Global Macro Trading Journal

Quote from darkhorse:

Yep, don't really disagree -- except for the caveat that gold stocks could turn out to be a massive value trap, maintaining the worst scenario for gold is neither inflationary recovery nor deflationary collapse, but a shitty limp-along recovery that satisfies no one (except guys like Roubini and Shilling).

As Jeremy Grantham points out, lazy value investors do better than attentive ones in situations like the above -- instead of acting on "compelling cheap," they aren't roused 'til "ridiculous cheap" or "insanely ridiculous cheap."
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In what way specifically could they be a 'value trap'? The term implies a fundamental reason why a company's yields on its assets will never improve if price to book is the valuation metric, or why generated cashflow will never be delivered to investors if we're using price to earnings - e.g. a Japanese company trading at very low price to book but generating dismal returns on its assets, which won't be bought out or broken up for legal or cultural reasons.

In the case of gold stocks we've seen about two months of acute price weakness, evidently based on the presumption of a 'goldilocks recovery,' where the metal itself continues to look strong. Obviously gold can fall apart but in that case it won't have been a 'value trap,' just an error in forecasting gold's price direction.
 
Quote from Specterx:

In what way specifically could they be a 'value trap'? The term implies a fundamental reason why a company's yields on its assets will never improve if price to book is the valuation metric, or why generated cashflow will never be delivered to investors if we're using price to earnings - e.g. a Japanese company trading at very low price to book but generating dismal returns on its assets, which won't be bought out or broken up for legal or cultural reasons.

In the case of gold stocks we've seen about two months of acute price weakness, evidently based on the presumption of a 'goldilocks recovery,' where the metal itself continues to look strong. Obviously gold can fall apart but in that case it won't have been a 'value trap,' just an error in forecasting gold's price direction.
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The term can also imply fundamental reasons as to why cheap gets cheaper (or flatlines) for an extended period of time, resulting in 'dead money' for an unacceptably long holding period relative to what was anticipated.

I would question the presumed assumption as to why gold stocks are weak -- unbridled optimism is not at all required to justify this.

As mentioned, gold stocks could also be weak because the odds of an extreme economic scenario -- inflationary or deflationary -- are low relative to some more benign (though still disappointing) outcome. One does not have to be pollyanna to think the global economy could keep moping along in a half-assed sort of way.

Re, forecasting the price of gold... if one can do that, why not just go all in on gold futures? :D

We are flat gold stocks, and would neither buy nor sell them here, because we still suspect there is reasonable probability of a gold price collapse (or at the minimum substantial decline).

One could even argue, from a devil's advocate POV, that the poor performance of gold stocks relative to gold is an anticipation of gold price decline.

This would possibly fit tangential evidence of poorly performing energy stocks having negative things to say about the future direction of oil prices (as global slowdown looms and inventories build).
 
I'm thinking that taking a bearish position on an Australia fund (eg EWA) might be a better way to play Australia than shorting the currency.

1) To the extent AUD depreciates this will hit the US dollar value of any fund holding AUD-denominated assets.

2) If China stumbles and the mining boom fades, the Australian market will surely feel the impact; it's already been underperforming the US market since last spring but current prices nonetheless look attractive for a risk-controlled entry.

3) Aside from the commodity story, Australia appears to be heading towards the same sort of reckoning the US experienced in 2007: the backside of a housing bubble coupled with an overbuilt retail sector, which will rebound on the banking system in the form of bad debts, writedowns, etc. Financials make up 45% of EWA.
 
Quote from darkhorse:

Re, forecasting the price of gold... if one can do that, why not just go all in on gold futures? :D
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Well I feel comfortable with my gold holdings for the moment - but more specifically, GDX technically looks like it's positioned for an outsized bullish move over the next 12 months or so, whereas gold isn't near an obvious tactical entry point at the moment. This may have changed today btw and I might be reducing or ditching this position soon, the GDX action was extremely negative in terms of both the chart and correlations.

