The Recent Bank Craziness and All That

With all the craziness going on in the banking sector, it might seem funny to start with a bitcoin chart. Many people think of this as a liquidity gage, matching the breakout in the size of the Fed balance sheet below, means liquidity injection so risk assets should rise.

On the flip side, stocks usually tank after the fed reverses policy to easing when it is in response to a big recessionary event followed by large job losses – in other words, the reason these things are moving is important. Here’s what I’m thinking:

What’s going on with Crypto?

1. 3 banks went down last weekend: Silvergate, then Silicon Valley Bank, then Signature Bank. All 3 were important to the infrastructure of cryptocurrencies. Signature, for example, held billions in deposits for Circle, which runs the 2nd largest US-Dollar stablecoin, USDC.
2. These were targeted for their crypto activity. The takeover of Signature was questionable, and another bank called First Bank was bailed out by an organization of 11 big banks putting deposits there to offset their digital bank run.
3. Bitcoin could be rising in value from entities moving money outside of the semi-banked stablecoins into the largest and safest non-banked tokens. Etherium similarly rose in value, but the rise in the myriad of other tokens such as XRP, LTC, SOL, LINK and so on were much more muted.

How about the $300 Billion increase in the Fed’s balance sheet?

1. $143 Billion was allocated to holding companies that have taken over the recently failed banks. This is to allow depositors to immediately access their funds and move them elsewhere.
2. $148 Billion was borrowed through the Fed’s “discount window” program. This is a record amount of money and many banks are tapping it to meet the needs of depositors. This is the same discount window which banks were said to fear in 2008 because it showed balance sheet weakness. The Fed extended much larger loans than they would usually allow to stem the bank runs.
3. $12 Billion was borrowed using the Fed’s new Bank Term Funding Program, which allows banks to take government securities, such as a mortgage-backed security paying a 3% yield, and post them to the Federal Reserve to borrow 100% of the par value of the bond (more than it would be worth today with such rates over 6%) at a rate of OIS + 10bp which was recently 5%.

In short, we just went through the fastest rate-hiking cycle in history with rates going from zero to 4.5% in a year. This has caused massive losses in the current market values of long-term loans, bonds, and other securities. The business model of all banks is to borrow at short-term rates and lend at long-term rates, and they are all hit hard by these rate hikes and are all especially vulnerable to bank runs because of this.

After the chart called “Unrealized Gains (Losses) on Investment Securities” went viral around March 9th (I led last week’s blog post with this chart), an unprecedented digital run on banks began and the Federal Reserve took the opportunity to close out three struggling banks supporting a targeted sector while quickly moving to stem the damage through their programs.

While the Fed did protect the companies who held deposits in these banks by not removing their ability to conduct business, make payroll, etc., they did not bail out any of the bond holders or stock holders of those banks who will likely get next to nothing back. The exception was the organized deposits to save First Bank, which effectively bailed out all stakeholders. Still, they made an unusual exception to their FDIC insurance limits and they had to explain this to congress.

Here it gets worse, as Janet Yellen explained to a Senator from Oklahoma that this exception was made only because these banks were large enough to be systemically important, and that if his state’s savings and loans had a similar bank run then the businesses working with them would be wiped out. Even worse, they would pay for this increased insurance by charging more fees to all banks. If you want to here nobody special railing about this situation, look here: https://www.youtube.com/watch?v=Raavjoo-eao

As you can imagine, a record number of businesses have been moving the majority of their funds out of local banks and into large too-big-to-fail banks like Bank of America and JP Morgan Chase. A lot of the money borrowed from the Fed’s discount window was by small banks such as these which had to deal with these massive transfers of deposits.

Bank runs are one of the most deflationary events that can happen. The ECB is not concerned about this, as they just rose interest rates another 50bps last week while Credit Suisse looks to become the biggest casualty Europe has ever seen. The Fed is also more worried about inflation at the moment, and they plan to try direct measures to stem the banking crises, such as their new BTFP facility, while keeping rates high to stem future inflation.

So where does that leave us with the stock market?

We had the bullish Golden Cross in February as the 50DMA crossed above the 200DMA, then it looks like we re-tested the 200DMA successfully at first on 3/2 only to lose it on 3/9 and then re-test from the downside. While we closed below the 200DMA on 3/17, we are still very close to it so we haven’t broken down yet. That expanding structure from the 2/2 top is a strange one, not a bull flag.

A lot of the rallies we recently saw in things like tech and home builders was likely short covering as funds simply reduce leverage and reduce positions. Leverage is exceptionally dangerous at a time when banks might need to change the rules to tighten margin accounts and force hedge funds to sell – and of course hedge funds can see investor outflows too. Unfortunately I tried confirming this but the monthly margin data normally available from Finra stops on Jan 31, so all we can see is that bump higher matching the latest market high and nothing later. This is important because short covering is very different behavior than risk-on.

In the short term, I am inclined to think that the markets move higher from here and consolidate a bit more before we hit a major plunge (perhaps beginning of June?) This idea fits a Twitter thread done by @GameofTrades_ where he compared our current bear market with every market going back to 1969, showing that our current bear market is closest to the 1974 and 1969 markets where that happened. Also, Dereck Coatney, the professional Elliot Wave analyst I subscribe to, holds that view: https://dereckstrades.com/

So despite all the market craziness I actually purchased some stocks last week – mainly increasing my stake in EMX which is a unique mining royalty company I’d been waiting for a pullback on. If we do see another significant jump higher then I’ll re-sell a lot of those Uranium covered calls I recently bought to close and I might even try some 1-month SPY puts if the risk/reward is there … right now it just isn’t. If things seriously drop from here then my longer term “Hedges” should catch some gains from the downside, but my main goal is to accumulate mining stocks for the multi-year bull cycle I’m expecting there.

Here are my latest allocations:

• HEDGES (9.2%)
  • TLT calls (7.1%)
  • AAPL puts (0.8%)
  • LEN puts (1.3%)
• PRECIOUS METALS (42.1%)
  • AG (7.0%)
  • EQX (5.1%)
  • MTA (4.9%)
  • SILV (4.7%)
  • LGDTF (3.2%)
  • SLVRF (3.2%)
  • SAND (2.8%)
  • MMNGF (2.2%)
  • MGMLF (2.1%)
  • SSVFF (1.6%)
  • BKRRF (1.5%)
  • RSNVF (1.5%)
  • DSVSF (1.3%)
  • HAMRF (1.1%)
• URANIUM (26.3%)
  • CCJ shares w/ covered calls (3.8%)
• DNN shares (3.3%)
  • DNN calls (1.1%)
  • UEC (3.9%)
  • UUUU (3.9%)
  • BQSSF (3.9%)
  • UROY (3.0%)
  • EU (1.7%)
  • LTBR w/ covered calls (1.7%)
• BATTERY METALS (11.8%)
  • NOVRF (5.2%)
  • SBSW (4.6%)
  • EMX (3.1%)
  • PGEZF (1.9%)
• CANNABIS (11.2%)
  • AYRWF (0.6%)
  • CCHWF (0.7%)
  • CRLBF (1.3%)
  • CURLF (1.6%)
  • GTBIF (2.6%)
  • TCNNF (1.5%)
  • TRSSF (1.2%)
  • VRNOF (1.7%)
• OTHER TRADES (5.1%)
  • DOCN cloud computing, w/ covered calls (2.1%)
  • XRP crypto token (3.0%)
• CASH (-8.8%)

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Another Leg Higher?

Much of the market decline this week had to do with first Silvergate Bank, then the much larger Silicon Valley Bank collapsed into FDIC receivership. Both banks had similar problems … a highly concentrated depositor base in a struggling sector, along with massive unrealized losses from their bond portfolios.

Last year, the federal reserve rose interest rates at the fastest pace ever – starting at 0.08% in February 2022 and ending at 4.57% in February 2023. As a result, even the safest bond portfolios lost enormous market value. Banks are allowed to designate these bonds in a “held to maturity” portfolio and avoid writing down these losses – but if they suddenly need the money then they’ll have to sell those bonds and realize those losses. This chart circulated from the FDIC in criticism of the Fed’s rapid rate hiking schedule, and it went viral through financial Twitter:

Silvergate was the first major bank to serve customers in the Crypto space, and held a lot of deposits from companies operating in that space. As many of these companies were struggling with the fallout of frauds like FTX and the declining values of crypto coins, they began to pull out those deposits. Silvergate had many of those deposits invested in medium-term bonds in both commercial and residential real estate – and it was forced to sell these at steep losses to meet these depositor redemptions until their balance sheet went negative and the FDIC took over.

