Portfolio Update – November 2022

Over the month, my portfolio remained neutral in terms of market exposure until its second half, when I started buying my shorts again as I thought the bear market rally was close to an end. However, prices continued to climb up higher, the implied volatility declined and the value of the dollar, especially against the euro, fell rapidly. All this led to me taking another red month. All my current positions are reported at the end of the article.

However, contrary to October, my current positions have a longer timeframe. Also, I believe my entries were accurate enough and even if that wasn’t the case, I haven’t completed the positions yet, so I have flexibility in that sense. As I wrote on Twitter recently, I can afford to take a hit in the short-term if that’s to make a big result in the next 2 to 3 months.

On a side note, my Twitter account surpassed the 1,000 followers mark this month: I can’t express how grateful I am for this incredible support, and I truly hope my ideas and thoughts helped you these months. Also, the newsletter grew to 44 subscribers from the just 19 of last month: I’m really happy for this, and I’ll do my best to keep the content quality high. If you haven’t subscribed yet, consider doing it here.

General comments

Last year, November showed a new generation of investors how crazy the sentiment can become at the top of a bubble. At the time, we didn’t know yet, but in hindsight the signs were clear, and they built up over the year: crazy degenerates suggesting families to mortgage their houses to buy worthless internet tulips; trillion-dollar companies destroying their business model for a pivot to the metaverse (a year later, still nobody has a clear idea of what that should mean); analysts on CNBC pumping stocks of which they had no idea… You get the point. Everybody was a genius, money was very easy to make back then: everything went up without reason.

But despite the difficulties, this year November was even more interesting: FTX collapsed. This is interesting for a bunch of different reasons: firstly, FTX was the second-biggest exchange in the cryptospace; secondly, FTX was relatively young as a platform, as it was born just in 2019; finally, it showed everybody how not to run a business.

FTX collapse and its consequences

The story is complex, and I may write a dedicated article to get into more details about it, but roughly it goes as follows. On November the 4th, a report saying FTX may be insolvent gets published. Two days after, on November the 6th, the CEO of Binance Changpeng “CZ” Zhao, the biggest exchange in the industry, publicly says on Twitter that his firm is starting to liquidate all its FTT holdings (FTT is the token issued by FTX). Smelling a Lehman moment, I tweeted out (link) to withdraw the funds from FTX as soon as possible: I hope someone among my followers actually listened to my advice.

On CZ announcement, the token falls almost 6%, making the now ex-CEO of FTX Sam “SBF” Bankman-Fried state, always on Twitter, that FTX has no liquidity problem. This statement is the biggest red flag a financial company could come out with and, ironically enough, on November the 8th FTX stopped processing withdrawals.

On the same date, FTT falls more than 75% more, with an intraday low of -89.71% only saved by the possible acquisition of FTX by Binance itself. However, as I said in a tweet the very same day, Binance partly financed the Twitter acquisition by Elon Musk not so far ago, so they were unlikely to have the necessary liquidity to bail out FTX. While not wrong on the liquidity part, I was completely wrong on the reason why they didn’t proceed the acquisition: it turns out that, during the due diligence, Binance saw so many debts in FTX that “they wouldn’t buy it even for just a dollar” and, indeed, we discovered some days after that the hole in FTX’s balance sheet was in the range of tens of billions.

After having lost both the title of billionaire, millionaire, business-owner and successful person all during the same date, SBF files for bankruptcy. Shortly after, FTX does it too.

Now, this is where the interesting part begins, as everything started to move way faster after this collapse. First, the VC firm Sequoia was publicly humiliated for the now-deleted story of how the investment in FTX was made, and marked the investment down to zero.

Then, FTX was one of the biggest clients of Silvergate, a bank that deals only with crypto-related businesses, which is now suffering from the consequences of it. Although in a statement Silvergate announced they have no outstanding loans to FTX, the fact many more crypto-related businesses may go under because of the vertical decline of many coins was enough to make its shares fall 51% as of November 20th, 2022. Another big client of Silvergate is Microstrategy, the bitcoin-centered fund managed by Michael Saylor that got leveraged long on Bitcoin last year by getting loans directly from this bank: since November the 8th, shares plummeted 36%. Just for comparison, Bitcoin itself fell roughly 23% in the same period. I was short Silvergate, and continue to be so.

However, contagion doesn’t end here. Coinbase, Robinhood, Binance, Genesis, DCG: they are all suffering the consequences of this collapse. The infamous Tether even depegged and, at the time of writing, still is. I was skeptic about cryptocurrencies since long time ago, but I’m absolutely unbiased in saying this: if the industry can’t solve this mess fast, there won’t be another “big run”. Credibility in the cryptospace, which was already extremely low, got completely erased after these events. Even more so when we discovered things such as the fact FTX had no CFO, that its balance sheet was literally an Excel file manually updated, that Alameda Research was allowed not to get liquidated in drawdowns… You get the idea.

