I’m writing today from Minneapolis, where I had a week-long visit with my brother and a job interview. It’s interesting to consider what it would be like moving out here. I’ve lived in many parts of the country in the past including Hammond Indiana and upstate New York which also have cold snowy winters. Compared to Southern California, it certainly has a lot more interesting places you can walk to and a lot less traffic as well. Who knows what the future will hold, but I’m optimistic about this change.
As for investing, the markets certainly haven’t been dull. In the last week I added a Jan 2024 call in DOCN when it dipped below 90, though I’ll likely sell it soon as it may be nearing the end of its run before a correction. I also bought more Uranium exposure on the dips and sold some out of the money covered calls on it with today’s rally. I also added some more US Cannabis exposure on some dips though it’s hard to tell how it balances out without my laptop.
Precious metals miners are having another nice rally. I haven’t been adding much lately (last was a bit of DSVSF last week on solid news from exploration- the kind of thing you hear about when you have a paid service that tracks precious metals and Uranium miners. It’s Steve Penny’s Silver Chartist Report if anyone’s interested. It’s not clear that precious metals have bottomed yet, though with sentiment today I wouldn’t be surprised if it has. These things turn when most people see no reason to own them after all. As for Uranium, Kazatomprom followed Sprott’s lead with another physical Uranium fund to help Jack up the spot price of Uranium and encourage the big utilities to start a new contracting cycle. I’m especially bullish on the large existing Uranium miners here, so I stick with CCJ and UUUU.
The most important things to consider in the stock market right now are the following:
1. Buybacks are back (lots of corporate buybacks scheduled which push the indexes higher)
2. November is exceptionally strong for stocks seasonally (October is significantly weaker)
This is from @Callum_Thomas who has a free weekly Chartstorm that’s worth subscribing to:
I’m not going to bother posting seasonality again because I did that in a few recent posts. I need to get to the airport soon, so I’ll sign off here. Happy trading.
I’m going to have to make this week’s post short – my brother’s over with his 4 kids so breaking away to write is not easy.
It’s certainly been an eventful week though, my portfolio value jumped by over 10%. That helps fix some losses a few weeks back so that I’m now up 2.3% over the past 4 weeks.
Uranium went on a tear midway through the week. I have to admit this was a bit disappointing, because my covered calls all expired in-the-money so I’ll have to wait for a pullback to buy back in. I sold at-the-money covered calls on all the shares I bought a couple weeks ago because they were worth quite a bit … I generally like to do that after a quick run-up in price. Needless to say, my Uranium position is now way down and my unallocated cash is way up.
I’m also extremely bullish on Crypto at the moment, with the idea that we’re going on a massive end-of-year rally (and possible blow-off top) like you see with bitcoin in 2013 & 2017. There are a number of really bullish events coming forward including signs that an ETF in Bitcoin Futures is likely to be approved. One thing I should point out with this is something that Rauol Pal has been mentioning … that it’s really inefficient to have an ETF based on Bitcoin futures rather than allowing one that just purchases bitcoin – much like the Sprott funds in gold, silver & uranium. Futures involve a lot of middlemen making money though, so it amply rewards the Wall Street power structure, and that makes it much easier to approve. Whatever the case, it’ll have an effect.
There was also a decent rally in gold and silver miners this last week from very oversold levels. Copper ripped higher as well, and I sold off 20% of my copper/nickel miner NOVRF. I am still very bullish on copper over the next decade, but the current cover of The Economist focusing on rising commodities (natural gas in particular) has me nervous, as this tends to be a sign of sentiment and positioning getting a bit too hot.
Interest rates at the long end pulled back a week this well, which is good for TLT. Between the slowdown in China that the Evergrande situation portends and the fiscal cliff passing in the United States, I still expect lower rates next year and I’m also nervous about the effects on commodities. Gold and Silver miners should be a better protected than industrial commodities, particularly given the relatively low sentiment and the positioning in those spaces, so I still like the old Bonds-Bullion position for a slowdown here. My TLT calls position is pretty light compared to prior months over the past year, and I intend to add to it, but I’m waiting until the seasonally weak month of October comes to a close.
As for Fed tapering, I would probably use a tapering announcement to purchase more TLT calls as these have been bullish for bonds in the past. Like many things with bonds its a bit counter-intuitive, but it has to do with risk-aversion picking up. As I’ve said in the past regarding QE, I believe that it is a psychological game to try to encourage people to expect inflation and thus borrow and spend more. The actual effects in the system are mainly to take long term bonds and mortgage-backed securities from the banks and replace them with “overnight reserve assets” which they cannot sell or do anything with, and which pay them an interest rate near zero instead of 2%. Still, these psychological effects have proven extremely effective in the stock market. Also, I’ll repeat myself and say that bonds are low and gold has not been moving because QE is not money-printing and we are in a strongly deflationary environment – not because a highly sentiment-driven cryptocurrency market has replaced them as an inflation hedge.
Here’s where my portfolio left off. I have to go, have a nice weekend.
Last week, I wrote a post on seasonality, showing the following chart for Bitcoin:
As you can see, for the last 5 years Bitcoin has always gone down in September. Then it would rally strong in October. The exception was 2018 where it fell 3.5% – in an environment where the S&P 500 fell 6% and the Federal Reserve, which was on a program of balance sheet reduction and small interest rate hikes, reversed course back to easing the following January.
In other words, Crypto is exceptionally strong in October so it was on my mind. In addition, Crypto has previously moved on a 4-year cycle based on the 4-year halving cycle of Bitcoin (Bitcoin’s production rate for “miners” drops in half). Both 2013 and 2017 have had enormous end-of-year runs (followed by blow-off tops), and there have been a lot of comparisons with different Crypto assets to these prior moves in Bitcoin. The 50% mid-year pullback has also been a common theme. I’d been expecting this year to be similar, but debating on whether the current high levels of attention mean that acceleration to blow-off top happened early. Then last Sunday I saw an interesting catalyst in the “Pandora Papers.”
In case any of you haven’t heard about it, it’s worth YouTubing “Pandora Papers.” Basically, hundreds of journalists got together and did an in-depth study to expose the financial dealings of the world’s wealthiest individuals, and how and where they moved their money in shell companies. The actions of the super-wealthy can definitely move markets so it’s best to give it some thought. There are many countries, China being a big one, that have extraordinarily wealthy insiders who are vulnerable to political purges.
Picture an enormously wealthy politician in Hong Kong for example, seeing anyone associated with the 2019-2020 protests arrested, then seeing Jack Ma brought down and a big crackdown on rich people who were siphoning money out of the country. Now there’s a big release in the Pandora Papers showing shell companies he controls and assets in an array of foreign countries. Even the fear of what they might uncover could be enough to convince that person to flee, and he’ll want to bring as much money as he can with him. How do you do it? Banks are all run by intermediaries, and they would certainly not allow these transfers if they fear government reprisal – but Cryptocurrencies move money outside of that system. A wealthy person with a server could buy a cryptocurrency and move it to a numbered digital wallet to reclaim anywhere – which is why China has been moving to prevent any of their banks from supporting any transfers of money into cryptocurrencies.
Even if China was successful in preventing this, what about super-wealthy looking to flee Russia, Pakistan, the middle east, Iran, etc – any of these people trying to move money through crypto is an enormous catalyst to push the price further. Add in wall street momentum traders, a stock market which has roared higher every single November for the last 5 years, and the end of the 4-year rally and I think we really have something here.
Needless to say, once I connected those dots, I wanted to put more money into Crypto – especially the biggest two, Bitcoin and Etherium, because money moving through a token like this would want the liquidity of the biggest ones. I immediately transferred more money into Etherium in my Coinbase account, but most of my money is in my trading account, which doesn’t do crypto. So I looked up bitcoin proxies and there are several – MSTR, GBTC, MARA, etc. I wanted to leverage a small amount with call options, so I went with MARA (MSTR’s share price is high so options are too expensive, and GBTC doesn’t have options trading).
Here’s where my portfolio ended up:
14.9% TLT Calls
1.3% EEM Puts
PRECIOUS METALS (49.5%)
8.9% AG (Silver), mainly shares & some calls
5.9% SAND (Gold, Silver & others), all calls
5.9% EQX (Gold), mainly calls & some shares
5.2% LGDTF (Gold)
4.0% SILV (Silver)
4.1% SILVRF (Silver)
4.0% MTA (Gold & Silver)
3.4% MGMLF (Gold)
2.1% RSNVF (Silver)
2.3% SSVFF (Silver)
2.0% HAMRF (Gold)
0.9% WPM (Gold, Copper & Silver), all calls
0.8% GOLD (Gold, Copper), all calls
9.1% CCJ, covered calls sold on most of it
6.7% UUUU, covered calls sold on most of it
COPPER & NICKEL (5.4%)
1.6% MARA calls
DERECKS TRADES (1.5%)
It was a pretty light trading week for me, aside from the MARA calls Monday morning. I didn’t sell any of my TLT calls – they got crushed a bit as long bond yields soared higher – but my account gained 1.2% on the week as the smaller miners rallied so it’s still a hedge.
