Make no mistake about it, the evidence is overwhelmingly bullish that we will see Bitcoin hit near/past $7K by the end of this year if not early 2018. With that, we'll see our Bitcoin proxy investments (stocks) $MGTI & $OSTK appreciate as well. Bitcoin is also 20% of the entire Crypto portfolio, separate from the BotTrigger Stocks porto. For those who have not yet bought some Bitcoin and wish to...don't make this such an all or nothing kind of play. You can take a nibble or what I like to call a probing position. It's very simple to grab/buy some for anyone really. You simply go to https://www.coinbase.com which is a registered & SEC compliant Bitcoin, Ethereum, & Litecoin buying exchange in San Francisco with an actual banking license. They operate more as a bank than as an exchange in fact. It's very simple to setup an account there and once you verify you identity you'll be able to buy any divisible amount under their max caps of Bitcoin you want...so they do have max buying limits per week based on your account verification & buying history. We've said this before, but I'll continue to repeat it for some of our Members who I know haven't yet made the move. Our crypto members are all over it.
Bitcoin aside, let's go over some of the fundamental macro backdrops regarding the direction of the market relative to crypto.
It’s an understatement to suggest President Trump’s cabinet has dealt with turmoil. Infighting between the likes of Steve Bannon, Reince Priebus, John Kelly, Jim Mattis, H.R. McMaster, Rex Tillerson, Gary Cohn, Jared Kushner and the president himself has been consistent since the inauguration. However, there is one man who has escaped any form of criticism. That man is Treasury Secretary Steve Mnuchin. Over the weekend I had somewhat of an epiphany regarding Mnuchin. Stock market gains have been Trump’s primary defense against the critics. Continued gains into the month of October defy all explanation now that the Federal Reserve has embarked upon QT balance sheet reduction. Because of this monetary tightening, Bank of America identified October 2017 as a pivotal point reversal for the bull market. We agreed. But now we’re in October and the S&P 500 has risen 12 of the last 16 trading days since the Fed’s policy shift. A bad employment report was a ignored by Wall Street. Fears of hurricane weakness in Q3 earnings season is being ignored. Iran is being ignored. North Korea is being ignored. Overvaluation is being ignored. Kevin Warsh as the top White House choice to become the next Fed Chairman (who will increase the pace of balance sheet reduction) is being ignored. What gives? Mnuchin is our answer.
Janet Yellen was never a Trump insider nor is she complicit with his agenda. Steve Mnuchin is. After his 18-year career at Goldman Sachs, Mnuchin earned a reputation in the hedge fund and banking world as a vulture capitalist whiz. He and his staff still travel the globe in private jets owned by hedge fund billionaires. Ethics are ignored. He failed to disclose more than $100 million in offshore holding companies when filling out his questionnaire with the Senate Finance Committee. He and commerce secretary Wilbur Ross (another Trump cabinet member who is never criticized by the president) were profiteers from the foreclosure chaos of the financial crisis. Very smart guys. What kind of power does Mnuchin have as Treasury Secretary? Following the 1987 stock market crash a new government entity called the ‘Working Group on Financial Markets’ was created that eventually came to be known by its nickname ‘Plunge Protection Team’. This working group consists of the secretary of the Treasury, the Chairman of the Federal Reserve, the Chairman of the SEC and the Chairman of the Commodity Futures Trading Commission. The theory is that the team manipulates markets by executing trades on several exchanges when the market isn’t behaving as it would like. It works together with big banks like Goldman Sachs and JP Morgan, only to report to the President, and keeps no record of trades. After witnessing the least volatile September in history, it’s clear that Mnuchin is maintaining plenty of equity liquidity no matter what Janet Yellen decides to do at the Fed.
Why is this realization so important? Because we are in the process of syncing our Q4 portfolio strategy to the current market environment. The BotTrigger Stock portfolio has 20% exposure to bitcoin collectively through MGTI and OSTK, exposure to bond TLT puts and 7% exposure to EMES & XOM. We are positioned for digital currency to rally as a safe haven, oil to rally because of Iran, Venezuela and North Korea, and bonds to selloff as the Fed reduces its balance sheet. But what about Mnuchin? How do we account for his dominant role in market action? The Mnuchin trade is the VIX. Since he took over at the Treasury, low market volatility has given Trump the benefit of the doubt when it comes to sentiment. He can say anything, do anything, and as long as the market rallies people will look past it. You can see why Trump hasn’t criticized his Treasury Secretary. He loves the guy. What if this status quo continues? What if we go to war and the market remains stable? With Mnuchin in control of the Working Group on Financial Markets this could happen, no matter who is running the Fed. The best way to play continued low volatility is with UVXY puts (ProShares Ultra VIX Short Term Futures). This trend continues to trickle down.
As the VIX remains low, UVXY drops because it rolls short term VIX options. Over the last six months, UVXY has averaged -$7.67 performance each month. From its current price of $18.50, this same trend would lead to a price of -$36 in June 2018. Of course it’s impossible for UVXY to trade in negative territory; what happens is it reverse splits when the price drops to $6, which is projected to happen in December. Owning puts on UVXY gives investors exposure to the president’s plunge protection team. This allocation is highly volatile and should never occupy more than 10% of the portfolio but could still lead the way in terms of portfolio performance. We're considering an options short trade here and will further model out the potential benefit of some form of an options straddle trade that owns puts on the VIX as well as calls on the VIX as a simultaneous hedge in case volatility does return. Today we are adding UVXY puts to the watchlist with a momentum purchase point below $18.
