Is Crypto rolling over? Rotation to Value? Charts.

It’s been an exciting couple of weeks in the market to say the least. I’m going to go through some basic charts of the areas I’m looking at:

Crypto is having a crazy week. Bitcoin looks like it’s been in a topping distribution pattern since late February, recently breaking down under its 200 DMA. Etherium looks more like a blowoff top, with a frenzy of buying late April and a frenzy of selling from mid May. The altcoins are similar to Etherium but even more compressed.

I drew in the next significant lines of support ($30k in BTC and $2k in ETH). I am avoiding this space for now because I think of these assets as risk-on (aligning with growth & tech) while we’re rotating to more risk-off with a rotation to value. Crypto has shown extreme volatility in the past, including corrections of 50-90% on the way down, so those levels should not surprise a long term holder in the space.

Fundamentally, it is easy to try to label Crypto as worthless and entirely based on speculation, but this isn’t entirely true. There is heavy speculation in the space, but the only way these are going to zero is if they are actually banned. Crypto doesn’t declare bankruptcy and become worthless like a company, rather it goes into and out of favor like a commodity. As for price action I’d say that the risk is currently to the downside, but with massive 40%+ bear rallies, and that a bottom will form and a new leg up will begin a new leg up at some point. After the Dec 2017 crypto crash, this bottoming pattern took 2 years. Right now I get the feeling we’re in a shorter term consolidation which would hit new manic highs later this year followed by a more massive blowoff top. I may re-enter the space at some point but I haven’t decided yet.

The Nasdaq and the Russell 2000 both seem to be in topping distribution patterns just like Bitcoin. These are both risk-on in different ways, as the Nasdaq is heavy in tech and growth stocks, while the Russell 2000 is heavy in meme stocks (like Gamestop and AMC) and hyped re-opening plays. Insider selling has been high in both areas as well. I’ve heard predictions about Bitcoin leading the Nasdaq, and I have been playing around with short-term puts in QQQ.

There are a few people I follow on twitter who do their own forms of Elliot Wave analysis to predict where we are: @DereckCoatney @PuffDragon11 @MasterPandaWu . I am not going to try elliot wave on my own as it is complex, it requires special software, you have to figure which part of the wave you’re in and so on. These charts are interesting, but I like my simple charts and I’m not even going to pretend having expertise in this. Still, they’re generally predicting the end of a generally choppy wave 4 going to a big wave 5 to the downside.

I tend to think bearish, with the idea that we are in a debt-driven asset bubble, so I like to play with downside hedges that don’t crush my portfolio the way they did last year. So last Friday I bought 1-week QQQ puts, sold them for a gain on a Monday drop, bought more on the Tuesday rally, sold them for significant gains on the Wednesday drop, and then bought 2-week QQQ puts again end-of-day Friday. It’s a small bet, we’ll see how it goes.

I’m still heavy in Gold and Silver miners, seeing breakouts from long consolidation patterns. In my opinion we are not going through a crash yet, we are going into a late-cycle rotation to value and I see gold and silver miners as value plays.

The charts for Uranium and Copper miners above still look very bullish, so I’m still significantly in these spaces. I do believe that the inflation calls are over-hyped and that the numbers will likely will roll over by year end – but I also think we’ll see signs of consolidation in the charts before any significant selloff happens. In addition, I am long-term bullish on copper and uranium. Copper will be used like crazy in “green” government infrastructure plans and in the push toward electric vehicles. Uranium will be used like crazy as the life of US nuclear plants are once again extended while emerging markets are building nuclear plants like crazy to build up reliable power capacity without excessive reliance on coal and oil.

I’ll finish this up with charts on TLT (long dated US treasuries) and the DXY (US Dollar vs Euro and a few other currencies). There is significant debate going on about whether these are about to break lower or whether they are forming short-term bottoming patterns. I tend to think that TLT could be in a bottoming pattern, but I did sell some off for gold and silver miners a couple weeks back as TLT hit resistance around 140 and I plan to increase my position in TLT again if it re-tests the late March lows.

My opinion remains that we are not in any kind of new inflation paradigm. Most people will admit that debt levels in the US and the rest of the world are very high, but opinions diverge from there. Many are under the illusion that government debt is like a household budget that we can collectively “buckle down” and pay off. That isn’t the case … money is created by lending, more money must be paid back than borrowed because of interest, and there isn’t enough money in the system to pay it all back. As time progresses, the difference in the amount of dollars in the system vs dollar-denominated debt grows larger, which is why debt levels structurally increase over time and why these debt levels must increase an an ever-faster rate as the levels of overall debt get higher. Right now this difference is enormous, and it takes incredible levels of new debt creation just to keep the system going, but our major political arguments are reducing the deficit and balancing the budget. Our society is highly demand-constrained and our ability to supply goods and services is enormous with a lot of excess capacity which we are prevented from utilizing in the current paradigm. The only thing that tends to change this paradigm and start a new cycle is the advent of major war, as that is the only concern which can bypass the defecit hawks politically. UBI could be a similar game-changer if it pays people for non-productive work on a similar level to that of a war effort, but we are nowhere near getting there.

In short, the inflation we are seeing is from a combination of Covid-related supply constraints and Covid-related underestimation of demand in the face of massive – but temporary – fiscal stimulus. Once the fiscal stimulus finishes washing through our system, demand of goods and services will begin to fall as supply increases and we will see general CPI numbers fall back down.

When will this affect markets? In my opinion, you will not see deflationary forces affecting markets until margin lending starts to turn.

This chart runs through March, but a google search shows that Margin debt increased by another 3% in April. Until this chart tops, and we see actual margin debt reduction, I see the markets going into a rotation to value rather than any meaningful correction – which should be good for precious metals and many commodity-related stocks.

Here’s my latest portfolio:

  • DOWNSIDE BETS (28.4%)
    • 21.2% TLT Calls
    • 4.5% IWM Puts
    • 1.9% EEM Puts
    • 0.8% QQQ Puts
  • GOLD (16.2%)
    • 3.1% WPM & GOLD Calls (Large gold miners)
    • 2.8% EQX (Small gold miner)
    • 0.2% EQX calls
    • 10.2% SAND Calls (Small gold streamer)
  • SILVER (22.5%)
    • 10.7% AG (Small silver miner)
    • 1.7% AG Calls
    • 5.2% SILV (Small silver miner/explorer)
    • 1.3% MTA (Small silver miner/explorer)
    • 1.7% RSNVF (Really small silver miner/explorer)
    • 1.8% SILVRF (Really small silver miner/explorer)
  • COMMODITIES (18.5%)
    • 10.0% CCJ shares (w/ covered calls)
    • 1.0% UUUU (w/ covered calls)
    • 0.5% URG
    • 2.0% ALB (Lithium)
    • 1.9% NMGRF (Graphite)
    • 3.1% NOVRF (Nickel/Copper)
  • CANNABIS (5.5%)
    • 5.5% split between CRLBF, GTBIF & TSSRF (companies with significant US footprints)
  • CASH (8.9%)

I have built up considerable cash recently by selling EQX and replacing the exposure with EQX calls. As we tested major support with gold, I saw the 1-month calls selling really cheap and figured that I could maintain my position with lower risk to see which direction things head. If we go into a significant downward correction that some of the Elliot-wave guys are predicting at the end of May, this will be my dry powder to reallocate.

