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Weekly rollup | June 13-19 2022

Stocks Mentioned: Benchmark Metals (BNCH.V), Microstrategy (MSTR), Silvergate Capital (SI), Valero (VLO), Weyerhaeuser (WY), BW LPG (BWLPG.OL), Dorian LPG (LPG)

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June 13 2022

Benchmark Metals (BNCH.V) reported its updated Mineral Resource Estimate. Ignoring the headlines, global in-pit resources increased 14.9% to 3.04 million gold equivalent ounces. Out of pit resources increased 87.6%. However, the M&I resource grade for in-pit resources decreased from 1.6 g/t AuEq in the last estimate to 1.4 g/t AuEq in the current estimate. The grade decreased for the Inferred resource as well.

Further, the company pushed the completion of its PEA from Q2 to Q3 2022.

I think the fall in grade is a major problem. Low grade deposits are capex intensive in the best of times. With the rising cost of diesel, electricity, steel, not to mention labor, and increased lead times due to transportation bottlenecks, low grade deposits are now particularly unattractive for me. I exited Integra Resources (ITRG) in February 2022 for the same reason.

To make matters worse, Benchmark has not filed its quarterly report for the period ending Feb 28, 2022 on SEDAR yet. The latest company financials posted on their website is for the period ending May 31, 2021. I dislike having to root through exchange filings for quarterlies - in my book, the company is not shareholder friendly if they make me do this, which makes me distrust management.

Eric Sprott exited his shareholding in BNCH in Jan 2022 (except for warrants). It's time to follow his example and sell. Not today, when gold is being hit along with everything in a massive sell-off. I'll pick a better exit point.

Crypto price action and sentiment is terrible today. Most miners are down well over 10%, Microstrategy (MSTR) is down 22.3% pre-open and in all likelihood is headed for a giant margin call on their bitcoin backed loans. Silvergate Capital (SI), the bank which encouraged MSTR and wrote the loan, is down 13.2% pre-open. I thought we had bottomed when I decided to put on the CORZ trade on Friday, 6/3. When Monday 6/6 proved me wrong, I got out. A good trend trader would tell you to never bottom fish as it's an expensive pastime. I say it's only expensive if you stick to a losing trade hoping it'll recover. The 5.6% loss on the CORZ trade didn't hurt, given the upside potential if that was indeed the bottom. It was a loss well worth taking.

June 14 2022

June 15 2022

The Fed is a political institution. Consider the implication of a 75 bps hike or taking the Fed funds rate up to 3% as Gundlach is calling for. The GBP, Euro, Yen, to an extent even the AUD and Kiwi are in freefall. BoJ is going to fail at yield curve control, sending Japanese markets into a tailspin. Eurozone bond yields are soaring. Hedge funds are facing redemption pressures, which threatens the financial stability of their prime brokers and by extension the US banking system. Powell's no Elvira Nabiullina or Paul Volcker.

On the one hand, the Fed can hike rates and stay hawkish, break the back of inflation, let the zombie companies fail, get the bear market and recession out of the way and free up capital for a sustained economic recovery, with the rest of the world being collateral damage as the dollar soars and yields shoot higher. On the other hand, he could just throw up his hands and say oil prices are not in his control, that inflation is the price the civilized West has to pay to defeat Putin, that turmoil in the markets warrant caution on further rate hikes, pause QT temporarily, and reassure investors that the Greenspan-Bernanke-Yellen-Powell put is alive and well in order to stop things from breaking imminently. Long term thinking or kicking the can down the road for the next Fed Chairman to deal with, that's the binary choice the Fed currently faces. I think we get a dovish FOMC which surprises everyone expecting them to act tough on inflation.

How to trade this opinion?

For one, I'm already over 140% net long to start with. I stand to lose heavily on a 75 bps hike with the promise of another 75 bps hike next month, as many analysts seem to expect. But to directly express my opinion that the Fed walks back rate hike talks and talks the dollar lower, I'm long gold and S&P futures. To be precise, long MGC at $1813.5 and MES at $3730.5.

