BITQ - Examining 2022 To Date; And Looking Ahead

Summary

• My current view of securities discussed in my Seeking Alpha articles from earlier in 2022 are presented.
• Such securities include BLOK, CLAR, BITQ, AJX, AJXA, GECC and EPV.
• My current portfolio allocation and bearish market forecast are highlighted.

Introduction

2022 has been a difficult year for investors, particularly long only investors, as fixed income and equity securities have, on balance, fallen materially. It is within this context that I assess how the securities discussed in my 2022 Seeking Alpha articles have performed. Those articles covered the Amplify Transformational Data Sharing ETF ( BLOK ), Clarus Corporation ( CLAR ), the Bitwise Crypto Industry Innovators ETF ( BITQ ), Great Ajax Corporation ( AJX ) and its publicly traded debt ( AJXA ), Great Elm Capital Corporation ( GECC ), and the ProShares UltraShort FTSE Europe ETF ( EPV ).

Herein, I analyze the recommendations from those articles and my current view of each of these stocks/ETFs.

The Amplify Transformational Data Sharing ETF (referred to herein as "BLOK")

I wrote an article about BLOK in July, and that article followed a crypto portfolio update that dropped in April. In that update, I noted that:

The last crypto bull run mostly ended on or about November 10, 2021. While opportunities abound in the long run, it is (still) time to be cautious and selective and to have a plan should a deep crypto winter be in the cards. Of course, there will be oversold rallies along the way. I hope to trade and fade the bear market rallies...."

With the foregoing in mind, and the continued Federal Reserve Bank (the " Fed ") increases in the Fed Funds Rate, it is no surprise that I was bearish on BLOK in July. As of this writing (10/18), and even after a two-day rally, BLOK has materially underperformed the S&P 500:

• BLOK change to date:-16.60%
• S&P 500 change to date:-9.93%

In short, I believe we are in the middle innings of a crypto winter. Moreover, the Fed is going to continue raising rates , and earnings are likely to disappoint (indeed estimates have been revised downward ). I thus remain bearish on BLOK.

As an aside, the only crypto investments I currently hold are Bitcoin ( BTC-USD ) and the publicly traded notes of Argo Blockchain PLC ( ARBK ), which notes trade under the ( ARBKL ) symbol. Notably, these investments have not performed well in 2022, nor did any of my other crypto investments (which were sold earlier in the year). I made great money on crypto investments in 2020 and 2021 and gave back 1/4 to a 1/3 of the gains in 2022. In my (current) view, the crypto space is dead money for the next 4-6 months.

Clarus Corporation

I wrote an article about Clarus Corporation ( CLAR ) (hereafter " Clarus ") in August 2022. Clarus is a developer, manufacturer and distributor of outdoor equipment and lifestyle products, including brands such as Black Diamond®, Sierra®, Barnes®, PIEPS®, SKINourishment® and Rhino-Rack®. While I was bearish on the market at the time of writing such article, my bullish thesis on Clarus was as follows:

1) Clarus has strong niche brands which are showing positive momentum and sales trends.

2) The Company's balance sheet is in good shape and the Company's debt is modest. Financial covenant compliance is secure.

3) Strong brands and financial flexibility, coupled with secular trends that favor outdoor activities and defense, give management an enviable growth runway (of course, capital allocation decisions by management will be key).

4) I have taken a small position in Clarus, which, as noted above, i s paired with a short of the Russell 2000 via RWM ."

[Emphasis Added.]

Within the first few weeks of my Clarus article dropping, the stock increased by nearly 50% and I sold 1/3 of my position (and noted it in the comments to the article). Soon thereafter the stock dropped precipitously and it is currently trading under $13. My thesis on Clarus has not changed, however. I remain bullish on the company, but not the market, and, thus, continue to pair this investment with a short of the Russell 2000.

Notably, certain institutional investors have been increasing their stakes in Clarus, including one institutional investor who apparently did so in violation of Clarus's corporate governance documents.

Bitwise Crypto Industry Innovators ETF (hereafter "BITQ")

I wrote a bearish article on this investment in August 2022. Since that time, BITQ has dramatically underperformed the S&P 500 (as of 10/18).

• BITQ change to date:-39.90%
• S&P 500 change to date:-13.09%

I remain bearish on BITQ for the reasons noted in the analysis on BLOK above.

Great Ajax Corporation (hereafter, "AJX")

In my August article on AJX, I averred that I was not interested in the equity of the company due to, among other things:

[A] declining net asset value, tepid quarterly GAAP earnings for the most recent quarter (June 30, 2022), declining stockholder equity, the potential misalignment of incentives associated with external management, the current market environment (i.e., rising rates and rising credit risks) and the Company's relatively short and unimpressive track record as a public company."

