A Simple Playbook For Finding Deep Value


Earlier this week we talked about how the greatest value investors obsess over how much they can lose. They don’t care about the upside. They want to know the downside. These investors used various valuation tools to arrive at that downside number. 

We then argued that to generate outsized returns, you need to fish where there’s few fishermen. You need to turn over rocks in the dark corners of the market. 

The investors we profiled do exactly that. They comb through bankruptcy notices, all-time-low lists and special situation scenarios. These corners of the market offer little competition. A chance at handsome returns for those willing to do the work.

A Simple Playbook

The greatest investors follow a simple playbook for long-term success. And we’re revealing that playbook in this month’s Value Ventures:

  • You’ll learn how to find and value deeply discounted companies. 
  • You can layer these strategies on an existing investment philosophy, or as diversification in a larger set of factors. 

Along with these strategies, you’ll learn exactly where we’re looking for deep value. This is an area we think is ready for a massive bull run. 

You’ll receive three stock ideas from this area to jumpstart your own research. 

Creating Positive Asymmetry

Value Ventures is all about positive asymmetry. How do we do this? We combine deep value, fundamental bottoms-up investing with multiple risk management systems. In doing so, we create positive skew to the upside on each position (think call options). 

We won’t get them all right. And that’s the beauty. We don’t need to get them all right. We just need a couple great ideas a year. 

By adhering to our process, we cut our losers short and let our winners run. We’re not confined to traditional value investing jargon. This doctrine preaches buy-and-hold at all costs. Our goal is not to lose money. 

The Value Ventures process focuses on long-term shifts in sentiment, fundamentals and chart patterns. We bet big on a notional basis, while risking a smaller part of our actual capital. 

This is our bread and butter. It’s what we’re most passionate about

Value Venture’s Margin of Safety

Most value investing newsletters charge $3,000 or more per year for this type of information. We’re not like that. We’re value investors, after all. We want to provide the best information at the most affordable price

Because of this, we’re offering Value Ventures until this Sunday, November 10th at 11:59PM,  for $497/year! That’s $200 off our normal price of $697/year.  

So for less than a cup of Starbucks coffee a day, you gain access to:

  • 12+ deep dives into off-the-beaten path stocks a year
  • Bullet-proof Entry and Exit strategies to keep you in the game longer
  • Actionable investment philosophy and strategies
  • Continuous updates on existing stock ideas
  • 24/7 access for questions, comments or discussion
  • Bonus: Spin-Offs Crash Course

As a margin of safety, we also have a 30-day money back guarantee. If you’re not satisfied with the product, let us know. We’ll refund your order. No questions asked.  

So grab your hard hat, it’s time to venture!

Click here to access Value Ventures

Why The Traditional Financial Advisory Model Will Fail


How Financial Advisors Can Survive The Low-Fee Apocalypse

ETFs and robo-advisors are killing the traditional financial advisory model. Those that want to survive need to overhaul their approach. The standard 1% AUM fee no longer works. The future success of financial advisors is through subscription-based, freemium business models. Advisors that change their model while going smaller (not larger) will thrive.

Financial advisors must switch from an asset-gathering model to a tier-based subscription service. Cut fees for lower-end clients and offer exclusive, personal services to high-end clients. If the financial advisors want to contend with the machines they need to learn from their rivals in tech. Freemium, subscription-based business models can work.

History Rhymes: Robo-Advisers and Vanguard’s Playbook

Leading the destruction of traditional financial advisory models is Vanguard. This isn’t new to Vanguard. They’re the same company that destroyed the traditional mutual fund model. Their weapon? Cheaper ETF alternatives. The mega-asset manager is doing the same thing with financial advisors.

In his WSJ article The Rise of Ultra-Cheap Financial Advisors, Jason Zweig highlights this shift in Vanguard’s model (emphasis mine):

“Vanguard manages approximately $3 trillion in mutual funds and exchange-traded funds for a pittance of 0.19% in average annual expenses. The firm’s Personal Advisor Services unit, which provides investment management and financial planning for a flat 0.3% annual fee for most clients, has $3.6 billion in assets, up from just $755 million at the end of 2013.

They come in and rip through the price floor. They’re able to absorb the lower cost due to their scale. Then they make up for the lower fees by growing AUM. If this makes you think about Amazon’s model, you’re on the right track.

But it’s not just Vanguard that’s challenging traditional financial advisors. It’s the robots. It’s automation. It’s everything we expected.

The Rise of the Robots

To say robo-advisors have changed the financial advisory industry is an understatement. They’ve forced advisers to do two things:

  1. Justify their high fees to their clients
  2. Feel pressure to offer more service to justify their fees

Technology-driven companies offer basement level expenses for portfolio management. On top of that, many robo-advisers are introducing high-yielding interest bank accounts. Lex Sokolkin thinks these high-yielding interest accounts are customer acquisition costs.

Meanwhile, Charles Schwab now offers $30/month unlimited financial planning for its clients. This is in contrast to their historical 28bps asset-based fee. How are they able to charge so little? Most of their smaller clients are in automated, AI-driven portfolios. These portfolios automatically rebalance and adjust based on individuals’ risk tolerances.

Cynthia Loh, VP of Digital Advice at Schwab, says clients are demanding this type of payment and transparency. She goes on to say, “Customers are used to engaging with subscription services.” The demand for this service is growing. Since launching the new subscription-based offering, the company’s seen a 40% increase in average household assets enrolled.

But, But, Muh Human Interaction

The rise in robo-advisor popularity coincides with one of the longest bull markets in history. I’m not saying there’s a direct correlation between stock market rise and a move towards AI-drive advice. Yet people tend not to worry about their assets if all they do is appreciate in value.

What happens during the next economic downturn? Will robo-advisors remain as popular? Will people crave the comfort of their personal advisor? A defense among advisors is that they’re not paid for out-performance. They’re paid to manage their clients’ emotions.

