The Most Important 81 Minutes of Your Life

In today’s Money Morning…what happens next in the Grand Cycle…how to lose $4.46 billion in six months…why you should be wary of shorting Tesla…a simple equation you must understand…and more…

Today I have a special announcement.

If you’re a fan of Phillip J. Anderson’s theory of a Grand Cycle, which moves all kinds of asset markets, you’re going to love this…

We are just putting the finishing touches on a fascinating video tutorial.

It’s called ’18 = 14 + 4: Where We Are in the Cycle, and What Happens Next’.

It should be ready to debut next Tuesday.

It’s free to watch. But you’ll need to block out some time in your day. It’s feature-length. If you DO that, it could be the most profitable time you ever spend…

If you’ve followed our work closely in recent years, you’ll know that Phil and our team run on a simple principle: markets move according to a Grand Cycle.

This cycle has both explanatory and predictive powers.

In Phil’s words:

Once you understand this, you’ll know where you are in a Grand Cycle of the markets…where you’re going…and what’s plotted for the months and years ahead.

So what IS plotted for the future?

That’s what this special video you’ll get on Tuesday is all about. Stay tuned…

How to lose $4.46 billion in six months

Let’s dig down and look at how powerful (and potentially profitable) the predictive powers of the Grand Cycle can be…

You’ve probably seen The Big Short. Or at least heard of it.

Released in late 2015, The Big Short is based on a book by Michael Lewis. It details how a few forward-thinking fund managers made millions during the global financial crisis.

The film uses innovative techniques to describe complex financial instruments.

There were cameo appearances by a number of actors and celebrities. They spoke directly to the camera to explain subprime mortgages and collateralised debt obligations (CDOs) with a kind of insider’s view.

Now, if your eyes glaze over at the mere term ‘collateralised debt obligations’, that’s because they’re intended to. Just like the ridiculously complex CDOs themselves, the term is intended to make you feel stupid.

That’s right. No need to worry your untrained mind about this. Just hand over your money and let the ‘experts’ do the thinking for you.

Unfortunately, the experts pouring money into CDOs had their own bad case of ‘glazy eyes’. And despite the writing on the wall, most analysts were caught completely off guard by the US housing crash.

You may recall former US Federal Reserve Chairman Alan Greenspan’s mea culpa in late 2008. That’s when he belatedly admitted to Congress he was ‘in a state of shocked disbelief over the failure of his ideological assumptions on how markets should function.’

A typically complex and wordy speech from the Fed Chairman. Put simply, he was also caught by surprise.

Now…

The burst of the US housing bubble was no surprise to Cycles, Trends and Forecasts Editor Phil Anderson…

Phil was able to forecast the crisis and its timing well before the event. In 2004, he gave public seminars warning that a crisis would start in 2007. He also said we would recover from 2010. You’ll see how he was able to make this forecast…and what he’s forecasting next…in the video tutorial that’s coming on Tuesday.

The point today is that we seem to get a kick out of hearing about someone who is betting against the market. Especially when going against the market means they have to take a short position.

In case you’re not familiar, going short means selling something you do not own.

You borrow stocks through your broker and sell them into the market now. You seek to make a profit by buying them back later at a lower price and returning them to the broker, while you pocket the difference.

You might remember how legendary trader George Soros made a billion dollars from his infamous short position in 1992 against the British pound.

But you may not be aware that he gave back half a billion dollars the following year in a wrong-way bet against the yen. It’s not as good a story as betting the house against a government and winning.

Going short in the stock market is as old as the market itself, especially in US markets.

The press loves to print stories about short selling and we love to read them. Especially when someone is making or losing big bucks.

Think very carefully before shorting this stock

These days, the biggest story about short selling is Tesla [NASDAQ:TSLA].

Earlier this month, Reuters reported:

Traders short selling Tesla’s soaring stock have lost $3.7 billion this year, eclipsing the combined losses of traders shorting Apple, Amazon.com and Netflix.

The Palo Alto, California, company’s stock has become a battleground between investors betting Chief Executive Elon Musk will revolutionize the automobile industry and skeptics who question his aggressive production targets.

Those conflicting views of the electric-car maker have deepened in recent weeks, with short sellers increasing their exposure even as paper losses mount and Tesla’s stock hits new highs.

