Bear market rally?

Rauol Pal of Realvision suggested that this rally is being led by re-balancing of stock/bond funds, which would explain why you see inflows into stocks while Cryptocurrencies, which are not part of mutual fund flows, continue to struggle.

I anticipate fierce rotations under the surface, so here’s an RRG chart from stockcharts.com:

It looks like anything consumer-related got killed this week, which makes sense given the large inventory builds at Wal-mart and Target, and the earnings disappointment and layoffs at Amazon. Money is piling into energy, utilities, health care, and materials for that combination of inflation hedge and defensive sectors with dividend yields.

I actually sold covered calls on a lot of my Uranium miners a day early. I saw this awful bearish wedge pointed out on Uranium Insider, and decided to pull some money out by selling out-of-the-money covered calls for the big June 17 expiry:

The rally friday was actually strong enough to get a lot of my covered calls close to the money. With CCJ for example, I sold a $25.50 strike. I will very likely follow through with even more covered call selling next week, so if this rally continues through June 17 then I could end up significantly reducing my position again, just like I did on April 15th.

Note that I am actually very bullish Uranium miners in the next few years, but we are in an incredibly steep rate-hiking cycle as the economy is clearly turning down. This chart right here should scare anyone invested in risk assets:

Note that the data here is monthly, and it only goes through April 30th, but it already shows a -$162 billion (-17% so far) decline in margin debt with another -$173 billion (-29% further) to go to bring us to the pre-Covid trend or -$293 billion (-61% further) to bring us to the March 2020 bottom. Keep in mind that reduced margin debt is pulled directly from the stock market, and that it is the visible tip of the iceberg when it comes to financial leverage. We are clearly in a de-leveraging cycle right now, which is driven largely by the rate hiking cycle.

As risk-free interest rates are pushed higher, a few things happen:

  1. Margin debt gets more expensive. This also affects all other forms of financial leverage from new mortgage loans to collateralized loans in the vast and opaque repo market.
  2. Bonds lose value as interest rates go up, so any leveraged bond funds (perhaps using the repo market) will be able to borrow less from their bond portfolios. If the bond values fall enough, they could get a margin call in which case they have to sell off some of their bonds to pay down the margin (or repo) loan. Meanwhile, their income goes down as the spread between the interest of their held bonds and the interest on their repo loans shrinks.
  3. Stocks also lose value in this type of environment, which could lead to margin calls if the investors (or funds) don’t sell enough to keep their margin levels manageable.
  4. Non-leveraged investors start to get better options if they decide to reallocate money more defensively. Stock market declines encourage them to consider these options.

The way I see it, the Federal Reserve is intent on raising interest rates until we start to see some real forced selling here. They see the combination of sky-high asset values with CPI in the high single digits for over a year as a real shot to their credibility. Consider that the pre-pandemic peak in the S&P 500 was 3,380, which is 23% lower than Friday’s closing price. In addition, look at median housing prices:

Median housing prices are up 25% from the pre-pandemic norm. The federal reserve likely realizes there are significant risks to popping this bubble, and that it will take time to see this come down, but they are certainly of a mindset to want to reduce these back to levels they consider “normal.”

Right now, I’m still of the mindset that I don’t want to sit on the sidelines while massive amounts of money change hands. I’ve still got decades before retirement, and I still need to get significant returns if I want to have a chance at getting anywhere. My tiny 401k will simply sit in a money-market fund until the Fed goes back to easing, and then it will go back to 100% stocks, and I wouldn’t be surprised if that simple strategy beats my individual market performance – which is pretty dismal to date. So anyway, what now?

I still believe that we’re in the early stages of an upturn in commodity prices. There has been underinvestment for a decade, and we simply need a lot more investment going into energy and mining in the future. Still, a deep recession will hurt things badly between now and then. Mining and energy were extremely choppy from 2000-2003, so you really had to take profits on those rips higher. They also had an incredible run from 2003-2008, but even there it was incredibly choppy with opportunities to sell overbought rips and buy oversold dips throughout. Needless to say, I need to keep this in mind and be ruthless about selling this next rally so that I can be there to buy the following dip.

This includes the uranium miners. The funamental story behind them gets more and more bullish by the day, so I don’t want to let my exposure go to zero, but in a de-leveraging environment you need to sell those rips so that you have money available when others are forced to sell.

I also believe that the ramifications to the financial system will be tremendous as the federal reserve continues there hiking cycle, and that they will be forced to stop for fear of creating a systemically destabilizing event such as the Lehman Brothers bankruptcy in 2008. With the amount of leverage out there, they will probably hit the limit this summer and be forced to immediately pivot back down to zero interest rates and easing. The best strategy is actually to wait on the sidelines until this moment hits, but I will more likely increase my hedges, primarily in Jan 2024 TLT calls, after the next 50bps rate hikes go through around June 15th.

So here’s my plan going forward…

  1. Sell more June 17 covered calls on Uranium miners if they continue to rally. Same with my other miners if they catch a serious bid. Some of these are things I can’t sell covered calls on or the calls too cheap to make it worth my while, so I’ll just sell them if they rally a lot by June 15th.
  2. Sit and wait in mining stocks that are still way down. I know it sounds stupid, selling winners and sitting on losers, but I am long-term bullish on the sector so I’m not selling a stock like LDGTF which is below the March 2020 lows, or MTA which is hovering at 2-year lows, or AG which is between the two. I’ll be careful about allocating more here at the moment, but sentiment in precious metals miners is in the tubes while the metals themselves aren’t doing too bad. Same goes with my battery metals miners.
  3. Sit and wait in my US cannabis names. I’m not going to add on new lows, I put in enough, but I am still overall bullish on the sector and my allocation is low enough where I can just wait it out.
  4. Buy more TLT calls and possibly SPY puts if they’re cheap enough, but not until after the federal reserve meeting.
  5. I should not buy anything for the next 3 weeks.

Here’s my latest portfolio allocation:

  • HEDGES (13.9%)
    • 13.9% TLT Calls
  • PRECIOUS METALS (34.5%)
    • 4.3% SILV
    • 4.1% AG
    • 3.5% MTA
    • 3.1% SLVRF
    • 2.9% EQX
    • 2.9% LGDTF
    • 2.5% SAND
    • 2.1% RSNVF
    • 2.0% SSVFF
    • 2.0% MGMLF
    • 1.8% HAMRF
    • 1.4% DSVSF
    • 1.1% MMNGF
    • 0.9% BKRRF
  • URANIUM (22.2%)
    • 4.5% CCJ
    • 3.4% DNN shares & calls
    • 3.0% BQSSF
    • 2.9% UROY
    • 2.8% UUUU
    • 2.2% UEC
    • 1.8% ENCUF
    • 1.7% LTBR
  • US CANNABIS (15.3%)
    • 1.9% AYRWF
    • 1.8% CCHWF
    • 1.6% CRLBF
    • 2.2% CURLF
    • 1.7% GTBIF
    • 2.2% TCNNF
    • 1.6% TRSSF
    • 2.3% VRNOF
  • BATTERY METALS (10.7%)
    • 5.1% NOVRF
    • 4.0% SBSW
    • 1.6% PGEZF
  • CRYPTO (2.1%)
    • 2.1% XRP
  • OTHER (3.2%)
    • 2.6% DOCN (cloud computing)
    • 0.5% OGZPY
    • 0.1% ATCO calls
  • CASH (-1.8%)

I actually did add to a number of things this last week, in small amounts at least. This includes a number of Uranium miners like LTBR, UUUU & UROY as well as some precious metals miners like MTA and LGDTF. They were pretty beaten down early in the week so it was hard for me to resist.

It looks like I’ll lose my DOCN allocation soon though, as I sold a June 17 $45 call on it when it was still sitting at $38. It absolutely soared since then so its in-the-money now. Closing this off at a 10% overall loss at this stage in the cycle isn’t bad for a beaten-down tech name.

Anyway, I hope I gave you some food for thought here. Good luck on your trading strategies going forward, and be careful out there!

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Tech Bear, Commodity Bull

This week I figured I’d explain my thesis of what’s going on with markets, and why I expect we’re at the early stages of a bull market in commodities despite the bust in speculative tech, downturn in stock indices, rate hiking cycle, and pending recession.

The first idea I wanted to show was that of the decade themes I’d come across about years ago – own gold in the 70’s, Japan in the 80’s, Tech in the 90’s, Commodities in the 00’s, Tech in the 10’s, so now what. It makes sense to me that commodities are cyclical, going through cycles of over-production and price collapse, chronic underinvestment & consolidation, underproduction while the world works through stockpiles from the past, rapid increases in the commodity spot price, then massive investment in the sector until we hit overproduction again.

