The Treasury is soon to make a stunning announcement.

In my post from April 19th, Stormy Weather, I noted that the fed can drive rates lower by driving Treasuries higher.

This outlier move in Treasuries has been a central theme in these pages. Except for one thing. I never revealed the catalyst. What will be the catalyst? The Quantitative easing they announced in their 300 billion Treasury buy back plan has been shrugged at. To you, my readers, I will now reveal the catalyst.

Often when I explain what a catalyst will be, I do it by taking a page, out of our history.This article from November, 2001 from the New York times talks of what the Treasury Department was up to way back in 2001. History doesn’t repeat, but it often rhymes.

The Treasury Department’s decision to stop selling 30-year bonds could help push longer-term rates lower for reasons that have less to do with the economy than with the mechanics of the bond market. With no new 30-year bonds, more investors who want to own long-term bonds backed by the government will buy the Treasury’s 10-year note, which influences the interest rates on home mortgages. The added demand will push the price of the 10-year bond higher, and the yield, which moves in the opposite direction, lower. With the 10-year rate and related rates falling, mortgage rates will fall, too.

The Treasury Department will stop selling the 30 Year, which will push up demand for the Ten Year, driving rates lower. Is the strength in the housing index anticipating this? Driving mortgage rates even lower would allow a massive refi and write down cycle in residential mortgages. Just what the economy needs, to finally take flight again. Then what happens? They’ll do what they did then. Offer the 30 year for sale again. Same cycles, different players.

I wonder when they’ll announce it? During the market? After? Before? Who knows? Whenever they do, it will be a shock to everybody. Everybody but those who read me. Mr. Volatility.

Peace

As I write, Apple, Inc. ($AAPL) has reported earnings and the stock is trading higher.

What will be interesting is the conference call. Earnings conference calls are Wall Street productions. The dial in number for the conference call is passed around to the bankers and the insiders, hedge funds, etc.

The internet feed is promoted by the company as a way to listen to the conference call.

The Sting

If you listen to both the phone call and the internet feed, you’ll notice a delay in the internet feed. It runs behind the telephone wire feed. Once you’ve established a delay in information to some and not others, you have created statistical arbitrage. Casinos refer to this statistical arbitrage as house advantage. If you’d like to question Wall Street on this, they’ll use the Socratic Method and answer your question with a question. How could we have known!?

Listen to both feeds sometime and watch price movements. You will see interesting behavior.

These are things that you can learn from reading me.

Mr. Volatility.

Peace

Thu Mar 19 09:21:48 2009 EDT:
($ARE) 7 Million share Secondary priced at $38.25.

The deal size was increased to 7,000,000 shares from 4,500,000 shares.
Merrill Lynch & Co. ($MER), Citibank ($C) and J.P.Morgan ($JPM) were the dealers.

6:32 PM Mar 20th from web Mr. Volatility tweets:
It’s sad to think about all the poor shareholders that are now stuck with 7 million shares of ($ARE).

This morning ($ARE) lowered their dividend from 80 cents to 35 cents and announced a senior convertible debt offering.

In response to inquiries, management and the dealers will likely respond: How could we have known?

Peace

They always say time changes things, but you actually have to change them yourself.
-Andy Warhol

I mentioned in my post from April 13th that if you thought the rally in stocks had more legs, then $CENX was a chart to consider. Obviously, with the absolute crushing taking place in the S&P 500 today, there is absolutely no reason to be long the Base Metals. Stop Out. Movin’ on. I also mentioned Hecla Mining $HL. That’s the one to double up on as you stop out from Century Aluminum.

Peace

This New York Times article is a must read. I quote:

“In a significant shift, White House and Treasury Department officials now say they can stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, simply by converting the government’s existing loans to the nation’s 19 biggest banks into common stock.
Converting those loans to common shares would turn the federal aid into available capital for a bank — and give the government a large ownership stake in return.

While the option appears to be a quick and easy way to avoid a confrontation with Congressional leaders wary of putting more money into the banks, some critics would consider it a back door to nationalization, since the government could become the largest shareholder in several banks…
Taxpayers would also be taking on more risk, because there is no way to know what the common shares might be worth when it comes time for the government to sell them.”

To avoid having to beg for more money while being broadcast on national television, the government is carefully crafting a shift in the bailout plan. They will “stretch dollars” so that even more bank risk can be shifted to the masses. This sub plot is so obvious it cannot even be classified as “slight of hand.” There is one great trick inherent in this plan however—now you see a capitalist free market, now you don’t! With each and every new governmental “ownership stake” in private business, we creep ever closer to a socialist economy. The best ruse: they pulled the coin right out from behind our own ears!

With bailout dollars now convertible into equity, more dollars will magically appear—they have “stretched.” The pile of money is now bigger! But ask yourself, how much is a stretchy dollar worth?

The Catch
The catch is obvious: dilution. Now, the government will own a bigger share of the equity in the bank, but the equity will be diluted. This has significant ramifications for the masses. Recall when the article said, “taxpayers would also be taking on more risk.”
You are the government. Nationalized losses are your losses.

Gains for a few, losses for the masses.

Nothing changes in the markets—just the participants.

Peace