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Have We Got a Long Way to Run?

It is ten minutes after one in the afternoon on Sunday. I am at the store. Last week was an exciting one in the markets, with many S&P cos reporting earnings including all of the tech giants. Readers may recall I had a small speculative bet on silver, with option expirations on the 17th, which I wrote about here: http://rwhadvisoryllc.com/animal-spirits-or-spirit-animal/

Sadly, my calls expired just as the trade was coming into the money, but I did get shares put to me as the price crossed $19 and have enjoyed the gains on the way up. I maintain my long position in silver and continue to accumulate physical at the store. I don’t really have a price target at which I will sell. I view this, like gold and #bitcoin, as an easy trade for the foreseeable future and will probably only sell for reasons of necessity. If we see $48, I will probably take some profits and reallocate. Recall that I took only a very small position.

I should also follow up on this note I posted in between blog entries: http://rwhadvisoryllc.com/note-to-self-when-to-sell-dollars/ . Since then, the dollar has, in fact, dropped below 94.5. In fact, is reached about 92.64 before turning around to end the week at 93.46. I have dutifully reviewed my dollar long position and left it in place. I have not previously disclosed or discussed my dollar long position, so let me start with that.

I am fundamentally in the camp which says the dollar is going to go up, and will become very strong, i.e. the deflationary camp. I have found strong thinking on both sides of the inflation/deflation debate, and I squirm a little knowing how smart some of the people are saying that the dollar is crashing, but when I weigh these arguments on my own scales I have assayed that the dollar will experience a very strong rise before any final capitulation, should final capitulation occur. Also for the record, I think final capitulation will occur, just not now and not next. For insights into one of the strongest influencers on my long dollar thinking follow @jeffsnider_aip on Twitter and watch his Eurodollar university series on youtube: https://youtu.be/P0q7W9Hqk0M

But that isn’t the only reason I went long USD. I am thinking of it as a little bit of a paired trade with a bullish spread on CVX. I think we will be seeing some real volatility in oil over the next 12 to 36 months, ultimately with much higher overall prices. CVX, which was hammered after a negative earnings report last week, is a business I am familiar with and have traded or owned in the past. I expect the volatility in the dollar to show its reflection, both positively and negatively, in the overall stock performance of CVX. In the longer term I am expecting to shed my dollar long, and in the meanwhile look for gains and losses to partially off-set between these two trades. I don’t expect it to be a very direct kind of hedge. Just a little bit of a paired trade. I will be looking for USD to reach at least 104 before I think about selling.

Here are the details on my CVX spread:

I was able to spend some quality time with the earnings release by NRZ this week, but since I have already carried on quite a bit, I will post my thoughts separately. PennyMac will release earnings this coming week, currently scheduled for August 6th and I am looking forward to hearing what they have to say. Broadly, for this group of companies, my themes are:

  1. Transferring the bag, i.e. – shifting shares to public float, insider selling, loading up on debt, special bonuses and payouts to executives, etc.,
  2. The attendant pumping behaviors that go with (1), above, especially an emphasis on the current and next quarterly outcomes, which will all be very strong, a reluctance to recognize known or knowable costs and impairments in the current period and an unwillingness to acknowledge the potential severity of our current economic situation,
  3. The lack of self-awareness, avoidance or denial of the fact that huge profits are currently being privatized at the cost of taxpayers due to government manipulation of the markets and nationalization of mortgage banking risk, while privatizing profits, and
  4. The structural weakness and obsolescence of residential loan servicing and correspondent lending as activities at all.

I will look forward to digging in deeper on those themes this week. Meanwhile, stay informed with these two fantastic podcasts from this past week (I am not compensated in any way for posting these links):

Pomp Podcast #351: Roger Ver on Personal Freedom and the Early Days of Bitcoin

https://www.youtube.com/watch?v=P9oC_goIX8I&feature=youtu.be

Danielle DiMartino Booth with Jeffery Gundlach

https://www.youtube.com/watch?v=WQQA74TtWao

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Final thought, and it is a difficult one: as of August 1 we had about 155,000 covid-19 related deaths in the United States. This has played out almost exactly as I had guessed when I wrote this: http://rwhadvisoryllc.com/another-blog-post-about-covid-19/ . Now we can see with hindsight that it has coalesced in the public consciousness only very slowly, and in the face of unimaginable denial. And arguably, sadly, this amount of death has not yet been sufficient to fully bring about that coalescence, as politicians, press, and common people all battle over every aspect of the disease and our response, leaving us without a uniform plan. Have we got a long way to run? Yes.

