Monthly Archives: September 2017

Return of the King(s), Weekly Wrap, 9/24-30/2017

Macro and Markets

The 9-page Trump tax reform plan was released this week which was coincident with new highs in stocks, most notably the small caps. I choose my words carefully: most people ascribe the rise in stocks to the tax reform plans but excuse may be a better word. At any rate, there’s scant chance of the plan going through in its present form, its skimpy details notwithstanding. The point is that when the plan is rolled back, the stock market won’t give back any of the gains. On a personal level, it would mean a large tax INCREASE for me due to the elimination of state and local tax deductions.

Alphabet and Amazon finally got their mojo back this week hence the title of this weekly wrap. Needless to say it bodes well for NDX as well as the general stock market. 1998 continues to be the battle cry here.

Cryptocurrencies

Major cryptos broke out of their down trend channels this week and according to this analysis is eying a break out of the ascending triangle. I find it a little too optimistic. More basing is expected.

Portfolio

I have been reducing the position in $PCQ, the CA muni CEF this week. Its premium shot up to 22% while the NAV has been dropping. The hope is to re-enter at a lower point.

The position in 3X semi $SOXL has been going strong while new PM hedge with $DUST was added. I still can’t tell if gold has completed its B bounce or not. Either way it looks to have a date with $1240-1250 by the end of October.

Good Reads, Blog Edition

Recommendation this week is for the entire blog rather than any individual posts.

  • The Macro Tourist by Kevin Muir, former institutional derivatives trader. The Macro Tourist is witty, insightful and expansive at the same time.
  • The Fat Pitch by Urban Carmel, a former McKinsey consultant and President of UBS Hong Kong. The Fat Pitch provides regular updates and analysis on market internals and money manager positioning.

None of the above is investment advice, the standard disclaimer applies.

Divided We Fall, Weekly Wrap, 9/17-23/2017

Macro and Markets

The major economic news this week was the FOMC meeting whose statements on future rate increase and balance sheet reduction were on the hawkish side. Consequently, stocks and gold sold off. The gold COT showed a weekly decline although the price decline has been in place for over a week. Once started the decline tend to persist for at least 3-4 weeks and most likely longer in this cycle. We can now say that gold is in an intermediate decline that’ll likely last into late October. It has likely concluded or about to conclude A of an ABC down.

Over the weekend, the bombshell was not NK related but the feud between Trump and the sports leagues. Forcing businesses to take sides therefore alienating a large portion of their customer base will be utterly disastrous. No amount of tax cuts can off-set that. I’m relieved that NFL/NBA has taken the high road.

Reading the comments on Zerohedge & oh how I miss the old days where words were sharp but insightful & I couldn’t help but shaking my head. People who were advantaged by the electoral college system (as opposed to the population size) are blind to their disadvantages in economic power. If businesses were forced to choose, regional divisions aside, they will not come down on the side that technology advancement has left behind. The Civil War was won on economics, but of course certain people cannot be expected to know history. Let’s hope it does not come to that.

The market may start to worry that the tax cuts are in jeopardy. I say let’s get it over with, yeah or nay, and have the certainty that there is a lame duck President after just nine months. That’s all the certainty this market needs.

Cryptocurrencies

Prices still look to be in the downward channel since early September with ETH marginally stronger. Further thoughts can be found in the longer post I just completed.

Portfolio

On Monday afternoon I closed about 2/3 of my PM hedges at a spot price of $1307. I closed the rest Tuesday morning but should have kept them longer. I’m examining the circumstances around the decision on Tuesday to see how I can do better next time. The purpose of the PM hedges is to mitigate volatility and possibly enhance returns. Those hedges were quite profitable so met my goals in this regard. On Friday I rolled forward the ATVI puts at 65. I also picked up some SOXL.

Good Reads

None of the above is investment advice, the standard disclaimer applies.

Bitcoin, A Game Theoretic Perspective

Recently Charlie Bilello put together a nice collection of charts with the common theme of markets humbling the prognosticators. The one on bitcoin particularly has been making the rounds. However, I doubt that it will stop the top-calling. With the latest correction precipitated by China’s banning ICO and exchanges, there’s no shortage of “I told you so” going round, even from sources I respect. In this post, I discuss why I believe bitcoin prices will recover from this latest episode and go on to even greater heights. I’ll also address some of the common misconceptions.

