Modern Investing Techniques — Episode 27

It's Friday, welcome to Modern Investing Techniques, episode twenty seven. It's April twenty fourth, twenty twenty six and I'm Patrick in Vancouver. Friday wrap-up — let's see how the week played out and what to watch next. Quick reminder — everything we discuss here is for education and entertainment. The Practice Investment of the Day uses simulated trades with no real money. I'm not a licensed financial advisor and this isn't financial advice. Always do your own research before putting real money to work. The Federal Reserve faces a stagflation trap as the Hormuz closure removes twenty percent of global oil supply, with no painless policy option available. Markets traded modestly lower today with the S and P five hundred closing at seven thousand one hundred eight, down zero point four percent. The NASDAQ Composite finished at twenty four thousand four hundred thirty eight, down zero point nine percent. The T S X Composite was at thirty three thousand nine hundred thirteen, down zero point one percent. Geopolitical developments around Iran continue to influence commodity and inflation expectations. About fourteen days ago we picked SSRM on a balance sheet recapitalization and insider buying thesis. It closed down four point two one percent. This is a clear example of strong company fundamentals losing out to overriding macro forces. Are we beating the NASDAQ this week? Our simulated portfolio trailed once again. Our portfolio stands at year to date minus zero point five two percent versus the NASDAQ up five point one eight percent for an alpha of minus five point seven zero percent. Since inception it is minus zero point five two percent versus nine point two three percent for an alpha of minus nine point seven five percent. We need better alpha generation in the weeks ahead. When macro regimes shift this violently, static portfolios get punished. That is exactly why we are dedicating today's Strategy Spotlight to regime based hedging. Regime based hedging is an allocation approach that adjusts portfolio exposures according to the prevailing macroeconomic regime rather than following static benchmarks. In a stagflation environment of rising inflation combined with slowing growth, traditional long duration bonds and many equities become vulnerable. Certain real assets tend to outperform in those conditions. Today's conditions make this relevant because the closure of the Strait of Hormuz has removed approximately twenty percent of global oil supply. This is accelerating core inflation and recreating the impossible trade the Fed faced in the nineteen seventies. Raising rates would worsen unemployment and growth while cutting rates would likely send inflation higher. Historical parallels show severe drawdowns with the S and P five hundred falling forty eight percent in real terms from nineteen seventy three to nineteen seventy five. Inflation reached twelve point three percent during that period and similar dynamics played out in nineteen seventy eight to nineteen eighty. To implement this you can screen for exchange traded funds with proven performance in high inflation low growth periods. Focus on energy, broad commodities, and TIPS while avoiding long duration fixed income. You should also avoid overexposure to private credit that cannot easily refinance at higher rates. Platforms like Wealthsimple or Interactive Brokers allow easy exchange traded fund rotation with low commissions. Rebalance when inflation metrics or oil supply data shift the regime probability. This strategy worked best in the nineteen seventies inflationary decade but carries risks including high volatility in commodities. There is also potential opportunity cost if inflation moderates faster than expected. The key discipline is treating it as probabilistic regime allocation rather than a permanent tilt. With these regime risks front and center we are putting capital to work in a sector directly benefiting from the commodity dislocation. Here is today's Practice Investment. This is a simulated trade for educational purposes only with no real money involved. This is not financial advice. For our weekly hold we are selecting TECK, Teck Resources listed on both the T S X and N Y S E. The strategy is sector rotation into mining on positive earnings reaction amid commodity supply disruptions. The catalyst is an earnings beat combined with investor focus on sector rotation and commodity dynamics. The technical setup showed a positive price reaction to the earnings release. We will monitor whether it sustains above recent short term moving averages with volume confirmation. On risk we note that rising fuel costs could pressure margins going forward. Our maximum acceptable loss is capped at six to seven percent with a predefined stop. The target is plus two percent to plus six percent. Confidence is medium because the earnings catalyst and sector rotation provide two aligned factors. But fuel cost risks create a clear uncertainty that prevents high conviction. This trade demonstrates how to evaluate company specific results within a broader macro and sector context rather than in isolation. You should practice identifying when an earnings beat aligns with or conflicts with larger commodity or input cost trends. The exercise reinforces the value of written targets and stops regardless of whether the position ultimately delivers alpha versus the NASDAQ. We will track this one all week and evaluate it next Friday. Before we get too excited about the new position let us review what happened in yesterday's Flash Trade. It is a painful but instructive reminder. In the CLDX Flash Trade we entered at thirty five point seven nine on the analyst upgrade and positive Phase three data. We exited at thirty four point thirty eight for a loss of three point nine four percent. That equals minus thirty nine dollars and forty cents on a one thousand dollar position. Even with a clear binary catalyst the stock moved against us. Expectations were already priced in and sector momentum was absent. This reinforces the critical process gap in data verification. Rule: Always verify data availability from multiple providers before declaring a weekly hold closed. Two practical tools that