It’s been a schizophrenic year so far. Many of the economic cracks in the global economy (very much including the US) have grown larger. Of course, the impact to markets and portfolios has not been felt by all (so far).
This does not mean these fractures are not there. Institutional investors, among others, remain concerned about the many risk vectors.
The sudden emergence of AI (both as a ground-breaking technology and an investment theme) has provided a fun, bubbly distraction. And major market indexes (lifted by a very few large tech cos) have seen strength. But the underlying weakness in confidence remains. That includes me.
Oh, and sorry, in advance. For such a quiet H1 this ended up being a long update.
Market Manna: Food of the Bulls
As the midyear point came and went, one thing is obvious to even the most casual market observer: this has been an extremely narrow market rally. This highly concentrated market rally has been driven by a very few stocks. Here, manna is not food of teh gods, but food for the bulls.
Brian Levitt of Invesco posted a midyear outlook that is worth reading. I disagree on a number of points (and you might as well). And that might be one good reason to read it. It’s important to get perspectives contrary to your own.
But, as of midyear 2023, this bull move was hardly one of real strength. Perhaps MANNA is more apropos, with its allusion to the rare, ethereal and miraculous food of the gods.
But I must shout out his brilliant overhaul of an oft-used term. Since Facebook and Google changed their names, he declares that “FAANG gets retired…”. Instead, he proposes “MANNA”. This is for Microsoft, Apple, NVIDIA, Netflix and Alphabet.
Some of these market leading stocks did give ‘fangs’ (or horns, rather) to the bull market of recent years. But, as of midyear 2023, this bull move was hardly one of real strength. Perhaps MANNA is more apropos, with its allusion to the rare, ethereal and miraculous food of the gods.
The Invesco article is way too sunny for my taste. But, given (IMO) this market is knocking on heaven’s door, I vote yes to “MANNA”.
What can be said? The first half was insane. No, the word was schizophrenic….
Despite the AI enthusiasm, the signals remain weak. It is very hard to find material signs of market strength.
The inverted yield curve and extremely tight credit conditions (importantly, in the corporate market) are both continued headwinds, blowing us further off course and deeper into recessionary waters.
For its part, Schwab also presents a good, balanced mix of perspectives, while still trying to find the positives.
J.P. Morgan Research didn’t pull punches; they said it straight and right in the TLDR: “a synchronized global recession may (hit) sometime before the end of 2024.”
For its part, Schwab also presents a good, balanced mix of perspectives, while still trying to find the positives. “Fixed income market returns were positive through early June….” Yeah, sure.
Mid-caps (and SMBs in general) are seeing significant slowdowns. And small-caps are having their worst run in years. Regardless, there are strong sectors and politicians (plus their pundits) will highlight areas of strength. But the broader economic health crisis is undeniable.
|After reading below you can check out my previous investment update. You can also check out my other investment reports.
And then there is inflation. The Invesco take from Brian Levitt sees this as mostly housing-related. He is “not convinced that inflation is as sticky as believed.” I disagree.
The size of this decades-in-the-making move fueled, as it was, by a mega flood of QE and pandemic stimulus, simply cannot be reversed with a few timid rate hikes. It’s physics (or math, if you prefer). There has simply not been enough force applied (and for as long) as needed.
And Brian then presents fundamental and valuation arguments, using some tenuous data comparisons, to reassure those “nervous that a bubble could be forming.”
The Invesco article does acknowledge that, “the S&P 500 Index is more concentrated in the top 10 holdings now than it was at the peak of the 2000 equity market bubble.” But they are referencing a Bloomberg note. And Brian then presents fundamental and valuation arguments, using some tenuous data comparisons, to reassure those “nervous that a bubble could be forming.”
The Nasdaq top 10 may not be as over-inflated, but the rest of the market sure is weak. And the cavalry isn’t coming (ie rates are only going higher).
But Wait, There’s More
On a brief, technical note, the indexes are all exhibiting potential long term head-and-shoulders formations in the making. This implies the market is looking for a downward correction as well.
The AAII Sentiment indicator looks seriously TOPPY.
And the Fear & Greed Index hit a new high of 83 on June 30.
That beats the previous Feb 1, 2023 high of 82. Nice knowing you, Q2…
Fear & Greed a Directional Indicator
I think I’ll be experimenting with this as a higher confidence signal. It’s been in my toolbox but I may promote the Fear & Greed Index to be a key directional indicator.
As you will see in the screen below, this index is a fairly reliable market reversal signal. It does not, by itself, tell you how long to hold new positions. But as a way to identify initiation points it looks pretty interesting. This overlay chart with SP500 is available at MacroMicro but all the additional notations, arrows and shading were applied by me.
Core Portfolio Investment Performance
For the first time I have included my total unrealized return and not just equities. No reason not to have done this previously, it just had not occurred to me before.
I’ve also decided to start publishing (in more detail) the relative distribution across the portfolio. The biggest increases were real estate (based on continued valuation spikes) and public markets investments, on the back of a few very particular holdings.
