Chinese Bombshell, Aikido, and a Long Natural Gas Trade

Alex here with this week’s Macro Musings.

As always, if you come across something cool during the week, shoot me an email at alex@macro-ops.com and I’ll share it with the group.


Recent Articles/Videos —

The Principle of Bubble Rotation — Alex comments on The Principle of Bubble Rotation which states that whatever outperformed last cycle will not outperform in the next cycle.

Trade Wars? Who Cares — AK explains why the trade wars with China don’t matter to the market right now.

The Fed Hates Emerging Markets — Liquidity is getting drained from emerging markets. Find out why in this video.


Articles I’m reading —

First off, take 3 minutes and read this thread from @Fritz844 (link here). He talks about the Chinese deleveraging, renminbi deval, trade war impacts and what all this could mean for the rest of the world. It’s a topic we’ve been writing about over the last few months but it’s something that is strangely getting little attention.

I get the sense that the market has been lulled into the false comforting belief that China will just inject credit again if things get too bad. But there’s the real possibility that that won’t be the case this time around. And lest we not forget that China makes up more than half of global demand for many commodities… There will be major 2nd and 3rd order effects if this ends up playing out. @Fritz844 concludes with the following.

I read a lot of quarterly investor letters. Mostly from fundamental value managers that I respect. Bill Nygren of Oakmark Capital is high on that list. He’s one of the rare breeds of managers that has been able to successfully evolve and adapt as markets and the investing landscape has changed over time. You can learn a lot from reading his letters, which are filled with insight into his thinking and investment process.

Here’s his latest (link here) where he talks about how his thinking on ‘value’ has changed over the years and how one should go about valuing a company’s assets in a way that GAAP accounting fails to account for. It’s a short and worthwhile read, here’s a cut from the piece.

But, as the economy has become more asset-light, intangible assets—such as brand names, customer lists, R&D spending and patents—have become more important. Today, the relative importance of tangible assets compared to intangibles has completely flip-flopped from what it was 40 years ago. Intangibles now account for over 80% of the average company’s market value. But much like Graham, GAAP doesn’t even attempt to value those assets.

For those “exceptions,” true value investors should be able to explain how they’re calculating their margin of safety: What are they getting that they don’t think they’re paying for? As an example, let’s look at the largest holding in both Oakmark and Oakmark Select, Alphabet, a stock that is primarily owned by growth managers. Alphabet’s 2018 P/E is 26 times consensus estimates, which to us seems to be in the right ballpark given the expected growth from its search business. However, the company’s $115 billion in cash, YouTube and other bets (including Waymo), in total, contribute nothing to our estimate of current earnings, despite having tremendous value. That’s what we’re getting for free, which creates our margin of safety.

Michael Mauboussin shared an awesome library containing famed capital allocators writings that was put together by Austin Value Capital. You’ll find all the letters from Munger, to Fairfax, Constellation, Michael Burry and more. Check it out, there’s some great stuff in there (link here).

Lastly, here’s a great slide deck from Hayden Capital pitching the long case for iQiyi (IQ) which is China’s version of Netflix.


Podcast I’m listening to —

Patrick O’Shaughnessy’s latest Invest Like The Best with guest pseudonymous private fund manager @modestproposal1, was one of the best podcasts I’ve listened to in a while. Patrick’s podcast has become hands down my favorite market related podcast. The guy is continuously putting out fantastic content and this week’s was no different.

Modest Proposal gives a master class on value investing while also diving deep into the major trends in media, retail, and tech. You can find the link here, give it a listen, you won’t be disappointed.

Here’s some great notes on the interview shared by @victoriouscake.


Chart I’m looking at —

I’m sure you’ve all been seeing plenty of doom and gloom pieces in circulation, calling for an imminent recession because the yield curve is flattening. Well, here’s a tweet and a chart from @OddStats that will hopefully help you sleep better at night.

Plus, it’s also quite likely that the shape of the yield curve is less of a reliable recession indicator this time around. There’s a few reasons for this, but they all come down to supply and demand — as all market pricing does.

QE plus low/negative rates in Europe and Japan have led to a dwindling supply of long-dated safe assets and as a result, a persistent bid for greater relative yielding US paper from insurers and pension funds who need to match their liabilities with long duration safe assets. So unless we see German bund yields rise significantly, it’s tough for US 10yr yields to get too high off the floor; which is actually bullish for stocks.


Trade I’m looking at —

H/T to Mark Dow for first alerting me to this stock. It’s a beauty of a chart… The company is Energy transfer Partners (ETP), which is a midstream natural gas player (chart below is a weekly).

Insiders have been buying a good deal of company shares over the last year.

I’m just starting to look into the company but the chart is so cheery, I might throw on a small starter position soon.


Book I’m reading —

I’m nearly finished reading The Spirit of Aikido by Kisshomaru Ueshiba. I picked this one up in a used bookstore a few weeks ago because I liked this quote on the back cover:

When I grasped the real nature of the universe through budo, I saw clearly that human beings must unite mind and body and the ki that connects the two and then achieve harmony with the activity of all things in the universe.  ~ Morihei Ueshiba

The book’s about the philosophy and artform of Aikido, as well as some color and history on the founder, Morihei Ueshiba. It’s similar to The Book of Five Rings by Musashi and The Unfettered Mind by Soho. It’s got a lot of Zen Buddhist wisdom and discussion on the history of Japanese martial arts. I’ve enjoyed it and would recommend it if you’re into this type of stuff.


Quote I’m pondering —

In all matters related to the arts, including martial arts, superiority is determined through training and practice, but true excellence is dependent on ki. The grandeur of heaven and earth, the brilliance of sun and moon, the changing of the seasons, heat and cold, birth and death, are all due to the alternation of yin and yang. Their subtle working cannot be described by words, but within it all things fulfill life by means of ki, Ki is the origin of life, and when ki takes leave of form, death ensues. (Tengu geijutsu ron) ~ Morihei Ueshiba

Work on harnessing and focusing your Ki… I’m not completely sure what that means but it sounds cool.

That’s it for this week’s Macro Musings.

If you’re not already, be sure to follow us on Twitter: @MacroOps and on Stocktwits: @MacroOps. I post my mindless drivel there daily.

Here’s a link to our latest global macro research. And here’s another to our updated macro trading strategy and education.

 

Cash Flows Over Earnings, A Changing Asia, And Wisdom From Mr. Coolidge

Alex here with this week’s Macro Musings.

As always, if you come across something cool during the week, shoot me an email at alex@macro-ops.com and I’ll share it with the group.


Recent Articles/Videos —

Probabilities Not Predictions – Alex writes about how our job as traders is to size up the asymmetry of outcomes rather than make predictions.


Articles I’m reading —

Michael Mauboussin shared on the twitter an Amazon shareholders letter from 2004 where Bezos talks about why Amazon focuses on increasing free cash flow per share over the more popular earnings per share. He lays out in layman terms why free cash flow is a superior metric when evaluating the ability of a business to create value for shareholders. It’s a simple, yet for some reason, widely misunderstood concept. It’s a short read and is five minutes well spent, check it out (link here).

One of the more powerful secular trends in the world today — one which is only beginning —  is the shift in the world’s economic and geopolitical center of gravity from the West to the East. Here’s an excerpt from one of our monthly reports explaining why that is.

By 2030, global middle-class consumption could be $29 trillion more than in 2015. Only $1 trillion of that will come from more spending in advanced economies. Today’s lower middle-income countries, including India, Indonesia, and Vietnam, will have middle-class markets that are $15 trillion bigger than today.

We are witnessing the most rapid expansion of the middle class, at a global level, that the world has ever seen. The vast majority— almost 90 percent—of the next billion entrants into the global middle class will be in Asia: 380 million Indians, 350 million Chinese, and 210 million other Asians.

It’s a simple numbers game in which the West can’t compete. And it’s going to have an enormous impact on how the world looks 20 years from now.

On that note, the South China Morning Post (SCMP) wrote a great long form piece on how things are changing over in Asia and some of the growing pains they’re experiencing, as a result. Here’s a snippet from the piece and you can find the article here.

