By: Costas Bocelli — November 29, 2018

"Rogue Waves", Inside Jobs... (And How Buffett Will Bag His Next Billion).

“It was a rogue wave and it overwhelmed us.”


That was the explanation given by James Cordier, the president and head trader for, the recently defunct commodities options trading firm.

In a tearful video apology to investors, Mr. Cordier blamed a massive spike in volatility and a merciless “short squeeze” on the firm’s short natural gas call option position.

The firm’s strategy was basically to sell options, collect the premiums and bank bundles of cash.

It was smooth sailing for until darker skies began to emerge within the energy complex earlier this month.

As oil prices continued to drop, natural gas prices began to rise, causing the spread between the two commodities to widen.

(Click any image to enlarge)

oil gas spr

But the spread, what options traders call "dispersion", blew out in mid-November.  For those caught on the wrong side of the trade, it was a nightmare.

For, it was a death blow.  The firm’s broker dealer required a forced liquidation of all positions.

After Mr. Cordier described it as a “rogue wave” and blamed it for sinking his firm... he went on to add, “The speed at which it took place is truly beyond anything I have seen in my career.”

Rogue wave, huh?  Could be.  Or maybe there's another explanation?

Many people believe the markets are rigged.  Maybe you do too.  So could it have been an inside job?  Now, I’m no conspiracy theorist.  But what happened to was no accident.

You see, there are forces at play in the financial markets.  You may not be able to see them, but they are lurking in the shadows and looking for victims to pounce on.

We’ve seen their handiwork before, and more than once.  Take what happened to Lehman Brothers in September 2008.  Before being forced into bankruptcy, Lehman swore up and down they were solvent and had capital aplenty to weather the storm.

On the surface, their balance sheet appeared manageable.  But what most people didn’t realize was that the firm was hiding scads of toxic assets in shady off-balance sheet accounts.

But some people did know how much trouble Lehman was really in. Trouble was, they were ones who lurk in the shadows of the market.  And they ultimately pushed Lehman to collapse.

A few years later, the lurkers struck again.  This time they set their sights on MF Global, led by CEO Jon Corzine.

MF Global was known as a brokerage firm that provided financial services to its clients.  But under Mr. Corzine's leadership, MF Global expanded the business model and began aggressively trading for its own account.

MF Global took a major position in Italian sovereign bonds.  In 2011, during a flare-up in the European debt crisis, Italian bond yields spiked.  MF Global had to commit more capital to maintain its positions.

Unknown to most, MF Global was covering its margin maintenance on the Italian Bond position using customer funds held in the custodian accounts.  The firm was counting on this “accounting maneuver” to buy enough time for yields to move back down.

But others knew that MF Global was in a dire liquidity crunch.  It took just one more selloff in the Italian bond market, in late October 2011, to push MF Global over the edge.

On October 31, 2011, MF Global executives admitted transferring $700 million dollars from customer accounts to the firms broker/dealer account.  That same day, the firm also was forced to declare bankruptcy.  They began liquidating their sovereign bond position.

Ironically, buying Italian Bonds during that time could have been a highly profitable trade, likely netting the firm a massive windfall had they maintained the position.

But they could not.  They were unable to hang on long enough for one glaring reason… too much leverage!  The same with Lehman, which was levered more than 30 to 1.  And the same is true for "rogue wave" victims

Normally, selling options carries inherent (but not lethal) risk.  It’s the abuse of leverage that delivers the death blow.

Again, there are forces in the markets that hide in the shadows, waiting to pounce on weakness. They don’t do it for fun -- just for profit.  They do it to enrich themselves.

You see, with each of these incidents, there is one common denominator…

Market disruption.

Have a look at this breadth indicator (“the NYSE %30-Week MA”) which shows how oversold or overbought the stock market is.

thirty week

When the readings move below 20%, in the highlighted area, stocks are oversold and usually make for good buying opportunities.

That was the case with Lehman in September 2008.  And with MF Global in October 2011.

Today, the indicator is under 20% which means stocks are oversold.  Readings this low are rare.  In fact, on this chart, a reading below 20% has only occurred four times since 2003.

Think no one’s paying attention?  Think again!

Take Warren Buffett, one the greatest investors of all-time, and one of the richest men in the world.  While the market’s been correcting, what do you think Mr. Buffett’s been doing?

He’s been buying!

Here’s a flash from a recent filing with the Securities and Exchange Commission from Buffett’s firm Berkshire Hathaway (BRK.B).

sec 1 sec 2

What’s most compelling about this disclosure is that he recently took a new $4 billion stake in JP Morgan Chase (JPM).  Buffett also opened a new position in PNC Financial (PNC) and added more exposure to his other banking positions.

While Buffett is clearly not in the shadows, make no mistake. Many of his maneuvers are connected to those who are.

There's a lot more to say about these shadowy figures that control the financial markets, and how to profit right alongside them.

So we'll be talking more about all of this.

See you soon!



FREE e-Letter Sign Up