Fake News, Real Trades

Posted On Oct 11, 2017 By Dave Gonigam

  • Fake news prompts robots to execute real trades. Hilarity ensues
  • Useless earnings forecasts vs. profitable earnings trades
  • Not all “gold reserves” are created equal, says Rickards
  • Coal’s days are over, Trump notwithstanding…
  • … while graphene’s days are just beginning
  • Legal marijuana and gun rights discussion takes off on a new tangent

So this is what happens when the robots take over…

Apple & Google acquisition

This “fake news” went out over the Dow Jones Newswires shortly after the open yesterday. ($9 billion for a company valued at over $800 billion? What a steal!) So did several other similar stories.

Hackers? No. Dow Jones CEO William Lewis issued a statement saying, “I take today’s inadvertent and erroneous publication of testing materials extremely seriously.”

“Testing materials?” You mean “lorem ipsum” placeholder text wasn’t enough fun for your IT employees so they came up with this junk instead?!

In any event, look how Wall Street’s trading robots reacted when the “news” came out at 9:36 a.m. EDT…

Apple stock chart

Reflects John Mannes at TechCrunch, “It’s irritating, as it always is, when the curtains get pulled back for a brief moment and we all realize that our financial markets are being run by bots with the intelligence of infants. Keyword search, sentiment analysis, trend identification (certainly caused by other bots) and whatever other magic was at play really don’t cut it when long-tail events like this happen.”

Not that human analysis is any more reliable — as should be obvious on this day before the unofficial start of earnings season. (JPMorgan Chase is the first of the 30 stocks in the Dow industrials to report its numbers tomorrow.)

Depending on whom you want to believe, year-over-year profit growth for the S&P 500 companies will average 2.8% (FactSet), 4.0% (S&P Capital IQ) or 4.8% (Thomson Reuters). Just a slight variance!

But there’s a bigger issue than the all-over-the-map forecasts. Even if everyone could agree on what’s coming for earnings season, what could you do what that information? What difference would it make to your life?

Nothing. It’s useless.

And yet we also know earnings season is the time of year when stock prices can jump the most, as discussed here on Monday. There must be something you can do to harness the biggest moves.

And there is. Before a specific company’s numbers are released, there’s a small group of people who already know them. “They’re insiders — either upper management or lower-level accountants and bean counters who have full access to the company’s books,” explains our newest trading specialist, Alan Knuckman.

“Technically, these people can’t act on that knowledge. It’s called insider trading — buying or selling stock based on information the public doesn’t know. To prevent it, regulators strictly monitor when major stockholders buy or dump shares… and they pay close attention when large blocks of shares change hands.

“But there are some subtle ways for insiders to cash in on their privileged information. They can turn to alternative markets where they’re less likely to get caught. One way is through stock options.

“Study after study has shown that subtle moves in the options markets can predict moves in the underlying stocks,” Alan goes on.

He points to research from McGill University and New York University examining 16 years of trading activity. The researchers discovered, to use their words, “pervasive directional options activity, consistent with strategies that would yield abnormal returns to investors with private information.”

In addition, research from Cornell finds options trades tied directly to earnings announcements. “The direction of this preannouncement trading,” the study says, “foreshadows subsequent earnings news.”

“Of course,” Alan says, “these researchers could only see these trends after the fact. To cash in on this information, you need to see the options action as it’s happening. But with so many trades going on each minute, no human can analyze trends that quickly.”

And as we saw at the start of today’s 5, typical “algorithmic” robot trades are — uhh — subject to error. Garbage in, garbage out.

To work around all those limitations, and to help spot those trading patterns, Alan licensed some powerful, proprietary software. Using it, he developed a three-step process to identify promising trades to capitalize on earnings season.

And with earnings season starting tomorrow, there’s no better time to put it to work. You could take a huge step toward reaching your retirement goals as earnings season unfolds over the coming 42 days. Here’s where to begin.

The major U.S. stock market indexes are going nowhere this morning, traders perhaps biding their time till the release of minutes from last month’s Federal Reserve meeting later today.

At last check, the Dow had added six points to reach 22,836. Gold is likewise little moved at $1,287.

Time to clear up some gold confusion that’s emerged in the last few days.

Officially, the People’s Bank of China is sitting on a gold stash totaling about 1,800 metric tons. Unofficially, it might be as high as 5,000.

Along comes Reuters with a report last week that said the Chinese have upped their proven gold reserves to 12,100 metric tons. Many “alternative” financial news sources jumped on the story as some sort of smoking gun.

We, however, held off… because there are two kinds of “gold reserves.”

There are the monetary reserves held by a central bank or national treasury. And then there are mining reserves — i.e., gold in the ground. One has nothing to do with the other.

“Proven reserves” is a mining term — “an estimate of how much gold is buried in the ground in China and could feasibly be mined at current prices with current technology,” explains Jim Rickards. “Twelve thousand tonnes is still a lot of gold, but it will take 10 years or more and billions of dollars to dig it up and refine it.

“Still, the timing of the announcement is curious,” Jim allows.

Recall that last month, China announced plans to launch an oil futures contract priced in yuan and convertible to gold. If it catches on, it would be the first significant oil trading in the world that’s not priced in U.S. dollars. The Russians and Iranians, oil producers wary of U.S. sanctions, would be eager to jump on it.

“In order for the oil-yuan-gold deal to be credible,” Jim tells us, “China needs to show that it could deliver physical gold to the exchange without touching official [monetary] reserves. This report makes it clear that China will have ample internal gold supplies for years to come. This adds credibility to its plan to price oil in yuan convertible to gold.

