Musings: Soros on Anticipating Prevailing Expectations

Alex here with your latest Friday Macro Musings…

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


Latest Articles/Podcasts/Videos —

Your Monday Dirty Dozen [CHART PACK] —  I look at the latest prints of some leading US economic indicators, then talk SPX technicals, some Democratic polling numbers, virus growth, and BofA Global Fund Manager Survey, plus more.


Articles I’m reading —

This post from Ensemble Capital does a great job relating how we, as traders/investors, should think about the virus and its impact on markets. Here’s the link and a section from the report.

“But while it is perfectly reasonable to be concerned about the long-term economic impact of the virus, it is also perfectly reasonable to recognize that the virus may have little to no economic impact beyond 2020. Right at this moment in time, after such a sharp drop in the stock market, it is hard to believe that this might all fade in economic importance over time. But it is notable that in fact this is exactly what has happened with almost all past global virus outbreaks.

“Here’s David Quammen, the author of “Spillover: Animal Infections and the Next Human Pandemic” writing in the New York Times:

‘[This outbreak is] possibly even more dangerous to humans than the other coronaviruses. I say “possibly” because so far, not only do we not know how dangerous it is, we can’t know. Outbreaks of new viral diseases are like the steel balls in a pinball machine: You can slap your flippers at them, rock the machine on its legs and bonk the balls to the jittery rings, but where they end up dropping depends on 11 levels of chance as well as on anything you do.

Nobody knows where the pinball will go… Six months from today, Wuhan pneumonia may be receding into memory. Or not.’”

The key here is that nobody knows. It’s impossible to have an edge on this one. The coronavirus could end up being the Spanish Flu redux “or not” as Quammen writes.

In markets, we’re always dealing with uncertainty. Sometimes that uncertainty is relatively low and the range of plausible outcomes is more narrow than not. And sometimes that range blows out and assessing probabilities with any level of confidence becomes a crapshoot. Here’s some nifty diagrams from older posts that I’ve written on the subject, which you can find here, here, and here.

The coronavirus blows this cone out completely. That’s why the market is selling off as hard as it is — though some of this was inevitable due to crowded sentiment and positioning. But how do you properly discount a global pandemic in a world that’s as intricately connected as ours; where over 43 countries are involved in the making of a single iPhone?

It’s impossible… at least at this point in its evolution. Nobody can say with any level of conviction how things will progress going forward.

Maybe that’ll change in a week, or a month, or a couple of quarters… I have no clue. And that’s the point.


Charts I’m looking at —

Copper, the CRB Raw Industrial Metal Index, the Shanghai Pollution Index, are a few of the charts I’m tracking to get a leg up on when economic activity in China returns to more normal levels. There’s been a slight bounce over the last few days but hardly does a few data points make a trend.


Video I’m watching —

Watch the first 20-minutes or so of this panel discussion on COVID-19 from Johns Hopkins. It’s the best discussion I’ve seen on the topic. The main takeaway is that COVID-19 has likely crossed the threshold of what constitutes a technical pandemic and that there’s still a ton of unknowns about the virus and how it’ll progress. A positive is that they believe the mortality rate will likely drop once our means of testing for the virus improves. Here’s the link.

Also, I highly recommend giving this Real Vision interview with hedge fund manager Dan McMurtrie (I shared his latest letter in last week’s Musings). They cover a range of subjects in the talk, things like how he approaches investing, the attractiveness of SAAS stocks, the evolution of financial markets and more. But my favorite bit was what he had to say about inequality and what it’s doing to our politics. Here’s the link and a clip.

“You can chop the numbers a lot of different ways, but the reality is half the country right now is either financially, I would say close to insolvent, really just trying to get by and it’s a tight wire act or is just currently on the tight wire and they see that and that’s creating a lot of anxiety, a lot of anger, a lot of blame. I think for a lot of people, I think one of the reasons Bernie Sanders is doing so well and the reason that Trump is doing so well is in the last two years, first premiums went up and then deductibles spiked. As we saw premiums and deductibles spike, we saw all the polling data starts to correlate and what’s important to understand is because of the desperation people are in, it is forcing them to become single-issue voters.

“For a lot of Americans, they have to be a single-issue voter on health care. It’s not about ideology. It’s not about anything else. This could ruin their lives, it could bankrupt them. It’s a very serious problem. That introduces really serious political risk. The biggest risk for any country is when people within the country start acting not out of their own self-interest, but out of hate for the other.”


Book I’m reading —

A big hat-tip to Brent Beshore for sharing this one. The book’s name is “The Fish That Ate the Whale” by author Rich Cohen. I’d heard of it before but never got around to ordering it, though I quickly resolved that error after reading this excerpt from the book here.

The book is about Sam Zemurray. A penniless Russian immigrant who through sheer will and hustle created a banana empire, where he literally raised armies and overthrew governments. Here’s an excerpt from the excerpt.

“Zemurray had stumbled on a niche: ripes, overlooked at the bottom of the trade. It was logistics. Could he move the product faster than the product was ruined by time? This work was nothing but stress, the margins ridiculously small (like counterfeiting dollar bills), but it was a way in. Whereas the big fruit companies monopolized the upper precincts of the industry—you needed capital, railroads, and ships to operate in greens—the world of ripes was wide open. Within a few weeks of his return to Selma, Zemurray set out again, then again, then again. It was in these months, on train platforms and in small towns, that Zemurray first came to be known as Sam the Banana man.

“Historians later described the young Zemurray as a fruit peddler, no different from other poor Jews who pushed carts through Manhattan’s Lower East Side, except instead of a wagon, Sam worked out of a boxcar. (He was “Sam the Banana Man,” according to Life, “who once used railroads as pushcarts.”) It made sense, but only in a shallow way. In truth, Sam Zemurray was more interesting and unique—as a salesman of a perishable product, he was a kind of existentialist, skirting the line between wealth and oblivion, health and rot, a rider of railroads, a chaser of time. It was life: Move the fruit now or you’re ruined forever. He became a gambler by necessity—a risk-taker, a salesman, a brawler. “The little fellow,” as the big wheels in Boston called him, but the little fellow would build a kingdom from ripes.

“Sam eventually went into turnings, yellows, even greens. By 1912, he was living in the jungle in Honduras, where, working with mercenaries, banana cowboys, he had overthrown the government, empowering a president more friendly to Cuyamel, the company Sam led to victory against United Fruit. In the end, he would live in the grandest house in New Orleans, the mansion on St. Charles that is now the official residence of the Tulane president. He continued to wield tremendous influence into the mid-’50s, a powerful old man who threatened, cajoled, explained, a mysterious Citizen Kane-like figure to people in his city. When he died in 1961, the New York Times called him, “The Fish That Swallowed the Whale.” But part of him would always remain that big kid peddling ripes from a boxcar on the Illinois Central.”

Really looking forward to reading this one.


Trade I’m looking at —

Shipping stocks have taken repeated punches to the mouth since the start of the year. They’re an obvious victim of the virus; virus kills economic growth, trade slows down, and shipping rates fall. Now if the virus ends up petering out sooner than later then there’s some incredible offers to be had. But… as we discussed above, pretending to have certainty now can get you killed.

So what I propose doing is to size small and cut your risk when the tape tells you “not now”. TNK reversed back above its 200w MA yesterday on the back of a great earnings report, where the company announced they brought in $83m, or $2.47 per share and knocked their debt down by 15% last quarter. Not bad though the real tell will be next quarter when the virus’s impact begins to show up in the numbers more. Either way, I think the asymmetry of the trade makes it worth some repeated attempts. I may put on a long early next week if the tape holds into the close on Friday.


