Against all odds – sanctions, trade wars, real wars – the past week saw gains in the stock market, where we managed to recover some ground.
During stable periods, I am not a great fan of index trading, however with high volatility prevailing and some leverage applied, our trades in DAX30 / $GER30, CAC40 / $FRA40, IBEX35 / $ESP35 and Euro Stoxx 50 / $EUSTX50 worked out well this week, producing profits for my eToro copiers. Despite our portfolio not profiting from this weeks’ recovery in crypto-currencies, we are benefiting from other shares gaining value again!
When markets hit record highs they turn jittery and corrections follow. This week we saw what some count as the fifth largest drop in stock market values ever. The portfolio has not been helped by a cooling of the interest in the ever expanding range of cryptocurrencies. More than 90 major cryptocurrencies quoted lower this week. For most cryptos, we may already be seeing a slow decline, reason why I decided to cut losses on NEO, XLM and BCH and may close Ethereum and Bitcoin soon: http://iitm.be/cryptos4asset . I will also try to open more short positions in cryptos in addition to the short position on $BTC.
Because of market volatility I have been setting tighter stop losses on profitable positions, leading frequently to positions closing with small profits, followed by re-opening similar long positions at marginally lower prices. This has helped to lock-in profits from the likes of Aareal Bank AG / ARL, Aixtronic SE / AIXA, Alibaba Ltd / BABA, Davide Campari SPR / CPR, Cellectis SA / CLLS, Hella AG / HLLE, Leoni AG / LEO, Siltronic AG / WAF, Solvay SA / SOLB, as well as minor short trades in Paypal Inc / PYPL and and Petrofac / PFC.
A trade war?
Much of the steel dumped by China is generic and low grade. Despite some job losses in western steel mills, western consumers have been benefiting from cheaper steels and aluminium going into tins for food and drink and cheaper construction steel for factories, supermarkets and bridges. In turn much American produce and crops are sold overseas at lower prices than in their home market, thereby giving Chinese farmers cheaper pork and chicken feed and consumers cheaper food. Consumers throughout the world have been benefiting from increased competition through growing international trade. There is a chance that the American administration wants to direct their trade negotiation with the Chinese towards extracting greater respect for Intellectual and an opening of their market for Foreign Direct Investment. As far as the EU as the world’s largest consumer market is concerned it has much leeway in trade talks, I don’t expect the USA to start a trade war with the EU and our portfolio reflects that.
US stocks tend to have stretched price to earnings ratios. Our portfolio contains more EU shares than most on eToro. I expect the value our portfolio of shares in excellent and promising businesses to grow over the coming days and weeks, as pressure on the US administration increases to calm markets.
The market correction is probably worrying for the copy trader. However, if you share my optimism in the recovery of stocks like Santander SA / SAN, ThyssenKrupp AG / TKA, Unilever plc / ULVR, Inditex SA / ITX et al, then now is an optimal moment to copy my trades on eToro: http://iitm.be/oroetoro
I have further reduced our crypto-currency holdings. Just before eToro increases the weekend spread, I have gone one step further, partially hedging the remaining crypto-buy-positions, with so far only one short each on Dash and Bitcoind each. I would love to open a few more sell positions, specially on Ripple, but, as cryptos are purely speculative, I find it incredibly difficult to gauge the entry points. I hope the smoke lifts sufficiently, to allow me to see which of the opposite positions (buy and sell) I should close. I found eToro’s crypto discussion on Thursday informative in that I feel that the participants (eToro traders liamdavies, Wesl3y, Jaynemesis, stebliss, matthewne) failed to address the central questions putting crypto coins’ medium term value in doubt; eToro failed to put up a single panellist questioning cryptos as to create a debate.
If you are heavily invested on cryptos, you may want to consider copying my crypto-sceptic portfolio as a hedge.
ECB chief Mario Draghi failed to stop the Euro’s rise against the greenback. Though the US president has then said that he is supporting a strong Dollar – this may have been because he simply finds the word “strong” appealing. For its unpredictability, we have no US-Dollar currency positions in our portfolio. The drop in the value of the US-Dollars is in the short term bad news for selling CHF/JPY and in particular GBP/CAD, where I had to cut losses on two positions (eToro’s risk ratings unfortunately force popular investor’s hands in such circumstances), check the situations and I re-entered later with a smaller profit. The US-Dollar’s extreme weakness is – at least in theory – also bad news for European stocks, e.g. Unilever plc $ULVR.L and Commerzbank AG $CBK.DE. I closed Commerzbank at €13.59 and a profit of 10.13%. Though thanks to sustained growth in the Eurozone, European exchanges remained largely unaffected by the common currency’s appreciation.
