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Value Ventures: A Prologue

Hello Macro Ops World! Like the first program to run on the original Macintosh, my introduction into this growing community of people striving to be the best they can be inside and out of the markets isn’t fancy. My name is Mr. Bean. No, it’s not the name I wanted — I would’ve rather preferred something sexy, like ROGUE. However, Chris D made it very clear that you don’t pick your nickname, your nickname picks you. That being said, I’m thrilled to join the MO team and look forward to becoming both a better investor and human.

So what is Value Ventures?

Value Ventures will be Macro Ops’ one-stop-shop for all things value investing. Think of it like Bruce Greenwald and Michael Burry having a love-child in which pillow talk revolved around balance sheets, not bed sheets — you get the picture. Value investing has many definitions and everyone is quick to give you their views on the subject. Out of all the movers and shakers in the industry offering their definition, spin-off OG Joel Greenblatt’s makes the most sense: Trying to figure out what a business is worth, and then paying a lot less for it.

I could stop there — that’s it. Value Ventures is all about trying to figure out what a business is worth, and then seeing if we can pay a lot less to own it. Shares aren’t blips on a Bloomberg screen or tickers on a chart; they’re physical pieces of ownership in real businesses. This sense of ownership is vitally important to us as value investors. Without this “ownership” level of conviction in the businesses we buy, we won’t be able to stomach the downturns that inevitably come over time. As value investors our time horizon is far off in the distance — perhaps 10, 20, or even 30 years. This time frame gives us a tremendous edge against the fast-paced market shakers that are prodded out on CNBC every day.

What Content Can I Expect to Receive?

You might be thinking, “that sounds all good and dandy, Mr. Bean … but what kind of content should we expect from you?” Excellent question! You should expect deep work on individual businesses, topical musings on psychology, physical health, mental models, business moats, and the like. Finally, you’ll get a heavy dose of smaller write-ups on off-the-beaten-path companies such as spin-offs, SPAC’s, reverse mergers, and micro – caps. Wherever there’s value, we’re willing to venture.

I look forward to learning and improving each and every day with the MO community. You can reach me on Twitter @marketplunger1 or email mrbean@macro-ops.com.

Stay Venturing!

P.S. If you want to take a look at my pre-trade value checklist click here for a free download!

 

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Shippers: The Most Bombed Out Sector of the Market

Sir John Templeton used to quip that “People are always asking me where the outlook is good, but that’s the wrong question… The right question is: Where is the outlook the most miserable? Invest at the point of maximum pessimism.”

If you want deep value and a wide margin of safety then you have to be willing to venture where others won’t. Maximum pessimism is what creates the asymmetric bets where the risk then becomes time and not price, as Richard Chandler puts it.

Looking across global markets today there is perhaps only one industry that fits this bill. Where the outlook is beyond miserable and the stocks within it have either been dismissed by investors or just outright forgotten all-together.

I’m of course talking about marijuana stocks…

Just kidding. No. I’m talking about the shipping sector.

Take a look at the following charts showing the prolonged grinding drop in shipping rates.

The Harpex Shipping Index has been in a steep rolling bear market for nearly a decade and a half.

The Baltic Dry Index is down to 645. It’s only been lower three other times in the past 35-years for which we have data. Once in 1985, then in 2015 and again in 2016.

Price action drives sentiment which in turn drives price action in a perpetual feedback loop. A decade plus of falling prices and negative investment returns has created a pretty fatalistic consensus towards the industry — which has, in turn, led to some pretty amazing prices…

Many shipping stocks now trade for less than half their liquidation value. And that’s using sale prices in the fairly active second hand purchase market.

This means that companies could liquidate their fleets and after paying off debt there’d be enough leftover cash that equity holders would more than double their money.

So to sum things up, we have (1) maximum pessimism which has driven (2) bargain prices which creates (3) a large margin of safety.

That’s pretty good, but now we need a catalyst.

