We have two big auction days for Treasuries coming up. The 10 year note on Wednesday and the 30 year bond on Thursday. The thirty year is the big one that makes everyone nervous. It’s a barometer for the willingness of other countries to service U.S. debt. There is intense pressure on this and the question is, “Will China continue to float the U.S.?” (see prior story)

There is a way to play the ETFs for a quick profit. Here’s how to place resting bids on Treasury auction days (calendar).

The various Treasury auctions happen once a month at 1:00 p.m. ET. The notes range from 4 weeks to 30 years and their auctions are spread throughout the month.

Let’s use last week’s auction as an example for setups. Sometimes clear levels of resistance are made before the auctions. One can then place a low risk buy-stop-market order above the day’s range, right before the auction happens.

So we don’t know which will pop TBT or TLT. These ETFs track the 20 year Treasury bond. They are the most liquid and popular way to play Treasuries. TLT is long the bond and TBT is short.

Place a resting buy-stop-market order on both names. The name that pops will trigger the order. This won’t catch the entire move, but it’s a low stress partly automated way to make money. It also saves focus to manage the exit. Exits need to be on the same time frame as the entries. The risk of holding these trades past 30 minutes is large. The idea is to catch the first big impulse move and get out.

These are 3min charts on TBT and TLT for the same two day period last week. You can see that TBT would fill for a quick profit and TLT would never fill. So you only have to manage the winner.

TBT

The green arrow indicates the resting bid. Brokers call them different things. Some are called buy-stop-market orders. When the price is touched a market order is executed to buy. This assures an immediate fill. We want to catch the impulse move.

Say an order for 500 shares of TBT was placed at 52.75. This is $0.05 above the day’s high. We want a little wiggle room to lower the risk of being faked out. Price must get an impulse move to execute the order. It fills 52.80 at the market. The move stalls 10 minutes later. A sell at the market around 53.55 is $375 profit.

TLT

These resting bids are placed at the same time on TBT and TLT. We’re looking for a new high to enter the trade. TLT didn’t work that week. No big deal. The order never fills and focus is shifted to the one that did.

Background Manipulation

Here is more of the bigger story underlying these trades. GTM wrote about this last March (see story). This is old news, but nothing has fundamentally changed. Here is a snippet:

President Obama and his new government have adopted a series of measures to deal with the financial crisis. We have expectations as to the effects of these measures. We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried. -Wen Jiabao 03/13/09

On Sunday Bernanke does the first national interview a Federal Reserve chairman has ever done in 96 years. He says everything is fine and we’ll be back to business as usual by the end of the year. Then on Wednesday the Fed announces they will buy Treasuries until the end of days. So…

1. China warns about the financial stability of the U.S.
2. Bernanke goes on national television
3. Says he’s from Main Street, just like you and me
4. Then boldly lies about the economy

Three days later…

• FOMC announces a final push of a desperate crisis management plan
• U.S. dollar sees its 3rd biggest one-day decline ever
• Fed is now matching all of China’s $1 trillion in Treasuries

The Fed Buys Last Week’s Treasury Notes

Chris Martenson just exposed the way the Fed buys Treasuries under the table (see story). Here is a snippet:

Good grief! Just last week, when the auction results were announced it was trumpeted to great fanfare that there was “more than sufficient” bid-to-cover, “strong demand” and all the rest. And now it turns out that 47% (!) of the bonds that were taken by the primary dealers in that auction have been quietly bought by the Fed and permanently secreted to its balance sheet.

They didn’t even wait a full week! A more honest and open approach would have been for the Fed to simply buy them outright at the auction but this way, using “primary dealers” and “POMOs” and all these other extra steps the basic fact that the Fed is openly monetizing US government debt is effectively hidden from a not-too-terribly inquisitive US press and public.

The speed of the shell game is accelerating.

This immediate repurchase of newly auction bonds by the Fed tells us that demand for these bonds is not nearly as high as advertised, and that things are not quite as strong as represented.

Caveat Ursi 3.0

Mole at EvilSpeculator has been following POMO activity for a long time. He drew up an awesome chart showing each burst of virtually free money the Fed pumps into the market (see story).  It’s not free to you and me. We pay the interest on it through inflation.  It is essentially free to prime brokers who use it to gun index futures while everyone is sleeping.

As you are probably aware I have long been keen on learning more about the inner workings pertaining to the NY Fed’s repo auctions and I have occasionally reported on the slosh available to preferred primary dealers. After a very pertinent article posted by ZH earlier this week I carefully combed through the recent POMO calendar, which due their traditional rarity I had foolishly ignored for several months now, and to my surprise arrived at highly interesting results:

Coincidence? You be the judge of that – I however took the liberty to highlight and mark each day a POMO operation was held.

Conclusion

There will be a day, maybe this year, when Treasury auctions don’t get enough bids. We know demand has been slipping, which is being inflated by the Fed. There are limits to how long the Fed can pump the market. When that day comes, this strategy on TBT/TLT will pay out in a massive and immediate way.

As California faces bankruptcy there must be a way to profit off the ensuing panic. No one is seriously talking about this idea yet, which has slam dunk market strategy potential. This site is about the retail investor sticking it to the man. Let’s help each other on this and turn the game around. Please comment with your ideas!

As of December 2008, CalPERS managed the largest public pension fund in the United States with $179.2 billion in assets; however, that represented a 31% decrease from the peak value of its assets of $260.6 billion in October 2007.