Fair enough. But if that’s the case, doesn’t it make more sense to price your services in the same manner as a clinical psychologist? Via an hourly/session rate? If a client calls once or twice a year, why should advisors be compensated for ‘managing’ automated portfolios driven by AI … for 1% a year?

Millennials Are Familiar with Subscription-Based Models

Netflix, Amazon, Hulu, Disney+ … I could go on. The number of subscription-based services grows every day. We’re no longer a society that buys and owns things. Rather we rent, lease and subscribe to products and services on a term-by-term basis.

This shift is important for the financial advisory space because future growth will come from a generation used to a different model. A model not based on assets under management. But a model based on flexibility, transparency and technology.

The growth in subscription-based services is mind-boggling. They’ve grown 100% a year for the last five years. 15% of all online shoppers subscribe to at least one subscription-based service.

If your goal is to capture the next largest market (millennials and Gen X’ers) it makes sense, then, to offer something of familiarity.

A Few Survival Ideas

Offer Subscription-based revenue model for younger clients

Younger clients may not have sizable assets yet, but over time they will. Offering a subscription-based solution now gets your foot in the door and share in their wallet. Then, as they grow and accrue more assets, your firm becomes the natural solution to their needs.

Ken Fisher is an out-spoken critic of the subscription-based model. In a Barrons.com article, Fisher says, “[it’s a] stupid model aimed at moneyless clients. Subscription fee-based models work great for advisors who want to stay tiny and accomplish very little.”

Fisher isn’t the only critic. Many advisors claim they spend most of their time as psychologists, not as investment decision-makers. A subscription-based service could result in hundreds of questions each month. After all, clients would try and squeeze out as much value per charge as they could.

Use The Machines

This model can work on existing clients with small accounts. Many advisors use low-cost ETFs that automatically rebalance. Instead of charging based on assets under management, you charge a monthly (or yearly) recurring amount until a certain AUM is reached.

The argument against this is that these small account clients will take up advisors time and energy. Then, if you charge a smaller, subscription-style service on that time and energy, you net a loss.

Combat that using an automated approach. Pairing a low-cost ETF with automatic rebalancing reduces the time and energy needed to monitor the portfolio. It’s also about setting realistic expectations between client and advisor. The advisor should make the client aware that with X amount of assets, you’ll get X amount of service.

And it’s not low-quality, bottom-of-the-barrel service, either. That’s a common misconception about this method. You’re simply not offering the full suite of services that you would a client with 50x more money. If anything, it gives smaller clients an incentive to stay and grow their assets with you.

Platform-type business or (Financial Wellness as a Service)

Financial advisors must ask themselves this question: “Do we integrate or separate?” The technology disruption will force advisors to make a decision. Do they want to be the aggregator or a specializer? The subscription model works for both decisions.

If you choose to specialize, focus on one area of wealth management or financial planning. Then do that better than anyone. An example of this would be an advisory firm that exclusively offers estate planning advice.

Then there’s the aggregator method (or dare I say) Financial Wellness as a Service (FWaaS). Like Disney+ or Netflix, a FWaaS model combines all areas of wealth management. You’d have investment management, financial planning, estate planning, tax advice, retirement planning, savings accounts, and more.

The goal with this service is to be the one-stop-shop for all your client’s financial wellness. Check out the picture on the right from the Earnst & Young report:

The Costco Model Applied to AUM

The secret to success could lie in Costco’s business model. If you’re not familiar, AK at Fallible has an incredible series on COST. In short, COST makes no money on the produce they sell. Instead, all the money is made on the annual membership service. Membership revenues drop straight down to the bottom-line in pure profit.

So how can financial advisory firms learn from Costco? Advisors can turn AUM fees into an at-cost charge. Like Costco buying and selling peanuts for the same price, investment firms could charge AUM fees at-cost of their back-end processes. For example, if you operate at 0.35% of AUM fees, charge 0.35%.

Sure, you won’t make money on these fees.

But that’s the point.

The goal is to get your foot in the door. From here, you charge a subscription-based service based on financial planning, wealth management, tax guidance, estate planning, etc. The service can be customizable and personalized. Unique to each individual.

Concluding Thoughts: The Real Winners

Advisors, now more than ever, are closet-indexing their client’s assets. Clients in firms that index should demand lower fees for asset management. After all, they can get the same management for fraction of the cost with robo-advisors.

A tiered service service (as opposed to fee-based) based on asset level will keep financial advisory firms relevant amongst the robots, automation and larger competitors.

The winners of the future will be the firms that integrate the younger, lower asset level clients with subscription-based models, while providing tailored, fee-based services for high-net-worth clients.

This combination captures the best of both technology and personalization. Advisors can focus their time and energy on serving their highest-priority clients. In turn, their lower tier clients receive adequate services for their current asset level.

AI, automation and ETFs drastically reduce the cost of acquiring (and keeping) smaller asset clients. In turn, you increase the probability of accruing more assets as your smaller clients gain wealth.

Main Source: NextWave Consumer Financial Services: financial subscriptions are coming, Ernst & Young LLP

The Next Deep Value Corner of The Market


In my last article I shared the strategies of three famous value investors. Each investor had one shared theme: focus on downside protection.

These investors knew that in order to generate outsized returns, they needed to not lose money. Not losing money keeps them around long enough to reap the benefits of deep value investing.

Venturing Where Others Won’t

It’s also important to know where these investing legends found their ideas. How did they screen for stocks? Which rocks did they overturn? What was their sourcing process?

Let’s take a look at each investor.

Seth Klarman

Klarman searches through the market’s junk drawer. He focuses on companies on the verge of bankruptcy and stocks trading below cash or assets. These aren’t crowded investment spaces. You won’t find these companies on CNBC, Bloomberg or FinTwit.

Where to Find Klarman-like ideas: SEC Filings, Google Alerts, All-Time Lows

The tool I use to find companies on the verge of bankruptcy is to set Google Alerts. I’ll set alerts for the keywords:“Reorganization of bankruptcy” or “Chapter 11 stocks”. You can also scroll through filings of companies trading around their all-time lows.

