Jim Simons and The Four Sources of Alpha

Tyler 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/Videos/Podcasts —

A Tactical Short In Rates — Find out why Alex thinks a tactical short in bonds or utilities could score nicely in the next few weeks.

Anchors Away: My Three Favorite Shipping Ideas Our new deep value guy, Mr. Bean, reveals his favorite shipping stocks for 2019.

A Golden Macro Opportunity — Alex breaks down the drivers of the price of gold and explains why a HUGE move is on the horizon.

There’s A Big Macro Move Brewing In Markets — A review of a Druck trading maxim totis porcis and why it might be time to whip out the hog soon in FX.

Yield Curve Inversion: Why This Time Is Different — Confused as to what the inverted yield curve means for global markets? Check this out, Alex explains why it’s not time to run for the hills and go to cash yet.

Article I’m reading —

US rates have gotten killed. Below is a chart of the US 30-year rate which now sits at 2.81%.

If you need an udpate on the drivers then check out this Bloomberg article which summarizes the narrative nicely. (Link here)

Going into the beginning of the year, bond volatility had been sold into the ground because everyone felt that the Fed was in a holding pattern for the rest of the year. But the surprise dovish announcement on March 20th completely derailed that narrative causing rates to break out of their range.

All the traders that sold options, betting that rates would stay range bound, needed to cover their losses quickly causing additional momentum out of the range.

Podcast I’m Listening To —

I’m a fiend for anything Mauboussin does so I was extra excited to see him on the guest list for Invest Like The Best this week. (Episode link here)

Patrick and Mauboussin discuss the four sources of trading and investing alpha represented by the acronym  “BAIT.”

Behavioral — An investor exercising remarkable control over his emotions so he does not fall prey to the extreme pessimism and optimism of the crowd.

Analytical — An investor who can synthesize and interpret public information better than the rest of the market collective.

Informational — An investor who has access to information that other market participants do not have.

Technical — Arbitrage opportunities within the market microstructure.

If your a fan of investing process and meta-process like me be sure to add this to your queue this week.

Video I’m watching —

Andrew Lo had a fireside chat with Renaissance Technologies founder Jim Simons that I enjoyed. (Link here)

Before this interview I had no idea that Jim Simons actually had a background in fundamental discretionary currency trading. He mentions that his performance was good but he couldn’t handle the ups and downs that come with a discretionary approach.

One day he would walk into the office with his positions in the green and feel like he’s a genius. And the next day everything would reverse and he would feel like an idiot. The emotional gyrations wore on him which is why he decided to go full out systematic. With a system he simply did what the computer told him to do.

This speaks to the importance of knowing yourself inside and out if you want to have long-term success in the market. Some people need a system, others thrive with flexibility. The key is dabbling around on small size until you find out what works for you.

Chart I’m Looking At—

The NY Fed’s recession model is forecasting a 29% likelihood of a recession hitting the US within a year. Credit Suisse says when the Fed’s model goes up to 29% there is actually a 71% chance of a recession hitting within a year.

The Credit Suisse number looks a little curve fit to me… Our base case is for recession well into the future.  But we’ll keep a watch on the NY Fed’s model to see how the probabilities develop.

Quote I’m pondering —

A trader who initiates on a breakout from a major chart formation will invariably have more losses due to false breakouts. And each breakout may not get too far, but the trader has to be willing to trail a stop and not bank profits too soon. All he needs is 1-2 huge moves a year, but it takes lots of patience, discipline, and fortitude.  ~ Linda Bradford Raschke

Market’s follow a 90/10 distribution meaning only a few move moves will make your bottom line each year. It’s key to stay in the game and follow and sound process through all the false moves while you wait for the real one.

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

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

Have a great weekend.

A “Crazy” Deep Value Play Along With Some Other Stuff

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: The Macro Ops Collective Now Open!

It’s time for our spring enrollment into the Macro Ops Collective. This enrollment period will end on March 24th at 11:59PM so if you’re interested in joining our premium research community make sure to sign up by this Sunday.

Click here to enroll in the Macro Ops Collective!

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

Click here to enroll in the Macro Ops Collective!

Now for your latest Macro Musings…

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

Latest Articles/Videos/Podcasts —

Value Ventures: A Prologue — Our value expert Mr. Bean talks a little bit about his value investing philosophy and lays out the plan for all future value based content. If you like deep value make sure to stay tuned to his releases.

Macro Ops Podcast: Shippers – Bottom Fishing With Alex Barrow — Host Chris D. sits down with Alex to discuss his latest shippers thesis. Pop this episode in during your next workout or commute if you want to get up to speed on this bombed out sector of the market.

Articles I’m reading —

Matthew Ball wrote an article titled “Nine Reasons Why Disney+ Will Succeed (And Why Four Criticisms are Overhyped)”. Matthew is one of the most insightful commentators on the media/tech landscape, in my opinion. I try to read everything he does. This article serves as a well-argued bullish overview of Disney’s opportunity (and challenges) in its transition from being a B2B to a B2C company that controls its entire stack. I should note that I may be biased as Disney is one of our largest equity positions.  

Here’s Ball commenting on one of the many benefits of Disney’s owning its distribution channels through its move to SVOD (Disney+, Hulu, ESPN+).

While Disney+ will initially launch as a video-centric offering, I expect it will eventually go far beyond it. Disney’s ESPN+, for example, also includes access to ESPN.com’s paywalled content and coverage (which, in turn, can’t be accessed without an ESPN+ subscription). In time, Disney+ is likely to offer add-ons for everything else Disney – from comics (e.g. Marvel Unlimited), to ebooks, mobile games, music and even discounts to Disney’s theme parks and merchandise. And maybe even theatrical subscriptions and tickets. To this end, analysts need to look beyond the basic question of whether Disney+ will have enough content to sustain a standalone subscription. Video volume matters, but so too do other features and content offerings.  And notably, each additional category expands the bucket of spend that can be cannibalized.

Reminder… Disney, the company with the most valuable content IP and recognizable brands in the world, sells for just 15x earnings. That’s slightly less than Comcast at 15.8x and the market’s average of 21x. Makes sense… Here’s the link.

Our buddy Biren over at Perseid Capital put out two must-read writeups on the whole $TSLAQ debate. The first one serves as a good overview of the evidence-based bear case against Tesla (here’s the link). The second is an excellent analysis of the company’s cash flows — or lack thereof — and some speculation as to when Musk and team will be forced into bankruptcy (link here). We’re short the stock through long-dated puts and will likely be adding to our position sometime in the near future.

Finally, not sure how I came across this site but h/t to whoever shared it with me. It’s named Safal Niveshak, after the author. And it’s a collection of great original illustrations of key mental models, principles, and frameworks. There’s one for the Feynman Technique and another for Bezos’ Regret Minimization Framework. It’s pretty cool. Makes me wish I had the ability to illustrate something more advanced than just hand turkeys.

Here’s the link and an illustration of his framework for stock selection.

Book I’m Reading —

I’m currently reading Trading Sardines – Lessons in the markets from a lifelong trader by Linda Raschke. This also happens to be the monthly pick for our MO Book Club. Linda was nice enough to send the team and I an autographed copy and we’re hoping to get her on the podcast sometime here in the near future. For those of you who don’t recognize her name, Linda is an uber-successful trader who was featured in Schwager’s The New Market Wizards.

I’m about 2/3rds of the way through the book and really enjoying it so far. It’s filled with tons of humor, great stories about her time spent on the floor, and lots of practical trading advice. Here’s one of her shared lessons learned following a lucky break (random freak weather event) on a soybean trade that resulted in her first big money win.

I adopted the philosophy that trading has little to do with brains because overthinking mucks things up. Instead, it was about positioning yourself so that, once in a while, you might get lucky.

