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Operation Twist Expectations (or LSAD) Returning With A Vengeance Explains Today's Moves In Stocks And Gold
Whether the Fed will upgrade QE2.5, or "ZIRP through mid-2013", to QE3, or Operation Twist, the form we have been predicting it would take since May (and here), is still unknown: very few people know what Bernanke will say on Friday, minutes after the first revision to Q2 GDP reveals a sub-1% number. What is known is that while cross-asset correlation has soared over the past few days, the biggest driver of stocks over the past few days has been nothing but the 2s10s30s butterfly, which in turn is driven by On and Off rumblings of Bernanke doing the Twist. And here is the rub: when the Fed announces Twist it will be extending duration, it effectively means selling everything 10 Year and older (yes, QE3 could very well be LSAD or Large Scale Asset Dumping instead of LSAP). The goal of this action: make the 2s10s will go vertical and to pancake the 10s30s: a move that the butterfly is now indicating it is once again pricing in - today alone we have seen a massive 15 steepening in the butterfly: a nearly 20% move in the curve. It also explains why gold is being sold off today, because simplistic investors believe that without an actual balance sheet expansion, the Fed will not be diluting paper. Completely wrong: it will merely do so synthetically, from a duration basis. Furthermore, the market will very soon read through the Fed's intention which will be predicated entirely on asset rotation and not on incremental fiat capital. The final outcome will be QE4 where the Fed will have to match the synthetic duration extension with actual cash bond deliverables, namely monetizing bonds, a move which will be even more critical once the deficit spend starts soaring again in the next 3 months. And when it does, it will have to do so double time, to make up not only for previous synthetic exposure extension, but for future priced in moves. In other words, nothing has changed, and we fully expect stocks to soar if indeed Bernanke mentions "duration extension", together with yet another gold dump. The issue is that Op Twist in the proposed format would be physically limited by the amount of 10 Year+ bonds held in the Fed's SOMA. At last check it was not that many at all. So any surge in stocks will be albeit both painfully transitory.
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just about everything (incl PMs) just got bid at 15:30 except TLT lol what a joke
Is it the time when contracts settle for the day on the NYMEX.
Hey Tyler,
I have another way of explaining the move in stocks, gold and treasuries. Please tell me why you think I'm wrong.
I think that the market is saying that there's no QE3 imminent. Investors had been buying treasuries and gold in expectation of QE3... those investors now think there's no QE3 so they sell gold and the 10yr (which was the maturity that they think would've been the target of QE3). As for why stocks is moving up? It always moves up on low volume days so that's telling us nothing.
Is my scenario possible?
tyler is drinking heavily. again
yep, it's certainly "possible" as the cause or "a cause" but that is speculation as we hear by talking heads saying "the price of tea in china went down, today, because..."
tyler is not speculating as to cause and effect, here, if i read him correctly
he is talking about correlation, not causation
I thought the gold dip was brought about by margin hikes.
Does anyone have a good interpretation that we can understand?
This is what I have gleened, am I right?
Near Term
Treasuries:
30 year rates lower
10 year rates higher
2 year rates 0%
Result = this will pop bond bubble and send people into stocks
Stocks up
Result = metals down (as idiot fund managers leave safe haven)
Now after a short while (no idea how long that is supposed to be) (this is still very foggy to me) somehow the unicorns and rainbows actually expand the money supply and the MOMOs finally catch on and metals go back up. (my mind is still full of fuck with this part)
can someone please explain this shit?
Bernankster thinks that by artificially avoiding the inverted yield curve we can avoid recession. Talk about grabbing at straws. The further a market is from being able to realistically price a product, the more unstable the market becomes.
This is nuckin' futs.
This whole scenario is unlikely.
Selling long duration instruments to drive up those rates would destroy what little housing market remains.
This is speculation. I don't see it coming.
I think Bernanke will discuss some innovative maneuvers and buy no bonds whatsoever, and certainly not sell any.
He's inventing bullets.
Actually, it could have a prayer of working if it didn't collapse the system (how that happens is at the bottom).
At first glance one would think that the last thing to do when extending duration is selling 30s. I was also thrown off by the expression 'pancake the 10s30s'. I think the plan Tyler is hinting at is to bring the 10y yield down to ~parity with the 2y and push up the 30y yield. You would expect this to produce a ~2+% mortgage rate. If even that doesn't stimulate the housing market it may at least prompt some hedge funds to try house flipping.
I don't have the weighted duration of the Fed's holdings on the top of my head, but do recall that most of their purchases were in the belly of the curve. Rolling those out to 10y in sufficient volume to bring the 10y to parity with the 2y will increase weighted duration, even while dumping $1.6B in 30s assuming that figure, quoted somewhere in here, is correct.
Where the doomsday scenario appears is coupling this with the drop of IOER to 0%. I wrote elsewhere in 2008 that the Bernank had constructed himself a rheostat for the money multiplier. Dropping IOER to 0% is the equivalent of cranking the stero all the way up. In college, that would get you kicked out of the dorm. In real life 2012, that will send gold to $5000/oz. along with food, gas, and everything else. Sweeping $1.7T in excess reserves into the ecomony, even it it just gets parked into securities, will blow the roof off of prices and drive the last nail into the coffin of anyone not in the top 1%. And this fucktard thinks he can stop inflation in 15 minutes.
