Monthly Archives: December 2017

Bitcoin Bubble Peak, Weekly Wrap 12/17-23/2017

This will be the last week wrap this year. Merry Xmas and Happy New Year to all!

Cryptocurrencies

Another crazy week in crypto-land. I’ve been watching the tape rather closely this week. After making a high about $19.5K (GDAX) last weekend, the price action was indicative of distribution: higher volume on declines. In the past the dollar volume typically rises and falls in concert with price. The decline started to accelerate on Thursday. I had a phone conference in the morning so couldn’t trade very well. But I did manage to exit $RIOT and $OSTK calls as well as %BTSC with a 75% overall profit on the amount committed, granted lots more were left on the table. On bitcoin, my mental stop-loss thresholds were $14K on Wednesday and $15K on Thursday — the levels that would negate my $60K price projection. The $15K level was breeched convincingly during my Thursday commute home. Thursday night, I sold cryptos down to 40% across the board. Most of the rest were sold Friday morning such that now I only have some BTC in transit from the CoinBase vault. My total cashed out amount is now around 13 times the initial deposit and I approximately 10% of the total coins left (by value).

Price is still bouncing around as people try to pick the bottom. On Reddit and BitcoinTalk forums HODLers are still edging each other on. I know that bitcoin has seen similar or greater magnitude of declines before but the air of frenzy just prior to this peak felt different. Every bubble ends by running out of buyers and it was difficult to see how many more buyers can be conjured up. I was acutely aware of the mass psychology but still hoped for a final “hurray” to extract even more money when I made my $60K call. That said I had a fairly early peak date in mid January. To me, more likely than not, the greatest bubble of mankind has finally popped.

Could I be wrong? Certainly, as wrong as my $60K call was. Bitcoin will need to go back above $20K quickly to get me interested again. There will need to be a lot of gullible institutional money for that to happen. Real recovery will take a long time if ever. I hope years from now there are real companies with decentralized applications based on the blockchain technology. For now I’m taking my marbles and going home.

Fixed Income

10-year yield almost got to 2.5%, highest since March. I’m still trying to understand the impact of the new tax bill on interest deductibility. There has been some movement on $BGB which is a senior loan CEF. Meanwhile, the discount on $NAC continues to widen. I added more this week since reducing CA tax liability is of even greater importance now. The only thing holding me back from adding more is the fact that $NAC has been earning slightly less than distribution. I’m hoping the December UNII report will put that concern to rest.

Precious Metals

Signs continue pointing to both precious metal and miners having made an important bottom the week prior. I added a little $GDX this week and will continue to deploy money from now to the end of January to bring my PM allocation back towards 15%. If the bitcoin bubble has indeed popped, some funds may flow from digital gold to the real thing.

Portfolio

The trades have already been mentioned above. Current portfolio composition is as follows: PMs 9.6%; equities 53.9%; FI, 22.2%; cash equivalent, 10.5%; and other, 3.8%. The “other” category is composed of crypto, 0.7%; 3X ETFs, 0.35%; and options, 2.75%. Effective exposure from options is 63.2% of total portfolio value for a leverage ratio of 23X. The total portfolio is 116% long equities (not beta-adjusted).

Return-wise the portfolio is still doing well. Month-to-date the active account is up 9.2% and the total portfolio 5.6%. All returns reported here are pre-tax and a significant amount of capital gains taxes are due this year. Tax liability is treated as withdrawal from the account.

Good Reads

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

You Can’t Make This !@#$ UP, Weekly Wrap 12/10-16/2017

Macro and Markets

It’s been a busy week with lots to talk about. Bitcoin is again front and center with CME futures to commence trading on Monday. I expect the CME futures to be more popular than CBOE’s due to a better price referencing mechanism. By now I’ve heard most arguments for or against bitcoin. These days I dismiss out-of-hand any critic using the “tulip” analogy as their sole argument — it’s such an over-used line, not to mention quite mistaken. But you’ve got to check out the Yahoo Finance profile page of Bitcoin Services, Inc. ($BTSC). Note it’s a penny stock.

Bitcoin Services, Inc. engages in the bitcoin and mining of other crypto currencies. The company offers bitcoin escrow service, which acts as a neutral third party between buyer and seller when doing business online; and Bitcoin mining services through running SHA256 double round hash verification processes in order to validate Bitcoin transactions and provide the requisite security for the public ledger of the Bitcoin network. It is also involved in the development and sale of blockchain software. The company was formerly known as Tulip BioMed, Inc. and changed its name to Bitcoin Services, Inc. in March 2016. The company was incorporated in 1997 and is headquartered in Kalamazoo, Michigan.

