Flipout Friday!

Amazing shit here guys.

Bernanke. You gotta love the stupidity in the markets, and you really have to have respect for just how stupid Ben Bernanke is.

What he did hurt. A lot. People got burned bad by this, and the market will make him pay for this in the coming weeks.

Hell, let me be straight here. I got bit for about $30k today on a mark-to-market basis. While it sucked the big fat banana, I've lost more in a day, and in terms of realized losses, it was small (two futures positions I pulled as the spike started.) Do I believe most if not all of that will be returning to my account balance? Yep. Are most of those short positions still profitable? Yep. Piss me off? Absolutely. Why put numbers on it for you? So you understand that we all look through our own pair of glasses, and I'm no different than you!

Ok, enough of my personal wine (of which I'd like a glass) and on to Bernanke's insanity.

First, the discount window cut is not a rate cut. It takes some of the "penalty" off going to the discount window, which normally has a big penalty associated with it. Note that the penalty was not removed - it was just reduced.

That is all it is.

Second, doing this today before the market opened was insane. The impact on the "big boys" in the index options market was severe and totally unreasonable. The retail guy doesn't play there, but the big institutional guys do, and Bernanke just boned them up the ass.

Fortunately the two biggest-risk trades (and the ones I was not willing to hold into something like this) were in the futures markets and I was "on the trigger" when it happened. Yeah, it blew, but I got out with my head still attached to my body. Many others did not, and those who had open positions into Index OpEx got RAPED.

Ben - why not do this after the market opened and the SOQs were recorded? That would have done the same thing in terms of the pop and the actual liquidity impact, but it would have preserved order in the index options marketplace, the playground of hedging and institutional money, which is supposed to be what the Fed cares about - not whether you make or lose money, but whether the markets are ORDERLY.

I am not arguing against the actual action taken - which appears to be both reasonable and targeted. It will not fix the problem to the extent that it is insolvency, but will help solvent banks with temporary liquidity issues (which IS the Fed's place.)

But the timing - Bernanke, you're a tool. A total and complete tool. This will reduce confidence in the system, not improve it. To that extent it spells opportunity to those who trade against the crowd - like those who had the balls to short into the pop this morning.

But it also means that we are likely to see more instability in the markets in the next few days and weeks, not less. Not because of the action but because of the timing. Just an hour or so later, this would not have been a concern; the SOQs would have been taken, the winners and losers allocated based on last night's close, and then that would have been that.

But now we get the Fed adding to market instability.

Nice.

How come? Let's look at recent history - remember that Poole just the other day said he saw no reason for Fed Intervention at this time.

The are only this two possible explanations for this action, and both raise the risk of an outright market crash to astronomical levels:

1. There are one or more banks that are literally about to suck water. If that happens, the market will crash. Since this is likely an insolvency rather than an illiquidity issue, nothing has been - nor can it be - fixed.
2. The Fed lied outright to Wall Street and the Public and intended to do this all along, knowing full well that the statement Poole made on the matter was false. In this case the market's confidence in The Fed has just been destroyed; they've documented themselves as liars.

My prediction: Bernanke just insured a market crash. Not today, probably not Monday, perhaps not for a couple of weeks or a month. But he insured that it will happen because he pulled the rug out from under the market's view of the Fed being an instrument of ORDERLY markets. Now when the jitters over the next dislocation in the credit markets occur (which will be in the next days or weeks, not months or years) nobody will know what he's going do or when and they will expect DISORDER.

What do you do when you have no reasonable expectation of order?

YOU SELL NOW LEST YOU GET A NASTY SURPRISE LATER.

Now in the grand scheme of things this isn't as bad as Greenspan's "PUT", but it vies for it in terms of stupidity. At least Greenspan was predictable.

What Ben DID is something entirely different.

It was stupid, it was insane, it qualifies as bordering on criminal. And by the way, that rally yesterday? I'm forced to be suspicious of it being ignited by a leak. Short-covering in the financials eh? Hmmmmm..... I'm not so sure anymore. Maybe more like someone being tipped off?

Now let's talk about what Bernancke actually did today.

He hiked rates for people who are solvent, but cut them for people who are not!

Is this stupid or what?

Look, I'm sitting here listening to Cramer talk about how cutting The Discount Rate is "great". It is? What the hell is he smoking? Let's be straight here - the Fed still has a penalty associated with the discount rate (which they must lest banks arbitrage the discount window and make a mockery out of The Fed) and yet they did not move the Fed Funds rate.

