The Oscilloscope Trade

Today was all over the place and breaking news late should make tomorrow even more interesting. Right now is my "go to press" time so even a few minutes after I post this some information may change, so bear with me!

On a personal note, last nights article was featured as an Editors Pick over at Seeking Alpha. I am very humbled that a piece of mine was singled out as a "best read". Very cool.
Article as shown on Seeking Alpha

CIT: The Day Too Big to Fail Almost Got Much Smaller
It seems CIT may not be able to get a government backstop at this time:

Government will not give lender CIT 2nd bailout
WASHINGTON (AP) -- Struggling commercial lender CIT Group Inc. says the government will not give it another bailout.
The news increases the likelihood of a bankruptcy filing for CIT, a lender to small- and mid-sized businesses that faces a liquidity crunch.
The announcement comes after days of round-the-clock negotiations about a possible rescue for the company. CIT has warned that its failure could prolong the economic crisis by imperiling roughly one million businesses that depend on it for credit.
The New York-based company's release says CIT is "evaluating alternatives."
CIT received $2.3 billion from the $700 billion financial system bailout.

This release is far more final in tone than some earlier ones I had scanned. I would blame Goldman Sachs for stating clearly they were in no danger of CIT going bust, if GS is ok, then you are in big trouble!

Still, there were round the clock discussions for days about a rescue. It seems the FDIC dug in their heels and would not relent to adding CIT's debt to their overtaxed (pun intended) reserves. Today "Too Big to Fail" almost got quite a bit smaller in definition, but at this point it seems not to be the case. Any takers on what kind of reaction this will have tomorrow? Here are my two guesses:
1. The system is saved, now even CIT can fall and the system chugs along. Indices up 3%
2. The government is finally out of the private sector game, we are saved! Indices up 3%.
I really do not think this will be a negative. For now!

More Government Mortgage Meddling - Is 30 Years Too Long to Pay Off a Plasma TV?
One of the problems of all the various programs being both put into place and discussed is that you tend to lose track of them. Luckily the blogosphere never sleeps and you always have your back covered.

The always sharp Dr. Housing Bubble covers in depth the possibility of moving mortgage modifications into the 2nd mortgage arena. The data presented is top flight, and I would urge you to read the whole thing.

A key theme here at Economic Disconnect has always been the idea of "running out the clock" by the banks to hide losses until they disappear. Dr. Housing Bubble spells it out:

There is no basis for bailing out second liens. It is incredible that we are now moving down the path of bailing out loans in which people took vacations, added Jacuzzis to their homes, or even bought a luxury vehicle. Their idea of fixing this problem is making you pay for your 60″ flat screen 30 years into the future.

And even more important, how banks used to see mortgages, and perhaps how they would like to see them again:

What is being implicitly stated here by the U.S. Treasury is they don’t expect this family to ever pay this mortgage back. Their idea is that by giving someone a mini option ARM that they’ll be able to sell the home in 5 years for a higher price and the new buyer will simply roll the 1st and 2nd into one note and all will be well.

A great article.

The Oscilloscope Trade
The bipolar nature of the market may be getting people frustrated. A long series of starts, stops, turns and twists make market commentary very difficult. I usually try to stay away from specific market plays, but with a little input from some trusted sources I think a pattern has begun to emerge.

Today at Zero Hedge, author Tyler Durden presented this commentary and chart:

For people who have forgotten what asset diversification looks like, do not look at this chart to be reminded. All asset classes over the past three days have ploughed higher, contrary to any possible logical argument. But such is our market. Cash out of bonds into everything else... inverse... rinse... repeat. One wonders just how much excess liquidity is trapped in the market.

Chart:

Here seemingly disconnected markets trade all higher.

The Housing Time Bomb further elaborates on the two plays at work in the latest missive (excerpt):

The Two Headed Monster
There are two trading trends that have clearly developed over the past two months: The deflation trade and the inflation trade.

The deflation trade (which we saw last week) is dominated by rising treasuries(lower yields), falling stock prices, and sharp sell offs in things like the metals and other commodities. You also tend to see a stronger US dollar.

The inflation trade that we are seeing this week is a complete inverse of the deflation trade. Treasuries tend to crash(yields up), stocks soar, and commodities flourish. The US dollar tends to remain weak.

Which trade is correct? The market hasn't decided in my view. Its very apparent that Wall St is divided on how this all plays out. Inflation appears to be the big worry if the economy recovers because there are too many dollars floating in the system as a result of the reckless bailouts.

See the whole article for the conclusions.

I have been thinking about this very Oscilloscope Trade as of late as well. In the comments section of the article above I wrote:

What bothers me about the deflation/inflation trades is that they seem too "set in place". Stepping back, when the government needs to have a good bond auction, the "deflation" trade button gets punched. When the indices are nearing short term support lines with a break lower seemingly imminent, the "inflation" trade is put in place.

I agree this market is no place for an average person looking to get return OF capital, never mind return ON capital. Wild times indeed.

The timing of the switches are what is most interesting. A week to a week and a half out from an important bond auction? Plug in the deflation package. Charts looking ugly and and about 2 days out from an inflection point? Play the B side and the inflation tune for a spin.

This kind of market makes chasing a real loser strategy. The rollover is just too fast to get any traction unless you are a very nimble daily market participant. Or a high frequency algorithmic monster!

Addendum: Meant to add this;
From Wikipedia:

An oscilloscope (abbreviated sometimes as 'scope or O-scope) is a type of electronic test instrument that allows signal voltages to be viewed, usually as a two-dimensional graph of one or more electrical potential differences (vertical axis) plotted as a function of time or of some other voltage (horizontal axis). Although an oscilloscope displays voltage on its vertical axis, any other quantity that can be converted to a voltage can be displayed as well. In most instances, oscilloscopes show events that repeat with either no change, or change slowly. The oscilloscope is one of the most versatile and widely-used electronic instruments.

As a visual for the markets oscillation between inflation/deflation trade moves:


Have a good night.