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.

Musings: Opportunities Abound, From India to Turkey

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 signs of slowing growth here in the US along with data pointing to a rebound elsewhere. Plus, we take a look at where the money is flowing, check-in on sentiment, discuss a potential major bottom in a LatAm country, see what’s going on in Japan and point out the massive compression regime in major FX pairs, and more…

Value Hive: Pubs vs. Tourists, Spin-offs and Interviews — Brandon shares some of the latest Q3 investor letters he’s reading along with a number of other great investing nuggets he came across this week.

Lessons From 24 Years of Operating: Bowl America, Inc. (BWL.A) — Brandon shares what he learned reading through 24-years of shareholder letters from an incredible yet little known business operator, Leslie Goldberg.

Invest Like the Greats: Fox Corporation, Inc. (FOX) — Brandon lays out the value case for Fox.


Articles I’m reading —

Linda Bradford Raschke released a free ebook on trading this week titled “Building a Trading Foundation”. To download, just go to her site here and you’ll see the option in the right-hand column. It’s 59 pages of some great stuff with wisdom in there that traders of all skill levels can appreciate. And it’s free… so I highly recommend giving it a read. Here’s an excerpt from the book.

“Anytime that you’re in a trade and you start to have questions like, “Well, what should I do now? Should I get out now? Should I take profits now? Should I stay in a little longer? Should I add to the position?” Anytime you have a question like that, you have no business being in that market. You have lost your edge because you don’t have any control or game plan in that market. So, first, before you start swing trading, realize that you never want to put yourself in a position where you’re going to be reacting to that market.”

Brookfield (BAM), an asset management firm, made some interesting remarks during their recent earnings call regarding the long-term investment opportunity for India (h/t to Collective member Jon K.). You can find the transcript here and to save time you can just jump to the section where managing partner, Anuj Ranjan, lays out the major shift they’re seeing on the ground.

Here’s a clip from the call.

“For the first time ever, we’re seeing a transformation in which India 2 [middle class] and India 3 [rural poor] are becoming included in the formal economy, and this is happening for 3 reasons: data penetration, reforms targeting inclusion and a strong government that’s driving change. Let’s start with data. India has risen from being 150th to the first ranked country in the world in mobile data consumption in only the last 3 years. This explosive growth has been brought about by affordable data plans and falling smartphone prices. India now has 600 million Internet users, but what is shocking is this is only 40% of the population, implying a sustained and continued growth in the future. This digitization has contributed substantially to the inclusion of India’s large population, and it is translating to high growth across most businesses. We’re excited about this trend and actively evaluating opportunity in data infrastructure, including the acquisition, I earlier mentioned, of the country’s largest telecom portfolio.”

India’s set to become the fastest-growing major economy over the next 10+ years. A country of over 1bn people will soon be hitting the Wealth S-Curve. This is going to have profound impacts on markets and commodity demand around the world. Pay attention…

Lastly, Kuppy wrote up a great piece outlining the difficulties of being a small-cap value investor in this environment (link here).


Charts I’m looking at—

India’s CLI is squarely in the slowdown quadrant as the country, along with much of the emerging world, wrestles with an economic slowdown and a painful liquidity crunch.


Video I’m watching —

The GOAT of investing, John Malone, was on CNBC this week for an hour-long interview where he talked about the streaming wars, which companies he likes best in that space, big tech and much more. Malone is a wellspring of wisdom. Give the interview a watch, it’s worth your time (link here).  Here’s what he had to say about Disney (DIS), which is our biggest position (h/t @bluegrasscap).

Also, I really enjoyed this talk that Peter Thiel recently gave titled “The End of the Computer Age” at the Manhattan Institute. Peter talks about the current challenges facing the country, how we can better compete with China, and structural changes that are coming to the global economy. His talk starts around the 10min mark (here’s the link).


Book I’m reading —

This week I started reading Robert Shiller’s new book “Narrative Economics: How Stories Go Viral & Drive Major Economic Events”. I’m halfway through and thoroughly enjoying it. Shiller walks us through some economic history, a little neurolinguistics, and psychology, even some epidemiology… all to profer up a new way of approaching the study of economics. It’s good stuff.