A continued boom, however, is very much in Beijing’s interests, giving China’s construction sector, which is under stimulated at home, opportunities to build. In 2016, 30 per cent of all foreign investment into Cambodia came from China, and at a meeting between Hun Sen and Chinese President Xi Jinping in December, an additional US$7 billion was pledged by Chinese companies. The fact that Chinese state-owned enterprises are involved in the Thai Boon Roong Twin Trade Centre has convinced some analysts that the skyscrapers will actually materialise.

China’s “Belt and Road Initiative” has spurred much of the construction boom elsewhere in Asia, too. Last year, India committed to building 83,000km of roads before 2022. Fourteen skyscrapers, each to stand more than 200 metres tall, are planned for Jakarta, the capital of Indonesia. And Philippine President Rodrigo Duterte has launched a “Build, Build, Build” campaign and ambitious infrastructure spending spree.

And since we’re already talking about Asia, here’s a must-read from the site Macro Polo (a think tank of the Paulson Institute) discussing why it’s unlikely we’ll see China do an about-face on their deleveraging, this time around.

This is the number one thematic we’re tracking this year. China has been and still is the most important macro variable this cycle. Policy out of Beijing affects the rest of the world; especially emerging markets and commodities. Pay attention to this as it’s likely to become a much more dominant narrative in the months ahead.

Lastly, here’s a great write-up from Brad Setser where he lays out the long list of China’s trade abuses which led to the budding trade-war we have today. Here’s the link.


Chart I’m looking at —

This is depressing. These two charts from Goldman Sachs show the percentage of the US population that is either addicted to opiods or incarcerated, relative to every other developed nation. We are doing something horribly wrong in this country…


Trade I’m looking at —

Last summer we began pounding the table calling for much higher crude prices. In the January edition of our Macro Intelligence Report (MIR) titled 2018 Predictions Strong Opinions, Weakly Held  we updated this bull case and wrote:

Despite this run up in oil and energy stocks, we’re still hearing primarily bearish takes on the sector with traders looking to call a top after every rise.

Typically after a 30% rise over a short few months, a bullish narrative becomes popularized and widely adopted. But we have yet to see that. This is all the better because the greatest bull markets climb a mountain of disbelief. And that is what we’re seeing here.

This negative sentiment just bolsters the bull case. We think 2018 will be the year of the commodity bull. We expect WTI crude oil to climb over 20% higher and finish the year above $75bbl. This will drive energy stocks (our basket included) up by multiples, and the energy sector will finish the year as one of the best performing sectors.

I’m still bullish on the longer-term prospects for oil but I believe that Texas Tea may be in for a rough patch in the weeks-to-months ahead.

The primary reason is that sentiment and positioning have clearly shifted from negative at the start of the year to excessively bullish today. This chart from our friend Adam over at Free CoT Data shows how stretched net speculative positioning has become. Specs are more long now than in 14’ and we all know how that turned out.

I’m not expecting to see a sell off anywhere close to the one we saw in 14’. But, considering the stretched positioning and sentiment, and the fact that we’re entering what’s historically been a weak stretch of the year for crude, I’m willing to take a swing at the short-side. I think we could easily see a pullback down to the $60 range.


Book I’m reading —

Here’s a pic of my summer reading list that I’ve put together so far. It’s much lighter than usual on the market/economic side because I’m somewhat burnt out on the subject, so I’m giving myself a short break.

I finished reading The Upanishads, translation version by Easwaran.

I also recently read The Dhammapada, which I liked, but I found The Upanishads to have a lot more meat. And to be honest, it’s probably one of the more powerful books I’ve read. Here’s just a few of the many wisdom laced passages from the text.

Human beings cannot live without challenge. We cannot live without meaning. Everything ever achieved we owe to this inexplicable urge to reach beyond our grasp, do the impossible, know the unknown. The Upanishads would say this urge is part of our evolutionary heritage, given to us for the ultimate adventure: to discover for certain who we are, what the universe is, and what is the significance of the brief drama of life and death we play out against the backdrop of eternity.

~~~~

You are what your deep, driving desire is. As your desire is, so is your will. As your will is, so is your deed. As your deed is, so is your destiny.

~~~~

The Self in man and in the sun are one. Those who understand this see through the world And go beyond the various sheaths Of being to realize the unity of life. Those who realize that all life is one Are at home everywhere and see themselves In all beings. They sing in wonder: “I am the food of life, I am, I am; I eat the food of life, I eat, I eat. I link food and water, I link, I link. I am the first-born in the universe; Older than the gods, I am immortal. Who shares food with the hungry protects me; Who shares not with them is consumed by me. I am this world and I consume this world. They who understand this understand life.” This is the Upanishad, the secret teaching.

I definitely suggest picking it up and giving it a slow read.


Quote I’m pondering —

Nothing in the world can take the place of Persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent. ~ Calvin Coolidge

Well said, Calvin.

That’s it for this week’s Macro Musings.

If you’re not already, be sure to follow us on Twitter: @MacroOps and on Stocktwits: @MacroOps. I post my mindless drivel there daily.

Here’s a link to our latest global macro research. And here’s another to our updated macro trading strategy and education.

 

 

Lessons Learned From Our Trading In 2018

To others, being wrong is a source of shame; to me, recognizing my mistakes is a source of pride. Once we realize that imperfect understanding is the human condition, there is no shame in being wrong, only in failing to correct our mistakes. ~ George Soros

I learned that everyone makes mistakes and has weaknesses and that one of the most important things that differentiates people is their approach to handling them. I learned that there is an incredible beauty to mistakes, because embedded in each mistake is a puzzle, and a gem that I could get if I solved it, i.e. a principle that I could use to reduce my mistakes in the future. ~ Ray Dalio

Alex here.

Every two quarters the Macro Ops team spends a week poring over our last six months of trading. We comb through our winners, losers, and the trades we almost pulled the trigger on, but didn’t take.

We keep detailed records of our reasoning for taking trades and our thoughts on the market at the time (running a newsletter helps). When reviewing, we compare these notes to how things actually played out. Our goal is to see what we got right, what we got wrong, and where we completely screwed the pooch.

This is the most valuable exercise we do. Nothing pays us higher returns than taking a step back and ruthlessly dissecting our process and execution. I’ve learned more from studying my trading journal than I have from reading any trading book…

Like Dalio says, “embedded in each mistake is a puzzle, and a gem”.

Pain + Reflection = Progress.

One of the great things about trading is that mistakes are inevitable and constant. This game is dynamic and complex and we’re all limited in our ability to understand the system of which we’re all an integral part — like the fish who know little of the water in which they swim. We all get things wrong…. a lot. This gives us plenty of puzzles to solve, gems to uncover, and truths to realize.

The Palindrome (George Soros), one of the best speculators to have played the game, had a win rate in the mid-30s. On average, 2 out of every 3 trades he made were losers. Yet, the guy was a perpetual money machine over three decades. He knew how to lose and still win. Being good at being wrong is the most important skill set a trader can develop.

One of my favorite market technicians, Ned Davis, put it like this,

We are in the business of making mistakes. The only difference between the winners and the losers is that the winners make small mistakes, while the losers make big mistakes.

Much of our job then, as speculators, is to learn how to make smaller and smaller mistakes by ruthlessly studying our big ones. This is how we uncover first principles that comprise the foundation from which the entirety of our process is built upon.

This is akin to Josh Waitzkin’s concept of “making smaller and smaller circles”.

He notes,

It’s rarely a mysterious technique that drives us to the top, but rather a profound mastery of what may well be a basic skill set.

I’ve spent years dissecting the habits and practices of the greatest traders. And I can tell you that there’s no secret to anything they do.

They are just incredibly efficient at executing the basics:

  • Cutting losses short / protecting capital
  • Sitting on hands / letting winners run
  • Mental flexibility / strong opinions weakly held

This is what we’ll be going over today. We will revisit the first principles of trading and see where we can make smaller circles and refine our thinking and process with the hopes of improving our performance going forward.

In this review, we will:

  • Dissect our biggest winners and losers (focusing primarily on the losers)
  • Cover lessons learned, the gems we can gleam from the mistakes we’ve made, and how we can improve our process

Enough with the fluff, let’s to get to the goods.