In order to show this, I first looked to the ETF’s, but they are all created recently. Yahoo Finance doesn’t let you make log charts so multi-decade charts don’t work, and they let you download historical data for stocks but not for futures. So here’s the proxies I came up with using Microsoft for tech, Alcoa for base metal miners, and Barrick Gold for gold miners, importing into excel, and then messing with the log charts to make them look somewhat reasonable (log 2 worked the best; log 10 just had too much space between the axis):

All I can say here is, real world price trends won’t always match your theory. Maybe better proxies would fix it because of idiosyncrasies of the individual companies over the decades, who knows.

I can tell you that the reason I focused on mining stocks rather than oil is because the fracking cycle shortened the curve. With fracking in the US, we could get oil wells drilled and supplying in a year or two and they would run dry a year or two after that, whereas previous oil supplies such as ocean rigs would take nearly a decade of investment and then produce for a long time. Mining still can’t be rushed, it takes years to get a project going and then it will produce for a long time.

Uranium has the most classic bullish supply cycle going on, and I am strongly considering increasing my allocation to that sector. After working through massive stockpiles following the shutdowns driven by the Fukushima disaster, we are in a massive worldwide cycle of nuclear plant construction while mining capacity is glaringly inadequate. Follow Justin Huhn and his Uranium Insider for more information there.

Gold miners are simply grossly undervalued in regards to price. I posted a chart on that 2 posts ago (May 7th), so I won’t re-post it now, but I can’t easily explain why that is. Its tempting to question the fundamentals, perhaps its much more costly to mine and the new grades arent as good, but I don’t think thats it. Besides, fundamentals often have much less to do with stock price movements than most people think.

We’ve seen an incredible decade where money has flooded into the SPY and QQQ indexes more than ever, with the result that value stocks got cheaper while big growth stocks skyrocketed. Other trends from ESG to outright political hostility towards anything involving energy or mining have played a big role as well, leading us to a world of chronic under-supply of many critical materials.

The way I see it, demand for many commodities such as oil and copper have never recovered from the covid crash, while supply has been hit so bad that prices are near all-time highs in many key markets. Here are some examples:

We fly a lot less planes today (with higher priced tickets):

We certainly haven’t increased industrial/mining production in the past 20 years according to this chart:

China’s copper demand hasn’t been decreasing despite lockdowns and property busts and everything:

US production of oil is still down at 2018 levels, and is set to fall sharply do to lack of investment. DUC = drilled but uncompleted wells. With fracking, wells are pre-drilled and then tapped later to produce their oil. We are blocking new drilling for fracking, so the uncompleted wells are falling sharply as they are tapped for use, and oil production will plummet when they run out.

Sorry about the crazy chartstorm above, but I am a retail investor with a full time job and no subscriptions to proprietary data, so I am limited to the random array of charts I can get from yahoo finance, the st louis fed, and whatever google searches can bring up.

Anyway, I’ll summarize my perspective here:

  1. I agree with deflationists like Jeff Snider & Dave Rosenberg that we are actually seeing signs of acute dollar shortage in the system and we’re likely in a nasty recession already (GDP was surprisingly negative in Q1, at -1.4%).
  2. This downturn will have an enormous effect on the general stock indices if margin debt reduces to anything near its pre-pandemic levels. It has already been decreasing since October.
  3. Despite the recessionary trends we see including the active lockdowns in China, many commodities like copper, gold, and oil are at or near their highs.
    1. I believe that this means we will be stuck in recessionary conditions until we actually improve supply conditions for raw materials. Instead, we see production declining in many key sectors – particularly oil and farming. Mining will be complex going forward as populism in emerging markets explodes, and I might not be riding the best horse here, but I see an under-invested and under-priced sector and I’m taking a risk there.
    2. I realize that 2008 saw similar conditions in terms of peak commodity prices preceeding a downturn. I just believe that what we see much more resembles the 2000 tech bust that led to a commodity bull market. In the 2008 commodity peak, miners and drillers were flush with cash after an era of massive expansion.
  4. Right now it feels like investment money is much more crowded in the tech sector than in the commodity sector, and I expect investment funds to slowly rotate toward commodities over the next several years. This will be volatile, especially in sectors like Uranium which are relatively tiny in market cap and volume, but the small size leaves a lot more room to grow.

Here’s where my latest allocations landed:

  • HEDGES (14.9%)
    • 14.9% TLT Calls
  • PRECIOUS METALS (32.9%)
    • 4.2% AG
    • 3.9% SILV
    • 3.4% MTA
    • 3.2% SLVRF
    • 3.0% EQX
    • 2.4% LGDTF
    • 2.0% SSVFF
    • 2.0% SAND
    • 2.0% RSNVF
    • 1.5% HAMRF
    • 2.0% MGMLF
    • 1.1% MMNGF
    • 1.4% DSVSF
    • 0.9% BKRRF
  • URANIUM (20.5%)
    • 4.4% CCJ
    • 3.1% DNN shares & calls
    • 2.7% BQSSF
    • 2.5% UROY
    • 2.1% UEC
    • 2.7% UUUU
    • 1.6% ENCUF
    • 1.4% LTBR
  • US CANNABIS (16.1%)
    • 1.9% AYRWF
    • 2.0% CCHWF
    • 1.8% CRLBF
    • 2.4% CURLF
    • 2.1% GTBIF
    • 2.4% TCNNF
    • 1.7% TRSSF
    • 1.9% VRNOF
  • BATTERY METALS (10.3%)
    • 5.1% NOVRF
    • 3.8% SBSW
    • 1.4% PGEZF
  • CRYPTO (2.3%)
    • 2.3% XRP
  • OTHER (3.0%)
    • 2.5% DOCN (cloud computing)
    • 0.6% OGZPY
    • 0.1% ATCO calls
  • CASH (-0.1%)

I didn’t trade much this week. I sold an out-of-the-money covered call in DOCN as I don’t expect it to be higher after next month’s fed hikes, and I bought a bit more UUUU because it is one of my favorite Uranium plays and I currently feel under-allocated there.

Right now is really all about patience. Everyone knows that the Fed will continue to hike aggressively until something breaks, so sentiment is very negative. I don’t want to cram into puts because we could have an aggressive bear market rally at any moment, and I don’t want to cram into TLT calls because I could be wrong about how long it takes the Fed to pivot and how high TLT ultimately goes.

I am fully invested, and I feel that everything I’m in is both cheap and ripe for a major move higher in coming years. I don’t want to use much leverage – either in margin or in call options – because we could easily go much lower; we haven’t even seen forced selling hit the markets yet. So basically I’m waiting. If there is a massive selloff, I’ll nibble at some really cheap mining shares as long as my margin doesn’t get too high, and if there is a significant bear-market rally then I plan to sell out-of-the-money covered calls on all of my positions again.

Best of luck, whatever your strategy happens to be.

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Liquidity is Draining from the Markets

It was a great week for the US Dollar. On the flip side, it was a terrible week for any kind of investments. Everything sold off against the dollar including all stocks, bonds, crypto, foreign currencies, and commodities. Thanks to Friday’s rally I’m only down 6.4% on the week, which is better than the prior 3. My portfolio is actually down 35% since the beginning of April, so it’s quite volatile.

As you can see above, these last few weeks have been tough on all investments as everything was sold down together. Above is the S&P 500 next to proxies of everything in my portfolio.

As you can see, margin debt peaked around October and has been coming down. This is the tip of the iceberg as far as market liquidity goes. Margin debt is lending directly on stock portfolios to buy more shares, but it is just one small form of leverage in the system that happens to be visible.

In the fall of 2019, there was a dollar shortage which led to a spike in the repo markets leading the Fed to intervene. This was dubbed “Not-QE” by the fed, and let to a market meltup prior to the crash in March.

Lately, the federal reserve has been intervening heavily in the reverse repo markets instead. Notice how reverse repo ramps up and flattens roughly in sync with QE (Total Assets). The way I interpret this, the federal reserve wanted to keep QE going because they thought it would “provide liquidity,” helping the stock markets and the economy. This led to a shortage of collateral, especially among money market funds that have to invest in short-term treasuries. The Fed intervened by effectively selling treasuries in the Reverse Repo market to put a floor under the yields and prevent them from going negative. Once QE stated to top out, so did RRP. Using this logic, as QT progresses (Total Assets falls), I would expect the RRP to follow it down. What does this mean? Does this reflect excess liquidity in the system? These questions are certainly up for debate.

One thing that is very clear these last couple of months is the spike in the economically sensitive 10 year treasury yield, on which many loans such as mortgages are based. In addition, the recent rate hikes (matched with hikes in the RRP rate) set a higher floor on interest yields which increases the cost of margin debt and borrowing in the repo markets while reducing the value of the bonds and stocks used as collateral for those loans. Margin debt is still 25% above 2019 levels and 40% above the march 2020 trough, so I expect that to continue falling which means more general selling pressure in all the markets.

