Extra! Extra! Read all about it! CIT credit company declares bankruptcy: the equity markets tried to sell off on this weekend news but as we write the SPs are already higher as this is one of the most anticipated bankruptcies ever. The bond holders are the ones who appear to be the most satisfied as the equity holders have been thrown under the bus, this includes the U.S. taxpayers who were involved in an earlier bailout. The dollar and the equity markets traded in the synchronious fashion on Friday—dollar up and equity down and commodities getting hit also. Interestingly, soymeal and cotton both rallied late to close higher on the day helping to make the case for what is good will be good whatever happens with the carry trade—again think and look at the action of Sugar earlier in the year. The sugar would break with the dollar rally but would come back by the end of the trading session; this is the type of action we will be watching in the coming days. Also it should be noted that the GOLD rallied off its lows even as the equities stayed pinned to the bottom. One of our key indicators is the gold/currency spreads so GOLD holding will be a key this week especially with the FOMC meeting being Tuesday and Wednesday–with a statement on Wednesday afternoon. Some pundits are expecting the FED to remove the “extended period” wording from the previous statement but we are very doubtful that it will happen. The removal of that wording should have little lasting effect as it may be done to placate the inflation hawks that are voting members of the FED board, but it will do little more than initially flatten the curve. While on the yield curve it is interesting to note that Geithner was on the Sunday talk shows discussing the need for banks to start taking on more risk by increasing their lending. Will someone please help this man buy a clue. One of the biggest commercial lenders declares bankruptcy this weekend and the Treasury secretary is telling banks to take on more lending risk?! At the same time, two of the most respected global investors, Wilbur Ross and George Soros, were giving speeches about the coming stress in the commercial mortgage loans and the collateralized loan portfolios  and Geithner wants the banks to take on more loans. Why would any banker want to take on unknown risk when they can simply surf the yield curve–borrow fed funds and use them to but treasuries–earn a solid return and have no risk–you do the math. If the government wants the yield curve surfing to end and unlock bank lending the curve will have to flatten but this will scare many in the administration who are intent to prevent another 1937 when the fed  moved too fast to remove the stimulus. Those who are fearful of this will be referred to the 37ers as they are the ones who are in ascendence as most fed people and administration officials are scared to death of early removal especially with unemployment so sticky on the high side. This is the new conundrum and is why we believe the U.S. will err on the side of staying very easy for much longer then some inflation hawks would prefer.

Trades that will be watched will be ones that have the renewed carry to them—-again consult the technicals as correction levels will be the entry levels we seek as the market is nervous and prone to wicked corrections as the theme is crowded—the best correction should come on the FOMC release if the language is framed to give the inflation hawks a bone. We will be attentive to that and would remind everyone to be aware of that possibility. The aussie is interesting, for their rate rise put them ahead of the curve and now everyone else is on a hold and wait—we know the Norwegians raised by a 1/4 of a point last week also but the Norge economy is less significant and their rates are already quite low relative to the strength of their economy—so we think that it is a symbolic gesture at best.