You gotta put in the work. But then again, this is valuable work as other investors aren’t looking in these spaces.

Joel Greenblatt

Greenblatt loved spin-offs and dedicated most of his book You Can Be a Stock Market Genius to the topic. We’ve covered spin-offs in previous emails, but let’s recap.

The reason spin-offs are attractive is because of forced selling. Institutions can’t hold certain spin-offs. This forces them to sell the shares for non-fundamental reasons.

Where to Find Spin-offs: Google Alerts, SEC Filings, Spin-off websites

My favorite tool to find new spin-off ideas is a simple Google Alert for the keywords “stock spin-off” or “spin off”. You’ll sift through a few TV show spin-off rumors, but it’s worth the time. I also search for SEC filing Form 10-12/B. Companies must file this form when spinning off a company.

For more information on spin-offs, check out the website Stock Spinoff Investing.

Michael Burry

Burry preferred ‘ick’ stocks. These are stocks most investors pass over without a second glance. Along with these, Burry looks for ‘rare birds’. Rare birds are liquidation situations, stocks below net cash, etc. Things you’d find Klarman looking at.Where to find ick stocks: 52-week low list, all-time low list

Where’s The Next Deep Value Corner?

These investors go where others won’t to generate differentiated returns. In this month’s Value Ventures we’re diving deep into one of those areas.

This area remains untouched by a majority of the investment community.

Yet we believe this area is on the cusp of a major bull run and we’re revealing our top two picks.

A Potential 5-Bagger

Whenever you hear “potential five-bagger”, you roll your eyes and assume it’s another high-flying, cannabis stock. Yet one of the companies we found has the potential to be a five-bagger without much growth. In fact, if the company stays exactly where it is, we still see 300% upside.

This potential five-bagger meets all our requirements for an off-the-beaten-path idea. Management owns over 90% of the business. It’s the leader in its industry. It’s growing revenues, EBITDA and paying down debt. It trades less than $3,000 per-day. And market cap is around $350M.

It’s one of the cheapest businesses I’ve found in 2019.

You can read all about it in this month’s Value Ventures report. All you have to do is sign up at the link below:

Click here to discover the market’s next 5-bagger!

If you have any interest in catching this stock’s run make sure you subscribe now, because sooner or later the herd’s going to jump in and send this stock soaring.

Click here to subscribe to Value Ventures!

It’s The Downside That Matters


As investors, we want to ensure we’ve done all we can to profit from our hard work and due diligence. We read annual reports, scroll through slide deck presentations and read earnings transcripts. 

We’re business owners. Investing in actual businesses, not blips on a Bloomberg. In doing so, we try to understand the business as best we can. We study tailwinds, headwinds and competition. 

Some might think we do all these things to figure out how much money we can make from an investment. After all, we spent hours, days, even weeks studying this business. Shouldn’t we be rewarded for our efforts? 

Yet what if I told you the world’s greatest investors don’t focus on the upside of a business’ valuation?

It’s The Downside That Matters

The greatest investors focused on how much they can lose. Not how much they’ll make. Let’s look at three of the most-famous value investors as examples. 

Seth Klarman

Seth Klarman wrote the book on Margin of Safety. The idea is simple. An investor should pay a cheap enough price to account for volatility, bad luck and human error. 

Klarman used a variety of methods to find margin of safety. Net asset value, net cash value and net current asset value were some of his favorites. He would then invest in companies in which their stock prices were lower than the asset value. 

Joel Greenblatt

Greenblatt ran Gotham Asset Management from 1985 to 2006. During that time, Greenblatt compounded capital at a mind-numbing 40%. 

He generated those returns by focusing on the downside and let the upside take care of itself. Like Klarman, Greenblatt wanted a large margin of safety. He (like us) wanted to buy dollars for pennies. 

Greenblatt focused on cash flows, on earnings yields. It’s this distinction that differentiates him from Klarman. Greenblatt wanted to buy stocks today for less than what their cash would be worth in the future. The wider that gap, the more margin of safety.

This quote from Greenblatt sums up his strategy: 

“My biggest position isn’t in the stock that I think will go up the highest. It’s in the stock where I don’t think I’ll lose any money.”

Michael Burry

Michael Burry did things different from the others. His approach helped him achieve outsized returns at Scion Asset Management. His approach is simple, powerful and prevents him from losing his shirt in times of panic. 

Get Paid For Your Diligence — Follow The Greats

In next month’s Value Ventures, I’m laying out Burry’s entire investment process — the process that gives him his edge. We use this same process with every new investment idea pitched in our monthly Value Ventures report. 

Burry’s process keeps us in winners longer while cutting our losses quickly. All while investing in super cheap companies. The holy grail of successful investing. 

If you want to go deep on Burry’s process make sure to sign up for Value Ventures before the latest issue releases on Thursday, November 7th! After this date prices will rise going into the holiday season.  

Click this link to access Value Ventures!

Every purchase comes with a 30-day refund window so there’s absolutely no risk to check out the report. We’ll refund you no questions asked. In other words, there’s built in margin of safety with your purchase!

Your Monday Dirty Dozen [CHART PACK]


It is poor policy, I find, to wait for Opportunity to knock at your door. I train my ear so that I can hear Opportunity coming down the street long before it reaches my door. When Opportunity knocks, I try to reach out, grab Opportunity by the collar and yank it in.  ~ Richard D. Wyckoff

Good morning!

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

  1. Both the S&P 500 and Nasdaq made new all-time weekly highs last week. The technician Peter Brandt (@PeterLBrandt) has a measured move target on the S&P of 3,524. Approximately 15% higher from current levels.

  1. This chart from Callum Thomas (@Callum_Thomas) shows it’s not just US markets that are moving higher. The percentage of countries at least 20% off their 52-week lows is trending up from a very low base.

