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Weekly rollup | Feb 13-19 2023

Stocks Mentioned: Solana, Bitcoin, EuroDry (EDRY), Western Forest Products (WEF.TO), Argonaut Gold (ARNGF, AR.TO), Sprott Physical Uranium Trust (U-UN.TO), Energy Fuels (UUUU), Danaos (DAC), Silvergate Capital (SI), Rio Tinto (RIO), Freeport McMoRan (FCX), Southern Copper (SCCO), Teck Resources (TECK), Teck Resources (TECK), Etsy (ETSY), Teradata (TDC), Wix (WIX), Atlassian (TEAM), TESLA (TSLA), Southern Copper Corporation (SCCO), SPDR S&P Biotech ETF (XBI)

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February 13 2023

CPI data for January comes in tomorrow pre-market. Anecdotally, I've seen a lot of evidence of accelerating spending and high consumer confidence last month. If this is true, the CPI number may surprise to the upside, leading to a sell-off in stocks and 2Y-5Y treasuries as investors price in "higher for longer". If true, it also means a recession becomes inevitable, which is good news for 10Y and 30Y bonds.

Short the short duration bonds, long the long duration bonds, and short equities is a good way to play it. Gold is a wild card. Stocks are looking good today, but bitcoin is not confirming the move higher in the Nasdaq. My expectation is that the Nasdaq fizzles at some point later today, and we go down from here.

Being bullish in this market is easy. That goes with the primary uptrend. My hypothesis is just related to the CPI release and how that will affect the rest of this week. Continue to stay short the Nasdaq.

February 14 2023

The January CPI reading from the Bureau of Labor Statistics, which tracks changes in the prices paid by consumers for goods and services, is expected to show a 6.2% rise from a year earlier, slowing from a 6.5% year-over-year rise seen in the previous month, according to a survey of economists by Dow Jones. The core price measure that strips out volatile food and fuel costs, is expected to rise 0.4% from December, or 5.5% year over year.

Expectations and reality may differ this time.

Inflation picked up in the first month of the year, defying optimism from investors and officials over a steady move lower seen in recent readings.

The Consumer Price Index (CPI) for January showed a 0.5% increase in prices over the past month, an acceleration from the prior reading, government data showed Tuesday. CPI rose 6.4% over last year.

Economists had expected prices to climb at a 6.2% annual clip and jump 0.5% month-over-month, per consensus estimates from Bloomberg. New seasonal adjustments released by the BLS on Friday also switched December's initial reading of a 0.1% monthly drop in headline inflation to an increase of 0.1% in the year's final month.

On a "core" basis, which strips out the volatile food and energy components of the report, prices climbed 5.6% year-over-year, more than expected, and 0.4% over the prior month. Forecasts called for a 5.5% annual increase and 0.4% monthly rise in the core CPI reading.

Source: Yahoo Finance

Now that traders have run stops in both directions, the true trend will emerge.

Solana 1 hour chart

Bitcoin 1 hour chart. Holding up well considering the higher CPI number.

Whipsaw in 5Y yields

Move higher in 10Y yields rejected at the 100 DMA, followed by a whipsaw

30Y yields holding up. This is really bearish for equities. One, because the yield curve inversion signals recession. Two, because cost of capital is too high for the economy to bear.

Spoke too soon. Yields spiking across the curve, with 5Y yields up 2.6% today to 4.028%, 10Y yields up 2% to 3.789%, and the mighty 30Y yield up 1.2% to 3.837%. The bond market has a simple message today: RUN FOR THE HILLS.

Sell EuroDry (EDRY), Western Forest Products (WEF.TO), Argonaut Gold (ARNGF, AR.TO) and the two uranium plays Sprott Physical Uranium Trust (U-UN.TO) and Energy Fuels (UUUU).

The National Federation of Independent Business' (NFIB) optimism index rose 0.5 to 90.3 last month, an improvement from 89.8 in December. Still, this reading remains below the 49-year average for the index, the NFIB said in a release on Tuesday.

Two areas that continue to weigh on small business sentiment are labor and inflation. Twenty-six percent of owners say inflation was their single biggest dilemma when managing their business. Additionally, the outlook remains tough to get excited about for most respondents.

February 15 2023

What just happened?

The market was humming along quite nicely, up a bit, down a bit, prior to the CPI release. Mainstream media was opining that the inflation number will be higher than expected, so it was nothing to worry about. The consensus was that the consensus estimate was too low and inflation would surprise to the upside.

The CPI release initially caused a move lower, which lasted briefly, before we had a melt up in stocks and a melt down in bonds across the curve. The dollar strengthened, commodities sold off, yields blasted higher - yet the Nasdaq powered through it all and crypto had a melt up. Broadly, every sector did OK.

The bond market signaled "higher for longer", yet equities and crypto partied like it's 1999. Investors have been given a choice - trust the uptrend in the stock indices and party on, or trust the yield curve and sell equities. Gold just sat still, not moving hard either way. Typically, gold would have moved higher on surprise inflation data. Market expectation of "higher for longer" would have been bullish long duration treasuries (more rate hikes triggering a recession, triggering the safety trade into bonds and rate cuts to combat the recession), but wasn't.