The total investment value % change versus previous was a very deceiving +16.8%. Remember, this is a combined total (mostly unrealized) value.
Top 10 Holdings
Most of my anchor positions remain in the top 10. Despite stumbling out of the LLM starting gate, Google now has a tail wind. Tesla is back (for now) but TBD on that.
If you saw my last update you would notice that Maxar is missing from this list. It would have been my #5 holding on this list. I did not exit the position willingly, but I did exit well (see below).
The performance of the income instruments, DIVO and HIPS is deceiving. HIPS YTD daily total return is actually 8.26%; for DIVO it is 4.60%.
My ETH position has been lurking at the lower end of the top 20 for some time but the crypto recovery into midyear obviously helped. And then there’s NVDA, of course. I started adding to my (then small) position earlier last year. I’d like to say I was prescient, but that is not the case. 🤷♂️
Not reflected here, but a sizable position in relative terms, is the KRE cash position noted below (another unintended outcome).
My active plays in the first half were all options-based and focused on downside opportunities. That has not been a fruitful use of capital so far.
Public Market Investments
No new stock position initiations or position increases. Buying into this straw house rally just didn’t make sense to me. So, I didn’t. I had orders in, but the market just never retreated far enough to get filled.
My active plays in the first half were all options-based and focused on downside opportunities. That has not been a fruitful use of capital so far. But more about that below.
There was one very good trade. And it was against my will. On April 19 shareholders approved the sale of Maxar to private equity heavy Advent International. On May 3 the acquisition was completed. This marked the end of a pretty interesting history for the company. Still, for me the outcome was a bit depressing.
…this was one of my largest positions in notional terms.
This was an aerospace powerhouse and also strategically important to the US and western security interests. Those latter points don’t necessarily change with the sale (it remains US-controlled), but it does mean that I am no longer going along for the ride.
Having said that, this was one of my largest positions in notional terms. The stock was in the dumps 5 years back (before I owned it). But the company completely reversed its fortunes. In the end, the exit went my way, representing a ~323% long term gain.
Lossy & Low Res
This position is worse off now than the start of year. With every failed or delayed launch they will slip a little deeper into the hole. But rocket science is actual rocket science. Meanwhile, there is plenty of launch capacity thanks to that other X-related company. Not much more to say.
Coinbase has recovered a bit but continues to fight crypto headwinds, and mixed opinions on the same amongst traditional investment managers. They also are fighting regulators and bad legislation (a battle that benefits us all). The worst thing about this position is where I originally bought it. It tops my good company/bad buy list.
As with some of my other biggest losers, the pressure on PAYO is also more about external macro factors. The overall recessionary damper on global markets is a headwind. But Payoneer is far more than a simple payment network. It functions as a marketplace platform that positions it incredibly well for future, long term growth.
As always, I like to think I gained some knowledge along with the new scar tissue.
While the position recovered some this remains a (very) long play. There’s simply no question about the absolute dominance that GRAB has in its many markets. And given the longer term growth trajectory of those markets the opportunity is massive. If this was a short term play I could point to other factors (as negatives). IMO these are counterbalanced by the long term tailwinds.
Roblox has also recovered some this year, partly on the AI wave. But it’s still not where I’d like it to be (says every investor in such cases). As noted in other updates, I previously had the opportunity to take significant profit on this position but did not. If the position turns profitable again, what will I do? Ask me then…
I made a few downside plays in the first half. Taken together, these generated only limited returns. As always, I like to think I gained some knowledge along with the new scar tissue.
I started building a SPY Jun 16 2023 put butterfly position on Jan 6. These were, as is my habit, oblong butterflies. This means the wings were not equidistant from the center strike. In this case they were 360/340/325 strikes. I bought more on Feb 1 and then finished on April 3.
The chart below illustrates the breakdown I was leaning into. With hindsight, of course, it is easier to see the support levels I was discounting (but should have been more careful of). Adding to a questionable entry thesis I also mismanaged the position, which ended in a near wash-out (over 80% loss). I have to learn how to kill my darlings. Scar tissue, indeed.
Another play I made in H1 was shorting the bank sector. I again bought put butterflies, this time in KRE with Jun 16 2023 expiry. These were 56/50/45 flies and I initiated the position on Feb 1. I exited half the position at a profit on April 19. This netted me a ~3.5X return. But I got greedy.
Distracted with personal and business travels and other IRL developments, I took my eye off the ball. These were the same distractions that tripped me up with the SPY flies (a reason, not an excuse).
I’ve had my share of dumpster fires and I’m glad I wasn’t in this one.
Anyway, as KRE reversed hard and expiration approached, the calls on my remaining position were elected. That left me outright long shares of KRE at 49.4567. Not a position I wanted, but I decided to make the most of it.