  1. We’re starting to see a reversal in flows out of bonds and into equities for the first time in a long while (chart via BofAML).

  1. Like a rubber band that has been wound tight, there’s plenty of potential energy to unravel. A process that could spark a flood back into risk assets (chart via BofAML).

  1. The reason behind the lopsided flows is that money managers are bearish… and I mean extremely bearish… Barron’s latest “Big Money Poll” finds that only 27% of fund managers surveyed are bullish on stocks over the next 12-months. That’s the lowest bullish reading in more than 20-years.

  1. Valuations in the US are back near levels that in the past have acted as headwinds for equity market returns. This doesn’t mean we can’t see US multiples expand further (they probably will). But it increases the fragility of the trend.

  1. It also means that investors who now find themselves horribly underinvested and who are looking to dramatically up their exposure to equities may look elsewhere.

  1. The US has long earned its valuation premium over the rest-of-the-world due to its strong trend in earnings. But, BofAML noted in a recent report that this trend may be changing, writing “The US one-month ERR (0.49) has dropped below the global ERR (0.65) which is unusual. Note that in the post-crisis period, the S&P 500 ERR has been above the Global ERR 74% of the time, underscoring the earnings prowess of the S&P 500 relative to other regions due to its secular growth and quality biases. Are the tides shifting? Other signals suggest shifts from the US to other neglected pockets. Our global team notes that the October ratio improved the most in Asia Pac ex-Japan and Emerging Markets, but the ratio fell the most in the US (Europe’s ratio remained unchanged).”

  1. Equity markets have been benefitting from improved financial conditions this year relative to last. One of the few remaining conditions that have been tightening liquidity has been the persistently strong US dollar. But the USD is back below its 200-day moving average and as I noted in last week’s Dozen, we might finally be seeing the turn in King Dollar. A trend that would further boost financial conditions and make underweighted ex.US assets even more attractive.

  1. One of the cheapest markets at the moment is Russia (RSX) which just broke out to new multi-year highs last week.

  1. Remember how a month ago the bears were sharing this chart of the ISM Manufacturing New Export Orders which had just hit new post-crisis lows? Well, it just rebounded in one of its strongest MoM reversals. I wonder why those same people aren’t sharing the chart now?

  1. Finally, one of my favorite leading recession indicators, the Philadelphia Fed Leading State Index, came out with another solid print this last month (when it crosses below the red horizontal line is when you need to worry). Just another sign, amongst many, that a recession is still a ways off.

Your Monday Dirty Dozen [CHART PACK]


There are really four kinds of trades or bets: good bets, bad bets, winning bets, and losing bets. Most people think that a losing trade was a bad bet. That is absolutely wrong. You can lose money even on a good bet. If the odds on a bet are 50/50 and the payoff is $2 versus a $1 risk, that is a good bet even if you lose. The important point is that if you do enough of those trades or bets, eventually you have to come out ahead.  ~ Larry Hite

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at breakouts, breadth, and credit confirmations that are ALL signaling a move higher in global risk assets. Also, we look at positioning amongst inflation assets and see where the pain points in the US dollar are amongst CTAs. Plus more…

  1. Markets are breaking out to the upside everywhere. The S&P 500 Value Index is one of them. It made a new all-time high last week. According to Sentiment Trader, when the index “broke out to a new all-time high for the first time in 200+ days, the S&P 500 Value Index always went higher 6 months later”.

  1. When trying to gauge the strength of the underlying market trend, it’s key to pay attention to what’s going on under the hood in the individual issues. Breadth will nearly always precede major changes to the trend. This chart from @MacroCharts shows that breadth in the S&P is at its best level in over a year.

  1. I’m seeing similar indications of strength in nearly all my breadth and momentum indicators. Take the NYSE AD-line for example. It just made a new cycle high last week.

  1. And this strength isn’t just isolated to the equity market. Just as importantly, it’s showing up in credit as well. This past week we saw credit’s relative performance break out to new 18-month highs. This is exactly the type of action you want to see before a major move higher in stocks.

  1. Our “Leaders” are all doing what they’re supposed to be doing; moving up and to the right. Notice how the news and fintwit bears were all whining about Texas Instruments (TXN) earnings miss and lower guidance? Yet, the semis index (SMH) made new all-time highs last week (chart below is a weekly). Check your bias.

  1. Another thing to keep an eye on is cyclical vs defensive relative performance. Financials and industrials are on the verge of breaking out and the copper/gold ratio looks like it’s about to do the same. Another rate cut from the Fed this week (something which is looking likely) will steepen the curve and drive a bullish thrust in relative cyclical/defensive performance.

  1. I know I’ve been hammering this point over and over the last couple of months but sentiment and positioning remain in stark contrast to markets that are hitting new highs. The NAAIM Average Stock Exposure Index is at 65%, well below its 3yr and 5yr averages.

  1. And Nomura’s Global Equity Sentiment Index is back in negative territory. Apparently, no one is impressed with the across the board breakouts that are happening. This is exactly the type of sentiment we want to see for the next leg higher.

  1. We’re at a critical level for the US dollar. It’s still well within a technical uptrend and above its 200-day moving average. But as this chart from Nomura shows, if it moves any lower from here it will trigger selling from CTAs which could spark a positive feedback loop of a lower USD and more forced selling. The FOMC this week will be key to where the USD trades in the weeks to come.

  1. And CTA’s are positioned fairly long the dollar against a number of pairs (chart via Nomura).

  1. If we do see the dollar trade lower from here it’ll be a nice and needed tailwind for crude where hedge fund short positioning has become increasingly crowded on the short side (chart via @Warrenpies & h/t @TN).

  1. We’ll end with another great chart from @MacroCharts that serves as a perfect reflection of the current positioning/sentiment zeitgeist. Citi’s Long/Short Inflation Ratio is at levels that have marked the absolute lows in long/short inflation positioning two other times this cycle. Stocks are breaking out on the back of strong breadth while bonds are looking precarious and the Fed is likely to cut right at the moment when the global manufacturing recession has troughed. Position accordingly.