The negative cash balance is a small amount of margin. I don’t like to dip into margin too much because I don’t want to be subjected to forced sales, but it is useful when you want to put on a trade and you don’t want to sell anything. Next week my covered calls expire in CCJ and UUUU, and I’ll see if my Uranium is reduced to a much smaller allocation that I’d be adding to off dips or if they expire worthless in which case I’d hold what I have. Either way, I probably won’t trade much until that resolves.
I do plan to add to my TLT calls at some point here because I am still completely convinced that bond yields will revisit the lows, but with the extreme seasonal weakness in both September & October followed by a stronger November, I think I’ll refrain from adding anything there until the end of the month.
Last note, I should mention that I’ve been hearing a lot of bearish calls lately.
Make no mistake, this chart of the S&P 500 certainly does look bearish with a clear head-and-shoulders pattern followed by a failed test of the 50-day moving average.
Risks are elevated, and I am certainly wary – that’s why my overall bullish exposure to the general stock market is crammed into the 1.5% I call “Dereck’s Trades,” which is call options in companies that have very bullish patterns based on Dereck Coatney’s Elliot Wave projections, currently divided between 9 different names. I also expect the mining stocks and cannabis stocks I hold to fare better in a market correction because they have already been pulling back for a while (aside from Uranium) and they don’t have much (if any) institutional or mutual fund exposure – so if those guys sell that won’t be what they’re selling. Finally, a real market crash would end up with a rush to govenment bonds and my hedges would gain.
That being said, I don’t think we’ve hit the top yet. Too many people seem worried – the debt ceiling fight, will the fed taper, the high CPI readings, the ongoing Covid-19 restrictions, etc. Why would that prevent this from being the top? Market mechanics. Many put options have been purchased as hedges, and many shares have been sold.
A common dip like we’ve seen many times in the last 2 years works like this … active investors start to sell, worried about chart formations or Evergrande contagion, or fed tightening, or whatever. As the market goes down, two forces spring into action buying up shares – the dip buyers, and the closing of short positions and puts by active investors. Much of the money just sits on the sidelines and doesn’t trade. Once the active investors are done selling or have no more to sell, the market stabilizes and starts to shoot higher as the next waves of price-insensitive buying continue on – both from corporate buybacks and from 401k flows into passive index funds. Active investors start to get left behind and have to get long again leading to the next peak.
A larger correction, like we saw in March 2020 or Oct & Dec 2018, involves a big enough rush to sell to lead to forced selling from stop losses, margin calls, and so on. The downturn in 2008 even included what they called “mutual fund puking,” where people shifted 401k money away from stocks and the underlying funds had to sell shares. You could argue we’re seeing that with ARKK, but that’s not where the vast majority of US workers are parking their 401k money.
Anyway, here’s why I’m leaning bullish:
Seasonal factors: September and October are generally tighter months as far as liquidity is concerned, which I believe is due to banks starting to unwind and reduce derivatives trading to meet their Basel-3 regulatory targets by end of year. November is more bullish as much of this unwinding is complete and holiday sales & sentiment pick up. We saw a similar struggle in the S&P 500 last year.
Bearish positioning: I admit that I don’t have any fancy programs to help me find positioning or sentiment, but from what I see from the finance crowd I follow on Twitter, there is significant bearish positioning right now – which means those who are worried have less to sell and there are a substantial number of index put positions which will either be sold off or expire worthless on the Oct 15th options expiry.
Federal Reserve response: From Covid worries to employment report disappointments, to fiscal stimulus pullbacks and debt ceiling fights to allow the federal reserve to hold off on anything the market would consider tightening. This at a time where the 2022 mid-term elections are nearing and Fed Chair Powell is in a precarious position as a bargaining chip amongst fighting factions in the Democratic party.
With those 3 points, I really think the market’s got another leg higher. I expect the top to come when Covid restrictions are all but gone, and both the US government and the Federal Reserve agree that the US economy no longer needs emergency support. Once that happens, you’d better be ready for a drop!
I’ve been thinking more about seasonality lately as we come into 4th quarter. First, it is important to think about what seasonality is telling you. At a surface glance, it’s just telling you the number of times that the underlying stock ticker went up from beginning of month to end of month over the last 5 years. If it’s 4 to 5 times (80-100%), there is a good indication that there’s some seasonal reason you want to be long or at least not short. If it’s 0-1 times (0-20%) perhaps you want to be short or at least trim back longs. If it’s 2-3 times (40-60%) then look to other factors.
Why would seasonality actually work? There are a lot of financial forces that operate on a seasonal calender. The obvious ones are tax time, christmas shopping season, summer vacation season, weather-related affects (heating in winter, hurricanes in fall, etc). There are also reasons having to do with mutual fund activity such as end-of-quarter portfolio rebalancing or quarterly reporting.
In the link above, Jeff Snider and Emil Kalinowski explain how banks use the 4th quarter to adjust their balance sheets to hit whatever score they are aiming for in the Basel 3 regulatory system, so they often unwind derivatives and such in a way that causes bond yields to rise. This is certainly consistent with the typical drops in September & October.
The chart below helps you see the underlying trend and spot the anomalies. The anomalies above are very hard to spot, like the one in October 2017 when TLT bottomed at the end of September but barely rose in October – so the idea that these are weak months for treasuries based on repeating seasonal patterns is solid.
For the trend, TLT is barely above a declining 200-day moving average (above you see the 50-week moving average which is still rising). The current direction is still down as the TLT peaked with a major risk-off event in March 2020 and has been falling back toward its previous long-term rising trend.
Note that the primary reason I am interested in treasuries is because they tend to spike in a risk-off event. If all goes well, interest rates will steadily rise, but there are fragilities in the financial system which make periodic risk-off events more likely. The article below does a good job describing them, though it is a bit complex for the casual reader.
That being said, I should not be adding to my long TLT position until at least the end of October. I added a bit last week, which I wouldn’t have done if I considered seasonality first, but I’ll hold it through because it is still my primary hedge in case of a significant risk-off event (like a 20% drop in the S&P 500).
Now onto the S&P 500, using it’s big ETF proxy SPY:
You can see on the seasonal charts, that the S&P 500 almost always goes up month-on-month, though it is particularly strong both in Summer and in the November run-up to the Christmas shopping season. Last year, the S&P 500 struggled in September & October and the same is happening again this year. A lot of people on twitter are calling a top right now, which makes be more inclined to be long, especially through November.
Note that sentiment is a lot more about positioning than anything else – and there certainly has been a lot of put buying in the indexes lately. This is important because these hedges tend to be sold into a drop forming the next layer of support before the market climbs higher. The S&P 500 has significant regular price-insensitive inflows from both corporate buybacks and regular 401k contributions, so you can run out of active-investor sellers who then start to buy back in as the index reverses creating violent upward corrections. Around mid October, I should have significantly more long exposure in the S&P500, which I will express through more call options in bullish charts I see here: Home – Dereck’s Trades (dereckstrades.com).
I realize that the S&P 500 is very risky with it’s elevator-like drops and extreme valuations, which is why I am not positioned heavily here, why I have significant hedges in TLT, and why I think a relatively small number of call options might be the best way to get upside exposure.
Now let’s move on to my biggest position, precious metals miners, shown using the gold mining ETF GDX:
One thing I would like to immediately point out is the similarity between the 5-year charts GDX and TLT. Both were roughly flat with a minor rise in 2019, a spike in early 2020, and a consolidation lower ever since. In my opinion, this is because both are major hedges for local currencies that are held by central banks around the world. This gives them unique properties such as tending to well in risk-off scenarios.
As I have explained in previous posts, I follow Jeff Snider’s view that the world has been in a regime of top-tier collateral shortages and Eurodollar shortages since 2008. Central banks use “forward guidance” as their primary policy, with quantitative easing to give them the illusion of great power even though it does little, and their goal is to stoke the “animal spirits” of the market to make everyone more bullish with an inflationary bias. The result has been a series of compressed runs and panics in the real economy which has ever-lower employment and trend growth. Meanwhile financial asset declines are truncated by routinely scaring the “bears” and cheering the “bulls” while price-insensitive passive flows continue to drive valuations higher. As such, I believe that bonds and gold are both showing the same thing, which is a higher valuation related to asset scarcity and deflationary tendencies.
