The Forest and the Trees

One crazy thing about trading stocks is that you are hyper-focused on market moves and news events day by day, while looking in on charts that go back years. It seems so easy to point out the tops in these historical charts, but if you zoom in a bit you’ll find all sorts of fake-outs where bears called a top just to get gored by rushing bulls.

Professional traders are amazingly good at reading sentiment. They have their own indicators, often proprietary or paid subscription, and they are very good at using tools like stops to cut their losses quickly or adjust higher to lock in profits while letting the stock run. I don’t trade this way, because it costs money and it can be a lot of work, whereas I’ve got a totally unrelated day job and a portfolio that’s not quite big enough to cover the costs of expensive tools.

My strategy is more along the lines of picking a few sectors that should be solid winners over the next 5 years or so, selling covered calls on big runs, and acquiring more on big dips. I often use shorter-term setups to do option plays that cost little and have a potentially big payoff, in hopes of a win that shoots me toward escape velocity, or a level at which a modest return could fuel my lifestyle without working. I figure that would be around $800k total or so, so I’ve got a long ways to go and work alone will never get me there. That being said, I am happy taking a higher risk approach, and I can sit through years of losses if I can keep the hope of a big win someday.

That being said, I’ll start with my dot-com bubble roadmap from last week:

We are certainly in a very strange environment. The 2000 tech bubble did not include a housing bubble or a bubble in non-tech stocks, and short dated treasuries gave you a 5.5% yield. You could argue that our tech bubble has already collapsed by comparing the highly speculative stocks back then with the performance of ARKK in 2021.

If you look at SPY in 2000, it double-topped in August 2000 before dropping around 45% over the next 2 years. After that, the housing market skyrocketed along with commodities over the next 4 years. This time around, we have a major housing bubble like we saw peaking in 2007. At that time, the 2009 crash was just a correction for many commodities such as gold, silver, and copper, which peaked in 2011 – mainly due to the enormous stimulus and building programs in China.

Where are we today? Many have called it the everything bubble – stocks, bonds, housing all making new highs within the past year. Is it reasonable to expect everything to collapse? Not necessarily. Markets tend to rotate between sectors more than anything. Besides, the federal reserve can do a lot to juice the stock market as we saw just 2 years ago.

So where does that leave us? All I can do is throw some thoughts out about different sectors and decide on a direction to take. Using roadmaps from the past can help, but we have to realize that they are for different roads and be a bit more flexible with our thinking. So here are my thoughts:

  • Interest rates cannot go much higher without seriously breaking something in the financial system.
    • Debt/GDP levels are extremely high in every major world economy.
    • Junk bonds are a $4.7 trillion market vs corporate bonds at $609 billion according to https://www.fitchratings.com/research/corporate-finance/us-ig-market-size-grows-to-4-7-trillion-on-tech-driven-issuance-30-11-2021
    • The biggest fear that the Federal Reserve has is that companies will not be able to roll over their enormous pool of junk bonds and they will start defaulting. That is why the federal reserve made such a big noise about supporting the junk bond market back in 2020.
    • Meanwhile, CPI numbers (a lagging indicator) have been consistently surprising to the upside while the headline unemployment rate (also a lagging indicator) remains strong, and the Federal Reserve is under enormous political pressure to bring down inflation any way possible. Their only real tools are influence over interest rates with the discount window & repo markets, and the size of the fed balance sheet. They will increase pressure on the financial system using these tools until a significant market correction occurs.
    • The questions are how fast will the fed tighten, how much will it take to crash the market and cause a recession, how will the markets react in the interim, etc.
  • Commodities are in short supply
    • Many commodities markets have suffered a decade of poor returns, consolidation, and under-investment. Combine the ESG mandates, the winner-takes-all effect of passive index investing (where 9 companies are worth over 27% of the S&P 500 index), and the miniscule representation of energy and mining companies in the S&P 500 and we saw a serious lack of investment.
    • Supply problems in many commodities are so bad, that in today’s highly covid-constrained economy prices are skyrocketing as they can’t keep up with demand. It takes years of investment to get more mining and oil online, and we don’t see the level of investment needed.
  • Populism is growing
    • Populism often leads to geopolitical risk whether its the uprisings in Kazakhstan, the escalations in Yemen, the potential invasion of Ukraine, etc.
    • People are increasingly pushing for basic needs. Cheaper food, cheaper energy, affordable housing, etc. Meanwhile, governments in the US and in Europe shy away from any major investments in anything they don’t consider environmentally friendly such as the electric grid, mining, oil, nuclear, roads, bridges, etc. This is going to change at some point – but until then, deflation is the major risk.
      • Clarification on the deflation risk: The risk is not that CPI prices will drop, but that asset prices will drop such as stocks and real estate. Deflation in this sense simply means less money traveling through the system to bid up assets and fuel discretionary spending. In this framework, squeezing people on energy, fuel, housing, and food for money they don’t have will cause a nasty recession rather than a crack-up boom.

Basically, I’m loaded up on things I see as undervalued growth sectors for the future. Especially on gold and silver miners because they are more defensive commodities; they can soar when big money is looking for somewhere to hide. How’s that going? Let’s take a look:

The charts above are all 1-year charts ending Friday 1/21/2022 with their 20-day and 50-day moving averages.

Here’s my current portfolio:

  • HEDGES (11.7%)
    • 11.2% TLT Calls
    • 0.5% XOM Calls
  • PRECIOUS METALS (51.9%)
    • 7.9% AG (Silver), shares
    • 7.8% AG (Silver), calls
    • 3.4% SAND (Gold, Silver & others), calls
    • 5.3% EQX (Gold), mainly calls & some shares
    • 4.5% LGDTF (Gold)
    • 4.5% SILV (Silver)
    • 4.0% SILVRF (Silver)
    • 3.8% MTA (Gold & Silver)
    • 3.1% MGMLF (Gold)
    • 2.1% RSNVF (Silver)
    • 2.1% SSVFF (Silver)
    • 2.6% HAMRF (Gold)
    • 0.9% DSVSF (Silver)
  • URANIUM (25.1%)
    • 13.0% CCJ, mainly shares & some calls
    • 6.5% UUUU
    • 1.3% BQSSF
    • 2.5% UEC, shares & some calls
    • 1.1% DNN
    • 0.8% ENCUF
  • COPPER & NICKEL (0.0%)
  • US CANNABIS (15.4%)
    • 2.1% AYRWF
    • 2.0% CCHWF
    • 1.8% CRLBF
    • 1.9% CURLF
    • 1.8% GTBIF
    • 2.0% TCNNF
    • 1.9% TRSSF
    • 2.0% VRNOF
  • CRYPTO (23%)
    • 1.3% MARA, Bitcoin miner
    • 1.0% XRP
  • CASH (-6.5%)

During this last week, I sold off my copper/nickel miner and reduced my gold & silver holdings a little bit. Much of that money was spent on adding to laggards among US Cannabis stocks and Uranium Miners. As a result, my margin debt got a little bit bigger.

Some of my short-dated calls expired at zero, but my March XOM calls did well. I bought 20 of them at $0.15 each and sold half this week averaging around $0.92 each.

I bought back my MARA covered call again, bringing my average buy-in cost down to about $29/share. I’ll sell another covered call on it this next rally.

Right now I’m mainly looking for a serious breakout in my gold & silver miners and/or Uranium miners. I would like to reduce my holdings in both a bit before the end of March, but I do think that we see a significant bounce in both here over the next month so I’m not selling yet. When I do reduce, I also plan to do it mainly by selling covered calls, assuming that they have a decent premium to them. Gold and silver miners have practically no short-term premium on their calls at all right now, so I’m more inclined to want to buy them for a potential lottery win than sell them for a pittance. Next week my covered calls on AG expire and I’ll see if I keep those shares or not. If they do sell, it will greatly reduce my margin debt – which I mainly incurred by buying all those Jan 2024 AG call options to lever up my exposure while it was cheap.

Good luck trading these markets, this year will be a difficult one to trade.

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How I see this cycle playing out

I’ve been thinking that we are likely to see a pattern in the S&P 500 similar to the top we saw in the NASDAQ in 2000. Here’s roughly how that would chart:

Note that I created the above chart by roughly referencing the timeframes of the NASDAQ charts below:

Some rough thoughts on why I favor this approach:

  1. The NASDAQ today is far more concentrated than it was back in 2000, while the S&P 500 is far more tech-heavy. As such, I think that the 2000 NASDAQ is decent fit for today’s S&P 500.
  2. Today’s S&P 500 moved similarly to the 2000 NASDAQ in the year prior, going on a fairly steady up-trend that occasionally fell below the 50 DMA always stayed well above the 200 DMA.
  3. Both the NASDAQ going into 2000 and the S&P 500 going into 2022 saw a choppy market with decreasing breadth, as the more speculative growth stocks began to fall heavily while the biggest growth stocks continued to rise.
  4. Both the NASDAQ in going into 2000 and the S&P 500 going into 2022 saw a hawkish fed. In 2000, the rate hikes even continued one more time after the NASDAQ peaked and started its fall. Today, the political pressure on fighting inflation is enormous and the Federal Reserve sees the stock market as over-valued. They could easily do the same.
  5. Investors are scared right now. Indications people have been posting on twitter such as massive put-buying and record holdings in inverse ETF’s (betting short QQQ or SPY) while the bulls seem more cautious. It may seem strange, but this behavior can easily lead to a scenario where an upturn accelerates as bears losing money start to close out their short positions giving the market it’s final rapid rise.
  6. Seasonality is a real force in the markets. There is a reason that most stock market crashes happen in spring (March/April) or fall (September/October). These timeframes just tend to have less market liquidity. There are a number of reasons for this such as end of quarter portfolio rebalancing, banking adjustments to meet regulations in their holdings of different risk assets, corporate tax schedules, and so on.

