Jeff Bezos, Bruce Lee, and Chuck Akre Walk into a Bar…

Alex here with your latest Friday Macro Musings…

Latest Articles/Podcasts/Videos —

A Monday Dozen — Alex’s latest chart pack featuring this week’s most interesting macro charts. Check this post out to get a fresh update on how markets are positioned and where equities are most likely to travel from here.

Articles I’m reading —

@investing_city compiled and shared on the twitters all of Amazon’s annual Shareholder Letters (link here).

Bezos is one of the most lucid thinkers in business. His Shareholder Letters are chock full of gems on how to run a company. I suggest you start with my favorite two (1) the 2004 letter where he gives the best explanation that I’ve come across on why free cash flow per share is a significantly better gauge of a businesses’ health than earnings per share (link here) and then (2) the 2017 letter where he dissects the concept of “high-standards” and how one can apply them (link here).

Patrick O’Shaughnessy said this 1996 paper titled “Increasing Returns and the New World of Business” was one of the most interesting papers he’d read this year, and I can see why. As the title suggests, the paper talks about how the new economy of ‘bits’ flips the old economic law of “diminishing returns” on its head. It’s a good read and apparently was edited by Cormac McCarthy. Here’s the link and a cut.

In his book Microcosm, technology thinker George Gilder remarked, “The central event of the twentieth century is the overthrow of matter. In technology, economics, and the politics of nations, wealth in the form of physical resources is steadily declining in value and significance. The powers of mind are everywhere ascendant over the brute force of things.” As the economy shifts steadily away from the brute force of things into the powers of mind, from resource-based bulk processing into knowledge-based design and reproduction, so it is shifting from a base of diminishing returns to one of increasing returns. A new economics—one very different from that in the textbooks—now applies, and nowhere is this more true than in high technology. Success will strongly favor those who understand this new way of thinking.

Lastly, this one isn’t investing related but it’s something I reread every once in a while and thought I’d share it with you guys. It’s from Maria Popova’s wonderful blog Brainpickings where she shares some writings from Bruce Lee’s personal diary. Here’s the link and a cut.

I know that I have the ability to ACHIEVE the object of my DEFINITE PURPOSE in life; therefore I DEMAND of myself persistent, continuous action toward its attainment, and I here and now promise to render such action.

I realize the DOMINATING THOUGHTS of my mind will eventually reproduce themselves in outward, physical action, and gradually transform themselves into physical reality; therefore I will CONCENTRATE my thoughts for 30 min. daily upon the task of thinking of the person I intend to become, thereby creating in my mind a clear MENTAL PICTURE.

I know through the principle of auto-suggestion, any desire that I PERSISTENTLY hold will eventually seek expression through some practical means of attaining the object back of it; therefore, I will devote 10 min. daily to DEMANDING of myself the development of SELF-CONFIDENCE.

I have clearly written down a description of my DEFINITE CHIEF AIM in life, and I will never stop trying until I shall have developed sufficient self-confidence for its attainment.

If you’re interested in learning more about Bruce Lee’s philosophy, I recommend picking up his book The Tao of Jeet Kune Do. It’s a fav of mine.

Charts I’m looking at—

 A new global rate cutting cycle has begun… chart via NDR & @MacroCharts.

The big question, of course, is whether this is the start of a rate cutting cycle into a recession or a rate cut sans recession?

My money is on the latter.

Podcast I’m listening to —

The latest Invest like the Best interview with Chuck Akre of Akre Capital Management is so so good. Chuck has decades of experience in compounding wealth and shares a lot of the wisdom he’s picked up along the way. He talks about the pricing power of dominatrices (seriously, he does) and also covers his firm’s “three-legged stool” model for what they look for in a company, which are:

  1. An extraordinary business
  2. Talented management
  3. Great reinvestment opportunities and track record

Smart and simple is often best and a lot of what Chuck preaches is patience and a long-term investment horizon. Like ole’ Mr. Omaha says, “The stock market is a device for transferring money from the impatient to the patient.”

Here’s the link to the podcast and here’s a link to a Talk at Google Chuck did a few years back, which I also highly recommend.

Video I’m Watching —

ValueDACH published this great Q&A with two talented up and coming value fund managers, Steven Wood of Greenwood Investors and Fred Liu of Hayden Capital. They breakdown a few of their favorite holdings and explain why they like them, stocks like Zooplus, TripAdvisor, and Berkshire. Here’s the link and h/t to our resident value investor, Mr. Bean, for the find (sidenote: if you’re not already, you should most definitely follow Mr. Bean on twitter here).

Trade I’m considering —

This is a TARGET RICH environment, especially for us macro traders. Lots of moving parts and excellent setups happening at the moment. Fun times…  Anyways, I shared this one the other day in our internal forum. It’s a Russian steel stock, Mechel (MTL). Yea, I know, typically not something you want to touch even with a ten-foot pole and your least favorite friend holding. But hear me out… take a look at a chart of the ruble when you get a chance. It’s breaking out against the dollar. That’s good for Russian stocks.

I’ve been looking at steel companies in general over the last month. There’s a lot of deep value stocks in the space if you know how to weed out the terminally leveraged. Plus, the global steel industry is just about to come out of its deepest capital cycle trough in history, which usually makes for a good time to buy.

The big unknown, of course, is China which is not only the largest consumer of iron and steel but the largest producer, as well. There’s always a big risk there because you never really know what’s going on but the CCP has publicly stated that it’s a top priority of theirs to reduce pollution and cut the supply overhang which both equates to closing mills. Also, India is just entering the Wealth S-curve and that means exponential demand growth in a country of 1.3bn people is only getting started.

Anyways, it’s a purely speculative play. Do it for a trade and not an investment but cyclical stocks are always just trades, regardless. The chart setup is fantastic. It looks like it’s getting ready to run. Reminds me of the last time I pitched this stock, which was in the first MIR (Macro Intelligence Report) that we sent out to readers in the Fall of 16’. The stock was trading for around $2 then and shot up over 200% in the following months.

Quote I’m pondering —

Do not believe in anything simply because you have heard it. Do not believe in anything simply because it is spoken and rumored by many. Do not believe in anything simply because it is found written in your religious books. Do not believe in anything merely on the authority of your teachers and elders. Do not believe in traditions because they have been handed down for many generations. But after observation and analysis, when you find that anything agrees with reason, and is conducive to the good and benefit of one and all, then accept it and live up to it. ~ Siddhartha Gautama


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

Have a great weekend.

Margin of Spread, A Value Investors Roundtable, And Some Philosophy

Alex here with your latest Friday Macro Musings…

Latest Articles/Podcasts/Videos —

A Monday Dozen — You guys have spoken and it looks like this is going to be a regular thing. Every Monday I’m going to publish the 12 most interesting charts I come across on my weekend scan. There’s all sorts of data in this post, price action, sentiment data, cycle indicators. Check it out for a quick rundown of the market.

Arlington Value Investors Letters: Five Invaluable Lessons On Value Investing — Mr. Bean poured through 9 years of investment letters from Allan Mecham of Arlington Value and pulled out the 5 most important lessons. This is a little known investor who has compounded money at 37.9% annually since the GFC — a truly mind-boggling sum, so make sure to read this guy’s investing wisdom.

Articles I’m reading —

Bill Miller, the value focused fund manager who set a record for beating the market 15-years in a row before going belly up in the GFC, was interviewed this past week in the WSJ. A lot of people dismiss Miller’s ability because of his blow up but I’ve got respect for the guy and have always found his views on markets and investing insightful and often thought-provoking. Here’s the link to the article (porous paywall, incognito) along with a few excerpts (emphasis mine)

The financial crisis [of 2008] was so overwhelming that I thought it would affect people’s willingness to take risk. So there was a wide gap between perceived risk and real risk. The proper strategy was to look where perceived risk is high and figure out the real risk. You want to buy things where the volatility and perceived risk are above the market. That’s somewhat oversimplified, but the strategy likely gets you in areas of the market where there are excess returns.