Your Monday Dirty Dozen [CHART PACK]


It may be readily conceived that if men passionately bent upon physical gratifications desire greatly, they are also easily discouraged; as their ultimate object is to enjoy, the means to reach that object must be prompt and easy or the trouble of acquiring the gratification would be greater than the gratification itself. Their prevailing frame of mind, then, is at once ardent and relaxed, violent and enervated. Death is often less dreaded by them than perseverance in continuous efforts to one goal.
~ Alexis de Tocqueville

Good morning!

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

  1. There’s been a lot of talk about the growing divergence between hard and soft (survey) data over the past few months. Here’s a great chart from Citi showing just how unusual the current gap between the two is. The red circles highlight the fact that when the two diverge it’s usually the soft data the reverts back to the hard economic numbers. The one time this didn’t happen though was in 2008 so… feel free to go ahead and use this chart to confirm your priors.

  1. A benefit of the declining global economic picture, for risk assets at least, is that it has central bankers around the world hitting the gas pedal again. The percent of central banks cutting rates hit its highest level since the GFC this month (chart via FT).

  1. Citi’s Bear Market Checklist is still giving the all-clear. Current warnings only add up to 25%. For an official bear market signal, we need to see amber and red warnings add up to over 50%.

  1. I think this quarter’s earnings will be the big tell on where things are headed in the intermediate-term. And we have a busy week on that front, with a number of highly followed companies reporting over the next five days (chart via Earnings Whispers).

  1. So far, companies have had an easy time hurdling the low bar (pessimistic earnings consensus) with 84% of S&P 500s companies that have reported so far, surprising on the upside.

  1. That’s not to say the longer-term earnings picture is all hunky-dory. NDR’s SPX Earnings Model, which breaks earnings into two main categories (1) strong earnings growth and (2) weak earnings growth, shows that the trend has just moved into the “Weak Earnings Zone”. There’s been a number of instances where the model has crossed into these levels only to rebound later but something to keep in mind (chart via NDR & CMG Wealth).

  1. One thing that I think isn’t properly appreciated by the bears is just how much buybacks are driving this bull market. Net share destruction (share issuance – buybacks) has been significant. Companies buying back their stock has been pretty much the only demand source propping up this market year-to-date as investors have been net sellers for the most part. It’s difficult for me to see how this trend doesn’t continue as long as the credit market stays willing to fund it, which they appear to be at the moment (chart via NDR and CMG Wealth).

  1. The money supply in the US (both M1 and M2) has been picking up since the beginning of the year.

  1. This graph from Sentiment Trader shows that when the 12m growth in M2 is greater than 5.5%, as it is now. It tends to be positive for stock market returns going forward.

  1. @TN shared this great chart last week showing the Rydex Bull-Bear Asset Spread. When this ratio spikes, like it is now, it means that investors are positioning defensively. The highlighted points note that this is almost always a bullish sign going forward for the market.

  1. This graph from Koyfin (the best free charting and market analysis tool out there) shows country ETF performance over the last month. I like to regularly check up on this gauge of short-term momentum to see where the money is flowing. It looks to me like capital is starting to make its way back to the undesirables (the unloved and underweighted). Europe and Lat-Am, and even parts of Asia are worth a look. If the dollar breaks here then these will take off like a banshee.

  1. Malaysia (EWM) is one of these charts worth watching. It’s nearing 10-year lows and has been trading lower in a tight coiling descending wedge pattern. Patterns like this often precede explosive moves higher. Plus, I hear the country is readying major tax cuts and fiscal stimulus is on the way.

Your Monday Dirty Dozen [CHART PACK]


The point of forecasting is not to attempt illusory certainty, but to identify the full range of possible outcomes. ~ Paul Saffo

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at more charts showing the pervasive bearishness amongst investors; from sentiment near multi-decade lows to persistent outflows in EM stocks. We also check out seasonality, some gold charts and more. Here we go…

  1. Credit Suisse’s Global Risk Appetite is at depressed levels showing investors around the world have grown increasingly bearish.

  1. Individual Investors in the US aren’t immune to the negativity. AAII %Bulls is near 30-year lows.

  1. The 50-day moving average of the Total Put/Call ratio is close to 2 Stdev above its 12-month rolling average. This means investors have been persistently buying downside protection at a high rate. Similar trends in the past have tended to mark major bottoms.

  1. Investors across the board (from retail to institutions) have been net sellers of EM stocks since the start of the year (chart via MS).

  1. The chart below from Morgan Stanley shows how consistent these outflows have been week after week.

  1. The graph below shows GEM Fund Manager weighting relative to the MSCI EM Index (via MS).

  1. @MacroCharts recently shared this great chart showing the FX-adjusted US flows into Chinese equities. The outflows are at extremes. I agree with his thinking below. Many EM charts have built a nice coiled base. Weak hands look like they’ve all been washed out. It’s not going to take much in the way of “positive surprises” to reverse these flows.

  1. Tom McClellan noted in a recent blog post (link here) how the equity market’s seasonal have been shifting forward in recent years.

  1. If stocks start getting bid and we enter a new period of risk-on then bonds and gold should continue their recent bouts of weakness. Expect gold to continue to retrace and consolidate for a while.

  1. It’s probably going to take a few weeks if not a couple of months to work off the sentiment and FOMO buying that chased into this rally over the last few months. The chart below shows CFTC open interest (for futures only) spiking to all-time highs. We can see that similar spikes in speculation in the past have preceded extended retracements.

  1. Another data point showing extremely bearish positioning. Spec longs in the S&P are near levels that have marked major bottoms in the past. I hope you’re seeing the pattern here…

  1. We’re going to need to see the ISM bottom soon (I think it will) or else the odds increase that we’re on the cusp of an earnings recession. The chart below shows the ISM Manufacturing Index and TTM EPS for the SPX.