Here’s an excerpt from the book:

“Narratives appear in constellations partly because their credibility relies on a set of other narratives that are currently extant. That is, they sound plausible and interesting in the context of the other narratives. The storyteller does not need to refute the other narratives to set the stage for the current one. Also, the narrative may be based on certain assumed facts that the teller and the listener do not know how to test. Some narratives are contagious because they seem to offer a confirming fact. We can say with some accuracy that most people put on a show of their own knowledgeability and try to conceal their ignorance of millions of facts. Hence narratives that seem contrary to prevailing thought may have lower contagion rates that do not result in epidemics.”


Trade I’m looking at —

I have no position and probably won’t put one on since there are more interesting trades out there right now, like in shipping. But… The Turkey MSCI Country ETF (TUR) is breaking out of a basing wedge pattern (chart below is a weekly).

It’s been a while since I last checked in on what the mad ruler Erdogan is up to, so I may study up over the weekend. For what it’s worth, inflation there is normalizing and the lira (USDTRY) looks like it may be about to break out against the dollar. Also, the bond market has been catching a bid with Turkish gov 5yr yields dropping to multi-year lows along with CDS’s pricing in less risk relative to earlier in the year.


Quote I’m pondering —

Every limitation has its value, but a limitation that requires persistent effort entails a cost of too much energy. When, however, the limitation is a natural one (as, for example, the limitation by which water flows only downhill), it necessarily leads to success, for then it means a saving of energy. The energy that otherwise would be consumed in a vain struggle with the object is applied wholly to the benefit of the matter in hand, and success is assured. ~ The I Ching, circa 8th century B.C.

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: The Killing Fields of the Oil Patch

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 signs of a global rebound in growth, green shoots in Europe, trouble ahead for US bonds, check-in on the four drivers of gold, and check out oil extraction costs in different parts of the world, plus more.

Trading Politics [Part 1] — Tyler lays out how to use services like PredictIt to profit from mispricings in the betting market which is good stuff to know with election season drawing near.

Value Hive: Q3 Letters and LEGOs as Investments — Brandon dives into the latest investor letters, including those from Loeb’s Third Point and Einhorn’s Greenlight Capital and more.


Articles I’m reading —

I’ve been digging into the oil and gas sector quite a bit lately. It’s going through a much-needed culling and as is often the case in a widespread industry downturn, I’m seeing many babies getting tossed out with the bathwater. This is great since it takes periods like these of long drawn out value destruction to create total investor apathy and hence amazing value opportunities for those willing to come in and sift through the rubble.

Sam Zell, the man known as the “Grave Dancer” since he’s made his fortune in the distressed debt market, seems to be thinking the same. In a recent Bloomberg article (link here) Zell is quoted saying:

“The amount of capital available in the oil patch is disappearing… I compared it to the real estate industry in the early 1990s, where you had empty buildings all over the place, nobody had cash.”

A recent report by SRSrocco titled “The U.S. Shale Industry Hit A Brick Wall in 2019” lays out in very stark terms the inflection point in which the industry is currently going through (link here). Here’s a cut from the article which is worth reading in full.

“There several factors that have negatively impacted the U.S. Shale Industry in 2019; the compounded annual decline rate, the massive debt–inability for shale companies to raise money, and the stunning amount of new wells necessary to increase overall production.  While shale experts are knowledgeable of the typical 60-70% first-year decline rate of shale wells, not much is mentioned about the “compounded annual decline rate.’”

The commodity fund Goehring & Rozencwajg explained in a recent letter (link here) how out-of-whack the valuations have gotten in the space, writing:

“In particular, the bear market in oil exploration and production companies has created value that can hardly be believed. We analyzed the universe of all US-listed E&P companies with market capitalizations over $100mm and proved reserves that are at least 50% oil. We then compared the current stock price to the net-debt adjusted SEC PV-10 measure from their 2018 10Ks. As you may recall, a company’s PV-10 measures the discounted cash flow of all proved reserves at the prevailing oil and gas prices. Under normal market conditions, E&P stocks trade at a premium to their SEC PV-10, reflecting the expected value of any future reserves not yet “booked” in the reserve statement. However, due to the overwhelming bearishness among energy investors, the average company now trades at a 12% discount to its net-debt adjusted SEC PV-10 per share value.