As Warren Buffett said at the Berkshire Hathaway annual meeting [in early May], stocks are ridiculously cheap compared to bonds and cash. One of the mistakes people tend to make is saying that stocks are expensive because their price/earnings multiple is now 17, compared to a post-World War II average of 15. But that average is distorted by high-inflation periods, including roughly 1973 through 1982, when the P/E ratio was at 7. When inflation, interest rates and volatility are at their current low levels, I would expect the average to be 20. So the P/E ratio is below what you would expect.

Equities aren’t valued in a vacuum. Valuation is intrinsically a game of relative comparisons. Stocks compete with bonds for capital. Lower bond yields make equities more attractive on a risk-premia basis and lowers the discount rate at which their cash flows are valued. The current equity risk premia is still well above its historical average (see chart below).

That’s not to say there aren’t pockets of the market that are ridiculously overvalued. There are. But it’s important to remember that there’s a lot more to understanding aggregate valuations than looking at simple price-to-earnings multiples sans context. Doing so can be an expensive mistake that even the best in the game sometimes make — read this Forbes piece titled “Don’t Be a Yield Pig” by Seth Klarman where he lambasts the ridiculously low interest rates and crazy high stock valuations — the article was written in February of 1992. Here’s the link and an excerpt.

Some investors, desperate for better yield, have been reaching not for a new Wall Street product but for a very old one–common stocks. Finding the yield on cash unacceptably low, people who have invested conservatively for years are beginning to throw money into stocks, despite the obvious high valuation of the market, its historically low dividend yield and the serious economic downturn currently under way.

How many times have we heard in recent months that stocks have always outperformed bonds in the long run? Funny, but we never hear that argument at market bottoms. In my view, it is only a matter of time before today’s yield pigs are led to the slaughterhouse. The shares of good companies and bad companies alike are vulnerable to sharp declines.

(Note to Collective members: I wrote more about this topic in our Feb 17’ MIR titled Margin of Spread which is hung up in our archives if you’d like to read more.)

Patrick O’Shaughnessy (@patrick_oshag) recently asked people on the twitter to share the best blog post they’ve ever read. You can find the responses in the following thread (link here). I’ve spent much of my downtime over the last week reading my way through the list. If used correctly, Twitter can be the most effective AI for information aggregation and filtering, harnessing the wisdom of the collective. It’s a pretty awesome tool… Here’s a few of my favorite posts that I’ve read so far.

Alex Danco’s post titled “Secrets about People: A Short and Dangerous Introduction to René Girard” (link here).

I’ve come across Girard’s work a number of times lately as I’ve been studying up a bunch on the human impulse to imitate others and Girard constructed an entire philosophy around what he called mimetic desire. This post talks about that and many of Girard’s other contributions to understanding human nature. Peter Thiel credits much of his “trademark contrarian style” to Girard’s philosophy which makes more sense after reading the post.

You can follow up that post with this one from Slate Star Codex titled a Book Review: The Secret of our Success which is really not a book review but a wide-ranging discussion on the role that culture plays in pushing humanity’s collective intelligence forward. It’s complementary to the post on Girard. Here’s the link.

Lastly, read this awesome lecture given by William Deresiewicz at West Point titled Solitary Leadership. The talk is about leadership but also so much more. Here’s a cut and the link (there’s also an option to listen to the speech, which is about 30 minutes long).

I find for myself that my first thought is never my best thought. My first thought is always someone else’s; it’s always what I’ve already heard about the subject, always the conventional wisdom. It’s only by concentrating, sticking to the question, being patient, letting all the parts of my mind come into play, that I arrive at an original idea. By giving my brain a chance to make associations, draw connections, take me by surprise. And often even that idea doesn’t turn out to be very good. I need time to think about it, too, to make mistakes and recognize them, to make false starts and correct them, to outlast my impulses, to defeat my desire to declare the job done and move on to the next thing.

Oh, and Michael Mauboussin shared this slightly older research paper of his where he discusses various analytical methods for estimating a company’s total addressable market (TAM). Here’s the link.

Charts I’m looking at—

US stocks have trounced their European counterparts over the last decade. We should ask ourselves, is this trend likely to continue indefinitely? If not, and we see some mean-reversion, what will that look like? Currencies are driven by speculative flows which chase relative market performance, so what would an unwind of just some of this trend do to EURUSD spot?

Bernstein put out the following chart (h/t @ukarlewitz) showing the z-score for global equity – bond flows. Relative flows just hit 3 standard deviations, making for the most extreme flow disparity on record, even exceeding that of 08’. Bernstein notes that similar instances have “portended large stock-market gains ahead.”

And finally this… A chart showing economist’s predictions on where the UST 10-year yield was going to trade 6 and 12 months out. This is just a friendly reminder that nobody in this game KNOWS anything; especially the “experts”.

Video I’m watching —

This is a killer video. It’s a panel discussion with some of my favorite small-cap value investors (i.e., Scott Miller, Matt Sweeney, Dan Roller etc…) It kicks off with a talk from Miller on foundational value investing concepts and then leads into a round table discussion and Q&A with all the other managers where they talk process, the business aspects of running a fund, managing risk, and a host of other things that go into being a successful value fund manager. Here’s the link.

Book I’m reading —

I just started reading Range by David Epstein this week after listening to his interview on the Invest Like the Best podcast. I’m only about 20-pages in so can’t say much on it yet. I’ll share my thoughts in next week’s musings. But another book that I’m reading which I can recommend is The Bhagavad Gita translated by Eknath Easwaran.

I’d read The Bhagavad Gita years before (though it was a different translation) and enjoyed it but found sections of it tough to get through and comprehend. Easwaran’s translation makes for a much easier read and after reading this version (I’m nearly done) I’ve got to say that this book is likely going onto my short-list of regular rereads; Easwaran’s translation of The Upanishads, one of my all-time favorite books, is also on there).

The book is short but jam-packed full of wisdom on how to live a good life. I highly recommend giving it a read.

Trade I’m considering —

Back in September of 2016 I pitched a Colombian oil & gas stock in our monthly report writing:

EC recently completed an expensive modernization project on its largest refinery (Reficar). The project was plagued by cost overruns and typical Lat-Am corruption and scandal; which led to a 100% cost increase to the tune of $8B. But now all of that’s behind it and the company possesses the largest and most efficient refinery in Latin America — making it competitive with the major refineries in the US (where it exports a lot of its product). With the major one-time capital expenditures out of the way, the company should see improving margins moving forward, bolstered by the better throughput efficiency of the modern refinery.

Investors entering into any of these stocks will be getting in near a secular bottom for Colombia. There’s big potential for long-term appreciation in these plays.

Ecopetrol SA (EC) ran up over the following two years from a price of around $8.50 to a high of $28 for a gain of roughly 230%. I participated in absolutely none of this rally, personally, but that’s besides the point… The point is… that — and you should know this if you read me regularly — I’m becoming very bullish on oil & gas stocks.

There’s incredible value in this space and the catalyst that we need to send these stocks ripping higher is a weaker dollar, which I think is coming. EC trades at just over 4x EV/EBITDA,  has highly valuable strategically located assets, and a nice chart pattern forming. Another dirt cheap integrated oil & gas company that’s worth keeping on your radar. Oh, and then there’s also stuff brewing between the US and Iran that reeks of a setup by Bolton and crew to create cause for toppling the Iranian regime. But I’ll leave that topic for another writeup on another day…

Quote I’m pondering —

Certainly, if we reflect on the thousands of years that are past, of the millions of men who lived in them, and we ask,

“What were they? What has become of them?

But, on the other hand, we need only recall our own past life and renew its scenes vividly in our imagination, and then ask again,

“What was all this? What has become of it?”

As it is with that past life, so is it with the life of those millions. Our own past, the most recent part of it, and even yesterday, is now no more than an empty dream of the fancy, and such is the past of all those millions.

