Herewith an overview of my performance for the first quarter of 2022.
Summary
I had an amazing Q1. The strategy of shorting non-profitable tech with short term puts, while remaining long energy and resources worked out tremendously well:
January performance was 76%,
February was 41%, and
March was 10.5%
Overall for the quarter, my portfolio was up 174% on the quarter. When you’re making returns of this magnitude, you are surely taking on hidden risks somewhere in the portfolio. In March I found out where that risk was. I was short (long puts) a handful of Chinese tech which were getting absolutely slaughtered and I even made a comment on Twitter that it was like shooting fish in a barrel. I had large unrealized profits in JD, NIO, NTES, ALGN, JCI, TSM and NXPI.
Then one morning I woke up and Chinese tech was up about 20% overnight on comments from Xi and/or Chinese officials stating their support for oversees listed Chinese equities. I think this event gave extra momentum to the market as a whole as everyone who was shorting Chinese tech as a US tech hedge was forced to cover and an epic short squeeze promptly ensued and forced the entire market higher.
I wiped the deck clean and took the losses in stride prior to going on a Spring Break vacation with the family, taking a needed break from the markets. At the bottom of this article I provide some thoughts on what I’m watching and where we’re headed from here, and how I’m positioning for it.
Performance
Herewith the performance metrics and risk analysis for 1/1/2022 through 3/31/22, according to IBKR’s reporting functionality:
Overall Performance = 173.81%
Max Drawdown = 24.98%
Peak to Valley = 3/14/22 - 3/29/22
Recovery = Ongoing
Sharpe Ratio = 4.73
Sortino Ratio = 8.19
Standard Deviation = 6.04%
Downside Deviation = 3.49%
Mean Daily Return = 1.77%
Positive Periods = 40 (61.54%)
Negative Periods = 25 (38.46%)
Capital allocation throughout the period was as follows:
Position Contributions
The top 5 individual trade contributors during the period were the following:
ARKK Feb18 85.22 Puts contributed to 14.31% of the overall performance
NVDA Feb18 230 Puts contributed 12.34%
AMR Warrants contributed 8.62%
CVX Jan21 120 Calls contributed 7.50%
TGA common contributed 5.81%
Bottom 5 trade contributors:
TSLA Jun17 750 Puts contributed to -6.50 % of the overall performance
TSLA Jan21 1000 Puts contributed to -4.60%
TSLA May20 600 Puts contributed to -3.24%
USO Apr14 90 Calls contributed to -2.44%
METC Mar18 15 Calls contributed to -1.81%
Underlying Contributions
The top 5 performers by underlying equity are listed below:
ARKK contributed to 21.89% of the overall performance
CVX contributed 12.81%
NVDA contributed 12.77%
TWLO contributed 8.95%
W contributed 5.22%
The bottom 5 performers by underlying equity are listed below:
TSLA contributed to -9.22% of the overall performance
USO contributed -3.56%
SID contributed -1.80%
TSM contributed -1.68%
HON contributed -1.19%
Looking Ahead
As we look ahead into Q2 and the remainder of the year, I’m watching the following items very closely:
Chinese economic output as it relates to the forthcoming credit impulse → how that translates into real estate and construction → how that stimulates steel production → related iron ore demand → which could result in a reemergence of met coal supply shortages.
This has implications for Chinese manufacturing, and mining resources generally, but specifically met coal and iron ore, as well as dry bulk shipping. I’ve had a long standing thesis on the seasonally strong period we’re currently in and if the magnitude of Chinese steel production disappoints due to weakening real estate and construction domestically, the implications for mining resources in the second half of 2022 are tremendous.
High Yield Credit - Ticker symbol HYG. The equity markets can display wild selloffs and epic short squeezes, but if equities are going to blow up, the underlying direction of HYG will give us the signal.
The recent bounce in equities doesn’t appear as bullish viewed through the eyes of HYG, see above. I plan on watching HYG from a technical perspective in order to guide my tactical short strategy in non-profitable tech as we continue to march through 2022.
It’s rapidly becoming apparent that a recession is on the way. I believe Europe is more at risk than the US due to manufacturing (particularly in Germany). I am watching, and currently shorting European indexes as a recession hedge.
For more recession hedges, I’m keep an eye on (shorting) companies with broad exposure to consumer spending. My current favorite idea on this is SYF.
Higher rates and the Bond market collapse - I’m watching this broad Head and Shoulders Pattern on TLT:
I think the bond market is going to eventually throw a temper tantrum sometime during this Fed rate hiking cycle. Bonds will collapse and THEN the Fed will begin to implement some form of Yield Curve Control (YCC). Japan has already begun their own YCC program and the Yen got absolutely crushed when it happened. If/when the Fed does their own version, that is the moment for Gold (and all commodities priced in US Dollars) to really shine. This could be months away, but keep this idea in your back pocket because the payoff of nailing it could be epic.
Other than that, stay long cheap energy → THERMAL COAL.
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Is there a good unpaid source for met coal prices?
CT - congrats on the start to the year. Saw your note on SYF as a potential short play. Reasonably familiar with the company but I’d have to dust off my analysis. i understand the macro thesis and fundamentals are to the downside, but a couple things to consider
It’s pretty well run, the RSAs with their partners are tied to credit performance so there is a bit of a hedge on downward credit and they have a lot of excess capital with an aggressive buyback program which will provide some downside resistance. Quite a bit of pessimism priced in the stock already.