Wednesday, 13 August 2008

Coke is still it

If you’re more of a contrarian than a momentum guy, as I used to be, the thing that would kill you, time and time again was getting in early. You’d lose some, you’d make some more, and then you’d give it all back, betting that the momo guys were late and wrong.

Now, when I went into my ‘end of inflation’ call six weeks ago – with the post ‘Decision three’ – I had the right to go in large – I was up 35% at the time. And I had the reason. Positioning was extreme (long resource stocks and commodities, short financials). The inflation theme was at an extreme. And I had an angle – the combination of a shrinking US current account deficit, and falling bank multipliers meant that disinflation/deflation had already begun.

So I bet half my gains for the year – my stop was just shy of an 18% drawdown. What I was looking to do was to double my gains – to get to 70% up.

To make that kind of money, I couldn’t just be a contrarian. I’d have to be a contrarian first, and a momentum man second. Now my ‘perfect’ roadmap involved making 35% over the rest of the year, holding my nerve during 10% drawdowns. It worked out very differently. I made 9% in a week. I gave back 8% in a 24 hour period. Then I saw three or four big daily swings. I reduced my risk some after a gain. And now, in the six weeks after ‘Decision three’ – I’ve made 27% and I now stand 62% up.

The calls I made six weeks ago were deeply contrarian. Now they’re mid-term momentum. Which is nice.

I kind of deliberately got out of broadband range when it looked like I was on the right track. When it’s noisy it’s often good to turn down the volume. But now I want to start listening more carefully.

And what I want to listen to is reflationary tendencies. The fall in oil opens up a lot of doors. So does the YoY fall in Chinese construction activity. And the falling house prices across the Anglo and Scandinavian economies.

So the question I have is this. How do the professions respond? In my last piece I wrote that global macro is mainly inhabited by men in the professions, but fewer professionals (Of course, that doesn’t make it easy to make money – the professionals can build some very big positions).

What do people in the professions do here? They stop ordering or lending anything. July this year felt eerily similar to September 2000. In March 2000 we’d seen the dotcoms go while the economy was fine. July this year was another ‘six months after’ – this time, six months after Soc Gen.

In September 2000, one piece of data alerted me to the problem – the collapse in US aluminium orders. The world at large got wary when in October of that year John Chambers of Cisco said all was well, but in November said that he’d never seen such a sudden and extreme collapse in orders. Turns out Cisco had been financing its customers.

So suddenly, in July 2008, the macro fell to pieces. A little later, Vodaphone appeared to do a Cisco.

But the world is a mirror image of what it was then. Then the US was full of wage growth and the dollar was dominant. Now, the opposite. And the way out will be very different.

So now we’ve had a proper resource correction, getting on for a third.

And I’ve put on my first directional trade for six weeks (rather than adjusting my risk exposure across the board to control my volatility). I’ve cut back a third of my commodity shorts (in gold, copper and oil), and like for like I’ve raised my US equity exposure (I’ve bought the Dow). I’ve left all my long dollar positions intact.

It’s a small step towards a reflation call. So far all I can hear is the air flowing through open doors. My view right now is that, from here, we’ll see a lot more easing outside the US rather than within it. I am also expecting a rapid decline in the US current account deficit, and increased credit stress in Eastern Europe. So I’m still very bullish on the dollar, and I still think the winners will be companies that do well in a disinflation. Stocks like Coke, GM, British Airways, Walgreen and Majestic Wine (See my post – ‘Coke break’). But I think the risk/reward of being outright short commodities has diminished somewhat at the margin, while the risk/reward of being long stocks has improved.

Now I only have two resource stocks out of the 22 resource and infrastructure companies I owned on May 1st. Petrobras, 5% of NAV, is down 16% from when I bought it. Pico holdings, 6% of NAV, is up 32%.

In one post, before I turned bearish commodities, I said I’d bought Petrobras for the kids. My daughter won’t be thanking me now. Nor will the daughters of all the Barron's readers who later caught the infamous ‘Barron's Curse’. I haven’t yet hit my stop on Petrobras – although I’m close – but until I do I’ll hold it – it’s my proxy for the potential for reflationary pressure to build as the Fed faces lower growth and lower inflation in the months ahead – and I’ll use it as a signal to tell me when it’s time to move the entire portfolio onto the reflation trade.