Whoever has not yet recognised this, or will not recognise it, must add to the question asked above as to the fate of past generations of men this question also: Why he, the questioner, is so fortunate as to be conscious of this costly, fleeting, and only real present, while those hundreds of generations of men, even the heroes and philosophers of those ages, have sunk into the night of the past, and have thus become nothing; but he, his insignificant ego, actually exists? or more shortly, though somewhat strangely:

“Why this now, his now, is just now and was not long ago?”

~ Arthur Schopenhauer, The World as Will and Idea (h/t @Jesse_Livermore)

I love that.

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

Have a great weekend.

Asset Shortages, Druckenmiller Speaks, and THE Oldest Book on Markets

Asset Shortages, Druckenmiller Speaks, and THE Oldest Book on Markets

Alex here with your latest Friday Macro Musings…

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

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Now for your latest Macro Musings…

Latest Articles/Podcasts/Videos —

Genghis John And The Ultimate Mental Model For Markets — Alex introduces Boyd’s strategic framework, the OODA loop and explains how it can be used to read markets.

Playing The Player Update: Another Major Buy Signal — Alex pulls together the latest macro data and makes the case for a continued bull run in equities. Sentiment has diverged far away from the fundamentals creating an attractive buying opportunity.

The Market Is Teeing Up — Another macro data dump. Alex pulls together even more evidence to show why the probability of a recession is low.

Articles I’m reading —

The FT published an article this week titled “Why Taiwan poses a threat to the US bond market” that discusses what I think is a critical phenomenon in markets today, which is that of a growing asset shortage (h/t to @Mark_dow). Here’s a few excerpts from the piece that explain:

Taiwan may be small, but the island has emerged as a financial superpower thanks to the thriftiness of local savers and an eye-watering current account surplus of about 15 percent of gross domestic product. The country now has the second-largest financial system in the world, relative to gross domestic product.

… The local economy is not big enough to accommodate these enormous sums, so Taiwanese financial institutions have funneled a whopping $1.2tn abroad.

Long-time Collective members will remember that I wrote about this idea in our June 18’ MIR titled “A Persistent Bid”, where I shared the following:

The IMF points this out in a recent paper, saying an “economy’s ability to produce output is only imperfectly linked to its ability to generate financial assets.”

The chart below proves this point. As emerging markets increase in size, their domestic financial markets lag far behind — financial assets grow at roughly half the rate of GDP. With a limited domestic pool of securities, EM savers end up having to invest the majority of their assets abroad.

The IMF hits at what this means for global asset demand, writing “improved macroeconomic fundamentals have raised the demand for financial assets. Rising income per capita in EMs, pension reforms in Latin America, increasing commodity prices in the Middle East and Africa, and limited consumption growth in East Asia have contributed to an increasing supply of domestic savings in EMs that needs to be invested.”

As emerging markets mature, their ability to generate credit and grow their money stock increases exponentially. And since EM financial markets can’t soak up this money supply, it means that an increasing amount of it has to flow into the US; which has the deepest financial markets in the world. This significantly raises demand for US assets.

Rick Rieder, the CIO at Blackrock, pointed out in a recent twitter thread (link here) that “Due to the demographic revolution in pension, insurance, and central bank assets, there is roughly 3x as much capital that needs to be invested today as was the case in the early-2000s”. Rieder goes on to note that though the widening US budget deficit (read, rising Treasury issuance) has helped meet some of this increased demand, it’s still not enough. He concludes by saying “This dynamic has resulted in a dramatic supply/demand imbalance for yielding assets, which is likely to persist for many years, and can be clearly witnessed in the impressive capital flows into income in recent years”.

This all might read as a bit wonkish but it’s an important dynamic to understanding certain asset prices and potential market risks, today. Here’s just a few practical examples of what I mean.

  1. This persistent bid for yield is keeping rates low and financial conditions (ie, liquidity) loose
  2. “When the ducks are quacking, feed them”… We should expect to continue seeing rising corporate debt, perhaps to fund more stock buybacks?
  3. Dollar funding mismatches among financial institutions in Asia are becoming a systemic vulnerability

Here’s the link to the FT article (porous paywall). And if you’d like to learn more on this subject, I highly recommend giving this recent San Francisco Fed podcast interview with cross-border capital flow expert, Brad Sester, a listen (link here).

I’m sorry but it’s pretty much all wonky recs this week as far as reading goes. Nonetheless, I think this is important stuff to stay abreast of. The last article I think you should read is titled “Dual interest rates always works” written by Fund Manager Eric Lonergan over at the Philosophy of Money blog (link here). Eric talks about the vastly underappreciated power of the ECB’s recent mon-policy ‘innovation’ in TLTRO. It’s a short read and understanding TLTRO could be as important, if not more so, than MMT in the coming years.

Charts I’m looking at—

Over the last week, I’ve been pointing out the bearish extremes in a number of sentiment indicators we track. The NDR Daily Trading Sentiment Composite shows just how pessimistic traders have become (h/t @edclissold). The composite hit 16% on Tuesday. It was only lower for six days in December when the second lowest reading ever was recorded.

What does this mean?

Reading sentiment is more an art than a science. And it’s best used in conjunction with both technicals and fundamentals. A reading like this certainly isn’t bearish. I can’t help shake the feeling though that we’ll likely see one more corrective leg down, for a full sentiment capitulation, before the next major leg up. But who knows? Respect price and mind your risk…

Podcast I’m listening to —

Barry Ritholtz’s latest MiB podcast with Scott Galloway is exceptional and I highly recommend you give it a listen. They talk about Scott’s latest book “The Algebra of Happiness” which is his accumulated learnings for living a fruitful life. They also chat about big tech, debate the failures of our tax code, as well as the “elitist” syndrome plaguing our university system. It’s an hour well spent. Here’s the link.

Video I’m watching —

The Stanley Druckenmiller was interviewed on stage this past week at The Economic Club of New York (link here). Druck talks about how he flipped from all in on equities to piling into bonds at the start of May after the President tweeted something disparaging about trade talks with China; which of course was right when stocks rolled over and bonds shot through the roof.

He also talks about some of the things he looks at to read markets (I’ve written some about this here and here). Basically, he looks at the forward cyclical parts of the market to get a read on the economy and trend of the broader indices. Things like trucking, industrial metals, semis etc…

Anyways, give the interview a watch.

Book I’m reading —

 This week I started reading “Investing: The Last Liberal Art” by Robert Hagstrom. I had actually started it a few months ago, but I’m usually reading 4 to 5 books at a time and this one ended up getting put to the side for a while. But I’m glad I picked it back up again as I’m enjoying it so far. It’s an easy read and I’ve come across some good nuggets (I’m about halfway through).

The book is similar to Mauboussin’s “More Than You Know” or like a shorter version of “Poor Charlie’s Almanac”. Hagstrom explores mental models pulled from biology, physics, psychology, philosophy and so on… and then shows how they can be applied to markets and investing. I’ll be sharing my book notes with Collective members once I’m done.

Here’s a section from the book where he shares some bits of wisdom from the first book written on the stock market, “Confusion of Confusions” by Joseph de la Vega in 1688.

Vega’s “Confusion of Confusions” is easily summarized. In the Second Dialogue, Vega lists four basic principles of trading—as relevant today as they were 325 years ago: The first principle: Never advise anyone to buy or sell shares. Where perspicacity is weakened, the most benevolent piece of advice can turn out badly. The second principle: Take every gain without showing remorse about missed profits. It is wise to enjoy what is possible without hoping for the continuance of a favorable conjuncture and the persistence of good luck. The third principle: Profits on the exchange are the treasures of goblins. At one time they may be carbuncle stones, then coals, then diamonds, then flint-stones, then morning dew, then tears. The fourth principle: Whoever wishes to win in this game must have patience and money, since values are so little constant and the rumors so little founded on truth. He who knows how to endure blows without being terrified by the misfortune resembles the lion who answers the thunder with a roar and is unlike the hind who, stunned by the thunder, tries to flee.

Funny how much of that still applies.