There may be another $100 downside to gold if it takes a day or so to digest the implications, and you damn well better be loading the boat. May be the last chance to get it cheap.
someone fill me in on what he means by synthetic duration extension??
I second this request. In fact, I'd love to have a layman's description of what "Operation Twist" really means, and how it acts to add liquidity or otherwise function as Quantitative Easing. I can't find a real discussion of this anywhere...
--Brian
From May 31: "In Preparation Of The Fed's Last Doubling Down: David Rosenberg Believes QE3 Will Be Nothing Short Of "Operation Twist 2"
How many billion in long Treasuries are on the Fed balance sheet?
1,600 Bil$
Tyler, for some reason this link keeps coming up "blank" from where I sit. Must be getting a lot of hits or else something else is wrong. Hope you move ZH to a fully scalable system that adapts and use the indepdent servers just for backup to protect from the likely suspects.
how about this operation twist....the bernank gs, jpm, bac et al are walking in the desert and gs, jpm,bac, et als. get bit by a deadly snake in the dick...they send ben to the doc to save them {qe3}...doc says you have to suck out all venom and they will live....ben gets back , what the doc say....doc says your all gonna die.....so how are the chairs restructured if ben sacrifices his boys...no qe...
lol
...so what yerr saying is, we are in Dire Straits Twisting By The Pool, dark pool ...that is. lol http://www.youtube.com/watch?v=WMX_B8Iumsg
This video contains content from UMG. It is not available in your country.
There you go, music owners do hate Europe :P
I don't see how weighting the Fed's balance sheet with shorter maturities is creating a synthetic bond... unless the Fed went into a net short position in the 10s & 30s.
The Fed sees an obvious liquidity preference (and people still perceive these instruments as liquid). Driving down the short term to worthless & forcing anyone chasing yield into falling longer term maturities is exactly what the Treasury wants. Plus, the Fed makes a profit on the sales, which it can use for future monetization... which is coming.
Riddle me this batman-
S&P downgrades long term and says short term still ok. Based upon this - the 10 yr "should" rally and the 30 "shoulld" sell off with BurnHankee's sleazy prints no where to be found- but I'm sure that our ratings agencies and politicians would never try to pull something like that
your starter for 10.
Bond futures have to be delivered.
The Fed has a ton of MBSs from QE1 and QE-Lite.
Mortgage rates are strongly influenced by the yield of the 10 year bond.
As we continue to move into a recession, more people are likely to default on their mortgages. This would screw the Fed further.
The Fed plans on buying lots of 10 years to keep the 10 year rate absurdly low. The goal is for people to then refinance their ARMS into fixed products that have monthly costs that are a lot easier for Joe Blow American to deal with. Obviously, this requires some ball playing from the banks, since most of these mortgages are massively underwater.
They plan to somehow offset this by not buying shorter duration bonds, like the 2 year, causing those rates to rise. This willl likely also cause outside / international money to flow back into shorter term securities.
This can also be considered QE 2.5. By buying as many 10 years as they can, the Fed will be monetizing debt again. The primary dealers (the big banks) will once again buy as many 10 years as they can in the auctions and then flip them back to the Fed for a profit.
Unlike QE2, there is no definable finite end to this program (although it's likely to go through to 2013 once ZIRP disappears) and by starting this, they could go over their head on the purchase of 10 years. At least w QE2, the Fed already had a defined limit for how many bonds they would buy. In this case, they will continue to purchasing as many 10 years as necessary to keep the yield down to their predetermined amount.
Composite strap-on but I'm only guessing.
"It also explains why gold is being sold off today, because simplistic investors believe that without an actual balance sheet expansion, the Fed will not be diluting paper. Completely wrong: it will merely do so synthetically, from a duration basis. Furthermore, the market will very soon read through the Fed's intention which will be predicated entirely on asset rotation and not on incremental fiat capital."
I'd also add this as a very real possibility:
http://www.financeandeconomics.org/Articles%20archive/2011.08.17%20Bank%...
so the Fed is going to reverse repo cash to the banks? Aren't the NBRs the banks' cash?
That's the first easy to read article about all this shit I've seen all day.
Thx Turd!
Tyler, I don't know what your relationship is (if any) to a guy that I hear on the radio at 5:00 PM in Atlanta on AM 1190. His name is Bill Tatro, and I swear he blatantly steals material from this site everyday.
http://www.moneyradio1510.com/Audio-Archive?id=4032 Listen for yourself....
Turd, Nice article... Tatro is claiming this reverse repo idea is his as well.....
CME just hiked margins on gold by 27%! Sorry no link, just a bulliten on Marketwatch
looks like another dip to buy tomorrow.
Thanks Turd. Nice article.
I would think it would also suggest that anything moving against the banking sector - such as massive foreclosure issues for example - need to be swept under the rug awhile longer to avoid any hits to capital.
Excellent Find Turd. This would explain the "testing" of RR's the fed initiated here a couple of weeks back. I had not figured out why they were wanting to test a liquidity draining mechanism during a liquidity crunch. Still trying to grasp the implications of this as monetary policy becomes harder and harder to decode. I can't swear I fully grasp the implications even now. Bullish for GS I am sure...... Disclosure: Going long residential real estate. Prices in FL are back to the mid 80's, for real. Growing tired of these phony paper markets. F'n impossible to decode anymore.
