G + A= Boom

by Larry Levin


Today's market action was nearly a photocopy of yesterday's action: down early, then a rally, then a fall from the high that simply led to a choppy. There wasn't a great deal of news today to move the markets. Although the 10-YR Note auction was graded a D by Rick Santelli on CNBC, the auction results didn't move the market. It's doubtful that tomorrow's 30-YR Bond auction will either.

Bloomberg said this of the auction - Blame it on the weather but results for today's 10-year auction are disappointing. Like yesterday's 3-year auction, today's auction produced a tail as the high rate of 3.692 percent was more than 1 basis point over the 1:00 bid. Direct bidding was heavy with the group taking down 13% of the auction, down from 17% last month but still well over the recent average of 8%. Dealers have been complaining that strong direct bids will undermine how strongly they bid at auctions. Indirect bidders were very soft, at 33% vs. an average of 41%. Indirect and directs combined total 46% to indicate soft demand from non-dealers. Demand for Treasuries fell in reaction to the results.

There were more rumors of a bailout for Greece again today. The new news is that Germany will help Greece if France goes "Dutch" on the funds. Once that happens, do you think Spain and the others will have their hats in hand as well? I do. And what about here in the US? Once the Feds bailout California, surely my state of Illinois, then Nevada, then Michigan, Ohio, etc will be knocking on Congress' door with their hats in hand.

Bill Bonner recently wrote a piece on this subject that can be read here:

http://dailyreckoning.com/bailing-out-a-welfare-state-the-california-greece-debate/

but a portion is found bellow.

Today was a wild ride.....for a while. The early market saw good swing in both directions that were very tradable. The market was trading lower early because there were no rumors of a Greek bailout to goose equity shares until there was one. Another non-formal (read: rumor) bailout wafted through Fraud Street that caused yet another market explosion. (By the way, does this sound like a healthy market?) Later, a terrible 30-YR bond auction that apparently â?ocould have been worse? was ignored. Therefore, G (Greece) + A (auction) = (ka)Boom!

As I said the other day, the Europeans (or maybe the IMF now) want to sweep Greeceâ?Ts problems under the rug, thus allowing bondholders of the country's debt to avoid pain. Sound familiar? That's one of the main reasons why the US bailed out Fannie Mae, Freddie Mac, GM, and Chrysler. Once this bailout is final, I believe the others on the hot-seat will be asking for the same treatment. But the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) created 100% of their own problems; therefore neither Germany nor the IMF should assist them in any to bail them out. If that means the bondholders of the PIIGS lose funds, then so be it. These risk takers knew when they bought the debt what a financial mess each of these countries was in and as a result of their profligacy, corruption, and mismanagement their financial situations have only gotten much worse.

Today's bond auction, on the heels of yesterday's poor note auction, was also bad.

Bloomberg said this:

Results are disappointing for today's 30-year bond auction where the large $16 billion size made for soft coverage, at 2.36 vs. 2.68 and 2.45 in the January and December auctions. The high rate for today's auction of 4.720 percent is more than 2 basis points over the 1:00 bid. Note that all three coupon auctions this week show a tail, an indication of soft demand.

Direct bids were a record 24 percent, well above any prior level and follow a large direct bid for yesterday's 10-year auction, results which will firm suspicions that retail accounts are aggressively bypassing dealers. The large direct bid made for a very soft indirect bid with the group taking only 29 percent of the auction vs. a recent average of 41 percent.

Moreover, according to the Wall Street Journal, the Federal Reserve purchased $1.80 billion in 30-year bonds for its account....more than 10% of the total auction. Yes sir, Zimbabwe-Ben has the printing press running overtime.


Previous Day's Trading Room Results:

Trade Date: 2/11/10

E-Mini S&P Trades*
(before fees and commissions):

1) VA buy @ 8:35am at 1060.75 = +1.25 (1 lot)

2) Algorithm positions (17)

3) Reading the Tape positions (20) combined Secret's, Algo, & Reading the Tape total +25.00




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