TIB: Today I Bought (and Sold) - An Investors Journal #250 - US Interest Rates, Covered Calls

Markets walk a tightrope. Emerging markets take the brunt. Trade action is focused on managing margin and writing covered calls to generate additional income from assets I hold. More meddling culprits emerge from the closets.

Portfolio News

Market Jitters - Tariff Tantrum The dual hammers of rising interest rates and the tariff action by Donald Trump takes it toll on emerging markets - both bonds and stocks.

My portfolios certainly showed the exodus from emerging markets ETFs right across the board. Vietnam - 2.8%, Thailand - 2.2%, Indonesia - 2.7%, Russia - 2.4%, Philippines - 1.7%, Gulf States -3.4%, Taiwan - 1.4% only interrupted by Pacific Drilling, an offshore oil driller. The only ETF's in the category that did not go down were Saudi Arabia and Mexico.

Is this the time to panic or is it just a case of over-reaction without a full understanding of the fundamentals? Analysts are divided.

This article summarises the way I see it:

Bull Points • Synchronised global growth is very positive for emerging economies • Valuations are reasonable

Bear Points • US Fed raising interest rates could cause EM currencies to weaken • A trade war will be particularly negative for EM

https://www.investmentweek.co.uk/investment-week/feature/3034112/bull-bear-arjun-divecha-on-emerging-markets

This next article has a solid base of data. I highlighted in TIB210, the changing basis of the composition of emerging markets index over the last 10 years or so. This chart summarises the shift from materials/energy to technology well.

A small detail that I did highlight last time, Naspers owns about one third of Tencent, which makes it more a technology stock than anything else. The next part of the analysis in this article is much more salient as it addresses the debt and currency risk. The balance sheets of emerging market economies are in considerably better shape than they were ahead of the last Asian crisis and even more so than before the Latin American crisis before that.

EM currencies are more competitive and external balances are much healthier, with rising foreign investment and less dollar-denominated debt. As a result, rising US interest rates or a stronger dollar won't have the same impact on EM countries and companies as in the past, in our view

https://seekingalpha.com/article/4182263-emerging-markets-diminishing-risks-vs-headline-fears

This is the crux of the emerging markets selloff. Investors remember the last time and have not digested the changing dynamics. I am investing based on the change. In time, the markets will come back to the data away from the fear. There is another behavioural dynamic going on too. The ETF's I use are listed in the USA. Americans are very quick to head for the exits on things foreign that they do not understand. I do need to review whether European ETF's or direct investment is any less fraught with fear.

Oil headlines are key too. I wrote in TIB249 that I thought markets were diverging in their opinion.

It seems that the leaning on the OPEC side is to a more moderate increase in OPEC/Russia production than the market was fearing. Russia was looking for 1.5 million barrels increase and the consensus seems to be a lot lower with Iran looking to veto any increase. OPEC decisions have to be unanimous - so there has to be a compromise. Energy stocks were up

World Cup A Google search on Russia has headlines turning to the World Cup away from other matters.

Well mostly. The lingering troubles of Russian meddling in the US election with another skeleton coming out of the May 2016 closet - another contact between the Trump campaign team and a Russian. Who knows what is truth and what is not? It did knock the Kaliningrad nuclear bunker off the headlines.

https://www.washingtonpost.com/opinions/yet-another-russia-contact-with-the-trump-campaign-team-what-are-they-hiding/2018/06/18/4ca0a2d6-7328-11e8-805c-4b67019fcfe4_story.html

My local World Cup headlines dealt only with the TV streaming woes being faced by Optus here in Australia.

The Prime Minister had to intervene to find a solution - a temporary streaming deal by the state owned broadcaster SBS for 48 hours to give Optus time to sort out the load scaling problems. I guess it was a more important intervention than the one Vladimir Putin had to make the day before. And we get tongue pulling pictures from Nikola Kalinic who was sent home to Croatia for refusing to come on as substitute.

On the fields England and Belgium stamp their credentials for progressing to the next round and Russia prepares to take on Egypt. 2 goals from England captain, Harry Kane, made for a good birthday present for me. I am English after all.