Does this mean they will prolong the reset now and PM's will dip even more?
I bought a wad of silver this week at $43, never thought I'd see it below $40 again, now testing $39 ffs.
Where will it go over the next month, I've given up trying to predict this market.
Everyone keeps saying that the Fed is out of bullets. But each time they have said this in the past, the Fed has simply used a new gun. This a great article and I appreciate you sharing it.
so... there won't be a happy ending?
buggar.... buggar buggar buggar....
25 consecutive days of -1000 TICKs, that is a new record by a long shot.
Through yesterday, a -1300 TICK 6 consecutive days, unheard of.
http://stockcharts.com/h-sc/ui?s=$TICK&p=D&yr=0&mn=6&dy=0&id=p37322057532
Will be interesting to see how strong of a rally we get out of these lows based on the "panic" selling that has occurred the last month.
How does "panic" last for a month?
Panic just needs to find a new host every few days, that's all. This shit is easy for the real playerz.
Tyler - bullish on equities, who would have thunk it?
Read the full post.
Forgot my < sarc > flag. Didn't mean to scare you. This is basically "paper on paper" porn. Very inflationary, serious about that this time, not being sarcastic. Very inflationary, the 70's will be remembered as the good old days.
Stocks are only going to go up in nominal terms, not real terms.
Want real inflation data? I went shopping for school supplies for my kids yesterday.
One 3-ring binder w/ 80 sheets of college rule paper...$15.09!
Durable front and back plastic covers!!!!
WTF? Is that really what supplies cost these days? Jeebus, glad I aint got kids. That is downright awful.
Sure, at first glance it might seem a little pricey.
But then again, it is rated 5 stars. (Probably not by Standard & Poor's, though.)
LOOK INSIDE!
Stop shopping at Whole Foods for your kids school supplies then.
http://www.mead.com/meadstore/catalog/productDetail.jsp?prodId=DDD789&catId=&prodId=DDD789
Sold out? Damn you, Hugo, you got the last one!!!
Yeah but it says right on the cover that it's a hybrid.
You pay more for any kind of hybrid technology these days. Toyota and Ford just entered into a deal. Hybrids will be everywhere.
Oh. Wait ...
Yeah, the passenger side has a shorter half life than the driver side
stay present. stay patient. all of your shorts will fluctuate but in the medium term you shall all make killings.
agreed
So how will flatenning the long end of the curve help housing rates. I see this as hindering. Wouldn't this cause 10Y rates to rise additionally?
it is option experation week. We must stick to the script. Forced or volunteerd.
Yup, and I was planning on a downward move prior to opex to buy in to more silver -- and was pretty suprised when it hadn't materialized by yesterday. What a difference a day makes! A few more pennies and I'll already be profitable with today's purchase.
Damn, these guys sure are predictable.
Deleted.
Thought you were speaking of equity options.
AEM and NEM almost unchanged.
GDX/GLD Ratio Traders are about to get "Gang-Banged"....LOL...
I wonder if there is anything you could say that would not garner a red arrow vote.
There will be no happy ending unless you go to the Asian massage parlor located in the service alley open after nightfall.
...the Pursuit of which is guaranteed to all under the Rights of Bill.
I don't claim to understand everything being said above, but sure sounds like they're submerging this golden beachball further and further underwater.
I thought twist was Selling the 2 year and Buying the 30 year, not Selling everything 10 year and later? I thought the fed wanted to extend the duration on their books, and would do that by purchasing long duration bonds and dumping short duration, shortening the duration available in the market. Can you explain "And here is the rub: when the Fed announces Twist it will be extending duration, it effectively means selling everything 10 Year and older (yes, QE3 could very well be LSAD or Large Scale Asset Dumping instead of LSAP). The goal of this action: make the 2s10s will go vertical and to pancake the 10s30s:"
Thanks a lot
I second this question.
OT 2 is nothing more than the Fed doing all it can to steepen the 2s10s (far steeper compared to where it is now), and to flatten the 10s30s (that may or may not involve buying the 30s). There is no selling of the 2 Year courtesy of ZIPR through 2013 which means the 2 Year will be 0.00%. The fulcrum security is the 10 Year. Since the Butterfly has historically been double where it is now, the Fed will have a lot of the 10 Years to sell to return us to this formation.
i sent you mail fucker!
<------ if you are unable to mind your own fucking business.
Keiser Report: Bankers & Aliens (E175)
From: RussiaToday | Aug 23, 2011 | 23,008 views
http://www.youtube.com/user/RussiaToday#p/u/13/pudykXGTDtg
This week Max Keiser and co-host, Stacy Herbert, notice that looking back is not an option when all the evidence is destroyed by the SEC and Max tries to explain the gold / Treasury conundrum. In the second half of the show Max talks to Catherine Austin Fitts about exponential fraud and the financial coup d'etat.
To bring this down to tard level (where I'm at), essentially the 10 year is going to get juiced? Ie., if you believe this is going to occur, one would be bullish the 10 year futures?
