Don’t concern yourself with the bond market steadily pricing all of Europe out of survival. It’s fucking Christmas time, after all. The fact that the world’s largest combined economy is spiraling into recession should in no way interrupt your very important business of buying sweets and ham.

In the 9th floor, I’m not so optimistic and refuse to accept ambiguous explanations such as “global growth” to define the unprecedented divergences I’m seeing in the market, most especially crude oil.

Explain to me why the bid for crude oil has had intermittent volume spikes over the last week, resulting in 5%+ down moves over a matter of minutes? Explain to me how these stress fractures are not to be apprehensive about?

This weekend was very enjoyable for me. I usually do not like the calm quiet that happens on Saturday or Sunday, but with how things have been lately, I relished in the opportunity to spend time with my family and not listen to the noise that’s been cluttering my airwaves.

Mrs. Thaler and I cooked mint-marinated lamb, prepared a Mediterranean salad, and made grape leaves for our combined family on Saturday. Afterwards, I enjoyed a strong gin drink and laid out some plans with my loved ones.

It was all exquisite. And definitely much better than watching the market chop 10% semi-weekly and having traders not think anything of it.

Now I’m getting back to work. I’m sure the ECB will push the whole bond market back into negative yields by 1:45, as the euro rallies, just in time for a 2pm face-ripping rally. It’s so sensational, it’s almost boring.

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I’m absolutely crying; I’ve never seen a currency rally so much on news that a central bank has started to print money (call it whatever you want, it’s printing money).

The euro is skyrocketing on promises it will be devalued because Italy and Greece have switched captains of the sinking ships.

I don’t care who’s in charge. You could have made Captain fucking Kirk head of the Titanic after it hit that iceberg. That fucker was going down, Trekis be damned.

The euro rallying on news that the ECB is buying tens of billions in Italian debt (which implies buying hundreds of billions in Italian debt) is about the equivalent of bidding a country’s debt into a negative yield, in the bond world.

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You may have noticed that I’m barely exercising any risk management at all, now down almost 25% year to date thanks to a combination of events which include:

1. A massive rally in oil after I increased my short exposure at the bottom of the range.
2. A failed short in MGM.
3. Huge unrealized losses in BG and CCJ.

As a point, I’d like to address these things, because I would never – ever – suggest that someone follow my lead in the way that I have toed it.

After absolutely nailing the oil trade on the initial move lower, I confess I never dreamed that oil could be flirting with $100 so soon afterwards. I still don’t believe it, to be honest with you. I keep thinking this is some sort of nightmare where I will wake up and see crude hanging out at $30.

But that may lead some of you to question: why haven’t I covered?

The answer is really simple. Ask yourself, what do you think will happen to the U.S. economy if oil spikes back above $100 a barrel?

Right now, gasoline prices are fairly tame compared to crude oil itself, which leads me to believe that crude is a massive distortion of pricing. However, if crude stays at these prices, then eventually the cost of gasoline will necessarily rise…dramatically.

At that point, most predictions of continued U.S. economic relief go out the window. The effect of crude on the country is simply too great; so there exists a sort of overhead “elastic barrier” not quite as sure as a floor, but definitely pretty good.

If I’m already waiting around at $100, why not hang out at $110? Or $120? I’m short leveraged products, so the only consistent losses I’m booking are in interest payments.

MGM doesn’t really need to be addressed as I sold it to manage risk; I was overzealous and needed to cover to get back to my core position. They are most definitely done for, but it could be years before they collapse and shorting them just wasn’t a central theme. It was an ancillary play trying to scalp free money which went awry.

But as for losses in my core positions, I have been refusing to let those go as well. With CCJ, the purchase was a distressed asset play, which has yet to reap rewards. However, I believe in the underlying market, which makes CCJ attractive even as it punches small holes in my vessel.

And BG is just unrealistically cheap for a company that has been expanding to meet the growing food needs of the world.

So, because I so thoroughly believe in these remaining positions, I am allowing myself to overlook the terrifying losses that are manifesting in my portfolio. I have basic strategies to stay solvent, and am looking for a grand slam; I still have my margin abilities left, and may find that I add to my oil short, once I get some momentum in my favor.

However, I also appreciate that most of you would be vomiting at your desks if you saw the numbers I see. It takes a force of will to look down the road past the ugly skies that are plaguing you at the moment, to the sunshine that lies ahead.

This is why risk management is so important for the average trader; it staves off these spirit-breaking images that haunt you in the here in now.

I see a number of possible paths that I can generally say fall into one of two cases (depending on the exact path, I need to react in certain ways, with regards to timing exiting positions).

