Narrative Economics, Binaural Beats, and Fed Surveys

Here’s your latest Friday Macro Musings…

As always, if you come across something cool during the week, shoot us an email at and I’ll share it with the group.

Latest Articles/Videos —

Making Better Decisions — Chris explains his morning routine which primes him to make the highest quality decisions during the trading day.

The Fed Is Against You: AK explains how the Fed turned against markets and what that means for equity prices.

Articles I’m reading —

Check out this interview the CFA Institute did with Robert Shiller — I especially liked Shiller’s discussion around narrative economics, Traditional economic theory completely overlooks the impact of humanity’s thoughts, mood, ideas, and values on asset prices. And that’s a large reason why economists and the Fed are notoriously horrible at predicting financial market movements. Robert Shiller explains below how he thinks narratives shape economic decision making.

The theme of my book is that there are new ways of thinking that are encouraged by stories that people tell. We communicate through stories that are salient or that appeal to us in our thinking. Typically they have a human interest component and often a political component. They often affect our thinking and our moral judgment. The one thing I don’t hear from economists very often is that people feel that their expenditure patterns or their investment patterns are related to a sense of proper or moral behavior. A lot of curtailments of spending have nuances of boycott in them: “I’m going to boycott these companies.” It’s part of the emotional tenor that companies may face in bad times.

Even though I’ve been studying narratives and changes in human thinking, it’s still relatively new. I believe that economics and finance research will need to be more real‑world oriented and more willing to use information — digitized texts, for example — about how people are thinking and how their thinking changes. We’re not all there yet.

The full working paper on the topic can be found at this link. Here’s the abstract (emphasis mine):

This address considers the epidemiology of narratives relevant to economic fluctuations. The human brain has always been highly tuned towards narratives, whether factual or not, to justify ongoing actions, even such basic actions as spending and investing. Stories motivate and connect activities to deeply felt values and needs. Narratives “go viral” and spread far, even worldwide, with economic impact. The 1920-21 Depression, the Great Depression of the 1930s, the so-called “Great Recession” of 2007-9 and the contentious political-economic situation of today, are considered as the results of the popular narratives of their respective times. Though these narratives are deeply human phenomena that are difficult to study in a scientific manner, quantitative analysis may help us gain a better understanding of these epidemics in the future.

Understanding and dissecting the macro narrative is how Macro Ops generates an investing edge. Because as Shiller says in his abstract above “these narratives are deeply human phenomena that are difficult to study in a scientific manner.” By focusing on interpreting the macro narrative we can play a game that the machines can’t.

Charts —

The chart below shows a collection of US Regional Fed surveys graphed along side the widely watched ISM number. It’s suggesting that the ISM number has further to fall in February’s release.

What does that mean for equity markets? We could be in for a few more months of sideways chop and vol a la’ 2016. It’s time to exercise patience.

Music I’m listening to —

If you need help focusing at work I recommend giving this a try. It’s a 2-hour long youtube video that plays binaural beats and other soothing sounds. While listening I felt a deep sense of relaxation that allowed me to reach a flow state during some deep work sessions this past week. Our new team member Chris D’s a big fan of binaural beats as well. (Check out his newest post here on the subject.)

It’s not for everyone, but I recommend giving it a try the next time you need to crush through some mentally taxing work.

Podcast I’m listening to —

Dr. Peter Attia and Tim Ferriss had an interesting chat about mental health that I found enjoyable. (Link here) They dive into the world of psychedelic drugs and how these compounds have been shown in the newest research, spearheaded by the John Hopkins Psychedelic Research Unit, to dramatically alleviate depression and anxiety. Ferriss has pledged over a $1,000,000 dollars towards this effort.  

Both Tim and Dr. Attia have used psychedelics for therapeutic purposes, and they go through why they think these experiences have helped them immensely in the show. This type of stuff isn’t normally talked about by high profile people. Their candidness was refreshing.

If you want more advice on health and longevity techniques I, recommend checking out Dr. Peter’s website here.

Trade I’m looking at —

The short vol trade has popped back up on my radar. VIX dropped from a high of 36 on Christmas Eve all the way down to 20. And realized vol in the S&P has started to contract as well. This trend change has me stalking the volatility products for a setup.

I noticed that VVIX — or vol of vol has been trading in the bottom of its range which is unusual. When VIX rips and SPX tanks usually options on the VIX derivatives become more expensive. But that didn’t happen in this latest sell off.

This makes buying optionality on the volatility complex attractive. My ideal entry would be on a retrace of the current leg down in VXXB. (VXX is getting delisted at the end of the month and VXXB will take its place.)

If price shot back up to those levels I would look at the buying the June 41 puts in VXXB. Going long VXXB puts allows us to short volatility in a risk defined way. And if the market stays propped up from here until summer, vol will contract nicely and these puts will show a hefty gain.

Quote I’m pondering —

Bulls make more money than bears, so if anything being an optimist about life and about things in general is a great attribute to have as an investor. You just can’t be starry eyed and naive. ~ Stanley Druckenmiller

I thought this was a pretty strong statement coming from someone who’s made a lot of money in bear markets. It’s okay to get bearish from time to time, just don’t stay that way for too long. Economies, nature, and mankind are naturally wired to grow, don’t fight that trend.

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

Have a great weekend.



The Volatility Tax and 100 Baggers

Last Call For The Macro Ops Collective!

Tonight (Jan. 4) at midnight EST enrollment into the Macro Ops Collective will officially close down. We extended the deadline from Monday because many of you missed the sign up window due to holiday commitments. If you want to lock in our special New Year rate please click the link below. After tonight prices will permanently increase by 55%.

Click here to enroll in the Macro Ops Collective!

Every purchase comes with a 60-day money back guarantee no questions asked. That means you have a full two months to immerse yourself in our community, read through our research, see how we trade, and go through a huge library of educational material before committing your hard earned dollars. If the material isn’t a good fit, just send us an email and we will promptly return your money within the refund window.

Click here to enroll in the Macro Ops Collective!

Now for your latest Macro Musings…

As always, if you come across something cool during the week, shoot us an email at and I’ll share it with the group.

Latest Articles/Videos —

A Macro Update and My Stock Shopping List for 2019 — Alex takes a high-level view at the macro markets and debuts his favorite stocks for 2019.

Full Capitulation In US Stocks Not Here Yet — Our explanation for why the S&P might be due for another leg down.

Articles I’m reading —

Our friend Adam Collins over at Movement Capital put out a great short read on the “Volatility Tax”. The volatility tax refers to the hidden tax on investment returns caused by the negative compounding effects of large drawdowns.

High volatility in an asset can lead to large differences in that asset’s annual average return and its compound returns. If you buy and hold an asset it’s the compound returns (CAGR) that matter. Here’s a chart from the piece that shows the differences between the two per asset class.

Adam gives the following example of how the vol tax plays out in reality. He writes, “Emerging market stocks had an average annual return of 10.6% from 1992 to 2018, at first glance outpacing the 10.5% average return of US stocks. Yet the compound return of emerging market stocks was only 4.6%, meaning they actually underperformed less risky assets like government bonds.”

That’s quite a difference.

Here’s the link to the piece, it’s certainly worth a read. And he cites a paper by Mark Spitznagel on the subject, which you can find here.