State Public Worker Pension Fund Takes Big Hit (from SFGate):

You don’t get in a situation like we have right now, where the economy is heading in a downward spiral and you ramp up taxpayer obligations to meet those pension obligations. -California Treasurer Bill Lockyer

Calif. Taxpayers Due Refunds May Get IOUs

“If you expect you’ll be getting a refund from California when you file your 2008 state income tax return, be prepared: you may instead receive a ‘registered warrant.’”

So the question is: How can we profit off a perceived bankruptcy of California?

Short CalPERS’ largest holdings?

California Public Employees Retirement System Holdings and Details

Will risk in Cal Bonds push TLT over the edge?

What about CalPERS exposure to interest rate swaps? How can we make money off those things blowing up like CDOs did in 2008?

Does anyone know about the swaps? I don’t know enough about them and need some help.

What is the TLT?

iShares Lehman 20+ Year Treasury Bond Fund: The Underlying Index measures the performance of public obligations of the U.S. Treasury that have a remaining maturity of 20 or more years. As of May 31, 2008, there were 10 issues in the Underlying Index.

The Underlying Index includes all publicly-issued U.S. Treasury securities that have a remaining maturity of greater than or equal to 20 years, are rated investment grade and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non-convertible.

The Fund generally invests at least 90% of its assets in the bonds of its Underlying Index and at least 95% of its assets in U.S. government bonds.

TLT Weekly Chart

So what is so interesting about this chart? It shows that Treasury bonds have made a new swing high which is now confirmed:

Sept. 8 (Bloomberg) — Treasuries fell the most in almost two months as the government takeover of Fannie Mae and Freddie Mac gave investors confidence to buy higher-yielding assets.

Last Friday’s high corresponds with the swing high of 2007 and several points of overhead resistance in 2008.

TLT vs. SPY

This shows a clear inverse correlation between the TLT and SPY. When Treasuries top out money flows back into the financial heavy stock market.

Each arrow points to swing lows which also showed as swing highs on the TLT, as we saw on Friday. So we’re seeing capitulation in equities and exuberance in government bonds. Nice market timing model eh!?

Evidence of the PPT?
If you asked traders last Thursday when the DOW dropped -345 points if they thought the market would rally hard next week, the answer was probably no. With massive across the board selling the consensus is that everyone was raising capital. Margin calls, hedge fund liquidation, and impending financial disaster were all good reasons to sell.

You can see how range bound the market was through all of August. That trend was broken strongly last week, with the potential of more selling a real possibility. A perfect time to bail out the market.

Who Will Win: Fundamentals or Technicals
The consensus among many traders is fundamentals will eventually trump technical breakouts and the US capital markets will tank further.

The thinking goes: Treasuries get sold, then the dollar drops, which supports financials, which adds to the debt burden, and the heavily weighted market will continue to slide.

The counterpoint goes: Treasuries will be supported because the entire bailout and global equities depend upon it. The Fed’s PPT power is based upon this to prevent a systemic crash.

Here is a collection of some thoughts:

“Tomorrow morning equities are gonna fly, especially financials… for how long, I can’t even begin to predict. But one thing is for certain. The crash is going to be spectacular.” -The Financial Ninja

“Here’s your open thread for the night: How much of this bailout was calculated not at “Systemic Risk,” but instead at Asset Depreciation, i.e, falling stock prices?

Does tomorrow’s gap up hold? Or, is this like all of the previous weekend rescues — rally, failure, new low?” -The Big Picture

The International Forecaster:

The troubled funds were forced to bail themselves out, and that meant selling their winners in long oil contracts, which in turn collapsed the price of oil. This sharp drop in oil prices then wiped out a huge hedge fund that was long oil big-time, causing oil prices to collapse even further. Dollars had to be purchased to acquire the liquidated oil contracts, thus supporting the dollar, and these dollar proceeds were then used to pay down margins at big commercial and investment banks, which then used the margin-covering funds to purchase treasuries not only to make a return, but also to absorb the dollars that had been flushed out by the collapse in oil prices.

Also, the bank failures, worldwide recession and the Fannie/Freddie debacle are scaring foreign and domestic investors alike into the perceived safety of treasuries, which means that foreign paper assets are being sold and the foreign currencies received as proceeds are being used to buy dollars, which are the only form of payment acceptable for treasuries, thus further supporting the dollar. This flight to safety ties in with the continual and incessant de-leveraging that remains ongoing in a vain attempt by Wall Street fraudsters to restore capital ratios, and this de-leveraging is making it impossible for the PPT to sustain any stock market rallies. That is why the stock markets are going up and down like a seesaw, bobbing and weaving like a drunken sailor. Banks can no longer buy and hold. They have to take profits off the table as soon as they are earned, or even more pathetically, sell when their losses are reduced by the PPT orchestrated up-ticks in the stock markets. That is how desperate they are. All this dollar strength then ignites a short-squeeze on those who are short the dollar, thus creating yet more support for the dollar. The problem is, the dollar can only be pushed so far before the short-covering expires and the dollar continues its downward trend based on the fundamentals.

The New York Times:

Bankers estimate that $1 trillion of China’s total foreign exchange reserves of $1.8 trillion are in American securities.

Still China finds itself hemmed in. If it were to curtail its purchases of dollar-denominated securities drastically, the dollar would likely fall and American interest rates could soar.

Along with Treasuries, China has invested heavily in mortgage-backed bonds from Fannie Mae and Freddie Mac, the struggling mortgage finance giants that are sponsored by the United States government. Standard & Poor’s estimates China’s holdings at $340 billion.