Charts I’m Looking At—

Here’s an interesting chart from Deutsche Bank showing how a cyclical increase in inflation has led prior recessions by an average of 3-years (h/t @macronomics1). I think it was PTJ who said something along the lines of every bear market has basically occurred because of a rise in inflation and an uptick in rates. The lack of much of a cyclical rise so far helps explain why this cycle has gone on for so long. And why it may go on much longer still…

Trade I’m Considering —

We’re currently bullish on oil and have been buying some energy names as well as going long the underlying. Well, this week, Kuppy, who authors one of my favorite investing blogs Adventures in Capitalism, put out a good write-up on Antero Resources (AR) (one of the companies we’ve been looking at).

You can see from the chart that AR has had a tough go as a public company. But, as Kuppy argues quite convincingly, the storm may or not be passing anytime soon but the value to be had is “getting crazy here” to use his own words.

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

At Friday’s closing price of $7.81, the company had a market cap of $2.411 billion. It owned 98.87 million shares of Antero Midstream (AM – USA) with a value of $2.335 billion (at Friday’s closing price of $23.62). You are also promised roughly $300 million in cash from the mid-stream simplification in Q1/2019 and a $125 million payment in early 2020 related to the earn-out on the sale of the water business. Add it all up and the market is valuing AR’s upstream business at a residual equity stub of NEGATIVE $349 million (it’s worth noting that the EV is less extreme as AR does have $3.8 billion in standalone net debt). So what sort of toxic equity stub is the market paying you $349 million to take off its hands?

Note: The thesis has changed since the recent kneecapping of AM (down 40% over the last week) so those shares in AM are worth closer to just over a billion dollars. But it’s still interesting nonetheless and there are a number of other energy names trading for very low multiples of current cash flows. Plus, oil has a tendency to spike in the latter stages of the cycle.

Quote I’m pondering —

You must learn to allow patience and stillness to take over from anxiety and frantic activity… The good player is patient. He is observant, controlling his patience, and organizing his composure. When he sees an opportunity, he explodes. ~ Jim Lau, martial artist

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.

Retail Sanity, Wholesale Madness, and Texas Tea

Tyler 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 —

Shippers: The Most Bombed Out Sector of the Market — Alex reveals his latest deep value thesis on the shipping sector. If you’re looking for dirt cheap stocks to buy check out this writeup.

Bear Markets and Liquidity Conditions — Tyler shows why liquidity conditions are the most important macro fundamental. The best macro traders in the world all obsess over liquidity conditions. Make sure you are too!

Latest Podcast: Macro Moves in Metals, Bonds, and Currencies — Operator Chris explains how his quantitative global macro system is interpreting the latest price action in gold, bonds, currencies, and equity indices.

Articles I’m reading —

Spinning Gold — Broyhill Asset Management put out a blog on spinoffs. Investing in them has been extremely lucrative for the managers that became specialized enough to separate the good from the bad. When someone says “spinoffs” most of us immediately think of Joel Greenblatt and his You Can Be A Stock Market Genius book.

But a relatively unknown man by the name of Bill Stiritz has actually been crushing the spinoff game well before Greenblatt ever released his book. By focusing on spinoffs, Stiritz was able to return 6100% to his investors over his 35-year career. $1 invested with Stiritz would’ve turned into $57 by the end of it all…

He did it by exercising time-arbitrage, or as Munger would put it “sitting on your ass.” By extending holding periods well past the average investor you can realize returns that many just don’t have the patience for.

What Is Amazon? —  I stumbled across this piece by Zack Kantor on Fintwit. It’s a short essay on the history of Walmart, what made them great, and ultimately what led them to give up the retail throne to Amazon. It’s a highly engaging piece about the inner workings of a large retail company and what it takes to succeeds in that business.

These days there’s a lot of talk about regulators coming in and breaking up the big tech companies under antitrust laws. But Zack shows that this threat is minimal for Amazon because it has such a good track record of anticipating regulatory destructing and changing course proactively.

We’ve seen the strategy that Amazon takes when it sees a regulatory threat looming on the horizon; it voluntarily started collecting sales tax in many states before states could force it to do so, and adopted a $15 minimum wage before it drew the full ire of a populist movement. With multiple headquarters distributed across multiples cities and outside access provisioned for all of its key products and services, Amazon seems more likely to break itself up – along its own preferred lines – than it is to be forcibly disassembled by regulators.

I also liked his final summary for what Amazon has become and what it must do to survive and remain king of the retail hill for the decades to come.

So, what is Amazon? It started as an unbound Walmart, an algorithm for running an unbound search for global optima in the world of physical products. It became a platform for adapting that algorithm to any opportunity for customer-centric value creation that it encountered. If it devises a way to keep its incentive structures intact as it exposes itself through its ever-expanding external interfaces, it – or its various split-off subsidiaries – will dominate the economy for a generation. And if not, it’ll be just another company that seemed unstoppable until it wasn’t.

Podcast I’m Listening To —

Alex here. Just jumping into Tyler’s Musings this week to share with you a killer podcast I listened to the other day. It was recommended to me by one of my old Marine buddies and I was hooked for the full 2+ hours of the chat. It’s the Jocko Podcast episode 89 titled “The Critical Importance of Taking Care of Your People” with Frogman and Medal of Honor recipient Mike Thornton.

Thornton is a Vietnam Veteran and a legend in the Teams. He shares the leadership lessons he learned during his storied career as well as recounts the incredible mission for which he earned the MoH. The dude is one bad mamma jamma. Give it a listen. You will not be disappointed. Here’s the link.

Charts I’m Looking At—

Here’s an interesting chart I found while reading a BoFA report this week.

The delay in tax refunds started two years ago when the IRS passed a law requiring further verification for those claiming the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC). For the last two years, refunds were delayed until Feb 15th for this population, but this year they were delayed until Feb 27th because of the timing of the President’s Day holiday

The lower income cohort is disproportionately impacted by this law. Households earning less than $50K a year saw a meaningful delay relative to before the law was passed, but those earning more than $125K saw little change.

The good news is that the cumulative amount of refunds caught up by the end of the month. However, there was still less time for consumers to spend their refunds in February. We think this creates a downside bias to retail sales, which is confirmed when looking at the income level spending data.

Bottom line: although there were good reasons, the consumer cut back spending at the turn of the year after a period of robust activity in 2018. We believe that once these special factors reverse, the reality of healthy fundamentals will set in, supporting spending in the spring.

That means we should see the next retail sales number tick up and support this bid in US equities.

Trade I’m Considering —

The US government shutdown earlier this year actually caused some huge data issues for our beloved COT reports. We haven’t been able to look at reliable positioning data because the CFTC had stopped releasing the data during the shutdown.

But finally they’ve been able to catch up and we are back in business!

The Crude Oil Spec chart caught my eye this morning as I was going through the latest data.

You can see that specs aggressively sold crude during the end of 2018 creating a historically extreme short positioning. And of course, when you check out the price action in crude it’s about to break out to 50-day highs and squeeze the hell out of all of these specs.

We’ve started to nibble on the long side here. Alex has a more in-depth fundamental note on crude that we released to Collective members yesterday. If you’re interested in checking that out, shoot us an email.

Quote I’m pondering —

We might describe our world as having retail sanity, but wholesale madness. Details are well understood; the big picture remains unclear. A fundamental challenge… is to integrate the micro and macro such that all things make sense.~ Peter Thiel

Indeed. That’s the hardest part about picking stocks, making sure the micro thesis also fits the “general conditions” of the market.

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

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

Have a great weekend.

Global Disunion and a DEEP Value Industrial Mining Play

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.

Articles I’m reading —

Someone shared this on the twitter, @chriswmayer maybe? Anyways, it’s a good read about a little known but highly respected value investor by the name Norbert Lou who runs Punch Card Capital.

