Everyone is Talking Their Own Book

The market is an amazing creature.  It’s both always right and never right at the same time.   We have the most intelligent minds in the world analyzing all of the data available to us at every given second, so they can make the best investment choices.  These people should be working at NASA, but Goldman and Blackrock pay way more.  From the “always right” standpoint, at any given second or minute, the market is pricing in everything we know and everything we can logically anticipate with regards to every data piece possible.  As a whole, it is always right about what it can foresee at that given moment.  It is always wrong though, because the market makes emotional swings both higher and lower.  I think looking back now, we can all conclude the highs in the market at the beginning of this year were, for lack of a better term, bullshit.  The part where the market is always wrong can only be seen while looking back.  For example, in 2001, the S&P topped at about 1500, then declined 45% to about 800.  In 2008, the S&P topped again at 1500, then sharply declined again, 45% to 800 and stayed there for a while.  At the absolute peak of panic, it dropped quickly to 666, losing about 2/3 of its value from the high then rebounded to 800 and ultimately made it back to 1000 within about a year.  Looking back, we can conclude that further drop to 666, was a panic induced overreaction.  But this was the biggest financial crisis in 70 years, over reaction was warranted to some extent.  But then it rebounded quickly and was headed higher.  The markets quick overreaction was “wrong”.  But it was “right” for pricing in the severity of the panic, which was unprecedented up until now.  These situations are the panics you must take advantage of buying in to.

On Thursday we posted 6.6 million more jobless claims, that’s 10 million in 2 weeks.  Wednesday, ADP set the expectation by concluding that 27k people were unemployed as of March.  Friday, the BLS reported a loss of 700k.  The market barely budged.  It somehow found the perfect balance between the complete panic overreaction everyone was scratching their heads about weeks ago, and the ability to analyze the data it had available at the time, better than any model you or I or even the CDC or Federal Government could conclude about the effects of this virus on the economy.  (Or at least better than what they were willing to tell us).  We spent weeks, wondering why the market dropped 30% in such a short time, and here is the data showing us why.  But the market will likely be wrong again, pricing in swings that are too high or low at peak emotional points.  We must use these points to our advantage, to buy long term holdings, and cash in on hedges and trading positions.  It’s not in your interest to over analyze the “why”, you just need to be in a position where you can react accordingly.

Getting to the topic of this post, you also must realize that EVERYONE is talking their own book.  In other words, while they may be legitimately telling you their opinion and outlook, they have an agenda.  The Fed said they expect 1Q GDP to still be positive while 2Q GDP contracts 2.5%.  At the same time, the treasury secretary is telling congress there could be 30% unemployment.  These two things obviously do not mesh.  The Fed doesn’t want people to panic, however the Treasury Secretary very much NEEDED congress to panic into passing a bailout bill as quickly as possible, while thinking about it as little as possible.   Last week Goldman put out there GDP expectations.  It calls for a 34% contraction in GDP in the 2Q.  That is massive on a scale we have never seen before.  But Goldman wants you to panic, so they can snatch up your assets.  No matter who it is, they have an agenda; they are trying to sell you on something.  I have an agenda.  I think I am right about my analysis of this situation.  I am buying accordingly and writing these posts to share my thoughts.  Ultimately, if I am right, and people think I am right, they will buy the same things I am holding, pushing the prices higher on my own assets.  My exposure here is pretty small, so I doubt if everyone reading bought everything that I own and advise, it would make any difference.  Really, I just want to take my knowledge of markets and help people survive in an environment that I see as a slow killer of the entire middle class.  If I am accurate about what I say and gain respect and clout for it, that is great for my career as an analyst, and I would be happy knowing I’ve helped people and been accurate about my analysis.  But large or small, everyone has some form of agenda, and it’s important that is recognized whenever you analyze anyone’s opinion.  (It’s usually not hard to figure out what people or organizations get out of the points they promote.  Just be conscious of it).