Short bets against Tesla have grown to $10.1 billion from $8.7 billion at the start of April, and during that time short sellers have racked up paper losses of $1.4 billion, according to S3 Partners, a financial analytics firm. Tesla’s stock has climbed 15 percent in the same period and has surged 50 percent so far in 2017.

“You have your momentum guys riding this stock up and making a fantastic return, and the fundamental guys holding onto their shorts and building them and saying ‘this can’t continue’ and waiting for the shoe to drop,” said Ihor Dusaniwsky, S3 Partners’ head of research.

“It’s one of your classic yin and yangs on Wall Street.”

This follows the early April tweet from Chief Executive Elon Musk, who took a swipe at traders betting against him.

Stormy weather in Shortville …’, he tweeted, after Tesla delivered better-than-expected results for vehicle deliveries in the March quarter.

The following day, ‘@Forin2020’ tweeted: ‘Stock price reflects the future (potential) of the company, not the present…

To which Elon Musk replied, ‘Exactly. Tesla is absurdly overvalued if based on the past, but that’s irrelevant. A stock price represents risk-adjusted future cash flows.

We’re not sure about these ‘risk-adjusted future cash flows’. So we had a chat to an old friend of ours. We can’t tell you who he is. But suffice to say he’s spent 30 years trading markets all around the world. And he knows a few people in the game.

Among those people, he has regular contact with a couple of big fund managers in New York. So we asked our friend to find an ‘insider’ who could tell us a bit more about the Tesla story.

The gentleman we were put in touch with — from one of the bigger US funds — laughed when we asked about shorting Tesla. Here’s what he told us: ‘Anyone who shorts Tesla doesn’t understand how the big fund managers play the game.

He told us to look at a long-term chart of Tesla. Have a look for yourself. Below is the weekly chart since the IPO in July 2010:

Source: Optuma

Click to enlarge

There’s nothing much to report for the first few years. But notice the massive increase in trading volume for about a year from March 2013 — highlighted with the red box.

Our insider says this shows four or five big mutual funds stepping up to buy a very large chunk of Tesla stock. They can’t book their entire positions in one day. Instead, they more stealthily accumulate a huge position over many months.

He reckons that, between them, the big fund managers have ‘cornered the float’ in Tesla stock. This is another way of saying there isn’t much of the stock in weak hands.

What does this mean for those calling to short sell Tesla?

Well, whenever the big short sellers drive the price lower, the big fund managers simply buy a bit more. And it’s not hard for them to drive the price straight back up.

This causes a great deal of pain for those who are short at lower prices.

Imagine…

Many of these sellers sold Tesla short at the previous highs near $260. They need to buy back their shorts at lower prices in order to make a profit.

But as you know, that hasn’t happened.

Now that the Tesla share price has pushed higher, a seller wanting to close out the short position will need to buy back the stock at current prices above $300.

And all of the sellers who are still holding their short positions from the last few years are now bleeding from even bigger losses. The higher the stock price goes, the bigger these losses will become.

We were interested in exactly how much pain the short sellers might be suffering. So we took a closer look at the figures quoted by Reuters in the article above.

It just so happens that NASDAQ releases stats on the short interest in a stock twice a month.

In November 2016, the NASDAQ site reported the short interest as 35,687,317 shares. At the then price of $190, it was valued at $6.78 billion.

At today’s price of $315, these same shares are worth $11.24 billion, a difference of $4.46 billion. Ouch…

Phil Anderson has a simple rule he uses to avoid such pain: never trade against the trend. And never trade against the Grand Cycle…

We’ll be commandeering this email newsletter for the next four days in the build-up to Tuesday’s tutorial.

You will see over the next few days that the mainstream media has been completely misreading the situation in financial markets for the last 24 months.

And that supposedly ‘huge’ events like Brexit and the US election…terror attacks, the British election this year, and even the tensions with North Korea…are actually mere ‘fluff’ within the wider context of the Grand Cycle.

You will also see that, if you are even remotely going to improve your wealth over the next few years, you absolutely MUST learn to do the opposite of the crowd.

And you MUST understand the following equation: 18 = 14 + 4.

What does that mean?

And how can you use it as a sort of ‘pin code’ to profit from movements in all kinds of asset markets.

You’ll find out on Tuesday…

Best wishes,

Terence Duffy,
Editor, Money Morning


Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come.


Money Morning Australia