The writeup, done by Santangel’s Review, covers Norbert’s investing career from start to present along with his framework and approach to markets plus a few case studies of his best (and worst) investments thrown in for good measure.

Norbert’s origin story is a unique one. You should read the article for the full scoop but he started out investing $60k of his mother’s nestegg which he turned into a few million dollars in less than 9-years. All while working a full-time job. He was then seeded for his fund by Joel Greenblatt because Joel liked Norb’s investment write ups on the Value Investor’s Club so much. Not bad. Give it a read, here’s the link and a section I like from the piece:  

A few years before he started Punch Card, Norbert had read a speech in which Charlie Munger reverse engineered the success of the Coca Cola Company. Even though Munger did not intend it as a stock pitch, Norbert later called the speech “the best stock write-up ever.” Unlike almost everyone else on Wall Street, Munger spent no time focusing on the balance sheet, income statement, or earnings multiples. Rather, he spoke almost exclusively about qualitative factors, such as economies of scale, universal appeal, and a strong brand that helped turn Coca-Cola into the world’s most dominant beverage company. “You can identify certain business momentums in the real world that aren’t necessarily in the financials and allow for sustained returns on capital,” Norbert learned.

He had already seen business momentums at work in some of his biggest winners: economies of scale in NVR, for example, and network effects in NII Holdings. Norbert also realized that the qualitative factors that drive sustained returns on capital are not always obvious at first. “NVR’s management didn’t even know how great the company was,” Norbert noted. “There is no universal test for a great company.” Another lesson of Munger’s speech: on those occasions when several of these qualitative factors occur together, the results can be outstanding. “Supernormal results are usually achieved through the combination of multiple forces working together,” Norbert said.

Twitter thread I’m thinking about —

Check out the following short Twitter thread from one of my favorite follows @teasri (link here).

He comments on a recent CLSA report regarding China’s weakening credit multiplier and notes that two forces are at work, these being (1) A liquidity trap where monetary easing fails to kickstart credit growth and (2) The “pushing on a string” effect. Dalio often talks about this and its impact on DM economies currently but @teasri notes how when new marginal credit fails to boost economic activity it typically flows into bidding up asset prices, instead.

I shared in last week’s Musings a section from a Nomura report which showed their indicators of sentiment for local investors in China had reached euphoric levels. Given the incredible year-to-date run up in Chinese equities, that sentiment is understandable. The fundamentals behind the move though are not due to an improving economy (see next section) but rather a consequence of China pushing on a string (also, perhaps MSCI planning to raise their China exposure levels).

Charts I’m Looking At—

All signs point to a continued slowdown in the Chinese economy. Charts via Morgan Stanley.

Podcast I’m listening to —

You should give Patrick O’Shaughnessy’s latest podcast a listen. It’s good. Really good. Here’s the link.

Patrick talks with Geopolitical Strategist Peter Zeihan. Here is Peter’s website.

The theme throughout the interview is the unstoppable march towards “Global Disunion”. The antithesis of Globalization. Peter talks about how this trend will vastly reshape the world as we know it; China will fall apart (again), the eurozone will dissolve, and self-sufficient countries like the US will weather the new epoch the best. He also covers the changing landscape of the energy market as well as where he thinks we’re likely to see the next major war pop up (hint: Russia moving back into Eastern Europe).

Peter used to work for Stratfor and it shows. He uses a similar geopolitical framework for understanding the world as the one developed by George Friedman, Cofounder of Stratfor. The framework is one that focuses on constraints rather than possibilities. Here’s a section from Friedman’s book “The Next 100 Years” which outlines this framework.

Geopolitics assumes two things. First, it assumes that humans organize themselves into units larger than families, and that by doing this, they must engage in politics. It also assumes that humans have a natural loyalty to the things they were born into, the people and the places. Loyalty to a tribe, a city, or a nation is natural to people. In our time, national identity matters a great deal. Geopolitics teaches that the relationship between these nations is a vital dimension of human life, and that means that war is ubiquitous.

Second, geopolitics assumes that the character of a nation is determined to a great extent by geography, as is the relationship between nations. We use the term geography broadly. It includes the physical characteristics of a location, but it goes beyond that to look at the effects of a place on individuals and communities. In antiquity, the difference between Sparta and Athens was the difference between a landlocked city and a maritime empire. Athens was wealthy and cosmopolitan, while Sparta was poor, provincial, and very tough. A Spartan was very different from an Athenian in both culture and politics.

If you understand those assumptions, then it is possible to think about large numbers of human beings, linked together through natural human bonds, constrained by geography, acting in certain ways. The United States is the United States and therefore must behave in a certain way. The same goes for Japan or Turkey or Mexico. When you drill down and see the forces that are shaping nations, you can see that the menu from which they choose is limited.

Kind of reminds me of the “psychohistory” used by The Foundation from one of my all-time favorite sci-fi series of the same name.

Trade I’m Considering —

I’ve been following US iron ore producer Cleveland Cliffs (CLF) for a while now. The long-term chart has a lot going for it and I noticed that Michael Burry (the value investor profiled in The Big Short) recently took a large position in the stock.

Revenues and cash flows are trending in the right direction: up and to the right. And yet the stock is trading for less than 3x earnings.

Maybe the market is scared off by the company’s debt? I don’t know… A cursory look at its balance sheet shows they shouldn’t have any problems there. The vast majority of CLF’s debt isn’t due until 2025. The company has an EBITDA-capex/interest expense coverage ratio of 4.6x, which is plenty. And this is near the bottom of a long cyclical bear in iron ore / steel pricing.

Insiders seem to think the stock is a good buy. They’ve been gobbling up the stock over the last two years.

I’ve gotta dig into it more. But on first take, it seems like quite a bit of disappointment is already baked into this cake.

Quote I’m pondering —

Theory cannot equip the mind with formulas for solving problems, nor can it mark the narrow path on which the sole solution is supposed to lie by planting a hedge of principles on either side. But it can give the mind insight into the great mass of phenomena and of their relationships, then leave it free to rise into the higher realms of action. There the mind can use its innate talents to capacity, combining them all so as to seize on what is right and true as though this were a single idea formed by their concentrated pressure—as though it were a response to the immediate challenge rather than a product of thought. ~ Carl Von Clausewitz

Clausewitz would have been a good trader.

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.

A Contrarian and a Calculator + The DEEP Value Case For Shipping Stocks

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 —

The Fed Put Is Real and China Stimulates — Alex updates us all on China’s surprise stimulus and the Fed’s epic flip from hawk to dove.

Macro Ops Podcast: Alex, Tyler, Chris, and Mr. B — Chris hosts a monster 2.5+ hour Macro Ops roundtable with Alex Barrow, Tyler Kling and Mr. B.

Articles I’m reading —

I don’t recall how I came across this piece (Twitter maybe?) but it’s a terrific interview in Logic Magazine with an “Anonymous Algorithmic Trader” about the trends, dangers, and future of quantitative finance. Anybody who is anybody is now using “machine learning, AI, and BIG data” to run their hedge fund. Why you ask? Well, because it’s the future… Or, at the very least, it helps one raise large amounts of AUM which is really what this game is all about, at least for most.

One of my favorite sections from the interview was when the Algo Trader covered a number of the dangerous fallacies embedded into practically all machine learning/AI/quant trading models — this is a subject near and dear to our heart and one that we covered in our latest wide-ranging (and wine-fuelled) group podcast discussion (link here). But, anyway, here’s a clip from the interview after Mr. Anonymous was asked about what new vulnerabilities are being introduced to the financial system from the rising popularity of quant investing (emphasis by me).

The way that mortgage-backed securities precipitated the financial crisis is very much applicable here. One of the fallacies behind that phenomenon was the assumption that the world would behave in the future the way it had in the past. For instance, housing prices would go ever upwards.