Quote I’m pondering —

There is always a divergence between prevailing expectations and the actual course of events. Financial success depends on the ability to anticipate prevailing expectations and not real-world developments. But, as we have seen, my approach rarely produces firm predictions even about the future course of financial markets; it is only a framework for understanding the course of events as they unfold. If it has any validity it is because the theoretical framework corresponds to the way that financial markets operate. That means that the markets themselves can be viewed as formulating hypotheses about the future and then submitting them to the test of the actual course of events. The hypotheses that survive the test are reinforced; those that fail are discarded. The main difference between me and the markets is that the markets seem to engage in a process of trial and error without the participants fully understanding what is going on, while I do it consciously. Presumably, that is why I can do better than the market. ~ Geroge Soros

“Financial success depends on the ability to anticipate prevailing expectations and not real-world developments”. This is especially true in the current environment where the veil of the future is so thick. Instead of trying to figure out how bad this virus is going to get, focus instead on what the main narratives of the market are; where there’s consensus that’s not being reflected in the price and try and anticipate how that consensus will evolve going forward.

Unlike the virus, you can model that within a reasonable range of probability.

That’s it for this week’s macro musings.

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

Have a great weekend.

Musings: Massive Supply Chain Disruptions and Tipping Points

Alex here with your latest Friday Macro Musings…

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

Latest Articles/Podcasts/Videos —

Your Monday Dirty Dozen [CHART PACK] — l look at positioning in the options market versus direct, then we explore the possibility of the SPX entering an extended trading range, followed by good looking charts in precious metals as well as a few stocks, before ending with fiscal and US confidence.

The Perils of Too Much Information —  I explore when too much information can be a bad thing and why the market tends to know more than we do.

A Record-Breaking Market — I discuss the big swing in sentiment we’ve seen over the last four months and the increasing signs of wild speculation + my base case for where I believe things are headed.

Articles I’m reading —

Take a few minutes and read through this twitter thread from hedge fund manager Dan McMurtrie talking about the coronavirus and its inevitable impact on the global supply chain. This is an issue I’ve been digging into and Dan does a terrific job of laying out the increasingly real risks that the market and global economy are facing. Here’s the link and a summary of his main points.

    • We should expect at minimum two-quarters of severe supply chain disruption globally
    • This risk increased significantly with news the virus is rapidly spreading across both Japan and Korea
    • In China, we’re seeing the largest “containment/effective imprisonment via quarantine” in history. The economic impact of that is nearly impossible to model
    • The ubiquity of Just in Time manufacturing and the non-linearity of supply chains mean there’s a leverage downside effect to where the hit to the economy is “not a 1 month hit. It’s not a 1 qtr hit. It’s an annual hit *right now*”.
    • Chinese rail traffic is still only 1-3% of normal and the widely talked about store reopenings are more forced propaganda than a meaningful change

The virus has now spread to every major continent excluding Antarctica and South America. Here’s a useful tracking app from Johns Hopkins which shows you the latest location, growth, confirmed, and death rates for the virus.

One of the major problems with trying to discount this event is that we have low fidelity data. So while China is reporting a slowing growth rate for the virus, simple statistical analysis shows that the numbers they’re giving us are almost certainly manufactured.

Barron’s pointed out this week that “A statistical analysis of China’s coronavirus casualty data shows a near-perfect prediction model that data analysts say isn’t likely to naturally occur, casting doubt over the reliability of the numbers being reported to the World Health Organization”.

Then there are the issues with testing and identifying the virus. It should be telling when a developed country such as Japan stumbles so badly in getting a jump on this thing, as Nomura’s Richard Koo recently pointed out:

“Despite numerous warnings from experts appearing on Japanese television, the Ministry of Health, Labour and Welfare waited until 14 February to announce a plan to allow those who had not traveled to China’s Hubei province to be tested for COVID-19. All the time, the virus was spreading.

“… Adding to the problems is the fact that the world’s third and fourth-largest economies — Japan and Germany—reported negative economic growth at the end of last year. When coupled with the further slowdowns expected in No. 3 Japan and No. 2 China as a result of COVID-19, the implications for the global economy and global supply chains are likely to be severe.”

Now think about what’s likely already going on in parts of Africa where only two laboratories on the entire continent have the capability to test for the virus.

Here’s some morel numbers:

    • According to Goldman Sachs “The number of ‘missing workdays’ in China will be roughly equivalent to the entire US workforce taking an unplanned break for two months.”
    • The airline industry just announces that it expects to see the first annual decline in global passenger demand in 11-years.
    • Foxconn, a major supplier to Apple (AAPL) whom it’s estimated makes up roughly 50% of Foxconn’s numbers, just announced that Q1 revenues may be down by 45%.

The Science Journal Nature noted the extremely wide cone of probabilities that remain around the final damage of this virus, writing:

“Epidemiologists have been trying to estimate roughly when the outbreak will peak, so public-health officials can prepare hospitals and work out when it will be safe to lift travel restrictions in Wuhan and several nearby cities.

“Some models suggest that the climax will happen any time now. Others say that it is months away and that the virus will infect millions — or, in one estimate, hundreds of millions — of people before then. This model assumes that many more people have been infected than is reflected by official counts, but that these people have no symptoms or are not ill enough to seek medical treatment.”

Keep your head on a swivel. COVID-19 isn’t going away anytime soon.

Charts I’m looking at—

The domino effects of this are just beginning (chart via UBS).

Video I’m watching —

Here’s a short couple minute clip of the ever balanced Mohamed El-Erian giving his take on the virus’s impact on markets and the global economy (link here).

His quick take: Markets have been lulled into complacency and this complacency isn’t justified by the data.

Book I’m reading —

I just cracked this one open after I saw that @patrick_oshag recommend it. It’s about animal infections and human pandemics and why we should expect to see a significant rise in both in the coming decades. Fun stuff.

Here’s a cut from the book.

“Make no mistake, they are connected, these disease outbreaks coming one after another. And they are not simply happening to us; they represent the unintended results of things we are doing. They reflect the convergence of two forms of crisis on our planet. The first crisis is ecological, the second is medical. As the two intersect, their joint consequences appear as a pattern of weird and terrible new diseases, emerging from unexpected sources and raising deep concern, deep foreboding, among the scientists who study them.

“How do such diseases and raising deep concern, deep foreboding, among the scientist who study them. How do such diseases leap from nonhuman animals into people, and why do they seem to be leaping more frequently in recent years? To put the matter in its starkest form: Human-caused ecological pressures and disruptions are bringing animal pathogens ever more into contact with human populations, while human technology and behavior are spreading those pathogens ever more widely and quickly. There are three elements to the situation.”

Trade I’m looking at —

Okay, not exactly a trade recommendation. Just something to be aware of if you’re stuffed to the gills with some of the popular tech momo names. The Economist has a pretty good track record of ringing the bell at major turning points. But… and I want to stress this… momentum is still on their side and favors more upside. Don’t step in front of a freight train. Wait for the market to give a signal and a setup.

Quote I’m pondering —

A positive feedback is self-reinforcing. It cannot go on forever because eventually, market prices would become so far removed from reality that market participants would have to recognize them as unrealistic. When that tipping point is reached, the process becomes self-reinforcing in the opposite direction. ~ Geroge Soros

Watch for tipping points.

That’s it for this week’s macro musings.

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

Have a great weekend.