The shipping industry is a notoriously cyclical industry which follows the classic Capital Cycle. Martin Stopford’s excellent book, “Maritime Economics”, notes that there’s been 23 shipping cycles going all the way back to 1743. Timing here is key. We don’t want to sit in a dead money trade for another 5-years when our capital could be going towards something that’s actually working for us.

Luckily, there’s a number of potential catalysts lining up that could make 2019 the year that the trend finally changes. These are:

  • A one-two regulatory punch
  • New banking regs leading to tighter financing and thus lower supply
  • Capital Cycle: supply and demand in deficit
  • China/India starting to buckle down on fighting pollution which means they need to import cleaner industrial fuel imports (ie, more shipping demand)

Let’s start with the one-two regulatory punch.

Last year shipping companies were forced to begin installing costly ballast-water treatment systems, thus raising the operating costs on an already struggling industry. And by next year, shippers will have to adhere to IMO 2020.

IMO 2020 is a new global regulation aimed at reducing airborne sulfur pollution by requiring shippers to reduce the sulphur limits in their fuel from 3.5% to 0.5%. There’s a number of ways for companies to reduce their sulphur output and all of them are bullish for the shipping industries’ supply and demand dynamics.

For instance, shipping companies can install scrubbers that will reduce the sulphur from burning bunker fuel. But, these scrubbers are expensive, which means less capital to deploy towards ordering new ships and paying down debt. Also, installation will require significant dock time which means there’ll be less ships on the water, which means a tighter supply market.

Another option, and this is likely to be the more popular one, at least initially, is for shippers to switch to low-sulfur marine gasoil.

But the issue here is that even with no change to the current pricing conditions, switching to marine gasoil will represent a substantial increase in fuel costs and fuel costs already make up the largest portion of a shipper’s operating costs.

According to Wood Mackenzie, shipping industry fuel costs could increase by $60bn next year. This would represent a jump in fuel expenses of around 50%.

In order to economize on fuel costs, ship charterers are likely to begin slow-steaming ships. Here’s the following on what this will mean from S&P Global Platts (emphasis by me):

The simplest way to curtail costs would be to reduce consumption via reducing speed.

Reducing speed from 12 knots to 10 knots would effectively remove 17% of dry bulk shipping supply overnight,” it said.

Ships older than 15 years of age, comprising about 142 million dwt or 17% of the existing fleet would come under maximum pressure and would become ideal candidates for scrapping, as their older engines are not able to burn LSFO.

In 2020, you are going to have a supply shock either through slow steaming of the entire fleet or a combination of scrapping of some of the older ships and the balance of the existing fleet slow steaming,” it said.

Then we have new banking regs.

Basel IV bank regulations mean that the traditional sources of financing for the shipping industry (ie, the credit they use to order more ships) are no longer available.

Under Basel IV, bank’s have to account for the volatility of the asset being loaned against. And, well, shipping is pretty volatile. This means that shipping loans are becoming more capital intensive. Gone are the days of 90%+ loan-to-value construction finance which led to the glut of yore. Now, many new vessel orders require over 30% in equity financing.

European banks, which have long been the primary lenders to the industry for the last 100-years or so, are either drastically reducing their loan books or exiting shipping finance all together.

Bear markets are always the authors of bulls. And it’s for reasons like the above as to why tight financing effectively means tight future supply and tight future supply means higher prices.

And this brings us to our next catalyst: The Capital Cycle.

Dry bulk shipping is an extremely capital-intensive business. With over 10,000 ships, each with an average 25-year lifespan, somewhere between 300-500 new vessels need to be built each year just to counteract natural attrition. That’s not even accounting for growth in demand.

According to Clarksons Research, the global bulk fleet is expected to grow by just 2.2% this year.

This will make 2019 the third consecutive year in which demand growth outpaced the growth in supply, putting the market in deficit.

And by the looks of the current orderbook, this deficit looks set to continue. The current orderbook at just 11% of the fleet, is at its lowest levels since the early 2000s. It takes approximately 2-years from the time of order for a ship to be delivered. So this means that a supply constrained market is practically guaranteed going forward.

And lastly, we have the growing importance of combating pollution in emerging markets.

