Equity Valuation by Country

Musings: Wealth, War & Wisdom and Japan’s Time to Shine

Alex here with your latest Friday Macro Musings.

Latest Articles —

A Monday Dozen  — I take a look at bitcoin’s technicals, small-caps nearing a relative performance 70yr+ trendline, easy Q3 earnings hurdles, spiking global economic uncertainty and more.

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Articles I’m reading —

This piece written by Bob Henderson (@RobertH90430077) for Nautilus (one of the few hard copy periodicals I subscribe to) titled “What I Learned from Losing $200 Million” is excellent. It was written back in 2015 but is still a very worthwhile read.

Bob talks about his time working as a derivatives trader during the GFC and a particular pickle he found himself in when an exotic option deal that he put together turned south, in a big way. He uses this story to explore the dangers of the “illusion of control”, why rigid models and complexity don’t mix well, and why we’re neurologically wired to desire both.

Here’s a cut and the link (h/t to @keanferdy for sharing this in our Comm Center).

“In another study, done in 1992, a group of Israeli college students was found to be more willing to bet on dice, and to bet bigger, before they rolled than after, reflecting the belief that they had control over their rolls. Such a preference for prediction over postdiction had been observed before, but this study also found that the preference grew stronger when the students were threatened with an electric shock if they guessed wrong—evidence that stress amplifies the illusion of control.

Langer’s work showed that the illusion is also intensified by “skill cues”: circumstances that make people feel like they’re engaged in acts of skill rather than luck. Such cues include competition, choice, and familiarity with the task at hand. Therefore people will tend to overestimate their prospects in a game of pure chance even more than usual if they face a nervous-looking opponent, or if they pick rather than get assigned a lottery ticket, or if they’re given the chance to familiarize themselves with an apparatus that’s simply spitting out random numbers.”

I’m no Buffett fanboy but www.buffettfaq.com is a pretty neat site that somebody (with way too much time on their hands) put together. It’s is a digital compendium of every Q&A ever done by the Oracle and organized by topic. For instance, if you select “Accounting, Corporate Finance & Investing” and then click “Your Thoughts on EBITDA” you get the following sourced quote:

“It amazes me how widespread the use of EBITDA has become. People try to dress up financial statements with it.

We won’t buy into companies where someone’s talking about EBITDA. If you look at all companies, and split them into companies that use EBITDA as a metric and those that don’t, I suspect you’ll find a lot more fraud in the former group. Look at companies like Wal-Mart, GE and Microsoft — they’ll never use EBITDA in their annual report.

People who use EBITDA are either trying to con you or they’re conning themselves. Telecoms, for example, spend every dime that’s coming in. Interest and taxes are real costs.”

Lastly, give these two short pieces a read. The first is on the economics of podcasting (link here). The author estimates (using conservative numbers) that Joe Rogan is pulling in $60-$235mn a year annually from his podcast. Not a bad gig if you can get it. And the second is a recent writeup from Brent Beshore titled “Investors and Operators: Lessons I’ve Learned from Both Worlds” (link here). There’s some great bits of wisdom in there for both operators and investors. Here’s one of my favorite lines:

“Precise spreadsheets are maps of a world that never existed and will never come to fruition, even if the numbers are hit. Business is about people and people are hot messes, capable of incredible feats of brilliance and stupidity. What’s more, they’re either optimistic or pessimistic, but rarely accurate. Some relentlessly strive to beat the numbers, while others have never hit a projection. Get to know the people and the business and the operations. That’s where the opportunity is. The numbers are the numbers.”

Charts I’m looking at—

Check out this chart from Martin Pring (@martin_pring) showing the commodity to bonds ratio. It’s fallen to long-term support and is now in deeply oversold territory. Martin Pring notes that this sets “the ingredients for an inflationary rally”. I’m leaning in this direction as well…

Video I’m Watching —

Real Vision’s recent interview with Mark Ritchie is fantastic (it’s free to watch on YouTube, here’s the link). For those of you who aren’t familiar with Mark, he’s a legendary old school trader who was profiled in Schwager’s New Market Wizards book. Mark dives into two of the most important aspects of trading — and not surprisingly, they’re the two areas that are the least discussed: losing and position sizing.

Mark Spitznagel wrote in The Dao of Capital that the most valuable lesson he learned from his Chicago trading pit mentor, Everett Klipp, was that “you’ve got to love to lose money.” Learning to lose is one of Ritchie’s favorite topics. It’s also one of the primary reasons he’s been so successful in markets. The video is roughly 45 mins long and is worth every minute. Give it a watch.

Oh and here’s a line I have in my “trading quotes” notebook from Ritchie which must be from Market Wizards.

“Magnitude of losses and profits is purely a matter of position size. Controlling position size is indispensable to success. Of all the traits necessary to trade successfully, this factor is the most undervalued.”


Book I’m reading —

This week I found myself thumbing through Barton Biggs’ Wealth, War & Wisdom. I first read the book a few years ago but cracked it open again to look for some color on ‘a war and markets’ research piece I’m working on.

Biggs is the author of one of my all-time favorite investing related books, Hedge Hogging. While Wealth, War & Wisdom isn’t quite on par with the former it’s still an enjoyable and educating read — especially if you have intersecting interests in markets and wartime history. Plus, he also writes a good deal about one of my favorite subjects; the wisdom of crowds, especially as it pertains to markets.

Here’s a section from the book:

“I first became fascinated with the subject of the wisdom of markets when, by chance, I discovered that the British stock market bottomed for all time in the summer of 1940 just before the Battle of Britain; that the U.S. market turned forever in late May 1942 around the epic Battle of Midway; and that the German market peaked at the high-water mark of th eGerman attack on Russia just before the advance German patrols actually saw the spires of Moscow in early December of 1941. Those were the three great momentum changes of World War II — although at the time, no one except the stock markets recognized them as such. This, to me, confirmed the extraordinary (and unrecognized) wisdom of market crowds.”

Trade I’m considering —

You know what country has a pretty good looking chart?

Wrong, not that one.

The correct answer is Japan.

Here’s a weekly of the Nikkei 225 index (EWJ for those of you who trade ETFs). The index just bounced off its 200-week moving average (blue line) and is consolidating in a tight range.

There’s a lot to like about Japan. It’s one of the cheaper markets at the moment, relative to history.

It’s also one of only two major economies, along with Canada, that’s seeing positive economic surprises currently.

Earnings revisions breadth (average analyst revisions to earnings expectations) is horrendous. But this is actually a good thing because it means that expectations have been fully reset to low levels — the ‘positive surprise hurdle’ is very low. Note the last two times revisions breadth was this bad it preceded major bull runs in the market.

Though I’d like to see the LCI find a bottom first which I think we’ll see when the July and August numbers finally come in.

Anyways, it’s just a potential trade I’m thinking about. I like the technical setup in the Nikkei and will keep a close watch of it. Oh, and also, Michael Burry of Big Short fame recently turned bullish on the country and has been loading up on some Japanese stocks. You can see what he’s been buying here.

Quote I’m pondering —

But if someone could turn their minds from wondering what will happen to them, and make them wonder what they could do, they will be much more cheerful. You know, I am sure, that not numbers or strength brings victory in war; but whichever army goes into battle stronger in soul, their enemies generally cannot withstand them. ~ Anabasis: The March Up Country, Xenophon, 430-355 B.C.

Like good ole’ Henry Ford put it, “Whether you think you can, or you think you can’t — you’re right”. The human will is a powerful thing. Make sure to use it.

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

Have a great weekend.

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