Musings: Pareto’s Law, Fed Independence, and Retail Traders Gone Wild

Alex here with your latest Friday Macro Musings…

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


Latest Articles/Podcasts/Videos —

Your Monday Dirty Dozen [CHART PACK] — I look at buy climaxes, wild speculation, some strangely muted sentiment, and positioning data, then get into virus growth rates and finish with a Russian tech giant breaking out of a huge base….


Articles I’m reading —

There’s a handful of quarterly Investor Letters that I read regularly. Hayden Capital is at the top of this list. Fred Liu, founder of Hayden Cap, always finds a way to impress me with a unique take on investing theory or a left-field approach to analyzing a familiar company. This quarter’s letter did not disappoint.

Liu talks Pareto’s Law and how important it is to make sure he’s structuring his investing process to optimize for this law of returns. He discusses Lee Freeman-Shor’s terrific book “The Art of Execution” and the benefits of portfolio concentration versus diversification. And then gives an update on one of his larger positions, Sea Limited (SE) — a stock I pitched in these pages back in November (link here).

Here’s the link and a section from the report.

“When you’re underwriting your investment thesis on multiple expansion, your upside is naturally capped. Shorter-term investment strategies that rely upon a change in perception (and thus underwrite multiple expansion for returns) can perhaps generate a 20%, 50% or rarely a 100% return (i.e. a 5x P/E stock going to 6x, 7.5x or 10x)… but it’s almost impossible to generate a 1,000% return (5x to 50x).

This means that under this type of strategy, you need to have a very high hit rate, to make up for the narrower range of outcomes (lower expected return per bet). The name of the game is consistency, and the great players will exhibit low volatility in their strategies. The institutional assets in our industry have been shifting towards this style in the last decade, which means more assets chasing after the same investment theses in this style bucket.

On the opposite end of the spectrum, I’m searching for “fat” returns. While a P/E ratio may not expand 10- fold, a company’s earnings certainly can. When you underwrite for earnings growth, your odds of being right are going to be lower, since predicting the future is inherently imprecise. However, if the investment process proves correct, the odds of today’s $1 Billion market cap company becoming tomorrow’s $10 Billion or even $100 Billion company is much greater. Given the magnitude of the payoff, your hit rate can be closer to 50% (or even below), while still making above-average returns.”

Lastly, give this short piece from Axios a read (link here). The article covers the current effort by the President to influence the Fed, by installing a Trump loyalist in Judy Shelton. Unlike Cain or Moore who he failed to get through the vetting process, Shelton is likely to pass the Senate. And if Trump wins reelection then it’s odds on she’ll be picked to replace Powell.

Normally I find most people equate way too much importance between politics and markets. That doesn’t hold when it comes to the Fed. Politicizing the Fed matters. And it can matter a LOT.

It’s still a long way from here to there but each step closer will build a narrative and that narrative will begin to impact markets in interesting ways.

Actually, one more thing and on a completely unrelated topic. If you’re at all interested in tightening up your business writing then give these notes that Jerry Neumann put together on the subject a read. Some useful tips in there. Here’s the link.


Charts I’m looking at—

Retail is getting back in the game… (chart via SentimenTrader).

 

Video I’m watching —

Peter Thiel was recently interviewed on stage at the Hoover Institute. In this short 35 min talk Peter talks globalization, US-Sino relations, Bernie Sanders, the scourge of political correctness, and why we need to rethink the doctrine of American exceptionalism.

It’s a good interview. Here’s the link.

And I haven’t watched it yet but here’s Munger’s latest Daily Journal meeting (link here). Heard it was a good one. Hoping to give it a look over the weekend.


Book I’m reading —

This week I started reading The Laws of Trading by Agustin Lebron after having a few people recommend it to me.

I’m only 30 pages or so in, so I can’t give an educated take on the book quite yet. Though I am enjoying it so far. What’s refreshing is that it’s not your normal trading book. It’s really a book about decision making and enhancing your mental systems. I’ll give more of an update next week once I’m finished.


Trade I’m looking at —

I have a long backlog of names on my research list. These are ones that have already passed the initial smell test and warrant further digging. This week I added Yext (YEXT) to that list.

Yext is a US-based tech company that is focused on improving internet search. Essentially it’s a cloud platform that allows businesses to more effectively manage their data and brands and sync it to hundreds of different publishers (think Gmaps, FB, Insta, Yelp etc…).

JP Morgan considers the company to be a “category leader that enjoys the greatest mindshare among its ~40,000 customers and strongest credibility among publishers.”

Here are the key metrics for the business via JPM.

There’s a lot to like about the company; interesting category-leading product, killer management team (five former high levels Salesforce execs + digital media legend  Michael Walrath as its Chairman), long runway if they can execute well. But, there’s a number of things not to like: decelerating revenue growth, falling guidance, ballooning operating costs etc…

I’ve got plenty more digging to do.


Quote I’m pondering —

O God, I could be bounded in a nutshell and count myself a king of infinite space, were it not that I have bad dreams. ~ William Shakespeare, Hamlet

That’s it for this week’s macro musings.

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

Have a great weekend.

Musings: A Dangerous Idea and an Italian Defense Stock Ready To Launch

Alex here with your latest Friday Macro Musings…

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

Latest Articles/Podcasts/Videos —

Your Monday Dirty Dozen [CHART PACK] — I look at Democratic Primary probabilities, then give a coronavirus update along with potential regional economic impacts, and end with some monthly and weekly charts on major assets.

Articles I’m reading —

This Investor Letter from Tyro Capital Management is one of the best letters I’ve read in a long while. For those of you on the twitters, Tyro is run by Dan McMurtrie (aka. @SuperMugatu) who is one of the funnier personalities in the FinTwit space.

They cover a whole range of great stuff, from the three “triggers” they see driving a major societal confrontation, to some wise words on the theory of investing, as well as a few writeups on a couple of their holdings. It’s really an excellent piece. I suggest you read it in full. Here’s the link and a cut.

“Managers who are dogmatic and eschew securities outside of an overly rigid definition of their style inevitably form emotional and psychological issues as they underperform (“The people making money right now are hacks! This will end badly! These companies are fads!”) or outperform (“I showed those fools! No one listened to me and now they are getting what they deserve! I’d never buy XYZ at any price!”). Instead of viewing the market rationally, they have developed an adversarial relationship and association with certain types of investments and investors, definitionally limiting their opportunity set. It is worth noting that very few of the money managers who made immense sums of money prior to the 2008 financial crisis would listen to bearish views as it approached, and very few money managers who made immense sums of money in the crash have been able to make any money since, largely due to psychological anchoring. And then there’s David Tepper. He owns an NFL team now.”

Charts I’m looking at—

Deutsche Bank (DB) published a good slide deck the other week where they essentially show the diminishing dynamism of the American economy. I’ll share with you a few.

The percent of children earning more than their parents has declined from over 90% back in 1940 to just 50% today.

There are fewer new businesses being created while existing firms are staying in business longer.

Which is helping to fuel widespread discontent and pessimism amongst the younger generation.

Video I’m watching

Here’s 45-minutes of Patrick O’Shaughnessy interviewing Michael Mauboussin on stage at Capital Camp 2019. They talk about how to improve processes for thinking, decision making, and investing. And they also get into complexity theory, information transmission, and competitive advantages amongst many other things. It’s good and well worth your time. Here’s the link.

Book I’m reading —

There’s a killer used book store chain here in Texas called “Half Priced Books”. It’s like a Costco, but instead of 50-gallon drums of olive oil, they just have shelves and shelves of used books. First time I went there I ended up with a literal shopping cart filled with new reads. The place is awesome.