Precious metals miners are still my favorite holdings because miners in general tend to shut down production and consolidate after years of price declines (see 2011-2019), while ramping up production to meet higher prices and demand takes a lot of time and money, leading to long busts followed by long runs – and I believe that we are in the early stages of a long run through 2030. Add to that the increasing relevance of gold in the international system as many countries such as China attempt to move past the aging petro-dollar system and their reliance on US dollars for international trade. China looks to Russia and Iran as examples of what they want to avoid in the event that the US turns the weapon of sanctions their way.
Back to the seasonality chart though. The big declines are in February are likely centered around the Chinese New Year, as the strongest buyers of physical gold are off the market. As for the weakness in autumn, particularly September, my guess is that it has some similarities with the decline in bonds during that period. Also, Thanksgiving (end of November) is thinly traded week in the US with an important expiration in Futures that is always preceded by large amounts of contract selling. This creates an annual event that is always so oversold that it sets up December to be an easy gain.
I’ll finish this off with Crypto. Although I am currently betting on Etherium, I am using the Bitcoin seasonality chart as a proxy because they tend to trade in tandem, and Bitcoin was a more mature market in 2017:
To be totally honest, I should be using a log chart for this one but I can’t figure out how to make log charts in Yahoo Finance, and the log chart in stockcharts.com won’t let me set the date range. The reason for a log chart is simply because the a standard chart artificially shrinks the price fluctuations of the past. On a log chart, a 2x return is the same length whether it is $1,000 to $2,000 or $15,000 to $30,000 – and this makes sense because you experience a double the same way as an investor. If you aren’t into crypto, think of it as viewing a 50-year chart of the Dow Jones Industrial Average – a log chart shows the extreme volatility of the 1970’s on par with the moves today, whereas a standard scale would make it look like nothing really happened in the stock market until the early 1990’s.
As far as the chart goes, it’s easy to see the similarities between the 1st and second peaks of 12/2017 and 2/2108 as similar to the peaks in 4/2021 and 8/2021, concluding that we passed a blowoff top and we should avoid this asset class for another year. I get that, which is why my position is small. However, there is also an argument to be made that bitcoin is retracing its paths in 2013 and 2017 which included significant corrections and volatility mid-year before peaking in December.
As for seasonality, October has been a winning month for crypto for whatever reason. November has been iffy, but it has been a fantastic month for stocks and I consider Crypto a highly risk-on asset, so I will hold it through October at least. Perhaps I should then sell when it hits significant resistance on the chart (like if bitcoin just manages to hit it’s $60k peak at the end of October), then buy back in on a correction just to see if we get that parabolic year-end rise, but I don’t currently plan on holding it past year-end in case of a 4-year cycle repeat.
I’ll keep watching crypto though, the weird thing about tradeable asset classes such as stocks, commodities and cryptocurrencies is that they are always changing. There are plenty of reasons to expect different behavior now than during 2013 or 2017 because we have a large financial presence complete with futures markets and ETF’s that simply didn’t exist in those cycles. The bitcoin halving cycle was a primary driver of the movements back then, and there are many reasons to see this decrease in relevance as other forces take over – though for now I lean toward viewing these new forces as amplifiers of the current cycle, as more momentum chasers push us toward a final year-end pump.
Here’s where my portfolio landed:
18.5% TLT Calls
1.5% EEM Puts
PRECIOUS METALS (45.8%)
9.1% AG (Silver), mainly shares & some calls
5.3% SAND (Gold, Silver & others), all calls
4.8% EQX (Gold), mainly calls & some shares
4.5% LGDTF (Gold)
4.0% SILV (Silver)
3.9% SILVRF (Silver)
4.0% MTA (Gold & Silver)
3.1% MGMLF (Gold)
1.9% RSNVF (Silver)
2.1% SSVFF (Silver)
1.6% LWDEF (Gold)
0.9% WPM (Gold, Copper & Silver), all calls
0.7% GOLD (Gold, Copper), all calls
9.3% CCJ, covered calls sold on all of it
7.1% UUUU, covered calls sold on all of it
COPPER & NICKEL (5.6%)
CRYPTO (2.2%): All ETH
DERECKS TRADES (1.6%)
I did some buying last week as miners were hit hard. This includes small adds to precious metals miners, another Jan 2023 TLT call, a little more Cannabis to even out my holdings, and a touch more in Dereck’s trades (sticking with the bullish ones).
I also bought significantly more CCJ and UUUU. I’ve been worried about completely losing my stake in both as everything I held in these had covered calls expiring in 2 weeks with trading very near the strike prices. If the calls expire worthless and I keep my stake, I’ll be happy to keep a higher allocation given the success of the Sprott Uranium fund as a major catalyst in the space. If my shares get called, I managed to pick up an initial new stake significantly below the strike prices they were called at.
That buying has pushed me into margin a little bit (hence the negative cash), so I should add sparingly in coming weeks. Good luck and happy trading!
Here are some of my thoughts/predictions at the moment:
Evergrande is not going to be the pin that pops the US giants in the S&P 500 & NASDAQ. We are at a seasonally weak time for stocks, and they could pull back a bit, but I do expect a rally into the end of the year. The price insensitive money flows of corporate buybacks and 401k money into passive funds is like a tide coming in that keeps pushing the levels of that set of US stocks higher. Active managers may get nervous about Evergrande and sell, but if the downward pressure doesn’t continue they’ll have to come back in. There’s also the end-of-quarter rebalancing coming soon, and bonds did outperform stocks last quarter so we’ll see money shift from bonds to stocks in target date funds.
There’s a lot of negative news about Crypto right now, including a big bloomberg article on the Chinese crypto crackdown. Despite that we don’t see much of a pullback. I bought some ETH at $3000 to hold for the next few months, and I’ll buy more if it dips to $2500 and again if it approaches $2000. I don’t expect it to move down that much, but it’s an extremely volatile asset class so it’s good to be ready for it. I still support Rauol Pal’s idea that it follows the 4-year crypto cycle trajectory with quick enormous gains like we saw through December 2017, and I believe it will have a similar drop to follow. I’m typically early with Crypto so I’ll probably watch the price jump quite significantly after I sell.
I like the idea of using Dereck Coatney’s charting service to time the ins and outs of trading stocks at these levels. I simply don’t feel comfortable with long-term holds at these valuations, its too much risk, but with charts and targets I closed my first options trade for a little gain as PLUG hit its target.
Uranium is interesting to say the least. Sprott could very well accelerate the contracting cycles of the major utilities to the benefit of big US miners as they can lock in production at profitable prices. My favorites in the sector are the north american biggies – CCJ (Cameco) and UUUU (Energy Fuels). I still have covered calls sold on all of my shares expiring in 3 weeks, and at current prices they’re out-of-the-money so I may hold on to my stake after all. They’re in a good pullback though, so looking at my allocation levels I’ll probably add next week.
I’m still (somewhat irrationally) bullish on the Gold and Silver miners. They’re still in a slump and to me they seem like screaming values. However, nearly half my money is in those things so I’m not going to add unless we get another significant drop. That could very well happen as the Evergrande fallout hits Asian markets (which buy much more physical gold) and commodities markets (due to less building in China) which should keep the pressure on that space. The bulls can point to the COT reports with managed money getting more short, the miners getting less short, and the bullion banks (swap dealers) closing out a bunch of their shorts. This is a process … it’s getting closer to what it generally looks like at the lows, but that doesn’t mean we’re there yet.
I’m still leaving my allocation to NOVRF – the nickel/copper streaming company – in place as my allocation is not frighteningly high. I have limit sells on a chunk of it in case it nears resistance at $3 though. This is going to see the biggest fallout from a commodities slowdown in China, yet I’m still bullish on the sector long term as our modern form of “green” uses a lot of renewable resources with their outsized copper power cables, a lot of batteries, and a lot of solar panels all while supply is somewhat constrained from a decade of low copper prices followed by the era of covid restrictions.
My allocation to US Cannabis is up a bit as the sector rallied last week. I’m happy where it’s at at the moment.
