Uranium, Interest Rates, Portfolio Outlook

For me, this week was largely about the push in Uranium miners.

I came into the trading week with a few things in mind:

  1. The federal reserve meeting on March 17th about bank regulations and the rapidly rising interest rates. I expected that Powell would disappoint markets.
  2. End of quarter portfolio rebalancing as any retirement funds with a large fixed stock/bond mix would have to sell stocks (which shot up higher this quarter) and buy bonds (which have been losing significant value in the past month.
  3. The quad witch on Friday, where stock index futures, stock index options, stock options and single stock futures expire all at once. During these events, it is normal for a significant counter-trend move as the powerful market makers, who take the other side of the contract when everyone is betting long, have a large motivation to hammer the price lower before the close.

All three of those gave me a bearish bias on the week.

With Uranium, I’ve been bullish on it for a while and trading it using the large US miner CCJ. Over the past few months with the rapid run-up in price, I have been playing this with covered calls which tended to expire in the money and then I’d find a point to buy back in. Two weeks ago Friday I did just that, refilling my CCJ allocation on the big price dip that morning. The following week, I noticed that the call options expiring week ending 3/19/21 were selling like crazy. My first reaction was to buy back all of my covered calls, go to work, and see if it continued. The next few days, stock options continued to pour in so I purchased some – first at a $17.50 strike, then at an $18.50 because the price for those was only $0.20/share which is crazy cheap for one that will be pumped.

I was sitting on 70 1-week call options in CCJ by the end of the trading day on Friday (Mar 12th), with only about $1500 at risk. From my experience with prior gamma squeezes (AMC, then SLV, then FSR, then PLTR, then EXPR) I expected the following:

  1. A significant jump between Friday close and Monday open.
  2. A flurry of option-buying activity with end-of-week out-of-the-money contracts hitting up to $0.50/share way up the chain in early morning trading.
  3. Significant price gains from open to 20 minutes in, with a small dip around the 30 minute mark. Then significant selling pressure a few hours later with option premiums higher up the chain collapsing. Then a fight between buyers and sellers with a possible jump on Wednesday and a weak Friday.

With this game plan in mind, I jumped into action, getting to my computer for the 6:30am market open:

I found the volumes and the price jump on Monday morning particularly underwhelming. The $18.50 call options which I had bought at $0.20/share each on Friday were not moving up that much, the price seemed to be struggling, and I didn’t see the flood of call option buying I anticipated. I decided to cut with small gains here, dumping those back at $0.25/share and then selling off all my shares as well.

30 minutes later the price flew to $18.50 and I realized I blew it. That would’ve been $7k in gains – and another $7k on top of that if I sold around the $19.50 peak. Oh well, live and learn. I was still up $1k those call options, but I need to keep more upside than that if I’m going to make up for the mauling I’m still getting with TLT … overall I’m still down 0.8% on the week.

The biggest rookie mistake in stock trading is to cut your winners too soon (I need to grab these gains while there good!) and then hold onto your losers too long (It’ll come back. Won’t it? Maybe now?). I fear I’m making both mistakes right now. A good trader can make small losses 60% of the time while powering ahead on significant gains from the 40% that win.

Anyway, I bought back into CCJ on Friday morning at roughly the same price I sold out the prior Monday and I sold covered calls on all of it because the 1-month option premiums were pretty steep.

Aside from that I doubled my allocation into AG on Friday morning, and the covered calls I had on the existing half expired worthless. I really like using covered calls to chase things you want to get into … with AG, I actually bought it a month ago paying $19/share and immediately sold an at-the-money covered call for $1.50. Factoring that in, the buy price was $17.50 which is still above trading today, but it wasn’t that bad.

My overall portfolio outlook – TLT and Interest Rates:

I have clearly been bleeding out on this trade so far, but I’m holding it. If I didn’t jump in too high earlier I’d be tempted to add, because I still expect that interest rates will roll over and hit a new low. This could be rather quick given the enormous speculative shorts in long duration bonds, but it could also take several months or over a year. In early 2008, TLT was high and started getting crushed from March-June, then it stabilized through August, then saw volatility above and below the March highs until November when it massively spiked.

I’ll be honest, the technicals on TLT look simply awful. My bullish thesis really comes down to massive speculative short positions, very bearish sentiment, and the constant push of the inflationary narrative which I simply don’t believe. If the big players are all short and bearish then all it takes is for some of them to switch sides and get less short. Flight for safety in a stock market dump would do this. With inflation, I believe there is a serious misunderstanding about what causes it and what gives value to money – particularly involving levels of debt.

Swiftly increasing debt causes temporary inflation which could last if incomes pick up allowing a continued rise in spending. Debt itself is highly deflationary because it has to be serviced with monthly payments, sucking dollars out of the system. Imagine buying an expensive car with hefty payments … that shows up initially as a big increase in spending which is inflationary, but those payments require that your spending levels drop significantly in coming years. The supply and transportation constraints due to worldwide Covid restrictions will soon be lifted, and then the data will turn significantly as production increases while most people are still very tight on cash.

Game plan: I will not add any more to TLT because I over-allocated, but I won’t sell it either. I will also try to take advantage of this hedge to buy the dips with confidence in commodities like Silver and Uranium because a scenario causing them to tank will likely be great for TLT. I need to have more confidence staying bullish when I get the right setups.

