The following is a newsletter article from Larry Levin of www.secretsoftraders.com and it touches on the ice berg of a major issue.  Some of this is opinion, although opinion from a successful trader who understands the markets.  That said, always read between the lines as numbers can be made to look pretty much any way the person making the argument wants them to look.  Yet the numbers themselves are there pointing to where we are, and they can’t be ignored.

Good article, and I agree with it.  So here is the piece from Larry Levin’s Nightly Newsletter

Bond Market to Feds: Drop Dead!

Today’s bond market action reminded me of the famous 1975 Daily News headline, “Feds to New York: Drop Dead.” At the time the federal government decided to reject a request for a NY city bailout, which prompted the headline.

However, times are different today: nobody is allowed to fail. Chrysler was allowed to keep its $11.4 billion “bailout” (that’s right US taxpayer – you were robbed!) and GM is said to be on the docket to receive ANOTHER $50 billion bringing its total to $69,400,000,000.00. Do you think GM will repay this money? Do you think AIG will repay? What about Shitigroup and Bank of America?

By the way, as of yesterday GM was worth about $800 million. Uh-huh, we’re giving GM $69.4 BILLION when its current net worth is almost 87 times less! What the hell kind of math is used to justify such nonsense? Oops, my bad – that’s Washington DC math.

Well, when you throw in the assured future handouts to insurance companies, commercial real estate firms, government run healthcare, State handouts, “free” college educations, etc the bond market is saying – no thanks. All of these so-called freebies are “budgeted” at today’s interest rates.

Like the fools that they are in government, they extrapolate funding this madness to infinity with ultra-low interest rates but forget that the bond market does not have to play along. The bond market is bigger than the President. The bond market is bigger than Tax-Cheatin-Timmy at Treasury. And although Helicopter-Ben doesn’t know it, the bond market is bigger than even the Federal Reserve.

Today the bond market may have said to all the aforementioned: DROP DEAD!

With today’s price collapse in the 10-yr Notes and 30-yr Bonds and commensurate yield spike, spreads widened. The 2yr/10yr spread is now at the widest spread ever. The 2yr/30yr spread is now just three basis points shy of its all time 1992 record. The 30-YR fixed mortgage rate on the eRATE real time mortgage quoter spiked a huge 28.2%! Yesterday it was quoted at 5.08% and today was quoted at 6.52%! Surely this was a knee-jerk reaction and will fall somewhat, but it should be a wake-up call.

So what happened? Today’s 5-YR Note auction went well – better than expected – and the bond market still crashed. Uh-O, good news and the market still drops thus increasing interest rates? That’s bad and why I say the bond market is getting tired of the bailouts. Remember, GM is only days away from filing BK and therefore another MASSIVE cash infusion.

Tomorrow brings us a 7-YR auction and thus perhaps more fireworks – or not. You see, it is the 7-YR that many believe is the cutoff between where the foreign central banks will slow or stop buying Treasury’s IOUs. The US is beholden to the kindness of foreign banks of China, Saudi Arabia and others. At the moment they seem willing to buy short term IOUs, but not the longer term junk, which is driving up interest rates.

Question: If long term rates continue to rise while Helo-Ben is powerless to stop them, how much of a so-called recovery do you thing there will be?

The government must STOP THE BAILIOUT MANIA NOW!!!

Ever since the Helicopter-Ben fueled up his money-helo, long term interest rates have been going up – slowly. That was not supposed to happen. Ben thought he could wave a magic wand and make everyone do his bidding. He was wrong. However, the bond market is massive and cannot be turned around like a Ski-Nautique boat; it’s more like an aircraft carrier. Therefore, I believe we have time to avoid the worst possible outcome: Jimmy Carter era interest rates. Call Congress and demand an end to the madness.

We should consider today’s action a shot across the bow. If the Treasury and White House do not cure their bailout psychosis, the USA will become the ultimate subprime borrower. “Change you can believe in.”

Sadly, I believe the current changes in the bond market have to do with; systemic structural weakness in the US financial system, the gross amount of government debt, and obscene fiscal irresponsibility. The lofty yield curve is a vote by the trading community that the US economy is a massive systemic risk, with a real possibility of core failure.

For those of you aware of the current CNBC vs. Stewart of the Daily Show debate I would like to point a few things which I think people need to be aware of. Stewart, I believe, was very short sighted in his views. While I do think CNBC could provide more “trading education” instead of simply opinion, we must remember they are news network. So to keep this brief I am going to point out a few things in point form:

• All news networks have a bias because they rely on a certain type of audience. The station has to make money and the only way they stay on the air is if they tow a certain line. If you don’t like what is being presented, don’t watch the station. But don’t plead ignorance.

• I realize not everyone is able to tell when financial news is biased because they are not educated in this area.Well, I must say that finance is not for everyone.The stock market, even the housing market, is not for everyone.You don’t sit down at a high stakes poker game betting your entire financial future on a few hands do you?Then why do you think the financial markets would be any different?The players in the financial markets have spent their lives figuring out how to make money.While people who make money in the markets come and go, there is generally one common theme – the people uneducated in the market lose money.