Silicon Valley Bank actually fell for the same reason, the only difference being that its depositors were largely firms in California’s enormous technology sector. It is devastating to companies – deadly to startups – if they can’t get ready access to their deposits in order to pay bills and make payroll. Some firms were struggling and legitimately needed the money, but many more were pulling it out to protect themselves. Two days after the Silvergate collapse, Silicon Valley Bank went under FDIC receivership – marking the second-largest banking collapse in history (after Washington Mutual during the global financial crisis).

So why am I nervously bullish here? I can’t help thinking about trading after the Bear Sterns collapse in 2008. Bear Sterns actually collapsed for somewhat similar reasons – they invested heavily in both commercial and residential mortgage-backed securities, which were considered very safe and many of which were government guaranteed. However, they funded these in the overnight repo market, and when liquidity for these securities collapsed, they were required to post a lot more collateral to get basic funds for operation – collateral which they didn’t have. Essentially it was a big margin call which spiraled out of control when they started trying to sell large amounts of these securities in an illiquid market. Was there market panic? Of course – but then look what happened:

We just had a major sentiment drop this week, and the market barely budged. I wouldn’t be surprised at all if it formed a short term bottom here.

Picture this: Jerome Powell is really worried about contagion spreading throughout the banking system, as businesses which have balances much larger than the FDIC-insured limits start to pile into the biggest banks for safety. More forced sales and spreads between mortgage-backed securities widen just like they did in 2008 – most people don’t realize that the whole reason the fed purchased all of these was due to the liquidity collapse in those particular bonds. Obviously, he does not want to go down in flames as an incompetent who caused an inflationary spike only to over-react to the point of causing a much worse banking crisis.

So what does Powell do? He comes out and tries to reassure markets. He’ll be careful about future rate hikes, he’ll build facilities to make sure banks don’t run out of access to liquid cash, he’ll do what it takes (to quote Draghi during the European debt crisis). Markets will stabilize, and cash will flow back in. Narratives will shift – the Fed’s got this, liquidity is improving, rate hikes are nearing an end, we’ll see a soft landing after all.

I still firmly believe we’re in a bear market rally, I just don’t think a crash is imminent so I sold off my 1-month SPY puts (for a small but decent gain). So what to do now?

David Rosenberg said that stocks won’t legitimately rally until AFTER bonds rally. I firmly believe he’s right, and I put my 401k into the safest all-bond portfolio a couple weeks ago. I highly suggest any readers do this as well – hold it there until the fed actually cuts interest rates down to 2% or lower, which is likely over the next year. Only then move it back to stocks because you’ll book a shockingly good gain and bonds become dangerous when rates are too low.

Aside from selling my SPY puts, I purchased back the covered calls on a bunch of my Uranium stocks. If we get a rally for a month or two then these Uranium stocks will rally again and I can sell those covered calls at a favorable time again.

My mining stocks have not bottomed yet, and they could easily go lower in the next major down-leg of this bear market, but I am determined to ride them through. They are crazy cheap for what’s coming in years ahead, and not everything will bottom at the same time.

That’s all for now – have a wonderful weekend!

• HEDGES (7.9%)
  • TLT calls (5.3%)
  • AAPL puts (1.0%)
  • LEN puts (1.5%)
• PRECIOUS METALS (39.2%)
  • AG (6.1%)MTA (4.6%)EQX (4.2%)SILV (4.1%)SLVRF (3.3%)LGDTF (3.0%)MMNGF (2.3%)SAND (2.4%)MGMLF (2.0%)SSVFF (1.7%)BKRRF (1.6%)RSNVF (1.5%)
  • DSVSF (1.3%)
  • HAMRF (1.2%)
• URANIUM (27.9%)
  • CCJ shares w/ covered calls (4.0%)
• DNN shares (3.6%)
  • DNN calls (1.2%)
  • UEC (4.0%)
  • UUUU (4.2%)
  • BQSSF (4.4%)
  • UROY (3.2%)
  • EU (1.6%)
  • LTBR w/ covered calls (1.9%)
• BATTERY METALS (12.5%)
  • NOVRF (5.5%)
  • SBSW (4.8%)
  • PGEZF (2.3%)
  • EMX (2.3%)
• CANNABIS (11.7%)
  • AYRWF (0.3%)
  • CCHWF (0.7%)
  • CRLBF (1.5%)
  • CURLF (1.8%)
  • GTBIF (2.7%)
  • TCNNF (1.5%)
  • TRSSF (1.3%)
  • VRNOF (1.8%)
• OTHER TRADES (5.2%)
  • DOCN cloud computing, w/ covered calls (2.2%)
  • XRP crypto token (3.1%)
• CASH (-6.6%)

Is CPI chronically understated?

CPI is a centrally important measure in practically every aspect of our economy. How much is real GDP growing? Real retail sales? Real wages? Real food prices? It all depends on the CPI adjustment. CPI is perhaps the only measure which can make all of our economic figures look better or worse.

This question is actually more difficult to resolve than you’d think. CPI is a complex calculation and the year-over-year numbers can be incredibly noisy. Showing charts with the typical annual year-over-year gains and arguing about weightings will just bury us in confusion. Perhaps looking at price levels and showing changes in the trends is the best way to go. Here are some charts:

With that hefty growth in retail sales relative to the CPI, wages must be going up considerably to pay for it:

Apparently median earners aren’t the answer here – college workers match the CPI, though all workers broke up a little faster after 2015.

It looks like we’re back to the soaring wealth inequality. Total wages and salaries have been absolutely soaring for 30 years while median wages have been shrinking and the labor force remained relatively flat.

This explains a lot actually. In most people’s experience, wages have not kept up with general costs of living. Thus they are angry and bearish and they can’t understand why stocks keep going up. Speaking of which:

Stocks have been absolutely soaring. This actually fits into the narrative of wide and increasing wealth disparity – the super-rich can’t possibly spend all of their money, so they invest most of it – which pushes up the valuations of all investable assets such as stocks, bonds and real estate.

Anyway, here are the basic takeaways I got from this exercise:

1. Political pressure is building. Most people have been getting a lot less than they used to. Thus they are angry and distrust of institutions is high and growing. Mainstream narratives don’t even agree on what the problems are let alone how to solve them, so politics seems more divided and hopeless than ever.
2. Valuations are lofty, but a return to trend is not necessarily imminent. I thought that housing prices would return to trend vs incomes after the 2008 crash, only to find that the rules changed to make prices turn back up. I thought that stocks would crash after the pandemic lockdowns because locking down enormous numbers of people across the globe seemed like it would be bad for the economy, yet cash flows increased dramatically, especially towards the wealthy who invest in financial assets.
3. Don’t mix economics with stock prices. It’s best to stick with charts and trends, figuring out where the cash flows are coming from and whether those are sustainable.

On that note, I listened to a fantastic podcast with Mike Green on Forward Guidance, and he had some pearls about the dangers of shorting on fundamentals. Say you go short a company, convinced that a lot of its earnings are vastly overstated, its market position is weak, and its industry is shrinking. Think something like AMC. You go short, convinced it’s valuation has to eventually match reality. Meanwhile, most value investors are out or short, and the largest holders are passive funds from Vanguard, Blackrock, and State Street. How do you convince those passive funds to sell? They don’t care about fundamentals or earnings or prospects – as long as money flows in, they invest a fraction of that purely based on price. The company is illiquid, so the valuations soar on this buying. Shorts are squeezed and they soar further. Do any of these firms start selling? No. They happily continue investing even more of their incoming money into these companies, causing their values to climb even higher – all while they happily lend those shares to short sellers in order to make a bit more money on the side.

As long as money continues flowing into these passive vehicles, the only sustainable downside pressure comes from insiders as stock-based compensation is handed out and the company issues new shares. Of course, there is always the danger of what happens when these passive funds flows reverse – prices can cascade lower with no buyers in sight. Passive vehicles are often referred to as a ticking time bomb (as in Jared Dillian’s Daily Dirtnap) for that reason. Mike Green’s suggestion is to ride the upside while buying long-dated put protection when its cheap.