Following China’s recent “Two Sessions”, Li Ganjie, the Minister of Environment and Ecology, declared that “It is necessary to maintain the strength of ecological and environmental protection” and there must be “no wavering, no relaxing” according to Trivium China. Li went on to say that four sources account for over 90% of particulates, with industrial emissions and coal burning the two worst offenders.

The industrial emissions are largely attributed to China’s dirty steel mills. These mills use iron ore that has a high sulphur and ash content. Recent changes in policy will require mills to use less pollutive materials going forward. This means that China will have to import “cleaner” industrial fuel sources (ie, iron ore and coal) from far away places, such as Brazil and Australia.

This is important because iron ore and coal account for over half of the global dry bulk trade (29% and 24% respectively). According to shipbroker Banchero Costa, “China remains very much at the centre of the action, estimated to account for 70 percent of global iron ore imports and 41% of the dry-bulk market all-together”.

Just to show you the outsized impact China has on the shipping market, see the chart below showing Chinese iron ore imports (orange line) and the Baltic Dry Index (blue line).

So the requirement for cleaner industrial fuels is a positive. But this chart also reveals the shipping industries’ achilles heel. China.

Where Chinese iron ore imports go, so too will the shipping industry.

And that’s where the near future for shipping stocks becomes less certain.

I’ve been writing for the last year about how China is slowing down. This slower growth is clearly visible in the data.

And this is putting downward pressure on global trade; hence the recent collapse in the Baltic Dry Index.

But I’m also expecting China to begin pump priming its economy for the 2021 centenary anniversary of the Communist Party in the second half of this year.

If that happens, then we should get a buoyed global market combined with a structurally tight shipping industry; one that appears to be rising from the trough of the capital cycle.

Throw in the secular rising demand from India crossing the Wealth S-curve and brighter days should be ahead for the industry.

If this ends up being the case then there’ll be oodles of money to be made. Not only do we have bargain bin prices currently but these companies also benefit from high operational gearing.

Shipping companies have extremely high fixed costs, so even a tiny uptick in charter rates flows directly through to their bottom lines. Plus, any upturn in the cycle will raise the value of the underlying fleets which are trading at depressed values. This kind of operational gearing combined with the currently low stock prices means that some of these shipping companies could earn their entire market cap in a single year once cash flows mean-revert.

This is why bull markets in shipping tend to be incredibly explosive.

Shakespeare once wrote that:

There is a tide in the affairs of men, Which taken at the flood, leads on to fortune. Omitted, all the voyage of their life is bound in shallows and in miseries. On such a full sea are we now afloat. And we must take the current when it serves, or lose our ventures.

Shippers undoubtedly have the most miserable outlook. Over a decade of falling charter rates has birthed maximum pessimism, which has led to depressed prices (read: amazing values). Now we have a tight supply market and a turning capital cycle, with a number of structural changes that will ensure it stays this way. China is the big unknown, but it always is. Buying positive FCF producing shippers for less than half of NAV gives us a reasonable margin of safety where our only risk is time, not price.

We’re going to put on a starter position in a basket of shippers. Look for a trade alert with further info soon.

Time to leave the shallows and take the current

For more information on our market framework click here to access the Macro Ops handbook.

 

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Bear Markets and Liquidity Conditions

Credit spreads have narrowed significantly since the beginning of the year. Check out the graph below via Citi Bank.

Credit spreads and stocks move together because all market moves are governed by liquidity conditions. When liquidity conditions tighten (credit spreads widen) the cost of capital goes up, and therefore the returns investors receive in equities relative to other assets looks less attractive.

It’s important to stay in tune with liquidity conditions because that’s how you give yourself a chance to actually time the market. Stanley Druckenmiller earned his breathtaking track record by paying close attention to liquidity in the financial system. (Quote below)

I never use valuation to time the market. I use liquidity considerations and technical analysis for timing. Valuation only tells me how far the market can go once a catalyst enters the picture to change the market direction.

Central banks around the world have been easing significantly since the start of the year, injecting liquidity into what was a panicked market back in December.