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Covid precautions are almost over in the US

I’m with a bunch of family in Florida right now, so I’m going to write a quick post and leave it at that. Out here you still see masks here and there but many aren’t worried about it.

Nearly half of the US population has at least one shot of the vaccines. The CDC said that vaccinated people don’t need to mask, and no one is going to check so pretty soon all those rules will be gone – unless some new variant gets around those vaccines I suppose.

Last week we saw significant down moves in the major US indexes with gold, silver, and uranium holding pretty strong.

Friday was the typical “vol-crush” bounce and I bought a couple of 1-week QQQ puts in the last hour of trading. Some of the people I listen to more on Twitter are warning of downside, and the Elliot Wave people I follow say we could be completing a wave 5 down. This won’t lead to a major selloff unless a significant hedge fund blows up, so I’m planning on exiting my short trade at the first decent drop. If I’m wrong and markets rocket higher, I figure they’ll pull up my miners with them so I’m not worried about being out that put money.

This was peak inflation month because next month we’re comparing year-on-year numbers with last year’s fresh $1400 stimulus running through.

I’m still in the deflation camp in that I think long term treasury rates will hit new lows in the next year. However, I can’t deny that precious metals are breaking out on the charts while TLT has shown an ominous bear flag formation – so I think the metals are going higher while interest rates may re-test their recent highs in the intermediate term. On Monday I sold off some of my TLT calls (I still have a heavy position) and put the money in gold and silver miners – and I picked up a decent bit of UUUU and a touch of URG later in the week.

If TLT tests those recent lows, I will reverse that move and reduce gold and silver for long dated TLT calls again. However, I’m planning on staying long the miners for a while yet because I really believe they are going for a multi-year up-trend. When TLT spikes again, the whole market will be struggling and I’ll be re-allocating that capital at that time.

I predict an exciting trading week next week. Now I need to break off for some family BBQ and more beach fun.

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I’m bullish precious metals. Time for charts.

I figured I’m focus on some charts today, starting with the most bullish – commodities:

Cameco is the Uranium miner I’ve been holding, and it just broke out to new highs. I sold covered calls on it last week to lock in some gains, but I admit I’m beginning to think I shouldn’t have. Copper miners look to be breaking upward into a new channel as well. Some of my gold miners like WPM have copper exposure, but I also have some battery metal plays such as NOVRF – a copper/nickel streamer which finally put a bullish green candle over it’s 50DMA after months of consolidation.

Gold and Silver miners both had significant breakouts and backtests of bullish flag formations, and both just jumped over both their 50 day and 200 day moving averages. I used 1-year charts for these because they have been consolidating for that long. Hopefully they’re finally completing their cup-and-handle formations with 1-year handle formations on 10-year cups.

It looks like the Russell 2000 is forming a topping pattern, which could become a head & shoulders reversal. It had a bullish friday, jumping back above the 50 DMA, but these last few jumps didn’t seem to last long. It looks like it needs to test some significant support lower to regain upside momentum.

The S&P 500 also looks ready to fall a bit, but all that the current chart is calling for is another re-test of the 50 DMA – a drop of about 4%.

Although this is still my largest position, I can’t deny that this formation looks like a bear flag consolidation before another drop.

I still believe in the bullish case for TLT – that long dated treasuries are destined to fall a bit. TLT is highly shorted, the labor market is weak, and a lot of the money flooding into housing, the stock market, and commodity futures is debt based.

Steven Van Metre argues that this could be a bottoming formation, and that is possible. There is significant resistance at the 140 level here and a break above that could push values significantly higher.

I’m seriously thinking about whether or not to reduce my TLT exposure, but I will wait at least a couple of weeks before making any serious moves. The stock market looks like it’s ready for a pullback and that should be good for more risk-off trades like US treasuries and gold. I am very bullish precious metals right now, and I am expecting a significant market rotation into this sector over the next few months.

Here are my current allocations:

  • DOWNSIDE BETS (33.8%)
    • 27.7% TLT Calls
    • 4.2% IWM Puts
    • 1.9% EEM Puts
  • GOLD (20.3%)
    • 4.3% WPM & GOLD Calls (Large gold miners)
    • 8.1% EQX (Small gold miner)
    • 7.8% SAND Calls (Small gold streamer)
  • SILVER (20.7%)
    • 10.3% AG (Small silver miner)
    • 1.6% AG Calls
    • 5.3% SILV (Small silver miner/explorer)
    • 1.2% MTA (Small silver miner/explorer)
    • 0.7% RSNVF (Really small silver miner/explorer)
    • 1.7% SILVRF (Really small silver miner/explorer)
  • COMMODITIES (16.2%)
    • 10.3% CCJ shares (w/ covered calls)
    • 2.0% ALB (Lithium)
    • 1.4% NMGRF (Graphite)
    • 2.5% NOVRF (Nickel/Copper)
  • CANNABIS (6.1%)
    • 6.1% split between CRLBF, GTBIF & TSSRF (companies with significant US footprints)
  • CASH (2.9%)

Some of the people I follow on twitter are calling for a potentially significant correction in mid May. I plan to purchase some 1-month SPY puts this Friday if their charts seem to be working out right. They use various forms of elliot-wave analysis which seems to work pretty well but you have to know what you’re doing and I don’t – so I prefer to post my own simple charts with simple patterns that make sense to me.

Last week I did a few trades, selling off my FNV and WPM calls for decent gains and selling covered calls on my CCJ. I also bought some long dated calls in AG and increased my stake in NOVRF, but mainly just built my cash position a bit. I’ve heard calls for a pullback in Uranium, and if this happens I’ve been aiming for an entry stake in UUUU.

I am very cautious about Cryptocurrencies in general at the moment. I still think it’s nearing the end of an explosive parabolic move higher, where the highs will be reached followed by significant blow-off tops like you saw at the end of 2017. Don’t even try shorting this beast, as prices are more likely to surge higher than drop in coming months. I’m not touching crypto at all now though because I can’t trust myself to tell the difference between a very common heavy short-term price correction or a blowoff top and bear cycle, and I’m skeptical of the long-term bull story, so I’m liable to buy and sell at the wrong times in that space. Better for me to stick with precious metals where my bullish conviction is tested and strong.

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Beware the false choices of mainstream narratives

We’re at a point in the market that’s difficult to read. The S&P 500 was flat all week, with intraday false breakouts on the upside and the downside. I closed out my short-dated SPY puts Friday morning for a loss a bit under 10%, which is not bad considering they went from 3 weeks to 2 weeks in duration while I held them. Many sectors have been on a parabolic rise for quite some time, and it’s difficult to tell if this is just a pause before more explosive upside, or a top which could lead to a reduction in our extreme levels of margin debt leading to a cascade of forced selling. I’m going to wait for a better signal before I make short-term downside bets again, which will probably be in the 2nd half of May.

I still haven’t found reason to change my positioning focused on a deflationary long bet with TLT combined with a bet that money will eventually rotate back to the gold and silver miners which haven’t really participated as nearly everything else so far has rallied.

I spent this weekend with family and I’ve seen a lot of political tweets, which got me thinking about the strong narratives giving us false choices. Even worse is that passive news sources totally leave out international news, space exploration, new technologies, and anything else just to hyper-focus on divisive social narratives. Consider how blatantly manipulative many of the mainstream narratives are:

  • Capitalism vs Communism
    • We constantly see this debate as if our only choices were a “Capitalism” of government favored monopolies and oligopolies versus a “Communism” of direct government control over everything. Don’t fall for this debate – the real issue is about individual choice that everyone wants, which we are losing as power and money are continually concentrated by both political parties. In the end it doesn’t matter if you are being micro-managed by a corporate monopoly or a government panel – this trend toward centralized decision making is bad for all of us.
  • Endless Race-baiting
    • The way that major news networks continually push stories about racial violence by police, while constantly asking what side you support, is extremely manipulative. What good does any of it do if we fail to offer a path toward real living-wage jobs?

