Monthly Archives: January 2018

So Long, and Thanks for All the Fish

The title is borrowed from the fourth book of Douglas Adams’ Hitchhiker’s Guide to the Galaxy “trilogy”, where the dolphins leave earth before its imminent destruction.

This morning I sold the last of my ethereum. Later on GDAX, BTC dropped to as low as $9928, below the Dec 22 low of $10,400, while ethereum got to as low as $852. I have been calling $19.8K on Dec 17 THE peak in BTC since the end of December. The odds of that being right are better than 50/50.

I’ll show my crypto account activity one last time. In the last two weeks, I was able to add a little ethereum and then gradually got out between $1100 and $1400. Overall, I made 15 times my money — not bad for 10 month of “work”. Cryptos will surely go down in history as THE most outrageous collective delusion. I count my blessings that my investment philosophy allowed me to hitch a ride and make a decent profit. The words of George Soros ring true:

“When I see a bubble forming, I rush in to buy, adding fuel to the fire,” he said in 2009. “That is not irrational.”

If I’m right, a large part of the human drama is still to be played out. Many late-comers will lose a lot of money. There’s little that I can say to counsel them other than that in a bear market, bounces are to be sold.

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

Three Kings, Weekly Wrap 1/7-13/2018

Macro and Markets

I’m going to try hard NOT to talk about the rally in the equities. As a matter of fact, I hope we get a pull-back soon which is necessary for this bull market to extend its life into 2019. Instead, I find the drama in bond and currency markets far more entertaining. The year started with significant weakness in bonds, with 10 year yield touching 2.6% briefly.

  • On Tuesday the 9th, Bond King Bill Gross came out and said “Bond bear market confirmed today.” 25-year trendlines in 10-year and 5-year yields were broken.
  • The other Bond King, Jeff Gundlach wasted no time saying “Gross is early” in a presentation peppered with excellent charts. His line in the sand: 2.63% on the 10 Year.
  • Gross then came back with a rather cryptic Bonds, like men, are in a bear market”. Was he making a social commentary? Putting that aside, he was clear about this: “There are several significant reasons that should lead to a 2.70% + year end yield and a mild bear market total return of 0-1% for most bond portfolios.” OK, a mild bond bear market then.
  • The last bond king (at least in my mind), Pimco’s Dan Ivascyn, has been his usual quiet self. Note I have the majority of my FI CEF’s at Pimco, especially $PDI and $PCI which he manages with Alfred Murata. A recent thread on MorningStar discussed interest rate swaps in $PDI. The gist is that the fixed pay IRS should start to gain value (as well as net payments) as interest rate increases. It’s why reason most Pimco multi-strategy CEFs have had rather stable NAV in his environment.

The last time I tried to make sense of the 10-year yield, I concluded it was going to 2.8% this year and eventually over 3% before the end of the bull market in stocks. To me that is consistent with a yield that is “slowly rising but under control”. The market will probably be OK with that scenario. What will spooked the market, is a sudden uptick in inflation. Let’s hope we steer clear of that.

In the meantime, the USD has dropped below its September low and now sitting on the bottom rail of the bearish megaphone pattern. It may be puzzling that the dollar should be so weak despite interest rate and central bank policy differentials viz-a-viz ECB and BOJ. A guest on CNBC Asia (which I listen to on my evening commute) made the point that better growth prospects/stock market internationally is siphoning capital away, which I thought was a rather intriguing point. Whatever the reason for the dollar weakness, it’s definitely positive for gold.

Portfolio

I’ve already made my 2018 529 and backdoor Roth contributions and re-balanced the passive account. Other recent transactions on the active side include adding to PMs ($GDX/$GDXJ), adding to Aqua America ($WTR) after recent drop but still too early, selling some Ethereum, selling vested company RSU stock and then buying ATM calls to minimize regret, and finally continued maintenance of the short put positions by moving up the strike price as the underlying made nice gains.