My solution is to simply bet somewhere else, looking for a powerful market rotation into the tiny mining sectors as the need for new mines drives commodity prices higher, which drives more money flows into a currently tiny sector. I don’t think people will abandon passive investing – but I do think that a higher price of metals can spark interest in mining which drives momentum investors and passive vehicles to the sector and makes prices soar to levels as stupid as the tech companies of 2000 and 2021 or the mining companies of 2011. It hasn’t been working yet, but I still believe it will.

I didn’t trade much this week, except to close out my UNG calls for roughly breakeven (a gain barely enough to cover fees). I held this trade for a full month, and I am very wary of vehicles that follow futures markets – zoom out on UNG and you can see that it loses money consistently over time as contracts are rolled over. This is normal as such instruments say explicitly that they are meant for short-term trades and not long-term holds. Still, prices jumped after I sold which was a bit frustrating.

Anyway, I’ll end there. Here are my latest portfolio allocations. Last note – I’m not sure what happened this week, but a couple of my US/Canadian junior miners had big jumps – SLVRF & MMNGF. Happy trading!

• HEDGES (5.6%)
  • TLT calls (3.5%)
  • AAPL puts (0.8%)
  • LEN puts (1.4%)
• PRECIOUS METALS (40.5%)
  • AG (6.3%)
  • MTA (4.5%)
  • EQX (4.4%)
  • SILV (4.0%)
  • SLVRF (3.3%)
  • LGDTF (3.3%)
  • MMNGF (2.8%)
  • SAND (2.5%)
  • MGMLF (2.0%)
  • SSVFF (1.8%)
  • BKRRF (1.7%)
  • RSNVF (1.5%)
  • DSVSF (1.3%)
  • HAMRF (1.2%)
• URANIUM (30.4%)
  • CCJ shares w/ covered calls (4.2%)
• DNN shares (4.1%)
  • DNN calls (1.4%)
  • UEC w/ covered calls (4.0%)
  • UUUU w/ covered calls (4.7%)
  • BQSSF (4.9%)
  • UROY (3.5%)
  • EU (1.8%)
  • LTBR w/ covered calls (2.0%)
• BATTERY METALS (12.2%)
  • NOVRF (5.5%)
  • SBSW (4.7%)
  • PGEZF (2.0%)
  • EMX (2.2%)
• CANNABIS (12.1%)
  • AYRWF (0.4%)
  • CCHWF (0.7%)
  • CRLBF (1.5%)
  • CURLF (1.9%)
  • GTBIF (2.8%)
  • TCNNF (1.6%)
  • TRSSF (1.4%)
  • VRNOF (1.8%)
• OTHER TRADES (5.1%)
  • DOCN cloud computing, w/ covered calls (2.1%)
  • XRP crypto token (3.1%)
• CASH (-8.1%)

Moving my 401k from Money Market to Bonds

Last March, I moved my 401k to 100% money market fund. This last week, I finally moved it again – this time 100% into an investment grade bond fund. I don’t talk about it much because I really don’t have much in it yet as I didn’t have access to one until mid 2021, but its growing. I don’t get matching or anything, but I still put in as much as I feel comfortable doing because it saves me 35% in taxes (at only $50k/year, you’re already in the 25% federal bracket and the 10% California bracket). Anyway it’s building up.

Right now we’re at the point where the fed has been hiking swiftly for almost a year, bringing interest rates from near zero to over 4.5%. This makes the yield pretty competitive to wait until the hiking cycle completes. Typically, the lagging effects of the rate hikes build up as the “smoothed” economic data by the government looks fantastic until big waves of layoffs happen seemingly all at once, at which point the stock market tumbles and the federal reserve cuts rates at a rapid clip.

There are a few un-intuitive things that I need to note as far as bonds go:

1. The value of a bond fund can change considerably based on the change in market interest rates. This means two things:
   • The performance of any bond fund you look at right now is absolutely terrible due to the rate hiking cycles last year. Don’t let this fool you when thinking about investing in these today.
   • Even though investment grade bonds yield north of 5%, your annual earnings will come out significantly higher if the federal reserve cuts interest rates back down.
2. If the federal reserve cuts rates back near zero, your past returns will look fantastic but you will be earning extremely low returns going forward. This is when you need to sell off the bond fund and get back into stocks.
3. My advice is that stock market leaders tend to switch between bear markets. In the 1990’s you wanted tech & consumer discretionary. In the 2000’s, you wanted value stocks and commodities. In the 2010’s it was tech & consumer discretionary, so my advice is to look for a value stock fund for your 401k – after the federal reserve cuts rates.

Choosing the right investment in your 401k is actually simpler than you’d think because you typically have very few options. I am allowed to choose between 3 bond funds – a high risk, medium risk, and low risk fund. I chose the low risk, and here are the things I note on the prospectus:

This looks pretty safe, right? A nice low-risk bond fund. Duration isn’t anywhere near the 20+ years of TLT, so how much can it really move?

Wow. It lost over 13% over the last year, and effectively returned nothing for 5 years! What happened? Simple, check out the federal funds rate:

If you were holding this in January 2022, then you were earning a yield pretty close to zero. Even at an effective duration of only 6.5 years, discounting bonds using 4.5% instead of 0% makes an enormous difference in valuation, and there was no earned yield to offset that difference. Right now, if the federal reserve keeps hiking, then the value of the fund will continue to drop but the 4.5% yield will offset those losses making it a much safer bet. At the same time, if the federal reserve cuts rates back to zero, you can expect the inverse – a remarkable 13% valuation increase in a portfolio of safe bonds.

When they say “past returns are not indicitive of future results,” this is absolutely true when it comes to a fund like this. High past returns can just mean that everything you’re buying into is overvalued and low past returns can mean that its all undervalued. With an actively managed portfolio you are expecting that you are measuring the ability of the manager, but in a passive fund or bond fund you are merely purchasing a pile of assets at current valuations.

So now the next question – why do I expect interest rates to fall? The headline labor numbers have been fantastic, inflation is still high, and the fed is expected to hike at least one more time and possibly more. We hear about the soft landing (small recession) vs no landing (no recession) debate all the time, along with the idea of sticky inflation like we saw in the 1970’s.

The 1970’s was a unique time where we had strong labor unions, a large draft, a large cohort of young adults in the workforce, enormous military and infrastructure expenditures, and big disruptions in oil supply from the oil embargoes to the revolution in Iran. On top of that, debt to GDP was near all time lows.

Right now most of that doesn’t apply at all – we had lockdowns reducing supply and changing purchasing habits, stimulus to spur demand which all went into durable goods to support moving, remote work, and remote education. Then we had an energy policy which destroyed a large portion of our nuclear plants during these lockdowns while preventing investment in oil and gas infrastructure and mining, and then a proxy war with Russia that diverted a lot of supply in key commodities. In other words, this latest inflationary spike will result in demand destruction like it always does, which will eventually show up in the headline labor market data, the stock market, and the fed funds rate.

Here’s an example of how the fed hiking cycle worked in 1998-2003:

1. Stocks continued to climb along with interest rates (stock values went up and bond values went down) until early 2000.
2. Stocks and interest rates both topped out in early 2000. Unemployment stayed low and CPI inflation stayed high throughout the year.
3. Stocks started falling in Q3 2000, then interest rates started falling in Q4 2000 (stock values went down and bond values went up). This continued through 2002.
4. CPI didn’t start falling and unemployment start rising until mid 2001, with CPI bottoming and unemployment topping in early 2002. These lag – don’t use them to time the bond market or the stock market.

Here’s the next big cycle, from 2005-2010:

1. Stocks climb along with interest rates until early 2006. Then the Federal Reserve stops the rate hikes as they start to worry about the housing market cooling off, and they feel justified by the drop in CPI.
2. Stocks soar into 2007. The fed stopped hiking and CPI has come down, what could be better? When stocks begin to stumble a bit with housing worries in mid 2007, the fed starts cutting rates and they shoot right back up.
3. The CPI rises again late 2007, yet the fed continues to cut interest rates and the stock market starts to stumble. Bear sterns tumbles in March and stocks hit a low.
4. The federal reserve organizes and funds a Bear Sterns bailout/takeover by JPM. Everything seems to be recovering for stocks, but the fed keeps cutting rates as financial strains haven’t left the system. Unemployment began to rise, particularly in anything related to housing and finance.
5. The fed decides to let Lehman Brothers collapse in Q3 2008, refusing to put any money or guarantees to incentivize a takeover like they did with Bear Sterns. This is totally unexpected. The stock market tanks, the CPI tanks, and unemployment soars.
6. The federal reserve bails out Fannie, Freddie, and AIG which are much bigger than Lehman was. They cut rates to zero and started an alphabet soup of acronym-labelled programs, including the temporary measure we now know as QE.
7. Stocks bottomed in March 2009 after mark-to-market rules are suspended. We shift away from GAAP accounting towards the much more gameable IFRS, and stocks proceed to the next bull run.