Next, give this post by Chris Mayer a quick read. It’s a good write-up on hundred baggers and ‘coffee can’ stocks. Here’s the link.

Lastly, if you want to read an ultra-bearish, yet still thoughtful, take on the markets then give this report a read. It’s by James Montier of GMO and serves as some good food for thought.

Charts —

@Robbinwigg (editor of US markets for the FT) put out a chart storm on the twitter yesterday. There are some really interesting charts in there, definitely worth checking out (here’s the link). Here’s just one of them showing that the ‘Goldilocks’ period of moderate growth and slow inflation has come to an end.

Book I’m reading —

This last week I’ve been reading the following three books (I like to read books in different subjects at the same time so I don’t get bored). I’m about a quarter of the way through Diffusion of Innovations and thoroughly enjoying it so far (I may be writing about it some in this month’s MIR).

I’m about halfway through The Upside of Stress and I already consider it a must-read for those interested in performance, personal growth, and all-around mental health. Essentially, the book, which is based on the latest scientific research on stress, flips the old way of thinking about stress on its head. The reality is that stress is neither good nor bad. Rather, it’s all in how you think about it that makes it so…

And finally, there’s The Big Money by Frederick Kobrick. This is an older book on fundamental value investing and Kobrick is a former long-time value fund manager who put up some good numbers, so he knows what he’s talking about.

He lays out in the book, in very practical terms, his process (which he gives the acronym of BASM) for selecting great companies to buy and hold for a long time; along with his rules for when to buy and when to sell. It’s one of the better books I’ve read on value investing in a long time. Definitely worth a read if you’re interested in that type of approach.

Video I’m watching —

The newest addition to our team, Chris D, shared this video in our CC the other day. It’s Vice’s documentary on the Great Financial Crisis. This is a must watch for those of you who weren’t involved in markets back then. And even if you were, it’s a great reminder of just how crazy things were at the time. The world seemed to be teetering on the brink — many would argue that it was — and this documentary does a fantastic job of relating the level of panic that was going on.

Quote I’m pondering —

The really best traders don’t think twice about how many hours they’re working or whether
they come in on a weekend. There’s no substitute for that level of commitment.


So many people want the positive rewards of being a successful trader without being
willing to go through the commitment and pain. And there’s a lot of pain.

~ Bill Lipschutz

Most people want the success without the work. Not only is that impossible but even more importantly it completely misses the point. The hard work is the success… “Success” without work is empty and meaningless. Seek out a challenging endeavor, pour your heart into it, and get after it.

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

And if you’d like to discuss macro with the rest of the Operator community, check out our Global Macro Facebook group by clicking here.

Have a great weekend.



A Macro Update And My Stock Shopping List For 2019

Special Announcement — Macro Ops Collective Deadline Extended!

We got a flood of emails on Jan. 1 from many of you saying you missed the deadline this week for the Collective because of vacation and other holiday commitments.

We have decided to extend the Collective enrollment deadline until this Friday, January 4th at 11:59PM EST. So if you missed the first window, now is your last chance. After Friday, the Macro Ops Collective will no longer be available for $179.50 a month.

Click here and scroll to the bottom of the page to sign up for the Macro Ops Collective!

Today’s Note and Stock Shopping List

Hope everyone is recovering well from their New Years celebrations and ready to dive back into markets for the year.

Just wanted to share with you some quick thoughts on the market, the dollar, and gold. And then at the end, I’ve got our Stock Shopping List with our favorite names that we’re looking to begin buying over the coming weeks.

Alright, let’s jump in…

The S&P 500 is trading higher off a short-term bottom. We should see it run up into the 2,600+ range — its 50-day MA acting as an attractor (red line) — but as I note on the chart below, the market is going to bump into significant resistance here. There are a lot of players who bought into this range that are underwater and who will look to close out their positions for break even once price climbs back to these levels. This is called a supply overhang.

With large supply overhangs like this, it typically takes the market a number of attempts before it can break through and move to new highs. The supply needs to be worked off and so I’d expect to see a reversal around the 2,650-75 range followed by a selloff to recent or even new lows — double bottoms are typically the pattern we see after large selloffs like these.

This action will also help to reset that last bit of stubborn sentiment I pointed to in last week’s market update.

Last week, I tweeted this about gold.

Here’s a closer look at the chart. Gold is now at a major make or break inflection point (chart below is a weekly). If it’s turned away and closes lower for the week then that sets it up for a good sell signal.

For those of you who are new to the group, I view gold as a reflection of global relative demand for USD assets (ie, the relative attractiveness of USD assets such as stocks, bonds, and the dollar versus the RoW). This is why gold trades in lockstep with relative equity momentum of EM vs. US equities.

The RoW is currently seeing slowing economic growth while growth in the US remains relatively strong. This higher growth is driving higher real rates in the US. The below chart shows the widening gap between the inverted yield on TIPs (the real yield) and gold. We should see this gap close with gold going lower.

I’ve also commented in the past about how platinum often leads gold. The current gap between the two metals should be concerning for gold bulls (red lines is platinum and black is gold).

One thing to note is that January tends to seasonally be the strongest performing month for gold (chart via Commodity Seasonality). You don’t ever want to trade off seasonality alone but it’s something to keep in mind. I think after the unusually strong December month for the yellow metal that perhaps that performance was pulled forward. In any case, let’s watch gold closely. A weak weekly close will set it up for a high R/R short opportunity.

And then we’ve got the dollar.

Last week I noted (link here) how the divergence between gold and the dollar and how gold often leads the dollar at turning points. The key word there is often, as in not always. That relationship may or may not hold this time around. So stay open minded and flexible.

The EURUSD might be seeing a key reversal day today. We’ll need to see if it holds into the close. The aussie is also making new lows against the dollar. Ultimately, we want to be short both pairs against USD.

The reasons why we want to be long the dollar against the euro and the aussie are pretty much the same for both. When looking at currencies we want to look at: rate differentials, growth differentials, relative equity momentum, and positioning.

Capital flows to where it believes it will earn the highest risk-adjusted return. Both Europe and Australia have large exposure to China — which just printed its first contraction in PMI since May of 17’ — while the US economy is more insulated to slowing Chinese demand.

Looking at the euro (though same holds true for the aussie) we can see that relative financial stock performance between the US and Europe favors a much lower euro. Financials trade off growth and rate expectations which is why this is a key indicator to track for currency pairs as the relative financial stock performance almost always leads.

The most important rate differential to track is the real (inflation-adjusted) 10yr yield. The current difference in rates also suggests we’ll see a much lower euro.

Relative total stock and bond performance favors a much stronger dollar versus the euro.

And the trend in relative economic growth favors a much lower EURUSD pair.

The short-term bear case against the dollar is just that positioning and sentiment remain somewhat crowded to the long side, though much of this has been worked off and is now less of a headwind. And then, the gold divergence which I mentioned above and which is hardly an iron-clad heuristic.

Technically, EURUSD remains in a tight coil resting on significant support in its 200-week moving average. This is around the spot 1.13 level. If we see a weekly close below this level then I think it’ll be high-time to load up on short EURUSD. But, until then, we’ll patiently watch the dollar pairs from the sideline.

Now onto our Stock Shopping List.