On seasonality, one of my favorite measures of market liquidity is that of TLT:

I like TLT because long bonds have more to do with market liquidity than most other instruments, and the seasonality is pretty sharp with some months being very positive and others. It is interesting to note that there are inflections in spring and fall here, where long bonds shift positive in March and shift negative in September – which coincide with struggling times for stocks.

Not only do serious stock corrections start more often in March and September, but both months are low on the seasonality chart above (which only goes back 5 years here).

Market Rotations

Right now, there is a fierce rotation going on beneath the surface of the market. Speculative tech stocks like the one’s ARKK holds are collapsing while certain commodity plays like XOM are rallying. Let’s look at this in more detail here:

The biggest recent moves have been towards XLE (Energy), XLF (Financials), and XLP (Consumer Staples). These moves have been coming out of XLK (Technology) and XLY (Consumer Discretionary).

How am I playing this?

I have been avoiding direct exposure to the SPY and the QQQ throughout this rally. In retrospect that has been a bad move, but I am not comfortable with the enormous amount of concentration in the top sliver of companies. Right now, the top 9 companies in SPY are 27.4% of the index, and the top 9 companies in QQQ are 53.4% of the index. Despite the fact that the top 2 names – AAPL & MSFT – have enormous stock buyback programs, I still don’t like being long the same thing as everyone else. Who’s going to buy when these stocks start to sell off, and at what price? That being said, I’m not planning on going long these vehicles now. However, I’m not going short either, as I’ve found the risk/reward in timing the downside to be miserable. Maybe I’ll tiptoe into some index puts in March if the charts look just right, but that’s not going to be my focus.

The current narratives are high inflation, a booming economy, and rising interest rates. In the next leg higher, I expect energy, financials, and consumer staples to follow higher.

At the moment, I am still using a bit of margin going into February and I plan on building cash as we go into March.

As my portfolio goes, I expect great performance from my recent XOM position, significant outperformance from my Uranium Miners, and decent performance from my copper/nickel miner. If this rally happens, I plan to close out the last of my nickel/copper exposure (I reduced half of it this last rally), sell off my calls in XOM for a decent gain, sell of my calls my Uranium stocks, and sell in-the-money covered calls on most of my Uranium miners.

I also plan to leave my US Cannabis positions completely alone unless they double or something, but I don’t expect them to.

That leaves the big one for me, which is precious metals miners. This is a really tough one for me because it has been consolidating for so long with declining sentiment as many investors exit the sector entirely. I expect great things in this sector, but I expect them to come in quick moves out of nowhere just like 2020 where $12.50 silver raced to $16, consolidated a month, raced to $18.50, consolidated a month, then raced to $28. Needless to say, I’m planning on holding a sizable stake here regardless of what happens, but I am planning on reducing a bit if I get a decent bounce.

What the chart above tells me is that if I get a decent bounce in my precious metals miners by February, I’d better take advantage and reduce. It’ll still be my largest position because I’m a stubborn fool of a precious metals bull, but I can certainly reduce. In fact, I’ve recently sold Feb 4 $10.50 covered calls on most of my AG shares which should force me to divest them if we get that bounce. I’d been planning on selling them for a couple weeks already because I bought a lot of Jan 2024 $10 calls in AG on a big dip and I wanted to cover the margin debt that incurred. Let’s face it, this is my crypto sector where I expect to make big gains by holding junior miners and long-dated calls even though it’s somewhat irresponsible.

On that note, here’s my current portfolio:

  • HEDGES (10.7%)
    • 9.9% TLT Calls
    • 0.8% XOM Calls
  • PRECIOUS METALS (50.2%)
    • 7.4% AG (Silver), shares
    • 6.9% AG (Silver), calls
    • 4.5% SAND (Gold, Silver & others), calls
    • 5.0% EQX (Gold), mainly calls & some shares
    • 4.5% LGDTF (Gold)
    • 4.1% SILV (Silver)
    • 3.8% SILVRF (Silver)
    • 3.6% MTA (Gold & Silver)
    • 3.0% MGMLF (Gold)
    • 2.2% RSNVF (Silver)
    • 2.0% SSVFF (Silver)
    • 2.4% HAMRF (Gold)
    • 0.9% DSVSF (Silver)
  • URANIUM (25.3%)
    • 14.1% CCJ, mainly shares & some calls
    • 6.0% UUUU
    • 1.3% BQSSF
    • 2.6% UEC, shares & some calls
    • 0.8% DNN
    • 0.6% ENCUF
  • COPPER & NICKEL (1.6%)
    • 1.6% NOVRF
  • US CANNABIS (16.4%)
    • 2.3% AYRWF
    • 2.1% CCHWF
    • 1.8% CRLBF
    • 1.7% CURLF
    • 1.8% GTBIF
    • 2.3% TCNNF
    • 2.1% TRSSF
    • 2.3% VRNOF
  • CRYPTO (2.0%)
    • 1.6% MARA, Bitcoin miner w/ covered call
    • 0.5% XRP
  • CASH (-6.3%)

As for recent trades, I bought 20 $80 strike XOM March calls last Monday as a hedge in case of the likely Russian invasion of Eastern Ukraine, and the havoc that would wreak on the oil and LNG markets (XOM is a top LNG carrier). Those calls doubled in value since I bought them as XOM soared this week, but I’m still planning to hold them at least through February. I have to admit, if Russia invades, I’d likely sell the news on it and book gains there. I lump this with hedges, because I expect it to be bad for risk assets in general and I’m nervous about it causing pullbacks in my mining stocks.

I left precious metals and cannabis alone this week, but I couldn’t help buying some of these dips in Uranium. I bought a bunch of cheap 1-month calls in UEC in case that jumps, and some more UUUU shares. I also sold half of my remaining NOVRF into a rally to reduce my margin debt a bit. Paychecks and a Q4 bonus helped with that too.

As for XRP, I have some friends who are really into it. They’re convinved that once the lawsuit with Ripple is over the result will be good for XRP holders as a chunk of the founder’s XRP could be burned and it could potentially be added back to platforms such as Coinbase to make trading easier. As of now, I got a crypto wallet which allows me to exchange crypto and hold XRP – so I can put money into Coinbase, transfer it to my wallet as Bitcoin or Bitcoin Cash, and then exchange it there for XRP. Total fees incurred are about 10% of the money I put in, so it’s not cheap, and the bulk of those fees are from exchanging the BTC (or BCH) into XRP in my wallet. I’ve found that ETH charges insanely high fees, and that USDT uses the etherium network so it also charges high fees just to transfer Crypto from Coinbase to my wallet. To move $100 over, ETH or USDT will charge $12-$15 whereas BTC will charge around $0.08 and BCH even less.

Note that if you expect the 4-year Crypto cycle to continue then it is a horrible time to invest in the space. I’m nervous about it, but I see the case for potential rotation to XRP in the Crypto space after the trial ends and it becomes easier and cheaper to purchase. That being said, I plan to unload MARA in February but I might slowly add to XRP on weakness. I’m not sure yet.

Last note, in case any of you are curios about my charts, I use stockcharts.com for fancy things like seasonality and rotations and I use finance.yahoo.com for all my basic charts with notes added in Paint. These two sites simply have the best free tools for finance.

Good luck navigating this year, and may the odds be ever in your favor!

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Is your portfolio prepared for war?

What’s going on in Ukraine?

I recently listened to the following podcast: Hidden Forces ep. 226: Why Putin Plans to Invade Ukraine…

I suggest you look that up on youtube or your favorite podcast and give it a listen. The gist is clear though, there’s a significant chance that Russia will invade eastern Ukraine this month and possibly annex it like they did with Crimea. While they’re at it, it wouldn’t take much to annex Kazakhstan as well while their troops are in at the Kazakh president’s request to quell the unrest there.