So where do we stand today?

1. Stocks were consolidating sideways in 2018-2019 as the Federal Reserve conducted the slowest rate hiking cycle we’ve seen, combined with QT (the opposite of QE).
2. The repo market started to wobble in mid 2019 and the Fed intervened with rate cuts and QE. Stocks picked up on this and soared on narratives of “easy money” policy.
3. Pandemic lockdowns caused unemployment to soar and the stock market to crash.
4. The federal reserve intervened in the bond market, cut rates to zero, and started the biggest QE we’ve ever seen. The federal government passed the largest fiscal “stimulus package” we’ve ever seen.
5. The stock market absolutely took off, followed by the CPI. Headline unemployment shrank considerably, coming back to pre-pandemic lows as economic re-opening brought many jobs back.
6. The stock market topped out as the Federal Reserve began to talk about hiking rates and QT back in late 2021. Interest rates absolutely soared as stocks fell producing an extremely unusual plunge in both stock and bond valuations at the same time.
7. The CPI has clearly peaked, but it is still much higher than the Fed wants. Headline unemployment hasn’t shown any weakness yet.

There is great debate here whether we are in a consolidation like 1998, 2006 or 2018, or whether we are in another bear market rally like 2001 or 2008. Determining this is more difficult than you’d think.

The economic craziness of the lockdowns was unprecedented in modern times. Combined with the enormous stimulus packages, it has pushed all of the indicators we normally see to extremes. Not only are the seasonal adjustments in headline numbers screwy, but the economic data is all over the place.

The federal reserve paints as rosy an economic picture as possible focusing on job openings, headline unemployment, nominal wage growth, and CPI. Many bulls look at this and think that the heavy fiscal and monetary stimulus must have pushed us into a red-hot economy.

Bears point out weakness in new orders, stagnant shipping volumes, stagnant full-time employment, low employment participation rates, and negative real wage gains and say it all looks like recession.

I am in the bear camp hear, predicting that we are seeing another recession which combines aspects of the biggest US stock bubble from the dotcom and the biggest US housing bubble from the global financial crisis. Add in the weak demographic trends and we’re looking like 1990 Japan. In August 1990, the bank of Japan had interest rates at 6 percent and started a long bull market in government bonds. Right now we have interest rates at 4.5 percent, and I think they’re close to topping out.

Future movements in these markets are very hard to predict, but I do think we’ve already seen the turning point where rotations start to favor value and commodities over tech and consumer discretionary. The majority of my portfolio reflects this rotation idea. Precious metals do best in a period of uncertainty and low real rates of return in bonds, and I believe they’ll do well after the fed cuts rates and the stock market bottoms. Meanwhile, my hedges include TLT calls for those rate cuts, AAPL puts for the tech bubble aspect, and LEN puts for the housing bubble aspect.

I also believe we are at a time of transition, where actively managing and rebalancing your portfolio is critical. This was the case in 2001 as well as 2008, where you really had to switch allocations for the next cycle.

I’ll end here. As for trades, I couldn’t help buying more AG shares when they absolutely plunged to $6/share. They were above $9/share just 6 weeks ago and above $14/share less than a year ago. This has everything to do with the recent plunge in precious metals, as AG is heavily exposed to the price of Silver. I had a pay week which limited the cash draw, but it still pushed my cash balance more negative. Also, I closed out my SBSW calls a few months early because their value plunged so much. This allows me to sell covered calls again if we get a rally before then, probably for a lower strike price.

Here are my latest allocations:

• HEDGES (5.9%)
  • TLT calls (3.3%)
  • AAPL puts (1.0%)
  • LEN puts (1.6%)
• PRECIOUS METALS (38.9%)
  • AG (6.1%)
  • MTA (4.4%)
  • SILV (4.0%)
  • EQX (4.1%)
  • LGDTF (3.2%)
  • SLVRF (2.7%)
  • SAND (2.4%)
  • MGMLF (2.2%)
  • RSNVF (1.7%)
  • SSVFF (1.7%)
  • BKRRF (2.0%)
  • DSVSF (1.3%)
  • HAMRF (1.2%)
  • MMNGF (2.0%)
• URANIUM (31.0%)
  • CCJ shares w/ covered calls (4.3%)
• DNN shares (4.1%)
  • DNN calls (1.5%)
  • UEC w/ covered calls (4.0%)
  • UUUU w/ covered calls (4.8%)
  • BQSSF (4.9%)
  • UROY (3.5%)
  • EU (2.0%)
  • LTBR w/ covered calls (1.9%)
• BATTERY METALS (12.9%)
  • NOVRF (5.6%)
  • SBSW (5.0%)
  • PGEZF (2.3%)
  • EMX (2.2%)
• CANNABIS (12.3%)
  • AYRWF (0.5%)
  • CCHWF (0.8%)
  • CRLBF (1.5%)
  • CURLF (1.9%)
  • GTBIF (2.9%)
  • TCNNF (1.6%)
  • TRSSF (1.4%)
  • VRNOF (1.8%)
• OTHER TRADES (5.7%)
  • DOCN cloud computing, w/ covered calls (2.1%)
  • XRP crypto token (3.2%)
  • UNG calls (0.4%)
• CASH (-8.9%)

Dollar-Cost Averaging: An Emotional Response

One of the biggest sales pitches you hear in the stock market world is the idea of dollar-cost averaging. It seems to make a lot of sense in a system where buying low and selling high seems like the obvious way to make money.

Unfortunately, nothing in the stock market is as it seems. Consider your thought process when buying anything, really. You hear the bullish narratives, often with a fundamental case which sounds quite solid. Yet, the way these things are priced is incredibly opaque. Here’s a perfect example:

Back to dollar-cost averaging. Consider the natural emotional difficulty people have in acknowledging loss. By purchasing more shares “on the cheap,” you can sidestep this feeling entirely and feel like your old investment is not just intact, but growing faster than ever. This effects absolutely everyone – including me. See this post as a personal example:

Another Look at MSOS

There are plenty of solid-sounding reasons to invest in the US Cannabis sector. The US market is one of the largest in the world, and that market for Cannabis is enormous, yet the US Cannabis companies are under-priced because institutional investors can’t hold them until you see a change in Federal legislation which seems inevitable. Despite all that, MSOS is down 90% from its 2021 peak and dollar-cost-averaging into it has been an absolute disaster.

I first heard about the US Cannabis trade in a way that sparked my interest from Tony Greer on Realvision back around May 2021. He clearly said he was watching it and it was too early to get in. He tried purchasing at one point and exited when his stop loss triggered, and he quickly moved to other sectors like oil that were responding well. Think about the difference there. Your emotional response will resist getting out of the trade, and your perspective will be biased to fit the compelling narrative. A professional like Tony Greer will probably come into a trade like this after clear signs of accumulation followed by a bullish pullback to re-test a trendline, which will likely happen after all the uncertainty about regulation is over. He might miss the initial gap higher, but he’ll miss the downside and still be along for the bulk of the ride.

So what am I going to do here? Sit and wait. Hopefully it’s not 16 years like MSFT before it hits new highs, but my fear of selling out at the bottom is greater than my fear of riding these down to zero. As much as I like to talk about trading properly, I am still a retail investor looking for a big win, fascinated with the puzzle of investing, yet distracted by real life and a full-time job involving a flood of construction projects, estimates, change orders, purchase orders, and so on.

If you look at my portfolio, my only real winners are my Uranium stocks. My precious metals and base metals miners are all heavily in the red, though not as bad as my cannabis stocks. However, these are all relatively small, illiquid sectors that have a solid fundamental narrative and a chance of a big win.

I’m trying to develop my own style which incorporates chances of big wins while not losing everything. Part of that involves the ideas of throwing in hedges to try to offset higher risk elsewhere, and part of it involves trying to ride the major oscillations with call and put options.