Here’s my latest allocations:
17.7% TLT Calls
1.3% EEM Puts
PRECIOUS METALS (45.2%)
9.3% AG (Silver), mainly shares & some calls
5.5% SAND (Gold, Silver & others), all calls
4.9% EQX (Gold), mainly calls & some shares
4.3% LGDTF (Gold)
4.1% SILV (Silver)
3.6% SILVRF (Silver)
3.4% MTA (Gold & Silver)
2.8% MGMLF (Gold)
2.0% RSNVF (Silver)
2.0% SSVFF (Silver)
1.5% LWDEF (Gold)
1.0% WPM (Gold, Copper & Silver), all calls
0.7% GOLD (Gold, Copper), all calls
7.3% CCJ, covered calls sold on all of it
4.8% UUUU, covered calls sold on all of it
COPPER & NICKEL (5.4%)
CRYPTO (1.8%): All ETH
DERECKS TRADES (1.5%)
I’m thinking of adding to my TLT calls. Weakness spreading from Evergrande leading to a slowdown in construction and spending in China is a growing deflationary force. Combine that with the SRF facility which allows big companies, banks, central banks, etc. to access the repo market for instant overnight liquidity in any treasury security and I think we’ll see a lot of cash moving that direction. There aren’t too many things that you can earn money on and still get full immediate value from in a crisis.
Needless to say, I expect the yield curve to continue to flatten as this “inflationary growth surge” hysteria subsides to show the same sickened two-tier economy we’ve grown accustomed to since 2008 – except with heavy covid restrictions instead of heavy Chinese construction spending. How anyone can think that transportation logjams can lead to an inflationary growth spiral is beyond me – average people are not getting more money and they aren’t going to continue flooding the durable goods market to fill their homes like we saw when the stimulus checks hit.
Final note – I did not actually sell anything last week besides my call in PLUG. The allocations for both TLT and precious metals miners went down purely from a slump in valuations. In fact, my portfolio is down 6.8% on the week, but who’s counting right? The advantage of being a retail investor is that I won’t get fired for my performance, so I have the luxury of deciding that the miners seem cheap and I don’t like the risks of chasing a parabolic rise in big tech, while the professionals have no choice but to chase and play the momentum game.
I listened to an interesting podcast with Mike Green this week about the implications of passive investing. This isn’t new, and I’ve heard some of this before, but he mentioned a number of implications I thought of and something clicked.
Think for a bit about how money flows into and out of companies whenever money is switched from an actively managed fund to a passive fund. Here are some of the strange implications:
Anti-Fundamentals flow: Active managers do research to figure which companies will surprise on earnings and outweigh these companies and sectors. Sometimes they have a small amount in short positions in companies they think will disappoint. As money moves to passive, they have to reverse all of these trades to re-allocate into the index. Money will reallocate away from their picks and towards what they didn’t pick.
The big get much bigger: Active managers have strict caps to prevent them from focusing too much money into any one stock. Passive ETF’s have waivers for this, so that over 27% of the popular SPY index are focused into just 9 companies (2 of the tickers are Google). Whenever an active fund is exchanged for a passive one, expect these juggernauts to get a big inflow of money:
Note that a lot of those companies at the top do an enormous amount of share buybacks to feed this frenzy. Could the top ten holdings become 37% of SPY over the next year? You’d better believe it!
3. Meme stock champions can remain winners for much longer than you think. I picked Gamestop and AMC Movie Theaters below because most people are well aware of the story behind them with the short squeeze and the various memes. Both video games and movies have been moving toward streaming for years, so they were unloved on a fundamentals basis.
The biggest passive funds by far are run by Vanguard and Blackrock. As you can see below, these institutions hold 17.3% of all Gamestop shares and 14.6% of all AMC shares. When you switch money to a passive account, you are buying these.
In case you don’t know what a meme is, it is basically a cute picture aimed at getting people excited about crowding into a particular trade. Prime example of a meme:
Even the known fraud Nikola, with the CEO fighting in court and the tentative GM contract pulled, is STILL trading at a $4.25 Billion market cap – with Vanguard and Blackrock among the top holders!
4. Much less cash on the sidelines. It is very common for a mutual fund manager to hold 5% in unallocated cash. They do this to deal with various frictions such as account withdrawals, reallocations, and even minor trading so they can take some profits on a big gain or add a bit when the market drops. Passive funds don’t do any of that – they invest 100% by simply purchasing when money comes in, selling when money goes out, and holding in between. That means whenever you switch from an active fund to a passive fund, 5% of that money is newly added to the market which drives the index higher.
5. Much less market liquidity. During the week preceeding the pandemic announcement, the US stock market was collapsing lower day after day. In just 1 month, the S&P 500 dropped all the way from 3,385 to 2,237. The head of Vanguard announced with pride that less than 1% of his accounts traded during that time. What happened?
5A. Leading up to March 2020, there were plenty of warnings about Covid-19 from the harsh reactions in China to the cases found in New York and Italy. Active managers were watching with nervous anticipation, but the market kept climbing into mid February.
5B. Some of the big political insiders got wind that lockdowns were coming and dumped their holdings, followed by other active managers as they got skittish. This only accelerated when the news actually got out.
5C. For every seller, there must be a buyer. Passive funds pay no attention to pricing whatsoever – they don’t see a bargain when stocks are cheaper or a ripoff when they get too high, they just mechanically buy when payrolls send more 401k money in. There were very few entities able and willing to buy during this market drop, many of whom were hedge fund managers closing out their short positions.
5D. March 23rd, 2020 marked the bottom, as the federal reserve came in with a big announcement. Interest rates plunged lower in reaction. Active managers stopped selling. Some started buying. Early April saw an enormous buying binge as target date funds with fixed stock/bond ratios all had to re-balance their holdings in a period that had seen stocks plummet and bonds jump higher in value.
5E. From April 2020 on through today, the market marched relentlessly higher as payrolls kept putting money into 401k funds and many corporate buybacks continued forward. The buying frenzy picked up as active managers realized they were being left behind and started piling in. Low interest rates and the idea of Federal Reserve support created an environment of increasing leverage, as more and more funds started to use margin lending and other forms of borrowing to pile even more money into the markets. Anyone who was bearish lost big time and had to change tactics or quit trading. Narratives came and went in a frenzy as everyone tried to somehow tie the market reaction with recent news or fundamentals in some way – but fundamentals really had nothing to do with this rise.
6. Dismal performance from active managers leads to more switching. Active managers have had their fundamental analysis/earnings driven world turned upside down. Anything they hold gets sold off and anything they avoid or short gets bought up. If their account holders don’t switch their funding, they are heavily incentivized to become closet indexers themselves. Maybe they’ll shoot it to a few different passive funds (which all hold greatly overlapping stocks), so they can meet the index. Keep in mind that showing a 6% gain when the S&P 500 is up 10% can get them fired, but a 10% loss when the S&P 500 goes down 10% is expected.
I honestly think this keeps going. We may see some big selloffs from exogenous events, but they’ll turn around just as quickly as long as the passive cash flows keep moving. I’m well aware that this can’t last forever, but try to think about what can stop it?
An exogenous event like Covid-19 lockdowns could get a lot of active managers to sell, maybe even get some people to switch their 401k’s to money market funds. This would create a sharp selloff, followed by a reaction from the federal reserve, followed by the same pattern we saw after March 2020.
A liquidity event could strike. The collapse of Archegos didn’t cause it, but there is speculation that Evergrande might. This would involve big hedge funds de-risking their portfolios by selling and reducing margin debt and other leverage, which would result in a bigger drop than #1 above. The federal reserve and federal government would react to “stabilize” things, but unless it was big enough to engender distrust of passive investing the same result would ensue.
Retirement funds could start getting redemptions. This is many years off, however. Most actively managed funds are held by the older generation, who are slowly switching due to the increasing amounts of closet indexing by their managers. As they retire, they aren’t going to switch money into bonds all of a sudden, more likely they’ll leave the money with the same managers. Even if they have “forced distributions,” that doesn’t mean they’ll spend the money – it just means they’ll pay some taxes and move some money to after-tax investment accounts. No real selling in bulk will happen here until the median boomers are actually passing away and the accounts are divided among their heirs.
Passive funds could hit a critical threshold where they are so big that the market stops functioning effectively. Whenever someone wants to buy or sell shares, someone has to be there to make the market. What happens when so much of it is held by passive funds that there is simply no more MSFT or AAPL for them to buy? Again, it seems like this outcome is years down the road.
Political change. You can’t rule out the rules of the game being changed, especially with the wealth disparity and political anger as high as it is today. This is a roll of the dice however, and it could just as easily accelerate the process (like the Covid-19 reaction) as disrupt it.
What about inflation?
Inflation is widely misunderstood. The crux of the matter today is really all about QE. You either believe that quantitative easing is money printing and that we have excess dollars all over the place, or you believe that QE is a largely irrelevant asset-swap and the federal reserve is actually mainly using the policy they call “forward guidance” to encourage people to invest and spend.
Japan pioneered the idea of using their central bank to buy up bonds in what they called “Quantitative Easing” back in 1998, and it still resulted in a deflationary environment with dropping interest rates despite all the ramp-ups which have even gone to purchase much of the Japanese stock market and even some of the US stock market. This should have created enormous inflation, but didn’t.
