AK here with this week’s Macro Musings.
As always, if you come across something cool during the week, shoot an email to [email protected] and we’ll share it with the group.
Our Recent Articles —
David Einhorn’s Greenlight had a strong fourth quarter; Gains on Neubase Therapeutics [Q4 Letter]
David Einhorn's Greenlight Capital was up 5.2% in 2020, underperforming the S&P 500's 18.4% return. For the fourth quarter, the fund was up 25%, which was its best quarterly result ever. Longs contributed 42% during the fourth quarter, while shorts detracted 15% and macro detracted 1%. Q4 2020 hedge fund letters, conferences and more Growth Read More
Bruce Kovner On Listening To The Market, Politics, & Risk Control: For those of you who missed it, we reposted Bruce Kovner’s speech from Caxton Associates’ 20th anniversary. Lots of great nuggets in here… it’s well worth the read.
Articles I’m Reading —
Operator Darrin recently shared a solid article in the Comm Center about the importance of focus in trading and investing. You can read it here. Below is an excerpt:
Still, the research I’ve undertaken to identify the characteristics of successful traders has consistently shown that cognitive traits, and not just emotional ones, are essential to superior performance. This is why, for example, I have emphasized the structure of the learning process as a source of mastery in the Enhancing Trader Performance book and why I devoted a large section of the Trading Psychology 2.0 book to the development of creativity and the cultivation of our cognitive strengths. Show me a successful trader, and I’ll show you someone who displays unusual talents in processing information.
The most basic of these cognitive strengths is focus. Indeed, the ability to sustain focused attention is seen (albeit in different ways) among both successful day traders and successful investors. In the daytrader, we see the ability to sustain intense concentration on a number of variables simultaneously. It is this parallel processing skill that enables the daytrader to act quickly on shifts in buying and selling flows. Conversely, the skilled investor maintains a depth of concentration over time that allows for a deeper understanding of fundamentals and the supply/demand changes that result from monetary and geopolitical sources.
The challenge faced by these market participants is distraction. Distraction interferes with focus and thus reduces the quality of our information processing. Distractions can be emotional in nature, but can result from environmental sources as well. Indeed, I’ve consistently found that both home environments and trading floor environments are poorly suited for the optimization of focus. This is why many of the successful traders I’ve known have made it a practice to get away from their screens for periods of time during the day to both renew their concentration and to increase their focus on the bigger picture of what they are doing.
To approach this focus/distraction argument from a different angle, it’s important to avoid “shiny object syndrome”. This is a trap too many traders fall into. They’re constantly jumping from system to system or theory to theory, searching for something new that’ll magically transform their returns. This is often just a distraction that degrades results. The key is to remain focused on executing your own strategy.
Continuous learning and development is a must in this game to keep your edge. But you need to make sure you’re not falling prey to distraction.
Video I’m Watching —
I randomly found this old gem on YouTube the other day. It’s a 60 minutes interview with Jeff Bezos back at the height of the dotcom mania in ‘99. It’s amazing for a few reasons.
First off, it greatly increased my respect for the now richest man in the world. Back in ‘99 Bezos was worth $10 billion on paper yet still worked out of a crummy office space and drove an old Honda. All of Amazon’s cash was used to benefit the customer. He’s maintained this hardcore customer-first approach since inception and I think it’s a great business principle.
Second, the video allows us to peek back at the emotions, reactions, and moods of people caught up in a true market mania. The fervor for dotcom was eerily similar to what we’re seeing in the crypto space today. Having a great example of bubble psychology to reference is helpful.
And finally, the guy’s laugh is absolutely hilarious which makes for an enjoyable watch. I actually laughed out loud a few times!
You can watch it below:
Chart(s) I’m looking At —
Below is a chart plotting the frequency of a 2-sigma move in the S&P 500 spanning from 1995-2015. If the markets were truly normally distributed we should see that frequency sit right around 5%. The chart empirically shows that this isn’t the case. For short time windows the S&P has more 2-sigma movements then what the Gaussian distribution suggests.
This information is extremely useful for anyone interested in buying options. Since the model fails more often over short time horizons it’s better to buy options with below 10 days to expire. The options with 10-25 days to expire are fairly priced according to this study.
Trade(s) I’m Looking At —
We’re watching natural gas closely and considering going long the futures. The COT profile is neutral and technically the price action looks good. Odds are increasing we’ll experience a La Nina this winter which would bring more extreme winter weather to the US.
Looking at CHK’s (a natural gas producer) levels of CAPEX to depreciation shows how far fixed investment into future production has fallen. It’s at its lowest level in the 20+ years for which we have data. The CAPEX picture is similar across the industry.
These low levels of investment into future capacity mean that we’re likely headed for a major supply crunch in the near future. And a supply crunch means much higher prices.
We already hold DOTM calls on CHK which is a synthetic long natural gas play. We might double up our position if the data continues to line up favorably for this trade.
Quote I’m pondering —
Below is a short excerpt from Joel Tillinghast’s excellent book titled Big Money Thinks Small. Considering everything going on in the crypto market this seems timely. If you’ve tried debating with a crypto head on Twitter then this will resonate with you.
French Polymath Gustave Le Bon wrote The Crowd in 1895 as a rant on French politics, but his observations also describe how stock market manias occur. Under the influence of crowds, individuals act bizarrely, in ways they never would alone. Le Bon’s key theme is that crowds are mentally unified at the lowest, most barbaric, common denominator of their collective unconscious — instincts, passions, and feelings — never reason. Being unable to reason, crowds can’t separate fact from fiction. Crowds are impressed by spectacle, images, and myths. Misinformation and exaggeration become contagious. Prestige attaches to true believers who reaffirm shared beliefs. Crowds will chase a delusion until it is destroyed by experience.
If you’re not already, be sure to follow us on Twitter: @MacroOps. We post our mindless drivel there daily.
Have a great weekend.
Your Macro Operator,