The long-awaited Fed hike

Mar 15-16 is the next meeting at the Federal Reserve, where they are expected to make their first 25 bps rate hikes. How much they hike and how the market reacts will determine a lot.

IMO, the fed will hike 25bps, announce a slow rolloff of their balance sheet (QT), and try to sound hawkish.

I expect front end rates to rise a decent amount afterward, bringing TLT to its next inflection point where it will trend steadily higher as interest rates invert, leading economic indicators struggle, and the economy slows as CPI remains sticky. The sticky CPI will be due to the lagging nature of the large housing measure and the stubbornly expensive oil as the administration makes token gestures to lower it will refusing to complete the gulf auctions or allow for new fracking wells. This will result in significant shortages such that the economy would have to fall back to covid lockdown levels in order to curb demand enough to reduce the price. Meanwhile, emerging markets will really struggle as commodity shortages (particularly food & fuel) combine with dollar shortages and cause major problems.

The chance of a serious deleveraging event this coming month is significant. At the same time, blind money flows should continue into US stocks from corporate buybacks and 401k flows into passive funds. The S&P 500 will not go flat, it’ll be more like the elevator down then stairs up we saw in March 2020.

I’m not confident at all how it will move really, so I’m leaning towards Jan 2023 TLT calls as my primary hedges – with the added benefit that the best time to add to them will be after the fed spooks markets to the hawkish side. It’s possible that the Fed comes out too dovish, in which case my gold, silver & uranium miners should do very well, but my current plan is to have a significant amount of cash on hand by the end of the week.

Here’s my current portfolio. It’s been a fantastic month for it to be honest, up 2.9% on the week, 23.8% since February, but only 5.4% on the year (January was rough).

  • HEDGES (7.3%)
    • 7.3% TLT Calls
    • 2.7% AG (Silver), shares
    • 6.8% AG (Silver), calls
    • 3.0% SAND (Gold, Silver & others), calls
    • 5.8% EQX (Gold), calls & shares
    • 3.7% LGDTF (Gold)
    • 4.2% SILV (Silver)
    • 4.0% SILVRF (Silver)
    • 3.1% MTA (Gold & Silver)
    • 3.0% MGMLF (Gold)
    • 1.9% RSNVF (Silver)
    • 2.4% SSVFF (Silver)
    • 2.4% HAMRF (Gold)
    • 0.8% DSVSF (Silver)
  • URANIUM (32.0%)
    • 15.5% CCJ, mainly shares & some calls
    • 7.4% UUUU
    • 3.9% UEC
    • 2.0% BQSSF
    • 1.8% DNN
    • 1.4% ENCUF
  • US CANNABIS (12.4%)
    • 1.6% AYRWF
    • 1.6% CCHWF
    • 1.6% CRLBF
    • 1.6% CURLF
    • 1.4% GTBIF
    • 1.6% TCNNF
    • 1.5% TRSSF
    • 1.5% VRNOF
  • CRYPTO (1.1%)
    • 1.1% XRP
  • OTHER (0.6%)
    • 0.5% OGZPY
    • 0.1% ATCO calls
  • CASH (2.2%)

I’ve been slowly selling down my precious metals exposure the last 2 weeks, mainly just selling off some of my Jan 2023 call positions to lock in some profits. I think these will be great positions this coming decade, but I am a bit nervous about a deleveraging event. Still, the price action looks remarkably bullish as gold takes a shot at the highs following a long ~18 month basing pattern. The miners are lagging of course. May seems to be a great month for the miners, so maybe I could go to all shares/no long calls around then.

For Uranium, I’ve been much more aggressive about selling covered calls into the move. I have a lot of covered calls expiring March 18th, which I’m expecting will boost my cash position next week. In total, I have 4 covered calls in CCJ and 5 in UUUU which I expect to expire in the money this week, 4 in AG and 5 more in UUUU which might expire in the money this week (they are close), and then another 5 UUUU and 11 UEC covered calls which expire in April. If price really rockets this week, I might sell all my long dated CCJ calls. I’ll still have plenty of uncovered upside exposure, and I’m still very bullish on the sector, but I am trying to play it a bit safe and have plenty of excess cash this next month to prepare for a pullback without selling everything.

With US Cannabis, I just intend to buy more shares to a limited extent every time they make new lows to make the market value stay about even and then let them fly once they move higher. A stiff recession will make the anticipated “safe banking” type legislation more likely as our congress can use the anticipated tax gains from that to offset something they want to spend money on.

Aside from the above, I’ll probably add to my collection of TLT calls this week as I expect it to hit new lows. I added a couple last week, sticking with the Jan 2023 calls. I really do expect a significant move higher in TLT over the next year as something breaks in the financial system and long-dated treasury yields once again test toward the downside, but it is a very slow market. The way I see it now, I could lose 7.3% of my portfolio value if they expire worthless, but if a Russian default combined with the Evergrande Chinese property defaults and general emerging market weakness causes another LTCM-type blowup then we could see TLT spike to 170 on a risk-off move. If that happens, that small 7.3% portfolio allocation I have gives me (28) TLT calls, which would provide quite a hedge. Perhaps I should up that allocation to 12% and get some serious upside potential.

If Crypto tanks end of month, which I kind of expect, I am planning to increase my XRP exposure a bit. Anyway, that’s my current plan. Hard to make any moves in this crazy environment where volatility is high, liquidity generally low, and valuations make no sense whatsoever.

All I know for sure is markets will move a lot and I’ll need to make some significant bets if I ever want a chance of winning a decent retirement or maybe even an early one. Besides, win or lose, it’s fun to write about. Happy trading everyone, and good luck with the crazy month ahead.

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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