One could even argue, from a devil's advocate POV, that the poor performance of gold stocks relative to gold is an anticipation of gold price decline.

This would possibly fit tangential evidence of poorly performing energy stocks having negative things to say about the future direction of oil prices (as global slowdown looms and inventories build).
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I concur that this is exactly what the market seems to be anticipating - but it's unclear why investors in the shares should be the ones to get it right and gold futures traders the ones to get it wrong. Either way GDX performance for the past few months either represents a major mispricing opportunity or signals a change in the underlying dynamics of these markets.
 
Quote from Specterx:

it's unclear why investors in the shares should be the ones to get it right and gold futures traders the ones to get it wrong.
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Nothing more than a SWAG, but perhaps gold is better supported than gold stocks by a steady undercurrent of central bank buying.

Which, one would think, is gold-bull supportive -- unless the governments of the world are once again wrong.

If central banks are the axe in gold -- bull market buyers with a lag -- do they know something everyone else doesn't? Or are they operating on a dated thesis (fighting the last war once again) and not to be followed? Is it not odd in the first place to contemplate governments getting it right?

Things that make you go 'hmm'... and part of the reason why gold is such a black box. (Silver, on the other hand, a nice short... at least for now...)
 
Quote from Specterx:

I'm thinking that taking a bearish position on an Australia fund (eg EWA) might be a better way to play Australia than shorting the currency.

1) To the extent AUD depreciates this will hit the US dollar value of any fund holding AUD-denominated assets.

2) If China stumbles and the mining boom fades, the Australian market will surely feel the impact; it's already been underperforming the US market since last spring but current prices nonetheless look attractive for a risk-controlled entry.

3) Aside from the commodity story, Australia appears to be heading towards the same sort of reckoning the US experienced in 2007: the backside of a housing bubble coupled with an overbuilt retail sector, which will rebound on the banking system in the form of bad debts, writedowns, etc. Financials make up 45% of EWA.
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In addition to the above, from a long-term bear perspective, Mongolian natural resources = Australian natural resources without the transport costs.

If you are China, why ship your iron ore, lead, nickel, zinc etc. thousands of miles by freighter when the same stuff is sitting on your back doorstep.
 
http://advisorperspectives.com/newsletters12/Why_a_60-40_Portfolio_isnt_Diversified.php

This article shows the performance of a stock, bond, tips and commodity portfolio compared to a 60/40 equity bond portfolio.
I'm not entirely sure their numbers are accurate(Its hard to get commodity returns from back to 1920 because there wasn't a number of futures markets and since ETFs were not available you don't know the returns net of fees, also TIPS were created in 1997, so their correlation figures could be off because they not necessarily reflect current inflation but actually expected inflation)

Still since I believe commodities are in a bull market that balanced portfolio should beat the 60/40 one by quite a bit(Of course, this is a bet on my part).
My plan is to go towards that kind of portfolio when I feel that its safer to take on more risk, during a China panic of some kind.

The plan is to have most of my networth in stocks(probably a blend of commodity country stocks like Canada, Brazil, Aus plus safe large caps like BRKB), some in fixed income(with short duration, BOND from pimco could be used), commodity ETFs(GCC, DBA, I would avoid ETNs so it would exclude Rogers stuff even though I like them more) and MAYBE some TIPS(Though I'm scratching my head how tips could have beaten commodities according to their figures, maybe they don't add the interest income from USTs that were used as margin for the commodity futures position?)

This could generate about 6-10% a year and be used as margin for macro bets that are more levered and concentrated
The objective would be to take that return(Lets call it 8%) to 16% or possibly more
 
There is a flaw with me being long the commodity country stocks though. Since the portfolio will be highly focused on the inflation theme I will be shaken out easily and might dump it as soon as I start to fear recessions and things like that(They should go down more than normal stocks). Its happening right now with a possible US and China recession. So perhaps I should stick with a higher quantity(Say 75%) of normal safe stocks(I might buy WMT if it pulls a BP) and only 25% in more commodity focused stocks. BOND should protect me against bad economic times as well
 
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