BlueLinx Holdings (BXC)

The best risk/reward opportunities are typically found in stocks that don’t screen well. This is due to the rise of quants along with the free and wide access to a plethora of various screeners and algorithmic stock ranking systems available to any and all. Because of this, any obvious quantifiable mispricing quickly gets repriced in the market. Long gone are the days when buying a stock just because it has a low PE made you money.

Now, the best opportunities are in stocks that are mispriced because their true value is distorted and disguised by the popular GAAP accounting numbers and ratios that people typically look at. If you’re interested in reading more on this then check out our Value Investing Manifesto.

BXC is one of these stocks.

The company is a wholesale distributor of building products with distribution centers across the Eastern US. Previously, BXC served as the captive distribution arm of Georgia Pacific (GP) which is the country’s largest producer of plywood. In 2004, BXC was spun out of GP by a private equity buyer who did what PE firms do, they saddled the company with lots of debt. This wasn’t great timing of course, with the housing crash just around the corner and all. And in 2017, the PE firm was forced to liquidate its holding in the company at bargain prices.

The stock is underpriced because it doesn’t screen well. The GAAP balance sheet likely understates the value of the company’s real estate to the tune of a couple hundred million dollars while also overstating its leverage.

Here’s the following from Matt Sweeney of Laughing Water Capital on the opportunity in BXC (with emphasis by me).

While buying from a seller that is not concerned with price is a good place to start, by itself this is not
sufficient for investment. We were further attracted to the business because of its misleading GAAP
balance sheet, which we believed under-stated the value of the company’s real estate by almost $200M.

Importantly, the company had been monetizing their real estate through sale-leaseback transactions,
which allowed the company to paydown debt. While the mechanical screeners that rule the markets were viewing the company as levered ~8x, we believed the company had already reduced its leverage to ~6x, and could be theoretically almost debt free if they simply continued to monetize their real estate.

More important than this theory however, is the reality: they just don’t need all of the land they have.
Because the company started as a part of GP, their footprints were designed to accommodate storage of plywood and other sheet goods. Storing plywood requires a lot of space for a small amount of margin, and is thus not a good business to be in.

Additionally, a look at BXC’s product mix vs. public competitors showed significant room for margin
expansion through moving into more value-added aspects of the building supply distribution business.
Combining the above elements, I felt that BXC was significantly mis-understood by the market, and that
there were multiple ways to win in the years to come.

What I did not consider was that BXC would announce a merger with a competitor that has a highly
complementary business and footprint only months after our purchases. Shares more than doubled on
the news, driving BXC into a top 5 position for us. While it may be tempting to just take the money and
run after a move of this magnitude, reviewing the transaction indicates that the combined company may
be cheaper now in the low $30s than it was below $12 just a few months ago. This is a business where scale matters, and the opportunity to take costs out of the combined business and drive revenue through consolidating the footprint to more fully utilize square footage, leveraging purchasing power, leveraging administrative resources, and cross-selling complimentary products is very real. It is not difficult to envision scenarios where the combined company can generate $8 to $12 in free cash flow per share looking out a few years, which when combined with a likely de-leveraging of the balance sheet leads to the potential for significant additional upside.

An expanding business that’s moving into higher margined products combined with the benefits of increasing scale make BXC an attractive company. The opportunity is made even richer when you also consider the pace of deleveraging in the balance sheet (lower debt makes the equity worth significantly more) and a business that should be generating $10+ in free cash flow in the coming years. The stock is currently only trading at $25…

Insiders think the stock is a steal at current prices and have been loading up on it — typically a good sign. And from a technical perspective, the chart looks great. It’s broken out of a large base and has now retraced to the lower band of its weekly Bollinger Band.

For more info on BXC you can read this dated but still relevant write-up from Adestella Management on the company (link here).

To be continued…

If you want access to the rest of the shopping list sign up for the Macro Ops Collective!

We have extended our New Years offer until this Friday, at 11:59PM EST. After that prices will permanently increase by 55%.

Click here and scroll to the bottom of the page to join the Macro Ops Collective!

Have a great week!



Full Capitulation In US Stocks Not Here Yet

Following is just a short note with some things I’m looking at in the market and what I want to see before we start getting more aggressive on the long side.

First, the Russell small-cap index is knocking up against major support this week in its long-term trend line, 50mma (red line), and lower Bollinger Band (chart below is a monthly). We should see more of a bounce here but I’m skeptical it will hold and am looking for a further move lower — I’ll show you some of the reasons why, below.

One of the big ones is the stubbornness in the II Bull/Bear sentiment data to budge. We’ve talked about this chart quite a bit over the last few months, so I won’t continue to beat a dead horse. But II sentiment provides the highest signal to noise out of all the sentiment data, imo. And the failure to see capitulation on this size of a selloff in the market, tells me this move lower most likely isn’t over.  

Now we don’t NEED to have a full capitulation sentiment reset for a bottom to be in. But it’d give me a lot more confidence to be aggressive on the long side if we did.

Besides sentiment, here are a few other things that I want to see to confirm that a new uptrend is starting.

Druckenmiller often talks about how “the market is smarter than he is and so he listens to the signals of the market” to figure which side of the trade to be on. One of the things he pays close attention to — and we at MO do as well — is the trend in cyclical versus defensive stocks.

Check out the chart below which shows cyclical versus defensive stocks (orange line) and the S&P in blue. When the orange line is trending up, it means that cyclical stocks are outperforming defensive sectors. This means that investors are moving to more risk-on positioning as their perceptions of future economic growth become more optimistic. And when the orange line trends lower it means that investors are becoming more defensive in their positioning and more pessimistic on the market outlook.

Now we want to see the trend in cyclical vs. defensive confirm that of the broader market. When it doesn’t, it often means that the market’s internals are shifting and there’s likely a major change in trend coming, as we can see in this chart.

We want to see this orange line (cyclical vs defensive) put in a higher low in order to signal a shift in market internals and confirm that a bottom is in.

In the hierarchy of traders, bond traders tend to be the most well informed. This is why moves in credit almost always precede large trend changes in the equity market. Similar to the market bottom in early 2016 we want to see the orange line (investment grade bonds relative to USTs) confirm a bottom is in by moving higher. Without this, it’s unlikely any stock rally will have legs…

The below chart is my take on the late Marty Zweig’s Breadth Thrust indicator. It’s simply the 10-week moving average of all NYSE advancing issues divided by advancing plus declining issues: ADVN/(ADVN+DECN).

For a true confirmation of a breadth thrust and thus an indication that the market move higher is likely to have legs, we want to see the indicator (red line) dip below 0.4 (lower horizontal black line) and then quickly thrust above the 0.60 level (upper horizontal black line). The vertical red lines show past instances when this indicator has been tripped. Each marks the end of a major down move and the beginning of a major advance.

An important question is which markets will lead the next advance: the core (US) or periphery (EM)? I shared this chart in one of our more recent MIRs which shows the aggregate total long USD synthetic positioning in the futures market. Large orange spikes indicate that traders are crowded long USD assets. We can see that when this spike crosses above the red horizontal line, emerging market stocks typically enter a period of outperformance against the US.

We saw one of our largest long USD positioning spikes this last October. And ever since EM stocks have been outperforming, but the positioning has dropped and though still a bit elevated is getting close to a neutral level.