Over the last 6-months we’ve executed 54 trades. This number includes pyramiding trades, basket trades on a theme (which we view as a single position), and exiting trades from the prior year. In reality, the number of standalone trades we executed since the start of the year is closer to 25 which is around our sweet spot of averaging 3-4 trades per month.

Out of the 54 trades, 26 were winners and 28 were losers. This gives us a win rate of 48% year-to-date. This is above our long-term win rate which typically hovers around 41%. On average, our losing trades lost 55 basis points on our total capital and our average profits on our winners was over 2x the size of our losers.

Our biggest losing macro trades were:

  1. Long Purple Innovations (PRPL) where we lost 1.2% of our capital
  2. Long Yatra Online (YTRA) where we lost 1.1% of our capital
  3. Long Nikkei futures (NKD) where we lost 1% of our capital

Our losses adhere to the same power laws as our profits; 10-20% of our losers will account for 80-90% of our total losses. This year has been no exception. The losses on the above trades are multiples larger than the capital lost on the remaining 23 losing trades. Finding ways to reduce the size of our biggest losers can dramatically improve our overall results.

And just looking at these trades above, I recognize that most of these losses were not due to market randomness — losses are unavoidable — but rather to sloppiness in execution on our part.

Take Purple (PRPL) for example.

I entered this trade back in March, the stock quickly ran up 25+% only to gap down reverse on missed earnings. Because it’s an illiquid stock we weren’t able to exit the full position at our risk point and took a loss that was 20% larger than what we had intended.

This was stupid.

Because it’s a relatively new SPAC and is illiquid I should only have taken a position if I was willing to make it an investment; meaning size it smaller and widen the risk point by a lot. I still think the stock is an interesting value, especially now at current levels. But, the mattress space is getting crowded and my experience in investing in that type of consumer business is limited. My position size should have reflected this limited experience. So instead of taking what should have been a 35bps loss, it was instead 4x larger. This is not a mistake I should make again.

Yatra Online (YTRA) is a similar case study. It’s also a relatively new and illiquid stock. We entered our initial position with too much size and too close of a stop. We have long-term conviction on the stock and our positioning and risk points should have better reflected this.

We have since reentered the stock with a smaller size and much wider stop. But we should have done this on the first attempt. My position sizing needs to better reflect the volatility and liquidity conditions of the underlying.

Our Nikkei loser is a combo of a number of sloppy mistakes.

The overall trade setup was decent, though not great. I don’t regret putting it on. But where I screwed up was getting too aggressive with the pyramid and failing to move my risk point up after the move; especially considering the flashing warning signs that sentiment indicators were giving at the time of the trade.

I was too aggressive at a time when I should have been reducing my holdings and I was too loose with my risk point at a time when I should have been pulling them close.

Going forward I need to be more diligent in continuously assessing the Marcus trifecta of macro, technical, and sentiment and adjusting fire accordingly. I was sloppy here and that cost me.

Overall, we’ve done a decent job of protecting our capital these last six months. Especially, when considering the volatility at the start of the year. Even our drawdown of 11.3% from NAV highs — which is our largest drawdown from peak to trough to date, was exaggerated by the number of long-term DOTM calls we held on our books. Many of these temporarily fell to near zero during February’s sell-off, which didn’t at all reflect their true value.

But we did make a number of mistakes. Mistakes from which we can tease valuable lessons and improve our performance going forward. These are:

  1. Position sizing and risk points need to better reflect the volatility and liquidity conditions of the underlying (ie, size smaller and stop wider in smaller cap stocks).
  2. Always reassess broader market conditions (macro, sentiment, technicals) before executing a trade. It’s easy to get tunnel vision when you get excited about something but it pays to step back and objectively reassess the environment. When the market is greedy, be fearful and when the market is fearful, be greedy.

Now let’s take a quick look at our largest winners.

Our biggest macro winners so far this year have been (this percentage gain is on our portfolio’s TOTAL capital. The actual underlying trades advanced much more):

  1. Long TripAdvisor (TRIP) where we’ve made 6+% on our total capital
  2. Long W&T Offshore (WTI) where we made 3.2% on our total capital
  3. Long USD (DXY futures) where we’ve made 2.5% on our total capital (position is still open)
  4. Long United Health (UIHC) where we’ve made 1.7% on our total capital (position is still open)
  5. Long Interactive Brokers (IBKR) where we made 1.5% on our total capital

Tripadvisor (TRIP)

I started digging into TRIP last fall. What we found was a very compelling value stock with a number of positive catalysts on the horizon. The more I dug into the company, the more I liked the stock due to its moat, the consensus negative sentiment on the company, and the broader macro tailwinds for the OTA market in general. TRIP checked the right boxes and that gave us high conviction in the asymmetry of the trade.

We took our first swing at TRIP in early October but were stopped out a few weeks later for a small loss. This gives us a good opportunity to study the pros and cons of two different styles/approaches to speculating.

If we bought TRIP as an investment and not a trade, then we would have had to sit through large volatility over the ensuing months; including a 30+% drawdown at one point. The fundamentals never changed but the market was doing what markets do and was washing out the weak hands.

This would have ended up working out because the stock ultimately ran higher than our original entry point. But, sitting on the position would have been extremely taxing mentally and even more importantly, there’s the chance that we could have been wrong in our thesis and the stock. And in that case, the stock would have continued to sell off and we would have eventually cried uncle and taken a large loss.

Instead of doing that, we’ll just take multiple swings on a high conviction trade like we did here with TRIP. By doing this, we only have to risk small amounts of capital each time and never expose ourselves to a large drawdown. I think of this approach as insurance against my own ignorance. There’s always the chance that I”m wrong, very wrong, when taking a highly contrarian position. And I’d rather pay a small premium than risk a huge loss in protecting myself from myself.

The downside is that there’s the possibility that the stock gets away from us and we end up buying at a higher price than our original entry. This is a worthwhile trade off in my opinion as I’d much rather have a poorer entry than risk a large drawdown. So when we’re dealing with liquid stocks, we’ll always treat them as trades and not buy and holds.

W&T Offshore (WTI)

WTI was a homerun for us. Almost everything went right on this trade. We nailed the macro call on being bullish oil last year. We bought WTI on textbook technical breakout. And held onto the stock through its wild ups and downs, while it embarked on a monstrous trend over the subsequent 8-months that we held onto the position.

All in all, we got a 30x return on our initial risk. Not too shabby…

But, here’s what we could’ve done better.

We know that returns follow power laws. The majority of our returns will come from just a handful of our trades. The trading greats like Druck and Tepper are great because they fully exploit this power law and size up their positions when the stars align and a fat pitch comes their way.

Bullish oil was a high conviction theme for us. We played the trade by buying a basket of energy names. We eventually cut the other stocks because they failed to follow through, unlike WTI. As WTI’s trend progressed we should’ve added on technical inflection points and built our position size to match our confidence level.

This is of course easier to say in hindsight. And it’s just a constant fact of trading that we’ll always have too little in our winners and too much in our losers. But I do feel I could have done a better job managing this trade over the life of its fantastic trend.

US Dollar (DXY)

We made the majority of our discretionary returns last year shorting the dollar. This year we’ve made them on the long side.

If I could only trade one market it’d be currencies. I’ve made the majority of my returns throughout my trading career trading forex. It’s the ultimate macro market and there are numerous false beliefs and bad pervasive mental models used by players in the FX space that create a lot of edge for those who objectively and independently study it.

I’m overall pleased with the way we’ve executed our our FX trades this year. We’ve been lucky in catching the trends at exactly the right times. I’m still very bullish the dollar and believe there’s plenty more upside in left for this move. This will likely end up being a bottom liner for us on the year.

United Insurance Holdings (UIHC)

UIHC was a simple setup. The great chart setup and large amounts of insider buying are what originally drew my attention to the stock. It’s also an under the radar company with solid management and strong fundamentals.

The excellent inflection point in the technical setup gave us a great point at which to buy and allowed us to buy in size.