Getting to the markets, the SPX has stalled dead roughly around the 2636 area.  I was convinced we’d have a bigger move higher to 2700-2800, but it looks like this might be it.  This week I began shorting the SPX in VERY small amounts.  I had previously advised splitting the difference between outright shorts on the SPX and buying volatility as a hedge against the market and as a way to build a cash position to buy as things dropped.  I did just that myself but am seriously reconsidering my position in the VIX.  Volatility spiked weeks ago and has dropped a lot since then. I would have looked at this as a buying opportunity until someone proposed this idea:  If the market has bottomed and will head higher from here, the VIX is a sell.  If the market hasn’t bottomed and still heads lower, it is most likely we still have seen the peak of panic, and therefore VIX is likely to still headed lower even as stocks decline.  I can not argue with this logic.  It is more likely that even if the market drops greatly, we will not see the panic volatility we saw as this began, which largely could have been due to hedge fund short covering on the VIX that I spoke of a few weeks ago.  While I still own the VIX, I will be looking to sell next week and believe the best bet to play a further declining market here is to short the SPX outright in very small amounts, and to short the Russell 2000, (small cap index) which has been the worst performing index and will continue to get murdered as this goes on.  But stay vigilant.  Cruise ship stocks dived when they found out there was no bailout for them.  Oil stocks are up with Trump talking about a deal between the Saudis and Russia on production cuts, (that have yet to transpire).  Bailouts will continue to come.  This is far from that last stimulus, so be careful about what you’re betting against.  I wouldn’t recommend shorting any outright stock or industry.  Take the index as a whole as a trading position and buy that same index on the way down as a long-term asset.

Gold did just what I expected 1 week ago in my last posting.  We dropped to exactly 1575 and then bounced.  I am still hesitant about a liquidity problem that could harm the miners the most.  The GDX has been slipping a bit and is visibly showing lower highs on the rallies compared to the metal.  Silver also looks much weaker.  I believe the miners will show you the best profit ultimately, but for the purposes that most people look to gold for, the asset to buy that will perform in such a matter, is gold.  Not silver, not the miners.  If you are looking for the uncertainty hedge, the hedge against government, economic crisis, etc, that asset is gold only.  Everything else related has performed differently, and quite frankly, not as well.

I said last week I am looking for the GDX at about 22-20 range to begin buying, and I still think we get that range.  On the GDXJ I’d still look for 24-22.  The juniors have really gotten hit badly, but this is expected because many of them have much higher costs and are not situated as well financially.  But I believe it is soon time to start buying majors and juniors.  I would be hesitant with some, as mentioned before, for the long term I would focus on building a good position in royalty companies as a main gold investment position.  But at this stage, buying small amounts into declining silver and gold miners is a pretty good bet looking forward over the rest of this year.  Look up their balance sheets, do your own due diligence.  Find out who can weather the storm and whose debt will crush them.  Buying the GDXJ itself helps with the individual risk.  SSRM and PAAS are two strong silver miners that I think are good to begin buying on declines.  I also like AG.  I expect AG to gain 50% if you can get it under 6.  I want to see a little more decline in names like NEM and WPM and FNV.  RGLD and SAND have done very well from the panic levels I started buying them at and recommending them at and would love to buy more of both if we see it again.  I think 75-80 level is great for RGLD, and under 5 is a good deal for SAND.  I have liked and been a shareholder of FSM and EXK but I would be very careful about buying too much of these stocks.  They could face serious problems if silver does not move higher.  Likewise, CDE and HL are a bit of a gamble too.  If your fine with the gamble and the higher return, go for it, but just don’t bet the farm on these.

It’s Sunday night, futures open in 30 mins and the US is hitting 333k Covid-19 cases and nearly 10k deaths.  That’s 1.25m worldwide with nearly 70k deaths.  At this trajectory, we will see 1 million cases in the US in 9 more days.  NYC is still the epicenter, but it’s spreading into more rural areas that have not been taking it seriously.  They are going to prolong this for everyone, and it will drastically affect the economy.  I think we will soon see mandatory orders to not leave home.  There’s a good chance we will have to have “permission slips” to travel in the near future.  I don’t think this is paranoia, I think this is just the result of a devastating pandemic, that continues to get worse while we are seeing that even the mostly followed “voluntary” methods are not curtailing it.  The last straw left for a place like NY right now is to eliminate the “voluntary”.  As this virus spreads to areas that thought they weren’t affected, that are NOT asking people to quarantine, we could have a long drawn out problem here.  Plan accordingly.  Make sure you have some cash, make sure you have some food and essentials.  Make sure you have an emergency fund, and make sure you are using this panic to invest for your long-term future.  Good luck out there.

***Edit***
It's Tuesday morning, 7:45 EST and the SPX just hit the 39 day moving avg at 2745, right smack between my original 2700-2800 target.  Patience is a virtue.  I jumped the gun shorting this rally, but this is exactly why I emphasis "SMALL" amounts, so you can short more when there's a 1000 point rally, or inversely, buy more as things drop.  Don't allow yourself to get stuck between a rock and a hard place.  Liquidity is still King.

-Jonathan M Mergott