When a sector is hot, like Uranium is today, it is common to find that call options sell at quite a premium. When a sector cools down, it can seem that call options are relatively cheap. Duration is important on both counts, and sometimes you find a strange jump in premiums after a specific point. How does this work in practice? Back in late December with CCJ trading around $22, I bought a Jan 2025 call. This week with prices in the $29 range, I sold that call and sold covered calls on my remaining shares. Sometimes it doesn’t seem worth the money to sell covered calls because they’re so cheap, like with my precious metals miners. Other times you find a sweet spot in the duration, like with Uranium miner UEC where I was paid an immediate 15% premium for selling a covered call 11 months out with a price 37% higher than today’s. That’s a pretty good deal, even if the thing skyrockets I can’t complain about getting a 15% + 37% = 52% return in less than a year, and if the price cycles down I still harvested gains from that up-move.

Anyway, I sold off covered calls on most of my Uranium miners that have decent options markets. One exception is Dennison Mines (DNN). I still have long calls in this because I like to have some exponential upside in the sector, and this one has a couple of unique features. First, their management’s refusal to chase price when UEC outbid them for an increased stake in one of their mines shows their reluctance to dilute shareholders. Second, they have a fairly low market cap ($1B) with an active options market. Third, their current price is right around that sweet-spot range where the big meme stonk guys like to pump stocks – and it is common to see fairly large open interest in call options going up the strikes on 1-month calls.

While this level of open interest isn’t necessarily the level of rocket fuel needed to launch the price higher, it certainly shows some interest in pumping it like a meme stonk. When I saw the rocket fuel pushing AMC higher back in January 2021, I participated with a lot of shares on which I sold covered calls. I bought in the mid $4’s just to see a jump near $20 two days later, but a lot of my covered calls were sold at the $5.50 strike (the rest at $7.50) so I saw modest gains instead of serious gains. I think there’s a decent chance that DNN gets targeted for such a pump, so I’m keeping the upside on my shares as well as holding a decent chunk of Jan 2024 and Jan 2025 calls.

I actually like AG for similar reasons … it is a mining company that does not hedge silver exposure, and it has been targeted by meme stonk players during the silver-squeeze days of early 2021. The current calls charts show none of that activity that I highlighted in Dennison mines – so I’m not buying long dated calls in it even though they’re relatively cheap. However, I got some juicy premiums selling covered calls in AG during the bulk of it’s decline, as it certainly has an active options market compared to most junior miners, and it’s heavy leverage to the price of silver gives it the potential for serious upside. As for the downside, AG has been around since 2006 and it has a well-regarded management team, so I don’t think it’s going to zero – though I could easily see it plunge more than 50% if silver got hammered back below $18/oz for an extended period. Ultimately I’m bullish silver over the next few years though.

Anyway, I’ll stop there. Everyone has to find their own strategy and risk/reward on these things, higher risk does not necessarily mean higher reward, and it is important to be a bit introspective when investing. Here’s my latest portfolio allocations:

• HEDGES (5.7%)
  • TLT calls (3.5%)
  • AAPL puts (0.8%)
  • LEN puts (1.3%)
• PRECIOUS METALS (38.1%)
  • AG (5.1%)
  • MTA (4.5%)
  • SILV (4.0%)
  • EQX (4.1%)
  • LGDTF (3.1%)
  • SLVRF (2.8%)
  • SAND (2.4%)
  • MGMLF (2.2%)
  • RSNVF (1.7%)
  • SSVFF (1.8%)
  • BKRRF (2.1%)
  • DSVSF (1.4%)
  • HAMRF (1.3%)
  • MMNGF (1.6%)
• URANIUM (31.0%)
  • CCJ shares w/ covered calls (4.2%)
• DNN shares (4.2%)
  • DNN calls (1.8%)
  • UEC w/ covered calls (4.0%)
  • UUUU w/ covered calls (4.8%)
  • BQSSF (4.7%)
  • UROY (3.5%)
  • EU (2.0%)
  • LTBR w/ covered calls (1.8%)
• BATTERY METALS (13.0%)
  • NOVRF (5.7%)
  • SBSW w/ covered calls (5.2%)
  • PGEZF (2.1%)
  • EMX (2.2%)
• CANNABIS (12.3%)
  • AYRWF (0.5%)
  • CCHWF (0.8%)
  • CRLBF (1.5%)
  • CURLF (1.9%)
  • GTBIF (2.9%)
  • TCNNF (1.7%)
  • TRSSF (1.4%)
  • VRNOF (1.8%)
• OTHER TRADES (5.6%)
  • DOCN cloud computing, w/ covered calls (2.1%)
  • XRP crypto token (3.2%)
  • UNG calls (0.3%)
• CASH (-7.8%)

I still think its a bear market rally

I’ve often heard over the last year about how much air travel is booming, showing a vibrant consumer, based on anecdotes of crowded airports. My inclination is that we see less flights at higher cost, so I decided to update my chart on TSA passenger data, which you can pick up from here: https://www.tsa.gov/travel/passenger-volumes

I closed out my SPY puts after a decent drop this week. They were far enough out of the money where the chance of them hitting was low, and its better to take a loss than ride these things to zero.

I also decided to buy another Jan 2025 TLT call because the price seemed reasonable. Too many people are betting that treasury rates stay higher for longer, with a myriad of explanations about the Fed and sticky inflation.

A few things I would like to point out on treasuries though:

1. Treasury yields have only been rising over the past year because of actions by the Federal Reserve and the implicit floor of RRP. This is made clear not only by the heavily inverted yield curves, but also by the way that short-end treasuries yield significantly less than the rates offered by the Fed in reverse-repo.
2. Long-term yields price in expected future growth rather than CPI data which tends to lag the cycle. Leading indicators have been dropping for quite some time, and coincident indicators have peaked.
3. The Federal Reserve is a reactive institution, often reacting to stock market sentiment in order to influence lagging indicators (headline unemployment & CPI). A spike in unemployment (like 2008 or 2020) and/or a significant financial market plumbing issue (2019) can cause the Fed to pivot rather quickly. Remember how fast they went from low rates forever in 2020 to aggressive hiking in 2022.

On the last point, just look at how far and how quickly rates are cut at any sign of trouble.

I’m almost out of time here, so no more charts. I have certainly noticed the recent pounding of precious metals and precious metals miners. This happens, anyone who’s been in the space for a while gets used to it. I’m still holding these as a longer duration bet that we are in a multi-year period that will be favorable to commodities over tech and consumer discretionary stocks.

Gotta go. Have a nice weekend!

Here are my latest allocations:

• HEDGES (6.3%)
  • TLT calls (4.1%)
  • AAPL puts (0.9%)
  • LEN puts (1.2%)
• PRECIOUS METALS (37.3%)
  • AG (4.6%)
  • MTA (4.4%)
  • SILV (3.8%)
  • EQX (4.4%)
  • LGDTF (3.2%)
  • SLVRF (2.8%)
  • SAND (2.5%)
  • MGMLF (2.2%)
  • RSNVF (1.7%)
  • SSVFF (1.6%)
  • BKRRF (2.1%)
  • DSVSF (1.4%)
  • HAMRF (1.1%)
  • MMNGF (1.7%)
• URANIUM (33.0%)
  • CCJ shares (4.4%)
  • CCJ calls (0.8%)
  • DNN shares (4.3%)
  • DNN calls (1.8%)
  • UEC (4.7%)
  • UUUU w/ covered calls (4.9%)
  • BQSSF (4.8%)
  • UROY (3.8%)
  • EU (1.8%)
  • LTBR w/ covered calls (1.8%)
• BATTERY METALS (12.8%)
  • NOVRF (5.4%)
  • SBSW w/ covered calls (5.3%)
  • PGEZF (2.2%)
  • EMX (2.2%)
• CANNABIS (10.7%)
  • AYRWF (0.5%)
  • CCHWF (0.8%)
  • CRLBF (1.0%)
  • CURLF (1.8%)
  • GTBIF (2.6%)
  • TCNNF (1.5%)
  • TRSSF (0.8%)
  • VRNOF (1.7%)
• OTHER TRADES (5.2%)
  • DOCN cloud computing, w/ covered calls (1.8%)
  • XRP crypto token (3.0%)
  • UNG calls (0.4%)
• CASH (-7.5%)

Remaining Stubbornly Bearish

The fed meeting and decision came Wednesday. Powell hiked 25 basis points, pointing to labor market strength and an inflation rate that is on the decline but still uncomfortably high. The S&P rallied.