Anyways, this week I started reading one of the purchases that I picked up on my last trip. It’s titled “Zero: The Biography of Dangerous Idea” and it’s written by Charles Seife. I’m roughly 40% of the way through it and got to say I’m really enjoying it. If you’re into math and history then I’d recommend picking yourself up a copy.

Here’s an excerpt.

“Irrationality was dangerous to Pythagoras, as it threatened the basis of his ratio-universe. To add insult to injury, the Pythagoreans soon discovered that the golden ratio, the ultimate Pythagorean symbol of beauty and rationality, was an irrational number. To keep these horrible numbers from ruining the Pythagorean doctrine, the irrationals were kept secret. Everyone in the Pythagorean brotherhood was already tight-lipped — nobody was allowed even to take written notes — and the incommensurability of the square root of two became the deepest, darkest secret of the Pythagorean order.

Trade I’m looking at —

Value focused hedge fund, GreenWood Investors, pitched an Italian defense and aerospace company named Leonardo (LDO) in their quarterly letter a while back (link here). The bull thesis was quite simple. LDO is set to capitalize on their recent heavy investment and their growing backlog would improve their cash conversion profile. In addition, the company had recently won big contracts with the US DoD and is also nearing certification for the first civilian tiltrotor in history.

I’ve had the stock on my watchlist for a while and have just been checking in on the tape from time to time. Well, recently, the stock has started to break out of its year-long + coiling wedge. Admittedly I haven’t done any digging myself into the stock yet but I’m planning to this weekend. Let me know if you’re familiar and have any thoughts on the company.

Quote I’m pondering —

I’ve found this to be true in every domain I’ve operated in — and I’ve lived many lives.

Almost everybody is full of shit. Seriously… it’s true. The vast majority of people who rise near the top are mostly just good talkers, ass kissers, politicians etc… The only professional areas where this isn’t true are MMA’ers as Tucker notes and other fields like military operators, professional poker players, real traders etc…The key differentiator being having serious “skin in the game”.

The finance industry is the worst offender here. Most hedge fund managers are just pedigreed dimwits who went to a good college and are really practiced at spewing Buffettism’s. They don’t actually know what they’re doing. They think they do but that’s because they’ve never really thought about the why or what behind what it is they’re doing. And they don’t need to because they get paid on AUM and trying to not lose much more than their benchmark… which is literally something “dart-throwing monkeys” can do.

That’s it for this week’s macro musings.

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

Have a great weekend.

Musings: Viruses, Chronic Disease, and a Medical Tech Stock

Alex here with your latest Friday Macro Musings…

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


Latest Articles/Podcasts/Videos —

Your Monday Dirty Dozen [CHART PACK] — I review our confirmed sell signals in equities, revisit the indications of overbought and overloved stocks, and then reiterate our long bond call


Articles I’m reading —

Ray Dalio shared his and his team’s thoughts on the coronavirus and potential market impacts this past week. The article is titled “Our Early Thinking on the Coronavirus and Pandemics”. They run through a number of past pandemics, going all the way back to the Spanish Flu which occurred during WWI. I’m not sure how much of this is useful from a practical investing standpoint but it’s interesting and does give you some context in case things get much worse. Here’s the link and an excerpt:

“As for the spreading of this virus, as with any sort of unknown, there are 1) actual events and 2) the expectations of events that get reflected in market pricing.  Generally speaking, these once-in-a-lifetime big bad things initially are under-worried about and continue to progress until they become over-worried about, until the fundamentals for the reversal happen (e.g., the virus switches from accelerating to diminishing). So we want to pay attention to what’s actually happening, what people believe is happening that is reflected in pricing (relative to what’s likely), and what indicators that will indicate the reversal.”

In addition, Bianco Research is putting out some worthwhile reading materials on the virus which you can find here.


Charts I’m looking at—

This chart is from Cornerstone Macro. The green line shows the Bloomberg Economic Surprise Index of Leading Indicators while the grey line shows the relative performance of industrials (XLI) versus the S&P (SPY). It suggests that industrials may be in for a big rebound in relative performance. This also fits with the underlying strength of breadth/participation that I’m seeing in the sector. There’s a lot of strong tapes in XLI right now.


Book I’m reading —

Not a book, but a long white paper Michael Mauboussin and his team at Credit Suisse put out last year. It covers the all-important concept of moats (competitive advantage). I read everything by Mauboussin. He’s one of the smartest reads on investing and market theory. The paper is well worth your time.

On the subject of moats (and floats), here’s one of the best discussions on the subject I’ve ever come across from the Fundoo Professor. It’s a great slide deck that explores how Buffett so ingeniously exploited the investing power of the two to make his billions. You can find the presentation here.


Trade I’m looking at —

Here’s a company I’ve recently started looking into, Livongo (LVGO). LVGO provides a digital health platform that assists people living with chronic illnesses, such as diabetes. The platform connects to wearables, provides personalized digital guidance, as well as access to health coaching.

Unfortunately, the chronic disease market is booming here in the US as well as elsewhere. Apparently, more than half of the US population suffers from one or more chronic conditions — example, over 4k Americans are diagnosed with diabetes each day.

Anyways… LVGO’s TAM is large and growing. This gives the fast growing (FY19’ revenue growth is expected to be around 160%) quite a long runway.

Currently, the stock is knocking on some support. We’ll have to see if it holds. I’m considering putting on a small starter position next week if I like what I find while doing more digging over the weekend. If you have any thoughts or insight on the company, please shoot them my way!


Quote I’m pondering —

As investors, we also always have to be aware of our innate and very human tendency to be fighting the last war. We forget that Mr. Market is an ingenious sadist, and that he delights in torturing us in different ways. ~ Barton Biggs

That’s it for this week’s macro musings.

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

Have a great weekend.

Musings: We Think About Thinking, A 120% Year, and Gut Feeling

Alex here with your latest Friday Macro Musings…

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

Latest Articles/Podcasts/Videos —

Your Monday Dirty Dozen [CHART PACK] — I look at some underlying technicals, discuss the equity/yield relationship, look at private investor flows, review the bullish action out of Mexico, and end with some charts on Japan.

Markets as a Banana: The MOST Important Fundamental Part 2: I lay out the second piece of the all-important global asset shortage puzzle and conclude with why the market is a banana.

Articles I’m reading —

I love comeback stories. That’s why I was pumped to see this title scroll across the news feed on my terminal this week.

For those of you who aren’t familiar with Bill give this short piece by Jason Zweig a read (link here). Zweig details the fund managers meteoric rise along with his equally impressive fall, writing “In a business that thrived for decades by nurturing the cult of the star stock picker, no star had sparkled more brightly than Mr. Miller’s — or fell to earth with such a thud. Each year from 1991 through 2005, Mr. Miller’s fund outperformed the S&P 500 — a streak of 15 consecutive calendar years, unmatched by any other manager, even the great Peter Lynch…”

Bill’s fund lost over 50% in the financial crises which subsequently led to death-by-redemption where he was eventually forced to walk away from his firm, Legg Mason.

So nice to see you back in full swing Bill!

Following this news, I gave his most recent Investor Letter a read which you can find here. There’s some good stuff in it. I particularly like his take on general investor sentiment and the leftover trauma from the GFC that’s keeping most people from going full-throttle long like in cycles past. Here’s a couple of clips from the letter.

