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Bi-Weekly rollup | Nov 21 - Dec 04 2022

Stocks Mentioned: DHT Holdings (DHT), Anavex Life Sciences Corp (AVXL), Homebuilders ETF (XHB), West Fraser Timber (WFG), Alibaba (BABA), Invesco Chinese Tech ETF (CQQQ), Chinese large-cap ETF (FXI), Barrick Gold (GOLD)

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November 22 2022

Today's open (looking bullish) should be a good entry point to get short DHT. This is a market environment which predominantly rewards longs, but I see this as an opportunistic counter-trend trade. Unlike tech stocks which can trade at lofty valuations and grow into them, shipping companies can never be worth multiples of book value, no matter the earnings growth, because their earnings are cyclical in nature. The STNG short was poorly timed, let's hope I have better timing on this one.

November 26 2022

According to Kpler data, Ukraine exported only 20.9 million tons of grain in 2022 to date, meaning its year-on-year decline will be around 55% compared to last year’s total of 51.1 million tons.

November 29 2022

AVXL was down 23.5% yesterday after starting the day higher. Two explanations:

  1. There has been a data leak and the Phase 2b/3 study of its Alzheimer's drug candidate is a bust.

  2. Traders gunned for stops.

Given the overall price action yesterday, I suspect the latter. The company will be presenting its findings on Dec 1, so not long to wait. Some commenters on yesterday's earnings call noted that had their trials gone well, they would have signaled it one way or another during the call. Perhaps. But it's not a long wait, and I'd rather risk a slightly higher loss and hold on for 3 days than capitulate now and watch in agony as the stock rips higher on better than expected results.

On China

Ostensibly, yesterday's broad market sell-off was driven by China protests. If that's to be believed, why was Alibaba (BABA) up slightly for the day? Why did Chinese tech (CQQQ) end the day 1.8% higher? And the broader Chinese large cap ETF (FXI) post a marginal gain? Also, I note that Hang Seng is up 4% today. My take is that yesterday's sell-off was just noise. The uptrend remains intact.

November 30 2022

The Fed will not go bankrupt.

"One aspect of Federal Reserve Bank accounting that will be important in some scenarios is the deferred asset. When Reserve Bank income is not sufficient to cover interest expense, realized losses, operating and other expenses, a deferred asset is created. For example, as shown on the H.4.1 Statistical Release from November 3, 2011, the Federal Reserve Bank of New York recorded a deferred asset that week and the subsequent week.

The deferred asset reflects the amount by which earnings failed to cover expenses and, as a result, the amount of future earnings that must be withheld as a result. Put differently, if a Reserve Bank were to incur an overall loss, its capital would not fall, rather it would suspend remitting to the Treasury until such time as it had returned to positive earnings and had earned back any losses to date...

Because there has never been a deferred asset of any meaningful size, there is little guidance as to the whether or not there is a limit to the potential size of the asset. It may be plausible to assume that it would not be allowed to exceed the value of all future earnings, possibly in present discounted terms, given the fact that it is paid down through future earnings. As will be clear in these projections, a scenario that would result in a deferred asset in excess of the present value of future earnings is difficult to contemplate".

December 01 2022

The market interpreted Powell's remarks at Brookings yesterday as a sign that he is going to pay attention to market distress rather than ram through rate hikes at the cost of causing a Great Depression. In the Q&A, he was explicitly asked whether he wanted to adopt a "shock and awe" approach, by raising rates hard enough to cause a crash which will surely bring inflation down (cause a deflationary shock). Powell responded by saying that's not in the best interest of the people whose lives will be affected by such a policy, and the Fed does not intend to do that. They will instead go in for permanently higher interest rates, but slow the pace of hikes while the consequences of their current rate hike campaign work itself through the economy.

Today, Chinese state owned media officially announced the end of Guangzhou lockdowns.

Broadly, this is good news for dry bulk shipping (SBLK, GOGL, GNK, EGLE, SHIP, EDRY), iron ore producers (Vale, Champion Iron), treasury futures (2Y, Eurodollars, and maybe 5Y), gold and gold miners, homebuilders (XHB) and timber suppliers (WFG, TSX:WEF). This also takes the pressure off growth tech and crypto.

I've been running a pretty lean portfolio since September because my trade ideas didn't pan out. If we do get a lift-off like we did in 2018 under very similar conditions, I'll be more active with my trade recommendations.

December 02 2022

6/6 analysts covering AVXL have a buy rating on the stock and a price target multiples of the current price. I'm no expert in biotech, but the words "statistically significant" in the press release headline implies they're on to something with their new oral drug for the treatment of Alzheimer's disease.

Parsing through Twitter, sentiment is mostly negative. Today's trading will be make-or-break. If the stock fails to rally, I'm pulling the plug on this trade.

AVXL at $10.9 pre-market, up 23%.

Today's correction provides a good entry point for getting long gold miners.

Buy Barrick Gold (GOLD).

The homebuilding industry has been absolutely devastated by rising interest rates. That should change now that the Fed is close to pausing rate hikes. The XHB ETF sits above its 100 DMA. West Fraser Timber (WFG) sits right below. Buy both in anticipation of the recovery in housing. This is a risky trade since the recovery might fail to materialize. Lumber futures are still crawling along trying to find a bottom. My guess is it breaks to the upside but that's all it is - a guess.

Potential band squeeze setup in lumber. Note the collapse in recent volatility.

AVXL has traded 14.3 million shares in the first 11 mins of trading vs. 1 million shares per day on average. Let's hold to see how this goes.

Price action reads like algos were hunting for stops by short sellers, the inverse of what we saw on 11/28. 16.7 million share volume and counting. Now we need to see buyers step in. BITG has a $35 target, Jones Trading has a $80 target. Our entry is at $12.4 so we can afford to be patient as this squeezes.

December 04 2022

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