The starting point is two facts: 1) Bitcoin is a survivor, from its obscure origin in 2009, it survived no less than five 70-90+% declines, the Mt. Gox hack, the Silver Road case, and most recently the BCC hard fork. It not only survived but flourished with price briefly exceeding $5000. 2) Bitcoin is now an international phenomenon with participation in every major economy. The map below came from a recent Cambridge study “Global Cryptocurrency Benchmarking Study”. It shows where key components of the cryptocurrency ecosystem are located.

Bitcoin and Government Crack Down

One of the greatest fears for a “would-be” bitcoin investor is the likelihood of government crack-down. I want to counter by taking a look at the most well-known example in game theory: the Prisoner’s dilemma. I’ll assume it’s somewhat a common knowledge. A full description can be found at the the Wikipedia Link. A quick synopsis of the conclusion is that although the best outcome collectively is for both prisoners not to talk, the rational decision for each is to talk irrespective of what the other prisoner does. An analogy to bitcoin and government crack down can be drawn:

  • A crime has been committed → the distributed ledger/blockchain is a true innovation that will have profound disruptions in finance and beyond. The bar is not high: it only needs to be believed to have a reasonable probability of coming true.
  • The best collective outcome is for both not to talk → the best collective outcome for all governments is to maintain the status quo by collectively crack down on bitcoin/all crypto.
  • The rational decision for each is to talk → the rational decision is for each country to foster bitcoin/crypto development within so as to get a leg-up/not fall behind in a future where the promises of the distributed ledger come true.
  • The worst outcome for each prisoner is when he does not talk but his partner does → the worst outcome for each country is to crack down on bitcoin/cryto only to find itself fallen behind. Here’s why the multi-player version of the Prisoner’s dilemma is stronger since the probability is higher that at least one other will talk/decide to develop blockchain technology.

So that’s the basic game theory consideration as far as whether governments will or can ban bitcoin/crypto altogether. My conclusion is no country at this point can afford to given the disruptive potential that the blockchain technology has already demonstrated. It’s telling that China’s ban was focusing on the exchange between fiat and crypto which had everything to do with capital controls. They actually made a point to distinguish the blockchain technology itself. Note also that cryptos are both the platform and the funding mechanism so can’t be separated from the development.

Bitcoin and Criminal Activity

It’s undeniable that historically bitcoin has been used by criminals to bypass financial controls, e.g. Silk Road and ransomware; however, there are serious misconceptions as well. I’ll offer some of my own thoughts.

  • All bitcoin transactions are part of the ledger and traceable. There are other coins or services on top of the bitcoin network that make transactions anonymous but bitcoin is open and fully transparent by design. The anonymity comes from the fact that addresses can be obtained easily and without any reporting mechanism.
  • I fully expect that US based exchanges and wallets to be required eventually to identify real persons behind the accounts ala the FINRA “know your customer” regulation. There will be efforts to register individual accounts and addresses. Coinbase will issue 1099’s & that’s probably a prerequisite for its IPO.
  • I have the mental picture of a large “gray goo” that represents all the bitcoin addresses. As legitimate businesses and individual addresses are certified, they become probing needles into this gray goo. Of course the gray goo is growing in size too, so it’s not so easy to limit nefarious activities. But the flip side is that it’ll be trivial to verify the legitimacy of funds and transactions which can be made into a requirement.

The last bullet point is why some believe “Satoshi Nakamoto” to be the evil incarnate (or a CIA agent, which is the same thing) bent on subverting individual freedoms. Now contrast that with those who believe bitcoin is invented for criminals, the dissonance is almost comical. I offer no personal opinion on this matter but thinking individuals should be aware of all sides of this issue.

Miners and Hedge Funds

Of the members of the bitcoin/crypto ecosystem, the miners have probably made the largest capital investment. They are also likely the largest beneficiary of the advancement in prices. There are staircase-like advancement in most cryptos, usually one after another. I have always thought it was the miners engaging in pump-and-dump to unload the results of their mining operations. I have no evidence of course. I simply put myself in their shoes and ask “what would I do?”, with the assumption that everything I can think of, plus plenty more, other people can think of. Anyway, as long as miners are in it for the dough, and the going is good, there is no reason to stop. In that vain, we must watch out for the next halving for an inflection point.