Trade I’m considering —

In following with one of my current macro thematics which is “short overvalued growth, buy value” I’ve been spending the majority of time looking at incredibly beaten down left for dead stocks that apparently nobody else is interested in owning. Naturally, many of these names happen to fall in the energy space and I’ve pitched a few of these names in Musings over the last few weeks.

I plan on writing up an in-depth report on this sector of the market next week for Collective members. I think there’s incredible positive asymmetry on offer in this space. And I believe the recent weakness in crude is more a result of what became stretched bullish positioning — that’s currently being washed out — than it is a reflection of poor supply/demand fundamentals.

Anyways, here’s one of the stocks on my radar W&T Offshore (WTI). Longtime readers will be familiar with this one. I first pitched it back in 2017 when it was trading for just over $2 a share. It ended up being one of our better traders over the following year. And now I’m thinking we’re getting close to another major buying opportunity.

The stock trades for just over 3X EV/EBITDA. It’s nearing significant support in its lower Bollinger Band and 200-weekly moving average. If the dollar breaks to the downside soon, we could see a significant pop in oil along with these energy plays. I’m also seeing signs that long-term capital is beginning to makes its way back into the space.

Quote I’m pondering —

Meditation on inevitable death should be performed daily. Every day when one’s body and mind are at peace, one should meditate upon being ripped apart by arrows, rifles, spears and swords, being carried away by surging waves, being thrown into the midst of a great fire, being struck by lightning, being shaken to death by a great earthquake, falling from thousand-foot cliffs, dying of disease or committing seppuku at the death of one’s master. And every day without fail one should consider himself as dead. ~ Yamamoto Tsunetomo, Hagakure: The Book of the Samurai

And on that note… 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.

EM Hoodwinking Investors and a BIG Bond Short

EM Hoodwinking Investors and a BIG Bond Short

Alex here with your latest Friday Macro Musings…

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

Articles I’m reading —

Jason Zweig writing for the WSJ published an article (link here) highlighting what I think is an important and often misunderstood fact, which is that high GDP growth doesn’t necessarily entail high stock market returns; in fact, it’s often quite the opposite. Zweig writes:

History shows that countries with faster-growing economies often produce lower—not higher—stock-market returns.

“If you told most investment professionals that you would give them future dividend yields, inflation and economic growth rates, they would probably believe they could rank the future stock returns across countries very well,” Mr. L’Her says in an interview. “That has not been the case in the past 20 years—not by far.”

He adds, “Even if you’d had perfect foresight into such factors, you would have done a very poor job forecasting the differences in returns across stock markets.”

One component of return swamped all others in predicting returns: whether the total supply of shares was contracting or expanding. That alone, says Mr. L’Her, explains more than 80% of the extent to which returns have diverged across stock markets over the past 20 years.

EM companies are notorious for fleecing shareholders. Their dependency on investor capital, despite being situated in high-growth economies, is why “over the last decade real EPS at an index level has more than halved in three of the five largest emerging markets” as Aoris Investment Management points out in this piece (link here) that dives deeper into the subject.

The chart below from Aoris shows that China is by far the worst offender.

Give this profile from Forbes titled The Oracle Of Apopka: Meet Eddie Brown, One Of Wall Street’s Greatest Untold Stories a read (link here). Brown has such an impressive and inspiring origin story. I love learning about investors like this who have a solid record of trouncing the market but are relative unknowns.

Lastly, here’s a short write up (link here) from Kuppy over at the Adventures in Capitalism blog pitching a long Greece (GREK) trade. I like the thesis as well as the technicals.

Charts I’m looking at—

10-year US Treasuries are trading a bit rich on a technical, sentiment/positioning, and valuation standpoint. $ZN_F is now knocking on its monthly upper Bollinger Band; a level that more often than not acts as a significant price repellent.

This move only makes sense if you think a recession is right around the corner. I view that as a low probability event at the moment and am willing to take the other side of the trade. Just need to wait for momentum to wane and a bearish setup to occur, which may be a week or two off but I think we’re getting close. Keep an eye on ‘em.

Podcast I’m listening to —

Patrick O’Shaugnessy’s latest podcast with science writer David Epstein is killer. David is the author of the book The Sports Gene, as well as the newly released Range: Why Generalists Triumph in a Specialized World, which they spend a good deal of the interview discussing.

They cover everything from how Gladwell’s 10,000-hour theory is based on faulty science to how the first Nintendo Gameboy was dreamed up using “lateral thinking with withered technology” to the best learning hacks that few practice. I already bought the book (Collective members, I’m thinking this is our book for the June read. What do you think?). Go and give it a listen. You won’t be disappointed (link here).

Book I’m reading —

This week I found myself revisiting sections of Adam Grime’s book The Art and Science of Technical Analysis. It’s one of my favorite comprehensive books on technical analysis and at the top of my list of books I recommend to traders looking to learn more on the topic.

One of the reasons I appreciate Grime’s work is that he takes a very logical and thoughtful approach to technical analysis. Unlike many tech traders who practice something more akin to reading chicken bones and pattern confirmation bias. Adam lays out when, why, and how technical analysis can provide an edge and more importantly when it doesn’t. Here’s a section from the book (emphasis mine).

“This is important. In fact, it is the single most important point in technical analysis — the holy grail, if you will. Every edge we have, as technical traders, comes from an imbalance of buying and selling pressure. That’s it, pure and simple. If we realize this and if we limit our involvement in the market to those points where there is an actual imbalance, then there is the possibility of making profits. We can sometimes identify these imbalances through the patterns they create in prices, and these patterns can provide actual points around which to structure and execute trades. Be clear on this point: we do not trade patterns in markets — we trade underlying imbalances that create those patterns.

Quote I’m pondering —

Remember that big stack poker is a game of patience. You don’t have to make a big play in every marginal situation that comes along, just as a good hitter in baseball doesn’t have to swing at balls outside the strike zone. Wait for good solid situations before making big plays. ~ Dan Harrington

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.

Madness is the Norm and a DEEP Value Energy Play

Alex here with your latest Friday Macro Musings…

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

Recent Articles/Podcasts —

Boom-Bust Barometer Biffs Badly — Alex shows how the divergence between Ed Yardeni’s Boom-Bust indicator and the S&P 500 means lower stock prices ahead.

Articles I’m reading —

The Atlantic published a worthwhile read on the difficulties of prediction titled “The Peculiar Blindness of Experts: Credentialed authorities are comically bad at predicting the future. But reliable forecasting is possible”. The article focuses on the work of Phillip Tetlock and the traits that distinguish a good forecaster from a poor one (sidenote: if you haven’t read Tetlock’s book, Superforecasting, go and pick it up. I consider it required reading for anybody involved in markets).

A section of the article talks about an experiment that Tetlock began running in the 80s where he collected forecasts from hundreds of highly educated and experienced “experts” about specific events regarding American-Soviet relations. The project lasted 20-years and comprised 82,361 probability estimates about the future. Here’s a clip from the article on Tetlock’s findings.

The result: The experts were, by and large, horrific forecasters. Their areas of specialty, years of experience, and (for some) access to classified information made no difference. They were bad at short-term forecasting and bad at long-term forecasting. They were bad at forecasting in every domain. When experts declared that future events were impossible or nearly impossible, 15 percent of them occurred nonetheless. When they declared events to be a sure thing, more than one-quarter of them failed to transpire. As the Danish proverb warns, “It is difficult to make predictions, especially about the future.”

The piece goes on to point out that “Even when faced with their results, many experts never admitted systematic flaws in their judgment. When they missed wildly, it was a near miss; if just one little thing had gone differently, they would have nailed it. ‘There is often a curiously inverse relationship,’ Tetlock concluded, ‘between how well forecasters thought they were doing and how well they did.’”

Dunning-Kruger is a powerful drug… The article also mentions one study which compiled a decade’s worth of annual EURUSD prediction from 22 leading investment banks, where each year the banks predicted the end-of-year exchange rate. Wanna guess how they did? If your answer is waaaay off the mark then well done. The “banks missed every single change of direction in the exchange rate”. And “in six of the 10 years, the true exchange rate fell outside the entire range of all 22 bank forecasts.”

