Green Monday

Green Monday was a novel written by Michael Thomas and published in June 1980. I remember reading it as a young trader at the CBOE in Chicago. While I don't think it was ever a NY Times bestseller, Green Monday was still entertaining and even thought provoking. This fictional story was mostly about oil and manipulation in the financial markets. OPEC was at the height of its power at that time (1980), financial markets were reeling under the strain of sharply higher energy prices, near record interest rates, out of control inflation, and restrictive monetary policies. The global economies were mostly in recession and there was almost no light at the end of the tunnel. As I recall, Green Monday is about a few key oil sheiks conspiring to actually LOWER oil prices to ward off the potential threat of military action against the OPEC countries by western energy consuming nations. The plot thickens when these same sheiks attempt to personally profit from this action by accumulating massive amounts of U.S. equities ahead of the actual announcement that crude oil prices will be dramatically lowered. They quietly accumulate huge stock positions in almost every liquid exchange listed company and then make billions when on Green Monday the announcement of lower oil prices is made.When the actual announcement is made, energy-related share prices went down at first in the book, but then joined in a record bull run with most other companies.

While the novel Green Monday doesn't sound like much of a page-turner, I think the story line may actually be relevant to the current economic environment, where sharply lower oil prices are creating havoc (and opportunity) in the financial markets. 

Almost every headline was ugly today in the financial media. European banks are collapsing, demand for credit default swaps is soaring, gold and silver are safe havens again, the once almighty and invincible U.S. Dollar is under significant pressure in foreign exchange dealings, and global stock prices are in full retreat.

So why are buy signals suddenly being triggered by my computer trading software in major U.S. stock market averages? Maybe we shouldn't ask why! Maybe we should just BUY!!

However, if we do ask "why", then maybe the answer is that sharply lower energy prices will soon lead to a dramatic and unprecedented wealth transfer from energy producing nations to energy consuming nations. And maybe, just maybe, real economic growth and prosperity will finally be generated on a global basis!

Bottom line: I think it's time to buy U.S. stocks again! The next big swing in equity prices is probably to the upside. The end of the great correction of the last few months is probably close at hand. I even think that today's intra-day price lows could represent a tradable bottom, and they might even represent THE BOTTOM!

S&P 500 Index Weekly Chart with Computer-generated Buy & Sell Signals

A Portolio Manager's Greatest Fear

Answer: The overnight, out-of-the-blue, outrageous, and shocking Corporate Announcement in your largest stock position!

In the 38 years that I have been trading, investing, and managing money, I've seen my fair share of shocking corporate announcements. And I have been on the wrong side of a few of them, but I fortunately have managed to dodge most of them. When I was younger I employed the less-than-optimal trading strategy of "placing all your eggs in one basket, and then watch the basket very carefully". Lessons of time and money have prevailed and I now "diversify" a little more, although "overweight" situations are probably still more common than they should be in my current investment approach (i.e. gold stocks).

On Thursday morning, February 4th, I woke up early as I usually do and reviewed all my positions for potential overnight activity. I remember feeling great with my massively "overweight" allocation in precious metals mining shares, as everyone one of them had posted 25% to 50% gains since I bought them in mid-January 2016. In my head I was thinking "Master of the Universe" after what looked like a brilliant call on the U.S. Dollar (down) and Gold (up) earlier this year (in this column and with my portfolios). To capitalize on my bullish view on gold and silver stocks, I could have taken the easy and safe route with purchases of the most popular ETFs (GDX, GDXJ, and SIL), but I reached deep into my "master of the universe" stock picking talent and bought 6 of my favorite names in this hated sector. Those 6 names were AG, CDE, EXK, IAG, SSRI. and PPP. Yes, PPP !?

After the close late Wednesday, February 3rd, Primero Mining Corp. (symbol PPP) announced that its Mexican subsidiary, Primero Empresa Minerva had received a legal claim from the Mexican tax authorities (better know as SAT) seeking to nullify the Advance Pricing Agreement (better know as the APA) issued by the SAT to Primero Mining Corp in 2012. This APA confirmed Primero's basis for paying taxes on realized silver prices for the years 2010 to 2014. Mexico's SAT did not identify any different basis for Primero to pay its taxes, but Primero's management and its legal counsel indicated to investors that they strongly believe this latest "legal claim" by Mexico is "without merit" (and they will fight it "vigorously").

Of course, even though I held 6 different names in my precious metals portfolio, Primero was my largest allocation. Given that Gold and Silver prices were up sharply again Thursday morning (in a strong uptrend), I remember thinking early Thursday morning that PPP may actually open unchanged or just slightly lower, but the market would then quickly shrug off this negative corporate "tidbit", especially given that the Mexican government was looking at increased taxes on Primero's silver sales, and PPP is mostly focused on Gold mining. Primero traded as high as $2.73/share intra-day on Wednesday, February 3rd, but closed suspiciously weak that day at $2.63/share. After the overnight negative news, PPP opened at $2.10/share and promptly went south to close out the week at $1.62/share which was down 41% from Wednesday's intra-day high. I consider myself fortunate to sell my billion shares of PPP at $2.04/share. And when I was selling my entire stake in PPP, paranoia began to take hold and I started to think that Mexico would soon go after every mining company to nullify ALL its ATA agreements in a semi-Nationalist attempt to secure (steal) much-needed additional revenue for this impoverished State. Of course, all my mining stocks have Mexican properties, so by Thursday's close I had blasted out of every mining stock I own. Most gold/silver mining stock portfolios posted gains of at least 5% on Thursday, February 4th, but my 6-stock portfolio actually lost 3% that day. We can all think of worse war stories (i.e. October 1987, May 2010), but it still hurt none-the-less. "Master of the Universe"? Perhaps not yet!

Bottom Line: 

1. While I don't have any horses in the race right now, I still think Gold/Silver mining shares will be among the big winners of 2016 (assuming they aren't nationalized).

2. My computer trading system has triggered some interesting buy signals in the U.S. stock market (see charts below). I am not sure right now if I will attempt to participate on the long side, but there is no chance that I will be shorting the S&P 500, the Russell 2000, or the Nasdaq Composite anytime soon.

3. While central banks across the globe look like they are no longer omnipotent, I strongly suspect that they have a few more tricks up their sleeves to boost financial assets prices in attempt stimulate economic growth.

Primero Mining (PPP) Daily Chart with 200-Day Moving Average Line

Phildelphia Gold/Silver Mining Stock Index (XAU) Monthly Chart

Russell 2000 Weekly Chart with Computer-generated Buy & Sell Signals and 200-week MA

S&P 500 Stock Index Weekly Chart with Computer-generated Buy & Sell Signals

NY Composite Index Weekly Chart with Computer-generated Buy & Sell Signals