Category Archives: Weekly Wrap

Amazon HQ2, Weekly Wrap 11/12-18/2017

I’m away on a family vacation, hence the delay in writing this post. Happy Thanksgiving to those in the US. I’m going to skip the weekly wrap post Thanksgiving.

Macro and Markets

Amazon’s HQ2 has been getting lots of press and rightfully so. I can’t offer any insight as far as predicting which city Amazon is likely to pick. Much has been written on the candidate cities’ work force, infrastructure, and culture — there are far more knowledgeable people than I on those matters. But I do have some thoughts about Amazon’s motives that I haven’t seen written elsewhere. First, I make the following observations:

  1. Amazon doesn’t need money, at least not the puny billions (if that) any city will be able to offer via tax incentives.
  2. Amazon can damn well hire any one it wants.
  3. If you look at the numbers given in the link above, Amazon can make/re-make whichever city it picks into whatever cultural environment it wants to.

What’s the biggest obstacle in Amazon’s growth trajectory? Political and popular backlash due to its growing clout. What did the military-industrial complex do to curry favor with politicians to get its projects and contracts? Putting factories in the key congressional districts. What can Amazon’s HQ2 accomplish? Transform, or should I say ingratiate itself with, an entire city, region, and state — and more than a few votes I would imagine. Is that the only consideration? Absolutely not, but to assume it’s not part of the consideration is equally naive.

Anyway, that was part of a wider reflection on the sustainability of the growth from AI/ML/IoT/robotics/blockchain/CRISPR/etc. There is more than enough to underwrite a new secular bull market and I’m sure Amazon will be part of it (disclosure: no position in AMZN as of now). Though the tricky part is to be able to take advantage of mispricing, both on the way up and down.

Back to the more immediate developments in the market this past week: there was a nice bounce on Thursday, though much was given back on Friday, at equal or larger volume to boot. It was the case for S&P, Dow and Nasdaq.

The CNN Money fear and greed index dropped below 40 and ended the week at 44. There may still be uncertainty surrounding the senate vote on tax reform but I don’t see anything that will derail this bull market. There is still an outside chance we’ll see 2700 on the S&P by the end of this year.

Portfolio

For someone convinced the bull market is intact this past week presented several buying opportunities. I added to QQQ calls and $LABU (I’m incorrigible), and most proudly: Pimco CEFs $PCI and $PDI before the reversal on Wednesday. The latest UNII report showed much better coverage ratios, likely from taking profits in swap positions. Once again it points to the folly of listening to someone who can’t tell interest rate swaps from the internal revenue service.

Current portfolio composition is as follows: PMs 9.9%; equities 56.4%; FI, 23.2%; cash equivalent, 5.1%; and other, 5.6%. The “other” category is composed of crypto, 3.3%; 3X ETFs, 0.35%; and options, 1.85%. Effective exposure from options is 67.2% of total portfolio value. The option leverage ratio is 36X. The total portfolio is over 130% long equities (before considering the beta of each position).

Good Reads

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

NDX Prediction, Weekly Wrap 11/5-11/2017

Macro and Markets

Two pieces of news cast doubt on the tax reform this week. While the POTUS was on his Asian tour, the GOP suffered resounding election defeats around the country. It was seen as a firm rejection of the President and his policies. In addition, the Senate’s version of tax reform plan had a one-year delay in corporate tax rate reduction. As far as the stock market is concerned, I remain as suspicious as ever that the tax reform is “priced in”, i.e. not much credence was given to passage, in the present form anyway. The real growth-inducing initiatives that I can see are the repatriation of off-shore profits and faster investment dispensing, both are front-loaded and one-shot deals. As far as the corporate rate that grabs the headlines, multinationals already have so many ways to reduce their taxes. Small caps may indeed benefit which is why the Russell is acting so poorly this year — evidence again that the market has NOT priced in the tax reform. As far as “trickle down corporate rate cuts” to raise labor compensation is concerned, I have a bridge in Brooklyn for sale if you actually believe that. While I stand to benefit as an investor, any wage increase will come from the tight labor market, not lower corporate tax rates.