Which brings me back to my question, what just happened?

One explanation I can think of is that liquidity collapsed. Which makes sense given it's the algos moving the markets at times like this.

The other explanation - deep breath - is that equities are shrugging off extreme pressure and showing resilience. That stocks are now in the hands of the strongest holders, and it'll take a lot more than 5% Fed funds for the whole of 2023 to dislodge equities from diamond hands.

Which is it? Not a clue. As an aside, if you got whipsawed yesterday, this song is for you: The Whipsaw song

My thinking is simple. I haven't the foggiest as to what just happened. I can't find anybody who does. Long-only accounts are now >80% in cash and equivalents. I'm just going to sit out the fireworks and let other traders enjoy the chop.

Remember, one good trend pays for them all.

Just looking at closing prices and % change, everything that happened appears to be a tempest in a teapot.

Start of a correction, or is the market mocking the bears before staging a bullish reversal that catches everyone except Cathie Wood off-guard? I'd rather not speculate on the answer to that question, which is why I'm sitting on cash. I have a few illiquid gold explorers in my portfolio where the bid kept disappearing as I tried to hit it, so I'm probably going down with the ship on those. Also, this is exactly why I don't recommend illiquid nano caps in this trading service.

Danaos (DAC) continuing to prove itself as a graveyard of capital. The company earned $27.28 per share in 2022, of which $7.54 was in Q4. The announced dividend was a big fat 75 cents, or 10% of earnings. Zim is returning 50% of earnings as dividends, while DHT holdings is returning 100%. But not DAC. Management wants to hoard it all and will eventually piss it away on acquiring vessels. Classic value trap. I'm sure glad I got out and stayed out.

February 16 2023

What just happened in crypto land? Not an effin clue. For sure somebody got absolutely murdered on the short side. It's as scary to go short now as it was scary to go long tech stocks in late October/ early November. That's why I didn't recommend tech stocks back then in this trading service.

I believe the moves in overall markets yesterday is just more evidence of whipsaw price action. This will end with volatility compression, then the market will trend. When? Which market? What price? All yet to be made clear.

Right now, shorts are getting squeezed. Maybe that morphs into a bull market. I suspect otherwise. I've seen extremes several times in my career. I've seen bull moves several times in my career. This is one of the former. The difference is in how long the move lasts, and how violent the rallies get. What we just saw in bitcoin is the opposite of the capitulation move lower in June 2022. This is the time to get tactically short, with strict stop losses. Not a recommendation - can't really give out timely buy and sell alerts in a fast move like this. But my bias is to be short and not get suckered into buying the parabolic rally.

Sell Silvergate Capital (SI). I doubt we will get a better exit than today.

It's hard to explain why this is a short squeeze but the move in Solana that we caught was a bull move. It's a "feel". But let me try to explain that "feel" using a cricket analogy. Imagine you're facing Brett Lee's bowling. If he runs up 21 paces, he can bowl at 87 mph consistently, wearing out the bats and keep up a long spell. Now imagine if the rules changed and fast bowlers were forced to run up 100 paces for each delivery. Lee can still get in one or two fast balls, but that's it. His energy will wear off, and the batsman will have a field day.

That's the difference between a real bull market and a short squeeze. The short squeeze is very short lived, because you cannot consistently run up a 100 paces and still maintain momentum. Exhaustion sets in fast, and it's game over. We're very close to game over, if it hasn't happened already.

I'll be looking to recommend some put option trades to profit from the end of the short squeeze.

USD.JPY at a critical level. If USD strengthens further, it's going to get uglier for commodities and emerging markets. My buy stop is at 134.41.

Oil futures went to negative $37.63 per barrel in April of 2020. You couldn't give it away for free, but had to pay someone to take it off your hands. Until LNG changed the dynamics, natural gas was regarded as a "problem", because oil producers needed to light it on fire and get it out of the way before they could get at the good stuff in newly drilled oil wells. Called flaring, it was deemed to be an environmental hazard and there were regulations in place to limit flaring. Then natural gas became a hot commodity and Stifel wrote that EU will have a natural gas supply shortage until 2024. So much for that ridiculous prediction, with natural gas now down 78.3% since last August. Oil & gas bull Josh Young of Bison Interests blocked me on Twitter when I called this out sometime in September or October.

India's gold imports plunged 76% in January to hit a 32-month low. With the benefit of hindsight, it's possible to look back and figure out why gold topped out on Feb 1st at $1970.8/oz. Lack of demand. Same reason crude oil topped last June, and natural gas last August. With commodities, the cure for high prices is high prices.

Copper is likely next, as fear mongering about shortages at LME warehouses changes to an inventory glut. Copper bull Paulo Macro blocked me on Twitter, so that's a good sign. The environment is ripe for copper to plunge. It's only natural that it follows in the footsteps of oil, gas, gold, silver, platinum, palladium, lumber, heating oil, gasoline, coal and aluminum (incidentally, steel is in an uptrend, the only commodity that's refusing to roll over and die).