I’m still holding the stock and I think there’s a good chance it will take out its all-time highs of $28 before the end of the year.

Interactive Brokers (IBKR)

IBKR is a great example of a great trade poorly executed.

We pitched the bullish case for IBKR in our August MIR from last year. This was a high conviction call and I believed the trade had a lot of positive asymmetry.

I screwed up because I missed the original inflection point in the technical breakout at the time we released our bullish call. I then waited for a pullback because I was disappointed in myself for missing the initial entry. This is BAD trading. When you have high conviction on the asymmetry of a trade you don’t try and pinch pennies and wait for it to come back. You will almost always end up buying at much higher prices.

I then compounded this initial mistake by putting too little size into the trade. My position size was nowhere near my conviction level. This is largely due to the fact that I was pissed that I missed the original entry.

The stock then ran straight up, nearly doubling over the following 6-months and I never added to the position. Another big mistake.

Even though this was a bottom line trade for us, our returns should have been more than twice what they were. But my poor execution and poor trade management kept me from fully exploiting the trend. Unsat…

Our biggest miss: GAIA

If any single trade epitomizes my failure in trade execution over the last year, it’s GAIA. I did everything wrong on this trade and turned what should have been a monster winner into a small one. Let’s go through the mistakes I made.

We first pitched GAIA in our March 2017 MIR. This was a high conviction, high asymmetry trade with a loooong runway.

But, similar to IBKR, we waited over a month to buy into the stock after missing its technical breakout and seeing it run up over 20%. I was annoyed that I missed our initial entry point and then waited for a pullback. The pullback never came so I finally put the trade on in much smaller size — just like in IBKR.

I then allowed myself to get shaken out of the stock after it rising over 30% from my entry point. This exit made no sense. I was fundamentally VERY bullish on the company. Management was executing flawlessly and I continued to put out bullish updates on the stock all the way up. I did then, and still do, believe that GAIA is a $60+ stock within a few years. It’s now up over 150% since our initial call. But I lost my position in the stock because I failed to be patient enough and give it the room it needed to run. My trade management didn’t match my fundamental conviction. And so I turned what should be a monster gain into a tiny winner.

This tendency to compound my mistakes is something I need to really work on. I need to look at trades with fresh eyes and not let mistakes and poor execution of the past affect what I should do in the present. The market doesn’t care if I missed my original entry, so I shouldn’t either. I need to just judge the trade on its merits in that very moment and then manage accordingly.

To sum up the lessons we can take away from our winners is:

  • High conviction fat pitches only come around a few times a year
  • Our performance hinges on our ability to fully exploit these
  • This means we need to size and manage our trades so that they’re in alignment with our conviction and perceived asymmetry of the trade
  • Portfolio concentration is also needed if we want to vastly outperform the market. Druckenmiller and Tepper typically have 60+% of their long portfolio in just five trades
  • We can accomplish this by being patient and trading less but being aggressive when a great trade comes along

It all goes back to the basics of:

  • Cutting losses short / protecting capital
  • Sitting on hands / letting winners run
  • Mental flexibility / strong opinions weakly held

Conclusion

All in all it’s been a good year for us in the markets. I’m personally loving the macro game right now. These volatile markets are my bread and butter and I think the second half of this year will be even better for the MO portfolio than the first half. I’m seeing the beginnings of some powerful trends developing.

With that said, there’s obviously a lot that I can improve upon in my trading. I don’t view this as a negative but rather a positive. My mistakes and shortcomings as a trader are just opportunities for me to learn from and grow.

I’m on a path of continuous evolution and the only way to walk this path is by continuously and ruthlessly studying my failures. And doing so has become my favorite and most fruitful exercise. I look forward to dissecting my future mistakes again six months from now. I just hope they’re not the same ones I’ve recently made — hopefully I’m making smaller circles then.

Macro Ops is now 30-months old. It’s a young operation. We’ve come a long way since we started, but we still have a long ways to go.

The community we’ve built is awesome. I think we have the best Collective of hard-charging, maniacally obsessed traders anywhere in the world. And I love how global we are. We now have members on every major continent. That’s a lot of eyes scouring markets and feeding intel and trade ideas into the group.

I want to give a big thanks to those of you who’ve joined us. Thank you for supporting us and bringing value to the community. I hope we give you plenty of value in return and I promise it’ll only increase going forward.

Our mission statement today is the same as when we started.

  • Build the best community of like minded traders from around the world
  • Continuously study markets and trade theory and pass this knowledge to the group
  • Create a flywheel of growth where we teach members, they teach us, and on and on
  • Use the expanse of the Collective to scour the globe for trades and make lots of money
  • Develop and share our macro framework and tools with members empowering them to make their own informed macro trades

Our primary directive going forward is to further refine and breakdown our global macro approach in a way that can then easily be shared with the group.

We want to make a much bigger push in creating short video courses on all things trade theory and markets related.

We just started work on building a platform where we can directly share our data and various market models with you guys. Essentially, Macro Ops has always been about the three of us (Tyler, AK, and I) building the trading site that we always wanted but didn’t exist.

It’s a long road from here to there, and we’ve got our work cut out for us, but I’m more determined than ever to get us there.

Thanks for reading!

It’s a big honor and extremely humbling to have you read our work and we love all the feedback you guys give us.

I’ll leave you with some wise words from the smiling fat man.

There are two mistakes one can make along the road to truth… not going all the way, and not starting. ~ Siddhartha Gautama (Buddha)

 

 

Dollar Strength, Trade Wars and The Macro Ops Collective

Tyler here with this week’s Macro Musings.

As always, if you come across something cool during the week, shoot me an email at tyler@macro-ops.com and I’ll share it with the group.

Macro Ops Collective Now Open For A Limited Time!

Thanks to everyone who came out to the special event last night. I’m glad these post-mortem trade reviews are as helpful for you guys as they are for our own trading.

For anyone that wasn’t able to attend, I want to let you know that as of last night, we have opened up the Macro Ops Collective for enrollment. The Collective is our premium offering where you get a front-row seat to all of our macro research, education, and trading — in real time. This enrollment period will end on Sunday night, July 1st at midnight. After that we’ll shut it down again until the fall enrollment. So if you want access to our trades in real time hit the link below.

Follow this link to learn more about the Macro Ops Collective!

If it turns out the Collective isn’t for you — that’s okay. We realize not everyone is as passionate about macro as we are. That’s why we have a 60-day money-back guarantee on all Collective subscriptions. You have two full months to test out everything before committing. It’s a zero risk trade!

Now for the Macro Musings….


Recent Articles/Videos —

Semiconductors — A review of the semi sector and the plays we’re looking at.

Dalio’s Principles — Dalio reviews the principles he used to build his investment strategy.

The Business Of Trading — AK and Tyler chop it up about the realities of being a professional trader.


Articles I’m reading —

There’s a lot of tension between the US and China right now. The “impending” trade war has been the mainstream media’s excuse for weak equities. Chinese stocks have now entered into a bear market, and US stocks have been experiencing steady selling over the last 3-weeks.

But I think this softness has less to do with trade wars and more to do with what’s going on in the dollar. In recent years, Chinese companies have turned to borrowing in USD because of crackdowns on shadow financing. Here’s some more color from Bloomberg (full article here):  

Chinese builders, faced with bond payments of $77.4 billion in the domestic and overseas markets through 2019, have been reeling from tightened liquidity at home induced by a clampdown on shadow financing. That’s prompted them to sell debt in the offshore market, with dollar bond sales reaching a record $27.5 billion this year.

But now, with the greenback rallying, these Chinese companies are having a tough time paying back this debt. The Chinese government has taken notice of the problem and in response has started to slow approvals for offshore bonds. But that just creates another problem — it reduces financing options for these over indebted cash strapped Chinese companies. So they’re really just trading one problem for another.

This will be the important macro narrative to track going forward. Not trade wars. If you want even more on this story I suggest checking out this Zerohedge article.  


Video(s) I’m watching —

John Oliver’s Last Week Tonight Episode about Xi Jinping caught my attention. First, because China is the single greatest driver of our current macro situation, but more so because the Chinese government retaliated by blocking HBO’s website in mainland China.

