Alex here with this week’s Macro Musings.
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Our Recent Articles —
A “Marcus Trifecta” Look At Markets: We review the current market through the lense of macro, sentiment, and technicals.
Mark Sellers On Becoming A Great Investor: Do you possess the seven traits required to become a great investor?
Stanley Druckenmiller Video: A quick video on what we can learn from Druck. Let us know if you like these videos and we’ll make more!
Articles I’m reading —
Dalio wrote a fantastic piece on the growing disparity between the ‘Haves’ and ‘Have Nots’ in the US. He does a great job of disaggregating the data to show the economic plight faced by a large and growing group of Americans.
Here’s a (depressing) section from the piece:
- Now, the average household income for main income earners without a college degree is half that of the average college graduate.
- The share of whites without college degrees who describe themselves as “not too happy” has doubled since 1990, from 9% to 18%, while for those with college degrees it has remained flat, at around 7%.
- Since 1980, divorce rates have more than doubled among middle-age whites without college degrees, from 11% to 23%.
- Prime working-age white males have given up looking for work in record numbers; the number of prime-age white men without college degrees not in the labor force has increased from 7% to 15% since 1980.
- More broadly, men ages 21 to 30 spend an average of three fewer hours a week working than they did a decade ago; most of that time is spent playing video games.
- The probability of premature death for whites without college degrees between the ages of 35 and 64 is nearly three times higher than it is for whites with college degrees, and the rate of premature deaths is up by about 25% since 2000 (while it is down for virtually every other demographic group). The US white population is unique among large groups in the developed world for seeing increases in their death rates. Below, we show premature deaths among working-age whites between the ages of 35 and 64. Again, the average obscures the picture. America’s non-white population isn’t seeing such a rise in premature deaths.
Here’s the link. It’s worth a read.
Now onto something not so dour.
This is an awesome write up on the beginnings of Amazon and a sort of ‘survival guide’ for competing retailers put together by Brent Beshore and the team over at Adventure.es. It’s also got some great Bezos quotes with some filters to use when analyzing companies that compete with the 800lb gorilla. Here’s the link along with some words from Bezos:
There’s no rest. We can’t rest on our laurels. Over the last twenty years, there has never been a time when we looked into the future and thought it was clear sailing. We look into the future, and we see always an intensely competitive environment, a world awash with high rates of change and new technologies, all kinds of disruptive influences. It never looks like smooth seas to us from the inside, no matter what it might appear from the outside.
Customer obsession… competitor obsession… business model obsession… product obsession… technology obsession… There are many ways to center a business… Many of them can work. I know and have friends who lead very competitor-obsessed companies and those companies can be successful… I like customer obsession.
Unenumerated is my new favorite blog. It’s written by Nick Szabo, a smart polymath who writes about history, money, law, philosophy, and sometimes completely random but interesting things. Check out this post on the history of metal, money, and odd shiny things (link here).
Video I’m watching —
Here’s a pretty good, short presentation given by Jeff Macke at Stocktoberfest this year on the Golden Age of Retail (link here).
The key takeaway is that retail is not dead, it’s just changing, which is something it’s always done. And the winners will be those who reinvest into their business and products and build/capture customer loyalty. Some of the names he likes are Walmart (WMT) and American Eagle Outfitters (AEO).
And he thinks Macy’s (M) and Victoria’s Secret (LB) are going out of business.
Book I’m reading —
This week I read Money by Eric Lonergan who’s an economist and macro hedge fund manager.
It’s an excellent book. And it’s short (only 178 pages) which I like because I finished it in a couple of days and that makes me feel super productive. The book is a philosophical take on the nature of money. And while I don’t agree with some of his points (one being that he fails to truly differentiate between both cash and credit which is a very important distinction, imo) it’s a worthy read for his novel takes and insights into the functions and purpose of money.
Here’s an excerpt from the book:
The least obvious function of money is control of the future. We strive to reduce uncertainty in our lives. Life is unlivable if we act and reason in a manner wholly consistent with the truth of how little we know. The future is particularly uncertain, and fraught with risk. Money is the means by which we try to control it. But this property is also paradoxical: human beings crave certainty, but are excited by risk. Money fulfils this desire benignly through inventive and experimental risk-taking, but also facilitates leveraged gambling. Surprisingly, it is this relationship to uncertainty and risk that money shares with religion. Religion also seeks to satisfy these desires. At times it provides the promise of certainty about our purpose or future, but it also pursues the intrinsic appeal of mystery and risk-taking.