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Animal Spirits, or Spirit Animal?

It is about twenty minutes after eight in the evening, and I am at the store. This morning while doing my financial markets reading, I was caught up in the animal spirits. I made my usual, daily entry in the record books that the market is stupid; it was another nice up day, of course, because now those are the only kind. And I read a few pump articles on Seeking Alpha about one of my favorite subjects: silver. Gold looks like it is trying to push and stay higher. Like I said, animal spirits. So I have made a little wager on the potential for a silver rally between now and July expiry. Here is (approximately) the trade:

I have a real hate for this market, and see many areas of weakness that beg for shorting, but with interventionism and the potential for truly major currency issues, this small, short-time frame bet in a familiar category was all the more animal spirit I could muster. And for the record, I only did this trade 2X, so sold 2 of the puts, etc. Come July expiry, if it has not paid off, I will seriously consider rolling the trade, just because I think this is a thing that is going to happen.

What sort of dynamics might the turbulence of the current climate cause in the silver markets? If there truly is a ‘V’ recovery, and industrial demand for silver recovers to pre-covid levels, will there be a supply crunch due to mining interruptions? What if industrial demand does not recover? Glut, and price crash? Could consumer demand off-set significant decreased industrial demand? Will silver ever have a place on the currency, collateral or savings technology spectrum again? Will we have major, state-sponsored infrastructure and industrial spending initiatives as a part of this cycle, which will fuel demand for silver in the longer term? Most of these questions can’t be answered within my option period, but silver continues to feature in my thoughts for its potential.

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Half a Blog Post, on Silver, and rwhadvisory LLC

It is about ten minutes after eight and I am at the store. Last night as I was loading inventory I listened to the most recent MacroVoices podcast featuring guest Ronald Stoferle. They covered many topics of interests, and the entire pod is worth a listen, as Erik’s always are. Check it out here: https://www.podbean.com/ew/pb-9q83q-de0932 . But the comments about silver had me checking in on the trade. I hadn’t been watching the silver trade very closely. Since I last wrote about silver on April 27, here, http://rwhadvisoryllc.com/silver-update-the-world-silver-survey/ when the closing spot price was $15.15 the metal is up 22% ending May at $18.49. Looks like it has taken a dive again so far in June, currently trading at about $17.99 as I write. Silver will continue to be an interesting part of the macro and monetary story, I believe. My take-aways? In the World Silver Survey the authors talk about and average silver price for the year of about $15.70 and a peak price of about $19. I would say so far their thesis is intact. Secondly, experts often talk about silver as gold’s volatile cousin, or sibling, or similar. I think in the MacroVoices pod I reference about the guest refers to silver as ‘gold on steriods’. During approximately the same time period (month of May) gold was up about 1.7%. I find May illustrates silver’s relative volatility.

Since I have my resale business, I continue to accumulate physical silver, but have not revisited a trade. I still have exposure to silver through my CDE trade (if you missed it you can read about it here: http://rwhadvisoryllc.com/one-of-the-days-in-quarantine/ . I am comfortable to continue in that fashion, as far as silver goes.

I have much, much more to write since last publishing. Coming topics will include:

  • Writing my own shitcoin on the Ethereum network
  • Orchid VPN
  • CA AB 2501 and reason # 47 on why MSRs are a liability, not an asset
  • Securitization of personal property and collectibles, or tokenizing them (ah…a peak at some of the thinking that went into launching Good Find Stores?)

So, getting this half-blog posted now and will return soon with these other topics.

Final thought: I had a former friend and colleague reach out to me the other day. She had seen my work anniversary notification on LinkedIn, and checked my profile. We haven’t spoken in about five years. She asked “Looks like you are consulting and doing retail?!”  The way I would say what I am doing is: I am building and buying businesses that interest me, and align with my long-term macro thesis and providing business planning, management and operations services, but only in exchange for equity-based compensation. But yeah, if you took a snapshot, I am totally doing consulting and retail. Specifically resale retail, which is an important distinction.