And because of this the Dow has rallied almost 4000 points this year! Until liquidity conditions tighten up again we remain bullish and in sync with liquidity flows. Shorts must use extreme caution until liquidity conditions deteriorate again.

For more information on how to measure liquidity, check out our Free Stuff tab of the website to download our Advanced Liquidity webinar for free!

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The Fed Put Is Real and China Stimulates

In our December MIR titled Genghis John and Building Snowmobiles during the midst of the market rout I wrote the following noting the key macro variables we didn’t and couldn’t know at the time:

  • We can’t predict with high certainty exactly how the Fed will react to slowing global data ex. US
  • We can’t predict if/when China will attempt to reflate its economy with another massive credit injection
  • Rising geopolitical tensions bring greater risks and unknowns. We don’t know if the trade war will escalate significantly (though recent signs indicate it will) or if other events will conspire (such as a Russian invasion of Ukraine).

Here’s a chart of the Russell small-caps index I included in the report along with our thoughts on where the market was headed.

Much has happened since those early volatile December days. The market sold off and bounced off key support as we expected.

And we’ve received some answers to two of our three previous ‘unknowns’ (1) The Fed’s response to slowing global growth and (2) if/when China would stimulate.

Let’s start with China and the Red Dragon’s predilection for debt.

The answer to our question of if/when China would stimulate and by how much ended up being “now and by A LOT”.

Chinese credit data for the month of January just hit and the numbers are… how do you say… impressive?

January was a gargantuan month for credit creation in China.

Total Social Financing in January was the largest monthly liquidity injection as a % of GDP on record. That one month is equal to nearly a quarter of the total credit creation for ALL of last year and makes for a 51% increase over the year prior.

Here’s another look at the data. The orange line shows that credit growth in the shadow banking sector is still contracting (though, the contraction even seems to have stalled somewhat). The red line shows the recent hockey stick turn in total credit creation.

I’ve been writing for the last few years about how China is THE most important macro variable this cycle. The reason why is shown in the chart below.

China has undeniably been the global growth workhorse this cycle having helped staved off crushing global deflation with its incredibly large and reliable injections of credit at the nearest hint of slowing growth.

The last time China injected anywhere close to this amount of credit was at the start of 16’. That shot to the arm defibrillated the global economy back to life and sent markets on a 2-year near volatility-free money printing uptrend.

Should we expect the same thing again? Are we about to embark on another emerging market (EM) led bull? Is it time to mortgage the house and dump the proceeds into some EM high-fliers and then just kick back and wait to cash out?

Not so fast Kemosabe…  

We have to look under the hood of this credit data to get a better grasp on what’s really going on. And when we do that, we find that the stimulus is not all it’s cracked up to be.

First, the January numbers were inflated due to seasonal issues. The Chinese New Year fell earlier in the month of February than the previous year which meant banks were giving out more loans in the weeks of January leading up to the holiday.

Secondly, the financial derisking campaign began in earnest at the end of 17’. Because of this, last year’s new credit numbers were abnormally low which means there was a very low base effect for this year.

Thirdly, the PBoC pointed out themselves that the credit growth numbers for the month were aided by a slowing pace of contraction in the shadow banking sector. Authorities are still very much focusing on dismantling the off-balance sheet Godzilla they’ve spawned, so it’s unlikely January will mark a major turning point in the trend in shadow banking credit growth.

And fourthly, it appears the vast majority of January’s credit growth was due to a one-off jump in banker’s acceptances and bill financing (short-term loans). This is not indicative of a shift to long-term credit growth. In fact, Premier Li Keqiang went out of his way this past week to drill home the fact that the party isn’t going to repeat the massive credit stimulus playbook of times past. Li said (via Trivium China):

I reiterate that the prudent monetary policy has not changed and will not change. We are determined not to engage in ‘flood-like’ stimulus.”

So while January’s credit data isn’t nothing. It’s notable. it’s just not quite ‘flood-like’ and certainly not as impressive as many market participants seem to be thinking it is.

