The last few months have been tumultuous. After 3 consecutive winning positions in 3D systems (DDD, long, short, then long again), a large speculation in Tesla Motors (TSLA), and a large winning position in the USDJPY, I was up more than 70% for the year.

I took this as a sign that my ideas were working. The logic I was using made me believe that the moves in the USDJPY would continue, and, in fact, strengthen, on the basis of a stronger trend in Japanese growth leading to optimism about Abenomics. However, I left myself vulnerable by not managing my risk very well.

By upping my position in the USDJPY at a higher level, I left myself with a worse buy-in price. This subsequently led to large losses when the dollar became weaker. I also failed to realize the correlation between the Nikkei and the weaker yen. Investments in Japan by large international institutions are hedged against currency depreciation by buying the USDJPY. Thus, when institutions began to pull out of Japan on the back of a normal correction (a test-period for the Abenomics trend), the USDJPY fell as well.

In addition, the US Dollar became increasingly volatile because of these large bets. Because international investments in the US lead the US Dollar to correlate with the US Stock Market, a decline in world-wide equities amplified the fall of the USDJPY in two ways – a weaker dollar and a stronger yen.

This led to two subsequent losses in the USDJPY. I made a third mistake by over-leveraging. After taking a loss, it is best to take a step back, re-evaluate, and start again with smaller positions. However, I did not learn my lesson – my earlier gains in the year left me too cocky.

I then moved on to short 3D Systems. This was not a bad technical play – two analysts had turned against the stock, and the growth rate is slowing enough to make the P/E look ludicrous. In addition, there was a setup for a technical correction on May 14-16. I thus set my bets – but again made the mistake of overleveraging. My over-confidence led me to over-look something else as well – the technical setup of a flag formation, as the stock constantly bumped up against the May 14 high. Eventually the stock broke out, and I took my third loss for the year.

I finally came to my senses and stopped the bleeding. I ended the losses, and I still maintained a modest profit overall for the year, something in excess of 10% – not terrible, but small in comparison to the run in the S&P. Now the time has come to re-evaluate. I have made some small speculations on the China recovery and a small short on ExOne’s fall. The latter is something that I believe will sustain itself for some time, as momentum changes directions. In other words, I believe that ExOne has begun a turnaround.

3D Systems will eventually be a good short, but the technicals have to be set up correctly. It will be tricky to decide the appropriate amount of leverage to use, and the timing of the play. I believe the pessimism is growing, and the risk-reward to shorting is favorable (even now), but my own weakened position leaves me vulnerable to even small risks right now.

I have also been lucky enough to salvage some additional profits from my bets in Penn West Virginia (PVA), C&J Energy (CJES), and BNCCorp (BNCC). These plays may eventually bear fruit after a long waiting period.

The losses were hard to bear, but they have given me caution and sharpened my wits. With these new tools, I plan to proceed with a more modest approach to my investments.

After my original article, I sold my Tesla speculation, with the intention of trading back into it within a few weeks. At about the same time I wrote my second article, I was looking for a pullback below the $100 mark, perhaps into the low – $90 range. I had expected that the pool of shorts that needed to cover their failed bets would diminish, and sellers would suddenly overwhelm buyers. I believed this would be a temporary phenomenon that would serve as a test of the Tesla momentum. In fact, I was so bold as to proclaim the winding down of the sale of certain credits that Tesla was profiting from would lead to this pullback “test” as early as the end of the 2nd quarter.

So much for predicting the future. Tesla has rallied well beyond my wildest expectations. To compound the matter, Goldman Sachs’ call for an $84 stock price did nothing to scuttle momentum. From a slower-moving reflexive boom, Tesla has now become a full-blown bubble.

What is gripping the stock can only be described as mass hysteria. Or, perhaps, mass delusion. There is no timetable for production that can justify these prices now. Every day I read more and more unrealistic assumptions written, by those who have been overjoyed at their profits, and who grow greedy for more.

Take them. Take your profits, and be happy. There is no playing this game at this point. To do so, is to play with fire.

I have stood faithfully by the long dollar, short yen trade for some time. Though I suffered a major loss by over-committing prior to the break in the first few weeks of June, I was able to reestablish a smaller position at a good price, and I have stuck with this through the uptrend.

The trend is reinforcing. If the Japanese get their goal of inflation, interest rates will rise. This will make the government debt prohibitively expensive. Though the government is bound to try all sorts of tricks to keep the interest rate down, the only thing that will surely work is purchasing more government bonds with newly printed yen. This reinforces the downward move of the yen, accelerating inflation, and increasing the upward pressure on interest rates. It is like trying to force a growing helium ballon under water. Eventually, it will out. And the Japanese government will be left broke.

The government must know this. They are deceiving themselves if they think they can grow out of this problem by inflating the economy and increasing tax revenues. With insanely low tax rates and a massive debt, the interest payments are bound to grow faster than tax revenues. Which assures the eventual government crisis.

Kuroda, the head of the Bank of Japan has committed to no “step-wise” monetary measures. If the BOJ sticks with its word, the collapse will happen sooner rather than later. In which case, M3 would collapse (as defaults become common in a rapidly rising interest rate environment), which would lead to a deflationary debt spiral, shooting the yen upwards. I would be badly burned in such a scenario. In the opposite case, if the BOJ does not stick with its word, they will take the measures I have mentioned above, printing more yen to buy government bonds to keep the government from defaulting. I am biased toward the latter scenario. I think that if interest rates begin to rise too soon, officials will believe that “Abenomics”, the current government stimulus program, has not had time to work yet, so they will be convinced to push forward with a second round of yen printing. But I cannot lever up as much as I would like on this trade, as a sharp rise in interest rates could de-rail it at any moment.