Of course, I exited the 2 put (wing) positions. Against the long shares in KRE I (carefully) sold calls to enhance returns. I also happily accepted a $0.40 quarterly dividend along the way. Combined, the ~2 month yield was ~1.6%.
Not Losing Is Winning
Just a side note… Silicon Valley Bank (SIVB) had been on my watch list for a few years. I never really got close to pulling the trigger but… I’ve had my share of dumpster fires and I’m glad I wasn’t in this one.
There is plenty that can be said but the crypto markets have an even bigger second half. So…next time.
Ether Capital Update
This has been a large equity holding, but very much tied to the crypto market. With all its operations in Canada and its (obvious) exclusive focus on ETH, I see less risk/exposure to some of the heavy-handed and borderline nutso moves of certain US regulators (and a few legislators as well).
But it also highlights that they will in-house this critical part of operations.
However, it is a small company with a very singular mission. And it’s been clear for a while that management has not been holding the purse strings as tightly as they should. This announcement reiterates their (near) all-in plans for staking.
But it also highlights that they will in-house this critical part of operations. It is presented as a cost saving step but, given all the counter-party risk in the markets (not least of which, crypto) I see this as a positive move for security reasons as well. The actual cost cutting efforts (which must be related to the change in CFO) are surely welcome also.
The stock is extremely correlated to the price of ETH, which has not enjoyed nearly the bounce that BTC and some other digital assets did. To add to this, the US equity was down-listed on the Nasdaq, which is annoying.
Yield Experiment Wrap
The crypto interest-yield experiment in the ‘family office’ account has come to an end. Abra was always somewhat off the radar in the US. However, they operated there. Until they couldn’t. The regulatory clamp-down has decimated any and all companies operating in the gray zone there, at least the ones that don’t have the legal budget to push back.
The total return for this relatively small (~4X pos size) stake was ~10% over a ~20 month period.
Following the announcement from Abra that they would fully end interest-bearing services on USD stable coins, funds have been pulled out of the yield account. They subsequently announced that any US account holders would need to move remaining funds off the platform and the accounts would be closed.
The total return for this relatively small (~4X pos size) stake was ~10% over a ~20 month period. That’s OK, considering what was happening in the equities market over the same period.
But, it’s probably not great relative to the risk free rate, when considering where these funds were parked. Abra is hardly a top tier crypto service provider…but I’m not sure there is a top tier atm.
I invested in Gumroad in Q1 of 2021, via Republic. This was a(nother) passion position when I first got in. The history of the company, and the founder/CEO Sahil Lavingia is quite unusual (too much to describe here). Let’s just say he doesn’t break the mold because he never used one.
But what the company has always represented for the creator community is undeniable. And a more seasoned and mature Lavingia now appears on track to do big things. In addition to achieving profitability in 2023 (as so many other companies falter) Gumroad has built an entire second business.
…when you look at the history of Gumroad, it’s clear that this was not just a dividend but a statement.
Flexile aims to be a better staff management, operations and payment solution. But the wild differentiator here is that it helps “retain contract talent with a mix of cash, equity, and/or dividends”.
And they opted to pay out this dividend to investors via Flexile as well. It’s a modest 1%+ yield, but I’m quite happy with that. Sure, they have better things to do with the money. But when you look at the history of Gumroad, it’s clear that this was not just a dividend but a statement.
And a field test for Flexile. Bravo. 👏
Business Experiments & Time Investments
Continued progress on the SaaS side…
Micro SaaS v1 Live
On the back of some official go-live promotion, SERP Sonar topped 100 users in June. It’s a modest amount, but a new high. And I can already see user momentum growing in the last few weeks.
We also went live with a paid advertiser. It’s a deep discounted, early adopter ad rate. But it’s still revenue, which is a positive for a v1 launch of a bootstrapped SaaS. Watch this space!
Investing Toolbox: Stock Unlock
This section is not part of my standard format for these articles. But I got a question previously about what is in my tool box. There’s a lot. But I started paying for Stock Unlock a while back and have become a big fan.
Following is a brief review of this fundamental analysis tool. NOTE: there are no affiliate links but anyone that signs up gets a free month (and do I too).
I’ve been in the finance space for a long time and I have seen many tools, for both personal and professional use. Stock Unlock really has some interesting and solid differentiators. I have done a full Stock Unlock review so I will keep this one a summary.
There’s a very foundation of data and information here, with the usual must-have utilities included. These being a portfolio tracker, screener and watch list. The abundance of analytics data, news, research and analyst guidance make this a very strong offering. But none of these are the real killer apps.
…these two additional features give some pro level SaaS tools a run for the money.
The two stand-out features are the Free Form charting and visualization tool and the DCF (discounted free cash flow) tool. This clean, intuitive and very beginner friendly SaaS already delivers good value without them.
But these two additional features give some pro level SaaS tools a run for the money. Add to this, a pretty surprising founder backstory. I strongly suggest giving Stock Unlock a look.
That’s it! Phew… Best of luck in all you do.