False rally - but short squeeze could pressure our puts

I bought DUG and remained on the sidelines because I saw too much hyperbolic behavior in commodities.
The last few days pullback was exactly the thing I wanted to see. It was exaggerated by program selling - technical moves and not fundamentals.

So I will be buying some calls this morning.

In the meantime, my take on the rally yesterday is this:
1. The Fed announced that it will keep the money pumps flowing
This cuts in several ways. In March they announced that the loans to banks and investment companies would be short term - ending in September. Now they see the loans continuing through 2009. That reinforces the banks significantly and, in the short term, removes some pressure to repay loans.
But the important point to me is that the Fed clearly sees that the situation is much, much worse than they imagined. And that they see it persisting another 18 months.

2. Banks and Lenders are too big to fail
The Fed is waiving laws that require Fannie Mae and Freddie Mac to be solvent. In other words, these lenders are insolvent - they lent more money than they have. The law requires that these companies must immediately raise capital - and they need ~$100B combined. Obviously they can't, which would force them into bankruptcy.
So the Fed has given them a hall pass.
That removes immediate pressure, but it doesn't solve the downstream mortgage mess. FNM and Freddie are the largest lenders in the US. This state of affairs will affect their ability to lend as well as the expectations in the markets that buy US mortgages.
Given the obvious risk associated with mortgages, I expect rates to rise even more to reflect a bigger risk premium. I predict that, by the end of the year, if the Fed raises rates, the Jumbo loan rates will be 8%+.

Get ready to buy today