“If China relied exclusively on gold imports, it could be strangled by gold sanctions aimed at China by the U.S. and its allies such as Canada and Australia. Instead, China looks ready to go it alone with its own gold.

“That’s a very big deal and one more nail in the petrodollar’s coffin. It’s also extremely bullish for gold.”

The Trump administration has given a short-term lift to coal stocks — but Greg Guenthner says it won’t last.

“The war on coal is over,” declares EPA head Scott Pruitt.

“But,” Greg interjects, “if this administration thinks it can permanently revive the dying coal industry by cutting some regulations, they’re in for a surprise.”

This week, the EPA proposed repealing the first federal limits on carbon emissions from power plants — a crucial step in undoing the Obama administration’s climate-change agenda.

But a strange thing happened on the way from the coal mine: “Some sizable power companies, such as American Electric Power Co., NRG Energy Inc. and Southern Co., said the move will have only a marginal effect on their planning,” says this morning’s Wall Street Journal. “Cheap fuel, improving technology and consumer demand are creating a market for cleaner energy that is largely unaffected by what is happening in Washington.”

Greg Guenthner points U.S. coal demand tumbled 33 million tons last year. Global coal consumption fell 1.7%.

Coal stocks have been volatile this year, but Greg spotted a short-term bump in KOL, the big coal ETF, starting late last month.

KOL stock chart

“In the grand scheme of the markets,” says Greg, “coal’s comeback move is probably nothing more than a dead cat bounce.” But if KOL can push above last month’s highs, “we’re more than happy to take the ride,” he tells Rude Awakening PRO readers.

As long as we have carbon atoms on the brain, how about an update on the “magic material” known as graphene?

Graphene’s been on our radar for years. To refresh your memory, here are some fast facts:

  • Discovered in 2004, with a Nobel Prize awarded in 2010 for its discovery
  • Stronger than diamonds and 200 times stronger than steel
  • Conducts heat and electricity more efficiently than any substance on Earth
  • Supposed to unseat silicon in mass production of electronics.

When the space-age material came on the scene, it got a quick pop from investors… and then crickets. So what happened?

“Just like any other ‘newly discovered’ material with the potential to change the world, graphene will take decades to emerge from a laboratory and onto production lines,” says our small-cap specialist Lou Basenese.

“And now that the initial hype has worn off, the handful of companies that are working to commercialize graphene are incredibly cheap.”

He has two favorites, named in Wall Street Daily: Graphene NanoChem PLC (OTCBB: GRPEF), based in Malaysia, designs nanotechnology solutions for the oil and gas industries. Meanwhile, London-based Haydale Graphene Industries PLC (OTCBB: HDGHF) has developed a proprietary graphene-production process.

“The graphene growth story remains a blip on the radar,” Lou reminds us, “registering less than $50 million in revenue last year.

“It remains highly speculative. As such, it makes the most sense to go small to go big. By that I mean the smart thing to do is to take a small position in some of the early market leaders and continue to uncover and diversify by making small investments in other up-and-comers over time.”

“Interesting point of view,” a reader writes after our musings yesterday about legal marijuana and gun rights.

“Surely the NRA’s silence about the Philando Castile case has nothing to do with the fact that Castile was black — and the NRA is composed of mostly middle-aged white guys who are afraid of and ‘superior to’ black men?”

The 5: That’s a bum rap.

The NRA went to the mat in 2014 for Shaneen Allen, a black woman who held a concealed-carry permit in Pennsylvania. She had the misfortune of getting pulled over one day in the People’s Republic of New Jersey, having forgotten to remove her handgun from her car before crossing the state line.

Allen, a single mom, spent 40 days in jail and faced a three-year mandatory minimum prison term until the NRA brought enough pressure to bear that Gov. Chris Christie pardoned her.

The problem with the NRA isn’t racism as much as its fealty to law enforcement — which “has made the NRA indifferent to the ways that police tactics, use-of-force policy and police training violate the rights of gun owners (and those perceived to be carrying guns),” writes Radley Balko, author of Rise of the Warrior Cop.

The irony is that if a panicky cop had “escalated” Allen’s traffic stop and ended up plugging her, as happened with Philando Castile, the NRA probably would have ignored her case. Time and again the NRA has been mute when police shoot and kill innocent gun owners during botched late-night raids — when the victim logically fears a robbery and defends himself or herself with armed force.

Balko again: “For all the NRA’s dire warnings about government gun confiscation, the real, tangible threat to gun-owning Americans today comes not from gun-grabbing bureaucrats but from door-bashing law enforcement officers who think they’re at war — who are too often trained to view the people they serve not as citizens with rights but as potential threats. Here, the NRA just doesn’t want to get involved.”

Because weed, y’know. It’s pathetic…

We also got a looong email from a reader who felt compelled to tell us “the Second Amendment does not grant you the ‘right’ to bear arms!

“In fact, none of the first 10 amendments grants the people anything. What the amendments clearly state is the limits to what the federal government, their employees and contractors can legislate, decree or ‘rule’ on.”

We’ll spare you the rest. For the life of us, we can’t figure out what we said yesterday that betrayed an ignorance of the principle that rights are inherent to our existence as human beings and not granted to us by government. Guess some people just have a chip on their shoulder…

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. “Companies are making more money than ever, And the results that come out these next few weeks could be huge,” says Alan Knuckman on the coming earnings season, starting tomorrow.

With the help of a proprietary computer program, Alan has refined a method to make the most of earnings announcements — before they happen.

Only today he spotted a trade with the potential to double your money. But you’ll want to be in before earnings season is underway tomorrow. Learn more at this link.


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