Twas The Night Before Taper

Please enjoy my version of this classic poem.  Merry Christmas and Happy New Year. 

Twas the night before Taper, when all through Morgan;s house
Not an investor was stirring, not even a bot.
The portfolios were hung by the brokers with care,
In hopes that St Yellen soon would be there.

The muppets were nestled all snug in their beds,
While visions of Cap-Gains danced in their heads.
And mamma in her ‘kerchief, and I in my cap,
Had just settled our brains for a 2014 nap.

When out on the lawn there arose such a clatter,
I sprang from the bed to see what was the matter.
Away to the window I flew like a flash,
Tore open the shutters and threw up the sash.

The moon on the breast of the new-fallen snow
Gave the lustre of mid-day to objects below.
When, what to my wondering eyes should appear,
But a miniature taper, and no tightening  there.

With a little old Fed Chair, so smart  and so glib,
I knew in a moment it must be St Yellen.
More rapid than algos her soothing words they came,
And she whistled, and shouted, and said more of the same

"Now Morgan! now, BOFA! now, Stanley and St Street!
On, Deutsche! On Barings, ! on, Citi and Chase!
To the top of the market! to the top of the bubble!
Now buy away! buy away! buy away all!"

As dry powder that's there before the wild selloffs fly,
When they meet with an algo, mount to the sky.
So up to the market-top the bankers they flew,
With the sleigh full of POMO,  St Yellen she knew.

And then, in a presser, I heard on the news
The prancing and pawing of each taper view.
As I admired my statement, and was patting my back,
Down went vol with a low volume attack.

She was dressed in PHD's, from her head to her foot,
But her ideas were all tarnished with Keynesian soot.
A bundle of QE she had flung on her back,

But she looked like a peddler, just opening her pack.

Her white papers how they twinkled! her words were so merry!
Her programs like candy, so sweet and so sure!

Tapering not tightening doesn't sound so scary,

Investors 'round the world were sure there'd be more.

So confident and bright, a right jolly old banker,
And I laughed when I saw her, in spite of myself!
A wink of her eye and a twist of her head,
Soon gave me to know I had nothing to dread.

She spoke not a word, but went straight to her work,
And filled all the statements, and if you sold your'e a jerk.
And laying her finger aside of her nose,
And giving a nod, up the market it  rose!

She sprang to her desk, to her bankers gave a whistle,
And away they all flew like HFT's on a missle.

 I heard her exclaim, ‘as they hid out of sight,
"Happy trading to all, and to all a good-night!"

Bob Kudla 2013

Watching Volatility

We are now once again whigging out on whether our drug dealer Ben Bernanke is going to give the market its fix, or we start going on our methadone treatments.  My personal view is they never taper as the patient is so dependent on their POMO doses it would cause a seizure in the markets.

The Fed is ultimately a political entity and causing a market crash during Christmas, while the incumbent President is weakened and on defense, and not wanting another thing to deal with, doesn't seem to me to be the brightest thing to do for their survival. Note Yellen is not confirmed yet, coincidence, I think not.

However, I could be wrong, so as I am buying UVXY puts for Week4 December (and will add if Monday or Tuesday is higher), I will buy some SPY puts expiring on Friday if the market is flat going into Wednesday morning.

Otherwise I am not adding anything new for this year and will let stops run their course on other current holdings.

TNX-X

We have the 10 year pushing right up to the 3% area again, and mortgage rates are now in the mid 4% range.  This is important as this IS the only thing that matters.

The whole purpose of the FED doing QE is to keep the banks from imploding.  All the other chatter is to simply keep you confused. The employment report is a house of mirrors, and it is simply a tool to push asset prices around where the TPTB need them pushed.

The banks need every dime of QE, for a very long time.  The banks are not lending because there is risk of default, so the FED must give them a free spread that they then lever up and buy ES future contracts and sell volatility contracts and generate profits.  At the same time the plan is to lift the price of housing so that others can buy them from the banks with the lowest possible loss and clean up their balance sheet in the process.

Well rising interest rates throws a grenade into this party, as housing simply dies unless prices start coming down again to produce a yield for investors.  Falling housing and stock prices, rising delinquencies, or falling sales will have a knock on effect economically and politically, and will destroy bank profitability.  Plus the Fed's other master the Government is not in a position to borrow at a higher average rate, and for 2014 the pols will want to spend to curry favor with voters.

This will not be allowed to happen.

But, is there a way for the Fed to taper and have the TNX-X fall?  3% yield on ten year paper to Japan looks awfully tempting.  They borrow at zero, clip coupons at 3% and get to devalue their currency.  The dollar stays stable, energy pushes back down, and rates drift down again.  They could easily soak up any difference.

If not Japan, the Fed will need to ramp up QE, not reduce it to maintain status quo.  The high costs more exponentially everyday.

It is unfathomable to me that the Fed will be allowed to let the bond market rise, in an election year, with the deflationary forces of healthcare taxes, and higher energy costs, and if no action higher interest costs.

All I want for Christmas is ..........Gold

I made my list and sent it to Santa, and judging by the action this week we may get a gold rally into December gold delivery month expiration.  My RSI signal fired, it broke its down channel line, and now awaiting my stochastic signal to fire.

From a macro perspective, if investors think taper, and if so, that means unwinding of positions, which is gold positive. The charts are clear that the SPY move and the gold move have been perfect mirrors.

For perspective, I am looking at a 2-3% move for this cycle, with the next cycle in the new year to be much stronger.

In other news, UNG looks like it hit strong resistance, oil is in a weird spot.  I can make the case for a mover in either direction,  URA broke out, volatility should pick up this week, and month, and cooper looks flat.

Hope you had a great turkey day.