The crux of the matter is HOW the central banks are making these purchases. Essentially, they are buying these holdings directly from big banks that have accounts with the central bank, and they are crediting these banks with “overnight reserve assets.” These reserve assets are NOT money, and they cannot be cashed in for executive bonuses, stock buybacks, debt reduction, or anything else.
What can these banks actually do with overnight reserve assets?
They list them on their balance sheets as assets. For accounting purposes, it counts towards a positive book value.
They can settle liabilities with other big banks that hold an account with the central bank. If your employer pays you from their wells fargo account to your citibank account, then wells fargo can transfer “overnight reserves” over to citibank in order to settle this transfer.
They earn interest on this overnight reserve based on whatever the central bank decides. In Europe or Japan they may charge for holding these as part of negative interest rate policy, but in the US they usually get paid some miniscule token amount for holding them, currently an 0.25% annual rate.
Anyway, I’m in the deflation camp in that I believe the inflation we’re seeing is not from an excess of US dollars. The supply constraints from Covid has been significant, as have the temporary government assistance and one-time check payments to Americans. Meanwhile, the fed’s cherished “wealth effect” has worked like a charm as money has plowed into investment vehicles driving up the costs of a variety of investment assets including housing.
Steven Van Metre, a deflationist with on his YouTube channel, asked the following question: With a record number of 60 enormous cargo ships waiting outside the port of Long Beach, CA just as government benefits are drying up and congress fights over the debt ceiling with lower and lower stimulus targets, how much money will consumers have left to purchase all of that inventory when it hits the shelves?
Consider that we’re still 5 million workers shy of January 2020, and anyone who has been skipping rent payments during the moratorium is about to get evicted. Also consider that the vast majority of the wealth gain has gone to the top 1%, who may be able to fly to space on vacation, but they won’t be purchasing boatloads of consumer goods.
Next, consider the situation with Evergrande and the clampdown that China has been having on their big companies. This is a serious problem if you’re long commodities, as the Chinese government is clearly not interested in building enormous “ghost cities” like they did in 2008 as they encouraged a property-purchasing frenzy. Even though I expect the financial spillover to be somewhat limited, I am seriously starting to wonder how much of a dent this will have in the use of base metals and anything involved in construction over there.
I have to admit, I’m also nervous about a pullback in precious metals, as I hold the bulk of my money in a variety of precious metals miners. I’m not planning on selling; Gold and Silver spent a decade carving out a base in pricing during which miners cut back heavily on exploration and development and they aren’t primary metals used in construction. I still believe this decade will be great for these metals even if there is turbulence ahead. Plus, I like something that isn’t tied to the passive investing ponzi we see developing.
Anyway, one thing I’ve done is I’ve decided to get some bullish market bets on the table. One of the guys I’ve been following on twitter for a while just launched a technical analysis/charting service where he finds stocks with bullish chart formations and posts target prices, using a combination of traditional technical analysis with his own take of Elliot Wave formations. His twitter handle is @DereckCoatney with proprietary handle @Derecks_Trades
My current holdings:
19.0% TLT Calls
1.2% EEM Puts
PRECIOUS METALS (47.1%)
9.3% AG (Silver), mainly shares & some calls
6.0% SAND (Gold, Silver & others), all calls
5.4% EQX (Gold), mainly calls & some shares
4.7% LGDTF (Gold)
4.2% SILV (Silver)
3.9% SILVRF (Silver)
3.5% MTA (Gold & Silver)
3.0% MGMLF (Gold)
2.1% RSNVF (Silver)
1.7% SSVFF (Silver)
1.6% LWDEF (Gold)
1.2% WPM (Gold, Copper & Silver), all calls
0.7% GOLD (Gold, Copper), all calls
7.1% CCJ, covered calls sold on all of it
4.8% UUUU, covered calls sold on all of it
COPPER & NICKEL (5.4%)
DERECKS TRADES (1.5%)
I did actually buy some RSNVF and SSVFF last week as these silver miners were hammered and I didn’t have much of a stake in them anyway. I am very skeptical about adding more to this sector at the moment though – I’m not selling, but I want to be able to add if we see a significant price drop. In my opinion, the fundamentals are sound and they’ll be fine, but we may see something like the precious metals selloff we saw in 2008-2009 before continuing to their 2011 peaks.
I also bought a decent amount of Cannabis stocks as those were hit pretty hard as well, and I’m thinking they’ve come down enough to potentially stabilize. I’ll continue adding on big drops only with a target of around 10-12% of my portfolio going there.
The Derecks Trades section is simply call options at a variety of strike dates, mainly December, currently divided between 9 different stocks that had bullish chart formations which will go up significantly if they hit their targets. While call options can easily go to zero in a sideways market, I am not expecting a sideways market – we will either have a March 2020 style drop or continue ratcheting higher. Plus, this allows me to put money into companies that have lousy fundamentals so I can reap some of the gains from the passive investing trend without being worried about losing big.
Good luck getting your head around this new paradigm – the implications still have my head spinning. Like I should buy Tesla with a 400 P/E ratio because it’s expensive, it’s in the S&P 500, and active managers hate it … I’m getting dizzy just thinking about it.
The last couple of weeks have been pretty wild as far as market movements. As such, I’ve done a significant amount of trading. Meanwhile, with a labor day weekend in Ensenada, Mexico I haven’t had time to add up all my positions. This is important to do periodically, and it’s simply not something that a simple trading application like tdameritrade can do for you. They can’t tell you your gains netting out deposits, or categorize your positions into categories, and they don’t make it easy to balance market allocations between multiple accounts (Roth, IRA, Regular). Anyway, I’m starting backwards today – listing my allocations, then explaining my thoughts on each.
Above are the movements of my main holdings over the last 2 months, which is quite volatile as you can see.
18.6% TLT Calls
1.0% EEM Puts
PRECIOUS METALS (47.0%)
9.2% AG (Silver), mainly shares & some calls
6.2% SAND (Gold, Silver & others), all calls
5.4% LGDTF (Gold)
4.8% EQX (Gold), mainly calls & some shares
4.0% SILV (Silver)
4.2% SILVRF (Silver)
3.3% MTA (Gold & Silver)
3.3% MGMLF (Gold)
1.7% RSNVF (Silver)
1.5% SSVFF (Silver)
1.5% WPM (Gold, Copper & Silver), all calls
1.1% LWDEF (Gold)
0.9% GOLD (Gold, Copper), all calls
7.3% CCJ, covered calls sold on all of it
4.8% UUUU, covered calls sold on all of it
COPPER & NICKEL (5.1%)
My lousy returns and my explanation:
To start, I’ll let you know that my overall returns have been downright lousy. I have always been an individual investor who’s “investing” habit is supplemented by a full-time job. By articulating these I hope to get better. Anyway, here’s a rough indication of how I’m doing:
-4.8% on the week
+3.6% on the month
+5.7% since April
-22.4% since the pandemic lows
-44.3% since January 2020
Those big losses are almost all because of puts. I’ll start with the pandemic though…
In early 2020, I was expecting a bit of a rough patch so I had a larger than normal cash position. I went on a 9-day trip through Portugal in early March and partway through the market started collapsing. I was kind of excited, buying dips in a number of things that were less market sensitive dividend payers. By the end of the trip I was levered long. Then they declared a worldwide pandemic and everyone had to get home by Friday the 13th – and luckily that was my planned ticket home anyway.
Over the weekend, they declared lockdowns in Italy and in New York. I didn’t think that this was something they could or would do in Democratic countries, so I decided to just “rip the bandaid” and sell everything the following Monday. At first it seemed like a good move as prices continued falling, then everything started to sharply recover.
I really expected that worldwide lockdowns would be bad for the stock market, and that the indexes would at least fall below their levels during the “Trump Tariffs.” After betting on individual sectors going down around April 2020 didn’t work (cruise ships, airlines and such), I closed off those puts and started with long dated puts in the SPY (S&P 500), which promptly rocketed higher. I closed those out in June/July of 2020 because they weren’t working and decided to focus on the more sensitive sectors with puts in IWM (small caps) and EEM (emerging markets). I really ramped up on these around October/November right before they rocketed higher. The only reason my portfolio didn’t blow up at that time was because I didn’t put everything short. I also had big positions in gold miners and SLV before those rocketed higher, big positions in dividend payers that did okay, and significant positions in Bitcoin & Ethereum that rocketed higher later in 2020.
In 2021, I was becoming more wary of puts. I held my long-dated January 2023 puts for quite a while, eventually selling them all off in mid August. What killed me early on though was my big bet on TLT. After my disastrous timing on all of those puts, I went really heavy on TLT calls in February, right before yields spiked going into March. I couldn’t add on the lows because I was already too heavily allocated, I ended up closing my shorter dated positions on small rallies, and my long dated positions in TLT calls are still in the red (though not by much).