Note that all bear markets see sharp rallies, sometimes for months, but I expect general de-leveraging and selling of risk assets to continue as long as the Fed keeps hiking interest rates. I actually have my 401k (which is much smaller than my portfolio below) sitting in money market funds until the Federal Reserve announces it is done hiking rates, at which point I plan to move it back into a stock fund.

Here’s where my portfolio ended up:

  • HEDGES (14.1%)
    • 14.1% TLT Calls
  • PRECIOUS METALS (34.0%)
    • 4.3% AG
    • 4.0% SILV
    • 3.8% MTA
    • 2.9% SLVRF
    • 2.9% EQX
    • 2.7% LGDTF
    • 2.1% SSVFF
    • 2.0% SAND
    • 2.0% RSNVF
    • 1.9% HAMRF
    • 1.9% MGMLF
    • 1.3% MMNGF
    • 1.3% DSVSF
    • 0.9% BKRRF
  • URANIUM (20.3%)
    • 4.3% CCJ
    • 3.1% DNN shares & calls
    • 2.9% BQSSF
    • 2.6% UROY
    • 2.3% UEC
    • 2.0% UUUU
    • 1.7% ENCUF
    • 1.5% LTBR
  • US CANNABIS (16.0%)
    • 1.6% AYRWF
    • 1.9% CCHWF
    • 1.8% CRLBF
    • 2.3% CURLF
    • 2.2% GTBIF
    • 2.4% TCNNF
    • 1.8% TRSSF
    • 2.0% VRNOF
  • BATTERY METALS (10.5%)
    • 5.1% NOVRF
    • 3.8% SBSW
    • 1.6% PGEZF
  • CRYPTO (2.2%)
    • 2.2% XRP
  • OTHER (3.1%)
    • 2.5% DOCN (cloud computing)
    • 0.6% OGZPY
    • 0.1% ATCO calls
  • CASH (-0.2%)

Note that I actually managed to keep margin near zero. This isn’t easy when all of your assets which you believe to be long-term buys keep falling. I have to admit though, a bonus check enabled me to buy some this week so it wasn’t purely discipline there.

I am happy with my portfolio allocations overall, despite the current market pressure. Still, I consider my mining stocks as my biggest priority right now – Uranium, Gold, Silver & Battery metals – so if these low levels persist then I won’t be adding paychecks to any of my other holdings. You can see how unbalanced my cannabis shares are getting as a result, as I had been keeping them above a minimum market value as they sank in the past whereas now I’m just letting them fall where they land.

These are dangerous times in the markets for sure, but there are also opportunities. Last note, Dave Rosenberg was interviewed on the Macro Voices podcast a few days ago, and I was very happy to hear that his views aligned with my portfolio. He believes that 10Y interest rates are in the process of topping out for the cycle and will be much lower by year-end, that gold will start to outperform likely by the end of the summer when Powell announces a freeze in future rate hikes, and that he is bullish on certain commodities such as Uranium from a supply perspective. It always makes you feel better when one of your most trusted financial analysts talks up your positions.

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Crazy Fed Week Buying

This week I figured it would be fun to start with my predictions from last week and how my gameplan panned out.

Here is exactly what I said last week:

  1. Relief rally Monday morning from oversold lows, speculation that perhaps the federal reserve will ease up after the massive disappointment with Q1 GDP falling by 1.4% when it was expected to rise by 1%.
  2. A violent shock sometime between Monday & Tuesday, as Powell makes it clear that he is moving forward with a 50bps hike, and that his main goal is to crush inflation Volcker-style.
  3. Markets wobble a bit Wednesday as institutions look for buyers to appear.
  4. A significant selloff in both stocks and bonds on Thursday, probably through Friday as the buyers supported by Japanese yield-curve-control policies don’t show up at all during Golden Week.
  5. Counter-rally the following week from oversold lows, massive influx into US treasuries to get that sweet yield.

If it all works out as I expect, I should be 100% invested by the end of the week. I’ll buy a little bit here and there, focusing on Thursday as my biggest potential buy day. I plan to pick up a lot of TLT calls and Uranium miners specifically, though I might go for some of my other names if they are truly beaten to a pulp. I also plan to buy some more XRP which I expect to get somewhere in the 50-cent range.

Here’s how it played out:

  1. Market continues lower into Monday and TLT dives. I bought (3) Jan 2024 TLT calls and re-entered SAND, one of my favorite precious metal royalty companies that I had exited completely a couple weeks back. Market rallies at end of day, as institutional shorts finally take some profits off the table.
  2. Markets hover around at low volume until Powell’s speech on Wednesday. I bought a couple more crushed commodity plays – CCJ, UEC, NOVRF, etc. I also topped off my US Cannabis (again).
  3. Powell’s comment takes 75bps hikes off the table on Wednesday. Algo’s re-price bonds a bit and market shorts frantically cover through the end of the day. I remember thinking that I was going to end the week with a lot of excess cash after all, and being glad that I at least purchased some things earlier in the week.
  4. Markets plunged Thursday and Friday as they digested Powell’s message of 3 back-to-back-to-back 50bps rate hikes this summer. Short speculators re-entered, long speculators backed off. I bought 3 more TLT calls as that plunged, then focused on the fire sale in my favorite mining shares. I bought a lot, and even ended up pricking up some XRP in the 50’s at the end of the week (well, $0.59 or so).

All-in-all, I feel like it was a pretty successful week, which is funny because my portfolio ended down 8.8%. In fact, my portfolio value is down 25% since the beginning of April, but who’s counting? Psychology is weird that way I suppose, it doesn’t seem so bad if you’re accumulating. I suppose that’s why us retail investors often catch falling knives in these markets.

Here’s where my portfolio ended up:

  • HEDGES (12.9%)
    • 12.9% TLT Calls
  • PRECIOUS METALS (35.5%)
    • 4.3% SILV
    • 4.0% SILVRF
    • 3.2% AG
    • 3.2% EQX
    • 3.0% MTA
    • 2.9% LGDTF
    • 2.5% MGMLF
    • 2.4% SSVFF
    • 2.2% RSNVF
    • 2.1% HAMRF
    • 1.8% SAND
    • 1.6% MMNGF
    • 1.5% DSVSF
    • 0.8% BKRRF
  • URANIUM (18.0%)
    • 3.2% CCJ
    • 1.4% UUUU
    • 2.8% UEC
    • 2.9% BQSSF
    • 2.4% DNN
    • 1.2% DNN calls
    • 1.5% ENCUF
    • 2.5% UROY
  • US CANNABIS (17.4%)
    • 1.9% AYRWF
    • 2.2% CCHWF
    • 2.1% CRLBF
    • 2.4% CURLF
    • 2.2% GTBIF
    • 2.5% TCNNF
    • 1.9% TRSSF
    • 2.1% VRNOF
  • BATTERY METALS (11.4%)
    • 5.7% NOVRF
    • 4.1% SBSW
    • 1.6% PGEZF
  • CRYPTO (2.3%)
    • 1.9% XRP
    • 0.4% BTC
  • OTHER (3.1%)
    • 2.4% DOCN (cloud computing)
    • 0.6% OGZPY
    • 0.1% ATCO calls
  • CASH (-0.5%)

Speaking of retail investors catching falling knives, that is exactly what all of my US Cannabis buying has been. The sector ETF MSOS went from $42 to $14 in one year. As my holdings are simply top ones in MSOS, that’s a pretty good average of all of those. My stake is higher mainly because I topped it off to keep the dollar amount the same while my portfolio value went down as a whole. To be honest, I probably lost more in TLT anyway though.

As for the successful part, I re-entered and/or accumulated a lot of my favorite miners that I had exited week ending 4/14, including AG, SAND, EQX, CCJ, UEC, DNN, UROY and more. I also shifted more towards battery metals by adding to the severely beaten-down NOVRF and SBSW, and I greatly increased my share of Uranium miners.

Here’s the basic reason I’m so bullish on Gold & Silver, Uranium, and Copper mining in 3 charts:

With gold, it just seems amazing that the miners are so beaten up while the spot price is near its 2011 peak. Copper miners fare better against their metal, but they are still below their 2011 peaks while the spot price is higher.

Uranium is a similar story, although the chart isn’t as clear. I had to get Uranium spot pricing from the St Louis Fed and combine it with monthly close pricing of CCJ and DNN from Yahoo Finance and put them together in Excel, so it’s not a relative performance chart like the other two. I tried a log axis and it made things more confusing, so I just put DNN on an axis on the right so that it would show up despite the lower price. Needless to say, but Cameco and Dennison are much lower than they were at comparable Uranium spot prices in 2006 and 2011, at a time when Uranium Spot price has enormous structural pressures to the upside.

Anyway, the miners are all super cheap compared to the metals. In addition, mining in general hasn’t expanded much in the last decade due partially to the collapses in spot price and partially because they aren’t ESG and passive indexing has led much more money into growth than value. Mines take years to get online and producing, and during that time the price should continue higher due to undersupply. It still seems incredible that Copper is near peak valuations while China is not only locked down, but has been going through a drawn-out homebuilding bust for over a year.