“As 2019 drew to a close, the mood was quite different with stocks posting record high after record high. Still, the so-called “chattering classes,” those who make their living talking or writing about stocks but not by actually owning or managing them, evinced little enthusiasm…  I would characterize the mood as that favorite term of pundits, including those who actually do manage money: “cautiously optimistic.”… The forecaster always sounds more serious and smarter if he or she is cautious and expresses concerns about the risks that are always lurking about, especially when stocks are at an all-time high.”

And…

“Barron’s 2020 outlook issue a few weeks ago surveyed market strategists and typified the cautiously optimistic view: a “more muted” 2020, with stocks rising 4% on average. Add in a 2% dividend yield and the expectation was for a 6% return. That is about as cautious as can be since, after an above-average return in stocks one year, there is about an 80% probability they are higher the next year.”

Lastly…

“The shock and trauma of the 2008 financial crisis were so scarring that people have been and remain risk and volatility-phobic and see every negative event as presaging a serious correction or perhaps a recession and bear market.”

I agree on all points and have written as much over the last year. And that last line really gets at the heart of the matter, saying that investors “remain risk and volatility-phobic and see every negative event as presaging a serious correction or perhaps a recession and bear market.

Last year it was yield curve inversion, then repo rates, and now I’m seeing the same “chattering masses” wail about coronavirus. Absolutely ridiculous…. Only Shiva knows what doom and gloom narrative the Zero Hedge crew will attach themselves to next. I just hope it’s a convincing one because my money is betting on that this market will rise until this bear cult begins losing followers en masse.

Charts I’m looking at—

Short-term indicators of sentiment and positioning are stretched. This is a known-known and it seems like everybody I follow on the twitters is talking about. It’s odds on we see a 5%+ selloff in the coming weeks but we need to wait for the tape to confirm the bears have control before we do much about it.

I’m not expecting too large of a pullback though. The reason? Financial conditions are as flush as can be… The St. Louis Financial Stress index just hit cycle lows, Kansas is low and trending lower, rates remain a tailwind, and the BAA/BBB is moving in the right direction.

Liquidity is loose.


Book I’m reading —

I’ve been reading Gerd Gigerenzer’s book “Gut Feelings” off and on for about the last month or so. I’ve actually been really enjoying it and would have finished it already — it’s a small book at a short 225pgs — but I’ve got a handful of others that I’m reading concurrently, so I’m making slow progress on all of them.

Gerd is a psychology researcher at the Max Planck Institute for Human Development. I first heard of him while listening to his, quite excellent, interview with Russ Roberts on the Econ Talk podcast (link here). Which is what convinced me to buy his book.

Gut Feelings is the counter-argument to the famous work done by Tversky and Kahneman into human bias — which has become so popular that seeing biases everywhere is becoming a bias itself!

Gerd convincingly takes the other side of the argument. Not to try and convince people that biases don’t exist but rather that human intuition can sometimes be extremely powerful and should not be dismissed outright. I’m about two-thirds of the way through it and have read enough to recommend to anybody interested in learning how and when one’s intuition can effectively be utilized.

Trade I’m looking at —

Just for kicks, I’m looking into Tutor Perini (TPC) after reading about it in Miller’s Deep Value Q3 letter (link here).

Here’s the section on TPC from the note.

“During the quarter, we increased our weighting in Tutor Perini (TPC) in our Deep Value Strategy as the stock price fell below $10 and initiated a position in our Concentrated Strategy. Tutor Perini is a leading global civil, building, and specialty construction company that provides general contracting and design-build services for some of the largest and most complex public/private projects. Tutor Perini share price has been recently under pressure due to a soft patch in business operations as older projects came to completion and new projects start dates were delayed.”

“In our opinion, near-term results are well-below normalized levels, as the company has had great success in winning new contracts, growing its backlog to nearly $11.5B versus their current $4.5B annual revenue run rate. Their civil segment has been the largest beneficiary of new contract wins with greater than $6B in back-log. As the civil segment carries the highest company margins, in excess of 10%, we believe this new business wins with supported normalized earnings in excess of $3/share over the next couple of years.”

“The company also anticipates the resolution of sizable outstanding receivables over the next couple of quarters. With a successful resolution on the outstanding receivables, Tutor Perini has the potential to generate more than $500M in free cash flow by 2021, allowing for significant debt reduction. At the end of the quarter, the company’s valuation multiples approached historical lows, EV/Revenue of .3x and 60% discount to book value. In our opinion, Tutor Perini’s share price looks significantly mispriced, providing a very attractive reward/risk opportunity.”

On the surface, this isn’t the kind of company I’d want to buy and plan to hold for the long-term. Its revenues and earnings have been stagnant for the last decade and that’s unlikely to change much. But… It’s bounced off the decade-long support level a number of other times and probably will this time too. In which case, it could be good for a quick mean reversion pop and run up gain.

Quote I’m pondering —

The securities we typically analyze are those that reflect the behavioral anomalies arising from largely emotional reactions to events. In the broadest sense, those securities reflect low expectations of future value creation, usually arising from either macroeconomic or microeconomic events or fears. Our research efforts are oriented toward determining whether a large gap exists between those low embedded expectations and the likely intrinsic value of the security. The ideal security is one that exhibits what Sir John Templeton referred to as “the point of maximum pessimism.” – Bill Miller

Are you seeing any “points of maximum pessimism” in this market?

Shoot me your thoughts, if so.

That’s it for this week’s macro musings.

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

Have a great weekend.

Musings: Only 50% up! What are you doing?

Alex here with your latest Friday Macro Musings…

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

Housekeeping note: Winter enrollment for the Macro Ops Collective has begun. Go ahead and give this link a click if you’re interested in joining our team. If you’ve got any Qs don’t hesitate to shoot me an email. Looking forward to having you in the group!


Latest Articles/Podcasts/Videos —

Your Monday Dirty Dozen [CHART PACK] — I play devil’s advocate to my bearish bonds thesis is still valid and then discuss what falling yields would mean for other areas of the market, such as precious metals and EM.

My Three Stock Picks For The 2020 MO Stock Picking Competition — I sifted through hundreds of stocks to find the most hated, vile, left-for-dead trio of stocks imaginable… 1 or 2 of them could end up being huge winners (while one of them is almost certainly a fraud).


Articles I’m reading —

Veteran market technician Martin Pring published a post this week titled “Our Business Cycle Work is Close to signaling a Stage III. Guess Which Market That’s Bullish for?”.

The answer to the question posed in the title is: commodities.

Martin uses a number of long-term technical indicators along with inter-market analysis to argue — quite effectively, in my opinion — that it’s highly probable we’re starting a new bull market in commodities. Here’s a section from the post where Martin points to major trendline breaks in a number of his charts (emphasis by me).

“It’s a well-known fact that the dollar and commodities move inversely most of the time. December saw some tentative signs the currency may be peaking, but there is not yet sufficient evidence to be conclusive on this. What we can say though, is that there is an even stronger link between the performance of the Canadian dollar and commodity prices than the Dollar Index itself. Here, the evidence of a bottom is far more compelling. Chart 4, shows that broad swings in the CRB Composite are matched fairly closely with those for the Canadian buck. Moreover, the green arrows demonstrate that momentum buy signals for the currency have represented excellent opportunities for the acquisition of commodities. Since that currency momentum has started to reverse to the upside, we should expect to see recent breakouts by both the Index and the Canadian dollar become more decisive and with that a vote for higher prices.”

I’m sympathetic to this take. I believe it’s odds on we move into a mini-bull cycle in commodities this year — I’m also long CAD and love the long-term technicals and fundamentals of the trade. Here’s the link to the post.