The jobs report came in Friday, boasting a payrolls surge of 517,000 as unemployment declined to 3.4%. The S&P rallied.

Important technical indicators switched bullish. The great Milton Berg swiched bullish close to the October bottom, pointing to bullish signals on breadth and credit spreads and such. The simple golden cross measure which I pointed out as a great simple signal for the S&P 500 finally happened, as you can see in the chart above with the purple 50 DMA line firmly crossing over the blue 200 DMA line. Overall sentiment remains bearish while many good traders are switching to the bullish camp.

So what gives? Why am I still bearish here? As a trained engineer, if the answers don’t make sense then the problem is with the data.

1. Was the average bear market really exceeded?

We certainly hit the average bear market decline of 35.6% over 289 days in October, but where does that stat come from? I’m grabbing a chart from this article here: https://seekingalpha.com/article/4483348-bear-market-history

The big red boxes are all independent “bear markets” which are back-to-back, one year after the other – even including 2 bear markets in the years 1931 and 1933. This makes no sense for the answer everyone is looking for – the answer that the declines are over and its smooth sailing ahead. From personal experience in the last two double-bears on this chart – the dotcom bust and the global financial crisis – I guarantee you that new highs were not made between these double-bears and that these double-bears are indistinguishable from typical bear-market rallies.

In short, this decline average and the number of days should both be considerably larger.

2. What about the strong economic data presented by the Fed and the jobs report?

As many fin-twit regulars probably know, much of the data has been screwy for quite some time. People see clear signs of recession, booming economy, sticky inflation, depressionary deflation – all citing parts of the same reports. It almost feels like one of those rigged card game scenes where the mark has a crazy good hand while the cheater has an even better hand so that they can bid up the pot like crazy.

Unemployment: there are a few interesting things that the bears have been pointing out here. I’ll grab a couple from some of the twitter accounts I follow:

Mish is pointing out that full time jobs have been on the decline since May 2022. His article is worth reading.

The above chart, zooming out to show a bigger payrolls trend, is from Mish’s article here: https://mishtalk.com/economics/unemployment-rate-hits-new-low-of-3-4-percent-as-jobs-and-employment-jump-but

Jeff Snider’s latest Youtube podcast shows the large disconuities in the BLS Payrolls numbers coming from annual population adjustments.

The above chart is one of my favorites to view occasionally. Its not a terrible number being above 80%, but I do think it’s good at showing the real slack in unemployment that shows up in recessions because it focuses on the prime working age population and it can’t be artificially improved by declaring that people are no longer in the labor force. What it says to me now is that we haven’t felt the brunt of the recession yet. Recessions called by the NBER always involve significant layoffs, which is why they didn’t call a recession in 2022 despite having 2 consecutive quarters of negative GDP growth. As you can see though, this tends to top out early in recessions and then plummet. Unemployment is a notoriously lagging indicator because firing trained personnel is something most companies try to avoid.

In short, we haven’t seen confirmation of a recession from the most lagging indicators, but numerous leading indicators (new orders, hours worked, yield curves, etc) have been weak.

3. What about the technical indicators?

The reason I pointed to the golden cross (50 day moving average moving above the 200 day moving average) as an important signal in the S&P 500 is because the volatility is generally low and it tends to trend bullish over many years. If you look at anything with higher volatility, such as my Uranium stocks CCJ or URNM, then this golden cross happens too much to be a worthwhile signal. I would argue that the S&P 500 has been more volatile and less liquid of late, as more and more flows become price-insensitive. This is partly due to the price-insensitive or even price-following nature of passive index funds and the growing role of corporate buybacks, both of which increased substantially year after year for well over a decade. It is also partly due to the much heavier use of call and put options over the past few years.

The breadth signals show that more companies have been gaining rather than losing value since October. However, the first step in many bear markets – especially in the dotcom bust – was for smaller companies to get absolutely crushed with 50-90% losses while the big money sought safety in the larger names. These large companies like MSFT ended up falling considerably later in the cycle – and MSFT didn’t reach new highs for 15 years! Right now, market capitalization is more crowded than ever in the top 5-10 stocks due to the popularity of market-weighted index funds like SPY and QQQ, so it doesn’t surprise me to see breadth improve.

Credit spreads are another important indicator – clearly we aren’t in risk-off mode when JNK is rallying like crazy, right? A 5 year treasury yields 3.67% vs 4.76% for a 5-year corporate bond and 7.7% on similar junk bonds. Still, this indicator tends to behave like unemployment data where it slowly tops out before it plummets.

Technical indicators are extremely useful, and I’d say essential at figuring out when to buy, when to sell, and how to manage risk in a trade. Like anything else though, there are many signals and each has its limitations. I prefer simple lines and wedges, and I feel totally justified in saying that the bear market might not be over when we still haven’t breached the August 2022 high.

4. What about earnings fundamentals?

Many earnings fundamentals still show excessively high valuations, down from the 1/2022 peak but still on par with the 3/2000 peak. Even so, there are a number of considerations which wildly affect your outlook about potential future gains. You can throw this in with the many metrics that have gone screwy.

Here are some of the questions that people have wildly divergeant answers on leading to wildly divergeant views:

1. Has there been considerable money-printing going on?
   • The CPI has certainly been high.
   • QE has been astronomical, and many believe that is or leads to money printing (I’m skeptical).
   • Government spending has been high, which I admit creates more dollars.
   • Debt is also higher than ever, which pulls money out of the system.
   • Globalization has been spreading dollars all around the world, which is a deflationary force. Has this been changing? (I don’t think it’s changing much, but perhaps enough for a long-term tailwind for gold)
   • Supply constraints have been palpable in a number of areas, particularly energy and base materials. How much new production is coming on? How much demand is receding? Do we expect this demand to grow again and if so will supply keep up? (You know my feelings here, I’m very long-term bullish mining stocks)
   • Corporate profits have been greatly increasing over past years while wage gains have been relatively muted, which speaks more of growing monopoly power than of wage-price spiral.
2. What about the jobs data, is there considerable labor strength?
   • Charts show that the fraction of GDP given to labor over capital has been dropping for decades and is quite low. Many argue it has bottomed and is increasing.
   • JOLTS data shows jobs vs unemployed people growing like crazy since the global financial crisis. Many think this shows labor market strength. Many believe there are serious problems with the data such as double-counting listings. I believe the overcounting is quite high, as I know people working in companies with listed jobs they have no intention of filling, and there are countless stories of scams where unemployed people apply for a job to find requests for money and identity theft. The costs of listing jobs are negligible, so they have been growing like crazy making the data point worthless in my opinion. Still, many find value in it.
   • Demographics with the boomer generation retiring and the labor force flat-lining can be argued as something that increases the power of labor as less of it is available, yet it also decreases the power of labor politically to the point where Powel and Biden openly complain about the labor market being too strong and wages too high.
   • Technology increases productivity. Some argue that this increases the amount workers can be paid, others argue that it makes labor less valuable as less of it is needed.
   • Inequality is at record levels in the US. This certainly has plenty of implications on the power of labor among other things.
   • The employment to population ratio has been shrinking. There are many arguments as to why and whether it increases labor strength or merely hides labor weakness.

I can go on, but I won’t. The most pivotal view though has to do with the money question … Many bulls like Raoul Pal say that the governments can’t let deflationary pressures hit and they will continue to effectively print money in order to keep the system going and asset values high. Bears like Dave Rosenberg think that deflationary pressures are underestimated and outpace inflationary ones.

Jeff Snider continually points out that the vast majority of US Dollars comes from bank lending, much of which is completely outside the US, and that it has been roughly stagnant since 2008. The rough story is that money increased exponentially prior to 2008 as more and more collateral was accepted to back up loans including the most recent buildup of mortgage-backed securities into cash equivalents. After the Bear Sterns collapse, banks started to become a lot more cautious, demanding much more liquid assets like T-bills and on-the-run US treasuries, and heavily reducing the amount that they’ll lend on anything else. Banks have never seriously experimented with easing these conditions as we stumbled from one eurodollar crisis to another (they count us on number 6). Much of this has been invisible to US investors who didn’t feel the sovereign debt crises that hampered Europe among other places, and to the upper middle class and wealthy who have seen asset gains greatly outpace things like labor costs.

