“It was the sittin’ and the waitin’ that made me all the money.”
Q: What famous short seller from Milwaukee used to spin vinyl at Yale Hockey parties in New Haven, Connecticut? A: Jim Chanos.
I was on a plane to Kansas City yesterday. I was equipped with my standard flight issue: helmet, gloves, and a pile of reading. After I removed the foil and put on my glasses, I was quite satisfied to see some Lessons From A Macro Man at the top of my pile.
In his most recent presentation at the Virginia Value Investor Conference (10/22/09), Jim Chanos outlined some “Lessons from the Financial Crisis That Investors Will Soon Forget.” Taking a cue from a man’s work that I have often appreciated from afar, I have marked some of the lessons down in my notebook.
*Full Disclosure: I have cherry picked the 3 lessons that are most closely aligned with the views that I tend to belabor:
1. “Too Big To Fail = Too Big To Exist”
2. “Capitalism on the Upside and Socialism on the Downside”
3. “Quantitative Easing Has a Cost”
While Chanos may not appreciate being called a Macro Man, that’s fine. I am certain he has been called worse. It’s better than being called Octopussy. What’s most interesting to me about the evolution of his investment thoughts is how closely his “bottoms up” conclusions are aligned with someone as “top down” as me.
Wall Street likes to put investors in boxes. They like to label us “value” guys and “macro” gals. Some fund of funds like to think that they really have this pinned down. Maybe that’s why they don’t. The best way to ensure that a groupthinker doesn’t think outside the box is to draw one around his head.
To borrow a thought coined by my neuroscience friend, Richard Peterson, “Inside The Investors Brain” can be a fascinating place to observe behavior. The New Reality is that great investors are evolving their investment processes. They always have. As the game changes, they do.
Macro matters. Three years ago a lot of investors disagreed with me on that. Everything is crystal clear in the rear-view. There has never been more real-time and interconnected macro data affecting market prices than what you see out there today. “There were 5 exabytes of information generated from the dawn of mankind to the year 2003… that amount of information is now generated every two days.” (Eric Schmidt, Chairman/CEO of Google).
So now that we are successfully bridging macro conclusions with what does and does not work in the American Financial System, I guess the only thing for us to do this morning is to get right back to work. No matter where you go this morning, here the new macro data points are.
Bullish US stock market factors:
1. The SP500 closed 1 point above its YTD high from October 19th – higher highs are bullish
2. The Nasdaq has moved back above its immediate term TRADE line of 2125
3. US market volatility (VIX) closed below its intermediate term TREND line of 24.91
Bearish US stock market factors:
1. The Nasdaq didn’t make a higher-YTD-high; neither did the Russell 2000
2. The Russell 2000 (small caps are a proxy for liquidity risk) remains below its immediate term TRADE line of 595
3. Volumes continue to decelerate as market prices accelerate to +62.4% above the March 9th low
Bullish Global Macro factors:
1. Chinese economic data was fantastic (+16% IP growth, +29% Money Supply growth, and negative CPI growth)
2. The US Dollar is down for the 6th out of the last 7 weeks
3. Oil continues to trade in a Bullish Formation (Positive TRADE, TREND and TAIL), with TRADE line support at $77.56/barrel
Bearish Global Macro factors:
1. Japanese and South Korean equities were down again overnight and remain broken from both a TRADE and TREND perspective
2. Dr. Copper is putting in lower-highs, trading down to $2.98/lb after inventories on the LME hit a 6 month high this morning
3. Chinese, Brazilian, and Russian equities have not confirmed the higher-high close in the SP500 (all are trading at lower-highs)
Those are just some of the outputs of my multi-factor macro model. I go through the same paces every morning. No glory. Rinse and repeat.
Another major macro data point that might be more topical to Mr. Chanos this morning is related to another one of his Macro Lessons: “Mssrs. Glass and Steagall Were Right After all”…
This could be a larger Macro issue than Healthcare. Word from the big insider birds in Washington has it this morning that Paul Kanjorski’s office (D – Pennsylvania) created quite a stir on the eve of what is the anniversary of a major Macro repeal. If you didn’t know that American savers (depositors) finance Wall Street risk taking and compensation structures, now you know.
Today is the 10-year anniversary of Clinton/Greenspan repealing Glass-Steagall…
Reversing the lessons from the men who didn’t do Macro back then may very well make Macro Men and Women of us all. After all, Greenspan himself is now on the record saying, that there was a “flaw in the model that I perceived is the critical functioning structure that defines how the world works.”
Volcker, Chanos, McCullough – we have a Macro view that investment banking and prop trading should be separated from traditional lending and deposit businesses. I’ll speak for myself in welcoming all comers in this critical Macro debate.
My immediate term TRADE lines for the SP500 are now 1072 and 1111.
Best of luck out there today,
EWT – iShares Taiwan — With the introduction of “Panda Diplomacy” Taiwan has found itself growing closer to mainland China. Although the politics remain awkward, the business opportunities are massive and the private sector, now almost fully emerged from state dominance, has rushed to both service “the client” and to make capital investments there. With an export industry base heavily weighted towards technology and communications equipment, Taiwanese companies are in the right place at the right time to catch the wave of increased consumer spending spurred by Beijing’s massive stimulus package.
XLU – SPDR Utilities — We bought low beta Utilities on discount on 10/20. TRADE and TREND bullish.
GLD – SPDR Gold — We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.
CYB – WisdomTree Dreyfus Chinese Yuan — The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.
TIP – iShares TIPS — The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.
EWY – iShares South Korea — South Korea has joined Japan in the ominous position of broken TREND and TRADE. This is not China or Taiwan. This is an early cycle economy that we want to be short against China/Taiwan.
XLI – SPDR Industrials — We shorted Industrials again on 11/9 on the up move as the US market made a lower-high. This is the best way for us to be short the hope of a V-shaped recovery.
EWU – iShares UK — Despite areas of improvement, broader fundamentals remain shaky in the UK: government debt continues to expand, leadership in critical positions lacks, and the country’s leverage to the banking sector remains glaringly negative. Q3 saw its GDP contract by -0.4%. Further bank stimulus and the BOE’s increase in its bond purchasing program suggest that this will not end well.
XLY – SPDR Consumer Discretionary — We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30. TRADE and TREND bullish.
EWJ – iShares Japan — While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.
FXB – CurrencyShares British Pound Sterling — The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16.
SHY – iShares 1-3 Year Treasury Bonds — If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.