could have helped us avoid that outcome are worth highlighting today. First is implied move from options pricing. This technique uses options prices specifically at the money straddles to quantify the percentage move Wall Street is pricing in ahead of earnings. When implied moves appear cheap relative to historical post earnings volatility it can signal asymmetric opportunity. It gives individual investors an edge by revealing when the market may be underestimating uncertainty. This allows better position sizing or volatility based strategies. Intermediate options users on platforms like Interactive Brokers or Questrade can access this directly in the options chain seven to ten days before reports. No special subscription is required beyond standard broker tools. Second is insider transaction monitoring. Services that surface timely Form four filings let you see when executives buy shares with their own capital. For example Nike chief executive Elliott Hill purchased twenty three thousand six hundred sixty shares. These transactions provide a data point on internal confidence though they should never be used in isolation. The edge comes from piggybacking on information asymmetry while combining the signal with technical confirmation and valuation checks. Canadian investors can use free S E C E D G A R searches or paid platforms like Unusual Whales for alerts. Always verify the size, timing, and whether the buyer has a history of well timed purchases. While we are scanning for edges here are four Quick Hits that caught our attention this morning. Tesla has now generated more than twenty billion dollars in cumulative free cash flow. This highlights improving capital efficiency and cash generation power. Review existing E V and A I exposure and consider adding on a five to eight percent pullback if the free cash flow trend remains the primary long term driver. AMD's market capitalization climbed above five hundred billion dollars in after hours trading for the first time. It came with a more than six percent gain. Rebalance any single name semiconductor positions that now exceed five percent of total portfolio weight following the valuation expansion. SoftBank is seeking a ten billion dollar margin loan collateralized by its Open A I shares. This is amid continued A I investment appetite. Audit personal margin usage and reduce leverage if A I themed holdings represent more than twenty five percent of your account. FIGR shares fell nine percent despite reaching a one billion dollar lending milestone. Broader sentiment weighed on crypto linked equities. Avoid initiating new positions in blockchain based fin tech names until daily volatility drops below four percent and price stabilizes above recent lows. Looking at our overall simulated portfolio after eight trades the win rate sits at thirty eight percent with three wins four losses and one break even. Cumulative profit and loss is minus forty one dollars and fifty six cents. Average return per trade is minus zero point three eight percent. The best trade delivered plus seven point eight eight percent while the worst was minus seven point four nine percent. We are currently on a one loss streak. Our A I analysis is learning from these macro rotation patterns and adjusting the screening process accordingly. This remains a learning journey and you can apply the same analytical discipline to your own portfolio decisions. Now here is something that most retail investors get wrong and it has cost money before the lesson sinks in. Imagine you allocated fifty thousand dollars to a private credit fund in twenty twenty four seeking steady eight to ten percent yields with low volatility. Your quarterly statements show consistent returns and a stable net asset value. But behind the scenes the fund is likely using mark to model valuations instead of observable market prices. This means losses from defaults can remain hidden for one to two quarters before appearing in reported numbers. Unlike publicly traded bonds that reprice daily private loans are valued based on internal models. Current data shows a shadow default rate of six point four percent while headline figures sit under two percent. One sub segment sits at nine point two percent. Forty percent of borrowers are now generating negative free cash flow up from twenty five percent in twenty twenty one. Over three hundred fifty billion dollars in debt matures in twenty twenty six and twenty twenty seven at rates two to four percentage points higher than origination. Professionals always demand underlying loan level data, vintage year performance breakdowns, and manager skin in the game metrics before committing capital. They also cap exposure to any single private credit manager at five to ten percent of the overall portfolio. You should stress test defaults at two to three times headline figures and maintain strict liquidity buffers. The biggest misconception is believing the reported low volatility and steady net asset value reflect economic reality. Instead always stress test private credit holdings by assuming default rates two to three times higher than the headline figures. Open your brokerage account whether T F S A, R R S P or non registered and locate your three largest holdings. For each note the percentage of portfolio and whether it would benefit or suffer in a stagflation regime. Energy and commodities are positive while long duration bonds are negative. Decide on one specific reallocation you would make this week if inflation data continues to surprise to the upside. It takes under fifteen minutes. Before we wrap tomorrow we will examine how to use options implied moves to position for potential volatility spikes in the commodity complex. That's it for today's Modern Investing Techniques. The resources page has links to everything we discussed. Subscribe and share with someone who wants to go beyond index funds. See you tomorrow. This podcast is curated by Patrick but generated using AI voice synthesis of my voice using ElevenLabs. The primary reason to do this is I unfortunately don't have the time to be consistent with generating all the content and wanted to focus on creating consistent and regular episodes for all the themes that I enjoy and I hope others do as well.