As of now, I am still wary of the markets. Prices have been climbing steadily higher on waves of price-insensitive buying by passive ETF’s and corporate buybacks, while the Federal Reserve holds a dovish stance and margin debt has skyrocketed. Even so, many are worried about a downturn in markets so I don’t think one is coming yet. According to Darius Dale on RealVision, there are still a lot of short positions and puts on the major sector ETF’s which would lead to significant buying power on any dip. At the same time, with the $300bn Evergrande restructuring (along with dozens of similar firms valued at less than $30bn each), there is the potential of a liquidity event like we saw following the Lehman Bros collapse in 2008.
That brings me to explain my hedges:
My hefty cash position is to ensure I have money to buy into significant dips. I plan to keep it large until I see great buying opportunities like I saw in gold and uranium miners back in mid August after gold was hammered to 1650 in thin Sunday-night trading. Then I’ll slowly build it up again with paychecks.
My EEM puts are actually shorter dated (December), so that they’ll have positive intrinsic value below $51. This is mainly in case the Chinese company clampdowns and their property company trouble (Evergrande) actually spill over enough to affect the emerging markets fund. It also hedges my gold portfolio a bit because trouble for emerging markets often means they have to sell gold for dollars.
Quantitative Easing (central bank balance sheet expansion) is NOT money printing – just an asset swap aimed at pushing money “down the risk curve” into junk bonds, stocks, real estate, etc.
The flood of money into asset markets is offset by mortgage debt (housing), corporate debt (stock buybacks), margin debt (stocks), and other forms of debt that hedge funds can access to put into these investments. The market will continue rising along with leverage until the leverage can no longer grow – then you’re faced with a possible cascade of margin calls, forced sales, and defaults as asset values plummet and can’t support the same level of lending. If interest rates rise enough it will spark this outcome, in which case the Fed will intervene causing interest rates to plummet again.
The working-age labor force participation rate broke back in 2008 and never recovered. It was hit again hard in 2021 and is very low today. Many of these people who fall out of employment effectively become modern-day “ronin,” or economic exiles. They live in cars or tents, and are in a position where it is simply impossible to go back to a private sector job. If they managed to get one paying minimum wage they could not pay rent on those wages, let alone get cleaned up with new clothes and all. Small employers are also rightfully wary of these people, would expect them to steal, and would not trust them to man their stores. Data is all over the place on these issues … is employment really tight? Are median wages ever going up, or is it just wages at the top from excessive corporate compensation with all those stock options plus some wages at the bottom when minimum wages dictate a rise? Tough to tell, but less people earning money doesn’t sound like a vibrant economy to me.
The Federal Reserve created a number of repo facilities which are significant game-changers in how the currency and interest rates interact. Currency swaps in 2020 were widely used, which prevented the US Dollar from strengthening too much after the lockdowns. Those facilities are still available to many countries. Reverse repo was created to put a floor in short-dated interest rates at 5bps (or 0.05%) so that money market funds which have to buy these wouldn’t give negative returns. This was due to a shortage in US Treasury bills, and has climbed to over $1 Trillion in use. If tapering ensues, that $1 Trillion number will slowly fall before any rates actually move. Then there’s the newest expansion of repo facilities which enables many big entities and countries (like China) with enormous US Treasury reserves to swap out treasuries of any duration for an overnight loan at a 0.15% interest rate which can be extended indefinitely. These entities can even lever up and buy lots of 10-year treasuries at 1.3% or 30-year treasuries at 1.9% to make the spread over that 0.15% loan. Needless to say, you don’t need a crash for interest rates to get lower – and you will get a crash if interest rates get much higher – so TLT calls seem like a decent bet.
I like the cyclical story of the mining sector in general. They had great returns in 2000, peaked in 2011, and dropped precipitously over the following decade. During the decade you saw a number of mines close, very little exploration for new mines, and a lot of consolidation in the space. These companies have been very careful with their balance sheets and maintaining positive cash flow, at the expense of expansion and growth. This leads to underinvestment as supply drops lower and lower to reach demand. Then you get a bit of a demand spike and it’s off to the races, like we saw recently. It takes many years to ramp up production in these things, and this cycle will take years to play out. I fully expect to see the old 2008 highs in this sector when it comes to an end (perhaps in 2030?).
If you look at the charts of GDX vs SIL or GDXJ vs SILJ, you’ll find a lot of correlation between these miners. I personally don’t bother with gold/silver ratios and all that, I just invest in both.
Gold is primarily a monetary metal, held by all the world’s central banks. I believe that our 30-year trend toward free trade and globalization starting with NAFTA in 1994 is coming to an end. This doesn’t mean imminent war or anything crazy, just that Americans & Europeans will be more guarded about their manufacturing sectors while other countries will be more skeptical about relying so heavily on exports to keep their economies moving. Additionally, many countries look at the potential threat from US Sanctions which have been used extensively this last decade and try to reduce this risk. Part of this trend change will be a decrease in the need for US Dollars used in foreign trade, and a corresponding decrease in the need for US Treasuries as reserve assets. I believe a significant portion of this re-allocation will go towards gold because it is a widely accepted asset that cannot be frozen by a foreign central bank. Keep in mind, the move I expect is a slow multi-decade trend that will be a tailwind on gold prices; it does not entail any kind of currency collapse.
Gold is also used in jewelry and other things, and silver is partly an industrial metal that is used in things like solar panels, but I expect the meat of the move in this sector to be from the view of precious metals as pseudo currencies.
This story has gone on for years … the Fukushima disaster in 2011 led to the shutdown of most of the Japanese nuclear plants causing a supply/demand imbalance that crippled the mining industry. The sector consolidated considerably into a few big players, mine development was abandoned, and many mines like Cameco’s Cigar Lake facility were shut down. Meanwhile, nuclear power is still the most feasible way to bring power to many 3rd world countries without the carbon footprint and environmental problems associated with coal. 37% of global energy is still from coal, and barely over 10% is from nuclear. Technology has improved in leaps and bounds, and many countries like China have been ramping up their nuclear fleets.
Uranium supply is very difficult to get on line. Its radioactive. Its dangerous. Environmental and safety concerns for these mining facilities are immense. That is why I really like focusing on the big guys here – they will benefit the most from a demand crunch.
Uranium demand is extremely inelastic. Nuclear power plants produce a lot of energy with a lot of upfront capital cost with a fairly small amount of uranium fuel. Fuel costs are a tiny portion of the expense of running a nuclear plant, and they can ramp up considerably without leading utilities to propose expensive shutdowns.
Recently, Sprott launched a Uranium fund, with the aim to buy and hold physical Uranium to drive up the price. They launched on August 17, and it was like a rocket firing up on this sector.
I was interested in the Uranium story from 2019 on, and invested increasingly more since the pandemic started. It has had many price spikes – some lasting and some not – and I tend to take profits on the early side when anything spikes. In 2020 I was completely out (covered calls were called) when Cameco hit $12 and the price was screaming higher, so I just bought more shares chasing the price & immediately sold at-the-money covered calls until the price stabilized enough so they calls expired worthless. Every big dip I would add, and every spike I would sell covered calls. This time around I did the same thing, though I’m thinking I should have waited a bit longer. I was long 3-week calls into the spike and the calls I sold were at-the-money so they’ll be solid gains if called. Still, I’m not exiting this sector … if called I’ll chase and sell more covered calls until it stabilizes and I’ll add on future dips.
I got into this stock – NOVRF – as a recommendation from the Silver Chartist Report which I subscribe to. They focus on what he calls the two biggest “battery metals.”
Similar story with the cyclicality of mining and declining supply capacity, except with a major ESG-trend kick. Electric vehicles use a lot more nickel and copper than other cars. Charging stations use tons of it. Wind and solar plants tend to be in remote locations with intermittent supply, requiring many miles of power cables that are vastly oversized (vs stable energy outputs like coal/gas/oil/nuclear) for the power they provide.
Just like the other miners, you’ll want a place in it over the next decade even though we’re likely to see more brutal downside corrections in the next year or so. There’s no way of telling when these things stop bottoming and launch, so it’s best to keep a position, but one that’s small enough so you can still add to on dips.