Too early to tell, but markets seem to be holding up pretty well considering the Fed has hiked rates by 75 bps and is targeting 3.8% Fed funds rate in 2023.

June 16 2022

Glad to see I am in good company.

Stopped out on the MES position at 3705.5. I didn't want to stick around in case there was a new low.

Second attempt at shorting Valero (VLO)

It feels super weird to short a stock that has fallen so far so quickly, but I had my alert set to attempt this trade a second time once the stock came back to my original short price. I can second guess my entry, fine tune it, not take the trade and just ignore the alert, but I'd rather do the trade and lose money than let my feelings interfere with a trade I've been patiently awaiting. My stop is a move back above the 20 day EMA, ~$130.

June 18 2022

Positioning as of this week's close. Gross exposure is 187% and I'm net long 176%. Note that this includes the notional value of my gold futures position. Still, leverage is rather high for my taste. I funded my account on Friday but the wire will be processed and funds credited only on Monday. That should bring my leverage down. I'm also planning to exit WY and reduce timber exposure as the WOOD ETF has broken down from its 1 year trading range and is now below the 100 week moving average. WY also gapped below the 100 WMA this week. Maybe this is a false breakdown driven by the sell-off in everything exacerbated by quad witching week, maybe not. Either way, I have enough arguments with the price action on my value longs (containerships, containerships, and more containerships!) and I have to cut risk somewhere.

I might also be trading around with the LNG/LPG position. The Freeport LNG terminal fire could be the catalyst that ends the bull market in LNG related stocks and US nat gas prices.

While BW LPG (BWLPG.OL) trades at under 4x expected 2022 earnings, Dorian LPG (LPG) trades at 5.2x expected 2022 earnings. I've adjusted my earnings expectations to account for the drop in US export volumes due to the Freeport LNG terminal fire. Dorian has a book value of $22.93/share, while BW LPG has a book value of NOK 89.37. At closing price of $14.43, Dorian trades at a 37.07% discount to book, while BW LPG at NOK 71.05 trades at a 20.5% discount to book. However, Dorian is a smaller player and the short interest is 8.4% of float (perks of a US listing). BW LPG is decidedly more low risk, while Dorian is higher risk and I've favorably weighted BW LPG over Dorian to reflect my risk appetite. That might change if we see the beginnings of a short squeeze.

Bitcoin is currently below it's last cycle high of $20k. The leveraged long traders/HODLers are getting taken behind the woodshed and shot. Bitcoin is also being sold by over leveraged crypto funds because it is the most pristine collateral in the crypto space, and the shitcoins are dangerously close to "no bid".

Two ways to play this.

Option 1: Do nothing, wait for New York to open and see how the asset moves once trading volumes are back. Monday being a Juneteenth holiday, that's over 3 days of waiting.

Option 2: Catch that falling knife even if the mark-to-market on this trade looks scary. Realise that blow ups are not normal bear market action or downtrends. At some point, we'll get a violent move higher as the late shorts get squeezed. All this will be exacerbated as collateral disappears from exchanges (get your coins out, you never know which exchange will go under). Just buy, self-custody, deal with the scary looking P&L and wait for the real trend to emerge.

But whatever you do, don't buy the shitcoins. Pointless risk for dubious reward. We are not going to get an alt bull market in the foreseeable future, and the leaders in each alt bull market change so previous winners recovering to all-time highs is as likely as Warren Buffett doing the hula on Wall Street with Miley Cyrus swinging naked behind him on a wrecking ball. Also, avoid leverage at all costs while this all plays out. That includes borrowing money to buy bitcoin.

In crisis comes opportunity.

There aren't many good articles on Victor Niederhoffer. But his two blow ups are my go-to case studies when I'm taking risk. I have read both his books and respect his style a lot. Not that I'd follow it, but whenever I take an unquantifiable risk, like buying bitcoin during a liquidation sale, his trading experience helps me to visualise the downside.

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