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.