Divine Rebound

If I had a dime last week for every podcaster/market guru/tea-leaf-reader that used the term “trapped” in describing the Fed’s current predicament, I would be a great deal more liquid than I am today. It seems that every time that a podcaster with the most internet views comes out with a new narrative, eight-hundred clones descend upon the YouTube galaxy and that narrative suddenly goes viral. Buzzwords like “pivot”, “trapped”, “cornered” and “cooked” are conveniently thrown into the mix with the S&P a mere 6.6% off the January highs and not yet even in “correction” mode. Astonishingly, it seems that the degree of muscle memory expecting new highs each and every month has expanded greatly in recent months giving rise to my own personal wonderment of how the kiddies will react when this Papa Bear Market finally growls and slashes its way into the cabin of perpetual profits. In fact, I predict that the unemployment rate will drop like a rock as soon as the NASDAQ crashes another 20% forcing all of these Millennials and GenExers out of their parents’ basement and back into the labour force as they discover that day-trading earnings-vacant tech stocks is actually not such a good gig.

For me, there were three major events that are worth keyboard-thumping and they were:

• Oil prices above USD $90/bbl.
• The perfect, to the penny, 61.8% Fibonacci retracement from the January lows before rolling over last Wednesday, and
• The U.S. 10-year yield above 1.90%

There were other interesting developments that did their best to confound and confuse but what really floored me was a political event in Canada’s capital city where an army of truckers decided to pay homage to their Prime Minister who preferred the safety and solitude of his Parliament Hill bunker rather than face a pack of attitudinally-challenged Albertans which was actually a pretty good idea. I tried to imagine the outcome if a bunch of Maritimers showed up, preferably Newfoundlanders, sipping on a few drams of screech in need of a “conversation” with their cowering “fearless leader”. Having laced on the blades back in the day against more than a few Maritimers, Mr. Trudeau would not want an encounter of that ferocity. 

It seems the RCMP have ramped up their security protocol to avoid having any incidental (or intended) discourse with the invading truckers, but then again, Justin is well-skilled in the use of disguises to avoid being recognized so perhaps I am overreacting. I am sure that with a tin of shoe polish and a Soul Train wig, he could avoid the throngs with nary a hitch.

Having covered the bulk of my shorts and liquidated all volatility on Monday, January 24th into what I brilliantly – er luckily – deemed as a mini-capitulation low, it was not all that difficult to call with RSI readings for the DOW, S&P, and NASDAQ all plunging into the low 20’s and the CNBC anchors all wandering around like deer in the headlights. Now, however, comes the really hard part. As I really do not enjoy being unhedged into a Fed-tightening cycle, I have to re-establish my volatility positions and try to manage a growing short position in crude oil and its ETF cousins.

One of my good friends sent me a list of reasons why shorting oil was a dumb move which included

• Deep freeze in Texas with shut-in supply
• Houthis attacking the UAE
• Ukraine tensions
• Cyber attack in EU oil terminals, and
• OPEC refusal to increase production

My reply was really simple: Those reasons are precisely why oil is up from $62 in early December to $92 today. Furthermore, every time I turn on a financial news station, the anchors are all forecasting $100 oil or at the least quoting some other “expert” with the same opinion. It seems that every oil bear has been run over by the “escalating inflation” narrative and while that might have worked in free market regimes, we know that $70/bbl. oil is just one phone call from the NSA to the Working Group on Capital Markets who them zap instructions to 33 Liberty St. after which the NY Fed and its battery of traders go to work. We have seen it in stocks and in gold and silver and in Libor and since oil is Russia’s greatest natural resource (and Putin’s private and very personal ATM), oil prices in the $90’s are like gold above $2,000 and silver above $30. All represent “a clear and present danger” to the national security of the United States.

Energy is the #1 input cost to manufacturing and transportation and host of other industries and therefore represents the #1 element of cost-push inflation because profit margins can only be maintained by passing on cost increases to the consumer by way of higher product prices. The Fed knows this and they also have the means and wherewithal to neutralize both Vlad the Impaler and inflationary expectations by taking oil right back down into the $60’s like they did last November.