Since that time, AJX has underperformed the S&P 500 by a wide margin (as of 10/18):

• AJX change to date:-17.68%
• S&P 500 change to date:-11.41%

I did, however, purchase some publicly traded notes of the Company ( AJXA ) (CUSIP No.38983D409) (the " Notes "). The Notes mature April 30, 2024 (roughly 18 months from now) and yield more than 7.50%. The Notes are senior to the Company's preferred and common shares and I continue to believe that management would cut the common and preferred dividends to avoid defaulting on the senior Notes. In addition, under the external manager management agreement, AJX has the ability to pay 50% of the manager's fee in common stock, which would provide liquidity in a distress scenario. Of course, AJX is not an investment grade company and is engaged in a risky leveraged business. That said, I currently believe the reward is worth the risk with respect to the Notes, particularly with the relatively short maturity.

Great Elm Capital ("Great Elm")

I wrote a bearish article on Great Elm ( GECC ) in August and, since that time, Great Elm has underperformed the S&P 500 by a wide margin (as of 10/18):

• GECC change to date:-18.98%
• S&P 500 change to date:-8.32%

My bearish thesis, summarized from that article below, has not changed:

I am BEARISH on the Company for a variety of reasons, including poor quarterly financial results for the most recent quarter (June 30, 2022); a significant decline in net asset value per share for the quarter and consistent declines in net asset value throughout its history; the misalignment of incentives associated with external management; the current market environment (i.e., rising rates and rising credit risks); the Company's inability to deliver a consistent dividend (cut recently as noted below); and the Company's overall unimpressive track record."

ProShares UltraShort FTSE Europe ETF (hereafter, "EPV")

I wrote a Bullish article on EPV in September and since that time, EPV has materially outperformed the S&P 500 (as of 10/19):

• EPV change to date: 8.20%
• S&P 500 change to date: -5.41%

I continue to be very Bearish on Europe and, thus, Bullish on EPV. My EPV buy rationale from the September article is restated below:

[I]nvestors are "hoping" a bottom is in place in the European equity markets. In this regard, I think investors are underestimating how strong this recession is likely to be, and also underestimating how much further the recession has to go in Europe, where interest rates were just raised by 75 basis points. If the U.S.'s Federal Reserve Bank has been behind the curve on inflation (it's not transitory after all!), then European central bankers are likely even further behind the curve on inflation.

In addition to rising interest rates, I do not think the markets have fully priced in the adverse effects that the energy crisis will have on the earnings of European companies. As has been widely noted, the West's proxy war with Russia and Putin's response to the West's sanctions have resulted in soaring consumer electricity prices in Europe. A cold and dark recession for Europe appears to be nigh (if not already at hand), exacerbated by the continent's dependence on Russian natural gas. (See "All-In Podcast," for a great discussion .)

There is likely no quick fix to Europe's energy problems as the continent seems to have undervalued energy independence (in favor of the Green agenda) and, as a result, higher energy prices will increase input costs and reduce company profits. Many European manufacturers have recently shut down plants , continuing a process that started in the spring of 2022. The energy crisis will likely only get worse in the winter, which is coming soon.

If that wasn't bad enough, disruptions in the supply of food and materials due to the Ukraine War and China's Covid shutdowns are likely to further slow the European economy. Further, as the Chinese and U.S. economies slow, European exports (an important component of European public company profits) to those countries will likely decline; indeed, this is, in my view, a deepening global recession that will likely hit Europe hardest. Things will likely only get worse as the Fed (and the ECB) increase rates into this global recession."

Portfolio Allocation

Heading into the last two months of the year, my portfolio, which is clearly tilted in a cautious direction, is allocated as follows (with representative holdings noted):

Six Month Outlook

Looking out over the next two quarters, I remain very bearish. Rates are rising, inflation is not backing off, the housing market cannot handle 7% mortgage rates in my opinion, and earnings are starting to decline. Even Apple ( AAPL ) is apparently cutting back production of its new iPhones.

Having lived through the technology bubble and the Great Financial Crisis, experience tells me it is better to wait things out on the sidelines when bubbles burst, and friends, I think this has been the mother of all bubbles. From Jeremy Grantham:

Only a few market events in an investor’s career really matter, and among the most important of all are superbubbles. These superbubbles are events unlike any others: while there are only a few in history for investors to study, they have clear features in common....

The U.S. stock market remains very expensive and an increase in inflation like the one this year has always hurt multiples, although more slowly than normal this time. But now the fundamentals have also started to deteriorate enormously and surprisingly: between COVID in China, war in Europe, food and energy crises, record fiscal tightening, and more, the outlook is far grimmer than could have been foreseen in January. Longer term, a broad and permanent food and resource shortage is threatening, all made worse by accelerating climate damage.

The current superbubble features an unprecedentedly dangerous mix of cross-asset overvaluation (with bonds, housing, and stocks all critically overpriced and now rapidly losing momentum), commodity shock, and Fed hawkishness. Each cycle is different and unique – but every historical parallel suggests that the worst is yet to come. "

[Emphasis Supplied]

In summary, be careful out there, remain disciplined and have a bear market plan (and execute it)!

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