While we have seen individual companies trade at a discount, we cannot recall a time when the industry average was less than its SEC PV-10 value. We should point out that the price used in most companies’ SEC PV-10 analysis for 2018 was $55 per barrel, not materially higher than today’s price.”

If you’d like to read my long-term take on the energy sector then give this piece I wrote a while back (link here) as well as this great follow-on update put together by Evergreen Gavekal (link here).

I think there’s going to be incredible opportunities in this space. I have a basket of offshore E&Ps that I’m tracking closely. All have solid balance sheets, great long-term assets, and generate tons of free cash flow even in this low pricing environment.

These companies are not only going to benefit from the oncoming culling with all the uneconomic supply getting taken out to the woodshed. It’s also going to give them the opportunity to pick up great assets from forced sellers for pennies on the dollar.  In an illiquid environment, those flush with cash are kings.

We’re still in the early stages of this game and there’s likely more downside than upside in the very near-term. It’s going to take some large scale bankruptcies (see CHK) and the funding tap to get completely turned off in order for a durable bottom to be put in. Plus, I’d like to see a confirmed cyclical top in the dollar as well.

I’m thinking this is a 2H 2020 play. But the opportunity is so great it’s worth keeping a very close eye on now.


Charts I’m looking at—

The extended bear market in oil was caused by two things (1) China’s growth story hitting a brick wall and (2) unproductive US frackers funded by cheap money and over-eager investors.

China has entered a period of decline which will not end anytime soon. But… India and other parts of Asia are not burdened by Everest sized piles of debt and happen to be hitting the knee of the Wealth S-Curve. This is going to drive a secular exponential rise in energy demand. And to our second point, as investor willingness to fund unprofitable producers declines so too is drilling activity, which we can see by the steady fall in rigs over the last year.


Podcast I’m listening to —

The journalist Bethany McLean published a book last year titled “Saudi America” that I recommend reading. She does a good job telling the origin story of the US fracking industry as well as explaining the inherent structural problems that the sector is now dealing with.

She was on the podcast circuit promoting the book earlier this year. Here’s a good short (30 mins) interview she did with NPR where she summarizes the main points from the book (link here).


Video I’m watching —

Not at all trading related but I really enjoyed this so I thought I’d share. Here’s a short clip of Steve Jobs talking about how he thinks about marketing (click on the image to see the video) in terms that advertising genius Rory Sutherland would approve. Jobs explains that building a brand and marketing products is not about logic but about invoking feelings and imparting values. Give it a watch, it’s great.


Quote I’m pondering —

What matters isn’t how well you play when you’re playing well. What matters is how well you play when you’re playing badly. ~ Martina Navratilova

As true in markets as it is in tennis…

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: How To Spot A Fraud, O’Shea’s Market Models, And Words From PTJ And Gang

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.


Special Announcement  —

Bradon our value guy at Macro Ops just published his latest pick which he thinks has 5-bagger+ potential…

You can read all about it in this month’s edition of Value Ventures.

Until this Sunday, November 10th you can pick up a subscription of Value Ventures for $497 a year. The letter normally sells for $697/year and prices will increase into 2020.

There’s also a 30-day money-back guarantee on all purchases so there’s no risk to stopping by and kicking the tires a bit.

Click here to subscribe to Value Ventures!

And now for the musings…


Latest Articles/Podcasts/Videos —

Your Monday Dirty Dozen [CHART PACK] — I look at price targets following new record highs, check out rising global markets, dissect fund flows to see where capital is headed, look at world equity valuations, and see what’s going on in Putin’s Russia, plus more…

It’s The Downside That Matters — Brandon lays out why it’s so important to focus on your downside first when analyzing an investment citing famed investors such as Klarman, Greenblatt, and Bury to make his point.

Why The Traditional Financial Advisory Model Will Fail — Brandon discusses the secular changes in financial advisory and what players are going to have to do to stay alive and thrive.


Articles I’m reading —
 

Somebody on the twitters (apologies, I can’t remember who) shared this great report on famed short-seller Jim Chanos. It covers everything from Jim’s start in the business, early lessons learned, what factors make for a good short along with what characteristics make for a successful short-seller. There’s also a number of case-studies of some of his bigger trades. Here’s the link and a section on “How To Spot A Fraud”.