Monday, 11 August 2008


Why do you have to work so late? I’m not working. Well, the screen is on and you’re reading a book that’s clearly not a novel. Er….

That’s not an unusual conversation chez Garran.

Here’s a new one; you just said that you didn’t trade last month, but you’ve been watching the screen the whole time. Er yes, er, sorry.

So a month ago I found that one of my trading sites offered online poker. I mentioned it to my wife. Her faced dropped. She had a bit of an inkling about my character.

The next three weeks I played a couple of hours a day. Outside trading hours. Mainly around when the pubs closed – I’d heard that was a good time to take advantage. In the first week, I found I was making about £15 an hour with one losing session to four wins on average. Second week I was making £30 an hour with four winning sessions in six. Third week I was making about £60 an hour, before I found out there’s a good reason other people lose money when they play after the pubs have closed. And I dumped two weeks of effort in a petulant frenzy.

Here’s how I did it. I moved two levels up from $100 to $500. I then quadrupled my buy-in playing the first hour. What I was looking for was weakness, and when I found it – I went all in. So, the third time I went in heavy I blew it. I went from $2000 to $1100. And from there, I was road kill. I busted. $500 more, busted, $500 more, I busted, & I cut. Discipline, schmiscipline. I was all over, Grover. So I thought about it. Like you do. And I realised this – I love poker – I’ve played since I was nine. But I love trading macro more.

And the problem with poker is – I reckon I could get pretty good at it, but I’d have to put my soul into it, and that would crowd out time at home and trading macro.

There’s one thing about poker; everyone’s trying to win. At the low tables, that’s great, because most folks don’t have the knowledge, or the temperament, to win. Trying screws them up. But at the higher tables, more have the temperament. And higher still, more again. There’s always Muppets with money. Some pros will fly around the world to play them. But mainly, there are pros.

In macro, there are many people in the professions, but fewer professionals. My own attitude is the same as the pro poker player – I’ll fly anywhere in macro to play against the weak.

Now, this wouldn’t be a blog by me if I didn’t mention a book. And the book I spent my remaining poker profits on was Brett Steenbarger’s ‘Enhancing trader performance’. My view on these sorts of books is that the odds of any one being any good is like drawing a card to an inside straight. It’s just less than a one in 13 call. But the difference is that the payoff when you draw a good book is worth 50 busted flushes. To mix a metaphor.

So already this is a quality book. Steenbarger realises that his previous idea – don’t get frustrated – ain’t quite right. Cool dudes and three-day weekers, well, they didn’t seem to last. The frustrated guys did. So why?

Well, if you trade when you’re frustrated, you trade badly. That’s what happened to me when I lost out playing poker. Dennis Gartman’s rule – if you lose, get smaller - is largely a psychological call. And it is a good call at that. But if frustration gets you thinking – it’s useful. If it gets you more stuck-in, and working out a better way to do things. So I’m no Zen trader.

Benjamin Bloom, a University of Chicago researcher, sought out successful people in a range of fields – and he tried to analyse systematically the source of their success. It seemed they had something in common. They started out doing it for fun. Then they were in a place where they got supported big time, and started turning fun into profit. Then they just kept working to get better. So they ended up working on it more, getting better, and having more fun. It was never really work in the first place.

Now I’ve tried out fifty ways to make money. From fieldwork to working a field. But out of all of them, the thing I’ve really enjoyed – that I really got stuck into, and just kept working on it to get better – is trading macro.

It started when I was broking commodities. I was a one man band, and I knew I’d not beat Macquarie – with three detail pros – if I concentrated on building the most comprehensive supply/demand balances. And I wouldn’t beat UBS, with their 24 strong resources team, with my breadth of coverage or my access to sources. And it would be hard to be faster to a story than the producers, who have 1000s on the ground, and who can trade their own book with impunity. I knew I’d only beat these guys with a macro call, so that’s what I set out to do.

And I enjoyed it from day one. From commodities and resource stocks, through European equity strategy, to broking and trading global macro. Now I said to someone not very long ago, that I wanted to run macro for another 50 years. And for one reason – it’s great fun making money that way. I don’t notice I’m working.

So rule one; never blow up. I always run preset risk, and I always cut. And rule two; always bet hard on a big call – when I see extreme positioning, sentiment, and a fundamental angle.
And one thing I’ll bet on; I’ll still be trading macro in 2058. But I’ve no idea if I’ll still be playing poker.