Tether all the way down, Weekly Wrap 1/21-27/2018

Macro and Markets

Investors were undeterred (encouraged?) by the turmoil in bond and currency markets and continue to bid up stocks. There are signs that we have entered a parabolic phase which if continue unabated will reach S&P 3500 in April.

To be clear, this early a blow-off top is NOT the scenario I had been expecting. I established my options position in two large tranches, first in Jun-Aug, and then Oct-Nov of last year. All were Jan’19 expiry LEAPs with the hope of realizing long term capital gains from the long call side. Peaking in April is too far from the 1-year anniversary that it’s uneconomical to try to use protective puts to tie me over. So I’m mentally preparing to take the gains early if necessary. It won’t be the first time. It’s exactly what I did with cryptos. I had wanted to wait till March but the price action didn’t allow that luxury.

That said signs of excessive optimism are everywhere. One example is the equity put/call ratio being at extreme lows. The most recent Epsilon Theory letter also covered this topic.

I’m still holding the $UVXY calls. VIX was flat on the week even as stocks made new highs, indicating a degree of nervousness out there. Everyone is looking to the FOMC meeting for some direction. The $UVXY calls are a very small position as I’m expecting only a minor pull-back.

Muni CEFs sold off this week while the interest rate hedged multi strategy CEFs held steady — no surprise there. I’ve made the decision not to make any changes on the fixed-income side until a clear sign that the credit cycle has turned; however the discount in $NAC is looking mighty enticing. In general I expect money coming out of bonds into stocks should further fuel this rally.

Cryptocurrencies

The chatter around Tether is growing louder. The sub-Reddit (/r/Tether) is becoming a hang-out for concerned people. YouTube is another source (search Tether). I bought a few puts on Overstock ($OSTK, Mar 60), a crypto proxy. In December I made some quick money in its calls.

I actually quite like Overstock’s idiosyncratic CEO, Patrick Byrne, but this is not about personal likability. $OSTK was at mid 70’s this week, still up a hefty amount from mid teens back in August when it announced keeping the cryptos that its customers paid, and later establishing its own cryptocurrency. I’d say there is still plenty of “fluff” in that stock price should the whole cryto complex implode.

The supposed defense that Bitfinex/Tether put out actually implied egregious accounting misconduct: at a minimum co-mingling of funds belonging to separate legal entities even if the principles are the same. I suspect Tether is “printed” to purchase BTC which should have been sold for USD to back Tether but was not. Were I to feel generous, I’d assume that Bitfinex hands Tether fiat for that BTC. At any rate, Bitfinex/Tether is probably holding a massive amount of BTC giving them further incentive to prop up its price. But should BTC continue to fall, e.g. breaking $10k again, they will be under pressure to liquidate and it’ll be like a dam bursting. Trading has been unusually calm in the last couple of days. It’s hard to tell real vs. wash trades to give volume analysis any confidence.

History tells that when one has a weak hand and everyone else knows about it, the outcome seldom goes one’s way. A recent example was Amaranth when every hedge fund went against its position; Long Term Capital was a more distant example. Everyone who holds crypto will be affected when this thing implodes. You are forewarned.

Portfolio

Oh how I wish I held onto $LABU a little longer, that was another 15-20% that I missed. I’m still short $XBI puts so still have exposure there. Other trades this week were to move up strike prices on the short put positions. I also continued to add to PM miners.

Current portfolio composition is as follows: PMs 11.2%; equities 51.6%; FI, 22.0%; cash equivalent, 5.8%; and other, 9.5%. The “other” category is composed of 3X ETFs, 0.4% and options, 9.1%. Effective exposure from options is equal to 95.9% of total portfolio value for a leverage ratio of 10.6X. The portfolio is 147.5% long equities (not beta-adjusted). Options value and effective exposure both increased along with that of the underlying. Gamma remains positive. Options had and will continue to have outsized returns as long as this bull market continues.

YTD the active account is up 20.04% and the total portfolio 13.59%, vs. 7.39% for SPY and 4.08% for 60/40. About 2/3 of the gains have come from options, i.e. about +4.5% from everything else.

Good Reads

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