Global Macro Trading Journal

Quote from Ghost of Cutten:

There's a lot of extra risk of shorting 2 single stocks, versus shorting the whole market. As a long-term trade I wouldn't short more than 5% in a single stock, whereas I'd short up to 50% in an index, for example.

In 2008 did people make more money shorting financials rather than the S&P, once you adjusted for risk? No they didn't - the financials went down more but were considerably more volatile during the bear market rallies. Lehman went up 100% at one point in 2008, so did Fannie and Freddie, and numerous financials gapped up >100% overnight in September 2008. The S&P by comparison had a maximum bear market rally of 25-30% if I recall. Shorting the S&P made 60% peak to trough with a max DD of almost 30%, a 2:1 ratio. Shorting financials made a bit more with much more risk.

Then, there is the extra time required to find the best individual stocks to short, time which may be better spent researching other opportunities. And some people are simply not stock-pickers - they might be good at the macro calls or the trade timing, but not the analysis of accounts and company microeconomics needed to pick stock A over stock B as the future bum of the month club contender.

The best argument for stockpicking is if you are running a long/short book. However, in macro-dominated plays like this, a long/short book generally deteriorates into a Texas Hedge, as it did with the short financials/long commodities play in 2008, which eventually blew up in 48 hours some time in the summer and busted out a lot of traders. For example, if you short banks and miners, and go long exporters, you are just doing a double-bet on China/Oz going into recession - there is no hedge to speak of, except of the ten gallon hat steer-prodding variety.

Thus there are legitimate risk/reward, efficiency, and skills/knowledge factors that argue for making the broad play rather than the more specific one. It is therefore lazy to accuse someone of being lazy just because they short an index or a sector fund.
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Makes no sense. A person doesn't have the knowledge to understand the difference between a miner or a bank or a retailer in Oz, but they have enough insight to wager serious money the Oz economy is set to struggle, the currency is set to weaken, and this should lead to a decline in an index (which apparently they couldn't do a couple of clicks on the internet and figure out what was in the index). Lazy AND ignorant.

If you think the entire country of Oz is going to crash Spain style, go ahead and short the index. I haven't heard anyone on this thread suppose that.

If you think there's some sort of iron ore bubble that's popped and will hit the Oz mining industry, short a mining industry company. If you think the banking industry is going to have funding issues, short a bank. If you think the currency is going to decline, short it.

I fail to see how any of these ideas translates into shorting an index that has companies in industries that have been strangled by the strong aussie and that will start to make a lot of money as it weakens.
 
Brazil seem to be trying to pull a China late 2008 style policy revival to keep the economy going

-Changed the head of the central bank and put lots of pressure for them to ease. They complied, cut rates in surprising ways even though inflation is still an issue(All time low for the Real real interest rates)
-Stop intervening in the FX market when the Real is tanking. Usually they sold USD and bought BRL when the currency was plunging quickly
-Is pressuring all banks to cut their spreads over the CB funding cost in their loans. State banks are complying a lot, private banks more slowly but are as well
-Changed the way savings accounts returns are calculated so to leave room for the central bank to cut rates bellow 8.5%(In that past this would drive flows to savings account to the expense of government bonds, now savings accounts pay less if rates go lower). This looks like an indirect order to take rates lower(I'm sure that on the backstage they are not being so indirect)

There are probably other things I haven't noticed
 
Quote from darkhorse:


Nor do I understand the attitude that "stockpicking is so hard" etcetera. Sure, it ain't easy, but getting the macro right is??? Everything is deeply competitive about this game. It's one thing to admit a personal weakness in one's skill set (e.g. inability to pick stocks or industries), and another to irrationally say "nobody can really make money in that area" or "that skill set isn't so valuable as my ability to just add some more lazy leverage on an index."
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I personally find the macro easier than stock picking. Lots of 'edges' I found in macro are simply basic human nature flaws that I recognize(Lately has been the tendency to be too optimistic in the face of severe imbalances) whereas in lots of stocks you have to do deeper work in terms of digging out fillings, listening to calls, estimating future earnings. There are a lot of business I simply have no expertise on, like coffee brewers, I have no clue how to estimate future k-cup consumption and things like that

If I stock is mispriced due human nature flaws, I will go long without a problem. But most of the time I have to do deep work in business I don't have lots of experience on, this diminishes my edge a lot
 
In other words, in macro, I just have to be good at one thing, understanding how the macro variables affect asset prices. In stock picking you have to know a lot about many different businesses and sectors.