I mean, you just can’t make this !@#$ up! On a more serious note, I was able to find two bitcoin proxy companies that are also optionable: Overstock ($OSTK) and Riot Bitcoin ($RIOT). I established call positions that are already profitable.

Looking at the BTC price on GDAX for the past week. We seem to be completing a cup-and-handle pattern with declining volume during consolidation. My model calls for breaking to definitive highs and then entering an exponential regime on Dec 17th and no later than early next week. The transition may even happen 1 day earlier by the looks of it. I’m maintaining both the target price and timing given on Dec 5th.

The stock market was equally exuberant this week, making new highs as the tax bill inched towards the finishing line. I’m ambivalent towards the bill itself. It’s both unnecessary and unjust, but I’ll likely come out ahead personally from advancing equity prices even after losing some SALT deduction. I consider myself correctly positioned for this equity environment and not planning any drastic changes to my allocation for 2018, at least up to Q4.

The NAVs of the fixed income CEFs have stalled for several months. There was an excellent article onSeekingAlpha this week. I’m not so concerned with the lack of year-end special but it was good to understand the NAV growth from non-agency MBS had probably run its course. For now these CEFs remain holds despite what Jeff Gundlach said about interest deductibility in the new tax bill. Overall I remain a believer in “lower for longer”.

Precious Metals

Garry Savage, whom I had a tremendous amount of respect for, called an intermediate cycle low in gold this week. As you know I have been equivocating between December and January for the low, if anything leaning towards January. A key piece of my reasoning has been the high commercial short position in the commitment of traders report (COT). New data came out Friday. Lo and behold, I can’t recall the rate of commercial short reduction ever as high as during the last two weeks. That said, the principle of “reflexivity” is still to be respected as Yellen transitions to Powell. Since I still have my long term PM position, I’m not in a hurry to add just yet.

Portfolio

$OSTK and $RIOT calls were added, as well as a tiny position in $BTSC — how could I resist?! Current portfolio composition is as follows: PMs 8.7%; equities 52.3%; FI, 21.3%; cash equivalent, 4.0%; and other, 12.7%. The “other” category is composed of crypto, 7.8%; 3X ETFs, 0.4%; and options, 4.5%. Effective exposure from options is 72.5% of total portfolio value for a leverage ratio of 16X. The total portfolio is 125% long equities (not beta-adjusted).

Return-wise the portfolio is doing extremely well. Month-to-date the active accounts are up double digits and year-to-date over 50%.

Good Reads

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

Two Days And 60% Early, Weekly Wrap 12/3-9/2017

It’s good to be back writing my weekly wrap again.

Macro and Markets

Bitcoin mania is in full swing: I could hardly turn to any financial publication without seeing a front-page article. Of course this is exactly what a blow-off top requires. The run-up to $19K and the subsequent pull-back is part of the script. I now anticipate some weakness which will embolden some shorts once the futures start trading — the very shorts whose carcasses will be the stepping stone to the top outlined here. Other prognosticators have given similar price targets as me, but no one to my knowledge the same timing — which is even more critical imo. TheMacroTurist hearkens back to the 1980 gold bubble:

One of my favourite trader war stories comes from Jim Rogers. In the late 1970’s, Jimmy was long gold (I know, shock!) In the early months of 1980, gold went parabolic. Traders were scrambling to buy their inflation hedge, and just-get-me-in orders were flooding the exchanges. Well, sensing the mania was getting out of hand, Rogers pulled out some pink tickets. He was within two days of the high. Problem was, he was 60% early in terms of price…

This week’s Bitcoin rally reminds me of that period.

The stock market is not exactly quiet either. After a classic “sell on the news” earlier in the week the indexes look to have put that episode behind them and are ready for new highs again. 2700 on the S&P, which I first fingered in March, is still in play. Even the biotech ETF $XBI, the bane of my existence for the past two months, is looking up after having made a double bottom. The long shadow on this week’s low is especially encouraging.

Precious Metals

Gold finally broke below its $1260 support this week. It took more time moving sideways than the simple sketch I drew almost two months ago. The low obviously is still to come. I’m still leaning towards the 63 week/13.5 month bottom coming in January, which may also corresponds to the peak in bitcoin.