We are in a very strange time, where it’s extremely difficult to find good comparisons for where we are headed. The 2008 housing bust came off high commodity prices and low tech valuations, with enormous stimulus in China, mainly going into construction. The 2000 dot-com bust came off low commodity prices and high tech prices as globalization and US outsourcing & off-shoring were expanding like crazy. The 1970’s oil shocks was during a time of a rapidly growing labor force, a big war with a draft, strong unionization, strong US production capacity, and low overall debt levels. The late 1940’s commodity spikes were just after WW2 as the Korean war brought demand forward in fear of rationing. Debt levels were high, valuations were low, and we were about to start a period of massive rebuilding internationally and massive infrastructure investment in the US. None of these periods seem to fit today.

Today we see signs of an incredibly weak economy in the US and abroad, crazy high debt levels worldwide, property bubbles that show signs of turning in many countries, and a Federal Reserve intent on hiking rates like crazy despite a soaring US dollar and inverted yield curves. To make matters worse, the state of the economy itself and the reasons for it are in complete confusion. Here are some examples:

  1. Labor market
    1. Many people like me, Jeff Snider, David Rosenberg, etc. see a weak labor market shown by a sinking labor force participation rate, a smaller workforce than 2019, and negative real wage growth. This trend has been going on for decades, it took a serious and permanent change for the worse in 2008 and it never recovered.
    2. The concensus view, particularly among our political leaders and the Federal Reserve economists, is that we have an incredibly tight labor market as shown in their headline unemployment rate and their soaring JOLTS data (which is flawed in a number of ways, but that’s another story).
  2. Money supply
    1. There have been serious signs of dollar shortages and collateral shortages that have been resulting in weak demand, weak growth, and recurring crises in much of the world including the Eurozone, China, and elsewhere. The US has been somewhat shielded from the effects, but it still shows up in our incredibly slow GDP growth, shrinking labor force, and lack of real wage growth. We took years to “recover” from the great financial crisis, but we never reached the former trendline growth so arguably we never recovered.
      1. The high CPI is largely due to the combination of demand shocks and supply shocks.
      2. Demand shifted from services to consumer goods in the pandemic and was temporarily boosted by fiscal transfers from worldwide governments (particularly the US) in 2020 and early 2021.
      3. Supply remained constrained partly due to the lockdowns, but also partly due to the complete lack of willingness in natural resources development. The US and Europe block most energy and mining investment citing “environmental concerns” while the emerging markets have seen a decade-long series of accelerated booms and busts in these sectors, and they have trouble accessing capital anyway.
    2. The consensus view is that the central banks of the world united in a money-printing binge that left way too much money in the system. The inflation is a reflection of the incredibly strong economy and consumer demand (ignore the fact that less units are sold at higher prices so the only increased demand is nominal).

To this day, we still see an astonishing lack of willingness to invest in natural resources and related infrastructure despite soaring prices. Politicians are torn between subsidizing the poor due to rapidly rising costs and an extreme wealth divide, and limiting any spending whatsoever to reduce inflation. Investing in energy production and distribution, desalination plants, mining, oil & gas production, nuclear, etc is seen as wasteful government spending and bad for the environment to boot.

We will eventually invest a lot more money in metals & mining, especially if governments are serious about spending on alt-energy projects which use an incredible amount of these resources per unit power. Meanwhile, prices of these materials should really start to soar. In investing we’ve heard about generational opportunities a lot lately, and this is the one that I’m planning on riding.

My base case currently is that the federal reserve’s rapid hiking cycles will break something in the enormous and opaque repo markets. A recent statistic was that bond markets worldwide have lost over $2.6 Trillion in 2022. That was reported back in March. The federal reserve receives reporting on tri-party repo (going through BNY Mellon), but nothing on bank-to-bank repo.

These overnight repo facilities can be thought of as massive margin debt on the worldwide bond markets. Banks (and sometimes central banks) lend at a very low overnight rate, protected by the right to sell off the underlying collateral at any time. This collateral comprises of a variety of widely traded bonds including US Treasuries, other sovereign debt, and corporate bonds of varying ratings and maturities. When interest rates spike higher, these bonds lose value in the spot market, and borrowers have to post more collateral or their bonds are sold. Bear sterns went bust in March of 2008 because their enormous holdings of mortgage-backed securites lost value in the spot market and they did not have enough collateral to post to make up for the shortfall. These are highly levered markets and this will happen.

Anyway, in that base case we see a liquidity cruch after which central banks intervene and TLT spikes. Then I can sell off the TLT calls and buy a lot more mining shares on the cheap.

My alternate case is that we somehow avoid this liquidity crunch and muddle through, in which case my TLT calls could go to zero but my mining stocks should do very well.

As for the other sectors I’m in … US Cannabis, a touch of cypto, and DOCN for cloud computing … I see those as highly speculative bets which might pay off big but might end up like a dot-com stock after 2000. I wouldn’t invest in them if I didn’t think they had staying power, but my main conviction is that we are in a commodity bull market that will last through the decade of the 2020’s.

Enjoy your weekend everyone!

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Golden Week, A Buying Opportunity

We’ve been having one of those months that makes all investors feel stupid. I’m down 7% on the week, down 19.5% on the month, down 14.6% YTD, and down 11.8% on the last year. If you’re interested in these little retail-dominated sectors like I am, than you’re probably in the same boat.

Here are the charts relevant to my portfolio:

SPY: S&P 500 index

If you just stuck with investing in the S&P 500 index, SPY, you’d be about even on the year, though with a somewhat volatile ride. It certainly has some powerful tailwinds as blind money from stock buybacks, 401k’s, and pensions crowds in heedless of valuations. Still, the downside risk can be quite significant as the fed hikes interest rates making portfolio leverage more expensive, the earnings cycle peaks and declines, and consumer spending shows the strain of keeping up with basic living costs, and so on. All of the mega-caps have fallen significantly below their peaks, and some of them like FB had enormous drops overnight. When steady flows of passive money push these stocks ever higher, sellers can find quite an air pocket before any real buyers show up. The chart also has the look of a nasty topping formation with a lower low on Friday. On the flip-side, it seems that everyone is bearish, so you never know when a massive rally will start to squeeze out anyone who’s positioned short. That has me nervous about short hedges, though I’m not going long either.

TLT: Long duration US Treasuries

This is my main hedge. Looking at the chart above, it’s easy to ask why. Basically, I don’t think that the Fed will get that far with rate hikes. Parts of the yield curve began to invert from hawkish talk alone, before they hiked 25bps. After that the inversions became deeper and more frequent. Many other recessionary signs are apparent, and recessions typically mean top tier collateral that banks and hedge funds can borrow against like crazy get bid up. If worries start to spread about the vast junk bond market, the banks and funds which invest in those with leverage (or regulatory constraints), they will have to post more collateral or be forced to sell. This often leads to a rush toward higher tier bonds that allow the most leverage when borrowing in the repo markets. Aside from that complex view, you can consider that unlike stocks, long duration bonds are absolutely hated and that they do tend to go up in recessionary periods. Besides, look at the chart below. In the post-GFC world of ZIRP & QE, TLT is more prone to spike than ever, and it is hitting a line of decade-long support.

SILJ: Junior Silver Miners

The SILJ index best represents my precious metals miners. That 30% of my portfolio is all in this highly speculative sector, which has been struggling for almost 2 years now. The recent drops don’t surprise me much, as commodities are overcrowded in general and this is a volatile retail-dominated sector. Basically, I’m sticking to this alternating-decades idea with mining stocks. You have a strong decade like 2000-2010 ending with a spectacular investor frenzy and crash as too much production comes online, then a huge decade-long bust where all investment in the sector halts and supply slowly shrinks down below demand. During such busts, like the 1990’s or the 2010’s, other investments like tech soar as commodities are generally not a constraint. I still feel like we’re seeing a major commodity shortage which will play out over the decade of the 2020’s. In other words, this is a long term play, and I plan on adding or reducing support based on the charts in between. As such, I have made some really good calls, such as levering up like crazy with call options in AG back in January and then selling all of my long calls and reducing dramatically the week ending April 14th. I don’t know when this sector will really soar, but I am convinced its within the next 6 years and I’m planning to be there when it does. Then I’ll exit and move on to other things; there is no such thing as an investment to hold forever. That being said, the time to exit will be when metals and mining stocks are a significant portion of the S&P 500 and new production is coming online. We had a bit of a speculative frenzy during covid, but we did not see any significant growth in mining production. Here’s a chart for you. Make of it what you will, but I see production back down to levels a decade past – and during a time when it’s industrial use has gone up with much more widespread electronics, batteries, etc. Unfortunately I can’t find a good silver demand chart for you, but I do expect that supply will go back to levels seen in 2012-2019 before it peaks out.