This brings us to our next chart which shows gold (gold line) overlaid on a AUDUSD chart (black line). I’ve written about in the past (link here) about how gold often leads the dollar at turning points. Similar to using market internals like cyclical vs. defensive sectors for confirming/disconfirming signals, we need to pay attention to the trend in gold when it diverges from the inverse trend in the dollar.

The recent divergence between gold and the dollar (AUDUSD) is worth noting. What this tells me is that it’s odds on that we see a sizable dollar selloff in the coming weeks. This view is also in line with the long synthetic dollar positioning that still needs to be worked off.

I’m ultimately bearish on gold and bullish on the dollar and would view this move as a tactical short-term one. But due to the tight coiling action in the EURUSD (which makes up more than half the trade-weighted USD basket) it seems as though a sharp move is possible.

I’m not sure what the catalyst is going to be; maybe more noise about a US/China trade deal or a dovish turn from the Fed when the FOMC next meets at the end of January. But it looks to me like we may first see more continued EM outperformance, coupled with a dollar selloff, and precious metals staying bid before the dollar finds a bottom and the US stock market really starts taking off.


A Special Announcement and Market Update

Just wanted to share some exciting news and a quick market update. But first, I’d like to wish everybody a very Merry Christmas and a happy holidays! It means a lot to us here at MO that you’ve chosen to be apart of the MO tribe and for that, I want to extend to you our most sincere thanks and gratitude.

Now onto the exciting news…

Chris Dover is officially joining the MO team. If you’ve been in the Comm Center at all these last few months then you already know Chris. But for those of you who don’t, here’s a quick bio:

Chris is a Quant/Systems trader with over 19 years trading the markets and currently running his family office. A Former Marine, Government Contractor, a serial tech entrepreneur, Angel investor and lifetime student. Chris travels the world with his wife living out of a carry on bag, focusing on health and wellness, quality of life, running his trading systems and helping others achieve their goals of trading for a life.

Chris uses his focus on Quantitative Systems Trading to advise hedge funds, family offices and individual traders on building trading systems that achieve consistency and durability over time.

Chris brings a unique approach to markets, focusing on mindset, health and then finally, consistently profitable trading.

I couldn’t be more stoked to have Chris join the team. Not just because he’s a fellow Jarhead, but also because he’s an incredible trader who shares the Macro Ops passion for relentless learning, growth, and personal evolution.

We’ll be working out the details over the coming weeks on how Chris can best share his knowledge and experience with the group. But, things like a podcast and courses on theory/strategy in building trading systems are definitely in the works.

Our long-term goal at MO is to build a small team of 4-6 traders who are some of the best in their respective niches. This is kind of the old-school macro fund model where a team that includes a classical chartist, a fundamental value investor, a currency specialist, a systems/algo trader and so on…

There are a number of benefits to this approach from a portfolio management standpoint. One is that you get strategy diversification. Various strategies excel in different market regimes and you can tilt-weight your portfolio and focus on the strategies that best align with the current regime.

Another benefit and this is more specific to MO as a group, is that everybody is different and we all need to adopt trading strategies that fit our personality. This is key, because what works for me, likely won’t work exactly for you. That’s why the whole idea of your typical market newsletter which just gives you buy and sell signals is bunk.

Ultimately, everybody’s long-term success in markets comes down to their ability to consistently execute a trading strategy with a definable edge. And if one doesn’t fully understand their system, their edge, or if their approach isn’t aligned with their personality, then there’s zero chance of them executing consistently and they will inevitably fail.

This is why we spend just as much time discussing mental models and theory as we do covering markets and trade setups. We want to give everybody the tools with which you can mix and match and shape to make your own, in a system and framework that works for you.

We plan to do much much more of this. And bringing Chris on the team is going to significantly increase our bandwidth and allow for more of this sharing of ideas and theory.

In the end, we’re focused on rapid personal evolution. Not just in trading but in every area of our lives (health, fitness, meaningful relationships, and helping others), since success and growth in one area tends to overflow and permeate the next. And trading markets may be the best game in the world (I certainly think so) but it’s still just a game, albeit a serious one.

We’ll be looking to further grow our team over the next 12-months. A number of you have reached out in the past, looking to work with us. The timing wasn’t right then but if you’re interested, please shoot us an email and connect. We’re looking for right fits, experienced traders who are maniacally devoted to Learning, Sharing, and Evolving.

Now onto markets!

This is the best explanation I’ve heard as to what’s driving this slow drip selloff in markets. It mirrors what I’ve been hearing from the fund managers I talk with (h/t to @InsiderBuySS). The following is from Kuppy’s blog Adventures In Capitalism (emphasis by me).

Moving to small caps; I’ve been involved in this sector for nearly two decades. I can only think of two other times where I have seen so much pain and frustration amongst my small cap friends. That would be the 2008 to 2009 period and to a lesser extent during the first few months of 2016. I am stunned at how many high-quality businesses trade for mid-single digit cash flow multiples—despite strong balance sheets. I’m even more stunned at how many slightly leveraged businesses trade at low single digit cash flow multiples. It’s outright insane how many companies trade for massive discounts to NAV. Take a look at shipping for instance—you have dozens of companies where you can liquidate the fleet and double your money based on current vessel values. This is despite the fact that charter rates are up and values are increasing. Of course, this still doesn’t quite compare to anything exposed to the energy sector. These things are being given away as dozens of energy funds liquidate and sell everything they own. You could say that some of these businesses are challenged—they aren’t all challenged. Moreover, they shouldn’t all be declining by a few percent a day—with hardly an up day.

What is going on? You are witnessing a massive culling of the hedge fund industry as hundreds of funds are liquidated and thousands more get sizable redemptions. Many of these funds own the same companies—the outcasts from the indexed world, the cheap, the unloved; the same stocks that many other hedge fund managers own. With the hedge fund industry going in reverse, there is suddenly no natural buyer for what must be sold. As a result, you are seeing waves of forced sell orders and few buyers. It is creating rather insane bargains all around.

Like all trends, this one too will end. If your fund is facing a year-end redemption, you need cash in hand by December 31 and you probably finish selling a few days before then. Therefore, at most, there’s 9 ½ days left to make sales. It may get even uglier—it may not. No one knows how to time this. What I suspect, is that the pain will finally abate in two weeks. Or at least the forced selling pain will be done. If you look at Q4, despite only a small drop in the S&P, it has been one of the most painful that my friends or I can remember. There are lots of guys down 20% to 30% this quarter and suddenly forced to de-lever further, to get their risk ratios in order. This sort of pain and indiscriminate selling creates lots of opportunities.

Hedge funds have been getting slaughtered this year. The back and forth chop of the market has essentially taken a sickle to the bloated money management space. This is a good thing for us active traders and was kind of inevitable. There’s just too many money managers all crowding into the same damn trades.

Anyways, this hedge fund killing field, as Loeb put it, is driving end of year redemptions which means forced selling of positions. The Russell small-cap index is now down -27% on the year, with many good individual names I track down 40, 50, 60%+.

Anytime there is forced selling in the market, opportunities are created. This time is no different. I expect this grinding persistent selloff to abate sometime in the next week or two, as it looks like we’re seeing that total sentiment capitulation event that we’ve been waiting on.