Part 2: #Recession2020, Really? A Review of the Data


I’ve got some bad news…

According to this guy, there’s at least a 70% chance we enter a recession next year, maybe sooner.

It’s not just James of “Financial  Education”. It’s literally every popular social media influencer on youtube predicting a major slowdown in the economy over the next 12-months.

I guess it’s time to sell our longs and leverage our shorts guys, and gals. Praise be to these high-minded Tubers who bless us with their all-knowing economic wisdom…

Alright, enough sarcasm.

I’ll be honest, the probability of a recession has increased since the start of the year. It’s gone from basically nill to maybe 35% odds we’ll see one in the next 12-months — these are very fudgy numbers just fyi. I should note that I will adjust these numbers dramatically and without shame, if the data significantly deteriorates or improves.

And therein lies an important point. What’s up with everybody’s obsession in trying to predict a recession, anyway?

I get it if you’re a business owner and you don’t want to take on too much leverage before an extended slowdown in the economy or something. But as traders and investors who mostly deal in highly liquid instruments why spend so much time and effort on trying to play Nostradamus and predict what’s going to happen to something as complex and dynamic as the US’s $20trn economy 12-months out?

I’m not saying it’s not important to pay attention to the macro trends — of course, it is, we’re macro traders after all and I’ll walk you through our basic recession dashboard here in a sec. What I am saying is that I think there’s a not too small population of traders and investors out there (maybe even the majority) who see a recession around every corner and react to every dip in the market as if it’s the BIG one.

I’m guessing they’re playing the “let me show everybody how smart I am versus making money game” that we talked about earlier this week. That or they’re trying to sell a newsletter. Hey… being bearish sells. That’s why you see so many unapologetic bears on Twitter who’ve been spewing doom and gloom for the last 7-years. It’s making them money, not investing money, but loads of subscription money

Thank GOD these people exist because they create the wall of worry that drives the beautiful bullish trends for us to exploit.

I digress…

Here’s how I think about recessions.

Actually, first, a quick PSA.

Recessions are not two consecutive quarters of negative real GDP growth as most think. Rather, the NBER defines them as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” Formal recessions aren’t identified until well after the fact.

Now that we have that out the way. Here’s how I think we should think about them.

Traders and investors don’t trade recessions. We trade the market. The market performs poorly in a recessionary environment. Dips that were once bought, tend to be sold. And a  consecutive number of lower highs and lower lows in the indices, spawn a bear market. During this time we want our bias to be to the short-side.

The market is one of the “best predictors of recession” as Stanley Druckenmiller likes to say. Our collective wisdom is actually pretty intelligent — and sure there’s a reflexive self-fulfilling component in there too. This is why the SPX peaks on average 7-months before a recession hits. And yeah, the market will give false signals from time to time but that’s where the rest of our “weight of the evidence” comes in handy; to tell us if this dip is really the start of a new cyclical trend or just another vanilla bull market retrace.

I guess that’s the point I’m trying to make. We play the technicals in front of us while keeping an eye on what’s on the horizon. But we’re limited in how far we can see. Things are always a little hazy when they’re further out in time. It’s counterproductive to spend much time or energy playing the prediction game (again, unless you’re trying to raise AUM or sell a newsletter) when instead you should be teeing off what’s happening in the market and its internals, now.

You can do better by spending just a few minutes every month going through the Recession Dashboard below. Flip through our leading and coincident indicators and then put them in context with what the market is saying (which I talked about earlier this week).

We want to look at this data holistically. Remember, it’s about the weight of the evidence. Not what one or two indicators are doing.

As of right now, the odds of a recession are fairly low. The LEI, which has led every recession (median lead time is 10-months) since its creation roughly 50-years ago, is at cycle highs. So is New Housing Starts. Initial claims troughed 5-months ago but they haven’t started trending up and are still well below their 36-month moving average. The 2s10s yield curve only briefly inverted 2-months ago and that one tends to have a long lead.

*** Click on the indicators to see the charts***

Early U.S. Recession Indicators
Indicator Median Lead Time Current Cycle Key Recession Level Current Level
Conference Board LEI Peak  10-months New cycle high Negative YoY% +1.08
Yield Curve Inverts (2s10s)  19-months 2-months NA NA
Initial Claims (4wk avg) Trough 8-months 5-months 36-month MA crossover Well below
SPX Peak 7-months 2-months Below 50-week MA Above
New Housing Starts Peak 28-months New cycle high NA NA
Leading/Coincident U.S. Recession Indicators
Indicator Key Recession Level Current Level
Consumer Confidence Index 36-month MA crossover   Above
Breadth of Philly Fed State Leading Indexes Below 0.7 1.4
ISM Manufacturing Index Below 44 47.8
ISM Non-Manufacturing Index Below 51 52.6
Conference Board’s Business Confidence Index Below 43 34
Unemployment Rate 12-month MA crossover Below
Real Retail Sales YoY% Negative YoY% +2.3%
Adjusted National Financial Conditions Index Above 0 -0.65
Kansas Fed Financial Stress Index Above 0 -0.35

The real weakness has been in the soft data. The ISM and Conference Board Surveys. The CB CEO survey is abysmal. No doubt some, or much, of that weakness can be attributed to the trade war. The rest of the data shows a slowing though still positive growth economy.

Financial conditions remain incredibly loose. Consumers are still spending and the labor market isn’t showing signs of serious deterioration.

If more of these indicators begin to flip red and we start to see the US market turn down along with participation begin to crumble, then we’ll want to update our odds. Until then, focus on the market trend.

One final thought that I want to leave you with today.

The US and rest of the world (RoW) decoupled about 18-months ago. Growth in the US and ex.US began to fade going into 18’ due to decelerating Chinese credit growth and the US moving to the backend of a large fiscal impulse (tax cuts) — yeah sure, the trade war mattered too but not as much as everybody thinks. And while the US stayed buoyant, mostly thanks to a strong consumer. The RoW flipped over on its belly…

This is why most ex. US markets have spent the last 21-months or so in a bear market downtrend or, at best, sideways range (as I noted here). Much of the world was in a recession as shown by NDR’s Global Recession Probability Model below.