And to further confirm my bias, here’s a piece from Orbis, an investment management firm, where they argue from a Capital Cycle perspective why they’ve turned bullish on commodities and commodity-linked assets. Here’s a section and a chart from the report.

“While we have no edge predicting energy prices, we know from history that commodity prices and capital expenditures (capex) in the sector follow a classic “boom-bust” pattern. Capital flows freely in the good times and dries up when the going gets tough. At both extremes, optimism and pessimism sow the seeds for the next turning point in the cycle. Commodity price recoveries tend to start after capex has been depressed for some time and production capacity becomes unsustainably tight. Similarly, price declines are often triggered by the abundance of supply that follows years of expansion. Investor psychology tends to work the same way. A sector tends to feel most risky when times are tough, but in reality the opposite is likely true. Periods in which everyone is focused on risk and downside are often the least risky times to invest, as you are typically well compensated for assuming said risks.”

Also, if you get a chance. I highly recommend giving Ben Thompson’s (of Stratechery) latest post a read. It’s titled “The End of the Beginning”. Using the evolution of the auto sector throughout the 20th century as a parallel, Ben writes that big tech is following a similar path as that of the big automakers and that “there may not be a significant paradigm shift on the horizon, nor the associated generational change that comes with it.” Instead, the “beginning era of technology, where new challengers were started every year, has come to an end.”

He asserts that today’s dominant tech behemoths are like the GM, Ford, and Chrysler of yesteryear… unlikely to be usurped and that the real high impact changes will occur in ancillary areas going forward. Just like the mass adoption of cars led to the development of the burbs and big-box retail stores so too will big tech change the way companies evolve and provide value in the future. Here’s the link.

Oh, and lastly, if you’re committed to the path of mastery — which as an MO reader I assume you are — then give this Time article a read. It’s a short and actionable lesson on how to effectively master new skills. Here’s the link and h/t to Chris D.


Charts I’m looking at—

Stock market returns following a 30%+ year via LPL Financial. Momentum begets momentum…


Video I’m watching —

If you like the report above from Martin Pring and want more, well you’re in luck cause he also put out an hour-long presentation in conjunction with StockCharts on the big trends he’s seeing going into 2020. I’ve only watched bits and pieces of it but it looks like there’s some good stuff in there (here’s the link).

And if videos are your thing then I can highly recommend giving Al Brook’s 2020 market analysis a watch. Brooks, who is one of the best tape readers out there, analyses the major trends he’s seeing in the most important markets. It’s 50 minutes long and you’re sure to get something out of it. Here’s the link.


Trade I’m looking at —

I tore through hundreds of charts this week when doing research for my MO 2020 Stock Picking Competition. I ended up with a long list of good looking charts filled with stocks that just didn’t quite make the cut. Mobile game maker Zynga Inc. (ZNGA) was one of these (chart below is a weekly).

The stock recently broke out of a 3-month bullish wedge after spending 5-years going mostly sideways in a rounding bottom.

I haven’t dug into this company but a quick look at some of the key metrics show the numbers are trending in the right direction. Revenue and free cash flow growth are accelerating (graph shows the last 10-years). The company also sports little debt. I need to do more digging into this one but may put on a starter position if this weekly breakout holds before I’m finished doing DD.


Quote I’m pondering —

STOCK MARKET AT ALL-TIME HIGH! HOW ARE YOUR 409K’S DOING? 70%, 80%, 90% up? Only 50% up! What are you doing? ~ Donald J. Trump, circa Jan 9th, 2020

Seriously, what the hell are you doing?

😉

That’s it for this week’s macro musings.

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

Have a great weekend.

Click here to Check out the Macro Ops Collective

Musings: One Man’s Trash Is Another Man’s Treasure

Alex here with your latest Friday Macro Musings…

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


Latest Articles/Podcasts/Videos —

Your Monday Dirty Dozen [CHART PACK] — I look at the total returns ytd for the major asset classes, then we discuss why stocks performed as well as they did, followed by further talk on stretched sentiment, note some strange action in fund flows, and point out a few good looking chart setups in the gold mining and E&P space.

ValueHive: Contrarian Investing in Europe, Japan, & Cyclicals —  Brandon shares some great stock writeups from value-minded fund managers, discusses a recent MIT paper on how they used machine learning to forecast company revenues more accurately than Wall St. analysts and more.


Articles I’m reading —

Bloomberg put together a great overview of all the 2020 market predictions from the major shops. It’s searchable by asset and theme (link here).

These predictions are only valuable in that they give us a sense of how the street is thinking. It’s a helpful thing to know what the consensus is because the consensus will almost certainly be wrong. This year… the herd is calling for no recession, a muddle-through low growth economy, and very meager but positive returns in the stock market. Here’s a snapshot of the piece.

The site Visual Capitalist also put together a post aggregating a summary of popular 2020 predictions after analyzing over “100 articles, whitepapers, and interviews.” Here’s the link.

Here’s a graphic they created showing Wall Street’s end of year predictions for the SPX. The average price target is for a gain of just 3.5% which makes it one of the smallest expected gains in 20-years according to Bloomberg. Yeah… I’ll take the over on this one.

Lastly, Jesse Stine (@InsiderBuySS) shared his 2020 outlook. I always enjoy reading Jesse’s take as he has one of the best reads on sentiment and positioning in the market out of anyone I know. Here’s the link.

Oh, and finally, Peter Lynch was interviewed in Barrons recently (link here – porous paywall). When asked what the major opportunities are in the market that he’s excited about, Peter responded with:

“I’m looking at industries that are doing badly; that for some reason will get better. Shipping. If you want to buy a ship, it’s a two- or three-year wait. People haven’t ordered ships for a long time, because by the time one comes in, prices may be down again.

Energy services is awful; that could have a major turn in the next year or two. Oil is interesting. Look, longer-term, solar, windmills really work. But you need natural gas and oil to bridge to this. Everybody’s assuming the world’s going to not use oil for the next 20 years, or next year. China might sell five million electric vehicles next year, but they might also sell 17 million internal combustion engines. They don’t have old cars to retire. There are no electric airplanes. Near term, liquid natural gas and liquid petroleum gas might replace diesel fuel for trucks. I’m buying companies that I don’t think will go bankrupt. They’ve got to be around the next 18 to 24 months, or I have no interest.”

I couldn’t agree more Pete.


Charts I’m looking at—

The market is going to be fighting some bad seasonality over the next few weeks. Just something to keep in mind (chart via @McClellanOsc).


Podcast I’m listening to —

Eric Weinstein’s latest chat with economist Tyler Cowen (of Marginal Revolution) is superb. It’s 2hrs of some of the smartest minds discussing everything from the difficulties in measuring inflation and productivity to why the Beatles are the most impressive collection of musical talent to date and everything in between.

Here’s something interesting I learned from the chat. Apparently, the CIA fostered and promoted American Abstract Expressionist painting in the 50s and 60s in their war of propaganda against Soviet Russia. Who’d have thunk… Here’s the link.


Book I’m reading —

I just finished reading Pierce Brown’s latest book in the Red Rising series titled “Dark Age”. Brown is bar-none the best science fiction writer out there at the moment. His books are page-turning gut-wrenching roller coasters that are almost exhausting to read because they are so engrossing. I’m actually glad to be done with them for a while so I can get back to reading some non-fiction.


Trade I’m looking at —

We’re either at that stage of the rally where everything is going up including the trash… or we’re seeing a major sea-change afoot. Take Deutsche Bank (DB) for example. It’s been the favorite whipping boy of the bears this cycle. Well, it just broke out of an 8-month coiling wedge.