It’s actually a pretty good history lesson on Xi Jinping and how he has been running the country over the last 5-years. Worth a watch.


Chart I’m looking at —

The rising dollar has been wreaking havoc on EMs. But those negative effects haven’t materialized in the US. Despite higher interest rates in the US, liquidity conditions have remained loose. The US economy is strong enough to counteract the recent tightening from the Fed. That’s why we’ve seen US equities outperform the rest of the world by so much this year.

If the dollar continues it’s rally, a likely scenario in our view, then it will pay to focus on US equities over anything else in the world. We’re already positioned that way, and we’ve even been toying with the idea of offsetting some of our US long exposure with shorts in foreign stocks.


Trade I’m looking at —

I originally saw this idea from @pat_hennessy on Twitter. If you’re into vol definitely give him a follow.

The Bloomy chart below has one month IV plotted in white and 20-day HV plotted in orange. IV is the market’s prediction of future volatility over the next month. And HV is what actually played out in the SPX last month. The sub chart plots the spread between the two.

You can see at the beginning of the year IV rallied and SPX followed close behind resulting in a deep negative value for the spread. In that case higher option prices were justified.

But now we see IV rallying without the SPX following through. The spread has drifted positive. This tells me traders are overly worried about the trade war and paying too much to hedge.

It’s possible to take advantage of this fear by selling vol (in a risk defined way) on the SPX. I’m taking a look at shorting the 2600/2460 put spread expiring in August.

Quote I’m pondering —

War, battles, and conflicts of all kinds (including poker) set in motion forces that quickly become unpredictable. Small defects or problems that are present at the beginning can quickly spiral out of control. And if small problems can do this, think what starting out with large problems means.  ~ Zen and The Art of Poker

The first loss is always the best loss. Never forget that!

That’s it for this week’s Macro Musings.

If you’re not already, be sure to follow us on Twitter: @MacroOps and on Stocktwits: @MacroOps. I post my mindless drivel there daily.

Here’s a link to our latest global macro research. And here’s another to our updated macro trading strategy and education.

 

Trading Is Simple, Not Easy… and a 320%+ oil trade

Good trading is simple, just not easy.

Literally, successful trading can be boiled down to these few words from the original OG, Amos Hostetter.

Cut your losers short, and let your winners run…

This old trading axiom has been repeated throughout time by all the greats. It’s also continuously ignored by nearly everybody.

It’s not that people don’t get it or they don’t think it’s a good principle. Traders talk about how important it is all the time… yet, very few consistently apply it.

The reason why is because it’s incredibly hard to do. It goes against hundreds of thousands of years of our evolutionary neurological wiring.

Evolution wired us to be so risk averse that our instinct is to avoid losses at all costs… even small ones. It’s easier for us to renege on our risk points and let the dice roll in the hopes that price comes back our way; at least until the loss becomes painfully unbearable, our uncle point is hit, and we tap out in despair…  

On the flip side, we’re wired to want to take profits quickly because we count those paper gains as already ours and the psychological pain of losing them instinctively outweighs the perceived value of sitting on the position in hopes of further gain.

This is all part of Prospect theory that was first put forth by Kahneman and Tversky. Wikipedia describes the concept as, “a behavioral economic theory that describes the way people choose between probabilistic alternatives that involve risk, where the probabilities of outcomes are known. The theory states that people make decisions based on the potential value of losses and gains rather than the final outcome, and that people evaluate these losses and gains using certain heuristics.”

We’re wired to cut winners short, and let losers run.

We evolved to be bad traders. Trading is simple, just not easy.

You may say, “well, yeah… cutting losers short and letting winners run is important but it’s hardly the whole kit and kaboodle…”

And technically you’re right. Cutting your losers short and letting your winners run isn’t everything… It’s just pretty close to being everything.

You also need to be an independent thinker; be able to develop contrarian ideas; possess mental flexibility, be able to hold multiple opinions and weight them effectively — the whole strong opinions weakly held idea.

But, really, all these mean nothing if you can’t do the basics of cutting your losers short and letting your winners run. And most can’t.

This trading maxim is so important because of the bunchy nature of market returns. Portfolio returns follow a natural power law. This power law exists in all of nature. It’s Pareto’s 80/20 rule… and in markets, it’s more like 90/10.

This means that over time, 90% of your profits will come from 10% or fewer of your trades. For example, if you’re a good trader and you place 100 trades a year, 90 them will be small losers and small winners that will effectively cancel each other out. And just 10 will account for the vast majority (90%) of your nut for the year.

This is an ironclad law. It’s true for everybody. If you study the returns of any of the greats (Buffet, Druck, Soros, Tepper, Livermore etc…) you’ll see the same 90/10 distribution of returns.

Cutting losers short, and letting winners run works because it’s in harmony with this natural power law that’s inherent to markets.

Cutting losers short cuts off the left-tail distribution of losses — yes, losers will follow the same power law if they aren’t cut short. And letting winners run let’s you fully exploit the right tail events; those 10%’ers, the fat pitches, the ungodly asymmetric trades… that only come down the pipe every so often.

But back to this not being easy to do.

It’s not only not easy because we’re psychologically wired to want to instinctively do the wrong thing. But it’s also just really hard to sit and hold through a monster trend.

Take W&T Offshore (WTI). This was a trade that we recently took full profits on. It ended up being one of our 10%’ers for the year — though far from being our biggest winner.

We first pitched our high conviction bullish oil call in August of 2017. It was clear to us that the market and popular bearish oil narrative we’re completely detached from the developing fundamentals.

We bought into WTI in August for around $2.18.

Over the following 8 months, WTI’s stock price increased over 320%, to just under $9…

We 30x’d our risk on the trade. (Our stop was at $2.00.)

This is what we consider a good trade. But sitting for the full gain was not easy. During the 8-month 320%+ rise, we had to sit through two 30%+ drawdowns and countless 5-10% drawdowns along the way.

Meanwhile, we had to endure these large pullbacks all while the majority of the market was telling us a host of very good and smart sounding reasons for why we were wrong; why the correct position was to be bearish on oil — being a contrarian is NEVER easy.

It was tough to follow the foundational trading principle of cutting your losers short, and letting your winners run… specifically, the latter.

But that’s necessary to being a good trader. You have to have the discipline to sit on your winners, ride through the inevitable pullbacks, and weather the storm as long as your reasons (for us it’s always a confluence of macro, technical, and fundamentals) for being in the trade are still valid.

This is the only way you can harness the power law of the markets and exploit it to your benefit.

Chess Grandmaster Josh Waitzkin wrote in his book The Art of Learning that:

It’s rarely a mysterious technique that drives us to the top, but rather a profound mastery of what may well be a basic skill set.

This couldn’t be any truer for trading. The best are the best because they are really good at harnessing the 90/10 power law of markets and utilizing it to their advantage. They do this by cutting their losers short, and letting their winners run.

We were fortunate enough to outperform the market during the first half of 2018. And we did so because we stuck to the basic principles of profitable trading and letting the 90/10 power law play out.

Tomorrow night, we’re throwing a live special event: How We Beat The Market In The First Half of 2018. Tyler, my partner here at Macro Ops, will be showing you guys exactly how we navigated through a tough and volatile year to produce multiples of what the S&P 500 has delivered to passive buy and holders. It’s going live at 9PM EST on June 28th.

Click here to register for this event!

On top of a full breakdown of our 2018 trading, he’ll also be updating you guys on our DOTM option strategy as well as our best practices for drawdown management. Until we hit that big trade in WTI, we had a lengthy multi-month drawdown which would’ve been impossible to endure without our drawdown management techniques.

Finally, you’ll hear how we’re positioning into year-end, and where we expect to find our next 10%’er. You don’t want to miss this!

Click here to register for the live event!

 

 

The Coming Oil Supply Shock, Structural Silicon Demand Shift, And No Macro “Experts”

Alex here with this week’s Macro Musings.

As always, if you come across something cool during the week, shoot me an email at alex@macro-ops.com and I’ll share it with the group.

Macro Ops Special Event Next Thursday, June 28th!