Inflation vs Deflation

The most important fight in the investing world right now is inflation vs deflation. Unfortunately, it also becomes extremely political. How can you say that inflation is low when the costs of living are soaring, particularly in real estate and rents? The simple answer is that you need to define much more specifically what you’re trying to predict. Are interest rates going up or down and should they? Why are prices in real estate and many base commodities soaring right now? Is it purely monetary – too much money in the system – or is it something else? Are these forces permanent or temporary? The political and economic ramifications of these things are enormous.

I’ll try to illustrate the bulk of my thinking here in bullet points. Let’s start with inflationary vs deflationary forces.

  • Inflationary forces
    • Increases in borrowing, putting more money into the economy.
    • Deficit spending, which is simply an increase in borrowing by the government.
    • Supply constraints which can be caused by shutdowns in factories or mines as well as by bottlenecks in shipping due to covid constraints
    • Growth in private incomes which allow individuals to spend more.
    • Inflation concerns which cause people and businesses to increase a stockpile of goods.
  • Deflationary forces
    • Taxes, which pull money out of the real economy.
    • Debt payments and interest payments also pull money out of the real economy.
    • Reduction in private incomes which prevent individuals from spending.
    • Uncertainty of incomes which increases the need for saving.

Most of the inflation versus deflation debate concerns whether the enormous increase in the federal reserve balance sheet is flooding money into the economy. The inflation side tends to think it does or it will, while the deflation side argues that all created money is offset by debt, and that all the central bank is doing is forcing the banks to hold more government reserves on their balance sheets which pay out a near-zero interest rate.

Back to the political situation (unfortunately), comes the fallacy of focusing solely on government debt. People are wired to think that way because of our own personal budgets, but it simply doesn’t work in the overall economy. As a family, you assume that your labor can provide a fixed amount of money which can pay down debt or purchase goods. When you look at the overall system, you can’t ignore the fluctuations of demand for labor in general as jobs are created and destroyed. If you just cut spending then it cuts the demand for labor which causes higher unemployment and other associated problems that often trigger required spending with reduced tax revenue and you end up in a bigger debt hole than before. This is what the Eurozone has been living through for the past decade.

The economy is built of people who actively work to produce goods and services. We can encourage this production to increase or decrease. More production can be used for a variety of things from typical service jobs, to mining or construction, to infrastructure building or environmental cleanup. Less production simply means that the economy uses less labor and more people are left to scramble for other methods of public or private support in order to survive.

We are stuck with yet another false choice politically with one side saying we should just pay people to stay home and the other side saying that we should cut spending and let them fend for themselves. Meanwhile homelessness has been soaring for decades while the labor force participation rate has been declining, and this has only made the debt problems worse.

My prescription is simply that we need to address these problems head on, rather than throwing money into asset bubbles and expecting that to solve all our problems. There are many ways to do this, and my favorite is bringing back the Civilian Service Corps and allow anyone to sign up. Just like a military branch, they would have uniforms and barracks and mess halls, and they could assign you to whatever work they needed done. Unlike a military branch, anyone could sign up and the government would have to strive to make them useful.

The most common question is always “how do we pay for it?”. That is entirely the wrong question because it assumes a balanced budget is possible when it isn’t, and it assumes that ignoring the problem is a viable solution when that clearly isn’t either. In the end, debt levels aren’t what matters – it’s all about cash flows. Inflation is a problem when cash flows exceed productive capacity, which can happen in the short term (solved by expanding production or temporary money supply running out), or in the long term (caused by steadily increasing money supply or permanent reductions to production). This is where the “Economic Pie” analogy comes in. We increase this pie by encouraging and increase in production, even if we have to stretch to find uses for the labor. When it comes down to it, we’re better off having a burger-flipper earning a living wage rather than a homeless person fighting for handouts.

I have to close out here as more family events are calling. As a final note, I encourage everyone to keep an open mind and try to figure out where people are coming from rather than trying to convince them of anything. Also, make sure that at least some of your news comes from proactive sources (internet searches, youtube searches, online articles, etc) rather than passive sources (TV or radio programs). Finally, always remember that no amount of online interaction can replace our need for physical human contact and interaction. I’ll be back to markets again next week, I promise.

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Stock reactions from news vs underlying cash flows

The stock market reacts to events in funny ways. Usually the headline news events have nothing to do with market movements at all, but the press will just say “stocks went up on optimism about vaccines” or occasionally “stocks went down on (insert negative news headline here)”.

This Thursday at 1pm, an announcement about congress increasing capital gains taxes went out on capital hill, and the S&P 500 immediately dropped. The next day the S&P gained that all back and then some. There is a significant amount of algorithmic trading or other trading styles that quickly react to news events which are supposed to move markets, but they only move prices in the very short term.

There are very powerful cash flows that move markets over the intermediate term, driven by their own considerations which often have little to do with daily news events. Here are some of the major sources of these cash flows affecting stocks:

  • 1. Employee retirement plans like 401k’s, which keep buying stocks at current market prices week after week as long as these employees keep getting paychecks.
    • This category hasn’t been affected much by the pandemic lockdowns because most of the job losses hit lower end employees who don’t have these retirement plans.
    • 401k’s became common in the 1980’s, and have had a powerful effect increasing the P/E multiples of the stock market ever since.
    • 401k stock flows are increased by low interest rates over the longer term, as the fraction of money allocated to bonds has steadily decreased.
    • As you can see from the chart below, retirement contributions have had a rapidly growing influence on the US stock market over the last decade. Unfortunately it is incredibly difficult to find data on the combined annual contributions, so this survey on tax credits for retirement contributions, discontinued in 2016, was the only indication I could find on this critically important cash flow.
  • 2. Stock buyback programs from big US corporations relentlessly borrow money on their balance sheets to purchase their own shares at current market prices.
    • Share buybacks had an enormous impact on the stock market this past decade, often representing the largest flows of money into the US stock market. The spike in 2016 had to do with the corporate tax change, followed by an enormous “repatriation” of cash held outside the US into share buyback programs.
  • 3. Increases in margin lending, available in small amounts to retail investors and enormous amounts to hedge funds, put enormous amounts of borrowed money into the stock market.
    • As you can see in the chart below, large flows into margin accounts often occur during recessions. This is in part because the federal reserve tends to lower interest rates and generally encourage banks to lend. Many large funds are always willing to take on more leverage to boost their returns and their market impact. When large funds plow money into illiquid assets, the underlying asset valuation skyrockets and they can look like geniuses – think of the thinly traded tech names that funds like ARKK and Archegos purchased large stakes of. These funds tend to shut down and get liquidated all the time to minimal fanfare, unless they are big enough to make a significant dent in bank earnings. Margin flows then reverse later on due to margin calls and/or efforts at risk reduction.
  • 4. Rotations from large funds from one sector of the stock market into another are extremely important in how real money is made over time. Big investment funds will rotate out of one sector and into another for various reasons, such as the often talked about rotation from growth into value, large caps into small caps, tech into energy and finance, and so on.