Current portfolio composition is as follows: PMs 11.4%; equities 52.6%; FI, 23.6%; cash equivalent, 5.7%; and other, 6.7%. The “other” category is composed of crypto, 0.5%; 3X ETFs, 0.4%; and options, 5.8%. Effective exposure from options is 80.7% of total portfolio value for a leverage ratio of 13.9X. The total portfolio is 133% long equities (not beta-adjusted). Options value and effective exposure both gained along with that of the underlying. Gamma is positive. Options had and will continue to have outsized returns as long as this bull market continues.

The trend of strong performance in Q4 is continuing. YTD the active account is up 9.7% and the total portfolio 6.23%, vs. 4.14% for SPY and 2.27% for 60/40.

Good Reads

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

Individual Stocks January 2018

This is an update to the collection of individual stocks in my active account. The last review was published in early October 2017. These stocks are all held in taxable accounts as I have reserved any tax-advantaged space under the active account for CEFs and to a lesser extent, some PM miners and trading 3X leveraged ETFs. Within my active account they have a targe allocation of 60% and an actual allocation of 55.1%, making them the single largest slice in my total portfolio.

My long-term goal is to have 25-30 stocks each of which can be considered a “permanent holding”. This is similar to Buffet’s 20 ticket punch card idea. With this many stocks, I’m giving up on some diversification benefits. In return, I get the advantage of very low cost, tax loss harvesting, lower current tax by selecting low dividend-payout stocks, and income generation from selling option premium. The current list is below:

There are only 26 stocks vs. 30 in October. I sold Cheveron ($CVX) and Exxon ($XOM) as I was planning on getting out of the energy sector altogether; Philip Morris ($PM) and Kimerly Clark ($KMB) for tax loss harvesting; and finally Gilead ($GILD) to dial down the exposure to healthcare. The only new stock in the current list is Activision Blizzard ($ATVI). Activision got a recent boost from their launching of the Overwatch eSports league, but I could have just as easily bought Take Two ($TTWO), owner of the Grand Theft Auto franchise. I also added to the following existing positions: Tencent ($TCEHY), Johnson & Johnson ($JNJ), BYD ($BYDDF), Eli Lily ($LLY) and Aqua America ($WTR).

P&L is calculateds as market value over cost basis. Every single stock is up. Most have see nice price appreciation in the last quarter along with the rest of the market. From April to December this group was +3.71% over $SPY. The weighted dividend payout is down to 1.1% which keeps a lid on current taxes. In the table red fonts denote a “high-conviction” holding. All but three positions are red right now. In other words, there likely won’t be much change to this portfolio going forward.

I do keep track of the sector weights as more of a check than trying to adhere to any specifict weights. The portfolio is light on consumer staples. Indeed, there are two stocks in that sector that I have been watching. I’m in no hurry though, as value is likely to continue lagging in the current environment.

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

Passive Account Asset Allocation, January 2018

Most of my writing centers around activities in the active account by design. On the other hand, I consider the passive account the bedrock of my portfolio. If any thing, it provides a safety net in case I go batshit crazy in my active account. Like most other years, I have already completed my (backdoor) Roth and 529 contributions. I also took the opportunity to rebalance the portfolio. The asset allocation for 2018 is as follows:

For most of 2017, I was at the aggressive end of my range, where equity/FI/PM = 55/30/15. Of which the domestic/international equities were split 28/27. For 2018, the overall allocation categories stayed the same but I made domestic/international exactly 27.5% a piece. The REITs got subsumed into respective equity slices mainly due to the availability and size of various accounts.

To me the allocation itself is plain vanilla. If my whole portfolio were like that, I’d have nothing to write about all year. The headache lies in asset location as I juggle over a dozen different accounts between my wife and I. The passive account consists of most of our tax advantaged accounts: two Roth IRAs, two 401Ks, and one HSA. Lastly, physical precious metal bullions (taxable) are also included in this category. EM and REITs are only available in the Roth IRAs at Vanguard. It ended up being too much trouble to maintain the small slices of REITs. There’s no real rhyme or reason to the relative ration of 18:9.5, other than that it feels about right.