Takeaway: Read Tetlock, train to become a “fox”, and listen to the “experts” to develop a sense of the popular narratives but not for what’s likely to actually happen. Here’s the link.

Hayden Capital’s latest Investor Letter is out and like always, it’s worth a read. Fred Liu, who’s the manager of Hayden, typically includes a thoughtful section on investing theory in his letters which I enjoy reading. In this note, he writes about how many of the stocks he buys have a wide range of outcomes. He explains that this is why the mispricing exists in the first place as most investors tend to put them in their too-hard bucket. But it’s not necessarily a bad thing and what’s more important is understanding the “angle” of outcomes versus the width. Graphs below give you a visual of what he’s referring to.

He also reviews a number of his holdings, including one of his more recent additions, Sea Ltd. (SE). SE is a Singapore based e-commerce company disguised as a mobile gaming business that does few sales in Singapore but is big in 13 other Southeast Asian countries, with Indonesia being one of its bigger markets, that’s listed on the NYSE. It’s an interesting company that’s a compelling long even after its 185% year-to-date rise.

Here’s some notes from Fred on SE’s valuation:

However even at an $11BN valuation, if we are correct in our thesis, it’s going to look very cheap in hindsight. Sea has $1.5BN of net cash on its books, resulting in an Enterprise Value of $9.5BN. Of this, I conservatively value Garena at ~10x EBITDA (compared to gaming peers at ~12 – 17x), for ~$4.5BN today20.

The result, is the market implying a ~$5BN valuation for Shopee. This is still attractive, for a business that is #1 in the region at 28% market share and will do ~$16BN in GMV this year or a 0.3x GMV multiple (albeit a very crude / simplistic valuation measure). Especially when compared to peers such as Flipkart (>2.5x GMV), Tokopedia (~1x GMV), and the latest private rounds of others such as, Bukalapak, etc at between 1.5x – 2x GMVs, this looks like a relative bargain.

… Marketplaces consistently have a 30-40% margin profiles globally. Assuming Shopee follows this “base rate”, we’re looking at ~$200M in normalized earnings power this year. At the market implied $5BN, this may optically seem fairly valued at ~25x normalized earnings. However, I expect Shopee to grow at a ~40% y/y CAGR over the next five years, ahead of Southeast Asia’s projected e-commerce growth rate of 32% y/y (Google-Temasek’s 2018 report projects e-commerce to grow 34% y/y between 2015 – 2025; LINK).

Given Southeast Asia’s accelerating e-commerce adoption (e-commerce penetration is only ~3% in Southeast Asia), the soft-datapoints indicating an inflection in profitability, “downside” protection due to the strength of Garena, and our “edge” of looking in areas of the world few US-based investors are paying attention to, we’re very comfortable making a bet on Sea Ltd. Forrest Li, the CEO, has stated he thinks Sea Ltd can become a $100BN business – we sure hope he’s right, and will be following closely along that journey.

Give the full letter a read. Here’s the link.

Oh, and one last thing. Take two minutes and give this Bloomberg profile of Salesforce CEO, Marc Benioff, a read (link here). I had to do a double take to make sure it wasn’t a piece from The Onion or something Mike Judge had dreamed up. The hubris is nauseating. I haven’t taken a hard look at CRM in a while but I’m going to throw it on my research list for short targets after reading this one. After all, perpetually buying growth is not a long-term business strategy.

Video(s) I’m watching —

I’m talking my book, but… give these videos a watch that confirms our bias on two of our current longs ;). Honestly, though, these are two well put together presentations arguing the bull case for two stocks that we believe have significant upside. The presentations are on Garrett Motion (GTX) and Graftech (EAF) and were given at the recent VALUESPAÑA conference. Here’s the link to GTX and EAF.

Charts I’m looking at—

I’ve been scratching my head over the collapsing NYSE margin numbers these last few months. The data set only goes back to the mid-’90s but there’s no comparable episode where we’ve seen investors deleverage this much outside of a bear market and recession.

Sustained bear markets are caused by euphoric overleveraging (aka. Belief Cascades, which I’ve written about here) late in the business cycle — see the margin spikes in 99’ and 06’/07’. This over-positioning creates the fragility necessary for a prolonged bear market (ie, forced selling). Not only have we not seen anything like that this cycle, but with equities near historic all-time highs, investors are derisking.

I don’t know what to make of this and if any of you have ideas, I’d love to hear them. My hunch though is that this is a sign of accumulating pent up demand that’s going to create another large up-leg in markets once this current correction plays out.

Podcast I’m listening to —

I may be a little biased but I’ve listened to Chris D’s talk with fellow MO Collective member Darrin Johnson twice and I’ll probably listen to it a few more times. It’s the best interview I’ve listened to in a while. Darrin is wickedly smart, knows his stuff, and walks the talk. Do yourself a favor and give it a listen, Darrin drops a ton of knowledge bombs. Here’s the link.

Book I’m reading —

This week I’ve been reading The True Believer: Thoughts on the nature of mass movements by Eric Hoffer. Even though the book was first published in 1951, the author’s insights into the psychology of mass movements are as timely as ever.

At only 168 pages in length, the book packs quite a punch. It’s all meat… Hoffer pulls from history to give color and examples of mass movements while dissecting the drivers and requisite environment for such movements to reach a critical mass.

I’ve riddled the book with highlights and page tags. I highly recommend picking it up as I think it’s full of knowledge that will be applicable to understanding geopolitical developments over the coming years. Here’s one of the many lines from the book that I enjoyed.

A man is likely to mind his own business when it worth minding. When it is not, he takes his mind off his own meaningless affairs by minding other people’s business.

This minding of other people’s business expresses itself in gossip, snooping and meddling, and also in feverish interest in communal, national and racial affairs. In running away from ourselves we either fall on our neighbor’s shoulder or fly at this throat.

Trade I’m considering —

Energy stocks have been getting hammered. The selloff is being driven by the rise of the EV s-curve adoption narrative along with investor’s preference to only own stocks that trade at over 10x revenues and have “cloud” in their business description.

Gavekal Research and I have both written about why we think the market is way off-target on this one (link here). Oil recently started a positioning driven selloff (speculators became crowded on the long side) which should continue to play out over the next couple of weeks. But, ultimately, I think oil and energy stocks are setting up for a buying opportunity.

Energy hasn’t been this oversold in nearly five years.

The incessant selling has created some incredible value opportunities. Energy’s relative FCF yield is now close to a record high.

There’s a number of stocks I like in this space. One that I’m currently digging into is Sandridge Energy (SD). I first came across SD while reading one of my favorite market blogs, Adventure’s in Capitalism, that’s written by the pseudonymous Kuppy.

In a post titled 40% Less Than Carl Paid… Kuppy lays out his bullish thesis for SD. Here’s an excerpt (emphasis by me).

Since he [Carl Icahn] took control this summer and replaced old management; operating costs have been cut dramatically, non-core assets were sold, contiguous and overlapping assets were acquired in a highly accretive manner and North Park Colorado results have surprised to the upside. This is Carl’s classic playbook; add value, don’t do anything stupid and get someone to overpay for the assets. We’re in the early innings of this play, but you can now buy shares at a hair over $10 or 40% less than what Carl paid a year ago. Meanwhile, SandRidge has been dramatically de-risked and transformed since he bought his shares.

So what do you get at SandRidge today? Strip out severance for old management and the costs of the proxy fight, normalize cash flows for the current cost structure, and I think you’re paying somewhere between one and two times cash flow for a company with no debt, and a pretty unlimited pipeline of drilling locations. Now, I get that shale wells rapidly decline and that you need to re-invest in order to keep production constant. However, they’re hitting it out of the park in Colorado with IRRs of over 100% and they still have substantial cash flow from their Miss Lime assets that everyone seems to despise.

The company trades at just 1.6x EV/EBITDA… That is ridiculously cheap. Here’s Kuppy’s writeup on the stock, give it a read.

