Category Archives: Weekly Wrap

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.

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.

Dollar Woes, Weekly wrap, 8/27-9/2/2017

Starting from this week I’m using a more descriptive title for the weekly wrap.

Macro and Markets

This week we had a preview of the “post August moon-shoot” that my model has been predicting. The Nasdaq established a new closing high. Gold was no slouch either with the spot reaching $1334.5 on Friday. Gold’s move mirrored the dollar’s fall through its 200 week moving average. Near term we’re likely to see a top in gold and rebound in the dollar but I’m leaning to the rebound being short-lived which is more consistent with my views on gold and equities.

If the dollar should fall definitively below its 200 week average, it will likely be the start of a multi-year decline and will have serious repercussions on the pricing of all financial assets.

Cryptocurrencies

The relentless upward thrust seemed to have been finally repelled by the psychologically significant barrier at BTC/$5000, LTC/$100 and prices might have started an intermediate decline. I have long given up making any short term predictions or at least trade with them. I sold some LTC this past week (well below the high). My LTC and ETH are at 75% of my peak holding, and plan to sell enough bitcoin to get to the same point by the end of this year. I have withdrawn 84% of my initial deposit and still hold coins with a market value 4.5 times that for an IRR of 3900%.

One thing obvious from looking at Coinmarketcap.com is that the premium at the Asian exchanges have all but vanished. It was only two month ago that prices in Korean Won routinely had a 20% premium. To me that’s the surest indication that the big-money arbitragers have arrived. There has been no shortage of reports of hedge funds getting into this space. This latest example happen to also contain useful data: I’ve surmised that bitcoin is not correlated to other assets by observing its price behavior, but it’s nice to see a piece of data.

So we’re knee-deep with institutions, but probably still a ways from massive public involvement, or the premium on $GBTC wouldn’t be nearly as high. There is renewed talk of a bitcoin ETF which could usher in the final mass speculation phase of this bubble and I would give it no more than a year after that to reach the final top. My current plan is to sell at least 5% every 6 months, but also to hold no more than 20% after the bubble pops.

Portfolio

I’m running out of options for tax-loss-harvesting this year. This week I harvested losses in Altria ($MO) due to an FDA announcement a while back. To maintain sector exposure my main options were Philip Morris ($PM) and British American Tobacco ($BTI). $PM had higher PE but a stronger balance sheet so it was a toss-up fundamentally. In the end I went with $PM due to its pure international exposure as opposed to $BTI with its Reynolds acquisition — the irony is that I used to own Reynolds before $MO. Just another example of the trajectory of USD making its way into all investment decisions.

Outlook

No change.

Good Reads

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

Weekly wrap, 8/20-26/2017

Macro and Markets

The week’s low was part of the reversal on Monday. It stopped right at the intermediate trend line and nowhere near to the June low of 2405. Jackson Hole was pretty much a non-event for stocks but gold and bonds were up and the dollar down on the “non-hawkish” Yellen. Next week will be the last chance to take out the June low before the big shots return from summering in the Hamptons. I still see that scenario as more consistent with the post-August “moon-shot” my model has been calling for, but not absolutely necessary.

The Q’s are acting better than the S&P, despite not having leadership from Amazon ($AMZN), Alphabet ($GOOGL, $GOOG) or Facebook ($FB). This rotation is necessary and healthy. It bodes well for the market when the “kings” do return.

Portfolio

For a second week there is no transaction other than the usual 401K/HSA contributions (which ought be assumed as the norm from now on). This level of activity (or lack thereof) is quite normal as my core positions have been established and the time scale of timing decisions are on the order of years. My largest speculative positions are leaps on the Q’s. Once it starts to move the short put legs will require more frequent maintenance but the long call legs will be held for long term capital gains.

Good Reads

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

Weekly wrap, 8/13-19/2017


Macro and Markets

As expected the situation in North Korea appears to be calming down, for now at least. Relief for the market was short-lived though when the President’s comments on Charlottesville and the whole-sale defection of CEO’s put the administration’s pro-business agenda in jeopardy. The CNN Money fear and greed gauge was at 19 on Thursday and 17 on Friday, signifying extreme fear. Ironically, taking out the June low (S&P 2405) is probably the best thing that can happen, paving the way for the maniac phase of this bubble. We may get there on next week the way things are looking at Friday’s close. On the bright side, it’ll surely make our more astrologically inclined friends happy.

Alan Blinder was on CNBC talking about the “mysterious lack of inflation”. It seems to me much of the pricing pressure can be attributed to Amazon, with the fear of automation (AI + robotics) suppressing wages. Can it be that obvious? The key take away: he is of the opinion that if inflation stays low, the December hike will be off the table. That will be broadly positive for many assets.

Precious Metals

Spot gold exceeded $1300, for what, 5 minutes (?!) on Friday. I was expecting a pull back above $1300 but not that brief! Though if the stock market tanks next week “traders” (in quotes because those trading gold like stocks don’t last long) will have another chance to load up just in time to be whipsawed again. My main correction targets are $1265/1240. Long term holders need not fret as I believe gold will amble along as the stock bubble enters its mania phase, ready to take over the baton once stocks deflate.

Cryptocurrencies

This is the first truly global bubble where even an Nigerian Prince with an Internet connection and a bank account can participate. The Reformed Broker linked to an interesting video on Bitcoin valuation. I originally bought into cryptocurrencies because I saw the outcome as bi-modal (heaven or earth, nary in-between). Now the positive outcome looks increasingly likely. I expect each of the following to happen at some point: bitcoin ETF, Coinbase IPO, and finally major banks facilitating bitcoin transactions. This is far from the majority opinion as can be seen in this poll. BTW, Mr. Money Mustache is frequented by gen Y early-retirement aspirants. My own expectation is somewhere between the last two choices, or about 1 trillion market cap.

Since the last ramp saw bitcoin going from $1500 to $3000, very simplistically I expect the next pause to be around $6000 which is also Tom Lee’s target for next year. Bitcoin’s daily volatility is hovering around 5-6% vs. about 1% for gold on average. I’m staying with my allocation of 12% to PMs and 2% to cryptocurrencies.

Portfolio

No transactions this week other than the usual 401K/HSA contributions. The July Pimco UNII report came out and numbers were … dreadful. There was an SeekingAlpha article and much discussion on the MorningStar forum. Those funds are indeed black boxes. They have paid off handsomely for me but I harbor no illusion of them being buy-and-hold vehicles. When the credit cycles turns they could drop faster than stocks. That’s the price to pay for reliable increases punctuated by sporadic buying opportunities during more peaceful times. For now I’m holding and watching NAV’s closely.

Among my individual stocks I pay particular attention to the losers believing the winners will take care of themselves. I was relieved that Ross ($ROST) jumped after reporting good numbers on Friday. I’m still vexing over Chevron ($CVX) and Exxon ($XOM), my only energy names. The crude cycle seems finally bottoming but I’m not sanguine about the long term prospects. If I decide to maintain some exposure I’ll switch to a refiner. I’m not terribly inclined to buy into renewables or other “new” energy companies, nor am I looking for yield so MLP’s are out as well. Decisions, decisions.

Outlook

No change.

Good Reads

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