There’s typically a 6 to 9 month lag between stimulus and its effects being felt throughout the real economy. As of now, there’s no sign of the data improving.

The current extent of China’s slowing may surprise some given the number of other stimulative measures the CCP has enacted over the last year (ie, tax and rate cuts). But this should be expected when you have an economy like China’s that’s hit the end of the Gerschenkron Growth Model, is straining under its debt burden, and is riddled with unproductive assets.

If the latest round of credit growth is enough to right the ship or is a precursor to a continued ‘flood-like’ stimulus then we should soon see it reflected in the data. The primary one being M1 money supply growth (new net credit growth should lead to deposit growth). See the big jump in M1 in 2016 during the last credit injection? Well, nothing similar yet. M1 growth is still sitting at multi-decade lows…

Before moving on, I’d just like to reiterate that we should expect China to continue to slow — at least until they really hit the classic stimulus button leading up to the Party Centennial in 2021 which I expect will happen in the second half of this year — but we shouldn’t expect a crisis. Here’s one of my favorite economists, Michael Pettis, explaining why:

Paradoxically, too much debt doesn’t always lead to a crisis. Historical precedents clearly demonstrate that what sets off a debt crisis is not excessive debt but rather severe balance sheet mismatches. For that reason, countries with too much debt don’t suffer debt crises if they can successfully manage these balance sheet mismatches through a forced restructuring of liabilities. China’s balance sheets, for example, may seem horribly mismatched on paper, but I have long argued that China is unlikely to suffer a debt crisis, even though Chinese debt has been excessively high for years and has been rising rapidly, as long as the country’s banking system is largely closed and its regulators continue to be powerful and highly credible. With a closed banking system and powerful regulators, Beijing can restructure liabilities at will.

Of course, this doesn’t mean that China has found the secret to defying the basic laws of economics and can just continue to stimulate its way to perpetual prosperity. There’s a cost to everything and a crisis is only one way the bill comes due. And in fact, the other payment method can be much more costly. Here’s Pettis again:

Contrary to conventional wisdom, however, even if a country can avoid a crisis, this doesn’t mean that it will manage to avoid paying the costs of having too much debt. In fact, the cost may be worse: excessively indebted countries that do not suffer debt crises seem inevitably to end up suffering from lost decades of economic stagnation; these periods, in the medium to long term, have much more harmful economic effects than debt crises do (although such stagnation can be much less politically harmful and sometimes less socially harmful). Debt crises, in other words, are simply one way that excessive debt can be resolved; while they are usually more costly in political and social terms, they tend to be less costly in economic terms.

It’s likely that China will go the way of Japan in the 90s and Russia in the 70s. This means decades of stagnation and low single-digit growth as the country gives back its share of world GDP and gets stuck in the middle-income trap.

Moving onto our second unknown: how will the Fed respond to slowing global growth?

You should already know the answer. It was uber-dovishly…

And this was the correct move, in my opinion. Powell and team had let the market assume too much of an inflexible stance regarding rate hikes and balance sheet runoff, hence the market volatility in December. Jay and the FOMC have been walking those expectations back and in this, they’ve done a good job.

Fed watcher Tim Duy summarized the FOMC’s stance perfectly, writing:

The Fed made a dovish shift, declaring that they are on the sidelines for the time being. Given that they seem to believe the downside risks are more prevalent, it is reasonable to think the bar to easing in the near term is much lower than the bar to hiking. Importantly, it looks to me that the Fed has shifted gears well ahead of any recession; then did not invert the 10-2 spread and then keep hiking as typically occurs ahead of a recession. A flexible Fed and the lack of inflation was always a saving grace for the economy. The Fed may have just pushed back the next recession. If so, expect everyone who expects an imminent recession to “blame the Fed” when that recession fails to emerge.

Jerome Powell said, “I would want to see a need for further rate increases, and for me, a big part of that would be inflation.” This means that the Fed is on standby with rate hikes until either inflation begins to perk up or — and this is just my take and wasn’t explicitly stated by the Fed — the market begins to run hot again and the Fed wants to cool risk-taking.