The first is we are on a road to recovery. I don’t buy this at all, but if it’s true, then BG and CCJ are very undervalued. In this case, if it looks like the worst is past I sell AWK, cover all shorts, and revolve all funds into my remaining positions, riding AEC, CLP, BG, and CCJ. Based on their previous highs, that brings my portfolio back to where I was at the beginning of the year, and I lose nothing but a few months.

The second is the path I fear most and am actively planning for. We are about to enter the next move lower, as currency related trauma upends the globe, and demand is regularly destroyed, leading commodities and business lower and causing a second uptick in unemployment. I don’t think the economy sheds jobs as brutally as in 2008-2009, but we could see a bounce to somewhere in mid-range. In this case, my entire core portfolio (and yours) will be hit aggressively with selling, and if I don’t have the shorts in place, there will be no quick redemption.

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Who do you think was pushing Italian bonds lower this morning? Keep in mind, when I’m asking this, that less mainstream Italian short term debt nearly doubled in yield at the latest auction. Ten year yields are pushing much lower, back below 7%; ten year yields are runway models of finance.

No one in the private sector is buying Italian debt. No foreign countries are buying Italian debt. No European countries are buying Italian debt. America is not buying Italian debt.

The ECB is the only buyer of Italian debt.

Do you think that the euro is properly priced here against the dollar? Do you think that a simple move from 1.4 to 1.35 is adequately representing the amount of money the ECB will need to create to keep Italy from sucking her neighbors into a singularity?

Italy needs 300 billion euros, and the grand fanfare, the EFSF, is going to be off line for even longer than Europe first anticipated – assuming you believe it’s coming online at all.

Is the euro pricing in the rate cut? I doubt it. Is the euro pricing in the recessions that are miring her members? Certainly not.

Is the euro pricing in the EU forcing out two or even three of their members? Is it pricing in the citizens of the cast-out keeping their euros (who trades in for a currency facing imminent devaluation?), then running into the remaining euro members to spend?

Nope.

I know you do not want to hear this; you desperately want to believe in the Fed, QE3, government stimulus, and the inevitable demise of the dollar. But it’s not happening.

The Fed is not intervening unless the U.S. economy contracts and input prices settle. The government is in deadlock and will accomplish nothing, but that won’t change that we’re borrowing at rates that make “free” look attainable and don’t need to address the debt ceiling until after the elections. They are not coming to aid until they have too.

And in the meantime, European austerity – which doesn’t even cover the whole funding issue – will ensure a euro that buys little and still faces the threat of devaluation.

I added to EUO this morning, and look for it to go much higher.

I also bought ERY.

Sadly friends, Thanksgiving has been canceled this year.

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The oil markets are the most heavily manipulated in the world. There is no sense in today’s move higher, with growth prospects being written down system wide. Yet, here we are.

I cannot fathom who is paying this price for oil, especially given how much of it we have being produced, and how diminished the prospects are for using it. So why the buying?

Is it an attempt by a group of market participants laden with oil exposure to protect their portfolio going into year end?

Is it Iran jitters?

Is it a temporary phenomenon from storage?

Perhaps the U.S. is loading up the Strategic Petroleum Reserve, at any price?

Or is the economy actually rebounding, and we just haven’t seen the effects of it yet?

Perhaps it’s a combination of all the above. But what I do know is that the sort of fast, hard moves higher we’re seeing are not natural in a “normal” market. It’s the sort of behavior that comes from either extremely low volume, coordinated purchases, or extreme changes/miscalculations becoming perceptive.

But I cannot, in good faith, cover UCO right now. If the oil market is mispricing what the rest of the market is reflecting, then when it corrects, it will correct abruptly, without warning, and in extreme magnitude. And it could happen any time.

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Without question, the temptation is there for me to jump around and declare myself master of the universe. However, I am instead going to behave like a gentleman and refrain from doing so.

Even though it appears as though my insistence to hold out against the rally is now justified, the truth is I am still down a considerable sum (almost 20% for the year). I hardly call that a victory.

So I will wait with dignity, my body erect, head up, and calmly and quietly observe the happenings of the market.

To be sure, watching the Italian yields crack as fast as they did after the EU attempted to lithely and slyly circumvent an entire market has been humorous. It is at least as humorous as when Porsche organized that epic short squeeze on the shares of Volkswagen, only to watch its own funding dry up as the same market participants began to shun Porsche’s debt.

The law of unintended consequences reigns supreme.

I hope there’s a valuable lesson here for politicians the world over; do not try and outsmart people who are smarter than you. In trying to save their banks a few measly hundred billion, they may have just cost their governments and banks a trillion.

Nice move, guys.

I am playing this selloff on two fronts; short oil (breakeven around UCO $33, I believe), and with EUO, effectively short the euro.

If any of you feel that the euro will not be going to par against the dollar now, I would be delighted to hear (and subsequently ignore) your opinion. But I digress; leave a scribble.

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