I’m standing hunched over the desk in my 9th floor office, chewing lightly on a light Mediterranean salad, which is giving off slight aromatic aromas mingled with the sharp hint of vinegar, and a side of tender chicken while I work. In between taking bites, I can’t help but feel my lips purse into smirks.

Looking over my shoulder; WTI is now toppling into the $82-83 range. Yet, SCO is also falling, as is ERY, and reliably, TVIX is inside of $10 again (that product is useless).

What funniness!

I can’t say I blame anyone because the horizon is murky. So all products are being sold off together. Only cash is king today.

My expectation is that by the POMO meeting towards the end of June, policy makers will have already yielded some form of accommodative support to markets. However, it could come later. This is a big gamble, so having plenty of cash and feeling secure and confident about one’s book is critically important.

I was somewhat suspect of holding products like ETFs into today, because I figured they could sell off, much like last Friday. Being wary of the potential for intervention over the weekend, I sold SCO yesterday; missing out on big gains this morning.

However, that is the price of safety sometimes.

I’ve decided to hold ERY through the weekend – I’m going to trust that, if something big is announced this weekend, I’ll be able to get out with the herd on Monday. It’s a risk, but worst case, ERY opens down ~10% and it does 2-3% of damage to my portfolio.

At that point, I would theoretically deploy some of my – by then larger – cash position.

I yearn to buy more silver; but I cannot do so here. Lower; I need lower prices.

I’ll be preoccupied with some work for the remainder of the day. It’s my intention to stop back periodically and to finalize my strategy before the closing bell. If I do not get the chance, let me take this moment to wish you a fine weekend.

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The second mouse gets the cheese.

All that I warned you about is steadily coming to pass – it’s last year, all over again. Europe is cratering, and the result has been carnage to the euro. This in turn is propping the dollar, pushing it towards a breakout.

It has been a little over one year since I first came out, suggesting that cash was a strong position; coincidentally nailing the bottom of the channel, almost perfectly.

Manufacturing in Europe continues to crack and their economies (sans Germany) are folding left and right. The latest US numbers were horrible, as all benefits from the Capital Goods Tax Deduction and cyclical winter activity have now fully worn off, revealing a country (ironically) increasingly at the mercy of exports.

Commodities continue to be brutalized, as the fluidness provided by dollars overtakes any advantage of trying to hold oil, gas, or rocks. For the second time in two years, it looks like the crude oil markets will implode on themselves.

And, of course, debt and derivatives standing with notional values in the trillions of dollars must be serviced, putting a massive bid under the USD…

But despite appearing on the cusp of victory, once again, I am aware of my vulnerabilities.

I have been mercilessly taunting QE3 speculators, especially when the ever elusive “next round” failed to materialize, time after time after time. However, this is difficult to juggle, because I really do believe that there will be more quantitative easing, ultimately. My mocking QE3 hounds isn’t about QE3, so match as timing and responsive policy – I think this is a big Catch 22.

I don’t know if Bernanke will announce more loose policy when the FOMC meets on June 19-20 or not. I suppose that ultimately depends on how much damage those of you who were counting on free money sustain over the next several weeks.

But, whether or not QE3 is announced, I will be prepared for it.

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I’m almost obligated to get into this affair with Dimon & Co. However, I promise you I’ll save you the self-righteous lectures, which are so well versed and recorded at this point to fill a small history book or ten.

It’s not that I don’t agree with much of what’s being said. Or that I have anything against those of you who are saying it. More that, since you are all so on top of this, I don’t have to be.

Instead, let’s talk about something a little more practical.

Dimon mentioned that they have a $2 billion loss, presumably unrealized, over a 6 week period. We know that the position is composed largely of derivatives. So, we have a timeline, and we have a medium. But we are missing a quantity. That’s unfortunate, as it would be let us know how deep JPM is, and what they need to do or have happen in order to unwind it.

But hey, let’s just guess.

What do we know happened about 6 weeks ago? Well, looking at yields of major bonds, that was about when both Italian and Spanish 10 years reversed hard off their, up until then, descent from the ECB LTRO operation. We also know that buying those bonds, betting on further depressed yields was a VERY popular trade amongst the financier elite. Look at Corzine – who has deep ties to Dimon.

In fact, JPM was clearing Corzine’s trades in the MFGlobal affair, if I recall, so some of this position could even be a legacy. That would be fascinating. But that is WILD speculation on my part, so let’s get back on track…

It seems reasonable to guess that the culprit of this blow up is European debt. It was a popular target. The timeline’s right. So, assuming it is EU debt (specifically Spanish and Italian bonds), what does that tell us?

Well, Italian 10 years are currently trading up 50 basis points. Spanish 10 years are trading up 100 basis points. .5% and 1% – those are our defining numbers.

Rather than trying to blend them, let’s just assume that the entire position was either all Spanish 10 years, or all Italian 10 years, with the truth being somewhere in the middle.