The most important part of the above flows when it comes to market tops is from margin accounts. This is because market crashes always involve forced selling – initially from margin calls, and later from mutual funds or index funds that have redemptions when people who are worried about their 401k’s reallocate the money into funds they consider safer.

Very few of the fund flows above are affected by headline news. The one segment that is most affected is market rotations, as investment managers look for narratives that encourage fund flows into one sector or another. Unexpected events like wars can quickly shift the narrative stream, while expected events like the tax increases last week just feed into existing narrative streams.

Note that investment narrative streams from the mainstream news should always be viewed with skepticism. Big investment firms tend to feed the financial press their narratives, so they tend to have news about everything going wrong in a sector while they accumulate a position and everything going right in a sector when they strategically sell out of that position. Think of the oil fears from demand collapse culminating in a large negative spot price, followed by the inflation narratives pumping everything energy related.

Here’s my latest portfolio:

  • DOWNSIDE BETS (37.6%)
    • 29.8% TLT Calls
    • 4.6% IWM Puts
    • 2.0% EEM Puts
    • 1.2% Short dated puts
  • GOLD (22.2%)
    • 7.1% FNV, WPM, GOLD & NEM Calls (Large gold miners)
    • 7.9% EQX (Small gold miner)
    • 7.2% SAND Calls (Small gold streamer)
  • SILVER (19.8%)
    • 10.3% AG (Small silver miner)
    • 0.8% AG Calls
    • 5.1% SILV (Small silver miner/explorer)
    • 1.2% MTA (Small silver miner/explorer)
    • 0.8% RSNVF (Really small silver miner/explorer)
    • 1.7% SILVRF (Really small silver miner/explorer)
  • COMMODITIES (14.7%)
    • 9.4% CCJ shares
    • 2.0% ALB (Lithium)
    • 1.4% NMGRF (Graphite)
    • 1.9% NOVRF (Nickel/Copper)
  • CANNABIS (5.6%)
    • 5.6% split between CRLBF, GTBIF & TSSRF (companies with significant US footprints)
  • CASH (0.1%)

I did some trading this week, picking up additional shares of SILVRF and NOVRF. I also sold off last week’s short dated puts for a decent gain on Tuesday, then picked up new short dated puts on Friday. It seems a common pattern for the stock market to hit new highs on Friday and then struggle Monday thru Wednesday. These are mainly timing moves, as some of the chartists I follow on twitter have Elliott wave charts on the S&P 500 showing a pullback to 4100 followed by a breakout to new highs around 4250. Perhaps I’ll swap out the short dated puts for short dated calls when it hits my target there. It’s a good exercise to get a feel for timing market moves in general and seeing how reliable these charts are. On the other hand, a significant correction is expected following this top in May and these moves can always come earlier than planned so I won’t be risking a lot.

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My thoughts on Crypto

Cryptocurrencies have been going crazy this week, particularly the altcoins lead by quick triples in DOGE and XRP. I do wish I held onto the bit that I sold off a week and a half ago as they all jumped, some by 50%. Of course if I did hold I’d just be selling them now. I realize that this is the manic phase where Bitcoin is supposed to jump past $100k in a month or two while the altcoins gain multiples, but I just don’t feel comfortable with them.

Turkey became the next country to restrict Crypto – banning purchases in it but not ownership of it. I don’t see this as a surprise because all countries have traditionally required use of their own currencies in transactions, the exception being those with high numbers of foreign tourists who encourage them to spend by accepting dollars and/or euros. In the US this has been the case the whole time, as any payments in Crypto are considered taxable events recorded as selling crypto for dollars when the payment is made.

A few things still puzzle me about Crypto in general.

  1. What is the use case going to be? Speculation doesn’t count here, as that can apply to anything. Here are my thoughts…
    1. Money transfers. Banks may charge you significant fees to transfer money outside the country, and will take days to process any transactions at all. Transfers from a Crypto wallet are very quick with low fees. Question: How will banks react? Will they ultimately offer solutions that lower their fees and increase their processing speeds? When they do, why would they use cryptocurrencies at all rather than an internal electronic system in their own currencies?
    2. Currency hedging / store of value for emerging markets. People living in countries which periodically face significant currency devaluations – Argentina, India, Turkey and many others – have traditionally held more gold and silver to help shield their savings. Cryptocurrencies are much quicker and easier to use for this purpose and have lower transaction fees. Will more countries ban their use because of this? India has periodically banned gold imports as a way to stop flight from their currency, so banning the use of any and all crypto products shouldn’t be a surprise.
    3. Smart contracts for insurance products. As an example, instead of paying premiums for hurricane insurance followed by a huge process involving insurance adjustors you pay premiums to a crypto-based insurance product which essentially says you get a payout (5-10x your money back?) if there is a hurricane of pre-defined category strength that hits landfall within a pre-defined distance from your house within a 1 year period. There is an array of products that are under development and getting licensed (many based on Etherium), but we haven’t quite seen them advertising yet. How big can this get? How will our insurance companies react? How will the government react to their powerful lobbying efforts? Will this take off in emerging markets first, where they don’t have these entrenched interests?
    4. Smart contracts for financial products. An array of things have been discussed, from young athletes selling portions of future potential major league sports contracts, to small businesses selling a percentage of revenues over a fixed period, to college students selling a percentage of future paychecks over a fixed period. Mostly the idea is competing with traditional products like credit cards or lines of credit by creating an equity-like structure where a failure or setback doesn’t result in bankruptcy but the payback would be significant if it all works out. I think this idea is in its infancy, but with the prior advent of “crowdfunding” sites I could see it getting somewhere.
  2. Can Bitcoin really keep going up forever?
    1. Bitcoin is a deflationary asset – both because the total supply is fixed as new users are added, and because keys can be lost over time which locks up those coins forever.
    2. Large central banks will never own Bitcoin for two reasons – one is that it is subject to strategic attacks from the basic banning of transactions in it to a coordinated hash attack on the “proof-of-work” system. Two is that large countries have much more to gain from keeping their own currencies dominant.
    3. Small central banks and/or large hedge funds have significant reasons to get into bitcoin. They are big enough to move the price significantly, so they can easily do an accumulate-then-peg campaign where they try to build up bitcoin from a rise of say $50k to $200k and then let it float but purchase whenever it drops below their $200k peg. These entities gain much more from the borrowing capacity they get by holding an asset with high value than they get from selling it to realize the gains.
      1. How would this affect transaction volume? If strong entities like this take up most of the bitcoin, will you get to a point where most of the transaction volume simply dies off? If that happens, couldn’t bitcoin be displaced altogether by a cryptocurrency with a more vibrant transaction base like Etherium, Polkadot, Cardano, Binance, etc?
      2. Another way of looking at this – if bitcoin became too concentrated, would people lose faith in it as a store of value? If all retail holders were reduced to tiny fractions of bitcoin, wouldn’t the risk/reward seem to fall apart or move in favor of other assets?
  3. Why do smart contracts need to push up the value of crypto coins at all?
    1. The simple answer is that they don’t. You can already hedge emerging market currency with “stablecoins” that track dollars or euros, and any transactions for insurance and/or lending products would ultimately be settled in the local currency as nothing else would make sense.
    2. It follows that the main point of fluctuating cryptocurrencies is to attract interest through speculation. However, if this speculation is not tied to any direct use (like oil futures) or value (like company earnings), then it can potentially fizzle out just like any former collectables craze.