Forgive me for being dense possibly, but reading Rosies post you just tweeted from May, it sounds like his version of OT2 would be to pin the 10 year at a low yield, and the only way to steepen the 2s10 would be to widen out the 10yr. How does steepening the 2s10 help risk assets?
Steepening 2s10s sends fins surging: remember net interest income? Fins have to be leadership group again, and with 25% short interest this group could explode higher (however briefly). As for Rosie, back in May the 2s10s30s was double where it was now. Courtesy of all the panic buying of USTs, the Fed can now sell the 10 Year to get to where Rosie wanted to get to from the perspective of May 30! And in doing so it will push out everyone who is long the curve into stocks and other assets.
Once again, this entire move is limited by the amount of call options the Fed can sell on the 10 Y+ and/or how much long-dated debt is held in the SOMA.
Which is unlimited, right?
I just can't see the fed purposely driving up the 10y yield. Mortgage rates are based on the 10y. The agencies and banks have a lot riding on rates staying low. Steepening the 2-10 would not be as effective at generating bank bonuses as the sack-frost approach imo.
Maybe just seems a calculated risk. Defaults will increase and values will drop further, but with the foreclosure pipeline effectively crashed into the legal system (most likely on purpose), realization of loses is postponed and capital protected to fuel the reverse repo engine.
Just amatuer speculation here. FWIW.
Are suggesting the Fed could synthetically manipulate 10 year yields by writing naked calls or by simply dumping actual 10 year bonds, or both? If it is the former the Fed is taking on infinite risk, especially if the market anticipates a run on the 10 year once it realizes that US gov will continue to issue debt like no tomorrow. Then the Fed would NEED the Gov to issue debt just so it could monetize, otherwise the Fed would become Lehman X100, I think.
With a DV01 of $1.5 billion currently, the Fed has infinite IR risk as is.
Right, I get that, however are you suggesting that it will get even worse, correct? If they don't hold enough physical 10 year bonds, and the 2 year locked at zero due to ZIRP as you mention, then the only thing they can do is write naked calls. If they won't do that, then the move in the 10 year is entirely predicated on the # of 10 years on Fed balance sheet, which you are speculating is not a lot. Of course, the market could panic if it senses the Fed will dump and everyone could sell their 10 years at once. Then the Fed could go more steepening then they would ever want. This would essentially destroy housing even further while offsetting that with extra interest income for the TBTF. Of course the TBTF do not care if housing is destroyed because of Mark to fantasy and the Gov absorbing all losses.
Next question... what does it mean for foreign bondholders (China)?
Yep. That's what I meant when I said the "market" may panic and dump 10 years ahead of the Fed. Same conclusion: we are screwed.
Soros talking about the inevitable need for the Eurobond. Wonder if there is a rhythm here. Also, can any one shed some light on PIMCOs positioning relative to potential OpTwist? Can't imagine Gross wouldn't play this like a grand piano (i.e. arbitrage running off the Fed desire to pin rates).
IR risk means nothing to the fed. they can hold to maturity using the proceeds to QE2.5 all the way.
TD....thanks so much....you are just such an amazing resource...can you take on one more rem dial question?? How does this trigger a gold sell off and what is the underlying fundamental that drives gold higher again off of this dynamic??
Please, Tyler, wee need to know how much long-dated debt is held in the SOMA. Please tell us.
Last calculated total SOMA was $2.6 trillion. This phrase was included in the last Fed Report: "Between June 29 and July 27, 2011, the SOMA’s
holdings of longer-term Treasury securities grew ..." But by how much?
@ t.d.'s Steepening 2s10s sends fins surging: remember net interest income?
yep! this is called steepening the curve, i think, and it helps the banks, b/c they can "borrow short and lend long", in time terms, and "make money"
and this also leads to "lending" whether the fins "lead" here or not, b/c imo there are zombies among them, but that is not saying they won't, since they sure have been lagging!
so, now, after hearing about "the cash the banks have" since your kid was a sophomore and now (s)he's graduated, we can maybe doodoo some good old fractional reserve lending and finish the re-flating like freaking gangbusterZ!
but phyzzZZZ still won't pay you any interest, of course. so now that we can "see past the recession" we agreed we were in, on monday, watch your PM charts and don't be afraid to buy on the way down, b/c this could last, like, another 2 weeks or so!
at least, BiCheZ! "we are not worthy"~~~~of loans! [unless one is rich and doesn't "need" to borrow]
the banksters that bought the dip are now gonna sell into the "better get leveraged and buy" rally (don't you miss out!). and then...and then...and then: The Coasters - Along Came Jones (1965) - YouTube
Too high price short term, no yeild long term. Why would i pay a high short term price with 0 short term yeild? Losing prop.
Why would i pay a low long term price for equally low or no long term yeild? Losing prop. Now im fucked on t's, where to go? Gold?
Gold is seen as an inflation hedge (traditionally) MM's of certain funds can't hold gold like banks and hedgies, doesn't fit into their investment model.
Where to go?? the only thing left is equities. And there you have it.
Reality: The twist is designed to scare money out of t's and gold and into equities. Thereby killing two birds with one stone, equities pop and gold drops.
Unless you are invloved in a structural Keynesian failure, (like we are), with runaway debt, insolvent banks (on a global scale this time), 0 production, acute economic contraction,
unbearably high unemployment, record public assistance, and an administration that is so fucking retarded, it is an embarassment to be an American, all is well.