Here are some key things to consider:

  1. Russia shares borders with Kazakhstan, Georgia, Ukraine, and Belarus. These all used to be soviet satellite states.
    1. Kazakhstan has major unrest going on and some have been burning government buildings. The president tried some appeasing measures such as reversing the gas price hike that catalyzed the protests and dismissing his cabinet. Then he invited Russian forces in for help and authorized military to shoot protesters if necessary.
    2. Georgia has been a hotspot in the past, with their key position on the black sea, though news seems quiet today.
    3. Ukraine is a big hotspot with Russian troops right along the border, with everything necessary to invade at a moment’s notice. They had also suspended gas supplies through Ukraine since April, but according to Reuters they resumed supplies as of Jan 5: https://www.reuters.com/business/energy/russia-resumes-gas-supply-romania-via-ukraine-2022-01-05/
    4. Belarus has also had considerable protests during this last year which Russia helped their president quell.
  2. Buffer zones have long been an important defensive strategy for Russia, and they are still upset about the baltic states – Latvia, Lithuania & Estonia – joining both the EU and NATO in 2004.
    1. There was a revolution in Ukraine back in 2014, where a pro-Russian leader was ousted for a pro-EU leader who wanted to join the EU and threatened to kick the Russians out of Sevastopol. Russia saw this as a major strategic threat, annexed the Crimea, and helped support a seperatist movement in eastern Ukraine.
    2. Note that the Russian empire had controlled the Crimea since 1783. It was their long-sought warm-water port and nothing short of war could get them to give it up.
  3. This is a golden opportunity strategically for Russia to make a significant military move.
    1. The EU is totally dependent on their natural gas supply. France has a few nuclear plants shut down for maintenance, Germany just shut down half of it’s last 6 nuclear plants early for political reasons, electricity and natural gas prices are skyrocketing, and they find themselves forced to result to coal where they can as their leaders try to push more wind and solar. They are unlikely to intervene unless there is direct threat to EU or NATO member states.
    2. The US can’t do much either, especially without EU support.
      1. We cut Russia off completely with sanctions years ago, so they are de-dollarized and totally adjusted to work around that.
      2. We abandoned agreements with Russia and Iran in the past, so they don’t have much reason to trust new ones.
      3. We abandoned Afghanistan completely not long ago, so we don’t have much support near Russian borders.
      4. We just dumped a lot of our strategic oil reserves last month and encouraged our allies to do likewise. We also refuse to invest in our oil and gas production so it has been declining, and we refuse to allow any more LNG port expansion so we can’t offer the EU much help with their energy woes.

How do I see this playing out:

  • Odds are that Russia will aid the president of Kazakhstan similar to how he aided the president of Belarus last year, and those countries will remain politically tied to Russia without any direct diplomatic spat. The current trouble will still disrupt some Uranium production in the short-term which will give a tailwind to the Uranium price and Uranium miners outside the region.
  • As for Ukraine, I could easily see Putin taking half of Ukraine with token resistance and then annexing it with a vote similar to Crimea, after which they work on a peace deal with the EU which includes more pressure to allow their completed Nord Stream 2 pipeline to start operating. Meanwhile the US response would resemble the famous quote from Macbeth: A tale told by an idiot, full of sound and fury, signifying nothing.

We have no control over any of that, so there’s no sense dwelling on the politics behind it. Instead, we need to focus on what we can control – our investment portfolios.

How will this affect our investment portfolios?

  1. Exposure to upside moves in LNG carries, European natural gas producers, and oil companies would be a good hedge. I’m thinking of getting some call options, perhaps going out a couple months, just to get some quick and cheap upside exposure to these sectors.
  2. Russian and Chinese stocks will likely get hit. They won’t necessarily be nationalized or anything, but the fears of something like that will drive out foreign investors until the situation calms down – and who knows how long that will take.
  3. A risk-off event may be sparked in US companies with a considerable footprint in China based on similar fears.
  4. Investors are already spooked by an increasingly hawkish Fed, and it could spread bearish sentiment in the market as a whole, especially if oil shoots higher (see below).
  5. Cryptocurrencies could see risk-off behavior as well, though it’s hard to read that sector. I won’t be placing bets there, though I do plan to sell my MARA shares if I get a good bounce in coming weeks.

As you can see by the 2008 chart below, quickly rising oil prices can be bad for stocks.

Now for a look at my personal portfolio:

  • HEDGES (10.5%)
    • 10.5% TLT Calls
  • PRECIOUS METALS (49.0%)
    • 7.5% AG (Silver), shares
    • 6.6% AG (Silver), calls
    • 3.7% SAND (Gold, Silver & others), calls
    • 4.6% EQX (Gold), mainly calls & some shares
    • 4.3% LGDTF (Gold)
    • 3.9% SILV (Silver)
    • 3.9% SILVRF (Silver)
    • 3.5% MTA (Gold & Silver)
    • 3.3% MGMLF (Gold)
    • 2.2% RSNVF (Silver)
    • 2.1% SSVFF (Silver)
    • 2.5% HAMRF (Gold)
    • 0.9% DSVSF (Silver)
  • URANIUM (26.6%)
    • 15.1% CCJ, mainly shares & some calls
    • 6.1% UUUU
    • 1.2% BQSSF
    • 3.5% UEC, shares & some calls
    • 0.9% DNN
  • COPPER & NICKEL (2.9%)
    • 2.9% NOVRF
  • US CANNABIS (16.5%)
    • 2.2% AYRWF
    • 2.0% CCHWF
    • 1.8% CRLBF
    • 1.8% CURLF
    • 1.9% GTBIF
    • 2.3% TCNNF
    • 2.2% TRSSF
    • 2.3% VRNOF
  • CRYPTO (1.7%)
    • 1.7% MARA, Bitcoin miner
  • CASH (-7.3%)

With the big risk-off move last week, I made a number of moves. The big one was adding (20) more Jan 2024 AG $10 calls, as I decided it was stupid cheap so I should add long-dated calls for leverage and then reduce shares to cover the margin cost on the next bounce (hence my significantly higher negative cash balance). I also decided that the US Cannabis sector was getting stupid cheap again, so I looked up the ETF MSOS, picked their top holding that I didn’t have yet which was CURLF, and added that to my holdings in the sector. I didn’t touch Uranium, it just shot up in value – and I didn’t touch TLT, it just went down in value.

Overall, my portfolio (adjusted to net out new deposits) went down 6% on the week as my precious metals miners and TLT calls dropped. I didn’t mind the added risk with AG because I’m expecting a bounce as there is significant support around $10. Also, there’s been a lot of put buying in general lately and I’m actually expecting a final squeeze higher before markets start to drop. The NASDAQ jumped 30% between early Jan and early Feb back in 2000 before it finally crashed late March. In fact, a lot of crashes tend to happen around September and March, so whatever seasonal factors come into play likely support that. Of course, a Russian invation of Ukraine could accelerate things a bit so I have to be careful.

Here are my current thoughts on my holdings:

Hedges/TLT (20+ year US Tresuries):

On past rallies, I’ve sold off portions of my Jan 2023 TLT calls, and I’ve been focusing on cheaper hedging exposure with August and September 2020 calls lately. Thus my position is smaller but I still expect it to provide some protection if markets crash in Q1 or Q2. I’m thinking I hold for now though, maybe add a small amount if it breaks to 138 and a bigger amount if it re-tests the 135 level. That being said, I’m unlikely to add here until I see how January plays out, and I might wait until March before adding anything here. I do think the fed and oil prices will crash the market causing TLT to rally, but the timing is too risky to bet too much on.

Precious Metals Miners:

I hate to say it, but I really need to reduce here. This sector has come to dominate too much of my portfolio, and though I believe in the long term move higher, the odds favor a short-term move to the downside. Sentiment here is terrible and getting worse, but we could be due another washout before any significant rally.

As far as Ukraine is concerned, an invasion would be bearish for the precious metals sector. We already have a rallying dollar with central banks in places like Turkey dumping gold to prop up their currencies, and Russia’s central bank could halt gold purchases and sell some if necessary to support war spending and counter investor flight. That being said, I expect the downside to be somewhat muted as they could potentially get more money for their oil and gas exports, and gold tends to have some positive risk-off characteristics. I expect Silver to roughly follow gold with bigger price swings.

Uranium Miners:

I am wildly bullish this sector. Kazatomprom is the biggest supplier by far, and a lot of money has been put into both the mining ETF and the sprott physical fund after the unrest in Kazakhstan started. That being said, I’m not adding – I’m just letting my exposures ride, including the Jan 21 calls I have in UEC. I also plan to sell at-the-money covered calls on everything if the miners hit their November highs. As of now I have no covered calls sold, so it’s all upside.

Copper & Nickel Miners:

This sector will have a monster bull run some time this decade due to supply constraints, but the risks are firmly to the downside with the Fed’s risk-off and the slowing of Chinese construction. I don’t want to exit the sector so I have token exposure, but I don’t plan on adding yet unless prices go down significantly. After I think the Chinese slowdown is priced in, especially if the Fed crashes the market, I’ll be looking to add a significant chunk here. For diversification from NOVRF, I plan to add more names from Steve Penny’s portfolio – I subscribe to his Silver Chartist Report because he has great feedback and he’s a crazy mining-sector bull like me.

US Cannabis:

This sector is almost all retail investors, kind of like Bitcoin before 2020. While this makes it volatile, the underlying companies are growing like crazy in states where it’s legal, and the catalyst of Federal legislation suddenly allowing institutional investors and bond market access makes it a generational opportunity. If you’re really interested, follow @todd_harrison on twitter. Aside from that, I’d expect the sector to get hit by risk-off just like Crypto and tech stocks in a market plunge, so I don’t want to overdo my exposure here.

Crypto:

I bought back my Feb 18 covered call in MARA mainly because I don’t want to wait it out to expiry. If there is a final squeeze higher for the market in SPY & QQQ, Bitcoin could rally with them. It doesn’t have to though, as the last leg of market gains focused almost entirely on the top 5 companies, while tech stocks further out the risk curve, such as anything owned by the ARKK ETF, have been hammered. That being said, I will likely sell these shares off in a significant bounce or sell a covered call again if call prices are high.

Cash:

I still plan on building cash in February, especially if I get a bounce in precious metals and a spike in Uranium. If Russia does move on Ukraine before any discernable bounce, then I may end up reducing into weakness, probably dumping my AG shares while sitting on the calls and everything else. February and March are terrible seasonally for AG so I suppose I’d better take any bounce I can get at this point. Slightly in-the-money 1 week covered calls would get me an extra $0.20/share or 2%, it’s something to think about.