On Monday I shared the chart of the Europe 600 Index showing that it just broke through major 20-year resistance — a level that had knocked it back four other times — and is now at new all-time highs (link here). That’s pretty interesting considering European equities have been one of the most under-owned assets these last few years.

Also, check out this chart showing the relative performance between the MSCI US and Europe financial indices (yellow line). Never before have US financials outperformed their European counterparts by anywhere close to this much.


Quote I’m pondering —

A man can be himself only so long as he is alone, and if he does not love solitude, he will not love freedom, for it is only when he is alone that he is really free. ~ Arthur Schopenhauer

That’s it for this week’s macro musings.

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

Have a great weekend.

Musings: GOATS: Druckenmiller and Soros Speak

Alex here with your latest Friday Macro Musings…

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


Latest Articles/Podcasts/Videos —

Your Monday Dirty Dozen [CHART PACK] — I look at the technical picture for the SPX, go through some stats that show this bull is gonna keep running, talk about the latest data that suggests the global economy has troughed, and finish with some single stock setups we’re looking at.

Poker and Investing: Lessons from a Professional Poker Player —  Brandon talks with fellow Collective member and former poker pro, Macro Nakamoto (pseudonym). We at MO think of poker as one the best training grounds for trading and investing (outside of markets). And in this chat, the two dive into poker theory, what it takes to play at the pro level, similarities to trading and more.


Articles I’m reading —

Someone on Twitter (apologies I can’t remember who) shared this great paper by Peter Drucker titled “Managing Oneself”. Peter is legendary in the executive management coaching world. He basically invented the category and has authored numerous books on the topic including one of my favorites “The Effective Executive”.

This one is a fairly quick read and it’s jam-packed with useful teachings on how to organize your life and get the results you want — tons of parallels for us as traders and investors. Here’s the link to the paper and an excerpt.

“Most people think they know what they are good at. They are usually wrong. More often, people know what they are not good at – and even then more people are wrong than right. And yet, a person can perform only from strength. One cannot build performance on weaknesses, let alone on something one cannot do at all.

Throughout history, people had little need to know their strengths. A person was born into a position and a line of work: The peasant’s son would also be a peasant; the artisan’s daughter, an artisan’s wife; and so on. But now people have choices. We need to know our strengths in order to know where we belong.

The only way to discover your strengths is through feedback analysis. Whenever you make a key decision or take a key action, write down what you expect will happen. Nine or 12 months later, compare the actual results with your expectations. I have been practicing this method for 15 to 20 years now, and every time I do it, I am surprised.”

This past week Bloomberg published a collection of observations and predictions from leading “China Watchers” on where the country’s economy is headed in 2020 and the years following.

I’ve been writing for the last few years now about how China is the most important macro variable this cycle. I believe this still to be true, especially considering the high wire act that the CCP is currently trying to perform; slowly deflating the debt monster it created while maintaining financial stability and high employment.

I believe 2020 is going to be particularly interesting as the data is beginning to indicate that China has finally neared the Minsky cliff and growth is going to slow materially absent another hail-mary injection of credit. Which way things will go I do not yet know… The first half I believe will be fine as a recovery from the recent global recession should spur a short-lived global boom in CAPEX but in the second half and onwards, I’m having a tough time seeing where the net-investment is going to come from as per the Levy-Kalecki equation to keep the cycle going.

We’ll need to keep a close watch to see what the CCP does. The 2021 centennial anniversary of the communist party does raise the specter of them giving the econ a bit more gas for one last hurrah. Anyways, here’s a cut from one of my favorite China Watchers, Michael Pettis, as well as the link.

“My worst call was to propose that Beijing would recognize the extent of investment misallocation and the inexorable rise in debt by 2015-16, and would begin to lower the GDP growth target rapidly after that. I did not recognize how politically difficult this would prove, and that it couldn’t happen until Xi Jinping and the people around him had done a lot more to consolidate political power.

Every historical precedent — and the logic of the growth dynamics — suggests it will be another Japan. GDP growth rates will drop consistently every year until China is growing at below 3%, and the longer it takes to get there, the more debt it will have to work off and the greater the macroeconomic financial distress costs it will have to absorb.”


Charts I’m looking at—

Bianco Research put out some great charts this week showing the weightings of the top stocks in the SPX throughout time.

Take this first one for example. The bears are always yelping about how the weighting of the FAAMG stocks is now larger than the concentration of the largest tech companies during the dot-com bubble. But, as the chart below shows, if you pull back a bit we find that now is not that unusual at all and in fact, the index concentration of the big tech names is pretty vanilla compared to history.


Video I’m watching —

The GOAT Stanley Druckenmiller was on Bloomberg this week and did a near hour. The entire thing is worth a watch.

Stan talks about his performance year-to-date (just cracked double digits as he’s been playing it safe). Discussed his outlook going forward (he’s mildly bullish) and shared a few of the trades he’s most excited about (he really likes the UK and pound here). Here’s the link.

I also watched this fantastic hour-long interview with Stan’s mentor, the palindrome himself, George Soros (h/t Sam for the find). The interview is from 95’ and a younger George Soros speaks with Charlie Rose about investing and markets. It’s killer and I highly recommend giving it a go. The good stuff comes after about the 10 min mark. Here’s the link and a line from the interview.

“It’s different when you’re risking your principle than when you’re risking your profit. That’s how you get these runs, where you get it right and you can risk more and make more money. When you have lost it, when you’re doing poorly, you need to retrench. Risking your profit is much easier than risking your principle. The reason we have such a good record is we never lose our principle. Once we are in a bad position we retrench, so we might lose a little bit but we are never in danger.”

In trading and investing, the best offense is good defense.


Podcast I’m listening to —

I actually haven’t listened to this one yet but I’m excited to and will hopefully get to it this weekend. But it’s the Hidden Forces podcast which I’m a fan of and this particular episode is with Michael Green, a PM a Thiel Macro (@profplum99).

Green is a regular on Real Vision and is one of the most original thinkers on there. I love watching his stuff as he’s always coming out of left field with something. In this chat, it looks like they get into how passive investing is changing the market and distorting price signals and the functioning of efficient capital allocation. Here’s the link.

Book I’m reading —

This week I’ve been reading Pierce Brown’s “Iron Gold”. It’s the fourth installment in the “Red Rising” series. This is sci-fi at its best. Pierce is a disgustingly good writer. If you pick this series up just be forewarned. You will lose sleep because they are nearly impossible to put down.


Trade I’m looking at —

So many breakouts this past week. GPRK broke out (talked about here). Shippers, such as DHT, EURN, STNG, are breaking out again. Match (MTCH) which I mentioned in Monday’s Dirty Dozen had a big breakout. Gotta love these end of year fireworks as under-positioned managers trip over themselves to add risk and performance chase into the new year.

One chart that I’ve been closely watching for the last few months is the Chinese internet giant, Baidu (BIDU). After a year-plus long downtrend, the stock has been working its way out of a multi-month base and just crossed its 200-day moving average for the first time since July of 18’.

There’s a big gap up to $150 that I wouldn’t be surprised to see BIDU quickly run up and fill — it’s currently trading at $128. Anyways, just a name I’m thinking about playing for a swing.