The 30% fixed income allocation remains the same for 2018. Once again, it’s entirely in stable value funds in the 401Ks. This ultra-safe approach counter balances the risk I take with leveraged closed-end funds (CEFs) in my active account. In 2017, this strategy paid off handsomely.

I’m a big believer in having a sizable precious metals allocation. That part of my portfolio construction can be traced back to the permanent portfolio and later the Golden Butterfly (see PortfolioCharts.com). In 2017, gold was up something like 13%, a slight drag vs. the 60/40 benchmark. But as I wasn’t making regular bullion purchases, the PM allocation drifted lower all year. As part of the annual rebalance, I bought Central Fund of Canada ($CEF) a close-end fund of both gold and silver bullion in my wife’s Roth. There is still a tiny amount of Newmont ($NEM) and the Junior miner ETF ($GDXJ) left from long time ago. I may finally be able to sell them this year.

My wife and I have two other Roth IRAs at Scottrade that falls under my active account. They house the Pimco multi-strategy CEFs that pay 8+%. So each year I have the option of adding to either the passive side or the active side (or any combination thereof) with the Roth contributions. Since return on the active account were so much higher in 2017 I decided to add to the passive side this year to even things out.

My investment policy statement (IPS) stipulates an annual review where changes to the asset allocation is allowed. I also have the leeway to perform a mid-year allocation change, but only if the new plan is already laid-out at the beginning of the year. Recent signs of stock market overheating notwithstanding, I’m still projecting a bubble peak in 2019. In other words, this AA is likely to stay another year.

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

Cryptocurrency 2017 Recap

On Dec 5, I made a prediction for bitcoin to reach $60K on Jan 11, 2018. I can now safely say that is not going to happen. I was mistaken and won’t make any excuses here. The model did have goal posts along the way that prompted my exiting most of the positions. Here I’m going give a recap of my crypto activities in 2017, share a chart and some current thoughts.

I linked to a long-term BTC chart earlier. To the best of my knowledge, it originated here. I made my own chart with price data from CoinDesk.

This is a Log-Ln plot. The fit implies that BTC price has a time dependence of ~T^2.91. We sometimes refer to strong price action as “going parabolic”. No wonder bitcoin looks askance at all previous bubbles — its long term trendline is almost cubic! Clearly, this is not sustainable. The three prior notable vertical phases, labeled with green arrows, all culminated in exponential rises over a range of about e^4. That was the basis of my $60K prediction. Unfortunately, this time the price fell well short.

I bolted for the exit when it was clear the exponential rise wasn’t going to happen. In retrospect, I was too early, but probably still correct. The recent bounce to $17K was a much better selling opportunity. I believe that BTC has seen THE PEAK, based on signs of euphoria rather than any technical analysis. My tape reading, i.e. observation of the real-time price volume action, also confirms that view.

The table below captures my crypto activity from the original purchase in March for a scaled “100” or 0.6% of my portfolio at the time. By now I have cashed out more than 13 times the initial deposit. At one point in December, cryptos were about 9% of the portfolio.

At the end of 2017, I had only about 10% of my coins left. Obviously I could be wrong to top-call BTC and it can come back like it did many times before. I’ll keep an open mind and re-examine if BTC can make a new high. In the meantime, Ethereum has been acting strong and making new all time highs. I bought some more at $883. It’s the only crypto I hold today, at about 1% of my portfolio.

The total crypto market cap has also been making new highs, although it can be argued that many of the top coins are pre-mined, thinly traded, and with even less credible fundamentals than BTC. I’m of the opinion that the crypto party is ending in 2018. During the dot com bubble, the Dow and S&P stayed strong into September after the March peak in Nasdaq. During the housing bubble, house prices peaked in 05-06, two Lehman hedge funds collapsed in Feb’07 (on an Armstrong turn date), but the S&P didn’t peak until October’07. The time now feels like those in-between periods when the last bit of speculative money is funneling into adjacent avenues while distribution takes place.

I’m glad that I took a ride on the bitcoin train, and equally glad having gotten off. Besides writing two big checks to IRS and the CA franchise tax board, some of the proceeds is earmarked for buying gold, the real kind.