Against that background, I view the drop on Thursday as nothing more than a natural fluctuation. We’re so used to low volatility that a 1% intra-day move was sufficient to take the CNN Money fear and greed index down to 54, squarely in the neutral range. I’m going out on a limb again to make a prediction on NDX. Below is its weekly chart. I think it has entered into a phase similar to end of Jun’13 to Feb’14 where the index stayed mostly above the 10 WMA and definitely above the 20 WMA for eight straight months. Timing wise it points to a top (not necessarily THE TOP) next April. Along the way, a test of the 20 WMA in early 2018 is to be expected. As a price objective — I’m using the 1.618 extension of the dot com era high (4816) or 7792, equivalent to $190 for the QQQ. This is a refinement of my current market view, so no immediate portfolio change is required.

Portfolio

I got out of $SOXL on Monday with a good profit, but jumped into $LABU too soon and was stopped out. I’m out of $JDST as well. In fact, I’m out of all leveraged ETFs and just going to enjoy the bulk of my $SOXL profits for a while. In PMs, I still believe the intermediate trend is down and the low in January scenario is increasingly likely. It’s just a very difficult environment to trade so I will simply lay off for now.

This week I participated in an IPO. InteractiveBrokers was an underwriter for Sogou ($SOGO), a Chinese search engine. I requested 1000 shares and was allotted 100 @ $13. It closed the week at $13.85, not a blockbuster but I’m happy with any gains.

Current portfolio composition is as follows: PMs 9.8%; equities 56.8%; FI, 22.7%; cash equivalent, 6.2%; and other, 4.6%. The “other” category is composed of crypto, 2.7%, and options, 1.9%. Effective exposure from options is 64.6% of total portfolio value. The option leverage ratio decreased to 34X due to increases in option value. The total portfolio remains over 120% long equities (before considering the beta of each position).

Good Reads

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

Semis, Weekly Wrap 10/29-11/4 /2017

Macro and Markets

Another week, another set of records in the major indexes. Wall Street got its preferred Fed Chair nominee in J. Powell, the status quo candidate. Economic numbers were mostly mildly positive or unremarkable. Earnings from Apple and FaceBook were solid but a repeat of last Thursday/Friday was not in the cards. So the market grinds higher, relentlessly. The S&P still has a good chance of hitting my year-end goal of 2700, less than 5% away.

The leak on Friday that Broadcom ($AVGO) was making a go at Qualcomm ($QCOM) kicked the semis into a higher gear — I didn’t know that was even possible. It was the eighth weekly advance of the ^SOX index which looks to be challenging the all time high of 1347.94 on Mar 10, 2000. I’ve been in the 3x ETF $SOXL since mid September. Qualcomm was the poster child of the dot com era and famously split 2:1 then 4:1 in one year. More recently it has been embroiled in a bitter legal battle with Apple in addition to having trouble closing the $NXPI deal. Both Broadcom and Qualcomm stocks reacted positively to the news.

Gold

I closed out $DUST earlier in the week and re-entered $JDST on Friday. Medium term outlook is unchanged from two weeks ago.

Portfolio

There were a flurry of trading activities this week. I was short $63.5 puts in Activision Blizzard ($ATVI) expiring Friday; they closed 30 cents in the money. Since I was planning on acquiring more it didn’t even occur to me to close out the puts that had been rolled twice already. I’ll be happy to be assigned. Last week, I highlighted the extreme ratio of the energy sector ETF ($XLE) to crude. Both $XLE and crude had a strong week. Refiners continue to do well but Exxon ($XOM) and Chevron ($CVX) started rolling over which finally convinced me to sell. I added to Eli Lily ($LLY) and BYD ($BYDDF) to bring them closer to the average weight among my individual stocks. Elsewhere, losses were taken in Kimberly Clark ($KMB) and Philip Morris ($PM). That brought the number of stocks to 27 and left a hole in the Consumer Staples sector. I didn’t find any good candidates at current prices so will continue to monitor this space.

Both pharma and biotech had been weak for several weeks. I tried to catch a falling knife in the biotech ETF ($XBI options) and left bits of finger on the floor. Nonetheless, bull markets are forgiving with poor timing, biotech looks to finally have turned the corner this week. On the other hand, the NDX remains strong which allowed me to continue moving up the strike of the short QQQ puts and add to calls. Across all speculative option positions, the leverage ratio declined to 34X due to increased option market values.