That fallacy is intensified in the case of quantitative investing, because all quantitative models use historical data to train themselves. As these techniques become more widespread, the assumption that the world will behave in the future the way it has in the past is being hard-wired into the entire financial system.

Another fallacy in the lead-up to the financial crisis was the assumption that financial markets were so efficient that participants didn’t need to do the underlying work to figure out what the securities were actually worth. Because you could rely on the market to efficiently incorporate all available information about the bond. All you need to think about is the price that someone else is willing to buy it from you at or sell it to you at.

Of course, if all participants believe that, then the price starts to become arbitrary. It starts to become detached from any analysis of what that bond represents. If new forms of quantitative trading rely on assumptions of market efficiency—if they assume that the price of an instrument already reflects all of the information and analysis that you could possibly do—then they are vulnerable to that assumption being false.

Give it a read. Here’s the link.

I don’t think we’ve shared this one in our Friday Macro Musings (if we have, then sorry for being repetitive) but Mauboussin put out a killer research paper the other week titled “Who Is On The Other Side?” which delves into the following problem-set:

If you buy or sell a security and expect an excess return, you should have a good answer to the question “Who is on the other side?” In effect, you are specifying the source of your advantage, or edge. We categorize inefficiencies in four areas: behavioral, analytical, informational, and technical (BAIT).

Anything Mauboussin puts out is worth a read but this one, in particular, is a must… Here’s just one of the many great tidbits from the paper as well as the link to the full thing (link here).

Overextrapolation. Overextrapolation, the excessive projection of recent experience, is one of the key ideas behind the psychology of belief formation. For example, financial economists have shown that investor expectations for future stock returns in the next year are highly correlated with returns in the past year. Exhibit 3 shows the percentage of household equity and fixed income investments that are allocated to equities and subsequent five-year stock market returns. Investors expect high returns after realizing high returns and expect low returns after realizing low returns.

Because stock prices are more volatile than corporate earnings, valuations tend to be higher following a period of strong price advances and lower subsequent to price declines. In contrast with expectations as the result of overextrapolation, high valuations are associated with low expected returns, and low valuations with high expected returns. This relationship holds for asset classes beyond stocks, including bonds, real estate, and sovereign debt.

Avoiding this type of overextrapolation demands the ability to “disregard mob fears or enthusiasms and to focus on a few simple fundamentals.” Seth Klarman, founder, chief executive officer, and portfolio manager of The Baupost Group, captured the concept beautifully when he said, “Value investing is at its core the marriage of a contrarian streak and a calculator.” The “contrarian” part demands an examination of the other side of the popular view. The “calculator” part ensures that valuation is sufficiently extreme to generate excess returns.

A contrarian streak and a calculator. I love that…

Also, here’s some links to a number of great quarterly writeups that have recently hit the webs:

  • Coho Capital Q4 Shareholder Letter: Jake Rosser, Managing Partner at Coho, always puts out an insightful letter and this quarters is no different. Jake pitches the value case for Netflix (NFLX) and gives a masters class on the unique business advantages of combining subscription economics with massive scale.
  • KKR “Global Macro Trends: Tons of great macro charts in here with a focus on slowing global growth, changing Chinese trade dynamics, and a structurally/politically weak Europe.
  • Crescat Capital Q4 Shareholder Letter: Crescat is bearish. I mean reeeaal bearish. I don’t necessarily agree with their views but I appreciate their point of view and I always enjoy hearing what those on the other side of the trade are thinking.
  • Broyhill Asset Management Q4 Shareholder Letter: A measured take on the market along with an update on some of their core holdings (DLTR, OAK, MCK, WBA, AGN). They also use one of the more interesting analogies I’ve heard to describe the deflating of an asset bubble, which is:

“They say that gradually letting the air out of a bubble is like trying to gradually let a fart out at a cocktail party. It’s a risky move with a blemished track record—for party-goers and for the Fed. As a result, like those uncomfortable moments at the cocktail bar, bubbles have a tendency to linger longer than anyone expected and surprise everyone by how magnificently they burst.”

Charts I’m Looking At—

China’s A-shares market is up 26% ytd. Not a bad start to the year, though the market still needs to rally another 27% just to get back to its most recent high reached in 18’. Either way, Nomura research says the Chinese market is getting frothy and investors there are now “euphoric”, at least according to Nomura’s sentiment indicators. 

Euphoric investors don’t typically bode well for the short/intermediate returns of the market in which investors are so worked up in a frenzy over. But, if you pull back some, Chinese stocks and tech stocks, in particular, have taken quite a drubbing over the last year (see below chart from KKR). Does this mean we should sell Chinese tech stocks now and buy later? or hold now and buy more later? or do neither and fuggedaboutit?

I don’t know. I’m torn to be honest. On the one hand, some Chinese tech companies are amazing innovators and are dominant businesses. On the other hand, companies like BABA and Tencent are really just corporate arms of the CCP and are vulnerable to the whim and wishes of the Party. And I’m not sure how I feel about that.

Podcast I’m listening to —

After a brief hiatus, I’ve found myself getting back into podcasts again. And over the last two weeks, I’ve listened to a number of different ones but two that really stood out for me were both Tim Ferriss productions. One was his interview with Shopify (SHOP) CEO Tobi Lutke (link here) and the other was with Business strategist and all-around Polymath, Jim Collins (link here).

From the Lutke interview, two things really stood out at me, or rather three things (1) was the best definition of hell I’ve ever heard which is “The last day you have on earth, the person you became will meet the person you could have become” (2) Lutke’s discussion on his uncomfortableness with being comfortable because being comfortable means stasis (ie, not growing) and (3) I really wish this interview could have come out in early 2015 so I could’ve learned how impressive Shopify’s CEO is and then bought in its IPO for around $26.

And then the Collins interview is just all-around fantastic. He has this habit of tracking where his time is spent throughout his day and then assigning a number evaluation to each day (-2 for a crappy day and +2 for a great one). This has helped him to quantitatively optimize his time usage and ergo his happiness. The result is he spends a lot more time doing distraction free creative work and less time caught up in shallow busy tasks. I’m thinking of implementing the same.

Trade I’m Considering

Tyler wrote about Nintendo I think in last week’s Musings. We’ve been digging into this one and really like what we see. @HardcoreValue shared a good pitch deck outlining the long thesis on the company this week (link here).

On an unrelated note, another area of the market that I’m looking at is Shippers. Below is a chart of the Invesco Shippers ETF (SEA) which has been in a bear market since its inception nearly 9-years ago.

Kuppy, who’s behind the excellent investing blog Adventures in Capitalism, has been pitching the long case for shippers for a few months now (here’s a link to his latest).

The bull thesis essentially boils down to this:

  • Shipping stocks are insanely cheap with many selling for less than half and even a third of NAV using values from the secondary sale and purchase market. And many of these stocks have stable balance sheets and positive free cash flows.
  • Tighter financing and an aging global fleet mean less tonnage coming online and an increasing scrap rate in the years ahead.
  • Regulation, particularly IMO 2020, which states that as of 2020 all ships must either use 0.5% sulfur or lower fuel or install a scrubber to remove exhaust. There are a number of ways for shipping companies to adhere to this rule and pretty much all of them are bullish for charter rates and ipso facto shipping stocks.

So we have below asset liquidation valuations, positive future trend in supply/demand dynamics, and a coming near-term catalyst to further drive profitability. Throw in a decade long bear market and a completely forgotten/disregarded sector and you’ve got yourself a pretty decent trade setup. You know, the whole Klarman contrarian streak and calculator thing works out pretty well here.

I’m going to continue digging into this space and will be putting out a report in the coming week to those of you in our group.