As I write this we’re still in the middle of a decline from early September where the spike low below $3000 represents a correction of over 40% in BTC. From Charlie Bilello’s table that could be the extent of this correction using the other two in 2017 as a guide. We know hedge funds are getting into this game. The new entrants are probably looking to load up since there are no easy way to short. We know the miners can’t leave the correction running too long or too deep, lest it gets “cold” and people lose interest. We also know the potential hard fork on Nov 1 could be a catalyst. So let’s see how things will play out.

Is Bitcoin a Bubble?

Well, fuck yeah! What else can you call it?! Now before you go sell off all your bitcoins make sure you read my views on bubbles. A statement like that has no meaning outside of the context of price targets and time frames (but it absolutely won’t stop people from issuing them). My own view as always been there is still one more leg of this bubble with mass participation to come, especially as the two main concerns mentioned above gets addressed. While we’re at it, here are some other thoughts related to bitcoin that may or may not be commonly accepted:

  • All currencies are based on confidence (hat tip to Martin Armstrong). Bitcoin is the opposite of fiat. It costs way more to mine a bitcoin than to print a federal reserve note.
  • Bitcoin is limited in number by design. Those who say there are be other cryptos so the supply is unlimited should look up the words “network effect”.
  • Crypto is an asset class. Claims of being currency are at best half-truth, just like every bubble needs some element of truth to get started. Bubbles are not about truth or falsehoods but the magnitude of expectations.
  • Hedge funds are rushing into cryptos like it’s a modern day gold rush. Except the gold is not the cryptos themselves but the masses that will loose their shirts.
  • In cryptos we may well be witnessing the repricing of a trillion-dollar asset classes, eventually. Just as the promises about the internet pretty much all came true, but the road was littered with carcasses like Webvan and Pets.com, and so will most altcoins.
  • Bitcoin will not be ALLOWED to reach 1 million (short of hyper inflation), at that point the whole lot will be worth 16-21 trillion. That’s simply too big a fraction of the world economy and such wealth transfer cannot be allowed.
  • That said I believe a price of $10-50K is totally possible or even likely.
  • The mass phase of the bubble will be signaled by something like a bitcoin ETF and/or Coinbase IPO. I would expect the price to double in several months to a year.

One thing for sure, crypto is a once in a life time opportunity. At times I find it a greater fascination to observe my own emotional reaction to the price movements. This self-awareness is at the root of my conviction that the mass bubble phase still lies ahead. Timing, as always, is everything.

1998, Weekly wrap, 9/10-16/2017

Macro and Markets

What difference a week makes! The S&P finally made it over 2500 on Friday, brushing aside yet another NK missile test. While Amazon and Alphabet are still wallowing, the semiconductor index conclusively broke out of its triangle. Risk-off assets were sold: gold finally and bonds right after the yields were at resistance the previous week.

My first prediction for a final bubble phase of this market appeared in November 2016. In March 2017, I added that S&P will end the year with a “27 handle”. The words “post August moon-shot” appeared in the very first weekly wrap, where the target was set at “the S&P to 3300-3500 and the NDX to 10K in 12-18 months”, which, to be honest, were meant to be on the safe side. I didn’t really have to write all the preceding words to state my position since there is one number that that succinctly captures them all: 1998, as in the year 1998 in relation to the first tech bubble. E’nuf said.

Cryptocurrencies

Overnight BTC dipped below $3000, ETH to $200 and LTC was in the low $30’s. The sentiment was such that I’m willing to go out on a limb and call a bottom to this correction — or shall I say the conclusion to this particular bubble. I’m beginning to regard bitcoin as a series of bubbles each with a fresh group of hopefuls. Please note that I’m not a crypto trader and don’t take this as trading advice. Do check out the two bitcoin links below especially Charlie Bilello’s.

Portfolio

The Apple ($AAPL) puts were closed on Monday with a 50% gain. They would have expired today had I held but couldn’t take the chance over the iPhone X launch. I added to PM miner hedges on Monday such that I’m only 30% long. On Wednesday I sold puts on Activision Blizzard ($ATVI) as an attempt to acquire the stock cheaper. In addition, I swapped Qualcomm ($QCOM) for more Visa ($V) but regretted it almost instantly. I still have semi exposure elsewhere though.

Good Reads

None of the above is investment advice, the standard disclaimer applies.

Edit Oct 14, 2017: fixed link to “March 2017” post.