Gold Miners:

Like TLT, the long consolidation in gold from June of last year has pushed well into bearish territory. Sentiment has been very bearish for gold as well as for TLT and you can find plenty of bear cases on both. Bloomberg for example talks about how bonds are rising due to inflation and this is pressuring gold lower because it pays no yield. However, gold and GDX have been hitting significant support levels and staying firmly above even on days when the rest of the market is selling off. This looks like a potential bottom to me, and if the formation is an extended bull flag then the upside could be significant.

In the longer term, I am very bullish on precious metals. In recent years we have seen the overuse of US Sanctions, an increasingly protectionist trade stance, a reduction in the US percentage of global trade and GDP, and an increasingly antagonistic relationship with the next largest economy which is China. In light of this, it makes less and less sense for trade between foreign countries to remain predominantly in US dollars. If trade is conducted in a larger variety of foreign currencies, then foreign central banks will not need to hold as many of their reserves in US dollars. Right now there is simply no major alternative to replacing the US dollar reserves as all foreign currencies have their own problems filling this role. As such, countries that wanted to rapidly de-dollarize have been turning increasingly to Gold. While I don’t believe that we can move back to a system where gold becomes the major world currency, I strongly believe that it’s relative importance in a basket of currencies will increase in coming years.

At the same time, foreign central banks will ensure that the US dollar is not going to tank for the simple reason that they don’t want their export markets crushed. At the same time we are seeing massive productivity increases from technology, massive debt levels worldwide, and central bank responses which tend to be limited to inflating asset values. In short, a period of low growth and continued financial repression which should be great for precious metals.

Other Commodities:

I continue to remain bullish on Uranium and battery metals as the countries of the world continue their push to reduce carbon emissions.

Uranium just came through an enormous period of oversupply and capacity reduction resulting from the Fukishima fallout, and we are about to see significant shortages in coming years as major countries such as China, India, and Brazil increase their capacity. At the same time, Uranium is a relatively insignificant cost in generating nuclear power so spot prices can increase rather dramatically. The main reason I like to focus on Cameco is because they own extensive mines and they are well positioned to get lucrative contracts with nuclear facilities in the Americas and Europe who are looking for reliable supply.

Metals such as lithium, graphite, nickel, copper, and silver are needed extensively for increasing use of batteries as well as solar panels, windmills and so on. As the US and Europe become increasingly wary of allowing China to dominate and control production in these sectors, we should see more favorable treatment of the miners we have going forward. In addition, I wouldn’t be surprised if we saw both an infrastructure push in a number of countries (including the US which badly needs more investment in it’s electrical grid) combined with a small boom in construction projects as big companies and SPACs, flush with cash from selling shares, buy up and repurpose abandoned restaurants, malls, office buildings, and so on.

Current portfolio:

  • DOWNSIDE BETS (38.9%)
    • 30.0% TLT Calls
    • 6.0% IWM Puts
    • 2.9% EEM Puts
  • PRECIOUS METALS (33.2%)
    • 6.4% FNV, WPM, GOLD & NEM Calls (Large gold miners)
    • 8.2% EQX (Small gold miner)
    • 7.3% SAND Calls (Small gold streamer)
    • 11.4% AG (Small silver miner)
    • COMMODITIES (15.1%)
    • 10.0% CCJ shares (Uranium miner with covered calls)
    • 2.1% ALB (Lithium)
    • 2.3% NMGRF (Graphite)
    • 0.8% NOVRF (Nickel/Copper)
  • CANNIBUS (5.4%)
    • 5.4% split between CRLBF, GTBIF & TSSRF
  • CRYPTO (2.6%)
    • 1.4% LTC
    • 1.2% LINK
  • CASH (4.7%)

I think we’re about to see significant downside pressure in the major US indexes in coming weeks due to the following 3 effects:

  1. End-of-quarter rebalancing from stocks into bonds (required in a significant number of big investment funds)
  2. Rapidly rising interest rates
  3. Margin reductions. Hedge funds use massive leverage in stocks, bonds, and futures trading. Banks are required to hold more reserves as a percent of their balance sheet as the SLR exemption expires. When this exemption was put in place, banks ramped up their profitable margin lending and margin levels are higher than ever. As banks reduce these margin limits, big funds will need to sell to reduce their leverage.
  4. Potential de-risking. If selling of the major US stock indices hits a certain level, leveraged funds will need to begin selling to de-risk their portfolios. This could lead to bigger selling and margin calls sending prices plummeting, or it could simply absorb whatever buying pressure exists leading to choppy markets.

I’m thinking about buying more puts in the next short-term rally. If the SLR exemption starts on March 31, then perhaps I could look at a small amount of strategic puts in QQQ that expire in a month or two. Long dated puts would require a substantial investment per contract and would require a significant correction to pay off, so I don’t really want to add to my long term puts at this time.

Good luck navigating through this. I find it a very exciting time to be trading, perhaps the most exciting time since 2008. Just like then, I’m optimistic and full of ideas. Hopefully I execute my trades better this time around.

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at gluskinsheff.com. Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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