Thursday, February 18, 2010

More on Fed Discount Rate Hike - Effect on OpEx

So, just to show how "independent" the Federal Reserve is, the board of governors of the Federal Reserve raised the discount rate by 0.25% to 0.75%.

In front of the Option Expiration Day.

Why couldn't they wait until Friday's market close? I trade, so I totally share the sentiment of Karl Denninger in his post:

Fed Changes Terms In Front of OpEx Again
(2/18/2010 The Market Ticker)

[Here are the paragraphs that Denninger 'interprets' the Fed's statement in italic.]

We just made sure that anyone who was long into Options Expiration - which is tomorrow - especially on index options which cannot be hedged or traded now, is screwed. Just like in August of 2007 when we did the opposite. [Note: The announcement was made at 4:30 PM EST. The stock market closes at 4:00 PM, and options don't trade after hours.]

Of course we couldn't wait until Friday after the close when it wouldn't hose people - instead, we timed this for maximum pain.

We gave no warning either. Ha ha. You did wear your titanium plate in your pants, right?

[Referring to the discount rate hike which is effective tomorrow,] That's "right now", in case you didn't figure it out yet.

This is something we said we'd do, but heh, you gotta love our timing. We make a practice of burning people - a few years ago it was the shorts (who were right), this time it's the longs (who were also right - well up until this evening!

Denninger feels that "this release was intentionally timed to hurt people, just as was the August 2007 one". He continues:

"Bernanke and his pals ought to be run out of town on a rail for this sort of repeated abuse. They seem to think that the markets are their plaything, and all they're doing is destroying confidence with each and every move of this sort.

"It is not what you do, it is how you do it, and this sort of thing is just yet another reason why The Fed must be audited. The timing on this is too damn suspicious - never mind that someone sold a metric ton of SPY right in front of the announcement - literally by seconds, 2 million shares were unloaded."

He has an intraday chart of SPY in the post linked above.

The Fed is "independent" - does that mean it is free to openly mess with the market mechanism like this? I guess so.

I have very inadequate hedge against the market crash that some say will come tomorrow, and I couldn't unload options because options don't trade after hours. In other words, I am one of those who will potentially be "screwed", come tomorrow morning.

Thank you Ben and the hawks at the Fed, including this guy with excellent connections all over who wrote a peculiar op-ed piece on Wall Street journal back in September 2009 declaring the noble and courageous intent of the Fed to do what it thinks is right, regardless of the condition of the financial markets or the general economy.

Normalization? What's there to normalize? The financial markets and the economy are anything but "normal".

May you all rot in hell where the economy is forever trapped in a deflationary spiral no matter what they do. (I guess they could go to Japan right now instead.) Or I could wish them an inflationary spiral no matter what they do to rein in.

Or better yet, I wish them an economy that simply ignores whatever they do. They can squawk all they want, and it won't make a bit of difference.


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