The market is not even a zero sum game, it is negative sum game. Meaning you lose more than you actually lost on a trade, and profit less than the actual profit you made on a trade. This is because no matter what you paying commissions, or fees or spreads regardless of if you make a profit or lose. And every time someone makes money, another person has lost or has given up an opportunity to make a profit.

Stewart failed to realize this. The masses will almost always loss, in boom and bust cycles. Why? Because it was the masses that pushed prices up so high (and then low)! This is from poorly educating oneself on the dynamics of the market they are entering.

• We all have biases based on self interest, unfortunately that same bias has created multi-billion dollar industries which tout that you don’t need to know anything “Just give us your money and we will make you a return for a small fee.” Some people do get lucky and make money, but many more do not. The market changes and the paper profits that were there disappear. The smart ones get out with their money.

• The markets are constantly changing and no one knows where prices are going to go. Good traders don’t necessarily make money off of predicting market moves. Rather they adapt to current conditions and control risk. CNBC almost always has different opinions from the analysts they have on. One is bullish, one is bearish. So it is the investor who decided which analyst’s advice to follow. Which brings up another point – be your own analyst. Don’t try to get into the biggest game in town for free. If you really want to have an idea of what is going in you need to educate yourself and put yourself in the game. Take a bit of the money you were going to invest and buy products or get a quick education that will at least put you slightly ahead of the masses in terms of your market knowledge.

• Watching the news is not educating your self. The markets are dynamic and no one will ever make consistent money off of listening to opinions. You need a plan for the markets. Getting mad at CNBC will not do anything for your portfolio. Getting yourself educated will. Spend less time watching the news, which is not even required to make money in the markets, and spend that time actually learning to trade.

• I love Stewart and Colbert. They are fantastic entertainment, as are some of the shows on CNBC. It is something to watch which gives you a gauge of the market, but it should not be relied upon for trading decisions. Only you are responsible for your trading decisions. And if you lack the knowledge to take responsibility for your actions, don’t get involved in the markets – any market you are unfamiliar with.

• To me this all comes down to people not taking responsibility for their own actions. I am not going to punish the drug dealer for putting a pill in front of me…it is my choice if I take it, not his!

BEING IN, AND MAKING MONEY IN THE MARKETS IS BASED ON HARD WORK AND COMMITMENT, BUT IT IS NOT A RIGHT!!!  The market owes you nothing, if you believe that it does, you have fooled yourself.  It is you who owes it to yourself to find out what you can and educate yourself on how the markets actually operate.

Were mistakes made, and are their problems with the financial system? Most definitely, but for you who originally simply wanted to make money off this F’ed up system, then that is what you should focus on. Profits will never occur without losses. We must accept losses in order to achieve profits. Realize that through losses is where profit arise.

Please note:  My heart does go out to those who lost homes or are in danger of losing their home and who were not trying to make a profit or flip a house or anything like that, but simply needed a home to live in.  There are victims in this debacle, and it is unfortunate.  Although there are many who are not victims at all, but were 100% willing participants (while they were still expecting profits, but then they portrayed themselves as victims once losses occurred).  But starting fights is not going to solve anything.  It is up to each of us to change and be responsible for our own actions.  It is only through this that you will create the personal world in which you want to live.

Through personal accountability the world will change and we will change if we need to.  And through this even if the world does change for the worse (because others don’t take accountability for their actions), it won’t drag us down with it.

~Cory Mitchell

The Federal Deposit Insurance Corporation is a member bank funded insurer that covers cash deposits up to $250,000.

There has been talk recently that if the fund has become depleted and is in danger.  So the questions become: Are deposits at risk? And how will the FDIC rebuild its depleted reserves?

The second question is easy.  The FDIC has already increased fees to bring up their reserves.  But this action is not likely to make a huge impact in the short term.  So the first question becomes center stage – are deposits at risk?

With more than two dozen banks having failed already this year, the FDIC will run out of funds if the situation does not stabilize.  It is no question they are facing a threat, but the likelihood they will fail, and depositors will not receive their deposits up to the prescribed amount, is extremely remote.  So the short answer is no, deposits are not at risk.  The FDIC has a $30 billion credit line and the government has said that they will back the FDIC if it gets into trouble.

The FDIC is essentially backed by the government.  This means the government can provide indefinite funding to keep the organization afloat.  Since the government theoretically can print as much currency as needed, the government would not let the FDIC fail.  A FDIC failure would likely result in a run on the banks, further bank failures and a crippled US economy.  The government would not allow this to happen – not through a FDIC failure.

But while the dollar amount of deposits seem to be safe, for it will be covered by the government backed FDIC, the cost of funding and all the other bailouts which the government is printing more currency for does not come without its own price tag.   The more currency that is printed and in circulation then theoretically the higher chance there is for inflation to creep in and a weakening of the currency.

So far, despite mass spending, the USD has done well against other currencies such as the EUR and GBP.  This is likely due to the fact that this bailout problem is not country specific, but rather global in scope and thus other countries are also being forced to save some of their business.  The USD currently appears to investors as the lesser of evils and somewhat of a safe haven.

While generally headlines have been grim it would seem that deposits are safe, and during these time savings rates are also at their highest levels since 1995.

The Dow Index also rallied sharply on Tuesday, finishing higher by more than 350 points or 5.5%. Positive comments from Citigroup may have played a part in the rally.

~Cory Mitchell

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