Quote I’m pondering —

I am by nature warlike. To attack is among my instincts. To be able to be an enemy, to be an enemy—that presupposes a strong nature, it is in any event a condition of every strong nature. It needs resistances, consequently it seeks resistances…. The strength of one who attacks has in the opposition he needs a kind of gauge; every growth reveals itself in the seeking out of a powerful opponent—or problem: for a philosopher who is warlike also challenges problems to a duel. The undertaking is to master, not any resistances that happen to present themselves, but those against which one has to bring all one’s strength, suppleness and mastery of weapons—to master equal opponents. ~ Friedrich Nietzsche, 1844–1900

A GREAT life requires GREAT opponents, GREAT challenges, and GREAT obstacles. It’s these powerful external pressures that force us to grow, adapt, and evolve. Stress and struggle is our greatest teacher and the most valuable gift we can receive. Seek out the hard and sharp edges of life and turn from the siren calls of the crowded comfortable complacency of normalcy…

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.



How One Man Traded His Way To Billions, Cold Showers, and The Freedom Dividend

Tyler 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/Videos —

Using Political Prediction Markets For Fun And Profit — Tyler shows how to use political prediction markets to calculate the implied probability of a candidate becoming elected. With the right strategy you can even arbitrage these markets against a pesky political acquaintance and make some guaranteed money on election night!

Portfolio Review — AK reviews trades from the Fallible equity portfolio.

Costco — AK explains why Costco’s business model makes them so successful.

Options — AK explains why position sizing is key to options trading.

Articles I’m reading —

An optometrist who beat the odds to become a billionaire — Herbert Wertheim built himself a $2.3 billion fortune by using Warren Buffett style investing principles. He has an extraordinary investment track record but isn’t widely known because he never managed outside capital. His fortune was built by finding companies he felt had quality intellectual property and then holding onto those stocks for decades.

Instead of concentrating on the metrics in financial statements, Wertheim is devoted to reading patents and spends two six-hour blocks each week poring over technical tomes. “What’s more important to me is, what is your intellectual capital to be able to grow?” Thanks to his engineering background, the technical nature of optometry and his experience as an inventor, the patent library is Wertheim’s comfort zone. Stocks he invested in based on their impressive patent portfolios include IBM, 3M and Intel.

Cold Showers Lead To Fewer Sick Days — Harvard Business Review writes how cold exposure can improve your health and build mental toughness.

Participants who took the cold showers actually reported feeling ill just as many days, on average, as the people who showered normally. But either their symptoms were less severe or they felt more energetic, so they were better able to push through the sickness and function anyway.

The article says that even a 30-second cold blast at the end of each shower has benefits. I personally have been implementing this in my routine over the last few months and have noticed the benefits. I’m able to power a little bit harder through workouts, arduous work projects, and other things I don’t enjoy doing. My general energy levels also feel higher.

I started off with a simple 30-seconds of cold at the end of each shower. But now I’ve worked up to a 1-minute start and a 1-minute finish of cold water.

Fighting that urge to skip the cold blast each day I find empowering. It’s a small mental win that subtly boosts my confidence and mood.

Charts I’m Looking At—

I saw this in a BofA report this week. Around 40% of their clients think that the key to getting the Eurozone out of its current growth funk is via China stimulus supporting German exports.

Whether the transmission mechanism of China’s easing will be effective this time remains to be seen, especially with high China total debt levels, and in particular rising Chinese household debt/GDP.

Yet, there’s no denying that China is serious about fighting its growth wobbles: the chart above shows that January’s Total Social Financing number of CNY 4.64tr. was around 5.5% of Chinese GDP…the biggest monthly liquidity injection ever registered.

I think the Chinese stimulus we saw in the first chart was a large reason for this v-shape recovery in equity markets.

But the other obvious key driver is the epic backtrack in central bank hawkishness. In 2019, the Fed has already pivoted to being on-hold, the ECB has moved the balance of risks to the downside, Australia has stopped hiking and India has delivered a surprise rate cut.

When the most important central bank in the world changes course, others must follow…or risk unwanted currency appreciation. True to form, as the above chart shows, the number of global central bank rate cuts over the last 6m is now greater than the number of central bank rate hikes. And when central banks flip-flop, so do markets. With interest rate vol at record lows now in Europe, this means a green light for carry trades and a return of the thirst for yield.


Video I’m Watching —

Charlie Munger Speaks at Daily Journal Annual MeetingMunger stays true to form and delivers yet another epic speech on the art of investing. It’s crazy how much wisdom this guy can spit out still at the age of 95.

If your short on time, fast forward to 23:30 in the video and listen to his spiel on diversification. He talks about how the key to beating the indices is to have a few times when you know a play is better than average and then betting big on that play.

Conviction + Edge + Big Bets = Outperformance

Podcast I’m listening to —

For all of my life, I’ve never been able to get fired up about politics. Candidates rarely inspire me, I don’t like to waste energy thinking about the pointless hot topic battles they spend their time talking about. And it annoys me when they go on and on about how bad everything is. To be honest, for the last 8 years or so I’ve tuned out unless it impacted a trade I was making in the markets.

Well recently the nihilist in me has been slain. On Joe Rogan’s pod, he interviewed democratic candidate Andrew Yang (Link here). I’d never heard of Andrew until this interview and I came out of the episode a huge fan. Yang talks clearly, approaches problems logically, and leaves out all of the identity politics that plague our system.

Yang is pushing hard for a universal basic income — a $1,000 monthly check to every American over 18 years old. You can check out his logic for why he likes UBI here on his website.

And I highly encourage a listen to his interview with Rogan so you get a feel for his personality.

Trade I’m Considering —

Long Nintendo

We’re long Disney partly because of its booming theme parks business. Nintendo, the creator of video game hits Mario, Super Smash Brothers, Legend of Zelda, Donkey Kong, and Pokemon has decided to do something similar which has got us interested.

Nintendo is working with Universal Studios to open three theme parks at existing Universal properties in Florida, California, and Tokyo, starting in 2020.

I think this is largely an IP play, one Herbert Wertheim from the beginning of this Musings would look at with excitement.

The titles and characters that Nintendo owns are timeless and ingrained into our culture. In my opinion, there is a tremendous amount of value that is still locked up inside this $32 billion company, even before considering its $8.7 billion in cash and nonexistent debt.   

Quote I’m pondering —

If you are a beginner, trade with an amount of money that is small enough so that you can afford to lose it, but large enough so that you will feel the pain if you do. Otherwise, you’re fooling yourself. ~ Mark Minervini

Yep, I couldn’t agree more. In order to survive for the long haul in this game you have to know yourself emotionally inside and out. And you can’t do that unless you have an amount of money on the line that makes you slightly uncomfortable — something in between no feeling and can’t sleep at night.

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

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

Have a great weekend.



Fed Day Trades, The Art of Breath, And Uncomfortable Reality

Chris D here with your latest Friday Macro Musings…

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

Articles I’m reading —

Experiments in Art of Breath written by Brian MacKenzie, Jason Donaldson and Rachael Colacino.

There are side effects as well: less heavy breathing, calmer beings, better sleep. Overall we are becoming less sympathetic dominant creatures. The transition has been awe-inspiring in that we can see how if you overuse any of your body’s systems, you become inefficient and less likely to recover.

The Avoidable War A collection of speeches by Hon. Kevin Rudd

The year 2018 represented a fundamental turning point in U.S.-China relations. While the trade war between the world’s two largest economies drew much of the headlines, a deeper rift was brewing. After 40 years of strategic engagement, during which the United States welcomed China into the international order and supported its economic development, the Trump administration called for a new era of “strategic competition.” Simultaneously, much of the Chinese political establishment was adopting the view that the United States sought to contain China’s rise.

And finally, this very interesting research on China’s ownership of the US Film Industry which might be better illustrated in the Tweet Storm by Lux Capital’s Josh Wolfe. Puts things into perspective, doesn’t it?