This slowdown began in earnest in the spring of 18’. Ex. US slowdowns tend to last 14-months on average which would put this one ending sometime around now, give or take a few months.

Now China is a black box and I prefer to consume a large helping of salt when I look at their numbers (and why I like to check their data against 3rd party sources). But, there are tentative signs that growth may be in the process of bottoming.

We shouldn’t expect to see global growth hockey stick as we saw in 16’. The CCP has made it clear they’re serious about reigning in leverage so a flood of Chinese credit probably isn’t on the way. But… the CCP is even more concerned with keeping Chinese unemployment low and social sentiment elevated. So maybe we see some more easing at the margins from them which makes for a decent if underwhelming bounce in global growth.

If this ends up being the case… well, let’s just say there’s a lot of money that’s offsides and will need to be put back to work…

But then again, who knows…  maybe Jeremy and all the other Tubers end up being right. Maybe we do get hit with a recession in 2020 — it’d be the first time that I know of where we all saw the big one coming.

Really, that’d be fine too. The tape will tell give us a heads up and our data will confirm the tape.

P.S. Fall enrollment for the Macro Ops Collective has begun! We regulate the number of new signups because we’re going for quality over quantity and want to make sure we’re able to provide the most value to our fellow Collective members as possible and keeping the inflow limited helps us do that. If you’re interested in checking us out then go ahead and click this link here to see what’s on offer or feel free to shoot me an email with any Qs you may have at alex@macro-ops.com.

Either way, thanks for being a reader and good luck in the markets.

Part 1: The Tape Tells All


We kick off our series of imagining alternate scenarios and evaluating the weight of the evidence by starting with the most important thing, the tape.

I’m going to walk you through my process for looking under the hood at the broader supply and demand forces driving underlying price-action in the averages and what the technicals are saying right now (hint: It’s odds on we’ve started what should be a decent-sized corrective impulse).

Before I get into I want to let everyone know that our flagship macro product, The Macro Ops Collective, has officially started Fall enrollment!

Collective members receive macro analysis like this each and every week. So if you want to step up your game and get serious about markets into the end of the year I suggest taking a look at the MO Collective

Now back to markets…. 

Here’s the basic framework we’re going to go through:

    • Technicals
      • Major Market Indices
      • Leading Cyclicals
      • The Generals
    • Internals
      • Momentum
      • Participation and Breadth
      • Cyclical vs. Defensives
      • Credit and Spreads
    • Sentiment (Collective Members Only)
      • Short-term Positioning and Sentiment
      • Long-term Positioning and Sentiment
      • News Cycle and Popular Narratives

Like a thermometer

Charts reflect the collective voice of the entire marketplace. Most of the time the market is pretty good at discounting an unknowable future. But, sometimes, reflexivity kicks in and the pendulum swings too far in one direction or the other. These swings are fairly easy to identify because they only occur when a near consensus surrounding a popular narrative has been reached (ie, sentiment is running really hot or freezing cold).

To quote Bruce Kovner again, “technical analysis is like a thermometer. Fundamentalists who say they are not going to pay any attention to the charts are like a doctor who says he’s not going to take a patient’s temperature. But, of course, that would be sheer folly. If you are a responsible participant in the market, you always want to know where the market is — whether it is hot and excitable, or cold and stagnant. You want to know everything you can about the market to give you an edge.”

By just taking a step back and looking at the long-term trends in the major global indices we can get a feel for where the supply and demand trends have been and where they may be headed. Remember, momentum is a powerful force in markets and established trends tend to persist until they hit local extremes, usually noted by buying/selling climaxes and accompanied by a consensus narrative.

Most global indices have been in or were recently in an extended bear market — as marked by consecutive lower highs and lower lows — with the US being the sole exception.

The US NYSE has been moving sideways since Jan of 18’. Asia ex-Japan and Europe peaked around the same time and have been trending lower for 12-21 months depending on whether you count the year-to-date bounce as the start of a new trend or a corrective bounce.

Within the US we have a mixed bag. The SPX and Nasdaq have been in a high volatility low angle uptrend and small-caps peaked 14-months ago and have yet to make a concerted advance towards new highs.

Next, we want to look at our leading cyclicals.

The market is a discounting mechanism and peaks on average 6-9 months before a recession hits. Within the market, there are leading cyclicals that tend to peak even earlier. These are areas of the market that track things such as financials, consumer spending, construction etc… they are representative of business activity within the broader economy.

We don’t need to get fancy here. Just look to see where the 200-day moving average (blue line is trending). The following are all 5-year charts.

Financials have traded sideways for 21-months.

Housing declined for all of 18’ but has since been moving steadily higher.

Autos have been trading sideways for a while.

Like housing, construction materials trended lower for all of 18’ but have been steadily rising since.

Flooring traded lower for all of 18’  and has chopped sideways year-to-date.

Construction materials trended lower for all of 18’ but have been in an uptrend ytd.

Home improvement has been in a solid uptrend ytd.

Auto parts have been trending lower for 18-months.

Semis are in a broader uptrend.

Outside of the auto sector, the majority of our leading cyclicals are for the most part positive — they are trending up and to the right.

Lastly, we have our Generals. The Generals are the stocks that capture the zeitgeist of the cycle. They’re the popular cycle outperformers. When this group begins to falter we want to take stock.

This Generals index has all the FAANMG stocks as well as some other large high-flying SAAS companies and JPM for good measure. Our Generals have been trading sideways for the better part of this year and the basket looks susceptible to at least a short-term selloff below its 200-day MA (red line). On an individual basis, there’s some increasing technical weakness in these names.