Here’s something cool. Apparently, Hedge Fund Market Wizard Colm O’Shea has a blog (h/t Chris M.). It’s titled Applied Macro, here’s the link. Colm was profiled in Shwager’s last Market Wizards book, my friend Kean Chan wrote up a summary of that chapter here.

He covers a number of things on the blog from politics to psychology, how he approaches hiring and managing people, and then, of course, trading. There’s a bunch of good stuff on there including posts where he shares his framework for various asset classes; like how he looks at FX markets as well as fixed income. It’s definitely worth taking some time digging through.


Charts I’m looking at—
 

I tweeted this about the bearish setup in bonds the other week which looks to have triggered. I get the sense that we’re seeing the start of a BIG unwind in consensus trades at the moment; trades, which according to BofAML, are highly correlated to the UST 10-year yield. This. Could. Get. Interesting…  (h/t @macrocharts for the chart).


Podcast I’m listening to —

Mark Dow (@mark_dow) was on the Stansberry Investor Hour podcast the other week. I’ve never listened to this podcast before as I’m not a huge fan of Stansberry, personally. But, Mark is one of my favorite follows on the twitters, so I figured I’d give it a listen and was glad I did. Mark covers a wide range of subjects from the big misconceptions over the repo rate hysteria, to the drivers behind negative interest rates, along with his views on gold amongst a few other things. It’s an hour well spent. Here’s the link.


Video I’m watching —

Must watch: Ray Dalio and PTJ sat down and talked shop recently at the Greenwich Economic Forum. They discuss politics, policy, and markets. It’s great.

My one big takeaway though is that man… does PTJ have a poor grasp on macro. That’s not even a knock against him really, just an observation. I mean, he’s still PTJ and I’m just some dude typing away in a van down by the river and all that… And, really, it’s a testament to his trading prowess and how macro is overrated in comparison to cold hard trading skills. Druck is the same way too.

Anyways, it’s a fun watch. Here’s the link.


Book I’m reading —

This week I started reading Trading Price Action Trends by Al Brooks. A number of members of our Collective have been diving into his training lately. I had read one of his earlier books, I think it was Reading Price Charts Bar by Bar a number of years ago, but I thought I’d revisit his work. I’m only a quarter of the way through the book. It’s dense and tends to read more like a textbook than a thriller. But the content inside is excellent.

Brooks is a Trader’s trader. He’s the consummate professional, someone who has spent decades refining his price action-based approach to markets. Brooks does a great job of explaining the reasoning behind various price setups. His work is detailed, thoughtful, and backtested. Most importantly, his emphasis is on the process (ie, how to manage trades) versus focusing primarily on setups.

The book is the first in a three-part series. I’m planning on cracking open the next one as soon as I’m finished with this. Here’s a section from the first chapter.

“If you think about it, trading is a zero-sum game and it is impossible to have a zero-sum game where rules consistently work. If they worked, everyone would use them and then there would be no one on the other side of the trade. Therefore, the trade could not exist. Guidelines are very helpful but reliable rules cannot exist, and this is usually very troubling to a trader starting out who wants to believe that trading is a game that can be very profitable if only you can come up with just the right set of rules. All rules work some of the time, and usually just often enough to fool you into believing that you just need to tweak them a little to get them to work all of the time. You are trying to create a trading god who will protect you, but you are fooling yourself and looking for an easy solution to a game where only hard solutions work. You are competing against the smartest people in the world, and if you are smart enough to come up with a foolproof ruleset, so are they, and then everyone is faced with the zero-sum game dilemma. You cannot make money trading unless you are flexible, because you need to go where the market is going, and the market is extremely flexible. It can bend in every direction and for much longer than most would ever imagine. It can also reverse repeatedly every few bars for a long, long time. Finally, it can and will do everything in between. Never get upset by this, and just accept it as reality and admire it as part of the beauty of the game.”

That should be read and then re-read and then re-read again. Don’t go creating “a trading god”…


Trade I’m considering —

I’ve shared this one a number of times lately because I’m watching it close and I’m about to pull the trigger on it. The stock is Geopark (GPRK), it’s a Chilean E&P with assets located around Latin America. The chart below is a weekly and it’s looking ripe for a run…

The company reported strong earnings yesterday. Here’s a snapshot from the report. The stock is trading on the CHEAP. Its got strong FCF and a solid balance sheet.