I’m not sure what else to say about Crypto except that I have always struggled to believe in it, warily eyeing the huge price increases that could easily reverse sometime. This seems funny on the surface because I am still a big believer in gold and silver. The reasons there are partly history – these metals have been the common currencies of the advanced world for millenia, they initially provided the backing for the modern fiat currency regimes, and they are still valued as central bank reserves assets (though gold much more than silver). The world is dividing and any country wanting to or needing to de-dollarize has been primarily turning to gold as the alternative reserve asset. If Russia is worried about their assets in US dollars, they won’t feel more comfortable relying on Euros, Pounds, and Yen instead. I don’t think we will go back to a gold-based system, but I do think that countries will look to diversify their holdings and to de-dollarize more of their international trade.

Here’s where my holdings ended up:

  • DOWNSIDE BETS (38.9%)
    • 31.4% TLT Calls
    • 4.6% IWM Puts
    • 1.9% EEM Puts
    • 1.0% Short dated puts
  • GOLD (22.8%)
    • 6.9% FNV, WPM, GOLD & NEM Calls (Large gold miners)
    • 8.4% EQX (Small gold miner)
    • 7.6% SAND Calls (Small gold streamer)
  • SILVER (19.9%)
    • 10.7% AG (Small silver miner)
    • 0.8% AG Calls
    • 5.3% SILV (Small silver miner/explorer)
    • 1.2% MTA (Small silver miner/explorer)
    • 0.8% RSNVF (Really small silver miner/explorer)
    • 1.1% SILVRF (Really small silver miner/explorer)
  • COMMODITIES (14.5%)
    • 9.5% CCJ shares
    • 2.0% ALB (Lithium)
    • 1.5% NMGRF (Graphite)
    • 1.5% NOVRF (Nickel/Copper)
  • CANNIBUS (5.7%)
    • 5.7% split between CRLBF, GTBIF & TSSRF (companies with significant US footprints)
  • CASH (-1.8%)

I picked up some short-dated puts in SPY and calls in SQQQ, thinking that the market may have reached a short-term top. One of the chartists I follow is calling for an end-of-month pullback that will likely turn to new highs in May and then a much more substantial drop to follow. Short dated well-timed puts along technical points on the charts seems like relatively good downside protection as long as I keep the bets small. My long dated puts have been bleeding quite a bit of value over time, as have my long dated TLT calls.

I really think my precious metals holdings are ready to break out. Sentiment had bottomed in the space, and gold is hitting 1770 resistance with the stochastic still low and rising – a ways to go before it is overbought. Long consolidations are like coiled springs building for a big move. I currently don’t have covered calls sold on anything – my last batch of CCJ covered calls expired worthless on Friday – so I am poised for a big up move in those assets.

The main danger of course is still the potential liquidity squeeze as margins are reduced, margin calls are triggered, forced selling hits reducing values, more margin calls and stop losses are triggered, and even more forced selling occurs. In a case like this, forced sellers tend to sell whatever has held its value best which would hammer gold and silver but create great buying opportunities. This will happen at some point – parabolic debt-driven asset price increases tend to end that way. Some prefer to hold more cash ready, but I have opted to try different “downside bets” for this instead.

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Talk of a market top is probably early

I’ve found Twitter to be an invaluable tool to get a sense of the stock markets. For years I used it only to announce blog posts, thinking of it as a weird newer Facebook or something. For news, I tried mainstream sources like the Wall Street Journal, the Economist, and even Foreign affairs for a while and found them to be somewhat interesting, somewhat time consuming, but not particularly useful. I looked to blogs like John Mauldin’s free newsletter, King World News, Wolf Street, and StockCharts.com for different perspectives. I found a lot of value from a paid subscription to Real Vision once they made their low cost tier accessible. Now its a whole different world – a huge number of free podcasts, many of high quality, financial chatter including beautifully laid out charts with technical analysis, and so on.

Of course you have to take everything with a huge grain of salt. It’s like a haystack of information with some very important needles if you can sort them out.

Technical analysis most certainly works for a number of reasons, but it is also easy to make a chart point out anything you want with lines and arrows. StockCharts.com has a great beginner course that I went through which describes the fundamental patterns and some of the reasoning.

Understanding the basics of technical analysis is especially critical now because everyone seems to be looking for a topping signal. You can see many TA shortcuts that get posted, with big circles by all the tops and corresponding signals below – but all signals have spurious results and many charts don’t bother to highlight those. People lose a lot of money buying puts at these spurious signals. If you can’t look at the chart by itself and re-draw the lines and arrows, then you don’t understand it well enough to act on it.

There’s a lot of chatter about the stock market topping out, buying puts, and the like after the Archegos fund collapse. This is certainly understandable, as everyone knows that they aren’t the only fund with excessive leverage, margin lending is likely to cap out or even decline, and margin calls followed by forced sales can happen at any moment. But before you put significant money on the downside, consider this:

A lot of the chatter I’ve heard mentions the incredibly low volume during the climb this week. I don’t quite get it … as you can see on the 6 month charts above, March and early April were certainly high volume but volumes were lower from Dec-Feb. It also seems that low volume is more associated with upside than downside.

You can see the simplistic lines I put on the charts above. The S&P 500 does seem to be breaking above a prior channel. Will it lead to a false break out or a successful backtest and new highs? The Nasdaq had been struggling lately but it printed a nice inverted Head & Shoulders pattern suggesting upside ahead. The Russell 2000 is still struggling after a monster 52% climb between November and March. Does this push it back to the 200 level, or do you stay bullish, focusing on its recent success in holding the 50 day moving average?

I’m not sure what the answer is to all these questions, but my gut tells me we’re at that Bear Sterns moment where we’re about to shock the bears with a coming rally through May.

I exited my crypto positions this week, as all the talk about Archegos and leverage shook me out of my least confident positions. This had me missing out on some gains, but I had gains. I probably won’t re-enter the crypto space for a while because I just don’t have the faith and conviction there that I can muster up for gold and silver when everyone hates them.

I admittedly have a bearish bias, and I feel that the long consolidation of precious metals shows a lower potential downside while the parabolic gains of crypto and mainstream stocks can lead to significant corrections or blow-off tops. Rauol Pal mentioned on Friday’s daily briefing on Real Vision that most people are mean-reversionists by nature … it’s just how we’re wired. This can crush us in a strongly trending market, and it’s also a big part of the reason that technical analysis works.

Here’s where my portfolio landed this week:

  • DOWNSIDE BETS (37.25%)
    • 29.8% TLT Calls
    • 5.2% IWM Puts
    • 2.3% EEM Puts
  • GOLD (22.9%)
    • 6.9% FNV, WPM, GOLD & NEM Calls (Large gold miners)
    • 8.4% EQX (Small gold miner)
    • 7.7% SAND Calls (Small gold streamer)
  • SILVER (19.6%)
    • 11.5% AG (Small silver miner)
    • 0.9% AG Calls
    • 5.3% SILV (Small silver miner/explorer)
    • 1.2% MTA (Small silver miner/explorer)
    • 0.7% RSNVF (Really small silver miner/explorer)
  • COMMODITIES (15.5%)
    • 10.2% CCJ shares (Uranium miner with covered calls)
    • 2.0% ALB (Lithium)
    • 1.7% NMGRD (Graphite)
    • 1.6% NOVRF (Nickel/Copper)
  • CANNIBUS (6.1%)
    • 6.0% split between CRLBF, GTBIF & TSSRF (companies with significant US footprints)
  • OTHER (0.2%)
    • 0.2% short dated calls
  • CASH (-1.5%)

My short-dated call is in NEE, betting that some big clean energy ETFs will position there as they expand their holdings from ~33 companies to ~100 companies this month. This went along with a put in PLUG (where these ETFs are most concentrated) that I bid on but didn’t get on Monday. I closed out my short-dated TLT calls this week, so those went down a bit.