Good luck and happy investing. And if you’re more nervous than excited, then you might need to adjust your portfolio. I’m certainly pondering that at the moment.

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Happy New Year

I’m going to do a bit of a shorter post this week, because a lot of the holiday chop we saw doesn’t mean much in the scheme of things. Trends are created by big institutional players with regular money flows, and we’ll see how that plays out in January.

A couple of things I’ll say …

I don’t trust markets where everyone crowds into the same 5-10 stocks, so I’m avoiding SPY and QQQ altogether. The last 2 years have taught everyone that an illiquid melt-up can crush bears easier than an illiquid crash can crush bulls.

I’m still bullish on Gold, Silver & Uranium miners in particular as there has been a decade of chronic underinvestment, and that’s usually followed by a decade of outperformance in these cyclicals because new supply is difficult, costly, and time consuming to bring on line. I’m more worried about base metals because we are early in the cycle and demand will be hurt with a slowdown in Chinese construction.

Here’s a good proxy for the difference in behavior of precious metals vs base metals in the cycles, as shown by a chart of long-term gold miner Barrick vs long-term base metal miner Freeport McMoran:

In a few years, I’ll be much lighter gold & silver and much heavier copper, I just think we’re jumping the gun a bit here on base metals.

Also, to clarify my views on some basic things with Gold and Silver, I’m going to lay out some of my thoughts on current narratives:

  1. I still view gold and silver in a very similar light, with silver moving faster in both directions. There’s no getting around the fact that a large portion of their investor demand works that way.
  2. Gold has a long-term bull story of de-dollarization, as countries like China that are wary of US sanctions slowly but deliberately decrease their reliance on the US dollar for trade, and Gold begins to take a much larger role on their central bank balance sheets because no currency is trusted world-wide enough to replace the US dollar there.
  3. Silver has a long-term bull story based on the heavy use in electronics that are increasingly important with everyone having cell-phones, automation of more things, and the heavier need for it in any of the wind, solar, electric vehicle programs that tend to be pushed by big government.
  4. The idea of Bitcoin or other crypto stealing gold’s thunder doesn’t hold water with me. The investors there are much more likely to be in tech or meme stocks than in a slow-moving commodity like gold. Gold is generally about preserving wealth (risk-off), while Crypto is about growth and high rates of return (risk-on).

On to Uranium, I really do think we’re at a generational shift here. The cycle moved ahead a bit because of the Sprott Physical fund – it would have been a few more years otherwise as countries like China ramped up more to replace their heavy coal use while Europe and the US shut more down because the boomers still hate anything nuclear. The shift is generational though because a pro-nuclear stance is one thing that both Gen X and Millenials tend to agree on, so more nuclear is inevitable when our aging politicians finally, reluctantly, step aside.

As for Covid, all I can say is that politicians who are imposing heavy-handed measures with lockdowns and mandates are taking a political risk here … if hospitals fill up like they tended to do after the other Covid spikes, they’ll have some slack, but if hospitals don’t fill up despite these Omicron spikes then they face enormous political pressure to ease as people are generally anxious to return to pre-pandemic rules.

Here’s where my portfolio landed this week:

  • HEDGES (13.4%)
    • 13.4% TLT Calls
  • PRECIOUS METALS (47.1%)
    • 10.6% AG (Silver), mainly shares & some calls
    • 4.5% SAND (Gold, Silver & others), all calls
    • 4.8% EQX (Gold), mainly calls & some shares
    • 4.4% LGDTF (Gold)
    • 4.1% SILV (Silver)
    • 3.8% SILVRF (Silver)
    • 3.6% MTA (Gold & Silver)
    • 3.3% MGMLF (Gold)
    • 2.1% RSNVF (Silver)
    • 2.1% SSVFF (Silver)
    • 2.8% HAMRF (Gold)
    • 1.0% DSVSF (Silver)
  • URANIUM (23.1%)
    • 13.4% CCJ, mainly shares & some calls
    • 5.3% UUUU
    • 1.2% BQSSF
    • 2.5% UEC, shares & some calls
    • 0.8% DNN
  • COPPER & NICKEL (2.6%)
    • 2.6% NOVRF
  • CANNABIS (14.1%)
    • 2.0% AYRWF
    • 1.8% CCHWF
    • 1.7% CRLBF
    • 1.9% GTBIF
    • 2.3% TCNNF
    • 2.1% TRSSF
    • 2.2% VRNOF
  • CRYPTO (1.7%)
    • 1.7% MARA, Bitcoin miner with a covered call sold on it
  • SHORT SQUEEZES & OTHER TRADES (0.0%)
  • CASH (-2.1%)

I didn’t do much trading this last week – just bought more August 2022 TLT calls and sold off my last short squeeze play. I’m still sitting on calls Jan 21 calls for both UEC (Uranium) and AG (Silver) that will likely go to zero unless there’s a spike. I do like the idea of having some money in these kind of setups, where you gamble hundreds in the hope of winning thousands – especially when the calls are cheap and the open interest shows others making bets in the same place. At the same time, these aren’t going to move the needle much for me if they fall to zero.

Anyway, get we’ll see soon enough how much fund rebalancing goes on. From what I gather on Twitter, there is a lot of bearish positioning which makes a significant correction less likely at the moment. I still don’t believe QE or QT has much effect outside of investor sentiment/psychology, so I think the real test for the stock market will come after the tapering is done and the Fed starts raising interest rates. I don’t like the risk-reward on the long side here, but it’s no better on the short side so I’m sticking with my own sectors.

Happy New Year, now we’ll see what 2022 brings. I remain optimistic on a number of things, especially with precious metals, and I’m happy with my portfolio positioning overall.

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Holiday Madness, low volume volatility

I just got back to LAX from Zurich last night. The new regulations and required covid test the day before are actually a bit more complicated than we thought, mainly because they are new enough so that they aren’t well labelled and most people don’t know what they are. We all eagerly checked our results when they were ready and felt relieved when they were negative; it would have been really inconvenient and potentially expensive otherwise.

Markets were terrible for a lot of my miners and US Cannabis stocks these last two weeks, so I couldn’t help but add a bit more even though I’m dipping on margin a bit. I have to admit I feel stupid using margin at all when we are at serious risk of a major risk-off event soon. I just don’t think the markets will be effected much by the tapering, and the big risk-off event will be after the first rate hike. Besides, the TLT calls should gain big in such an event. And with that line of thinking, I even added a bit to my TLT calls when it fell back to 147 the other week.

Anyway, here’s where my allocations ended up:

  • HEDGES (13.1%)
    • 13.1% TLT Calls
  • PRECIOUS METALS (47.5%)
    • 11.3% AG (Silver), mainly shares & some calls
    • 4.3% SAND (Gold, Silver & others), all calls
    • 4.6% EQX (Gold), mainly calls & some shares
    • 4.5% LGDTF (Gold)
    • 4.2% SILV (Silver)
    • 3.8% SILVRF (Silver)
    • 3.7% MTA (Gold & Silver)
    • 3.4% MGMLF (Gold)
    • 1.9% RSNVF (Silver)
    • 2.1% SSVFF (Silver)
    • 2.8% HAMRF (Gold)
    • 0.9% DSVSF (Silver)
  • URANIUM (23.5%)
    • 13.4% CCJ, mainly shares & some calls
    • 5.5% UUUU
    • 1.2% BQSSF
    • 2.6% UEC, shares & some calls
    • 0.8% DNN
  • COPPER & NICKEL (2.7%)
    • 2.7% NOVRF
  • CANNABIS (13.7%)
    • 1.9% AYRWF
    • 1.9% CCHWF
    • 1.7% CRLBF
    • 1.8% GTBIF
    • 2.3% TCNNF
    • 2.1% TRSSF
    • 2.1% VRNOF
  • CRYPTO (1.8%)
    • 1.8% MARA, Bitcoin miner with a covered call sold on it
  • SHORT SQUEEZES & OTHER TRADES (0.3%)
  • CASH (-2.7%)

A number of my calls and covered calls expired worthless in the last few weeks, and I sold off more of my “other trades” above. For Uranium, I’m actually in a very bullish position – not only did all my covered calls expire, but I bought a number of long calls as I still think the sector is having a violent pullback on an otherwise intact upside trend.

Here’s how I see CCJ for example:

Precious metals are a bit different … the charts of many miners don’t look good at all. Take a look at my largest holding for example, AG:

I’ll be honest here and tell you that even though I have an outsized 11.3% position in this stock, including call options, there isn’t really much to like about this chart. A quick glance can tell you it’ll probably bounce off the 50 DMA resistance coming up. There is significant open interest in the Jan 21, 2022 calls for this one, so it does have potential for another gamma squeeze spike like you see at the beginning of the chart above (January 2021). It is also a well respected mining company with an experienced team, it is heavily geared toward silver, and I am very bullish on silver over the next decade. Not much more I can say though, it’s risky of me to allocate this way but I’m going with my gut a bit here.

