Markets turn on false Fed taper expectations

Overview and Observation:

The continuing saga of the "Bitcoin" where no intrinsic value can be determined and where prices have skyrocketed leads me to reminisce about my 1982 trip to Kuwait. I was there at the request of a Shiek member of the Royal Family to establish a branch office for a U.S. Brokerage firm, Jesup & Lamont. Unfortunately the timing was wrong since it was exactly at the time of the Souk Al-Manakh stock market crash.

The market had been housed in an air-conditioned parking garage that had been for trading camels. It dealt in highly speculative and unregulated non-Kuwaiti companies. Its capitalization was exceeded only by that of the U.S. and Japan and higher than that of Great Britain and France. Unfortunately the companies were mostly "shell creations" and the investors were buying stock with post-dated checks as well. The crash occurred after a Passport Office employee presented a postdated check that bounced. That prompted the crash, which by September of 1982 was met with the Kuwaiti Ministry of Finance closing the exchange as the outstanding "worthless checks" totaled the equivalent of $94 billion from 6,000 investors." Only Kuwaiti’s were made whole while outsiders had to "bite the bullet." That, in turn with the Iraq, Iranian war, which reduced oil revenues, pushed the entire Gulf region into recession. Needless to say I spent nearly a week there with Hotel Meridien workers who were either Palestinian or Syrian, no liquor or "pork products" (the bacon was beef) and lunching on lamb hanging on a chain over a spit surrounded by flies….. The best part of the trip was the flight back on Lufthansa to London and then the Concord to New York.

Getting back to the current "Bitcoin" phenomena, I see another "crisis" developing and China, in its recent statement disallowing the use of bitcoins, agrees. I am curious to see how the value of the Bitcoin is established since a "brass Coin" though limited in outstanding number, is still a brass coin. The decision by China to disallow its banks from dealing in "bitcoins" was to some extent due to Former U.S. Federal Reserve Chairman Alan Greenspan calling the rapid rise in "value" a "bubble." The ban was imposed since bitcoins are not backed by any country or "central authority" according to the Chinese notice. Now for some actual information……

Interest Rates:

The March 30-year Treasury bond contact (CBOT:ZBH14) closed at 129 09/32nds, up 10/32nds on Friday recovering from the early session selloff that saw prices decline to a low of 128 01/32nds. The stronger than expected U.S. jobs report prompted the selling as the data showed the U.S. added 203,000 jobs in November and the unemployment rate declining from 7.3 to 7% flat. The concern is that the Federal Reserve may consider "tapering" its bond buying program at its Dec. 17-18 policy meeting. The data on Friday also showed consumer confidence increased to its highest level in five months with the University of Michigan/Thomson Reuters index rising to 82.5 in December from the final November reading of 75.1. Economist expectations called for an increase to 76.5. The lower unemployment rate was also a reflection of the return of federal workers after the end of the October government shutdown. We do not feel the U.S. Federal Reserve would use one "questionable" report to modify its current stimulus program but one Fed Governor, Plosser, suggested it may be time to "gracefully exit" the QE3 program and that is of concern to both bond and equity traders. We maintain our "neutral" position and expect the current range to remain intact. Analysts consider any change in policy a 50/50 chance. On any rally in bonds we would sell calls and on any sharp decline sell puts establishing a "strangle" spread.

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