Aside from that I’m mainly watching at the moment. My portfolio was up on the week again, with gains in gold, silver and uranium. I expected half of my CCJ to be liquidated this Friday, but the close pushed the price below my covered calls and they expired worthless. So instead of looking for a dip to buy back in, I’ll be looking for a rally to sell covered calls into again.

I don’t have any covered calls sold on my precious metals miners at the moment, as I want to be open for explosive upside in case both gold and silver miners break their 8-month consolidation patterns to the upside here. When they move, it tends to be quick.

I still find myself in a weird position on the macro side being long both bonds and miners. I still believe we are in a fed-induced debt-driven asset bubble which is ultimately deflationary – and that the fiscal deficits are nowhere near high enough to combat the deflationary effects of record levels of debt. I agree with my fellow bond bulls that inflation won’t show up and yields will eventually roll over to new lows, but I disagree on their call for $1200 gold. On the other side, I agree with my fellow gold and silver bugs that sentiment in the miners has bottomed, that they represent great values today in terms of cash flows and assets, and that there really is a shortage in these metals. Yet I can’t help but roll my eyes whenever I hear about hyperinflation, Weimar, Venezuela, Zimbabwe, re-living the 1970’s and so on. Gold can go higher without a dollar collapse, especially in a world with central banks suppressing bond yields and encouraging asset bubbles while big investment funds scramble to hit impossible targets for returns.

The world I see is certainly a volatile puzzle when it comes to investing. I’m a big fan of Mike Green who says you want to be long vol rather than short, but don’t confuse this with investing in a “Volatility” ETF because those are money pits … to me it simply means be prepared to benefit from explosive upside (my miners) or explosive downside (my TLT calls) because markets are not going sideways from here.

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My deflationary view with a bullish tilt to Gold, Silver & Uranium miners

I finally broke an 8-week losing streak. After seeing negative portfolio returns every week since the beginning of February, taking me down 36.5% (adjusting the money I put in out of the gains), I hit a 2.1% uptick.

The reasons are obvious … my calls in TLT were absolutely killing me, while my heavy positions in gold, silver, and uranium miners weren’t helping. Last week I bought some falling knives in junior silver miners – particularly on Tuesday – and they rallied back hard by the end of the week.

One week’s performance means very little in the scheme of things, however. I need to focus on the longer term trends as I see them.

I saw an interesting link on Twitter yesterday with the article here: March Research Letter | Crescat Capital

This is what I really found intriguing: “It comes down to our primary macro call: long commodities and short equities, but especially long precious metals.

I have found myself in a strange wedge here:

  • I agree with the basic deflationary narrative of Steven Van Metre, Travis Kimmel, Lacy Hunt & Dave Rosenberg. Just like in Japan, the massive QE will not produce lasting inflation. To reflect this view I have long dated puts in EEM, IWM and long dated calls in TLT – betting on dollar strengthening vs emerging markets, US small caps going down, and long term interest rates rolling over and going back down. However, a number of these guys are bearish on base commodities and precious metals.
  • I am quite bullish on the miners – particularly in Gold, Silver and Uranium but also in the battery metals like copper, nickel, graphite & lithium. However, this brings me in with the crowd who are crying out hyperinflation with a major US dollar collapse.

I was interested to actually see someone with a similar nuanced view who is both short major equities but long the miners. However, I did find that I disagree with a significant amount of his reasoning. Ultimately, he sees a re-run of the 1970’s or 1910’s and I really don’t think that’s what we’re seeing.

One big disagreement I have with Crescat Capital is their claim that we have had massive wealth transfers which actually led to gains for the bottom 50%. Most of the gains for the bottom were from two things: one time payments of a couple thousand dollars, and expanded unemployment benefits which only really helped the newly unemployed keep up with food and rent for several months. Both are short-term impacts. He also mentions that most of the gains for the bottom 50% are in housing – but the bottom half in this country don’t own homes and likely never will.

My view on deflation:

  1. There are major deflationary forces at work that greatly outweigh any of the deficit spending we are about to see.
    1. High debt levels require regular servicing – which pulls dollars out of the system month after month.
    2. High unemployment and the large fraction of temporarary/gig/part time work will keep a lid on wages so that price spikes in one area will merely result decreased demand elsewhere.
    3. As more boomers retire, their replacements are typically paid much less – if those positions are even kept open. Many of them retired early due to covid and those high-paying jobs won’t come back.
    4. Small family-owned businesses like restaurants, hair salons, travel agencies, etc. don’t have access to the excess capital in junk bond markets and such. Lending for them has been tight, and many have gone under permanently. This is devastating for an enormous source of middle class mobility and wealth.
    5. Politics are still dominated by fiscal conservatives. The stimulus bill that just passed took a party-line vote in the senate with the slimmest majority seen. A 50-50 vote like this can only work a couple times a year – they need 60 senators for most bills including the infrastructure bill in discussion. They started big so that fiscal conservatives can add taxes or cut spending to reduce the cost of the proposed infrastructure bill, but it is about to be whittled down considerably and it is still unlikely to get enough Republican support to pass. What they are fighting over now is at best the early projects of FDR’s new deal – which was also heavily opposed due to its cost.
    6. What will actually bring lasting inflation is when they stop fighting about the cost all together like they did on the outset of World War 2. Wars are HIGHLY inflationary because they create an enormous demand for all kinds of raw materials and energy while bringing many people into the paid labor force as soldiers as well as in many other industries. The big reason we saw the high inflation in the 1910’s was WW1 and the reason we saw it in the 1970’s was the Vietnam war. The creation of the federal reserve and the exit from Bretton Woods were merely tools in funding the war spending.

How the debt cycle generally works:

  1. Dollars are actually created by lending. The central bank cannot create money, they can only replace US treasuries on bank balance sheets with lower-paying overnight reserves to entice them to lend.
    1. The central bank can actually hit a hard limit on QE by taking all of the treasuries off the bank balance sheets and replacing them with zero-interest overnight reserve assets.
  2. Banks need to make money on their loans with interest. They can only lend to credit-worthy borrowers and these are becoming more difficult to find.
  3. In past cycles, reducing rates enough would create another investment boom. Projects that previously seemed too low profit or with cash flows too far out would suddenly start to work. Investments in non-productive assets like housing wouldn’t seem as much of a burden. Then then next cycle would start.
  4. We hit a problem with the zero-bound in interest rates. Low rates make it harder and harder for the banks to lend profitably, and negative rates make it nearly impossible. The federal reserve has been begging the government to create some spending because they banks are finding it difficult, dangerous, and unprofitable to lend more money into the real economy.