Charts I’m Looking At—

This one comes from Quantifiable Edges Blog. It displays the results of a backtest of buying the SPX on Fed Days since 1979 when Paul Volcker was chairman of the Fed.

This is interesting that up until this last Fed announcement, when we had a big rally, it was 0/7 with ol’ Jerry Powell.

Side note: Tyler has a Fed Day strategy that he has thoroughly tested, which is what I used here; not just something I found on the interwebz.

Nearly $3 Billion has flowed into Vanguard’s Total International Bond ETF in 2019 already, bringing total assets to near $16BN. Approximately ⅓ of the fund’s assets are in Japanese and German debt. I interpret that as a short USD bet, and suddenly everyone in and out of macro seems to have an opinion on the direction of the dollar. Two points of interest here: first, according to Morgan Stanley’s FX Matrix, the USD position remains the most crowded currency position and BofAML fund manager survey mentions the 3 most crowded trades in their survey:

  • 1 Long Emerging Markets
  • 2 Long USD
  • 3 Long FAANG+BAT

Book I’m Reading —

After reading about CItadels Billionaire Founder, Ken Griffin’s recent purchase of a $238 Million Dollar NYC Penthouse, the most expensive ever, I was reminded of one of my favorite books.

The Quants, you can it here: Amazon and Audible,

The book goes into the backgrounds of some of the most well known and successful quants like Ed Thorp, Peter Muller, James Simons, Clifford Asness, Aaron Brown and Boaz Weinstein…and their card playing habits.

My key takeaway is about how crowded and thus dangerous successful strategies in the markets can be, and serving as a great reminder of the importance of position sizing/risk management.

Give it a read and let me know what you think!

Podcast I’m listening to —

As host of the Macro Ops Podcast, you might have guessed that I spend a significant amount of time listening to other podcasts while wandering the Montana backcountry. This is where my best thinking happens. Usually, I have a podcast from Tim Ferriss, Joe Rogan or Shane Parrish jammed into my ear holes, as they are some of the best in the business, and always thought provoking.

For this week’s episode of Marco Musings, however, I would like to go back in podcast time to encourage you to have a listen to perhaps one of the greatest stories told. Not the story itself, but the legendary story teller Dan Carlin. For those that don’t know, Dan is the voice of Hardcore History, one of the most successful podcasts ever released. He brings deep insight into what it would have been like to live through some of the most important times in history.

Currently, I am re-listening to the 5 part Blueprint for Armageddon about World War I. Even if you you aren’t a fan of history, I highly recommend this series. A word of warning: don’t start these when you have other things going on; these are highly addictive and last about 5 hours per episode.

Trade(s) I’m Considering —

To be clear, I run a quant strategy, swing trading currencies mostly. My trades are mean reversion trades, not longer term mega moves, though they occasionally end up catching one of the major macro moves. Most of the time they last a few days, up to a few weeks. A big edge in my system is utilizing buy stops to enter on longs and sell stops to enter on shorts. This way the asset has to move in my direction before I even enter the trade and it keeps me out of trades that will never work out.

An even bigger edge is position sizing. I only risk about 1% of my account (as measured by stop loss) on any given trade. With these two factors, I am not, and don’t need to be right all the time.When right, however,  I have plenty of dry powder to increase my exposure as a swing trade turns into a big macro trade.

EUR/USD Long is on my radar and I have a buy stop at 1.13100 on EURUSD with a daily close below 1.12490 as a stop loss. (It must close the days trading below that level to exit, not intraday). If EURUSD doesn’t see 1.13100 before it sees the stop level, I will cancel the trade.

Quote I’m pondering —

I think one should recognize reality even when one doesn’t like it, indeed, especially when one doesn’t like it.

~ Charlie Munger – Poor Charlie’s Almanack

Do you catch yourself yelling at the TV, Twitter or a chart because the market isn’t doing what you think it should be doing? At this point, you must consider that you don’t have all the information or you don’t have the right information.

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

If you’re not already, be sure to follow me on Twitter:@chrisdmacro or on Instagram @chrisdmacro

Have a great weekend.



When Breath Becomes Air

Alex here with your latest Friday Macro Musings…

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

Latest Articles/Videos —

How To Earn $1 Billion Dollars — A fun article by Chris D. that shows how with enough time, anyone with a modest savings can compound their way to a cool billion dollars.

Earning 2x On SBUX — In this video, AK goes over one of his recent options trades that doubled in just over 2 weeks.

Apple Earnings Review — AK reviews earnings for one of our Macro Ops target companies.

Facebook’s Comeback — AK takes a look at how Facebook (one our Macro Ops holdings) is turning things around in 2019.

Articles I’m reading —

Morgan Housel put out a great writeup titled Origins of Greed and Fear on how both play a critical — and often detrimental — role in our decision-making process. Dostoevsky once said that “Lying to ourselves is more deeply ingrained than lying to others” and Morgan lays out in this piece just why this is. Here’s an excerpt and the link.

But if you overestimate how much of your previous outcomes were caused by identified actions that were in your control, then doubling down on what happened to work before increases the odds of future failure.

Greed happens when you overestimate how influential your past actions were on outcomes, enticing you to keep pushing right up to, and beyond, the point of eventual regret.

Some great Investor Letters have hit the wires in the last two weeks. Scott Miller of Greenhaven Road Capital put out his Q4 letter that has some interesting pitches for buying KKR and BXC and is definitely worth a read. Here’s the link.

Fred Liu of Hayden Capital also shared his letter (here’s the link). Fred’s letters are always some of my favorite reads as he has interesting discussions on investing theory and market trends. In this one, he talks about rising customer acquisition costs (CAC) and how that’s driving the trend of companies diversifying away from their core business models in order to steal more of their customer’s attention. Here’s a cut from the piece.

Within an industry’s profit pools, value typically accrues to the company controlling the scarce resource (i.e. where the bottleneck is). With distribution methods and shelf space increasing, the “bottleneck” has shifted to the next scarce resource: customer’s attention and time. Last year, Netflix’s CEO even claimed its competition isn’t other video streaming platforms – it’s other uses of your time like sleep.

Concurrent with this, companies like Amazon figured out a decade ago, that by aggregating consumers and making them happy (versus finding ways to squeeze every last dollar out of them), they could control this scarce resource, and at the same time grow to unprecedented levels. This is because the ultimate limitation on a company’s size and degree of control over an industry, was and still is, anti-trust (i.e. monopoly) regulations.

He also makes a compelling bull pitch for the online car order/delivery company, Carvana (CVNA). Give it a read.

Charts —

The following chart is via @ukarlewitz. It’s of the NYSE McClellan Summation Index which is an indicator of breadth for the overall market. The chart shows that the index is about to cross +900 in the next few days after being deeply negative at the end of last year. Urban Carmel notes on the chart in yellow the other instances where this has happened. Each point marked a significant bottom.

Strong market breadth means there’s a lot of participation in this rally. It’s an essential ingredient to producing a sustainable bullish thrust. And all the indicators of breadth that we look at (including those for the HY bond market) are showing incredible strength. This tells me that the bottom is likely in on this move and though the market is technically stretched on a short-term basis and we should expect some kind of a pullback here, the path of least resistance is still higher (for US stocks at least).

Book I’m Reading —

While flying back from Puerto Rico this week, I devoured the book When Breath Becomes Air by Paul Kalanithi. This book is incredibly beautiful… My eyes welled up with tears while turning its pages. The late author had an incredible gift for words and strikes home at some deep truths about life, death, and finding meaning in it all.

The back cover gives the following description of the book:

At the age of thirty-six, on the verge of completing a decade’s worth of training as a neurosurgeon, Paul Kalanithi was diagnosed with stage IV lung cancer. One day he was a doctor treating the dying, and the next he was a patient struggling to live. And just like that, the future he and his wife had imagined evaporated. When Breath Becomes Air chronicles Kalanithi’s transformation from a naïve medical student “possessed,” as he wrote, “by the question of what, given that all organisms die, makes a virtuous and meaningful life” into a neurosurgeon at Stanford working in the brain, the most critical place for human identity, and finally into a patient and new father confronting his own mortality.