Plus, oil itself is starting to look like an attractive long to me, though I’m waiting on further confirmation from the tape. The curve is in backwardation, open interest and long hedge fund positioning has collapsed and inventory growth is starting to come down. Also, not sure if you’ve seen the latest Economist cover but it’s some rendition of the “Death of Oil” narrative that’s now back in vogue.

Keep a close eye on this one.


Quote I’m pondering —
 

You can’t build in a feedback or reactive model, because you don’t know what to model. And if you do know — by the time you know — the odds are the market has changed. That is the whole point of what makes a trader successful — he can see things in ways most others do not, anticipate in ways others cannot, and then change his behavior when he starts to see others catching on. ~ Richard Bookstaber

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.

The Man That Solved The Market And An Annual 11,367% Return

Alex here with your latest Friday Saturday Macro Musings…

I’ve been laid up the last few days with the flu hence my tardiness in getting this out.

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 breakouts, breadth, and credit confirmations that are ALL signaling a move higher in global risk assets. Also, we look at positioning amongst inflation assets and see where the pain points in the US dollar are amongst CTAs.

Brandon’s Value Hive — More of our favorite value manager Q3 letters. Tiffany receives a premium takeout offer. A 16-page article on everything Jim Chanos. TechCrunch has an ‘oopsie’ with SnapChat, and more!


Articles I’m reading —

Barry Ritholtz wrote a review of a new book about Jim Simmons and the hedge fund powerhouse he founded, Renassaince Technologies. The book is titled “The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution” written by Gregory Zuckerman. George spent nearly three years researching the firm and was given direct access to the hyper-reticent Simmons for interviews.

Here’s the link and a cut from the article.

“…Zuckerman painstakingly reconstructs the 30-year track record of the firm’s crown jewel, the Medallion Fund. Although rumors of its performance have long circulated on Wall Street and in the press, the actual numbers are even more mind-blowing: From 1988 to 2018, Medallion returned 66.1% annually before fees. Net of fees, the gains were 39.1%. Estimated trading profits during those 30 years amounted to $104.5 billion. About those fees: If the standard hedge fund management fee of 2% of assets under management, plus 20% of the profits sounds expensive, then what do you think of Medallion’s “5 and 44”?”

I’m looking forward to reading this one.

Dylan Rice of Calderwood Capital Research is back to publishing his “Popular Delusions” series. In the latest report, Dylan covers the failed state of Venezuela (and goes through the value case for Venezuelan bonds), then gives his take on MMT, and ends with a quite unfavorable review of David Graeber’s book “Debt: The First 5,000 Years”.

Here’s the link along with some of his thoughts on MMT.

“To repeat, I really don’t like this and find it a terrible idea on many, many levels. Primarily, I don’t buy the premise that we are all better off because central bankers and government officials have some clever way of ‘managing’ the macroeconomy. To me prosperity, wealth, job creation are micro, not macro phenomena.

But bad ideas can still become policy (eg imperialism, eugenics, socialism). And if I was a host to the macroeconomic meme, and I believed that my judicious interventions could make the world a more prosperous and harmonious place, I’d be looking at MMT’s idea that government spending should only be constrained by the economy’s inflation speed limit, and I’d be excited. I’d be thinking, “Globally inflation is low and falling. Economists have been warning about the dangers of deflation for years now, and we’re getting closer. Surely, that can only mean … we’re not spending enough money fiscally!”

Alternatively, if I were a megalomaniac politician living for votes and seeing myself as some kind of wise benevolent dictator, I’d be rubbing my hands and salivating.”

Looks like Dylan and I are on the same page in regards to MMT. It’s an okay idea in theory but one that’ll surely be abused in practice.

Lastly, GMO recently published a report touting the favorable valuation tailwinds for emerging market stocks. With the dollar stumbling and EM stocks showing strong technicals, it might be a good time to check your EM exposure. Here’s the link and a chart.


Charts I’m looking at—

@MacroCharts has been killing it with his fintwit charts lately. He considers the below Stock/Bond ratio to be one of the most important charts in the world at the moment. I agree.