Good Reads

Edit: 11/6/2017 Qualcomm splits

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

Leverage, Weekly Wrap 10/22-28/2017

Macro and Markets

The last weekly wrap featured a flag breakout pattern in the Russell which fell back into the consolidation channel earlier in the week. My own portfolio is highly leveraged to the NDX so I went into Thursday with plenty of angst. Fortunately they didn’t disappoint. The Christmas rally is now in “full on” mode. Naturally big tech earnings will be fingered as the proximate cause but I believe money coming out of the bond market will provide the more sustained fuel. The last time I showed the 10 year yield ($TNX/10) it was sitting at the recent low of 2.03%. It has since shot up to 2.43%, a huge move. I expect it to reach 2.8% in the first half of next year and eventually over 3% to force investors who have been piling into bond funds to switch into stocks, setting the stage for the final bubble mania.

Below is the ratio of the Energy ETF ($XLE) to the price of Wester Texas Intermediate. The ratio has dropped below support as energy stocks stagnated while crude price advanced on supply cuts. $XLE just tested its 200 DMA and has the potential to get back to $73-75. I continue to monitor this space for an opportune time to unload my Exxon and Chevron.

There were a number of important geopolitical events this week. Abe won convincingly again which means BOJ will maintain its loose monetary policy (~$50bn per month?). Draghi announced a “dovish taper” of €30 bn per month to at least Sep’18 (note combined they are greater than the projected $50 bn Fed balance sheet reduction, before anything from the PBoC). Xi JingPing consolidated his power — I’ve never worried about the Chinese debt, much less so after this expected development. The final solution for any debt problem is some kind of equity/debt swap which only a country like China can successfully pull off. Congress is likely to expand CFIUS review (source). As far as seed-stage tech investing is concerned I can see how this can backfire. Chinese VCs will simply ask early-stage start-ups to move to China — in ZhongGuanCun, they work harder and for less. The market and users are there, so why not?

Gold

Gold price movement is unfolding as laid out last week. Next significant bounce may occur at the 200 DMA ($1260) around the next FOMC meeting (Oct 30 – Nov 1). The bounce will likely fail.

Portfolio

Despite the movement in rates noted above, many Pimco multi-strategy CEFs gained in NAV, i.e. they have negative effective duration. I added to PCI. Muni CEFs are under pressure but I believe their distributions are safe and will continue to hold/add. I added to Tencent ($TCEHY) to bring its weight in-line with other tech stocks.

A portfolio allocation breakdown can be found in the annual review in July. There has been some changes since then: PMs have dropped to 10%, equities increased to 58%, fixed income slightly lower at 23%, and the “Other” category more than doubled to almost 5%. The “Other” category has three components: cryptocurrencies (2.5%), 3x leveraged ETFs (1.1%), and options (0.9%). The market value of the options is quite deceiving. As of Friday, the total delta times the underlying equals about 55% of the total portfolio. In other words, there is a leverage ratio of 55-60X on the current market value. I expect the delta to increase due to positive gamma; as I move up the strike of the puts I use some of the gains to buy more calls. This level of leverage is possible with futures. However I like the liquidity of QQQ options vs. NQ, I also plan to get long term capital gain rates instead of the 60/40 split of section 1256 contracts.

I have debated whether to reveal the exact option trades but have decided not to, at least at this time. The basic mechanics have already been discussed in this blog. Basically, naked puts were sold to finance calls, and a million variations on that theme. All transactions were for credit, i.e. there was no cash outlay to build up these positions. There is margin impact for selling naked puts for sure. At IB where I have portfolio margin, it’s 10% of the max loss or assuming the underlying drops to zero. On that basis, the leverage ratio is about 13X. Note margin impact is not the same as margin balance. I don’t buy on margin or pay any margin interests.

The main reason for not revealing my exact option trades is that they’re of little use to the readers. First, I don’t expect many to have the level of trading authorization to sell naked puts. Second, the right time to put on those exact positions was before the market took off. I started at the of June. Last but not least, it takes a tremendous amount of conviction to with them. Following someone else blindly into a trade is just about the worst thing one can do.

Good Reads

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

Fear and Loathing, Weekly Wrap 10/15-21/2017

Macro and Markets

S&P made new highs everyday of this week, something of a record. RSNBS. This is precisely the kind of behavior required to reach my end-of-year target of 2700 and beyond. There are multiple flag breakout patterns like the one in Russell that portend higher prices to come. This bull market will continue until every bear is decimated and every market-topping sign they point to stretches beyond imagination. The analogy “1998” was made with both the timing and magnitude of the dot com bubble in mind.

