Global Macro Trading Journal

"After 15 years of publishing, Citron can confidently state that Chemours (NYSE:CC) is the most morally and financially bankrupt company that we have ever witnessed."

https://twitter.com/x/status/738412723231281152

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Pretty good example of why the stock market and good equity investors tend to appear 'optimistic idiots', its because the bears who appear all manly and smart are EXPONENTIALLY exposed to mistakes.

But of course, I'm sure citron doesn't care about any of this because he covers the majority of his shorts within 1-15 minutes of his tweets/reports and leaves followers to hold the short bag. He is the most morally bankrupt in this situation, not CC
 
Going to sell 1/4 of my EWZ position today and subtitute it for VWO. This is going to help me deal with the volatility of the pension reform in Brazil. I fear a scenario where the market tanks, I get out using a MA stop and get back in, over and over again. Locking gains in 1/4 and having a 50% position size MA stop (MA crosses, I sell 50%), I decrease that risk a lot
 
Trump tax proposal

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The core of his tax plan (personal and corporate income tax reform) cost about $5T, with $2T of revenue coming from repeal of deductions. But congress is likely to negotiate rates up, Trump is asking for 15% as a negotiating tactic. Total cost will be more along the lines of $3T. There is a $1T hole, that can be closed with the health care vote or other moves
 
I disagree with Montier but he brings a good different perspective
https://www.fuw.ch/article/to-get-back-to-fair-value-the-sp-500-would-need-to-drop-by-50/

Why I disagree? Right now the dividend+buyback yield of the market is around ~4%, a 50% drop would take that to 8%. But dividends and buybacks tend to grow overtime, so that 4% and 8% are worth more than that, perhaps 1% to 2% extra. So the market has an implied return of 5-6% and he thinks it would be fairly valued at 9%-10%. Indeed, 9%-10% is more along the historical experience. But I just happen to think his mindset is terrible, to me it makes very little sense to second guess people's preferences when it comes to valuations, except in very extreme circunstances. Investors have pretty good reasons for keeping valuations where they are, a lot of the time it involves way more rationality than the avg pundit with a contrarian bug thinks
Things like liquidity, ETFs, better information, and other things tend to play a role. To increase cash and second guess valuations is to put a 'synthetic short' in the stock market, that short has an unlimited loss potential. And indeed Grantham and co have been struggling for years due that synthetic short.

But if he expectes a drop in US corporate profitability, then that's a different story, that would be a situation where the market drops 50% but a lot of that drop is justified (so the implied return does NOT rise to 9-10%), thats a risk but I don't think that risk is high when a business friendly administration that is trying to boost after tax returns and an enviroment where the economy is growing at 2% with chances of that rising to 2.5%-3%. Peak profit margins is a risk to monitor but at this point I'm not sure why one would worry about this. Trump has added 'call options' that will help that, not the other way around
 
Thing is, this profit collapse risk that Grantham/Montier have been warning for a decade is real but when Trump got elected the risks associated with that changed. It simply makes little sense to think those risks rose, tax reform/cuts, less regulations, better infrastructure and potential better GDP growth are like free call options that can boost corporate profits but are very unlikely to cut it (so upside with no downside). Thats why I increased my equity allocation after the election.

And the payoff of those free call options are exponential, an extra 1-3% gain in stocks can addup to big amounts, compounded over the long-term. In fact, in some of the optimistic scenarios, the rich valuations of US stocks could become even cheap. Its easy to dismiss these scenarios due to the 'contrarian bug' people have (specially if the hate the politician in office) but its not about the baseline scenario, its about the payoff in ALL scenarios.

Yes, there was pessimistic scenario, where Trump fails to do anything but its kinda like that CC Citron situation. Yes there is a bear scenario that 'makes sense' but there is also a bull scenario that makes sense, you got to compare the payoffs. When you realize that the bear scenario has an static payoff (a decline of a certain %) but the bullish has an exponential payoff (of several hundreds of %s in the case of CC stock), you realize that being in the optimistic side tends to be more robust and less error prone.
So its 'healthy' to buy into the Trump growth story, what is unhealty is to be skeptical of it. There you got little margin for error, especially if along with that skepticism you are increasing cash allocations.
A good investor that understands stocks will immediatly 'buy into' the Trump story as a default, he can then look for reasons to give up on that story, in the future, if some very reliable information/thesis arises but the default is to agree with it
If a bias is so beneficial to an investor (financially), its no longer a bias, its actually the correct mindset
 
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Something along with this line of thinking...

If you met Michael Jordan when he was 15, how much would you pay for 10% of his lifetime sports and marketing earnings?

Of course, if depends on what you thought of him. If you saw his true potential, you would pay a giant amount, everybody would tell you are crazy, that it makes no sense based on underlying earnings, past earnings, or even projected earnings under optimistic scenarios. That there is no 'rational' reason for you to do what you are doing, that perhaps there is a bubble in earnings share buying from young basketball players and you are the proof. Perhaps some journos will even write articles talking about your 'ridiculous' trade. Yet, 10-15-20 years later you will get a gigantic payoff that will make your investment look prescient. You would have proven all the 'rationalists' wrong

We saw this happen in the real-world in the case of Amazon, valuations made no sense for years, thats because people were buying Bezos and his grandiose plans not past or even current amazon fundamentals. Decades later Buffett says he missed that one and Bezos might be the best businessman of all time, Amazon total addressable market is the almost the entire world of retail and Bezos has shown he is a good destroyer of competitors. So here is a CLEAR example of the intelligence of 'optimistic idiots' from the stock market, seeing something that the avg contrarian COMPLETLY missed and screwed up on.