Podcast I’m listening to —

I listened to two great podcasts this week. The first is Eric Weinstein’s “The Portal” with comedian Bryan Callen. Eric and Bryan talk for more than 2-hours on everything from the enlightenment, “cancel culture”, the holocaust, to gender dynamics and more. The Portal has quickly become one of my new favorite podcasts. This latest episode doesn’t disappoint. Here’s the link.

The second is the latest Bloomberg OddLots interview with Brad Sester of the CFR. They talk about the Taiwanese life insurance industry and the massive position they’ve built up in USD denominated assets — I wrote about this a few months ago but Taiwanese Lifers own something like 15% of long-term Corporate debt, which is wild.

The interview is a LOT more interesting than the title makes it sound. And it’s an important development to stay abreast of, especially if we see the dollar start a new downtrend. Here’s the link.


Book I’m reading —

This week I returned to a book I’d read years ago and had to pick up again for a piece I’m writing. The book is “How I Made One Million Dollars Last Year Trading Commodities” by Larry Williams. It’s a poorly edited so-so read but there’s a few interesting nuggets in it.

 

The book is about Larry’s legendary run in the 87’ World Trading Championship where he clocked an eye-watering 11,367% return — a record that still stands to this day.

Wanna know something interesting? The third all-time record return in that same championship was 1,000% and made a decade later by larry’s daughter, Michelle Williams. If that name sounds familiar it’s because Michelle is also a famous Hollywood actress who was once married to Heath Ledger. Pretty wild, right?

Here’s Larry’s “most important trading advice”.

Buy only on down days

Sell only on up days

That advice is worth thousands of dollars. It’s hard to follow, like all good market techniques. But, it’s dynamite. It will put you into positions at optimum prices where you are protected and well-entrenched.

The herd instinct almost forces us to buy on up days while the laws of probability (which work well with commodities) tell us that up days are more likely to be followed by down days. Especially if it’s the third or fourth up day of a move. Don’t fall for these sucker plays!


Trade I’m considering —

A bunch of EM names are setting up nicely. The EM relative outperformance against the US over the last few months could spark a feedback loop fueled by heavy investor concentration in the US where capital flows out to EM driving the US dollar lower and thus raising the total returns of EM assets and so on.

One of the names I like is Sea Limited (SE). Here’s a chart of it on a daily basis.

Sea Limited is a holding company whose subsidiary’s include the online marketplace platform Shopee which primarily serves Southeast Asia ( Indonesia, Taiwan, Vietnam, Thailand, Philippines, Malaysia, and others).

Hayden Capital put out a good slide deck on the company last year (link here). I like the chart and the long-term macro drivers of the business. I’m still doing some digging but this one is worth keeping on your radar.


Quote I’m pondering —

It belongs to the imperfection of everything human that man can only attain his desire by passing through its opposite. ~ Soren Kierkegaard

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: The Illusion of the Great Moderation and an Update on Shipping

Alex here with your latest Friday Macro Musings.

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


Latest Articles —

Your Monday Dirty Dozen [CHART PACK] — We look at the widening gap between the positive hard data and the horrendous soft data, we check in on global central bankers to see what they’re up to, take a look at earnings season and where the beats and misses are trending and more.

Value Hive: Investor Letters, Options Trader Wins Big and More! —  This edition is LOADED with investor letters as we clear the deck for one of our favorites: Scott Miller. We’ll touch on some other things, such as a trader turning $700 into $100K+. Artko Capital continues to kill it. And Howard Marks discusses negative rates.


Articles I’m reading —

If you’re looking for a good laugh then give Matt Levine’s latest on the WeWork/Softbank circus titled “How Do You Like We Now” a read (link here).

Daniel Want of Prerequisite Capital shared his latest quarterly letter. I enjoy Daniel’s letters, the guy has good taste in books and always finds a way to weave in interesting quotes and excerpts into his writing. Here’s the link along with an excerpt he shared from Garet Garret’s terrific book “A Bubble That Broke the World”, published in 1932.

“The general shape of the universal delusion may be indicated by three of its familiar features.

