Morning Note: The Unexpectable

“Coming sure and fast, that profit of millions! But it never reached me. No; it wasn’t side-tracked by a sudden change in conditions. The market did not experience an abrupt reversal of form. Coffee did not pour into the country. What happened? The unexpectable! What had never happened in anybody’s experience; what I therefore had no reason to guard against. I added a new one to the long list of hazards of speculation that I must always keep before me. It was simply that the fellows who had sold me the coffee, the shorts, knew what was in store for them, and in their efforts to squirm out of the position into which they had sold themselves, devised a new way of welshing. They rushed to Washington for help, and got it.”

–Jesse Livermore, circa 1923 

Last spring the smart money who was short junk bonds (yes, clients, you were short junk bonds at the time), fully expecting that the debt bubble would burst and utterly destroy the space — and demolish all of the hedge funds and private equity firms whose portfolios were awash with the garbage — saw their then handsome gains evaporate literally in the blink of an eye.

That was when the Fed announced the unannounceable; that they would step into the market and start buying junk bonds. Their own charter forbids it, but, in the interest of once again bailing out BIG egregious risk-takers, they found a workaround. 

More than any other factor, that move by the Fed has kept the stock market — thus far — from accurately discounting the fundamental reality of the world we live in… 

Last night the gang who, per last evening’s note, are sticking it to the big guy were screaming bloody murder (and rightfully so!) when their chatroom got temporarily closed. The sponsor claimed it was due to too much “hate speech.”

Well, somebody changed their mind and the door was reopened.

This morning, the same group’s target stocks rolled over on news that at least two brokers suspended trading in those names (they’re rallying again, so perhaps that was reversed as well). Hmm….

Yes, market manipulation has been around since the beginning of time. Much of it is illegal, except of course when it comes at the hand of the government, or the Federal Reserve… and perhaps even a powerful broker or two…

Now, buyer beware, unless the market has indeed been effectively, and permanently, anesthetized (yesterday it begged to differ), history says that the greater the attempt to manipulate it (apparent success notwithstanding) the angrier it ultimately becomes!

Asia followed yesterday’s U.S. action overnight, with all but 2 of the 16 markets we track closing notably lower.

Europe’s rallying back this morning, with all but 2 of the 19 bourses we follow currently in the green.

U.S. major averages are rebounding nicely off of yesterday’s mess: Dow’s up 486 points (1.61%), SP500’s up 1.47%, SP500 Equal Weight’s up 1.59%, Nasdaq’s up 0.96%, Russell 2000’s up 0.69%.

The VIX is down 22% (was up 60%+ yesterday) to a still very dangerous 29.18. VXN (Nasdaq 100 implied volatility) is down 13.99%.

Oil futures are up 0.61%, gold’s up 1.21%, silver’s up 5.74%, copper futures are up 0.93% and the ag complex is down 0.12%.

The 10-year treasury is down (yield up) and the dollar is down 0.24%.

Buoyed by silver, metals miners, utilities, healthcare, financials and industrials, our core portfolio is up 0.79% to start the day. 


Here’s more from Jesse Livermore on that coffee experience:   emphasis mine…

“Now I have a horror of whiners and I do not mean to intimate that the Price Fixing Committee was not doing its honest best to curb profiteering and wastefulness. But that need not stop me from expressing the opinion that the committee could not have gone very deeply into the particular problem of the coffee market.

They fixed on a maximum price for raw coffee and also fixed a time limit for closing out all existing contracts. This decision meant, of course, that the Coffee Exchange would have to go out of business. There was only one thing for me to do and I did it, and that was to sell out all my contracts.

Those profits of millions that I had deemed as certain to come my way as any I ever made failed completely to materialise.

I was and am as keen as anybody against the profiteer in the necessaries of life, but at the time the Price Fixing Committee made their ruling on coffee, all other commodities were selling at from 250 to 400 per cent above pre-war prices while raw coffee was actually below the average prevailing for some years before the war. I can’t see that it made any real difference who held the coffee.

The price was bound to advance; and the reason for that was not the operations of conscienceless speculators, but the dwindling surplus for which the diminishing importations were responsible, and they in turn were affected exclusively by the appalling destruction of the world’s ships by the German submarines.

The committee did not wait for coffee to start; they clamped on the brakes. As a matter of policy and of expediency it was a mistake to force the Coffee Exchange to close just then. If the committee had let coffee alone the price undoubtedly would have risen for the reasons I have already stated, which had nothing to do with any alleged corner.

But the high price—which need not have been exorbitant—would have been an incentive to attract supplies to this market. I have heard Mr. Bernard M. Baruch say that the War Industries Board took into consideration this factor—the insuring of a supply—in fixing prices, and for that reason some of the complaints about the high limit on certain commodities were unjust.

When the Coffee Exchange resumed business, later on, coffee sold at twenty-three cents.

The American people paid that price because of the small supply, and the supply was small because the price had been fixed too low, at the suggestion of philanthropic shorts, to make it possible to pay the high ocean freights and thus insure continued importations.

I have always thought that my coffee deal was the most legitimate of all my trades in commodities. I considered it more of an investment than a speculation. I was in it over a year.

If there was any gambling it was done by the patriotic roasters with German names and ancestry. They had coffee in Brazil and they sold it to me in New York. The Price Fixing Committee fixed the price of the only commodity that had not advanced. They protected the public against profiteering before it started, but not against the inevitable higher prices that followed.

Not only that, but even when green coffee hung around nine cents a pound, roasted coffee went up with everything else. It was only the roasters who benefited. If the price of green coffee had gone up two or three cents a pound it would have meant several millions for me.

And it wouldn’t have cost the public as much as the later advance did.

Post-mortems in speculation are a waste of time. They get you nowhere. But this particular deal has a certain educational value. It was as pretty as any I ever went into. The rise was so sure, so logical, that I figured that I simply couldn’t help making several millions of dollars. But I didn’t.

On two other occasions I have suffered from the action of exchange committees making rulings that changed trading rules without warning. But in those cases my own position, while technically right, was not quite so sound commercially as in my coffee trade.

You cannot be dead sure of anything in a speculative operation.

It was the experience I have just told you that made me add the unexpectable to the unexpected in my list of hazards.”

Have a nice day!
Marty

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