What happened in 2020:

  1. At the end of 2019, there was a yield curve inversion that signaled problems in the credit markets. The federal reserve responded by massively increasing their lending in the overnight repo market and all seemed to calm down. This action essentially reversed all of the previous balance sheet reductions in a fairly short amount of time. Tradeable markets responded by going up.
  2. In March 2020 we hit a major problem with the pandemic and lockdowns. Credit markets were freezing up, stocks were plummeting, margin calls were being made, and everyone was concerned about massive defaults.
  3. The US Government and Federal Reserve responded in a number of ways. They created a number of lending facilities as a backstop to corporate debt and even some junk bonds, combined with a large amount of fiscal stimulus.
  4. Banks were enabled and directed to massively lend into this environment. Massive QE gave them enormous amounts of reserve assets to lend against, while the SLR rule exemption was put in place so that they would just lend without worrying too much about leverage ratios.
  5. Banks responded massively in both the junk bond and corporate debt markets. In addition, they were able to ramp up another extremely profitable line of earnings – margin lending. FINRA Margin Debt (ycharts.com)

6. Money is created by lending. Margin debt began to increase dramatically across the board. Banks were encouraged to keep any lending growth moving. This led to massive inflation in the prices of tradeable assets such as US stocks and bonds.

7. Real estate lending – mortgages – were also highly encouraged with similar results. Not only did interest rates hit record lows, but telecommuting enabled a surge of people stuck in overpriced cities to move far enough out to buy their first homes. For the banks, most of these loans are guaranteed by the government, and even purchased by the fed to create reserve assets.

The above seems to fit a highly inflationary narrative – except that things are beginning to change. The Federal reserve became worried about the size of the stock market and housing bubbles on the one hand, and about the persistently high unemployment and lack of lending into the real economy on the other. They have long considered “Forward Guidance” to be one of their most effective tools, and they have been using it to encourage the “inflation” narrative.

Those “in the know” began to highly short the long end of the bond market in anticipation of a fed reaction to back this narrative. In February, a number of Japanese entities began dumping US treasuries for reasons relating to the end of their fiscal year creating a rout hit the US long bond. Interest rates on the 10 year and 20 year treasuries shot much higher and my long investments in TLT plummeted. Those short positions are still they have been reducing considerably. The stock market began to wobble, especially the tech-heavy NASDAQ, the many recent SPACs, and the big money losers dominating the Russell 2000.

Next, they decided to let the SLR exemption expire. This makes it more difficult for the banks to keep up their massive levels of margin lending.

Then Archegos Capital blew up. This hedge fund had extremely high levels of leverage, with margin lending from a number of different banks. Many of the holdings were large positions in relatively low-volume stocks such as VIAC. Goldman Sachs and Morgan Stanley started dumping these positions on the market the following Friday, and the share prices plummeted. Ironically, this liquidation actually caused a major ramp higher in the major stock indices because the fund was “hedged” with considerable short positions in them.

So what now:

  1. Banks need to reduce lending, particularly margin lending, due to the expiry of the SLR rule exemption.
  2. Banks just lost a bunch of money from a highly leveraged hedge fund blowing up with assets unable to cover its margin debt. This further incentivizes banks to reduce margin lending.
  3. Just like creating margin lending was highly inflationary in tradeable assets like stocks, a reduction in margin lending will be highly deflationary.

This will lead to a significant move lower in the markets. The main question is when. Many smart players are going to a larger cash position. So what should I do here?

I think that if a major selloff occurs, long-dated interest rates are likely to return to all-time lows. This will create a big payoff in my large position of TLT calls, as well as increasing the value of my long-dated puts.

So why am I still so bullish on the miners?

  1. As interest rates go back to all-time lows while genuine fear returns to the stock market, a lot of money will be looking for a place to hide and will find it with Gold.
  2. Sentiment in gold is pretty lousy right now and a lot of speculators have been shaken out at the trade, yet it has stubbornly pushed above the 1700 level quickly after every attempt to push it lower.
  3. The physical shortages of Gold in the system are very real, as are the number of unallocated gold bars with more than one owner.
  4. Gold miners are extremely profitable at current gold prices, with great cash flow.
  5. Miners of all types have received very little investment since the 2013 crash in gold, resulting in a long period with very little spent on exploring and developing new veins. It takes several years to get these mines into production.
  6. Silver goes up considerably when the sentiment in gold improves, and it is essential in many popular “green” applications such as solar panels.
  7. Uranium is similar but somewhat unique:
    1. Miners have gone through massive consolidations and closures since the Fukushima disaster in 2011 caused a collapse in demand following the many lengthy shutdowns of Japanese nuclear plants.
    2. Meanwhile, nuclear power remains the main way that large countries such as China and India can effectively reduce carbon emissions – and they have been building large numbers of new plants. A significant supply crunch is coming in this industry.
    3. The cost of Uranium is a tiny fraction of the cost of producing nuclear power, so the demand can drive up pricing substantially.
    4. The entire Uranium sector has a relatively small market cap, so any significant institutional investment would drive the miners up considerably.

Note that a major deflationary event could bring some downside to the miners, but I tend to think this potential downside is limited and they will bounce right back on the next fed/government reaction.

That pretty much sums it up. Here’s where my portfolio landed:

  • DOWNSIDE BETS (39.8%)
    • 32.3% TLT Calls
    • 5.3% IWM Puts
    • 2.3% EEM Puts
  • GOLD (21.4%)
    • 6.3% FNV, WPM, GOLD & NEM Calls (Large gold miners)
    • 8.1% EQX (Small gold miner)
    • 7.0% SAND Calls (Small gold streamer)
  • SILVER (18.9%)
    • 11.0% AG (Small silver miner)
    • 0.8% AG Calls
    • 5.1% SILV (Small silver miner/explorer)
    • 1.2% MTA (Small silver miner/explorer)
    • 0.8% RSNVF (Really small silver miner/explorer)
  • COMMODITIES (15.4%)
    • 10.1% CCJ shares (Uranium miner with covered calls)
    • 2.0% ALB (Lithium)
    • 1.7% NMGRF (Graphite)
    • 1.6% NOVRF (Nickel/Copper)
  • CANNIBUS (6.1%)
    • 6.1% split between CRLBF, GTBIF & TSSRF (companies with significant US footprints)
  • CRYPTO (3.0%)
    • 3.0% split between ADA, LINK & LTC (Coins smaller than ETH that are in the top 10)
  • CASH (-4.6%)

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Rethinking my positions as markets get volatile

It’s been a volatile week. Looking at my weekly market performance, I’m down 2.1%. In fact, my peak valuation was back on Jan 30 and since then I’ve been down every week with a cumulative loss around 36.5%. I actually have less money tucked away than I did in October 2019, despite working full time and saving a significant sum in the interim.

I realize that plenty of people would immediately say I should throw in the towel, never look at a stock market again, and put everything into an index fund from here on out. Then they’d point at their fantastic gains from doing just that. All I can say is, that’s not my path. I simply don’t trust that plugging all of my money into SPY would yield me enough to retire on in 30 years – it seems more likely to me that it would be like plowing all of my money into the Nikkei back in 1990, adding in year after year, and trying to retire off that. Besides, with my path I have hope – serious hope that I can get somewhere some day.

I made a few notable trades this week, like buying 1-month puts in EEM and QQQ on Monday and selling them on Wednesday for a decent gain. Then on Thursday I rolled those winnings into 1-month calls on TLT thinking that there was an air pocket without much resistance for a ways. I should’ve looked before I leapt though, which isn’t always easy when you’re working full time, because there is considerable volume at the 138 level traded on Feb 25th, making that a significant near-term resistance. Still, there’s the end-of-quarter rebalancing, the tightening regulations on bank capital, and the purchases of the federal reserve – it could turn back.