Sentiment is nearing outright ridiculous levels…

The equity risk premium (difference in earnings yield versus treasury yields) via Sentiment Trader is now 4 standard deviations below average. This is extreme…

According to SentimentTrader when the ERP Z-score is below -2, the annualized return shot up to 40.1%.

According to the latest BofAML Fund Manager’s Survey, money managers continue to hold large amounts of cash. This is NOT something you see at the top.

And then here’s how every quarter performed following a 10%+ down quarter post-WWII via Bespoke Investments.

The market is setting up for a MAJOR buying opportunity. There’s likely a bit more pain ahead in the short-term but I think a bottom is near. Our puts in NVDA, BABA, TSLA, as well as our DAX short and long bond / long VIX position is hedging us well. We’ll look to take profits on a number of these trades in the week(s) ahead.

I’ll be putting out my stock shopping list this weekend. I haven’t been this excited for deals in a LONG TIME.

That’s all I’ve got for now. Shoot me an email or hit me up in the CC if you’ve got a question.

Enjoy the closed markets tomorrow and we’ll be back in the saddle on Wednesday!

Uber Cannibals, Bond Traders vs Stock Traders, and The Power of Now

Here’s your latest Friday Macro Musings.

As always, if you come across something cool during the week, shoot us an email at and I’ll share it with the group.

Latest Articles/Videos —

The Bullish Case For US Stocks — Alex explains why sentiment indicators are signaling a potential bottom in the stocks.

Yield Curves — Not sure what an inverted yield curve means? Check out this video.

Articles I’m reading —

Mohnish Pabrai founder and CEO of Dhandho Funds has released the latest picks for his “Free Lunch” Portfolio. (Link here) It’s an algo that selects stocks within three categories: Uber Cannibals, Shameless Cloning, and Spinoffs. You can read about this in more detail here.

If you want a concise overview of the happenings in tech, Ben Thompson’s The 2018 Stratechery Year in Review has it all. Topics include: Aggregation Theory, Tech and Regulation, Antitrust, and a summary of what has gone down at all the big tech firms in 2018.

Operator Kean, wrote a fantastic piece on the Second Opium War, and how those events have shaped the way the Chinese think about policy to this day — nearly 158 years later. (Link here)

Here’s a summary in his words on what the Chinese learned from their defeat.

The Chinese have learnt bitterly that:

High levels of ethnocentrism would only lead to misunderstandings and clashes. In the 19th century, these clashes resulted in the technologically superior party triumphing over the other (Britain at first, and later France, Germany, Tsarist Russia, the United States (US) and Japan).

In order to catch up with their peers/rivals, they need to be open-minded and humble to learn from others. However, they look a long time to realise this as their Manchurian overlords (the Qing imperial government) were the dominant power in Asia for centuries and were slow to accept that they have become obsolete. The early Chinese reformers during the last days of the Qing Dynasty like Dr Sun Yat-sen took inspiration from both the US and Japan.

While attempting to learn from others, adaptation is required to ensure that the new concept or system is unique and appropriate for Chinese civilisation and its continuity.

Most importantly, they have to strive towards being technologically superior than others as the memories of having their arms twisted are very much alive in the Chinese psyche.

These lessons learned from the war long ago still drive their policy today. It’s useful to have this context when gaming out probable macro scenarios for the future of China’s economy.

Finally, check out this Julian Robertson article on how he navigated through the 1987 crash after experiencing a 30% drawdown on his fund within one month’s time. This post shows how a true master trader navigates out of emotionally tough times.

Charts —

Last week, I listened to Adam Robinson talk about his global macro investment process. And this week I did a little digging into his methods.

Adam mentioned that he likes to look at what bond traders are doing as a leading indicator for what equity traders are going to do. Here’s an excerpt explaining it in a little more detail.

So suppose bond traders are pessimistic about the world, about the economy, right? They start selling corporate bonds and buying Treasurys. So, bond traders are pessimistic about the economy, and stock traders are optimistic. They’re bidding up stock prices. I will tell you that 19 times out of 20, when those two groups disagree, the bond traders are right and early. They are right and early. When I say 19 times out of 20, really I mean 99 times out of 100.

So, for example, the ETFs for that, if people follow this, the best ETFs for that are LQD and IEF. So LQD is the investment-grade corporate bond ETF, and IEF is the US Treasury 10-year ETF. So you just take a ratio of that, and follow that ratio, and that’ll tell you what bond traders think of the economy. And when they disagree seriously with equity traders, the bond traders are right and early.

I charted this LQD/IEF ratio out yesterday and saw exactly what Adam was talking about!

Corporate bond spreads (in blue) never recovered from the February sell off. They continued to make new lows and trudge around sideways during the summer months. This divergence eventually resolved itself in favor of the bond traders after this horrendous Q4 in stocks. Bond traders were right and early.

Podcast I’m listening to —

The Past, The Present, & Future of Quant with Cliff Asness kept me engaged because of the philosophical nature of the show. Patrick O’Shaughnessy asks Cliff the hard questions about whether or not factor investing can continue to produce alpha.

Cliff also had some really interesting commentary on the role of active traders vs passive traders and what that mix will look like going forward. Excerpt below:

One giant question is how many people, how many organizations, how much of the world’s resources have to be devoted to accurately pricing securities?

Now to someone who hates markets, their default answer is almost anyone doing this is just betting and it’s not a useful function in society and I will take the strong otherside of that. A huge advantage of a market economy versus, and I’m getting political, but versus a planned economy is that smart people in a competitive world are trying to set prices, and there is a tremendous positive externality from people doing it. It doesn’t mean everyone has to be an active manager, right? If the whole world were actively trading stocks the information is already there. And like all math problems, the last piece of information, taking it from 1 basis point mispriced to 0 basis points mispriced is worth approximately nothing.

To give you another example, Jack Bogle will tell you flat out something very obvious but still fun to hear from Jack. Not everyone can market cap index. Somebody has to think about individual stocks. Quants can help, but I actually think you still need traditional managers.

We do need active managers. We have no idea how many we need.

Book I’m reading —

The Power of Now by Eckhart Tolle — I found this through a recommendation from a friend. It’s a book about mindfulness. It was written in 1999 and still makes appearances on Amazon’s “Most Read” list, an incredible testament to its quality.

The concepts inside aren’t anything new. But Eckhart Tolle has a way of talking about mindfulness that makes it easier to internalize. Here’s one of my favorite excerpts from the beginning of the book.

Then the mind is using you. You are unconsciously identified with it, so you don’t even know that you are its slave. It’s almost as if you were possessed without knowing it, and so you take the possessing entity to be yourself. The beginning of freedom is the realization that you are not the possessing entity — the thinker. Knowing this enables you to observe the entity. The moment you start watching the thinker, a higher level of consciousness becomes activated. You then begin to realize that there is a vast realm of intelligence beyond thought, that thought is only a tiny aspect of that intelligence. You also realize that all the things that truly matter — beauty, love, creativity, joy, inner peace — arise from beyond the mind. You begin to awaken.

A lot of this stuff goes hand in hand with developing high-level emotional resilience to the ups and downs of the market. And with VIX clocking in at 28.4 as of yesterday’s close, we need to be prepared for a lot more whipsaw.

Video I’m watching —

I went down a physics rabbit hole this week.

I’ve always been fascinated by Einstein’s theory of special relativity and time dilation. Time dilation is a difference in elapsed time measured by two observers due to a velocity difference relative to each other.

