Crazy Fed Week Buying

This week I figured it would be fun to start with my predictions from last week and how my gameplan panned out.

Here is exactly what I said last week:

  1. Relief rally Monday morning from oversold lows, speculation that perhaps the federal reserve will ease up after the massive disappointment with Q1 GDP falling by 1.4% when it was expected to rise by 1%.
  2. A violent shock sometime between Monday & Tuesday, as Powell makes it clear that he is moving forward with a 50bps hike, and that his main goal is to crush inflation Volcker-style.
  3. Markets wobble a bit Wednesday as institutions look for buyers to appear.
  4. A significant selloff in both stocks and bonds on Thursday, probably through Friday as the buyers supported by Japanese yield-curve-control policies don’t show up at all during Golden Week.
  5. Counter-rally the following week from oversold lows, massive influx into US treasuries to get that sweet yield.

If it all works out as I expect, I should be 100% invested by the end of the week. I’ll buy a little bit here and there, focusing on Thursday as my biggest potential buy day. I plan to pick up a lot of TLT calls and Uranium miners specifically, though I might go for some of my other names if they are truly beaten to a pulp. I also plan to buy some more XRP which I expect to get somewhere in the 50-cent range.

Here’s how it played out:

  1. Market continues lower into Monday and TLT dives. I bought (3) Jan 2024 TLT calls and re-entered SAND, one of my favorite precious metal royalty companies that I had exited completely a couple weeks back. Market rallies at end of day, as institutional shorts finally take some profits off the table.
  2. Markets hover around at low volume until Powell’s speech on Wednesday. I bought a couple more crushed commodity plays – CCJ, UEC, NOVRF, etc. I also topped off my US Cannabis (again).
  3. Powell’s comment takes 75bps hikes off the table on Wednesday. Algo’s re-price bonds a bit and market shorts frantically cover through the end of the day. I remember thinking that I was going to end the week with a lot of excess cash after all, and being glad that I at least purchased some things earlier in the week.
  4. Markets plunged Thursday and Friday as they digested Powell’s message of 3 back-to-back-to-back 50bps rate hikes this summer. Short speculators re-entered, long speculators backed off. I bought 3 more TLT calls as that plunged, then focused on the fire sale in my favorite mining shares. I bought a lot, and even ended up pricking up some XRP in the 50’s at the end of the week (well, $0.59 or so).

All-in-all, I feel like it was a pretty successful week, which is funny because my portfolio ended down 8.8%. In fact, my portfolio value is down 25% since the beginning of April, but who’s counting? Psychology is weird that way I suppose, it doesn’t seem so bad if you’re accumulating. I suppose that’s why us retail investors often catch falling knives in these markets.

Here’s where my portfolio ended up:

  • HEDGES (12.9%)
    • 12.9% TLT Calls
  • PRECIOUS METALS (35.5%)
    • 4.3% SILV
    • 4.0% SILVRF
    • 3.2% AG
    • 3.2% EQX
    • 3.0% MTA
    • 2.9% LGDTF
    • 2.5% MGMLF
    • 2.4% SSVFF
    • 2.2% RSNVF
    • 2.1% HAMRF
    • 1.8% SAND
    • 1.6% MMNGF
    • 1.5% DSVSF
    • 0.8% BKRRF
  • URANIUM (18.0%)
    • 3.2% CCJ
    • 1.4% UUUU
    • 2.8% UEC
    • 2.9% BQSSF
    • 2.4% DNN
    • 1.2% DNN calls
    • 1.5% ENCUF
    • 2.5% UROY
  • US CANNABIS (17.4%)
    • 1.9% AYRWF
    • 2.2% CCHWF
    • 2.1% CRLBF
    • 2.4% CURLF
    • 2.2% GTBIF
    • 2.5% TCNNF
    • 1.9% TRSSF
    • 2.1% VRNOF
  • BATTERY METALS (11.4%)
    • 5.7% NOVRF
    • 4.1% SBSW
    • 1.6% PGEZF
  • CRYPTO (2.3%)
    • 1.9% XRP
    • 0.4% BTC
  • OTHER (3.1%)
    • 2.4% DOCN (cloud computing)
    • 0.6% OGZPY
    • 0.1% ATCO calls
  • CASH (-0.5%)

Speaking of retail investors catching falling knives, that is exactly what all of my US Cannabis buying has been. The sector ETF MSOS went from $42 to $14 in one year. As my holdings are simply top ones in MSOS, that’s a pretty good average of all of those. My stake is higher mainly because I topped it off to keep the dollar amount the same while my portfolio value went down as a whole. To be honest, I probably lost more in TLT anyway though.