The most worrisome thing about betting on the dollar with yen, is the fact that I am betting on the dollar at all. The dollar is the least bad option of all the world currencies, because it is the only one that has made a commitment to stop easing – i.e. M1 will not grow significantly once the Fed pulls back its policy. The effects on M3 – whether banks are really lending more – remain to be seen. I may transfer the yen short to a different currency once the Federal Reserve begins to pull back QE.

The Federal Reserve has stated that easing will continue for some time. The market views this as a backtrack of the Fed’s wording. In reality, Ben Bernanke never committed to pulling back QE3 in the first place. He has only reiterated the same statement in different ways that the market interpreted differently each time. The main message is: The Federal Reserve will pull back QE3 when the economy is ready. As to what that means, perhaps only the Fed knows. My best guess is that it will happen in the last few months of the year.

But it is certain that it will happen within the next year. And the effects of this have already manifested in the market, as participants try to move ahead of the central bank. Bonds have begun their descent. They have been too high for too long, and have fallen quickly. With knowledge of rising interest rates, everyone is trying to get in to position. REITS have also fallen. All income investments look less attractive when you know you can get a higher risk free interest rate in the near future.

Gold has begun to fall. I believe this is more in anticipation of the eventual rise in the dollar than in reaction to the actual rise in the dollar. That is, gold has gotten ahead of itself. The fall has already started to correct, after the Federal Reserve clarified that it will not stop easing any time soon.

This will have negative effects on oil and gas. So my dry gas plays are not as sure of a bet anymore. More demand will have to come online to push up prices in the face of this supply. Perhaps the Oil and Gas E&P’s were prescient in their view by not upping production earlier in the year. I stand corrected.

Rising interest rates generally have negative connotations for stock prices. However, the Federal Reserve is able to pull back QE because of real strength in the underlying economy. This biases me to think that stocks can continue to rise in the face of these interest rates. Since stocks have already risen so much (on the back of global speculation) there is not a lot of room to rise. Stocks are now at record highs. I do not imagine we will be much higher by the time the year ends.

I am in a precarious situation. Having already placed my bets in the oil and gas sector, I am stuck. I have a margin of safety on many of them – Penn West Virginia is trading significantly below Book Value, for example – but the prices of these may decline in the face of declining commodity prices. C&J Energy does look like a fairly sure play – the fracturing market will eventually recover – however the timing is uncertain, because of the uncertainty in the commodity market.

This leaves few options. Perhaps buying gold in Japanese Yen, as Dennis Gartman suggested. However, I do not have experience in the futures market, and I am not ready to experiment in it at this time. China is likely oversold at this point, so a small speculation may be warranted.

I will also continue to keep an eye out for small cyclical companies with margins of safety, with a mind to purchase on the next downturn in the market. All cyclicals should continue to rise for the next few years, provided the unemployment rate can continue the downward trend.

A strengthening dollar means commodity prices will decline. This will be negative for my oil and gas investments. A major part of my thesis was the fact that natural gas exploration and production companies were not reflecting the increase in the Henry Hub natural gas benchmark. Unfortunately, before natural gas producers have had a chance to respond to the change, natural gas prices have begun to descend, as expectations for the Federal Reserve’s end of QE3 push the dollar higher.

I have purchased producers that stand at a discount of 50% or more of their book value, which I believe is a reasonable margin of safety to insure against declines in the price of natural gas down to levels closer to $3.50. However, the major impetus for a rise in the stocks is being weakened, so I cannot justify purchasing more of these companies, UNLESS they have price hedges to secure the sales price of their gas.

Constellation Energy Partners appears to fit this bill on first glance, so I am doing more research to investigate. Penn Virginia, however does not have these prices hedges, but trades at a greater discount to book value. I believe these stocks are insulated from extreme declines, but the strength in the dollar is lowering the upside potential.

Disclosure: I am long PVA. I may purchase shares of CEP in the next 72 hours.

Tesla Motors

On this speculation, my fundamental thesis is still intact. However, I have also closed my position on this.

Paul Santos wrote an article detailing the precarious position of short sellers of Tesla Motors – it costs too much to initiate shorts, and those who had previously initiated a short are being forced out their positions simultaneously.

However, I drew an additional conclusion from the article: the shares short are rapidly decreasing. Once the majority of the shorts who are being forced to cover are driven out of the market, there will be a sudden drop in demand for shares. Simultaneously, Tesla has announced its biggest offering ever, which will flood the market with supply. Thus, I believe these two forces will combine to drop the share price in a correction.

I will likely buy on a pullback, as I believe the bull run has long legs. This offering will likely be soaked up by new long investors, and the tremendous injection of capital should allow Tesla to far exceed its previous expectations of sales.

I cannot justify holding my long position, as I believe that the pullback will cause the price to dip lower than its present position. I may be wrong, but I am willing to pay to see the effects of the end of the short covering. I believe that Tesla will see much higher prices than $92 in 2013 – the fervor surrounding this company is capable of doubling the shares yet again.