Knowledge accumulated about some stocks might be unused for a long-time(One is not likely ever need to use k-cup consumption predicting skills again) but knowledge in macro accumulates and can be used again in other countries(Some people are shorting Australia as semi-repeat of the US bubble crash)
 
Anyone have more details on the JPM specific trades that blew up?It seems that they were doing basis trades on corporates(buying cash bonds and selling cds). What I want to know is how are in the liquidation process are they in, because once they are close to out those prices should snap back quite quickly
 
A key info about this whole case is that Dimon has 4 day's from the discovery of the material event to disclose to investors(SEC rule). Which means he only discovered it recently and is only now closing up the casino
 
Quote from Daal:

I personally find the macro easier than stock picking. Lots of 'edges' I found in macro are simply basic human nature flaws that I recognize(Lately has been the tendency to be too optimistic in the face of severe imbalances) whereas in lots of stocks you have to do deeper work in terms of digging out fillings, listening to calls, estimating future earnings. There are a lot of business I simply have no expertise on, like coffee brewers, I have no clue how to estimate future k-cup consumption and things like that

If I stock is mispriced due human nature flaws, I will go long without a problem. But most of the time I have to do deep work in business I don't have lots of experience on, this diminishes my edge a lot
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Different strokes for different folks...

I am a huge fan of macro. I believe that macro trades are the biggest and best trades. The grand slam homerun, "knock the cover off the ball" type trades tend to be macro trades.

BUT, you can also get long droughts where macro opportunities dry up completely. Sometimes the macro is an exercise in pure frustration, for long stretches, while during the same period there are certain industries (or certain individual stocks) that are just kicking ass in one direction or another.

I mean, look at consumer retail names on the long side these past few years. Not all of them indiscriminately, but the juggernauts, my god. Same for some short areas of the market. Shorting gold miners has been like shooting fish in a barrel, for someone willing to go with price action and near term drivers and not trying to get overly fancy in terms of anticipating future turns. (Price action works!)

And as for estimating k-cups, it's funny you should mention that one, because with GMCR David Einhorn did all the work for you. I mean, am I really going to come up with an analysis better than his? And he delivered it in plenty of time to profit. This happens a lot.

One of the things I love about the big smart hedgie shops (Greenlight, Third Point, Appaloosa etc) is that they tend to be very right, but also very early in a lot of instances. They are like an outsourced research team for a nimble player who can wait to act on their fundamental theses until price action confirms.

Last but not least, I find that macro opportunity sets and stock picking opportunity sets tend to have a pretty handy inverse correlation. When there are great macro opportunities out there, individual equities can mostly be ignored in favor of large vehicle bets. But on the flipside, when the macro theatre calls forth the sound of crickets, that's when you tend to have a Minskian "stability to instability" type trend where long only investors are just rolling their favorite names higher and higher, convinced the world is fine.

Long story short: The macro skill set and the stockpicking skill set are like peanut butter and jelly. They go great together. And if you can do both, you have more ways to generate alpha, less likelihood of hitting a drought, and more ability to prosper over time.
 
Quote from Daal:

In other words, in macro, I just have to be good at one thing, understanding how the macro variables affect asset prices. In stock picking you have to know a lot about many different businesses and sectors.
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Hmm. I don't really agree with this at all.

To say macro is about "one thing" is like saying understanding women is about one thing. I agree more with Barton Biggs:

The successful macro investor must be some magical mixture of an acute analyst, an investment scholar, a listener, a historian, a river boat gambler, and be a voracious reader. Reading is crucial.


Quote from Daal:


Knowledge accumulated about some stocks might be unused for a long-time(One is not likely ever need to use k-cup consumption predicting skills again) but knowledge in macro accumulates and can be used again in other countries(Some people are shorting Australia as semi-repeat of the US bubble crash)
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As for the k-cup example, I think you may have an efficiency issue there if you think it's necessary to replicate the good analysis work of others. As I said previously, if David Einhorn makes a great argument for why GMCR is a short, why should I repeat the work?

And in many cases, as I pointed out with the examples of certain industries going + or -50% in six months during a period where the broad market does little, the analysis is actually a macro / micro blend -- an understanding of fundamental drivers for a group that is not exactly "macro" in that you are drilling down to an individual industry, but not 100% micro either, as you don't give a shit about page 16 of the 10K for WNR if the whole refinery group is on fire.

My macro-informed approach applies to my stock picking in the sense that I am top down and willing to rely on the work of sharp analysts, whether they work for me directly or work for someone like Einhorn or Tepper or Loeb.

One of the things that amuses me more than anything is the amount of useless effort on the street that goes into overkill analysis. You have these analysts who are paid to write 5,000 word reports on companies that are neither here nor there in terms of opportunity, instead of zeroing in on clear and present opportunity.

BTW did anyone see that WSJ article the other day, "What makes a great analyst?" Talk about drudgework... my god, I would kill myself if I had that job.

Someone who doesn't understand how to maximize efficiency in their research process, and dial in quickly on the most attractive industry or individual equity opportunity sets, leveraging the good deep detail work of others, is definitely more likely to miss great opportunities in stocks.

I'm not trying to argue stock picking is better than macro, as I don't believe that. If someone said "You can only do one or the other," I would do macro. But nobody is saying that, so I up my game substantially by having access to both skillsets. And they are often so inter-related anyway, I don't understand the attitude of shunning a little deeper digging on the stock side. The idea that high quality stock picking involves reading foot notes and measuring out k-cups is a canard in my opinion. There are guys who can do that for you, if you have the kwan, the nous, the intuitive smarts, to know whose information to act on and when.
 
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