Quote I’m pondering —

Madness is the exception in individuals but the rule in groups. ~ Friedrich Nietzsche

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 Crypto Comeback and A Trader’s 7 Figure Payday

Tyler here with your latest Friday Macro Musings…

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

Special Announcement —

 Macro Ops team member Chris D. has officially launched his first course on systems trading called The Consistently Profitable Trader.

As an introductory offer you can grab a copy of this course for $79 until this Sunday 11:59PM EST. After Sunday the price will ratchet higher to $149.

If you want to explore the world of systematic trading then check out this course!

Click here to access The Consistently Profitable Trader.

Recent Articles/Podcasts/Videos —

 Something That Everyone Knows Isn’t Worth Anything — Alex discusses reflexive market dynamics and how this property leads to a pendulum motion from extreme bullish sentiment to extreme bearish sentiment. Using this framework he demonstrates how the bond bear narrative from 2018 was really a false trend.

Market Update: Expanding Cone of Uncertainty — With trade war tensions mounting market volatility is on the rise. Alex explains what’s going on and argues why now is a good time to start derisking your book.

Option Trading With Darring Johnson — Chris D. speaks with Macro Ops Collective member Darring Johnson. Darrin is an independent trader who specializes in options and volatility. If you want to know how an expert option trader views the market then give this episode a listen. So far it’s been one of our most popular podcasts!

Articles I’m reading —

 You Can Now Pay With Cryptocurrency At Whole Foods — Despite the crypto crash, startups have been working behind the scenes to move the technology forward. Cameron and Tyler Winklevoss, founders of crypto exchange Gemini, have gotten a deal together that will allow consumers to pay with crypto on the same scanners that take things like Apple Pay.

I think we need to pay attention to the crypto narrative again. The chart of bitcoin has been moving up and we are starting to see bullish media coverage. Like it or hate it crypto is a great trading market.

The latest Graham & Doddsville letter is out (link here). This quarter’s issue is filled with the usual investment write-ups and interviews, the most notable being their sit down with John Hempton of Bronte Capital (twitter handle: @John_Hempton). Here’s a section from the chat.

G&D: That´s fascinating. How would you describe your investment philosophy?

JH: The first question Kerr Neilson asks on any business is, “What makes you want to own this in the next two years, five years, and ten years?” In my case, it is usually a company that makes a widget that is a small yet important part of a bigger thing, has high switching costs, and has incrementally improved over time. I call this the trifecta. There´s an old saying for this: “There are riches in niches.” Warren Buffett does this all the time. Buffett talks about the six big non-insurance businesses that were about 70- 80% of the non-insurance profits at Berkshire. One of them, International Metalworking Companies, makes tiny cutting tools that go on the end of blades. If you can make a cutting tool that speeds the whole factory up, you can charge a lot of money. You get pricing power from being a small part of the bigger thing, and the switching cost is high because you have to reprogram all the computer-driven blades. IMC has a 45% operating margin, which is almost twice the margin of Apple. It´s an astonishingly good business.

 Lastly, stop what you’re doing and read this awesome post from Melting Asphalt on diffusion and networks.

Charts I’m Looking At—

 Bitcoin is on a tear…

Bitcoin has rallied over 140% from its 2018 lows which makes it the best performing macro asset of 2019 by a mile. What’s even more impressive is the volume numbers coming in. This rally has had higher volume than the Q4 2017 blow off top. (Volume in gray below) Growing volumes is a great sign for crypto!

Finally, the “alt” coins have taken off as well with increased volume from the 2017 bubble highs.

Chris D., our resident systematic trader, has fired up his crypto trading system again to take advantage of the renewed interest. We are working to push out crypto related trade intel because when these things go into bull markets, there is a lot of volatility and therefore a lot of opportunity for a swing trader.

Podcast I’m Listening To —

 Chat With Traders: Opportunity meets experience—defining moments of one traders’ career w/ Nishant Porbanderwalla

Nishant, a prop trader in Austin Texas (also the location of the MO HQ), gave a brilliant interview on Aaron Fifield’s Chat With Traders Podcast.

He talks about how the markets have changed over the years since he first started and how many of the edges he initially employed in his trading, no longer work.

He also has a great story about his single largest trading day ever during the August 2015 flash crash. He along with many other traders at the firm earned a seven-figure payday by buying ETFs and stocks that opened up way lower than what the E-mini S&P 500 contract was implying.

That flash crash part starts at 37:25. I’ve heard this story a few times from some of the traders around town here and it’s pretty nuts. Check it out.

Trade I’m Considering —

Whenever VIX trades into the 20s I like to open my dip-buy playbook and pick out the best trade expression I can find.

Elevated vol makes for good premium sells. And I think if VIX can get back up to 20 selling a SPX put spread 60-90 days out for some premium collection is the play.

That should also coincide with a double bottom test in SPX.

I like the out of the money put spread for a few reasons:

  1. We get to take advantage of elevated implied volatility. When VIX rises put premiums become more expensive and shorting fat premiums makes for a good risk/reward.
  2. At worst I see the market in a choppy range bound environment for the next three months. I believe it’s unlikely we see a retest of the Christmas Eve lows when positioning is as neutral as it is currently.
  3. At best we bounce hard and go to new highs.

The put spread should benefit in both scenarios, if the market goes to new highs we’ll collect the full premium of the short put spreads. Should the market chop we still have a chance at collecting all of the premium as long as spot expires above the 2750 level.

Lastly, by selling one put and buying a put further out of the money the trade has capped risk. If VIX goes crazy again and hits 55, we’re protected from an outsized loss.

Quote I’m pondering —

For eighteen years I followed the sea, took what it offered. It has brought me shipwreck and success, sorrow, danger, and unutterable happiness. ~ Henry de Monfreid

 Sounds a lot like trading!

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.

Standard Deviations

Modern Monetary Theory With Pinot Noir

Tyler here with your latest Friday Macro Musings…

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

Recent Articles/Podcasts —

Lessons From A Trading Great: Linda Bradford Raschke — Tyler breaks down market wizard Linda Bradford Raschke’s best trading advice.

Disney, Memetics, and Markets — Alex updates the Disney growth narrative, a theme we’ve been tracking here at Macro Ops for over a year. On the news of streaming service Disney+, the stock has made its way to 52-week highs.

Breaking Down A Market Edge — Tyler uses Michael Mauboussin’s BAIT acronym to break down what it means to have an edge in financial markets.

Articles I’m reading —

If you haven’t already go check out the Macro Tourist’s latest pieces on Modern Monetary Theory. Part 1 here and Part 2 here.

In this series, Kevin takes the side of the MMT professors and explains how government deficits may actually not matter as much as we all think if the central bank is the one holding the debt. Debt with no consequences sounds blasphemous. But perhaps there’s some truth to this? This question is worth exploring and Kevin Muir does a great job tackling this point.

The most interesting section of part 1 was how Macro Tourist explains bond issuance within the confines of MMT theory (emphasis mine).

Well, let’s think about this bond issuance within the confines of MMT theory. The government did not issue war bonds to finance the spending, but to alter the private sector’s behavior. Recall, the only constraint is in real terms. The government did not want individuals competing by buying goods that were needed in the war. So the government issued War Bonds to change their spending not to finance the war.

The important thing to realize is that governments always spend first and that bond issuance is simply a way of controlling inflation and altering private sector behavior.

That last part was an “ah-ha” moment for me.

Part 2 focuses on how to position if MMT were adopted full stop and the era of fiscal-austerity-monetary-easing came to an end.

Here’s Kein’s favorite trades for an MMT world.

  • Sell US Bonds
  • Put on a steepener
  • Buy real assets
  • Prioritize value over growth.

Read his full rationale here.

Next, I thoroughly enjoyed A Nobel Prize-winning psychologist says most people don’t really want to be happy from Quartz which explains Daniel Kahneman’s theory on happiness.

Kahneman claims that humans, for the most part, are not in search of happiness. Instead, they are looking for satisfaction. Happiness is a fleeting emotion, whereas satisfaction is a long-term feeling of fulfillment and accomplishment. Here’s a snippet from the article.