Next Thursday, June 28th at 9PM EST, Tyler will presenting our trading results for the Macro Ops Portfolio — Pain + Reflection = Process.

We’ve been fortunate enough to call the macro correctly over the last 6-months which has allowed us to outperform the market by a wide margin. We’re up 12.20% year-to-date and 20% on a TTM basis. But, we’ve still managed to make plenty of mistakes which we can analyze and learn from. Tyler will discuss what worked, what didn’t, and how we can improve and adjust fire going forward — I urge everyone to sign up at the link below. He’s got an insightful presentation prepared.

Click here to register for the event!

Make sure to register and show up on time because there will not be any recordings!


Recent Articles/Videos —

Google Buys JD.com — AK discusses the implications of Google’s ownership in one of our highest conviction plays, JD.com.

Portfolio Review — AK reviews our positions in the MO portfolio along with a few new plays we’re looking at.

Coaching Paul Tudor Jones — AK sheds light on the coaching PTJ himself gets for his trading.


Articles I’m reading —

Scott Miller, who manages the value focused hedge fund GreenHaven Road Capital, gave an interview this week with SumZero and it’s a great read.

Scott is one of the best up and coming investors right now, in my opinion. Not only does he put up excellent numbers but the guy is in a league of his own when it comes to understanding and valuing businesses. His quarterly investor letters always make for an interesting and enlightening read. I’ve sourced many ideas from him over the last few years.

In the interview, Scott talks about his investing philosophy, his edge, how markets are changing, and his greatest mentors and their lessons — he also pitches an interesting microcap tech stock, ticker (SHSP). It’s a short and insight filled read that’s well worth your time. Here’s the link and here’s a section from it (emphasis mine).

Harris: What are your thoughts on the rise of quantitative strategies at the expense of more traditional value and activist strategies?

Miller: The beauty of investing is that there are many ways to make money.  Renaissance Technologies has one of the best track records of any fund using any strategy, and they are using a quantitative strategy. I actually want quantitative strategies to proliferate.  I want money to pile into them, gobs and gobs of it. The more money into quant strategies the better, as I think they are likely to create distortions that I can take advantage of over time.  You can have your backward looking quantitative data and use that for the foundation of your decisions. I would rather understand the product, market, and management team of the companies I am investing in.  Quantitative strategies tend to scale well allowing for large AUM, have a large number of holdings, and have short holding periods.  Greenhaven Road is effectively the inverse of that. I want to be small, concentrated, and have a long holding period. I want to understand qualitative factors such as the competitive landscape, the customer value proposition, and the incentives of the team.

The FT wrote an important article this week discussing a long-term macro theme we’ve been kicking around for the last year or so. And that is whether or not the oil and gas industries’ unwillingness to invest in major long-term projects will lead to a supply shock and much higher oil prices down the road? We think it will…

The gist of my thinking is this:

  • The energy industry and investors have largely bought into the “peak demand” narrative, that essentially says global oil demand is on a secular decline due to the rise of renewable energy and EVs.
  • Because of this, energy companies are no longer making large scale investments into future capacity and instead are focusing are short-cycle projects like shale.
  • Meanwhile, the digging I’ve done makes me believe that the whole “peak demand” narrative is a load of crap… similar to the whole “peak oil” narrative that captivated the market 8-years ago and predicted a quickly diminishing supply of crude and much much higher prices. The truth is, EV adoption will have a very limited impact on global oil demand over the next decade.
  • What will have a HUGE impact on the price of oil is the exponential growth in energy demand we’ll see arise from the billions of people hitting the Wealth S-curve in Asia over the coming decade. This is not being priced into the market at all…

This is a long secular theme I’m tracking. And while I’ve been bullish oil and oil stocks since early last year, after the recent rise the short-term asymmetry is now not as good. Especially when short-term headwinds like a stronger dollar and slowing Chinese demand are taking into account. But, there will be A LOT of money to be made in the next cycle once this supply pinch begins to really be felt. So definitely worth keeping an eye on. Here’s the link to the article and a chart from it.


Video(s) I’m watching —

You may have seen this video of Frank Abagnale’s Google Talk doing the rounds on twitter this past week. I saw a number of people highly recommend it so I finally gave it a watch (I personally don’t have a lot of patience for videos and prefer writing). I’m really glad I did because it’s excellent.

Frank is the guy who the Spielberg movie Catch Me If You Can is based on.  In the talk, he goes over his amazing life story and the lessons and values he learned along the way — he says some beautiful and powerful things about parenting and what it really means to be a man and a father. And his story is amazing; he worked in a hospital as a doctor though he never went to medical school, flew around the world for free posing as an airline pilot, practiced law without a law degree and so on… All while he was a young runaway teenager!

He spent years behind bars paying for his crimes and was eventually offered a deal to work off the remainder of his sentence assisting the FBI catch others like him. He’s stayed on with the Bureau and has now worked there for over three decades. I used to work in the same building as him and occasionally passed him in the halls, though I never had the chance to speak with, personally.

He’s a beyond interesting and surprisingly insightful guy, and his talk is well worth your time. Here’s the link.              


Chart I’m looking at —

China now imports more semiconductors than oil. There are two reasons for this (1) China is modernizing and its consumer base is growing rapidly, thus buying more gadgets that require computing power and (2) IoT, AI/ML, big data, autonomous driving etc… is leading to an exponential growth shift in structural demand for silicon globally.

This is a big macro theme that we’ve been tracking and it’s not one that’s being priced into the market yet, at all. But did you know, that the computing power needed to enable wide-scale autonomous driving is equivalent to over five new iphone industries being created annually. Then there’s the virtuous cycle that’s being created by the rise of big data and machine learning, where more data leads to improved machine learning which requires more compute which leads to more data capture and so on…

I think there’s some really interesting trades in a few select semi stocks at the moment.


Trade I’m looking at —

I’ve been told my entire life that I have absolutely no dress sense. Girlfriends have always complained that I dress like an old man and friends give me their hand me downs because they feel bad for me.

It’s not that I can’t afford nice looking clothes or anything. It’s just that I’ve never cared the slightest about what I wear and I loathe going shopping.

My wife long ago gave up on trying to drag me to the mall. But recently, she found a compromise in a new startup called Stitch Fix (SFIX). StitchFix is a US based online data-driven retailer. They allow you to select your style on their website and then send you an assortment of clothes, picked by a stylist with your style in mind, and then ship you these clothes at a regular interval of your choosing (ie, every month, two months, or quarter). You pay for the clothes that you like and send the others back in a prepaid shipping bag. The process is easy.

I’ve been using the service now since the start of the year. I like it. I don’t have to go shopping at a store to try on clothes. I get clothes that check my requirements (meaning, they’re comfortable and practical). And I appease my wife by no longer dressing like a total scrub.

SFIX IPO’d just last year. The chart recently broke out of 7-month coiling triangle pattern on strong volume.

They’re seeing strong sales growth and are already profitable.

Bill Miller’s hedge fund is a large holder of the stock. Here’s what one of his PMs wrote about SFIX in a recent post.

We’d heard fabulous things about the company and its CEO Katrina Lake from Bill Gurley at Benchmark Capital who was an early venture backer. It priced below the initial range as Blue Apron’s disastrous IPO and fears about ramping marketing spend concerned prospective buyers. At the IPO price of $15, we were able to buy it at only 1x expected fiscal 2019 (ending Jul 2019) revenues. For a company that had clearly demonstrated profitability, making it to $1B in revenues on only $42M in venture investments, we believe that valuation was quite a deal. Stitch Fix looks to transform apparel retail. As a long-time customer who buys most of her clothes from Stitch Fix, I can attest to their value proposition. While we’ve already done quite well with the stock at $25, we look forward to a long investment in the company.

I’m just digging into this stock and still have some thinking to do. I’m trying to figure out if there’s any realistic network or scale effects from becoming the dominant player in this space — they’re far from being the only business doing this. But the chart and fundamentals look good and at 2x sales the price seems reasonable when their growth is taken into account.


Quote I’m pondering —

This is so true.

The biggest secret in this game is that there is no secret.