Nothing has changed, nor will it ever, until this cycle completes. And it will complete. And based on roughly a quad of liabilities, likely much more, gold will be 10K if it's a penny.
There are too many external forces working with regard to gold, so the volatility has just begun. Now we will have a veritable assload of money unsure where the hell to go, and will be jumping in and out of various asset classes, making this last rout, a daily occurence. 1K up 2K down, once or twice a week, until it finally sets in that there is a problem. That's when gold goes parabolic.
Hope that helps, im off to the tit bar. ;)
and what, if anything does this do to China's UST holdings?
if it flattens 10s30s do they dump?
I think that stock markets are betting on QE Classic, not this low calorie QE Lite Twist nonsense that won't even help the bulls put on fat. Even QE Classic wouldn't matter very much, and they're not going to get QE Classic from Jackson Hole. They're likely to get it later, not now.
You're welcome to check out my new blog: http://how-to-trade-armageddon.com/
First article is titled Fight the Fed: http://how-to-trade-armageddon.com/2011/08/24/fight-the-fed/
The gist is, don't be intimidated by this Bernanke Put rally, the bulls don't have a leg to stand on. Let's go eat 'em!
they have a leg until they don't
its the end of the month wont be shocked if guys buy the market to chase performance
Okay, Imma take a stab at this. So the Fed unloads all the T30 it holds and that crushes their value on the open market. Nobody has any incentive to hold anything long (cuz yields are in the toilet, unreflective of risk). Large scale sell off on the long end. Am I right so far?
And the other side of the coin is the US freezing rates on the low end bond, right? Where did I hear that one?
So all this is pushing $$ out of bonds and back into stox? And the velocity of money goes up as a result?
If that's the story then it looks fishy to me.
So the fed will short bonds via TBT? I consider it doubtful. Stocks are rising because the short bus thinks QE3 is in the bag. The Bernank will wait for rates to rise before announcing QE3 so there may be some short-term disappointment.
Klaatu Barada Nikto.
Don't you have to say that twice.
Heghlu'meH QaQ jajvam said the bernank.
<----- if you like to suck cock.
http://www.youtube.com/watch?v=MvK5qxgETCg&list=FLbRZZAixeFXZfqszvKisEdQ&index=1
Uploaded by DoomBoomGloom on Aug 23, 2011
Go to http://marcfaberchannel.blogspot.com for details
Carol Massar and Matt Miller talk to Marc Faber Bloomberg TVs
QE-3 Started Already when the FED said low or 0% interest for the next couple (or more) years.. people can buy 10 Year Treasuries with 0% short term monies!
From BB upcoming speech - snark
Modigliani and Sutch argued that, if Operation Twist did
contribute to a narrowing in the spread, it was unlikely to have
exceeded 0.1 or 0.2 percentage points—a modest reduction at
best. As they also point out, it is common for the spread to
narrow as the economy recovers. (The trough of the business
cycle was in February 1961; its subsequent peak was in
December 1969.)
From this episode, many policymakers and analysts
should have recognized, according to Benjamin H. Beckhart, that
"long-term interest rates cannot be substantially reduced by
money market gimmicks." It is doubtful, therefore, that the Fed
would be more successful today than it was 30 years ago in
attempting to twist the yield curve. Indeed, now that interest rate
ceilings on deposit accounts are no longer in effect, there are no
artificial forces holding these rates at any particular level.
What's more, if expectations have a role in determining longterm
interest rates, then the interest rate spread includes an
inflation component that will not disappear simply because fewer
long-term bonds are circulating in the market. As long as the
swapping operation leaves inflationary expectations unchanged,
no lasting narrowing of the interest rates spread can occur. In
Beckhart’s words, “A lasting decline will be achieved only if
people gain confidence in the long-term purchasing power of the
dollar.”
http://research.stlouisfed.org/econ/zaretsky/bold.pdf
Good day for anyone playing the compression between gld and TBT that Tyler alluded to the other day . . . .
from a pure political driven though, obummer needs deflation to appease wage earners so that their real wages will rise. Im willing to bet hind to horses there will be NO type of QE3 or lite for that matter. I mean the bond market will do the feds work for them, as investors will rush into treasuries driving yeilds down. as a recession is priced in.....Anyone that has thoughts on this, please comment.
Obummer might need deflation but he isn't going to get it... Deflation will come but not on Obummer's schedule... followed by hyperinflation...
Fed and all central banks will fight deflation at the expense of their currencies being destroyed... thats when hyperinflation kicks in...
Freeze dried food bitches! You still can't grasp this means war on US soil soon!
Question for the group, how long does it take for FAZ to start having serious decay? What is the max hold time before it gets bad? Thanks in advance.
exactly 1 day like today
Heck, a couple hours is all it takes.
You have to time these ETFs almost perfectly. Very unforgiving when it goes against you (and when they do, it's usually overnight with a gap up or down at open).
I would not hold them for more than 2-3 days (at most). You might be able to break-even after a week -- if you're lucky. Anything longer than that is usually a death sentence.
Know what's really fun? Buying puts & calls on stuff like FAZ, FAS, etc. Leverage on top of leverage!
Fun for the whole family.