Portfolio

There were no trades this week. Current portfolio composition is as follows: PMs 9.0%; equities 55.3%; FI, 22.5%; cash equivalent, 4.9%; and other, 8.2%. The “other” category is composed of crypto, 5.5%; 3X ETFs, 0.35%; and options, 2.35%. Effective exposure from options is 64.5% of total portfolio value for a leverage ratio of 27X. The total portfolio is 120% long equities (not beta-adjusted). Most of the percentages have fallen due to the rise of cryptos whose market value has increased to 10 times my initial deposit even after withdrawing 113% of the deposit amount.

Good Reads

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

Bitcoin Peak Projection: $60K!?

I have an updated crypto account summary table which shows both the cost basis and prices I have sold at. The number of coins are measured against my peak holdings in May. So far I have sold 25% across the board and cashed out 113% of the initial (also my one and only) deposit which had been scaled to 100.

My plan had always been to keep 20% of the coins long term, which meant I needed a schedule for selling another 55%. Should I do 5% a month for 11 months? Or 5% a month until my original target of $25K and then 10% a month? These were the initial options under consideration. Of course, I would like to wait as much as possible until the capital gains become long term. Last Friday I started looking at the BTC price chart with much greater intensity than ever before in order to formulate a plan.

That effort quickly morphed into a modeling exercise that had me staying up until 3AM Saturday. The key would be the market reaction to the new bitcoin futures: XBT on CBOE will start trading on Dec 10, followed by BTC on CME on Dec 18. Opinions are divided on the immediate repercussions: some say it will release pent-up demand on the short side, but I’m of the opinion that the pent-up demand on the long side is even greater.

So I ran a model assuming a blow-off top. I was absolutely flabbergasted at the conclusion but these were the numbers: the model called for a peak of $60K on Jan 11, 2018. The range was $40-100K with a timing band of +/- 8 days. I still can’t believe it myself as I type these numbers. Needless to say this is a lot higher, and way way earlier than what anything I had in mind.

I won’t go into the model itself — it’s either too valuable or too trivial, depending on your point of view. Without the details, I don’t expect anyone to have the conviction necessary to trade on this projection; that’s never the intention of this blog anyway (that’s my way of saying if you do trade on this you’re a bigger nut job than I). The point of this post is to put another stake in the ground and demonstrate again that I’m not afraid of making a fool of myself when just about every piece written on bitcoin ends with “nobody knows where its price will go”.

We should have a good indication by Xmas whether a blow-off top is in progress, or I just had too much to drink Saturday night.

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

Performance Tracking November 2017

For calculation methodology see this post.

November was an even better month than October which was a mild surprise to me. I had expected a small pull back but the market roared back with $SPY gaining 3.06% and the 60/40 1.77%. My portfolio had been outperforming significantly but gave back ground in the last couple of days when the FANG’s retreated. Still the total portfolio and the active accounts gained 4.08% and 6.29% respectively. Both were new records 2nd month in a row. The YTD returns have further distanced from that of $SPY, while the active accounts have overtaken $SPY since blog inception.

Breaking down individual components: cryptos again were the star of the month contributing about 1.6% as BTC climbed over the $10k mark; options delivered another 1.1% or so; the individual stocks lagged SPY, 2.9% vs. 3.06%, due to the large cap tech stocks; fixed income CEFs faced some difficulty, however adding at the bottom and partial recovery resulted in a positive month, 0.05% vs. -0.15% for $AGG. PMs continue to be lack luster which I now expect to deteriorate into the end of January.

Transactions that haven’t been covered in weekly wraps include closing the tiny $SOGO position received in its IPO, and closing Gilead to add to $JNJ. The latter was really about reducing the total number of individual stocks, which currently stands at 26, and having a larger position in each.

End of Month Portfolio Composition

PMs were at 9.5%, equities 56.1%, fixed income 22.7%, cash 5% and other 6.6%. The “Other” category was composed of cryptos 3.9%, 3X ETF 0.4%, and (market value of) options 2.3%. Exposure from options equaled 66% of the total portfolio, or a leverage ratio of 28X. Lower leverage ratio was a result of gains in $QQQ and closing $GILD positions. Total portfolio equity exposure was at 122%.

Comparisons

AllocateSmartly tracks over 40 different tactical asset allocation strategies. In November my total return of 4.08% would have trounced the pack whose highest return was 3.06%, matching that of $SPY. YTD the first and second ranked strategies are at 24.72% and 20.25% respectively, vs. 24.05% and 34.84% for my total portfolio and active accounts. My portfolio remains leveraged long equities and I expect the out-performance to continue as long as this bull market lasts.