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Silver Update, the World Silver Survey

I am posting this short entry tonight to follow up on my posts about silver back on April 1st and 17th. I continue to survey the market looking for conviction on a silver trade. That conviction has manifested in the Coeur Mining trade I detailed, but so far nothing else. The CDE spread was performing well heading into the earnings call. On the call the CFO identified an approximately $10 million hit to free cash flow coming out of the company’s Mexico properties due to the covid-19 related shut-down. I personally listened to the call and was encouraged, but the market did not receive the call so well and the stock price is not back to a very similar level, around $3.60, to where it was when I put on the spread. With that in mind, it is my policy to double down on an unexpired investment thesis if the market presents an opportunity, so I am considering it. I am considering it with a strong lean away; I would like to find a different approach to any upside in silver, if I can get conviction, before revisiting my current trade.

But the reason I am writing tonight is because, during the month of April (and in fact it looks like just a day or two ago) the Silver Institute and Metals Focus have published their annual World Silver Survey, which can be found here: https://www.silverinstitute.org/all-world-silver-surveys/ . Anyone interested enough to be reading this post should be interested enough to read the report, but the take-aways for me were:

  • Excess inventories,
  • Covid-19 related disruptions across the supply and demand spectrum making projections difficult, and I would characterize Metals Focus’ estimates both on the impact to extraction and to industrial demand as far too conservatively low in magnitude,
  • Average 2020 price projected to be a meager $15.70, peak price target of $19,

Overall, I did not find the report particularly bullish for silver in the next 12 months. Time will tell. I would love to hear your key take-away from the World Silver Survey. Leave your comments below!

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One of the days in quarantine…

The markets continue to rage back and forth like never before, and obvious trades like shorting low-grade debt are stamped out in a moment by the latest, unprecedented Fed actions adding to the difficulty of this market. I discussed placing some limit put orders in an effort to go long silver at the beginning of the month and that those orders went unfilled. To clarify, I was looking at entering either SIL or SLVP, both silver ETFs. What I have ended with is a spread of options on CDE, Coeur Mining, Inc.

Coeur is a holding in both ETFs. It is a Junior gold and silver miner with holding primarily in the US but also in Mexico and Canada. I have gone long the security by selling the $8 put with a 9/2020 expiry. The option premium was $4.83. I used $0.45 of the proceeds to buy $2 puts with the same expiry, just to hedge away the last loss. So if I have to buy the shares at $8, they will only have cost me $3.62 each [$8 – $4.83 + $0.45 = $3.62]. The spot price was $3.13. I received a large payment of $4.38 net cash per share, have only $1.62 of value at risk per share, and have exposure to this security issue’s upside if elements of the current macro trend play out as expected.

The big-ticket macro features that I expect will impact this trade are not limited to my thesis about the gap up in silver prices. CDE will also benefit from the expected rise in gold value. And maybe most exciting and least considered is the potential impact that low fuel costs are going to have on the extraction price for metals. I expect these gold and silver miners to be printing money like the New York Fed before the end of the third quarter. Timing is always difficult though and it is possible that price discovery won’t have manifested in the stock price before my options expire.

I am also very cautious about what is happening with the dollar. I, like many, continue to expect a strong and probably rising dollar across this option period. A really strong dollar may be too much headwind for metals prices. Another risk is liquidity selling. If people just need money to live and must start selling their gold stash to stay afloat, increased selling pressure could serve to keep a lid on some of the crazy gains that would otherwise manifest.

I have re-visited this trade today during the trading session and it looks still available. There have been a few analyst actions on CDE since I initiated the trade. On April 14th Canaccord downgraded CDE from buy to hold with a $3.50 price target. B. Riley has maintained its buy recommendation and raised its price target from $11 to $13. Consensus estimate is about $6. The Q1 earnings call is scheduled for April 22nd. I will be excited to hear guidance and see first quarter performance.

Though I only took a pretty small position, I did not expand it today. I continue to approach the market and risk management with extreme care. This is a speculative trade, and investors should do their own research. I would welcome feedback on this trade an thank you for your attention.