Recommendations: Don't leave to take a shower, a piss, get food, or anything else. Probably good to load up NoDoze or something too.
You should generally trade these like an option position. Simply put, keep an eye on volatility; if it drops significantly and remains at that lower relative level, the decay really starts to eat away at the levered etfs.
market will rally no matter what bernake says
bernake s mere appearnce on tv causes people to buy. he will save us all
True - for any soul that is still left in this schizophrenic market trading..
Tyler, do you want to tell me that this sell-off has nothing to do with option expiry and the huge OTC short position on gold and silver some banks hold?
I thought operation twist would require the Fed buying, not selling, everything 10 Year and older...
Isn't the objective to bring down the rates at the long end of the curve?
"Isn't the objective to bring down the rates at the long end of the curve?"
I don't think so. The whole charade for the past 3 years has been to save the bank(er)s.
Additionally, TPTB need growth in both the economy to appease the masses, and in credit to reverse the destruction of the shadow banking balance sheet which is still ongoing.
Traditionally, credit grows through lending by the banks. Banks have no incentive to lend at the moment, so there is no growth (the fact that there is never organic growth in a debt=money system to begin with is a topic for another thread). To help the banks, the long term interest rates need a bigger spread over the short term rates. The current 2.17% on the 10year doesn't help the banks when Bernake is targeting core inflation at 2% and failing miserably to hold it there.
So, the whole point of Operation Twist 2 is to materially force the 10 year rate higher because even though the 2 year yields nothing, the 10 year isn't yielding enough for people to feel confident about the future. Therefore, even the ones with the ability, don't borrow.
This is the first half of the butterfly.
The back end is this: government debt is absurdly large. They can't afford rates on the 30year to spike up as they force the 10 year higher because the interest cost becomes problematic. Therefore, they will buy/sell 30's as necessary to keep the interest rate in line with the 10 year.
I can't really draw a 2-D graph, but my guess is they would like the following:
2year at 0% interest (there is really no choice on this because of the ZIRP)
10year at X% interest
30year ALSO at X% interest.
Obviously, X is a number which only they know at this point. Maybe 4%, 5%, 3.2%........who knows. But they want it as high as they can put it
I could be wrong, but this is how I'm reading the situation. If I am wrong, others with more knowledge will surely blast my financial illiteracy and set things straight.
Check out all the suckers taking the BAC bait CNBC threw out yesterday when they started their blogger conspiracy attack. Just goes to show you that the only thing left in these markets is a bunch of Chesters running around trying to get Spike a bone.. With all due respect, I will have to say there is still one credible anchor at CNBC that actually called it right a few years back and took a lot of heat in doing so..And no Dennis it's not you so don't even bother clicking the link...
http://www.youtube.com/watch?v=j0hfbdAUx1Q&playnext=1&list=PL741FA1B31083F49D
Why should Bernanke QE3 (Twist or whatever)if stocks have been rallying?
The Dow is currently around 11,300, the last top was around 12,800.
There's no way he will QE3 until he HAS to and, to me, that means sub 10,000 Dow or sub 1040 (ah yes, remember that support in 20010?).
DavidC
They could also throw out that they're using the short term treasuries maturities to purchase the long end. They've already indicated they're doing that to some extent and QE Lite was that. Changing the weighted average duration may just as well be the language.
They've shot this wad to a certain extent.
I don't expect they'd say this, but they still have the derivatives issue too. Twist is really about making sure Interest Rate Swaps expire worthless. They could always assume the risk on their books. They essentially are, but the difference is whether it appears a risk mangers' book at the banks or not.
Gold's move is primarily related to furtures expiration. You can make nice money every month by buying GLD puts 3 or 4 days before futures expirtaion. They almost always (9 times out of 10) hammer gold into expiration - which happens to be tomorrow. Buy at the close tomorrow.
Day late....bought Sept GLD calls yesterday. Only 5, but still.....
Why didn't you post this on Monday?
Need some HELP here. In QEII, the Fed LOANED $ to the Primary Dealers who then bought bonds from the Treasury with that money. The PDs then transferred the bonds to the Fed in repayment of the loan.....right? IF that is right, how are the non-borrowed reserve accounts of the PD and commercial banks getting so large. I understand that the Fed (in this scenario) is now holding a ton of Treasuries that they paid for with money printing, but how does this translate to the huge NBRs?
Thanx in advance for helping clear this up.
It's a long story, but basically they use mirrors.
So BTFD in gold after the Bernanke announces this? Too late. I already started.
Timing be damned. The end result will be obvious enough.
You're better at synthetic vocabulary existentialism than a sanitational engineering confabulator.
Oh wait. That's actually the most concise way to communicate facts about this ridiculous Washington
Monument of Lies they've created.
Hope that crack grows fast.
You're misunderestimating his connotations.
Forsake order; embrace Chaosiness.
Looks like it found it's bottom to me.
The Benbernak will speak in clear, precise English Language, yet nobody will understand a f**king word he says until Tepper Tantrum 2 decodes it all on CNBC.
maybe is a stupid idea but i think that we will get a real QE from jackson hole....but not on friday and not from the fed.
on saturday trichet will speak at 10.25am. i think he will announce the official european QE. now EU has a bigger problem then in the US and the world economy can't afford two QE programs ( ..one qe is too much ..) . in the next period the EU will print money...