Sell short the following 4 copper miners:

Rio Tinto (RIO) - stop loss at $81 for a risk of 8.8%

Freeport McMoRan (FCX) - stop loss at $46.75 for a risk of 10.5%

Southern Copper (SCCO) - stop loss at $79 for a risk of 4.6%

Teck Resources (TECK) - stop loss at $44 for a risk of 4.7%

Teck has exposure to coal and copper, making it more of a hybrid short. FCX is facing rain related operating difficulties at its biggest mine in Indonesia. Southern Copper has significant exposure to Peru, which is now a ticking time bomb with protests against the leftist schoolteacher turned President (who incidentally threatened to kick out all international mining companies if he came to power) rocking the country. Rio Tinto doesn't have any major problems I know of, but it is the bellwether stock to short if you're bearish copper. I pick these 4 instead of just shorting the Copper Miners ETF ($COPX) because I think I can add alpha that way.

If you want to hedge the trade a little, pair it with a long position in Ivanhoe Mines ($IVN.TO). Ivanhoe has significant Chinese backing, which means it can safely operate in the DRC unlike other Western miners. Canada's Globe and Mail and the mighty Bloomberg published hit pieces against IVN alleging corruption (big whoop, alleging corruption in the DRC) and the company managed to successfully defend itself, with the share price recovering from the damage AND making a new high. It's a quality miner in a strong position, and one I'm a bit sad to have missed, having followed it for over a year but never buying.

Futures are down after the double whammy of initial jobless claims coming in lower than expected and PPI coming in hotter than expected at 0.7% month-on-month. Buckle up, today is going to be interesting.

I like dry bulk shipping, but the industry is going to have a hard time overcoming the drop in TCE rates. Valuations aren't particularly attractive either. I'm short Golden Ocean on the Oslo Stock Exchange in response to today's disappointing earnings print.

Teck Resources (TECK) is at $45 pre-market. Just a heads up, as that's over my stop loss price. I'm removing Teck from the short list.

Peter Boockvar says it best:

"Either the stock market at current levels believes that this rate move higher won’t last or it’s delusional in thinking it’s ok at the same time an earnings recession has begun. A game of chicken now between stocks and bonds?”

Teck Resources halted, news pending. That's a bullet dodged, lol.

Buy Etsy (ETSY) 31 March puts at $100 strike for $1 to $1.1.

We're short the Nasdaq. Time to ante up or call it quits. Why Etsy? We all love Etsy but the company is unprofitable, has way too much debt and negative book value. No shorting strength, let's pick off the weak and lame.

Buy Teradata (TDC) 21 April 2023 $42.5 Puts at $2-$2.1

Buy (WIX) 21 April 2023 $90 Puts at $8.8-$9.2

Buy Atlassian (TEAM) 31 March 2023 $160 Puts at $5.8-$6.1

Sell short Teck (TECK) as well, with a stop loss at $49.5 for a risk of 9%. The stock was halted on rumors of a spin-off of its met coal unit, nothing material.

Marketwatch headline. All of a sudden, seems like my view is becoming consensus. Or I'm just seeing this news pop up everywhere given that this is top of mind. Make of it what you will, but the stock-bond disconnect is now in the news.

Nothing to worry about. The economy is fine and can take 50 bps hikes and still power higher.

But everything is awesome


February 17 2023

In hindsight, we got extremely lucky with timing on those puts. Premiums were low because volatility was low. Not going to be the case now.

Hope you stopped out of the long yen position. Dollar looks ready to blast off. Even the milkshake guy gets it right every now and then, although he's almost always wrong on gold.

In the last month, retail investors poured an average of $1.51 billion per day into U.S. equities, the highest amount ever recorded. (Source: VandaTrack)

Another reason to get short SCCO

February 18 2023

Note the range compression, falling volatility, fading momentum, and the wedge pattern on the Dow. Industrial stocks typically perform well late cycle, when input prices have collapsed yet capex hasn't. The wedge can be a continuation pattern, which will go with the 'late cycle' lasting for longer than expected. However, my bias is a break to the downside, following which all hell breaks loose. After a tight range like this, traders are going to accelerate any move in either direction, so if this breaks, you can get a 20% move lower in the Dow before you can say Bob's your uncle.

Will that happen for sure? Of course not. Charts don't predict the future. Nothing does. My question is: why the hell would you want to be long the Dow here, given the macro backdrop and that tight range? Easier to just step aside and wait for a clear signal.

I've been banging on about liking biotech stocks (XBI) but haven't recommend a long trade because that too is stuck in a long-term channel, with moves out of the channel in either direction reversing quickly.

February 19 2023

Until people figure out we're entering a deflationary depression, inflation fears won't abate. Like generals, we all have a tendency to fight the last war, to fear the last thing that hurt us.

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