URNM: Uranium Miners

The news from this sector is nothing but bullish. Just like with precious metals miners, I believe that this cycle will last the bulk of the 2020’s decade, and I plan to ride it through while reducing at peaks so that I can add at valleys. I reduced a lot week-ending 4/14, and I’m planning on building my position back up despite the coming recessionary backdrop. This sector is small, extremely volatile, and dominated by retail investers so expect massive swings in price. Makes it more fun, don’t you think?

MSOS: US Cannabis

This is a sector which I believe holds much promise, but still acts like a falling knife. Major US institutions can’t invest here because it isn’t federally legal yet. They aren’t opposed to the sector however, as institutional investors have entered into Canadian companies like TLRY. It’s a bizarre situation, as US producers & distributors can only list on the junior Canadian exchange and are restricted from the US banking system while foreign producers & distributors have full access and list on the NYSE. There is a continual barrage of states opening up to it and eying that precious tax revenue, and there is a significant movement to change the situation federally. I see it as a matter of time, and I’ve been steadily adding at new lows to keep my allocations up, without selling anything, and my earlier positions are already down 50%. Whatever, as a retail investor I won’t get fired from managing my own portfolio, and I fully intend to keep my minimum allocations near 15% until this thing plays out.

XME: Metals & Mining ETF

I see my battery metals allocation more in base metals category of the XME chart. I fully expected gold and silver miners to outperform first, then base metals later on as industrial demand really picked up. We had worldwide shutdowns due to Covid restrictions for much of 2020-2021, followed by a real estate bust and subsequent construction bust in China, followed by the current extremely aggressive Chinese lockdowns, and base metals have been absolutely soaring. You wouldn’t know it with the likes of Nickel-Copper royalty company NOVRF, which is flirting with 16-month lows, but the underlying metals must be in critically short supply if they are soaring in this environment – and all at a time when western governments are planning on funneling ever more money into alt-energy projects that absolutely waste these metals with enormous power-lines spreading for many miles which are vastly oversized to deliver intermittent power without breaking at the peaks. Anyway, I intend to build this sector up a bit more.

Here is my latest portfolio:

  • HEDGES (10.6%)
    • 10.6% TLT Calls
  • PRECIOUS METALS (29.8%)
    • 1.3% AG (Silver)
    • 2.2% EQX (Gold)
    • 4.0% SILV (Silver)
    • 4.0% SILVRF (Silver)
    • 2.9% LGDTF (Gold)
    • 2.9% MTA (Gold & Silver)
    • 2.7% MGMLF (Gold)
    • 2.6% RSNVF (Silver)
    • 2.3% SSVFF (Silver)
    • 2.3% HAMRF (Gold)
    • 1.2% MMNGF
    • 1.5% DSVSF (Silver)
  • URANIUM (10.6%)
    • 1.4% UUUU
    • 1.3% UEC
    • 2.3% BQSSF
    • 1.6% DNN
    • 1.3% DNN calls
    • 1.4% ENCUF
    • 1.3% UROY
  • US CANNABIS (15.1%)
    • 1.8% AYRWF
    • 1.9% CCHWF
    • 1.7% CRLBF
    • 2.2% CURLF
    • 1.8% GTBIF
    • 1.8% TCNNF
    • 2.0% TRSSF
    • 2.0% VRNOF
  • BATTERY METALS (8.7%)
    • 4.7% NOVRF
    • 2.6% SBSW
    • 1.4% PGEZF
  • CRYPTO (1.2%)
    • 1.2% XRP
  • OTHER (3.0%)
    • 2.5% DOCN (cloud computing)
    • 0.5% OGZPY
    • 0.0% ATCO calls
  • CASH (21.0%)

I’ve been waiting for a while to get the perfect buying opportunity, when the federal reserve continues with its 50bp hike and tries to scare the heck out of everyone while the Japanese institutional buyers aren’t there to purchase US treasuries. I did jump the gun a bit this week though, adding a little bit each to of a number of different names in my portfolio in all my main sectors – precious metals miners, uranium miners, battery metals miners, and US Cannabis. Its hard to sit on more than 25% unallocated cash while some of your favorite names are hitting new lows.

That being said, here’s how I see the week playing out:

  1. Relief rally Monday morning from oversold lows, speculation that perhaps the federal reserve will ease up after the massive disappointment with Q1 GDP falling by 1.4% when it was expected to rise by 1%.
  2. A violent shock sometime between Monday & Tuesday, as Powell makes it clear that he is moving forward with a 50bps hike, and that his main goal is to crush inflation Volcker-style.
  3. Markets wobble a bit Wednesday as institutions look for buyers to appear.
  4. A significant selloff in both stocks and bonds on Thursday, probably through Friday as the buyers supported by Japanese yield-curve-control policies don’t show up at all during Golden Week.
  5. Counter-rally the following week from oversold lows, massive influx into US treasuries to get that sweet yield.

If it all works out as I expect, I should be 100% invested by the end of the week. I’ll buy a little bit here and there, focusing on Thursday as my biggest potential buy day. I plan to pick up a lot of TLT calls and Uranium miners specifically, though I might go for some of my other names if they are truly beaten to a pulp. I also plan to buy some more XRP which I expect to get somewhere in the 50-cent range.

Anyway, that’s my plan. If you decide to follow me on this, look once more at the lousy returns I mentioned at the top of the page, and realize that this is a bit of a gamble, and that I could lose money in these sectors for quite some time before they turn. I’m still young enough to take risk, and I feel that I need to more than ever if I hope to get anywhere. It’ll pay off some day. Happy trading!

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Will we see a melt-up prior to the market crash everyone expects?

It’s been quite a week, with a big selloff starting on Thursday and continuing into Friday. My portfolio is actually down 7% on the week, which is quite remarkable given my heavy weighting in cash. In addition, I actually had a lucky call buying a couple of SPY puts before I drove off to the office Thursday morning, and sold them later that day for a 50% gain.

Last night I listened to David Hunter explain his calls for a 40% market melt-up followed by an 80% crash. The gist I got from it is that sentiment is too bearish for this to be a top; we need one final squeeze to get all the bearish positioning out and get the bulls excited, then we can get a blowoff top that heads lower. The downside story is the same general stuff I wrote about last week.

While the downside makes a lot more sense to me, we do have a very strong mantra about how QE is money printing, so we had lots of excess liquidity which will drive all markets higher. It seems to me that if this were remotely true, we would have much lower debt levels, and we would have seen a very different outcome from the QE programs of Japan, the Eurozone, and the Federal Reserve prior to the pandemic. However, it remains a strong enough narrative that it could give credence and conviction to feed a bullish bias into a major melt-up.

I have to admit that the melt-up scenario is still possible, despite the end-of-week selloff we saw and the rapid interest rate hikes in anticipation of the Fed. I’m not confident in that outcome, so I’m not long the major indexes, but every long position I have would gain if such a melt-up were to occur. I also don’t want to hold puts too long at the moment because it seems like everyone expects the S&P to fall. That is why my main hedge is a position in TLT calls, which would benefit in a downside move leading to another Powell Pivot, and is a very unpopular trade with all the expected rate hikes to come. Still it is a certainly a gamble, so I’m holding a hefty cash position as well.

If the melt-up scenario actually started to happen and I saw gold approach 2500 with big moves in all my mining stocks, I would sell them off. I don’t mind sitting in excess cash if I don’t like the risk/reward I see, and I don’t trust rapid moves especially in a late-cycle fed-hiking environment. Whether you think it’s likely or not, I suggest thinking through what you would do in such a scenario just so you don’t get end up missing your opportunity to claim significant gains or worse, chasing a blow-off top. There would also be a point where I’d feel comfortable getting some puts again, although I will be forever cautious betting on the downside after my experience in 2020.

As a final note, I did actually buy some stocks last week. This includes a bit more DOCN, which I see as a long-term hold in cloud computing, and more of each of my battery metal miners NOVRF, SBSW, and PGEZF. It is very tempting to buy things you consider long-term holds on the way down, but I keep telling myself I need to at least wait through the first week of May.

My base case is still that we see an enormous interest rate spike and corresponding stock market plunge during the first week of May, after the Federal Reserve has its meeting with all of its hawkish comments and an actual 50bps rate hike while the Japanese institutional buyers are on holiday so they don’t stem the selloff in US treasuries. To me, this spike will represent significant lows in TLT, and I plan to purchase a significant amount of TLT calls into it. All my holdings will likely get crushed, although I expect my miners to hold up better than the broader stock market. The Powell Pivot might be as late as Q4 but I think Q3 is more likely. Regardless, I plan to hold a hefty cash position until then and rush into Uranium miners in particular once it’s announced. This is easier said than done, as I will likely want to buy Uranium miners on weakness before then. I’m trying to convince myself to hold out for Cameco below $23 (around the 200DMA). I would also like to re-enter AG and SAND and re-build my stake in EQX, but that’s lower priority at the moment. Now is simply not the time to buy.