Durden - excellent cheater analysis. I'm moving on this pre-"the bernankster" Fri Jackson Hole shit-spew. You are the best. Thanks.
Where's Graham Summers when you need him, oh yes, shorting gold at the bottom...
Never waste an opportunity to create a crisis.
I think my brain just fucking exploded. I love this site but sometimes this shit is so over my head. I need to take the ZH for Dummies course.
Keep reading, watching, and do read the comments to help acquire the lingo and provide context, it'll come to you. Your head will still explode, but that stops the throbbing.
Shameless plug for OperationTwist2.com
This makes ZERO sense at all: Most of the mortgage rates are based on the 10 year Treasury rates. If the Fed's selling 10yrs in order to engineer a steeper curve to help the banks out, the value of bank owned mortgages is going to go down. Not to mention what higher mortgage rates are going to do to the zombie housing market
It might make sense if they have A Plan on how to take care of the mortgage mess for the banks.
QED: Wasn't one fo the GSE giants recently caught still buying crap paper from BofA or another TBTF? That sure would solve the bad-loan issue once and for all, wouldn't it?
Check out the volume at the end of the day today. Absolutely insane.
Yesterday and today the market actually looked like it was going to go down at the open and then some BS headline scanning gave the market a parabolic move up at 10:00. A drop down and then a massive afternoon rally.
I think something got leaked at the end of the day. Can someone tell me how you get 176 million trades issued at the end of the day on the S&P when 2 min volume for the entire day averaged about 6 million?
I hear confidence and good news is what we need to get our economy rocking so he should just come out at Ja(ss)ckson Hole and give everybody a hug and say it's all under his control.
There, problem fucking solved.
My sense is that this post outlines a form of "fake inflation" that can be collapsed... like one of those blow up castles with the slide on it that Mom's rent for their kids birthday parties. Real inflation cannot be collapsed into deflation easily, but wouldn't that be the case in this instance. Then once gold is say $7,500 and the new gold-back SDR two-part currency is in place (pan-Euro-USA) then once the deflation switch is flipped banks will be redeeming their outstanding loans in what is essentially gold-backed fiat.
The thing that is really bugging me is the chorus (Greenspan/Zoellick, etc.) that is saying "Gold is now a currency" yet they are denying that a rise in gold is still some form (albeit yet undefined) of inflation in that it is too many dollars pursuing too few goods. I'm not saying that it is inflationary in the classic form, what I am saying is that it is like an\ form of inflation filled with hot air... like a balloon form of inflation that can instantly be deflated (think overnight reset switch) and leave you holding the bag when a wave of deflationary tsunami based on a new gold-backed system is put into place instantaneously in conjunction with a crisis.
http://tradewithdave.com/?p=7803
http://tradewithdave.com/?p=7114
http://tradewithdave.com/?p=5310
What I am really saying is that they are setting an inflation trap. You could escape that trap if not for the fact that it is not only an economic trap, but also a political trap that will include some exclusion for the free exchange of gold as the endgame courtesy of some human sacrifice of Blackrock on the altar of the free market. I've been down on silver for a while and bullish on gold, but my feeling is shifting because the central banks can't carry silver on their balance sheets and they can't criminalize it either for many reasons.
Gold will continue upward, but you would have to buy your gold every morning and sell it every night (in a physical form) before you went to sleep to avoid stepping into the golden bear trap in your sleep (then again you could use a buddy system). I've been under the impression that all this was 5 - 10 years out, but I'm starting to think the whole thing may go down next year or two. If gold goes parabolic again, I don't expect we'll see another pullback until it leaves the rails entirely and you can no longer own it just like you can't own a gun in many countries. For perspective I made a call on August 8th to sell gold and buy the dow, so I'm no huge fan of gold, I just believe its been formed into a weapon against us.
Tell me what I'm missing here.
Dave Harrison
www.tradewithdave.com
My logic is probably far too simplistic here, but my instinctive take is that when the day arrives and they need to recreate a monetary system based on the gold standard they are going to force gold holders to sell at a fixed price -- I'll pick one for argument, say US$200/oz -- and claim this price represents a fair return for those who were historic holders of gold, and the "evil speculators" can sue for their losses.
Not a big play really. Mostly just a way to bankrupt the speculator class and push them off the playing field for a generation. But it would be a relatively easy move. And it's been done before.
They'll need truckloads of these just to get mine.
http://www.amazon.com/gp/product/B004XFZZG2/ref=as_li_tf_tl?ie=UTF8&tag=...
IMO - this pullback is nothing more than robot trading.
Algos has technical analysis programmed into them... so expect that when these indicators get breached, that you see what happened today.
Major players are also toying with the myth of Jackson's Hole... head-faking the market. If you don't believe me, pull up the gold chart and look at the classic 10:00 am headfake that we're so use to.
These moves indicate that we are getting close to a currency collapse. Europe and it's sovereign and liquidity crisis just didn't go away.
dave, this makes sense as to why the CCP has been encouraging its 'citizens' to buy gold, while a dominant meme on the streets all over the urban US right now is "WE BUY GOLD!" (of course, if you go in and ask, most likely, they ain't selling it, oh no).
chubby checkers on a comeback tour.