I really got interested in this trade after Tony Greer mentioned it on Real Vision Daily Briefing months ago, perhaps a week or two after the huge Tilray spike. The idea is that the US producers are operating legally in their states, but they still can’t list on the NYSE and have difficulty accessing funding because of US Federal laws that everyone expects to change. As of now, you can invest in a number of them on the Canadian exchanges which small US investors can get into with pink sheets on the NYSE. When I got into the sector, I knew the price was way ahead of itself and would correct down hard for a while, but I wanted to keep it on my radar so I took small positions in three of the Cannabis companies I heard Greer mention. They have gone down precipitously since then – with CRLBF down 50% from the February highs so far – but I barely noticed and just topped off the positions every once in a while to keep even and totaling around a 5-6% portfolio allocation. The sector had a significant fall again last week, and I’m thinking that it might be a good time to ramp up a bit soon and I’ll want more companies to divide into. So I did some google searches and found 3 more US cannabis stocks I could add to the list and got starter positions in those. The charts show no sign of bottoming yet, but they’re getting to some resistance levels that should provide solid entry points. Next drop I’ll be adding more, possibly taking my allocation to 8% on the next dump and 10% on the following.
I should note that a big part of the reason I’m interested in the space is because I wanted to find something that was a potential value with significant possible upside that wouldn’t correlate with mining. It’s hard to find those these days.
Although I’m not currently allocated to Crypto, I have traded it in the past and may do so again. I have friends who are excited about the space, but I still see it as a risk-on play with little to no fundamental value, some exciting narratives and fast market action, and something to actively trade in small increments rather than to hold or accumulate. No matter what use cases I hear about, I can’t help but see the main drive as hoping that someone else will buy it from you for more money later. You can argue most stocks are that way, especially these days where the divide between stock prices and the economy has never been this large, but my reaction is to go for things that I think will have value even after a bear market ensues. Remember those? I used to think it was normal to have a bear market every decade.
I’ll end here. Hope you find this post interesting, it was certainly interesting to write.
I’m writing this blog from my friend’s place in Ensenada, at the beautiful Ochentos Pizza. I drove down Friday evening, had a nice relaxing weekend, and now I’m contemplating the drive up north.
Last week, the spot price of Uranium went up a lot as the Sprott Physical Uranium fund started building up inventory. I sold all of my call options in CCJ for a solid gain on Friday, then sold slightly out of the money October calls on all my CCJ and UUUU.
I expect a pullback, and this is a good way to take advantage of the price spike while it’s still there. As you can see, this stock just had an amazing run from a low around $15.50 to over $21 in 2 weeks.
That last candle on Friday looks like an exhaustion gap, where buyers pushed the price up to new highs, then sellers came in and pushed the price back down. I expect it to at least test $20, but if it does continue higher I’m happy with the strike price my shares would be called at.
I also bought some puts on EEM last week as it was north of $53 again and I’m thinking that the Chinese tech clampdown and the Evergrande blowup might have spillover effects. I’m still wary of puts after my experience this last 18 months, so it’s a small position.
That’s all for this week, I hope you had a nice holiday weekend.
On Friday, we had one of the most anticipated events in the asset markets, often more important than earnings: A policy announcement from the Federal Reserve.
Ultimately, Fed Chair Powell announced that it is too early to taper bond purchases and that he will revisit the decision next month.
Here’s a quick breakdown of what this means:
For a long time, the federal reserve has held a dual mandate to promote price stability and full employment. They do this by performing actions which they consider to be either tightening or loosening monetary policy. Up until the great financial crisis, they would primarily use tools controlling overnight interest rates.
Once these hit zero, they followed the Japanese and European central banks into a policy of asset purchases that they call Quantitative Easing. They roughly use this as the next interest rate lever, where more purchases per month is considered easing and less purchases per month is considered tightening. At first it was debated whether reducing those asset purchases was really tightening rather than just “easing less,” but a 2013 event called the “taper tantrum,” where a slight reduction in the federal reserve’s monthly purchases resulted in a spike in interest rates and a drop in the stock market, solidified the view that tapering is tightening.
Since July 2020, the federal reserve has been engaging in Quantitative Easing, where the central bank purchases $80 billion in treasury securities and $40 billion in mortgage-backed securities every month. Powell simply announced that these purchases would continue at the same level for now, which is perceived as “not tightening”, which is perceived as bullish.
What did market participants expect? It depends on their views (inflation vs deflation):
As usual, this brought out the vigorous inflation vs deflation debate back into center stage. Inflationists expected the federal reserve to announce a schedule to reduce asset purchases toward zero, while deflationists expected the federal reserve to wait on that decision.
I am in the deflation camp and I expected Powell not to taper, but here are the arguments as I see them:
Inflationists point out that the CPI has been above 5% for the last 3 months. Deflationists point out the following:
This also happened in 2008 before a deflationary bust
The numbers are narrowly based in 20% of the index. This reflects temporary tightened supply in a few things while true dollar devaluation would show throughout the index.
The numbers are year-on-year comparisons and 2020 was filled with anomalies.
Inflationists point out that the payroll numbers were strong and there are many more job openings than job seekers. This could lead to wage gains, and those are problematic because they are sticky and difficult to reverse. Deflationists point out the following:
The jobs report has many seasonal adjustment factors which make the headline numbers misleading to the upside. While seasonally adjusted payrolls are up 943,000 the non-adjusted numbers are down by 133,000.
The counting of unfilled jobs is questionable, as the methods leave plenty of room for double- or triple-counting open jobs.
Most of the unfilled jobs are the very low wage retail and service jobs that were lost in the pandemic response. While some employers are experimenting with one-time payouts or temporary raises, few are actually increasing hourly pay. Also, these are typically high turnover jobs and there are many examples over the last decade of employees being replaced by workers at lower wages.
The boosted government unemployment benefits are about to end. The people receiving this money are at the low end of the income spectrum, so all of this money tends to be spent. Whether they stay on reduced unemployment or opt for low wage jobs, less money will be spent into the economy so it will have a deflationary effect.
Inflationists point out the skyrocketing asset prices in stocks, bonds, and housing as a negative side effect of QE that will lead to increased rents and increased wealth disparity. This one’s an interesting narrative, but I’ll point out the following:
The federal reserve has consistently shown that it favors higher asset prices and fears asset price declines. In addition, they have repeatedly claimed that their actions do not promote wealth disparity. Regardless of what you think on this issue, this is clearly not something that they are considering as a factor in reducing asset purchases at this time.
Rents are not set by cost of housing, but by the supply and demand of renters. Supply of rental units is about to increase. A bunch of people will be evicted as the moratorium on evictions comes to an end. Many of the evicted renters could not afford their previous situation so they will be both unable to afford a similar unit and unable to pass the typical background & credit checks that most apartments require. At the same time, demand of rental units will be limited to the ability and willingness of renters to pay.
Inflationists point to the central bank balance sheet and how fast it’s grown. In fact, it has more than doubled since 2020. That represents a large increase in the money supply which should ultimately cut the value of the dollar in half. This is a very common misconception, so I’ll point out the following:
Quantitative Easing is not money printing. All it does is take government backed assets from the big banks and replace them with an overnight reserve asset. This reserve asset is not money, and it cannot be spent by the banks or used to pay down debt; it can only be transferred between the large banks that have accounts with the federal reserve.
The Bank of Japan first announced negative interest rates in 1999 and quantitative easing in 2001. These policies have not lead to any inflation in the Japanese Yen.
Most of the asset price increases following the federal reserve policies have been offset by increases in debt. Housing has gone up in price along with levels of mortgage debt. Stock prices have gone up along with levels of margin debt. This leads to a dangerous situation where a stall in the increase of these asset values can lead to sales to pay down this debt, which reduces prices and then cascades into a deflationary flood of sales and margin calls as seen at the end of any asset bubble. Even if this deflationary bust doesn’t occur, higher prices for the same income streams (in stocks, bonds, and housing/rents) mean that more of these income streams must be diverted toward debt servicing which is again deflationary.
How did the fed decision affect asset classes:
I haven’t explored this in a while, but stockcharts.com has a “CandleGlance” function which allows you to see a lot of indices side by side. This is very useful for sector analysis. I have reorganized these using Paint, with my own notes added.
As you can see above, there were bullish reactions to everything except for the defensive Utilities and Health Care Sectors. Note that I judged a bullish reaction as a price increase on the day, a bullish trend as one with a 20-day moving average above the 50-day moving average, and I put Flat/Bullish where the moving averages were crossing a lot or very close.
Another side note is Technology, which was traditionally considered growth along with consumer discretionary, but there have been debates about changing that designation. I call it defensive, seeing the big drivers in the sector more as cash cows like staples or utilities than as growth names (Apple, Microsoft, Facebook, Google, Amazon… think about it).
The big question is always “where do we go from here?” There are some worrying signs. Margin debt is a big one, which has actually shown a slight decrease this last month. There is also a low in protective puts on individual names, though this is largely because these moved to index ETF’s. Many of the twitter handles I follow have different sentiment readings, which are surprisingly neutral. Valuations are a major concern, but they are notoriously bad in predicting price action.