Now, I know from looking them up that CDS coverage on an Italian 10 year will run you about $450 to insure a $10,000 notional bond. That’s a 1% profit spread for the bond holder. And I know that CDS coverage on a Spanish 10 year will run you about $500 – again a 1% profit spread for the bond holder.

So, if JPM had a prop position in Italian or Spanish CDS betting bonds were going to swing the other way, how big would it have to be to generate a $2 billion loss?

Well, for Spanish debt, which have rallied 1%, the move in CDS, assuming that same 1% profit spread for bond holders, would be from about $400 for coverage, to the current $500. That’s a 25% loss on any uncovered position JPM might be holding.

For Italian debt, which have rallied .5%, the move in CDS, assuming that same 1% profit spread for bond holders, would be from about $400 to $450. That’s a 12.5% loss on any uncovered position.

Now, in order to actually determine the size of the position, remember that their loss will be equal to the amount they’re losing on the mark-to-market aspect of the position, minus any positive carry trade they get up front for the CDS. The quickest way to do this is a solver method. I’m not going to bore you. I did it on the side.

For Spanish debt, the position would only have to be about $9.5 billion to generate these size losses. But, for Italian debt, the position would have to be much bigger – probably $23-24 billion in CDS.

So, I feel I can say pretty confidently that JPM has a $10-25 billion uncovered position in CDS, betting on better yields for EU bonds.

Now, JPM probably doesn’t feel very comfortable right now. Between the limited number of sizable buyers of CDS and the idiotic moves that EU countries have been making to restrict the rights of CDS holders, plus the fact that everyone knows JPM has this big position, the odds that they manage to unwind this thing at current prices are nil.

So Dimon says he’s going to offset the losses (which could still grow significantly, especially if EU bonds keep getting hit) by realizing some $1billion or so gains from equity markets.

Well, markets (were) up 10% in the first quarter of this year. So if Dimon thinks he has $1 billion in gains, just swinging with a wide guess here, that’s about $10 billion in assets he thinks he’s going to be able to sell.

To put things into perspective, if Dimon somehow managed to get on the sell side of 1 out of every 2 trades of a still very liquid stock like AAPL, it would still take him more than three days and 18 million shares to offset things. Assuming he somehow didn’t also collapse the market, which over a 3 day period he most certainly would.

Should Dimon manage to sell 1 in 10 shares of average trades in AAPL, keeping with our little game, it would take him more than 2 weeks to offset this.

And, being more reasonable still, if Dimon can only sell 1 in 100 shares of the average trade volumes of AAPL without risking collapsing that particular market, then it would take him over 4 months, in terms of AAPL, to cover his ass on this.

And if things get worse for JPM, with current estimates the losses could get as high as $4 billion, then naturally JPM would have to unload even greater equity positions to offset that. The total amount of assets they would need to sell, (and there by the expected reasonable time line for doing so), could triple, or even quadruple.

I know that $10 billion, $20 billion, or even $40 billion does not sound like that much in this day of trillion dollar bailouts that we live in. However, each of these is equivalent to a fairly large hedge fund entering a full-blown margin liquidation.

So, in summary, I would guess there’s going to be a powerful put over this market for at least a few months. Firstly because they will definitely have to be selling stock directly, which will lead to lots of momentum stocks like AAPL breaking down and lots of future setups that traders favor getting disappointed as “the JPM put” is in effect.

And secondly because, from the standpoint of the CDS, there are only two ways for JPM to get out – they can buy back the CDS directly, or they can go short the corresponding bonds to close the position. Well, $10-25 billion in CDS would be covering $200-600 billion in euro bonds, wouldn’t it?

Even if JPM only tries to close out a tenth of that, that’s still between 2-6 weeks worth of funding for a Spain or an Italy. They’re having enough time trying to sell their own debt directly; imagine having to compete with short sales by JPM?

So, what I’m saying here is this. This is not an LTCM “holy hell, we just destroyed the world with $1 trillion notional exposure” kind of event. But it is serious, and it does come at a most inopportune time. Particularly should equity markets begin to sell off, JPM might actually start to sink European bond auctions scrambling to save itself. This could at worst spark the next LTRO round, or on a lesser level the need for a $50 billion or so injection from the ECB.

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Miraculously, the Fed did not change their tune at all…again. Nor did they speculate in any way, shape or form about enacting further easing anytime within the immediate vicinity of “now”.

Not that that will stop the rumors of further intervention in the slightest. It’s been quiet since the FOMC announcement, but I’ll give it another hour before the die hards are running back through the streets, throwing flaming garbage at people’s doorstep.

More importantly for me, oil corrected hard this morning and has been bouncing around a slight selloff, thanks to a mingling of two developments.

The first was all estimates of oil supplies getting lit up like a Kuwait field at the hands of Hussein, as a 4 million inventory build come through the line. That makes a 22 million barrel build of inventory in the last month.