We closed a buy position in Essilor International SA $EI.PA of Charenton-le-Pont (Val-de-Marne), France, at a small profit and opened a buy in L’Oréal SA at €183.97 – analysts see a target well above €200 for $OR.PA.
The two bio-pharma stocks in our portfolio, AbbVie Inc $ABBV of Chicago and GW Pharmaceuticals plc of Cambridge, UK (my second home), are growing well (no pun intended). Before I could get around to readjusting the take profits, our position in $GWPH with leverage x2 hit a take profit overnight. I took the opportunity to open a new position in GW Pharmaceuticals plc without leverage.
Early investors in Bitcoin have profited from staggering gains over the past few years. Crypto-currencies were the hot-investment of 2017. I have to confess, that I have earned some money speculating with crypto-currencies and I hold small amounts of Bitcoin (BTC), Bitcoin Cash (BCH), Dash, Etherum Classic (ETC), Etherum (Ether), Litecoin (LTC) and Ripple (XRP) (though as of week 4/2018 I am shortening in the majority).
While I am not sufficiently technical to give a judgement on the different blockchain developments, I understand that there is a future for the technology in a number of fields. However, I make a distinction between the blockchain technology being used in transactions (eg between financial institutions) and a bit of crypto code to be held as an investment. I will try to explain why below:
The enormous fluctuation in value produced by the speculation in the likes of Bitcoin, Ripple and other crypto-currencies (pump and dump of 40% or more in a week) actually make them unattractive as a method of payment. Who would close a futures contract for oil or sell their house in BTC, if its value fluctuates so dramatically.
Anonymity – governments will fight it
The EU and other advanced social-market-economies are slowly advancing their difficult fight against tax evasion. Breaking the secretiveness of tax-havens is a crucial element of this struggle, diminishing the use of cash over traceable electronic payments another one. Crypto-currencies anonymity appeals to certain types of investors, Mafiosi and dictators, as it allows them to store and transfer funds in encrypted anonymity and circumvent embargoes. Think e.g. of Kim-Yong-un paying in crypto when shopping for missile parts or computers.
Seizure of US$206 million from a drug trafficker in Mexico’s capital in 2002. That wouldn’t have happened with Bitcoin.
If not just the Mafia and the wealthy elite, but every cabbie and plumber can hide their cash and payments, too, it will make tax evasion more egalitarian, but come to the detriment of schools, roads, police, the armed forces and the health service. Democratic governments will need to fight encrypted payments and storage Dash et al are facilitating, or find a way to secure their tax base by other means.
The appeal of limited supply
Bitcoin and Etherum Classic (among others) appeal through the limit put on the number of so called coins that can be minted – often compared to the way in which gold is costly to mine and its supply limited. However, unlike precious metals, there is no limit to the number of forks or crypto-currencies to be created. There are plenty of alternatives to Bitcoin. According to a recent article in the Economist, “by January 10th, around 40 had a market capitalisation of more than $1bn.“ “Even Dogecoin, which was launched in 2013 as a bitcoin parody… The crypto-currency was never really used, except for tipping online, and one of its founders has called it quits. But recently its price has soared: on January 7th the dollar value of all Dogecoins in circulation reached $2bn” – suggesting not only that investors are going irrational, but also that there is no gold standard in cryptos – every crypto-currency can easily be replaced, potentially rendering a previous generation of blockchain technology worthless.
Want to store money or create value?
There is a fundamental economic difference between storing money in e.g. land, gold or bits of blockchain code versus investing in productive capital (for example through the stock market). Investing in limited supply assets like land or BTC makes these dearer, while investing in shares provides employers and inventors with capital, driving economic growth, potentially improving standards of living. There is no progress deriving from driving up the market valuation of homes or crypto-currencies, investing in it is socially irresponsible. While shares can deliver dividends and houses rent, cryptos have no intrinsic value. At the current levels of money being absorbed in cryptos it may not be a problem, but in some medium size economies with large markets for digital currencies – like South Korea – the crypto bubble may already have taken on dangerous proportions.
Could a crypto-currency replace the US Dollar?
If the creator of a crypto-currency can overcome the value fluctuation problem and finds a way to make payments traceable for tax purposes and for the control of illicit trade (and the control of embargoes) etc can be found, the crypto-currency could challenge the US-Dollar in its dual role as currency for the payment of commodities (oil, gold, wheat etc) and as the world’s leading reserve currency. Even if a crypto-currency gets to challenge the greenback in those roles, and that is a very big IF, the US government and financial interests will defend the Dollar. The fight will be worse than the campaign against the so called toilet currency (that was the name given to the Euro) – and just think of for how long the Anglo-Saxon press has been forecasting the Euro’s demise….
I will continue to check the market for crypto-currencies and try to extract some profit when I see feasible. But I am sceptical about cryptos as a means of storing value in the medium to longer term.