The second item for discussion was the uncanny ability of the S&P 500 to rebound last week right up to the 61.8% Fibonacci Retracement Level at almost exactly 4,550 after which it gave back 50 quick points to close out the week at 4,500. “Like it had eyes” is the clutch putter’s refrain after draining a 12-footer on the 18th green and that is exactly what I thought of as I was replacing the last two tranches of my UVXY:US replacement position.

Now, it does not automatically follow that stocks will resume their downtrends next week but it sure warrants lightening up on scalps taken on around the Jan. 24th lows and replacing hedges lifted at the same time.

Not intending to sound like a broken record, but what investors have to understand is that “Buy the Dip” only works when the Fed chairman and his regional henchman are also “buying the dip”. Before they all got outed and had to resign for trading their p.a.’s like drunken sailors, you could mirror their uber-bullish trading biases and be virtually guaranteed to make money. Alas, thanks to the wonderment of full disclosure and transparency, they now are flat and those that are no longer employed by the Fed

are retired which means they are no longer “in the loop”. To be sure, Powell ordered Blackrock to dump his ETF’s so now he is flat looking for a re-entry point which naturally dovetails beautifully with his decision to withdraw all of the technical and sentimental conditions supportive of a “buy the dip” strategy.

One glance at the chart of 10-year Treasury Yields and one is immediately filled with wave after wave of cynicism as it was the time of greatest public scrutiny that the Feds were forced to dump stocks (or retire out of Dodge) that yields started to rise. That point back in August where Powell first told the world that he that he had forgotten how to spell the word “T-R-A-N-S-I-T-O-R-Y” was the precise moment, as world-famous card player Omar Sharif said, that “the cards turn for or against you” with the Fed Chairman signalling to the legions of member bank prop desks that the benevolent Fed was now doing its impression of Lon Chaney Jr. at a full-moon midnight and turning hairy and hostile and horrifically nasty for all that thought that “buy the dip” was an unalienable right of passage.

As for gold and silver and those disgusting miners, they could not muster up a sustained bid even if Pierre Lassonde, Rick Rule, and Peter Schiff decided to do a hat-and-cane vaudeville revue touting their “incredible value” with a song-and-dance act performed to the tune of “Happy Days are Here Again” accompanied by George Formby on the ukulele and Stormy Daniels on the flute. This entire sector is acting like it has been caught in the crosshairs of a deflationary wave that is just over the horizon and if it were not for oil’s impressive trajectory since December, it would probably explain a lot.

I have been “in the chair” (investing) for nigh on forty-five years and have never seen babies hurled out with bathwater as frivolously as is happening here in 2022. Whether a company trades at three times cash flow with a six percent yield is irrelevant; operating in a third world country means they should be thrown directly under a manure truck without passing “GO”. Make no mistake; gold and silver miners are dirt cheap but that does not mean they are “attractive” to the legions of generational mutants that have never made a plug nickel on anything that produces metal. They are delighted to own companies with tens of billions in market cap that sell stationary bicycles equipped with IPads for entertainment (and lap counting) or electric vehicle producers forced to recall half of their second-quarter production because their cars kill people. That is fine though because “old guys” like me “don’t get it” and you kiddies can continue to tell me that until the Papa Bear comes rumbling into the room and impolitely relieves you of your net worth at which point I would expect you will lobby the politicians for “emergency relief” because they did not tell you that stocks had a downside risk element. You are absolutely correct; I really do not (and will never) “get it”.

Disclaimer:

This letter makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents my views and replicates trades that I am making but nothing more than that. Always consult your registered advisor to assist you with your investments. I accept no liability for any loss arising from the use of the data contained on this letter. Options and junior mining stocks contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. One should be familiar with the risks involved in junior mining and options trading and we recommend consulting a financial adviser if you feel you do not understand the risks involved.

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