We’re all just grasping for straws. The greats are just good at minimizing losses when they’re wrong and maximizing gains when they’re right. That’s really all there is to it.

Also, Jawad Mian is a great follow on twitter if you’re not already.

That’s it for this week’s Macro Musings.

If you’re not already, be sure to follow us on Twitter: @MacroOps and on Stocktwits: @MacroOps. I post my mindless drivel there daily.

Here’s a link to our latest global macro research. And here’s another to our updated macro trading strategy and education.

 

 

Emerging Markets, Salem Witches, and the Power of Doing Nothing

Alex here with this week’s Macro Musings.

As always, if you come across something cool during the week, shoot me an email at alex@macro-ops.com and I’ll share it with the group.


Recent Articles/Videos —

Jack Schwager On Failure — AK uses an interview with Schwager to discuss failure in trading.

Trading Journals — AK discusses why you need a trade journal and how to create one.

Tesla Shorts — AK explains why making the hero play shorting Tesla isn’t worth it.


Articles I’m reading —

This article was published last week but it’s such an important topic that I wanted to share it here. It’s written by Urjit Patel, the Governor of India’s central bank. And it’s about two significant trends (the Fed’s tapering and the ballooning US deficit) that, if left to continue unabated, will have cascading effects throughout emerging markets and the rest of the world. Here’s an excerpt from the piece (emphasis mine).

The upheaval stems from the coincidence of two significant events: the Fed’s long-awaited moves to trim its balance sheet and a substantial increase in issuing US Treasuries to pay for tax cuts. Given the rapid rise in the size of the US deficit, the Fed must respond by slowing plans to shrink its balance sheet. If it does not, Treasuries will absorb such a large share of dollar liquidity that a crisis in the rest of the dollar bond markets is inevitable.

Consider the scale of both events. Starting in October 2017, the Fed began reducing reinvestment of the coupons it receives from debt securities holdings. That shrinkage will peak at $50bn a month by October and total $1tn by December 2019. Meanwhile, the US fiscal deficit is projected to be $804bn in 2018 and $981bn in 2019, implying net issuance by the US government of $1.169tn and $1.171tn, respectively, in the two years.

This unintended coincidence has proved to be a “double whammy” for global markets. Dollar funding has evaporated, notably from sovereign debt markets. Emerging markets have witnessed a sharp reversal of foreign capital flows over the past six weeks, often exceeding $5bn a week. As a result, emerging market bonds and currencies have fallen in value.

This is set to become a dominant macro trend over the coming year. It will pay to stay on top of this development. Here’s the link to the article.

For another great explanation on what’s driving EM volatility take 5 minutes and watch this clip of @teasri on Bloomberg talking EM growth troubles and investor flight — if you’re not already you should follow @teasri, he’s one of my favorites on the twitter.


Podcast I’m listening to —

I’ve listened to this podcast twice this week. It’s one of Tim Ferris’s latest and it’s with VC/engineer/futurist Steve Jurvetson. They cover a wide range of topics from quantum computing, to AI and deep learning, space and terraforming Mars, to Elon Musk and Steve Jobs (Steve worked closely with them both). The section on quantum mechanics and computing is absolutely mind blowing. Give it a listen, you won’t be disappointed (link here).


Book I’m reading —

I watched the movie Molly’s Game a few weeks ago. It’s about the real life story of a failed Olympic skier who by chance got asked to run an underground poker game which eventually became the highest stakes game in the US — apparently, she once saw someone lose $100m on a single hand… That’s e’ffing nuts! She was eventually taken down by the Feds and narrowly avoided having to spend years behind bars. It’s a really good movie.

Anyways, in the movie they talk about an old play called The Crucible by Arthur Miller. And since I have an Amazon book buying addiction, I naturally ordered it on my phone as soon as they mentioned its name.

The play is closely based on the actual events of the Salem Witch trials that occurred in 1693. It’s a short and fascinating read. It’s a wonderful example — with many parallels to investing and markets — of just how bat crap crazy people can become when they get riled up by a belief and then sunk costs and herding behavior totally consume their faculty for reason.

You can read it in a day or two. I highly recommend it.


Chart I’m looking at —

I think this is an interesting chart via WSJ’s Daily Shot. It shows the S&P 500 (purple) and the most shorted US stocks (gold). I’m not sure how much, if anything, we can infer from this chart other than the most hated stocks have been outperforming — by a lot. It could be that the market is losing its collective mind. Or maybe, it’s just that investors haven’t smartened up to the powerful network effects of some of these tech companies and they’re shorting because of high P/Es when they should be paying more attention to FCF growth. I don’t know…


Trade I’m looking at —

Going long Spotify (SPOT) is a trade I’ve been thinking about for a few weeks now. The tape continues to look great but I haven’t pulled the trigger for any other reason than my book is near full and I see so many opportunities in this market that it’s tough to choose what I like most.

For a good overview of the value thesis for SPOT check out this thread from @emilio_gold.

SPOT’s success, and the success of music streaming platforms in general, rests on their ability to lower content costs which is currently very high. There’s two ways that SPOT can gain better control of this and boost their operating margins (1) is they attract enough users and become a dominant enough player giving them more leverage over the music labels in negotiating content costs and/or (2) they cut out the music labels entirely and go directly to the artists. SPOT is working on both. Here’s a recent article on how exactly SPOT is trying to accomplish this.

I think at current prices, the stock isn’t properly valued to reflect its probability of success nor the potential size of the opportunity should SPOT succeed. It seems rather asymmetric, in my opinion. But I plan on doing some more digging.


Quote I’m pondering —

This company looks cheap, that company looks cheap, but the overall economy could completely screw it up. The key is to wait. Sometimes the hardest thing to do is to do nothing. ~ David Tepper

…It goes to show that when you are confused it is best to do nothing. You are just going for a random walk and that is when you are liable to get mugged because you don’t have staying power. You are likely to be faked out by some stray fluctuation because you lack the courage of your convictions. ~ George Soros

The key is to know when to do nothing. Most people, even if they have a winning strategy, will not follow it because they lack discipline. ~ Mark Minervini

I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime. Even people who lose money in the market say, ‘I just lost my money, now I have to do something to make it back.’ No, you don’t. You should sit there until you find something. ~ Jim Rogers

The powerful concept of doing nothing has been re-cemented into my cranium this cycle. Livermore’s advice to just sit on your hands is so simple, so valuable, and yet so so so…. hard to do.

Relearning this has kept me from making many mistakes over the last few months and has benefited my P&L tremendously. I suggest you give it a try. Here’s to doing nothing….

That’s it for this week’s Macro Musings.

If you’re not already, be sure to follow us on Twitter: @MacroOps and on Stocktwits: @MacroOps. I post my mindless drivel there daily.

Here’s a link to our latest global macro research. And here’s another to our updated macro trading strategy and education.

 

 

The Data Says This Bull Market Still Has Legs

The following is an excerpt from our Macro Intelligence Report (MIR). If you’d like to learn more about the MIR, click here.

Over the next 12-18 months we expect the US market to outperform the rest of the world as we head into the final stages of this economic expansion.

Once a quarter we like to review our US macro indicators to see if they confirm or reject our primary macro thesis. Here are the latest readings.


Liquidity:
US liquidity is near its cycle highs (meaning, it’s extremely loose). This is very bullish US risk assets and should prevent emerging markets from going into full-blown crisis mode. This indicator will turn over well before this bull market ends.


LEI (Leading Economic Index):
The Conference Board LEI, which tracks a basket of US economic indicators, is still in a strong uptrend on both an absolute and YoY basis. This indicator will roll over well before we enter a recession.


CLI (Composite Leading Indicator):
Our US composite leading indicator shows the US economy is in an accelerating expansion which should continue into the end of the year.


Inflation ROC:
The 3-month annualized core inflation rate has come down from its Jan/Feb highs, which sent interest rates shooting up. A slower change in inflation eases up pressure on yields and is bullish for stocks.


Advisor Sentiment:
Advisor sentiment has reset from its excessively bullish Jan/Feb highs and is now giving a neutral reading. This is supportive of stocks moving higher.