Still, this narrative rings true to me even though its a difficult one to trade. My current bet is mainly on a rotation just like we saw from the 90’s to the 00’s as tech and consumer related stocks decline in value as more money rotates into natural resource stocks like energy and mining.

Anyway, I did considerably increase my “Hedges” this week by adding puts in AAPL, LEN & SPY. I’m sticking with Jan 2024’s on AAPL and LEN, while my bearish SPY bets are at the cheaper but harder-hitting Feb 17 expiry. I also added some UNG calls, as it recently plummeted 76% over 5 months to 5-year lows. Do we really have that much extra natural gas on hand, or is it another example of financial market overshoot? I went with Jan 2024’s as they were surprisingly cheap given the volatility.

Some of this was offset by selling out-of-the-money calls in UUUU and CCJ, but mostly it made my negative account balance worse. I keep telling myself I should run a positive cash balance in a crazy market like we’re seeing, but it isn’t easy when everything I hold is deeply in the red except for a few Uranium miners. Anyway, It’s something I continually remind myself, especially when I feel inclined to purchase anything.

Here’s where my portfolio allocations ended up:

• HEDGES (6.6%)
  • TLT calls (4.6%)
  • AAPL puts (0.7%)
  • LEN puts (1.1%)
  • SPY puts (0.2%)
• PRECIOUS METALS (38.4%)
  • AG (4.7%)
  • MTA (4.4%)
  • SILV (4.1%)
  • EQX (4.4%)
  • LGDTF (3.2%)
  • SLVRF (2.8%)
  • SAND (2.5%)
  • MGMLF (2.2%)
  • RSNVF (1.9%)
  • SSVFF (1.7%)
  • BKRRF (2.2%)
  • DSVSF (1.5%)
  • HAMRF (1.1%)
  • MMNGF (1.7%)
• URANIUM (31.9%)
  • CCJ shares (4.1%)
  • CCJ calls (0.7%)
  • DNN shares (4.2%)
  • DNN calls (1.9%)
  • UEC (4.6%)
  • UUUU w/ covered calls (4.8%)
  • BQSSF (4.7%)
  • UROY (3.6%)
  • EU (1.8%)
  • LTBR w/ covered calls (1.7%)
• BATTERY METALS (13.2%)
  • NOVRF (5.4%)
  • SBSW w/ covered calls (5.5%)
  • PGEZF (2.3%)
  • EMX (2.1%)
• CANNABIS (10.7%)
  • AYRWF (0.5%)
  • CCHWF (0.8%)
  • CRLBF (1.0%)
  • CURLF (1.8%)
  • GTBIF (2.6%)
  • TCNNF (1.5%)
  • TRSSF (0.8%)
  • VRNOF (1.7%)
• OTHER TRADES (5.3%)
  • DOCN cloud computing, w/ covered calls (1.8%)
  • XRP crypto token (3.1%)
  • UNG calls (0.4%)
• CASH (-8.2%)

Another Fed week

The next Fed meeting is Tuesday-Wednesday, and the big question as always is not whether they hike or how much, but how will the S&P 500 react. As you can see from the previous meetings on the chart above, this is difficult to predict.

1. 3/17/2022, 25 bps hike, Pivot to big rally
2. 5/5/2022, 50 bps hike, Fakeout rally then continued lower
3. 6/16/2022, 75 bps hike, Pivot to big rally
4. 7/27/2022, 75 bps hike, Consolidation then continued rally
5. 9/21/2022, 75 bps hike, Continues downward trend
6. 11/2/2022, 75 bps hike, Drops ahead then rallies to continue uptrend
7. 12/14/2022, 50 bps hike, Drops

If anyone can see a pattern here, feel free to tell me what I’ve missed. I tend to think that way too much attention is paid to the Fed. Their next big meeting is always perceived as a catalyst, and it often has an initial move ahead of the meeting that reverses afterwards as money is traded around the event.

I’ve taken minor bearish bets on the S&P 500 coming up, getting a 2/17 SPY put last week and adding one more 2/17 SPY put at a higher strike this week. There are a lot of voices on Twitter about soft landing and bullish signals – price sets the narratives after all – so I figure it’s a good time to shake out some recent skittish bulls.

Here’s my game plan for how I expect this to play out:

1. The S&P 500 drops into Tuesday, likely a retest of the 200 day moving average which overlaps the previous downtrend line around 3960. If that happens, I’ll probably take the opportunity to sell off both of my Feb SPY puts.
2. The S&P 500 continues to rally into the Fed meeting on Tuesday, with talk about falling inflation bringing a Fed pivot and all. I’m very likely to purchase another Feb 17 SPY put if that happens.
3. The S&P 500 consolidates flat into the meeting on Tuesday. I’ll hold my SPY puts and wait to see which way the market breaks. This is the situation where I’m most likely to lose significant value on these puts, assuming the break goes higher. If that happens I figure I’ll get a decent rally in my Uranium miners which have decent beta, so I can sell some out-of-the-money covered calls there to make up for it.

The Federal Reserve tends to be a reactive organization more than anything, and they focus way too much on the stock market. If there is a rally into the meeting with pivot expectations and all, then I fully expect Jerome Powell to come out uber-hawkish to try and scare the market lower. If the market falls into the meeting, he won’t see a need to do this so he’ll be the kind of mildly hawkish that spurred the rally back in March.

Thats all for now. Here’s where my portfolio weightings drifted.

• HEDGES (6.4%)
  • TLT calls (5.1%)
  • AAPL puts (0.3%)
  • LEN puts (0.7%)
  • SPY puts (0.3%)
• PRECIOUS METALS (39.5%)
  • AG (4.6%)
  • MTA (4.5%)
  • SILV (4.5%)
  • EQX (4.6%)
  • LGDTF (3.4%)
  • SLVRF (2.8%)
  • SAND (2.6%)
  • MGMLF (2.3%)
  • RSNVF (2.0%)
  • SSVFF (1.8%)
  • BKRRF (2.3%)
  • DSVSF (1.5%)
  • HAMRF (1.1%)
  • MMNGF (1.6%)
• URANIUM (31.4%)
  • CCJ shares (4.0%)
  • CCJ calls (0.7%)
  • DNN shares (4.2%)
  • DNN calls (1.8%)
  • UEC (4.4%)
  • UUUU (4.9%)
  • BQSSF (4.5%)
  • UROY (3.4%)
  • EU (1.9%)
  • LTBR w/ covered calls (1.5%)
• BATTERY METALS (12.7%)
  • NOVRF (5.3%)
  • SBSW w/ covered calls (5.4%)
  • PGEZF (2.1%)
  • EMX (2.1%)
• CANNABIS (9.4%)
  • AYRWF (0.5%)
  • CCHWF (0.7%)
  • CRLBF (0.9%)
  • CURLF (1.6%)
  • GTBIF (2.2%)
  • TCNNF (1.4%)
  • TRSSF (0.6%)
  • VRNOF (1.5%)
• OTHER TRADES (4.7%)
  • DOCN cloud computing, w/ covered calls (1.7%)
  • XRP crypto token (3.0%)
• CASH (-6.2%)

S&P rally is fading, opportunities persist in mining

I’ve been getting more bearish lately as it feels like the upward momentum has been fading. My calls for an end of year drop on Dec 4: https://johnonstocks.wordpress.com/2022/12/04/preparing-for-an-end-of-year-drop/ followed by a New Year’s rally on Dec 24: https://johnonstocks.wordpress.com/2022/12/24/new-years-rally/ have both played out pretty well.

While the rally was waning, I looked to sell covered calls on anything that seemed to have a decent price, but only ultimately sold them on LTBR and SBSW. I often look at AG for that, but if the price I’d get is too low then I prefer to keep the possible upside, especially if there is a lot of open interest in the different strikes. On the other side, I’ve been adding to my puts – first gettting 1-year puts in AAPL and LEN, then finally adding a 1-month put in SPY during that huge rally on Friday.

While this feels like its turning bearish to me, you can never tell where the next short-term move will take you. Betting that we get a significant move down before January 2024, at least challenging those October 2022 lows seems a lot more likely than betting on a decent drop by mid February. The market does seem to be coiling up for a bigger move which could hit in either direction. With the S&P 500 testing the 200 day moving average again on Friday though, I decided that my portfolio is safer overall with a small bet that it falls from here because my mining stocks will get a nice rally if it doesn’t.