The key here is memory. Satisfaction is retrospective. Happiness occurs in real time. In Kahneman’s work, he found that people tell themselves a story about their lives, which may or may not add up to a pleasing tale. Yet, our day-to-day experiences yield positive feelings that may not advance that longer story, necessarily. Memory is enduring. Feelings pass. Many of our happiest moments aren’t preserved—they’re not all caught on camera but just happen. And then they’re gone.

So it’s not really the plane ride to Jamaica or that feeling after purchasing a brand new sports car that we are after. It’s about pushing forward our life’s narrative. If the narrative starts to derail and go to a place we didn’t envision we become miserable. If the narrative maintains course than we can remain satisfied on a day-to-day basis.

I think taking a hard look at the narratives we tell ourselves is important and could do wonders for our quality of life.

Video I’m Watching

The Macro View on Gold (w/ Tavi Costa) | Trade Ideas — Tavi’s a macro analyst out of Crescat Capital. In this presentation, he discusses his bullish view on gold and suggests buying GLD with a stop at $111 and a target at $145.

We don’t agree with his thesis, but I enjoyed using the presentation as a Red Team tool.

Charts I’m Looking At—

Check out the performance spread between value and growth.  

We are now over 2.5 standard deviations away from historical averages, which is greater than the dotcom bubble.

Who knows when this trend will reverse (maybe when we finally get a bear market). But this info is useful for those who are allocating capital on a longer time horizon. If you have time on your side it might make sense to start trimming some growth names and putting capital in stuff like this.

Book I’m Reading —

Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market

Dark Pools is an informative read for anyone wanting to know the history behind how we went from big guys screaming at each other in the pits to computers executing trades in microseconds. Scott Patterson, in my opinion, is best in class when it comes to making arcane financial concepts entertaining.

Wine I’m Tasting —

I felt like mixing it up this week, so I want to share with you this fantastic pinot noir I tried from the Willamette Valley in Oregon.

It’s called Illahe. I’m not a wine expert but I found myself thoroughly enjoying this one. I confirmed with a few of my sommelier friends that this part of Oregon is famous for pinots. Anywho gives it a taste, you won’t be disappointed!

Trade I’m Considering —

As I was combing through charts last weekend I stumbled upon Zynga Inc. (ZNGA).

I haven’t watched this stock since it’s epic collapse post-IPO. I remember hearing my neighbor constantly complaining during that time. He had put a significant amount of his savings into the stock right when it IPO’d and continued to hold the bag for the entirety of its subsequent 80% collapse.

Anyway, ZNGA is back on my radar as the stock is trending up and out of a long-term base and making new multi-year highs.

A quick dive into the fundamentals tells us that a turnaround looks to be in the works here.

Zynga initially hit it big with their Facebook game “Farmville”. But since the stock crashed, they’ve severed ties with the social media giant and now focus on publishing their own games and apps for mobile devices. Their strategy is now centered around releasing free-to-play games and monetizing via advertising or in-game purchases. A new initiative is to make “watch-to-earn” offers which give players virtual currency bonuses if they choose to watch an ad.

Zynga has also decided to branch out, license IP, and launch some games based on Harry Potter, Game of Thrones, and Star Wars. These titles won’t come to market until late 2019 or 2020.

So far, the new strategy seems to be working. But we still have plenty of digging to do before we put on a position.

Quote I’m pondering —

Talent hits a target no one else can hit; Genius hits a target no one else can see. ~ Arthur Schopenhauer

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 Billionaire Horse Gambler and Bubbly Chinese Sentiment

Alex here with your latest Friday Macro Musings…

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

Recent Articles/Podcasts —

Target Hospitality: A Former SPAC IPO With Multiple Ways To Win — Mr. Bean reveals his latest deep value play, a SPAC IPO that focuses on providing temporary housing solutions for oil field workers.  

Investing In Shipping Stocks: Lessons From Walter Schloss — Mr. Bean shares the wisdom of Walter Schloss, a legendary value investor who compounded capital at 16.4% a year for 32 straight years. He then uses Schloss’s stock picking framework to dissect potential value in the shipping space.

Minsky and the Levy/Kalecki Profit Equation — Alex answers the question “where do profits come from?” in his latest high level macro essay. In it he discusses the systematic issues that threaten the stability of the US economy.

Macro Ops Podcast: The Global Macro Picture Is Read To Explode with Alex Barrow — Host Chris D. talks with Alex about the developing trends in the major macro markets.

Articles I’m reading —

Our friend Kean Chan put out a great writeup on the horse-racing gambler who earned nearly a billion dollars over his betting career. Kean’s piece is based off a profile done by Bloomberg last year. I highly recommend you read both. Here’s Kean’s article and the one by Bloomberg.

The gambler in question is Eric Benter, a Pittsburgh native who’s got to be a runner up for The Most Interesting Man in The World title.  

Benter spent his early years hitchhiking across Europe on down to Egypt and even driving across Russia at one point. At 22, after reading Edward Thorp’s Beat The Dealer, he dropped out of college and moved to Vegas where got a $3 an hour job clerking at 7-11 so he could count cards in his off time. He joined a blackjack team which ended up being so successful that they were chased out of town and blacklisted from Vegas casinos for life. From there, Benter and one of his card counting buddies, went to the race tracks in Hong Kong with the goal to do what most said was impossible, quantitatively crack horse betting.

They did… And the two literally wrote the code that would form the base of a new budding industry, quantitative sports gambling. Give both pieces a read, you’ll be happy you did.

Moving onto China. Dinny McMahon, who wrote one of my favorite recent books on the country titled China’s Great Wall of Debt, put out a solid writeup on the Macro Polo site where he discusses China’s NPL (non-performing loan) problem and what it’s doing to address it.

It seems that China is operating on the economic principle that a “rolling loan gathers no loss”. The CCP is carrying out a multi-pronged approach of opacity (no one knows the true level of NPLs in the economy), passing the buck (spreading the bad assets amongst private and local governments), and then providing countervailing liquidity injections to keep the house of cards from cratering in on itself. And so far, it seems to be working as well as one could hope.

Here’s McMahon making an important point regarding China’s most recent stimulus and their overarching objective:

It would be inaccurate to interpret an increase in the debt level as an abandonment of the deleveraging campaign. In fact, the very structure of the current stimulus speaks to Beijing’s commitment to cleaning up the financial system. Rather than a free-for-all, where banks and shadow banks are given the freedom to shovel as much credit as possible into the economy—which is broadly the approach to stimulus pursued repeatedly between 2009 and 2016—the current effort is targeted and limited only to banks (that have been chastened since their freewheeling days) and the bond market. The current effort to stimulate the economy has been designed specifically to avoid undoing the deleveraging of the last two years.

…Unquestionably, Beijing’s long-term goal is to reduce—or at least stabilize—debt levels relative to the size of the economy. However, given that China’s economic model is still dependent upon debt-enabled investment to deliver politically acceptable levels of growth, such a reduction is not likely to be feasible in the short term. Hence, the great success of financial reform has been—rather counterintuitively—to make the system less risky so that it might safely support higher levels of debt, at least for the time being.

If you’re interested in China — which, if you have money in the markets then you should be — this article is certainly worth a read. Here’s the link.

Video I’m Watching —

Check out this interview with Robert Vinall who’s the global value-focused fund manager of RV Capital. Robert has a great track record and in this interview gives some insight into his investment process and how he started his fund. It’s just 26 minutes long and worth a watch. And looks like they have a part 2 coming out soon. (Link here).

Charts I’m Looking At—

@TN posted a good thread this week on the extremes in sentiment we’re seeing in the Chinese market (link here). @TN notes that according to a recent Bloomberg survey, Chinese fund managers are 74% allocated to stocks — the previous high was 80% reached in Jan 18’, right before a major market peak. Also, China’s margin debt has exploded and is now close to the heights reached in early 18’.

Here’s a chart showing Chinese Consumer Confidence going parabolic via @TaviCosta.