Just imagine for a moment... you have been asleep since 2006 (bump on your head)... and you just work up today and are getting caught up on where the markets are at... now what the #uck would be going through your head???
Robots are controlling gold and silver... sit tight... we are in the middle of the destruction of the US$.
You give me no choice. Time to go long XLF for the first time in 5 years..
Tyler, why would Gold dump on a twist scenerio? Seems to me with no buyers of long dated paper the yilds will increase on their own and by artificially droping rates on 10 years or less it will have no affect on growth since there is no lending.
The recent Panic and Fear in the market is not something to be taken lightly. According to the chart above - it is only second to the Panic during financial meltdown in 2008 and only slightly higher than we have experienced last year in May. Some people are talking about today's Sell Off in Gold as a sign that Bernanke "will do nothing" and his "tool box" is empty. We see this "trash Gold operation" as a part of PPT plan to save the market again. Please do not make any mistake - it is not for the sake of investors, at least not ordinary ones with their pension plans - it is for the insolvent financial system in order to keep it running. The falling market in the deflation death spiral with ticking up CDS on all banks, with the stars like Bank of America in the headlines, will make the real financial meltdown is just one policy mistake away. http://sufiy.blogspot.com/2011/08/gold-vix-panic-and-ppt-in-action-will....
don't forget banks borrow short, and lend long, a lot of that lending rate is based on the 10 year, therefore increasing 10 year yields makes banks profit more. I always evaluate fed in terms of what money it makes for banks.
Tyler, this post could use some editing from someone who doesn't really understand bonds. hard to figure you. I wanted to dump tlt any way, exposure dropped by 50% today, also put some more into tbt. timeto sell some muni now as well since yeilds are so low.
I want to make a play on OT2. I don't have access to a bloomberg terminal for all the juicy data (CTD bonds, etc), could someone tell me the best way to construct the 2s10s30s using ZT, ZN, ZB, UB? Please let me know if it is 50/50 or DV01 weighted. Cheers!
I think I found my answer of the following, for DV01 neutral and (roughly) cash neutral. Let's hope I'm right =)
7 ZT + -7 TN + 1 UB (Sept '11)
Hey Tyler, do you have a link to a good before-bedtime-type conspiracy story about how the Federal Reserve Chairman is elected? Thx.
while we have many interesting ideas at our blog,read this:http://trendybull777.blog.com/
The downgrade by S&P with head mr.sharma was an operation “World Corp” against “World Bank Corp” and they lost,mr.Sharma was try throw insider trade to shut down US markets and install pro-corporation government which is now weak pro-banking government,he used weak point thinking they can to succeed,he forgot-he has not printing press of Beny Shalom and lost.Now,to every one attention the calculations made of long term ETFs and ETNs holders in gold,while bullish ETFs and ETNs during last 3years worked perfect making almost 2% for each gold rise in 1%(i meaning DBs),the bear funds was so much smashed that now i set some home work to find that any bear who invested in DB GLL or DZZ at the gold price 850$ is currently loosing at very big,so,other investors should know that if you bring the gold price from current levels into 850$ price the GLL will reflect 60$(when gold was 680$ GLL was issued at 125$),this meaning that to get to the original investment price investors will be lacking 30-35%,same with DZZ-this is very unadeqate situation,where the bears positions was squezed while gold bug benefited at rise,this to the Banks of Deutsche Bank which had stollen via 3years from investors 30-35% and this could be a good big case against bank on behalf those ETF,ETNs holders.Bank must brink equality into pairs DZZ/DGP,GLL/UGL.Things simple as banking cartel benefited from bulling gold even more that any gold bug on the planet via comissions,instruments and broker dealing process.But where is fairness in those markets?If admit that on the way from 850$ gold to 1900$ bears lost in DZZ case from 27$ down to 4$ minus 30% unrecoverable %,make summation on the way back to 850$ and i think totally bears may get just 30% from initial paid price,where the 60% then?DeutscheBank and firends who are now expecting to be all time no cash banks!
In the bank statement written that both ETFs/ETNs is reflecting similary situation in the market futures.However we would like to ask bank,how during gold rise DB ETFs/ETNs bulls benefited according to statement,while bears if the gold price going back to 850$ would get only 30-35% less from money invested in funds.The Banks like DB recommending to use those instruments as short term and not as the buy&hold investment-its very clear that on DB gold bull ETFs those policies did not apply and I calling the bank to respond to unfare practices,because only buy &hold practice in gold DB bulls could to deliver results as metal was in buy&hold stand,would the banking managers offer us to trade each time those ETFs to get for them fees?I think yes,they just had lie to those who believed that International Gold Cartel was interesting to advertise together with companies and Gold Council the metal which has no practical use in current days untill some political willingness,however I would like people if the value of gold is so high what price bread farmer will be selling for gold?Think twice,as your gold holding may soon became coal compare to prices of food,they just can catch up running after gold and you dear gold bug will stand with yellow metal and cry,because corporations and mining industry thise is those who sold to you idea of the gold valuable asset ,food is a valuable cause we cannot leave without it,but we can leave without gold!However,those who interesting in writing united letter to the DeutscheBank London branch issuer of the GLL and DZZ can leave here they messages and we can build some compensation case because stealing 30% from your value is criminal!