Now for US Cannabis, with my largest holding TCNNF:

Funny enough, I started investing US Cannabis partly to diversify my holdings from mining stocks – and the chart above looks a lot like the one for AG. There are a couple of differences – first, US Cannabis doesn’t have call options so there was a lot of share buying in Jan and Feb but no gamma squeeze. There are a couple of other differences though… First, I’m fairly well convinced this chart is in a bottoming process, whereas I’m not convinced AG is bottoming yet. Second, this one has a unique potential catalyst from the federal government. Cannabis is still federally illegal, even though it is legal in many US states, and there are a number of prominent politicians trying to change that. For now, US Cannabis can only trade on junior canadian exchanges where US retail can invest using pink sheets. Large institutions in the US are forbidden from investing in these. Meanwhile, there is considerable institutional interest in foreign cannabis comanies like the NYSE listed Canada-only TLRY, and it is easy to imagine much of this money flooding into the enormous US Cannabis market once Washington gives the okay.

That’s all I have for now, as my laptop just ran out of power (I’m back on my iPad now) and my charger is in my checked luggage which didn’t make our tight connection in Paris yesterday. Hopefully I can get it back soon or I’ll be driving in to work all next week.

Anyway, I’m happy to be home for Christmas, so merry Christmas everyone, and remember that next week will be a crazy low volume period that might see some interesting volatility. We’ll see more reliable trends form when the institutional investors are back in force early January.

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Traveling in the time of Covid

I’ve long been into travel, and I would routinely take two major off-season trips and a couple of minor trips per year during the 2010’s. Travel had been extraordinarily cheap during that decade, as a spring or fall trip with hotels, plane tickets, and the Globus tour busses would often run to $1800 for a 9 day trip after paying for excursions and everything. As I saw it, that was the same cost as 1 month’s rent in a 1 bedroom apartment, and I was always finding ways to save on rent. Besides, my employers are pretty laid back when it comes to requesting days off.

As fortune would have it, 2019 was a major travel year for me, starting with a tour through Switzerland in the Spring, a trip to Hawaii for my brother’s wedding, both Oahu and the big island, a trip to see relatives in South Bend Indiana, a December trip to France which we changed to London at the last minute due to national strikes, and then a tour through Portugal ending on that critical Friday the 13th (March 2020) where president Trump said all Americans had to return home. That trip was amazing as everything was open yet there were no crowds anywhere.

After Covid, our planned trip to Israel was cancelled so we switched to more local travel. First a hotel at Carlsbad beach, then Sequoia/Kings Canyon, then Yosemite at the lovely Ahwahnee hotel – which fatefully had to close down the day after we left – then snowboarding in Big Bear, a trip to Florida right after getting the vax, another to see a cousin in Portland, another to see my brother in Minneapolis, and a weekend to see my friends in Ensenada.

Early in the year, we decided to take a trip that my mother’s travel agent was personally bringing a group to – so we signed up for a cruise down the Rhine with Ama Waterways. Covid restrictions would surely be over by then, right?

You can see the route we’re taking above, along with the rough location I’m writing from.

As you all know, we ended up with the great year of the variants, starting with waves of the then-called UK variant which became Alpha, then the Gamma waves in South America, and the Delta wave surge worldwide. My niece who planned on coming had to cancel first because she’s a nurse and they are insanely busy.

The week before the trip, Omicron hit and our travel agent dropped out along with everyone except my determined group of 3. The cruise ship was initially capped at 70% capacity, but now holds only about 64 passengers out of a 150 total capacity. As you can imagine, the service is amazing.

We have to wear masks while walking around indoors, but not on the upper deck outside or while we’re sitting down. Everyone seems pretty laid back, and the atmosphere is fun.

You may have heard about the curfew in Amsterdam – a friend of mine was showing me clips from the news of riots going on and all that, but I’ve long since learned that there usually isn’t much behind that mindless clickbait. Needless to say, I didn’t see any riots in Amsterdam in my 2 days there. The streets were crowded, and you only have to wear masks indoors, not outside. The curfew applies to restaurants and pubs only – after 5pm they can only serve takeout because indoor dining is not allowed. People are still around, getting food to eat outside or bring back to their homes or hotels. Funny enough, our cruise ship bypassed this rule by pulling out of port, cruising during dinner, and then pulling back in.

The Christmas markets in Köln and Rüdescheim were still full of people. You don’t have to wear masks outdoors for the most part, except within certain marked boundaries. Restaurants and such are still open too – just wear masks indoors except when sitting. Today we went to see Speyer, and the Christmas market was especially crowded because they are shutting it down after tonight in a new wave of Covid restrictions.

Amsterdam after 5pm curfew is still a lively place.

We practically had the cruise ship to ourselves. Around 64 passengers out of 150 capacity.

The Christmas markets in Germany are still a big affair.

Anyway, I know everyone is hearing a lot about the horrors going on in faraway places – the protests, the heavy-handed restrictions, and so on – but people are still people, life goes on, and many of these places are much nicer than the news likes to portray them. These restrictions won’t last forever simply because people won’t put up with it. Meanwhile, if you do get a chance to travel, you get the bonus of smaller crowds, shorter lines, and prices that are still affordable.

As for the markets this week, I have been watching. The only trades I made were a starting position in a Uranium miner, ticker DNN, which was beaten to a pulp before the Fed speech and some minor adds to my US Cannabis positions that fell below my current $3k threshold.

US Cannabis has been falling pretty steadily since February. I entered 3 stocks with very small positions in May and just waited a few months until it seemed like they were carving out a bottom. I added 3 more names in August, then increased my position size of each, then added a 7th stock and increased my position size again about a week or two ago. I realize that adding to losing positions is not the way to trade, but I take a different approach with different sectors, and this is a small enough position for me that I can still manage it that way. Besides, the relative valuations are compelling, the catalyst of federal legalization through “safe banking” legislation would allow big investment funds to access the sector, and it is genuine diversification from my mining stocks.

The Federal Reserve take was interesting, as the markets initially dumped, then rallied. The best take I heard was that the surface talk of faster tapering and 3 possible hikes was hawkish so the markets reacted down. Then, in answer to a question, Powell said that he didn’t have a set schedule and he would react to data as things develop, which seemed to imply that he would quickly pivot dovish if the stock market started to dump.

My precious metals miners have been absolutely hammered this past few weeks, and I am heavily invested in the sector in anticipation of positive December seasonality. Gold and silver recovered slightly Thursday and Friday, but it’s too early to tell how much to read into that, and the miners are still at the post-Thanksgiving beatdown levels.

One guy I follow, @MacroAlf, was saying that it looks like big funds were rebalancing from winning sectors into losing ones so we can’t read into it much from a Macro level, and I fear he is right. For now I’m just planning on holding where I’m at and seeing how it goes. I would like to build more cash before the Fed taper finally ends, but I’m not ready to dump my positions for that yet, as I still think a significant rally is possible before then. We’ll see soon enough, and if my miners continue to get crushed I’ll probably just sit on the shares until they recover. After all, I’m still convinced that they will go up significantly in coming years, we just might need one more big washout before then.

For now, I’m halfway through my vacation so I’ll be having a great time exploring Europe and generally limiting my trading. Merry Christmas to everyone, and try to take some time to go out and enjoy the festivities of the season!

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Jobs report, CPI, etc. Now what?

The big focus this week was on the jobs report and the CPI so that everyone could guess and the Federal Reserve’s tapering and rate hike schedule. Both seemed to support fed tightening. Both are also lagging indicators, so it’s funny how much they’re relied on here.

For now, the S&P 500 is still rising with narrow breadth as mega caps like AAPL continue higher while most stocks struggle beneath the surface. Junk bonds (JNK) aren’t at their highs, but they are considerably higher than their Dec 1 low. The risk-averse long dated treasury bonds pulled back significantly from their Dec 1 high, but are still relatively high at the moment. The VIX is still falling from its recent peak on Dec 3.

What does all this mean? We are still going through a bullish trend on the S&P 500 as confirmed by the new highs today. Stocks climb a wall of worry and there is certainly a lot of worry in the markets today as everyone expects the market to struggle and possibly crash when the fed tightens policy. As of now, the federal reserve is tapering their level of bond purchases and debating about how quickly they should hit zero. In other words, they are easing less and talking about when to start tightening policy.

I wouldn’t be surprised if the overall S&P 500 index continued to rise until they actually stop their bond purchasing program, though you can never really tell when the top finally comes – and when it does come, the first dip is generally bought as many still don’t believe the top is in. My guess is still around February or March.

When the market does finally crash, TLT will spike, which is why I’m still holding TLT calls as a hedge. I wouldn’t be surprised if everything else in my portfolio crashes along with the general stock market, though I am still optimistic about precious metals, uranium, and US cannabis overall.

Copper and Nickel should also do well in coming years, but I’d prefer to wait until after the market turns to scale in there.

For precious metals, I’m still hoping that seasonality pans out as they are typically strong in December, and I will certainly reduce a bit if they get a good rally. Meanwhile, the mining shares just seem stupid cheap so it is difficult for me to resist adding. I need to resist though, as I do still plan to build up some unallocated cash as Q1 progresses next year.

Uranium still has that crazy catalyst of the Sprott fund and Kazatomprom fund buying up the physical supply to drive up the spot price, and the Uranium miners will all rise along with that spot price. In addition, there is growing pressure to label Nuclear Power as green, which would unleash a flood of money into the sector. If we do continue to see market highs over the next month or two, I expect more excited cash to rally the miners here giving me a chance to take some profits off the table.

