In the future (past), society began to re-asses the utility of being online. The internet (as we know it) develops in a series of cycles. In time, we learn that during certain cycles, it becomes more valuable to utilize the internet to hide oneself as opposed to promote oneself (inversion).
-Mister Volatility

After a conference call with my assistant, Tonya, I am still uncertain if I own any preferred shares of Twitter. Trading public markets is like venture capital with one caveat—timeframe. Venture investors trade over periods of years. Mister Volatility (that’s me) invests in ventures himself and has, from time to time, lent money to VC firms to participate in their arbitrage. Private equity is a longer timeframe trade. In public market trading there is sufficient liquidity on smaller timeframes (scales), down to the millisecond. These micro scales present results to the exponential–so I must build models to trade them. The liquidity cycle of Venture Capital is much longer. Given the variance in timeframes my investment focus is dual: Private equity on in the longer frame and public (liquid) markets on the shorter.

I do not own any direct shares of Twitter—but it is possible that I own some through a fund. The reason Tonya doesn’t know is because she doesn’t know everything about me. If there is one imperative I can impart about assistants, even the great ones, it is this: keep some secrets.

Anyway, what I am saying is that I want to buy shares of Twitter, even if I already own some. If I already have some, I’d like more. I understand there are shares for sale at Sharepost.com, and I instructed Tonya to take care of it. Unfortunately, she said the website will not accept my registration because The Tinker Factory does not release it’s physical addresses, and an address is required. Therefore, if anyone is interested in selling me shares, please come by the office sooner rather than later. I am an internet analyst after all, and my analysis reveals that the market cap of Twitter will surpass that of Google. In fact, it will be the second largest company in the world (as measured by market cap). We will talk about the first largest company in the world later, but I’ll give you a hint: think automated distribution and green energy. (But don’t limit yourself to the typical definition of clean and efficient power. Might not “green energy” refer to banking–some money is green and banking is about moving money, which requires energy!)

Perhaps someone will be in touch soon to sell me some shares. No matter, I am going to build some companies over the next couple of weeks that I’ll sell to Twitter for stock as opposed to cash.

And the beat goes on.

Today’s trading was a flight away from risk–risk off. US equities were weak with the S&P 500 (SPX) off 2.82%, the Dow Jones (INDU) Industrial Average down 2.51% and the tech heavy Nasdaq Composite (COMPQ) down 2.5%. The Volatility Index traded higher by 24% at 30.71. On the Nasdaq, there were 4.2 decliners for every advancer. On the NYSE, 6.5 decliners for every advancer. Volume was heavy all around.

S&P 500 - Daily

Volatility Index (VIX) - Daily

The US Dollar index closed higher by .62% at 76.39, Ten year Treasury futures traded higher by to close at 118 19/32 or up .76%, IEF closed at $91.99.

IEF - iShares 7-10 Year Treasury

Below are a few of the intraday charts.

US Dollar Index - 15 Minute

Crude Oil - 15 Minute

ES S&P Electronic Mini

Citigroup: He Said, She Said

I couldn’t help but reach for puts in Citigroup (C) today. Analyst Mike Mayo was quoted as saying that Citigroup will write down $10 billion of deferred tax assets, representing 10% of Citigroup’s tangible equity. Citigroup quickly responded they had no idea how the analyst was making those calculations. No matter if Citigroup learns how to calculate or not, their common stock is likely heading south of $1 within the next 6 months to year. I am short the big C–the former largest bank in the world.

Citigroup - Daily

The Shimmer of Gold and Silver

Yesterday, I noted that my stance had changed on the precious metals. I am positioned to take advantage of a move higher in gold and silver.

Gold was weak at the equity open this morning, but strengthened throughout the day to close near unchanged. This is evidence of the strength in gold to come. I am long select gold miners and maintain my stop below yesterday’s low. Credit default swaps on Japanese sovereign debt are rising, and the Yen is outperforming against the US Dollar versus other major currencies including the Euro (FXY), the British Pound (FXB) and the Aussie Dollar (AUD).

The charts below show this outperformance graphically. It is my view that this relationship will eventually lead to US Dollar weakness, and therefore strength in gold.

Gold - Daily

FXY - Japanese Yen

FXE - Euro

FXB - British Pound

FXA - Australian Dollar

Next week, same time, same place. And the beat goes on.

It was written on the walls that success is a process
No matter how hard I fall I know it is some progress
Notches of the ladder I climb, holdin a bottle of wine
So many paths to take, I’m followin mine
-Common

Yesterday, I wrote about Goldman Sachs lowering their expectations for Q3 GDP to 2.7%. This morning, the Advance GDP number was announced at 3.5%–higher than expectations and far higher than Goldman’s lowered target of 2.7%. This is the first of three GDP announcements. We’ll see preliminary GDP on November 22 and final GDP on December 22. I find it tough to think that an advance number of 3.5% can be lowered all the way down to 2.7%. Then again, don’t count Goldman out. Goldman is Goldman.

No matter where the final Q3 GDP number comes in, the announcement today is significant in that the economy grew in the 3rd quarter for the first time in just over a year. It was widely expected that there would be growth, and now the actual growth numbers will be analyzed and argued about on television.

There will be a myriad of economic releases in the next few weeks that will provide insight into what Q4 GDP will come in at. If Q4 GDP expectations need to be revised downward, there will be large gains by being short the right sectors.