As for the successful part, I re-entered and/or accumulated a lot of my favorite miners that I had exited week ending 4/14, including AG, SAND, EQX, CCJ, UEC, DNN, UROY and more. I also shifted more towards battery metals by adding to the severely beaten-down NOVRF and SBSW, and I greatly increased my share of Uranium miners.

Here’s the basic reason I’m so bullish on Gold & Silver, Uranium, and Copper mining in 3 charts:

With gold, it just seems amazing that the miners are so beaten up while the spot price is near its 2011 peak. Copper miners fare better against their metal, but they are still below their 2011 peaks while the spot price is higher.

Uranium is a similar story, although the chart isn’t as clear. I had to get Uranium spot pricing from the St Louis Fed and combine it with monthly close pricing of CCJ and DNN from Yahoo Finance and put them together in Excel, so it’s not a relative performance chart like the other two. I tried a log axis and it made things more confusing, so I just put DNN on an axis on the right so that it would show up despite the lower price. Needless to say, but Cameco and Dennison are much lower than they were at comparable Uranium spot prices in 2006 and 2011, at a time when Uranium Spot price has enormous structural pressures to the upside.

Anyway, the miners are all super cheap compared to the metals. In addition, mining in general hasn’t expanded much in the last decade due partially to the collapses in spot price and partially because they aren’t ESG and passive indexing has led much more money into growth than value. Mines take years to get online and producing, and during that time the price should continue higher due to undersupply. It still seems incredible that Copper is near peak valuations while China is not only locked down, but has been going through a drawn-out homebuilding bust for over a year.

We are in a very strange time, where it’s extremely difficult to find good comparisons for where we are headed. The 2008 housing bust came off high commodity prices and low tech valuations, with enormous stimulus in China, mainly going into construction. The 2000 dot-com bust came off low commodity prices and high tech prices as globalization and US outsourcing & off-shoring were expanding like crazy. The 1970’s oil shocks was during a time of a rapidly growing labor force, a big war with a draft, strong unionization, strong US production capacity, and low overall debt levels. The late 1940’s commodity spikes were just after WW2 as the Korean war brought demand forward in fear of rationing. Debt levels were high, valuations were low, and we were about to start a period of massive rebuilding internationally and massive infrastructure investment in the US. None of these periods seem to fit today.

Today we see signs of an incredibly weak economy in the US and abroad, crazy high debt levels worldwide, property bubbles that show signs of turning in many countries, and a Federal Reserve intent on hiking rates like crazy despite a soaring US dollar and inverted yield curves. To make matters worse, the state of the economy itself and the reasons for it are in complete confusion. Here are some examples:

  1. Labor market
    1. Many people like me, Jeff Snider, David Rosenberg, etc. see a weak labor market shown by a sinking labor force participation rate, a smaller workforce than 2019, and negative real wage growth. This trend has been going on for decades, it took a serious and permanent change for the worse in 2008 and it never recovered.
    2. The concensus view, particularly among our political leaders and the Federal Reserve economists, is that we have an incredibly tight labor market as shown in their headline unemployment rate and their soaring JOLTS data (which is flawed in a number of ways, but that’s another story).
  2. Money supply
    1. There have been serious signs of dollar shortages and collateral shortages that have been resulting in weak demand, weak growth, and recurring crises in much of the world including the Eurozone, China, and elsewhere. The US has been somewhat shielded from the effects, but it still shows up in our incredibly slow GDP growth, shrinking labor force, and lack of real wage growth. We took years to “recover” from the great financial crisis, but we never reached the former trendline growth so arguably we never recovered.
      1. The high CPI is largely due to the combination of demand shocks and supply shocks.
      2. Demand shifted from services to consumer goods in the pandemic and was temporarily boosted by fiscal transfers from worldwide governments (particularly the US) in 2020 and early 2021.
      3. Supply remained constrained partly due to the lockdowns, but also partly due to the complete lack of willingness in natural resources development. The US and Europe block most energy and mining investment citing “environmental concerns” while the emerging markets have seen a decade-long series of accelerated booms and busts in these sectors, and they have trouble accessing capital anyway.
    2. The consensus view is that the central banks of the world united in a money-printing binge that left way too much money in the system. The inflation is a reflection of the incredibly strong economy and consumer demand (ignore the fact that less units are sold at higher prices so the only increased demand is nominal).

To this day, we still see an astonishing lack of willingness to invest in natural resources and related infrastructure despite soaring prices. Politicians are torn between subsidizing the poor due to rapidly rising costs and an extreme wealth divide, and limiting any spending whatsoever to reduce inflation. Investing in energy production and distribution, desalination plants, mining, oil & gas production, nuclear, etc is seen as wasteful government spending and bad for the environment to boot.

