To put things in perspective, I offer the following:

1) Government risk is priced very near October 2008 levels.

2) Financial institution risk is at July 2008 levels.

Position yourself accordingly.

The S&P hugged the lows of yesterday for the majority of the day in a mostly quiet session.

S&P 500 Intraday Range

Quiet as it seemed, there was a pick up in volume in both the S&P e-mini contract (machines) and the pit traded contract.

S&P 500 - Daily

Poker

When I left off on my poker analogy, the market called my re-raise after the flop. I stated that I would call the market, no matter what the turn card. The turn card was dealt yesterday and the break lower showed a pick up in volume. Along with the pick up in equity volume, the credit market confirmed what it had been hinting at all of August. Credit spreads widened across the board, most notably in the financial complex.

Waiting for the turn card was the tough part. I have now bet the size of the pot and I await the market’s reaction. Based on today’s action, I’d say the market has not reacted much. It is still staring down at his cards. So far the only tell is the pick up in volume in the S&P futures contracts today.

I stuck to my plan when the turn card was dealt by buying puts in a range of asset classes and calls in 10 year Treasuries. From a chart perspective I see potential resistance in the 10 year above the 120 mark.

Treasury Futures

Gold

Gold traded strong today and was up the most it’s been since March. Depending on where the trendline is drawn, some may declare it an official breakout. Some time back, I sold my gold positions. Last year, when the flight to safety trade gripped Wall Street, gold traded much lower–as low as $680 per oz.

In light of that, I am going to see if gold can surpass the $1,000 mark–and the subsequent reaction–before I am tempted back into gold futures. For now, the physical gold that I hold in safe haven countries around the globe will suffice.

Gold

Slowly but surely, cracks in the foundation of the market are appearing and confirming themselves. If volatility is to make a sudden move higher, I am positioned well.

As I wait for the market to react to my bet, I will seek out the important tells and communicate them as best I can.

That’s a Rap.

Peace. Out.

Nobel Prize winner Professor Robert Mundell, whose research laid the groundwork for the introduction of the euro, is on the wire in an interview with the Frankfurt General Newspaper (Frankfurter Allgemeine Zeitung).

According to Mundell:
-The Euro will “go back down substantially.”
-The Euro’s steady appreciation against the dollar in the last several years threatens to devastate the European economy.
-The higher Euro will tend to tip the euro area into mild deflation, worsening the difficulties of debtors and the solvency of the banks.

On the subject of the Euro, Professor Mundell is not merely a contributor—he is the moderator. Listen well.

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Keep an eye on Treasuries (FT)

“But concern about the bond market is more meaningful. It is vital to keep US rates down, to revive both the housing market and the health of the banks. That is why the Fed is buying bonds. If even this drastic action is not enough to keep rates low, then these policy aims are in jeopardy.”

As the stress in the system intensifies, the case for being long treasuries solidifies.

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Gold and silver garnered attention last week as both took noticeable jumps. As I have written, the asset class to own for the big move over the next few years is precious metals.

Gold

Peace

The Volatility Index (VIX) has continued its perilous plunge from the heights of its October summit. Why hasn’t it caught an outcropping yet? Perhaps it is because the Index is not reflecting the underlying stress in the market. The core reasons for this are tri-fold:

First, quant funds are selling index volatility and buying volatility in individual names, which has a masking effect.

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Second, the season of quazi-investors reaching for returns by selling huge call positions is upon us.

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Third, The FED and it’s media have been so successful in augmenting bank sentiment that they have procured a huge boost in their common equities. This has allowed billions upon billions of dollars to be raised in common stocks of banks. Consequently, the equity offerings that have been raised of late will need to be further diluted. The stress tests were rigged, and the adverse case scenarios were far too optimistic.

Where does this all lead? For my money, I continue to own size in Ten Year calls. I am also finding safe footing in select miners and precious metal names.

The crash of 2009 is mounting, but so too is my strategy. The Ten Year goes far, far higher. In spite of all government efforts and their media machine, I veer not from my position. There is a wild outlier push coming in Treasuries, and rates will go below 2%. The FED has skillfully driven the market higher, but their trade will unwind; and as it does, the (VIX) and Treasuries will soar. Very few will be prepared. Peak earnings require a slow, methodical trek—and patience is one of my gifts.

When the climb of this year is over and my gains reach their crest—multiplying exponentially—my musings will see a larger audience. It’s a little known fact of the market that one’s net worth equals one’s net voice. Do you hear me yet?

Peace

The VIX

In one of the most absurd, inaccurate, and audacious articles of the week, Barron’s alleges that “Treasuries are in a bear market.” Equal parts silly and supercilious, they go on to presume that they have insight into the Treasuries top!

“Barron’s called a top in Treasuries and a bottom in the rest of the bond market in an early 2009 cover story.”

In hindsight (if persons so inanely bold dare to use it), this cover will look as ridiculous as their June 2nd cover story: Buy GM .

As chronicled here at Trade the Picture, Treasuries must go higher

. The Treasury market is the only viable entity left which the fed can manipulate to lower rates. The Fed Funds rate can’t be lowered—it’s as low as it can go.

By claiming that Treasuries have topped, Barron’s is essentially fighting the Fed. The casualties, no doubt, in this misguided confrontation are their countless readers. They continue to publish some of the worst coverage of financial markets the world has ever known.

At some point, Treasuries will top and a bear market will follow. Before they do, they are headed much, much higher. The price action in Treasury futures attests to this eventuality. Despite Barron’s reckless assertions and deceptive cover stories, Treasuries are not in a bear market.

10 Year Treasury Note

Peace