Basically it means that time is not a constant, and it is possible to “travel through time.”

This video does a great job of breaking the concept down into something I have been able to wrap my head around.

Quote I’m pondering —

Have more than thou showest, speak less than thou knowest, lend less than thou owest.  ~ Shakespeare

Deutsche bank should’ve read a little more Shakespeare…

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

And if you’d like to discuss macro with the rest of the Operator community, check out our Global Macro Facebook group by clicking here.

Have a great weekend.



The Bullish Case For US Stocks

Sentiment, positioning, and technicals ALL say that we’re getting close to the bottom of this move. And the market is setting up for a monster rally (at least in US stocks).

Let’s start with sentiment.

We’re still waiting for the capitulation spike in bearish sentiment via the Investors Intelligence report, but we should get that this week.

Other indicators and signs of sentiment suggest that bearish sentiment is finally becoming near consensus.

BofAML’s Bull & Bear Indicator is near “Extreme Bearishness” levels and should give a buy signal in the week(s) ahead.

UBS’s composite positioning amongst fund managers in US stocks show that fund manager holdings of US equities are near extremely oversold levels relative to history.

The mainstream non-financial news is now predicting a market crash in 2019. The above is from the NYT’s Lifestyle section of all places. This is NOT what you see at market tops.

Ron Paul is back to making headlines pitching doom and gloom.

AAII bearishness is at its highest levels since February 2016.

The State Street Investor Confidence Index for North America is at its most bearish level since 2012.

The percent of stocks trading above their 200-day moving averages is now at 19%. This is DEEPLY oversold territory. The last three times the indicator was this low, it marked major bottoms in the market.

The RoC in rates has reversed and is now back in neutral territory and is no longer a headwind for stocks. We should see this come down even further on dovish guidance from the Fed.

Now look at the giant gap between the ISM in the US and YoY change in the SPX. They typically track each other as the ISM is an indicator of economic growth in the US and therefore company earnings. This type of divergence is extremely rare and should be closed by the SPX doing most of the work by moving higher.

I’m looking for the SPX to dump below the trendline in the coming day and perhaps sell off to the 2,500 level before reversing. Odds are that this is setting up to be a major bear trap.

Same thing with small-caps (IWM). They’re getting close to the 200wma and long-term trendline. We should see a dump below followed by a quick reversal to regain the trendline.

I believe US stocks are setting up for an extraordinary buying opportunity in the next 1-3 weeks. I see a LOT of amazing deals in stocks and I’ll be putting out our Macro Ops shopping list later this week.



Walt Disney’s Paper Route and The Spread of Ideas

Here’s your latest Friday Macro Musings.

As always, if you come across something cool during the week, shoot us an email at and I’ll share it with the group.

New MIR Issue Out, Sign Up Now

The December MIR is now available! Alex explains how to use John Boyd’s OODA loop to break down a complex system like financial markets. We cover the entire macro narrative in detail through this framework. Topics include credit growth, Fed actions, China’s slowdown, the long-term debt cycle, macro positioning and much more. The report finishes out with trade ideas in EURUSD, gold, copper, and Indian equities.

We have a 60-day money-back guarantee, so there’s literally no risk for you to check out our analysis. Sign up to the Macro Intelligence Report by clicking here.

Latest Articles/Videos —

Powell And ‘Below Neutral’ — Review how the Fed influences the economy and what Powell meant when he said rates are just below neutral.

Evolutionary Biology — Learn why human evolution over millions of years has made it so difficult to control our emotions in the market.

Articles I’m reading —

Read this amazing section from the book Walt Disney: The Triumph of American Imagination about the daily struggle and outright drudgery of Walt’s childhood that no doubt helped shaped him into the icon he eventually became (h/t to @ivan-brussels for sharing).

This reminds me of one of my favorite quotes, which is.

Per aspera ad astra is a latin phrase that was popular in ancient Rome. It essentially means, “Through struggle to the stars”.

I also enjoyed reading about Jack Dorsey’s 10-day silent vipassana meditation retreat that he embarked on for his birthday this year. (Link here)

I wouldn’t mind going to one of these retreats someday. Perhaps with some of the MO Collective crew. This practice seems to be working wonders for @jack who’s running two wildly successful billion dollar companies simultaneously.  

Square’s Cash App (his other public company) has now overtaken Coinbase as the most widely used iOS app for bitcoin purchases. Cash App has also overcome YouTube’s app as the top free mobile application on the iOS store. (Link here) Jack’s winning the game right now. It looks like his mindfulness practice is working…

Lastly, Meb Faber shared his list for best podcasts of the year (link here). I’ve listened to maybe a third of them and look forward to working my way through the list.

Charts —

There is a great growth divergence right now between the US and the rest of the world. This is set to intensify over the coming quarters, at least until the second half of 19’ when the negative effects of China’s collapsing credit growth should have finished working its way through the system.

And while liquidity in the US is still relatively flush, it’s beginning to tighten quite significantly in the rest of the world.

The same pattern is playing out in Asian liquidity. Readings peaked at the beginning of 2018 and have made consecutive new lows all year.

The dollar and metals are wound up and look ready for a run. Remember, speculative flows drive currencies and speculative flows chase growth. 2019 is looking like it may be the year of the dollar.

Potential trade I’m digging into —

We’ve mentioned Facebook (FB) here a number of times and we continue to track it waiting for a bottom to be put in. The chart is beginning to look more constructive but we think there’s likely one more leg down. The stock is insanely undervalued at these prices. Saber Capital shared a recent update on FB’s valuation case that’s worth reading if you’re interested (here’s the link).

Podcast I’m listening to —

Winning at the Great Game: My Interview with Adam Robinson (Part 1) [The Knowledge Project Ep. #47]

This is a Farnam Street podcast featuring game theorist Adam Robinson. Adam is a rated chess master, co-founder of the Princeton Review, and global macro advisor to some of the largest family offices and hedge funds in the world. He’s an incredible thinker and life philosopher and whenever he comes up on the podcast circuit I try to tune in.

His conversation with Shane covers happiness, life’s big questions, subconscious thinking, investing and much more.

If you’re short on time the investing discussion starts in at [39:30] and runs until the 1 hour and 25 minute mark.

It’s a fascinating segment where Adam reveals part of his investing framework — a process that uses neither fundamental analysis nor technical analysis. Here’s a snippet of his explanation for how he approaches markets.

So, there’s a third way, and John Maynard Keynes said, “Successful investing is anticipating the anticipation of others.” And that’s fascinating, right? John Maynard Keynes, who was not just one of the great economists of all time—and by the way, the one economist Warren Buffett ever cites—he was also a great investor. So during the Depression, John Maynard Keynes ran one of the Cambridge College portfolios, and it was up three- or four fold during the Depression and World War Two. He was a great investor. And so how do we anticipate the anticipation of others? That’s very clever as a formulation, but how do we do that? And we can do that using game theory. So my approach to markets is simply this, to wait for different groups of investors to express different views of the future, and to figure out which group is right. I look for differences of opinion strongly expressed, and decide which one is right.

Book I’m reading —

In the above podcast, Adam Robinson talks about how trends are really just the spread of ideas which is really interesting if you think about it from a macro perspective. Markets trend because minority beliefs become dominant beliefs until consensus is reached. Then the world changes and the process repeats.