We will eventually invest a lot more money in metals & mining, especially if governments are serious about spending on alt-energy projects which use an incredible amount of these resources per unit power. Meanwhile, prices of these materials should really start to soar. In investing we’ve heard about generational opportunities a lot lately, and this is the one that I’m planning on riding.

My base case currently is that the federal reserve’s rapid hiking cycles will break something in the enormous and opaque repo markets. A recent statistic was that bond markets worldwide have lost over $2.6 Trillion in 2022. That was reported back in March. The federal reserve receives reporting on tri-party repo (going through BNY Mellon), but nothing on bank-to-bank repo.

These overnight repo facilities can be thought of as massive margin debt on the worldwide bond markets. Banks (and sometimes central banks) lend at a very low overnight rate, protected by the right to sell off the underlying collateral at any time. This collateral comprises of a variety of widely traded bonds including US Treasuries, other sovereign debt, and corporate bonds of varying ratings and maturities. When interest rates spike higher, these bonds lose value in the spot market, and borrowers have to post more collateral or their bonds are sold. Bear sterns went bust in March of 2008 because their enormous holdings of mortgage-backed securites lost value in the spot market and they did not have enough collateral to post to make up for the shortfall. These are highly levered markets and this will happen.

Anyway, in that base case we see a liquidity cruch after which central banks intervene and TLT spikes. Then I can sell off the TLT calls and buy a lot more mining shares on the cheap.

My alternate case is that we somehow avoid this liquidity crunch and muddle through, in which case my TLT calls could go to zero but my mining stocks should do very well.

As for the other sectors I’m in … US Cannabis, a touch of cypto, and DOCN for cloud computing … I see those as highly speculative bets which might pay off big but might end up like a dot-com stock after 2000. I wouldn’t invest in them if I didn’t think they had staying power, but my main conviction is that we are in a commodity bull market that will last through the decade of the 2020’s.

Enjoy your weekend everyone!

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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5 Responses to Crazy Fed Week Buying

  1. phusg says:

    Thanks again for your thoughts John. A penny stock for your thoughts on the timing of the counter-rally this week? Are we oversold enough yet in your book? Looking at the continuing plunge of crypto this weekend it seems like we have a way to fall yet, maybe to 4000SPX?

    • johnonstocks says:

      I think we are in a bear market and will be until the Federal Reserve capitulates and reduces rates again.
      It is common in such markets to have oversold conditions longer than you expect, but with everyone bearish and a big CNBC “markets in turmoil” thing, you could see a violent bear market rally.
      I’m nervous about going short anything here, I think it’s better to wait until a major rally hits and then take short positions (I use puts).
      Ultimately, the March 2020 drop didn’t go nearly as far as I thought it would and TLT ended up spiking big time – so I’m expecting something similar at the next bottom.
      As for Crypto, it is a risk-on trade. I’m mainly tiptoeing into XRP to join some friends who are crazy bullish on it, and I see the potential for a rally if their court case ends and they become easy to trade in the US again. Right now I have to buy Bitcoin in Coinbase, transfer it out to a wallet, then exchange it for XRP and face ~10% fees on the way. The BTC I have was Coinbase telling me they weren’t allowing me to move it until Monday.
      Last note, next week the Japanese re-enter the market and they still have yield curve control. I wouldn’t be surprised to see their institutional buyers jump into US treasuries for the yield, causing rates to drop and stocks to rally in the short term.

  2. JAG says:

    Nice write up….thanks.

    I put my toes in the “TLT water” last week with a couple of call options. I can’t believe how cheap they have gotten. Is everybody stupid or is it just me (as usual)? I will buy more.

    I saw a compelling case made for a bull move in the miners this summer by Jason at sentimentrader.com, though silver looks like it may be entering its annual doldrums.

    I usually have a slew of defensive VIX call options to protect my portfolio but I sold them all. I find myself in a position that I’ve never been in before: Super long, naked and afraid, lol.

  3. JAG says:

    Hey John,

    I got a question regarding TLT. What do you think about the head-and-shoulders pattern that appears to be playing out with TLT? It looks like TLT would need to drop to the upper $90’s to complete this pattern.

    Is this hogwash?

    Thanks for your time.

    • johnonstocks says:

      I don’t think technical analysis works the same on things like VIX and TLT as it does with stocks and crypto. The nature of the flows is different.
      For me, it’s just the idea that a lot of bond holders are highly levered thru the repo markets, and a blowup in that space is much bigger and more systemic than a blowup of a stock fund like Archegos or ARKK.

      The MacroVoices podcast today had Dave Rosenberg and I thought it was interesting that just like me he’s bullish on government bonds, gold & uranium.
      With silver, I just think it will follow gold for the most part. Longer term there’s building industrial demand for silver, but the primary driver today seems to be investment like gold.

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