Gross Domestic Product

Risk On, Risk Off

The higher than expected GDP announcement this morning spiked S&P futures and induced a selloff in the US Dollar. I have been referring to the “risk aversion trade.” The risk aversion trade is a risk off trade–when traders and investors run for cover. In the current market, I’d describe the risk off trade as being short the S&P, long the US dollar and long treasuries. Today’s market was the opposite of the risk aversion (risk off) trade. Traders scrambled to the risk on trade–long the S&P, oil, short treasuries, short US Dollar. When the risk on trade is on, the Volatility Index (VIX) trades lower. When the risk off trade is on, the VIX trades higher. From the intraday charts below, you can see that what the S&P lost yesterday, it gained back today. Conversely, what the Volatility Index (VIX) gained yesterday, it gave back today. Yesterday was risk off, today was risk on. You follow?

Volatility Index - 15 Minute

S&P 500 Index - 15 Minute

Phone Calls

Can a phone call change your view of the market? This one quite possibly could. I have long opined in these pages that there is more risk to this market than what it is priced for. Of late, I have written of a sudden spike in the dollar that no one is prepared for. After a phone call with a broker in Japan last night, I think it is best to be short select names in the weakest sectors rather than be short broader indices or sectors. Here is why. My broker in Japan alerted me to something very important: Japanese default swap spreads are at their widest in 6 months. Other sovereign default swaps have seen a significant widening as well. This is a sign of potential dollar weakness to come. If the dollar weakens, it will be tougher for the S&P index to sell off dramatically. It is for this reason that I am once again long some silver options (calls). If this widening of swap spreads is a sign–a tell in poker parlance–of dollar weakness to come, the best way to take advantage is to be long precious metals.

The Wall Street Beat

And there you have it, straight from the gut of Vinnie Vega of the Wall Street Beat, a subsidiary of Volatility News.

And the beat goes on.

Meanwhile, back at the office, Anything Anywhere! and I are going to see Paranormal Activity later. Before that, we are discussing the tape. Friday was significant, and the biggest gains of the year are in front of us, not behind us. Anything Anywhere!, who is in the delivery business, is jumping up an down about the breakdown in the railroads (BNI, UNP, CSX). There is so much to talk about, I’ll start with the broader averages.

The S&P 500 closed down 13.31 points or 1.22% at 1079.60. The Dow Jones Industrial Average closed at 9972.18, down 109.13 or 1.08%. The Nasdaq Composite was only down about half as much. It closed at 2154.47, down .50%. The fall in the Nasdaq was softened by strength in names such as Micrososft (MSFT), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), Bidu (BIDU), and T Rowe Price (TROW).

While equities were weak, the dollar showed signs of support. The US Dollar Index closed higher by .50%. In my prior post, I mentioned the importance of the $75 level in the USD Index. That was two weeks ago, and we continue to hold the line.

US Dollar Index - Weekly

Trading Lesson

Since I anticipate a breakdown in equity prices–and strength in the dollar–I look to be short weakness, not strength. In other words, I’d never be short Amazon (AMZN), or Google (GOOG) here. Rather, I’d look to go short Northern Trust (NTRS) or Knight Trading (NITE). Trading lesson: If you are bullish, buy strength; if you are bearish, short weakness. Write that down.

Dark Pools

Of late, there has been limited media attention to dark pools. Dark pools are off exchange platforms run by large banks (Goldman et al). Dark pools allow traders to remain anonymous, in order to disguise their trading strategies. Important speculation regarding dark pools is currently circulating—if certain proposals are passed, trading rules will alter. And when the rules of a game are changed, it is prudent to be cautious.

The proposal in place seeks to cut the trading limits in a dark pool. Currently, if trading through a dark pool, you are allowed to trade 5% of a company’s daily volume. The proposal–which will be put into effect imminently–will restrict the amount of shares you can trade from 5% of a company’s daily volume down to .25%. You can trade 95% less shares now. By cutting the amount of shares you can trade, regulators are effectively shutting down dark pools.

Knight Trading (NITE) is, through all intents and purposes, a dark pool. It is my opinion that NITE will trade below $1 in the near future. There are plenty of fundamental data points which indicate trouble. Also noteworthy is the tremendous promotion scam which was just recently perpetrated.

It all kicked off in March, when someone figured out that something was wrong with NITE–perhaps it’s business was going away. In order to sell a huge position, someone floated a rumor: NITE was to be taken over by a large online brokerage firm based in San Francisco, CA. These rumors bring in suckers, and allow smart money to position.

On Wednesday August 19th Pali Research raised NITE from hold to buy.

On September 16th, NITE was mentioned positively on CNBC program Mad Money.

On October 9th, takeover chatter made the rounds again—more hitting the bid by insiders.

Now, smart players have sold their positions in NITE and gone short. The setup is complete. If dark pools are shut down, liquidity will be hindered. The ramifications of this will be more significant than what the market is priced for. Coming back full circle, I own put options in NITE. Someone knows something, and I am happy to follow their tracks.

Knight Capital Group - NITE

Gold

Gold has traded in a range over the past two weeks. Gold and precious metals remain vulnerable to a sudden rally in the dollar. I continue to view the metals from the sidelines.

Gold Futures - Daily

Looming Catalyst

Living up to it’s name, the stock market is currently a true market of stocks. There are plenty of names that are showing strength–AMZN, TROW, and MSFT to name three. In my view, we are witnessing one of the greatest liquidity driven rallies of all time. Investors are bought in. The movie theatre of the market is jam packed, standing room only. The lights just went down. At some point, someone is going to stand up and yell fire. A catalyst that will cause a rush to the exits. Everyone can’t get out at once.

As all of this unfolds, fortunes will be made and lost. All the while, the beat goes on.

Some of my cycle analysis on the US Dollar shows support at 75.

US Dollar