US Cannabis had a bit of a disappointment as the safe banking clauses were not added to the defense bill. There is growing pressure for the so-called safe banking provisions, which basically allow these companies formal access to the banking system so that they can trade on the NYSE, issue bonds, and invite institutional investors. Until then, it’s really just a bunch of individual money and retail investors plowing into OTC shares. These are still in a downtrend, I don’t expect a good opportunity to take profits ahead of a potential market crash, and they will get hit in such an event. However, they are some of the most compelling values on the market as the companies are growing fast and investor access is restricted.

Here’s my current portfolio:

  • HEDGES (13.2%)
    • 13.2% TLT Calls
  • PRECIOUS METALS (45.6%)
    • 10.6% AG (Silver), mainly shares & some calls
    • 3.9% SAND (Gold, Silver & others), all calls
    • 4.5% EQX (Gold), mainly calls & some shares
    • 4.4% LGDTF (Gold)
    • 4.1% SILV (Silver)
    • 3.7% SILVRF (Silver)
    • 3.6% MTA (Gold & Silver)
    • 3.2% MGMLF (Gold)
    • 2.0% RSNVF (Silver)
    • 2.0% SSVFF (Silver)
    • 3.0% HAMRF (Gold)
    • 0.8% DSVSF (Silver)
  • URANIUM (23.1%)
    • 13.5% CCJ
    • 5.6% UUUU
    • 1.2% BQSSF
    • 2.8% UEC, shares & some calls
  • COPPER & NICKEL (2.6%)
    • 2.6% NOVRF
  • CANNABIS (13.3%)
    • 1.8% AYRWF
    • 2.0% CCHWF
    • 1.8% CRLBF
    • 1.9% GTBIF
    • 2.2% TCNNF
    • 2.1% TRSSF
    • 1.4% VRNOF
  • CRYPTO (1.9%)
    • 1.9% MARA, Bitcoin miner with a covered call sold on it
  • SHORT SQUEEZES & OTHER TRADES (1.1%)
  • CASH (-0.8%)

I actually added another TLT call, so the allocation reduction from last week was entirely from the pullback in valuation. I also added a little bit to precious metals again this week in SSVFF and a little bit to Cannabis, though I really need to resist adding any more to those sectors until after the market tops. I also added a significant amount to Uranium because the pullback is a lot bigger than I expected, but I need to refrain from adding there for a bit as well and focus on building up cash.

I’m still doing some side trades as well, and one of Dereck’s trades based on his Elliot wave charts paid off rather quickly as I bought a call in AAPL last week and sold it this week after a solid impulse wave for a $600 gain. I’m actually thinking of reducing TLT again if it climbs back to 152 in case Dereck’s Elliot wave chart is right on that one as well, as it makes sense to me that TLT could pull back significantly as the S&P 500 continues to climb and worries recede in the next month or two. It’s a great market hedge, but it can be volatile.

I also added crypto back in based on a bullish Bitcoin call Dereck had. I’m nervous about this sector, so I looked at calls in the Bitcoin miner MARA. The calls were expensive, so I decided to just buy MARA shares and sell a 2 month covered call on it. If all goes well then I’ll make 20% in 2 months, but I can still break even if it tanks by 25%.

Tomorrow I leave for Europe for my big cruise down the Rhine. I have to admit, I am a bit nervous because Covid rules keep changing, and I have to get tested on arrival and before departure. I am triple-jabbed, but I could still end up testing positive and being forced to quarantine so I plan to bring my laptop and work phone in case that happens. Hopefully I won’t look at either one until I return to the states, though I’ll still follow the markets a bit and perhaps write next week on my iPad.

Happy holidays, and good luck betting on evergreen markets through the new year.

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Inverted Yield Curve

Markets have continued to see pressure ever since Thanksgiving, as seen in the significant pullbacks in the S&P 500, the junk bond index JNK, commodities like gold, silver and oil, and cryptocurrencies like Bitcoin.

The yield curve inverted as shown by this graphic from The Repeating Tides of Payroll And Inflation – Alhambra Investments (alhambrapartners.com)

The famous inverted yield curve signal has projected every recession infallibly for decades. The short term rates are buoyed by the perception of a hawkish fed, while the long term rates are going down by the perception of a weakening economy and the beginning of flight to safety.

What happened to markets after the last yield curve inversion? Here it is:

Here’s what various markets did after that time. I marked the yield curve inversion date with a blue arrow on each one:

As you can see above, both the S&P 500 and Oil struggle and drop in following months, then start to recover after the famous “Powell Pivot” the following January. Similar story with JNK, representing corporate high yield debt.

TLT, representing long-dated US treasuries was a great hedge during the turmoil.

Junior silver miners and Gold struggled a bit with a much flatter range, then broke to the upside before stocks and oil.

Right now there seems to be genuine fear in the precious metals sector and definite wariness in Uranium. I couldn’t help but get longer both – including purchases of a nice chunk of Jan 2024 $10 strike calls in AG. I also wanted to get longer the US Cannabis sector, which I’m convinced will rocket higher once Congress passes legislation allowing them access to the banking sector. At first I added a little more to some of the 6 names I had to somewhat even out the share counts, then I just decided to add a 7th name.

I also reduced by TLT calls by a full 25%, though I’m thinking I should’ve held, and I sold the last little chunk of Crypto I was holding.

Here’s where my portfolio ended up:

  • HEDGES (16.3%)
    • 16.3% TLT Calls
  • PRECIOUS METALS (43.7%)
    • 10.3% AG (Silver), mainly shares & some calls
    • 4.0% SAND (Gold, Silver & others), all calls
    • 4.6% EQX (Gold), mainly calls & some shares
    • 4.2% LGDTF (Gold)
    • 3.8% SILV (Silver)
    • 3.4% SILVRF (Silver)
    • 3.5% MTA (Gold & Silver)
    • 2.8% MGMLF (Gold)
    • 1.9% RSNVF (Silver)
    • 1.5% SSVFF (Silver)
    • 2.9% HAMRF (Gold)
    • 0.8% DSVSF (Silver)
  • URANIUM (19.6%)
    • 11.1% CCJ
    • 5.4% UUUU
    • 1.1% BQSSF
    • 2.0% UEC, shares & some calls
  • COPPER & NICKEL (2.5%)
    • 2.5% NOVRF
  • CANNABIS (12.7%)
    • 1.7% AYRWF
    • 1.8% CCHWF
    • 1.8% CRLBF
    • 1.7% GTBIF
    • 2.2% TCNNF
    • 2.1% TRSSF
    • 1.3% VRNOF
  • SHORT SQUEEZES & OTHER TRADES (1.4%)
  • CASH (3.7%)

As you can see, I kept a positive cash balance which is important in a potential downturn, so that you can be looking to add when others are hitting margin calls. Still, I should show more discipline, as I added significantly to both Uranium and Cannabis and even to my largest silver miner when I should be building more cash.

The market value of my portfolio actually dropped 13.4% in the last 3 weeks which shows the volatility of my holdings, particularly the long dated call options in gold and silver miners as well as TLT. As long as I don’t dip into margin this level of volatility won’t be a problem, and the volatility certainly works to the upside as well; in the 5 week winning streak prior I saw 25.9% gains.

The twitter feeds in finance are still focused on inflation vs deflation, is it transitory, is the Federal Reserve going to crash the market, did a major correction in the S&P 500 already start or is there going to be another rally before the real crash sometime in the first quarter next year, and so on.

There are certainly a lot of risks out there, and our extreme levels of margin debt leave us open to a March 2020 style crash. This could be especially bad given that central banks throughout the world are worried about high CPI increases. Both governments and central banks are unlikely to push anywhere near the level of stimulus into the markets that we saw in reactions to the first Covid lockdowns in March 2020. And of course, governments are still tightening borders and restrictions in response to both the continuing surge of the Delta strain and the highly contagious new Omicron variant.

What can I say, I suppose that’s why I like focusing on precious metals – which can be a bit of a safe haven – as well as unique and under-held markets like Uranium miners and US Cannabis, and why I tend to avoid the trades I see as crowded including the general US stock markets and Crypto. I’m under no illusion that these will hold up nicely while everything else falls – I just think the fall will be much more shallow, and the rebound much more significant. In the end, you have to risk your money somewhere or you’ll never build up anything.

Last note – I am going on a river cruise starting next weekend from Amsterdam to Basel with port stops in Germany and France. It was limited to selling at 70% capacity, and they’ve had a lot of cancellations. We’ve had to go through some hoops to be allowed entry into these different countries, and I went ahead and got a 3rd jab so they won’t bug me about that, but I’m fascinated to see how it will go. If it works, then it will be an amazing trip with little to no crowds and an interesting group of die-hard travelers to meet. Here’s hoping it works!

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Inflation, Deflation & Omicron: Tight supplies with a dollar shortage.

I’ll start today by summarizing my take on the new Omicron strain.

  • Omicron has spread widely in the region of South Africa it was discovered. Cases have also been detected in a number of other countries including Botswana, Hong Kong, the UK, the Netherlands, etc.
    • Implications: Omicron is highly infectious and it is spreading. They think it might be more infectious than Delta but that is not sure yet.
  • Omicron shows a number of mutations on the spike protein, more than any other variant.
    • Implications: There is speculation that Omicron may evade natural immunity from previous covid strains and covid vaccines. A number of companies are working on an Omicron-oriented booster shot.
    • If Omicron is not affected by immunity from Delta, there is no implication that Delta will be affected by immunity from Omicron. In other words, we could potentially see both waves spreading together rather than Omicron replacing Delta as Delta was replacing other strains such as Alpha and Gamma. This is pure speculation.
  • Many regions of the world including Europe have been increasing restrictions in response the large outbreaks of the Delta strain
    • Implications: Omicron will potentially lead many parts of the world to increase Covid restrictions.

