Global Macro Trading Journal
- Thread starter Daal
- Start date
Well, my friend GoC, we're just gonna have to disagree on this one...
Firstly, as I keep saying, I ain't a macro punter (what little macro punting I do is PA and mostly for fun). There ain't no books out there for the stuff that I do, 'cause it just isn't very glamorous and fashionable. Instead it mainly involves a lot of boring hard work, which wouldn't make a very interesting book. Hence, one of my problems with all these trading books/conferences etc. To sell a book, whether it be about trading or fiction, it needs at least some degree of drama. You know the sort of thing where a fearless BSD trader, flying in the face of overwhelming odds, eventually triumphs thanks to strength of resolve and character, and rides his Bentley into the sunset. There's all sorts of issues I have with these sorts of narratives. I can easily imagine that things are very different if you're trading equities or are a macro punter. However, it would be nice if you could avoid gross generalizations.
Secondly, I can assure you that my competitors, as well as my peers, have better things to do than to read trading books. One of the reasons is given above.
Thirdly, yes, studying past performance can be useful and I would be a fool to deny it. However, apart from the point I have mentioned above, there's another issue. Trading books are emphatically different from a boxing video or an historical account of a battle. Specifically, trading books are not impartial factual representations of what actually occurred. So, with all due respect, I think I am pretty safe and not likely to be given a good kicking, thrown out of my place of work and all those other dire things.
Finally, pls permit me to ask a question of my own. How much have you read by Daniel Kahneman?
To argue US equities are 'ridiculously cheap' based on current earnings and estimates is assuming profit margins will stay at 10% for the next couple quarters or even years. If they do then yes, stocks are dirt cheap. But that's not how you value a stream of future cash flows.
Likely, over coming years margins will revert back to their mean, say 6-8%. And suddenly your PE 10 becomes PE 14. Dirty cheap becomes fairly valued.
The ideal setup for a multi-year equity bullmarket is cheap PE ratios paired with historically low margins. Then you have two potential drivers pushing up prices: PE expansion and margin improvements. The early 80s are the textbook example.
Likely, over coming years margins will revert back to their mean, say 6-8%. And suddenly your PE 10 becomes PE 14. Dirty cheap becomes fairly valued.
The ideal setup for a multi-year equity bullmarket is cheap PE ratios paired with historically low margins. Then you have two potential drivers pushing up prices: PE expansion and margin improvements. The early 80s are the textbook example.
Quote from Butterball:
To argue US equities are 'ridiculously cheap' based on current earnings and estimates is assuming profit margins will stay at 10% for the next couple quarters or even years. If they do then yes, stocks are dirt cheap. But that's not how you value a stream of future cash flows.
Likely, over coming years margins will revert back to their mean, say 6-8%. And suddenly your PE 10 becomes PE 14. Dirty cheap becomes fairly valued.
The ideal setup for a multi-year equity bullmarket is cheap PE ratios paired with historically low margins. Then you have two potential drivers pushing up prices: PE expansion and margin improvements. The early 80s are the textbook example.
Couldn't agree more. I find myself questioning even Grantham and Hussman estimates(5% or so). If you add in
-Margin compression
-Shiller PE above 20x(And those earnings are a bit inflated due unusually good profit margins)
-Multiple contraction(Secular bear)
-Weak NGDP growth(Due the Fed not being aggressive enough)
-Fiscal austerity as the US is forced to bring down the deficit
Its hard to see how stocks even compound 5% over the next 10 years. But maybe I'm underestimating the resilience of earnings growth
Either way I surely can't justify going all-in in stocks
For what it's worth: Drobny's books, and the handful of trading books I have most appreciated over the years, are nothing like this at all. Process, ideas and insights are the drivers, not bullshit machismo.
If anything the "fearless BSD" mentality -- a cartoon caricature in and of itself -- would be mocked and laughed at by true high caliber professionals. The guy who wants to bet it all on black can get his jollies in a casino.
Like the others I have to disagree.
First, I expect the uselessness of forward operating earnings estimates as a valuation measure has been sufficiently demonstrated by several sources (Hussman comes to mind). And it makes perfect sense: we know analysts using this method were saying stocks were cheap in 2007 while still 'expensive' in late 2008/early 09, FOEs involve simple extrapolation of short-term trends and miss long-term cyclical or secular factors (as for instance the Shiller PE may capture), analyst estimates are invariably too optimistic even in bull runs (but not at genuine lows!), and so on.
Second, the level of bond yields doesn't imply anything about the future direction of stock prices. If you can estimate stocks' valuation and future returns, low yields may mean stocks are relatively a better investment, over a similar ten, twenty or whatever year period. It doesn't mean that you won't suffer a 50% drop in stock prices next year, or that significant inflation starting in five years won't completely swamp your 5% nominal gains. And in fact, in 100% of historical cases, secular bear markets have terminated (and bull markets begun) at valuation levels far below those seen in 2009, let alone what we see today. Even rising earnings would not necessarily mean rising prices: in the 1972-74 bear market S&P earnings actually rose from under $6 to $9, while prices crashed by over 40%.
Finally, the only sentiment indicator I'm aware of that indicates fear or pessimism is Yale's "Crash Confidence Index." AAII survey shows 45% bulls; mufu cash is near record lows; stock buybacks and insider sales are surging; Sentimentrader's indicators range from neutral to highly optimistic (Rydex inflows for instance show a record high bullish skew, comparable to 2007 top). And of course analysts are regularly hammering away with the Forward Operating Earnings model, while last month Bloomberg came out with a story titled "Global Strategists Are Abandoning Bearish Views." There's hardly a 'wall of worry' here and even if there were, the implications are decidedly short-term in nature.
Not all earnings estimates are created equal. For example, estimates set after a market decline (such as we saw 6 months ago), and that get confirmed (and beaten) by the micro and macro data as time goes by, have a lot more weight than earnings that are clearly optimistic after a major bull run, and based on backward-looking data or the excesses of a credit boom.
As for my trading position - how long it lasts will depend entirely on market conditions. As long as the market keeps acting like a bull market, and does not give any clear exit signals, I will stay long. Ordinary pullbacks are normal in a bull market, and usually should be bought, not sold.