Aside from that, my PVG was liquidated last week when covered calls expired in the money and I saw the silver miners get a major smackdown – so I loaded up my exposure in silver miners this week.

I suppose I must be wired to look for mean-reversion in a market that is strongly trending. Interesting to think about anyways, I certainly have plenty of room for improvement in my trading.

Last year I was dumb enough to think that the economy would suffer and the stock market would eventually reflect it, then I moved on to being dumb enough to think that the massive amount of liquidity chasing low yields and highly overvalued companies would eventually find it’s way into precious metals, then I moved on to being dumb enough to think that the deflationary forces of record high unemployment and record high levels of unproductive debt would keep a lid on long-dated interest rates – and that precious metals and commodities would be there if I was wrong.

My main takeaway from 2020 is that my biggest trade ideas were way too consensus:

  1. In mid 2020, my calls of a struggling market were way too consensus – especially given the massive injection of Fed liquidity which has proven time and again to find it’s way into the stock market.
  2. Betting on precious metals was also way too consensus. Everyone, bullish or bearish, thought that gold and silver would be a good place to hide late last year. Speculative investors were heavily long, but that didn’t seem to bother me because they had been long since 2019.

Currently, my main two trades are not consensus, or at least they don’t feel that way.

TLT: 20+ Year Treasury Bonds

Everyone seems to believe that long-dated interest rates are going higher. They’re trumpeting that message on Bloomberg, and I see it endlessly on Twitter.

I look at the COT report however, and I struggle to figure out what it means: CFTC Commitments of Traders Short Report – Financial Traders in Markets (combined)

These financial futures divide out the following:

  1. US Treasury Bonds – I can’t figure out what the duration is
    1. Dealers are net short, which is typical
    2. Asset managers are significantly net long
    3. Leveraged funds are significantly net short but covered a bunch of shorts last week
    4. Other (small investors) is slightly net long and sold some longs
    5. Nonreportables in treasuries (perhaps foreign investors?) are slightly net short but didn’t trade much.
  2. Ultra US Treasury Bonds – A google search says this is 20+ years duration
    1. Dealers are net short
    2. Asset managers are heavily long
    3. Leveraged funds are heavily short and reduced longs
    4. Other is significantly long and covered some short positions
    5. Non-reportable is roughly even and sold some longs
  3. 10 year US Treasury Notes
  4. Ultra 10 year US Treasury Notes – Google says that the difference between the 10 year and ultra 10 year is the range of maturities. So is the duration 10 year but the spread between 2’s and 20’s vs closer to 10? I have no idea.

I was hoping to give some analysis here, but I’m lost on that – all I can say is that the world of US treasuries is extremely complex and opaque. I’ve heard about the record net shorts in yield-sensative assets but I don’t see where it is. I even tried looking at short interest in TLT and it doesn’t seem high or at a particularly high point.

All I can say is that I really think the long term deflationary forces in our economy (high debt levels requiring servicing, high unemployment, low wage growth) outweigh our inflationary forces (government deficit spending) and that many of our current inflation measures are up due to temporary Covid-related restraints on supply and transportation. This should cause interest rates to roll over, though it could easily take a couple of years to do so which would make all my call options worthless.

I’m leaving this trade where it is for now, but I really need to look into it more and I don’t have time at the moment. The chart looks like it is still oversold after plummeting substantially in February, and it has a decent chance of testing the 50-day moving average or at least consolidating a bit below the 138 resistance before it continues on.

Gold and Silver Miners

This trade also has a remarkably non-consensus feel to it. Despite the gold and silver squeeze narratives, gold has been hammered down to bearish territory on the charts while silver has been hanging on. Despite this, I am used to precious metals consolidating for longer periods between upward moves so it doesn’t seem that shocking that the bull flag formation starting last June would continue on for so long. Even the great gold bull market of 2000-2010 showed year-long downward consolidation moves.

The COT report in gold is thankfully much simpler than that of treasuries. There is only one contract for GOLD and one for SILVER.

Producers – the gold and silver miners themselves – are always short because they like to hedge their positions to ensure that their mining operations are profitable.

Swap Dealers – the big bullion banks who routinely manipulate the market – are close to neutral on Silver but still significantly short gold even though they’ve been covering those shorts relentlessly in past weeks.

Managed Money – Big investment funds are still long both gold and silver, and they have become a bit more long gold and less long silver last week but not by big margins.

Other and non-reportables – Typically smaller funds and retail – are still long both silver and gold. They picked up more shorts in Gold last week and reduced a few longs in silver as they become more nervous about both.

This looks like a classic story of retail being shaken out of the trade while the big guys cover their shorts, and I am happy to be long here. In fact, I still strongly believe that we’re in a bull market in precious metals which could last a decade, that the downside risk is somewhat limited while the upside possibilities are big.

The biggest danger I see for gold is an actual liquidity event – which could happen if the dollar continues to strengthen, more emerging market currencies blow up, and more funds blow up, but this event would make my bets on TLT pay off big time as long treasury yields would plummet just like in March 2020.

I do plan to shift from Gold more toward battery metals and emerging markets after the re-opening starts. In my view, this will be initially bad for risk assets as money finds more real world investments and pulls out of the artificial market ones – and then it will set the stage for significant growth … but this is a shift that is at least 2 years out.

Here’s where my portfolio landed:

  • DOWNSIDE BETS (41.2%)
    • 32.6% TLT Calls
    • 6.0% IWM Puts
    • 2.7% EEM Puts
  • GOLD (20.5%)
    • 5.9% FNV, WPM, GOLD & NEM Calls (Large gold miners)
    • 8.0% EQX (Small gold miner)
    • 6.6% SAND Calls (Small gold streamer)
  • SILVER (17.5%)
    • 10.8% AG (Small silver miner)
    • 0.8% AG Calls
    • 5.0% SILV (Small silver miner/explorer)
    • 0.8% RSNVF (Really small silver miner/explorer)
  • COMMODITIES (14.9%)
    • 10.0% CCJ shares (Uranium miner with covered calls)
    • 2.1% ALB (Lithium)
    • 2.0% NMGRF (Graphite)
    • 0.8% NOVRF (Nickel/Copper)
  • CANNIBUS (4.9%)
    • 4.9% split between CRLBF, GTBIF & TSSRF (companies with significant US footprints)
  • CRYPTO (3.1%)
    • 3.1% split between ADA, LINK & LTC (Coins smaller than ETH that are in the top 10)
  • CASH (-2.1%)

I dipped in the margin a bit because the silver miners really got hammered this week and I had been meaning to load up on Silvercrest in particular for a while now. I do this from time to time when there’s a compelling buy, but not by much and I get back to positive cash fairly quickly.

A final note before I end my post today …

I started by mentioning my losses because I need to be honest about them. Last year I ended up losing 16.6% despite being up 4.4% from april to year-end because my views were more consensus than I thought. This year I am going for a different approach which involves significant risk using options to bet on non-consensus plays, so it shouldn’t be surprising that it goes down significantly before it turns back. These are long dated options with nearly 2 years to play out, and I’m diversified into a few other things, so my account won’t go to zero. However, if gold, silver, or long dated interest rates go my way then I will still be sitting on significant gains overall – provided I don’t cut out too early like I did with CCJ last week. I’m still relatively young and my expenses are low so this is the time I should be taking risk. Good luck, and happy trading!

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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.

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