Right now, this could be happening on Tesla. I have no idea if the optimists will turn out to be right but I do know that the short side makes no sense, current valuation is meaningless when it comes to situations like this. What matters is the convexity of the bet, the payoff for the optimists is massive but unknown. the shorts got no idea of how much they will lose if they are wrong, they only know how much they will make. This is just a POOR trade, a terrible trade, even if works.

But the avg contrarian doesn't see that, he cant realize that when something is different, that those stocks doesn't dont work like other stocks. As a result, they get their asses handed to them. Its some kind of 'convexity blindness'. Einhorn would be investable if he didn't short, he seems to be a big sufferer from convexity blindness
 
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So its useful to think in terms of convexity and how that convex exposure changes overtime. In stocks like AMZN, TSLA *I think* thats how a lot of investors are thinking. They look at recent events and try to figure out how the convexity exposure is changing, whether it is increasing or decreasing. For instance, if Elon Musk were to die, TSLA would be a HUGE short (depending on how big the gap down was), whoever took his place would be so unlikely to be the 'steve jobs' of cars that a lot of the convexity of the bet would collapse. Same thing if Bezos went senile

In fact, I worry about whether Dalio is going crazy/senile. He was secretive his whole life, now all the sudden he is all over the media, doing interviews all over the place, is now on twitter etc. He is probably trying to help people out but the effect of that could be that he now longer will be focusing as much on running the place as well as he did in the past. so the convexity of market beating returns could be dilluted
I think this sort of stuff are the true 'fundamentals' in convex bets, not current or past earning metrics and things like that. In fact, I bet a lot of hedge fund investors in some conscious or unconcious levels are thinking like that. They figure 'worst case I lose 20-40% and fire this guy in 2 years, best case, this is the new Druckenmiller and I'm set forever as a very wealthy person'. Not to say that picking the next Steve Jobs of cars or trading is easy but its what the contrarians miss when they claim its all irrational
 
When I Einhorn calls AMZN/TSLA 'bubble stocks' he is being reckless in my view. A better name is 'genius stocks'.

In these genius stocks whats matter is not necessarly what you can see in the balance sheet, cash flows, etc, what matters is the chance that the person running it is actually a genius. Look at BRKB, early on, they had a certain amount of cash on hand/capital to invest. You could look at Buffett/Munger and think there was a certain amount of value of having that capital in their hands. But because they are geniuses, that value increased over the years as they 'innovated' on capital deployment. Two major ways where:

-Buffett 'created' a new source of capital/cash, namely by acquiring insurance companies that were well managed. This gave BRK float that they could invest, enhancing returns. This produced an exponential payoff to BRKB shareholders, even the ones who seemed to be paying too high a price for the stock sometimes.
-Munger 'inovated' with his theory of 'its better to buy a great business at a fair price than an ok/bad business at a cheap price'. This produces larger exponential investments returns due deferral of tax payments plus all the innovations of that great business (a genius can recognize another genius or semi-genius and the compounding effect can be enhanced further)

These 'assets' (namely, the innovations on capital allocation) were not in the balance sheet and didn't show up anywhere on BRK back in the day, its what Ackman calls 'platform value'. Yet, if someone recognized that genius early on, they could have invested in BRK knowing that a genius allocating their capital was going to do a better job than themselves.

That's why, I believe, TSLA trades like it does. There is nothing in the balance sheet, cashflows that justify the price, except that there is a certain chance that Musk is actually a genius and TSLA shares are a fraction ownership of cashflows from his car/solar innovations. Heck, its possible that even Musk doesn't know what he can discover/innovate on/produce down the line, its possible that he will be the one who will mass produce self-driving cars in 10 years and flying cars in 20-30 (and looking at how quickly drones are being developed, this might not seem so crazy), just like Munger and Buffett didn't know what they discovered later. And if even Musk doesn't know, how can an analyst or some asshole doing DCF analysis know? When these innovations happen, the payoff is gigantic/exponential. This means that longs don't have to be right very often to be making a good bet

But there is more, because longs can monitor these geniuses and their business decisions, they can ALWAYS sell when it looks like that thesis is broken (guy turns out to not be so smart, dies, goes crazy, etc). So you are not risking 100% of your money (you dont have to ride to $0), you can sell at -30%, -40%, -50% and cap your loss. This creates an even better payoff to risk ratio. Effectively, longs get paid 10-1, 50-1, 500-1 to be making these bets and shorts take the other side. Who is smarter?
 
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I truly wish I had learned all of this early on in my trading/investing career. I would have made a lot more money in stocks and avoided a lot of mistakes. I had too strong of a 'contrarian bug' of wanting to take the other side of convexity, when that works, its fun and you look like the manly bear who gets to be the macho in the bar but over the long-run, you want to be long convexity not short, that's how you grow capital and get rich. I will leave the bar fun to the contrarian types from wall street, I will take the money any day
 
What these contrarians need to ask themselves is 'how would a stock trade if it was a company run by a genius but the market only gradually realized that?', especially if it was in a disruptive industry. And I believe the answer would be that it would have a rising premium over conventional fundamentals like price to book, sales, earnings etc. It would look 'irrational' and a 'bubble', until the company actually delivered, but by then it would be too late for shorts and skeptics

To analyze these companies, I would spend more time reading the bio of the guy, checking his history, perhaps even his grades from school if possible (maybe talking to classmates, hear stories from him growing up), that matters a lot more than crap like price earnings, DCF analysis. Anyone relying on DCF was wrong by a HUGE amount on amazon, that's the genius effect from perhaps the best businessman ever running things
 
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