up their plastic and walking away from their mortgages. Plus, the US can always monetize the debt, as they did after WWII by holding rates at 2.5% for years. In which case gold makes for a much better play than shorting T's.

Taking Half My Shorts Off the Table

Trades:

Sell to close: 4 EWA Jul 19 puts @ 1.75, + 146%.

I closed this for several reasons. First, the VIX just hit 45, the highest in a year. The McClellan Oscillator closed yesterday at -327, an extremely oversold level. These are the day-to-day timing tools, and they both said "sell!" The intermediate technical indicator I used was the 1-yr chart with a 50 and 200 moving average. Currently, the chart shows the most oversold level in a year, at 20% below the 50 day moving average. Support right around $18, although the current price is about $18.50. Close enough. The final reason I sold was as part of my options risk strategy and discipline. (The rule I follow is that I want my options account to have a weighted average life-span on my account of six months even if all options expire worthless. I hope to ensure that I have enough cash on hand for new opportunities and limit risk with this strategic discipline.) The jump in this option had lowered my life-span from 6 to 4 months.

Sell 20% position in EUO @ $24.06, +14%.

Not bad for a month and a half! Everyone and their mother knows the problems the euro has. Short interest on the euro is getting ridiculous.

Buy to cover 10% position in AGO @ $14.55, +32%.

I never thought AGO would fall so far, so fast. The chart just shows it falling off a cliff, and there really hasn't been any news of muni defaults leading to losses. That's why I sold them in the first place, so I guess I might short them again should they jump back up to $20 or so.

Economics

According to Bloomberg, Goldman Sachs and JP Morgan traders made money every day in the first quarter. Now, trading is always a zero-sum game. Someone wins, someone loses. Just one question. Who did they take that money away from?

Short Squeeze on the Markets

DOW futures up 300 points. Unfortunately, I didn't take profits Friday. Too late, thought I should sell bonds. The thing to watch is gold. If it falls, it might be a nice time to pick up an ABX call.

In other news, the price of coal in China is plunging. This could be a volatile month, so I need to keep my eyes peeled for any confirmation of commodities plunging in China.

*puts pinky to mouth* "One triiiiiiiiilion dollars."
I have just one question: How long will it last?

Oh, and Russ Winter says put the shorts back on if the market soars on Monday. Watch morning action. Mish reminds me that the short squeeze on Fannie Mae lasted four days.

I just came up with another question: How much is Spain going to contribute to its own bailout? This is a short-term fix by squeezing the shorts. But details are light, and there is also the question of implementation as opposed to talk. As Mish says, you can't defend the euro by printing more of them.

As of 1am, the euro Stoxx market is up 7%. The euro is up two cents to $1.30. And the S&P 500 futures are up 45 (4.1%). Let's see how quickly the shorts cover and what's left under the market.

Ban HFT

High Frequency Trading needs to be banned. Yesterday's action in the market clearly shows that HFT contributes to volatility and systemic risk. Of course, the media immediately blames human error. Someone hit "b" for billion, instead of "m" for million. Really? Maybe, but I doubt it. I think that most of the computers trading for market makers on the exchange exist to front-run other traders and/or move the price up whenever volume is low. However, these buying programs turn off and run as soon as volume picks up. Although not a likely explanation for yesterday, it is possible that someone found that point, crashed the market, and bought back cheap. Goldman Sachs anyone? They're the HFT leaders, and they're big enough to do it.

Why Doesn't the Market Like the Bailout?

Now that we have a real Greek bailout, both big enough to cover all refinancings over the next two years as well as approval from Germany, world equity markets are plunging.

What gives? Didn't stock markets rally on every bailout rumor up til now? Maybe it's a case of buy the rumor, sell the news. But that's not the case with PIIGS bonds. The contagion seems worse now than before. The media says it's fears of the Greek debt crisis. But since I've seen that in print about a dozen times, it must be wrong.

Granted, there are still some dangers, such as the German parliamentary vote coming up on May 7th. More than that, though, the size of the bailout, in my opinion has emboldened speculators. They know now that if they push on Portugal and Spain, the bailout needed would probably kill the value of the euro. Rosenberg predicts the euro goes back to $0.85. He sees gold at $3,000 and the 10-yr Treasury under 3% again.

I missed a golden opportunity to buy the SPY 118 May put, but options require patience and you can't jump on the bandwagon with them. Better safe than sorry. Although Russ Winter did tell me the timing was "close enough."