The second is a report that Iran’s envoy is Moscow has been saying Iran would be willing to hit the brakes on the nuclear program to stop the EU from putting the embargo in place. With regards to this, I doubt it. I’m sure the envoy did say that, but the instant it comes time for the Iranian clerics to actually come to the table, they definitely will back out. They built a regime on appearing in a position of total power. How would that look, if “God’s servants” got forced into submission by “the evil ones”?

Still, there was never going to be a war with Iran. Maybe at best a decimation of Iran masquerading as a war, Iraq and Afghanistan style. One where America loses a few thousand people, pisses away a few billion of borrowed money, and generally crushes their entire civilization. That’s not a secret, so the Iranians aren’t going to do shit, and we know it.

Basically, oil markets are moments (in market time, naturally) away from massive implosion. Risk premium from a supply disruption is far overpriced, and thanks to manufacturing slowing across the entire planet, our inventories continue to swell excessively.

When this realization finally dawns on the crowd, the kinds of estimates for oil prices being ventured by Goldman Sachs and Friends are going to be a distant joke. Of course, $GS will have unloaded plenty of their own stock on Gonzo by then.

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Are you intentionally deceiving yourselves, or do you really not understand what “Catch 22” means?

As I wait agitatedly for the coming “fireside chat with the Bearded One”, my head resting on the palms of my hands, I can feel myself slowly digging my thumbs into the side of my eyeballs. While this may sound uncomfortable, I assure you, it is much more relaxing than letting my eyes read the garbage being distributed through the internet.

How many times, people??

How many times are we going to play this stupid game? How many times do I get to listen to you declare confidently that the next round of quantitative easing is just around the corner, only to reach the corner and watch you crumble in disappointment, just to jump back up five minutes later and start the whole cycle over?

How many times can you be wrong?

Now, in light of three consecutive quarters of mistakenly calling for quantitative easing, the most vocal of the cheerleaders are trying to tell me that it doesn’t even matter if Bernanke ever announces QE3. Because he is definitely going to do more QE, so if he never announces QE, it doesn’t matter, because QE is coming…

“All that matters is the perception, Cain. PPPSHSHSHSHH. Don’t you know that?”

Let me tell you when QE3 is going to be announced…about two months after your finances have been so thoroughly shredded from retarded commodity investments that your broker’s banker is calling THEM for margin settlements.

Take a look at M1, and tell me what about this was not already thoroughly known:

Where is all the “mysterious policy response” that I’ve been hearing of? There doesn’t seem to be much responsive policy at all in these numbers; no Federal Reserve fighting to keep the dollar low.

Why would they need to? Bernanke sneezes and people short Benjamin Franklin.

It seems like everything coming out of the Fed has been pretty much thoroughly anticipated. You know where unanticipated policy has been coming from? Europe. Japan. The US is a bedrock next to everywhere else.

My point to this is simple; if you keep expecting QE3, you’re never going to get QE3. Bernanke isn’t going to devalue the currency with this much hot money pressing equities, commodities, bonds, etc.

Come on! The man did attend a prestigious school, and has done this his entire life. This is not his first rodeo. He has thought about all of these things considerably. You and your two years of policy experience are not about to outsmart the man whose life has been dedicated to this endeavor.

Bernanke wants you thinking he’s going to print. That’s when you’re putting your neck on the line.

Let me tell you exactly what’s going to happen. Ben will let you talk your talk, and bet your wad. He’ll sit patiently and let you keep the wheels of capitalism turning for him; making horrible investments at lofty prices. There’s no need for him to worry about the capitalization of banks when markets can’t seem to get enough BAC and C and JPM…expecting that Ben is secretly worried about the capitalization of banks.

There’s no need for him to worry about the capitilization of our government when markets can’t seem to get enough government paper…expecting Ben is secretly worried about the capitalization of our government.

There’s no need for him to worry about mortgages when markets can’t get enough mortgages…betting Ben is going to fret and buy more mortgages.

And then, just when the majority of people are panicking that Ben isn’t coming, and selling off hard, and the threat of dwindling investment is ACTUALLY a concern (not just a specter of concern), that’s when Ben will come in to assist. But that’s the bitch of it all, isn’t it?

In order for the mindset of the day to triumph, it first has to lose. Big.

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Here’s what I don’t get about the QE Infinity expectations:

Bernanke has a goal to keep people investing in job creation and taking risks, to keep the economy going.  The opposite to this effect is a rush to safety that causes investment in economic activity to be replaced by hoarding metals and soap boxes in secretive compartments under one’s floor boards.

Okay.

But if you’re already investing, expecting QE, what incentive does Bernanke have to actually ease?  Will he get you more than completely long?  Greater than totally leveraged, without cash?

(Right now, I imagine some of you smacking your head, cacophonously blurting “bad thought, bad thought”)

That would mean that those stocks you’ve been loading up on for 3 of the last 6 months really are just overpriced investments in the middle of a slowing growth cycle.

I’m not saying Bernanke won’t be forced to devalue the dollar more.  I just don’t understand how you intend to survive the process.

Please enlighten me.

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