Yet the market treated this announcement as if not only the Fed Funds Rate was cut AND there is no risk of an economic downturn!

WRONG ON ALL COUNTS.

Further, there is ZERO relevance in this to mortgage rates or to home affordability, and the latter is where the problem lies. You can't fix that without major price declines in houses! It just can't happen.

Oh, and where did this come out of? Look at the statement - New York and San Francisco Fed Banks? Hmmmmm..... so we got one or more banks in potential trouble - like potential collapse trouble - and they might be in New York or..... California? This is bullish and worth a near-300 point rally?

Never mind clues like this:

"Anxious customers jammed the phone lines and Web site of Countrywide Bank and crowded its branch offices to pull out their savings because of concerns about the financial problems of the mortgage lender that owns the bank."

Or this:

"Mason also cited Bagehot's rule, a basic banking principle which he explained as the need to distinguish between illiquid and insolvent organizations. "You want to lend to illiquid but not insolvent institutions," he said. Lending to insolvent institutions just enables them to dig themselves an even deeper hole.

To him, that's what seems to be happening.

"I would argue that Countrywide is insolvent. Their only asset is their pricing platform, their business algorithm, and that's not working. The next biggest asset they have is the toner for their copiers.""

Which was enough reason for me to short more. We'll see who's right on that one. By the way, a "run on the bank" can kill any bank, because none have more than a small fraction of the funds on deposit actually available - the rest is loaned out. So if everyone shows up and demands their cash.....

Oh, by the way, The UM Sentiment Index came in at 83.3 way down from 90.4 and far below expectations.

I said I was going to head to the waterpark with my kid today and did; got banged on my futures trades (who didn't who was short today?) but I only took off a couple of shorts.

I know a lot of people who read the Ticker got buried today (hope you guys read my risk management screed a week or so back!) and the interest is in what's forward, not what's behind us. With that in mind I'm going to put up some charts, leading with an extension of the one I posted last night.




Ok, so let's step back a bit and look at the big picture for a guide as to what we've got in store for us. We'll start with the SPX, although the Dow is probably the more interesting chart.



Hmmmm......



This is one of your "Tells". We have a very nice Head and Shoulders, a drop below the neckline, a ping below the 200 which didn't stick and now a retest of the neckline that held from the bottom!

I said the other night we were looking at February's numbers as the near-term target. I still think we are. But - we're still sitting here this evening with a sideways indication for the immediate future.

Intermediate term what changes my mind? A decisive break over the neckline that holds. What changes my mind that we've seen the bottom? Gotta get the primary support levels back - most importantly, SPX 1490.

What confirms my bearish indication? The 200 has to break and hold below.

By the way, the shorts got both creamed and cleaned up today. There was an amazing amount of short-covering today and the PUT/CALL ratios plummeted. This leaves the door open.

Oh, and the Yen? It is still way below the "all clear" level on the Carry.

So we go into the weekend with people having a couple of days to stew on it.

Sunday evening the Japanese get first crack, along with the Futures and FX guys. Key will be whether any "bombs" are dropped over the weekend - any late-night "specials". Then we get to see what Japan thinks of this.

Bottom line - nothing has changed, and giving money to insolvent people on a temporary basis doesn't fix the insolvency.

The mortgage companies who loaned money to people who cannot pay it back are going to suffer and so will all those who bought their paper, those who bought homes from 2004 onward will suffer, and the consumer will suffer. It is a near-certainty that we will have a recession by Christmas no matter what the Fed does. The credit markets remain jittery at best and the equity markets, staring at a near-certain recession, are likely to react as they always do to recessions. And Bernanke has taken what was looking like a sharp but orderly decline and raised the spectre of an outright crash - I now give it 50:50 odds, where before I was consider this as more of a "1 in 10" scenario - because the market can no longer trust that he will conduct himself in an orderly, transparent fashion.

Short term, money management is going to be very important, as this volatility - and these sorts of surprises - both good and bad - are likely to continue.

Oh, you think this was a "healthy" rally on good news? Then explain Gold, Silver, and the 35 New Highs and 114 New Lows.

On a day that was up almost 300 Dow points.

If you want to believe in that - as many of the "Fast Money" guys do - I have a bridge for sale.