Adam says he learned about this concept by reading an old book written by Everett M. Rogers in 1962 called Diffusion of Innovations.

Quote I’m pondering —

Risk taking is not just a quantitative discipline, it is a philosophy of life. There are basically two sensible attitudes about risk. The first is to avoid it whenever possible, unless there is some potential payoff worth the risk. The second is to embrace risk taking opportunities that appear to offer a positive edge. The advantage of the second course is that you take enough gambles that the outcome of any one, or any ten or hundred, doesn’t matter. In the long run, you will end up near your expected income, like someone flipping a coin a million times.  ~ Aaron Brown

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

And if you’d like to discuss macro with the rest of the Operator community, check out our Global Macro Facebook group by clicking here.

Have a great weekend.



A Looming Global Recession and a Short Metals Trade

Here’s your latest Friday Macro Musings.

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

This Week in History (“You have to know the past to understand the present” ~ Carl Sagan) —

There’s been a lot of chatter this week about the flattening yield curve and whether or not this means a recession is around the corner.

Well, this week in history, all the way back in 1997, a similar discussion was going on. In fact, there’s a number of similarities to that time. Economic data in the US was strong but there were growing concerns over emerging markets and tightening liquidity due to a Fed raising interest rates; and the yield curve was about as flat as it is today. The NYT wrote the following in a short article titled Leading Indicators up 6th Month in a Row (link here).

The largest restraining influence was the interest-rate spread, the difference in the yields on 10-year Treasury bonds and Federal funds, which are overnight loans between banks. The spread, often referred to as the yield curve, is unusually flat now, a situation widely regarded as one of the most reliable predictors of slowing economic activity.

Now we all know about the horrible recession and bear market that followed. Except, of course, that was 2-years later and after the S&P went on to run another 60%+.

Investing legend Bruce Kovner once said that, “The Heisenberg principle in physics provides an analogy for the markets. If something is closely observed, the odds are it is going to be altered in the process.” Meaning… if everybody is freaking out about a flattening yield curve and an impending recession then those two things are unlikely to occur.

When the yield curve flattens and nobody is paying attention is when you want to worry.

Articles I’m reading —

Adam Tooze (author of the Book Crashed which I have on my reading list but haven’t gotten to yet. Have any of you read it? Is it good? I digress…) wrote a great article in the NYT on the potential Italian debt crisis and all the head-scratching politics involved. It’s appropriately titled How Does the E.U. Think This Is Going To End?

At the heart of the matter is a deeply indebted (Italy’s debt to gdp is roughly 133%) structurally weak country that wants to expand its budget deficit to boost growth but the EU isn’t having it. Tooze notes the current plight of Italians, writing:

Over the past 10 years, Italy’s gross domestic product per capita has fallen. This decline is unique among large advanced economies. (It is even worse than Japan’s infamous lost decades.) And the suffering is extremely unevenly distributed: More than 32 percent of Italy’s young people are unemployed. The gloom, disappointment and frustration are undeniable. For the commission to declare that this is a time for austerity flies in the face of a reality that for many Italians is closer to a personal and national emergency.

The two sides have been in a standoff for weeks. The EU is hoping that Rome will stand down but the Italians are damned if they do (weak growth will continue to popularize populist parties) and damned if they don’t (risk backlash from the EU and ECB which would lead to investor flight and higher yields).

This is an important developing macro story and depending on how it plays out, will have wide-ranging implications for the EU down the road. Make sure to read up on it (link here) and stay abreast.

Macro strategist, Felix Zulauf, spoke with German publication Neue Zürcher Zeitung this week about the global economy and where he thinks it’s headed. Felix gives his take on China, the trade war, Europe, and global economic conditions. When asked where he thinks populism is driving economic policy, he said:

The globalization movie is going backwards in the next 10 to 15 years. Estimates still assume a global expansion of 3 to 4% for next year. I expect less than half. Economic politicians will probably draw wrong conclusions for some time and make wrong decisions. I expect a big disappointment in 2019. Expectations for company profits of plus 10% are thus in a vacuum and must be reduced. This makes markets vulnerable to corrections. The growth of real global liquidity currently stands at 0% with falling trend. In the past, followed by a twelve-month delay, a global recession.

I’m a fan of Felix and find myself agreeing with him quite a bit lately. I think 2019 is going to be a rough year for stocks, globally. With much of the world skirting the line of recession. I shared that NDR Global Recession Probability Indicator recently which has historically indicated recession within the coming months with a 90%+ hit rate. I don’t think this time will be any different.

Like 98’ though, I think the US keeps trucking along, albeit slowly, while the rest of the world flounders. Anyways, here’s the link to the piece and you can use Google translate if you don’t read German.

Lastly, this one isn’t investing related but it’s so good I had to share, and h/t to @movement_cap for it. It’s a post written by Ryan Holiday titled How You Do Anything Is How You Do Everything. Here’s a great excerpt from the piece, and there’s many more.

In every situation, life is asking us a question, and our actions are the answer. Our job is simply to answer well.

The great psychologist Viktor Frankl, survivor of three concentration camps, found presumptuousness in the age-old question: “What is the meaning of life?” As though it is someone else’s responsibility to tell us. Instead, he said, the world is asking you that question. And it’s our job to answer with our actions.

In every situation, life is asking us a question, and our actions are the answer. Our job is simply to answer well.

Right action — unselfish, dedicated, masterful, creative — that is the answer to that question. That’s one way to find the meaning of life. And how to turn every obstacle into an opportunity.

So good… Here’s the link.

Charts —

Potential trade I’m digging into —

Paging Dr. Copper, your patient is hemorrhaging.

Copper will follow the crests and crashes of the Chinese economy (which accounts for over 50% of global copper demand).

Which is why those who are long should be concerned about the slowing credit growth in the land of dragons.

My money’s on copper breaking down to the downside of its bear flag.

Podcast I’m listening to —

This week I listened to one of Tim Ferriss’ latest podcast with drummer Dave Elitch. This was a surprisingly good listen. Dave is a super well-read and fascinating guy who’s made a life long study of the art of learning and how to master a craft.

There’s tons of applicable knowledge in here for those of you on the Trader’s Journey. The entire episode is worth a listen. Here’s the link.

Book I’m reading —

This week I revisited some chapters from Alan Watts’ book on Taoism, called Tao: The Watercourse Way. I’m a big fan of Watts and have read, I think, all his books. He’s an amazing communicator and an absolute well of knowledge. This book is a great read for those of you interested in the eastern philosophies. It’s an absolute beautiful read.

Quote I’m pondering —

Seek facts diligently, advice never. ~ Philip Carret

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

And if you’d like to discuss macro with the rest of the Operator community, check out our Global Macro Facebook group by clicking here.

Have a great weekend.



Steve Cohen on Markets and The Inventor of Candlestick Charts on Trading

Alex here with this week’s Macro Musings.

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

Articles I’m reading —

Take a few minutes and read this short article by John Curran (formerly a partner at Bruce Kovner’s shop Caxton Associates, and now CIO of a family office). John gives his insightful take on the current macro environment and where he thinks we may be headed (hint: it’s not good). He starts off discussing his concerns over the growing supply of Treasuries, noting the lack of foreign buyers due to dollar hedging costs, and how this is likely to lead to rising interest rates and subsequent multiple contraction for US stocks.

