Performance and Allocation Self-Reflection Time

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.

  • HEDGES (19.6%)
    • 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
  • URANIUM (13.3%)
    • 7.3% CCJ, covered calls sold on all of it
    • 4.8% UUUU, covered calls sold on all of it
    • 1.2% BQSSF
  • COPPER & NICKEL (5.1%)
    • 5.1% NOVRF
  • CANNABIS (6.4%)
    • 1.5% CRLBF
    • 1.5% GTBIF
    • 1.6% TRSSF
    • 0.7% CCHWF
    • 0.6% AYRWF
    • 0.5% TCNNF
  • CASH (8.5%)

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
  • -27.6% YTD
  • -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:

  1. 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.
  2. 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.
  3. My TLT calls are all January 2023. I still believe that we are in an economic slowdown. See Jeff Snider’s work on Market Research – Alhambra Investments (alhambrapartners.com) for a good explanation.
    1. 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.
    2. 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.
    3. 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.
    4. 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.

Mining Stocks:

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?).

Precious Metals:

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.

Uranium:

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.

Copper/Nickel:

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.

Cannabis:

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.

Crypto:

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.

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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2 Responses to Performance and Allocation Self-Reflection Time

  1. This is excellent and wonderful work.

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