To summarize the technicals picture, we have:

    • Market Indices
      • The majority of global markets have been in an extended bear market that began on Jan 18’
      • The US, for the most part, has traded sideways for the last 21-months, with large caps in a low angle volatile uptrend and small-caps in a slight downtrend for the last 14-months
    • Leading Cyclicals
      • Housing and construction sectors are in a broad uptrend following a year-long downtrend in 18’
      • Autos are weak across the board
      • Semis are trending up and to the right
    • The Generals
      • Been trading sideways for much of the year and look susceptible to short-term weakness

Stay with me, we’re building a picture.

The strength of the line

Next up we have our market internals. Internals give us an under-the-hood look at where the capital is flowing into and out of which provides us with a sense of the strength or lack thereof, of the trend.

We start first with momentum, for which we use just a simple MACD oscillator. Currently, the SPX is working off both a weekly and daily MACD sell signal and downside momentum is accelerating.

For momentum to endure you need to have a strong line. Think of the stock market averages as a medieval battle unit, standing shoulder to shoulder as they march headlong into the enemy lines. The greater their depth of advancing soldiers the stronger their front lines are and the easier it is for them to advance. Conversely, when these lines thin out and there are fewer and fewer soldiers pushing forward, the easier it is for the line to break and momentum to reverse.

There are many ways to gauge the strength of the market’s line and one of these is the NYSE Advance/Decline line (stocks only). As long as the AD line and market are moving higher in gear with each other, there’s little to worry about; it’s unlikely the market will suffer a significant correction.

However, when this indicator diverges from the market for a significant period, it’s time to become cautious. A negative divergence that lasts a couple of weeks is likely to be only a minor correction. A major divergence that lasts a few months means a bear is waking from its slumber.

You can see the multi-month divergence that appeared in early 07’ preceding the nasty bear market.

The AD line made a new high just last month and has since been moving lower in lockstep with the market. The lack of an extended negative divergence — a weakening of the line — suggests that it’s highly unlikely we’re putting in a market top right now.

For more intermediate and short-term measures of market breadth, my go-to’s are the McClellan indicators (both summation and oscillator). For a detailed explanation of how these indicators are constructed, go here. But, put simply, the McClellan Oscillator is just another way of looking at the number of advancing and declining issues in the market whereas the Summation index is just a running total (summation) of the Oscillator.

Generally speaking, when the Oscillator and Summation indicators are positive, it signals that money is flowing into the market and vice-versa when they’re both negative. And when the two hit local extremes it can indicate a reversal point.

Both triggered sell signals within the last two weeks and are not yet showing signs of a reversal in the near-term.

Credit spreads are widening and cyclical vs. defensive groups have been trending lower. Both are indicating that we’re likely to see a continuation of short-term weakness in the weeks ahead.

Market internals summary:

    • Momentum
      • A weekly and daily MACD sell signal are still in effect which means we should be biased to the downside until these flip
    • Participation and Breadth
      • The NYSE AD line made a cycle high last month and has been moving in lockstep with the market. There is no major divergence thus it’s highly unlikely we’re putting in a major top
      • The McClellan indicators have not reversed the sell signals they triggered two weeks ago. Keep a downside bias
    • Internals
      • Credit is leading the way lower. Keep an eye on LQD/IEF and high-yield (JNK). Both look like they’re about to crack. Falling oil prices raise the potential for a selloff in credit like the one we saw at the end of last year
      • Cyclical vs. Defensives have been unable to get off the floor, largely due to the relative strength of defensives. We want to see this trend reverse if we’re going to start a sustainable impulse higher

Playing the player: no consensus

One of our key operating guidelines is that the market is going to move in a way that frustrates the majority of people, the majority of the time.

This is why it’s important we’re constantly gauging public sentiment and the average positioning of the market. When we can identify key consensus points we can wait for technical confirmation and then fade the masses.

We look at a host of sentiment and positioning indicators. Some are good for the short-term and some for the longer-term.

I sent out our full sentiment report to Macro Ops Collective members this morning. If you’re interested in the current state of market positioning check out the Collective

Let’s start with a few of my favorite short-term ones.


Combining technicals, internals, and sentiment together we get a more detailed picture of what’s going on in markets.

We can sum things up as this: Markets globally ex. US peaked nearly 2-years ago and have been mostly trading lower or sideways since. In the US, markets have largely gone sideways for the last 21-months; with large-caps slightly up and small caps down a good deal.

Outside of autos, the leading cyclical sectors are trending up and to the right, following a 12-month long beat down in 18’.

This cycle’s Generals have traded sideways for the better part of this year and look susceptible to some short-term weakness. But, they remain in a broader uptrend.

Momentum is indicating short-term weakness ahead but the broader breadth and participation of the market remains strong, which means it’s low odds that we’re in the process of putting in a cyclical top.

The credit market looks like it’s about to have a conniption. This should exacerbate short-term weakness in the stock market. But longer-term, credit spreads remain fairly tight and funding pressures are low.

Sentiment and positioning indicators show that, for the most part, the market is becoming increasingly bearish. The II is the one stubborn survey, this should get washed out following further downside.

Ultimately, the broader technical picture says that we’re likely to continue in our current volatile sideways range until we hit a local extreme in sentiment. Furthermore, the weight of the evidence suggests that this is likely a consolidation period that will lead to another impulse higher. The technicals, internals, and sentiment pictures do not yet support the argument that we’re putting in a long-term top. Though they do suggest that it’s high odds we see an acceleration in this down move over the coming weeks.

The next two weeks are some of the most volatile weeks of the year on a seasonal basis. Over the last 20-years, the S&P has tended to sell-off into the end of the month (26th is the average bottom) before rocketing higher. I expect we may see a similar pattern this time around.

If you would like to see exactly how we’re positioning for this volatility check out the Macro Ops Collective before this Sunday!

In our follow-up piece, we’ll dissect the economic numbers. See where the strength and weaknesses are in the global economy as well as where the major trends are headed.

Until then, keep your head on a swivel and your risk tightly hedged. I get the feeling that the market is about to really start reacting to the US/China conflict narrative.