I’ll go with my gut and say that if the federal reserved is seen as dovish than asset prices are more likely to rise from here. I still think we’re at a dangerous point in the cycle, but if you look at the final manic rises in the 1989 Nikkei or 1999 NASDAQ they were quite spectacular.
I’m not changing my strategy, but I’ll re-state what it is:
Accumulate junior miners on big dips and patiently wait when they aren’t dipping. The trend is bearish – expect more dips rather than quick gains. The valuations are fantastic in my opinion if you can wait out the trend until that matters, which could take weeks, months, or years. Be mindful that when the bottom hits, though it may be considerably lower, it will be selling off because everyone expects further lows in the future.
Be cautious of puts as a hedge. Use them only in short term bets based on reasonable technical analysis. I still like both TLT calls and unallocated cash as hedges.
Don’t be adverse to considering other opportunities. I recently signed up to receive technical setups from twitter handle @derecks_trades and I’m hoping to get in on some when I come up with a system for doing so, possibly with alerts from the Yahoo Finance app. This system is essential for be because I work full time and I can’t follow the market effectively during trading hours.
As far as opportunities go, I’m not adverse to benefitting from the crazy meme stock activity that I experimented with earlier this year. A couple of the stocks I trade have shown heavy call options activity in the past which have lead to price spikes – particularly AG and CCJ – so I check the options charts periodically.
Here’s what I found interesting:
The open interest column shows a lot of Sept 17 call options being purchased for CCJ. The federal reserve statement catalyzed bullish action, pushing those $17 strike calls firmly in the money. Options dealers will have to buy to hedge and others could joint the party leading to another price spike. I decided to join in with calls at the $19 strike – a bit of a gamble but with decent odds.
Junior Gold Miner index above, back at 2019 levels when gold was in the 1400’s. The larger gold miners in the GDX index isn’t as bad, but still fell below it’s Feb 2019 high.
Junior silver miner index above, also below pre-pandemic highs when silver was struggling to break $18. The larger miners in SIL weren’t hit as bad, down to May 2020 levels but above pre-pandemic.
Gold and silver futures above. They didn’t hit annual lows and are still well above pre-pandemic levels.
These charts show the pressure on GDX, GDXJ, SIL & SILJ over this last week.
I think we’re running out of buyers.
Sentiment in gold and silver and their miners has been steadily declining, as neither metal has shown any positive developments since July 2020.
Cryptocurrencies have been skyrocketing over this past year, and many of the would-be metals speculators have gone to the action over there.
Mining stocks are generally excluded from any ESG investments, especially in precious metals, so they get no money from this growing trend.
Mining stocks in general have little if any footprint in the most popular passive investment vehicles such as QQQ, SPY & IWM.
Mutual funds have long favored a mixture between stocks and bonds, with little interest in the mining sector except as a high-beta cyclicals play and generally no interest in precious metals.
Momentum traders and trend followers are usually long-only and simply avoid markets with price action below declining moving averages, especially with the 50 day moving average below the 200 day.
At the same time, economic data has been turning in favor of the deflationist side. Lumber touched below pre-pandemic levels, copper hit 2019 levels last week and has since rallied to March 2020 levels. The labor market is still surprisingly weak, the 2020 stimulus levels will not be repeated, and talk of fed tapering abounds. Interest rates have been plummeting, while TLT (20+ year treasuries) have been strong and rallied past 150.
The bullion banks are trying to reduce their short positions in gold, and they very successfully hammered gold in the light trading on Sunday 8/8 past a number of key levels, causing managed money to reduce longs by 56,000 contracts while they reduced their shorts by 33,000 contracts. According to Alastair Macleod in his interview on kingworldnews.com, these bullion banks are trying to get rid of most of their short gold positions in order to adjust to changes from Basel 3.
I wouldn’t be surprised if the bullion banks tried to hammer gold again, but their goal is to trigger stop losses and buy back, and they lose a lot of money if they don’t trigger any. There is a limit to how much this can accomplish, especially as more of the managed money is shaken out of their positions. A significant amount of the managed money positions don’t rely on stop-losses and algo trading, and the only momentum traders in the space are going short (hence the 29,000 short contracts opened in the last COT report).
Anyway, I was a buyer last Thursday as the miners were thoroughly crushed, focusing on miners that I had lighter exposure to, and I used that down day in general to finally sell of my long-dated put positions. Here’s where my portfolio ended up:
22.4% TLT Calls
PRECIOUS METALS (46.7%)
9.8% AG (Silver), mainly shares some calls
6.6% SAND (Gold, Silver & others), all calls
5.4% LGDTF (Gold)
4.4% EQX (Gold), shares & calls
4.2% SILV (Silver)
4.1% SILVRF (Silver)
3.7% MTA (Gold & Silver)
3.0% MGMLF (Gold)
1.8% RSNVF (Silver)
1.4% SSVFF (Silver)
1.4% WPM (Gold, Copper & Silver), all calls
1.0% GOLD (Gold, Copper), all calls
OTHER COMMODITIES (17.1%)
5.5% NOVRF (Nickel/Copper)
6.4% CCJ (Uranium)
3.9% UUUU (Uranium, Vanadium, Copper)
1.4% BQSSF (Uranium)
General thoughts and trades on my positions:
Hedges: I changed this back from “downside bets” because I no longer consider it recklessly short. Just last week it was at 30% of my portfolio, last month at 35%, before that hovering near 40%. I’m going to be a lot more careful with long-dated index puts in the future and right now I just consider calls in TLT as a better hedge. Those puts were not only fighting the fed, but also fighting a relentless wave of share buybacks and passive investors. I’ll try to be more strategic about these in the future; right now I just think we’re more likely to see another bounce than a significant correction.
Precious metals: This portfolio isn’t easy to balance, because I work full-time as a project manager and often only have my phone app when trading. During the day I have general ideas of what I’m least long and what I want to add to. Last week (mainly Thursday), I added a few more calls in SAND and GOLD, but mainly stuck with shares of anything my previous allocation was low in. Next dip I will be looking back at EQX, SILV & MTA because these are some of my favorites which I haven’t added to in a while.
Other Commodities: I actually tried to sell some NOVRF at $3 but was too late. I’ll probably add more if it revisits $2 though. I also added a little UUUU but otherwise didn’t touch the space, as I’m comfortable with my current allocations.
Cannabis: I originally entered this sector back in March as a small entry into an area with long-term potential and possible near-term weakness that I figured wouldn’t correlate with the rest of my portfolio. The sector has been weak since then, coming down around 20%, and I’ve added just enough here and there to keep my 3 picks balanced and at roughly the same level. I don’t think about this sector much, and I plan to just leave it on “cruise control” this way until it finally starts to get somewhere.
Crypto: I have no conviction in this space. Performance of the sector in general has been phenomenal, and my trades there have all made decent money in the past year. I may enter again in the future, but for now it feels too risky to me with deflation piping up and stocks struggling. With the junior precious metals miners I can see new lows and think “blood in the streets, I’m buying” with confidence that these will do well this coming decade. With Crypto I can’t help but think “alright, another tether pump. Let’s see how far they drive it. When will this scam finally end?” I’ve heard the bullish cases and how crypto will revolutionize finance, but I still just see a digital game token, a market for expensive 8-bit graphics called NFT’s, a free-for-all with pump and dumps and ponzi-like stablecoins that have questionable backing, and a feverish FOMO frenzy about values rocketing to the moon. In short, I see Crypto as a pure risk-on asset with price action as it’s primary narrative.
Cash: I would’ve had much better performance over the last 18 months if I just avoided puts entirely and stuck to heavier cash allocations to reflect my concerns for risks in the system. I’m still juggling how to play levels of one vs the other, but for now I decided to use puts more tactically and I think a bounce is more likely than a plummet. This is partly because of people I follow on twitter saying something about how there is still a lot of protection bought on this market (as in short positions and puts) which is plenty strong enough to provide another bounce. Anyway, I’ll likely wait for a good time in the charts to buy more puts, and I’ll likely have less money in them when I do, but I really want some flexibility to add to my favorite mining stocks when they get smashed again.
Last note, I am not calling a bottom in precious metals or miners. I am very bullish on both this coming decade, but I have no idea how far they’ll drop or how long it will take. As such, my strategy is to simply buy more every time they get smashed, then wait and accumulate cash when they go back up. I do not plan on using leverage, I plan to stick mainly with shares because they don’t expire, and I plan to limit my call options to the highest duration possible (generally Jan 2023). Many people blindly put money into index funds and mutual funds month after month in their 401k’s, and I simply plan on doing that with mining stocks for a while.