Here are my current positions:

  • HEDGES (10.4%)
    • 10.4% TLT Calls
  • PRECIOUS METALS (28.0%)
    • 2.2% EQX (Gold)
    • 4.0% SILV (Silver)
    • 3.9% SILVRF (Silver)
    • 2.9% LGDTF (Gold)
    • 3.0% MTA (Gold & Silver)
    • 2.6% MGMLF (Gold)
    • 2.8% RSNVF (Silver)
    • 2.4% SSVFF (Silver)
    • 2.4% HAMRF (Gold)
    • 0.9% MMNGF
    • 0.8% DSVSF (Silver)
  • URANIUM (9.7%)
    • 1.0% UUUU
    • 1.3% UEC
    • 2.3% BQSSF
    • 1.7% DNN
    • 1.4% DNN calls
    • 1.5% ENCUF
    • 0.6% UROY
  • US CANNABIS (15.2%)
    • 1.5% AYRWF
    • 1.6% CCHWF
    • 1.9% CRLBF
    • 2.3% CURLF
    • 1.8% GTBIF
    • 2.0% TCNNF
    • 2.3% TRSSF
    • 1.9% VRNOF
  • BATTERY METALS (6.4%)
    • 3.3% NOVRF
    • 1.7% SBSW
    • 1.4% PGEZF
  • CRYPTO (1.0%)
    • 1.0% XRP
  • OTHER (3.0%)
    • 2.5% DOCN (cloud computing)
    • 0.5% OGZPY
    • 0.0% ATCO calls
  • CASH (26.3%)
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Preparing for late-cycle tightening

Wealthion had a some interesting podcasts on YouTube this last week, first with Dave Rosenberg and Stephanie Pomboy, then with Michael Pento. Same rough idea with both – prepare for the coming recession with a potentially nasty bear market.

Here’s a quick rundown of what we’re looking at:

  1. Record fiscal stimulus spending of 2020 and 2021 has come to an end. Positive GDP growth will require that private sector spending grows more than enough to offset this.
  2. Record monetary stimulus with has just come to an end and been replaced by a very hawkish tone. Only one rate hike of 0.25% so far, but the 1 year treasury rate is already 1.85%, showing that the Federal Reserve is expected to raise rates that high within a year. They are expected to hike by 0.5% in May and announce an aggressive QT cycle, reducing the balance sheet much faster than they did in 2018.
  3. The yield curve has inverted in several places, including the famous 2-year / 10-year inversion. This has been a very reliable indicator of coming recessions.
  4. Inventories excluding petrolium have been building considerably since last October, as Jeff Snider and Emil Kalinowski often point out. When this happens, businesses cancel or reduce orders and feel pressure to reduce prices.
  5. Real wages have not kept up with the rapid CPI growth. Many have felt the pinch of higher prices and have to cut spending elsewhere.
  6. Retail sales excluding energy have been coming down considerably.
  7. Mortgage rates have come up dramatically from last year, as home prices are at all-time highs. This makes an enormous difference, as a 50% hike in monthly mortgage rates can mean 50% higher monthly mortgage payments, and that drastically reduces the price that new buyers can pay. While we don’t expect a foreclosure wave like 2009-2012, it is very possible to get a wave of investment funds selling their homes as investors move their money elsewhere.
  8. The stock market has been showing considerable late-cycle behavior as both commodities and devensive stocks like utilities outperform.
  9. The Federal Reserve has come out a number of times and said that the stock market is overvalued. They are aiming to bring it down a bit.

Anyway, we are definitely in a late cycle market which has significant risks of heading lower. Meanwhile, it seems that these risks are being talked about everywhere. I’m still worried that there’s a considerable amount of hedging in the system, both in terms of outright shorts and puts and in terms of cash on the sidelines. This can cause markets to stay elevated longer than you’d think, and can even cause a massive bear-market rally.

That being said, here is my latest positioning:

  • HEDGES (8.5%)
    • 8.5% TLT Calls
  • PRECIOUS METALS (29.2%)
    • 2.4% EQX (Gold)
    • 4.5% SILV (Silver)
    • 4.2% SILVRF (Silver)
    • 3.3% LGDTF (Gold)
    • 3.1% MTA (Gold & Silver)
    • 2.5% MGMLF (Gold)
    • 2.8% RSNVF (Silver)
    • 2.5% SSVFF (Silver)
    • 2.3% HAMRF (Gold)
    • 1.0% MMNGF
    • 0.8% DSVSF (Silver)
  • URANIUM (11.4%)
    • 1.2% UUUU
    • 1.8% UEC
    • 2.4% BQSSF
    • 1.9% DNN
    • 1.9% DNN calls
    • 1.6% ENCUF
    • 0.7% UROY
  • US CANNABIS (15.2%)
    • 1.9% AYRWF
    • 1.6% CCHWF
    • 1.8% CRLBF
    • 2.2% CURLF
    • 1.8% GTBIF
    • 2.0% TCNNF
    • 2.1% TRSSF
    • 1.9% VRNOF
  • BATTERY METALS (3.9%)
    • 2.0% NOVRF
    • 0.9% SBSW
    • 1.0% PGEZF
  • CRYPTO (1.1%)
    • 1.1% XRP
  • OTHER (2.5%)
    • 2.0% DOCN (cloud computing)
    • 0.5% OGZPY
    • 0.0% ATCO calls
  • CASH (28.2%)

I reduced risk considerably this week by selling off all of my long-dated calls in gold and silver miners. In addition, all of the covered calls that I’d sold on my Uranium miners expired in-the-money, so my footprint in that space is considerably lower.

I actually looked at selling covered calls on my remaining Uranium miners last week, and I saw a lot of open interest in the May calls for a number of names. The sector is small and tight, and the individual investors are growing in it fast. I’m thinking this has some of the feel of Bitcoin in 2020, or a meme stock thats ready to soar. Anyway, instead of buying covered calls, I bought a bunch of Jan 2024 calls in DNN. The premiums were a bit pricey, but it gives me about 2.5% leverage on the money I put in, and it seems like a prime choice for retail investors to target. Anyway, we’ll see if insane new highs hit this May. To be clear though, I’ll never claim to have diamond hands – If it looks like a blow-off top I’ll likely be out halfway before the peak just like I was with Bitcoin.

With US Cannabis, I’m just keeping the same strategy I’ve been using for a while and buying a bit on new lows, but mainly just waiting for bullish federal legislation. I can afford to sit and wait years if I cap it at 15% of my portfolio. I don’t think I’ll have to wait years though, it’s gaining popularity on capital hill and a number of congressmen (& women) are buying into some of the names and ETFs. Follow @todd_harrison for updates and details on that sort of thing, as I certainly don’t follow that closely.

As for TLT, I have to admit I’m wondering when it will turn. It is deeply oversold, but if the Federal Reserve comes through with a 0.5% rate hike in May it’ll see more downward pressure, and maybe they’ll even follow up with another 0.5% rate hike in June. I still think that its just a question of when something in the financial system breaks. Some highly levered fund or some bank that no one is thinking about will suddenly have solvency issues which spread through the system causing margin calls, forced sales, and a rush for cash and cash-equivalents. US treasuries are used in a myriad of complex ways with repo markets and derivatives and such, not to mention short funds.

Anyway, it’s way too early for me to pile in. In fact, I’m thinking that I probably shouldn’t pile in at all – just add a small amount of TLT calls on major dips while leaving plenty of room to add more on the next dip. There’s no way I can time this thing … the famous 2 year / 10 year inversion hit after just one 0.25% hike, which is unprecedented. Usually it takes a number of hikes over a year or more to get an inversion like that. What that means to me is that the system is incredibly fragile and we can see a liquidity crunch followed by a TLT spike at any time. You can’t wait for the right moment on a spike, by the time it happens it’s too late to start the trade, so you have to be in a bit now. But I could also be early and find the summer pass by with a fed funds rate of 1% or higher and no blowup yet, followed by months of sideways correction in rates that leaves my call options worthless.

So anyway, there’s my rough gameplan. Reduce miners further if prices really spike, hold them otherwise. Sit and wait with the Cannabis stocks. I’m kind of thinking sit and wait with DOCN as well – it was a fast-growing cloud computing darling not too long ago, and I picked it up recently around $51/share. Ease into more TLT calls being careful to spread the investment over time, not just over price. And keep a hefty cash balance because that is the ultimate hedge in such a crazy market. If forced sales hit, I could be rushing back into a number of my favorite mining stocks on the cheap.

Writing this out really does help me think things through. Good night and Happy Easter.

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Top-ticking interest rates

In the current environment, I see the biggest chance to make outsized returns as top-ticking interest rates through calls on TLT. It is obviously a high-risk play, as these things can go to zero if TLT simply goes nowhere long enough.