He then talks about how the rise of passive investing may lead to forced indiscriminate selling if/when the market should fall below a certain uncle point, writing:

There is an important psychological distinction to be made here. Passive investors, through indexing, willingly sacrifice the potential for gains greater than the benchmark. In market downturns, they find temporary comfort in the fact that their drawdowns or losses are on par with the market. However, when-less informed participants reach their individual absolute pain threshold, they may become emotional sellers regardless of price and valuation, and in the case of passive or index investing this leads to wholesale liquidation of the entire market, not merely in justified overvalued individual sectors. In the past we have seen examples of bear markets led by technology, banking, or housing sectors and selling was predominant and focused in the sectors. In the liquidation phase of the current huge passive contingency, it will be the entire market being sold regardless of sector-specific fundamentals and, as these pain thresholds are breached, the selling will trigger new pain thresholds and the feedback loop will be in full force.

Read the article in full (link here) and h/t to Kean Chan for sharing this with me.

Next, read this interview (link) with one of my favorite China watchers, Tim Murray of J Capital, in the Financial Review.  

The interview covers Tim’s fascinating career and how he initially got his start doing business in China and then dives into his thoughts on the current macro space there and where things are going — he thinks major stimulus is done for now, the renminbi is headed to 10, and commodities are slinking towards a cliff. He also has this to say about China’s tech powerhouses:

Tencent and Alibaba, those two. What are they? They’re frauds for sure. Now you can talk about it because they’ve already come off [in price], but you couldn’t have talked about this two years ago, if you’d said that, people would say ‘you’re a crank’.

But, you couldn’t have proved it. Look at their level of disclosure, there’s nothing there. Alibaba and its GMV – whatever GMV is – you can’t prove anything. Tencent was always what we call propping and tunnelling: pretending they had high profits and then tunnelling fake cash off the balance sheet through acquisitions. That’s a very common strategy. But hard to prove for an organisation of that size.

Hedge funds would often respond, “who cares? All companies in China are a bit fraudulent. As long as it’s making money. There’s a lot of that.”

I agree, which is why I’m short BABA.

Lastly, for you more wonkish types, here’s Patrick O’Shaughnessy’s follow up to his Factors from Scratch paper.

Oh, and one more. Here’s a good blog post with comments from Buffett and Munger on how to read an annual report (link).

Video I’m watching —

Check out this interview with hedge fund manager Steve Cohen (link here) and h/t to @neckarvalue for sharing.

Steve talks about his beginnings and some of his philanthropic endeavors. The more interesting stuff starts around the 20 minute mark when he talks about his firm’s move into quantitative investing and some of the more esoteric data sets they use to gain an edge. Then you can skip over the middle section where they talk about his art collecting and move to the Q&A at the end, where he fields questions about the market and investing.

Book I’m reading —

This week I’ve been reading The God of Trading, Honma by Lee Hyong-do which is about the original trading OG, Honma Munehisa. Munehisa is a trading legend who is believed to have amassed a fortune of over $100B in today’s money trading rice in Japan during the mid 18th century. He also invented candlestick charting as well as basic technical analysis with being the first to discover Head and Shoulder turning points (he called them the Three Mountains) as well as a handful of others.

Honma supposedly wrote a book titled Honma’s Fountain of Gold where he detailed his trading philosophy. I haven’t been able to find a copy of that one but this book does a good job of sharing and summarizing the main points from it.

All in all it’s a fun read. There’s a lot of fluff which you can skip through but there are the occasional gems that make it worth it. Here’s one, where the author recounts a story told by Munehisa about a time after he blew up his account early in his career and so he went to spend some time at a Buddhist temple to try and get his head straight.

While he was staying in the temple, doing nothing really fruitful, the chief monk of the temple came to see Honma Munehisa as he was turning and tossing in his bed. Watching the man who had locked himself in the room without going out even once, the monk asked Honma Munehisa, “Mind if I ask you what you are doing lying in bed?” Seeing the monk who stood in the doorway, Honma Munehisa reluctantly sat up and said, “I was just lying down. I don’t have anything particular to do, do I?” Sensing how desolate he felt, the monk beckoned to him and said, “Come here. Come here and sit down.”

Honma Munehisa dragged himself out to sit on the wooden porch, next to the monk. Then the monk asked him, “Do you see the flag over there?” He was pointing at a flag that was fluttering behind the fence. “Yes, I see that.” “Why do you think the flag is fluttering?” After thinking for a while, he answered, “Of course it flutters because the wind is blowing.” “Is there another answer?”

Honma Munehisa stared at the monk, blinking his eyes, before he managed to answer, “Well, could it be because of the chi energy that runs through the universe?” Believing that there must be a different answer, he thought hard but he could not come up with anything that sounded reasonable. All he could find was an answer which he thought was just as lousy as the first one.

The monk stared at Honma Munehisa‘s face for a while and said, “The flag is fluttering because your mind is shaky.” After spitting out the words that seemed to have boiled out of his mind, the monk walked away towards the grand hall. The monk’s words hit Honma Munehisa hard; he felt he had just been hit by a hammer on his head. He sat there for a while sensing only his pounding heart in total dismay before he bolted up and cried out, “So that’s the kind of a person this man has been!” After awakening to a major truth, he never lost in trading. He made profits each time he traded and was able to build a huge fortune. People started calling him Dewa No Tengu from then on, and people also said that he was the god of the markets who could win a hundred times in a hundred battles, a man who moved the world without moving himself.

Still your flag…

Chart I’m looking at —

Global earnings momentum has turned negative for the first time since early 2016. I’m becoming a little more bearish on markets going into next year. Not because of recent volatility, I actually think that’s a good thing. But primarily because I think China is going to surprise markets with the speed at which it decelerates. And with profit growth having already peaked in the US, we may be in for a bumpier ride than many are expecting in the quarters ahead.

Trade I’m considering —

There’s a number of stocks that I have on my shopping list currently and TripAdvisor (TRIP) is one of them. We owned it earlier in the year and took profits back when it last ran up and hit its 200-week MA (blue line). After a slow start, the turnaround finally looks to be picking up steam and I’m really liking the recent changes they’ve made to the platform/app.

Steven Wood of GreenWood Investors put out a great update on the fundamental bull case for the company which you can find here. He believes the stock still offers an extremely positively skewed bet at these prices, which I have to agree with. Here’s his various targeted outcomes.

Quote I’m pondering —

In trading, the beginning is crucial. If the beginning is bad, the ensuing course will continue in disorder. You should never rush when entering trading because rushing is the same as a bad beginning. When buying or selling, wait for three days from the moment you feel you could profit from a certain market condition. This is the rule. Consider the distribution condition of the rice in addition to the ceiling and bottom prices of it before you make your decision. This is the rule of the three. If you are not able to figure out which is the ceiling price and which is the bottom price, wait until you are certain even if it takes months instead of three days.  ~ Honma Munehisa

The great thing about trading and investing is that we don’t have to swing at any pitch we don’t absolutely love. A busy mind leads to busy trading which leads to poor results. Work on stilling your mind and developing patience to wait for the fat pitches to come your way. Unforced errors are the all too common disease of the struggling trader.

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