Nagilum’s Market, 10 Year Yield, Weekly wrap, 9/3-9/2017

Nagilum is a powerful, immortal being from Star Trek: The Next Generation. Once it trapped the starship Enterprise and presented its crew with various apparitions to study their responses — all to satisfy its curiosity about the human race. I mentioned it because the stock market action of the past few weeks give the impression of traders “being played”, where listless see-sawing seemingly designed to frustrate and induce over-reactions. I won’t be surprised if it’s revealed at a later time that AI bots have taken over.

Below is a long term chart of the 10-year US treasury yield (X10) that got to as low as 2.03% this week. It’s pretty amazing to recall that early this year Bill Gross was drawing a line-in-sand at 2.6%, and Jeff Gundlach, making fun of “second-rate bond managers” had it a bit higher. Per my trend lines, we’re just above resistance (call it 2% flat, if broken 1.85% is the next stop); whether it holds will have major implications.

If you put aside the market timing element and just look at asset allocation and security selection, I expect (and have been getting) greater contribution from the fixed income side than the equity side compared with a 60/40 portfolio. In fact, with my individual stocks I’m happy to just match SPY. It is my fixed income allocation — currently at a 50/50 bar-bell of stable value funds and leveraged CEFs that’s been hitting it out-of-the-park, month after month. This is in stark contrast to most DIY investors who tend to have nearly all the portfolio risk exposure and return potential from equities. I’m aware of what William Bernstein said about where to take risks, I simply disagree. I want my fixed income space to deliver returns just like any other.

  • My baseline expectation is for rates to rise as indicated by the generally rising trend lines. I’m by no means married to my CEF positions. The critical timing decision is to catch the turning point in the credit cycle to swap CEFs with treasuries.
  • If rates continue to stay low, it might still be a good hedge to equities when the bubble pops. In fact, rates staying low will fuel the equity bubble even more.
  • The real concern is if both bonds and equities drop, or to be more precise a rout in bonds leading to a rout in equities. Sovereign default is a real possibility of course, but I expect it to start in Europe first. That said, there are scenarios in which US treasury is dumped (at which point a collapsing market may be only minor concern in the overall scheme of things). The question is whether there will be any safe-haven assets or whether the only right position is “short or fetal” to quote a Fast Money trader (I think it was Macke) during the GFC. This is a low probability event but must not be dismissed since the consequences are so dire.

These things will take a year or more to play out so there are no near-term implications on my portfolio. Though it’s good to be prepared.

The US dollar dropped further this week and gold went up some more. I have been expecting a short term turn since the end of last week. My PM miner positions have been slightly hedged to 60% net long while the bullion positions are long term holds. I would have liked to have better timing but I’m maintaining the small hedge since gold looks finally ready for a short term correction. $1300 will be the first target.

Cryptocurrencies

The correction that started at BTC/$5000 could have reached a bottom by now but the second announcement from China banning all exchanges may have changed the character of this correction. The furtherest I can see it running is into the potential November 1st bitcoin SegWit hard fork. Last time BCH rewarded all BTC holders with a free dividend and the bottom came two weeks before Aug 1st. These are not trading recommendations and there is no change to my “managed withdrawal”. FWIW, I’m planning to write a blog post to argue for continued bitcoin appreciation from a game theoretic perspective. Hopefully I can get it done this month.

Portfolio

Sold margin secured Apple ($AAPL) puts EOD Friday, meant to be a very short term trade.

Outlook

Frankly I’m not happy with the market action this week. I would have liked the June lows to be taken out, instead we stopped right at the intermediate trend line. We now have anemic action from that lack of catharsis. There are chatters about an October correction which even if true would likely be mild. Still I might tweak my stable of individual stocks that now number 31. I want to pare down the number but increase the dollar amount. In short each stock needs to be a high conviction idea. I have not avoided mentioning any individual names on this blog, but neither have I given a comprehensive list. I’ll consider publishing it once I’m done with adjustments.

Good Reads

  • Profit Margins, Bayes’ Theorem, and the Dangers of Overconfidence: anything by PhilosophicalEconomics gets an automatic mention but this is easily one of the top 5 posts there and that’s saying a lot. Excellent explanation of the Bayes’ theorem, the whole article is as close to a mathematical proof of “strong conviction, carried lightly” as they come.
  • Yet Again? Howard Marks memo covering all the topics near and dear to my heart: market and positioning (agree in principle but not timing), bitcoin, passive investing, and six ways to invest in a low return world (#6 here I come)

Edit 9/10/2017: added “10 year yield” to blog title

None of the above is investment advice, the standard disclaimer applies.