Podcast I’m listening to —

Patrick O’Shaughnessy’s latest podcast with hedge fund manager Geoffrey Batt is stellar. Batt is one of the only US-based hedge funds focused on Iraqi equities. The episode is titled The Nature of Transformational Returns and Batt does a great job of laying out what one has to do to accomplish such.

They cover a wide range of topics, from how the news often does not portray an accurate depiction of what’s really going on on the ground to the importance of raising money in a way that’s conducive to your market approach. Batt’s style of investing reminds me of how the Chandler brothers operated in their early days.

Definitely give the episode a listen if ya get a chance. Here’s the link.

Trade I’m Considering —

To be honest, I’m mainly just biding my time until we see a break in the tightly coiled macro instruments we’ve been talking about (link here). That’s what’s most got my attention at the moment. Oh, well, that and shippers which have been breaking out (link to our write up here).

But I’m also looking at emerging markets which are fairly overbought and may be in for a pinch if we see US rates continue to rise (wrote about that here). Take a look at Chinese tech company Tencent (TCEHY) below. Tencent has the largest weighting in the MSCI EM ETF (EEM).

The chart is a weekly showing that Tencent has retraced up to the fib 0.618 level while piercing its weekly upper Bollinger Band. We’ll have to see if it has a weak close on the week. If so, it may be a good candidate for a tactical short.

Also, check out EM high yield (EMHY). Unlike the US it’s gone nowhere since the start of the year. Could be a sign of exhausted buyers which would not bode well for EM stocks.

Oh and also keep an eye on gold. It may be the tell. If it closes below the significant 1290 level then it’s likely headed much lower and EM should follow suit (and the dollar would move higher).

Quote I’m pondering —

Understand: the greatest generals, the most creative strategists, stand out not because they have more knowledge but because they are able, when necessary, to drop their preconceived notions and focus intensely on the present moment. That is how creativity is sparked and opportunities are seized.

Knowledge, experience, and theory have limitations: no amount of thinking in advance can prepare you for the chaos of life, for the infinite possibilities of the moment. The great philosopher of war Carl von Clausewitz called this “friction”: the difference between our plans and what actually happens. Since friction is inevitable, our minds have to be capable of keeping up with change and adapting to the unexpected. The better we can adapt our thoughts to changing circumstances, the more realistic our responses to them will be. The more we lose ourselves in predigested theories and past experiences, the more inappropriate and delusional our response. ~ Robert Greene, 33 Strategies of War

“Friction” in markets is a constant. Thus, we need to maintain a fluid mindset and not cling to rigid opinions or beliefs. We need to keep a child’s mind and remain open to new experiences and theories that contrast with our own. The continuous ability to adapt and evolve is necessary to one’s long-term survival in this game.

Like Bruce Lee said, “become like water my friend”.

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.

Perspectives On Risk and A Rockstar Fed

Tyler here with your latest Friday Macro Musings…

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

Latest Articles/Videos/Podcasts —

Macro Ops Podcast: Tesla On The Brink, Eurodollar, and Uranium with Biren Shah Part 2 — Chris and Biren rehash the $TSLAQ thesis and then hit on some interesting trade ideas in eurodollars and uranium.

Macro Ops Podcast: Global Macro and Value Collide with Mr. Bean — Chris and Mr. Bean talk value, health, lifestyle, wellness and longevity.

Articles I’m reading —

Perspectives on Risk — Euan Sinclair, one of my favorite option specialists writes about risk. Euan mentions how successful risk control is a MUST if you want to walk away from the markets with more than you started with.

But great risk control alone won’t make you money. Risk control needs to be combined with a valid market edge in order to produce profits. Here’s a snippet from the article (emphasis mine)

Risk control is not all you need. A seemingly prudent rule like “only risk 2% on any trade” is both wrong in its arbitrariness and misses the point that if the trade has no intrinsic edge this rule will just lead to bankruptcy one 2% loss at a time. A related piece of stupidity is that discipline is what will lead to success. Executing a trade with no edge in a disciplined manner is worse than executing it in a  haphazard manner. If you are inconsistent at least you will avoid some of the inevitable losses.

Sycophants and Other Party Stories — I think Kevin Muir over at the Macro Tourist has done a great job covering the epic shift in Fed policy we saw between Q4 of last year and Q1 of this year. Kevin points out that Trump has succeeded in beating the hawk out of Jay Powell. And for his next party trick Trump plans to appoint Stephen Moore to the FOMC — someone who thinks the Fed should lower rates by another 50 basis points!

Also as of this writing, there’s rumors circulating that Trump will select Herman Cain to fill the other open FOMC seat. Moore and Cain are two political loyalists that will sit on the board of the Fed. Trump can use them to keep Powell inline and the markets propped until his reelection in 2020.  

Yield Curve Inversion: Maybe It’s Different This Time — SRVN asset management put out a note on how to interpret the recent inversion in the US yield curve. Rather than call for an immediate recession SRVN reflects our recent sentiment, that the inversion we are seeing is no cause for concern.

SRVN writes how the yield curve changes depending on the term premium — the additional yield investors demand for running the risk that short-term interest rates don’t evolve in the expected manner. Here’s more on the term premium in case you need a quick refresher.

The term premium is not directly observable. It is estimated by subtracting investors’ expectations of the future path of Fed policy from the Treasury yield. Most models of the term premium agree that since the early 80s, when inflation and interest rates peaked, the term premium has gradually fallen and in recent years turned negative. (Why is beyond the scope of this post, but may be related to an aging population.)

The Federal Reserve Bank of New York publishes daily estimates of term premia according to a model developed by staff economists Tobias Adrian, Richard Crump, and Emanuel Moench (“ACM”). The ACM model estimates that the 10-year Treasury term premium is -0.8% as of March end. In other words, investors think short-term rates will average 3.2% over 10 years, but will buy a 10-year Treasury yielding 2.4% now to lock in that rate, according to this particular model.

Accounting for the ACM model term premium, the plot of the yield curve actually ends up looking normal. Check out the post for more details!

Podcast I’m Listening To —

Top Traders Round Table with Chris Cole, Matthew Sargaison, and Dan Stone – Part 1 and Part 2

These three hedge fund managers on the roundtable all specialize in long volatility and positive convexity trading. Over the course of both parts the three discuss why trading volatility from the long side has been so tough with overly accommodating central planners. All three of them think the period of central bank volatility suppression will end soon.

Dan Stone has some interesting trade ideas which he talks about around the 15 minute market in part 1 and the 11 minute market in part 2. Here’s the quick summary:

  • Rate volatility and currency volatility is cheap
  • It’s likely that this vol will catch up to equity vol when the cycle turns
  • The term structures are flat and downward sloping on many of these products which means you can buy long-dated volatility that has positive carry. This makes for an extremely attractive trade structure.

Trade I’m Considering  —

I’ve been looking for a shiny new growth name to watch and The Trade Desk (symbol TTD) came up on my search. This stock has been on absolute tear, up over 95% since the December sell-off.

The Trade Desk is where people go to buy and manage data-driven digital ad campaigns. This company is really starting to gain some steam, sales growth increased 56% in the fourth quarter, up from 50% in the quarter before and 42% the year before that. Gross spending on the Trade Desk platform increased 51% to $2.35 billion.

There’s no reason to believe the momentum is over either. Trade Desk specializes in programmatic advertising, which is a small $33 billion subset of the $725 billion advertising industry. As the years progress data driven companies will want to continue steering their dollars into programmatic advertising since it’s easier to measure success.

Chart I’m Looking At—

Chinese stocks have been ripping since the beginning of the year and that’s because the economic data coming out of China has been on a strong rebound. Check out this graph of the Chinese PMI.

It’s above 50 which means the Chinese economy is expanding again.

Quote I’m pondering —

Define a target, a strategy consistent with the target, a set of disciplines to follow, and risk management guidelines. Then trade, track, and evaluate your performance.  ~ Ari Kiev

If you don’t have targets and guidelines set for your trading process you’ll never be able to improve. Evolution requires a consistent measure of your results.

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.

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 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.