What makes life worth living in the face of death? What do you do when the future, no longer a ladder toward your goals in life, flattens out into a perpetual present? What does it mean to have a child, to nurture a new life as another fades away? These are some of the questions Kalanithi wrestles with in this profoundly moving, exquisitely observed memoir.

There are a number of gems in this book and I highly recommend picking it up (it’s short and can be read in one sitting). Here are a few sections that have really stayed with me:

On being a surgeon Paul writes:

The secret is to know that the deck is stacked, that you will lose, that your hands or judgment will slip, and yet still struggle to win for your patients. You can’t ever reach perfection, but you can believe in an asymptote toward which you are ceaselessly striving.

On living and dying:

Lucy and I both felt that life wasn’t about avoiding suffering. Years ago, it had occurred to me that Darwin and Nietzsche agreed on one thing: the defining characteristic of the organism is striving. Describing life otherwise was like painting a tiger without stripes. After so many years of living with death, I’d come to understand that the easiest death wasn’t necessarily the best.

On how to struggle, well:

I woke up in pain, facing another day — no project beyond breakfast seemed tenable. I can’t go on, I thought, and immediately, its antiphon responded, completing Samuel Beckett’s seven words, words I had learned long ago as an undergraduate: I’ll go on. I got out of bed and took a step forward, repeating the phrase over and over: “I can’t go on. I’ll go on.”

Because I think this book is such an important read I want to gift it to our Collective members. If your part of the Collective then just shoot us an email with your name and mailing address and we’ll get a copy sent out to you.

Trade I’m looking at —

Uranium stocks continue to set up well.

Below is a chart of Cameco Corp (CCJ) showing the stock has put in what looks like a textbook bottoming formation and is now trading above its 200-week moving average. I don’t know when the next uranium bull market will start in earnest. But, the fundamental backdrop makes the risk-reward picture so good here that it makes sense to have continuing exposure to the space, as long as the technical picture remains strong.

There’s a lot to the fundamental uranium bull story. But ultimately, uranium, like all commodities, follows the capital cycle. This is where periods of high capex leads to oversupply and a bust followed by periods of low capex which leads to low supply and then a boom. The chart below shows that uranium miner capex is, and has been, at an all-time low for a considerable amount of time. This is similar to holding a beach ball under water. It’s now just a matter of when will the downward pressure be removed and the market spike similar to 02’.

Quote I’m pondering —

Look at things as they are, not as your emotions color them. In strategy, you must see your emotional responses to events as a kind of disease that must be remedied. Fear will make you overestimate the enemy and act too defensively. Anger and impatience will draw you into rash actions that will cut off your options. Overconfidence, particularly as a result of success, will make you go too far. Love and affection will blind you to the treacherous maneuvers of those apparently on your side. Even the subtlest gradations of these emotions can color the way you look at events. The only remedy is to be aware that the pull of emotion is inevitable, to notice it when it is happening, and to compensate for it. When you have success, be extra wary. When you are angry, take no action. When you are fearful, know you are going to exaggerate the dangers you face. War demands the utmost in realism, seeing things as they are. The more you can limit or compensate for your emotional responses, the closer you will come to this ideal. ~ The 33 Strategies of War by Robert Greene

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

Have a great weekend.



A Fed Gear Change and The Mental Toughness Bible

Tyler here with your latest Friday Macro Musings…

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

Latest Articles/Videos —

MO Podcast #1 Volatility, Smart Beta, Ancient Chinese Philosophy, and Poker — Check out our very first MO podcast with Chris D. and Tyler! Available on all major platforms.

MO Podcast #2 Macro Ops Monthly Intelligence Report, Dollar, Tesla, and Birds — For the second episode of the MO podcast Chris D. talks with Alex about his history as a United States Marine Corps sniper and how that has helped him navigate markets. Available on all major platforms.

Emerging Markets Explained — AK goes over the history of how the emerging markets fund was created as well as what the EEM ETF is actually composed of.

Articles I’m reading —

At the beginning of 2018 Dalio went on TV in Davos and said something along the lines of “you would look pretty stupid holding cash in 2018.”

Cash then went on to be one of the best performers of 2018… and the internet took notice, trashing Dalio and his early 2018 Davos “prediction” gone wrong.

People assumed Dalio stuck to that call for the full year, but Dalio and his hedge fund Pure Alpha updated their outlook as the year played out (something every good trader does) and posted some killer numbers — their best since 2011. (Link here for full article.)

The O’Shaughnessy Asset Management team put out a deep dive on quant value investing that I found interesting. (Link here)

In it, they take a look at four specific value measures: trailing-twelve-month P/E ratio, CAPE, PRE (Price to Retained Earnings), and average investor equity allocation.

All of the measures show that the equity market is historically overvalued. But they go on to say that this means nothing for forward 1-3 year returns. Valuations only matter to investors holding for the long haul. The statistical relationship just doesn’t mean much on a shorter time frame.

It’s good to read about this stuff now and then so we can avoid making the mistake of sitting out in the short-term because a long-term metric is telling us to do so. Many traders have missed out on the upside in stocks over the last few years because they have been overly focused on valuation metrics.

Charts —

I think this is one of the more important macro charts right now. Markets took this week’s FOMC announcement as a sign that the Fed has put the breaks on the hawkishness for good. But easier policy this year will drive greater risk-taking in markets which could then feed into the real economy. And, ultimately, that may lead to a more hawkish Fed later this year. Remember, we always need to look at what’s likely to happen versus what’s being priced in and it seems the market has become fairly one-sided in their pricing of future outcomes for the Fed Funds Rate.

And then there’s this one on hedge fund positioning.

Hedgies aren’t taking much risk compared to the past. They have a defensive stance right now which means rallying in the equity market will likely bring in FOMO buying as funds feel the pressure to keep up.

Podcast I’m listening to —

If you’re a short-term trader check out Linda Raschke’s episode of the Futures Radio Show. If that name sounds familiar it’s because Linda was interviewed in Jack Schwager’s New Market Wizards book. She’s a hardened veteran of the trading business and has lots of quality intel and wisdom for the next generation of traders.

At the beginning of the show, Linda speaks about a few concepts that we talk about a lot here at MO.

  • She said trading experience allows you to spot the “fat pitch” and press when appropriate.
  • She also said 2 days of her trading month make up 80% of her monthly profits.

Both of these statements are in line with our mental model of how markets work. They move according to a power law, meaning the truly fertile opportunities only come around every so often. But, when they do, they pay out big to those who know when to press at the right time.

The trader’s first job is to control risk so we don’t get taken out of the game. But just controlling risk won’t make you rich. You have to go for the jugular when conditions align and squeeze the fat pitch for all it’s worth…

Book I’m Reading —

Can’t Hurt Me by David Goggins — Do you feel yourself caught in a rut, unmotivated, and beaten down by life’s challenges? Have you struggled with pushing your limits in the gym and at work? If so, get your hands on a copy of this book as soon as possible. It has expanded my mind in ways no self-help book ever has. And since then I’ve been able to push my mental and physical pain thresholds to new heights.

David Goggins is an ex-SEAL who’s a regular on the ultra marathon circuit. To succeed in these pursuits he’s had to find ways to dampen that little voice in the back of all of our heads that tells us to quit when things get uncomfortable. Goggins learned how to hack his own mind and give that little voice the finger as he endured excruciating circumstances. He shares these mental hacks in this book. And it’s not BS fluff. It’s actionable tips that will help you push when things get hard.

Goggins even gives you clear and simple action items that you can integrate into your life so the initial shot of motivation you get from reading this book sticks with you for the long haul.

