Trade Update. (Dec. 6 – Jan. 15)

3d blue background with stock diagram

Please note: This should not be considered to be investment advice, and is just a way to maintain a periodic track record. There is no substitute for personal research and a high quality education in investment strategy.   If it was easy, everyone would be doing it for a living.

Here is a summary of my stock activity to date and my coming anticipated trades.  I’ve been alternating between a hedged and unhedged portfolio depending on my certainty in the market direction.

Indexes.

Since the week of December 7 I have been long in the TVIX, a volatility index play, ahead of the Federal Reserve’s announcement.  I anticipated the Fed. rate hike (and correctly surmised that the risk was already priced into the market on the day).  This position has been extremely lucrative over the last few weeks as the index is negatively correlated with the overall stock market.

I’ve been short a handful of commodity ETFs.  I’ve also been short SEA, which is the Guggenheim Freight Index. Also a profitable trade.

A risky natural gas ETF play over the last two weeks of December saw a 50% loss in that position. I was punting on a milder than average winter, and the fates turned against me in the US prior to the New Year. Luckily the position, being a punt, was not so large that it wiped out my gains. (Yes, I know, shorting Natural Gas in the middle of the winter.. the absolute madman.)

Stocks.
I’ve had brief stints of long stock positions in General Electric (GE), Smith& Wesson Corp. (SWHC) and Ruger (RGR), Lockheed Martin (LMT) and a brief dalliance with Go Pro (GPRO).

Go Pro ended in disaster and was fortunately cut loose prior to the class action lawsuit over their share price.

Smith and Wesson Corp. and Ruger turned a decent profit in the face of the San Bernadino shooting, security worries borne by immigration woes and posturing by the US Govt. regarding firearm regulations. (Unscrupulous, but I won’t fight a trend.)

Lockheed Martin made a moderate loss, but was a necessary hedge against the commodity short risk.

Overall my portfolio was up 7.2% in 6 weeks, outperforming the S&P500 significantly. As of yesterday the Dow Jones Industrial Average broke below its August low.

Looking Forward.

Currently I am now all in with a long stocks position as the market looks short-term oversold. I’m completely unhedged, expecting a moderate reversal in the markets now that panic seems to have reached a fever pitch. I’ve picked the following high beta stocks: Citibank (although I don’t particularly like the financials), Dow Chemicals (DOW) and General Electric (GE).  I’m also short TVIX. Hopefully the markets don’t come apart faster than I’ve anticipated.

After this week I will move back to a hedged portfolio, with a reduced long position.  Going into February I’ll be increasingly wary of a return to market panic.

Currencies.

The outlook for the US Dollar is strong, but given the popularity of the trade I am wary of a market shock. The Pound Sterling is looking extremely weak, expect more weakness moving forward.  The Euro is also weak, arguably even more so in the short-run than the GBP.  Hedging both currencies against exposure in the short to medium term would be prudent.

The Emerging Market currencies are bound to be a shitshow over coming months.  More devaluation likely. Expect pegs to uncouple as regional cash reserves get burned through at a record pace on account of the commodity slump.

Interestingly Bitcoin was the best performing currency of 2015. I am short-term positive on the cryptocurrency.

Nobody seems to be mentioning the Japanese Yen, the general consensus seems to be “safe haven” and it may be, but the Bank of Japan has been purchasing assets at a feverish pace (QE: Tokyo Drift) , vastly outstripping the US, or Europe in relative (GDP) terms. It begs the question: “What will the BoJ do if this policy hits its limits in the market?”  I like Japan in the long-run, but what happens when the widowmaker trade blows up in the medium to short term?

Potential Risk Factors Looming.

The lower oil goes, the greater the impetus for a commodity exporting government to go into a major war to goose tax revenues. This is a major risk factor and would present upside commodity risk. An impending short squeeze seems likely if so.

Interest rate risk remains palpable, despite the prevailing sentiment that the Central Banks are steering markets.  It’s only a matter of time before risk premiums price into interest rates.

Liquidity remains a major issue, with EM debt slowly going to hell, draining liquidity out of the financial system and causing increased volatility. Should the Fed. Reserve stick on their current course (and I do not see why they wouldn’t) expect December’s “dagger in the EM gut” to get twisted mercilessly, further expediting EM capital flight.

Finally with the very real possibility of a Euro decline, there is a fair chance of the CHF and the DKK uncoupling. There’s also a very real possibility of Denmark (and maybe Switzerland) switching to a 100% electronic currency and writing off internationally held reserves.

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