Uranium miners are still the sector I’m most near-term bullish on despite the overall economic, liquidity, and stock market difficulties everyone is focused on in 2023. I’ve been acquiring calls there that are all 1 or 2 years out, so that I have a decend chance of an outsized win. Here are the charts with CCJ as a proxy this time:

As you can see with the chart above, Cameco – the largest and most liquid Uranium mining stock – is extremely volatile, with it’s 50 day and 200 day moving averages crossing a lot here. This volatility makes Cameco difficult to chart, as you can see from my wedges at the end, the last of which has a false breakdown, reversed to significant breakout within 2 trading days.

The lower highs and enormous zone of support building between $20-$22.50 makes this look like a bullish consolidation on a larger-scale pattern.

While the 2-year chart looks a little bit difficult for my simple understanding of technical analysis, it certainly looks bullish.

This is the full chart of Cameco from its listing in 1996. An 8-year basin followed by an explosive 10x blow-off top, and now it looks like we could be around that 2004 point again. We had an 8-year basin starting in 2014, which we exceeded and began consolidating around.

What could bring us a 10x move from here? How about this: Uranium demand exceeds supply, the post-Fukushima excess supply is disappearing, and the current price of the commodity does not economically justify mine expansion. Utilities are signing contracts significantly above current Uranium spot prices to ensure adequate supply for their reactors. At the same time, climate change zealots have been turning more and more pro-nuclear as the wind and solar debacles have just led to a renewed spike in coal power and greenhouse gas emissions throughout the western world. There is a lot of money allocated with ESG in mind – which previously meant banning all mining, industrial production, and fossil fuel investments while overweighting wind, solar, and EV companies. Tesla and the EV craze made them shift their view to start supporting Lithium mining to a degree.

The Uranium sector is fairly small, and ESG funds tend to be passively allocated – which means they chase prices as they go up. If they start to invest in sectors relating to nuclear energy, it could easily replicate that massive multi-year bull run to 10x blowoff top highs like we saw from 2004-2007.

As for my largest weighting in precious metals, the story is not as explosively bullish, but it does seem cheap to me when the junior mining ETF GDXJ is trading below it’s 2019 highs while SILJ hasn’t really moved over the last 8 years. While I expect significant breakouts in gold and silver miners over the next 5 years, I don’t have the near-term conviction to acquire any long dated calls yet.

I’ll end it there. Here’s where my portfolio landed this week.

• HEDGES (7.3%)
  • TLT calls (5.6%)
  • AAPL puts (0.4%)
  • LEN puts (0.9%)
  • SPY puts (0.3%)
• PRECIOUS METALS (40.2%)
  • AG (4.6%)
  • MTA (4.6%)
  • SILV (4.2%)
  • EQX (4.4%)
  • LGDTF (3.7%)
  • SLVRF (3.0%)
  • SAND (2.6%)
  • MGMLF (2.5%)
  • RSNVF (2.2%)
  • SSVFF (1.9%)
  • BKRRF (2.5%)
  • DSVSF (1.4%)
  • HAMRF (1.0%)
  • MMNGF (1.6%)
• URANIUM (29.2%)
  • CCJ shares (3.6%)
  • CCJ calls (0.6%)
  • DNN shares (3.9%)
  • DNN calls (1.8%)
  • UEC (4.0%)
  • UUUU (4.5%)
  • BQSSF (4.0%)
  • UROY (3.2%)
  • ENCUF (2.0%)
  • LTBR w/ covered calls (1.7%)
• BATTERY METALS (12.9%)
  • NOVRF (5.3%)
  • SBSW w/ covered calls (5.6%)
  • PGEZF (1.9%)
  • EMX (2.2%)
• CANNABIS (9.9%)
  • AYRWF (0.5%)
  • CCHWF (0.8%)
  • CRLBF (1.0%)
  • CURLF (1.7%)
  • GTBIF (2.3%)
  • TCNNF (1.5%)
  • TRSSF (0.7%)
  • VRNOF (1.5%)
• OTHER TRADES (4.5%)
  • DOCN cloud computing, w/ covered calls (1.6%)
  • XRP crypto token (2.9%)
• CASH (-6.1%)

CPI’s, Interest Rates, and Charts

The big news of the week was the CPI number release, which continued on it’s downward trend, carving out a peak in June 2022. Here’s an interesting chart for overall reference on that statistic. Over the last hundred years, the peak has been exceeded in 6 distinct periods: 1979-1981, 1973-1975, 1951, 1946-1948, 1941-1942, and 1916-1920. The most prolonged of these periods involved major wars – WW1, WW2, and The Vietnam War.

I haven’t talked about interest rates for a while, but I’ve certainly lost a decent amount of money over the past few years betting on TLT calls. My reasoning was that debt levels are extremely high, the labor market is extremely weak (horrible labor force participation even for working age and stagnant real wages), and that the CPI inflation we have been seeing is actually driven by tight supply rather than soaring demand. I still hold TLT calls because the rapid rate hikes could cause problems in the financial system, which could warrant a swift reversal. TLT is a notoriously spiky chart. Anyway, my bias is still to bet on rates going lower, but this is what the chart is showing me:

Looks like a pretty classic bear flag continuation pattern on a downtrend. So my TLT calls still look like a bad bet, the next move in TLT looks to be building sharply lower (higher rates), and that even coincides with the idea of a “bear steepening,” where interest rates start to rise at the high end. Here’s a way to look at it from the rates side to see how that might play out – TLT is a bet on 20-30 year treasury rates after all.

Note that bear steepening’s often involve short-term rates dropping more than long-term rates spiking, so it doesn’t surprise me that bear steepening would show up weak in the recessions above.

Also note, that our current position relative to those grey bars is under fierce debate – whether we are in a recession, about to enter a recession, or will likely avoid recession. Recessions are called using the most lagging of indicators, so those grey bars are only useful in deciphering the past, and are never a help finding our position in the present.

Anyway, most people – including me – are more concerned about where the markets are going next. I’ll throw in a few quick charts here and call it a day.

If you zoom out on GDXJ, it held around $26 both in 2019 and 2018, it touched $20 in March 2020, and the 10-year cycle lows were around $17.70 back in 2016. I’d guess a consolidation will come soon, but seeing how fast GDX launched from $20 up to $65 back in 2020 makes me wary of accepting too low a premium on my covered calls. I’ve been looking to sell covered calls in some of my miners but the premiums just haven’t seemed worth the gains if they keep running.

I did manage to sell some covered calls on my SBSW shares today … then I spent the money and then some on a 1-year put in AAPL. The puts in SPY looked too expensive and it seems a bad time chart-wise to add to TLT calls, yet I wanted something that would add to my hedges. Here are my positions – good luck and happy trading!

• HEDGES (7.0%)
  • TLT calls (6.1%)
  • AAPL puts (0.5%)
  • LEN puts (0.4%)
• PRECIOUS METALS (39.9%)
  • AG (4.9%)
  • MTA (4.6%)
  • SILV (4.2%)
  • EQX (4.1%)
  • LGDTF (3.9%)
  • SLVRF (2.8%)
  • SAND (2.5%)
  • MGMLF (2.6%)
  • RSNVF (2.2%)
  • SSVFF (2.1%)
  • BKRRF (2.1%)
  • DSVSF (1.5%)
  • HAMRF (1.2%)
  • MMNGF (1.4%)
• URANIUM (29.1%)
  • CCJ shares (3.6%)
  • CCJ calls (0.6%)
  • DNN shares (3.8%)
  • DNN calls (1.9%)
  • UEC (4.2%)
  • UUUU (4.4%)
  • BQSSF (4.0%)
  • UROY (3.2%)
  • ENCUF (2.0%)
  • LTBR w/ covered calls (1.5%)
• BATTERY METALS (12.6%)
  • NOVRF (5.1%)
  • SBSW w/ covered calls (5.8%)
  • PGEZF (1.7%)
  • EMX (2.1%)
• CANNABIS (10.0%)
  • AYRWF (0.4%)
  • CCHWF (0.8%)
  • CRLBF (1.0%)
  • CURLF (1.7%)
  • GTBIF (2.3%)
  • TCNNF (1.5%)
  • TRSSF (0.7%)
  • VRNOF (1.5%)
• OTHER TRADES (4.4%)
  • DOCN cloud computing, w/ covered calls (1.6%)
  • XRP crypto token (2.9%)
• CASH (-5.1%)