All cryptocurrencies were nothing more than a vehicle where to store excess liquidity in the system, and I’d expect them to rally hard when the monetary policy will shift to expansionary again. However, if this mess doesn’t get solved, there will be nothing left. Furthermore, we actually risk this contagion to spread to the real economy, the same way Lehman’s liquidity problems slowed business for General Motors.

Views on the economy

Moving to something more boring, the markets continued to rally, fueling it with even more absurd narratives that all ran around the old “incoming Fed’s pivot”. On November 10th, the BLS published its monthly US CPI report, which was way lower than expected by consensus: after this result, both equities and bonds rallied hard as inflation expectations declined and, consequently, the implied terminal FFR fell too.

However, I think the market participants misinterpreted the reason why the CPI reported a lower-than-expected inflation rate. Indeed, the reason why CPI was so low is basically due to an adjustment to the way healthcare costs were computed, not prices accelerating less. If you add to this picture the baseline effects, you’ll see very easily why the report was nothing so bullish to justify such a rally: that day, the S&P 500 Index increased by 5.54%, and the Nasdaq Composite Index by 7.49%, one of the biggest single-day rallies of the index’s history. When the PPI came out below expectations too some days after, the market rallied even more, but quickly lost momentum and flat lined for the rest of the week.

There are two important takeaways from this rally:

  • the speculative (or gambling) mentality of the market, that still believes we’re up to a V-shaped recovery, is still very much alive: it’s a pity, though, that this time the Fed won’t intervene as it did in 2008, 2010, 2018, and 2020;
  • the markets are becoming extremely illiquid and option-driven.

On the second point, if you know what are the gamma-exposure (GEX) levels on a daily basis, you can forecast will a high degree of confidence the range between which the market will close. However, the increasingly higher volume of short-dated options will increase intraday volatility even more, as the market-makers find themselves in the position they need to delta-hedge their exposure moving yards in an increasingly illiquid market: we should expect ±3% intraday moves to become the norm as we approach the final bottom.

One could argue that’s incredible the VIX is still declining despite this extreme volatility, but by looking at the VVIX, which is basically the VIX on the VIX, we can see another picture: the traders are hedging themselves by longing the VIX through calls, rather than shorting the market through long OTM puts. However, we can’t be sure, as the prevalence of short-dated options (such as 0dtes) completely skewed both the VIX and the put-to-call ratios, making them both pretty much useless.

So two reasons behind this rally are the pivot narrative once again and the declined implied-volatility. The third reason, and probably the most important one, is to be found in the decline of the dollar. I wrote a thread on this, be sure to check it out. Basically, one big reason behind this decline is the rally of the euro, which was fueled both by fundamentals and technicals. On the fundamental side, Europe is not yet freezing, which is a big improvement considering the currency was priced for an Armageddon. However, that’s just because of the hotter-than-usual weather, and temperatures are expected to decline in the coming weeks. Furthermore, in the eurozone inflation remains double-digits, there are risks such as electricity and food shortages, the recession next year is expected to be terrible, and delinquencies started already, just to point out a few things that, currently, are being completely ignored to fuel the rally. On the technical side, a big reason why the euro rallied is because, as Robin Brooks said in a tweet, the speculative positioning on it became extremely bullish. Many banks changed their view on the euro too, forecasting targets up to 1.10 by the end of the year: however, JPM made a report a few days ago titled “Global FX Strategy 2023”, which I highly suggest reading, where they forecasted EUR/USD to trade at 0.95 or even 0.90 by 1Q2023 amid energy dependence, weakening global growth and poor carry. Holding tight my euro shorts, I tend to agree with JPM on this, but we’ll see: it’s always important to know who’s on the other side of the trade.

As the currency got stronger, equity indices for almost every EU country member rallied too: most notably, Germany’s DAX is up more than 20% from September’s lows. Considering that the economic outlook both for the country and, more importantly, for the continent got worse since then, and the Winter is still ahead of us, I opened a short on it and I will ride it out all the way down.

It’s important to keep in mind that in this context, meaning inflationary regime, high GDP growth is not something to hope for: indeed, as inflation is a proxy for how hot the economy is running, the higher the GDP, the higher the expected inflation coming thereafter. Both the EZ and the USA showed big GDP growth in Q3, mainly driven by the higher consumption characteristic of the summer months, which allows the relative central banks to continue hiking with little to no worries. Combining the stronger output data with the still-tight labor market, it’s easy to grasp why no monetary pivot is in sight, nor should be. The only reason I could see either Central Bank to pivot earlier than expected is if something breaks, which could happen in the EZ as soon as the weaker economies start to struggle to finance their debts.

That’s all for this month, see you in January!


The followings are my current open positions:

  • Long: MEX.L, WEAT, VIX, UUP

If you have questions regarding any of my positions, don’t be afraid of sending me an email or a message on Twitter: I’ll reply as soon as possible.

Finally, as there was no real interest regarding my monthly performance, nor does it make sense for me to feel the pressure of doing a good job every month considering my trades are based on a longer time horizon, I decided not to publish it anymore. Maybe I’ll start again in the future.