BAA Yield ROC:
The rate of change in yields has come down from its highs at the start of the year but it still remains elevated. This indicator is in neutral/headwind territory for stocks.


AAII Sentiment Survey:
Bullish sentiment has completely reset since the beginning of the year and is now supportive of stocks moving higher.


S&P 50-day MA Spread:
The percentage of SPX stocks above their 50-day moving averages is in overbought territory. It can and probably will move higher from here but we should be on the lookout for a pullback in the next few weeks as the short-term trend is becoming extended (chart via Bespoke).


Summary:
The US economy is strong and growth is accelerating. All our leading economic indicators are giving positive readings making the odds of a recession in the next 12-months extremely low. Liquidity is still flush which is supportive of the broader trend higher in stocks. Market sentiment has reset from its highs reached at the start of the year. All this means that the primary bullish trend in US stocks is supported by the data and the primary path of least resistance remains up.

However, over the short-term, the trend is overbought and the ROC in yields is elevated. This makes the market more susceptible to a selloff over the next few weeks. A selloff would reset both of these and give us a good opportunity to add risk. There are numerous catalysts that could spark a selloff this week ahead. We have CPI and DPRK Summit on the 12th, the FOMC meeting on the 13th, and June OpX on the 15th.

The above was an excerpt from our Macro Intelligence Report (MIR). If you’d like to learn more about the MIR, click here.

 

 

How To Get Rich, Young Billionaires, and A Marijuana Trade

Tyler here with this week’s Macro Musings.

As always, if you come across something cool during the week, shoot me an email at tyler@macro-ops.com and I’ll share it with the group.

Our June Macro Intelligence Report (MIR) is coming out this weekend! Find out what stocks Alex thinks will skyrocket in the final bull move of this record economical cycle by clicking here. We have a 60-day money-back guarantee, so there’s literally no risk for you to check out our favorite plays. Click here and scroll to the bottom of the page to sign up for the MIR.


Recent Articles/Videos —

India’s Big Boom — AK reviews the S-curve and why India along with commodities are the next huge secular trends.

Scared Trading — It’s the Billions season finale this Sunday! Get more of your Billions fix with AK as he analyzes Ben Kim’s timidness.


Articles I’m reading —

It’s not exactly an article, but this tweet storm from Naval Ravikant called, How to Get Rich (without getting lucky), was my favorite read of the week. It packs the punch of an entire MBA class in only a few hundred words. He discusses status games, thinking long term, utilizing leverage, and many more key concepts related to wealth generation. I highly recommend checking this out because there’s so much wisdom packed into so few words. Huge bang for your buck here.

As for conventional articles, this one caught my eye: How to make money in the art market: top collectors reveal their secrets.

I’ve always been fascinated by the art market because it’s 100% psychology driven, much like gold. There’s no cash flows attached, so traditional valuation anchors don’t exist. And the payoffs are distributed like venture capital. Most art sits in a warehouse and depreciates. But the winners 10x or more. It’s possible to get into the game for relatively low cost as well. You don’t have to buy something for 100 million. One of the collectors in the article started out in the 90s by buying pieces directly from artists for a few thousand bucks. Today those same pieces can be sold for seven figures.


Podcast I’m listening to —

One of the my go-to shows is How I Built This with Guy Raz. It’s an NPR podcast, so you can count on each episode delivering quality.

In this episode, Raz interviews Patrick and John Collison, two brothers from Ireland who founded the online payment processing company Stripe.

Stripe launched publicly in 2011, and in just 5 years both the brothers became self-made billionaires. Today the company is valued at 9 billion.

What stuck with me most was when Patrick Collison talked about how startups never feel easy even if they’re winning. There’s always an impetus to improve. He uses cycling to illustrate his point.

It never gets easier. You just go faster. And I used to kind of cycle quite a bit. And there’s a lot of sort of painful truth to that where as you cycle more, as you practice more, as you get fitter, as you get faster, as your form gets better, sure, you start cycling faster. Your times get better. But the experience of being on the bike never gets easier. The pain that you feel on the first bike ride, that’s the same pain that you’re going to feel on your 500th bike ride. You’ll just be going much faster on the 500th bike ride. And it kind of feels like that in a startup, where every day now the problems and challenges and, you know, visceral pain is just as acute as when we were starting out. The problem is just in a different form. It’s this kind of relentless process of trying to shift what it is that exists and what we’ve collectively managed to create so far into what we all set out to create in the first place. And we still have quite a ways to go there.


Chart I’m looking at —

For anyone trying to time the macro cycle, it’s useful to monitor loan delinquencies. Recessions don’t materialize until people stop paying their debt. Delinquencies are a telltale sign that liquidity has tightened and the short-term debt cycle has turned. I check this loan data about once a quarter.

As you can see, there’s nothing actionable here yet. The loan delinquency rate continues to downtrend and challenge all-time lows. Recession in the US is still a ways off.


Trade I’m looking at —

Marijuana has caught my interest again after I noticed the technical breakout in MJ, a new marijuana ETF.

The marijuana legalization theme has been on the market’s radar since 2014. And although the trend in these stocks has been higher, they have had crypto-like volatility. These names routinely rally 100% and then fall back another 50%.

The first time we wrote about weed was in the December 2016 issue of the MIR.

One of our picks, Aphria Inc. (APHQF) has climbed over 132% since! Sign up here to get our latest picks.

In that issue Alex quoted a Peter Thiel backed private equity firm which expressed their thoughts on how this theme plays out.

This will shake out similar to the alcohol industry or the soft drink industry, where economies of scale are very important… You want to have first-move advantage, and I think it will be aggregated to just a handful of companies.

I agree with this sentiment. A few companies will end up grabbing all the value. That’s why if you want to maximize your chances of getting paid, purchasing an ETF makes a lot of sense. If you take the index approach you maximize the chance of holding the winner at the end of the game.

There’s also a fresh catalyst underway in this space. The Canadian Senate is currently voting on the Cannabis Act, which if passed would legalize recreational marijuana. Canada will become the first large developed country in the world to have legalized adult-use marijuana. This would be a giant win for this “grey area” industry.

If you’ve been curious about the marijuana space, now may be the time to allocate some long-term capital as the rest of the developed nations around the world follow in Canada’s footsteps.


Quote I’m pondering —

…if you always put limits on what you can do, physical or anything else, it’ll spread over into the rest of your life. It’ll spread into your work, into your morality, into your entire being.  ~ Bruce Lee

Achieving greatness begins with the belief that you can.

That’s it for this week’s Macro Musings.

If you’re not already, be sure to follow us on Twitter: @MacroOps and on Stocktwits: @MacroOps. Alex posts his mindless drivel there daily.

Here’s a link to our latest global macro research. And here’s another to our updated macro trading strategy and education.

 

 

Why You Should Be Focused On India & Commodities

In this video we talk about why India (INDA) and commodities in general are the next huge investment trend. To understand why, we need to understand the S-curve. Macro Ops has a detailed article on this topic that I’ll link to in the comments. Be sure to check it out!

As people’s wealth increases, they buy more nonessential goods. As they do so, they consume a lot more commodities, including oil, gas, wheat, copper, and livestock. The growth in commodity consumption is exponential at this point.

We can actually predict when this will happen by tracking the GDP per capita of a country. Once the country hits a certain level, which is around $2,300 to $3,300 GDP per capita, their commodity consumption takes off. This happens in energy, but also in agriculture, where populations begin to increase their meat consumption. Raising livestock is over seven times more grain-intensive than producing for a simple plant based diet. That’s why we also see agriculture explode as well.

We’ve already seen this S-curve phenomenon happen in China (FXI). The last secular bull market in commodities which started in the early 2000’s and ended in 2011, occurred as China hit the S-curve take off point. If you bought the commodity index in 2000, right as the tech bubble was bursting, you would have compounded your money at over 20% annually over the following decade.

India is about to hit that point. Their GDP is exactly where China’s was in 2001, right before the last commodity bull market began. The country also has a population of over 1.3 billion people, just 60 million shy of China’s. Because of this, we think we’re about to enter the largest period of commodity demand growth the global economy has ever experienced.

Watch the video above for more!

And as always, stay Fallible out there investors!