How will this affect the stock market?

There is speculation about how more lockdowns and restrictions will affect the stock market, particularly because so many were blindsided by the fact that Covid-19 was so enormously bullish for the US stock market. Every time we heard about more waves of Covid restrictions and lockdowns, US stocks would soar to newer highs.

My take on this is that we are nearing the time where this news will be a big negative. The reasons are as follows:

  • Central banks around the world, including the Federal Reserve, have been under a lot of pressure to combat the high CPI readings. A number of central banks have been raising rates and stopping or tapering QE programs in response already. I don’t believe that central banks will move to reverse this stance unless the stock market, particularly the big US indices that the Federal reserve monitors, falls substantially.
  • An unprecedented amount of fiscal stimulus was pushed out after the 2020 lockdowns including programs in Europe to help people retain the bulk of their incomes, credit boosts in China, and the US response including unemployment boosters (which already expired), one-time checks (which might not be repeated), and huge programs to line the coffers of US corporations.
  • 2021 so far was a new all-time record year for US corporate share buybacks. Many of these companies, particularly in the financial sector, will be restricted from doing these buybacks if economic trouble is percieved – just like we saw in 2020.
  • China has had a significant economic shift, from cracking down on big corporate leaders like with Alibaba, to pulling the Ant Financial IPO and effectively nationalizing it, to allowing big developers like Evergrande to fail in an effort to tamp down on excessive speculation in housing and ghost developments held by investors with few people living in them. There is good reason to believe that China will not be interested in juicing financial markets as a go-to response this time.

What’s going on with inflation vs deflation?

I think that a lot of the commodity price increases will persist for the following reasons:

  • The European Union has decidedly moved against the Nordstream pipeline, and they have not shown any interest in supporting any additional drilling for natural gas or oil on their own.
  • The US cut back it’s oil supply dramatically as the covid lockdowns led to a supply glut. With the reopening in 2021, we have banned any new investment into fracking wells, and we are working on decreasing rather than increasing the number of usable oil and gas pipelines.
  • The US is focusing on demonizing oil and gas company profits and potentially banning oil and natural gas exports. This will discourage local oil and gas investment and exacerbate shortages elsewhere. The US is still a large producer.
  • OPEC can’t raise it’s supply of oil and natural gas forever, nor do they have incentive to keep oil at the 2014-2019 levels. It makes a lot more sense to expect them to let oil float in an $80-$120 range.
  • The port of Vancouver is a major exporting port for resource-rich Canada. The recent mudslides have caused an enormous amount of damage to cities and towns as well as the roads and rails which connect the port to those resources. This includes 5% of the grain destined for overseas markets as well as a lot of coking coal (used to make steel) and oil (the pipelines in this area can’t be used and are very likely damaged).
  • Many of the minerals we mine, including copper and nickel as well as rare earth metals, are highly concentrated into a small number of major suppliers in a small number of countries. They can make a lot more money with tight supply than with heavy supply, and they have covid safety protocols as an excuse to dampen supply at will.
  • Similar problems are cropping up with Potash, a key ingredient in fertilizer, which will likely push food prices higher.

At the same time, we are NOT suffering from an excess of dollars. QE does nothing but take bonds from banks that would otherwise pay 2-4% per year and replace them with “overnight reserve assets” on the central bank balance sheet which cannot be traded and pay yields ranging from near zero to less than zero depending on country. This is why QE in Japan has never solved it’s persistent problems with deflation. We see this as emerging market currencies are losing value as they sell gold and treasuries and hike interest rates in response.

However, QE is used extensively as a tool to boost inflation expectations – which are being boosted louder than ever on the mainstream news right now in order to convince investors to continue to borrow money in order to buy assets – from stocks, to real estate, to cryptocurrencies. Margin debts in the US hit an all-time high, reflecting the tip of the iceberg for the amount of leverage in the market. Levered ETF’s are also extremely popular. Investment funds have been buying up houses like crazy, often sight unseen.

How much longer can this last? Insider selling has been at record highs, making big investment funds start to worry about being too long. Zillow (along with many similar firms) was buying real estate like crazy and has now abandoned buying altogether and started listing properties at a loss in many regional markets. Banks are concerned with defaults for the first time in 18 months as Evergrande and many similar firms fall into default. If this wave of borrowed money flowing into assets merely subsides, the lofty valuations can quickly start falling from their peaks. If it begins to reverse, we’re back at March 2020 all over again.

Thus my strange opinions that commodities are a good investment even while we are in a deflationary environment.

I am still in the mindset that we have one last hurrah before everything falls apart, and that we won’t really see that until Q1 of 2022. When that happens, you will want to be long US treasuries (such as ticker TLT), short the major indexes, or have a sizable cash position so that you can deploy capital.

If there is a major stock market crash, I believe that the government will intervene and commodities will prove to be tremendous investments at that point – particularly ones in short supply that take time to ramp up production in such as most mining companies. A deflationary bust as I described could easily push oil down to the $20’s again, but without investment in supply it wouldn’t take long to jump back up to the $80’s. Similar stories with gold, silver, copper, uranium, potash, steel, and so on.

My current allocations:

  • HEDGES (20.6%)
    • 20.6% TLT Calls
  • PRECIOUS METALS (43.8%)
    • 8.6% AG (Silver), mainly shares & some calls
    • 4.7% SAND (Gold, Silver & others), all calls
    • 4.4% EQX (Gold), mainly calls & some shares
    • 4.8% LGDTF (Gold)
    • 4.1% SILV (Silver)
    • 3.5% SILVRF (Silver)
    • 3.6% MTA (Gold & Silver)
    • 2.7% MGMLF (Gold)
    • 2.1% RSNVF (Silver)
    • 1.7% SSVFF (Silver)
    • 2.8% HAMRF (Gold)
    • 0.8% DSVSF (Silver)
  • URANIUM (17.5%)
    • 10.3% CCJ
    • 5.6% UUUU
    • 1.2% BQSSF
    • 0.4% UEC, all calls
  • COPPER & NICKEL (2.6%)
    • 2.6% NOVRF
  • CANNABIS (10.9%)
    • 1.6% AYRWF
    • 1.6% CCHWF
    • 1.6% CRLBF
    • 1.6% GTBIF
    • 1.5% TCNNF
    • 1.6% TRSSF
  • CRYPTO (0.8%)
    • 0.8% ADA
  • SHORT SQUEEZE (1.6%)
    • 0.5% FUBO, shares
    • 0.7% OCGN, shares
    • 0.3% WKHS, shares
    • 0.2% BB, calls
    • 0.1% ROOT, calls
    • 0.2% SDC, calls
  • DERECKS TRADES (0.2%)
  • CASH (1.9%)

Sector Roundup

Hedges: I actually sold some of my short dated TLT calls on Friday as it rallied like crazy with the risk-off stock dump. I’ll buy more if the inflation narrative manages to drive it down again. If we see another risk-off rally, I might start to pick up some puts, but for now I think they are too early and too expensive.

Precious Metals: The seasonality for these is great as they rallied in December from Thanksgiving week lows in all 5 of the last 5 years. I bet on them doing the same thing again, even betting a bit more on calls in AG expiring in January. If we do see a significant rally, which I expect, I’ll be a bit more aggressive on taking profits – particularly with my call options. I still plan to ride through next year with a large position here however, as I believe the valuations are still strong (ie. limited downside and large potential upside). A Q1 market dump like I predicted would cause precious metals to dump considerably, but just like in April-May 2020 I expect a fierce bounce-back recovery.

Uranium: It’s hard for me to be anything but bullish on this sector. It has highly concentrated ownership (mainly Cameco and Kazatomprom). Buyers are price-insensitive; it’s a small relative cost for utilities, and they need to keep their power plants running. Investment excitement with the Sprott Physical fund and Kazatomprom’s new physical fund with explicit goals of driving up the spot price. Lofty goals to produce more nuclear power in China. SMR’s and MMR’s (small modular reactors and micro modular reactors) which make development much easier for many countries, and a worldwide push to reduce carbon emissions. In addition, it is extremely difficult to increase production with the safety and environmental precautions required for mining and processing radioactive materials. I’ll be riding this sector no matter what happens, and if a deflationary bust hits these down, I’m buying here big time.

Nickel/Copper: I am much more worried about these in the short term because of the slowdown in construction in China. However, the supply of these key metals is highly concentrated. Chile and Peru produce the vast majority of our copper, it’s not even close. In addition, all of our crazy ESG programs require tons of it – electric cars, solar panels and windmills with their excessively oversized long-distance power lines, and so on. I’ve reduced as much as I plan to, and I’ll be buying here big time if there’s a crash next year. • Largest producer of copper in the world 2020 | Statista

Cannabis: The main reason I got into this sector is because I wanted a strong growth story that didn’t involve commodities. US Cannabis certainly has that – these companies are growing like crazy while major investors are not allowed in the space until Congress passes legislation allowing them to. It looks more and more likely that this will happen as time goes on. On Friday, when almost everything was selling off, I looked in to buy but they didn’t drop – they actually rose on the day. In fact, my allocation increased significantly this week without any buying, because these went up as everything else dropped. Anyway, I’m not planning on buying more at this time, but I’m not selling either, and if you don’t have a stake in the sector then you should consider adding one, because I really think it’s long bottoming process is finally behind us.