With apologies to Johnny Depp, Benicio del Toro, and two of my favorite bloggers, the title of this post was borrowed from the 1998 black comedy of alcohol and psychedelic excess. In particular fear and loathing refer to Josh Brown’s poignant “Just own the damn robots”, and Kevin Muir’s spirited reply “The Winners of the New World Redux”.

Josh Brown’s post, as well as its similarly themed predecessor “Tech Stocks as Career Obsolescence Insurance”, makes the point that the AI/ML/robotics stocks are being bought as insurance against a future where only “engineers and managers” are gainfully employed — “in this context, the FANG stocks are not a gimmick or a fad, they’re a f***ing life raft”. I find there to be more than a grain, more like a boulder, of truth in that. This is from somebody who recently made a career pivot to work on products that have a intersects both IoT and machine learning, and one who is relatively level-headed about both the promise and limitations of these technologies. While not concerned with my own career, I have more than a little angst when I ponder the future of my daughters who are not as math/science inclined as I was at their age. I cannot fault them for being who they are but I’ll be remiss not to worry about their places in a society where every decent paying job requires coding experience.

It took Kevin Muire’s post to pull me back from the brink of loading up on $ROBO. He quotes a Jim Cramer speech from 2000 “The Winners of the New World” where he touted “724 Solutions (SVNX), Ariba (ARBA), Digital Island (ISLD), Exodus (EXDS), InfoSpace.com (INSP), Inktomi (INKT), Mercury Interactive (MERQ), Sonera (SNRA), VeriSign (VRSN) and Veritas Software (VRTS)”. For sure it was a cautionary tale. There is a right price for every stock no matter how strong the fundamentals. Nothing is a buy at any price.

For now at least, my heart or rather my fear falls on the side of Josh Brown. It’s why I took on additional risk when in theory I can coast for a decade and into retirement. To me the current market is the last chance to establish a lasting foundation for my family. The danger, of course, is to overstay the welcome, so Kevin’s words should always be at the back of my mind.

Cryptocurrencies

Bitcoin broke $6000 on Friday. I hadn’t been expecting that until the end of the year. The other cryptos continue to lag as pointed out last week. I have a few crypto-related links below but will not continue this section in the future as my focus will be elsewhere. The plan is still to sell down to 75% of the peak coin holding across the board in December/January, at which point I will have withdrawn more than the initial deposit made in March. I’ll then sell 2.5-5% at regular intervals once public participation starts.

Gold

Last week I wrote “$1307 and $1320 are likely upside targets for the current move”. Spot gold topped out at $1306 on Monday and likely started C of an ABC decline. There are two likely scenarios: A) continue moving down below the July low of $1204 around the December FOMC meeting on 12-13th; this intermediate low thus becoming the yearly low coinciding with a short 63-week/13.5-month cycle; B) the current leg finding a bottom around $1208; one more low in January for the normal 63-week/13.5-month cycle. They are drawn as the solid and dashed lines in the chart below. Of the two, scenario B is harder on trader’s psyche thus more likely in my mind. COT data should provide us a confirmation. The easy money continues to be in stocks.

Portfolio

The week finished strong and the Activision Blizzard ($ATVI) I picked up last week came above water. The 65 strike puts were rolled forward 1 week and down to $63.5. Consumer staples Philip Morris ($PM) and Kimberly Clark ($KMB) missed earnings and were duly punished. Biotech ETF ($XBI) was another blight in an otherwise strong portfolio. Month-to-date the individual stocks gained 3.61% vs. 2.34% for the SPY. I like to focus on the losers, sometimes even force myself to take losses when my own hubris becomes unbearable. That point may be reached soon.

Pimco multi-strategy CEFs were under pressure after a hit piece on $PCI appeared on SeekingAlpha. The author didn’t seem to know anything about interest rate swaps. I can’t say I understand them either but at least I know what they are which is more than the author can say. The issue of under-earning the distribution was flagged here a month ago and was extensively discussed on the MorningStar CEF forum, my go-to source for CEF information and knowledge. The NAVs of these funds remain strong and I’m satisfied with that. Friday’s data indicates Pimco is doing a terrific job navigating the current rate environment. These are managers who can easily command 2-and-20 and I feel lucky to only have to pay a 2% management fee. I took the de minimus cash left in my solo 401K and added $PCI. I wish I had space for more.

Good Reads, Crypto Edition

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