From here, I'm going to start posting correlations of varying instruments. For short term trading, it is important to know these things and how they change. These are rolling 30 day averages on daily correlations in changes of close. If you have any particular instruments you are interested in, let me know and I'll post them. If you aren't familiar with correlation, a value of 1 is 100% positive correlation and -1 is 100% negative correlation. A value of 0 means the instruments' daily motions have little to do with each other. Let's start today with S&P and Gold:

For the first time in recent years, universal dollar weakness, including weakness versus the Yen, is being confirmed by a little mini-flight on long maturity treasuries. This is worrisome as it obviously does not bode well for treasury bulls, and ultimately the Fed is placed into a little tighter corner than it has had to deal with recently. Either it turns the on faucet to increase the rate of debt monetization (as latest minutes reveal) via outright treasury purchases, accelerating dollar overshoot, or it shows restraint, letting the free market decide where the long term yield shall be. My flip flop between being a treasury bull and assumption of the more consensus reflationary scenario has come full circle.

Right now, in the most simplified manner, the Fed is pursuing a dual-pronged attack of quantitative easing. The first being through Agency MBS purchases - $1250B committed, $450B likely used up so far; the second being outright treasury buying.

There are long term worries that when inflation does come, the Fed will be in a difficult position, unable to unwind its asset portfolio, as most of it will be held in agency MBS and other somewhat obscure debt (read: illiquid versus treasuries). An investor looking for protection has an easy choice to make, despite it being a relatively consensus view: buy assets that will hold value as global money supplies skyrocket.

Stepping away from the immediately obvious deficit of shareholder equity in these insolvent bank institutions, it is clear two things are happening independent of the status of bank valuation (yet perpetuating the feedback loop of insolvency): credit is tight, and asset values are thus forced down.

OK. That's my "common view." Now for an interesting trade - the opposite approach. Treasuries might offer a good value here. With the 30 year Mar09 future trading in the high 126's, I can't help but perceive the following factors being supportive in the near term, contrary to my previous view:

To all the Op-Ed pieces that have been written on President Barack Obama, I do not think I could add more commentary as to how one man will turn things around. He has instilled a sense of hope and a level of confidence not only to Wall Street but more importantly to Main Street. Hope and confidence are crucial to the eventual reversal of our current financial and economic woes, because they lead to the re-establishment of trust that is essential to the restoration of the global economy.

1) Long treasury notes and bonds (10-30 years): China is providing $586B in fiscal stimulus over the next two years. This equates to at least their current buying rate of treasuries. If oil prices stay this low, this is less money to come back to purchase our debt. Next, when TARP money stops coming to support the long end of the market, who else will buy?

Release Date: October 6, 2008

For release at 8:15 a.m. EDT

To My Local Representative,

click to enlarge

Finally, to further support the availability of mortgage financing for millions of Americans, Treasury is initiating a temporary program to purchase GSE MBS. During this ongoing housing correction, the GSE portfolios have been constrained, both by their own capital situation and by regulatory efforts to address systemic risk. As the GSEs have grappled with their difficulties, we've seen mortgage rate spreads to Treasuries widen, making mortgages less affordable for homebuyers. While the GSEs are expected to moderately increase the size of their portfolios over the next 15 months through prudent mortgage purchases, complementary government efforts can aid mortgage affordability. Treasury will begin this new program later this month, investing in new GSE MBS. Additional purchases will be made as deemed appropriate. Given that Treasury can hold these securities to maturity, the spreads between Treasury issuances and GSE MBS indicate that there is no reason to expect taxpayer losses from this program, and, in fact, it could produce gains. This program will also expire with the Treasury's temporary authorities in December 2009.