The question many are probably asking is why on earth would I expect long-dated interest rates to fall when central banks have been printing money leading to record-high inflation. I’ll focus my post on trying to explain, starting with this chart taken from @DereckCoatney on twitter:

Simply put, I don’t believe we’re at the bottom of the down-cycle yet in US treasury rates, and it largely has to do with debt levels being as high as they are. Take a look a this chart I put together with St Louis Fed data in Excel:

It’s a bit simplistic, and I believe all debt matters not just US debt, but you still see that interest rates bottomed as the debt/gdp ratio peaked after WW2 and that interest rates peaked as the debt/gdp ratio bottomed around 1981. Simply put, long end interest rates tend to follow growth – not CPI – and high debt levels are bad for growth.

Here’s another chart I put together a couple weeks ago to show that the US 10-year yield doesn’t seem to relate to CPI at all:

As for the federal reserve, I make my case here that a soft landing is never possible because hiking the federal funds rate doesn’t seem to have much effect on the CPI at all, they simply go up together until some highly levered fund blows up and the damage to the financial system causes a recession, after which both the CPI and fed fund’s rate plummet: https://johnonstocks.wordpress.com/2022/03/19/is-a-soft-landing-possible-i-argue-no/

We also have an environment where record fiscal and monetary stimulus is reversing. With federal spending plummeting in comparison to last year, while any wage gains have not been enough to offset hikes in necessities like food, fuel, and rent, a recession seems inevitable. See a more articulate argument by Dave Rosenberg and Stephanie Pomboy here: https://youtu.be/Ei6VJOwKTuE

It’s also important to note that outside of petroleum, US wholesale inventories have been climbing at record levels due to the bullwhip effect that Jeff Snider explains with fantastic charts here: https://alhambrapartners.com/2022/04/08/concocting-inventory/

So what about the massive QE? Isn’t that money printing going to show up somewhere?

In short, QE is not money printing. If anything it’s effect is the reverse, hence the lackluster response to Japan’s decade-plus of QE programs as well as the pre-pandemic QE programs adopted by the ECB and the FED after the great financial crisis.

QE is simply the federal reserve taking high quality interest-bearing collateral from it’s member banks and replacing them with a zero-paying bank reserve balance on their ledger. The banks can’t do anything with this reserve except transfer it to other member banks to balance their accounts. Alternatively, banks would be holding treasuries and/or US guaranteed mortgage-backed securities which would equally count as top-tier collateral, but also allow them to earn interest, conduct repurchase operations, or even sell these securities into the market.

Banks are not constrained by reserves, but by top-tier collateral. They can simply create loans by putting an asset on their balance sheet (a loan) and an equivalent liability on their balance sheet (a deposit). Before the great financial crisis, we had a massive increase in the money supply as financial complexity and the eurodollar system grew, but after 1980 the inflationary effects were increasingly masked by rampant globalization in which the world collected dollars as the US outsourced nearly all of their production. This is in large part why the middle class has been shrinking as real wages went nowhere while asset valuations continued to climb.

As the use of the US dollar grew well beyond the size of the US economy, demand for more dollar-equivalents remained high. Check out this 3-part Jeff Snider series for a more detailed interpretation: https://youtu.be/ABltMhCZIOg

In the period leading up to the great financial crisis in 2008, repo operations and cash equivalent collateral was growing in leaps and bounds as mortgage-backed securities of even low quality were sliced and hypothecated into extremely liquid, high quality, AAA collateral. Once the value of these was questioned, this collateral quickly lost its place in the repo market, and Bear Sterns was asked to suddenly produce a lot more collateral to back its loans. While this caused a lot of feedback requiring the Federal reserve and JP Morgan to coordinate the buyout/bailout and preserve the system, it fell out of control once the decision was made that Lehman Brothers should fail.

This chart is from the Eurodollar University episode I linked above, with my cursor showing the time stamp at 19:42.

Ever since 2008 ,we’ve had a number of problems show up in various parts of the system. The labor force participation rate began to annually decline, even among the working-age population. ZIRP (zero interest rate policy) became the norm in the US with negative rates in Europe and Japan, along with numberous QE programs, as repeated crises happened in a number of countries. The Federal Reserve sees markets as beasts to be lead by psychological means, trying to make all the economic data look rosy and equating QE with money printing in an attempt to encourage the “animal spirits” to come out and give us some kind of recovery and return to an elusive “normal”.

Essentially, I see a lot of false narratives out there –

from the excess supply of unfilled jobs in the highly unreliable JOLTS explained here: https://alhambrapartners.com/2022/01/05/before-nodding-along-w-fomcs-hawks-on-inflation-first-grab-yourself-a-beveridge/

to the money-printing narrative I argued against above.

Here are my latest asset allocations:

  • HEDGES (9.8%)
    • 9.8% TLT Calls
  • PRECIOUS METALS (38.9%)
    • 6.6% AG (Silver), calls
    • 4.4% EQX (Gold), calls
    • 2.3% EQX (Gold)
    • 4.1% SILV (Silver)
    • 4.0% SILVRF (Silver)
    • 3.2% LGDTF (Gold)
    • 2.9% MTA (Gold & Silver)
    • 2.6% MGMLF (Gold)
    • 2.7% RSNVF (Silver)
    • 2.2% SSVFF (Silver)
    • 2.2% HAMRF (Gold)
    • 0.9% MMNGF
    • 0.8% DSVSF (Silver)
  • URANIUM (22.0%)
    • 7.9% CCJ, shares w/ covered calls
    • 3.6% UUUU, shares w/ covered calls
    • 4.4% UEC, shares w/ covered calls
    • 2.1% BQSSF
    • 1.9% DNN
    • 1.6% ENCUF
    • 0.7% UROY
  • US CANNABIS (14.4%)
    • 1.8% AYRWF
    • 1.7% CCHWF
    • 1.7% CRLBF
    • 2.0% CURLF
    • 1.8% GTBIF
    • 1.7% TCNNF
    • 2.1% TRSSF
    • 1.7% VRNOF
  • BATTERY METALS (3.5%)
    • 2.0% NOVRF
    • 0.9% SBSW
    • 0.5% PGEZF
  • CRYPTO (1.0%)
    • 1.0% XRP
  • OTHER (1.6%)
    • 1.1% DOCN (cloud computing)
    • 0.5% OGZPY
    • 0.0% ATCO calls
  • CASH (8.9%)

I actually did a fair amount of buying this last week, as you can see by the reduced cash levels. I added a little bit to junior silver miner RSNVF, added some battery metals with more NOVRF then new positions in SBSW and MMNGF, and on Friday I added a significant plug of March 2023 TLT calls.

TLT has been absolutely crushed this week as the Fed endlessly talks about how much they’re going to need to raise rates this cycle and warning about how stocks will crash, so allocation stayed the same as I put in more money, yet I am up to 47 total TLT calls which is a lot of upside exposure.

In an environment like this where everyone is encouraged to dump bonds and buy puts, I can’t help but play contrarian. Contrarian plays like being long TLT can get you big moves, as everyone scrambles to re-balance, while consensus plays like being long AAPL and hedging with SPY puts can stop going up simply because there’s no one left to buy.

The Uranium sector is a bit different in that it is still a tiny valuation as a whole, so it can shoot up like Bitcoin when funds really start moving in. A significant portion of my remaining 22% stake may disappear next week as all my covered calls expire then, but I didn’t sell covered calls on everything so I’ll still have a stake, and the ones I did sell are just barely at-the-money even after this week’s gains. The reason I reduce like this is because I want to be able to add back when the Fed gets enough risk aversion to bring these miners back to key moving averages like the 50DMA and 200DMA.

I’ll end there. We’ve got some crazy months ahead, so keep a stoic view while trying to game these moves. Remember the famous words of Douglas Adams Hitchhiker’s Guide to the Galaxy: Don’t Panic.

2 Comments

Bearish decline imminent? Not quite yet.

The famous 2’s-10’s treasury curve inverted a couple times this week, and yield curve inversions are becoming more regular topics in the circles of FinTwit (Financial Twitter). At the same time, it seems like to many people are nervous or hedging for a major crash to hit. It’s really hard to say here, I could as easily see a short-covering rally through April as a major fund blowup sparking a selloff. My gut says it’s too early to be stacking up on bearish bets, so I prefer building cash to jumping too fast into TLT calls and I really don’t like the risk/reward of buying puts here.

I’ve reduced my precious metals exposure significantly this rally, and I might reduce a bit further – specifically in the to positions where I hold long dated calls – AG and EQX. While I like the long-term story that countries will diversify away from the dollar and US-dollar denominated trade for various reasons, it always scares me when people harp on money-printing with hyper-bullish targets. In my view, money printing is simply a false narrative. I still agree with Rauol Pal’s view that we still have another lower high in yields and likely revisit the lows, but that it will happen faster this time because of the rapid monetary & fiscal easing of 2020-2021 followed by a rapid reversal of both. That being said, here’s a look at the two charts of my two positions I’m most likely to reduce.