      1. First, the idea that the panacea for debt is credit.
      2. Second, a social and political doctrine, now widely accepted, beginning with the premise that people are entitled to certain betterments of life.
      3. Third, the argument that prosperity is a product of credit, whereas from the beginning of economic thought it had been supposed that prosperity was from the increase and exchange of wealth, and credit was its product.

Result: Much more debt. A world‐wide collapse of foreign trade, by far the worst since the beginning of the modern epoch. Utter prostration of the statistical serpents. Credit representing many hundreds of millions of labor days locked up in idle industrial equipment both here and in Europe. It is idle because people cannot afford to buy its product at prices which will enable industry to pay interest on its debt. One country might forget its debt, set its equipment free, and flood the markets of the world with cheap goods, and by this offense kill off a lot of competition. But if this thought occurs to all of them, and so all with one impulse, raise very high tariff barriers against one another’s goods, to keep them out.”

I’ve been meaning to write an update on shipping but then I saw Kuppy’s latest I figured he did a better job than I could so why bother, I’ll just share his instead (link here). The important takeaway is “operating leverage”. Charter rates have been going through the roof — a VLCC recently chartered for $300k a day — while operating costs stay the exact same. This means that the rising higher margined revenue passes directly through to shareholders; one reason why bull markets in shipping can get as wild as they do.

Lastly, Srinivas Thiruvadanthai of The Levy Forecasting Center, published this excellent paper calling out the problems with inflation targeting and our over-reliance on monetary policy to boost aggregate demand.

Srinivas points out that “The mechanisms by which monetary policy works to stimulate demand inevitably leads to rising private sector debt ratios and a tendency toward asset price bubbles” and “The stability created by the so-called Great Moderation in reality was an illusion, and it compromised the resilience of the financial system.” He goes onto make the case that we need a total rethink of our economic policy framework, one that emphasises fiscal policy and not just leverage induced demand.

I agree on all points. Unfortunately, I don’t think we’ll see any significant changes until we use up the very last bit of our monetary policy (balance sheet expanding) juice.


Charts I’m looking at—

@MacroCharts shared this great chart on the twitters this week. The Global PMI is back in the green after it’s longest slowdown since the 90s.

Podcast I’m listening to —

A few weeks ago I shared the research piece titled “Bubble or Nothing” that was put out by the Jerome Levy Forecasting Center. It was an excellent paper and is essential reading if you’re trying to understand the increasingly binary macro environment we’re in, and a fragile binary one at that. This week Bloomberg’s Oddlots podcasts had on David Levy, one of the coauthors, to discuss how the economy works in a world of oversized balance sheets and leveraged risk taking. It’s a good listen. Here’s the link.


Trade I’m considering —

Not a trade, though there’s certainly trades to be made off this broader trend, but a number of markets are breaking out globally. This is important for a few reasons (1) it means that markets are looking past the current manufacturing recession and betting on a coming recovery (2) the strongest bull trends happen when markets around the world push higher in unison and (3) capital has become incredibly concentrated in the US due to chasing of US relative outperformance. This trend has flipped since August and if it continues it can become self-fulfilling as capital outflows drive USD lower, making RoW more attractive, leading to greater RoW outperformance and more capital outflows from the US etc…


Quote I’m pondering —

“Victory smiles upon those who anticipate the changes in the character of war, not upon those who wait to adapt themselves after they occur.” …General Giulio Douhet (1869-1930)

Anticipate, anticipate, anticipate…

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: The Anniversary of Black Monday and the Infamous PTJ “Trader” Doc

Alex here with your latest Friday Macro Musings. 

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

Latest Articles — 

Your Monday Dirty Dozen [CHART PACK] — We look at more charts showing the pervasive bearishness amongst investors; from sentiment near multi-decade lows to persistent outflows in EM stocks. We also check out seasonality, some gold charts and more.

Value Hive: Shipping Stocks, Water Assets and Jeff Bezos Interviews —  PG&E hides under the covers and shuts off power. Greece throws their hat into the negative-yielding debt parade. The short seller that screams loudest doesn’t always win, and more!

My Favorite Investing Resources — Brandon shares his favorite value investing related books, podcasts, and videos. 

Articles I’m reading — 

Here’s a slightly older but excellent long-form piece from the New Yorker, titled “Personal Best” that I happened to stumble across this week and gave it a reread (link here).