Crypto: This sector frightens me. Bitcoin City, Crypto Stadium, big NFL players asking for salaries in Crypto – these are things you see at tops. Plus, this is a highly speculative asset class where most investors are clearly expecting to get rich quick. I’m holding a bit of Cardano in case of a year-end hurrah like we saw in Bitcoin in 2017, but I’m not planning on holding a stake into January.

Short Squeezes & Derecks Trades: This was my attempt to play out the highly favorable seasonality in SPY during the month of November. It didn’t work out well; Derecks Trades did okay while Short Squeezes was a big flop. I’ll play out what I’ve got, looking for decent exits and selling before year end, but I’m done adding here for a while.

Cash: I intend to build up a stronger cash position in Q1, but I won’t rush to sell things before then. I expect it to continue to hover between 1-5% in December.

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Precious Metals Season is Next

During Thanksgiving week, it is normal for precious metals and the miners to get crushed prior to the options expiration, which comes on 11/23 this week. This effect is magnified in the mining stocks. Here’s a quick look at the seasonality that’s coming:

As you can see, the senior gold miners and junior silver miners tend to move together here, and you generally want to hold them during the month of December. How well does this level of seasonality usually work out? Let’s look at the last couple months that had 100% readings:

As you can see, the seasonality seemed to work for October in Bitcoin and November in the S&P 500, so now we’ll see for December in precious metals, where the week of Thanksgiving almost always marks a low.

As far as the general market goes, I’m as nervous as anyone about the current situation we’re in. The parabolic rise in price over the past 20 months, the relative divergences, the insider selling, the low breadth, meaning most stocks are dropping and a few names are pulling the index higher. The bond market is showing a flattening curve that screams low growth ahead, while the US Dollar rallies as a sign of financial trouble. Europe is locking down again over concerns with Covid-19. China is slowing with the Evergrande default and their construction sector will stay slower for a while. German industrial output is low, as are their export weights & volumes, though their exports have gone up in dollar value, the CPI has been soaring with huge bottlenecks in shipping and rising energy prices (oil, natural gas, etc.), and the port of Vancouver had an enormous problem with mudslides that will put all transportation to and from that area out of commission for weeks – and this is where 4% of the world’s wheat exports are shipped in addition to large amounts of coking coal (used in steel production) and huge disruptions in oil pipelines.

In other words, we’ve got more to worry about than ever, so why is the market at all-time highs? Well, margin debt went higher yet again in October so investors are still convinced it’s a good idea to borrow money to invest right now. Corporate buyback programs came back big time this month, pushing the big names higher even as insiders sold. Stock options are still being gamed all over the place to drive indexes.

There are also still a lot of shorts left to be squeezed. According to Stock Short Interest (shortsqueeze.com) we have the following:

  • SPY Days to cover: 2
  • QQQ Days to cover: 1.7
  • IWM Days to cover: 4.3
  • EEM Days to cover: 2.2
  • AAPL Days to cover: 1.3
  • MSFT Days to cover: 2.1
  • AMZN Days to cover: 1.5
  • FB Days to cover: 1.3
  • GOOG Days to cover: 1.9
  • TSLA Days to cover: 1.3

Note that days to cover is just the number of shares sold short over the average daily volume traded – I use that here because it helps to compare one stock vs another and show a relative gauge for how much short squeeze potential is available. I think about this primarily because of the short-squeeze characteristics of the 2000 Nasdaq top which like today was led by tech and had record high retail participation, though today there is a lot more data available to the average person and a lot more short-squeeze and options market gaming going on. Here’s our market compared to a few prior tops:

It seems that both October and March are popular months for stock market crashes. Perhaps these represent weak points in the workings of our financial system, maybe with overall liquidity from Eurodollar debt cycles or financial moves made by big corporations and investment funds on a quarterly basis, who knows, but I tend to think that a crash outside of these seasonal parameters would take a significantly bigger exogenous shock.

That being said, I am still looking more for a 2000-style short squeeze to blow-off top rather than a sudden November or December crash. So how am I trading this?

I sold off all of my EEM puts for a small gain last week, so I have no puts left. I also bought some more TLT calls, so this bet on dropping long-dated treasury bond yields are my only current market hedge. I reduced my base metals exposure a bit more, selling off more of my NOVRF copper/nickel royalty play. The strengthening dollar, flattening bond curve, and drop in Crypto spooked me a bit as well, so I sold off my Etherium for a decent gain. Crypto could be a canary in the coal mine to a dollar shortage in this case, but it could also be a normal selloff we see regularly in this sector.

Last week I also saw significant gains all due to precious metals, and I took advantage early this week by selling off some of my Jan 2023 calls in miners. That will allow me more leeway to increase back next week if I’m right about those getting crushed over Thanksgiving week and jumping higher in December. And last but not least, I increased my short-squeeze plays a bit.

SDC has been a big short squeeze play for me lately, with its prominent position on highshortinterest.com, its high options open interest in a variety of strikes, and its super cheap call options. For example, Thursday morning I went ahead and bought 100 $4 calls in this one for $0.03 each. I lost this bet of course, but 100 calls means that for every dollar above $4/share I would get 100 calls x 100 shares/call = $10,000 of upside. The chances of a spike might seem remote, but look what happened to AMC in a similar position back in February:

Basically, this stock jumped from around $4.90 to $19.90 overnight. I’m not necessarily betting on that level of spike with SDC, but when you’re spending a small amount per call option, any tiny gain is magnified. You can lose week after week with these things, and it is important to see if you’re still getting that open interest in call options on these plays. So I’ve divided between a number of different potential short squeeze plays, with a small amount of money bet in each, and with SDC in particular I have bets going out the next few weeks – on which I spent anywhere from $0.08 to $0.12 per call option. If we see end-of-year short squeezes anywhere, one of mine should hit. Keep in mind, these are lottery ticket plays so the calls are likely to all go to zero, but the crazy outsized gains possible are also there. This not only means that one win could easily make up for 20 losses, but also that I actually have a chance of winning really big, which isn’t normal in the investing world. Strange times we’re in.

Anyway, here’s where my portfolio ended out the week:

  • HEDGES (19.1%)
    • 19.1% TLT Calls
  • PRECIOUS METALS (46.0%)
    • 8.5% AG (Silver), mainly shares & some calls
    • 5.1% SAND (Gold, Silver & others), all calls
    • 5.1% EQX (Gold), mainly calls & some shares
    • 5.0% LGDTF (Gold)
    • 4.0% SILV (Silver)
    • 3.8% SILVRF (Silver)
    • 3.8% MTA (Gold & Silver)
    • 2.9% MGMLF (Gold)
    • 2.2% RSNVF (Silver)
    • 1.9% SSVFF (Silver)
    • 2.8% HAMRF (Gold)
    • 0.8% DSVSF (Silver)
  • URANIUM (15.3%)
    • 9.1% CCJ, covered calls sold on it
    • 4.5% UUUU, covered calls sold on it
    • 1.3% BQSSF
    • 0.4% UEC, all calls
  • COPPER & NICKEL (2.6%)
    • 2.6% NOVRF
  • CANNABIS (9.5%)
    • 1.6% AYRWF
    • 1.6% CCHWF
    • 1.6% CRLBF
    • 1.6% GTBIF
    • 1.5% TCNNF
    • 1.6% TRSSF
  • CRYPTO (1.0%)
    • 1.0% ADA
  • SHORT SQUEEZE (2.4%)
    • 0.5% FUBO, shares
    • 0.8% OCGN, shares
    • 0.4% WKHS, shares & calls
    • 0.2% BB, calls
    • 0.2% BBBY, calls
    • 0.1% ROOT, calls
    • 0.5% SDC, calls
  • DERECKS TRADES (0.3%)
  • CASH (3.6%)

A couple of other buys I should mention… On Friday, I bought the dip in Uranium miners, adding more CCJ shares and some calls in UEC. Also, I bought the dip in Cannabis stocks by topping off each of my stocks to stay at my new arbitrary minimum fixed dollar level. It’s an easy way to average in, I just add a few hundred when a name drops a few hundred below my threshold, and I let the stocks ride when they are at or above that threshold.

Also, I haven’t been adding to the Derecks Trades portfolio I had, but I should mention the performance so far … I have 5 call options remaining on different names that still have a month of duration left, and those aren’t looking good yet. I also closed out 6 names from that list, which end up with an $87 profit for $1,720 at risk so the performance remains to be seen. If you count my MARA play because he did recommend it, I just bought it for my own reasons at the same time, then shoot the profit up by $4,800 because that one was wildly profitable. As for now though, I’ve been reviewing his charts and elliot wave counts mostly to try to gauge when this market will peak. Dereck thinks it might have already, but I fear the 2000 short-squeeze potential enough to keep my hedges in TLT calls and avoid buying index puts at this time. For now, I’m assuming that we end with an up-month in November just like we saw in the past 5 years, but I might scale into some puts in December and a bit more between January and March 2022.

Good luck and happy trading!

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