Shorts

Eurodollar 3 Month Interest Rate Futures (GEZ). Interest rates between US and Europe are diverging ever since the European Central Bank meeting last week. Euribor rates have drifted down by 18 basis points - nearly one full rate hike.

Add to that some safe haven flows back to Japan and Switzerland and my IG markets account was facing some margin pressure - not a margin call but pressure. I chose to exit two Eurodollar positions that were in-the-money to release the margin pressure. Positions closed at 96.983 for 4 basis points profit. The one hour chart shows that it was not a bad point to exit and soon I can re-enter.

Income Trades

A busy afternoon setting up income trades for the month. A quick reminder on my process for writing covered calls.

• Select stocks I am happy to sell if I get exercised.
• Calculate 5% move up in price from previous day close
• Choose a one month out call option closest to 5% move up in price.
• Place a bid between bid and ask. Ideally one should aim for a premium of about 1% to make this worthwhile - I do not check but I did average 0.99% for June

A few new trades for this month

• Societe Generale (GLE.PA) and BNP Paribas (BNP.PA): Only on the parcels I added last week to average down my entry price
• Snap Inc (SNAP): I have made profits since adding this - covered calls might find the exit point
• Commerzbank (CBK.DE): Written on the whole parcel after I added stocks a few weeks ago. I have adjusted the average cost to reflect this

I have a number of bids open especially on emerging markets ETFs

The table shows purchase price and closing price, the premium received and the % relative to close and to purchase price. The strike is shown and the important columns after that are the amount price has to move to reach the strike price - you will see they are all around 5% with a few more than that. The net cost column is updated each month to show purchase price less accumulated premium received - the percentage column at the end shows what contribution income has made compared to purchase price.

Cryptocurency

Bitcoin (BTCUSD): Price range for the day was $412 (6.1% of the high). Price decided to break up towards the top of the channel and made a higher high. Good news given the bad vibes from the Bank for International Settlements - well known for extremely conservative views on financial matters.

Ethereum (ETHUSD): The charts for BTC and ETH look remarkably similar though ETH is now a lot closer to the top of its downward channel. We will need to see decisive price action - i.e., a higher high - to break out.

CryptoBots

Outsourced Bot No closed trades on this account (212 closed trades). Problem children was unchanged (>10% down) - (18 coins) - ETH, ZEC (-45%), DASH (-46%), BTS, LTC, ICX, ADA, PPT (-55%), DGD (-47%), GAS (-58%), SNT, STRAT (-46%), NEO (-56%), ETC, QTUM, BTG (-57%), XMR, OMG.

QTUM is a rounding up away from -40% club. Worst remains a tussle between NEO, GAS, BTG and PPT (which did improve a little).

Profit Trailer Bot No closed trades. Dollar Cost Average (DCA) list was unchanged at 12 coins with 2 coins improving, 2 coins trading flat and 10 worse and now 2 worse than 50% down.

VEN was the strongest mover progressing up towards the top of the trading channel it has been in. Make the top of the channel and it could be a profitable trade in a few days.

New Trading Bot Positions improved 2 points to go back under the 50 marker to -48.5% (was -50.6%).

All 4 coins traded better with BTC and ETH doing 3 points each.

Currency Trades

Forex Robot did not close any trades and is trading at a negative equity level of 1.5% (lower than prior day's 1.9%).

Cautions: This is not financial advice. You need to consider your own financial position and take your own advice before you follow any of my ideas

Images: I own the rights to use and edit the Buy Sell image. News headlines come from Google Search. All other images are created using my various trading and charting platforms. They are all my own work

Tickers: I monitor my portfolios using Yahoo Finance. The ticker symbols used are Yahoo Finance tickers

Charts: http://mymark.mx/TradingView - this is a free charting package. I have a Pro subscription to get access to real time forex prices

Bitcoin: Get started with mining Bitcoin for as little as $25 http://mymark.mx/Galaxy

June 18, 2018