Global Macro Trading Journal

Quote from Daal:

Guys like Ackman are experts on this, they will do a ridiculous amount of research, going down to even obscure levels of the US tax code in order to know how it would impact EPS. Their homework is so deep it gets to the point of its effect being similar as trading on inside information, it gives them an edge.
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Yeah and it worked great for Target (TGT)...

I think deep divers like Ackman are seriously over-rated. They expend huge amounts of resources picking gnat shit out of pepper and then, most of the time, the macro drivers overwhelm their "deep homework" one way or the other.

That kind of granular activity makes sense for, say, private equity, where you are actually diving into the guts of a company, restructuring it and rebuilding it from the inside out -- or for distressed debt investing, where the visibility is seriously opaque and it takes real forensics to get a true sense of risk levels -- but from the stock-picking perspective as to which investment valuations will rise or fall, it's the racehorse handicapper fallacy writ large: The false idea that if 10 variables are helpful, 60 variables are even better etc -- or in Ackman's case 600 variables. If he were a handicapper he would be sticking a periscope up the horse's ass and taking bacterial cultures, then writing a 10,000 word thesis on the petri dish findings.
 
Quote from darkhorse:

I think deep divers like Ackman are seriously over-rated. They expend huge amounts of resources picking gnat shit out of pepper and then, most of the time, the macro drivers overwhelm their "deep homework" one way or the other.
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Agreed ... other than turning a relatively small amount of starting capital into a billion, totally overrated.
 
Quote from ralph00:

Agreed ... other than turning a relatively small amount of starting capital into a billion, totally overrated.
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I didn't say worthless, just overrated. For all his digging, Ackman is congenitally optimistic, to a potentially dangerous degree, and has happily admitted as much. Overkill on the micro side does not cancel out disregard of the macro side, though many seem to think it does, mainly because it can take a long time to see who's swimming naked.

And if your sole criteria for being impressed is having made a large pile of dough, then I guess at one time Bill Miller, John Meriwether, Brian Hunter, Ken Lewis and Joe Cassano impressed the socks off you too.
 
Quote from Daal:

I'd point out one more thing. When my homework in a specific stock is very quick usually I'm going to be wrong(That is, the stock will underperform the index even if I make money).
This is because markets tend to be efficient with obvious stuff, using a simplistic analysis of 'hey the PE ratio is low' most of the time will get one burned, all one has to do is too look at studies done by Fama and French on stock picking, most of the top performers have returns that are not different from what you would expect from chance plus most of that ones that are not in the top, underperform the index

These people that underperform the index are all familiar with popular strategies like PE ratios, etc. If I want to outsmart them in excess of my costs of trading I will have to know something unusual about the stock that they don't, most of the time this will require time, extensive research etc. Guys like Ackman are experts on this, they will do a ridiculous amount of research, going down to even obscure levels of the US tax code in order to know how it would impact EPS. Their homework is so deep it gets to the point of its effect being similar as trading on inside information, it gives them an edge. I don't have an interest(nor capital) to do this kind of research(specially when the knowledge can't be used again soon)

The exception is when we are talking about mispricing due human flaws(Like BP in 2010 during the panic) in that case I usually do minimal work because I know WHY I'm outsmarting the other participants(I believe I'm less flawed than then)
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I think this is a good point. Know your edge, that's where your profit lies. If it's a homework edge, fine. If it's a psychology edge, fine also.

But I think darkhorse was describing something a bit different - I'm pretty sure he's not poring over accounts for weeks, trying to find some obscure data point that was overlooked. Rather it's a matter of, having made the macro call, knowing fairly obviously which stocks will benefit or suffer most.

Yes, if your macro call is wrong then those stocks will go against you the most also. But if you are right more than wrong, you will be more profitable by picking the most exposed stocks than a diffuse index with less pure exposure.

There is probably an ideal balance between being too broad and too focused. A basket of say 5-6 stocks should be enough for diversification of single stock risk, whilst not being so broad that performance is blunted by exposure to things that you don't want to bet on.

Another benefit is when you can hedge out a lot of market risk by being long one sector basket and short another. Yes it's not a pure hedge, especially once the trade becomes crowded, but if a 9/11 event happens, it will save your bacon.
 