It’s written by the renowned surgeon and author, Atul Gawande (he wrote “Checklist Manifesto” which is a great book and was required reading when I consulted for the tech company, Palantir). 

I love reading about people who are beyond obsessive about pushing the boundaries of excellence in their respective fields. And this article is a great example of that. Gawande details his recent experience of using a coach to critique his surgical performance and to help him break through a personal plateau. Here’s a great section from the piece (emphasis mine). 

Élite performers, researchers say, must engage in “deliberate practice”—sustained, mindful efforts to develop the full range of abilities that success requires. You have to work at what you’re not good at. In theory, people can do this themselves. But most people do not know where to start or how to proceed. Expertise, as the formula goes, requires going from unconscious incompetence to conscious incompetence to conscious competence and finally to unconscious competence. The coach provides the outside eyes and ears, and makes you aware of where you’re falling short. 

In 1987 the NYT profiled the three top hedge fund managers of the year: John Templeton, George Soros, and Gilbert de Botton. The article is a short read with some fun market anecdotes. Here’s a snippet I liked from the Palindrome: “If you’re doing poorly, the first move is to retrench,” he says. “Don’t try to recoup. And when you start again, start small.” And “You don’t need to know everything about a situation to make money… As with any scientific thesis, you should start in a small way, adding to it if the hypothesis looks good. Then, if it passes the tests, you’ll have a big reward.” That’s excellent advice from one of the greatest at riding winners for all they’re worth. (Here’s the link.)


Not trading related but worth reading nonetheless, is a piece from Nautilus (one of my favorite science publications) exploring the fractal nature of our consciousness (you can read it here). Here’s an excerpt: 

Giuseppe Vitiello, a physicist at the National Institute for Nuclear Physics in Italy, takes a different approach to the application of quantum physics to brain dynamics (using quantum field theory instead)—but he, too, likens it to an ordering along fractal lines. Like a magnet, he says: disordered on the microscopic level until a trigger causes the magnetic “arrows” to all point in the same direction and result in an organized macroscopic system. Vitiello showed that the advent of this coherent structure—namely, of coherent quantum states—corresponds to the way fractals are represented mathematically. In other words, underlying the brain’s fractal processes is quantum coherence.

There’s a market analogy in there somewhere…

Charts I’m looking at—

Check out this chart from @pricesmatter which shows EURUSD coiling tight against 50-years of support (looks like he uses DEM for the period before the euro was created). Maybe we bounce this time or maybe we finally break through the long-term trend-line lower. 


Podcast I’m listening to — 

Srinivas Thiruvadanthai was on David Beckworth’s Macro Musings podcast last week. Sri (@teasri) is one of my favorite macroeconomists to follow. He looks at the world through the lens of the Levy/Kalecki Profits Equation which is the proper way to view the macro-financial balance sheet. 

In their talk, Sri and David discuss the safe asset supply challenge, the fallacy of composition in macroeconomics, and ways in which the Fed could ease the cost of being the world’s banker. It’s a timely interview. Give it a listen, you’ll be sure to learn something (link here).

Video I’m watching — 

In the spirit of the 30th anniversary of Black Monday tomorrow (aka: the crash of 87’). I downloaded my copy of the infamous Paul Tudor Jones (PTJ) “Trader” documentary to YouTube. You can watch it here.

We should all aspire to one day trade the markets while wearing Bruce Willis’ high top sneakers “The man’s a stud”. 

Trade I’m considering — 

I keep sharing this one but the technical and fundamental set up on the Mexican peso is just too good. The below chart is a weekly of the MXNUSD cross. It’s nearing a major breakout point, perhaps another cut at this month’s FOMC is the spark that starts the fire? 


Quote I’m pondering — 

Understanding how our brains work — our limitations, endless mental shortcuts, and deeply ingrained biases — is one of the keys to successful investing. At Baupost, we believe that it is sometimes easier to predict how investors will behave in certain situations than it is to predict a company’s bottom line. At times of market extremes, by avoiding emotional overreaction and remaining aware of our biases, it may be possible to know market participants better than they can know themselves. ~ Seth Klarman

If you’re engaged in markets then you’re playing in Keynes beauty contest whether you realize it or not. If you’re not playing the player then you’re the one getting played…

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

Have a great weekend.