If you like audiobooks I highly recommend the Audible version of this title because in between chapters the reader and David Goggins put on “mini podcasts” which expand on what’s written down in the book. It’s a really interesting format and I think the audiobook/podcast combo will become more popular over the years as these two genres start to blend more.

Trade I’m looking at —

The Fed has given the bulls the all-clear. Here’s a summary of this week’s Fed meeting from Tim Duy’s Fed Watch.

The Fed gave markets participants all they could really hope for at the conclusion of the first FOMC meeting of 2019. Notably, the Fed shifted their guidance from further rates increases to patience, enshrining the recent Fedspeak in the FOMC statement and making clear that they Fed was in no rush to change policy and the next policy shift could be up or down. And if that alone were not enough, the Fed announced that they would likely be winding down the balance sheet run-off sooner than expected. Federal Reserve Chairman Jerome Powell came prepared avoid the missteps of the December FOMC meeting and markets rewarded him with a solid rally in stocks and bonds.

So now that they’ve shifted gears a bit I’ve gotten interested in our FOMC trade again. The FOMC trade involves shorting volatility on the day of a Fed meeting and covering the position around 30-60 minutes after the announcement.

This trade worked great during the bull run of 2013-2016, but in 2017 the trade ran started to putter — there just wasn’t enough vol to sell off with a VIX in the 11 handle.

2018 didn’t do too well either. Depending on how long one held after the announcement the trade scratched or had a down year.

The trend has finally reversed now that the Fed has started to ease up on the economic brakes.

Below charts out the intraday price action of volatility fund VXXB on January 30th. Going short 3 hours before the announcement and covering 30 minutes after the announcement produced gains of just over 2%. Not bad for a one day return.

Quote I’m pondering —

We might describe our world as having retail sanity, but wholesale madness. Details are well understood; the big picture remains unclear. A fundamental challenge… is to integrate the micro and macro such that all things make sense. ~ Peter Thiel

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

Have a great weekend.



50% Recession Probability and Munger on Inverting

Alex here with your latest Friday Macro Musings…

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

Latest Articles/Videos —

Emergent Properties of the Market Collective — Alex explains what starling murmurations and financial markets have in common. After he discusses how we can use intermarket analysis to interpret what’s next to come on the global macro chessboard.

Trading During 9/11 Attacks and Why I Became A Systems Trader — Chris D. recounts what it was like to hold a short position in the market as two planes crashed into the World Trade Centers. A must read.

Play To Win or Go Out Like Broomcorn’s UncleTyler talks about why going through the motions isn’t enough. True trading success relies on pushing hard when it counts.

Articles I’m reading —

This week I read Louis Li’s (of Himalayan Capital) forward to the chinese edition of Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger, which is one of my all-time favorite books. The forward is a fun read and will give you some insight into the mind of Charlie Munger (my favorite of the Berkshire duo). Here’s the link and an excerpt:

For example, when Charlie thinks, he always starts by inverting. To understand how to be happy in life, Charlie will study how to make life miserable. To examine how businesses become big, strong, and successful, Charlie first studies how businesses decline and fail. While most people care only about how to succeed in the stock market, Charlie is most concerned about why most have failed in the stock market. His way of thinking comes from the saying in the farmer’s philosophy: “All I want to know is where I’m going to die so I’ll never go there.”

Throughout his life, Charlie has been constantly collecting and researching the notable failures in each and every type of person, business, government, and academic research. He then arranges the causes of failures into a checklist for making the right decisions. Because of this, he has avoided major mistakes in his decision making over his life and career. The importance of this on the performance of Buffett and Berkshire Hathaway over the past 50 years cannot be emphasized enough.

I came across another great post on the subject of thinking written by Russell Ackoff titled A Lifetime of Systems Thinking. Russell boils down the system level “truths” he’s learned over his 80-years on earth. It’s a great piece and well worth the 10-minutes it’ll take for you to read through it. Here’s the link and an excerpt:

Here’s a second revelation that I’ve really enjoyed exploring: Most large social systems are pursuing objectives other than the ones they proclaim, and the ones they pursue are wrong. They try to do the wrong thing righter, and this makes what they do wronger. It is much better to do the right thing wrong than the wrong thing right, because when errors are corrected, it makes doing the wrong thing wronger but the right thing righter.

Also, it’s that time of year for Investor Letters! Here’s some of of my favorites so far:

  • Christian Ryther’s Curren Capital (link here)
  • Steven Wood’s GreenWood Investors (link here)
  • Robert Vinall’s RV Capital (link here)
  • George Livadas’ Upslope Capital (link here)

Charts —

Here’s some chart porn for those of you with a more bearish bent. The following indicators look to credit spreads and yield curves to derive recession probabilities (charts via GS). The combined model currently indicates a 50% probability of recession this year.

Book I’m Reading —

This week I’ve been reading Deep Work by Cal Newport. I’ve had this one in my Kindle library for a while and was finally able to get around to reading it. I’m only a little more than half way through the book but I can already say it’s excellent and well worth picking up.

The book is about the importance of cultivating the practice of doing deep work, otherwise known as getting in a state of flow. These are long stretches of time where you singularly focus on a task with no distractions or interruptions.

Developing the ability to work in these hyper-focused sessions for meaningful periods of time has become ever more difficult today with the pervasiveness of technology in our lives; tech that’s marketed as “productivity tools” but are really just distraction enhancers and are optimized to steal our attention away from doing deep work and instead lazily focus on the more shallow kind…

Here’s a section from the book.

Once your brain has become accustomed to on-demand distraction, Nass discovered, it’s hard to shake the addiction even when you want to concentrate. To put this more concretely: If every moment of potential boredom in your life—say, having to wait five minutes in line or sit alone in a restaurant until a friend arrives—is relieved with a quick glance at your smartphone, then your brain has likely been rewired to a point where, like the “mental wrecks” in Nass’s research, it’s not ready for deep work—even if you regularly schedule time to practice this concentration.

Trade I’m looking at —

I came across this writeup on Air Lease (AL) by Chris Mayer the other day that seems interesting.

Chris does a good job of laying out how the leasing business works and why AL is a standout name in the industry. I haven’t dug into the name myself but it seems worth a look. Here’s Chris summarizing the bull case for the stock.

In summary, Air Lease has a good business model. It uses its balance sheet and purchasing power to buy new aircraft from Airbus and Boeing at a discount. It runs a lean operation. (SG&A/Revenue is only 7.5% vs. more than double for its peers). It gets a tax break from Uncle Sam because of the depreciation and 1031 exchanges. The end result is one of the highest net profit margins in the industry.

I think Air Lease combines great upside with not a lot of downside at today’s valuation. It’s one of my highest conviction ideas. And it is a business I plan to own for years. The stock should, uh… fly higher!

Quote I’m pondering —

When you grow up, you tend to get told that the world is the way it is and your life is just to live your life inside the world, try not to bash into the walls too much, try to have a nice family life, have fun, save a little money.

That’s a very limited life. Life can be much broader once you discover one simple fact, and that is that everything around you that you call life was made up by people that were no smarter than you. And you can change it, you can influence it, you can build your own things that other people can use. Once you learn that, you’ll never be the same again.

And the minute that you understand that you can poke life and actually something will, you know if you push in, something will pop out the other side, that you can change it, you can mold it. That’s maybe the most important thing. It’s to shake off this erroneous notion that life is there and you’re just going live in it, versus embrace it, change it, improve it, make your mark upon it.

I think that’s very important and however you learn that, once you learn it, you’ll want to change life and make it better, cause it’s kind of messed up, in a lot of ways. Once you learn that, you’ll never be the same again. ~ Steve Jobs via Jonathan Tepper’s excellent write-up on life advice (link here).

I love this…

Now go and get after it.

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