Quote from Ghost of Cutten:


Yes, if your macro call is wrong then those stocks will go against you the most also. But if you are right more than wrong, you will be more profitable by picking the most exposed stocks than a diffuse index with less pure exposure.
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Yup, and along with this comes one of the powerful advantages of tight risk management -- asymmetry and size.

Traders who manage risk tightly can take bigger size positions as rule of thumb, because risk parameters are well defined and they don't have to wait around on positions that aren't behaving properly.

This creates a powerful asymmetry between losing positions and winning positions: When you lose, you lose relatively quickly and for a small amount. When you catch a big trend by the tail, however, you have the ability to ride and ride and ride...

If trading size equates to longer volatility tails on either side of the bell curve, tight risk management allows for cutting off the left (negative) side of the curve, while letting the right side extend.

Quote from Ghost of Cutten:


Another benefit is when you can hedge out a lot of market risk by being long one sector basket and short another. Yes it's not a pure hedge, especially once the trade becomes crowded, but if a 9/11 event happens, it will save your bacon.
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Yes again -- apart from the natural offsetting nature of long / short baskets, it is very simple to hedge out heavy exposure in one direction by a matter of means, indexes, structured options play etc -- and traders aside, for the life of me I can't understand why more long only managers don't understand this. I think it must be a combination of fear and laziness.

I have an old friend who is an excellent value investor, and on more than one occasion I urged him to just take out a little market insurance -- cheap options or some such thing -- when his open profits were very large and market conditions were precarious.

I tried to show him the math, the simple probability of the thing, the fact that he would not be making a "market call" (against his investing religion) any more than homeowner's fire insurance is a call that the house will burn down. He still refused to do it, seeing the whole world of options / hedging / derivatives etc. as too beneath him, or too incongruous with his value ethos, or some other b.s. I couldn't quite figure out. It cost him.
 
lots of knowledge in this journal...

can someone clarify this for me :

AU 3y bonds mat =jun/12 price is 97.36 (yield 100-97.36 = 2.64%)
90 days BB mat=Mar/15 price is 96.17 (yield = 3.83%)

http://www.sfe.com.au/content/prices/rtp15SFIR.html

3y bonds will mature jun/15 and so will 90 days bb mar/15. I would expect that prices would be similar but they are 119 poins away.

3y bonds should average 2.64 over the 3y period if markets right. Last three months average should be 3.83. From last settlements this is way way out.

How can that be ??

That looks like serious arbitrage opportunity but i guess it must be wrong in the age of computeres where each tick is arbitraged.

??
 
I'm going to take a small position on JPM monday. Stock sell off seems to be mispricing the stock

The Gordon Growth Model adjusted for earnings shows that there is a big difference between one time hits to earnings and changes in the growth rate of earnings. The former should impact how much you pay for a stock by only a little bit, while the latter should have a big impact

I understand one might say 'but what about the Volcker impact and how it will affect the growth rate going forward' but thats not what the stock market is pricing in, XLF went down 1% only, so clearly people don't expect a Volcker impact. They are afraid people will drive the position against JPM against them and force them to sell(Giving a couple of bad quarters in their earnings). I listed to the conference call and it didn't seemed the end of the world like the midia is making of this. Dimon already said they won't 'do anything stupid, we will hold through volatility', they are not going to sell

They have $180B in equity capital, this seem to be completely different from a LTCM type situation. And LTCM only survived because it got equity capital from the banks, JPM has plenty of capital to ride through the HF market manipulation. A mistake like this will probably help them have discipline back in terms of risk control, at least this is has been my experience with myself and other people, there is nothing like losing money for one to stop reaching for yields

Also, my macro exposures tend to be bearish most of the time(And I might take a large EUR short soon), this gives me a change to balance the other way
 
I might buy JPM and short XLF due my fears of a recession plus EU fears hitting banks. What I don't like about pair trades is that it ties up a lot of cash and margin
 
I mentioned here before some time back my grandma sold her appartment.

All the cash has stayed in her deposit account for 2 months now as I was unclear about what to do with it.

Now I have grown to the idea of putting 8% of the money in a gold mining ETF (crashed these last months so rebound potential, + I remain a believer in the gold bull case) and 8% in a short S&P ETF.

They are both in USD so that is a hedge against the rest of the Euro's in the account, a broad market crash would send the miners lower but the short S&P higher.

I could lose with goldstocks further thanking and the S&P further rising.
 
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