Quote I’m pondering —

When heaven is about to confer a great responsibility on any man, it will exercise his mind with suffering, subject his sinews and bones to hard work, expose his body to hunger, put him to poverty, place obstacles in the paths of his deeds, so as to stimulate his mind, harden his nature, and improve wherever he is incompetent. ~ Meng Tzu, 3rd century BC

Take your struggles as blessings. Thank the universe for them for they impart upon you gifts that you may not yet understand. Out of adversity greatness is born…

That’s it for this week’s macro musings.

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

Have a great weekend.

Musings: Great Empires, Trust in Economics, And Dr. Copper’s Prescription

Alex here with your latest Friday Macro Musings…

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


Latest Articles/Podcasts/Videos —

Your Monday Dirty Dozen [CHART PACK] — I look at the near-term technical picture for the SPX and then we analyze the valuation hurdle coming for the US market, followed by a look at multiples around the world and then we make the bull case for Europe. Plus more…

Market Gaggle with Vol Trader Darrin John —  This is a must-watch. Darrin is one of the smartest traders I know. And in this episode of the Market Gaggle, he and Chris talk edges: what they are, why they’re important, and how to exploit them, plus a lot more. Do yourself a favor and watch or listen to this episode all the way through.

How To Take Advantage of Tax-Loss Selling — Brandon talks about tax-loss selling and how to take advantage of it.


Articles I’m reading —

Freightwaves did a Q&A with Robert Bugbee, the president of Scorpio Tankers (STNG) — one of our larger positions.

They talk about the current pricing environment, the supply and demand picture going into next year (it’s tight), and the changes to the industry’s old financing structure as well as the new regulatory environment and how that will impact the market in the years ahead. Here’s a clip of them discussing a few of these major changes.

[Interviewer] The thing that really seems to be getting investors’ attention is the constraint on new vessel supply, which could potentially lock in higher returns for a multiyear period. We’ve got the pullback in traditional European commercial bank finance due to the new rules under Basel protocols. At the same time, we’ve got total confusion about what new building design will meet future carbon-emissions rules. This uncertainty is leading to fears of premature obsolescence among both owners and their lenders. How unique do you believe this situation is?

[Bugbee] “This is really unique. One thing you can guarantee about engineers is they dream about the ships they can build. Normally, I sit in front of our engineering department and ask, ‘If you were to build a ship, what would you build?’ If I ask that question today, they don’t have an answer.

“With lenders, this becomes really serious because lending in shipping is partly predicated on what the residual value will be. If you’re lending eight- or 10- or 12-year money, you have to have some conviction on what the asset is worth at the end of that period. If you don’t, you either have to lower the amount you’re willing to lend up front or shorten the tenor of the loan. Either way, it becomes harder and harder [to order new ships] because of what I’d call ‘environmental residual asset risk.’”

Here’s a link to the interview. And you can find my write-up of the bullish thesis on shipping from earlier in the year here “Shippers: The Most Bombed Out Sector of the Market”.

Jon Boorman (@JBoorman) has long been one of my favorite follows on the twitters. This week I re-read one of his older, yet still relevant write-ups on the wisdom he’s accrued up over the three decades he’s spent in markets (h/t @bblawrence8). The piece is aptly titled “Some Things I’ve Learned Over The Last 30 Years” (link here).


Charts I’m looking at—

I came across a number of great charts this week. First, check out this one from Bridgewater (h/t @TihoBrkan). It shows the rough estimates of the relative strength of the major global empires over the previous 500+ years. It’s from an article Dalio wrote on China back in January (link here).

The index assesses each empire across six measures (1) innovation & competitiveness (2) domestic output (3) share of world trade (4) financial-center size and power (5) military strength, and (6) reserve-currency status (click charts to enlarge).

I’m not as bullish on China’s long-term prospects as Dalio. I’ve laid out why here (link here) and in a few other pieces over the years. But it all really comes down to debt, demographics, and a fragile political system. When you add these up, you find the odds are quite high that China will fall into the middle-income trap and suffer all the negative consequences that come with doing so.

In a similar vein, here’s a graph showing the important relationship between trust and economic performance. It’s from Beinhocker’s excellent book The Origin of Wealth (h/t @MarceloPLima). Note how poorly the ex-communist societies fair (marked by italics).

Finally, here’s an interesting chart from Fundstrat showing the prime leveraging years of each generation. Millennials don’t reach peak credit consumption for another 5-years. That’s not a bearish data point.


Video I’m watching —

In today’s hyper-financialized world it’s critical to understand Hyman Minsky’s ideas around financial fragility and Ponzi Finance”.

Here’s a short 15-minute video where the man himself explains these concepts in his own words (link here). If you’d like to learn more about him and his ideas then I highly recommend picking up “Why Minsky Matters” by Randall Wray. I consider it mandatory reading if you want to learn how the banking system and money creation actually work.


Podcast I’m listening to —

Scott Adams, creator of the iconic cartoon Dilbert, recently published a new book titled “Loserthink: How Untrained Brains are Ruining America” and has been hitting the podcast circuit to promote it. He was recently on Farnam’s Street “The Knowledge Project”. He and Shane talk about a whole host of things that can be applied to trading and markets.

My favorite bit is when Scott talks about how we tend to back in a narrative to explain the outcomes of complex systems. Post-facto, everybody is an expert with a reasonable-sounding explanation. Unfortunately, these explanations have little value in explaining what actually happened and why.  Here’s a clip from the discussion.

“People who are writing non-fiction believe they’re telling you what is objectively true in the world, but we don’t have that capability. We all have this illusion that the version of the world we’re seeing is the one, and that if anybody’s got a different version, they must be wrong. It’s sort of the most common illusion that we all have.”


Book I’m reading —

This week I’ve been reading a fantastic little book titled The Path of Least Resistance – Learning to become the creative force in your own life by Robert Fritz. I want to say I picked it up after hearing Patrick O’Shaughnessy call it one of the best books he read this year. If so, thanks, Patrick!

The book is about exactly what the title says it is. Creativity and how to structure your life and your thinking in ways that foster more of it. I’m about 200 pages in (it’s just under 300 pages long) and have read enough to highly recommend it myself. Here’s a cut from the book.

“You are like a river. You go through life taking the path of least resistance. We all do—all human beings and all of nature. It is important to know that. You may try to change the direction of your own flow in certain areas of your life—your eating habits, the way you work, the way you relate to others, the way you treat yourself, the attitudes you have about life. And you may even succeed for a time. But eventually, you will find you return to your original behavior and attitudes. This is because your life is determined, insofar as it is a law of nature for you to take the path of least resistance.”


Trade I’m looking at —

Copper broke out this week of a large triangle pattern no doubt helped along by the recent record short positioning from hedge funds.

This chart from Renaissance Macro shows that tightening inventories are one of the tailwinds driving the metal with a Ph.D higher.

I’m not interested in playing copper directly but rather in what it implies for other assets. For instance, take the copper vs. gold ratio and the 10yr yield chart below. Copper-gold has a strong leading relationship to bond yields. Well, the recent relative outperformance of copper is suggesting that yields may be headed higher.

Also, I’ve been pointing out the interesting technical case for the beaten-down Chile ETF (ECH) which is trading near-decade lows. Chile is the largest copper producer in the world. So it’s not much of a stretch to think that they’ll benefit should this rise in copper prices gain some legs…


Quote I’m pondering —

Why major events ALWAYS surprise “experts”.

Chess masters first attack minor weakness HERE — forcing the opponent to defend — creating fatal weakness over THERE!

The same is true in the world. Pressures build somewhere, global systems contort to “defend”, creating breaking point somewhere over ELSE. ~ Adam Robinson

That’s it for this week’s macro musings.

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

Have a great weekend.