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.