And for more of my book recommendations, check out our comprehensive reading list for global macro traders and investors.
Chart(s) I’m looking at —
I don’t know who put this together (someone sent it to me). But the chart serves as a good example of how the market always climbs a wall of worry.
Not trying to disparage any of the names on the chart. Being wrong, often, is an integral part of this game. I’m wrong all the time. But… and this is a big but… I often wonder about some of the more vocal market commentators who keep giving the same biased — and wrong — take on the market year after year after year….
It’s one thing to be wrong and change your mind. But how can you be wrong for years and still give the same take… with the same amount of conviction? Shouldn’t you question your models and assumptions at some point?
Why be an ideological zealot and fight the market versus… maybe… trying to actually understand it?
I have a feeling the answer has nothing to do with wanting to be right and a lot more to do with selling newsletters. Peddling doom and gloom sounds smart and responsible and pays the bills I suppose.
On a completely unrelated note: Sign up for our monthly market report (MIR) where we talk about our secret “X indicator” that’s giving a rare market signal indicating total portfolio violence ahead… the only other times this alarm has triggered was in 08’, 99’, 29’ and the day before the asteroid wiped out the dinosaurs!
Trade I’m looking at —
We first pitched Fiat Chrysler (FCAU) back in April to readers of our MIR. It was part of our European reflation thematic that we were tracking.
Not only did the European reflation thematic work out but so did the bullish call on Fiat — it’s up near 80% since.
Despite such a quick appreciation in the stock’s price, I still think the company is a great value and has the potential to rise much much further. Here’s Scott Miller (who’s one of the best small-cap value fund managers in the game, imo) writing about Fiat in his hedge fund’s (Greenhaven Capital) latest quarterly letter:
In 2014, the company’s five-year plan outlined significant investments that would lead to the accumulation of a significant (€5B+) net cash position by the end of 2018 plus the generation of €9B in EBIT, up from €7B this year and €3.8B in 2014. Sergio has had dozens of chances to walk back the 2018 plan and push it out a year or two. However, he publicly confirmed the forecasts as recently as two weeks ago at a Ferrari event. One reason he may have reconfirmed the plan is that it was built on the U.S. new car market of approximately 16M units (SAAR), which will likely prove conservative for 2018 given the current run rate and the replacements from hurricanes. Sergio has also indicated that Fiat is working on spinning off the parts business, which grew revenue in excess of 10% last quarter and generated a full-year run-rate EBIT of in excess of €500M. If we put an 8x multiple on the parts business, the spinoff should be worth €4B. Add that to the anticipated net cash of €5B, and we are left with a core auto business that, according to the plan (which may be conservative), will generate €8B+ in EBIT next year. FCA’s share price is currently below €15. At the end of 2018, the cash and parts business should represent €6+ per share of value and the core business should add a bit over €5 EBIT per share if it generates €8B in EBIT overall. So, if the plan and the share price both hold, Fiat’s core business, ex-parts and cash, will be trading below 2x EBIT. Of course, the plan may not hold and this math exercise may prove useless, but if they come anywhere close, there remains an enormous amount of value in Fiat Chrysler. Additionally, as the balance sheet strengthens, buybacks or dividends become real possibilities and the company would be an accretive acquisition to any number of manufacturers.
Fiat’s CEO Sergio Marchionne is the best capital allocator in the auto industry. He’s a good jockey to back and Fiat’s current valuation gives one a pretty good margin of safety to do it.
Quote I’m pondering —
The speculator’s chief enemies are always born from within. It is inseparable from human nature to hope and to fear… The successful trader has to fight these two deep seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. ~ Jesse Livermore
The costliest belief that a speculator can have is that they’re different, they’re special, and were somehow born with the ‘right’ stuff for trading. It’s total nonsense, but it’s part of our human hardwiring. It’s an evolutionary hangover that makes us eternal, albeit illogical, optimists.
This leads to what I call the ‘Trader’s Paradox’, which is: To speculate in markets is to believe that you can outsmart millions of other people, some who are backed by billions of dollars, have the most advanced technology and the smartest researches in the world. But, to survive and win in this game, over the long term, you have to be extremely humble, be aware of and acknowledge your shortcomings, and accept your fallibility.
One has to be both arrogant and yet extraordinarily humble. Tough circle to square.
Becoming a successful speculator is as much about developing self-awareness as it is about studying markets.
So get your zen on and practice some self-reflection.
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.
Your Macro Operator,