"Way Back When" is an expression that my
grandmother used to use in discussing London during WWII when she and her
family would congregate in the underground subway tunnels as soon as the air
raid sirens began to go off. I use the expression "way back when"
to refer to that point in time where market prices were determined by the
natural forces of "inputs" such as demand and supply and where
demand was actual orders for delivery and consumption (usage) and supply was
inventory stockpiled on freight cars or in warehouses.
These were the days before central bank computers could
mysteriously create synthetic inventory and sell it as if it was actually
present on those freight cars or in those warehouses; they were also the days
before the Working Group on Capital Markets created the infamous "Plunge
Protection Team" for the express purpose of preventing a 1987-style market
crash through the purchase of S&P futures (synthetic stocks). Never again
will we see the margin clerks with their visors and round-rimmed glasses
toiling away into the wee hours of the morning with a calculator in hand
assessing just who was getting margin calls the next morning; computers do
that in real time today so that you don't have to wait until after dinner to
find out if you are insolvent or not.
Furthermore, now that the Price Managers can play Space
Invaders on their Bloomberg Terminals, trading gold and stock futures with
zero personal liability and never a margin call, the capital markets around
the globe have been totally corrupted by such a degree of moral hazard that
all those bleeps and beeps and buzzers going off are not the sound of an RPG
gamer losing a "life" but the sound of a gold producer laying off
staff or a bank calling in a credit line. Market behavior is now creating
outcomes that have no bearing on the inputs of demand and supply but rather
on "policy," and every time a politician opens his/her mouth or
pens an Op-Ed piece, pattern-recognition algorithms explode out of the gate
sending buy and sell signals after analyzing multiple word clouds to
high-frequency trading terminals creating untold havoc on prices and in
record time.
It is in this manner of price response that incongruities
arise, throwing valuations completely out of whack. You analyze a stock or
commodity and get a realistic handle on historical demand versus supply, you
observe technical price patterns, and then you come to an investment
decision. You make the trade and within hours, you are under water and within
days you are stopped out at a loss because "Mario Draghi was seen in a
restaurant with Angela Merkel eating lobster." In my opinion, when markets
have been relegated to total reliance on the "optics" of a trade
(momentum and volume) versus the economic fundamentals of the trade (supply
and demand), it leaves markets open to interventions that leave an indelible
mark on the integrity of markets. When markets lose integrity, they lose
customers and when they lose customers, they die. Such has been the case in
precious metals largely since 2009, and that is what I fear is coming for
stocks and bonds in the near future.
The big news this week revolves around the flapping gums
of the new POTUS and how he is continuing to cause disruptions in the
narrative focusing on his ability to create jobs, promote growth and limit
immigration. The level of vitriol in the Washington landscape now threatens
to disconnect the power cords of the political and legislative juggernaut and
there is no more obvious an indication of this brewing turmoil than in the
VIX (S&P 500 Volatility Index), which has suddenly spiked up from under
10 to 12.03 since the weekend. Looking at the COT report for VIX futures, we
are witnessing the largest non-Commercial speculator short position in the
history of VIX futures dating back to 2007. It has been well documented that
large Speculator positions at levels beyond the norm in most markets have resulted
in reversals and I use as an example the record shorts seen in Crimex Gold in
December 2015 held by non-Commercial Large Specs. Accordingly, I am opening a
long position in the UVXY (ProShares Ultra VIX Short-Term Futures) March $25
calls for $4.50; the number one trading rule for these is to hold them for a
maximum of 48 hours and if they are not "onside" by the close on
the second day of trading, you pitch them overboard like a dead seagull. If
the VIX catches a bid, it will advance through 15 by the end of the week and
carry the UVXY through $30.
As for gold, remember that "big, ugly, red
candle" from last Friday? I told you on the weekend that traders for the
bullion bank behemoths will purposely paint the tape on a Friday just to tilt
the Weekly Chart over the edge, and any and all monitors of the weekly charts
would construe it as "black bearish" and exit positions. Well, have
a look at how things have played out since the Friday close by looking at the
chart below.
The $20 advance of the late lows of last week has now got
everybody trapped either "out" or "short" going into the
FOMC minutes on Wednesday, so to the extent that I am constantly looking for
clues that would serve to refute my strategy, look no further than the silver
market where we enjoyed a 2.47% advance today versus 1.37% for gold. When
silver outperforms gold, it is like watching Fido crush the marrow out of a
pork bone while staring at me menacingly daring me to try to take it from
him. Silver is my resolute confirmation that I am directionally correct along
with the HUI's (NYSE Arca Gold BUGS Index) 2.93% move as further icing on the
cake. That "big, ugly, red candle" chirped about all weekend was
thus far a glorious fake-out and one that has the shorts' heads spinning as
they try to figure out why there was no follow through from Friday. The
shorts are close to scrambling now as we have moved through option
expiration, so the table is set for gold, silver and the miners.
Speaking of the miners, the GDXJ (VanEck Vectors Junior Gold
Miners ETF) calls purchased on Friday at $2.45 were pitched overboard on the
Monday opening at $3.30 and bought back at 15:55 EST just before the bell at
$2.65. At 9:40 this morning, I pitched them as well at $3.30 and waited all
day for the dip, which failed to materialize leaving me agitated, cranky and
hard-to-get-along-with here on the last day of January and the 31st day of my
newly found Jack Daniels Sabbatical, which has me feeling physically
wonderful, psychologically strong, and spiritually empowered except for the
screaming nightmares that have me clinging to the ceiling by my fingernails
while escaping the clutches of Zombie margin clerks closely resembling
Phyllis Diller�Rosie O'Donnell clones.
I sense that the all-too-wondrous complacency brought
about by muted performances by the VIX and the precious metals in the month
of January is about to undergo a stark transformation due to a
reconfiguration of market responses to DJT's policies and tweets. This
populist agenda that has, as its primary objective, him actually implementing
those campaign promises for his electoral loyalists, which will transpire as
a legion of heroin addicts (liberal Democrats) go through an agonizing
withdrawal all at the same time after eight years of free injections. The
poor Donald has to worry not only about the elitist "machine" in
Washington finding a way to unseat him through political chicanery but also
his own constituents coming after him with torches and pitchforks if he veers
off task for as much as a smoke break.
Alas, this mega-billionaire narcissist is garnering my
admiration not so much for banning immigrants from known terrorist-incubating
countries but more so for sticking it to the status-quo-loving globalist
elites who are happy with their private-school kids managing the "Home
Office" by demanding that those exported jobs be returned and interest
deductions on their fourth and fifth mansions be eliminated. This Trump
character is at the front of the First Armored Division, medals jangling, gun
over his shoulder, leading his soldiers into battle and apparently willing to
take the first bullet. As alarming as that might be to the Starbucks
latte-sipping, Birkenstock-sandal-wearing, iPhone-obsessed liberal youth of
today, it is serious "dancin' music" to the Joe-Bobs of the world
who are barreling down the highway on the way to DC, shotgun in tow,
Confederate flag a-wavin' in the wind and F150 pick-up full to the brim with
premium beer and all-too-ready to reclaim the "America of my
youth." If only this new invigoration of the American Dream could be
reflected in the abstinence of intervention and criminality in the gold and
silver arena, it would truly make my day and I would forgive the Donald for
the very minor indiscretion of telling us quite graphically how to deal with
women.
