Thoughts on Evergrande, Crypto, Commodities, Rates

Here are some of my thoughts/predictions at the moment:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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:

  • HEDGES (19.0%)
    • 17.7% TLT Calls
    • 1.3% EEM Puts
    • 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
  • URANIUM (13.4%)
    • 7.3% CCJ, covered calls sold on all of it
    • 4.8% UUUU, covered calls sold on all of it
    • 1.3% BQSSF
  • COPPER & NICKEL (5.4%)
    • 5.4% NOVRF
  • CANNABIS (9.8%)
    • 1.7% CRLBF
    • 1.8% GTBIF
    • 1.8% TRSSF
    • 1.3% CCHWF
    • 1.6% AYRWF
    • 1.6% TCNNF
  • CRYPTO (1.8%): All ETH
  • CASH (2.9%)

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.

That’s it for today. Good luck and happy trading.

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 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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