I can see both bullish and bearish indications on the charts above, but I lean towards the idea of an intermediate-term pullback followed by a long-term move higher. For now I think we’re likely to see a re-test of that January peak around $7.50 again.

It’s hard to tell what to think here, but I’m inclined to think we’ll see a declining bullish wedge form here which will drop around that $12.30 level before re-testing $14.50 again and perhaps consolidating lower from the large resistance around $16.00.

To be honest, I’m inclined to wait a bit here on both EQX and AG before reducing my call positions further. Both stocks show above average seasonal performance in both April and May anyways.

Here are my latest asset allocations:

  • HEDGES (9.8%)
    • 9.8% TLT Calls
  • PRECIOUS METALS (37.1%)
    • 6.5% AG (Silver), calls
    • 4.2% EQX (Gold), calls
    • 2.2% EQX (Gold)
    • 4.1% SILV (Silver)
    • 3.9% SILVRF (Silver)
    • 3.4% LGDTF (Gold)
    • 3.0% MTA (Gold & Silver)
    • 2.9% MGMLF (Gold)
    • 1.7% RSNVF (Silver)
    • 2.0% SSVFF (Silver)
    • 2.4% HAMRF (Gold)
    • 0.8% DSVSF (Silver)
  • URANIUM (19.9%)
    • 7.4% CCJ, shares w/ covered calls
    • 3.3% UUUU, shares w/ covered calls
    • 3.8% UEC, shares w/ covered calls
    • 1.8% BQSSF
    • 1.7% DNN
    • 1.3% ENCUF
    • 0.6% UROY
  • US CANNABIS (14.8%)
    • 1.8% AYRWF
    • 1.7% CCHWF
    • 1.8% CRLBF
    • 2.1% CURLF
    • 1.9% GTBIF
    • 1.8% TCNNF
    • 2.0% TRSSF
    • 1.7% VRNOF
  • BATTERY METALS (1.8%)
    • 1.3% NOVRF
    • 0.5% PGEZF
  • CRYPTO (1.1%)
    • 1.1% XRP
  • OTHER (0.5%)
    • 0.4% OGZPY
    • 0.1% ATCO calls
  • CASH (15.1%)

I made a couple of trades this week, though I’m trying to be patient here. I bought a couple more TLT calls after Weston Nakamura pointed out that the Japanese 10 year bond yield pulled back to 0.20% and said he might start accumulating. The BOJ has a yield curve control policy defending the 10 year at 0.25% with unlimited QE, and the fiscal year in Japan starts in April, so their institutions buy a lot of 10-year US treasuries once for the yield when it widens like this. It’s also portfolio rebalancing time, and while the S&P 500 is down 5.5%, corporate investment grade bonds shown in LQD are down 8.3%, so target date funds will be selling some stocks to buy bonds. Obviously the big mover here is the Federal Reserve and trying to figure when they’ll end their tightening cycle and start easing, and it seems I need to wait a bit longer there.

Aside from that, my SPY put expired worthless and I added some UROY as Uranium miners pulled back a bit. I’d really like to add more to my battery metals side, but I don’t want to chase because they could come down significantly if the coming slowdown becomes obvious to everyone instead of debated by some. At that time I’ll want to add like crazy because we have under-invested in mining for over a decade, so we’ll be stuck with a long-term bullish situation of chronic under-supply for the next several years. It’s hard for a retail investor like me to look through my trades every week and not be drawn to over-trade, but I prefer to learn the discipline rather than refusing to look.

I’ll end there. To be honest, I kind of rushed through my post today, as I’ve been assembling furniture like crazy after moving last Monday. I work full time and have long Tuesday & Thursday commutes so weekends are key, and this is my first weekend in the new place.

4 Comments

Moving Day

Its moving weekend for me, so I’m pretty busy right now. My mother is selling her house, basically cashing in on the enormous housing boom and we are moving to rent. We’re moving closer to family, east over the mountains so only about 30 miles as the crow flies, but 73 miles as the car drives.

I’ve heard plenty of warnings of a coming housing crash from people in the financial sector – unsustainable price gains fueled by short supplies and people who are recently freed by remote working to abandon their unaffordable cities, mortgage rates skyrocketing from 2.8% to 4.8% in record time, etc

So far though, we’ve seen nothing but a crazy tight market on the ground. A house down the street from ours sold above asking after one open house 2 weeks ago. Ours goes up early April. On the rental side, my mother was getting frustrated as 3 different houses she was interested in and applied for rented out in days. We went down to see a place 2 weeks ago on Saturday, and she was prepared with deposit checks on the spot after completing all the application paperwork before we went to see it. I don’t know how long it will last, but the market is still crazy tight. Perhaps a combination of people trying to lock in rates before they go up further while there is still unusually low supply on the market.

Anyway, I’m glad we’re doing this. In my opinion, its great to own a home, but price always matters. If it’s cheaper per month to rent, then it’s not worth the risk of surprisingly high maintenance costs, market crashes, job changes, and so on. Renting should always cost more, it takes away most of the risk and leaves you flexible for whatever comes. But we’re in a crazy world where 15 years of low interest rates have pushed large pools of investor money out the risk curve to find anything that can match their targets. During this era Calpers started using leverage for the first time, hedge funds have been buying homes for rent, passive funds have boomed as another way to scrap due diligence and ride the wave, and asset prices have soared. Who knows where, when, or how this ends, but a fed hiking cycle is typically a good time to reduce risk.

  • HEDGES (8.1%)
    • 8.0% TLT Calls
    • 0.1% SPY Puts
  • PRECIOUS METALS (38.5%)
    • 6.9% AG (Silver), calls
    • 4.5% EQX (Gold), calls
    • 2.3% EQX (Gold)
    • 4.3% SILV (Silver)
    • 4.0% SILVRF (Silver)
    • 3.5% LGDTF (Gold)
    • 3.2% MTA (Gold & Silver)
    • 3.0% MGMLF (Gold)
    • 1.8% RSNVF (Silver)
    • 2.2% SSVFF (Silver)
    • 2.2% HAMRF (Gold)
    • 0.8% DSVSF (Silver)
  • URANIUM (19.5%)
    • 7.3% CCJ, shares w/ covered calls
    • 3.4% UUUU, shares w/ covered calls
    • 3.8% UEC, shares w/ covered calls
    • 1.9% BQSSF
    • 1.8% DNN
    • 1.4% ENCUF
  • US CANNABIS (14.4%)
    • 1.8% AYRWF
    • 1.7% CCHWF
    • 1.7% CRLBF
    • 2.0% CURLF
    • 1.8% GTBIF
    • 1.7% TCNNF
    • 1.9% TRSSF
    • 1.7% VRNOF
  • BATTERY METALS (1.9%)
    • 1.4% NOVRF
    • 0.5% PGEZF
  • CRYPTO (1.1%)
    • 1.1% XRP
  • OTHER (0.5%)
    • 0.4% OGZPY
    • 0.1% ATCO calls
  • CASH (16.0%)

I reduced risk a lot this week, selling off all of my SAND calls and CCJ calls and more covered calls in uranium miners. The news is definitely bullish for gold, silver and uranium, but I also feel the need to take profits after any big move.

I bought some TLT calls this week, but I’m trying to stay patient so that I don’t get too long too early like last year. The Federal Reserve hasn’t been this fired up on hiking rates since 2018, as this article shows:

https://www.federalreserve.gov/econres/notes/feds-notes/dont-fear-the-yield-curve-20180628.htm?msclkid=3e2eb784acd111ec928d94906e85e55a

Basically, this article is explaining how the federal reserve is well aware of the inverted yield curve at various durations, and they don’t think it’s a problem. My prediction is they do a 1/4 point rate hike per month for the next few months, then reverse somewhere around Q4. That means I really need to be careful about getting too deep into TLT calls too early, because each hike will reduce its value while inverting the yield curve further until some levered fund thats big enough to cause systemic damage blows up.

I haven’t heard about Deutsche Bank for a long time, but they’ve gotta be struggling with high inflation across Eastern Europe and Turkey, the rapid rise in government bond yields throughout the Eurozone, and the strong US Dollar. I’m sure there are plenty of other banks that are struggling now with the commodity shocks, geopolitical risks, and rising rates – it’s only a matter of time till something breaks.

Anyway, patience is very important right now. I have to picture myself in January 2020 after the inverted yield curve and the first lockdowns in China … these markets will wear you down while meaningless narratives are spun to justify their every move. Turbulence lies ahead, but for now markets are as likely to soar to new highs as to re-test the lows. There are plenty of investors who can be squeezed out of bearish positions, and the market is more likely to go up until forced sales hit from somewhere.

That’s all for now. Good luck!

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