The market has responded by driving rate expectations lower (yellow line depicts the latest Fed Funds curve). And if anything, it’s now overpricing the downside risks to rates.

It’s not just the US Fed but central banks globally have pivoted from being in the aggregate hawkish to an easier stance.

The US Fed and central banks, in general, have shown themselves to be very responsive to the economy and the market. Some say that central banks have no mandate and therefore no business to be paying attention to the gyrations of the market. This type of thinking misses a key point regarding the reality of our modern economy and that’s the financial deepening in Western countries, especially here in the US.

You see, secular declining interest rates and inflation coupled with financial ‘innovation’ has led to a boom in consumer and corporate credit versus just 40-years ago. This has resulted in a financial deepening, or the financialization rather, of our economy.

This means that the financial economy is many times the size of the real economy. This financial economy is vulnerable to changing interest rates and widening credit spreads resulting from market volatility, more so than the real one. And because of its large relative size, pain in the financial economy can quickly transmit into pain in the real economy. Thus it’s become an important variable in the Fed’s mandate.

This is why we should expect the Fed to continue to error dovish when either the economic data begins to suggest downside risk is mounting or fear drives the market down to much. In a sense, the Fed put has now become real.

Where does this all leave us?

Let’s summarize what we’ve found so far:

  • The Fed has shown itself to be very responsive to the economic data as well as the market. The Fed is no longer a headwind for risk assets and we should expect the Fed to respond in kind to market volatility due to the financialization of our economy.
  • China has hit the stimulus button but the actual impact will likely be much less than the perceived size of the credit boost on the surface. We’ll have to keep a close eye on M1 growth but expect data out of China to continue to slowly weaken while the PBoC and CCP manage a gradual slowdown. Look for the real credit stimulus to come sometime in the second half of the year as they gear up for their run into 2021 Party centennial.

I hope this note brings everyone up to speed on the dominant macro narrative of the market.

 

 

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A Macro Update And My Stock Shopping List For 2019

Special Announcement — Macro Ops Collective Deadline Extended!

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

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

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

Today’s Note and Stock Shopping List

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

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

Alright, let’s jump in…

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

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

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

Last week, I tweeted this about gold.

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

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

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

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

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

And then we’ve got the dollar.

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

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

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

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

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

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

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

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

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

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

Now onto our Stock Shopping List.

BlueLinx Holdings (BXC)

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

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

BXC is one of these stocks.

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

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

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

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

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

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

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

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

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

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

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

To be continued…

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

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

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

Have a great week!

 

 

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Full Capitulation In US Stocks Not Here Yet

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

A Special Announcement and Market Update

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

Now onto the exciting news…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Now onto markets!

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

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

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

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

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

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

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

Sentiment is nearing outright ridiculous levels…

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

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

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

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

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

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

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

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

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

Here’s your latest Friday Macro Musings.

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


Latest Articles/Videos —

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

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


Articles I’m reading —

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

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

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

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

The Chinese have learnt bitterly that:

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

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

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

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

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

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


Charts —

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

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

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

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

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

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


Podcast I’m listening to —

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

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

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

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

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

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


Book I’m reading —

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

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

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

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


Video I’m watching —

I went down a physics rabbit hole this week.

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

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

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


Quote I’m pondering —

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

Deutsche bank should’ve read a little more Shakespeare…

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

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

Have a great weekend.

 

 

The Bullish Case For US Stocks

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

Let’s start with sentiment.

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

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

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

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

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

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

AAII bearishness is at its highest levels since February 2016.

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

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

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

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

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

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

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

 

 

Walt Disney’s Paper Route and The Spread of Ideas

Here’s your latest Friday Macro Musings.

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


New MIR Issue Out, Sign Up Now

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

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


Latest Articles/Videos —

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

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


Articles I’m reading —

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

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

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

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

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

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

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


Charts —

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

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

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

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


Potential trade I’m digging into —

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


Podcast I’m listening to —

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

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

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

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

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

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


Book I’m reading —

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

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


Quote I’m pondering —

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

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

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

Have a great weekend.